SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
AMENDMENT NO. -
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 ("THE ACT")
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 000-23775
APPROVED FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 52-0792752
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3420 HOLLAND ROAD, SUITE 107, VIRGINIA BEACH, VIRGINIA 23452
(Address of Principal Executive Office) (Zip Code)
757-430-1400
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common, $1.00 par value per share OTC Bulletin Board
Securities to be Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant is
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 5,482,114 shares at March 15,
1999.
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DOCUMENTS INCORPORATED BY REFERENCE IN FORM 10-K
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INCORPORATED DOCUMENTS WHERE INCORPORATED IN FORM 10-K
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1. Certain portions of the Corporation's Proxy Part III -- Items 10, 11, 12 and 13.
Statement for the Annual Meeting of Stockholders
to be held on June 14, 1999 ("Proxy Statement").
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APPROVED FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
AMENDMENT NO. -
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
INFORMATION REQUIRED IN ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.
General ................................................................7
Business Strategy..............................................................9
Purchase of the Assets of Funding Center of Georgia, Inc......................11
Purchase of MOFC Inc. d/b/a ConsumerOne Financial............................ 12
The Company's Borrowers and its Loan Products.................................12
Underwriting Guidelines.......................................................14
Mortgage Loan Servicing.......................................................18
Marketing ...............................................................20
Company's Sources of Funds and Liquidity......................................21
Savings Bank's Sources of Funds...............................................21
Taxation ...............................................................22
Employees ...............................................................22
Service Marks ...............................................................23
Effect of Adverse Economic Conditions.........................................23
Concentration of Operations in Seven States...................................23
Future Risks Associated with Loan Sales through Securitizations...............23
Contingent Risks..............................................................23
Competition ...............................................................24
Regulation ...............................................................24
OTS Regulation of the Company.................................................26
Regulation of the Savings Bank................................................27
Legislative Risk..............................................................34
Environmental Factors.........................................................34
Dependence on Key Personnel...................................................35
Control by Certain Shareholders...............................................35
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ITEM 2. PROPERTIES.
Properties ...............................................................36
ITEM 3. LEGAL PROCEEDINGS.
Legal Proceedings.............................................................37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Submission of Matters to a Vote of Security Holders...........................37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
Market Price of and Cash Dividends on Company's Common Equity.................38
Absence of Active Public Trading Market and Volatility of Stock Price.........39
Transfer Agent and Registrar..................................................39
Recent Open Market Purchase of Common Stock by the Company .................. 39
Recent Sales of Unregistered Securities.......................................39
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data.......................................................41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General ...............................................................43
Results of Operations - Years Ended December 31, 1998 and 1997 ...............43
Results of Operations - Years Ended December 31, 1997 and 1996 ...............52
Financial Condition - December 31, 1998, 1997 and 1996........................61
Liquidity and Capital Resources...............................................63
New Accounting Standards......................................................66
Hedging Activities............................................................67
Impact of Inflation and Changing Prices.......................................67
Year 2000 Issues..............................................................68
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management - Asset/Liability Management...........................70
Interest Rate Risk............................................................72
Asset Quality ...............................................................73
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and Supplementary Data...................................74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding certain relationships and related transactions appears in
the definitive proxy statement for the Annual Shareholder's Meeting to be held
on June 14, 1999 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation appears in the definitive proxy
statement for the Annual Shareholder's Meeting to be held on June 14, 1999 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management appears in the definitive proxy statement for the Annual
Shareholder's Meeting to be held on June 14, 1999 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions appears in
the definitive proxy statement for the Annual Shareholder's Meeting to be held
on June 14, 1999 and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
Financial Statements and Exhibits.............................................77
Signatures ...............................................................81
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PART I
ITEM 1 - BUSINESS
Certain statements in this report which are not merely historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Act of 1995 concerning Approved Financial Corp. and its subsidiaries
("Approved" or Company") concerning future loan production volume, revenues from
loan sales, restructuring and expense reduction plans, ability to profitably
enter the conforming mortgage business and any other mentioned business strategy
concerning the profitability of any current or future operations of the Company
are forward-looking statements. There are a number of important factors that
could cause the actual results of Approved to differ materially from those
indicated in such forward-looking statements. Those factors include, but are not
limited to the ability of the Company's management to implement restructuring
and expense reduction plans, any changes in residential real estate values,
changes in industry competition, general economic conditions, changes in
interest rates, changes in the demand for non-conforming or conforming mortgage
loans, the Company's availability of funding sources for capital liquidity,
changes in loan prepayment speeds, delinquency and default rates, changes in
regulatory issues concerning mortgage companies or federal savings banks,
changes in GAAP accounting standards effecting the Company's financial
statements, and any changes which influence any market for profitable sales of
all types of mortgage loans.
GENERAL
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 non-conforming mortgage customers satisfy their
financial needs and in many cases has helped them improve their credit ratings.
The company plans to begin offering conforming mortgage loans during 1999.
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 historically has derived 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, non-real estate secured consumer finance lending and the sale
of other financial products such as insurance policies.
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 1998, the dollar
volume in the broker lending division accounted for 39% of total originations
and the retail lending division accounted for 61% of total originations. The
Company is seeking to expand its broker network and its direct consumer lending
by developing larger sales staff in current or new branch offices, increasing
its use of advertising, direct mail and other marketing strategies including its
National Sales Center in Virginia Beach, and through strategic acquisitions or
relationship with other companies or individuals.
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 companies, banking institutions
and finance companies. The Company expects to begin selling conforming loans to
government and quasi-government agencies during 1999. The proceeds from the
sales release funds for additional lending.
The Company has four operating subsidiaries. One subsidiary, 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. ARMI operates most of its
retail offices under the service mark "Armada" Residential Mortgage and operates
one retail office under the name "The Funding Center of Georgia".
Another operating subsidiary is the Savings Bank, also headquartered in
Virginia Beach, Virginia.. The Savings Bank's principal business activities are
attracting savings deposits and originating, investing in and selling loans
primarily secured by first and junior mortgage liens on single-family dwellings,
including condominium units and to a lesser extent originates consumer loans to
credit worthy customers. The Savings Bank also 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.
The Savings Bank's charter provides for ease of entry into new markets,
with reduced legal costs. By taking advantage of the flexible provisions of the
charter, the Savings Bank is able to make real estate-secured loans in several
states where the Company's retail or broker units associated with other
subsidiaries of the Company are not licensed. The Savings Bank originates loans
utilizing a network of mortgage brokers for loan referrals and through retail
mortgage lending offices. The Savings Bank has contracted the Company to provide
the processing, underwriting and closing capabilities of the Company. The
Company has agreed to purchase all of the loans made by the Savings Bank. 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.
Additional subsidiaries of the Company include MOFC, Inc. d/b/a/
ConsumerOne Financial ("ConsumerOne") and Approved Financial Solutions, Inc.
ConsumerOne was acquired in December of 1998 and originates loans directly with
mortgage borrowers. (See: The Purchase of MOFC, Inc. d.b.a. ConsumerOne
Financial). Approved Financial Solutions, Inc. was formed in November of 1998
for the initial purpose of offering life insurance to the Company's loan
customers. To date, insurance sales have not represented a material source of
revenue
BUSINESS STRATEGY
The Company's business strategies are: (i) maintain quality loan
underwriting and servicing standards; (ii) reduce expenses through
centralization of all marketing, advertising, underwriting and processing
functions (iii) increase origination volume per retail branch (iv) acquire
additional loan production capability through acquisitions and strategic
alliances; (v) diversify loan sale strategies with a commitment to prudent
management of cash flow (vi); broaden product offerings (viii) increase loan
originations from broker referrals; (vii) build on the Company's initial
investment in the Savings Bank;
MAINTAIN QUALITY LOAN UNDERWRITING AND SERVICING STANDARDS. 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. In March of 1999, the Company hired several individuals with
extensive experience in conforming lending in an attempt to maintain solid
underwriting standards and to provide quality service in the conforming mortgage
area.
REDUCE EXPENSES THROUGH CENTRALIZATION OF ALL MARKETING, ADVERTISING,
UNDERWRITING AND PROCESSING FUNCTIONS. Currently the Company is implementing
plans to further centralize operations in the home office. All marketing and
advertising campaigns will be launched from the marketing department in Virginia
Beach. Underwriting and servicing is currently centralized and most processing
functions formerly handled in the branch locations are also being directed to
the home office. The Company is implementing this plan to take advantage of
economies of scale and to enhance quality control.
INCREASE ORIGINATION VOLUME PER RETAIL BRANCH. The Company intends to
expand its loan origination volume from existing retail branches by increasing
the sales staffs. Additionally, centralizing operating and marketing functions
in the home office as explained above, allows the Company to restructure the
branches as highly focused sales centers.
The Company has developed a National Sales Center ("Center") at the
Virginia Beach headquarters during 1999. The Center functions as a lead
generation source for the retail branch network by answering and screening
in-bound calls from various forms of advertising and marketing campaigns
centralized at the home office for the retail branches. In addition, the Center
originates mortgages through an on-site staff of loan officers.
The Company also utilizes targeted out-bound telemarketing to obtain
potential customers leads for the retail branches. Prior to 1999, a large
portion of the telemarketing activity was performed in the retail branches.
However, during 1999, the Company has centralized its telemarketing activities
in the Virginia Beach, Virginia location to achieve economies of scale and to
obtain greater quality control over this operation.
ACQUIRE ADDITIONAL LOAN PRODUCTION CAPABILITY THROUGH ACQUISITIONS AND
STRATEGIC ALLIANCES. 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
mortgage brokers or retail offices of other mortgage operations, which exhibit
management styles compatible with the Company's management team and that have
business strategies that complement those of the Company's.
See the discussions below regarding the January 26, 1998 acquisition of
the assets of a Georgia-based mortgage lender, Funding Center of Georgia, Inc.
and the December 15, 1998 acquisition of MOFC, Inc. d/b/a ConsumerOne Financial.
The Company has no specific plans for additional acquisitions of ongoing
businesses at this time.
DIVERSIFY LOAN SALE STRATEGIES WITH PRUDENT MANAGEMENT OF FINANCIAL CASH
FLOW. The Company historically has sold its loans on a whole loan basis
receiving cash at the time of sale. During the second half of 1998, many
companies in the mortgage business that previously utilized the securitization
market as their primary loan sale strategy experienced significant difficulty
with capital and liquidity issues and diverted to whole loan sales in order to
generate current cash flow. This strategic shift resulted in excess supply and a
reduction in premiums received on whole loan sales ("premiums"). While the
Company has been successful in obtaining new investors for whole loan sales, the
average cash premiums received on the Company's loan sales decreased from 6.39%
in 1997 to 4.92% in 1998.
Alternative or complementary loan sale strategies may be utilized by the
Company in the future in addition to whole loan sales. However, any new strategy
will be adopted only after prudent economic analysis has been performed to
determine the long term effects that such a strategy would have on the Company's
profitability and capital liquidity.
In future periods, the Company may sell a portion of the loans it
originates through a securitization program and either sell or 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. In
order to fund a securitization program, the Company would likely have to obtain
an additional credit facility and a means to either sell or finance the interest
only and residual assets created through a securitization. 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 securitized pools which, could
have a material adverse effect on the Company's results of operations.
From time to time, the Company varies the quantity of mortgage loans
that it holds for sale on its balance sheet. This permits the Company to sell
loans in various quantities and on a flexible time schedule, which is adjusted
according to short term shifts in the market demand for its loans.
INCREASE LOAN ORIGINATIONS FROM BROKER REFERRALS. While loan volume from
broker referrals was less in 1998 as compared to 1997, both on an absolute
dollar basis and as a percentage of total originations, the Company intends to
continue to develop its loan production from this source. The Company plans to
expand this business geographically when and where it sees opportunity to add
profitable volume. 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. However, the Company will not waiver on its commitment to
prudent risk adjusted pricing of mortgage loans simply to be competitive.
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. In order to facilitate the funding of conforming loans
in-house in lieu of funding these loans through other lenders, a strategic
alliance was formed with a Virginia Beach based conforming lender in March 1999
which is expected to increase the Company's revenue and profit potential from
conforming loans. The Company's recent development of a conforming mortgage
division is an example of its efforts to add products that will provide service
for a larger customer base.
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 1999, the Company has initiated plans which give the Savings Bank 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 provided very
little of the Company's loan customer's need for title policies.
The Savings Bank may enter other lines of business that could provide
complimentary benefits, or synergies, with the Company's main strategic goals.
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.
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. ("FCGA"), a Georgia corporation. All
of the employees of FCGA have become employees of ARMI, and the business will be
conducted under the name of ARMI d/b/a Funding Center of Georgia. The original
purchase price for the assets of FCGA's assets, which included deferred payments
that are subject to reduction or forfeit in the event of a failure to meet
agreed-upon pre-tax profit targets each year ("earn out payments"), was
$3,300,000. ARMI paid $600,000 at closing and paid $100,000 in semi-monthly
installments from February 1998 through January 1999. The potential "earn out
payments" of $2,400,000 were to be payable in three annual installments on
January 1, 1999, 2000 and 2001, with interest at 6%, However, no payment was
earned and was therefore forfeited for the initial installment on January 1,
1999. Currently, the maximum future payment is $1,800,000, however, due to
current market conditions the Company does not expect a payment to be earned for
January 1, 2000.
THE PURCHASE OF MOFC, INC. D.B.A. CONSUMERONE FINANCIAL
On December 15, 1998, the Company acquired all of the outstanding shares
of stock of ConsumerOne, located in Birmingham, Michigan. The Company paid an
initial payment of $575,000 in cash for the purchase of ConsumerOne and entered
into a three-year employment agreement with Keith Lewis, prior owner and
president of ConsumerOne. Mr. Lewis has the potential of earning an additional
purchase payment up to a maximum of $1,575,000 over a three-year period based on
minimum profit levels achieved each year by ConsumerOne. Future payments, if
earned, are payable fifty percent in cash and fifty percent in cash or stock at
the Company's option. During 1998, ConsumerOne originated an average of
approximately $6 million of mortgage loans per month.
THE COMPANY'S BORROWERS AND ITS LOAN PRODUCTS
The Company has historically committed the majority of its resources to
serving the non-conforming residential mortgage market. Prior to the very recent
development of a conforming origination division in March 1999, the Company
catered 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 but rather their monthly payment size. Therefore, these
customers are less rate-sensitive than conforming loan customers and therefore
lenders compete more often by the level, quality and speed of service to the
customer.
Loans made to such credit-impaired borrowers generally entail a higher
risk of delinquency and possibly higher losses, depending on associated loan to
value ratios, than delinquency and loss ratios for 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 delinquency, foreclosure, loss or prepayment speed rates 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 size of loans funded in-house by the
Company during 1998 was approximately $58,344. The average size of loans
originated by the Company, including loans funded through other lenders, during
1998 was approximately $61,678. In order to compensate the Company for the
increased credit risks associated with its non-conforming borrowers, higher
interest rates and origination fees or points are charged for these loans
compared to higher credit quality, 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 companies, finance companies and other financial
institutions including federally chartered banking institutions. The loans are
sold for cash on a whole loan, servicing-released basis. Consistent with
industry practices, the loans are sold with certain representations and
warranties. However, the Company may adopt alternative or complimentary loan
sale strategies in the future. The Company plans to make additional investments
in technology to further streamline its operating procedures, enhance
productivity, reduce expenses and provide for future expansion. However, the
Company expects that it would have to invest in additional capabilities if it
enters the securitization business. (see: DIVERSIFY LOAN SALE STRATEGIES WITH
PRUDENT MANAGEMENT OF FINANCIAL CASH FLOW)
A significant portion of the mortgage leads generated by Approved's
centralized out-bound telemarketing center and the Company's new National Sales
Center in Virginia Beach reflect a conforming credit profile. Therefore, the
addition of conforming mortgage loans to our product menu allows us to service
these conforming leads and is expected to add additional revenue on a
cost-effective basis. In order to facilitate the funding of conforming loans
in-house in lieu of funding these loans through other lenders, a strategic
alliance was formed with a Virginia Beach based conforming lender in March of
1999.
The Company has the ability to originate loans through the Savings Bank
that are not fully secured by real estate collateral, including consumer
installment debt. If offered, these products will be underwritten based on the
borrower's credit worthiness. As is the case with its other loan products, the
Company's intention would be to sell these loans in the secondary market, to
limit its exposure to future losses. To date, the Company has not originated a
material amount of non-real estate secured loans.
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 1998, loans originated from this source declined both in the
absolute dollar amount of loans originated and as a percentage of total loan
volume. Loans originated from mortgage broker referrals declined to 39% of the
total loan volume of $522.0 million for the year of 1998, compared to 55% of
1997 loan volume.
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 have 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.
RETAIL LOAN ORIGINATIONS. The Company initiated retail loan originations
in December 1994, when 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. 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.
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 joint venture and purchase of Armada
LLC and the purchase of FCGA and ConsumerOne are examples of such relationships.
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.
During the first quarter of 1999, the Company has opened the National
Sales Center ("Sales Center") at its headquarters in Virginia Beach. This new
unit was developed to enhance loan production volume and boost lead generation
capacity to accommodate an expanding sales force in the branch network.
Additionally, it creates the potential for savings in advertising and marketing
costs through economies of scale since system wide advertising and marketing
campaigns are now centralized in Virginia Beach and the Sales Center services
in-bound calls from these campaigns. The unit functions as both a lead
generation source for the retail branch network and a new source of retail loan
originations through its on-site staff of loan officers.
Also, during the first quarter of 1999, seven retail locations that
previously operated under ARMI were transferred to the Savings Bank.
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 originators as opportunities occur. The company
has no predefined structure of such alliances because it anticipates that each
will provide unique opportunities to generate new sources for revenues.
The Company's recent strategic alliance with a Virginia Beach based
conforming mortgage operation ("ConformCo") is the only strategic alliance that
the Company has at this time. The relationship is one by which the Savings Bank
hired operational employees that were previously employees of the ConformCo. The
Company and ConformCo will utilize these Savings Bank employees to underwrite,
process and sell conforming mortgage loans. The overhead expenses, will be
shared based on a pro-rata basis determined by the percentage of conforming loan
volume originated by the Company and the ConformCo which is facilitated by the
Savings Bank.
UNDERWRITING GUIDELINES
Historically, the Company has focused on the non-conforming mortgage
business. However, the Company plans to begin funding conforming mortgage loans
in 1999 as a result of its recent strategic alliance with ConformCo (See:
Strategic Alliances) Conforming mortgages are loans with characteristics meeting
conventional underwriting standards such as the standards required by the
Federal National Mortgage Association and other quasi government type lenders.
The Company's conforming underwriting guidelines are currently under development
and will reflect the guidelines established by the ultimate investors for such
loans targeted by the Company.
The following is a general description of the non-conforming
underwriting guidelines currently employed by the Company with respect to
mortgage loans it originate. 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. The Company's underwriters make determinations
on loans 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 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.
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, customer's history
of bankruptcy, the credit score of the applicant provided from services accepted
by the various investor's who buy our loans 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 rely on
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.
Upon completion of the underwriting and processing functions, the loan
is closed through 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.
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 oneto 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.
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 oneto 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.
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.
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 held
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.
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
immediately 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 and
follow up calls are made. A second written notice is sent on the fifteenth day
after payment is due and follow up calls are continued to be made by the
collector. 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. Notice of the
Company's intent to start foreclosure proceedings is sent at thirty days past
due. Further guidance with respect to the collection and foreclosure 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.
At the time the foreclosure process begins through the time of
liquidation of real estate owned ("REO") the account is transferred to the
foreclosure and REO department. There are occasions when a foreclosures and
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. If the Company were to adopt a
securitization loan sale strategy, it may engage one or more companies to
sub-service a portion of it's the loans securitized.
MARKETING
MARKETING TO BROKER NETWORKS. Marketing to brokers is conducted through
the Company's staff of account executives ("AE"), who establish and maintain
relationships with the Company's network of mortgage brokers that refer loans to
the Company. Loans made through the broker networks amounted to 39% of total
originations in 1998, compared to 55% of total loan originations in 1997. See
the table on page 45 for divisional loan originations by state. The AEs provide
various levels of information, assistance and training to the mortgage brokers
regarding the Company's products and non-traditional prospecting strategies, and
are principally responsible for maintaining the Company's relationships with its
clients. AEs endeavor to increase the volume of loan originations from brokers
located within the geographic territory assigned to them. The AEs and the
national and regional broker AE sales managers visit brokers offices and attend
trade shows. The AEs also provide feedback to the Company relating to the
current marketplace relative to 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 AEs are compensated with a base salary
and commissions based on the volume of loans that are originated as a result of
their efforts.
MARKETING OF RETAIL LENDING PRODUCTS. The Company markets its direct
consumer lending services through a sales staff of loan officers in its branch
offices located in several states. Loans made through the retail lending
division amounted to 61% of total originations in 1998, compared to 45% of total
loan originations in 1997. See the table on page 45 for divisional loan
originations by state.
The branch office network is used for marketing to and meeting with
the Company's local borrowers. During the first quarter of 1999, we have
consolidated or closed several small retail branch locations and initiated plans
to restructure the retail branches as highly focused sales centers. Retail
branches are currently expanding their sales staffs and directing the
telemarketing, advertising and most processing functions that were formerly
handled in the branches to the Company's home office in Virginia Beach.
The Company uses targeted outbound telemarketing that is centralized
from the Virginia Beach headquarters. An automatic dialer telemarketing system
is used for targeted lead generation campaigns for each retail branch. This
centralized system allows the Company to efficiently purchase and use lists of
potential leads and to maintain the required "do not call" list of names. The
campaigns are rotated to provide the appropriate number of leads to each branch
based on the number of loan officers.
To enhance retail loan production volume and boost lead generation
capacity for accommodation of an expanding sales force, the Company established
a new National Sales Center in its Virginia Beach office during the first
quarter of 1999. This division services in-bound calls from various forms of
advertising and marketing campaigns initiated from the home office in the
geographic locations surrounding retail branch locations. It functions both as a
lead generation source for the retail branch network and originates mortgages
through an on-site staff of retail loan officers.
Occasionally, when a potential retail 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.
COMPANY'S SOURCES OF FUNDS AND LIQUIDITY
At December 31, 1998, the Company had warehouse and other credit
facilities with an aggregate commitment of $125 million. The Company expects to
be able to maintain existing warehouse and other credit facilities (or 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 financing, 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. (See page 63
for further discussion).
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 $3,560,000, or 12.0%, of the Savings Bank's deposits at
December 31, 1998. The Savings Bank solicits deposits via a computer bulletin
board where the rates of many other banks and savings institutions are
advertised. At December 31, 1998, the Savings Bank had deposits of $26,168,000,
or 88.0%, 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
December 31, 1998, $15,749,000 of the Savings Bank's certificates of deposit
were scheduled to mature within one year (53.0% 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 obtain 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. The total deposit asset size of the
Savings Bank was under $4 million prior to October of 1997, therefore, 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.
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. (See page 20 of the audited financial
statements for a table that sets forth various interest rate categories for the
certificates of deposit of the Savings Bank.)
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 which has its own 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 December 15, 1997. On
December 16, 1997, the Savings Bank borrowed $1,000,000 from the FHLB, and this
amount was outstanding at December 31, 1997. During 1998, the outstanding
balance grew to $2 million before it was paid off on December 30, 1998. The
Savings Bank held $146,000 and $50,000 of the FHLB stock at December 31, 1998
and December 31, 1997, respectively. 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 intercompany
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.
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 December 31, 1998, the Company and its subsidiaries had a total of
482 full-time employees and 149 part-time employees or 556 full time equivalent
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.
SERVICE MARKS
The Company has four service marks that have become federally
registered. They are "Armada" which became registered on July 23, 1996,
"Approved Residential Mortgage" which became registered on May 15, 1995,
"Approved Financial Corp." which became registered July 21, 1998 and
"ConsumerOne Financial" which became registered on December 18, 1998. "Approved
Federal Savings Bank" and "Step Two Loan" are two additional service marks
currently pending registration.
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.
CONCENTRATION OF OPERATIONS IN SEVEN STATES
During 1998, 90.5% 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
Ohio). 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.
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 or a
change in secondary market conditions for any reason would result in a decline
in the value of loans to potential purchasers.
COMPETITION
The Company faces intense competition from other mortgage banking
companies, 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, banks, quasi-governmental
agencies and other 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.
Competition can take on many forms, including convenience in obtaining a
loan, service, loan pricing terms such as the loan to value ratio and interest
rate, marketing and distribution channels and competition for employees through
compensation plans and benefit packages.
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 uses mortgage brokers as a source of origination 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 (loans sourced from mortgage brokers) resulting from competition from
other originators of such loans, market conditions and other factors.
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 to 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.
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.
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 indemnification 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 the limitation of: (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 qualifies 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."
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).
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
capitalized the SAIF reserve to the level of 1.25% of insured deposits as
required by law. In 1996, the Savings Bank paid $23,000 for this assessment.
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.
The re-capitalization 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
December 31, 1998, 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 December 31, 1998. 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.
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 December 31, 1998.
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.
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 December 31, 1998,
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.
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 1998.
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 December 31, 1998, 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."
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 December 31, 1998, the Savings Bank's unimpaired capital and surplus
amounted to $5,058,000, resulting in a general loans-to-one borrower limitation
of $759,000 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 December 31, 1998, the Savings Bank was a well-capitalized
institution, which was not subject to restrictions on brokered deposits.
See "Business - Savings Bank Sources of Funds - Deposits."
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 deposit accounts and borrowings
payable in one year or less, which can be withdrawn. The liquidity requirement
may vary from time to time (between 3% and 10%) depending upon economic
conditions and savings flows of all savings associations. At the present time,
the required liquid asset ratio is 3%. 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.
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.
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.
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, correction of or
removal of such substances may be substantial, and the presence of such
substances, or the failure to properly correct 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
correction 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. The loss of Mr. Wykle's 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 March 15, 1999, Allen D. Wykle, Chairman of the Board, President
and Chief Executive Officer and Leon H. Perlin, Director, beneficially own an
aggregate of 50.3% of the outstanding shares of Common Stock of the Company.
Accordingly, such persons, if they were to act in concert, would have control of
the Company, with the ability to approve certain fundamental corporate
transactions and the election of the entire Board of Directors.
<PAGE>
ITEM 2 - 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 $1,134,000 as of December 31,
1998. (See Note 23 of audited financial statements for information regarding the
sale of the second office building in February 1999.)
As of December 31, 1998 the Company had leases for regional broker
lending offices, retail lending offices, and the administrative office for the
Savings Bank. These facilities are leased under terms that vary as to duration
and in general, the leases expire between 1999 and 2003, 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 $1,394,000, $966,000, and $317,000 in 1998, 1997 and 1996,
respectively. Total minimum lease payments under non-cancelable operating leases
with remaining terms in excess of one year as of December 31, 1998 were as
follows (IN THOUSANDS):
1999 $ 1,669
2000 891
2001 492
2002 330
2003 144
----------------
Total 1999-2003 $ 3,526
================
The Company anticipates that in the normal course of business it will
lease additional office space as it opens new retail loan origination locations
or assumes leases associated with any future acquisitions or strategic
alliances.
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. The Company purchased approximately 8 acres of land ("Property")
from the City of Virginia Beach Development Authority ("City") in March of 1999
for $ 660,450 dollars for the purpose of building a new facility. In the event
that the Company has not begun construction of the new facility at one year from
the date of purchase of the Property, then the City has the right or option to
return to the Company the purchase price less certain related expenses in
exchange for the conveyance of the Property to the City.
<PAGE>
ITEM 3 - 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
NONE.
<PAGE>
PART II
ITEM 5 - MARKET FOR 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 1998, 1997, and 1996 and cash dividends paid per
share. All stock price and dividend data has been adjusted to reflect
two-for-one stock splits which occurred on August 30, 1996 and December 16,
1996, and a 100% stock dividend that occurred on November 21, 1997.
<TABLE>
<CAPTION>
Stock Prices
---------------------------------------------- Cash
High Low Close Dividends
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
1998:
Fourth Quarter $ 6.50 $ 2.88 $ 3.38 $ -
Third Quarter 13.63 7.00 7.00 -
Second Quarter 15.63 13.13 13.88 -
First Quarter 15.08 12.08 13.13 -
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 $ 0.01
Third Quarter 9.13 3.75 9.00 0.01
Second Quarter 4.75 2.13 3.88 0.01
First Quarter 2.25 2.06 2.19 0.01
</TABLE>
The Company did not pay any cash dividends on its Common Stock in 1998
and 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.
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.
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 prepayment speeds, interest-only and residual asset valuations, sources of
liquidity to the industry participants and profit or 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.
RECENT OPEN MARKET PURCHASE OF COMMON STOCK BY THE COMPANY
The Board of Directors approved a stock repurchase plan at a regular
board meeting on November 2, 1998. The Company purchased a total of 30,000
shares of Approved Financial Corp. stock at a price of $3.75 per share on trade
dates between December 21, 1998 and December 29, 1998.
RECENT UNREGISTERED SECURITY TRANSACTIONS
The Company issued 116,706 shares of unregistered shares of common stock
on January 5, 1998 to the owners of the portion of Armada LLC which was not
owned by the Company. These share represented the final payment associated with
the Company's acquisition of Armada LLC. . 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.
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The historical consolidated financial data for the five years ended
December 31, 1998 were derived from the consolidated financial statements of the
Company included elsewhere herein. The historical consolidated financial data
are not necessarily indicative of the results of operations for any future
period. 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
and December 16, 1996, and a 100% stock dividend that occurred on November 21,
1997.
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended
December 31 1998 1997 1996 1995 1994
- -----------
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Gain on sale of loans $29,703 $33,501 $17,955 $ 7,298 $ 2,184
Interest income 10,308 10,935 4,520 3,065 2,556
Gain on sale of securities 1,750 2,796 - - -
Other fees and income 7,042 4,934 2,407 1,535 639
----------- ----------- ---------- ---------- ----------
Total revenue 48,803 52,166 24,882 11,898 5,379
----------- ----------- ---------- ---------- ----------
Expenses:
Compensation (1) 23,397 16,447 8,017 3,880 1,452
General and administrative (2) 15,306 14,188 6,853 3,050 1,337
Interest expense 6,252 6,157 3,121 2,194 1,700
Provision for loan and
foreclosed property losses 2,896 1,676 1,308 731 191
----------- ----------- ---------- ---------- ----------
Total expenses 47,851 38,468 19,299 9,855 4,680
----------- ----------- ---------- ---------- ----------
Income before income taxes 952 13,698 5,583 2,043 699
Income taxes 473 5,638 2,259 876 328
----------- ----------- ---------- ---------- ----------
Net income $ 479 $ 8,060 $ 3,324 $ 1,167 $ 371
=========== =========== ========== ========== ==========
Net income per share (diluted) (3) $ 0.09 $1.51 $0.63 $0.23 $0.07
=========== =========== ========== ========== ==========
Cash dividends per share (3) $ - $ - $0.04 $0.04 $0.04
=========== =========== ========== ========== ==========
Dividend payout ratio - - 6.35% 17.39% 57.14%
=========== =========== ========== ========== ==========
Weighted average number
of shares outstanding (diluted) 5,511,372 5,345,957 5,281,103 5,062,809 5,035,350
=========== =========== ========== ========== ==========
</TABLE>
- -------------
(1) This document reclassifies "minority interests in consolidated
subsidiaries" as "compensation."
(2) Amount includes Loan Production expense.
(3) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996 and December 16, 1996, and a 100% stock
dividend which occurred on November 21, 1997.
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended
December 31 1998 1997 1996 1995 1994
- -----------
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCES AT YEAR END
Loans receivable, net $ 105,044 $ 80,696 $ 45,423 $ 28,430 $18,021
Securities 3,472 15,201 20,140 - -
Total assets 136,118 118,125 75,143 34,485 23,109
Revolving warehouse loans 72,546 52,488 32,030 19,566 7,727
FDIC-insured deposits 29,728 17,815 1,576 - -
Subordinated debt 6,042 9,080 9,183 6,905 8,546
Total liabilities (1) 116,851 93,070 53,934 28,250 17,465
Shareholders' equity 19,267 25,055 21,209 6,236 5,645
SELECTED LOAN DATA
Loans originated (2) $ 522,045 $ 468,955 $ 258,833 $ 111,505 $43,079
Loans sold 389,589 420,498 228,918 83,328 34,409
Amount of loans serviced
at year-end 109,500 83,512 48,785 29,249 18,482
Loans delinquent 31 days or
More as percent of
loans at year-end 5.42% 5.50% 6.61% 8.88% 7.03%
SELECTED RATIOS
Return on average assets 0.40% 7.68% 7.32% 4.06% 1.67%
Return on average
Shareholders' equity 1.93% 32.69% 36.44% 19.86% 6.80%
Shareholders' equity
to assets 14.15% 21.21% 28.22% 18.08% 24.43%
Book value per share (3) $ 3.51 $ 4.64 $ 4.21 $ 1.28 $ 1.09
</TABLE>
- -------------
(1) Includes minority interests in subsidiaries.
(2) Includes $92.3 million brokered loans in 1998.
(3) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996 and December 16, 1996, and a 100% stock
dividend which occurred on November 21, 1997.
<PAGE>
ITEM 7. 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 for each year in the three-year period ended December 31, 1998 and
its consolidated financial position at December 31, 1998, and 1997. The
discussion includes some forward-looking statements involving estimates and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors
such as reduced demand for loans, competitive forces, limits on available funds
and market forces affecting the price of the Company's common stock. This
discussion should be reviewed in conjunction with the consolidated financial
statements and accompanying notes and other statistical information presented in
the Company's 1998 audited financial statements.
Results of Operations for the Year Ended December 31, 1998 compared to the Year
Ended December 31, 1997.
Net Income
The Company's net income for 1998 was $0.5 million compared to net income of
$8.1 million in 1997. On a per share basis (diluted), income for 1998 was $0.09
compared to $1.51 for 1997. The return on average assets was 0.40% in 1998,
compared to 7.68% in 1997. Return on average shareholders' equity was 1.93% in
1998, compared to 32.69% in 1997.
Origination of Mortgage Loans
The following table shows the loan originations in dollars and units for the
Company's broker and retail divisions in 1998 and 1997. The table includes $92.3
million of loans generated by the Company's retail division that were funded
through other lenders ("Brokered Loans") during 1998.
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
(dollars in millions) December 31, 1998 December31, 1997
----------------- ----------------
<S> <C> <C>
Dollar Volume of Loans Originated:
Broker $ 203.9 $ 256.4
Retail - funded through other lenders 92.3 *NM
Retail - funded in-house 225.8 212.5
-------- --------
Total $ 522.0 $ 468.9
======== ========
Number of Loans Originated:
Broker 3,484 4,399
Retail - funded through other lenders 1,099 *NM
Retail - funded in-house 3,882 4,022
-------- --------
Total 8,465 8,421
======== ========
</TABLE>
*NM = Not Material
The decrease of 8.4% in dollar volume of loans, excluding $92.3 million in
Brokered Loans, originated during the year ended December 31, 1998, compared to
the same period in 1997 was due primarily to increased competition in the
non-conforming mortgage industry.
Loans originated through the Company's retail offices, excluding $92.3 million
in Brokered Loans, increased 6.3% to $225.8 million, compared to $212.5 million
during the same period in 1997. The growth in retail originations for the year
ended December 31, 1998 was due to an increase in retail office locations from
internal growth and due to the acquisition of FCGA.
Brokered Loans generated by the retail division were $92.3 million during the
year ended December 31, 1998. Brokered loan volume originated during the year
ended December 31, 1997 was not material and therefore the dollar volumes were
not recorded. (See: Item 2-Other Income)
The volume of loans originated through referrals from the Company's network of
mortgage brokers decreased 20.5% to $203.9 million for the year ended December
31, 1998, compared to $256.4 million for the year ended December 31, 1997.
Contributing to this decrease in volume from broker referrals is the refinance
boom for conforming mortgages created by the low interest rate environment,
increased competition in the non-conforming mortgage industry and the Company's
acquisition of FCGA. Before the Company acquired FCGA in January 1998, FCGA was
a mortgage broker organization that referred loans to the Company.
<PAGE>
The following tables summarize mortgage loan originations, by state, for the
years ended December 31, 1998, 1997, and 1996.
(In thousands)
<TABLE>
<CAPTION>
Years Ended
December 31 1998 1997 1996
--------------------- --------------------- ---------------------
Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Broker Division
Florida $ 53,874 10.3% $ 61,897 13.2% $ 36,711 14.2%
Maryland 35,690 6.8 29,997 6.4 9,609 3.7
North Carolina 25,315 4.9 28,957 6.1 29,748 11.5
Georgia 34,617 6.7 59,792 12.8 54,488 21.1
Ohio 22,233 4.3 32,478 6.9 3,314 1.3
Virginia 11,698 2.2 5,415 1.2 9,405 3.6
South Carolina 9,444 1.8 4,463 1.0 3,820 1.5
Tennessee 6,391 1.2 7,826 1.7 886 0.3
Illinois 3,059 0.6 12,781 2.7 8,631 3.3
Michigan 1,115 0.2 3,680 0.8 3,514 1.4
Kentucky 361 0.1 -- -- -- --
Indiana 72 0.0 9,131 1.9 2,761 1.1
Pennsylvania 43 0.0 -- -- -- --
-------- ----- -------- ----- -------- -----
Total Broker Division $203,912 39.1% $256,417 54.7% $162,887 63.0%
======== ===== ======== ===== ======== =====
Retail Division:
North Carolina $ 49,912 9.6% $ 39,007 8.3% $ 12,353 4.8%
Maryland 66,911 12.8 66,954 14.4 45,089 17.3
Virginia 52,856 10.1 34,442 7.3 11,108 4.3
Georgia 58,558 11.2 12,886 2.7 25,599 9.9
Ohio 23,301 4.5 12,666 2.7 61 --
South Carolina 21,682 4.1 18,611 4.0 -- --
Delaware 15,905 3.0 16,056 3.4 1,736 0.7
Kentucky 14,368 2.8 85 -- -- --
Florida 6,374 1.2 4,141 0.9 -- --
Michigan 4,001 0.8 -- -- -- --
Illinois 2,065 0.4 4,877 1.0 -- --
Indiana 2,200 0.4 2,813 0.6 -- --
-------- ----- -------- ----- -------- -----
Total Retail Division $318,133 60.9% $212,538 45.3% $ 95,946 37.0%
======== ===== ======== ===== ======== =====
Total Originations:
North Carolina $ 75,227 14.4% $ 67,964 14.5% $ 42,101 16.3%
Maryland 102,601 19.7 96,951 20.8 54,698 21.0
Georgia 93,175 17.9 72,678 15.5 80,087 31.0
Florida 60,248 11.5 66,038 14.1 36,711 14.2
Virginia 64,554 12.4 39,857 8.5 20,513 7.9
Ohio 45,534 8.7 45,144 9.6 3,375 1.3
South Carolina 31,126 6.0 23,074 4.9 3,820 1.5
Delaware 15,905 3.0 16,056 3.4 1,736 0.7
Kentucky 14,729 2.8 85 -- -- --
Tennessee 6,391 1.2 7,826 1.7 886 0.3
Michigan 5,116 1.0 3,680 0.8 3,514 1.4
Illinois 5,124 1.0 17,658 3.7 8,631 3.3
Indiana 2,272 0.4 11,944 2.5 2,761 1.1
Pennsylvania 43 0.0 -- -- -- --
-------- ----- -------- ----- -------- -----
Total Originations $522,045 100.0% $468,955 100.0% $258,833 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<PAGE>
Gain on Sale of Loans
The largest component of the Company's net income is gain on sale of 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 financial institutions. The Company receives cash at the time loans are
sold. The loans are sold service-released on a non-recourse basis, except for
normal representations and warranties, which is consistent with industry
practices. By selling loans in the secondary mortgage market, the Company is
able to obtain funds that may be used for additional lending and investment
purposes. Gains from the sale of loans is comprised of several components, as
follows: (a) the difference between the sales price and the net carrying value
of the loan; plus (b) loan origination fee income collected at loan closing and
deferred until the loan is sold; less (c) recapture premiums and loan selling
costs.
Loan sales totaled $389.6 million for the year ended December 31, 1998,
including the sale of approximately $12.0 million of loans owned by the Company
for more than 180 days ("Seasoned Loans") at a discount to par value, as
compared to $420.5 million for the same period in 1997. The Company sold $2.3
million of Seasoned Loans at a 21% discount to par value in July 1998 and $9.6
million of Seasoned Loans at an 8% discount to par value in June 1998.
Gain on the sale of loans was $29.7 million for the year ended December 31,
1998, which compares with $33.5 million for the same period in 1997. These gains
exclude the sale of $12.0 million of Seasoned Loans at a discount in 1998. The
decrease for the year ended December 31, 1998, was the direct result of a
decrease in the weighted-average premium paid by investors for the Company's
loans. Gain on the sale of mortgage loans represented 60.9% of total revenue
during the year ended December 31, 1998, compared to 64.2% of total revenue for
the same period in 1997.
The weighted-average premium realized by the Company on its loan sales decreased
to 5.4%, excluding the sale of $12.0 million Seasoned Loans at a discount to
par, during the year ended December 31, 1998, from 6.4% for the same period in
1997. Including the discounted sale of $12.0 million of Seasoned Loans, the
weighted-average premium realized by the Company during the year ended December
31, 1998 decreased to 4.9% from 6.4% for the same period in 1997.
The decrease in premium percentage was caused by material changes in the
secondary market conditions for non-conforming mortgage loans. The Company has
never used securitization as a loan sale strategy. However, the whole-loan sale
marketplace was impacted by changes that affected companies who previously used
securitizations to sell loans. Excessive competition during 1997 and 1998 and a
coinciding reduction in interest rates in general caused an increase in the
prepayment speeds for non-conforming loans. The valuation method applied to
interest-only and residual assets ("Assets"), the capitalized assets created
from securitization, include an assumption for average prepayment speed in order
to determine the average life of a loan pool. The increased prepayment speeds
experienced in the industry were greater than the assumptions previously used by
many securitization issuers and led to an impairment of Asset values for several
companies in the industry. Additionally, in September 1998, a flight to quality
among fixed income investors negatively impacted the pricing spreads for
mortgage-backed securitizations compared to earlier periods and negatively
impacted the associated economics to the issuers. Consequently, many of these
companies reported material losses, experienced reductions in liquidity sources
and diverted to whole loan sale strategies in order to generate cash. This shift
caused excess supply in the whole-loan marketplace, which lead to lower premiums
on whole-loan sales.
<PAGE>
In addition, the premium percentage has decreased due to a decrease in the
Weighted Average Coupon ("WAC") on the Company's loan originations, which was
primarily the result of an increase in adjustable rate mortgage originations
during 1998 compared to 1997. These premiums do not include loan origination
fees collected by the Company at the time the loans are closed, which are
included in the computation of gain on sale when the loans are sold.
The Company defers recognizing income from the loan origination fees it receives
at the time a loan is closed. These 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. Origination fee income is primarily
derived from the Company's retail lending division. Origination fee income
included in the gain on sale of loans, excluding the sale of $12.0 million of
Seasoned Loans at a discount, for the year ended December 31, 1998 was $10.4
million, compared to $8.6 million in the year ended December 31, 1997. The
increase is the result of the Company selling more loans generated by its retail
division. The Company's retail loan sales during the year ended December 31,
1998 comprised 55.5% of total loan sales, with average loan origination fee
income earned of 5.0%, excluding the Seasoned Loan sale of $ 12.0 million at a
discount. For the same period of 1997, the Company's retail loan sales were
48.5% of total loan sales with average origination fee income earned of 4.2%.
Fees associated with selling loans decreased to approximately 20 basis points of
the dollar volume of loans sold for the year ended December 31, 1998 from 35
basis points for the year ended December 31, 1997.
The Company also defers recognition of the expense it incurs, from the payment
of fees to mortgage brokers, for services rendered on loan originations. These
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 expenses
pertaining to loans held for sale are taken into income at the time of the sale
of the loan.
Interest Income and Expense
The Company's net interest income is dependent on the difference, or "spread",
between the interest income it receives from its loans and its cost of funds,
consisting principally of the interest expense paid on the warehouse lines of
credit, the Savings Bank's deposit accounts and other borrowings.
Interest income for the year ended December 31, 1998 was $10.3 million compared
with $10.9 million for the same period ended in 1997. The decrease in interest
income for the year ended December 31, 1998 was primarily due to a lower
weighted-average coupon associated with the balance of loans held for sale.
