<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998
REGISTRATION NO. 333-56889
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ARBOR NATIONAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEW YORK (6282) ( )
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
</TABLE>
------------------------
333 EARLE OVINGTON BOULEVARD
UNIONDALE, NY 11553
(516) 832-8002
(Address, including zip code and telephone number, including area code
of registrant's principal executive offices)
------------------------------
IVAN KAUFMAN
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
333 EARLE OVINGTON BOULEVARD
UNIONDALE, NY 11553
(516) 832-8002
(Name, address, including zip code and
telephone number, including area code of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
JONATHAN A. BERNSTEIN, ESQ. RICHARD A. LIPPE, ESQ. FRED B. WHITE III, ESQ.
STEPHEN M. GOODMAN, ESQ. MELTZER, LIPPE,GOLDSTEIN, WOLF SKADDEN, ARPS, SLATE,MEAGHER
PRYOR CASHMAN SHERMAN & & SCHLISSEL, P.C. & FLOM LLP
FLYNN LLP THE CHANCERY 919 THIRD AVENUE
410 PARK AVENUE 190 WILLIS AVENUE NEW YORK, NY 10022
NEW YORK, NY 10022-4441 MINEOLA, NY 11501
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 15, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SHARES
[LOGO]
COMMON STOCK
------------------
All of the shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Arbor
National Holdings, Inc., a New York corporation (the "Company" or "ANHI").
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price will be $ per share. See "Underwriting" for information relating
to factors considered in determining the initial offering price. The Company has
applied to have the Common Stock approved for quotation on the NASDAQ National
Market under the symbol "ARBH."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 10.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to
Price to Public(1) Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share..........................................
Total..............................................
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $813,000.
(3) The Underwriters have been granted an option, exercisable within 30 days of
the date hereof, to purchase up to additional shares of Common Stock
on the same terms and conditions as set forth above. If the Underwriters
exercise such option in full, the total price to public, underwriting
discount and proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
The Common Stock is offered by the Underwriters when, as and if delivered to
and accepted by them, subject to their right to withdraw, cancel or reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of the shares to the Underwriters will be made through
the facilities of The Depository Trust Company, New York, New York on or about
.
LEHMAN BROTHERS FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1998.
<PAGE>
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES
"FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-
LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" CONSTITUTE CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 (as amended, the "Registration Statement") of which this
Prospectus is a part under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document are summaries of the material terms
of such contract, agreement or other document. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement (including the exhibits thereto)
filed by the Company with the Commission may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available
for inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a website that contains reports, proxy and
information statements and other information. The website address is http://
www.sec.gov.
The Company has applied to have the Common Stock approved for quotation on
the NASDAQ National Market, and the Registration Statement and such reports,
proxy and information statements and other information concerning the Company
may also be inspected at the offices of the NASDAQ National Market located at
1735 K Street, N.W., Washington, D.C. 20006.
Upon the effectiveness of the Registration Statement, the Company will be
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and, in accordance therewith, will file
reports, proxy and information statements and other information with the
Commission. Such reports, proxy and information statements and other information
can be inspected and copied at the addresses set forth above. The Company
reports its financial statements on a year ended December 31. The Company
intends to furnish its shareholders with annual reports containing consolidated
financial statements audited by its independent certified public accountants and
with quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.
Arbor National Holdings, Inc. is a New York corporation formed in June 1998.
The Company's principal executive offices are located at 333 Earle Ovington
Blvd., Uniondale, New York 11553 and its telephone number is (516) 832-8002.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE COMBINED FINANCIAL STATEMENTS AND THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF THE FACTORS SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED (I) THE INFORMATION IN
THIS PROSPECTUS ASSUMES THAT THE TRANSACTIONS DESCRIBED BELOW UNDER "RECENT
DEVELOPMENTS" AND "REORGANIZATION TRANSACTIONS" HAVE BEEN COMPLETED AND THAT THE
OVER-ALLOTMENT OPTION DESCRIBED IN "UNDERWRITING" IS NOT EXERCISED; AND (II)
REFERENCES TO THE "COMPANY" MEAN, AS APPROPRIATE, PRIOR TO THE EXCHANGE
TRANSACTION (AS DEFINED BELOW), ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC ("ANCM")
AND ARBOR SECURED FUNDING, INC. ("ASF"), AND AFTER THE EXCHANGE TRANSACTION,
ARBOR NATIONAL HOLDINGS, INC. ("ANHI") AND ITS SUBSIDIARIES.
THE COMPANY
Arbor National Holdings, Inc. is a fully integrated real estate financial
services company. The Company funds, on a negotiated basis, high-yielding
lending and investment opportunities in commercial real estate through mezzanine
loans, bridge loans, note acquisitions and other customized financing structures
("Customized Financing"). It also derives substantial revenue from the
origination for sale and servicing of government-sponsored and conduit mortgage
loans ("Permanent Loans") for multifamily and other types of commercial
properties.
In recent years the Company has experienced significant growth. Total
revenues increased from $16.7 million to $24.3 million for the years ended
December 31, 1996 and 1997, respectively, and from $4.3 million to $8.0 million
for the quarters ended March 31, 1997 and 1998, respectively. Pro forma net
income increased from $2.5 million to $5.2 million for the years ended December
31, 1996 and 1997, respectively, and from $0.7 million to $2.0 million for the
quarters ended March 31, 1997 and 1998, respectively. At March 31, 1998, the
Company's commercial servicing portfolio consisted of 136 loans aggregating
approximately $536 million and its portfolio of loans held for investment
consisted of 38 loans aggregating approximately $56 million.
The Company targets the market for transactions under $20 million,
particularly in the $1 million to $5 million range, where management believes it
has competitive advantages, particularly its lower cost structure and its
in-house capabilities. The Company generates a continuing pipeline of real
estate finance and investment opportunities through its six full-service offices
in Atlanta, Boston, Chicago, Dallas, San Francisco and Uniondale, New York, its
three satellite offices in Miami, Los Angeles and Florence, Kentucky (greater
Cincinnati, Ohio) and its extensive network of strategic relationships with
investment banking firms, brokers, developers, real estate owners and operators,
and other financial institutions.
The Company's Customized Financing activities highlight its unique
strengths. First, the Company's strong presence and established relationships in
the marketplace facilitate its ability to source and identify many
non-traditional lending opportunities. Second, the specialized lending expertise
and entrepreneurial abilities of its staff enable the Company to provide
creative, flexible financing structures, thus enhancing value for the Company
and its borrowers. Third, the Company, as a provider of both transitional
financing under its Customized Financing activities and permanent mortgage
financing under its Permanent Loan activities, is uniquely positioned in its
targeted market as a single source of financing solutions.
The Company's Permanent Loan activities consist of originating commercial
mortgage loans pursuant to government-sponsored and conduit loan programs, and
selling those loans, typically on a whole loan basis, to government-sponsored
entities or other secondary market investors, while retaining the servicing of
those loans for a fee. As compared to Customized Financing activities, the
Company's Permanent Loan activities generate a more stable and predictable flow
of revenue through servicing and other fee income. In addition, the Permanent
Loan activities keep the Company closely apprised of trends in the commercial
real estate market and provide an additional source for Customized Financing
opportunities. The
3
<PAGE>
Company primarily originates permanent loans pursuant to the FNMA DUS Program
(as defined below), under which it is one of 28 approved lenders. To date, the
Company has had no credit losses on its commercial servicing portfolio.
The Chief Executive Officer and founding stockholder of the Company is Ivan
Kaufman, who was the co-founder, chairman and controlling stockholder of Arbor
National Holdings, Inc. ("Old Arbor"), a publicly held, NASDAQ traded company
that went public on August 7, 1992 and was subsequently sold in January 1995 to
BankAmerica Corporation. From 1983 through 1994, under Mr. Kaufman's management,
Old Arbor's residential mortgage lending activities grew to 25 branches in
eleven states, with approximately 1,000 employees, originating more than $4
billion of loans annually and servicing nearly $5.5 billion. In connection with
the sale of Old Arbor to BankAmerica Corporation, the commercial mortgage
lending operations were acquired by Mr. Kaufman. Since this acquisition, the
Company has evolved to become a full service provider of real estate financial
services to owners and developers of commercial and multifamily real estate
properties. In anticipation of the Offering, ANHI was formed in 1998 as a
holding company for ANCM and ASF, which were reorganized into a single entity
and then acquired by ANHI through an exchange of equity. See "Recent
Developments" and "Reorganization Transactions."
COMPETITIVE ADVANTAGES
- BREADTH OF PRODUCT OFFERINGS--Since the Company offers both short-term and
long-term funding capabilities, as well as the skills and expertise to
develop creative, flexible financing structures, the Company can present
itself as a single-source financing alternative, attracting individual
clients with diverse and complex needs.
- FOCUS ON UNDERSERVED MARKET--The Company specializes in Customized
Financing transactions under $20 million, particulary the $1 million to $5
million range, which larger financial institutions will not consider, or,
because of organizational constraints, cannot offer on terms comparable to
those provided by the Company.
- ORIGINATION SYNERGIES--The Company's participation in Permanent Loan
programs provides significant synergies with the Customized Financing
business. The Permanent Loan programs create a stream of opportunities
that require transitional financing to position the underlying property
for a Permanent Loan while also providing an effective exit strategy for
Customized Financing transactions generated from other sources.