Interest expense for the year ended December 31, 1998 was $6.3 million compared
with $6.2 million for the year ended December 31, 1997. The increase in interest
expense for the year ended December 31, 1998, was the direct result of an
increase in the average balance of interest-bearing liabilities.
Changes in the average yield received on the Company's loan portfolio may not
coincide with changes in interest rates the Company must pay on its revolving
warehouse loans, the Savings Bank's FDIC-insured deposits, and other borrowings.
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.
<PAGE>
The following tables reflect the average yields earned and rates paid by the
Company during 1998 and 1997. 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.
<TABLE>
<CAPTION>
(In thousands) 1998 1997
----------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan receivable (1) $ 83,522 $ 9,761 11.69% $ 74,116 $ 10,662 14.39%
Cash and other interest-
earning assets 12,754 547 4.28 4,240 273 6.44
--------- --------- ----- --------- --------- -----
96,276 10,308 10.71 78,356 10,935 13.96
--------- ----- --------- -----
Non-interest-earning assets:
Allowance for loan losses (1,789) (1,231)
Investment in IMC 8,136 17,376
Premises and equipment, net 4,770 3,372
Other 11,875 7,112
--------- ---------
Total assets $ 119,268 $ 104,985
========= =========
Interest-bearing liabilities:
Revolving warehouse lines $ 49,810 3,888 7.80 $ 59,681 4,834 8.10
FDIC - insured deposits 22,858 1,361 5.96 6,076 357 5.88
Other interest-bearing
liabilities 10,677 1,003 9.39 10,307 966 9.37
--------- --------- ----- --------- --------- -----
83,345 6,252 7.50 76,064 6,157 8.09
--------- ----- --------- -----
Non-interest-bearing liabilities 11,126 4,264
--------- ---------
Total liabilities 94,471 80,328
Shareholders' equity 24,797 24,657
--------- ---------
Total liabilities and equity $ 119,268 $ 104,985
========= =========
Average dollar difference between
interest-earning assets and
interest-bearing liabilities $ 12,931 $ 2,292
========= =========
Net interest income $ 4,056 $ 4,778
========= =========
Interest rate spread (2) 3.21% 5.87%
===== =====
Net annualized yield on average
interest-earning assets 4.21% 6.10%
===== =====
</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.
<PAGE>
The following table shows the change in net interest income which can be
attributed to rate (change in rate multiplied by old volume) and volume (change
in volume multiplied by old rate) for the year ended December 31, 1998 compared
to the year ended December 31, 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 decrease of $723,000 in net interest income for
the year ended December 31, 1998 compared to the year ended December 31, 1997
was primarily the result of a decrease in the average yield on interest-earning
assets.
<TABLE>
<CAPTION>
($ In thousands)
1998 Versus 1997
Increase (Decrease) due to:
Volume Rate Total
------- ------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loan receivable $ 1,884 $(2,785) $ (901)
Cash and other interest-
earning assets 328 (55) 273
------- ------- -------
2,212 (2,840) (628)
------- ------- -------
Interest-bearing liabilities:
Revolving warehouse lines (776) (170) (946)
FDIC-insured deposits 999 5 1,004
Other interest-
bearing liabilities 35 2 37
------- ------- -------
258 (163) 95
------- ------- -------
Net interest income (expense) $ 1,954 $(2,677) $ (723)
======= ======= =======
</TABLE>
Gain on Sale of Securities
The Company sold 558,400 shares of IMC stock for $1.9 million, which resulted in
a pre-tax gain of $1.8 million, during 1998. The Company sold 233,241 shares of
IMC stock for $3.7 million, which resulted in a pre-tax gain of $2.8 million,
during 1997.
Other Income
In addition to net interest income (expense), and gain on the sale of loans, the
Company derives income from origination fees earned on Brokered Loans generated
by the Company's retail offices and other fees
<PAGE>
earned on the loans funded by the Company, such as document preparation fees,
underwriting service fees, prepayment penalties, and late charge fees for
delinquent loan payments. Brokered Loans fees were $4.3 million for the year
ended December 31, 1998, compared to $1.0 million for the year ended December
31, 1997. For the year ended December 31, 1998, other income totaled $7.0
million compared to $5.0 million for the same period in 1997. The increase was
primarily the result of the increase in Brokered Loan fees, which was offset by
a reduction in underwriting fee income due to a lower volume of loans closed.
Comprehensive Income
The Company has other comprehensive income (loss) in the form of unrealized
holding gains (losses) on securities held for sale. The shares of IMC Mortgage
Company common stock owned by the Company is the primary component of the
Company's security holdings (See Item 2 section "Assets"). For the year ended
December 31, 1998, other comprehensive loss was $6.8 million compared to other
comprehensive loss of $4.5 million for the year ended December 31, 1997. The
losses for the years ended December 31, 1998 and 1997, were related to a
decrease in the market price of IMC Mortgage Company common stock. The Company
owned 435,634 shares of IMC Mortgage Company common stock on December 31, 1998.
Compensation and Related Expenses
The largest component of expenses is compensation and related expenses, which
increased by $4.9 million to $23.4 million for the year ended December 31, 1998,
compared to the same period in 1997. The increase was directly attributable to
an increase in the number of employees. During the year ended December 31, 1998,
approximately 60% of the increase was attributed to staffing needs for seven
additional retail origination offices compared to the same period in 1997. The
remaining 40% of the increase in compensation and related benefits expense for
the year ended December 31, 1998, was due to a higher number of employees in the
corporate headquarters during the first six months of 1998. During the first six
months of 1998, the Company had an increase of 68.1% in corporate office staff
compared to the same period in 1997, with a corresponding increase in base
salaries and benefits of approximately $2.0 million. However, in July 1998, the
Company initiated a plan to reduce the number of employees in the corporate
office. As of December 31, 1998, the home office staff had been reduced by 21%
compared to March 31, 1998.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 1998
increased by $1.5 million to $11.7 million, compared to the year ended December
31, 1997. This increase is attributed to the addition of seven retail lending
offices during the year ended December 31, 1998.
Loan Production Expense
The largest component of loan production expense is fees paid by the Company to
mortgage brokers for services rendered in the preparation of loan packages.
Other items that comprise loan production expenses are appraisals, credit
reports, leads research and telemarketing expenses. Loan production expenses for
the year ended December 31, 1998 were $3.6 million compared to $1.9 million for
the year ended December 31, 1997. The increase was primarily the result of an
increase in services rendered fees.
<PAGE>
Provision for Loan Losses
The following table presents the activity in the Company's allowance for loan
losses and selected loan loss data for 1998 and 1997:
<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31 1998 1997
- ----------- --------- ---------
<S> <C> <C>
Balance at beginning of year $ 1,687 $ 924
Provision charged to expense 3,064 1,534
Acquisition of MOFC, Inc. 49 --
Loans charged off (2,372) (953)
Recoveries of loans previously charged off 162 182
--------- ---------
Balance at end of year $ 2,590 $ 1,687
========= =========
Loans receivable at year-end, gross
of allowance for losses $ 107,634 $ 82,383
Ratio of allowance for loan losses to gross
loans receivable at year-end 2.41% 2.05%
</TABLE>
The Company added $3.1 million during the year ended December 31, 1998 to the
allowance for loan losses, compared to an increase of $1.5 million for the year
ended December 31, 1997. The increase was primarily the result of two Seasoned
Loan sales, of approximately $9.6 million, at 92% and $2.3 million, at 79%, of
the carrying value of the loans. Also contributing to the increase in the
provision for loan losses was an increase in the balance of gross mortgage loans
held by the Company for the respective dates. All losses ("charge offs" or
"write downs") and recoveries realized on loans previously charged off, are
accounted for in the allowance for loan losses.
The allowance is established at a level that management considers adequate
relative to the composition of the current portfolio of loans held for sale.
Management considers current characteristics of the portfolio such as credit
quality, the weighted average coupon and the weighted average loan to value
ratio, and the delinquency status in the determination of an appropriate
allowance. Other criteria such as covenants associated with the Company's credit
facilities, trends in the demand for non-conforming mortgage loans in the
secondary market and general economic conditions, including interest rates, are
also considered when establishing the allowance. Adjustments to the reserve for
loan losses may be made in future periods due to changes in the factors
mentioned above and any additional factors that may effect anticipated loss
levels in the future.
<PAGE>
Provision for Foreclosed Property Losses
The Company decreased its provision for foreclosed property losses by $168,000
for the year ended December 31, 1998, compared to an increase of $142,000 for
the year ended December 31, 1997.
Sales of real estate owned yielded net losses of $660,000 for the year ended
December 31, 1998 versus $654,000 for the year ended December 31, 1997.
The following table presents the activity in the Company's allowance for
foreclosed property losses and selected real estate owned data for 1998 and
1997:
<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31 1998 1997
------- -------
<S> <C> <C>
Balance at beginning of year $ 671 $ 529
Provision charged to (reducing) expense (168) 142
------- -------
Balance at end of year $ 503 $ 671
======= =======
Real estate owned at year-end, gross
of allowance for losses $ 2,211 $ 3,038
Ratio of allowance for foreclosed property losses
to gross real estate owned at year-end 22.80% 22.09%
</TABLE>
The Company maintains a reserve on its real estate owned ("REO") based upon
management's assessment of appraised values at the time of foreclosure. The
decrease in the provision for foreclosed property losses relates to a decrease
in the dollar amount of outstanding REO at December 31, 1998 when compared to
December 31, 1997. While the Company's management believes that its present
allowance for foreclosed property losses is adequate, future adjustments may be
necessary.
Results of Operations for the Year Ended December 31, 1997 compared to the Year
Ended December 31, 1996.
Net Income
The Company's net income for 1997 was $8.1 million compared to net income of
$3.3 million in 1996. On a per share basis (diluted), income for 1997 was $1.51,
compared to $0.63 for 1996.
<PAGE>
The per share figures have been adjusted to reflect a two-for-one stock split of
the Company's common stock on August 30, 1996, a two-for-one stock split of the
Company's common stock on December 16, 1996, and a 100% stock dividend which
occurred on November 21, 1997.
The return on average assets was 7.68% in 1997, compared to 7.32% in 1996.
Return on average shareholders' equity was 32.69% in 1997, compared to 36.44% in
1996.
Origination of Mortgage Loans
The following table shows the loan originations in dollars and units for the
Company's broker and retail units in 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended
December 31 1997 1996
- ----------- -------- --------
<S> <C> <C>
Broker $256,417 $162,887
Retail 212,538 95,946
-------- --------
Total $468,955 $258,833
======== ========
Number of Loans Originated:
Broker 4,399 2,670
Retail 4,022 1,683
-------- --------
Total 8,421 4,353
======== ========
</TABLE>
The increases in the dollar volume of loan originations of 81.2% in 1997, 132.1%
in 1996 reflect strong growth in both broker and retail lending operations.
The Company's broker lending division originated $256.4 million of residential
mortgage loans during 1997, compared to $162.9 million in 1996. The 57.4%
increase in originations in 1997 compared to 1996 was attributed to the increase
in the Company's retail locations. On a unit basis, the Company originated 4,399
loans in its broker operation in 1997, compared to 2,670 loans in 1996 .
The Company's retail lending division originated $212.5 million of residential
mortgage loans in 1997, compared to $95.9 million in 1996. The 121.5% increase
in 1997 compared to 1996 is attributed to additional retail loan offices and
back-office capabilities. On a unit basis, the Company originated 4,022 loans in
its retail operation in 1997, compared to 1,683 loans in 1996.
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 1997 and 1996 were
minimal and the Company has no current plans to expand the activity of
purchasing pools of loans.
<PAGE>
Gain on Sale of Loans
The Company sold $420.5 million of mortgage loans during 1997, compared to
$228.9 million in 1996. Sales volume increased by 83.7% in 1997, by 174.7% in
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 1997, gain on the sale of loans was $33.5 million which compares with $18.0
million in 1996. 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 64.2% of total
revenue in 1997, compared to 72.2% of total revenue in 1996.
The weighted-average premium realized by the Company on its loan sales increased
to 6.39% in 1997, compared to 6.34% in 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.
Origination fee income included in the gain on sale of loans in 1997 was $8.2
million compared to $3.9 million in 1996. The increases of 108.4% in 1997 is the
result of the Company originating and selling more loans generated by the retail
lending division. The Company's retail originations increased by $116.6 million
or 121.5%, in 1997. The Company's retail loan sales in 1997 comprised 48.5% of
total loan sales, with an average loan origination fee income earned of 4.2%.
For 1996, the Company's retail loan sales were 35.0% of total loan sales with an
average loan fee income earned of 4.9%. Total recapture premium and fees
associated with selling loans represented approximately 35 basis points of loans
sold in 1997 compared with 30 basis points in 1996.
Interest Income and Expense
Interest income in 1997 was $10.9 million compared with $4.5 million in 1996.
The 141.9% increase in interest income in 1997 was primarily due to a higher
average balance of loans held for sale resulting from the increase in loan
originations. The average holding period in 1997 for mortgage loans in inventory
remained consistent with the average 1996 holding period.
Interest expense in 1997 was $6.2 million compared with $3.1 million in 1996.
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.
<PAGE>
The following tables reflect the average yields earned and rates paid by the
Company during 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.
<TABLE>
<CAPTION>
(In thousands)
1997 1996
-------------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 74,116 $ 10,662 14.39% $ 36,519 $ 4,464 12.22%
Cash and other interest-
earning assets 4,240 273 6.44 1,107 56 5.06
--------- --------- ----- --------- --------- -----
78,356 10,935 13.96 37,626 4,520 12.01
--------- ----- --------- -----
Non-interest-earning assets:
Allowance for loan losses (1,231) (754)
Investment in IMC 17,376 2,438
Premises and equipment, net 3,372 1,671
Other 7,112 4,423
--------- ---------
Total assets $ 104,985 $ 45,404
========= =========
Interest-bearing liabilities:
Revolving warehouse lines $ 59,681 4,834 8.10 $ 25,810 2,373 9.19
FDIC-insured deposits 6,076 357 5.88 470 21 4.47
Other interest-bearing
liabilities 10,307 966 9.37 8,690 727 8.37
--------- --------- ----- --------- --------- -----
76,064 6,157 8.09 34,970 3,121 8.92
--------- ----- --------- -----
Non-interest-bearing liabilities 4,264 1,314
--------- ---------
Total liabilities 80,328 36,284
Shareholders' equity 24,657 9,120
--------- ---------
Total liabilities and equity $ 104,985 $ 45,404
========= =========
Average dollar difference between
interest-earning assets and interest-
bearing liabilities $ 2,292 $ 2,656
========= =========
Net interest income $ 4,778 $ 1,399
========= =========
Interest rate spread (2) 5.87% 3.09%
====== =====
Net annualized yield on average
interest-earning assets 6.10% 3.72%
====== =====
</TABLE>
- ----------
(2) Loans shown gross of allowance for loan losses, net of premiums/discounts.
(3) Average yield on total interest-earning assets less average rate paid on
total interest-bearing liabilities.
<PAGE>
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 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 $3.4
million increase in net interest income in 1997 was the net result of a growing
balance sheet positively affected by lower rates on borrowed funds.
<TABLE>
<CAPTION>
1997 Versus 1996
Increase (Decrease) Due to
---------------------------------
(in thousands) Volume Rate Total
------- ------- -------
<S> <C> <C> <C>
Total interest-earning assets
Loans receivable $ 5,289 $ 909 $ 6,198
Cash and other
interest-earning assets 198 19 217
------- ------- -------
5,487 928 6,415
------- ------- -------
Total interest-bearing liabilities
Revolving warehouse loans 2,706 (245) 2,461
FDIC-insured deposits 327 9 336
Other 145 94 239
------- ------- -------
3,178 (142) 3,036
------- ------- -------
Net interest income $ 2,309 $ 1,070 $ 3,379
======= ======= =======
</TABLE>
<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 1996, the Company recognized $480,000.
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. During 1997, the Company sold 233,241 shares of IMC
stock for $3.7 million which resulted in a pre-tax gain of $2.8 million. The
Company is likely to experience volatility in its capital account in future
periods because of market price fluctuations of this investment security.
Other Income
In addition to interest on the loan portfolio and gains from the sale of loans,
the Company derives income from broker fees, document preparation fees,
underwriting service fees, prepayment penalties, late charge fees for delinquent
loan payments and rental income on office space. For 1997, other income totaled
$4.9 million compared to $1.9 million in 1996. The increase of $3.0 million or
156.0%, in 1997 was due to several factors.
Underwriting service and document preparation fees increased by $2.0 million in
1997 due to an increase in loan origination volume. These fees are charged to a
borrower at the time a loan is closed. The unit volume of loan closings
increased by 4,068 loans to 8,421 in 1997.
The Company brokers to various lenders loans that do not meet its underwriting
guidelines. Broker fee income increased by $0.5 million to $1.0 million in 1997.
Increases in prepayment penalty and late charge income are attributed to the
Company's larger loan portfolio.
Comprehensive Income
The Company has comprehensive income (loss) in the form of unrealized holding
gain (loss) on securities held for sale. The shares of IMC Mortgage Company
common stock owned by the Company is the primary component of the Company's
security holdings (See Item 2 section "Assets"). For the year ended December 31,
1997, comprehensive loss was $4.5 million compared to comprehensive income of
$11.4 million for the year ended December 31, 1996. The loss for the year ended
December 31, 1997 was related to a decrease in the market price of IMC Mortgage
Company common stock. The gain for the year ended December 31, 1996 was related
to an increase in the market price of the IMC Mortgage Company common stock for
the respective periods. The Company owned approximately 975,592 shares of IMC
Mortgage Company common stock on December 31, 1997.
<PAGE>
Compensation and Related Expenses
The largest component of expenses is compensation expense. Compensation expense
in 1997 increased by $8.4 million to $16.4 million. The increase of 105.2% in
1997 was directly attributable to the addition of new employees. The Company had
552 full-time equivalent employees at December 31, 1997 (443 full-time and 217
part-time employees), compared to 287 at December 31, 1996. The Company's
corporate office staff increased by 122.3% in 1997, with a corresponding
increase in base salaries of approximately $1,700,000. The broker division
increased its staffing by 63.6% and the increase in base salaries associated
with the new employees was approximately $500,000. The Company opened twelve
retail lending offices in 1997, and the retail lending staff increased by
100.7%, resulting in a base salary increase in the retail division of
approximately $3,000,000. Commission and bonus expense in 1997 increased by
approximately $2,500,000 due to increased production. Finally, additional 1997
costs due to merit and cost of living increases were approximately $700,000.
General and Administrative Expenses
General and administrative expenses in 1997 increased by $7.3 million to $14.2
million. The increase of 107.0% in 1997 was attributed to the growth of the
Company. The Company opened twelve retail offices in 1997. In addition, seven
offices opened in 1996 operated for a full year in 1997. The total general and
administrative expenses associated with the new retail offices was $1.8 million
in 1997. For offices open for all of 1997 and 1996, general and administrative
expenses increased by $0.9 million to $2.1 million in 1997, as a result of a
32.0% loan production volume increase in those offices. General and
administrative expenses related to the Company's corporate office staff
increased by $3.0 million to $5.6 million in 1997, as the Company increased
corporate staff expenditures to support the increased loan volume. These
expenses included increases in utilities, postage, office supplies, travel and
entertainment, depreciation on office equipment, and professional fees.
The broker division began paying fees to brokers in 1997 for services rendered
in the preparation of loan packages. The total expense associated with those
fees was $1.4 million in 1997.
<PAGE>
Provision for Loan Losses
The Company provided $1.5 million during 1997 as additions to the allowance for
loan losses, compared to $1.1 million in 1996.
The following table presents the activity in the Company's allowance for loan
losses and selected loan loss data for 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31 1997 1996
- -------------- -------- --------
<S> <C> <C>
Balance at beginning of year $ 924 $ 594
Provision charged to expense 1,534 1,145
Acquisition of the Savings Bank -- 20
Loans charged off (953) (863)
Recoveries of loans previously charged off 182 28
-------- --------
Balance at end of year $ 1,687 $ 924
======== ========
Loans receivable at year-end, gross
of allowance for losses $ 82,383 $ 46,347
Ratio of allowance for loan losses to gross
loans receivable at year-end 2.05% 1.99%
</TABLE>
<PAGE>
Provision for Foreclosed Property Losses
The Company provided $0.1 million during 1997 as additions to the allowance for
foreclosed property losses, compared to $0.2 million in 1996.
Sales of real estate owned yielded net losses of $0.7 million in 1997 and $0.2
million in 1996.
The following table presents the activity in the Company's allowance for
foreclosed property losses and selected real estate owned data for 1997 and
1996:
<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31 1997 1996
- ------------- ------ ------
<S> <C> <C>
Balance at beginning of year $ 529 $ 366
Provision charged to expense 142 163
------ ------
Balance at end of year $ 671 $ 529
====== ======
Real estate owned at year-end, gross
of allowance for losses $3,038 $2,606
Ratio of allowance for foreclosed property losses
to gross real estate owned at year-end 22.09% 20.30%
</TABLE>
Minority Interest in Net Income of Subsidiary. Contained in the consolidated
statements of income for 1996 was minority interests 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.
Income Taxes. Income tax expense for 1997 was $5.6 million resulting in an
effective tax rate of 41.2%. By comparison, the Company had income tax expense
of $2.3 million for an effective tax rate of 40.5% in 1996.
The effective tax rates differ from the statutory federal rates due primarily to
state income taxes and certain nondeductible expenses.
<PAGE>
Financial Condition at December 31, 1998 and 1997
Assets
The total assets of the Company were $136.1 million at December 31, 1998,
compared to total assets of $118.1 million at December 31, 1997.
Cash and cash equivalents decreased by $5.6 million to $6.3 million at December
31, 1998, from $11.9 million at December 31, 1997. There was a conscious effort
to reduce excess cash holdings in 1998.
Net mortgage loans receivable increased by $24.3 million to $105.0 million at
December 31, 1998. The 30.2% increase in 1998 is primarily due to the Company's
management deciding to hold loans in December instead of selling loans at very
low premiums. The premiums in the fourth quarter were very low due to increased
competition in the whole loan sale market. The Company generally sells loans
within sixty days of origination.
Real estate owned decreased by $0.7 million to $1.7 million at December 31,
1998. The primary reason for the 27.9% decrease in real estate owned was that
fewer properties were foreclosed on and more properties were sold in 1998 as
compared to 1997.
Investments consist primarily of shares of IMC Mortgage Company ("IMC") owned by
the Company and the Adjustable Rate Mortgage Fund and FHLB stock owned by the
Savings Bank. The market value of the IMC shares owned was $0.1 million at
December 31, 1998 and $11.6 million at December 31, 1997. The decrease in
investments was primarily due to the sale of 558,400 shares of IMC stock and a
decline in the market price of IMC stock from $11.875 on December 31, 1997 to
$0.28 per share on December 31, 1998.
Premises and equipment increased by $1.0 million to $5.6 million at December 31,
1998. The primary reason for the 1998 increase was the acquisition of
ConsumerOne Financial. At the date of acquisition, ConsumerOne's premises and
equipment totaled $1.0 million, of which $0.6 million were capitalized leased
assets.
Goodwill (net) increased by $3.8 million to $4.6 million at December 31, 1998.
The 1998 increase is due to the acquisitions of Funding Center of Georgia and
ConsumerOne Financial. The goodwill attributed to the Funding Center of Georgia
acquisition was $0.7 million and the remaining increase of $3.2 million was
goodwill attributed to the ConsumerOne Financial acquisition.
The Company had an income tax receivable of $2.0 million at December 31, 1998,
which was the result of overpayment of second quarter estimated tax payments. At
December 31, 1997 the Company had an income tax payable of $1.2 million.
The deferred tax asset was $3.3 million at December 31, 1998 compared to a
deferred tax liability of $1.1 million at December 31, 1997. The change was the
result of a decrease of $1.7 million in the deferred tax liability on
securities.
Other assets increased by $1.5 million to $4.1 million at December 31, 1998.
Accrued interest receivable
<PAGE>
increased $224,000 in 1998, which is the result of higher average loans held for
sale. Also, prepaid assets increased by $270,000 in 1998. Prepaid assets include
syndicated bank fees, insurance, taxes and rent. Broker fee receivable increased
by approximately $350,000 in 1998 to $559,000. The Company's brokered loan
origination's increased by 245.8% to $55.9 million in the final six months of
1998 compared to $16.2 million for the same period in 1997. The Company also
began originating non-mortgage consumer loans in 1998 which attributed to a
$246,000 increase in other assets. Also, the impound receivables increased by
$374,000 to $480,000 in 1998. Impound receivables are receivables due the
Company for force placed insurance, as well as legal fees incurred by the
Company on accounts that are in bankruptcy or in the process of foreclosure.
Liabilities
Outstanding balances for the Companies revolving warehouse loans increased by
$20.1 million to $72.5 million at December 31, 1998. The 38.2% increase in 1998
was primarily attributable to the increase in loans receivable and the $6.2
million balance on ConsumerOne Financial's warehouse at December 31, 1998.
The Company draws on its revolving warehouse lines of credit as needed to fund
loan production. As of December 31, 1998, the Company had issued loan funding
checks totaling $2.0 million 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 January 1999 and most were funded with cash on hand or new warehouse line
draws.
The Savings Bank's deposits totaled $29.7 million at December 31, 1998, compared
to $17.8 million at December 31, 1997. The Savings Bank substantially increased
its deposits in 1998 in order to fund loans. Of the certificate accounts as of
December 31, 1998, a total of $15.7 million was scheduled to mature in the
twelve-month period ending December 31, 1999.
On December 16, 1997, the Savings Bank borrowed $1.0 million from the FHLB, and
this amount was outstanding at December 31, 1997. The $1.0 million was paid off
in 1998.
Promissory notes and certificates of indebtedness totaled $6.0 million at
December 31, 1998, compared to $9.1 million at December 31, 1997. The reduction
was caused by redemption of $3.0 million promissory note from a shareholder. The
Company has utilized promissory notes and certificates of indebtedness to help
fund its operations. These borrowings are subordinated to the Company's
warehouse lines of credit. 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 9.59%
at December 31, 1998. 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 6.75% and 10.00%, with a weighted-average rate of 9.46% at December 31,
1998. The Company is not currently soliciting new promissory notes or
certificates of indebtedness. (See notes 11 and 12 of audited financial
statements for maturity schedule for the promissory notes and certificates of
indebtedness.)
Accrued and other liabilities increased by $1.9 million to $4.8 million at
December 31, 1998. This category includes accounts payable, accrued interest
payable, deferred income, accrued bonuses, and other payables. The 67.7%
increase in 1998 is primarily attributable to the acquisition of ConsumerOne
Financial. Included in accrued and other liabilities is $520,000 of capitalized
lease obligations and an
<PAGE>
investment payable of $1,575,000 due in three equal payments in 1999, 2000, and
2001. These payments are subject to reduction in the event of failure to meet
agreed upon pre-tax profit targets each year.
Shareholders' Equity
Total shareholders' equity at December 31, 1998 was $19.3 million compared to
$25.1 million at December 31, 1997. The $5.8 million decrease in 1998 was
primarily due to the reduction of $6.8 million in the unrealized gain on
securities. This reduction was offset by net income of $479,000. The Company
issued common stock in the amount of $669,000 for the acquisition of 17%
interest in Armada Residential Mortgage LLC. The Company also repurchased common
stock in the amount of $113,000, which caused a reduction in shareholders'
equity.
Liquidity and Capital Resources
The Company's operations require access to short- and long-term sources of cash.
The Company uses cash flow from the sale of loans through whole loan sales, loan
origination fees, processing and underwriting fees, net interest income, and
borrowings under its warehouse facilities and other debt to meet its working
capital needs. The Company's primary operating cash requirements include the
funding of mortgage loan originations pending their sale, operating expenses,
income taxes and capital expenditures.
Adequate credit facilities and other sources of funding, including the ability
to sell loans in the secondary market, are essential to the Company's ability to
continue to originate loans. The Company has operated, and expects to continue
to operate, on a negative cash flow basis due to the increased volume of loan
originations. For the years ended December 31, 1998 and 1997, the Company used
cash from operating activities of $31.8 million and $31.0 million, respectively.
The net cash used from operating activities was primarily used to fund mortgage
loan originations.
The Company finances its operating cash requirements primarily through warehouse
and other credit facilities, and the issuance of other debt. For the years ended
December 31, 1998 and 1997, the Company received cash from financing activities
of $22.2 million and $38.7 million, respectively.
The Company's borrowings (revolving warehouse loans, FDIC-insured deposits,
mortgage loans on Company office buildings, FHLB advances, subordinated debt and
loan proceeds payable) at December 31, 1998 were 82.3%, compared to 74.5% of
assets at December 31, 1997.
Warehouse and Other Credit Facilities
On December 10, 1997, the Company obtained a $100.0 million 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,
1998, $59.3 million was outstanding under this facility.
<PAGE>
Also on December 10, 1997, the Company obtained a $25.0 million seasoned loan
line of credit from certain members of 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. There is not a time limit as to the number of days from
origination for the loans pledged to secure this line of credit. As of December
31, 1998, $7.1 million was outstanding under this facility.
At December 31, 1998, Consumer One the Michigan based mortgage company acquired
by Approved had an existing warehouse credit agreement with a California
corporation. The line of credit commenced on June 10, 1998 and terminates one
year from the commencement date. The maximum, credit availability is $10
million. This line is collaterized by mortgage loans originated by ConsumerOne
company and bears interest at a rate of prime plus 1.75%. As of December 31,
1998, $6.2 million was outstanding under this facility. During February 1999,
the Company paid off this line of credit.
Whole Loan Sale Program
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 loan delinquency rates, the
term and current age of the loan, the interest rate and loan to value ratio,
whether or not the loan has a prepayment penalty, the credit grade of the loan,
the credit score of the borrower, the geographic location of the real estate,
the type of property, general economic and market 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.
Other Capital Resources
The Savings Bank's deposits totaled $29.7 million at December 31, 1998, compared
to $17.8 million at December 31, 1997. The Savings Bank substantially increased
its deposits in 1998 in order to fund loans. The Savings Bank currently utilizes
funds from the deposits and a line of credit with the FHLB of Atlanta to fund
first lien and junior lien mortgage loans.
The Company has utilized promissory notes and certificates of indebtedness to
help funds its operations. Promissory notes and certificates of indebtedness
totaled $6.0 million at December 31, 1998, compared to $9.1 million at December
31, 1997. These borrowings are subordinated to the Company's warehouse lines of
credit. The Company is not currently soliciting new promissory notes or
certificates of indebtedness. (See notes 11 and 12 of audited financial
statements for maturity schedule for the promissory notes and certificates of
indebtedness.)
The Company had cash and cash equivalents of $6.3 million at December 31, 1998.
The Company has sufficient cash resources to fund its operations at current
levels through the end of 1999. However, loan origination volume is expected to
continue to grow in 1999, and management anticipates that it will need
additional capital to fund this growth and to continue its expansion. 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 continued competition and rising
delinquencies.
<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 savings and
borrowings, which can be withdrawn and are due in one year or less is 5.0%.
Penalties are assessed for noncompliance. In 1998 and 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 December 31, 1998, the Savings Bank's book value under generally accepted
accounting principles ("GAAP") was $5.1 million. 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 December 31, 1998, 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 $ 5,058 $ 5,058 $ 5,058
Add: unrealized loss on securities 15 15 15
Nonallowable asset: goodwill (116) (116) (116)
Additional capital item: general allowance -- -- 276
------- ------- -------
Regulatory capital - computed 4,957 4,957 5,233
Minimum capital requirement 578 1,157 2,166
------- ------- -------
Excess regulatory capital $ 4,379 $ 3,800 $ 3,067
======= ======= =======
Ratios:
Regulatory capital - computed 12.86% 12.86% 19.33%
Minimum capital requirement 1.50 4.00 8.00
------- ------- -------
Excess regulatory capital 11.36% 8.86% 11.33%
======= ======= =======
</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.
<PAGE>
New Accounting Standards
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share," which superseded 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. There was no material change in the earnings per share amounts
as a result of adopting this new standard.
Effective January 1, 1998 the Company adopted SFAS No 130, "Reporting
Comprehensive Income". 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 only item the Company has in
Comprehensive Income for the year ended December 31, 1998 is an unrealized
holding gain or loss on securities, net of deferred taxes.
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 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. This statement does not have any material
impact on the financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued, effective for fiscal years beginning after June 15,
1999. This statement establishes the accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contract, (collectively referred to as derivatives) and for hedging
activities. It requires that entities recognize all derivative as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or
foreign-currency-denominated forecasted transaction. The company is currently
evaluating the effect this statement will have on the financial statements.
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" was issued, effective for the first fiscal quarter beginning
after December 15, 1998. The new statement requires that after an entity that
engaged in mortgage banking activities has securitized mortgage loans that it
held for sale, it must classify the resulting retained mortgage-backed
securities or other retained interest based on its ability
<PAGE>
and intent to sell or hold those investments. Any retained mortgage-backed
securities that are committed for sale before or during the securitization
process must be classified as trading. This statement does not have any impact
on the Company's financial statements since the Company has never securitized
loans.
Hedging Activities
The Company originates mortgage loans for sale as whole loans. The Company
mitigates its interest rate exposure by selling most of the loans within sixty
days of origination. However, the Company may choose to hold certain loans for a
longer period prior to sale in order to increase net interest income. In
addition, certain loans must be "seasoned" for periods of six to twelve months
before they can be sold. The majority of loans held by the Company beyond the
normal sixty-day holding period are fixed rate instruments. Since most of the
Company's borrowings have variable interest rates, the Company has exposure to
interest rate risk. For example, if market interest rates were to rise between
the time the Company originates the loans and the time the loans are sold, the
original interest rate spread on the loans narrows, resulting in a loss in value
of the loans. To offset the effects of interest rate fluctuations on the value
of its fixed rate mortgage loans held for sale, the Company in certain cases
will enter into Treasury security lock contracts, which function similar to
short sales of U.S. Treasury securities. Prior to entering into a hedge
transaction, the Company performs an analysis of its loans, taking into account
such factors as interest rates and maturities, to determine the proportion of
contracts to sell so that the risk value of the loans will be most effectively
hedged. The Company in 1997 used one of the commercial banks in its syndicated
bank group to arrange hedge contracts. The Company had no hedge contracts
outstanding at December 31, 1998.
If the value of a hedge decreases, offsetting an increase in the value of the
hedged loans, the Company, upon settlement with its counter-party, will pay the
hedge loss in cash and realize the corresponding increase in the value of the
loans. Conversely, if the value of a hedge increases, offsetting a decrease in
the value of the hedged loans, the Company will receive the hedge gain in cash
at settlement.
The Company's management believes that its current hedging strategy using
Treasury rate lock contracts is an effective way to manage interest rate risk on
fixed rate loans prior to sale.
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
<PAGE>
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 and it 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. 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.
<PAGE>
YEAR 2000 ISSUES
The Year 2000 issue relates to the way computer systems and programs
define and handle calendar issues. Non-compliant systems could fail or make
miscalculations due to interpretations of dates that fall past the millennium.
For example, the year value "00" could be interpreted to mean the year "1900",
rather than "2000". Other systems not normally thought of as computer related
may also contain embedded hardware or software that may contain a date or time
element. Approved, similar to other financial service institutions, is sensitive
and subject to the potential impact of the Year 2000 issue.
Approved initiated a Year 2000 project in late 1997 under the direction
of a project leader, supervised by the Company's Board of Directors. Management
has placed a high priority on Year 2000 issues, in recognition of the business
risk inherent in non-compliance. The project is proceeding ahead of schedule,
with expected completion by the end of first quarter 1999.
PROJECT. The Approved Year 2000 project generally follows suggested OTS
and FFIEC guidelines. The scope of the project includes: ensuring the compliance
of all systems and applications of significance, operating systems and hardware
of the Company's LAN and PC platforms; addressing issues related to other
systems not normally thought of as computer related, and addressing the
compliance of key business partners.
There are five (5) phases of the project: Awareness, Assessment,
Renovation, Validation and Implementation. During the Assessment phase, the
Company determined to concentrate physical upgrades to those computers
representing "current technologies". Older units may still be used in
non-critical applications, but would be phased out and replaced before the Year
2000. The Assessment phase also identified several systems that are classified
as "mission-critical" and represent the Company's core business of mortgage
lending. Project efforts have focused on getting these systems to year 2000
compliance levels.
Approved has no internally generated programmed software to correct, as
substantially all of the software utilized by the Company is purchased or
licensed from external providers. The Company is currently completing the
Renovation phase of the project. Virtually all "mission-critical" applications
and hardware have been upgraded to Year 2000 compliance release levels.
In addition, the Company has contracted for a new Human Resource and
Payroll system, which is certified by the vendor as being Year 2000 compliant.
Installation of these systems occurred in the fourth quarter 1998, with full
integration expected by the end of the first quarter 1999. All PC equipment
located at corporate headquarters, including hardware BIOS, and software, have
been upgraded to Year 2000 compliance release levels.
The final portion of the Renovation phase consists of field upgrades of
systems and software located in our branch offices, which was substantially
complete as of December 31, 1998.
The Company has initiated formal communications with significant outside
vendors and business partners to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
Approved is requesting that third party vendors represent their products and
services to be Year 2000 compliant and that they have a program to test for that
compliance.
The majority of the Company's mission-critical systems are already
certified by their respective vendors to being Year 2000 compliant. Certified
compliant systems include mortgage loan origination and processing, closing,
servicing, secondary marketing, and account systems. All named systems are
installed at current release levels. One system used for Indirect Lending is not
compliant. However, the vendor has scheduled replacement with a compliant
version by the end of first quarter 1999.
The majority of the Company's non-computer-related systems and equipment
are currently Year 2000 compliant, based primarily upon verbal and written
communication with vendors. Compilation of written documentation regarding this
compliance is virtually complete.
Validation of internal mission-critical applications has begun upon
those applications certified by their vendors as being fully Year 2000
compliant. Validations of several of the Company's mission-critical systems have
been completed. Approved Financial expects to meet the FFIEC milestone of having
"internal testing of mission-critical systems substantially complete" by the end
of the first quarter 1999.
COSTS. The total cost associated with required modifications and testing
to become Year 2000 compliant has been budgeted at $200,000, and is not
considered material to the Company's financial position. Costs are expensed as
incurred in the current period. This estimate does not include Approved
Financial's potential share of Year 2000 costs that may be incurred by
partnerships or ventures in which the company may participate but is not the
operator.
RISKS. The failure to correct a material Year 2000 problem could result
in interruption in, or failure of certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial position.
The Company's Year 2000 project has resulted in a significantly reduced
level of uncertainty about the Company's mission-critical systems and software.
The Company believes that the completion of the Year 2000 project as scheduled
will vastly reduce the possibility of significant interruptions of normal
business operations.
Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part for the uncertainty of the Year 2000 readiness of third-party
suppliers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the company's
results of operations, liquidity or financial condition.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 during 1998
and 1997, approximately 78.5% and 90.0% of the total loans originated and
funded in-house during the years ended December 31,1998 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.
December 1998 loan production represented approximately 30% of the total unsold
1998 loans. The majority of these loans were sold in January 1999. 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, 1998, 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.
<PAGE>
The Company's one-year gap was a negative 32.12% of total assets at December 31,
1998, as illustrated in the following table:
<TABLE>
<CAPTION>
One Year Two Three to More Than
Description Total Or Less Years Four Years Four Years
- ---------------------------------------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable (1) $ 107,634 $ 35,961 $ 1,399 $ 3,337 $ 66,937
Cash and other
Interest-earning assets 9,634 9,634
--------- --------- --------- --------- ---------
Interest-earning assets 117,268 45,595 1,399 3,337 66,937
Allowance for loan losses (2,590)
Investment in IMC 123
Premises and equipment, net 5,579
Other 15,738
---------
Total assets $ 136,118
=========
Interest-bearing liabilities:
Revolving warehouse lines $ 72,546 72,546
FDIC - insured deposits 29,728 15,749 7,742 3,667 2,570
Other interest-bearing
liabilities 7,252 1,015 1,574 2,082 2,581
--------- --------- --------- --------- ---------
109,526 89,310 9,316 5,749 5,151
========= ========= ========= =========
Non-interest-bearing liabilities 7,325
---------
Total liabilities 116,851
Shareholders' equity 19,267
---------
Total liabilities and equity $ 136,118
=========
Maturity/repricing gap $ (43,715) $ (7,917) $ (2,412) $ 61,786
========= ========= ========= =========
Cumulative gap $ (43,715) $ (51,632) $ (54,044) $ 7,742
========= ========= ========= =========
As percent of total assets (32.12)% (37.93)% (39.70)% 5.69%
========= ========= ========= =========
Ratio of cumulative interest earning
Assets to cumulative interest earning
Liabilities .51x .48x .48x 1.07x
========= ========= ========= =========
</TABLE>
(1) Loans shown gross of allowance for loan losses, net of premiums/discounts.
<PAGE>
Interest Rate Risk
The principal quantitative disclosure of the Company's market risks are the gap
table on page 71. The gap table shows that the Company's one-year gap was a
negative 32.1% of total assets at December 31, 1998. 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, 1998, 62.3% 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, 81.5%
of which reprice within one year of December 31, 1998. 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.
The Savings Bank is building a portfolio of loans to be held for net interest
income. 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.
<PAGE>
Asset Quality
The following table summarizes all of the Company's delinquent loans at December
31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Delinquent 31 to 60 days $ 697 $ 866 $ 1,519
Delinquent 61 to 90 days 1,115 1,124 390
Delinquent 91 to 120 days 1,460 970 363
Delinquent 121 days or more 2,658 1,567 794
-------- -------- --------
Total delinquent loans (1) $ 5,930 $ 4,527 $ 3,042
======== ======== ========
Total loans receivable outstanding, gross of the
allowance for loan losses, net of unearned loan fees (1) $107,634 $ 82,383 $ 46,347
======== ======== ========
Delinquent loans as a percentage of total loans outstanding:
Delinquent 31 to 60 days 0.65% 1.05% 3.28%
Delinquent 61 to 90 days 1.04 1.36 0.84
Delinquent 91 to 120 days 1.36 1.19 0.78
Delinquent 121 days or more 2.46 1.90 1.71
-------- -------- --------
Total delinquent loans as a percentage
of total loans outstanding 5.51% 5.50% 6.61%
======== ======== ========
</TABLE>
- ----------
(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 non-accrual status was
approximately $212,000, $154,000, and $91,000 in 1998, 1997, and 1996,
respectively.
<PAGE>
ITEM 8 - 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 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Position(s) and Offices Presently
Name Age Held with the Company
---- --- ---------------------
<S> <C> <C>
Allen D. Wykle 52 Chairman of the Board, President
and Chief Executive Officer, and member
of Executive and Compensation Committees
Leon H. Perlin 71 Director, member of the Executive,
Audit, Compensation and Option Committees
Oscar S. Warner 82 Director, member of the Audit,
Compensation and Option Committees
Arthur Peregoff 80 Director
Stanley W. Broaddus 49 Director, Vice President and Secretary,
and member of the Executive Committee
Robert M. Salter 51 Director, member of the Compensation and
Option Committees
Jean S. Schwindt 43 Director, Executive Vice President and
member of the Executive and Audit Committees
Neil W. Phelan 41 Director, Executive Vice President
Barry C. Diggins 35 Director, Executive Vice President
Gregory J.Witherspoon 52 Director, Chairman of the Audit
Committee
Eric S. Yeakel 34 Chief Financial Officer and Treasurer
Gregory W. Gleason 46 President, Approved Federal Savings Bank
</TABLE>
In addition to the foregoing, information regarding directors and executive
officers appears in the definitive proxy statement for the Annual Shareholder's
Meeting to be held on June 14, 1999 and is incorporated herein by reference.
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
Information regarding executive compensation appears in the definitive
proxy statement for the Annual Shareholder's Meeting to be held on June 14, 1999
and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management appears in the definitive proxy statement for the Annual
Shareholder's Meeting to be held on June 14, 1999 and is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears in the definitive proxy statement for the Annual Shareholder's Meeting
to be held on June 14, 1999 and is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
AUDITED FINANCIAL STATEMENTS
The following 1998 Consolidated Financial Statements of Approved Financial
Corp. and Subsidiaries are included:
- Report of Independent Public Accountants.................... 3
- Consolidated Balance Sheets................................. 4
- Consolidated Statements of Income and Comprehensive
Income (Loss).......................................... 5
- Consolidated Statements of Shareholders' Equity ............ 6
- Consolidated Statements of Cash Flows .....................7 - 8
- Notes to Consolidated Financial Statements.................9 - 35
- Stock Price and Dividend Information........................36
- Consolidating Balance Sheet.................................37
- Consolidating Income Statement..............................38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company (Incorporated
by Reference to Appendix A of the Form 10 Registration Statement Filed
February 11, 1998)
3.2 Bylaws of the Company (Incorporated by Reference to Appendix B of the Form 10
Registration Statement Filed February 11, 1998)
10.1 Approved Financial Corp. Incentive Stock Option Plan (Incorporated by
Reference to Appendix C of the Form 10 Registration Statement Filed February
11, 1998)
10.2 Employment Agreement between the Company and Neil W. Phelan (Incorporated by
Reference to Appendix D of the Form 10 Registration Statement Filed February
11, 1998)
10.3 Employment Agreement between the Company and Stanley W. Broaddus
(Incorporated by Reference to Appendix E of the Form 10 Registration Statement
Filed February 11, 1998)
10.4 Employment Agreement between the Company and Barry C. Diggins (Incorporated
by Reference to Appendix F of the Form 10 Registration Statement Filed
February 11, 1998)
10.5 Purchase Agreement of Barry C. Diggins' Interest in Armada
Residential Mortgage, LLC, and related Nonqualified Stock Option
Agreement (Incorporated by Reference to Appendix G of the Form 10
Registration Statement Filed February 11, 1998)
10.6 Employment Agreement between the Company and Eric S. Yeakel (Incorporated by
Reference to Appendix H of the Form 10 Registration Statement Filed February
11, 1998)
10.7 Mills Value Adviser, Inc, Investment Management Agreement/Contract with the
Company (Incorporated by Reference to Appendix I of the Form 10 Registration
Statement Filed February 11, 1998)
10.8 Share Purchase Agreement for Purchase of Controlling Interest in
Approved Federal Savings Bank (Formerly First Security Federal
Savings Bank, Inc.) (Incorporated by Reference to Appendix J of
the Form 10 Registration Statement Filed February 11, 1998)
<PAGE>
<CAPTION>
Exhibit
Number Description
<S> <C>
10.9 Stock Appreciation Rights Agreement with Jean S. Schwindt (Incorporated by
Reference to Appendix K of the Form 10 Registration Statement Filed February
11, 1998)
10.10 Asset Purchase Agreement with Funding Center of Georgia, Inc. (Incorporated
by Reference to Appendix L of the Form 10 Registration Statement Filed
February 11, 1998)
10.11 Gregory J. Witherspoon Registration Rights Agreement (Incorporated by
Reference to Appendix M of the Form 10 Registration Statement Filed February
11, 1998)
10.12 Pre-IPO Agreement between the Company and Industry Mortgage
Company, L.P., dated March 30, 1996 (Incorporated by Reference to
Appendix N of the Form 10 Registration Statement Filed February
11, 1998)
10.13 Employment Agreement between the Company and Barry C. Diggins dated February 1999
10.14 Purchase Agreement between the Company and MOFC, Inc.
10.15 Agreement between United Mortgagee Inc. and Approved Federal Savings Bank
10.16 Option Agreement between the Company and Allen D. Wykle
10.17 Option Agreement between the Company and Jean S. Schwindt
10.18 Option Agreement between the Company and Barry C. Diggins
10.19 Option Agreement between the Company and Neil W. Phelan
10.20 Option Agreement between the Company and Stanley Broaddus
10.21 Option Agreement between the Company and Gregory Gleason
10.22 Amendment to Stock Appreciation Rights Agreement with Jean S. Schwindt
10.23 Employment Agreement between the Company and Jean S. Schwindt dated February 1999
10.24 Employment Agreement between the Company and Eric S. Yeakel dated February 1999
10.25 Employment Agreement between MOFC Inc. and Keith Lewis dated December 15, 1998
10.26 Option Agreement between the Company and Eric Yeakel
21 Subsidiaries of the Company (Appendix N)
27 Financial Data Schedule
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
APPROVED FINANCIAL CORP.
(Registrant)
Date: March 31, 1999 By: /s/ Eric S. Yeakel
-----------------------------------
Eric S. Yeakel
Treasurer and
Chief Financial Officer
Date: March 31, 1999 By: /s/ Allen D. Wykle
---------------------------------
Allen D. Wykle
Chairman of the Board of Directors
President, and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 31, 1999 By: /s/ Eric S. Yeakel
-----------------------------------
Eric S. Yeakel
Treasurer and
Chief Financial Officer
Date: March 31, 1999 By: /s/ Allen D. Wykle
---------------------------------
Allen D. Wykle
Chairman of the Board of Directors
President, and Chief Executive
Officer
Date: March 31, 1999 By: /s/ Leon H. Perlin
-----------------------------------
Leon H. Perlin
Director
Date: March 31, 1999 By: /s/ Jean S. Schwindt
-----------------------------------
Jean S. Schwindt
Director and
Executive Vice President
Date: March 31, 1999 By: /s/ Barry C. Diggins
------------------------------------
Barry C. Diggins
Director and
Executive Vice President
Date: March 31, 1999 By: /s/ Neil W. Phelan
----------------------------------
Neil W. Phelan
Director and
Executive Vice President
Date: March 31, 1999 By: /s/ Stanley W. Broaddus
--------------------------------
Stanley W. Broaddus
Director, Vice President
and Secretary
Date: March 31, 1999 By: /s/ Robert M. Salter
-----------------------------------
Robert M. Slater
Director
Date: March 31, 1999 By: /s/ Oscar S. Warner
-----------------------------------
Oscar S. Warner
Director
Date: March 31, 1999 By: /s/ Arthur Peregoff
-----------------------------------
Arthur Peregoff
Director
Date: March 31, 1999 By: /s/ Gregory Witherspoon
-----------------------------------
Gregory Witherspoon
Director
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<PAGE>
CONTENTS
Pages
-----
Report of Independent Accountants ...................................... 3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 ....... 4
Consolidated Statements of Income and Comprehensive Income (Loss)
for the years ended December 31, 1998, 1997 and 1996 ......... 5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 ........................ 6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 .............................. 7 - 8
Notes to Consolidated Financial Statements ......................... 9 - 35
Consolidating Balance Sheet as of December 31, 1998 ................ 36
Consolidating Statements of Income for the year ended
December 31, 1998 ............................................. 37
<PAGE>
Report of Independent Accountants
To the Board of Directors of
Approved Financial Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income (loss), shareholders'
equity and cash flows present fairly, in all material respects, the consolidated
financial position of Approved Financial Corp. and Subsidiaries (the "Company")
at December 31, 1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the years ended December 31, 1998, 1997, and
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 which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
Virginia Beach, Virginia
March 3, 1999
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Cash $ 6,269 $ 11,869
Mortgage loans held for sale, net 105,044 80,696
Real estate owned, net 1,707 2,367
Investments 3,472 15,201
Income taxes receivable 2,023 --
Deferred tax asset 3,330 --
Premises and equipment, net 5,579 4,530
Goodwill, net 4,554 775
Other assets 4,140 2,687
-------- --------
Total assets $136,118 $118,125
======== ========
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 72,546 $ 52,488
FHLB bank advances -- 1,000
Deferred tax liability -- 1,109
Mortgage payable 1,210 1,216
Notes payable-related parties 3,628 6,684
Certificate of indebtedness 2,414 2,396
Certificates of deposits 29,728 17,815
Loan proceeds payable 2,565 6,364
Accrued and other liabilities 4,760 2,837
Income taxes payable -- 1,161
-------- --------
Total liabilities $116,851 $ 93,070
-------- --------
Shareholders' equity:
Preferred stock series A, $10 par value; $ 1 $ 1
Noncumulative, voting:
Authorized shares - 100
Issued and outstanding shares - 90
Common stock, par value - $1.00 in 1998 and 1997: 5,482 5,395
Authorized shares - 40,000,000
Issued and outstanding shares - 5,482,114
In 1998 and 5,395,408 in 1997
Accumulated other comprehensive income 30 6,854
Additional paid in capital 552 --
Retained earnings 13,202 12,805
-------- --------
Total equity 19,267 25,055
-------- --------
Total liabilities and equity $136,118 $118,125
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) for the years
ended December 31, 1998, 1997, and 1996 (Dollars in thousands, except share and
per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Gain on sale of loans $ 29,703 $ 33,501 $ 17,955
Interest income 10,308 10,935 4,520
Income from limited partnership -- -- 480
Gain on sale of securities 1,750 2,796 --
Other fees and income 7,042 4,934 1,927
-------- -------- --------
48,803 52,166 24,882
-------- -------- --------
Expenses:
Compensation and related 23,397 18,535 8,017
General and administrative 11,713 10,205 6,680
Loan production expense 3,593 1,895 173
Interest expense 6,252 6,157 3,121
Provision for loan and foreclosed property losses 2,896 1,676 1,308
-------- -------- --------
47,851 38,468 19,299
-------- -------- --------
Income before income taxes 952 13,698 5,583
Provision for income taxes 473 5,638 2,259
-------- -------- --------
Net income 479 8,060 3,324
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gain/(loss) arising during period (6,824) (4,547) 11,401
-------- -------- --------
Comprehensive (loss)/income $ (6,345) $ 3,513 $ 14,725
======== ======== ========
Net income per share:
Basic $ 0.09 $ 1.52 $ 0.67
======== ======== ========
Diluted $ 0.09 $ 1.51 $ 0.63
======== ======== ========
Weighted average number of shares outstanding:
Basic 5,465 5,310 4,964
======== ======== ========
Diluted 5,511 5,346 5,281
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended December 31,
1998, 1997, and 1996 (Dollars in thousands)
<TABLE>
<CAPTION>
Preferred Stock Accumulated
Series A Common Stock Additional Other
---------------------- ---------------------- Paid In Comprehensive Retained
Shares Amount Shares Amount Capital Income Earnings Total
---------- -------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 90 $ 1 606,680 $ 607 $ 1,142 $ 0 $ 4,486 $ 6,236
Net income 3,324 3,324
Reissuance of common stock 22,000 22 336 82 440
2:1 Stock split 628,680 0
2:1 Stock split 1,257,360 0
Exercise of warrants 4,648 1 7 8
Dividends on common stock (200) (200)
Unrealized gain on investments 11,401 11,401
available for sale, net of tax
-------- -------- ---------- -------- -------- -------- -------- --------
Balance at December 31, 1996 90 $ 1 2,519,368 $ 630 $ 1,485 $ 11,401 $ 7,692 $ 21,209
Net income 8,060 8,060
Redemption of warrants 176,836 44 288 332
Change par value of stock 2,022 (1,773) (249) 0
Issuance of common stock 1,500 1 1
Stock dividend 2,697,704 2,698 (2,698) 0
Unrealized gain on investments (4,547) (4,547)
available for sale, net of tax
-------- -------- ---------- -------- -------- -------- -------- --------
Balance at December 31, 1997 90 $ 1 5,395,408 $ 5,395 $ 0 $ 6,854 $ 12,805 $ 25,055
Net income 479 479
Issuance of common stock 116,706 117 552 669
Repurchase common stock (30,000) (30) (82) (112)
Unrealized loss on investments (6,824) (6,824)
available for sale, net of tax
-------- -------- ---------- -------- -------- -------- -------- --------
Balance at December 31, 1998 90 $ 1 5,482,114 $ 5,482 $ 552 $ 30 $ 13,202 $ 19,267
======== ======== ========== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income $ 479 $ 8,060 $ 3,324
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation of premises and equipment 750 609 133
Amortization of goodwill 395 -- --
Provision for loan losses 3,064 1,534 1,145
Provision for losses on real estate owned (168) 142 163
(Gain) on sale of securities (1,750) (2,796) --
Loss on sale of real estate owned 660 654 192
(Gain) on sale of loans (29,703) (32,696) (17,954)
Income from limited partnership -- -- (480)
Proceeds from sale and prepayments of loans 434,682 479,317 258,335
Change in unearned loan fees 909 -- --
Change in deferred loan costs (263) -- --
Change in deferred hedging loss 91 -- --
Loans held for sale in originations (430,363) (490,579) (258,826)
Changes in assets and liabilities:
Loan sale receivable (28) -- --
Other assets (2,931) (882) (545)
Accrued and other liabilities (709) 6,773 (110)
Income tax payable (3,184) 177 443
Deferred tax asset 112 (1,325) (888)
Loan proceeds payable (3,799) -- --
--------- --------- ---------
Net cash used in operating activities (31,756) (31,012) (15,068)
Cash flows from investing activities:
Purchase of securities -- (4,304) (1,000)
Sales of securities 1,844 4,458 --
Sales of ARM fund shares 4,957 -- --
Distribution from limited partnership -- -- 1,098
Purchase of premises and equipment (1,036) (3,113) (946)
Sales of premises and equipment 29 199 --
Sales of real estate owned 4,440 3,735 1,501
Real estate owned capital improvements (343) -- --
Recoveries on loans charged off 162 182 28
Purchases of ARM fund shares (4,563) -- --
Purchases of FHLB stock (96) -- --
Net cash paid for acquisitions (1,395) (382) (244)
--------- --------- ---------
Net cash provided by investing activities 3,999 775 437
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued for the years ended December
31, 1998, 1997 and 1996 (In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings - warehouse $ 380,182 $ 471,717 $ 262,854
Repayments of borrowings - warehouse (365,705) (451,259) (248,243)
(Repayments of) proceeds from FHLB advances (1,000) 1,000 --
Proceeds from mortgage loan payables -- 800 --
Principal payments on mortgages payable (83) (62) (46)
Net increase (decrease) in:
Notes payable (3,056) (155) 1,966
Certificates of indebtedness 18 53 311
Certificates of deposit 11,914 16,238 197
Redemption of common stock warrants -- 332 8
Redemption of common stock (113) -- --
Common stock shares issued -- 2 440
Cash dividends paid -- -- (200)
--------- --------- ---------
Net cash provided by financing activities 22,157 38,666 17,287
--------- --------- ---------
Net (decrease) increase in cash (5,600) 8,429 2,656
Cash at beginning of year 11,869 3,440 784
--------- --------- ---------
Cash at end of year $ 6,269 $ 11,869 $ 3,440
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 6,231 $ 5,991 $ 3,070
Cash paid for income taxes 3,546 5,461 2,880
Supplemental non-cash information:
Loan balances transferred to real estate owned $ 3,930 $ 4,641 $ 3,245
Exchange of stock for acquisition of Armada Residential
Mortgage LLC 669 -- --
Conversion of and recognition of unrealized gains of
Partnership interest to common stock 19,001
Accounts payable incurred in exchange for goodwill in
connection with the Consumer One acquisition 1,575
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 1. Organization and Summary of Significant Accounting Policies:
Organization: Approved Financial Corp., a Virginia corporation ("Approved"), and
its subsidiaries (collectively, the "Company") engage 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. Approved has three wholly-owned subsidiaries. Approved Residential
Mortgage, Inc. ("ARMI") had broker operations in nine states, and twenty-four
retail operations in ten states at the end of 1998. Approved Federal Savings
Bank (the "Savings Bank") is a federally chartered thrift institution. The
Savings Bank has a wholly-owned subsidiary operating as a title insurance
agency. The Savings Bank had broker operations in two states and two retail
offices in Virginia. Mortgage One Financial Corporation d/b/a ConsumerOne
Financial ("ConsumerOne") had three retail offices in two states at the end of
1998.
Principles of accounting and consolidation: The consolidated financial
statements of the Company include the accounts of Approved and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles require 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
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash on deposit
at financial institutions and short-term investments that are considered cash
equivalents if they were purchased with an original maturity of three months or
less.
Loans held for sale: Loans, which are all held for sale, are carried at the
lower of aggregate cost or market value. Market value is determined by current
investor yield requirements.
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, 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.
Origination fees: The Company accounts for origination fees on mortgage loans
held for sale in conformity with Statement of Financial Accounting Standards
("SFAS") No. 91, "Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." The statement requires that
net origination fees be recognized over the life of the loan or upon the sale of
the loan, if earlier.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
Note 1. Organization and Summary of Significant Accounting Policies, continued:
Hedging: To offset the effects of interest rate fluctuations on the value of its
fixed rate mortgage loans held for sale, the Company in certain cases will enter
into Treasury security lock contracts, which function similar to short sales of
U.S. Treasury securities. Gains or losses from these contracts are deferred and
recognized as an adjustment to gains on sale of loans when the loans are sold or
when the related hedge position is closed.
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
also capitalized to the property.
Premises and equipment: Premises, leasehold improvements and equipment are
stated at cost less accumulated depreciation and amortization. The buildings are
depreciated using the straight line method over thirty years. Leasehold
improvements are amortized over the lesser of the terms of the lease or the
estimated useful lives of the improvements. Depreciation of equipment is
computed using the straight line method over the estimated useful lives of three
to five years. Expenditures for betterments and major renewals are capitalized
and ordinary maintenance and repairs are charged to operations as incurred.
Securities: All investment securities are classified as available-for-sale and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as other comprehensive income in shareholders' equity.
Realized gains and losses on sales of securities are computed using the specific
identification method.
The Company's investment in the stock of the Federal Home Loan Bank ("FHLB") of
Atlanta is stated at cost.
Income recognition: Gains on the sale of mortgage loans representing the
difference between the sales price and the net carrying value of the loan are
recognized when mortgage loans are sold and delivered to investors.
Interest on loans is credited to income based upon the principal amount
outstanding. Interest is accrued on loans until they become 31 days or more past
due.
Advertising costs: Advertising costs are expensed when incurred.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
Note 1. Organization and Summary of Significant Accounting Policies, continued:
Income taxes: Taxes are provided on substantially all income and expense items
included in earnings, regardless of the period in which such items are
recognized for tax purposes. The Company uses an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
estimated future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.
Earnings per share: Effective December 31, 1997, the Company adopted SFAS No.
128, "Earnings per Share," which supersedes Accounting Principles Board ("APB")
Opinion No. 15, "Earnings per Share." The 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" reflects the effect of all dilutive
potential common shares such as stock options and warrants and convertible
securities. "Basic earnings per share" and "diluted earnings per share" replaced
"primary earnings per share" and "fully diluted earnings per share,"
respectively, as described under APB Opinion No. 15, and are reported on the
income statement.
The Company declared two-for-one stock splits effective August 30, 1996,
December 16, 1996 and a 100% stock dividend effective November 21, 1997. The
share and per share figures in this report have been adjusted to reflect these
splits.
New accounting pronouncements: Effective January 1, 1998 the Company adopted
SFAS No. 130, "Reporting Comprehensive Income". 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 only item the
Company has in Comprehensive Income is an unrealized holding gain or loss on
securities, net of deferred taxes.
In June 1994, 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. This statement
does not have any material impact on the financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued, effective for fiscal year ends beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that entities
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
Note 1. Organization and Summary of Significant Accounting Policies, continued:
New accounting pronouncements (cont.): recognize all derivative as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designed as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The Company is currently
evaluating the effect this statement will have on the financial statements.
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" was issued, effective for the first fiscal quarter beginning
after December 15, 1998. The new statement requires that after an entity that is
engaged in mortgage banking activities has securitized mortgage loans that are
held for sale, it must classify the resulting retained mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. Any retained mortgage-backed securities that are
committed for sale before or during the securitization process must be
classified as trading. This statement does not have any impact on the Company's
financial statements since the company has never securitized loans.
Reclassifications: Certain reclassifications have been made to amounts
previously reported in 1997 and 1996 to conform with the 1998 presentation.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 2. Securities:
The cost basis and fair value of the Company's securities at December 31, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Cost Fair Cost Fair
Basis Value Basis Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
IMC Mortgage Company common stock $ 73 $ 123 $ 162 $11,585
Adjustable rate mortgage mutual fund 3,219 3,203 3,569 3,566
FHLB stock 146 146 50 50
------- ------- ------- -------
$ 3,438 $ 3,472 $ 3,781 $15,201
======= ======= ======= =======
</TABLE>
The Company's investment in IMC Mortgage Company ("IMC") common stock had gross
unrealized gains of $50,000 and $11,423,000 at December 31, 1998 and 1997,
respectively. The Company's investment in the adjustable rate mortgage mutual
fund had unrealized losses of $15,000 and $2,000 at December 31, 1998 and 1997,
respectively.
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 1996, the Company recognized income of $480,000, from the IMC
Partnership.
The IMC Partnership converted to a corporation, 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.
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 SFAS No. 115. As of December 31, 1998, the Company owned 435,634 shares of
IMC stock. The Company's stock position represented approximately 1.3% of IMC's
outstanding stock at that date. During 1998, the Company sold 558,400 shares of
IMC stock for $1.9 million which resulted in a pre-tax gain of $1.8 million.
During 1997, the Company sold 233,241 shares of IMC stock for $3.7 million which
resulted in a pre-tax gain of $2.8 million. The Company also received 27,507
shares of IMC common stock as an incentive award relating to the volume of loans
sold by the Company to IMC. All of the share figures above reflect a two-for-one
split of IMC shares on February 13, 1997.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
Note 2. Securities, continued:
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.
Note 3. Mortgage Loans Held for Sale:
The Company owns first and second mortgages which are being held as inventory
for future sale. The loans are carried at the lower of cost or market. These
mortgage loans have been pledged as collateral for the warehouse financing.
Loans at December 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Mortgage loans held for sale $ 109,500 $ 83,512
Net deferred origination fees and hedging costs (1,866) (1,129)
Allowance for loan losses (2,590) (1,687)
--------- ---------
Total mortgage loans, net $ 105,044 $ 80,696
========= =========
</TABLE>
As of December 31, 1998, 1997 and 1996, the recorded investment in loans for
which impairment has been determined in accordance with SFAS No. 114 totaled,
$4,119,000, $2,500,000, and $1,200,000 respectively. The average recorded
investment in impaired loans for the years ended December 31, 1998 1997, and
1996 was $2,603,000, $780,000 and $64,000, respectively. Interest income
recognized related to these loans was $86,000, $94,000 and $13,000 during 1998,
1997 and 1996, respectively. Due to the homogenous nature and collateral for
these loans, there is no corresponding valuation allowance.
Nonaccrual loans were $5,930,000 and $4,511,000 at December 31, 1998 and 1997,
respectively. The amount of additional interest that would have been recorded
had these loans not been placed on nonaccrual status was approximately $212,000,
$154,000, and $91,000 in 1998, 1997 and 1996, respectively.
As of December 31, 1997, the Company had one open interest rate hedge position
with a notional amount of $15,000,000 under a contract which expired March 2,
1998. The Company had a deferred loss of $91,000 at December 31, 1997 related to
this hedge position. The Company did not have an open interest rate hedge
position at December 31, 1998.
The Company sold to IMC Mortgage Company 1,942 loans in 1998, 3,791 loans in
1997 and 1,536 loans in 1996, totaling $118,009,000, $235,228,000, and
$100,095,000 and recognized gains on the sale of these loans of $7,444,000,
$16,153,000, and $6,648,000 during the years ended December 31, 1998, 1997 and
1996, respectively. The Company has not sold any loans to IMC Mortgage Company
since September 1998.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997,and 1996
Note 3. Mortgage Loans Held for Sale, continued:
Changes in the allowance for loan losses for the years ended December 31, 1998,
1997, and 1996 were (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 1,687 $ 924 $ 594
Acquisitions 49 0 20
Charge-offs (2,372) (953) (863)
Recoveries 162 182 28
Provision 3,064 1,534 1,145
------- ------- -------
Balance at end of year $ 2,590 $ 1,687 $ 924
======= ======= =======
</TABLE>
Note 4. Real Estate Owned:
Real estate owned is valued at the lower of cost or fair market value, net of
estimated disposal costs.
Changes in the real estate owned valuation allowance for the years ended
December 31, 1998, 1997, and 1996 were (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of year $ 671 $ 529 $ 366
Provision (168) 142 163
----- ----- -----
Balance at end of year $ 503 $ 671 $ 529
===== ===== =====
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 5. Premises and Equipment:
Premises and equipment at December 31, 1998 and 1997 were summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Land $ 240 $ 240
Building & Improvements 2,513 2,101
Office Equipment & Furniture 2,303 1,465
Computer Software/Equipment 2,346 1,613
Vehicles 235 225
------ ------
7,637 5,644
Less accumulated depreciation 2,058 1,114
------ ------
Premises and equipment, net $5,579 $4,530
====== ======
</TABLE>
The Company has several capital leases for computer and other equipment included
in the premises and equipment table above. See Note 6 for further discussion on
capital leases.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 6. Capital Leases:
Capital leases at December 31, 1998 and 1997 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Computer equipment $ 322 --
Furniture & equipment 302 --
Less:
Accumulated amortization (116) --
----- -----
$ 508 --
===== =====
</TABLE>
Amortization expense for the years ended December 31, 1998 and 1997 approximated
$116,000 and $0 respectively.
Future minimum rental commitments, including the bargain purchase option
exercisable at the end of the lease terms and the present value of the net
minimum lease payments as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999 $230
2000 230
2001 120
2002 30
----
610
Less - amount representing interest 94
----
Present value of net minimum lease payments $516
====
</TABLE>
The Company has the option to purchase these assets at an established price at
the end of the lease terms. The Company recognized approximately $36,000 and $0
of interest expense related to the lease obligations for the years ended
December 31, 1998 and 1997, respectively.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 7. Leases
The Company leases some of its office facilities and equipment under operating
leases which expire at various times through 2003. Lease expense was $1.4
million, $1.0 million, and $0.3 million in 1998, 1997, and 1996, respectively.
Total minimum lease payments under non-cancelable operating leases with
remaining terms in excess of one year as of December 31, 1998 were as follows:
<TABLE>
<S> <C>
1999 $1,669
2000 891
2001 492
2002 330
2003 144
------
$3,526
======
</TABLE>
Note 8. Revolving Warehouse Facilities:
Amounts outstanding under revolving warehouse facilities at December 31, 1998
and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Syndicated warehouse facility with commercial bank
collateralized by mortgages/deeds of trust; expires December 31, 1999, with
interest at 1.50% over applicable LIBOR rate (5.54581% at December
31, 1998); total credit available $100 million. $ 59,261 $ 46,734
Syndicated seasoned loan line of credit with commercial banks collateralized by
mortgages/deeds of trust; expires December 31, 1999, with interest at 2.50% over
applicable LIBOR rate (5.54581% at December 31, 1998); total credit available
$25 million. 7,076 5,754
Subsidiaries warehouse facility with investor collateralized by mortgages/deeds
of trust; expires June 10, 1999 with interest at 1.75% over applicable prime
rate (7.750% at December 31,
1998); total credit available $10 million. 6,209 -0-
-------- --------
$ 72,546 $ 52,488
======== ========
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 8. Revolving Warehouse Facilities, continued:
On December 10, 1997, the Company obtained a $100,000,000 warehouse line of
credit from a commercial bank syndicate. The line is collateralized by loans
originated by the Company and bears interest at a rate of 1.50% 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. Also on December 10, 1997, the Company obtained a $25,000,000
seasoned loan line of credit from a 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 2.50% over the one-month LIBOR rate, and the Company
may receive credit advances of 90% of the current principal balances on pledged
mortgage loans.
Mortgage One Financial Corporation, Inc. d/b/a ConsumerOne Financial,
("ConsumerOne") the Michigan based mortgage company acquired by Approved, had an
existing warehouse credit agreement with a California corporation. The line of
credit commenced on June 10, 1998 and terminates one year from the commencement
date. The maximum credit availability is $10,000,000. This line is
collateralized by mortgage loans originated by ConsumerOne and bears interest at
a rate of prime plus 1.75%. This line of credit was paid off in February 1999.
ConsumerOne also has a $150,000 Small Business Line of Credit.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 9. Deposits:
The following table sets forth various interest rate categories for the
FDIC-insured certificates of deposit of the Savings Bank as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
(In thousands)
1998 1997
------------------- -------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------- -------- -------
<S> <C> <C> <C> <C>
5.24% or less 5.18% $ 1,883 -- $ --
5.25 - 5.49% 5.34 5,651 5.30% 198
5.50 - 5.74 5.65 2,179 5.56 300
5.75 - 5.99 5.86 12,789 5.91 8,318
6.00 - 6.24 6.12 6,039 6.11 8,010
6.25 - 6.49 6.40 1,187 6.32 989
------- ------- ------- -------
5.78% $29,728 6.01% $17,815
======= ======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of the certificates of
deposit of the Savings Bank at December 31, 1998.
<TABLE>
<CAPTION>
(In thousands)
Six Over Six Months Over One Year Over
Months or and Less than and Less than Two
Less One Year Two Years Years Total
--------- --------------- ------------- ------- -------
<S> <C> <C> <C> <C> <C>
5.24% or less $ 397 $ 1,387 $ 99 $ -- $ 1,883
5.25 - 5.49% 200 1,984 2,183 1,284 5,651
5.50 - 5.74 1,088 99 199 793 2,179
5.75 - 5.99 2,580 2,971 4,466 2,772 12,789
6.00 - 6.24 3,062 992 696 1,289 6,039
6.25 - 6.49 198 791 99 99 1,187
------- ------- ------- ------- -------
$ 7,525 $ 8,224 $ 7,742 $ 6,237 $29,728
======= ======= ======= ======= =======
</TABLE>
<PAGE>
At December 31, 1998, fifty-eight certificates of deposit totaling $5,800,000
were in amounts of $100,000.
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 10. Federal Home Loan Bank Advances:
Advances from the Federal Home Loan Bank ("FHLB") of Atlanta at December 31,
1997 of $1,000,000 were due and repaid in 1998.
At December 31, 1998, the Savings Bank has pledged its FHLB stock and qualifying
residential mortgage loans with an aggregate balance of $3,300,000 as collateral
for such FHLB advances under a specific collateral agreement. Interest is
computed based on the lender's cost of overnight funds. The interest rates on
December 31, 1998 and 1997 were 5.10% and 6.50%, respectively. Interest expense
on FHLB advances totaled $76,000 and $3,000 in 1998 and 1997; the Savings Bank
did not borrow from the FHLB in 1996.
Note 11. 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 $554,000, $666,000, and $547,000 in 1998, 1997
and 1996, respectively. The interest rates on the notes range from 8.00% to
10.25% and the notes mature as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 459
2000 748
2001 309
2002 482
2003 1,630
------
$3,628
======
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 12. Certificates of Indebtedness:
Certificates of indebtedness are uninsured deposits authorized for financial
institutions such as 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 6.75% and
10.00%. Interest expense on the certificates was $224,000, $225,000, and
$139,000 in 1998, 1997, and 1996, respectively.
Certificates of indebtedness maturities were as follows as of December 31, 1998
(in thousands):
<TABLE>
<S> <C>
1999 $ 390
2000 729
2001 556
2002 516
2003 223
------
$2,414
======
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 13. Mortgage Notes Payable:
The Company has two mortgage loans payable to a commercial bank. The loans are
collateralized by two office buildings used by the Company for its corporate
headquarters. The mortgage loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Mortgage loan with commercial bank collateralized
by office building; original amount of $590,000;
monthly payments of $7,186; matures May 2004;
with interest at 7.99% $ 375 $ 428
Mortgage loan with commercial bank collateralized
by office building; original amount of $800,000;
monthly payments of $7,953; matures June 2012;
with interest at 8.625% 759 788
Mortgage loan payable-
Foreclosed properties 76 --
--------- ---------
$ 1,210 $ 1,216
========= =========
</TABLE>
Interest expense on mortgage loans payable was $99,000, $73,000, and $40,000 in
1998, 1997, and 1996 respectively.
Aggregate maturities for mortgage payable are as follows as of December 31,
1998:
<TABLE>
<S> <C>
1999 $ 166
2000 97
2001 105
2002 114
2003 124
Thereafter 604
------
$1,210
======
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 14. Shareholders' Equity:
In January 1998, the Company issued 104,146 split-adjusted shares of its Common
Stock to purchase a senior officer's 17% ownership interest in Armada
Residential Mortgage, LLC ("Armada LLC") which was terminated in September 1997.
The senior officer terminated his employment with Armada LLC and became an
employee of Approved Residential Mortgage, Inc. ("ARMI"). The Company also
issued 12,560 split-adjusted shares to a key employee of Armada LLC.
In December 1998, the Company repurchased 30,000 shares of its Common Stock at
$3.75 per share. The Company's Board of Directors authorized this stock buy back
plan at its quarterly board meeting held on November 2, 1998. The Company was
authorized to repurchase up to 1 million shares of its Common Stock.
Note 15. Stock Options:
On June 28, 1996, the Company adopted the 1996 Incentive Stock Option Plan. The
Company's stock option plan provides primarily for the granting of nonqualified
stock options to certain key employees. Generally, options are granted at prices
equal to the market value of the Company's stock on the date of grant, vest over
a three-year period, and expire ten years from the date of the award.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option plans. SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued in 1995 and, if fully adopted, changes the method of recognition of cost
on plans similar to those of the Company. The Company has adopted the
alternative disclosure established by SFAS No. 123. Therefore, pro forma
disclosures as if the Company adopted the cost recognition requirements under
SFAS No. 123 are presented below.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 15. Stock Options, continued:
A summary of the Company's stock options as of December 31, 1998 and 1997 and
the changes during the years is presented below:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 9,200 $ 9.75 --
Granted 8,050 13.50 9,200 $ 9.75
91,375 4.00
Cancelled 400 4.00
------- ----------- ------- -----------
Outstanding at end of year 108,225 $ 5.19 9,200 $ 9.75
======= =========== ======= ===========
Options available for future grant 148,275 242,800
======= =======
Weighted average fair value of
options granted during year $ 1.20 $ 3.49
=========== ===========
</TABLE>
The weighted-average remaining contractual life of options granted at December
31, 1998 was 9.0 years and 8.0 years for options granted in 1997.
The fair value of each option granted during 1998 and 1997 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of zero; expected volatility of 34.48% in 1998 and
34.12% in 1997; risk-free interest rate of 5.42% for options granted in January
1998, 4.54% for options granted in November 1998, and 6.00% for options granted
in 1997.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 15. Stock Options, continued:
Had compensation cost for the 1998 and 1997 grants for stock-based compensation
plans been recorded by the Company, the Company's pro forma net income and pro
forma net income per common share for 1998 and 1997 would have been as follows:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------ --------------------------
As Reported Pro Forma As Reported Pro Forma
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income $ 479 $ 371 $ 8,060 $ 8,041
Net income per common share - Basic 0.09 0.07 1.52 1.52
Net income per common share - Dilutive 0.09 0.07 1.51 1.51
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. There were no awards prior to 1997 and additional
awards in future years are anticipated.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 16. Earnings Per Share:
The Company's earnings per share have been calculated in accordance with SFAS
No. 128, "Earnings Per Share." The statement requires calculations of basic and
diluted earnings per share. These calculations are described in Note 1. The
following table shows the reconciling components between basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Weighted Average
Shares
Net Income Outstanding Earnings Per
(Numerator) (Denominator) Share
----------- ---------------- ------------
<S> <C> <C> <C>
For the Year Ended December 31, 1998
Basic earnings per share $ 479,000 5,465,034 $ 0.09
Effect of dilutive securities:
Common stock issued -- 46,338 --
---------- ---------- ----------
Diluted earnings per share $ 479,000 5,511,372 $ 0.09
========== ========== ==========
For the Year Ended December 31, 1997
Basic earnings per share $8,060,000 5,310,263 $ 1.52
Effect of dilutive securities:
Stock options -- 1,162 --
Common stock payable -- 34,532 (.01)
---------- ---------- ----------
Diluted earnings per share 8,060,000 5,345,957 $ 1.51
========== ========== ==========
For the Year Ended December 31, 1996
Basic earnings per share $3,324,000 4,964,244 $ 0.67
Effect of dilutive securities:
Warrants -- 316,859 (.04)
---------- ---------- ----------
Diluted earnings per share $3,324,000 5,281,103 $ 0.63
========== ========== ==========
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 17. Income Taxes:
The components of income tax expense for the years ended December 31, 1998,
1997, and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current $ 361 $ 6,963 $ 3,147
Deferred 112 (1,325) (888)
------- ------- -------
$ 473 $ 5,638 $ 2,259
======= ======= =======
</TABLE>
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 principle reasons for these differences for the years ended December
31, 1998, 1997, and 1996 were (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Provision for income
Taxes at statutory $ 339 $ 4,731 $ 1,898
federal rate
State income taxes, net 58 827 332
of federal benefit
Nondeductible expenses 71 79 30
Other, net 5 1 (1)
------- ------- -------
$ 473 $ 5,638 $ 2,259
======= ======= =======
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 17. Income Taxes, continued:
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1998 and 1997 were (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and real estate $ 1,231 $ 912
owned losses
Deferred loan fees 847 487
Mark to market on mortgage loans 670 1,790
held for sale
Deferred income 1 52
Accrued premium recapture 229 160
Accrued expenses 196 --
Accrued 401K match 60 32
Accrued insurance expense 60 52
Other 79 --
------- -------
Total deferred tax assets 3,373 3,485
Deferred tax liabilities:
Market value of securities 19 4,568
Other 24 26
------- -------
Total deferred tax liabilities 43 4,594
------- -------
Net deferred asset (liability) $ 3,330 $(1,109)
======= =======
</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,
1998. However, there can be no assurances that the Company will generate taxable
income in any future period.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 18. Retirement Plans:
The Company has 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 1998, 1997, and 1996. 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, 1998, 1997, and 1996.
The Company has 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, 1998, 1997,
and 1996 were $0, $10,000, and $0, respectively.
The Company sponsors 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% of a
participant's payroll savings contribution up to 6% of a participant's annual
compensation. The Company's contributions to the plan for the years ended
December 31, 1998, 1997, and 1996 were $162,000, $115,000, and $33,000,
respectively.
Note 19. Employment Agreements:
The Company has employment agreements with various employees. The agreements
expire at various times from 1999 through 2001. 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 20. Acquisitions:
Effective January 26, 1998, Approved Residential Mortgage, Inc. ("ARMI")
purchased substantially all of the assets of Funding Center of Georgia, Inc.
("FCGA"), which is located in Atlanta. All of the employees of FCGA have become
employees of ARMI, and the business is conducted under the assumed name of
"Funding Center of Georgia". The purchase price for FCGA's assets was
$1,000,000. ARMI paid $600,000 at closing, paid $100,000 in 1998 and will pay
$100,000 in 1999, 2000, and 2001, with interest at 6%. The two principal owners
of FCGA entered in three-year employment agreements with ARMI to manage the
operations of FCGA. This transaction was accounted for under the purchase method
of accounting. Net assets of $7,000 were acquired with an associated intangible
asset (goodwill) recorded in the amount of $990,000. This goodwill will be
amortized over 10 years.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997, and 1996
Note 20. Acquisitions, continued:
Effective December 15, 1998, Approved Financial Corp. ("Approved") purchased
100% of the outstanding stock of Mortgage One Financial Corporation ("MOFC,
Inc.") a Michigan based mortgage company doing business as ConsumerOne Financial
("ConsumerOne"). ConsumerOne is now a wholly owned subsidiary of Approved and
continues under the management of its founder who entered into a three-year
employment contract with Approved. Approved paid $575,000 at closing and will
pay $525,000 in 1999, 2000, and 2001. Payment amounts of $525,000 in 1999, 2000,
and 2001 are subject to reduction in the event of a failure to meet agreed upon
pre-tax profit targets each year. This transaction was accounted for using the
purchase method of accounting. The associated intangible asset (goodwill) was
recorded in the amount of $3,184,000. This goodwill will be amortized over 10
years.
Note 21. 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 Savings Bank to maintain tangible
capital of not less than 1.5% of total adjusted assets. As it applies to the
Savings Bank, "tangible capital" means core capital (as defined below).
The core capital standard requires the Savings Bank to maintain "core capital"
of not less than 4.0%. Core capital includes the Savings Bank's common
shareholders' equity, adjusted for certain non-allowable assets.
The risk-based standard requires the Savings 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.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
Note 21. Regulatory Capital, continued:
At December 31, 1998 and 1997, the Savings 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
Savings Bank's capital to regulatory capital (in thousands):
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
December 31, 1998
- -----------------
<S> <C> <C> <C>
GAAP capital $ 5,058 $ 5,058 $ 5,058
Add: unrealized loss on securities 15 15 15
Non-allowable asset: goodwill (116) (116) (116)
Additional capital item: general allowance -- -- 276
------- ------- -------
Regulatory capital - computed 4,957 4,957 5,233
Minimum capital requirement 578 1,157 2,166
------- ------- -------
Excess regulatory capital $ 4,379 $ 3,800 $ 3,067
======= ======= =======
Ratios:
Regulatory capital - computed 12.86% 12.86% 19.33%
Minimum capital requirement 1.50 4.00 8.00
------- ------- -------
Excess regulatory capital 11.36% 8.86% 11.33%
======= ======= =======
</TABLE>
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
Note 21. Regulatory Capital, continued:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
December 31, 1997
<S> <C> <C> <C>
GAAP capital $ 3,242 $ 3,242 $ 3,242
Add: unrealized loss on securities 2 2 2
Non-allowable asset: goodwill (132) (132) (132)
Additional capital item: general allowance -- -- 73
------- ------- -------
Regulatory capital - computed 3,112 3,112 3,185
Minimum capital requirement 336 895 1,249
------- ------- -------
Excess regulatory capital $ 2,776 $ 2,217 $ 1,936
======= ======= =======
Ratios:
Regulatory capital - computed 13.91% 13.91% 20.40%
Minimum capital requirement 1.50 4.00 8.00
------- ------- -------
Excess regulatory capital 12.41% 9.91% 12.40%
======= ======= =======
</TABLE>
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 without the prior
approval of the OTS. The Savings Bank did not pay cash dividends to Approved in
1998, 1997 or 1996.
Note 22. Disclosures About Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the financial statements, for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
are based upon estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and the estimated future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts do not represent the underlying value of the Company.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments:
Cash and cash equivalents: The carrying amount of cash on hand and on deposit at
financial institutions is considered to be a reasonable estimate of fair market
value.
Securities: Fair values are based on quoted market prices or dealer quotes.
Mortgage loans: The estimate of fair value is based on current pricing of whole
loan transactions that a purchaser unrelated to the seller would demand for a
similar loan. The fair value of mortgage loans held for sale approximated
$109,637,000 and $83,996,000 at December 31, 1998 and 1997, respectively.
Interest receivable and interest payable: The carrying amount approximates fair
value.
Revolving warehouse lines: Collateralized borrowings consist of warehouse
finance facilities and term debt. The warehouse finance facilities have
maturities of less than one year and bear interest at market rates and,
therefore, the carrying value is a reasonable estimate of fair value.
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. The fair value of certificates of deposit
approximated $29,853,000 and $17,828,000 at December 31, 1998 and 1997,
respectively.
Mortgage loans payable: The fair value of mortgage loans payable is based on the
discounted value of expected cash flows. The discount rates used are those
currently offered for mortgage loans with similar remaining contractual
maturities and terms. The fair value of the mortgage loans payable approximated
$1,058,000 and $1,190,000 at December 31, 1998 and 1997, respectively.
Other term debt: The carrying amount of outstanding term debt, which bear market
rates of interest, approximates its fair value.
Note 23. Sale of Building:
The Company entered into an agreement on December 8, 1998 for the sale of the
administrative and executive office building located at 3386 Holland Road,
Virginia Beach, Virginia. The sales price is $1,081,250. The Company has a
mortgage note payable on this property in the amount of $759,000 at December 31,
1998. (See note 13) The closing date for this transaction was February 15, 1999.
The Company has also entered into a lease agreement with the purchaser to lease
back 15,574 square feet of the premises for an initial term commencing from the
closing date to September 30, 1999, with the option to renew the lease for three
additional one month terms. The lease payment will be $15,000 per month. The
expected gain on sale of the building is approximately $42,000.
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998, 1997 and 1996
Note 24. Purchase of Land:
The Company entered into an agreement, on August 20, 1998, with the City of
Virginia Beach Development Authority to purchase 7.77 acres of land for a new
administrative and executive office building. The purchase price of the land
will be approximately $650,000. The transaction is scheduled to close in March
1999.