- RAPID EXECUTION CAPABILITY--The Company's in-house expertise enables it to
act on proposals quickly and decisively and analyze opportunities, provide
commitments and close transactions within a few weeks and sometimes days,
if required. The Company believes its reputation for rapid execution
attracts, from both borrowers and other lenders, opportunties that would
not otherwise be available.
- CONTINUITY AND EXPERIENCE OF MANAGEMENT--The four senior executive
officers of the Company (including Mr. Kaufman) have an average of more
than twelve years of experience in real estate finance and investing,
while the 21 vice presidents and regional directors average almost sixteen
years of relevant industry experience. Eleven members of the Company's
management team worked with Mr. Kaufman at Old Arbor. The remainder have
been recruited because of their particular product specialization and
expertise in analyzing and structuring complex financial transactions in
commercial real estate.
- COMMITMENT OF SENIOR MANAGEMENT AND KEY EMPLOYEES--In addition to the
substantial ownership of the Company by Mr. Kaufman, all senior executives
and eighteen key employees have made significant equity investments in the
Company which align their interests with those of the Company's other
stockholders.
4
<PAGE>
- NETWORK OF RELATIONSHIPS--In addition to the market presence represented
by its full-service and satellite offices, the Company generates
significant opportunities through referrals from an extensive network of
strategic relationships with investment banking firms, brokers,
developers, real estate owners and operators and other financial
institutions.
BUSINESS STRATEGIES
- INCREASE CUSTOMIZED FINANCING OPPORTUNITIES by using the additional
capital from this Offering to offer an expanded range of maturities and
other terms suitable for various borrowers and projects.
- GROW THE COMPANY'S STREAM OF INTEREST INCOME by using the additional
capital from this Offering to permit longer retention of bridge and
mezzanine loans on the Company's balance sheet.
- DIVERSIFY THE COMPANY'S ORIGINATIONS AND INVESTMENTS beyond loans on
multifamily properties to include financings of assisted-living
facilities, hotels and other types of commercial property developments.
- CONTINUE THE COMPANY'S GEOGRAPHIC EXPANSION into selected major real
estate markets throughout the United States to expand its originations
capabilities by increasing local awareness of the Company's capabilities
and improving the Company's ability to monitor local activity for suitable
opportunities.
- INCREASE THE AVERAGE OUTSTANDING LOAN BALANCE of Customized Financing
activities through the utilization of the additional capital from this
Offering to fund larger transactions in the under $20 million market.
- LEVERAGE THE COMPANY'S CORE COMPETENCIES TO EXPAND ITS SERVICES and
develop related products, such as the FHA-insured multifamily and
healthcare financing program, as well as acquiring or developing in-house
property management capabilities.
RECENT DEVELOPMENTS
ANCM, which will become a wholly-owned subsidiary of ANHI on the closing of
this Offering (see "Reorganization Transactions"), acquired 100% of the
outstanding stock of ASF as of April 1, 1998 through the following series of
transactions, all of which occurred on that date (referred to herein as the "ASF
Transactions").
Prior to its acquisition by ANCM, ASF distributed a dividend of certain
assets that were not consistent with the intended business of the Company to
Ivan Kaufman, its sole stockholder, at their net book value of $1.5 million,
leaving ASF with assets consisting primarily of 19 loans in the aggregate amount
of $9.2 million. Immediately thereafter, Mr. Kaufman sold the outstanding common
stock of ASF for its remaining net book value of approximately $3.7 million to
the Ivan and Lisa Kaufman Family Trust, a trust for the benefit of Mr. Kaufman's
family members (hereinafter known as the "Trust"). Immediately thereafter, and
simultaneously with the purchase of Class B membership interests by certain
officers and employees of ANCM, the Trust, which was already a Class A member of
ANCM, purchased an additional Class A membership interest in ANCM by
transferring the ASF shares to ANCM. As a result of this transfer, the S
corporation status of ASF terminated. In connection with such transfer, Mr.
Kaufman agreed to indemnify the Company for any and all losses which may be
incurred by the Company or ANCM relating to any assets formerly owned by ASF and
any financing commitments previously made by ASF and subsequently transferred to
ANCM.
REORGANIZATION TRANSACTIONS
On June , 1998, all of the members of ANCM entered into an agreement (the
"Exchange Agreement") pursuant to which they agreed to exchange their membership
interests in ANCM for an
5
<PAGE>
aggregate of 7,500,000 shares of Common Stock (the "Exchange Shares"). Pursuant
to the Exchange Agreement, the exchange is to be effected without further action
by the members immediately prior to the closing of the Offering, at which time
each holder of membership interests shall receive a pro rata allocation of the
Exchange Shares based on such member's capital account in ANCM relative to the
aggregate capital accounts of all members.
As a result of this Reorganization, the Company will record a deferred tax
liability of $2.2 million and make a [$6.0 million] distribution to members of
previously undistributed earnings. See "Selected Financial Data."
Prior to this Offering, the Company received certain financial management,
marketing and human resources services, as well as office space, from Arbor
Management LLC ("Arbor Management"), a company owned by Mr. Kaufman, for which
the Company paid a management fee. See "Certain Relationships and Related
Transactions." In addition to the transactions which will occur pursuant to the
Exchange Agreement (the "Exchange Transaction"), the Company will also make the
following administrative changes no later than the closing of the Offering: (1)
the sub-lease for the Company's Uniondale, New York office will be transferred
to the Company; (2) all employees, including senior management, will be employed
and paid by the Company; and (3) all employee benefit programs will be provided
and administered by the Company.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered hereby....... shares(1)
Shares to be Outstanding After the shares(2)
Offering........................
NASDAQ National Market Symbol..... ARBH
Use of Proceeds................... The net proceeds from the Offering will be used
initially to repay outstanding indebtedness of the
Company and as working capital for general corporate
purposes relating to the growth of the Company.
</TABLE>
- ------------------------
(1) Assumes that the Underwriters' over-allotment option is not exercised. If
such over-allotment option is exercised in full, up to an additional
shares of Common Stock will be issued and sold by the Company. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding on June ,
1998. Does not include shares of Common Stock reserved for issuance
under the Company's 1998 Stock Plan (as defined herein) including
shares issuable under options which will be granted at the closing of
this Offering. See "Management--Employee Benefit Plans.
7
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
The following table presents summary historical combined financial
information for the Company at the dates and for the periods indicated. The
historical operations data for the years ended December 31, 1997, 1996 and 1995
and balance sheet data as of December 31, 1997 and 1996 have been derived from
the audited combined financial statements of the Company included elsewhere in
this Prospectus. The historical balance sheet data as of December 31, 1995 has
been derived from the Company's unaudited combined financial statements. The
historical operations data presented for the three month periods ended March 31,
1998 and 1997 and balance sheet data presented as of March 31, 1998 have been
derived from unaudited interim combined financial statements and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the three month period ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for any other interim period or the entire year ending December 31,
1998. The summary historical combined financial information should be read in
conjunction with, and is qualified in its entirety by reference to, the Combined
Financial Statements and related notes as set forth elsewhere herein as well as
"Recent Developments."
OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Interest earned...................... $ 2,529,979 $ 1,672,747 $ 9,641,121 $ 6,783,312 $ 3,725,904
Fee-based services, including gain on
sale of loans and real estate...... 4,373,022 2,340,814 12,686,908 8,794,147 2,627,716
Servicing revenue, net............... 539,241 305,253 1,957,983 1,082,699 394,461
Income from investment in real estate
held for sale, net of operating
expenses........................... 540,334 -- -- -- --
Total revenues....................... 7,982,576 4,318,814 24,286,012 16,660,158 6,748,081
Net income........................... 3,432,110 1,175,870 8,632,262 4,302,596 714,807
Provision for pro forma income
taxes(1)........................... 1,383,244 479,548 3,468,648 1,753,788 299,523
Pro forma net income................. 2,048,866 696,322 5,163,614 2,548,808 415,284
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
---------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1998
PRO FORMA(3) ACTUAL 1997 1996 1995
------------- ------------- -------------- ------------- -------------
Loans held for sale, net............ $ 11,826,971 $ 11,826,971 $ 46,482,348 $ 45,729,204 $ 35,349,890
Loans held for investment, net...... 54,821,182 56,273,289 68,609,906 38,685,564 36,030,439
Total assets........................ 93,491,402 94,308,355 140,181,758 94,761,612 79,926,724
Notes payable....................... 58,565,230 58,565,230 110,227,947 75,909,788 68,394,767
Total liabilities................... 75,988,049 67,853,049 117,148,176 81,298,478 72,243,186
Total equity........................ 17,503,353 26,455,306 23,033,582 13,463,134 7,683,538
</TABLE>
8
<PAGE>
OTHER DATA:
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------------ ----------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
Return on average equity (2) 33.1% 20.9% 28.3% 24.1% 5.7%
Return on average assets (2) 7.0% 3.2% 4.4% 2.9% 0.9%
Debt to equity ratio............. 2.2x 4.6x 4.8x 5.6x 8.9x
Total originations:
Permanent Loans................ $ 23,779,000 $ 34,013,000 $ 215,545,000 $ 244,287,000 $ 104,374,000
Customized Financing........... $ 11,649,000 $ 18,080,000 $ 174,377,000 $ 74,103,000 $ 81,729,000
Commercial servicing portfolio
(4)............................ $ 535,765,000 $ 418,541,000 $ 529,956,000 $ 385,518,000 $ 211,633,000
Number of loans in commercial
servicing portfolio............ 136 117 133 110 111
Selling and administrative
expenses as a percentage of
total revenue.................. 14.3% 19.2% 14.4% 21.0% 23.1%
</TABLE>
- ------------------------
(1) The pro forma provision for income taxes represents the difference between
historical income taxes and the income taxes that would have been reported
had the Company filed income tax returns as a taxable C corporation for each
of the periods presented using a pro forma income tax rate of 40%.
(2) Return on average equity and assets are based on pro forma net income and
historical average equity and assets, respectively. Return on average equity
and assets for the three months ended March 31, 1998 and 1997 are
annualized.
(3) The pro forma balance sheet gives effect to (i) the distribution by ASF of
$1,462,000 of ASF assets to Ivan Kaufman, its sole stockholder, on April 1,
1998, (ii) the contribution of capital by members on April 1, 1998 of
$717,062, net of a distribution of capital to a former employee, and (iii) a
distribution of previously undistributed earnings of [$6,000,000]. See
"Recent Developments" and "Reorganization Transactions."
(4) The Company's commercial servicing portfolio represents commercial loans
serviced for third parties for a fee and does not include loans held for
investment.
9
<PAGE>
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK IN ADDITION TO THE OTHER INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its success depends
to a significant extent upon the experience of Ivan Kaufman and other senior
management executives of the Company. The Company believes that Mr. Kaufman in
particular has an established reputation in the real estate investment industry
which is expected to aid the Company in obtaining investment opportunities.
Prior to the effective date of the Registration Statement of which this
Prospectus forms a part, the Company will acquire a key man life insurance
policy with respect to Mr. Kaufman in the amount of $5 million.
While the Company believes that it could replace these key executives, the
loss of their services could have a material adverse effect on the operations of
the Company through a diminished capacity to obtain investment opportunities and
to structure and execute potential investments. The Company may not successfully
recruit additional personnel and any additional personnel that are recruited may
not have the requisite skills, knowledge or experience necessary or desirable to
enhance the incumbent management. While directing the growth of the Company's
business, Mr. Kaufman and several of these executives have simultaneously
engaged, on a part-time basis, in other business activities of Mr. Kaufman which
are not competitive with the business of the Company. Their active involvement
in these other activities is not expected to continue beyond December 31, 1998.
The employment agreements of these key executives require them to devote
substantially all of their business time to rendering services for the Company
subsequent to December 31, 1998. See "Management--Employment Agreements." From
the closing of this Offering through December 31, 1998, Mr. Kaufman will
reimburse the Company for the services of these executives in his other business
ventures at a rate of $25,000 per month, an amount which is equal to the
estimated maximum portion of their time spent on such ventures, multiplied by
their per annum salary for 1998.
BROAD DISCRETION ON INVESTMENTS. The Company's business plan is general in
nature and subject to change based upon changing conditions and opportunities.
The Company invests in real estate-related assets, which may be subject to
varying degrees of risk generally incident to the ownership of real property.
Management has broad discretion and authority to invest in whatever loans or
other real estate-related assets the Company deems appropriate. The Company has
entered into, and may continue to enter into, joint venture arrangements with
third parties. The Company in certain instances will not have control over the
day-to-day operations of businesses and assets in which it invests in the form
of a joint venture, and will therefore be dependent on third-party partners for
the success of any such joint venture. Further, the Company may engage in
construction financing for development stage projects which is inherently
riskier than the Company's Permanent Loan and other Customized Financing
activities. Also, there are no limits as to the size of a particular transaction
which can result in significant concentration of capital in a single investment.
No assurance can be given that management's decisions on funding any particular
investment or any type of investment structure in this regard will result in a
profit for the Company.
CREDIT CONCENTRATION OF LOANS HELD FOR INVESTMENT. As of March 31, 1998,
46.9% of the Company's portfolio of loans held for investment consisted of three
loans of $11.1 million, $5.5 million and $10.4 million. These loans were held by
two unrelated borrowers and secured by individual properties or interests in
investment partnerships. A default by either borrower on any of these loans
would significantly reduce the value of such portfolio. In such event, the
business, prospects, financial condition and results of operations of the
Company could be materially adversely affected.
POSSIBLE VOLATILITY IN QUARTERLY RESULTS. Primarily due to the nature of
Customized Financing transactions, trends in origination volume, revenues and
earnings may fluctuate, causing the Company's quarterly results from these
activities to fluctuate and limiting the value of comparing operating results
from quarter to quarter. These limitations may result in uncertainty in the
market for the Common Stock and may
10
<PAGE>
therefore affect the stock price. Historically, the Company has experienced
increased transactions and higher revenues and earnings in the fourth quarter
primarily due to borrowers' desire to consummate transactions by year end.
VALUE OF COMPANY ASSETS DEPENDENT ON CONDITIONS BEYOND COMPANY'S
CONTROL. Customized Financing transactions are relatively illiquid. The ability
of the Company to change the mix of its investments in response to changes in
economic and other conditions will be limited. No assurances can be given that
the fair market value of any assets acquired by the Company will not decrease in
the future. The underlying value of the assets is dependent upon a number of
factors which are beyond the control of the Company. Among these factors may be
the ability of the Company's borrowers to operate their properties in a manner
that generates revenue sufficient to cover debt service due to the Company;
changes in interest rates and in the availability, cost and terms of financing;
adverse changes in national or local economic conditions; competition from other
properties offering the same or similar services and adverse changes in
governmental rules and fiscal policies.
ACCESS TO FUNDING SOURCES. The Company requires access to short-term
warehouse credit facilities in order to fund loan originations and purchases
pending the sale of such loans. The Company currently has a $90 million
warehouse line of credit funded by four financial institutions, a repurchase
agreement with Fannie Mae and a $10 million repurchase agreement with an
institutional investor. The Company has also borrowed funds from Mr. Kaufman.
Although the Company expects to be able to maintain and expand its existing
warehouse credit facilities and to obtain replacement or additional financing as
the current arrangements expire or become fully utilized, there can be no
assurance that such financing will be available on reasonable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions."
RISK OF LOSS ON LOANS SOLD UNDER THE FNMA DUS PROGRAM. The Company is
approved by the Federal National Mortgage Association ("Fannie Mae" or "FNMA")
to participate in its Delegated Underwriting and Servicing Program ("FNMA DUS
Program"). Under this program, the Company originates, sells and services
multifamily loans for Fannie Mae without having to obtain Fannie Mae's prior
approval for each loan. This program requires the Company to share the risk of
loss by paying a portion of the losses on mortgages it originates under the
program, up to 20 percent of the original principal balance of the loan. See
"Business--Permanent Loans--FNMA DUS." Additionally, changes in the Company's
estimates of defaults under the FNMA DUS Program could materially impact the
value of rights to service. The Company is required to maintain a letter of
credit or restricted cash balances based on the size of its servicing portfolio
of FNMA DUS loans which totaled $2.4 million at March 31, 1998. As of March 31,
1998, the unpaid principal balance of loans placed in the FNMA DUS Program by
the Company totaled $327 million (out of a total of $536 million principal
balance of Permanent Loans serviced by the Company). As of March 31, 1998, the
Company had a reserve of $1.7 million to provide for future loan losses under
the FNMA DUS Program. While the Company believes that this reserve is
sufficient, actual loan losses under the FNMA DUS Program could exceed this
reserve and could have a materially adverse effect on the Company's performance,
which in turn may adversely affect the price of the Common Stock.
RETAINED RISKS OF LOANS SOLD. In connection with the Company's origination
and sale of certain loans, the Company must make certain representations and
warranties concerning loans originated by the Company and sold to investors.
These representations and warranties cover such matters as title to mortgaged
property, lien priority, environmental reviews and certain other matters. The
Company's representations and warranties rely in part on similar representations
and warranties made by the borrower or others. The Company would have a claim
against the borrower or another party in the event of a breach of any
representations or warranties that are made by the borrower or others; however,
the Company's ability to recover on any such claim would be dependent upon the
financial condition of the party against which such claim is asserted. In
addition, the Company makes certain representations and
11
<PAGE>
warranties even though it does not receive similar representations and
warranties from borrowers or others, and the Company is not entitled to
indemnity with respect to violations of such representations and warranties.
There can be no assurance that the Company will not experience a material loss
as a result of representations and warranties it makes, which loss may in turn
adversely affect the Company's operations.
RISK OF LOSS FROM CHANGES IN GENERAL ECONOMIC CONDITIONS. Periods of
economic slowdown or recession, rising interest rates or declining demand for
real estate could adversely affect the Company's business. In addition, periods
of economic slowdown or recession, whether general, regional or industry-
related, may increase the risk of default on multifamily and commercial loans,
which may also have an adverse effect on the Company's business, financial
condition and results of operations. The Company may experience losses as a
result of reduced servicing fees from loans that are foreclosed and may
experience losses from mortgages in the FNMA DUS Program if the value of the
underlying asset declines. Such periods also may be accompanied by decreased
demand for multifamily or commercial properties, resulting in declining values
of properties securing outstanding loans, thereby weakening collateral coverage
and increasing the possibility of losses in the event of default. Significant
increases in the number of properties available for sale during recessionary
economic periods may depress the prices at which foreclosed properties may be
sold or delay the timing of such sales. There can be no assurance that the
multifamily or commercial markets will be adequate for the sale of foreclosed
properties and any material deterioration of such markets could reduce
recoveries from the sale of repossession inventory.