Note 25. Quarterly Financial Data (Unaudited):
The following is a summary of selected quarterly operating results for each of
the four quarters in 1998 and 1997:
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998:
Gain on sale of loans $ 9,754 $ 8,779 $ 7,060 $ 4,110
Net interest income 1,054 1,118 828 1,056
Provision for losses (111) 949 718 1,340
Other income 1,482 1,678 2,806 2,826
Other expenses 9,928 9,772 9,694 9,309
------- ------- ------- -------
Income before income taxes 2,473 854 282 (2,657)
Provision for income taxes 1,038 341 121 (1,027)
------- ------- ------- -------
Net income $ 1,435 $ 513 $ 161 $(1,630)
======= ======= ======= =======
Basic net income per share $ 0.26 $ 0.09 $ 0.03 $ (0.30)
======= ======= ======= =======
1997:
Gain on sale of loans $ 7,252 $ 8,133 $ 8,656 $ 9,460
Net interest income 613 1,426 1,520 1,219
Provision for losses 281 417 435 543
Other income 788 772 4,366 1,815
Other expenses 5,807 7,068 8,255 9,516
------- ------- ------- -------
Income before income taxes 2,565 2,846 5,852 2,435
Provision for income taxes 1,026 1,171 2,416 1,025
------- ------- ------- -------
Net income $ 1,539 $ 1,675 $ 3,436 $ 1,410
======= ======= ======= =======
Basic net income per share $ 0.30 $ 0.32 $ 0.64 $ 0.26
======= ======= ======= =======
</TABLE>
<PAGE>
Approved Financial Corp.
Consolidating Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
($ IN THOUSANDS)
MOFC,
Inc.
Approved d/b/a
Approved Approved Federal Consumer
ASSETS Financial Residential Savings Global One
Consolidated Eliminations Corp. Mortgage Bank Title Financial
------------ ------------ --------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash $ 6,269 $ 1,457 $ 1,134 $ 3,508 $ 50 $ 120
Mortgage loans held for
sale, net 105,044 13,929 56,036 28,904 -- 6,175
Real estate owned, net 1,707 359 1,348 -- -- --
Investments 3,472 (9,903) 9,996 -- 3,379 -- --
Income taxes receivable 2,023 (4,742) 6,765 -- -- -- --
Deferred tax asset 3,330 (23) 1,107 2,246 -- -- --
Premises and equipment, net 5,579 3,769 966 62 -- 782
Goodwill, net 4,554 1,254 -- 116 -- 3,184
Due from affiliates -- (692) 692 -- -- -- --
Other Assets 4,140 1,568 2,042 479 6 45
-------- -------- -------- -------- -------- -------- --------
Total Assets $136,118 $(15,360) $ 40,896 $ 63,772 $ 36,448 $ 56 $ 10,306
======== ======== ======== ======== ======== ======== ========
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 72,546 $ 11,592 $ 54,744 $ -- -- $ 6,210
Deferred tax liability -- (23) -- -- 23 -- --
Mortgage payable 1,210 1,210 -- -- -- --
Notes payable-related 3,628 3,628 -- -- -- --
parties
Certificates of indebtedness 2,414 2,414 -- -- -- --
Certificates of deposits 29,728 -- -- 29,728 -- --
Loan proceeds payable 2,565 -- 1,029 1,536 -- --
Due to affiliates -- (692) -- 56 35 1 600
Accrued and other 4,760 2,785 566 68 17 1,324
liabilities
Income taxes payable -- (4,743) -- 4,734 -- 9 --
-------- -------- -------- -------- -------- -------- --------
Total Liabilities 116,851 (5,458) 21,629 61,129 31,390 27 8,134
-------- -------- -------- -------- -------- -------- --------
Shareholder's equity:
Preferred stock-series A 1 1 -- -- -- --
Common stock 5,482 (299) 5,482 250 32 16 1
Unrealized gain on securities 30 15 30 -- (15) -- --
Additional paid in capital 552 (6,837) 552 491 3,056 -- 3,290
Retained earnings 13,202 (2,781) 13,202 1,902 1,985 13 (1,119)
-------- -------- -------- -------- -------- -------- --------
Total Equity 19,267 (9,902) 19,267 2,643 5,058 29 2,172
-------- -------- -------- -------- -------- -------- --------
Total liabilities and
equity $136,118 $(15,360) $ 40,896 $ 63,772 $ 36,448 $ 56 $ 10,306
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Approved Financial Corp.
Consolidating Statement of Income
For the year ended December 31, 1998
<TABLE>
<CAPTION>
($ IN THOUSANDS)
MOFC,
Inc.
Approved d/b/a
Approved Approved Federal Consumer
Financial Residential Savings Global One
Consolidated Eliminations Corp. Mortgage Bank Title Financial
------------ ------------ --------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Gain on sale of loans $ 29,703 $ -- $ 26,592 $ 2,900 $ -- $ 211
Interest income 10,308 7,356 14 2,909 1 28
Gain on sale of securities 1,750 1,753 -- (3) -- --
Other fees and income 7,042 313 6,649 53 27 --
-------- -------- -------- -------- -------- -------- --------
48,803 -- 9,422 33,255 5,859 28 239
Expenses:
Compensation and related $ 23,397 $ 7,033 $ 15,608 $ 669 7 80
General and administrative 11,713 5,281 5,824 503 3 102
Loan production expense 3,593 140 3,345 108 -- --
Interest expense 6,252 4,780 5 1,437 -- 30
Provision for loan/REO losses 2,896 5 2,688 203 -- --
-------- -------- -------- -------- -------- -------- --------
47,851 17,239 27,470 2,920 10 212
Income before Income taxes 952 -- (7,817) 5,785 2,939 18 27
Provision for income taxes 473 (3,147) 2,487 1,121 7 5
-------- -------- -------- -------- -------- -------- --------
Net Income $ 479 -- $ (4,670) $ 3,298 $ 1,818 $ 11 $ 22
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Stock Price and Dividend Information:
The following tables show the quarterly high, low and closing prices of the
Company's common stock for 1998 and 1997. All stock price and dividend data has
been adjusted to reflect two- for-one stock splits which occurred on August 20,
1996 and December 16, 1996, and a 100% stock dividend, which occurred on
November 21, 1997.
<TABLE>
<CAPTION>
Stock Prices
High Low Close
------ ------------ ------
<S> <C> <C> <C>
1998:
Fourth Quarter $ 6.50 $ 2.88 $ 3.38
Third Quarter 13.63 7.00 7.00
Second Quarter 15.63 13.13 13.88
First Quarter 15.08 12.08 13.13
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
</TABLE>
The Company did not pay any cash dividends on its Common Stock in 1998 and 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.
Employment Agreement
THIS AGREEMENT is made as of July 1, 1998, by and between APPROVED
FINANCIAL CORP. ("Employer" or "Company") 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 a 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 business or referrals of business to Employer.
(d) "Loans" means all residential real property loans, regardless of
lien position or classification as conforming or non-conforming.
"Non-conforming" Loans, means loans that do not conform to all applicable
Federal National Mortgage Association guidelines.
(e) "Primary Business Operation" shall mean the origination of loans,
by any method and from any source, and the sale of 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 employees Employee for the position of Executive
Vice President, performing duties as indicated on Schedule A. Employee agrees to
comply with the general supervision and all current and future policies of
Employer.
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 the Employee's ability, perform all of
Employee's duties.
5. Term and Renewal. The initial term of this agreement shall be from July
1, 1998 through December 31, 1998. On January 1, 1999 it will automatically
renew for a three (3) year term with each year running from January 1st through
December 31st. After December 31, 2001, this Agreement will be renewable on a
year to year basis. Either party must give ninety (90) days written notice if
<PAGE>
this Agreement is not going to be renewed after December 31, 2001. Upon failure
to give such notice, this Agreement will automatically renew for an additional
year on the same terms. This notice requirement shall continue of 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 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; (ii) 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) knowing violation of any law or regulation applicable
to the business of the Employer which has a material or adverse effect on the
Employer; or (iv) repeated neglect of duties. 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. To the extent that any act or omission in the
preceding clauses are capable of being remedied or cured (which determination
will be made by Employer at its sole discretion), then a violation will not be
grounds for immediate termination unless Employer first provides notice to
Employee which includes (a) the act or failure to act of Employee giving rise to
the proposed termination, (b) the corrective action which Employer reasonably
believes would cure the violation, and (c) twenty (20) days from receipt of the
notice to take such corrective action.
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
<PAGE>
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:
(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 which Employee worked at or
supervised during his employment with Employer.
(c) Employee will NOT, during the term of Employee's employment, nor
for two (2) year immediately following termination of employment, 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.
(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 of the 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 and requirements of notice or
objection whatsoever to the issuance of such an Order.
(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.
<PAGE>
(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 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; and (v) Employee
has had an opportunity to have this Agreement reviewed by legal counsel of
Employee's choice.
(j) 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 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. Any "Inventions"
developed from Authorized Outside Employment Activities defined on Schedule C,
attached, shall not be subject to any of the provisions under this section,
Intellectual Property Rights.
(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.
<PAGE>
(g) Employee need not assign to Employer any rights to an 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. Offset 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 and which are
evidenced in writing.
17. Notices. Any notice or other communication required or permitted by
this Agreement shall be in writing and addressed to Employer at its
administrative headquarters and to Employee at his residence, as indicated by
the records of the Employer, and shall be deemed to have been given, made and
received only:
(a) upon deliver, 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 days after deposit in the United States mail, certified
mail, postage prepaid, return receipt requested.
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.
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, including but not limited to
employment agreements. To the extent that Employee was employed by Employer
prior to the date of this Agreement, this Agreement is in confirmation of the
<PAGE>
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 of
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. 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: _______________________________________
Title: ____________________________________
EMPLOYEE:
-----------------------------------------
Barry C. Diggins
<PAGE>
SCHEDULE A
SPECIFIC DUTIES ASSIGNED
UPON THE EXECUTION OF EMPLOYMENT AGREEMENT
Barry C. Diggins shall be responsible for all duties assigned to him by
the Board of Directors, Chairman of the Board, Chief Executive Officer or
President of the Company. Such duties will primarily relate to, but are not
restricted to the management of retail loan origination offices as assigned by
the Board of Directors, Chairman of the Board, Chief Executive Officer or
President of the Company.
Barry C. Diggins shall operate from the Company's home office in Virginia
Beach, Virginia a minimum of 25% of the Company's working days. He will
participate in the Company's strategic planning efforts.
<PAGE>
SCHEDULE B
1. Base Salary. The initial monthly base salary shall be $16,667
commencing on July 1, 1998, and ending on December 31, 1999. For
each subsequent year of the Agreement, which will be January through
December, the base salary will increase by 10%, retroactive to
January 1 of the respective year, if the net income after tax of the
Company increases by 10% over the previous year. In the event that
the net income after tax increases by less than 10% over the
previous year, the base salary will increase by 3%.
Net income after tax for the years 1999, 2000 and 2001, will exclude
any dividend or capital gain income resulting from the Company's
current investment in IMC Mortgage Company common stock will be
excluded in the calculation of the percentage increase in year to
year net income after tax.
2. Group Benefits. Employee shall be entitled to group benefits as
contained in the stated written policy of Approved Financial Corp.,
which may from time to time be revised by the Company.
3. Vacation. Employee shall be entitled to three (3) weeks paid
vacation each year.
4. Bonus. Employee will participate in an Executive Bonus Pool, which
was approved by the Compensation Committee of the Board of Directors
of Approved Financial Corp on 11/3/98. The Executive Bonus Formula
shall be as follows:
That percent increase (in excess of a 10% threshold) of the current
after tax net income per share over the prior year, multiplied by
the Base Annual Salary for the current contract year, up to a
maximum of 100% of the Base Salary. For example, if the after tax
net income per share for fiscal 1999 is 1.20 and for 1998 is .80 and
the Base Salary for that contract year ending December 31, 1999 is
$200,000 then the bonus is $80,000:
($1.20-$.80)/$.80 = 50%
50% - 10% = 40%
$200,000 X 40% = $ 80,000
<PAGE>
Method of Payment:
50% of the bonus may be payable at the Employer's discretion in cash
or unregistered shares of common stock of Approved Financial Corp.
50% of the bonus may be payable at the Employee's discretion in cash
or unregistered shares of common stock of Approved Financial Corp.
Net income per share after tax for the years 1999, 2000 and 2001,
will exclude any dividend or capital gain income resulting from the
Company's current investment in IMC Mortgage Company common stock.
will be excluded in the calculation of the percentage increase in
year to year net income after tax.
5. 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 prior to December
31, 2000, then Employee in lieu of any other damages or compensation
shall be entitled to severance pay in an amount equal to the monthly
Base Salary multiplied by 12. If terminated without cause after
December 31, 2000 then the severance pay shall be the monthly Base
Salary multiplied by 12, multiplied by a percentage that is equal to
the number of days remaining in the term of this agreement (not to
exceed 365) divided by 365. If terminated during a one year renewal
term after December 31, 2001, and termination is without cause, 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.
6. Car: The Company shall provide an automobile of an equivalent
quality to his existing Company car for employee's use.
7. Initial Bonus Payment: Mr. Diggins will receive a bonus of $ 39,500
when Employee and Employer have fully executed this AGREEMENT.
<PAGE>
SCHEDULE C
NONE.
SHARE PURCHASE AGREEMENT
INTRODUCTION
This SHARE PURCHASE AGREEMENT is dated as of December 15, 1998, by and
between KEITH H. LEWIS ("Seller"), being the owner of all of the issued and
outstanding shares of capital stock of MOFC, INC., a Michigan corporation
("Company"), and APPROVED FINANCIAL CORP., a Virginia corporation ("Buyer").
BACKGROUND
Seller owns one hundred (100%) of the issued and outstanding shares of
capital stock of the Company (the "Shares"). The Buyer desires to purchase from
Seller, and Seller desires to sell to the Buyer, their 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).
"Accounts Receivable" means, as of any date, any trade accounts
receivable, notes receivable, bid, performance, lease, utility or other
deposits, employee advances and other miscellaneous receivables associated with
the Business.
"Affiliate" of a Person means a Person that directly or indirectly
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first Person. "Control" (including the terms
"controlled by" and "under common control with") means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
policies of a person, whether through the ownership of voting securities, by
contract or credit arrangement, as trustee or executor, or otherwise.
"Agreement" means this Share Purchase Agreement and the Schedules
attached hereto.
"Applicable Law" means all applicable provisions of all (i)
constitutions, treaties, statutes, laws (including the common law), rules,
regulations, ordinances, codes or orders of any Governmental Authority, (ii)
Governmental Approvals and (iii) orders, decisions, injunctions, judgments,
awards and decrees of or agreements with any Governmental Authority.
"Assets" mean all Company Entities` 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 position, customers and customer
relations and personnel of all Company Entities.
<PAGE>
"Buyer" is defined above in the preamble.
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, joint venture agreement or similar document governing
the entity.
"Company" is defined above in the preamble.
"Company Entities" mean the Company and its subsidiaries.
"Company's knowledge" or "knowledge of the Company" means the
knowledge of any director, officer or employee of any Company Entity or the
Shareholder.
"Confidential Information" means any confidential information or
Trade Secrets of a Person including, but not limited to, personnel information,
know-how and other technical information, customer and client lists, customer,
client and supplier information, advertising and marketing plans or system,
distribution and sales methods or systems, sales and profit figures.
"Contract" means any written or oral contract, agreement, lease,
instrument, or other document or commitment, arrangement, undertaking, practice
or authorization that is binding on any Person or its property under applicable
Law.
"Copyrights" means registered copyrights, copyright applications and
unregistered copyrights in bot published and unpublished works.
"Court Order" means any judgment, decree, injunction, order or
ruling of any federal, provincial, state, local or foreign court or
governmental, quasi-governmental or regulatory body, commission, bureau, agency
or authority that is biding on any Person or its property under applicable Law.
"Default" means (a) a breach, default or violation, (b) the
occurrence of an event that with or without the passage of time or the giving of
notice, or both, would constitute a breach, default or violation or cause an
Encumbrance to arise, or (c) with respect to any Contract, the occurrence of an
event that with or without the passage of time or the giving of notice, or both,
would give rise to a right of termination, renegotiation or acceleration or a
right to receive damages on a payment of penalties.
"Employee Benefit Plans" means "employee benefit plans" as defined
in section 3(3) of ERISA (whether or not subject to ERISA) and any other plan,
policy, program, practice or arrangement providing compensation or other
benefits to any current or former officer, director or employee of the Company
or any Subsidiary, or any affiliate or under which the Company 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.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability, defect of title or other claim, charge or
encumbrance of any nature whatsoever on any property or property interest,
including, without limitation, any restriction on the use, voting, transfer,
receipt of income or other exercise of any attributes of ownership.
"Environmental Laws" means all Applicable federal, state and local
Laws, regulations, rules or guidelines relating to the protection of the
environment, to human health or safety, or to any emission, discharge,
generation, processing, storage, holding, abatement, existence, labeling,
release, threatened release or transportation of any Hazardous Materials,
including, without limitation, (i) CERCLA, the Resource Conservation and
Recovery Act, and the Occupational Safety and Health Act, (ii) all other
requirements pertaining to reporting, licensing, permitting, investigation or
remediation of emissions, discharges, releases or threatened releases of
Hazardous Materials into the air, surface water, ground water or land, or
relating to the manufacture, processing, distribution, use, sale, treatment,
receipt, storage, disposal, transport or
<PAGE>
handling of Hazardous Substances, and (iii) all other requirements pertaining to
the protection of the health and safety of employees or the public.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"GAAP" means generally accepted accounting principles as
consistently applied for financial reporting purposes by a Person.
"Governmental Authority" means any nation or government, any state
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including, without limitation, any government authority, agency,
department, board, commission or instrumentality of the United States, any State
of the United States or any political subdivision thereof, any tribunal or
arbitrator(s) of competent jurisdiction, and any self-regulatory organization.
"Governmental Permits" means all governmental permits, licenses,
registrations, certificates of occupancy, approvals and other governmental
authorizations.
"Hazardous Materials" means any substance or material that: (i) is
or contains asbestos, urea formaldehyde foam insulation, polychlorinated
biphenyls, petroleum or petroleum-derived substances or wastes, radon gas or
related materials; (ii) requires investigation, removal or remediation under any
Environmental Law, or is defined, listed or identified as "hazardous waste" or
"hazardous substance" or "toxic substance" or "toxic waste" thereunder; (iii) is
toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous and is regulated by any Governmental Authority
or Environmental Law; or (iv) any other material or substance to which exposure
is prohibited, limited or regulated by any federal, state, country, local or
regional authority or which even if not so regulated poses or may pose a hazard
to health or safety.
"Intellectual Property" means any individual states, United States
or foreign: (a) patents (including design patents, industrial designs and
utility models) and patent applications (including docketed patent disclosures
awaiting filing, reissues, divisions, continuations-in-part and extensions),
patent disclosures awaiting filing determination, inventions and improvements
thereto; (b) trademarks, service marks, trade names, trade dress, logos,
business and product names, slogans, and registrations and applications for
registrations thereof; (c) copyrights (including software) and registrations
thereof; (d) inventions, processes, designs, formulae, trade secrets, know-how,
industrial models, confidential and technical information, manufacturing,
engineering and technical drawings, product specifications and confidential
business information; (e) mask work and other semiconductor chip rights and
registrations thereof; (f) intellectual property rights similar to any of the
foregoing including software licenses and Internet domain name registration; (g)
copies and tangible embodiments thereof (in whatever form or medium, including
electronic media).
"Inventory" shall mean al inventory, including raw material,
supplies, packaging supplies, work in process and finished goods.
"Law" means any statute, law, ordinance, regulation, order or rule
of any federal, provincial, state, local, foreign or other governmental or
quasi-governmental agency or body or of any other type of regulatory body,
including but not limited to those covering environmental, energy, safety,
health, transportation, bribery, record keeping zoning, antidiscrimination,
antitrust, wage and hour, and price and wage control matters.
"Liability" means any direct or indirect liability, indebtedness,
obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of
or by any person, absolute or continent accrued or unaccrued, due or become due,
liquidated or unliquidated.
"Lien" means any mortgage, pledge, hypothecation, right of others,
claim, security interest, encumbrance, lease, sublease, license, occupancy
agreement, adverse claim or interest, easement, covenant, encroachment, burden,
title defect, title retention agreement, voting trust agreement, interest,
<PAGE>
equity, option, lien, right of first refusal, charge or other restrictions or
limitations of any nature whatsoever, including but not limited to such as may
arise under any Contracts.
"Litigation" means any lawsuit, action, arbitration, administrative
or other proceeding, criminal prosecution or governmental investigation or
inquiry.
"Material Adverse Effect" means any event, occurrence, fact,
condition, change or effect that is materially adverse to the business,
operations, prospects, results of operations, prospects, condition (financial or
otherwise), properties (including intangible properties), assets (including
intangible assets) or liabilities of the Business.
"Material or Materially" means any fact, matter, event occasion,
action, omission, change, result, misrepresentation, nondisclosure, occurrence
or effect which a reasonable Person would want to know in determining a choice
of action such as but not limited to whether to purchase a business, how much to
pay for it or whether to accept certain risks.
"Owned Intellectual Property" means as defined in Section 3.26(a).
"Parties" means the Buyer and each Seller.
"Patent" means all patents together with any extensions,
reexaminations and reissues of such patents, patents of addition, patent
applications, divisions, continuations, continuations-in-part, and any
subsequent filings in any country or jurisdiction claiming priority therefrom.
"Person" means any natural person, firm, partnership, association,
corporation, company, trust, business trust, Governmental Authority or other
entity.
"Pretax Net Income" means net income before taxes pursuant to
GAAP.
"Seller" means Keith H. Lewis. The term "Seller" whenever used in
this Agreement will collectively include all Persons designated in this
definition even though used in the singular and not the plural. All covenants
and representations of "Seller " shall be joint and several with each Person
that is a Seller.
"Shares" means shares owned by Seller which constitutes one hundred
percent (100%) of all of the issued and outstanding capital stock of the
Company.
"Taxes" shall mean all taxes, duties, charges, fees, levies or other
assessment imposed by any taxing authority including, without limitation,
income, gross receipts, value-added, excise, withholding personal property, real
estate, sale, use, ad valorem, license, lease, service, severance, stamp,
transfer, payroll, employment, customs, duties, alternative, add-on minimum,
estimated and franchise taxes (including any interest, penalties or additions
attributable to or imposed on or with respect to any such assessment).
"Trade Secrets" means all know-how, trade secrets, Confidential
Information, customer lists, technical information, data, process technology,
plans, drawings, and blue prints, owned, used or licensed (as licensor or
licensee) by a Person, except for any such item that is generally available to
the public.
"Trademarks" means registered trademarks, registered service marks,
trademark and service mark applications and unregistered trademarks and service
marks, brand names, certification marks, trade dress, goodwill associated with
the foregoing and registrations in any jurisdictions of, and applications in any
jurisdiction to register, the foregoing, including any extension, modification
or renewal of any such registration or application.
"Transaction Documents" means this Agreement and all Schedules and
related documents referred to in this Agreement.
<PAGE>
"Transactions" means the purchase and sale of the Shares and the
other transactions contemplated by the Transaction Documents.
ARTICLE II
SALE AND PURCHASE OF THE SHARES
2.1. Sale and Purchase of the Shares. 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 Seller shall sell to the Buyer and the Buyer shall purchase from Seller
all of the Shares owned by Seller in exchange for the payment to Seller of an
amount equal to the Purchase Price as adjusted.
2.2. Purchase Price. The aggregate purchase price (the "Purchase Price")
for one hundred percent (100%) of the outstanding stock of the Company will be
Two Million One Hundred Fifty Thousand Dollars ($2,150,000.00) subject to the
provisions of Section 2.3.
2.3 Payment of Purchase Price.
(a) $575,000.00 shall be paid in cash at Closing.
(b) A maximum of $500,000.00 shall be paid in cash (or one half in
Purchaser common stock at Purchaser's option) one (1) year after Closing
contingent upon the purchased business achieving $825,000.00 in Pre Tax Net
income for the period of January 1, 1999 thru December 31, 1999 (Calendar Year
1999). If the Pre Tax Net Income during Calendar Year 1999 is under $625,000.00
there shall be no payment for Calendar Year 1997. If the Pre Tax Net Income for
Calendar Year 1999 is between $625,000.00 and $825,000.00 then the total
consideration to be paid under this subsection 3(b) shall be $500,000 multiplied
by a fraction, the numerator of which shall be the amount of the actual Pre Tax
Net Income in excess of $625,000.00 (but which numerator shall not exceed
$200,000) and the denominator of which shall be $200,000. For example, if the
actual Pre Tax Net Income was $775,000.00 then the total consideration for the
12 month period is:
$150,000 = 75% x 500,000 = $375,000
-------- Total consideration for
$200,000 prior 12 months
(c) During Calendar Year 1999 a portion of that consideration to be
paid for Calendar Year 1999 shall be paid on a monthly basis as follows:
The maximum monthly payment shall be $20,833. The actual monthly
payments shall be $20,833 multiplied by a fraction, the numerator or which shall
be that portion of the Pre Tax Net Income for the month which exceeds $50,000
(but which numerator will not exceed $16,661) and the denominator shall be
$16,667. For example if the actual Pre Tax Net Income for the month is $63,000
then that month payment is calculated as follows:
13,000 = 78% x 20,833 = $16,249.42 For that month
------
16,667
At the end of Calendar Year 1999 if the 12 monthly payments paid are
less than the total consideration to be paid for the entire 12 month period as
determined under subsection 3 (b) then the balance will be paid within thirty
(30) days after the end of Calendar Year 1999.
(d) A maximum of $500,000.00 shall be paid in cash (or one half in
Purchaser common stock at Purchaser's option) two (2) years after Closing
contingent upon the purchased business achieving $825,000.00 in Pre Tax Net
Income for the period of January 1, 2000 thru December 31, 2000 (Calendar Year
2000). If the Pre Tax Net Income during Calendar Year 2000 is under $625,000.00
there shall be no payment for Calendar Year 2000. If the Pre Tax Net Income for
Calendar Year 2000 is between $625,000.00 and $825,000.00 then the total
consideration to be paid under the subtraction 3(b) shall be $500,000 multiplied
by a fraction, the numerator of which shall be the amount of actual Pre Tax Net
Income
<PAGE>
in excess of $625,000.00 (but which numerator shall not exceed $200,000) and the
denominator of which shall be $200,000.
(e) A maximum of $500,000.00 shall be paid in cash (or one half in
Purchaser common stock at Purchaser's option) three (3) years after Closing
contingent upon the purchased business achieving $825,000.00 in Pre Tax Net
Income for the period of January 1, 2001 thru December 31, 2001 (Calendar Year
2001). If the Pre Tax Net Income during Calendar Year 2001 is under $625,000.00
there shall be no payment for Calendar Year 2001 . If the Pre Tax Net Income for
Calendar Year 2001 is between $625,000.00 and $825,000.00 then the total
consideration to be paid under the subtraction 3(b) shall be $500,000 multiplied
by a fraction, the numerator of which shall be the amount of actual pre tax net
income in excess of $625,000.00 (but which numerator shall not exceed $200,000)
and the denominator of which shall be $200,000.
(f) In connection with subsection 3(b) if the Pre Tax Net Income for
Calendar Year 1999 is less than $825,000.00 resulting in a reduction or
elimination in contingent purchase price for that year then at the end of the
second year, i.e., Calendar Year 2000, if the total Pre Tax Net Income for the
two (2) years (Calendar Years 1999 and 2000) averages per year an amount higher
than the actual number at the end of Calendar Year 1999, then the average (per
year) will be substituted in the first year formula in 3(b) and any increase in
amount due will be paid at the end of Calendar Year 2000. Similarly if the
amount paid for the first (Calendar Year 1999) and/ or second years (Calendar
Year 2000) results in a reduction or elimination of contingent purchase price
under subsection 3(b) or 3(d) but at the end of the third year (Calendar Year
2001) the average per year for the three (3) years would have resulted in higher
payments then the average will be substituted in the formula in 3(b) and/or 3(d)
and any increase in amount due will be paid at the end of the third year
(Calendar Year 2001). For example, if the actual Pre Tax Net Income was $590,000
in Calendar Year 1999 then there would be no payment of contingent price at the
end of Calendar Year 1999. But if in Calendar Year 2000 the Pre Tax Net Income
was $1,060,000 then the total of the two years would be $1,650,000 and the
average per year would be $825,000. Therefore, at the end of Calendar Year 2000
Seller would be entitled to $500,000 for Calendar Year 2000 and another $500,000
for Calendar Year 1999 because the average for the two years, i.e., $825,000,
would be substituted for the actual number of $590,000 for Calendar Year 1999.
(g) If Buyer elects to pay part of the contingent price in stock it
will be Buyer's Common stock and the price per share shall be the average of the
last trade for each of the ten (10) prior trading days (i.e., days when it
actually traded) immediately preceding the exercise of this election.
(h) The parties acknowledge that Seller is simultaneous with the
transaction entering into an Employment Agreement with a three (3) year term. If
Seller is terminated without cause in breach of the Employment Agreement or dies
prior to all potential contingent purchase price being paid if due under this
Agreement, Seller will still be entitled to whatever contingent purchase price
Seller would have received and on the dates Seller would have received the
payments under this Agreement. If Seller voluntarily terminates employment or is
terminated for cause as defined in the Employment Agreement then Seller will
have no further right to any contingent purchase price which was not already
paid to Seller prior to termination.
(i) Payments to be made at the end of the specified year in 3(b),
3(d) and 3(e) will be made promptly after Buyer has available proper financial
results including audited financials if Buyer deems appropriate.
2.4. Closing Date. The closing (the "Closing") of the sale and purchase of
the Shares shall take place on December 15, 1998, or as soon thereafter as the
parties agree, at a mutually satisfactory location.
2.5. Deliveries. At the Closing, subject to the provisions of this
Agreement, Seller shall deliver to the Buyer, free and clear of all Liens and
Encumbrances, 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 at Closing. At the Closing,
Seller will make available to the Buyer the written resignations of all the
directors and officers of the Company 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
<PAGE>
written contracts and other documents, instruments and papers belonging to the
Company and shall cause full possession and control of all of the Assets and of
all other things and matters pertaining to the operation of the Business to be
transferred and delivered to the directors and officers elected to succeed the
resigned directors and officers of the Company.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
Seller represents and warrants to Buyer as of the date of this Agreement
and as of Closing as follows:
3.1. Organization of Company Entities.
(a) Schedule 3.1(a) sets forth true and complete copies of the
Charter Documents and Bylaws of each Company Entity as amended to date and
expressly designates any amendments that have been proposed and are pending.
Articles of Incorporation are certified by the appropriate state agency in the
state of organization. The Bylaws of each are certified by the Secretary of the
Company.
(b) Except as specified in Schedule 3.1(b), the Company (i) does not
have any subsidiaries or affiliates; and (ii) is not a general partner or owner
in any joint venture, general partnership, limited partnership, limited
liability company, trust or other noncorporate entity. Except as set forth in
Schedule 3.1(b), the Company has conducted the entire Business directly and not
through any divisions or any direct or indirect subsidiary or affiliate of
Company.
(c) All officers, directors and key employees and their positions as
to each Company Entity are listed on Schedule 3.1(c).
(d) Each Company Entity has qualified to do business in those states
specified on Schedule 3.1(d) and is currently in good standing in each.
(e) Each Company Entity is duly organized, validly existing and in
good standing under the laws of its state of incorporation and 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 in the
locations it conducts business. Each Company Entity has qualified to do business
in all states wherein its activities require qualification to avoid liability or
disadvantage.
(f) All office locations for all Company Entities are specified on
Schedule 3.1(F).
3.2. Capitalization of Each Company Entity. There is only one class of
authorized stock of the Company which is common. As of the date of this
Agreement, 1,000 shares of the Company stock (which is common) were issued and
outstanding. All of the issued and outstanding shares of each Company Entity are
validly issued, fully paid and nonassessable. All stock of each Company Entity
is free and clear of any Liens, Encumbrances, charges, restrictions or rights of
third parties. There are no shares of stock for any Company Entity issuable upon
exercise of outstanding stock options, warrants or otherwise. All of the
outstanding stock of the Company is owned directly by Seller. Seller owns one
hundred percent (100%) of all issued and outstanding stock. No other person,
including members of Seller's family, owns any stock of any Company Entity or
has any other right or valid claims to ownership of any part of any Company
Entity except as specified on Schedule 3.2. The Company owns 100% of all issued
and outstanding stock of each Subsidiary except as described in Schedule 3.2.
Except as set forth in Schedule 3.2, no Company Entity is bound by
any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the transfer, purchase or issuance of
any capital stock of any Company Entity 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 understandings with respect
to voting of any Company Entity stock. Except as set forth in this Agreement, no
Company Entity has any 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
<PAGE>
agreements, shareholder agreements or other similar arrangements or restrictions
of any kind affecting the shares of any Company Entity. No Person has any
preemptive rights as to any stock in any Entity. All stock of each Company
Entity was issued in compliance with all laws.
3.3. Authority; No Violation.
(a) Authority. Seller 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 the Company in accordance with the Charter Documents,
Bylaws and other controlling agreements of each Company Entity and applicable
laws and regulations. Except for such approvals, no other corporate proceedings
on the part of any Company Entity are necessary to consummate the transactions
so contemplated. This Agreement has been duly and validly executed and delivered
by Seller and constitutes a valid and binding obligation of Seller, enforceable
against Seller in accordance with its terms.
(b) No Violation. 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 Company with any of the
terms or provisions hereof, will (i) violate any provision of the Company's
Charter or Bylaws; (ii) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to any Company Entity or
any of their properties or assets; or (iii) except as set forth in Schedule
3.3(b), 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 Company 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 any Company Entity is a
party, or by which it or any of its respective material properties or assets may
be bound or affected.
(c) Consents and Approvals. Except for any filings, consents or
approvals specified on Schedule 3.3(c) (the "Required Consents"), neither the
execution and delivery by Seller of the Transaction Documents to which it is or
will be a party, nor the performance of the Transactions performed or to be
performed by Seller or the Company Entities, will require any filing, consent,
renegotiation or approval, constitute a Default or cause any payment obligation
to arise under (a) any Law or Court Order to which the Seller or any Company
Entity is subject, (b) the Charter Documents or bylaws of the Seller or any
Company Entity or (c) any Contract, Governmental Permit or other document to
which the Seller or any Company Entity is a party by which the properties or
other assets of the Seller or any Company Entity may be subject. The Required
Consents have been obtained and are enforceable against the respective parties
from which they are obtained. Seller shall indemnify and hold Buyer and Company
harmless from any liability, damages, costs or expenses (including reasonable
attorneys fees) incurred as a result of the failure of Seller to obtain any
consent.
3.4. Financial Statements.
(a) Schedule 3.4(a) sets forth true and complete copies of the
Company's complete audited financial statements for fiscal year 1997 and
unaudited financial statements for ten (10) months ending October 31, 1998,
together with the notes thereto (the "Financial Statements"). The Company's
Financial Statements (including the related notes) have been prepared in
accordance with generally accepted accounting principles and fairly present the
consolidated financial condition of the Company as of the dates set forth
therein.
(b) The books and records of the Company 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).
<PAGE>
(c) Except as and to the extent reflected, disclosed or reserved
against in the Company's most recent Financial Statement dated October 31, 1998
attached hereto as part of Schedule 3.4(a), the Company did not have any
liabilities, whether absolute, accrued, contingent or otherwise material to the
Business, operations, assets or financial condition of the Company, taken as a
whole. Since the date of the most recent financial statement attached as part of
Schedule 3.4(a), the Company has not incurred any liabilities except non
material liabilities in the ordinary course of business and there have not been
any material adverse changes.
(d) The Company has and will through closing continue to provide
unaudited financial statements for all months subsequent to the financial
statement attached hereto for the end of the last completed fiscal year of the
Company. At Closing the Seller shall deliver to the Buyer unaudited consolidated
financial statements of the Business as of Closing, which shall include a
balance sheet and statement of income to be attached hereto as Schedule 3.4(d).
The Seller shall by such delivery be deemed to have made the representations and
warranties to the Buyer with respect to such subsequent financial statement as
those set forth in all subsections of this Section 3.4.
3.5. Assets. Schedule 3.5 sets forth a true, correct and complete list of
all interests of each Company Entity in real property and all tangible personal
property (including, but not limited to, machinery, equipment, office equipment,
vehicles, inventory and supplies) owned or leased by each Company Entity and
used in connection with the Business, indicating whether such property is owned
or leased, the location of such property and the nature of its use. As of the
Closing Date, there shall have been no changes to such listing except for sales
or purchases of inventory in the ordinary course of business.
Except for property leased pursuant to leases listed in Schedule
3.6, the real property includes all land, buildings, structures, and other
improvements used by any Company Entity or necessary to enable the Company
Entities to conduct business as is presently being conducted and as it has been
conducted in the past. The Company Entities do not own or hold, are not
obligated under, or party to, any option, right of first refusal, or other
contractual right to acquire any real property or interest therein. There is no
condition of the real property, owned or leased by any Company Entity, that
would be revealed by an accurate survey or physical inspection thereof, which
would interfere in any respect with the use, occupancy, or operation thereof as
currently used, occupied, and operated, or materially reduce the fair market
value thereof below the fair market value such parcel would have had but for
such encroachment or other fact or condition; and no portion of the real
property encroaches upon any property belonging to any third party. No portion
of the real property owned or leased by any Company Entity is located in a
special flood hazard area designated by any state or federal government
authority.
3.5.1. Title and Liens. The Company Entities have good and
marketable title to all their Assets, free and clear of any and all Liens and
Encumbrances except those disclosed in Schedule 3.5.1 hereto.
3.6. 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 is a complete list of all real property and personal property
leases to which any Company Entity is a party, along with true, correct and
complete copies of all such leases as of the date hereof, as amended. There are
no pending or proposed amendments, cancellations or changes. The Company will
indemnify and hold Seller harmless from personal liability on Company leases for
obligations after Closing provided necessary consents of Lessor, if any, are
obtained.
3.6.1. Subleases. Schedule 3.6.1 lists all subleases, if any, under
which any Company Entity 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, as
amended. There are no pending or proposed amendments, cancellations or changes.
3.7. Environmental Matters. Except as set forth on Schedule 3.7
attached hereto:
(a) All Company Entities have always and do currently comply with,
and their business, operations, assets, equipment, property, leaseholds and
other facilities are, have always and currently are in compliance with, the
provisions of all Environmental Laws. Each Company Entity has been issued and
will maintain all required federal, state and local permits, licenses,
certificates and approvals relating to (1) air emissions; (2) discharges to
<PAGE>
surface water or groundwater or public sewer systems; (3) noise emissions; (4)
solid or liquid waste disposal; (5) the use, generation, storage, transportation
or disposal of Hazardous Materials; or (6) other environmental, health or safety
matters.
(b) No Company Entity nor Seller has ever received notice of, and
they do not know of, or suspect facts which might constitute any violations of
any Environmental Law, with respect to the Business, operations, assets,
equipment, property, leaseholds, or other facilities.
(c) Except in accordance with a valid governmental permit, license,
certificate or approval which is attached hereto as part of Schedule 3.7, there
has been no emission, spill, release or discharge into or upon (1) the air; (2)
soils, or any improvements located thereon; (3) surface water or groundwater; or
(4) the sewer, septic system or waste treatment, storage or disposal system
servicing the premises, of any Hazardous Materials at or from the premises; and
accordingly the premises of each Company Entity is free from all such toxic or
Hazardous Materials.
(d) There has been no complaint, order, directive, claim, citation
or notice by any governmental authority or any person or entity with respect to
(1) air emissions; (2) 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; (3) noise
emissions; (4) solid or liquid waste disposal; (5) the use, generation, storage,
transformation or disposal of Hazardous Materials; or (6) other environmental,
health or safety matters affecting any Company Entity or their business,
operations, assets, equipment, property, leaseholds or other facilities.
(e) The Company Entities do 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, Hazardous Materials
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 any Company Entity to
comply with all Environmental Laws.
(g) There have been no environmental inspections, investigation,
studies, audits, tests, reviews or other analyses conducted in connection with
the Business or any of its owned or leased assets.
(h) The Company Entities do not utilize, store, dispose of, treat,
generate, process, transport, release, or own any Hazardous Materials nor has
any Company Entity every done so.
(i) No property at any time owned, leased, or operated by any
Company Entity now contains, or, to the knowledge of the Seller, in the past has
contained, any underground or aboveground tanks for the storage of any Hazardous
Material or fuel oil, gasoline or any other petroleum product or by-product.
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 knowledge of Seller or any Company Entity,
threatened, before any court or administrative body in any manner against any
Company Entities, or any of their properties or capital stock, which could have
a material adverse effect, taken as a whole, on the Company, or its financial
condition, assets, operations or earnings or the Transactions proposed by this
Agreement. The Company Entities and Seller 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 Company Entity or which could question the validity of any
action taken or to be taken in connection with this Agreement and the
transactions contemplated hereby. No Company Entity is 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 Company Entities have 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 due. The Company Entities have not executed or filed
with the Internal Revenue Service ("IRS") any agreement extending the period for
assessment and
<PAGE>
collection of any federal tax nor is any Company Entity 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 any Company Entity. The Company Entities have 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 any Company Entity 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 Company Entity as required by law.
The Company Entities have established (and until the Closing Date
will establish) on their 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 Company through the Closing. Except as set forth in Schedule 3.9, all
obligations for all Taxes of the Company have been paid in full. Seller will
indemnify and hold Buyer harmless from all unpaid taxes whether or not disclosed
which arise from circumstances or events prior to Closing even if not due until
after Closing. Except as set forth in Schedule 3.9, any applicable state
franchise tax returns of the Company 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 Company
Entity. Schedule 3.9 sets forth true and complete copies of the federal and
state income tax return of the Company Entities as filed for the past three (3)
years and all information in the tax returns is accurate.
3.10. Contracts.
(a) Except to the extent listed in Schedule 3.2 (options, warrants
voting and other specified agreements), Schedule 3.6 (Leases), Schedule 3.6.1
(Subleases), Schedule 3.11 (Insurance), Schedule 3.15 (Employment Agreements,
Labor Agreements and Benefit Plans), Schedule 3.26 (Intellectual Property),
Schedule 3.10 contains a complete and correct list of all agreements, Contracts,
commitments and other instruments and arrangements (whether written or oral)
including the types described below (x) by which any of the Assets are bound or
affected or (y) to which any Company Entity is a party or by which it is bound
in connection with the Business or the Assets (the "Contracts"):
(i) leases, licenses, permits, franchises, purchase
agreements, options, insurance policies, Governmental Approvals and other
contracts concerning or relating to the Real Property;
(ii) employment, consulting, agency, collective bargaining or
other similar contracts, agreements, and other instruments and arrangements
relating to or for the benefit of current, future or former employees, officers,
directors, sales representatives, distributors, dealers, agents, independent
contractors or consultants of any Company Entity;
(iii) loan agreements, indentures, letters of credit,
mortgages, security agreements, notes, pledge agreements, deeds of trust, bonds,
notes, guarantees, and other agreements and instruments relating to the
borrowing of money, obtaining of or extension of credit or granting or creating
Liens or Encumbrances;
(iv) licenses, licensing arrangements and other contracts
providing in whole or in part for the use of, or limiting the use of, any
Intellectual Property;
(v) brokerage or finder's agreements;
(v) joint venture, partnership and similar contracts involving
a sharing of profits or expenses (including but not limited to joint research
and development and joint marketing contracts);
<PAGE>
(vii) asset purchase agreements and other acquisition or
divestiture agreements, including but not limited to any agreements relating to
the sale, lease or disposal of any Assets (other than sales of inventory in the
ordinary course of business) or involving continuing indemnity or other
obligations;
(viii) orders and other contracts for the purchase or sale of
materials, supplies, products or services, each of which involves aggregate
payments in excess of $5,000 in the case of purchases or $5,000 in the case of
sales;
(ix) contracts with respect to which the aggregate amount that
could reasonably be expected to be paid or received thereunder in the future
exceeds $5,000 per annum or $5,000 in the aggregate;
(x) sales agency, manufacturer's representative,
marketing or distributorship agreements;
(xi) contracts, agreements or arrangements with respect to the
representation of the Business in foreign countries;
(xii) master lease agreements providing for the leasing of
both (A) personal property primarily used in, or held for use primarily in
connection with, the Business and (B) other personal property;
(xiii) contracts, agreements or commitments with any employee,
director, officer, stockholder or Affiliate of any Company Entity;
(xiv) contracts that cannot be terminated upon 30 days prior
notice without obligation or liability or the payment of any money to terminate;
(xv) contracts for the purchase of materials or supplies or
the performance of services over a period of more than 60 days after the date of
this Agreement;
(xvi) any other contracts not made in the ordinary course of
business;
(xvii) contracts limiting or restraining any Company Entity
from engaging in or competing in any line of Business with any Person; and
(xviii) any other contracts, agreements or commitments not
specified in response to the foregoing that are material to the Business.