FAILURE TO SUCCESSFULLY MANAGE INTEREST RATE VOLATILITY MAY ADVERSELY AFFECT
RESULTS OF OPERATIONS. In general, when the Company establishes an interest
rate on a loan held for sale, it attempts to contemporaneously lock in an
interest yield to the institutional investor purchasing that loan. By selling
these loans shortly following origination, the Company limits its exposure to
interest rate fluctuations. However, the Company will accumulate some loans for
bulk sale and in these circumstances the Company hedges its interest rate risk
with forward commitments and put options. The Company does not hedge its loans
held for investment because these loans are generally variable rate loans that
are based on short term LIBOR. However, the operations and profitability of the
Company are 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
originate loans. In such event, the business, prospects, financial condition and
results of operations of the Company could be materially adversely affected.
POSSIBLE CHANGES IN THE MARKET FOR WHOLE LOAN SALES. The Company sells all
of its loan originations to a limited number of institutional purchasers. There
can be no assurance that such purchasers will continue to purchase the Company's
loans and to the extent that the Company could not successfully replace such
loan purchasers, the Company's cash flow, results of operations, financial
condition and business prospects could be materially adversely affected. Also,
the inability of the Company to sell its loan originations limits revenue
generated from servicing such originations and may slow growth in its Customized
Financing activities. Further, adverse conditions in the commercial
mortgage-backed securitization market could negatively impact the ability of the
Company to complete whole loan sales, as many of the Company's whole loan
purchasers securitize the loans they purchase from the Company.
UNCERTAINTIES RESULTING FROM GOVERNMENT REGULATION AND CHANGES IN
GOVERNMENTAL PROGRAMS. The operations of the Company are subject to regulation
by federal, state and local government authorities (such as the Federal Housing
Administration, a division of the United States Department of Housing and Urban
Development ("FHA/HUD")), various laws and judicial and administrative
decisions, and regulations of government sponsored entities (such as Fannie Mae)
that purchase mortgages originated and serviced by the Company. These laws,
regulations and decisions require the Company, among other things, to maintain a
minimum net worth and minimum lines of credit, to submit financial reports, and
to maintain a quality control plan for the underwriting, origination and
servicing of loans. These laws and regulations also impose requirements and
restrictions affecting, among other things, the Company's loan originations,
12
<PAGE>
credit activities, maximum interest rates, finance and other charges,
disclosures to customers, the terms of secured transactions, collection,
repossession and claims handling procedures, personnel qualifications, and other
trade practices. Although the Company believes that it is in compliance in all
material respects with applicable local, state and federal laws, rules and
regulations and with the requirements of entities purchasing mortgages, there
can be no assurance that more restrictive laws, rules, regulations or
requirements will not be adopted in the future that could make compliance more
difficult or expensive, restrict the Company's ability to originate, purchase,
sell or service loans or further limit or restrict the amount of interest and
other charges earned on loans.
LIMITATION ON LIABILITY OF OFFICERS AND DIRECTORS OF THE COMPANY. The
Company's Certificate of Incorporation (the "Certificate of Incorporation")
contains a provision which limits the liability of a director or officer to the
Company and its shareholders for money damages except for liability resulting
from (a) actual receipt of an improper benefit or profit in money, property or
services or (b) deliberate dishonesty established by a final judgment as being
material to the cause of action. The Company will indemnify its officers and
directors from any action or claim brought or asserted by any party by reason of
any allegation that such persons are otherwise accountable or liable for the
debts or obligations of the Company or its affiliates.
ANTI-TAKEOVER PROVISIONS. The Certificate of Incorporation and the
Company's Bylaws (the "Bylaws") include provisions that could delay, defer or
prevent a takeover attempt that may be in the best interest of shareholders.
These provisions include the ability of the Board of Directors to issue up to
10,000,000 shares of preferred stock (the "Preferred Stock") without any further
shareholder approval, and requirements that shareholders give advance notice
with respect to certain proposals (including nomination of directors) that they
may wish to present for a shareholder vote. Issuance of Preferred Stock could
also discourage bids for Common Stock at a premium as well as create a
depressive effect on the market price of the Common Stock. In addition, under
certain conditions, Section 912 of the New York Business Corporation Law (the
"NYBCL") would prohibit the Company from engaging in a "business combination"
with an "interested shareholder" (in general, a shareholder owning directly or
indirectly 20% or more of the Company's outstanding voting stock) for a period
of five years unless the business combination is approved in a prescribed manner
or meets prescribed conditions.
CONTROL OF FOUNDING STOCKHOLDER. After giving effect to the Offering, Mr.
Kaufman, the Trust, and the Ivan Kaufman Grantor Retained Annuity Trust (the
"Kaufman Grantor Trust"), two trusts for the benefit of his family, will, in the
aggregate, directly or indirectly, beneficially own or control % of the
outstanding Common Stock. As a result, these stockholders, acting togther, are
able to effectively control virtually all matters requiring approval by the
stockholders of the Company, including amendment of the Certificate of
Incorporation, the approval of mergers or similar transactions and the election
of all directors. Mr. Kaufman and Mr. Lippe are the co-trustees of the Kaufman
Grantor Trust and Mr. Lippe is the sole trustee of the Trust. In addition, Mr.
Kaufman and Richard A. Lippe, are two of the five current directors of the
Company. See "Management" and "Security Ownership of Certain Beneficial Owners
and Management."
POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT ON FUTURE OFFERINGS ON MARKET
PRICE OF COMMON STOCK. 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 real estate
finance industry and the financial services sector such as, among other things,
interest rate movements, quarterly variations or changes in financial estimates
by securities analysts and a significant reduction in the price of the stock of
another participant in the real estate finance industry.
The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock,
Preferred Stock or debt securities. There can be no assurance that the Company
will be successful in raising sufficient additional equity or debt capital on
13
<PAGE>
acceptable terms. In addition, the actual or perceived effect of such offerings
may be the dilution of the book value or earnings per share of the Common Stock
outstanding, which may result in the reduction of the market price of the Common
Stock.
NO ANTICIPATED DIVIDENDS. The Company does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The decision whether to
apply legally available funds to the payment of dividends on the Common Stock
will be made by the Board of Directors of the Company from time to time in the
exercise of its business judgment, taking into account, among other things, the
Company's results of operations and financial condition, any then existing or
proposed commitments by the Company for the use of available funds and the
Company's obligations with respect to the holders of any then outstanding
indebtedness or Preferred Stock. The Company's ability to pay dividends may be
restricted from time to time by financial covenants in its credit agreements or
in arrangements with or regulations of government sponsored entities pertaining
to minimum cash reserve requirements.
POSSIBLE NEGATIVE EFFECT ON STOCK PRICE FROM ABSENCE OF PRIOR MARKET FOR
COMMON STOCK. There has been no public market for the Common Stock prior to the
Offering and there can be no assurance that a public market will develop or, if
it develops, that it will be sustained following the Offering. Certain factors,
such as changes in market conditions generally, could cause the market price of
the Common Stock to vary substantially. See "Shares Eligible for Future Sale"
and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price per
share of Common Stock is substantially higher than the net tangible book value
per share of the Common Stock. Purchasers of shares of Common Stock in this
Offering will experience immediate and substantial dilution of $ in the
pro forma net tangible book value per share of Common Stock. See "Dilution."
SHARES AVAILABLE FOR FUTURE SALE. Upon completion of this Offering, the
Company will have shares of Common Stock outstanding ( shares if the
Underwriters' over-allotment option is exercised in full). The shares
offered hereby ( shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restrictions or further
registration under the Securities Act, except for any shares purchased by
"affiliates" of the Company, as such term is defined in Rule 144 promulgated
under the Securities Act. The remaining shares of Common Stock are "restricted
securities" within the meaning of Rule 144. Restricted securities may only be
sold in private transactions or pursuant to Rule 144. The Company has agreed to
register for resale twelve months after the closing of the Offering the shares
owned by certain stockholders of the Company prior to the Offering
(approximately 1,125,000 shares). Until that time, all shares owned by
stockholders of the Company prior to the Offering may not be sold in the public
market due to the restrictions of Rule 144. See "Shares Eligible for Future
Sale." In addition, an aggregate of shares are issuable upon the exercise
of outstanding stock options and shares of Common Stock are reserved for
issuance under the 1998 Stock Plan (as defined below). The Company and each of
the stockholders of the Company have agreed that they will not, without the
prior written consent of Lehman Brothers on behalf of the Underwriters, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase, or otherwise sell or dispose of (or announce any offer,
sale, contract of sale, pledge, grant or any option to purchase or other sale or
disposition of) any shares of Common Stock or any other securities convertible
into, or exercisable for shares of Common Stock or other similar securities of
the Company, currently beneficially owned, for a period of 180 days after the
date of this Prospectus. Lehman Brothers may, in its sole discretion, at any
time and without prior notice, release all or any portion of the shares of
Common Stock subject to such agreements. In any event, the shares owned by the
stockholders of the Company prior to the Offering may not be sold for twelve
months from the date of the Offering due to the restrictions of Rule 144. Sales
of substantial amounts of Common Stock (including shares issued upon the
exercise of outstanding options) in the public market after this Offering or the
prospect of such sales could adversely affect the market price of the Common
Stock and may have a material adverse effect on the Company's ability to raise
any necessary capital to fund its future operations. See "Shares Eligible for
Future Sale," "Management's
14
<PAGE>
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from this Offering (after deducting
underwriting discounts and commissions and estimated expenses of the Offering)
are estimated to be approximately $ million (approximately $
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to use the net proceeds it receives from the Offering (i) to pay
down its outstanding borrowings from Mr. Kaufman; (ii) to reduce the current
outstanding balance on its warehouse line; and (iii) as working capital for
general corporate purposes related to the funding of its anticipated future
growth.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
March 31, 1998, (ii) at March 31, 1998, as adjusted to give effect to the ASF
Transactions and the Exchange Transaction, and (iii) at March 31, 1998, as
adjusted to give effect to the application of the estimated net proceeds of this
Offering after underwriting discounts and commissions. See "Use of Proceeds."
The data set forth below should be read in conjunction with the other financial
information appearing elsewhere in this Prospectus, including the Combined
Financial Statements and the related notes thereto.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------------- ------------- -----------------
Notes payable and repurchase agreements............................ $ 44,879,927 $ 44,879,927 $
Note payable--Ivan Kaufman......................................... 13,685,303 13,685,303
------------- ------------- ---
Total notes payable and repurchase agreements...................... 58,565,230 58,565,230
------------- ------------- ---
Stockholders' Equity
Equity(1)........................................................ 26,455,306
Preferred Stock, $.01 par value; 10,000,000 shares authorized; no
shares issued and outstanding..................................
Common Stock $.01 par value; 30,000,000 shares authorized; no
shares issued and outstanding, actual; 7,500,000 pro forma, as
adjusted to give effect to the Reorganization Transactions;
shares issued and outstanding, as adjusted following the
Offering....................................................... -- 75,000
Additional paid-in capital....................................... -- 17,428,353
------------- ------------- ---
Total stockholders' equity......................................... 26,455,306 17,503,353
------------- ------------- ---
Total capitalization............................................... $ 85,020,536 $ 76,068,583 $
------------- ------------- ---
------------- ------------- ---
</TABLE>
- ------------------------
(1) Equity consists of (a) 100 shares of no par value common stock with a value
of $1,000 and retained earnings of $5,141,820 of ASF; and (b) members'
capital of $21,312,486 of ANCM.
(2) As adjusted to give effect to the following:
(a) the distribution by ASF of $1,462,000 of ASF assets to Ivan Kaufman, its
sole stockholder, on April 1, 1998;
(b) an additional $717,062 comprised of contributions of capital by members
on April 1, 1998, net of a distribution of capital to a former employee;
(c) Reorganization transactions comprised of the following:
(i) the deferred tax liability of $2,207,000 as a result of the
Company's election to terminate its LLC and S corporation
status;
(ii) the payment of [$6,000,000] of previously undistributed
earnings; and
(iii) the exchange of members' interests for shares of Common Stock.
(3) As adjusted to reflect the receipt of the net proceeds of this Offering
(after deducting underwriting discounts and estimated Offering expenses).
16
<PAGE>
DIVIDEND POLICY
The Company does not anticipate paying cash dividends on the Common Stock in
the foreseeable future. The decision whether to apply legally available funds to
the payment of dividends on the Common Stock will be made by the Board of
Directors of the Company from time to time in the exercise of its business
judgment, taking into account, among other things, the Company's results of
operations and financial condition, any then existing or proposed commitments by
the Company for the use of available funds, and the Company's obligations with
respect to the holders of any then outstanding indebtedness or Preferred Stock.
The Company's ability to pay dividends may be restricted from time to time by
financial covenants in its credit agreements or in arrangements with or
regulations of government sponsored entities pertaining to minimum cash reserve
requirements.
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value of their Common Stock
from the public offering price. The pro forma net tangible book value of the
Company as of March 31, 1998 was $17,503,353, or $2.33 per share of Common
Stock. Net tangible book value represents the amount of the Company's tangible
net worth divided by the pro forma total number of shares of Common Stock
outstanding as of March 31, 1998 pro forma to give effect to the ASF
Transactions and the transactions described in "Prospectus Summary--
Reorganization Transactions." After adjusting for, and giving effect to, the
sale of shares of Common Stock by the Company in the Offering and the
application of the estimated net proceeds therefrom at an assumed public
offering price of $ per share (the midpoint of the filing range set
forth on the cover of this Prospectus), and after the deduction of underwriting
discounts and commissions and estimated Offering expenses payable by the
Company, the adjusted pro forma net tangible book value of the Company as of
March 31, 1998 would have been $ million or $ per share of
Common Stock. This represents an immediate increase in net tangible book value
of $ per share to existing shareholders and an immediate dilution of
$ per share to purchasers of shares in the Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share of Common Stock offered hereby.......... [ ]
Pro forma net tangible book value per share before offering............. [ ]
Increase per share attributable to new investors........................ [ ]
Adjusted pro forma net tangible book value per share after offering..... [ ]
Dilution per share to new investors..................................... [ ]
--- ---
--- ---
</TABLE>
The following table summarizes on a pro forma basis the relative investments
of investors pursuant to this Offering and the current stockholders of the
Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 7,500,000 [ ]% $ 17,503,353 [ ]% $ 2.33
New investors..............................
Total(1)...................................
</TABLE>
- ------------------------
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to shares of Common Stock. See "Underwriting."
If the over-allotment option is exercised in full, the new investors will
have paid [$ ] and will hold shares of Common Stock, representing
[ %] of the total consideration and [ %] of the total number of
outstanding shares of Common Stock. See "Description of Securities" and
"Underwriting."
17
<PAGE>
SELECTED FINANCIAL DATA
The following tables present historical combined financial information for
the Company at the dates and for the periods indicated. The historical
operations data for the years ended December 31, 1997, 1996 and 1995 and balance
sheet data as of December 31, 1997 and 1996 have been derived from the audited
combined financial statements of the Company included elsewhere in this
Prospectus. The historical operations data for the years ended February 28, 1995
and 1994 and balance sheet data as of December 31, 1995, February 28, 1995 and
1994 have been derived from unaudited combined financial statements. The
historical operations data presented for the three month periods ended March 31,
1998 and 1997 and balance sheet data presented as of March 31, 1998 have been
derived from unaudited interim combined financial statements and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the three month period ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for any other interim period or the entire year ending December 31,
1998. The historical combined financial information should be read in
conjunction with, and is qualified in its entirety by reference to, the Combined
Financial Statements and related notes as set forth elsewhere herein.
OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH YEARS ENDED FEBRUARY
31, YEARS ENDED DECEMBER 31, 28,
------------------------- ----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1995 1994
------------- ---------- ----------- ---------- ---------- ---------- ----------
Interest earned......... $ 2,529,979 $1,672,747 $ 9,641,121 $6,783,312 $3,725,904 $2,470,793 $1,556,136
Fee-based services,
including gain on sale
of loans and real
estate................ 4,373,022 2,340,814 12,686,908 8,794,147 2,627,716 891,520 680,845
Servicing revenue,
net................... 539,241 305,253 1,957,983 1,082,699 394,461 397,029 188,919
Income from investment
in real estate held
for sale, net of
operating expenses.... 540,334 -- -- -- -- -- --
Total revenues.......... 7,982,576 4,318,814 24,286,012 16,660,158 6,748,081 3,759,342 2,425,900
Net income(loss)........ 3,432,110 1,175,870 8,632,262 4,302,596 714,807 (899,891) 264,141
Provision(benefit) for
pro forma income
taxes(1).............. 1,383,244 479,548 3,468,648 1,753,788 299,523 (350,430) 107,558
Pro forma net income.... 2,048,866 696,322 5,163,614 2,548,808 415,284 (539,461) 156,583
<CAPTION>
BALANCE SHEET DATA:
AT MARCH 31, AT DECEMBER 31, AT FEBRUARY 28,
------------------------- ----------------------------------- ----------------------
1998 1998
PRO FORMA(3) ACTUAL 1997 1996 1995 1995 1994
------------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans held for sale,
net................... $11,826,971 $11,826,971 $46,482,348 $45,729,204 $35,349,890 $6,671,548 $46,899,797
Loans held for
investment, net....... 54,821,182 56,273,289 68,609,906 38,685,564 36,030,439 4,806,727 4,199,140
Total assets............ 93,491,402 94,308,355 140,181,758 94,761,612 79,926,724 15,094,285 54,044,192
Notes payable........... 58,565,230 58,565,230 110,227,947 75,909,788 68,394,767 7,375,168 52,303,481
Total liabilities....... 75,988,049 67,853,049 117,148,176 81,298,478 72,243,186 8,126,554 52,832,040
Total equity............ 17,503,353 26,455,306 23,033,582 13,463,134 7,683,538 6,967,731 1,212,152
</TABLE>
18
<PAGE>
OTHER DATA:
<TABLE>
<CAPTION>
AT OR FOR
AT OR FOR THE THE
THREE MONTHS ENDED AT OR FOR THE YEARS ENDED
MARCH 31, YEARS ENDED DECEMBER 31, FEBRUARY 28,
--------------------------- ---------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1995
------------- ------------ ------------ ------------ ------------ ------------
Return on average equity (2)............... 33.1% 20.9% 28.3% 24.1% 5.7% (13.2%)
Return on average assets (2)............... 7.0% 3.2% 4.4% 2.9% 0.9% (1.6%)
Debt to equity ratio....................... 2.2x 4.6x 4.8x 5.6x 8.9x 1.1x
Total originations:
Permanent Loans.......................... $23,779,000 $ 34,013,000 $215,545,000 $244,287,000 $104,374,000 $141,319,000
Customized Financing..................... $11,649,000 $ 18,080,000 $174,377,000 $ 74,103,000 $ 81,729,000 $ 9,162,000
Commercial servicing portfolio (4)......... $535,765,000 $418,541,000 $529,956,000 $385,518,000 $211,633,000 $222,000,000
Number of loans in commercial servicing
portfolio................................ 136 117 133 110 111 94
Selling and administrative expenses as a
percentage of total revenue.............. 14.3% 19.2% 14.4% 21.0% 23.1% 30.9%
<CAPTION>
<S> <C>
1994
------------
Return on average equity (2)............... 20.7(5)
Return on average assets (2)............... 0.6(5)
Debt to equity ratio....................... 43.2x
Total originations:
Permanent Loans.......................... $174,997,000
Customized Financing..................... $ 0
Commercial servicing portfolio (4)......... $166,000,000
Number of loans in commercial servicing
portfolio................................ 67
Selling and administrative expenses as a
percentage of total revenue.............. 23.4%
</TABLE>
- ------------------------
(1) The pro forma provision (benefit) for income taxes represents the difference
between historical income taxes and the income taxes that would have been
reported had the Company filed income tax returns as a taxable C corporation
for each of the periods presented using a pro forma income tax rate of 40%.