(b) The Seller has delivered to the Buyer complete and correct
copies of all written Contracts, together with all amendments thereto, and
accurate descriptions of all material terms of all oral Contracts, set forth or
required to be set forth in Schedule 3.10.
(c) 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 Company
Entities and the other parties thereto, enforceable against the Company Entities
and such other parties in accordance with its terms, (ii) the Company Entities
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 any Company Entities or any other party thereunder, have
occurred and/or is now continuing thereunder, (iii) the Company Entities and
Seller 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, (iv) the Company Entities and Seller have no knowledge of any
notice of any dispute or disagreement relating to any of the contracts, (v) no
consent of any third party is required as a result of or in connection with, the
enforceability of any contract, and (vi) no contract will be affected in any
manner by the execution and performance of this Agreement.
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 Company Entities all of
which are valid, binding and enforceable policies or bonds issued by insurers of
recognized responsibility. A copy of each policy is attached to Schedule 3.11.
Such insurance policies are adequate for the business conducted by the Company
<PAGE>
Entities in respect of amounts, types and risks insured. As of the date hereof,
the Company Entities have not received any notice of cancellation, nonrenewal or
notice of a material amendment of any such insurance policy or bond nor is any
Company Entity in default under any 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, all Company Entities
are in compliance with all applicable federal, state and local laws, rules,
regulations and orders and are not and have not violated any laws, rules or
regulations including, but not limited to, those relating or incidental to
mortgage lending and borrower's rights. The Company Entities have filed all
reports that are required to be filed with any regulatory authorities having
jurisdiction over them, and such reports, registrations and statements are true
and correct in all material respects. The Company Entities have obtained all
licenses required to conduct its business as it is being conducted and where it
is being conducted and all such licenses are in good standing.
(b) All of the Contracts (including all Customer Contracts) to which
any Company Entity is party or by which it or any of the Assets is bound or
affected are valid, binding and enforceable in accordance with their terms. The
Company Entities have fulfilled, or taken all action necessary 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 provision thereof, no
party is in Default thereunder and no notice of any claim of Default has been
given to the company or any Subsidiary. There are no provisions of, or
developments materially affecting, any such Contract which might prevent any
Company Entity from realizing the benefits thereof whether before or after the
closing in the Agreement. With respect to any of such Contracts that are leases,
no Company Entities have received any notice of cancellation or termination
under any option or right reserved to the lessor, or any notice of Default,
thereunder.
3.13. Real Property. The Real Property of each Company Entity is in full
compliance with all applicable building, zoning, subdivision and other land use
and similar Applicable Laws affecting the Real Property (collectively, the "Real
Property Laws"), and no Company Entity has received any notice of violation or
claimed violation of any Real Property Law. There is no pending, or to the
knowledge of any Seller, anticipated change in any Real Property Law that will
have or result in a material adverse effect upon the ownership, alternation,
use, occupancy or operation of the Real Property or any portion thereof. No
current use by any Company Entity of the Real Property is dependent on a
nonconforming use or other Governmental Approval the absence of which would
materially limit the use of such properties or assets held for use in connection
with, necessary for the conduct of, or otherwise material to, the Business. The
use and operation of the Real Property in the conduct of the Business does not
violate in any material respect any instrument of record for agreement affecting
the Real Property. There is no violation of any covenant, condition,
restriction, easement or order of any Governmental Authority having jurisdiction
over such property or of any other Person entitled to enforce the same affecting
the Real Property or the use or occupancy thereof. No damage or destruction has
occurred with respect to any of the Real Property that would, individually or in
the aggregate, have a Material Adverse Effect.
3.14. Liabilities at Closing. The Company Entities at Closing will
have no Liabilities except for:
(a) those Liabilities accurately and specifically set forth or
adequately reserved for on the Financial Statements in Schedule 3.4(a) and not
heretofore paid or discharged;
(b) those nonmaterial Liabilities arising in the ordinary course of
business subsequent to the date of the Financial Statement in Schedule 3.4(a)
consistent with good business practice under any Contract specifically disclosed
on Schedule 3.10; and
(c) those liabilities specified on Schedule 3.14.
<PAGE>
3.15. Employment Matters.
(a) Attached on Schedule 3.15(a) is a list of employees of each
Company Entity with a general job description, current salary rates or hourly
wages and the commencement date of employment for each. Seller has no knowledge
that any employees do not intend to remain with any Company Entity after this
sale except as expressly disclosed on Schedule 3.15(a). Also attached to
Schedule 3.15(a) are all written Employment Agreements with employees, which
agreements are valid, binding and enforceability as written.
(b) The relations of each Company Entity with its respective
employees are satisfactory, and no Company Entity has received any notice of any
controversies with, or organizational efforts or other pending actions by,
representatives of its employees. Each Company Entity has complied with all laws
and regulations 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,
social security and similar taxes, equal employment, prohibited discrimination,
fair employment practices, entitlements, safety, and all other applicable labor
or employment related laws or regulations, except as disclosed in Schedule
3.15(b). No person has asserted in writing that any Company Entity 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. There are no
verbal or written claims or threatened claims by any employees or prior
employees alleging violation of any Law or seeking damages.
(c) Except as set forth in Schedule 3.15(b), no Company Entity is a
party to or bound by any collective bargaining agreement and there are no labor
unions or other organizations representing, purporting to represent or
attempting to represent any employees employed in the operation of the Business.
There has not occurred or, to the best knowledge of Seller after due inquiry,
been threatened any material strike, slowdown, picketing, work stoppage,
concerted refusal to work overtime, unfair labor practice change or other
similar labor activity with respect to any employees employed in the operation
of the Business. There are no labor disputes currently subject to any grievance
procedure, arbitration or litigation and there is no representation petition
pending or, to the best knowledge of any Seller after due inquiry, threatened
with respect to any employee employed in the operation of the Business.
3.16. Employee Benefit Plans.
(a) All Employee Benefit Plans or benefits are specified in Schedule
3.16(a) and copies of all Employee Benefit Plans and all related documents are
attached to Schedule 3.16(a). Except as disclosed in Schedule 3.16(a), (i) no
Company Entity has any unfunded liability in respect of any of its Employee
Benefit Plans; (ii) the actuarially computed value of vested benefits under any
employee benefit plan does not exceed the fair market value of the fund assets
relating to such plan; (iii) neither Seller nor any plan nor any trustee,
administrator, fiduciary or sponsor of any plan has engaged in any prohibited
transactions as defined in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or the Internal Revenue Code of 1986, as amended (the
"Code"); (iv) all filings and reports as to such plans required to have been
made on or prior to the closing date to the Internal Revenue Service, the United
States Department of Labor or other governmental agencies have been timely
filed; (v) there is no material litigation, disputed claim, governmental
proceeding or investigation pending or threatened with respect to any of such
plans, the related trusts, or any fiduciary trustee, administrator or sponsor of
such plans; (vi) such plans have been established, maintained and administered
in all material respects in accordance with their governing documents and
applicable law and regulations including provisions of ERISA and the Code and
Treasury Regulations promulgated thereunder; and (vii) there has been no
"Reportable Event" as defined in ss.4043 of ERISA with respect to any Employee
Benefit Plan that has not been waived by the Pension Benefit Guaranty
Corporation; and (viii) the Company is not a party to any "Multiemployer Plan"
within the meaning of Section 4001(a)(3) of ERISA or a "Multiple Employer Plan"
within the meaning of Section 4063 or 4064 of ERISA.
(b) Except as specifically disclosed on Schedule 3.16(b), no Company
Entity is a party to any contract or agreement or requirement of law which would
require Buyer to hire, or subject Buyer to liability if it did not hire, any
employee of any Company Entity 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 any Company Entity 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).
(c) Other Employee Benefit Plans and Arrangements. Except as set
forth in Schedule 3.16, no Company Entity sponsors, maintains, supports, is
otherwise a party to, or has any liability or contingent liability under any
plan, program, fund, arrangement or contractual undertaking, including all
employment contracts, 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
<PAGE>
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; (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);
<PAGE>
(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.
(d) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan meets the requirements of a "qualified plan" under Code ss.401(a),
has received, within the last two years, a favorable determination letter from
the Internal Revenue Service that it is a "qualified plan," and Seller is not
aware of any facts or circumstances that could result in the revocation of such
determination letter.
(e) The market value of assets under each such Employee Benefit Plan
which is an Employee Pension Benefit Plan (other than any Multiemployer Plan)
equals or exceeds the present value of all vested and nonvested Liabilities
thereunder determined in accordance with PBGC methods, factors, and assumptions
applicable to an Employee Pension Benefit Plan terminating on the date for
determination.
(f) The Seller has delivered to the Buyer correct and complete
copies of all benefit plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, the most
recent Form 5500 Annual Report, and all related trust agreements, insurance
contracts, other funding agreements which implement each such Employee Benefit
Plan, the most recent actuarial valuation, employee manuals and all other
documents relating to any Employee Benefit Plan or other benefit (including all
listed in 3.16(c)), all of which are included in Schedule 3.16(a) attached
hereto.
(g) No Plan, other than the Pension Plan, if any, is subject to
section 412 of the Code or section 302 of Title IV of ERISA. As of the last day
of the most recently ended fiscal year of each Company Entity Pension Plan, if
any, the "projected benefit obligations" (within the meaning of the Financial
Accounting Standards Board Statement No. 87) under such Plan did not exceed the
fair market value of the assets of such Plan allocable to such "projected
benefit obligations," determined on the basis of the actuarial assumptions
specified for financial statement purposes in the actuarial report prepared for
such fiscal year of such Plan, each of which assumptions is reasonable, and the
present value of the "benefit liabilities" (within the meaning of, and
determined in accordance with, Title IV of ERISA) under such Plan does not
exceed the "current value" (within the meaning of section 3(26) of ERISA) of the
assets of such Plan allocable to such benefit liabilities, determined on the
basis of the actuarial assumptions required to be used in valuing pension
liabilities upon plan termination.
(h) No liability has been or is expected to be incurred by any
Company Entity, any related Person or the Business (either directly or
indirectly, including as a result of an indemnification obligation) under or
pursuant to Title I or IV of ERISA or the penalty, excise tax or joint and
several liability provisions of the Code relating to employee benefit plans that
could, following the Closing, become or remain a liability of any Company Entity
or become a liability of the Buyer or of any employee benefit plan established
or contributed to by the Buyer and, to the best knowledge of Seller after due
inquiry, no event, transaction or condition has occurred or exists that could
result in any such liability to the Business or, following the Closing, to
Buyer.
(i) All contributions required to have been made by contract, law or
regulation have been timely made and any such contributions which are accruing
but not yet due are properly reflected in the financial statements furnished to
Buyer and attached hereto as Schedule 3.4(a).
(j) With respect to any such Benefit Plan that is an employee
welfare benefit plan (within the meaning of Section 3(1) of ERISA) (a "Welfare
Plan") and, except as specified on Schedule 3.16(J), (i) each Welfare Plan for
which contributions are claimed by any Company Entity as deductions under any
provision of the Code is in compliance with all applicable requirements
pertaining to such deduction, (ii) with respect to any welfare benefit fund
(within the meaning of Section 419 of the Code) related to a Welfare Plan, there
is no disqualified benefit (within the meaning of Section 4976(b) of the Code)
<PAGE>
that would result in the imposition of a tax under Section 4980B(g)(2) of the
Code) complies, and, in each and every case has complied, with all of the
applicable requirements of Section 4980B of the Code, ERISA, Title XXII of the
Public Health Service Act and the Social Security Act , and (iv) all Welfare
Plans may be amended or terminated at any time on or after the Closing Date.
Except as specified on Schedule 3.16(J), no Benefit Plan provides any health,
life or other welfare coverage to employees of any Company Entity beyond
termination of their employment with such Company Entity, by reason of
retirement or otherwise, other than coverage as may be required under Section
4980B of the Code or Part 6 of ERISA, or under the continuation of coverage
provisions of the laws of any state or locality.
(k) Except as otherwise set forth on Schedule 3.16(K) neither the
execution and delivery of this Agreement nor the consummation of the
Transactions will (i) result in any payment to be made by and Company Entity or
an Affiliate thereof including severance, unemployment compensation, or golden
parachute (as defined in Code Section 280G) or otherwise becoming due to any
employee or former employee, officer or director; or (ii) increase or vest any
benefits payable under any Benefit Plan.
(l) Except as otherwise set forth on Schedule 3.16(L), any amount
that could be received (whether in cash or property or the vesting of property)
as a result of any of the Transactions by an employee, officer, or director of
any Company Entity who is a "disqualified individual" (as such term is defined
in proposed Treasury Regulation Section 1.280G-1) under any employment,
severance or termination agreement, other compensation arrangement or Benefit
Plan currently in effect would not be characterized as an "excess parachute
payment" (as such term is defined in Section 280(b)(1) of the Code).
(m) There are no material documents relating to any Employee Benefit
Plan or other Company benefits which are not attached to Schedule 3.16 (a) (b)
or (c).
3.17. Corporate Records. The minute book of each Company Entity 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 Company, as the case may be. The minute books and
stock books shall be provided to buyer for review prior to closing and shall be
transferred to Buyer at Closing. The minute books contain complete and current
copies of the Articles of Incorporation and Bylaws and Charter. The stock books
of each Company Entity are complete, current and correct.
3.18. Broker's and Other Fees. Except as set forth in Schedule 3.18,
neither the Company 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. Seller shall indemnify and hold Buyer and Company harmless from any
claims or liabilities by brokers retained by Seller or Company prior to Closing.
3.19. Absence of Certain Changes. Except as specified in Schedule 3.19,
since the date of the most recent financial statement in Schedule 3.4(a), the
Company and Seller have not:
(a) suffered any material adverse change in its working capital,
condition, financial or otherwise, assets, liabilities, reserves, business
operations, or prospects;
(b) suffered any damage, destruction, or loss, whether covered by
insurance or not, adversely affecting its business operations, or prospects,
assets, or conditions, financial or otherwise;
(c) permitted or allowed any of its property or assets (real,
personal, or mixed, tangible or intangible) to be subjected to any mortgage,
pledge, security interest, conditional sale, or other title retention agreement,
encumbrance, lien, easement, claim, right of way, warrant, option, or charge of
any kind (individually and collectively hereinafter referred to as a "Lien");
(d) created or incurred any liability (fixed, absolute, accrued,
contingent, or otherwise) except for unsecured current liabilities incurred for
other than money borrowed, and liabilities under contracts entered into in the
ordinary course of business and for amounts and for terms consistent with past
practice;
(e) canceled or compromised any debts, or waived or permitted to
lapse any material claims or rights, or sole, transferred, or otherwise disposed
of any of its properties or assets (real, personal, or mixed, tangible or
intangible), except in the ordinary course of business and consistent with past
practice;
<PAGE>
(f) transferred or granted any concessions, leases, licenses, or
agreements with respect to or disposed of or permitted to lapse any rights to
the use of any patent, registered trademark, servicemark, trade name, or
copyright material to the Business, or disposed of or disclosed to any person
any material, trade secret, formula, process, or know-how not theretofore a
matter of public knowledge.
(g) entered into any material commitment or transaction not in the
ordinary course of business and consistent with past practice or made any
capital expenditures or commitments for any additions to property, plant, or
equipment that in the aggregate exceed $5,000;
(h) paid, loaned, or advanced any amount to, or sold, purchased,
transferred, or leased any properties or assets (real, personal, or mixed,
tangible or intangible) to or from, or entered into any agreement or arrangement
with, any of its shareholders, officers, directors, or employees, or any family
member of any of its officers, directors, or employees, or any corporation or
other entity controlled by, controlling or under common control with it, or any
partner, officer, director or employee of any such corporation or other entity,
or any such individual's family members;
(i) purchased, redeemed, issued, sold, or otherwise acquired or
disposed of, directly or indirectly, any stock, stock options, warrants, bonds,
notes, or other securities, or rights to purchase or convert into any securities
of the Company;
(j) declared or paid, or set aside funds in anticipation of, any
dividends or other distributions to the Seller or any holder of any of its
securities;
(k) made any acquisition or disposition of assets except in the
ordinary course of business, consistent with past practice;
(l) introduced any material change with respect to the operation of
its business, including, without limitation, its method of accounting;
(m) except for sales of inventories in the ordinary course of
business, sold or otherwise disposed of, or entered into or agreed to enter into
any agreement or other arrangement to sell or otherwise dispose of, any of its
assets, properties, or rights or any agreement or other arrangement which
requires the consent of any party to the transfer and assignment of any such
assets, properties, or rights;
(n) paid or agreed to pay any bonus or extraordinary payment to any
employee or changed or agreed to change in any material respect the compensation
of any employee;
(o) agreed, whether in writing or otherwise, to take any action
described in this Section 3.19, and they have no knowledge of facts or
conditions which may result in a material adverse change; or
(p) caused or allowed any other material adverse change in the
Business or Company.
3.20. Disclosure. Except for normal business fluctuations, there are no
material facts concerning the business, operations, assets or financial
condition of the Company, which have not been disclosed to Buyer which could
have a material adverse effect on the business, operations, assets or financial
condition of the Company. No representation or warranty of Seller or the Company
contained in this Agreement, including all schedules and related documents,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading.
3.21. Counsel Opinion. Seller shall cause Seller's 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 shall be accurate and unchanged as of closing (except for changes in
the ordinary course of business that have no material adverse effect), and
Seller will certify the accuracy in a certificate at Closing.
<PAGE>
3.23. Mortgage Loan Receivables. Attached as Schedule 3.23 is a list of
all mortgage loans owned by Seller, which 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). Each mortgage loan complies with the
representations and warranties on Schedule 3.23 which representations and
warranties are incorporated herein and made a part of this Agreement.
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 including any present or future obligation or liability to either
repurchase mortgage loans it has sold to investors or 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. Seller
acknowledges that the pending repurchase claims exceed the reserves and
therefore Seller will prior to Closing increase the reserves to cover all
pending claims. Seller shall indemnify and hold Buyer harmless from all future
liabilities including repurchase obligations in excess of the increased reserves
which Seller represents cover all current claims on all mortgage loans sold to
investors prior to Closing.
3.25. Permits, Licenses and Registrations. Schedule 3.25 contains a list
of all government permits, license, registrations and other governmental
consents which the Company Entities have obtained in connection with the
operation of the Business including all mortgage banking and/or broker licenses
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. No Company Entity has received any written
notice of any claim of suspension or revocation of any such permit, license,
registration or other consent, nor do the Seller has knowledge of any event
which might give rise to such a claim.
3.26 Intellectual Property.
(a) Title. Except as disclosed on Schedule 3.26(a), the Company
Entity owns all Intellectual Property primarily related to, used in, held for
use in connection with, or necessary for the conduct of, or otherwise helpful to
the Business (the "Owned Intellectual Property") free from any Liens and
Encumbrances and free from any requirement of any past, present or future
royalty payments, license fees, charges or other payments, or conditions or
restrictions whatsoever. The Intellectual Property comprises all of the
Intellectual Property necessary for the Buyer to conduct and operate the
Business as now being conducted.
(b) Transfer. Immediately after the Closing, Buyer will own all of
the Owned Intellectual Property and will have a right to use all other
Intellectual Property Assets, free from any Liens or Encumbrances and on the
same terms and conditions as in effect prior to the Closing.
(c) No Infringement. The conduct of the Business does not infringe
or otherwise conflict with any rights of any Person in respect of any
Intellectual Property. None of the Intellectual Property of any Company Entity
is being infringed or otherwise used or available for use, by any other Person.
(d) Licensing Arrangements. Schedule 3.26(d) sets forth all
agreements, arrangements or Contracts (i) pursuant to which any Company Entity
has licensed Intellectual Property to, or the use of Intellectual Property is
otherwise permitted (through non-assertion, settlement or similar agreements or
otherwise) by, any other Person and (ii) pursuant to which any Company Entity
had Intellectual Property licensed to it, or has otherwise been permitted to use
Intellectual Property (through non-assertion, settlement or similar agreements
or otherwise). All of the agreements or arrangements set forth on Schedule
3.26(d) are in full force and effect in accordance with their terms and no
<PAGE>
default exists thereunder by any Company Entity, or by any other party thereto,
are free and clear of all Liens and Encumbrances, and do not contain any change
in control or other terms or conditions that will become applicable or
inapplicable as a result of the consummation of the transactions contemplated by
this Agreement. True and complete copies of all licenses and arrangements
(including amendments) set forth on Schedule 3.26(d) are attached to Schedule
3.26(d). All royalties, license fees, charges and other amounts payable by, on
behalf of, to, or for the account of, any Company Entity in respect of any
Intellectual Property are disclosed on Schedule 3.26(d) and in the Financial
Statements on Schedule 3.4(a).
(e) Intellectual Property Claims or Litigation. Except as Disclosed
in Schedule 3.16(e), no claim or demand of any Person has been made nor is there
any proceeding that is pending, or to the knowledge of the Seller after due
inquiry, threatened, nor is there a reasonable basis therefor, which (i)
challenges the rights of any Company Entity in respect of any Intellectual
Property, (ii) asserts that any Company Entities infringing or otherwise in
conflict with, or is, except as set forth in Schedule 3.26(d), required to pay
any royalty, license fee, charge or other amount with regard to, any
Intellectual Property, or (iii) claims that any default exists under any
agreement or arrangement listed on Schedule 3.26(d). None of the Intellectual
Property is subject to any outstanding order, ruling, decree, judgment or
stipulation by or with any court, arbitrator, or administrative agency, or has
been the subject of any litigation within the last five years, whether or not
resolved in favor of the Company Entity.
(f) Due Registration, Etc. The Owned Intellectual Property has been
duly registered with, filed in or issued by, as the case may be, the United
States Patent and Trademark Office, United States Copyright Office or such other
filing offices, domestic or foreign, and the Company Entities have taken such
other actions, to ensure full protection under any applicable laws or
regulations, and such registrations, filings, issuances and other actions remain
in full force and effect, in each case to the extent material to the Business.
(g) Use of Name and Mark. Except as set forth in Schedule 3.26(g),
there are, and immediately after the Closing will be, no contractual restriction
or limitations pursuant to any orders, decisions, injunctions, judgments, awards
or decrees on the Buyer's right to use any name or mark in the conduct of the
Business as presently carried on which has been used by any Company Entity.
(h) Patents.
(i) Schedule 3.26(H) contains a complete and accurate list and
summary description of all Patents in which a Company Entity has an ownership
interest. Such Company Entity owns all right, title and interest in and to each
of the Patents so specified, free and clear of any Encumbrances.
(ii) All of the issued Patents included in the Intellectual
Property of the Company Entities are currently in compliance with formal legal
requirements (including payment if filing, examination, and maintenance fees and
proofs of working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety (90) after the
Closing Date.
(iii) No Patent included in any Company Entity's Intellectual
Property has been, or is now involved in, any interference, reissue,
reexamination, or opposition proceeding. There is no potentially interference
patent or patent application of any third party.
(iv) No Patent included in any Company Entity's Intellectual
Property is infringed or has been challenged or threatened in any way. None of
the products manufactured and sold, nor any process or know-how used, by any
Company Entity infringes or is alleged to infringe any patent or other
proprietary right of any other Person.
(v) All products made, used or sold under any Patents included
in the Intellectual Property of the Company Entities have been marked with the
proper patent notice.
(i) Trademarks.
(i) Schedule 3.26(I) contains a complete and accurate list and
summary description of all Trademarks in which any Company Entity has an
ownership interest. Such Company Entity owns all right, title and interest in
and to each of the Trademarks so specified, free and clear of any Encumbrances.
<PAGE>
(ii) All Trademarks included in the Intellectual Property of
the Company Entities that have been registered with the US Patent and Trademark
Office are currently in compliance with all formal legal requirements (including
the timely post-registration applications), are valid and enforceable, and are
not subject to any maintenance fees or taxes or actions falling due within 90
days after the Closing Date.
(iii) No Trademark included in the Intellectual Property of
the Company Entities has been, or is now involved in, any opposition,
invalidation or cancellation and no such action is threatened with respect to
any such Trademark.
(iv) There is no potentially interfering trademark application
of any third party with respect to any Trademark included in the Intellectual
Property of the Company Entities.
(v) No Trademark included in the Intellectual Property of the
Company Entities is infringed or has been challenged or threatened in any way.
None of the Trademarks used in by any Company Entity infringes or is alleged to
infringe any trade name, trademark or service mark of any third party.
(vi) All products and materials containing a Trademark
included in the Intellectual Property of the Company Entities bear the proper
federal registration notice where permitted by law.
(j) Copyrights.
(i) Schedule 3.26(J) contains a complete and accurate list and
summary description of all Copyrights in which any Company Entity has an
ownership interest. Such Company Entity owns all right, title and interest in
and to each of the Copyrights so specified, free and clear of any Encumbrances.
(ii) All of the Copyrights included in the Intellectual
Property of the Company Entities have been registered and are currently in
compliance with formal legal requirements, are valid and enforceable, and are
not subject to any maintenance fees or taxes or actions falling due within 90
days after the date of Closing.
(iii) No Copyright included in the Intellectual Property of
the Company Entities is infringed or has been challenged or threatened in any
way. None of the subject matter of any of such Copyrights infringes or is
alleged to infringe any copyright or any third party or is a derivative work
based on the work of a third party.
(iv) All works encompassed by the Copyrights included in the
Intellectual Property of the Company Entities have been marked with the proper
copyright notice.
(k) Trade Secrets.
(i) With respect to each Trade Secret of the Company Entities,
the documentation relating to such Trade Secret is current, accurate, and
sufficient in detail and content to identify and explain it and to allow its
full and propr use without reliance on the knowledge or memory of an individual.
(ii) Each Company Entity has taken all reasonable precautions
to protect the secrecy, confidentiality and value of its Trade Secrets.
(iii) Each Company Entity has good title and an absolute right
to use its Trade Secrets. Such Trade Secrets are not part of the public
knowledge or literature, and have not been used, divulged or appropriated,
either for the benefit of any Person (other than the Company Entities) or to the
detriment of any Company Entity. No such Trade Secret is subject to any adverse
claim or has been challenged or threatened in any way.
3.27. Condition of Assets. All tangible assets and properties which are
part of the 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
<PAGE>
any such Asset which might curtail the present or future use thereof for the
purpose for which it was acquired. Except pursuant to leases described on the
attached schedules, no person other than the Company Entities owns any vehicles,
equipment or other tangible Assets situated on the facilities used by the
company in the Business (other than immaterial items of personal property owned
by Company Entity 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 creditors of all Company Entities, 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. As
of the date of this Agreement, Company Entity had no liabilities of any nature,
whether absolute, accrued or contingent, and whether due or to become due that
are not reflected on Schedule 3.28, and Seller does not know of any basis for
the assertion against any Company Entity of any such liability.
3.29 Certain Transactions. Except as set forth in Schedule 3.29, there is
no transaction, and no transaction now proposed, to which any Company Entity was
or is to be a party and in which any director or officer of the company or any
Subsidiary or any person owning of record or beneficially any of the outstanding
capital stock of any class of any Company Entity or any associate of any such
person had or has a direct or indirect material interest.
3.30 Foreign Corrupt Practices Act. No Company Entity nor any director,
officer, agent, employee or other person associated with or acting on behalf of
any Company Entity has used any corporate funds for any unlawful contribution,
gift, entertainment or other expense relating to political activity or made any
direct or indirect unlawful payment to any United States or foreign government
official or employee form corporate funds or violated or is a violation of any
provision of the foreign Corrupt Practices Act of 1977 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 each Company Entity 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 Company Entity and a summary statement of the terms thereof.
3.32 Product Warranties. Except as set forth in Schedule 3.32 and for
warranties under Applicable Law, (a) there are no warranties express or implied,
written or oral with respect to the products of the Business, and (b) there are
no pending or threatened claims with respect to any such warranty, and no Seller
has any liability with respect to any such warranty, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become due.
3.33 Mortgage Loan Purchasers. Schedule 3.33 sets forth a true, correct
and complete list of all of the Mortgage Loan Purchasers for the Business as of
the closing Date specifying the ten (10) largest. The Seller is unaware of any
loss or threatened loss of any mortgage loan purchasers. Except as disclosed on
Schedule 3.33, there is no mortgage loan purchaser that accounts for more than
five (5%) percent of mortgage loan purchases. True and accurate copies of all
Mortgage Loan Purchase Agreements are attached to Schedule 3.10. All sales of
mortgage loans by Seller to loan purchasers have been made without recourse
except for breach of representation in the Loan Purchase Agreement.
3.34 Distributions to Seller. No Company Entity will make any
distributions except ordinary salary to Seller after October 31, 1998 without
the consent of the Buyer.
3.35 Liability for Transfer Taxes. The Seller shall be responsible for the
timely payment of, and shall indemnify and hold harmless the Buyer against, all
sales (including, without limitation, bulk sales), use, value added,
documentary, stamp, gross receipts, registration, transfer, conveyance, excise,
recording, firearm, ammunition, license and other similar taxes and fees
("Transfer Taxes"), arising out of or in connection with or attributable to the
transactions effected pursuant to this Agreement. The Seller shall prepare and
timely file all Tax Returns required to be filed in respect of Transfer Taxes
(including, without limitation, all notices required to be given with respect to
bulk sales taxes), provided that the Buyer shall be permitted to prepare any
such Tax Returns that are the primary responsibility of the Buyer under
applicable law. The Buyer's preparation of any such Tax Returns shall be subject
to Seller's approval, which approval shall not be withheld unreasonably.
<PAGE>
3.36 Use of Business Name. After the Closing, Seller will not, directly or
indirectly, use or do business, or allow any Affiliate to use or do business, or
assist any third party in using or doing business, under the name of any Company
Entity or any similar name. Seller and Company have properly filed assumed name
certificate for the use of Consumer One Financial in all of the jurisdictions
wherein the Company does business.
3.37 Computer Software. The computer software of all Company Entities is
designed to be used prior to, during and after Calendar Year 2000 A.D. and such
computer software will operate during each such time period without error
relating to date data, specifically including any error relating to, or the
conduct of, date data which represents or references different centuries or more
than one century. Without limiting the generality of the foregoing, the computer
software of the Company Entities:
(a) will manage and manipulate data involving dates, including
single century formulas and multicentury formulas, and will not cause an
abnormally ending scenario within the application or generate incorrect values
or invalid results involving such dates, and
(b) has been designed to ensure year 2000 A.D. compatibility,
including date data, century recognition, calculations which accommodate same
century and multicentury formulas and date values, and date data interface
values that reflect the century.
3.38 Proceedings Involving Officers, Directors, Shareholders or Employees.
Except as set forth in Schedule 3.38 none of the Officers, Directors, or
shareholders of any Company Entity or, to the knowledge of the Seller, 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, regulations or
rules.
3.39 Territorial Restrictions. No Company Entity nor any employees is
restricted by any written agreement or understanding with any Person (other than
with the Company) from carrying on the Business anywhere in the world. The
Buyer, solely as a result of its purchase of the Business from the Seller
pursuant hereto and the assumption of the Assumed Liabilities, will not thereby
become restricted in carrying on any business anywhere in the world.
3.40 Confidentiality. Except as set forth on Schedule 3.40, the Seller has
taken all steps necessary to preserve the confidential nature of all material
confidential information (including, without limitation, any proprietary
information) with respect to the Business, including but not limited to the
manufacturing or marketing of any of the products or services.
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 its state of incorporation.
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.
<PAGE>
(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.
ARTICLE V
COVENANTS OF THE PARTIES
5.1. Conduct of the Business of the Company.
(a) From and after the date of this Agreement to the Closing Date,
each Company Entity 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 Company Entities, 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) From and after the date of this Agreement to the Closing Date,
no Company Entity will without the prior written consent of Buyer, (i) permit
any amendment or change to be made in the Charter or Bylaws of the Company; (ii)
take, or allow the Company to take, any action described or do any of the things
listed in Section 3.19 hereof; (iii) enter into or amend, or allow the Company
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 Company; (x) approve any loan, the
underwriting of which varies from the written credit policies of the Company;
(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 Company's directors, shareholders, officers or employees or enter into or
modify any employment, consulting or similar Contracts with 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 to any Seller or their affiliates; (xv) merge with or into
any other corporation or sell, assign, transfer, pledge or encumber any part of
the Assets or agree to do any of the foregoing; (xvi) waive any rights of value
or rights that would otherwise accrue to a Company Entity after the Closing
Date; (xvii) take any action or omit to take any action, the primary purpose of
which is to benefit Seller at Buyer's expense. The Company further agrees that,
between the date of this Agreement and the Closing 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 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,
<PAGE>
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 Company Entities 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 transaction 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 transaction
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 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.
(c) Buyer will make the Company's records available to Seller for
review in connection with Sellers filing a tax return for the period prior to
Closing.
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 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 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 III, no
supplement or amendment to such Schedule shall correct or cure any warranty
which was untrue when made.
<PAGE>
ARTICLE VI
CONDITIONS PRECEDENT TO THE BUYER'S OBLIGATIONS
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:
6.1. Accuracy of Representations. There shall be no material inaccuracy in
the representations and warranties of Seller set forth in this Agreement and all
representations and warranties shall be true and correct in all material
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.
6.2. Performance of Covenants. Seller shall have performed all obligations
required to be performed by Seller 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 6.2.
6.3. Employment of Key Personnel. Buyer shall have reached agreement, on
terms satisfactory to Buyer, with such key personnel as it deems necessary to
consult with Buyer or to operate the business from and after the closing date,
which key personnel shall be listed on Schedule 6.3 attached hereto. Buyer shall
be reasonably satisfied that no employees of the Business will voluntary resign
as a result of the transaction.
6.4. Leases. Buyer shall have entered into any lease arrangements for
necessary space as Buyer deems necessary in Buyer's sole discretion.
6.5. 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.
6.6. 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).
6.7. 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.
6.8. Subsequent Monthly Financial Statements. The Buyer shall have
received the Financial Statements specified in Section 3.4(d). Such Financial
Statements shall (a) contain no liabilities different in kind or in scope from
the liabilities set forth in the Audited Balance Sheet, (b) confirm and be
consistent with the information concerning the Business (including the projected
results of operations) previously provided to the Buyer by the Seller prior to
the date hereof and (c)otherwise be satisfactory to the Buyer.
6.9. Opinion of Counsel. The Buyer shall have received an opinion,
addressed to it and dated the Closing Date, from counsel to Seller, in substance
and form reasonably satisfactory to the Buyer.
6.10. Due Diligence. Buyer shall have the right to review the Company's
corporate and accounting records, inventory, work in process, pending orders,
condition of the equipment, financials and liabilities, and to conduct complete
due diligence (including having an audit conducted if deemed necessary), the
results of which must be satisfactory to Buyer in Buyer's sole discretion.
Seller will provide any information required by Buyer necessary to complete it's
due diligence.
6.11 Board Approval and Other Third Party Consents. Buyer's obligation to
close is contingent upon approval by Buyer's Board of Directors and upon the
receipt of any third party approvals, including any lender or other source of
funds upon which Buyer is relying for the purchase price.
6.12 Seller Employment and Non Compete Agreement. Seller shall have
executed the Employment Agreement attached hereto as Schedule 6.12.
<PAGE>
ARTICLE VII
TERMINATION
7.1 Grounds for Termination.
(a) 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:
(i) If an adverse change, after the date of this Agreement but
prior to closing, in the financial condition or Business of any Company Entity
occurs, or any Company Entity 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; or
(ii) If any of the representations warranties of covenants made
by Seller to Buyer were breached, false, inaccurate, unfulfilled or misleading
as of the date given or as of the Closing Date, and these beached, false,
inaccurate, unfulfilled or misleading representations warranties or covenants
shall not have been waived in writing by Buyer; or
(iii) 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.
(b) Buyer and Seller may terminate by mutual consent.
7.2. Effect of Termination. In the event of termination of this Agreement
as expressly permitted under Section 7.1 hereof, this Agreement shall forthwith
become void (except for this Section) and there shall be no liability on the
part of the Seller, the Buyer, or their respective officers, directors or
Affiliates; provided, however, if such termination occurs pursuant to Section
7.1(a)(ii) Seller shall be liable for any and all damages, costs and expenses,
including accounting and attorney fees sustained or incurred as a result of such
breach and those fees and costs including attorney fees incurred in connection
with this Agreement and this transaction.
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 December 15, 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., 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 stock certificates;
(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;
<PAGE>
(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 Company, 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;
(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 Company to be true, correct and complete as of the Closing Date;
(i) A certificate of good standing for the Company as of a
date not more than thirty (30) days prior to the Closing Date issued by the
Secretary of the State of the State of its incorporation and every other state
in which the Seller is authorized to do business;
(j) A clearance certificate 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; and
(l) Such other documents as shall reasonably be requested by
the Buyer in order to effectively 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 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 Buyer of
this Agreement and the other documents contemplated by this Agreement to be
executed and delivered by Buyer, duly certified by the Secretary or an Assistant
Secretary of the Buyer, and an incumbency certificate, certifying the names and
true signatures of the officers of the Buyer executing and delivering this
Agreement and the other documents contemplated by this Agreement.
(c) 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.
<PAGE>
ARTICLE IX
MISCELLANEOUS
9.1. "No Shop" Provision. Seller agrees 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 Company
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: (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 limitation,
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. Survival of Representations and Warranties. The representations,
warranties, covenants, and indemnities of the parties hereto contained in this
Agreement shall survive making of this Agreement, any investigation or
examination by either party, and the Closing for four (4) years.
9.4. 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.
9.5. Expenses. Subject to Section 7.2, 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.
9.6. Time of the Essence. Time is of the essence in this Agreement.
9.7. 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.
9.8. Indemnification.
(a) By Seller. Seller covenants and agrees to defend, indemnify and
hold harmless the Buyer, its officers, directors, employees, agents, advisers,
representatives and Affiliates (collectively, the "Buyer Indemnitees") from and
against, and pay or reimburse the Buyer Indemnitees for, any and all claims,
liabilities, obligations, losses, fines, costs, royalties, proceedings,
deficiencies or damages (whether absolute, accrued, conditional or otherwise and
whether or not resulting from third party claims), including out-of-pocket
expenses and reasonable attorneys' and accountants' fees incurred in the
investigation or defense of any of the same or in asserting any of their
respective rights hereunder (collectively, "Losses"), resulting from or arising
out of:
(i) any breach, default, inaccuracy or nonfulfillment of any
representation or warranty made by any Seller herein or under any related
agreement or in connection herewith or therewith;
(ii) any failure of any Seller to perform any covenant or
agreement hereunder or under any related agreement or fulfill any other
obligation in respect hereof or of any related agreement; and
<PAGE>
(iii) any claim, liability, suit, demand, proceedings,
assessments, fines, judgment, damages, cost or expense (including attorney
fees), known or unknown, fixed or contingent, whether or not disclosed in this
Agreement which are not accurately and specifically set forth or reserved for in
the financial statements attached as Schedule 3.4(a).
(b) By the Buyer. The Buyer covenants and agrees to defend,
indemnify and hold harmless Standard Seller and its officers, directors,
employees, agents, advisers, representatives and Affiliates (collectively, the
"Seller Indemnities") from and against any and all Losses resulting from or
arising out of:
(i) any inaccuracy in any representation or warranty by Buyer
made or contained in any Acquisition Agreement or in connection therewith; or
(i) any failure of any Buyer party to perform any covenant or
agreement made or contained in this Agreement or fulfill any other obligation in
respect thereof.
(c) Indemnification Procedures. In the case of any claim asserted by
a third party against a party entitled to indemnification under this Agreement
(the "Indemnified Party"), notice shall be given by the Indemnified Party to the
party required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and the Indemnified Party shall permit the Indemnifying
Party (at the expense of such Indemnifying Party) to assume the defense of any
claim or any litigation resulting therefrom, provided that (i) the counsel for
the Indemnifying Party who shall conduct the defense of such claim or litigation
shall be reasonably satisfactory to the Indemnified Party, (ii) the Indemnified
Party may participate in such defense at such Indemnified Party's expense, and
(iii) the omission by any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its indemnification obligation under
this Agreement except to the extent that such omission results in a failure of
actual notice to the Indemnifying Party and such Indemnifying Party is
materially damaged as a result of such failure to give notice. Except with the
prior written consent of the Indemnified Party, no Indemnifying Party, in the
defense of any such claim or litigation, shall consent to entry of any judgment
or enter into any settlement that provides for injunctive or other nonmonetary
relief affecting the indemnified Party or that does not include as an
unconditional term thereof the giving by each claimant or plaintiff to such
Indemnified Party of a release from all liability with respect to such claim or
litigation. In the event that the Indemnified Party shall in good faith
determine that the conduct of the defense of any claim subject to
indemnification hereunder or any proposed settlement of any such claim by the
Indemnifying Party might be expected to affect adversely the Indemnified Party's
tax liability or the ability of the Buyer to conduct its business, or that the
Indemnified Party may have available to it one or more defenses or counterclaims
that are inconsistent with one or more of those that may be available to the
Indemnifying Party in respect of such claim or any litigation relating thereto,
the Indemnified Party shall have the right at all times to take over and assume
control over the defense, settlement, negotiations or litigation relating to any
such claim at the sole cost of the Indemnifying Party, provided that if the
Indemnified Party does so take over and assume control, the Indemnified Party
shall not settle such claim or litigation without the written consent of the
Indemnifying Party, such consent not to be unreasonably withheld. In the event
that the Indemnifying Party does not accept the defense of any matter as above
provided, the Indemnified Party shall have the full right to defend against any
such claim or demand and shall be entitled to settle or agree to pay in full
such claim or demand. In any event, the Indemnifying Party and the Indemnified
Party shall cooperate in the defense of any claim or litigation subject to this
Section and the records of each shall be available to the other with respect to
such defense.
(d) Offset. Buyer shall have the right of offset against any
obligation (including under the Employment Agreement) to Seller to the extent
Seller is required to indemnify.
(e) Limits on Indemnification. Neither the Seller nor the Buyer
shall be liable under the indemnity provisions of Section 9.8(a) or Section
9.8(b), as applicable, in any instance until such time as the aggregate
liability under such section exceeds $5,000 (the "Basket"), in which event the
Seller, or the Buyer, as applicable, shall be liable to the full extent of such
liability, including the Basket.
<PAGE>
(f) Effect of Investigation or Knowledge. Any claim for
indemnification shall not be adversely affected by any investigation by or
opportunity to investigate afforded to the Buyer. Each Party shall be deemed to
be relying on the representations and warranties of any other Party set forth
herein regardless of any investigation or audit conducted before or after the
Closing Date or the decision of any Party to consummate the Transactions
contemplated hereby and complete the Closing.