(2) Return on average equity and assets are based on pro forma net income and
historical average equity and assets, respectively. Return on average equity
and assets for the three months ended March 31, 1998 and 1997 are
annualized.
(3) The pro forma balance sheet gives effect to (i) the distribution by ASF of
$1,462,000 of ASF assets to Ivan Kaufman, its sole stockholder, on April 1,
1998, (ii) the contribution of capital by members on April 1, 1998 of
$717,062, net of a distribution of capital to a former employee, and (iii) a
distribution of previously undistributed earnings of [$6,000,000]. See
"Prospectus Summary--Recent Developments" and "Prospectus
Summary--Reorganization Transactions."
(4) The Company's commercial servicing portfolio represents commercial loans
serviced for third parties for a fee and does not include loans held for
investment.
(5) Return on average equity and assets are based on the ending balances at
February 28, 1994 and the Company's initial capitalization in 1993.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S COMBINED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Arbor National Holdings, Inc. is a fully integrated real estate financial
services company. The Company funds, on a negotiated basis, high-yielding
lending and investment opportunities in commercial real estate through
Customized Financing structures. It also derives substantial revenue from the
origination for sale and servicing of Permanent Loans for multifamily and other
types of commercial properties.
RECENT DEVELOPMENTS
ANCM, which became a wholly-owned subsidiary of ANHI on the date of this
Prospectus (see "Prospectus Summary--Reorganization Transactions"), acquired
100% of the outstanding stock of ASF as of April 1, 1998 through the ASF
Transactions.
Prior to its acquisition by ANCM, ASF distributed a dividend of certain
assets which were not consistent with the intended business of the Company to
Ivan Kaufman, its sole stockholder. Immediately thereafter, Mr. Kaufman sold the
outstanding common stock of ASF to the Trust. Immediately thereafter,
simultaneously with the purchase of Class B membership interests by certain
officers and employees of ANCM, the Trust, which was already a Class A member of
ANCM, purchased an additional Class A membership interest in ANCM by
transferring the ASF shares to ANCM.
ORIGINATION VOLUME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31, % CHANGE
-------------------- ---------------------------------- --------------------------------
1998 1997 1997 1996 1995 Q1 1997-1998 1996-1997
--------- --------- ---------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Permanent Loans.............. $ 23,779 $ 34,013 $ 215,545 $ 244,287 $ 104,374 (30)% (12 )%
Customized Financing......... 11,649 18,080 174,377 74,103 81,729 (36 ) 135
--
--------- --------- ---------- ---------- ---------- ---
Total.................... $ 35,428 $ 52,093 $ 389,922 $ 318,390 $ 186,103 (32 )% 22%
--
--
--------- --------- ---------- ---------- ---------- ---
--------- --------- ---------- ---------- ---------- ---
<CAPTION>
1995-1996
-------------
<S> <C>
Permanent Loans.............. 134%
Customized Financing......... (9 )
---
Total.................... 71%
---
---
</TABLE>
The increase in the Company's Permanent Loan origination volume from 1995 to
1996 was primarily attributable to increased originations from the Company's
FNMA DUS product line, which commenced in December 1995. The decrease in the
Company's Permanent Loan origination volume from 1996 to 1997 and for the first
quarter ended March 31, 1997 as compared to the first quarter ended March 31,
1998 was primarily attributable to increased competition in the permanent
lending market and management's decision not to compete solely on price. In
1996, the Company decided to concentrate its efforts on high yielding lending
and investment opportunities in commercial real estate through Customized
Financing activities, a market that management believes to be underserved,
especially on transactions under $20 million. This strategic decision had a
significant impact on the Company's revenues as discussed below. The Company
also believes that there is significant growth opportunity in the Customized
Financing
20
<PAGE>
market especially in bridge and mezzanine loans. Due to the nature of these
activities, origination volume and the timing of recognizing the related revenue
will fluctuate. See "Risk Factors--Possible Volatility in Quarterly Results."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. The following table sets forth the components of the Company's
revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
-------------------------- %
1998 1997 CHANGE
------------ ------------ -----------
<S> <C> <C> <C>
Interest earned.......................................................... $ 2,529,979 $ 1,672,747 51%
Gain on sale of loans and real estate.................................... 2,193,245 615,833 256
Originated mortgage servicing rights..................................... 588,225 1,056,170 (44)
Fee income............................................................... 1,591,552 668,811 138
------------ ------------ ---
Fee-based services, including gain on sale of loans and real estate...... 4,373,022 2,340,814 87
------------ ------------ ---
Servicing revenue, net................................................... 539,241 305,253 77
Income from investment in real estate held for sale, net of operating
expenses............................................................... 540,334 -- --
------------ ------------ ---
Total revenues........................................................... $ 7,982,576 $ 4,318,814 85%
------------ ------------ ---
------------ ------------ ---
</TABLE>
Interest earned increased $857,000 or 51% to $2.5 million for the three
months ended March 31, 1998 from $1.7 million for the three months ended March
31, 1997. This increase was primarily due to a 61% increase in the weighted
average balance of loans held for investment (primarily bridge and mezzanine
loans) which, due to their customized characteristics and risk profiles, yield
higher interest rates and are held for substantially longer periods of time as
compared to loans held for sale. The weighted average loan balance of loans held
for sale decreased 21%.
Gain on sale of loans and real estate, which primarily represented all cash
gains, increased $1.6 million or 256% to $2.2 million for the three months ended
March 31, 1998 from $616,000 for the three months ended March 31, 1997. This
increase was primarily attributable to increased revenues from Customized
Financing activities. Past experience has shown that the nature of these
Customized Financing activities vary greatly and are highly negotiated, and as a
result the amount and timing of revenue recognition will fluctuate. The Company
expects this trend to continue in the future.
Originated mortgage servicing rights, which are the allocated cost of the
unsold portion of the loans and are recognized when loans are sold, decreased
$468,000 or 44% to $588,000 for the three months ended March 31, 1998 from $1.1
million for the three months ended March 31, 1997. This decrease was primarily
attributable to a 37% decrease in the volume of FNMA DUS loans sold for the
quarter ended March 31, 1998 compared to the quarter ended March 31, 1997 which
was a direct result of a decrease in the average loan size of originations from
the fourth quarter of 1996 to the fourth quarter of 1997.
Fee income comprised of origination, exit and commitment fees increased
$923,000 or 138% to $1.6 million for the three months ended March 31, 1998 from
$669,000 for the three months ended March 31, 1997. This increase was primarily
attributable to (a) fees earned on backup commitments to lend and purchase real
estate and (b) the increase in the Company's Customized Financing activities.
Servicing revenue, net increased $234,000 or 77% to $539,000 for the three
months ended March 31, 1998 from $305,000 for the three months ended March 31,
1997. This increase was primarily attributable to a 28% increase in the
Company's commercial servicing portfolio combined with an overall increase in
the
21
<PAGE>
weighted average servicing fee from March 31, 1997 to March 31, 1998 due to the
increase in the FNMA DUS portfolio, which yield higher weighted average
servicing fees than other loans serviced.
Income from investment in real estate held for sale consisted of rental
income earned, less operating expenses incurred during the three months ended
March 31, 1998. The asset generating this rental income, net was acquired in
September 1997.
EXPENSES. The following table sets forth the components of the Company's
expenses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
-------------------------- %
1998 1997 CHANGE
------------ ------------ -----------
<S> <C> <C> <C>
Interest expense......................................................... $ 1,944,208 $ 925,038 110%
Employee compensation and benefits....................................... 1,231,366 1,053,338 17
Selling and administrative............................................... 1,137,522 827,068 38
Provision for loan losses................................................ 237,370 337,500 (30)
------------ ------------ ---
Total expenses........................................................... $ 4,550,466 $ 3,142,944 45%
------------ ------------ ---
------------ ------------ ---
</TABLE>
Interest expense increased $1.0 million or 110% to $1.9 million for the
three months ended March 31, 1998 from $925,000 for the three months ended March
31, 1997. This increase was primarily attributable to (a) increased borrowings
to finance loans held for investment, which due to their customized
characteristics and risk profiles carry a higher borrowing rate than loans held
for sale; and (b) the interest cost associated with the increase in debt to
finance growth in investments in real estate held for sale, other real estate
joint ventures and other investments.
Employee compensation and benefits increased $178,000 or 17% to $1.2 million
for the three months ended March 31, 1998 from $1.1 million for the three months
ended March 31, 1997. This increase reflected increased staffing levels
associated with Customized Financing activities and the geographic and product
expansion of the Company's lending activities.