9.9. Schedules. All Schedules are expressly made a part of this
Agreement. Specified below is a list of Schedules:
3.1(a) Charter and Bylaws
3.1(b) Subsidiaries, Affiliates and Joint Ventures 3.1(c) Officers,
Directors and Key Employees 3.1(d) States in Which Company is
Qualified to do Business 3.1(f) Office Locations 3.2 Voting Trusts,
Buy Sells and Other Similar Arrangements 3.3(b) Disclosure of
Violations of Agreements 3.3(c) Required Consents 3.4(a) Financial
Statements 3.4(d) Financial Statements at Closing Date 3.5 Assets
3.5.1 Liens 3.6 Leases 3.6.1 Subleases 3.7 Environmental Matters 3.8
Litigation and Other Proceedings 3.9 Taxes 3.10 Contracts 3.11
Insurance 3.12 Noncompliance with Laws by Company 3.14 Undisclosed
Liabilities 3.15(a) List of Employees With Related Data and
Employment
Agreements
3.15(b) Employment Related Violations of Law
3.15(c) Collective Bargaining Agreements
3.16(a) Employee Benefit Plans
3.16(b) Requirements to Hire Employees and Liability For Not Hiring
3.16(c) Other Employee Plans, Benefits, Contracts or Arrangements
3.16(j) Welfare Plans 3.16(k) Payments to Employees Caused by this
Agreement 3.16(l) Golden Parachute Payment 3.18 Broker's and Other
Fees 3.19 Absence of Changes 3.21 Counsel Opinion 3.23 Mortgage Loan
Receivable 3.24 Mortgage Loan Related Obligations 3.25 Permits,
Licenses & Registration 3.26(a) Nonowned Intellectual Property and
Liens and Encumbrances
on Intellectual Property
3.26(d) Licensing Arrangements
3.26(e) Intellectual Property Claims or Litigation 3.26(g) Use of
Name and Mark 3.26(h) Patents 3.26(i) Trademarks 3.26(j) Copyrights
3.26(k) Trade Secrets 3.28 Creditors 3.29 Certain Transactions 3.31
Bank Accounts 3.32 Product Warranties 3.33 Mortgage Loan Purchasers
3.38 Proceedings Involving Officers, Directors, Shareholders and
Employees
3.40 Confidentiality - Failure to Preserve
<PAGE>
6.1 Sellers Certificate per Section 6.1 (Accuracy of
Representation)
6.2 Sellers Certificate per Section 6.2
(Performance of Covenants)
6.3 Employment of Key Personnel
6.12 Seller Employment and Non Compete Agreement
9.20 Assets Retained by Seller
9.10. 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: Approved Financial Corp.
3420 Holland Road, Suite 107
Virginia Beach, Virginia 23452
<PAGE>
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: Keith H. Lewis
370 East Maple Road, 3rd Floor
Birmingham, Michigan 48009
With a copy to: Michael Jacob
Raymond and Prokop, P.C.
2000 Towne Center, Suite 2400
South Field, Michigan 48075
All notices sent by mail as provided above shall be deemed received
and delivered five (5) days after deposit in the mail. All notices 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.
9.11. 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. 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.
9.13. 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 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. None of Buyer's investigations, due diligence or representations from
third parties will be deemed a waiver of Seller's liability for breach of any
representation or covenant by Seller.
9.14. 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.
9.15. 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.
9.16. 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
<PAGE>
Agreement. This Agreement shall be the sole expression of the agreement of
the parties respecting the Transaction.
9.17. 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.
9.18. Gender. Any pronoun used herein shall refer to any gender,
either masculine, feminine or neuter, as the context requires.
9.19 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. In
furtherance and not in limitation of the foregoing, the Buyer shall be entitled
to offset any loss against any obligation whether present or deferred on a
dollar-for-dollar basis.
9.20 Assets Retained by Seller. Seller may retain the assets listed
on Schedule 9.20.
9.21 Election Under ss.338(h)(10) of the Internal Revenue Code. Buyer
shall have the option with Seller's consent which consent is hereby granted to
treat this purchase of assets pursuant to ss.338(h)(10) of the Internal Revenue
Code. Seller hereby represents that there are no built in gains for which the
Company may be liable for any tax under ss.1374 of the Internal Revenue Code.
Seller further represents that if such an election is made, the Company will not
be liable for any tax under Code ss.1374 in connection with the deemed sale of
its assets (including the assets of any qualified Subchapter S subsidiary)
caused by a Section 338(h)(10) Election. Neither Company nor any qualified
Subchapter S subsidiary of Company has, in the past 10 years, (a) acquired
assets from another corporation in a transaction in which Company's tax basis
for the acquired assets was determined, in whole or in part, by reference to the
tax basis of the acquired assets (or any other property) in the hands of the
transferor, or (b) acquired the stock of any corporation which is a qualified
Subchapter S subsidiary.
9.22 Allocation of Purchase Price. If an election under 338(a) (including
a Section 338(h)(10) election) is made or determined to be applicable to the
Sale, the Parties hereto agree that the Purchase Price allocation made and
reported on IRS Form 8594 shall be consistent with the following principles:
(1) The purchase price allocation to each item of tangible real or
personal property shall not exceed the amount included on the Company's tax
books attributable to each such item of tangible real or personal property;
(2) The purchase price allocation to each item of intangible
property (not including business goodwill and going concern value) shall not
exceed the amount included on the Company's tax books attributable to said item
of intangible property;
(3) Any purchase price remaining to be allocated after the
allocations made under (1) and (2) above shall be entirely allocated to business
goodwill and going concern value.
The parties agree to file all IRS and other governmental forms in a manner
consistent with this paragraph.
9.23 Termination of Company S Corp Short Tax Year. For purposes of
allocating the Company's income, loss and deduction for the 1998 calendar year,
the Buyer and Seller hereby agree to elect to treat the Employee's 1998 short S
corporation tax year at closing on the lat day of such short taxable year in
accordance with Internal Revenue Code ss.1362(e)(3) and the Treasury Regulations
promulgated thereunder. The Buyer and the Seller hereby covenant and agree to
execute and file all documents and consents necessary to cause the Company's
1998 S corporation tax year to close as provided in Internal Revenue Code
Section 1362(e)(3) and to allocate all S corporation income, gain, deductions
and loss pursuant to the rules applicable to short S corporation tax years
covered by elections made under Internal Revenue Code ss. 1362(e)(3).
<PAGE>
9.24 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.
IN WITNESS WHEREOF, the parties hereto set forth below their signatures
and seals:
APPROVED FINANCIAL CORP.
By (SEAL)
(SEAL)
KEITH H. LEWIS
<PAGE>
S C H E D U L E S
<PAGE>
SCHEDULE 3.1(a)
CHARTER AND BYLAWS
Attached
SCHEDULE 3.1(b)
SUBSIDIARIES, AFFILIATES AND JOINT VENTURES
SCHEDULE 3.1(c)
OFFICERS, DIRECTORS AND KEY EMPLOYEES
SCHEDULE 3.1(d)
STATES IN WHICH COMPANY IS QUALIFIED TO DO BUSINESS
SCHEDULE 3.1(f)
OFFICE LOCATIONS
SCHEDULE 3.2
VOTING TRUSTS, BUY SELLS AND OTHER SIMILAR ARRANGEMENTS
SCHEDULE 3.3 (b)
DISCLOSURE OF VIOLATIONS OF AGREEMENTS
SCHEDULE 3.3 (c)
REQUIRED CONSENTS
SCHEDULE 3.4(a)
FINANCIAL STATEMENTS
Attached
SCHEDULE 3.4(d)
FINANCIAL STATEMENTS AT CLOSING DATE
SCHEDULE 3.5
ASSETS
Attached
SCHEDULE 3.5.1
LIENS
SCHEDULE 3.6
LEASES
SCHEDULE 3.6.1
SUBLEASES
SCHEDULE 3.7
ENVIRONMENTAL MATTERS
SCHEDULE 3.8
LITIGATION AND OTHER PROCEEDINGS
SCHEDULE 3.9
TAXES
1995, 1996, and 1997 Tax Returns Attached.
No unpaid taxes not disclosed in Schedule 3.4(a)
SCHEDULE 3.10
CONTRACTS
SCHEDULE 3.11
INSURANCE
Attached list and policies
SCHEDULE 3.12
NONCOMPLIANCE WITH LAWS BY COMPANY
SCHEDULE 3.14
UNDISCLOSED LIABILITIES
SCHEDULE 3.15(a)
LIST OF EMPLOYEES WITH RELATED DATA AND EMPLOYMENT AGREEMENT
SCHEDULE 3.15(b)
EMPLOYMENT RELATED VIOLATIONS OF LAW
SCHEDULE 3.15(c)
COLLECTIVE BARGAINING AGREEMENTS
SCHEDULE 3.16(a)
EMPLOYEE BENEFIT PLANS
SCHEDULE 3.16(b)
REQUIREMENTS TO HIRE EMPLOYEES AND LIABILITY
FOR NOT HIRING
SCHEDULE 3.16(c)
OTHER EMPLOYEE PLANS, BENEFITS, CONTRACTS OR
ARRANGEMENTS
SCHEDULE 3.16(j)
WELFARE PLANS
SCHEDULE 3.16(k)
PAYMENTS TO EMPLOYEES CAUSED BY THIS AGREEMENT
SCHEDULE 3.16(l)
GOLDEN PARACHUTE PAYMENT
SCHEDULE 3.18
BROKER'S AND OTHER FEES
SCHEDULE 3.19
ABSENCE OF CHANGES
SCHEDULE 3.21
COUNSEL OPINION
SCHEDULE 3.23
MORTGAGE LOAN RECEIVABLE
SCHEDULE 3.24
MORTGAGE LOAN RELATED OBLIGATIONS
SCHEDULE 3.25
PERMITS, LICENSES & REGISTRATION
SCHEDULE 3.26(a)
NONOWNED INTELLECTUAL PROPERTY AND LIENS
AND ENCUMBRANCES ON INTELLECTUAL PROPERTY
SCHEDULE 3.26(d)
LICENSING ARRANGEMENTS
SCHEDULE 3.26(e)
INTELLECTUAL PROPERTY CLAIMS OR LITIGATION
SCHEDULE 3.26(g)
USE OF NAME AND MARK
SCHEDULE 3.26(h)
PATENTS
SCHEDULE 3.26(i)
TRADEMARKS
SCHEDULE 3.26(j)
COPYRIGHTS
SCHEDULE 3.26(k)
TRADE SECRETS
SCHEDULE 3.28
CREDITORS
SCHEDULE 3.29
CERTAIN TRANSACTIONS
SCHEDULE 3.31
BANK ACCOUNTS
SCHEDULE 3.32
PRODUCT WARRANTIES
SCHEDULE 3.33
MORTGAGE LOAN PURCHASERS
SCHEDULE 3.38
PROCEEDINGS INVOLVING OFFICERS,
DIRECTORS, SHAREHOLDERS AND EMPLOYEES
SCHEDULE 3.40
CONFIDENTIALITY - FAILURE TO PRESERVE
SCHEDULE 6.1
SELLERS CERTIFICATE PER SECTION 6.1 (ACCURACY OF REPRESENTATION)
Attached
SCHEDULE 6.2
SELLERS CERTIFICATE PER SECTION 6.2
(PERFORMANCE OF COVENANTS)
Attached
SCHEDULE 6.3
EMPLOYMENT OF KEY PERSONNEL
SCHEDULE 6.12
SELLER EMPLOYMENT AND NON COMPETE AGREEMENT
SCHEDULE 9.20
ASSETS RETAINED BY SELLER
o TEE 1 Phone System and LAN
o Mainstreet software and hardware system (subject to Buyer's
exclusive use for the first six months after Closing)
o Personal Van and note for 1997 GMC Conversion Van o Xantel Phone
system
AGREEMENT
THIS AGREEMENT (the "Agreement") made and entered into as of the
19th day of February, 1999 (the "Closing Date"), by and between APPROVED
FINANCIAL CORP., (AFC) a Virginia corporation with an address located at 3420
Holland Road, Virginia Beach, Va 23452, and UNITED MORTGAGEE, INC., a Virginia
corporation (the "Company"), and LEO THOMAS, JR. (the "Stockholder"), an
individual with an address located at 604 Terrace Avenue, Virginia Beach,
Virginia 23451, being the sole Stockholder of the Company. AFC, Stockholder and
the Company shall hereinafter be referred to collectively as the "Parties."
W I T N E S S E T H
WHEREAS, the Stockholder is the record and beneficial owner of
all the issued and outstanding shares of capital stock of the Company;
WHEREAS, Stockholder is the owner of the premises occupied by the
Company as of the date hereof (the "Premises"), and AFC, subsequent to the
closing of the transactions contemplated herein, wishes to cause the Company to
continue to occupy the Premises from and after the date hereof; and
WHEREAS, AFC and Stockholder desire to make certain representations,
warranties, covenants and agreements in connection with the Acquisition and also
to prescribe various conditions to the Acquisition;
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties agree as follows:
I ARTICLE
WARRANT; EMPLOYMENT; PROFITS
I.1 Section Warrant. Company shall at closing grant to AFC a warrant in the form
of Schedule l.l attached hereto to purchase 50% nondilutable ownership in the
Company for $1.00 which warrant may be exercised at any time. Upon exercise the
parties hereto agree that AFC shall the right to elect one half of the Members
of the Board of Directors (and their successors) of Company. The minimum number
of total Directors at such time shall be two (2).
Section 1.2 Stockholder Employment. Stockholder will become an employee of
Approved Federal Savings Bank ("AFSB"), a wholly owned subsidiary of AFC,
pursuant to a two (2) year written employment agreement with a salary of
$120,000 per year and Stockholder will execute the employment agreement at
closing in the form of Schedule 1.2 attached hereto.
<PAGE>
Section 1.3 Company Employees. Once AFC has all approvals and investors in
place, all Company employees except loan originators will, at AFSB's election,
become employees of AFSB, some of which may have written employment agreements
as determined by AFSB. Attached as Schedule 1.3 is a list of employees to be
transferred.
Section 1.4 AFSB Overhead. After the employees have transitioned from Company to
AFSB, Company will pay its portion of AFSB overhead based on the percentage of
loans closed by Company compared to the total aggregate loans closed by AFSB and
Company. For example, if the Company closed 50 loans and AFSB closed 100 loans,
the Company will pay one third of AFSB's overhead. The overhead will include the
rent paid by AFSB to Stockholder and salaries of transferred employees. If other
services such as payroll are provided for the Company by AFC or AFSB, the
Company will pay a commercially reasonable compensation for such services.
Section 1.5 Company Profits and Proceeds of Sale. The parties agree that AFC
will be entitled to 50% of the Company after tax net income and if there is a
sale of the Company (assets or stock) AFC will be entitled to 50% of the
proceeds. AFC's 50% of net income shall be paid to AFC within 30 days of the end
of each Company year. Any sale of assets or stock of the Company must be
approved in advance in writing by AFC.
Section 1.6 Payment to Company. At closing AFC shall pay $125,000 to Company.
Section 1.7 Closing Date. The closing shall take place on February 23, 1999, or
as soon thereafter as the parties agree, at the location of the Company or at a
mutually satisfactory location.
Section 1.8 Lease. Concurrently with the execution of this Agreement, the
Stockholder and the Company shall enter into a lease agreement (the "Lease")
substantially in the form of Schedule 1.8 attached hereto pursuant to which the
Company will continue to occupy the Premises under terms and conditions set
forth therein.
<PAGE>
I ARTICLE
REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER AND COMPANY
I.1 Section Representations and Warranties of the Stockholder and Company.
Previously, AFC has requested Stockholder to furnish responses to a request for
due diligence materials, and Company and have, prior to the execution and
delivery of this Agreement, delivered to AFC a full and complete response,
including copies of all documents requested and made all of the Company files
available to AFC for AFC's inspection, the documents furnished and files made
available hereinafter referred to as "the Due Diligence Materials". AFC has had
an opportunity to examine the Due Diligence Materials. The Stockholder has,
concurrently with the execution and delivery of this Agreement, delivered to AFC
a disclosure schedule with respect to the representations and warranties set
forth below (the "Disclosure Schedule") attached hereto as Schedule 2.1. The
Disclosure Schedule incorporates by reference all of the Due Diligence
Materials. The Disclosure Schedule in each case describes the nature of the
exception, if any, in reasonable detail and specifically refers to the section
or subsection of this Agreement to which any exception set forth therein to a
representation and warranty contained in this Article II, or covenant in Article
III, applies (disclosure in any section or subsection of the Disclosure Schedule
shall apply to the corresponding section or subsection of this Agreement and
wherever else the information is applicable or referenced). Except as specified
on the Disclosure Schedule, as of the date hereof, the Stockholder and the
Company jointly and severally represent and warrant to AFC as follows:
(a) Corporate Organization and Authority. The Company is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has all requisite corporate power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted in Virginia and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification
necessary.
(a) Capital Structure of the Company.
(i) The authorized capital stock of the Company consists of 25,000
shares of common stock, $20.00 par value. There are 500 shares of the Company's
common stock issued and outstanding of which all are owned beneficially and of
record by Stockholder. All of the Shares have been duly authorized and validly
issued and are fully paid and non-assessable. All of the Shares are owned by the
Stockholder free and clear of any liens, options, trusts, or claims of any kind,
and Stockholder holds marketable title thereto. All of AFC Shares were issued
and sold to the Stockholder in a transaction exempt from all applicable federal
and state registration laws. Except as set forth above, at the date hereof, no
shares of capital stock or other voting securities of the Company were issued,
reserved for issuance or outstanding. There is not as of the date hereof, and at
any time up to and including the Closing Date there will not be, outstanding any
stock options, stock appreciation rights, restrictive stock grants or any other
such right to acquire any shares of the Company's common stock or any other
equity securities of the Company. A copy of the Minute Book has been provided to
AFC with the Due Diligence Materials.
<PAGE>
(i) No bonds, debentures, notes or other indebtedness having the right
to vote (or convertible into or exchangeable for securities having the right to
vote) on any matters on which Stockholder may vote ("Voting Debt") of the
Company are issued or outstanding.
(i) None of AFC Shares are subject to preemptive rights.
(i) Except for this Agreement, there are no outstanding securities,
options, warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which either Stockholder or the Company is a party
or by which either of them is bound obligating the Company to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or any Voting Debt of either of them or obligating either of them to
issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking.
(i) There are no outstanding contractual obligations of Stockholder or
the Company (A) to repurchase, redeem or otherwise acquire any shares of capital
stock of the Company, or (B) to vote or to dispose of or encumber any shares of
the capital stock of the Company.
(a) Authorization. Stockholder and Company have full capacity, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby as contemplated by this Agreement, and no consent or
approval of any other person is necessary for him to do so. This Agreement and
all other agreements, documents and instruments executed pursuant hereto are and
will be the valid and binding obligations of Stockholder and the Company,
enforceable in accordance with their terms, and the execution, delivery and
performance of this Agreement, and such other agreements, documents and
instruments and the transactions contemplated hereunder, have been and/or will
be duly and validly authorized. Stockholder will deliver to AFC simultaneously
herewith certified copies of the appropriate authorizing resolutions of the
Board of Directors and stockholders of the Company.
(a) No Violations. To the best knowledge of Stockholder, the execution and
delivery of this Agreement and the documents contemplated hereby by the
Stockholder does not and will not, and the consummation of the transactions
contemplated hereby and thereby by the Stockholder does not and will not, and
compliance by Stockholder with any of the provisions hereof or thereof does not
and will not, (i) conflict with, or result in any breach or violation of, or
default (with or without notice or lapse of time or both) under, or result in
the termination of, or accelerate the performance required by, or give rise to a
right of termination, cancellation or acceleration of any obligation or the loss
of a material benefit under, or the creation of a lien (any such conflict,
<PAGE>
breach, violation, default, termination, acceleration, right of termination,
cancellation or acceleration, loss or creation, a "Violation") pursuant to, any
provision of the certificate or articles of incorporation or by-laws of the
Company; (ii) result in any Violation of any loan or credit agreement, note,
mortgage, indenture, lease, benefit plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment, injunction, order,
decree, statute, law, ordinance, rule or regulation applicable to Stockholder or
to the Company or their respective properties or assets; (iii) result in the
loss of any material license, franchise, permit, legal privilege or legal right
enjoyed or possessed by the Company; or (iv) give a right of termination to any
party to any material agreement or instrument to which the Company is a party,
unless, in any such case, a consent or waiver with respect thereto is obtained
by the Company prior to the occurrence of any such event. Anything to the
contrary notwithstanding, Stockholder and Company have informed AFC that laws
and regulations of certain States in which Company is licensed, and certain
agreements, including agreements with lenders and purchasers of mortgages, may
require notification, consent and possibly approval in the event of a sale of
shares or a change in control; AFC accepts the risk that the Closing of this
transaction may require such notification, consent or other compliance and AFC
accepts responsibility therefor.
(a) Consents. To the best knowledge of Stockholder, no consent, approval,
order or authorization of, or registration, declaration or filing with, any
governmental entity, is required by or with respect to Stockholder or the
Company in connection with the execution and delivery of this Agreement and the
documents contemplated hereby by Stockholder or the consummation by Stockholder
of the transactions contemplated hereby or thereby, or the performance by
Stockholder of its obligations hereunder and thereunder, which has not been made
or obtained prior to the date hereof. Anything to the contrary notwithstanding,
Stockholder and Company give notice to AFC that regulations of certain States in
which Company is licensed, and certain agreements, including agreements with
lenders and purchasers of mortgages, may require notification, consent and
possibly approval in the event of a sale of shares or a change in control; AFC
accepts the risk that the Closing of this transaction may require such
notification, consent or other compliance and AFC accepts responsibility
therefor.
(a) Title to the Shares. Stockholder is the owner of all of the Issued
Shares and has good title to said Shares, free and clear of any and all liens,
encumbrances, security interests, options, claims, charges and restrictions on
transfer or otherwise.
(a) No Subsidiaries. The Company has no subsidiaries and does not own of
record or beneficially, directly or indirectly, any capital stock or equity
interest or investment in any other corporation, partnership, joint venture,
association or other business entity, or if the Company has any subsidiary or
subsidiaries, each subsidiary is listed on the Disclosure Schedule and each of
the representations, warranties, and covenants set forth in this Agreement is
also made by the Company with respect to each such subsidiary as if such
subsidiary were the "Company" and the Disclosure Schedule shall apply to each
such subsidiary in the same manner as if such subsidiary were the "Company." In
the event the Company has any subsidiary, the Disclosure Schedule sets forth the
equity interest of any person other than the Company or any of its subsidiaries
in any of the subsidiaries of the Company and also sets forth the identity and
address of any such person.
(a) Financial Statements. To the best knowledge of Stockholder and the
Company, the financial statements of the Company for the years ended May 31,
1998, May 31, 1997 and May 31, 1996, (the "Financial Statements"), copies of
which have heretofore been delivered by Stockholder to AFC (and are attached
hereto as Schedule 2.1(h)), have been (or will be) prepared in accordance with
generally accepted accounting principles, consistently applied during the
<PAGE>
periods involved (except as may be indicated in the notes thereto); and the
unaudited Financial Statement through February 17, 1999, have been prepared in
accordance with usual procedures consistently applied in prior periods and
fairly present the consolidated financial position of the Company as at the
dates thereof and the consolidated results of its operations and changes in
Stockholder's equity for the periods then ended.
(a) Undisclosed Liabilities. Except as set forth in the Disclosure
Schedule and/or the Financial Statements and to the best knowledge of the
Stockholder, the Company is not subject to any liabilities of any nature other
than in the ordinary course of business which have had or can reasonably be
expected to have an aggregate adverse financial effect exceeding $50,000.
(a) Absence of Certain Changes or Events. Except as set forth in the
Disclosure Schedule, since December 31, 1997, to the best knowledge of the
Stockholder, the Company has not incurred any material liability, except in the
ordinary course of its business consistent with its past practices, nor has
there been any change, or any event involving a prospective change, in the
condition of the Company which has had, or is reasonably likely to have, a
material adverse effect on the Company, including but not limited to, any
damage, destruction or loss (whether or not covered by insurance) materially
adversely affecting the property or business of the Company, any labor trouble,
or any event or condition of any character materially adversely affecting the
business of the Company, or any change in the financial condition, assets,
liabilities, or business of the Company which has been materially adverse, or
any redemption, purchase or other acquisition by the Company of any of its
capital stock, or any declaration, setting aside or payment of any dividend on
any capital stock of the Company; and since December 31, 1997 the business of
the Company has been operated in the ordinary and normal course and there has
been no material change in the operation thereof. Without limiting the
generality of the foregoing, except as set forth on the Disclosure Schedule,
since December 31, 1997 the Company has not:
(i) incurred any material obligations or liabilities (whether absolute,
accrued, contingent or otherwise and whether due or to become due) except in the
ordinary course of business and consistent with past practice, nor, without
limiting the generality of the foregoing, guaranteed, endorsed or assumed
responsibility for any material debts or obligations of any person or entity;
(i) paid, discharged or satisfied any material claim, lien, encumbrance
or liability (whether absolute, accrued, contingent or otherwise and whether due
or to become due), except claims, liens, encumbrances or liabilities which were
incurred and paid, discharged or satisfied since December 31, 1997, in the
ordinary course of business or consistent with past practice;
(i) sold, leased or otherwise disposed of a material portion of its
property or assets (including assets material to the business of the Company and
its Subsidiaries), real, personal or mixed, tangible or intangible, nor entered
into any agreement or commitment to do so, nor permitted, caused, nor allowed a
material portion of such properties or assets, to be mortgaged, pledged or
<PAGE>
subjected to any lien or encumbrance, except the sale of loans and servicing in
the ordinary course of business and except for the disposition of motor vehicles
which was done at the request of AFC;
(i) disposed of, or permitted to lapse, any patent, trademark, service
mark or copyright or any patent, trademark, service mark or copyright
application or license which is part of the property of the Company (see
Disclosure Schedule);
(i) except (see Disclosure Schedule) for customary increases in
employees' compensation consistent with past practice and market conditions,
granted, promised or offered any general increase in the compensation of
employees (including, without limitation, any increase pursuant to any bonus,
pension, profit-sharing or other plan or commitment of the Company), or any
increase in any compensation or fringe benefit to or for the benefit of any
officer or employee, or entered into any new employment agreement or bonus
arrangement or Benefit Plan;
(i) made any material capital expenditures or commitments for additions
to property, plant or equipment except as noted in the Disclosure Schedule;
(i) made any material change in any method of accounting or accounting
practice;
(i) except in the ordinary course of business, incurred any material
change in any of the licenses, permits or franchises of the Company;
(i) except in the ordinary course of business agreed to or made, any
amendment, modification or termination of any existing, or entered into any new,
contract, agreement, plan, lease, license, permit or franchise that is material
to the condition of the Company.
(a) Title to Assets. The Company owns, as of the date hereof, good, clear,
record and marketable title to all of the properties and assets, tangible and
intangible, which are material to its business, free and clear of all liens
except (a) liens set forth as permitted liens on the Disclosure Schedule; (b)
statutory liens securing payments not yet due or delinquent; and (c) liens, the
validity of which are being contested or litigated in good faith by appropriate
proceedings and for which the Company has set aside on its books any reserves
deemed by it to be adequate with respect thereto. The Disclosure Schedule
contains a general list of all fixed assets owned by the Company as of the date
hereof.
(a) Real Property The Company owns no real property.
(a) Intellectual Property.
<PAGE>
(i) To the best of Stockholder's knowledge, the Company owns or has the
right to use its corporate name as a service mark. The Company has not
registered any trademarks or service marks and has not made any copyright
applications. The Company has used an employee information handbook, job
description outlines, a lender's information handbook and other documents. The
Company makes no claim of originality, asserts no claim of exclusivity and has
not taken steps to protect such documents as trade secrets or otherwise. These
documents were available to current and former employees and may be used by
other entities in the mortgage brokerage business. Any computer software used by
the Company is subject to licensing agreements and the Company makes no claim of
right thereto.
(i) To the best of Stockholder's knowledge, the Company has not
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any intellectual property rights of third parties, and neither the
Stockholder or the Company has ever received any charge, complaint, claim,
demand, or notice alleging any such interference, infringement, misappropriation
or violation. No third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with the ownership of or rights
in the Intellectual Property of the Company.
(i) To the best of Stockholder 's knowledge, as a result of the
continued operation of the Company's business as presently conducted, AFC will
not knowingly, infringe upon, misappropriate, or otherwise come into conflict
with any intellectual property rights of third parties.
(a) Material Contracts. To the best of Stockholder's knowledge, the
Disclosure Schedule contains a complete reference of all contracts and summary
description of all material contracts, agreements, equipment leases, loan
transactions, and commitments, either oral or in writing relating to the
Company, extending beyond the date hereof to which Stockholder and/or the
Company is a party or which affect the business or property of the Company
(collectively the "Contracts"). To the best knowledge of Stockholder , the
Company is not in default nor alleged to be in default in any respect under any
Contracts. All Contracts are valid and in full force and effect, and there
exists no event, condition or occurrence which, after notice or lapse of time,
or both, would constitute such a default by Stockholder of any Contracts.
Complete copies of all Contracts have been or shall be made available to AFC.
(a) Accounts Receivable. The accounts receivable of the Company, including
without limitation, the accounts receivable set forth on the Financial
Statements, and the accounts receivable of the Company as set forth in its books
and records as of the date hereof or reflected on the Financial Statements are
lawful and valid and have arisen out of transactions in the ordinary course of
business and are fully collectable in the ordinary course of business, and in
any event not later than ninety (90) days from the date hereof. An aging of the
Company's accounts receivable is included on the Disclosure Schedule, and such
aging is accurate and complete through the date of the Financial Statements.
There are no conditions precedent remaining unsatisfied or in default, or any
other restrictions upon or limitation to, the prompt collection of such accounts
receivable remaining outstanding as of the date hereof.
<PAGE>
(a) Non-governmental Licenses. The Disclosure Schedule contains a list of
all material non-governmental licenses hereto held by the Company. All such
licenses remain in full force and effect and the Company is not in default under
the terms thereof.
(a) Loan Approvals. To the best knowledge of the Stockholder neither the
execution of this Agreement nor the consummation of the transactions
contemplated hereby are likely to result in any material cancellations or
withdrawals of accepted loan approvals. No notice has been given respecting any
cancellation of any loan approval by any of the Company's lenders, investors or
loan purchaser nor has any such cancellation been threatened; however,
Stockholder and the Company make no guarantee that any approval or consent to
this transaction which may be required by any investor, loan purchaser or
governmental agency will be granted.
(a) Employee Plans and Contracts. Set forth on the Disclosure Schedule is
a true and complete list of all bonus, pension, stock option, stock ownership,
stock purchase, phantom stock, benefit, welfare, profit sharing, retirement,
disability, death benefit, vacation, severance, hospitalization, medical,
insurance, incentive, deferred compensation and other similar fringe or employee
benefit plans, funds, programs, arrangements, or understandings (whether or not
legally binding), and all employment contracts, executive compensation,
consulting, termination, or indemnification agreements, written or oral, in each
of the foregoing cases which cover or are maintained for the benefit of any
current or former employee, officer or director of the Company that have
existing, current, continuing or potential future obligations with respect
thereto (the "Employee Plans"). Except as set forth in the Disclosure Schedule,
there has not been any adoption or amendment (not already embodied in the
documents provided to AFC, comprising any such Employee Plans. Without limiting
the generality of the foregoing, (A) the aggregate salary and termination
benefits payable to each of the senior officers of the Company under existing
employment agreements are as set forth in the Disclosure Schedule, (B) the
termination benefits payable to additional officers and employees under the
Company's severance plans are as set forth in the Disclosure Schedule, and (c)
no individuals other than those referred to in clauses (A) and (B) of this
sentence are, or will be at the Closing Date, entitled to salary, severance,
termination, bonus or other such benefits from the Company. True and correct
copies of all items referred to in this Section 2.1(r) have been heretofore
delivered by the Stockholder to AFC.
(a) ERISA Compliance. To the best knowledge of the Stockholder , each of
the Employee Plans is in compliance with the requirements provided by all
statutes and regulations applicable under the laws of the United States,
including without limitation the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and none of the Employee Plans are unfunded or
underfunded. Without limiting the generality of the foregoing, to the best
knowledge of the Stockholder :
(i) The Disclosure Schedule contains a list and brief description of
each "employee pension benefit plan" (as defined in Section 3(2) of ERISA
(sometimes referred to herein as a "Pension Plan"), each "employee welfare
benefit plan" (as defined in Section 3(1) of ERISA) and each stock option, stock
purchase, deferred compensation plan or arrangement and each other employee
fringe benefit plan or arrangement maintained, contributed to or required to be
<PAGE>
maintained or contributed to by the Company or any other person or entity that,
together with the Company, is treated as a single employer under Section 414(b),
(c), (m) or (o) of the Code (each, a "Commonly Controlled Entity"), for the
benefit of any current or former employees, officers, agents, directors or
independent contractors of the Company (collectively, "Benefit Plans").
Stockholder has delivered or made available to AFC true, complete and correct
copies of (A) each Benefit Plan (or, in the case of any unwritten Benefit Plans,
descriptions thereof), (B) the most recent annual report on Form 5500 filed with
the United States Internal Revenue Service (IRS) with respect to each Benefit
Plan (if any such report was required), and (C) the most recent summary plan
description (or similar document) for each Benefit Plan for which such summary
plan description is required or was provided to plan participants or
beneficiaries.
(i) Each Benefit Plan has been administered in all material respects in
accordance with its terms. The Company and each Commonly Controlled Entity and
all the Benefit Plans are in compliance in all material respects with the
applicable provisions of ERISA and the Code. There are no investigations,
proceedings or other claims involving any Benefit Plan that could give rise to
any material liability.
(i) All Pension Plans intended to be qualified under Section 401(a) of
the Code have been the subject of current, valid determination letters from the
IRS to the effect that such Pension Plans are qualified and exempt from Federal
income taxes under Sections 401(a) and, with respect to each trust created
thereunder, 501(a), respectively, of the Code, and nothing has occurred since
the date of any such letter that would adversely affect the qualified status of
the applicable Pension Plan.
(i) No Pension Plan, other than any Pension Plan that is a "multi
employer plan" (as such term is defined in Section 4001(a)(3) of ERISA) had, as
of the respective last annual valuation date for each such Pension Plan, an
"unfunded benefit liability" (as such term is defined in Section 4001(a)(18) of
ERISA), based on actuarial assumptions which have been furnished to AFC and
neither the Company nor any of its Subsidiaries is aware of any facts or
circumstances that would materially change the funded status of any such Pension
Plan. None of the Pension Plans has an "accumulated funding deficiency" (as such
term is defined in Section 302 of ERISA or Section 412 of the Code), and there
has been no application for a waiver of the minimum funding standards imposed by
Section 412 of the Code with respect to any Benefit Plan that is a Pension Plan.
No Commonly Controlled Entity has incurred any material liability to a Pension
Plan (other than for contributions not yet due) or to the Pension Benefit
Guaranty Corporation (other than for premiums not yet due).
(i) There have been no non-exempt "prohibited transactions" (as such
term is defined in Section 406 of ERISA or Section 4975 of the Code) or any
other breach of fiduciary responsibility with respect to the Benefit Plans that
could subject the Company, any Commonly Controlled Entity or any officer of the
Company or any Commonly Controlled Entity to any tax, penalty or other liability
under ERISA, the Code or other applicable law. Neither any of such Benefit Plans
nor any of such trusts has been terminated, nor has there been any "reportable
<PAGE>
event" (as such term is defined in Section 4043 of ERISA) with respect thereto,
during the last five years.
(i) With respect to any Benefit Plan that is an employee welfare
benefit plan, (A) no such Benefit Plan is funded through a "welfare benefit
fund", as such term is defined in Section 419(e) of the Code, (B) each such
Benefit Plan that is a "group health plan", as such term is defined in Section
5000(b)(1) of the Code, complies in all material respects with the applicable
requirements of Section 4980B(f) of the Code and each such Benefit Plan
(including any such Benefit Plan covering retirees or other former employees)
may be amended or terminated without material liability to the Company or any
Commonly Controlled Entity on or at any time after the consummation of the
Acquisition.
(i) No employee of the Company or any Commonly Controlled Entity will
be entitled to any additional benefits or any acceleration of the time of
payment or vesting of any benefits under any Benefit Plan as a result of the
transactions contemplated by this Agreement.
(a) Labor and Employee Matters. Except to the extent set forth in the
Disclosure Schedule and to the best knowledge of the Stockholder , (i) the
Company is and has been in compliance in all material respects with all
applicable laws of governmental entities respecting employment and employment
practices, terms and conditions of employment and wages and hours, including,
without limitation, the Immigration Reform and Control Act ("IRCA"), the Worker
Adjustment and Retraining Notification Act ("WARN"), and any such laws
respecting employment discrimination, disability rights or benefits, equal
opportunity, plant closure issues, affirmative action, workers' compensation,
employee benefits, severance payments, labor relations, employee leave issues,
wage and hour standards, occupational safety and health requirements and
unemployment insurance and related matters, and is not engaged in and have not
engaged in any unfair labor practice; (ii) no investigation or review by or
before any governmental entity concerning any possible conflicts with or
violations of any such applicable laws is pending, nor is any such investigation
threatened, nor has any such investigation occurred during the last three years,
and no governmental entity has provided any notice to the Company or otherwise
asserted an intention to conduct any such investigation or review, nor is there
any basis for any such investigation or review; (iii) no collective bargaining
agreement exists which is binding on the Company; (iv) the Company is not
delinquent in payments to any of its officers, directors, employees or agents
for any wages, salaries, commissions, bonuses or other direct compensation for
any services performed by them or amounts required to be reimbursed to such
officers, directors, employees or agents; (v) in the event of termination of the
employment of any of said officers, directors, employees or agents for any
reason, neither the Company nor AFC will, pursuant to any agreement or by reason
of anything done prior to the Closing Date by the Company or any of its
predecessors, be liable to any of said officers, directors, employees or agents
for so-called "severance pay" or any other similar payments or benefits,
including, without limitation, post-employment health care (other than pursuant
to COBRA) or insurance benefits; (vi) all benefits payable to current,
terminated or retired employees, including, without limitation, post-employment
health care or insurance benefits, may be modified or terminated by the employer
at any time; (vii) all employees of the Company are employed at will. There are
<PAGE>
no pending or, to the Stockholder 's actual knowledge without investigation,
threatened suits, claims, actions, charges, investigations or proceedings of any
nature respecting employment and employment practices, terms and conditions of
employment and wages and hours, including without limitation under or alleging
violation of IRCA, NLRA, FLSA, WARN or any applicable law respecting employment
discrimination, equal opportunity, labor relations, affirmative action,
disability rights or benefits, employee leave issues or wage and hour standards,
workers' compensation, plant closure issues, employee benefits, severance
payments, occupational safety and health requirements or unemployment insurance
and related matters.
(b) Employee Information. To the best knowledge of the Stockholder , the
Disclosure Schedule sets forth a complete and accurate list of all employees of
the Company, with each employee's salary or wage rates, as the case may be.
(a) Insurance. To the best knowledge of Stockholder , the Company is
presently insured, and during each of the last five years has been insured, for
reasonable amounts against such risks as companies engaged in similar businesses
would, in accordance with good business practice, customarily be insured. The
Disclosure Schedule sets forth a true and complete list and brief description of
all insurance policies (and fidelity or similar bonds) currently in force and
maintained by or for the benefit of the Company or its respective directors,
officers, employees or agents. Neither the Stockholder nor the Company has
received any notice of cancellation or non-renewal of any such policy.
(a) Motor Vehicles. The Company owns no motor vehicles.
(a) Compliance with Applicable Laws.
(i) To the best knowledge of Stockholder , the Company holds all
permits, licenses, variances, exemptions, authorizations, orders and approvals
of all governmental entities (the "Permits") that are required for them to own,
lease or operate its properties and assets and to carry on its business as
presently conducted, and there is presently no default under any such Permit. To
the best knowledge of Stockholder , the Company is in compliance in all material
respects with (A) all applicable statutes, laws, ordinances, rules, orders and
regulations of any governmental entity, and (B) its own respective internal
policies and procedures.
(i) To the best knowledge of Stockholder and except as shown on the
Disclosure Schedule, the Company has not received any notification or
communication from any regulatory authority which has not been resolved to the
satisfaction of the Company (A) asserting that the Company is not in substantial
compliance with any of the statutes, regulations, ordinances or guidelines which
such regulatory authority enforces or administers, or with the internal policies
and procedures of the Company, as the case may be, (B) threatening to revoke any
material Permit, (C) requiring, or threatening to require the Company, or
indicating that the Company may be required, to enter into a cease and desist
order, agreement or memorandum of understanding or any other agreement, or (D)
directing, restricting or limiting, or purporting to direct, restrict or limit,
in any manner the operations of the Company. Except as included in the Due
<PAGE>
Diligence materials and the Disclosure Schedule, the Company has not received,
consented to or entered into, nor is it subject to, any agreement with a
regulatory authority, nor has the Company been advised by any regulatory
authority that such regulatory authority is contemplating issuing or requesting
(or is considering the appropriateness of issuing or requesting) any such
agreement.
(a) Litigation. To the best knowledge of Stockholder and except as
disclosed in the Disclosure Schedule, there are, no claims, suits, actions or
legal, administrative, arbitration or other proceedings of any nature pending
against the Company or its property or threatened against or affecting the
Company or its properties or assets, which involves the possibility of any
judgment or liability in excess of $5,000 or which might result in any
materially adverse change in the assets, liabilities, business or condition
(financial or otherwise) of the Company; nor is there any judgment, decree,
injunction, rule or order of any governmental entity or arbitrator outstanding
against the Company; nor is there any circumstance known where such a dispute
reasonably should be expected, even if litigation has not actually been
threatened. The Disclosure Schedule also contains a true, correct and complete
list as of the date hereof of all pending suits, claims, actions, investigations
or proceedings of any nature where such suits, claims, actions and other matters
are brought or threatened to be brought by or on behalf of the Company, as
plaintiff or other claimant.
(a) Taxes. To the best knowledge of Stockholder and except as reflected in
the financial statements and except as described in the records of the Chapter
11 Proceedings which are incorporated in the Disclosure Schedule and as limited
herein, no tax lien exists on account of any taxes due from the Company, and the
Company has not committed any act, the effect of which could result in any tax
lien affecting the ordinary course of its business. The Company has not received
any notice of, and has no knowledge of, any tax deficiency proposed or
threatened against the Company. The Company has not filed state tax returns for
the fiscal year ending May 31, 1998, and an extension has been granted therefor.
There may be taxes due for prior years.
(i) To the best knowledge of Stockholder and except as reflected in the
Financial Statements and except for the tax return for the fiscal year ending
May 31, 1998, which have not been filed and for which extensions are in effect
(A) The Company and its subsidiaries, if any, have filed, been included in or
sent all returns, declarations and reports and information returns and
statements required to be filed or sent (including in each case extensions) by
or relating to any of them relating to any taxes with respect to any income,
properties or operations of the Company prior to the Closing Date (collectively,
"Tax Returns"), (B) as of the time of filing, the Tax Returns correctly
reflected in all material respects the facts regarding the income, business,
assets, tax bases, operations, activities and status of the Company and any
other information required to be shown therein, the Company has timely paid or
made provision for all Taxes that have been shown as due and payable on the Tax
Returns that have been filed, (D) no provision or reserves are or have been made
for all taxes payable for periods prior to May 31, 1998; (E) the charges,
accruals and reserves for taxes reflected on the books of the Company and a
<PAGE>
contemplated loss for the current year to date are adequate to cover the tax
liabilities accruing or payable by the Company in respect of periods prior to
the date hereof, (F) the Company is delinquent in the payment of taxes and has
requested an extension of time within which to file any Tax Return for the
fiscal year ending May 31, 1998, (G) no deficiency for any taxes has been
proposed, asserted or assessed in writing against the Company which has been
received by the Company other than those taxes being contested in good faith,
(H) the Federal income tax returns and the state tax returns of the Company have
not been examined by the IRS or the Virginia Department of Taxation, as the case
may be, for all fiscal years through May 31, 1997, (I) except as may have
occurred in connection with the Chapter 11 Reorganization Proceedings, the
Company has not granted any extension of the limitation period applicable to any
tax claims (which period has not since lapsed), other than those taxes being
contested in good faith, and (J) the Company has no contractual obligations
under any tax sharing agreement with any other corporation.
(i) For the purpose of this Agreement, the term "Tax" (including, with
correlative meaning, the terms "taxes" and "taxable") shall include, except
where the context otherwise requires, all Federal, state, local and foreign
income, profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise, occupancy and other taxes, duties or assessments
of any nature whatsoever, together with all interest, penalties and additions
imposed with respect to such amounts.
(a) Hazardous Substances.
(i) To the best of Stockholder 's knowledge, the Company has been in
compliance with all applicable Environmental Laws (as defined below), except for
possible noncompliance which individually or in the aggregate would not have a
material adverse effect on the Company. The term "Environmental Laws" means any
federal, state, local or foreign statute, ordinance, rule, regulation, policy,
permit, consent, approval, license, judgment, order, decree, injunction or other
authorization relating to: (A) releases (as defined in 42 U.S.C. Section
9601(22)) or threatened Releases of Hazardous Material (as defined below) into
the environment; or (B) the generation, treatment, storage, disposal, use,
handling, manufacturing, transportation or shipment of any Hazardous Material.
The term "Hazardous Material" means (1) hazardous substances (as defined in 42
U.S.C. Section 9601(14)), (2) petroleum, including crude oil and any fractions
thereof, (3) natural gas, synthetic gas and any mixtures thereof, (4) asbestos
and/or asbestos-containing material and (5) polychlorinated biphenyls ("PCBs"),
or materials containing PCBs in excess of 50 ppm.
(i) The Company is not subject to any judgment, decree or order
relating to compliance with any Environmental Law or to investigation or cleanup
under any Environmental Law. To the best knowledge of Stockholder, the Company
has no contingent liabilities in connection with any Hazardous Materials,
including claims of liability for having generated, used, stored, transported,
disposed of, or failed to cleanup, Hazardous Materials related to the Company or
any of its respective former subsidiaries.
(a) Personal Property Leases. Included in the Disclosure Schedule is a
true and correct list of all Personal Property Leases of the Company. The
Company has delivered to AFC true and correct copies of all Personal Property
Leases.
<PAGE>
(a) Accounts. The Disclosure Schedule correctly identifies each bank
account maintained by or on behalf of the Company, and the name of each person
with any power or authority to act with respect thereto.
(a) Contingent Obligations, Guaranties and Powers of Attorney. With the
exception of those agreements set forth in the Disclosure Schedule, the Company
is not a party to or otherwise obligated under any contingent obligations,
guaranties, indemnities, powers of attorney or similar arrangements to any other
person or entity.
(a) Partnerships and Joint Ventures. Except for net branch operations, the
Company is not a partner, member or otherwise a participant in, any partnership,
joint venture or otherwise involved in any business or enterprise not otherwise
disclosed in the Disclosure Schedule attached hereto.
(a) Accuracy of Information. To the best of Stockholder's knowledge,
without limiting any of the representations, warranties or statements contained
in this Agreement, in the Disclosure Schedule or schedules hereto, or in any
other agreement, instrument or document executed or delivered by or on behalf of
Stockholder or the Company in connection with the transactions contemplated
hereby or thereby, the information provided to AFC by the Stockholder and the
Company does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements contained therein, in
light of the circumstances under which such statements are or will be made, not
misleading. Copies of all documents furnished by or on behalf of Stockholder or
the Company to AFC pursuant to the terms of this Agreement are complete and
accurate. All documents (or copies thereof) referred to in the Disclosure
Schedule hereto have been delivered or otherwise made available to AFC.
(a) Title to the Shares. Stockholder is the owner of record and
beneficially of all of the issued Shares and has good title to said Shares, free
and clear of all liens, encumbrances, security interests, options, claims,
charges and restrictions on transfer or otherwise. Stockholder has full right,
power and authority to sell AFC Shares of Company Stock in the manner provided
for in this Agreement. Stockholder and Company represents that they are not a
party to any option, warrant, purchase right, or other contract, commitment or
understanding, whether oral or written, that would require such Stockholder or
Company to sell, transfer, or otherwise dispose of any of the Shares or give any
third party any rights therein. Stockholder is not a party to any voting trust,
proxy, or other agreement or understanding with respect to the voting of any of
the Shares.
I.1 Section Representations and Warranties of AFC. AFC represents and warrants
to the Company and Stockholder as follows:
(a) Organization. AFC is a corporation duly organized, validly subsisting
and in good standing under the laws of its state of corporation. AFC has full
power and authority (including all licenses, franchises, permits and other
governmental authorizations which are legally required) to won or lease its
respective properties, and to engage in the business and activities now
conducted by AFC.
<PAGE>
(b) Authority. AFC has full capacity, power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby, and no
consent or approval of any other person is necessary for him to do so. This
Agreement has been duly executed and delivered by AFC and constitutes a valid
and binding obligation of AFC, enforceable against AFC in accordance with its
terms.
(c) No Violation. The execution and delivery of this Agreement does not,
the consummation of the transactions contemplated hereby will not, and
compliance by AFC with any of the provisions hereof or thereof will not: (i)
breach any applicable statute or regulation of any governmental authority,
domestic or foreign; or
(i) conflict with or result in the material breach of any of the terms,
conditions or provisions of any judgment, order, injunction, decree or any
agreement or instrument to which AFC is a party, or by which AFC may be bound,
or constitute a default thereunder.
I ARTICLE
CONDITIONS PRECEDENT TO CLOSING
I.1 Section Conditions to Each Party's Obligation To Effect the Acquisition. The
respective obligations of each party to effect the Acquisition and the other
transactions contemplated hereby shall be subject to the satisfaction or waiver
at or prior to the Closing of the following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order or decree issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Acquisition shall be in effect; provided,
however, that each of the Parties shall have used its commercially reasonable
efforts to prevent the entry of any such injunction or other order or restraint
and to appeal as promptly as possible any injunction or other order or restraint
that may be entered. There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Acquisition, which makes the consummation of the Acquisition illegal or
otherwise prohibits, restrains, enjoins or restricts the consummation of the
transactions contemplated hereby.
I.1 Section Conditions to Obligations of AFC. The obligations of AFC to effect
the Acquisition are subject to the satisfaction of the following conditions at
or prior to the Closing, unless such conditions are waived in writing by AFC:
(a) Representations and Warranties. The representations and warranties of
Stockholder set forth in this Agreement shall be true and correct as of the
Closing Date.
<PAGE>
(a) Litigation, Etc. Except with respect to the actions and claims set
forth on the Disclosure Schedule, there shall be no material pending or
threatened lawsuits, arbitrations, proceedings, cases or other adversarial
actions of any kind by any person against Stockholder, the Company or any
director, officer or employee of any of the foregoing challenging or in any way
or in any manner seeking to restrict or prohibit the transactions contemplated
hereby, seeking to obtain any damages against any person as a result of the
transactions contemplated hereby, or which seek to adversely affect the business
or assets of the Company excluding litigation and claims covered by insurance or
not in excess of $50,000.00 or incurred in the ordinary course of business are
expressly excluded.
(a) Contingent Liabilities. Except for matters described in the Disclosure
Schedule (and as to such matters only to the extent of facts made available to
AFC on or prior to the date of this Agreement), the Company, at the time of the
Closing, shall not be subject to any suit, action or proceeding, or any
investigation or inquiry by any government entity (such suits, actions or
proceedings, or any such investigations or inquiries, being collectively
referred to herein as "proceedings"), which shall be pending or, to the actual
knowledge of Stockholder without investigation, threatened against or affecting
the Company, nor shall there be any potential unasserted claim or liability not
heretofore disclosed in the Disclosure Schedule unless AFC shall have
determined, in the exercise of its reasonable business judgment, that each
proceeding, claim or liability likely would not have, either individually or in
the aggregate with all other such proceedings, claims or liabilities, a material
adverse effect on the Company, excluding litigation and claims covered by
insurance or not in excess of $50,000.00 or incurred in the ordinary course of
business are expressly excluded.
(a) Consents Under Agreements. All notices to, consents, approvals,
authorizations, certificates and waivers from third Parties, including but not
limited to, Company's lenders, that may be required for the consummation of the
transactions contemplated hereby upon the terms hereof have not been obtained or
provided.
(a) Stockholder Additional Deliveries. At the Closing, Stockholder shall
deliver to AFC a copy of resolutions of both the Board of Directors and the
Stockholder s of the Company, certified as of the date hereof by its duly
authorized Secretary as having been duly and validly adopted and as being in
full force and effect as of the date hereof, authorizing the execution and
delivery by Stockholder and the Company of this Agreement, the other agreements
and instruments executed and delivered by the Company as provided herein, and
the performance by the Company of the transactions contemplate hereby and
thereby.
(a) State Licensing Requirements. AFC's counsel shall not have determined
that the Company does not have any license or permit required by any state
statute, rule, regulation or governmental entity in connection with the
operation of the Company's business as presently conducted.
(a) Governmental Approval. AFC's counsel shall not have determined that
all required consents, waivers, authorizations or approvals, industry clearance
from the appropriate authorities, or other governmental or regulatory
authorities in connection with the execution, delivery and performance of this
<PAGE>
Agreement and the transfer to AFC of the Shares have not been duly obtained;
(a) Disclosure Schedule. AFC shall have received the Disclosure Schedule
to this Agreement.
(a) Lease. AFC shall have negotiated and the Company shall have entered
into the Lease;
I.1 Section Conditions to Obligations of the Stockholder. The obligations of the
Stockholder to effect the Acquisition are subject to the satisfaction of the
following conditions unless waived by the Stockholder:
(a) Representations and Warranties. The representations and warranties of
AFC set forth in this Agreement shall be true and correct both as of the date of
this Agreement and (except to the extent such representations speak as of an
earlier date) as of the Closing as though made on and as of the Closing, except
as otherwise contemplated by this Agreement.
(a) Performance of Obligations of AFC. AFC shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing.
I ARTICLE
TERMINATION AND AMENDMENT
I.1 Section Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual written consent of AFC and the Stockholder; or
(a) if the Stockholder, on the one hand, or AFC, on the other hand,
materially breaches any of its covenants and obligations hereunder and such
breach is not cured after thirty (30) days' written notice thereof is given to
the party committing such breach by the other party;
I.1 Section Effect of Termination. Each party's right of termination under
Section 4.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 4.1, all
further obligations of the Parties under this Agreement will terminate, except
those that survive by their express terms; provided, however, that if this
Agreement is terminated by a party because of a breach of the Agreement by the
other party the terminating party's right to pursue all legal remedies provided
for hereunder will survive such termination unimpaired.
I.1 Section Amendment. This Agreement may be amended by the Parties
hereto at any time but only by an instrument in writing signed by each of the
Parties hereto.
<PAGE>
I.1 Section Extension; Waiver. At any time prior to the Closing, the Parties
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other Parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and waive compliance with
any of the covenants, agreements or conditions contained herein. Any agreement
on the part of a party hereto to any such extension or waiver shall be valid
only if set forth in a written instrument signed by suchparty. The failure of
any party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
ARTICLE V
ASSIGNABILITY OF COMPANY STOCK OR WARRANT
Section 5.1 Right of First Refusal.
(a) Neither Stockholder or AFC may transfer, sell, assign or otherwise
dispose of (hereafter referred to as "Transferring Member") all or any part of
its stock or warrant in the Company to any Person without first offering in
writing to transfer to the other at a price equal to the amount offered for such
stock or warrant by a third party and on the same terms and conditions (the
"Purchase Terms"). It is understood, however, that a merger, consolidation, sale
of majority of control or sale of substantially all assets of AFC will not
trigger a right of first refusal and is deemed permitted in this Agreement, and
does not constitute a Buy Sell event in Article V.
(b) The other party shall respond to the Transferring Member's written
offer within thirty (30) days of receipt of the offer.
(c) If the other party declines the offer or otherwise fails to respond to
the offer within thirty (30) days, the Transferring party may then transfer its
interest to the approved transferee within sixty (60) days from the date of
receipt of the offer, provided, however, the purchase price for such interest
shall not be less and the terms of purchase for such interest shall not be more
favorable than the Purchase Terms offered to the other party.
(d) Transferring party decides to sell and the other party does not
exercise its right of first refusal, then any sale of the stock or warrant of
the other party on the same terms and price unless the other party elects not to
sell.
ARTICLE VI
BUY-SELL
Section 6.1 Buy-Sell Event. Any of the following events shall constitute a
Buy-Sell Event.
(a) The death, disability or judicial termination of legal incompetence,
or dissolution and winding-up of any Stockholder or AFC;
<PAGE>
(b) The judicial determination of insolvency of Stockholder or AFC;
(c) The filing of a petition or suit of Bankruptcy by or against
Stockholder or AFC that is not dismissed within sixty (60) days of the filing;
(d) Any purported voluntary or involuntary Transfer or encumbrance of all
or any part of a Stockholder's stock or AFC's warrant (or stock if the warrant
has been exercised) in a manner not expressly permitted by this Agreement.
Section 6.2 Buy-Sell Notice. Upon the occurrence of a Buy-Sell Event, the party
(Stockholder and AFC are the parties for the purpose of the Buy-Sell) with
respect to whom such Buy-Sell event has occurred (the "Withdrawing Party"), or
its executor, administrator or other legal representative in the event of death
or declaration or legal incompetency, shall give notice of the Buy-Sell Event
(the "Buy-Sell Notice") to the other parties (the "Purchasing Parties") within
thirty (30) days after its occurrence. If the Withdrawing Party fails to give
the Buy-Sell Notice, the Purchasing Party may give the Buy-Sell Notice at any
time thereafter and by also doing, commence the buy-sell procedure provided for
in this Article.
Section 6.3 Purchase Option.
(a) Upon the occurrence of a Buy-Sell Event the Purchasing Party shall
have the option to purchase (the Purchase Option") the Withdrawing Party's stock
or warrant, whichever is applicable, at Closing pursuant to the terms and
conditions set forth in this Article VI.
(b) The party remaining must give notice of its election to exercise the
Purchase Option to the Withdrawing Party within (30) days following delivery of
the Buy-Sell Notice.
Section 6.4 Purchase Price.
(a) Unless otherwise agreed in writing by the Purchasing Party and the
Withdrawing Party within thirty (30) days after the Buy-Sell Event, the Purchase
Price shall be determined by a single appraisal made by an appraiser agreed upon
by the Purchasing Party and the Withdrawing Party, which appraisal shall be
final. If the parties cannot agree on a single appraiser, the Purchase Price
shall be determined by three appraisers, one selected by the Purchasing Party,
one selected by the Withdrawing Party and the third selected by the two
appraisers. The value determined by the majority of the appraisers shall be
final. The appraisal shall be for the 100% of the Company. The Purchase Price
shall be the Company's appraised value multiplied by the Withdrawing Party's
ownership percentage of the Company. For purposes of this Article, AFC shall be
deemed a 50% owner based on its warrant and Stockholder shall be deemed a 50%
owner. There shall be no minority or lack of marketability discount.
(b) The costs of appraisal shall be borned equally between the Purchasing
Party and the Withdrawing Party.
<PAGE>
(c) The Purchase Price to be paid shall be reduced by the amount of any
distributions, including employee severance, if any, made by the Company to the
Withdrawing Party from the date of the Buy-Sell Event up until Closing and by
any damages, liabilities, costs or expenses including attorney fees incurred by
the Purchasing Party resulting from any breach or default of any provision of
this Agreement, Stockholder Employment Agreement, or other written agreement
among the Stockholder and AFC caused by the Withdrawing Party.
Section 6.5 Terms.
(a) The Purchase Price, if the Purchase Option is exercised, shall be
payable as follows:
(1) Twenty percent (20%) of the Purchase Price shall be paid at
Closing in cash or by cashier check or certified checks; and
(2) The Purchasing Party shall pay the balance of the Purchase Price
by delivering a promissory note as of Closing which shall bear interest at an
annual interest rate of two percent (2%) plus the Prime Rate (but in no event at
an interest rte higher than the maximum rate legally permitted) and call for
payment of the principal amount in sixteen (16) equal quarterly installments,
the first being due one hundred twenty (120) days from Closing and with accrued
interest being payable at the time of payment of principal.
(b) The Withdrawing Party shall have a continuing lien on the stock or
warrant being acquired by the Purchasing Party to secure the promissory note,
which lien may be foreclosed and enforced under applicable law. The Purchasing
Party shall execute and deliver such instruments as may be necessary or
appropriate to create such lien.
(c) Any amounts due from the Withdrawing Party to the Purchasing Party
shall be paid out of the cash portion of the Purchase Price at Closing, and to
the extent that the cash portion is not sufficient to satisfy that obligation,
the balance due shall be paid out of the payments due under the promissory note
until the balance is paid off. The promissory note shall contain provisions to
effect this Section.
Section 6.6 Closing.
(a) The closing of the purchase pursuant to this Article shall take place
on the date agreed upon by the Purchasing Party and the Withdrawing Party, but
not later than ninety (90) days after the occurrence of the Buy-Sell Event (the
"Closing").
(b) Upon payment of the amount specified, the Withdrawing Party shall
execute and deliver such assignments and other instruments as may be reasonably
necessary to evidence and carry out the transfer of its stock or warrant to the
Purchasing Party.
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
Section 7.1 Survival of Representations and Warranties. The representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Closing indefinitely.
Section 7.2 Notices. All notices, demands and other communications hereunder
shall be in writing and shall be deemed given if personally delivered upon
delivery, if by facsimile upon receipt of confirmation, or if mailed by first
class United States registered or certified mail postage prepaid return receipt
requested three (3) days after mailing to the Parties at the following addresses
(or at such other address as such party shall specify by like notice):
If to AFC: Allen D. Wykle
Approved Financial Corp.
3420 Holland Road
Virginia Beach, VA 23452
With a Copy to: Ronald M. Gates, Esq.
Payne, Gates, Farthing & Radd, P.C.
Dominion Tower
999 Waterside Drive, Suite 1515
Norfolk, VA 23510-3309
If to Stockholder: Mr. Leo Thomas, Jr.
604 Terrace Avenue
Virginia Beach, VA 23451
With a Copy To: Marvin A. Rosman, Esq.
4912 West Broad Street
Richmond, VA 23230
If to Company: Leo Thomas, Jr.
United Mortgagee, Inc.
2620 Southern Boulevard
Virginia Beach, VA 23452
With a Copy To: Marvin A. Rosman, Esq.
4912 West Broad Street
Richmond, VA 23230
Section 7.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the Parties and delivered to the other Parties.
Section 7.4 Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein), and any other
agreement and understanding among the Parties entered into contemporaneously
<PAGE>
herewith, constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the Parties with respect to the
subject matter hereof. If any provisions of this Agreement shall be invalid or
unenforceable to any extent or in any application, then the remainder of this
Agreement and such term and condition, except to such extent or in such
application, shall not be affected thereby, and each and every term and
condition of this Agreement shall be valid and enforced to the fullest extent
and in the broadest application permitted by law.
Section 7.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Virginia, without regard to any
applicable principles of conflicts of law. All Parties agree that any disputes
hereunder shall be resolved and determined by the courts of the Commonwealth of
Virginia, and hereby submit to the jurisdiction thereof for any dispute arising
hereunder or for the enforcement of any provision hereof.
Section 7.6 Indemnification.
(a) By Stockholder and Company. Stockholder and Company jointly and
severally covenant and agree to defend, indemnify and hold harmless AFC, AFSB,
their officers, directors, employees, agents, advisers, representatives and
Affiliates (collectively, the "AFC Indemnitees") from and against, and pay or
reimburse the AFC Indemnitees for, any and all claims, liabilities, obligations,
losses, fines, costs, royalties, proceedings, deficiencies or damages (whether
absolute, accured, conditional or otherwise and whether or not resulting from
third party claims), including out-of-pocket expenses and reasonable attorneys'
and accountants' fees incurred in the investigation or defense of any of the
same or in asserting any of their respective rights hereunder (collectively
"Losses"), resulting from or arising out of:
(i) any breach, default, inaccuracy or nonfulfillment of any
representation or warranty made by Stockholder or Company herein or under any
related agreement or in connection herewith or therewith;
(i) any failure of Stockholder or Company to perform any covenant or
agreement hereunder or under any related agreement or fulfill any other
obligation in respect hereof or of any related agreement; and
(i) any liability of Company or Stockholder whether arising before or
after the date of this Agreement.
(b) By AFC. AFC covenants and agrees to defend, indemnify and hold
harmless Stockholder from and against any and all Losses resulting from or
arising out of:
(i) any inaccuracy in any representation or warranty by AFC made or
contained in this Agreement; or
<PAGE>
(ii) any failure of any AFC party to perform any covenant or agreement
made or contained in this Agreement or fulfill any other obligation in respect
thereof.
(c) Indemnification Procedures. In the case of any claim asserted by a
third party against a party entitled to indemnification under this Agreement
(the "Indemnified Party"), notice shall be given by the Indemnified Party to the
party required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sough, and the Indemnified Party shall permit the Indemnifying
Party (at the expense of such Indemnifying Party) to assume the defense of any
claim or any litigation resulting therefrom, provided that (i) the counsel for
the Indemnifying Party who shall conduct the defense of such claim or litigation
shall be reasonably satisfactory to the Indemnified Party, (ii) the Indemnified
Party may participate in such defense at such Indemnified Party's expense, and
(iii) the omission by any Indemnified party to give notice as provided herein
shall not relieve the Indemnifying Party of its indemnification obligation under
this Agreement except to the extent that such omission results in a failure of
actual notice to the Indemnifying Party and such Indemnifying Party is
materially damages as a result of such failure to give notice. Except with the
prior written consent of the Indemnified Party, no Indemnifying Party, in the
defense of any such claim or litigation, shall consent to entry of any judgment
or enter into any settlement that provides for injunctive or other nonmonetary
relief affecting the plaintiff to such Indemnified Party of a release from all
liability with respect to such claim or litigation. IN the event that the
Indemnified Party shall in good faith determine that the conduct of the defense
of any claim subject to indemnification hereunder or any proposed settlement of
any such claim by the Indemnifying Party might be expected to affect adversely
the Indemnified Party's tax liability or the ability of the Buyer to conduct its
business, or that the Indemnified Party may have available to it one or more
defenses or counterclaims that are inconsistent with one or more of those that
may be available to the Indemnifying Party in respect of such claim or
litigation relating thereto, the Indemnified Party shall have the right at all
times to take over and assume control over the defense, settlement, negotiations
or litigation relating to any such claim at the sole cost of the Indemnifying
Party shall, provided that if the Indemnified Party does so take over and assume
control, the Indemnified Party shall not settle such claim or litigation without
the written consent of the Indemnifying Party, such consent not to be
unreasonably withheld. In the event that the Indemnifying Party does not accept
the defense of any matter as above provided, the Indemnified Party shall have
the full right to defend against any such claim or demand and shall be entitled
to settle or agree to pay in full such claim or demand. In any event, the
Indemnifying Party and the Indemnified Party shall cooperate in the defense of
any claim or litigation subject to this Section and the records of each shall be
available to the other with respect to such defense.
(d) Stockholder has made some representations contained herein to the best
knowledge of Stockholder . AFC acknowledges that the nature of the business of
the Company is such that where Stockholder has made a representation "to the
best knowledge of Stockholder " there may be innocent misrepresentations and AFC
accepts that risk.
(e) Stockholder's Procedures. Should any claim be made by a person not a
party to this Agreement with respect to any matter to which the indemnity under
Section 6.6 relates, AFC shall promptly give Stockholder written notice of any
such claim, and Stockholder shall thereafter defend or settle any such claim, at
<PAGE>
its sole expense, on its behalf and with counsel of its own choosing. In such
defense or settlement, AFC shall cooperate with and assist Stockholder and AFC
may participate therein (including reasonable attempts by AFC and Stockholder to
allocate responsibility and liability for said claims among themselves) at its
own expense with counsel of its own choosing. Any payment resulting from such
defense or settlement, together with the total expenses thereof, shall be
binding on Stockholder for the purposes of Section 6.6. Failure to give such
notice shall not constitute a defense in whole or in part, to any claim by AFC
except and only to the extent that such failure by AFC shall result in prejudice
to Stockholder.
(f) Remedies Cumulative. Except as expressly provided herein, the remedies
provided herein shall be cumulative and shall not preclude the assertion by AFC
of any other rights or the seeking of any other remedies against Stockholder.
(g) Indemnification by AFC. AFC shall indemnify Stockholder and hold
Stockholder harmless at all times after the Closing against and in respect of
any of the following:
(i) any and all loss, cost, expense, liability, damage or deficiency
resulting from any willful misrepresentation or reckless or willful breach of a
surviving representation or warranty regarding a writing willfully concealed by
AFC, or non-fulfillment of any material covenant on the part of AFC under this
Agreement or any schedule to this Agreement or in any certificate or other
instrument furnished to Stockholder hereunder; provided, however, that the
Stockholder shall not be entitled to indemnification pursuant to this subsection
unless the action complained of constitutes gross negligence, wrongful,
reckless, willful or criminal conduct on the part of AFC;
(i) any and all loss, cost, expense, liability, damage or deficiency
resulting from any and all claims made against the Company or AFC for actions or
inactions of the Company on or after the Closing Date; provided, however, that
AFC shall not be entitled to indemnification pursuant to this subsection
6.7(c)(ii) where such claim alleges gross negligent, wrongful, reckless, willful
or criminal conduct on the part of the Stockholder;
(iii) any brokers' or finders' fees for a broker or finder employed by
AFC.
Section 7.7 Reliance Solely Upon Agreement. Each of the Parties hereto in
executing and carrying out the provisions of this Agreement is relying on the
representations, warranties, covenants, and agreements contained in this
Agreement or in any other instrument delivered pursuant to this Agreement or at
the Closing of the transactions herein provided for, and not upon any
investigation which it might have made or any representation, warranty,
agreement, promise, or information, written or oral, made by any person other
than as specifically set forth herein and therein.
Section 7.8 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned, in whole or in part, by either of
the Stockholder, on the one hand, or by AFC, on the other hand (whether by
operation of law or otherwise) without the prior written consent of the
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Stockholder in the case of such action by AFC or by AFC in the case of such
action by either of the Stockholder, and any such assignment is not so consented
to shall be null and void. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the Parties
and their respective successors and assigns.
Section 7.9 Tax Reporting. The Parties hereto agree and acknowledge that the
determination of the price for each of AFC Shares being sold by Stockholder to
AFC is the result of arms-length negotiations between the Parties. The Parties
further agree that each party shall be responsible for the payment of his own
taxes (whether local, regional, or country), if any, resulting from the purchase
and sale of AFC Shares hereunder.
Section 7.10 Expenses. Except as otherwise provided in this Agreement, the
Company shall bear all expenses incurred on their behalf of Stockholder and on
behalf of the Company in connection with the preparation, execution, filing and
performance of this Agreement and the transactions contemplated hereby,
including all fees and expenses of its agents, representatives, counsel and
accountants; and AFC shall bear all expenses of such nature incurred in its own
behalf.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
APPROVED FINANCIAL CORP. STOCKHOLDER:
- ---------------------------------
Allen D. Wykle., its President Leo Thomas, Jr., Individually
THE COMPANY:
UNITED MORTGAGEE, INC.
Leo Thomas, Jr., its President
OPTION AGREEMENT
THIS AGREEMENT, made this 4th day of November, 1998, by and between
APPROVED FINANCIAL CORP., a Virginia corporation (the "Company"), and ALLEN D.
WYKLE (the "Optionee").
WITNESSETH:
WHEREAS, the Optionee is now employed by the Company in a key capacity
and the Company desires to afford Optionee the opportunity to acquire, or
enlarge stock ownership in the Company so that Optionee may have a direct
proprietary interest in the Company's success;
NOW, THEREFORE, in consideration of the covenants and agreement herein
contained, the parties hereto hereby agree as follows:
SECTION 1
GRANT, PRICE AND SHARES
Subject to the terms and conditions set forth herein, the Company hereby
grants the Optionee, during the period commencing on the date of this Agreement
and ending ten (10) years from the date hereof (or five (5) years if Optionee is
a Ten Percent (10%) Shareholder), the right and option (the "Option") to
purchase from the Company, at a price of $4.00 per share (which price shall be
multiplied by 110% if Optionee is a Ten Percent (10%) Shareholder), up to, but
not exceeding in the aggregate 20,000 shares of the Company's Common Stock (the
"Stock").
SECTION 2
EXERCISE
Subject to the terms and conditions set forth herein, the Option may be
exercised in whole at any time or in part from time to time by the Optionee
during the period set forth in Section 1.
SECTION 3
INVESTMENT REPRESENTATIONS
The Optionee represents and warrants that Optionee has acquired this
Option for investment and not with a view to distribution and agrees to acquire
all shares provided hereunder for investment and not with a view to distribution
and upon each exercise of this Option will deliver to the Company a written
representation to such effect in form prepared by counsel to the Company.
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SECTION 4
RECEIPT OF THE PLAN
The Optionee acknowledges receipt of a copy of the Plan, a copy of which
is annexed hereto as Exhibit A, and made a part of this Agreement and Optionee
represents that he or she is familiar with the terms and provisions thereof. The
Optionee hereby accepts this Option subject to all the terms and provisions of
the Plan which are deemed incorporated herein. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions and interpretations of the
Committee as defined in the Plan.
SECTION 5
PROPER FORM OF NOTICE OF EXERCISE
Optionee agrees that in order to exercise any option he or she will
provide notice in the form of Exhibit B attached hereto to the Company and prior
to providing said notice will be certain that all representations contained
therein are true and accurate including the receipt by Optionee of the documents
specified therein.
SECTION 6
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 7
EXERCISE OF STOCK OPTIONS
a. EXERCISE. Except as otherwise provided elsewhere herein, if 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 this Agreement. No Option shall, except as provided in
Section 17 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
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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 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 Company
counsel's satisfaction of compliance with all laws and regulations.
d. Minimum Exercise. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of an Option unless the number of shares
purchased is the total number which remains to be purchased under the Option.
SECTION 8
SHAREHOLDER APPROVAL
The Plan previously received Shareholder approval.
SECTION 9
COMPLIANCE WITH LAW AND REPRESENTATIONS OF OPTIONEE
No shares of Common Stock shall be issued upon exercise of any Option,
and 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 this Agreement and compliance with all requirements
in this Agreement, including but not limited to required notices,
representations, warranties and covenants contained herein or as may be
requested by the Committee or counsel for the Company.
Unless the shares of Common Stock have been registered with the
Securities and Exchange Commission pursuant to the registration requirements
under the Securities Act of 1933, Optionee shall: (i) 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
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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 10
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 or she would have received had he or she
been holder of all shares subject to his or her 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 the 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 11
RIGHTS AS SHAREHOLDER
Optionee 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.
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SECTION 12
TERMINATION OR AMENDMENT OF THE PLAN
The Board of Directors may without the consent of the shareholders, at
any time, suspend, amend, or terminate the Plan, provided that except as set
forth in Section 10 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 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 13
AFFILIATION
Except as provided in Section 14 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 so employed, whichever is
earlier. During such period after cessation of employment, 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 employed 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.
SECTION 14
TERMINATION FOR CAUSE
If Optionee's employment by or service as a Director with the Company or
a Subsidiary is terminated for cause, the Options granted 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 14 "cause" shall include but is not
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,
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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 15
DEATH OF OPTIONEE
If Optionee dies while employed by or serving as a Director with the
Company or a Subsidiary, or during the three-month period referred to in Section
13 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.
SECTION 16
DISABILITY OF OPTIONEE
If Optionee is disabled while employed by or serving as a Director of
the Company or a Subsidiary or during the three-month period referred to in
Section 13 hereof, the Options granted to 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 17
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
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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).
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 10 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), merger
of the Company with another person or change of control ("change of control"
being defined herein to mean: the transfer or sale by Allen D. Wykle of all or
substantially all of his stock in the company (a "Reorganization Event"), 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).
c. 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.
d. NO OTHER RIGHTS. Except as expressly provided in this Section 17, 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 17,
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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 18
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
Director any right to continue on the Board or 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 remove any Director
or terminate the employment of any employee at any time with or without
assigning a reason therefor.
SECTION 19
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.
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.
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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;
(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
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(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 20
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 21
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.
SECTION 22
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 23
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.
10
<PAGE>
SECTION 24
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 25
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.
SECTION 26
SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of the
Company and Optionees.
SECTION 27
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:
APPROVED FINANCIAL CORP.
By:
OPTIONEE:
Allen D. Wykle
11
<PAGE>
EXHIBIT A
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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 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.
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
<PAGE>
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.
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.
<PAGE>
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).
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
<PAGE>
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.
c. 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.
d. 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.
<PAGE>
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.
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.
<PAGE>
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;
(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
<PAGE>
(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.
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.
<PAGE>
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.
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.
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF OPTION
The undersigned ("Optionee") hereby exercises his option for ________
shares of common stock of APPROVED FINANCIAL CORP. ("Company"). 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 the Company or 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 placed 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
certificate 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, regulations 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. Has read the Incentive Stock Option Plan of the Company, a copy of
which is attached to and incorporated into the Option contract between Optionee
and the Company; and
9. Understands that counsel for the Company 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)
OPTION AGREEMENT
THIS AGREEMENT, made this 4th day of November, 1998, by and between
APPROVED FINANCIAL CORP., a Virginia corporation (the "Company"), and JEAN S.
SCHWINDT (the "Optionee").
WITNESSETH:
WHEREAS, the Optionee is now employed by the Company in a key capacity
and the Company desires to afford Optionee the opportunity to acquire, or
enlarge stock ownership in the Company so that Optionee may have a direct
proprietary interest in the Company's success;
NOW, THEREFORE, in consideration of the covenants and agreement herein
contained, the parties hereto hereby agree as follows:
SECTION 1
GRANT, PRICE AND SHARES
Subject to the terms and conditions set forth herein, the Company hereby
grants the Optionee, during the period commencing on the date of this Agreement
and ending ten (10) years from the date hereof (or five (5) years if Optionee is
a Ten Percent (10%) Shareholder), the right and option (the "Option") to
purchase from the Company, at a price of $4.00 per share (which price shall be
multiplied by 110% if Optionee is a Ten Percent (10%) Shareholder), up to, but
not exceeding in the aggregate 12,500 shares of the Company's Common Stock (the
"Stock").
SECTION 2
EXERCISE
Subject to the terms and conditions set forth herein, the Option may be
exercised in whole at any time or in part from time to time by the Optionee
during the period set forth in Section 1.
SECTION 3
INVESTMENT REPRESENTATIONS
The Optionee represents and warrants that Optionee has acquired this
Option for investment and not with a view to distribution and agrees to acquire
all shares provided hereunder for investment and not with a view to distribution
and upon each exercise of this Option will deliver to the Company a written
representation to such effect in form prepared by counsel to the Company.
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<PAGE>
SECTION 4
RECEIPT OF THE PLAN
The Optionee acknowledges receipt of a copy of the Plan, a copy of which
is annexed hereto as Exhibit A, and made a part of this Agreement and Optionee
represents that he or she is familiar with the terms and provisions thereof. The
Optionee hereby accepts this Option subject to all the terms and provisions of
the Plan which are deemed incorporated herein. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions and interpretations of the
Committee as defined in the Plan.
SECTION 5
PROPER FORM OF NOTICE OF EXERCISE
Optionee agrees that in order to exercise any option he or she will
provide notice in the form of Exhibit B attached hereto to the Company and prior
to providing said notice will be certain that all representations contained
therein are true and accurate including the receipt by Optionee of the documents
specified therein.
SECTION 6
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 7
EXERCISE OF STOCK OPTIONS
a. EXERCISE. Except as otherwise provided elsewhere herein, if 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 this Agreement. No Option shall, except as provided in
Section 17 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.
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<PAGE>
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 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 Company counsel's satisfaction of compliance with all laws and
regulations.
d. Minimum Exercise. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of an Option unless the number of shares
purchased is the total number which remains to be purchased under the Option.
SECTION 8
SHAREHOLDER APPROVAL
The Plan previously received Shareholder approval.
SECTION 9
COMPLIANCE WITH LAW AND REPRESENTATIONS OF OPTIONEE
No shares of Common Stock shall be issued upon exercise of any Option,
and 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 this Agreement and compliance with all requirements
in this Agreement, including but not limited to required notices,
representations, warranties and covenants contained herein or as may be
requested by the Committee or counsel for the Company.
Unless the shares of Common Stock have been registered with the
Securities and Exchange Commission pursuant to the registration requirements
under the Securities Act of 1933, Optionee shall: (i) 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
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<PAGE>
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 10
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 or she would have received had he or she
been holder of all shares subject to his or her 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 the 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 11
RIGHTS AS SHAREHOLDER
Optionee 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.
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<PAGE>
SECTION 12
TERMINATION OR AMENDMENT OF THE PLAN
The Board of Directors may without the consent of the shareholders, at
any time, suspend, amend, or terminate the Plan, provided that except as set
forth in Section 10 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 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 13
AFFILIATION
Except as provided in Section 14 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 so employed, whichever is
earlier. During such period after cessation of employment, 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 employed 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.
SECTION 14
TERMINATION FOR CAUSE
If Optionee's employment by or service as a Director with the Company or
a Subsidiary is terminated for cause, the Options granted 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 14 "cause" shall include but is not
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,
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<PAGE>
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 15
DEATH OF OPTIONEE
If Optionee dies while employed by or serving as a Director with the
Company or a Subsidiary, or during the three-month period referred to in Section
13 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.
SECTION 16
DISABILITY OF OPTIONEE
If Optionee is disabled while employed by or serving as a Director of
the Company or a Subsidiary or during the three-month period referred to in
Section 13 hereof, the Options granted to 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 17
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
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<PAGE>
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).
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 10 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), merger
of the Company with another person or change of control ("change of control"
being defined herein to mean: the transfer or sale by Allen D. Wykle of all or
substantially all of his stock in the company (a "Reorganization Event"), 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).
c. 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.
d. NO OTHER RIGHTS. Except as expressly provided in this Section 17, 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 17,
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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 18
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
Director any right to continue on the Board or 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 remove any Director
or terminate the employment of any employee at any time with or without
assigning a reason therefor.
SECTION 19
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.
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.
8
<PAGE>
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;
(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
9
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(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 20
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 21
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.
SECTION 22
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 23
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.
10
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SECTION 24
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 25
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.
SECTION 26
SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of the
Company and Optionees.
SECTION 27
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:
APPROVED FINANCIAL CORP.
By:
OPTIONEE:
Jean S. Schwindt
11
<PAGE>
EXHIBIT A
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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 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.
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
<PAGE>
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.
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.
<PAGE>
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).
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
<PAGE>
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.
c. 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.
d. 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.
<PAGE>
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.
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.
<PAGE>
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;
(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
<PAGE>
(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.
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.
<PAGE>
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.
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.
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF OPTION
The undersigned ("Optionee") hereby exercises his option for ________
shares of common stock of APPROVED FINANCIAL CORP. ("Company"). 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 the Company or 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 placed 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
certificate 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, regulations 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. Has read the Incentive Stock Option Plan of the Company, a copy of
which is attached to and incorporated into the Option contract between Optionee
and the Company; and
9. Understands that counsel for the Company 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)
OPTION AGREEMENT
THIS AGREEMENT, made this 4th day of November, 1998, by and between
APPROVED FINANCIAL CORP., a Virginia corporation (the "Company"), and BARRY
DIGGINS (the "Optionee").
WITNESSETH:
WHEREAS, the Optionee is now employed by the Company in a key capacity
and the Company desires to afford Optionee the opportunity to acquire, or
enlarge stock ownership in the Company so that Optionee may have a direct
proprietary interest in the Company's success;
NOW, THEREFORE, in consideration of the covenants and agreement herein
contained, the parties hereto hereby agree as follows:
SECTION 1
GRANT, PRICE AND SHARES
Subject to the terms and conditions set forth herein, the Company hereby
grants the Optionee, during the period commencing on the date of this Agreement
and ending ten (10) years from the date hereof (or five (5) years if Optionee is
a Ten Percent (10%) Shareholder), the right and option (the "Option") to
purchase from the Company, at a price of $4.00 per share (which price shall be
multiplied by 110% if Optionee is a Ten Percent (10%) Shareholder), up to, but
not exceeding in the aggregate 7,500 shares of the Company's Common Stock (the
"Stock").
SECTION 2
EXERCISE
Subject to the terms and conditions set forth herein, the Option may be
exercised in whole at any time or in part from time to time by the Optionee
during the period set forth in Section 1.
SECTION 3
INVESTMENT REPRESENTATIONS
The Optionee represents and warrants that Optionee has acquired this
Option for investment and not with a view to distribution and agrees to acquire
all shares provided hereunder for investment and not with a view to distribution
and upon each exercise of this Option will deliver to the Company a written
representation to such effect in form prepared by counsel to the Company.
1
<PAGE>
SECTION 4
RECEIPT OF THE PLAN
The Optionee acknowledges receipt of a copy of the Plan, a copy of which
is annexed hereto as Exhibit A, and made a part of this Agreement and Optionee
represents that he or she is familiar with the terms and provisions thereof. The
Optionee hereby accepts this Option subject to all the terms and provisions of
the Plan which are deemed incorporated herein. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions and interpretations of the
Committee as defined in the Plan.
SECTION 5
PROPER FORM OF NOTICE OF EXERCISE
Optionee agrees that in order to exercise any option he or she will
provide notice in the form of Exhibit B attached hereto to the Company and prior
to providing said notice will be certain that all representations contained
therein are true and accurate including the receipt by Optionee of the documents
specified therein.
SECTION 6
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 7
EXERCISE OF STOCK OPTIONS
a. EXERCISE. Except as otherwise provided elsewhere herein, if 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 this Agreement. No Option shall, except as provided in
Section 17 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.
2
<PAGE>
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 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 Company counsel's satisfaction of compliance with all laws and
regulations.
d. Minimum Exercise. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of an Option unless the number of shares
purchased is the total number which remains to be purchased under the Option.
SECTION 8
SHAREHOLDER APPROVAL
The Plan previously received Shareholder approval.
SECTION 9
COMPLIANCE WITH LAW AND REPRESENTATIONS OF OPTIONEE
No shares of Common Stock shall be issued upon exercise of any Option,
and 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 this Agreement and compliance with all requirements
in this Agreement, including but not limited to required notices,
representations, warranties and covenants contained herein or as may be
requested by the Committee or counsel for the Company.
Unless the shares of Common Stock have been registered with the
Securities and Exchange Commission pursuant to the registration requirements
under the Securities Act of 1933, Optionee shall: (i) 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
3
<PAGE>
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 10
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 or she would have received had he or she
been holder of all shares subject to his or her 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 the 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 11
RIGHTS AS SHAREHOLDER
Optionee 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.
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SECTION 12
TERMINATION OR AMENDMENT OF THE PLAN
The Board of Directors may without the consent of the shareholders, at
any time, suspend, amend, or terminate the Plan, provided that except as set
forth in Section 10 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 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 13
AFFILIATION
Except as provided in Section 14 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 so employed, whichever is
earlier. During such period after cessation of employment, 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 employed 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.
SECTION 14
TERMINATION FOR CAUSE
If Optionee's employment by or service as a Director with the Company or
a Subsidiary is terminated for cause, the Options granted 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 14 "cause" shall include but is not
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,
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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 15
DEATH OF OPTIONEE
If Optionee dies while employed by or serving as a Director with the
Company or a Subsidiary, or during the three-month period referred to in Section
13 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.
SECTION 16
DISABILITY OF OPTIONEE
If Optionee is disabled while employed by or serving as a Director of
the Company or a Subsidiary or during the three-month period referred to in
Section 13 hereof, the Options granted to 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 17
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
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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).
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 10 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), merger
of the Company with another person or change of control ("change of control"
being defined herein to mean: the transfer or sale by Allen D. Wykle of all or
substantially all of his stock in the company (a "Reorganization Event"), 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).
c. 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.
d. NO OTHER RIGHTS. Except as expressly provided in this Section 17, 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 17,
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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 18
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
Director any right to continue on the Board or 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 remove any Director
or terminate the employment of any employee at any time with or without
assigning a reason therefor.
SECTION 19
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.
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.
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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;
(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
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(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 20
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 21
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.
SECTION 22
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 23
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.
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SECTION 24
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 25
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.
SECTION 26
SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of the
Company and Optionees.
SECTION 27
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:
APPROVED FINANCIAL CORP.
By:
OPTIONEE:
Barry Diggins
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EXHIBIT A
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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 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.
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
<PAGE>
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.
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.
<PAGE>
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).
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
<PAGE>
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.
c. 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.
d. 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.
<PAGE>
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.
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.
<PAGE>
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;
(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
<PAGE>
(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.
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.
<PAGE>
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.
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.
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF OPTION
The undersigned ("Optionee") hereby exercises his option for ________
shares of common stock of APPROVED FINANCIAL CORP. ("Company"). 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 the Company or 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 placed 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
certificate 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, regulations 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. Has read the Incentive Stock Option Plan of the Company, a copy of
which is attached to and incorporated into the Option contract between Optionee
and the Company; and
9. Understands that counsel for the Company 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)
OPTION AGREEMENT
THIS AGREEMENT, made this 4th day of November, 1998, by and between
APPROVED FINANCIAL CORP., a Virginia corporation (the "Company"), and NEIL
PHELAN (the "Optionee").