Selling and administrative expenses increased $310,000 or 38% to $1.1
million for the three months ended March 31, 1998 from $827,000 for the three
months ended March 31, 1997. This increase was primarily attributable to the
geographic and product expansion of the lending activities and a one time
increase in depreciation expense of $104,000 related to a change in the
estimated useful life of certain capitalized equipment.
Provision for loan losses decreased $100,000 or 30% to $237,000 for the
three months ended March 31, 1998 from $338,000 for the three months ended March
31, 1997. This decrease was directly attributable to a 37% decrease in the
volume of FNMA DUS loans sold for the quarter ended March 31, 1998 compared to
the quarter ended March 31, 1997. Under the FNMA DUS Program, the Company
assumes responsibility for a portion of any loss that may result from borrower
defaults based on FNMA loss sharing formulas. The Company's portion of the loss
sharing is limited to a maximum of 20% of the original principal balance.
22
<PAGE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. The following table sets forth the components of the Company's
revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
<S> <C> <C> <C>
1997 1996 % CHANGE
------------- ------------- ---------------
Interest earned......................................................... $ 9,641,121 $ 6,783,312 42%
Gain on sale of loans and real estate................................... 6,195,440 3,220,366 92
Originated mortgage servicing rights.................................... 3,148,981 2,958,029 6
Fee income.............................................................. 3,342,487 2,615,752 28
--
------------- -------------
Fee-based services, including gain on sale of loans and real estate..... 12,686,908 8,794,147 44
--
------------- -------------
Servicing revenue, net.................................................. 1,957,983 1,082,699 81
--
------------- -------------
Total revenues.......................................................... $ 24,286,012 $ 16,660,158 46%
--
--
------------- -------------
------------- -------------
</TABLE>
Interest earned increased $2.9 million or 42% to $9.6 million for 1997 from
$6.8 million for 1996. This increase was primarily due to a 38% increase in the
weighted average outstanding balance of loans held for investment (primarily
bridge and mezzanine loans) which, due to their customized characteristics and
risk profiles, yield higher interest rates and are held for substantially longer
periods of time as compared to loans held for sale. The weighted average loan
balance of loans held for sale increased 53% from 1996 to 1997.
Gain on sale of loans and real estate, which primarily represented all cash
gains, increased $3.0 million or 92% to $6.2 million for 1997 from $3.2 million
for 1996. This increase was primarily attributable to (a) increased revenues
from Customized Financing activities and (b) increased margins from Permanent
Loans originated for sale offset by a 17% decrease in volume of Permanent Loans
sold.
Originated mortgage servicing rights, which are the allocated cost of the
unsold portion of the loans and are recognized when loans are sold, increased
$191,000 or 6% to $3.1 million for 1997 from $3.0 million for 1996. This
increase was primarily attributable to the increase in the volume of FNMA DUS
loans sold, as a percentage of total sold loan volume, from 1997 to 1996. The
FNMA DUS loans yield higher servicing fees than other loans serviced and
therefore generate greater servicing values.
Fee income increased $727,000 or 28% to $3.3 million for 1997 from $2.6
million for 1996. This increase was primarily attributable to the increase in
the Company's Customized Financing activities.
Servicing revenue, net increased $875,000 or 81% to $2.0 million for 1997
from $1.1 million for 1996. This increase was directly attributable to a 37%
increase in the Company's commercial servicing portfolio combined with an
overall increase in the weighted average servicing fee from 1997 to 1996 due to
the increase in the FNMA DUS portfolio, which yield higher weighted average
servicing fees than other loans serviced.
EXPENSES. The following table sets forth the components of the Company's
expenses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
<S> <C> <C> <C>
1997 1996 % CHANGE
------------- ------------- -------------
Interest expense........................................................ $ 6,242,616 $ 4,048,947 54%
Employee compensation and benefits...................................... 4,920,495 3,893,873 26
Selling and administrative.............................................. 3,493,022 3,499,691 --
Provision for loan losses............................................... 997,617 915,051 9
------------- ------------- ---
Total expenses.......................................................... $ 15,653,750 $ 12,357,562 27%
------------- ------------- ---
------------- ------------- ---
</TABLE>
23
<PAGE>
Interest expense increased $2.2 million or 54% to $6.2 million for 1997 from
$4.0 million for 1996. This increase was primarily attributable to (a) increased
borrowings to finance loans held for investment (primarily bridge and mezzanine
loans), which due to their customized characteristics and risk profiles, carry a
higher borrowing rate than loans held for sale; and (b) the interest costs
associated with the increase in debt to finance growth in investments in real
estate held for sale and other real estate joint ventures, the bulk of which
occurred in the fourth quarter of 1997.
Employee compensation and benefits increased $1.0 million or 26% to $4.9
million for 1997 from $3.9 million for 1996. This increase reflected increased
commissions and incentives associated with the Customized Financing activities,
and the geographic and product expansion of the Company's lending activities.
Selling and administrative expenses remained stable from 1996 to 1997, yet
as a percentage of revenue, the selling and administrative expenses decreased to
14% in 1997 from 21% in 1996, which was primarily attributable to the Company's
decision to build the appropriate infrastructure in 1996 to expand the Company's
Customized Financing activities, and the geographic and product expansion of the
Company's lending activities.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES. The following table sets forth the components of the Company's
revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
<S> <C> <C> <C>
1996 1995 % CHANGE
------------- ------------ -------------
Interest earned.......................................................... $ 6,783,312 $ 3,725,904 82%
Gain on sale of loans and real estate.................................... 3,220,366 1,806,063 78
Originated mortgage servicing rights..................................... 2,958,029 -- --
Fee income............................................................... 2,615,752 821,653 218
------------- ------------ ---
Fee-based services, including gain on sale of loans and real estate...... 8,794,147 2,627,716 235
------------- ------------ ---
Servicing revenue, net................................................... 1,082,699 394,461 174
------------- ------------ ---
Total revenues........................................................... $ 16,660,158 $ 6,748,081 147%
------------- ------------ ---
------------- ------------ ---
</TABLE>
Interest earned increased $3.1 million or 82% to $6.8 million for 1996 from
$3.7 million for 1995. This increase was primarily due to an increase in the
average balance of loans outstanding resulting from increased FNMA DUS
originations in 1996. The Company's FNMA DUS loan origination business commenced
in December of 1995.
Gain on sale of loans and real estate, which primarily represented all cash
gains, increased $1.4 million or 78% to $3.2 million for 1996 from $1.8 million
for 1995. This increase was primarily attributable to increased revenues from
Customized Financing activities.
The increase in originated mortgage servicing rights, which are the
allocated cost of the unsold portion of the loans and are recognized when loans
are sold, was a direct result of the adoption on January 1, 1996 of SFAS # 122
(Accounting for Mortgage Servicing Rights, superseded by SFAS # 125). The
Company did not capitalize originated mortgage servicing rights in 1995.
24
<PAGE>
Fee income increased $1.8 million or 218% to $2.6 million for 1996 from
$822,000 for 1995. This increase was primarily attributable to (a) increased
volume of loans sold from the Company's FNMA DUS product line, which commenced
in December 1995 and (b) the increase in the Company's Customized Financing
activities.
Servicing revenue, net increased $688,000 or 174% to $1.1 million for 1996
from $394,000 for 1995. This increase is directly attributable to a 82% increase
in the Company's commercial servicing portfolio combined with an overall
increase in the weighted average servicing fee from 1996 to 1995 due to the
increase in the FNMA DUS portfolio, which yield higher weighted average
servicing fees than other loans serviced.
EXPENSES. The following table sets forth the components of the Company's
expenses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
<S> <C> <C> <C>
1996 1995 % CHANGE
------------- ------------ -------------
Interest expense......................................................... $ 4,048,947 $ 2,188,687 85%
Employee compensation and benefits....................................... 3,893,873 1,876,897 107
Selling and administrative............................................... 3,499,691 1,560,834 124
Provision for loan losses................................................ 915,051 406,856 125
------------- ------------ ---
Total expenses........................................................... $ 12,357,562 $ 6,033,274 105%
------------- ------------ ---
------------- ------------ ---
</TABLE>
Interest expense increased $1.9 million or 85% to $4.1 million for 1996 from
$2.2 million for 1995. This increase was primarily due to an increase in the
average balance of loans outstanding resulting from increased FNMA DUS
originations in 1996. The Company's FNMA DUS loan origination business commenced
in December of 1995.
Employee compensation and benefits increased $2.0 million or 107% to $3.9
million for 1996 from $1.9 million for 1995. This increase was primarily
attributable to increased sales' salaries and commissions, which are based
substantially on loan production, the geographic and product expansion of the
Company's lending activities and the increase in the servicing portfolio.
Selling and administrative expenses increased $1.9 million or 124% to $3.5
million for 1996 from $1.6 million for 1995. This increase was primarily
attributable to the Company's decision to build the appropriate infrastructure
in 1996 to support the Customized Financing activities, and the geographic and
product expansion of the Company's lending activities.