WITNESSETH:
WHEREAS, the Optionee is now employed by the Company in a key capacity
and the Company desires to afford Optionee the opportunity to acquire, or
enlarge stock ownership in the Company so that Optionee may have a direct
proprietary interest in the Company's success;
NOW, THEREFORE, in consideration of the covenants and agreement herein
contained, the parties hereto hereby agree as follows:
SECTION 1
GRANT, PRICE AND SHARES
Subject to the terms and conditions set forth herein, the Company hereby
grants the Optionee, during the period commencing on the date of this Agreement
and ending ten (10) years from the date hereof (or five (5) years if Optionee is
a Ten Percent (10%) Shareholder), the right and option (the "Option") to
purchase from the Company, at a price of $4.00 per share (which price shall be
multiplied by 110% if Optionee is a Ten Percent (10%) Shareholder), up to, but
not exceeding in the aggregate 7,000 shares of the Company's Common Stock (the
"Stock").
SECTION 2
EXERCISE
Subject to the terms and conditions set forth herein, the Option may be
exercised in whole at any time or in part from time to time by the Optionee
during the period set forth in Section 1.
SECTION 3
INVESTMENT REPRESENTATIONS
The Optionee represents and warrants that Optionee has acquired this
Option for investment and not with a view to distribution and agrees to acquire
all shares provided hereunder for investment and not with a view to distribution
and upon each exercise of this Option will deliver to the Company a written
representation to such effect in form prepared by counsel to the Company.
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SECTION 4
RECEIPT OF THE PLAN
The Optionee acknowledges receipt of a copy of the Plan, a copy of which
is annexed hereto as Exhibit A, and made a part of this Agreement and Optionee
represents that he or she is familiar with the terms and provisions thereof. The
Optionee hereby accepts this Option subject to all the terms and provisions of
the Plan which are deemed incorporated herein. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions and interpretations of the
Committee as defined in the Plan.
SECTION 5
PROPER FORM OF NOTICE OF EXERCISE
Optionee agrees that in order to exercise any option he or she will
provide notice in the form of Exhibit B attached hereto to the Company and prior
to providing said notice will be certain that all representations contained
therein are true and accurate including the receipt by Optionee of the documents
specified therein.
SECTION 6
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 7
EXERCISE OF STOCK OPTIONS
a. EXERCISE. Except as otherwise provided elsewhere herein, if 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 this Agreement. No Option shall, except as provided in
Section 17 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
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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 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 Company
counsel's satisfaction of compliance with all laws and regulations.
d. Minimum Exercise. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of an Option unless the number of shares
purchased is the total number which remains to be purchased under the Option.
SECTION 8
SHAREHOLDER APPROVAL
The Plan previously received Shareholder approval.
SECTION 9
COMPLIANCE WITH LAW AND REPRESENTATIONS OF OPTIONEE
No shares of Common Stock shall be issued upon exercise of any Option,
and 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 this Agreement and compliance with all requirements
in this Agreement, including but not limited to required notices,
representations, warranties and covenants contained herein or as may be
requested by the Committee or counsel for the Company.
Unless the shares of Common Stock have been registered with the
Securities and Exchange Commission pursuant to the registration requirements
under the Securities Act of 1933, Optionee shall: (i) 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
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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 10
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 or she would have received had he or she
been holder of all shares subject to his or her 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 the 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 11
RIGHTS AS SHAREHOLDER
Optionee 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.
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SECTION 12
TERMINATION OR AMENDMENT OF THE PLAN
The Board of Directors may without the consent of the shareholders, at
any time, suspend, amend, or terminate the Plan, provided that except as set
forth in Section 10 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 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 13
AFFILIATION
Except as provided in Section 14 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 so employed, whichever is
earlier. During such period after cessation of employment, 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 employed 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.
SECTION 14
TERMINATION FOR CAUSE
If Optionee's employment by or service as a Director with the Company or
a Subsidiary is terminated for cause, the Options granted 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 14 "cause" shall include but is not
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,
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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 15
DEATH OF OPTIONEE
If Optionee dies while employed by or serving as a Director with the
Company or a Subsidiary, or during the three-month period referred to in Section
13 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.
SECTION 16
DISABILITY OF OPTIONEE
If Optionee is disabled while employed by or serving as a Director of
the Company or a Subsidiary or during the three-month period referred to in
Section 13 hereof, the Options granted to 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 17
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
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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).
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 10 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 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
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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.
c. 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.
d. NO OTHER RIGHTS. Except as expressly provided in this Section 17, 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 17, 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 18
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
Director any right to continue on the Board or 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 remove any Director
or terminate the employment of any employee at any time with or without
assigning a reason therefor.
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SECTION 19
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.
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.
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(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;
(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 20
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.
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SECTION 21
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.
SECTION 22
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 23
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 24
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 25
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.
SECTION 26
SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of the
Company and Optionees.
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SECTION 27
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:
APPROVED FINANCIAL CORP.
By:
OPTIONEE:
Neil Phelan
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EXHIBIT A
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.
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.
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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.
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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.
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.
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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.
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.
<PAGE>
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.
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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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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 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.
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
<PAGE>
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.
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.
<PAGE>
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).
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
<PAGE>
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.
c. 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.
d. 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.
<PAGE>
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.
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.
<PAGE>
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;
(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
<PAGE>
(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.
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.
<PAGE>
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.
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.
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF OPTION
The undersigned ("Optionee") hereby exercises his option for ________
shares of common stock of APPROVED FINANCIAL CORP. ("Company"). 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 the Company or 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 placed 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
certificate 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, regulations 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. Has read the Incentive Stock Option Plan of the Company, a copy of
which is attached to and incorporated into the Option contract between Optionee
and the Company; and
9. Understands that counsel for the Company 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)
OPTION AGREEMENT
THIS AGREEMENT, made this 4th day of November, 1998, by and between
APPROVED FINANCIAL CORP., a Virginia corporation (the "Company"), and STANLEY W.
BROADDUS (the "Optionee").
WITNESSETH:
WHEREAS, the Optionee is now employed by the Company in a key capacity
and the Company desires to afford Optionee the opportunity to acquire, or
enlarge stock ownership in the Company so that Optionee may have a direct
proprietary interest in the Company's success;
NOW, THEREFORE, in consideration of the covenants and agreement herein
contained, the parties hereto hereby agree as follows:
SECTION 1
GRANT, PRICE AND SHARES
Subject to the terms and conditions set forth herein, the Company hereby
grants the Optionee, during the period commencing on the date of this Agreement
and ending ten (10) years from the date hereof (or five (5) years if Optionee is
a Ten Percent (10%) Shareholder), the right and option (the "Option") to
purchase from the Company, at a price of $4.00 per share (which price shall be
multiplied by 110% if Optionee is a Ten Percent (10%) Shareholder), up to, but
not exceeding in the aggregate 7,000 shares of the Company's Common Stock (the
"Stock").
SECTION 2
EXERCISE
Subject to the terms and conditions set forth herein, the Option may be
exercised in whole at any time or in part from time to time by the Optionee
during the period set forth in Section 1.
SECTION 3
INVESTMENT REPRESENTATIONS
The Optionee represents and warrants that Optionee has acquired this
Option for investment and not with a view to distribution and agrees to acquire
all shares provided hereunder for investment and not with a view to distribution
and upon each exercise of this Option will deliver to the Company a written
representation to such effect in form prepared by counsel to the Company.
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<PAGE>
SECTION 4
RECEIPT OF THE PLAN
The Optionee acknowledges receipt of a copy of the Plan, a copy of which
is annexed hereto as Exhibit A, and made a part of this Agreement and Optionee
represents that he or she is familiar with the terms and provisions thereof. The
Optionee hereby accepts this Option subject to all the terms and provisions of
the Plan which are deemed incorporated herein. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions and interpretations of the
Committee as defined in the Plan.
SECTION 5
PROPER FORM OF NOTICE OF EXERCISE
Optionee agrees that in order to exercise any option he or she will
provide notice in the form of Exhibit B attached hereto to the Company and prior
to providing said notice will be certain that all representations contained
therein are true and accurate including the receipt by Optionee of the documents
specified therein.
SECTION 6
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 7
EXERCISE OF STOCK OPTIONS
a. EXERCISE. Except as otherwise provided elsewhere herein, if 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 this Agreement. No Option shall, except as provided in
Section 17 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
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<PAGE>
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 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 Company
counsel's satisfaction of compliance with all laws and regulations.
d. Minimum Exercise. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of an Option unless the number of shares
purchased is the total number which remains to be purchased under the Option.
SECTION 8
SHAREHOLDER APPROVAL
The Plan previously received Shareholder approval.
SECTION 9
COMPLIANCE WITH LAW AND REPRESENTATIONS OF OPTIONEE
No shares of Common Stock shall be issued upon exercise of any Option,
and 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 this Agreement and compliance with all requirements
in this Agreement, including but not limited to required notices,
representations, warranties and covenants contained herein or as may be
requested by the Committee or counsel for the Company.
Unless the shares of Common Stock have been registered with the
Securities and Exchange Commission pursuant to the registration requirements
under the Securities Act of 1933, Optionee shall: (i) 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
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<PAGE>
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 10
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 or she would have received had he or she
been holder of all shares subject to his or her 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 the 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 11
RIGHTS AS SHAREHOLDER
Optionee 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.
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<PAGE>
SECTION 12
TERMINATION OR AMENDMENT OF THE PLAN
The Board of Directors may without the consent of the shareholders, at
any time, suspend, amend, or terminate the Plan, provided that except as set
forth in Section 10 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 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 13
AFFILIATION
Except as provided in Section 14 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 so employed, whichever is
earlier. During such period after cessation of employment, 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 employed 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.
SECTION 14
TERMINATION FOR CAUSE
If Optionee's employment by or service as a Director with the Company or
a Subsidiary is terminated for cause, the Options granted 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 14 "cause" shall include but is not
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,
5
<PAGE>
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 15
DEATH OF OPTIONEE
If Optionee dies while employed by or serving as a Director with the
Company or a Subsidiary, or during the three-month period referred to in Section
13 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.
SECTION 16
DISABILITY OF OPTIONEE
If Optionee is disabled while employed by or serving as a Director of
the Company or a Subsidiary or during the three-month period referred to in
Section 13 hereof, the Options granted to 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 17
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
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<PAGE>
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).
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 10 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 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
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<PAGE>
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.
c. 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.
d. NO OTHER RIGHTS. Except as expressly provided in this Section 17, 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 17, 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 18
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
Director any right to continue on the Board or 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 remove any Director
or terminate the employment of any employee at any time with or without
assigning a reason therefor.
8
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SECTION 19
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.
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.
9
<PAGE>
(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;
(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 20
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.
10
<PAGE>
SECTION 21
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.
SECTION 22
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 23
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 24
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 25
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.
SECTION 26
SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of the
Company and Optionees.
11
<PAGE>
SECTION 27
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:
APPROVED FINANCIAL CORP.
By:
OPTIONEE:
Stanley W. Broaddus
12
<PAGE>
EXHIBIT A
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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.
<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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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 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.
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.
<PAGE>
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.
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.
<PAGE>
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).
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
<PAGE>
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.
c. 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.
d. 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.
<PAGE>
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.
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.
<PAGE>
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;
(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
<PAGE>
(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.
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.
<PAGE>
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.
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.
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF OPTION
The undersigned ("Optionee") hereby exercises his option for ________
shares of common stock of APPROVED FINANCIAL CORP. ("Company"). 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 the Company or 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 placed 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
certificate 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, regulations 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. Has read the Incentive Stock Option Plan of the Company, a copy of
which is attached to and incorporated into the Option contract between Optionee
and the Company; and
9. Understands that counsel for the Company 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)
OPTION AGREEMENT
THIS AGREEMENT, made this 4th day of November, 1998, by and between
APPROVED FINANCIAL CORP., a Virginia corporation (the "Company"), and GREGORY
GLEASON (the "Optionee").
WITNESSETH:
WHEREAS, the Optionee is now employed by the Company in a key capacity
and the Company desires to afford Optionee the opportunity to acquire, or
enlarge stock ownership in the Company so that Optionee may have a direct
proprietary interest in the Company's success;
NOW, THEREFORE, in consideration of the covenants and agreement herein
contained, the parties hereto hereby agree as follows:
SECTION 1
GRANT, PRICE AND SHARES
Subject to the terms and conditions set forth herein, the Company hereby
grants the Optionee, during the period commencing on the date of this Agreement
and ending ten (10) years from the date hereof (or five (5) years if Optionee is
a Ten Percent (10%) Shareholder), the right and option (the "Option") to
purchase from the Company, at a price of $4.00 per share (which price shall be
multiplied by 110% if Optionee is a Ten Percent (10%) Shareholder), up to, but
not exceeding in the aggregate 1,350 shares of the Company's Common Stock (the
"Stock").
SECTION 2
EXERCISE
Subject to the terms and conditions set forth herein, the Option may be
exercised in whole at any time or in part from time to time by the Optionee
during the period set forth in Section 1.
SECTION 3
INVESTMENT REPRESENTATIONS
The Optionee represents and warrants that Optionee has acquired this
Option for investment and not with a view to distribution and agrees to acquire
all shares provided hereunder for investment and not with a view to distribution
and upon each exercise of this Option will deliver to the Company a written
representation to such effect in form prepared by counsel to the Company.
1
<PAGE>
SECTION 4
RECEIPT OF THE PLAN
The Optionee acknowledges receipt of a copy of the Plan, a copy of which
is annexed hereto as Exhibit A, and made a part of this Agreement and Optionee
represents that he or she is familiar with the terms and provisions thereof. The
Optionee hereby accepts this Option subject to all the terms and provisions of
the Plan which are deemed incorporated herein. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions and interpretations of the
Committee as defined in the Plan.
SECTION 5
PROPER FORM OF NOTICE OF EXERCISE
Optionee agrees that in order to exercise any option he or she will
provide notice in the form of Exhibit B attached hereto to the Company and prior
to providing said notice will be certain that all representations contained
therein are true and accurate including the receipt by Optionee of the documents
specified therein.
SECTION 6
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 7
EXERCISE OF STOCK OPTIONS
a. EXERCISE. Except as otherwise provided elsewhere herein, if 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 this Agreement. No Option shall, except as provided in
Section 17 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.
2
<PAGE>
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 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 Company counsel's satisfaction of compliance with all laws and
regulations.
d. Minimum Exercise. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of an Option unless the number of shares
purchased is the total number which remains to be purchased under the Option.
SECTION 8
SHAREHOLDER APPROVAL
The Plan previously received Shareholder approval.
SECTION 9
COMPLIANCE WITH LAW AND REPRESENTATIONS OF OPTIONEE
No shares of Common Stock shall be issued upon exercise of any Option,
and 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 this Agreement and compliance with all requirements
in this Agreement, including but not limited to required notices,
representations, warranties and covenants contained herein or as may be
requested by the Committee or counsel for the Company.
Unless the shares of Common Stock have been registered with the
Securities and Exchange Commission pursuant to the registration requirements
under the Securities Act of 1933, Optionee shall: (i) 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
3
<PAGE>
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 10
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 or she would have received had he or she
been holder of all shares subject to his or her 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 the 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 11
RIGHTS AS SHAREHOLDER
Optionee 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.
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SECTION 12
TERMINATION OR AMENDMENT OF THE PLAN
The Board of Directors may without the consent of the shareholders, at
any time, suspend, amend, or terminate the Plan, provided that except as set
forth in Section 10 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 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 13
AFFILIATION
Except as provided in Section 14 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 so employed, whichever is
earlier. During such period after cessation of employment, 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 employed 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.
SECTION 14
TERMINATION FOR CAUSE
If Optionee's employment by or service as a Director with the Company or
a Subsidiary is terminated for cause, the Options granted 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 14 "cause" shall include but is not
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,
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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 15
DEATH OF OPTIONEE
If Optionee dies while employed by or serving as a Director with the
Company or a Subsidiary, or during the three-month period referred to in Section
13 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.
SECTION 16
DISABILITY OF OPTIONEE
If Optionee is disabled while employed by or serving as a Director of
the Company or a Subsidiary or during the three-month period referred to in
Section 13 hereof, the Options granted to 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 17
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
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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).
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 10 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 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
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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.
c. 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.
d. NO OTHER RIGHTS. Except as expressly provided in this Section 17, 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 17, 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 18
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
Director any right to continue on the Board or 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 remove any Director
or terminate the employment of any employee at any time with or without
assigning a reason therefor.
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SECTION 19
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.
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.
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(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;
(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 20
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.
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SECTION 21
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.
SECTION 22
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 23
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 24
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 25
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.
SECTION 26
SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of the
Company and Optionees.
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SECTION 27
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:
APPROVED FINANCIAL CORP.
By:
OPTIONEE:
Gregory Gleason
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EXHIBIT A
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.
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.
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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.
<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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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 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.
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
<PAGE>
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.
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.
<PAGE>
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).
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
<PAGE>
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.
c. 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.
d. 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.
<PAGE>
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.
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.
<PAGE>
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;
(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
<PAGE>
(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.
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.
<PAGE>
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.
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.
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF OPTION
The undersigned ("Optionee") hereby exercises his option for ________
shares of common stock of APPROVED FINANCIAL CORP. ("Company"). 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 the Company or 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 placed 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
certificate 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, regulations 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. Has read the Incentive Stock Option Plan of the Company, a copy of
which is attached to and incorporated into the Option contract between Optionee
and the Company; and
9. Understands that counsel for the Company 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)
AMENDMENT TO STOCK APPRECIATION RIGHTS AGREEMENT
BETWEEN APPROVED FINANCIAL CORP. AND
JEAN S. SCHWINDT DATED APRIL 26, 1996
This Agreement is made this 22nd day of February, 1999 between Approved
Financial Corp. (the "Corporation") and Jean S. Schwindt ("Schwindt").
WITNESSETH:
WHEREAS, the parties hereto entered into a Stock Appreciation Rights
Agreement on April 26, 1996 which terminated the right to exercise on April 24,
1999; and
WHEREAS, the parties hereto desire to extend the period to exercise
until April 24, 2002;
NOW THEREFORE, pursuant to the foregoing premises and the terms
hereinafter set forth the parties agree as follows:
1. Article XI of the Stock Appreciation Rights Agreement is hereby deleted
in its entirety and in lieu thereof the following is inserted:
"XI
Termination of the Stock Appreciation Right and all rights and obligations
thereunder shall terminate and may no longer be exercised after the 24th day of
April, 2002."
2. All the other terms of the Stock Appreciation Rights Agreement shall
remain the same.
Witness the following signatures and seals:
APPROVED FINANCIAL CORP.
By: _______________________________
Title: ____________________________
-----------------------------------
Jean S. Schwindt
Employment Agreement
THIS AGREEMENT is made as of July 1, 1998, by and between APPROVED
FINANCIAL CORP. ("Employer" or "Company") and its successors and assigns, and
JEAN S. SCHWINDT, ("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 a 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 business or referrals of business to Employer.
(d) "Loans" means all residential real property loans, regardless of
lien position or classification as conforming or non-conforming.
"Non-conforming" Loans, means loans that do not conform to all applicable
Federal National Mortgage Association guidelines.
(e) "Primary Business Operation" shall mean the origination of loans,
by any method and from any source, and the sale of 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 employees Employee for the position of Executive
Vice President, performing duties as indicated on Schedule A. Employee agrees to
comply with the general supervision and all current and future policies of
Employer.
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 the Employee's ability, perform all of
Employee's duties.
5. Term and Renewal. The initial term of this agreement shall be from July
1, 1998 through December 31, 1998. On January 1, 1999 it will automatically
renew for a three (3) year term with each year running from January 1st through
December 31st. After December 31, 2001, this Agreement will be renewable on a
year to year basis. Either party must give ninety (90) days written notice if
<PAGE>
this Agreement is not going to be renewed after December 31, 2001. Upon failure
to give such notice, this Agreement will automatically renew for an additional
year on the same terms. This notice requirement shall continue of 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 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. The
restrictions in section 7 shall exclude her activity as a registered investment
adviser and the income earned from these advisory services.
8. Benefits. Employee shall be entitled to benefits according to
Employer's stated policy, as amended from time to time. Employee's tenure with
the Company, for the purpose of entitlement to current and future benefits
according to Employer's stated policy, shall begin on the date the Employee was
initially recommended for the Company's Board of Directors, which was in April
1992.
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; (ii) 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) knowing violation of any law or regulation applicable
to the business of the Employer which has a material or adverse effect on the
Employer; or (iv) repeated neglect of duties. 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. To the extent that any act or omission in the
preceding clauses are capable of being remedied or cured (which determination
will be made by Employer at its sole discretion), then a violation will not be
grounds for immediate termination unless Employer first provides notice to
Employee which includes (a) the act or failure to act of Employee giving rise to
the proposed termination, (b) the corrective action which Employer reasonably
believes would cure the violation, and (c) twenty (20) days from receipt of the
notice to take such corrective action.
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
<PAGE>
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:
(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 which Employee worked at or
supervised during his employment with Employer.
(c) Employee will NOT, during the term of Employee's employment, nor
for two (2) year immediately following termination of employment, 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.
(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 of the 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 and requirements of notice or
objection whatsoever to the issuance of such an Order.
(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
<PAGE>
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 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; and (v) Employee
has had an opportunity to have this Agreement reviewed by legal counsel of
Employee's choice.
(j) 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 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. Any "Inventions"
developed from Authorized Outside Employment Activities defined on Schedule C,
attached, shall not be subject to any of the provisions under this section,
Intellectual Property Rights.
(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.
<PAGE>
(g) Employee need not assign to Employer any rights to an 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. Offset 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 and which are
evidenced in writing.
17. Notices. Any notice or other communication required or permitted by
this Agreement shall be in writing and addressed to Employer at its
administrative headquarters and to Employee at his residence, as indicated by
the records of the Employer, and shall be deemed to have been given, made and
received only:
(a) upon deliver, 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 days after deposit in the United States mail, certified
mail, postage prepaid, return receipt requested.
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.
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, including but not limited to
<PAGE>
employment 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 of
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. 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: __________________________________
Title: _______________________________
EMPLOYEE:
--------------------------------------
Jean S. Schwindt
<PAGE>
SCHEDULE A
ADDITIONAL SPECIFIC DUTIES ASSIGNED
UPON THE EXECUTION OF EMPLOYMENT AGREEMENT
Jean S. Schwindt shall be responsible for all duties assigned to her by
the Board of Directors, Chairman of the Board, Chief Executive Officer or
President of the Company. Such duties will primarily relate to, but are not
restricted to, the areas of strategic planning, finance, investor relations and
security regulation.
<PAGE>
SCHEDULE B
1. Base Salary. The initial monthly base salary shall be $13,333
commencing on July 1, 1998, and ending on December 31, 1999. For
each subsequent year of the Agreement, which will be January through
December, the base salary will increase by 10%, retroactive to
January 1 of the respective year, if the net income after tax of the
Company increases by 10% over the previous year. In the event that
the net income after tax increases by less than 10% over the
previous year, the base salary will increase by 6%.
Net income after tax for the years 1999, 2000 and 2001, will exclude
any dividend or capital gain income resulting from the Company's
current investment in IMC Mortgage Company common stock will be
excluded in the calculation of the percentage increase in year to
year net income after tax.
2. Group Benefits. Employee shall be entitled to group benefits as
contained in the stated written policy of Approved Financial Corp.,
which may from time to time be revised by the Company.
3. Vacation. Employee shall be entitled to three (3) weeks paid
vacation each year.
4. Bonus. Employee will participate in an Executive Bonus Pool, which
was approved by the Compensation Committee of the Board of Directors
of Approved Financial Corp on 11/3/98. The Executive Bonus Formula
shall be as follows:
That percent increase (in excess of a 10% threshold) of the current
after tax net income per share over the prior year, multiplied by
the Base Annual Salary for the current contract year, up to a
maximum of 100% of the Base Salary. For example, if the after tax
net income per share for fiscal 1999 is 1.20 and for 1998 is .80 and
the Base Salary for that contract year ending December 31, 1999 is
$160,000 then the bonus is $64,000.
($1.20-$.80)/$.80 = 50%
50% - 10% = 40%
$160,000 X 40% = $ 64,000
<PAGE>
Method of Payment:
50% of the bonus may be payable at the Employer's discretion in cash
or unregistered shares of common stock of Approved Financial Corp.
50% of the bonus may be payable at the Employee's discretion in cash
or unregistered shares of common stock of Approved Financial Corp.
Net income per share after tax for the years 1999, 2000 and 2001,
will exclude any dividend or capital gain income resulting from the
Company's current investment in IMC Mortgage Company common stock.
will be excluded in the calculation of the percentage increase in
year to year net income after tax.
5. Compensation after termination. If Employee terminates her 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 prior to
December 31, 2000, then Employee in lieu of any other damages or compensation
shall be entitled to severance pay in an amount equal to the monthly Base Salary
multiplied by 12. If terminated without cause after December 31, 2000 then the
severance pay shall be the monthly Base Salary multiplied by 12, multiplied by a
percentage that is equal to the number of days remaining in the term of this
agreement (not to exceed 365) divided by 365. If terminated during a one year
renewal term after December 31, 2001, and termination is without cause, 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 C
NONE.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of July 1, 1998, by and between APPROVED
FINANCIAL CORP. ("Employer" or "Company") 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 a 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 business or referrals of business to Employer.
(d) "Loans" means all residential real property loans, regardless of
lien position or classification as conforming or non-conforming.
"Non-conforming" Loans, means loans that do not conform to all applicable
Federal National Mortgage Association guidelines.
(e) "Primary Business Operation" shall mean the origination of loans,
by any method and from any source, and the sale of 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 employees Employee for the position of Chief
Financial Officer, performing duties as indicated on Schedule A. Employee agrees
to comply with the general supervision and all current and future policies of
Employer.
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 the Employee's ability, perform all of
Employee's duties.
5. TERM AND RENEWAL. The initial term of this agreement shall be from
July 1, 1998 through December 31, 1998. On January 1, 1999 it will automatically
renew for a three (3) year term with each year running from January 1st through
December 31st. After December 31, 2001, this Agreement will be renewable on a
year to year basis. Either party must give ninety (90) days written notice if
this Agreement is not going to be renewed after December 31, 2001. Upon failure
to give such notice, this Agreement will automatically renew for an additional
year on the same terms. This notice requirement shall continue of all subsequent
renewal periods.
<PAGE>
6. COMPENSATION. 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.
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. Employee's tenure with
the Company, for the purpose of entitlement to current and future benefits
according to Employer's stated policy, shall begin on the date the Employee was
initially recommended for the Company's Board of Directors, which was in April
1992.
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; (ii) 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) knowing violation of any law or regulation applicable
to the business of the Employer which has a material or adverse effect on the
Employer; or (iv) repeated neglect of duties. 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. To the extent that any act or omission in the
preceding clauses are capable of being remedied or cured (which determination
will be made by Employer at its sole discretion), then a violation will not be
grounds for immediate termination unless Employer first provides notice to
Employee which includes (a) the act or failure to act of Employee giving rise to
the proposed termination, (b) the corrective action which Employer reasonably
believes would cure the violation, and (c) twenty (20) days from receipt of the
notice to take such corrective action.
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.
<PAGE>
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 which Employee worked at or
supervised during his employment with Employer.
(c) Employee will NOT, during the term of Employee's employment, nor
for two (2) year immediately following termination of employment, 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.
(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 of the 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 and requirements of notice or
objection whatsoever to the issuance of such an Order.
(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.
<PAGE>
(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 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; and (v) Employee
has had an opportunity to have this Agreement reviewed by legal counsel of
Employee's choice.
(j) 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 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. Any "Inventions"
developed from Authorized Outside Employment Activities defined on Schedule C,
attached, shall not be subject to any of the provisions under this section,
Intellectual Property Rights.
(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.
(g) Employee need not assign to Employer any rights to an 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.
<PAGE>
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. OFFSET 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 and which are
evidenced in writing.
17. NOTICES. Any notice or other communication required or permitted by
this Agreement shall be in writing and addressed to Employer at its
administrative headquarters and to Employee at his residence, as indicated by
the records of the Employer, and shall be deemed to have been given, made and
received only:
(a) upon deliver, 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 days after deposit in the United States mail, certified
mail, postage prepaid, return receipt requested.
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.
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, including but not limited to
employment 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 of
extrinsic evidence of any nature shall be used to supplement or modify any of
the terms of this Agreement.
<PAGE>
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. 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: _____________________________
Title: Executive Vice President
EMPLOYEE:
_________________________________
Eric S. Yeakel
<PAGE>
SCHEDULE A
ADDITIONAL SPECIFIC DUTIES ASSIGNED
UPON THE EXECUTION OF EMPLOYMENT AGREEMENT
Eric S. Yeakel shall be responsible for all duties assigned to him by
the Board of Directors, Chairman of the Board, Chief Executive Officer or
President of the Company. Such duties will primarily relate to, but are not
restricted to, the customary duties associated with the position of Chief
Financial Oficer.
<PAGE>
SCHEDULE B
1. BASE SALARY. The initial monthly base salary shall be $10,000
commencing on July 1, 1998, and ending on December 31, 1999. For
each subsequent year of the Agreement, which will be January
through December, the base salary will increase by 10%,
retroactive to January 1 of the respective year, if the net
income after tax of the Company increases by 10% over the
previous year. In the event that the net income after tax
increases by less than 10% over the previous year, the base
salary will increase by 6%.
Net income after tax for the years 1999, 2000 and 2001, will
exclude any dividend or capital gain income resulting from the
Company's current investment in IMC Mortgage Company common stock
will be excluded in the calculation of the percentage increase in
year to year net income after tax.
2. GROUP BENEFITS. Employee shall be entitled to group benefits as
contained in the stated written policy of Approved Financial
Corp., which may from time to time be revised by the Company.
3. VACATION. Employee shall be entitled to three (3) weeks paid
vacation each year.
4. BONUS. Employee will participate in an Executive Bonus Pool,
which was approved by the Compensation Committee of the Board of
Directors of Approved Financial Corp on 11/3/98. The Executive
Bonus Formula shall be as follows:
That percent increase (in excess of a 10% threshold) of the
current after tax net income per share over the prior year,
multiplied by the Base Annual Salary for the current contract
year, up to a maximum of 100% of the Base Salary. For example, if
the after tax net income per share for fiscal 1999 is 1.20 and
for 1998 is .80 and the Base Salary for that contract year ending
December 31, 1999 is $120,000 then the bonus is $48,000.
($1.20-$.80)/$.80 = 50%
50% - 10% = 40%
$120,000 X 40% = $ 48,000
<PAGE>
METHOD OF PAYMENT:
50% of the bonus may be payable at the Employer's discretion in
cash or unregistered shares of common stock of Approved Financial
Corp. 50% of the bonus may be payable at the Employee's
discretion in cash or unregistered shares of common stock of
Approved Financial Corp.
Net income per share after tax for the years 1999, 2000 and 2001,
will exclude any dividend or capital gain income resulting from
the Company's current investment in IMC Mortgage Company common
stock. will be excluded in the calculation of the percentage
increase in year to year net income after tax.
5. 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 prior to
December 31, 2000, then Employee in lieu of any other damages or compensation
shall be entitled to severance pay in an amount equal to the monthly Base Salary
multiplied by 12. If terminated without cause after December 31, 2000 then the
severance pay shall be the monthly Base Salary multiplied by 12, multiplied by a
percentage that is equal to the number of days remaining in the term of this
agreement (not to exceed 365) divided by 365. If terminated during a one year
renewal term after December 31, 2001, and termination is without cause, 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 C
NONE.
Employment Agreement
THIS AGREEMENT is made as of December 15, 1998, by and between MOFC, INC.,
d/b/a CONSUMER ONE FINANCIAL ("Employer") and its successors and assigns, and
KEITH H. LEWIS ("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) "Loans" means all residential real property loans, regardless of
lien position.
(e) "Primary Business Operation" shall mean wholesale and retail
origination and sale of 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 specified on
Schedule A. Employee agrees to perform such duties and to comply with the
general supervision and policies of Employer and the orders, advice, and
direction of the Board of Directors in managing such offices.
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 three (3)
years, 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 an
additional year on the same terms. This notice requirement shall continue for
all subsequent renewal periods.
<PAGE>
6. Compensation. 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.
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 relating to the Business; (ii) 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, or other act or omission which in the
sole discretion of the Board of Directors or Executive committee of the
Employer, could have an adverse impact on the Employer in any respect, including
but not limited to its financial condition, assets, operations, earnings,
reputation, employee relations or discipline; (iii) violation of any law or
regulation; (iv) repeated neglect of duties; (v) failure to follow any lawful
directive from the Chairman of the Board or Board of Directors related to the
Business; or (vi) a material breach by Employee of a representation, warranty or
covenant in the Share Purchase Agreement of even date herewith in which Employee
sold his stock in MOFC, Inc., d/b/a Consumer One Financial to Approved Financial
Corp. To the extent that any act or omission in the preceding clauses are
capable of being remedied or cured (which determination will be made by Employer
in its sole discretion), then a violation will not be grounds for immediate
termination unless Employer first provides notice to Employee which includes (a)
the act or failure to act of Employee giving rise to the proposed termination,
(b) the corrective action which Employer reasonably believes would cure the
violation, and (c) twenty (20) days from receipt of the notice to take such
corrective action. 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.
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.
<PAGE>
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 which Employee worked at or
supervised during his employment with 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), 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. 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.
(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.
<PAGE>
(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 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 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.
(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.
(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
<PAGE>
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. Employee authorizes Employer to offset
against any compensation or other amounts owing to Employee any sums that
Employee owes to Employer or Approved Financial Corp., evidenced in writing
including under the Share Purchase Agreement of even date herewith between
Employee and Approved Financial Corp.
17. Notices. Any notice or other communication required or permitted by
this Agreement shall be in writing and addressed to Employer at its
administrative headquarters and to Employee at his residence, as indicated by
the records of the Employer, 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 days after deposit in the United States mail, certified
mail, postage prepaid, return receipt requested.
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.
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.
<PAGE>
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. Attorney's Fees. In the event of any action at law, in equity,
arbitration or otherwise between the parties in relation to this Agreement, the
non-prevailing party, in addition to any other sums which such party shall be
required to pay pursuant to the terms and conditions of this Agreement, at law,
in equity, arbitration or otherwise shall also be required to pay to the
prevailing party all costs and expenses of such litigation, including reasonable
attorney fees.
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 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:
MOFC INC.
By:
Title:
EMPLOYEE:
KEITH H. LEWIS
<PAGE>
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S C H E D U L E S
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<PAGE>
SCHEDULE A
ADDITIONAL SPECIFIC DUTIES ASSIGNED
UPON EXECUTION OF EMPLOYMENT AGREEMENT
Keith H. Lewis shall serve in the position of Chief Operating Officer and
Executive Vice President. He shall be responsible for supervision of the current
offices of MOFC, Inc. d/b/a Consumer One Financial, and any other offices
mutually agreed to in writing by Keith H. Lewis and Employer.
<PAGE>
SCHEDULE B
COMPENSATION SCHEDULE
1. Base Salary. Salary will be One Hundred Forty Thousand Dollars
($140,000.00) per year.
2. Group Benefits. Lewis shall be entitled to group benefits as contained
in the stated written policy of Purchaser which may from time to time be
revised.
3. Vacation Lewis shall be entitled to three (3) weeks of paid vacation.
4. Bonus. In each year when Purchaser reaches the "Profit Target" for
offices under Lewis' supervision, Lewis shall be eligible for a bonus of up to
100% of his Base Salary. The Profit in the Profit Target is defined to mean the
pre-tax net income attributable to the offices supervised by Lewis. The Profit
Target is One Million Six Hundred Thousand Dollars ($1,600,000.00). The bonus
will be based on achieving that portion of the Profit Target that exceeds
$800,000.00 (the "Excess Portion"). There will be no bonus if $800,000.00 or
less of the Profit Target is reached. If more than $800,000.00 of the Profit
Target is reached the Bonus shall be the product of multiplying the Base Salary
($140,000.00) by the percentage of the Excess Portion reached.
Example:Assume $1,200,000.00 of Profit Target Reached
1,200,000 - 800,000 = 400,000 = 50% x 140,000 = $70,000 Bonus
------------------- -------
800,000 800,000
5. Compensation After Termination. If (i) Employee terminates his
employment; (ii) it is terminated due to death, disability, or for cause as
defined in this Agreement; or (iii) this Agreement expires or either party
elects not to renew as provided herein, this contract shall cease, and no
further compensation or benefits under this Employment Agreement shall be paid
to Employee. If this Agreement is terminated by Employer without cause in breach
of this Agreement, then Employee in lieu of any other damages or compensation
shall be entitled to severance pay in an amount equal to the annual Base
Compensation multiplied by a percentage equal to the number of days left in the
initial three (3) year term at termination divided by 1095.
6. Commission. Lewis shall receive 50% commission on front and back end
fees on all loans he generates (not to exceed 10 loans per month). Front end
fees exclude underwriting fee, doc preparation fee and processing fee.
<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
OPTION AGREEMENT
THIS AGREEMENT, made this 4th day of November, 1998, by and between
APPROVED FINANCIAL CORP., a Virginia corporation (the "Company"), and ERIC S.
YEAKEL (the "Optionee").
WITNESSETH:
WHEREAS, the Optionee is now employed by the Company in a key capacity
and the Company desires to afford Optionee the opportunity to acquire, or
enlarge stock ownership in the Company so that Optionee may have a direct
proprietary interest in the Company's success;
NOW, THEREFORE, in consideration of the covenants and agreement herein
contained, the parties hereto hereby agree as follows:
SECTION 1
GRANT, PRICE AND SHARES
Subject to the terms and conditions set forth herein, the Company hereby
grants the Optionee, during the period commencing on the date of this Agreement
and ending ten (10) years from the date hereof (or five (5) years if Optionee is
a Ten Percent (10%) Shareholder), the right and option (the "Option") to
purchase from the Company, at a price of $4.00 per share (which price shall be
multiplied by 110% if Optionee is a Ten Percent (10%) Shareholder), up to, but
not exceeding in the aggregate 12,500 shares of the Company's Common Stock (the
"Stock").
SECTION 2
EXERCISE
Subject to the terms and conditions set forth herein, the Option may be
exercised in whole at any time or in part from time to time by the Optionee
during the period set forth in Section 1.
SECTION 3
INVESTMENT REPRESENTATIONS
The Optionee represents and warrants that Optionee has acquired this
Option for investment and not with a view to distribution and agrees to acquire
all shares provided hereunder for investment and not with a view to distribution
and upon each exercise of this Option will deliver to the Company a written
representation to such effect in form prepared by counsel to the Company.
<PAGE>
SECTION 4
RECEIPT OF THE PLAN
The Optionee acknowledges receipt of a copy of the Plan, a copy of which
is annexed hereto as Exhibit A, and made a part of this Agreement and Optionee
represents that he or she is familiar with the terms and provisions thereof. The
Optionee hereby accepts this Option subject to all the terms and provisions of
the Plan which are deemed incorporated herein. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions and interpretations of the
Committee as defined in the Plan.
SECTION 5
PROPER FORM OF NOTICE OF EXERCISE
Optionee agrees that in order to exercise any option he or she will
provide notice in the form of Exhibit B attached hereto to the Company and prior
to providing said notice will be certain that all representations contained
therein are true and accurate including the receipt by Optionee of the documents
specified therein.
SECTION 6
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 7
EXERCISE OF STOCK OPTIONS
a. EXERCISE. Except as otherwise provided elsewhere herein, if 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 this Agreement. No Option shall, except as provided in
Section 17 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.
<PAGE>
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 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 Company counsel's satisfaction of compliance with all laws and
regulations.
d. Minimum Exercise. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of an Option unless the number of shares
purchased is the total number which remains to be purchased under the Option.
SECTION 8
SHAREHOLDER APPROVAL
The Plan previously received Shareholder approval.
SECTION 9
COMPLIANCE WITH LAW AND REPRESENTATIONS OF OPTIONEE
No shares of Common Stock shall be issued upon exercise of any Option,
and 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 this Agreement and compliance with all requirements
in this Agreement, including but not limited to required notices,
representations, warranties and covenants contained herein or as may be
requested by the Committee or counsel for the Company.
Unless the shares of Common Stock have been registered with the
Securities and Exchange Commission pursuant to the registration requirements
under the Securities Act of 1933, Optionee shall: (i) 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:
<PAGE>
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 10
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 or she would have received had he or she
been holder of all shares subject to his or her 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 the 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 11
RIGHTS AS SHAREHOLDER
Optionee 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.
<PAGE>
SECTION 12
TERMINATION OR AMENDMENT OF THE PLAN
The Board of Directors may without the consent of the shareholders, at
any time, suspend, amend, or terminate the Plan, provided that except as set
forth in Section 10 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 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 13
AFFILIATION
Except as provided in Section 14 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 so employed, whichever is
earlier. During such period after cessation of employment, 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 employed 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.
SECTION 14
TERMINATION FOR CAUSE
If Optionee's employment by or service as a Director with the Company or
a Subsidiary is terminated for cause, the Options granted 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 14 "cause" shall include but is not
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.
<PAGE>
SECTION 15
DEATH OF OPTIONEE
If Optionee dies while employed by or serving as a Director with the
Company or a Subsidiary, or during the three-month period referred to in Section
13 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.
SECTION 16
DISABILITY OF OPTIONEE
If Optionee is disabled while employed by or serving as a Director of
the Company or a Subsidiary or during the three-month period referred to in
Section 13 hereof, the Options granted to 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 17
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).
<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 10 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), merger
of the Company with another person or change of control ("change of control"
being defined herein to mean: the transfer or sale by Allen D. Wykle of all or
substantially all of his stock in the company (a "Reorganization Event"), 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).
c. 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.
d. NO OTHER RIGHTS. Except as expressly provided in this Section 17, 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 17, 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.
<PAGE>
SECTION 18
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
Director any right to continue on the Board or 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 remove any Director
or terminate the employment of any employee at any time with or without
assigning a reason therefor.
SECTION 19
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.
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.
<PAGE>
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;
(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
<PAGE>
(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 20
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 21
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.
SECTION 22
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 23
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.
<PAGE>
SECTION 24
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 25
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.
SECTION 26
SUCCESSORS
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of the
Company and Optionees.
SECTION 27
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:
APPROVED FINANCIAL CORP.
By:
OPTIONEE:
Eric S. Yeakel
<PAGE>
EXHIBIT A
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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 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.
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.
<PAGE>
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.
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.
<PAGE>
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).
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
<PAGE>
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.
c. 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.
d. 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.
<PAGE>
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.
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.
<PAGE>
(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;
(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
<PAGE>
(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.
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.
<PAGE>
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.
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.
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF OPTION
The undersigned ("Optionee") hereby exercises his option for ________
shares of common stock of APPROVED FINANCIAL CORP. ("Company"). 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 the Company or 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 placed 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
certificate 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, regulations 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. Has read the Incentive Stock Option Plan of the Company, a copy of
which is attached to and incorporated into the Option contract between Optionee
and the Company; and
9. Understands that counsel for the Company 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)
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 Residential Mortgage Inc
DBA Funding Center of Georgia
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
MOFC, Inc.
370 East Maple Road
Third Floor
Birmingham, MI 48009
State of incorporation: Michigan
Names used in business: ConsumerOne Financial
Approved Financial Solutions
3420 Holland Road
Suite 107
Virginia Beach, Virginia 23452
State of Incorporation: Virginia.
Names used in business: Approved Financial Solutions, Inc.
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.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,914
<INT-BEARING-DEPOSITS> 355
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,326
<INVESTMENTS-CARRYING> 146
<INVESTMENTS-MARKET> 146
<LOANS> 107,634
<ALLOWANCE> 2,590
<TOTAL-ASSETS> 136,118
<DEPOSITS> 29,728
<SHORT-TERM> 73,395
<LIABILITIES-OTHER> 7,325
<LONG-TERM> 6,403
0
1
<COMMON> 5,482
<OTHER-SE> 13,784
<TOTAL-LIABILITIES-AND-EQUITY> 136,118
<INTEREST-LOAN> 9,761
<INTEREST-INVEST> 547
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,308
<INTEREST-DEPOSIT> 1,355
<INTEREST-EXPENSE> 4,897
<INTEREST-INCOME-NET> 4,056
<LOAN-LOSSES> 3,064
<SECURITIES-GAINS> 1,750
<EXPENSE-OTHER> 38,535
<INCOME-PRETAX> 952
<INCOME-PRE-EXTRAORDINARY> 952
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 497
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<YIELD-ACTUAL> 4.21
<LOANS-NON> 5,930
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,687
<CHARGE-OFFS> 2,372
<RECOVERIES> 162
<ALLOWANCE-CLOSE> 2,590
<ALLOWANCE-DOMESTIC> 2,590
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