Provision for loan losses increased $508,000 or 125% to $915,000 for 1996
from $407,000 for 1995. This increase was primarily attributable to increased
loan origination volume from the Company's FNMA DUS product line, which
commenced in December of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs consist of funding its Customized
Financing activities, and its Permanent Loan activities. To meet these needs,
the Company currently relies on borrowings under its warehouse facility,
repurchase agreements, borrowings from Ivan Kaufman and cash flow from
operations. The maximum permitted borrowings under the warehouse facility were
$90 million at March 31, 1998 and December 31, 1997 and $70 million at December
31, 1996. At March 31, 1998, December 31, 1997 and December 31, 1996,
outstanding borrowings under the warehouse facility were $26.9 million, $36.3
million and $26.8 million, respectively, leaving available funds of $63.1
million, $53.7 million and $43.2 million, respectively. Borrowings under the
warehouse facility are secured by a pledge of the loans funded.
Under the warehouse facility, the interest rate charged for borrowings is
based on the Company's option to use either Federal Funds or LIBOR plus 1% to
1.5% for Permanent Loans and 2.25% to 3% for specified Customized Financing
activities. The warehouse facility expires on November 26, 1998 and is
25
<PAGE>
funded by four financial institutions. The Company expects to be able to renew
or replace the warehouse facility when its current term expires.
The Company also funds loan originations through repurchase agreements with
FNMA and a Wall Street firm which, for financial reporting purposes, are
characterized by the Company as borrowing transactions. Both of these repurchase
agreements are uncommitted and therefore have no stated expiration date. The
FNMA repurchase agreement allows the Company to fund FNMA DUS loan originations,
that the Company has committed to sell to institutional investors, at an
interest rate of LIBOR plus 0.4% to 0.55%. Under this agreement, the Company is
required to arrange for institutional investors to take delivery of the loans
within 60 days of the date of such borrowings; otherwise the Company is required
to repurchase the loans. As of March 31, 1998, December 31, 1997 and December
31, 1996, total outstanding borrowings under this agreement were $7.5 million,
$27.4 million and $6.0 million, respectively.
The repurchase agreement with the Wall Street firm provides the Company with
up to $10 million (with temporary increases above the $10 million allowed at the
Wall Street firm's discretion) of additional funds for loan originations at an
interest rate of LIBOR plus 1.75%. As of March 31, 1998, December 31, 1997 and
December 31, 1996, total outstanding borrowings under this agreement were $8.9
million, $16.7 million and $5.0 million, respectively.
In the event these agreements were to be terminated, the Company believes
that other financial institutions would provide it with similar repurchase
agreements, but no assurances can be made that the Company will obtain such
financing on reasonable terms or at all.
The borrowing agreements contain certain covenants, including, among others,
limitations on indebtedness, liens, mergers, changes in control and sales of
assets, and requirements for the Company to maintain a minimum servicing
portfolio, minimum net worth and other financial ratios. The Company was in
compliance with these covenants as of March 31, 1998.
Historically, the Company has borrowed funds from Ivan Kaufman. Borrowings
outstanding from Mr. Kaufman (and/or the Trust and the Ivan Kaufman Grantor
Retained Annuity Trust effective March 31, 1998 (the "Kaufman Grantor Trust"))
totaled $13.7 million at March 31, 1998, $28.8 million at December 31, 1997 and
$25.4 million at December 31, 1996. Interest on virtually all of the Company's
borrowings from Mr. Kaufman is at the prime interest rate plus 1%, or 9.5% at
March 31, 1998. The borrowings from Mr. Kaufman are subordinate to the warehouse
facility. The Company plans to repay the total balance of outstanding borrowings
from Mr. Kaufman with the proceeds from this Offering. See "Use of Proceeds."
In June 1998, the Company entered into a 50/50 joint venture with a Wall
Street investment banking firm pursuant to which each of the joint venture
partners agreed to contribute up to $25 million in equity to the joint venture.
In addition, the Wall Street firm agreed to provide $200 million of financing to
fund Customized Financing activities, including $75 million for mezzanine loans
to the joint venture in the form of a repurchase agreement. The interest rate
charge for the financing is LIBOR plus 2%. The repurchase agreement expires in
June 2000. The Company believes that this joint venture will greatly enhance the
Company's ability to increase its Customized Financing activities in the future.
The Company sells its loans to various institutional investors. The terms of
these purchase arrangements vary according to each investors purchase
requirements; however, the Company believes that the loss of any one or group of
such investors would not have a material adverse effect on the Company.
As of a result of the Offering, the Company believes that the increase in
equity will allow the Company to reduce its borrowing rate on its Customized
Financing and Permanent Loan activities.
The anticipated increase in business is expected to be funded by additional
borrowings under the warehouse facility, repurchase agreements, increased
capital resulting from this Offering and funds
26
<PAGE>
provided from operations, all of which are expected to enable the Company to
fund its operations for a minimum of twelve months following completion of this
Offering.
INFLATION AND SEASONALITY
In general, when the Company establishes an interest rate on a loan held for
sale, it attempts to concurrently lock in an interest yield to the institutional
investor purchasing that loan. By selling these loans shortly following
origination the Company limits its exposure to interest rate fluctuations.
However, the Company will accumulate some loans for bulk sale and in these
circumstances the Company hedges its interest rate risk with forward commitments
and put options. The Company does not hedge its loans held for investment
because these loans are generally variable rate loans based on short term LIBOR.
However, the operations and profitability of the Company are 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 originate loans. In such event,
the financial condition and results of operations of the Company could be
materially adversely affected.
The Company is generally not subject to seasonal trends. However,
historically the Company has experienced increased transactions and higher
revenues and earnings in the fourth quarter primarily due to borrowers' desire
to consummate transactions by year end.
YEAR 2000 RISK
The Company has implemented a Year 2000 program to ensure that the Company's
computer systems and applications will function properly beyond 1999. The
Company believes that is has allocated adequate resources for this purpose and
expects its systems to be compliant by January 1, 1999. Although the Company
expects all of its systems to be Year 2000 compliant by January 1, 1999, there
can be no assurances that all of the Company's and vendor and business partner
systems will be Year 2000 compliant. The Company's cost to comply with the Year
2000 initiative is not expected to be material.
INCOME TAXES
Effective April 1, 1998, ASF distributed a dividend of certain assets which
were not consistent with the intended business of the Company to Ivan Kaufman,
its sole stockholder, and immediately thereafter the outstanding common stock of
ASF was sold to the Trust. Immediately thereafter, the Trust contributed the
common stock of ASF with a book value of $3.7 million, which approximated fair
value, to ANCM in exchange for ownership interests in ANCM. Simultaneous with
the contribution, ASF ceased to be treated as an S corporation. Upon the
effective date of the Offering, all members of ANCM, pursuant to the terms of
the Exchange Agreement, will contribute their ownership interest in ANCM to the
Company in exchange for 7,500,000 shares of Common Stock (the "Exchange"), which
will constitute all of the shares of Common Stock outstanding prior to the
Offering. Simultaneous with the Exchange, ANCM will no longer be recognized as a
limited liability company for tax purposes.
As a limited liability company and S corporation, the Company's income,
whether or not distributed, was taxed at the member or shareholder level for
federal and most state tax purposes. As a result of the Exchange, the Company
and ANCM, which will become a wholly-owned subsidiary of the Company, will be
fully subject to federal and state income taxes at the corporate level, and will
result in the Company recording a deferred tax liability on its balance sheet.
The amount of deferred tax liability to be recorded as of the date of the
Exchange will depend upon timing differences between financial reporting and tax
reporting. The pro forma provision for income taxes in the accompanying
statements of operations shows results as if the Company had always been fully
subject to federal and state taxes at an assumed combined rate of 40%.
27
<PAGE>
BUSINESS
THE COMPANY
Arbor National Holdings, Inc. is a fully integrated real estate financial
services company. The Company funds, on a negotiated basis, high-yielding
lending and investment opportunities in commercial real estate through
Customized Financing structures. It also derives substantial revenue from the
origination for sale and servicing of Permanent Loans for multifamily and other
types of commercial properties.
In recent years the Company has experienced significant growth. Total
revenues increased from $16.7 million to $24.3 million for the years ended
December 31, 1996 and 1997, respectively, and from $4.3 million to $8.0 million
for the quarters ended March 31, 1997 and 1998, respectively. Pro forma net
income increased from $2.5 million to $5.2 million for the years ended December
31, 1996 and 1997, respectively, and from $0.7 million to $2.0 million for the
quarters ended March 31, 1997 and 1998, respectively. At March 31, 1998, the
Company's commercial servicing portfolio consisted of 136 loans aggregating
approximately $536 million and its portfolio of loans held for investment
consisted of 38 loans aggregating approximately $56 million.
The Company targets the market for transactions under $20 million,
particularly in the $1 million to $5 million range, where management believes it
has competitive advantages, particularly its lower cost structure and its
in-house capabilities. The Company generates a continuing pipeline of real
estate finance and investment opportunities through its six full-service offices
in Atlanta, Boston, Chicago, Dallas, San Francisco and Uniondale, New York, its
three satellite offices in Miami, Los Angeles and Florence, Kentucky (greater
Cincinnati, Ohio) and its extensive network of strategic relationships with
investment banking firms, brokers, developers, real estate owners and operators,
and other financial institutions.
The Company's Customized Financing activities highlight its unique
strengths. First, the Company's strong presence and established relationships in
the marketplace facilitate its ability to source and identify many
non-traditional lending opportunities. Second, the specialized lending expertise
and entrepreneurial abilities of its staff enable the Company to provide
creative, flexible financing structures, thus enhancing value for the Company
and its borrowers. Third, the Company, as a provider of both transitional
financing under its Customized Financing activities and permanent mortgage
financing under its Permanent Loan activities, is uniquely positioned in its
targeted market as a single source of financing solutions.
The Company's Permanent Loan activities consist of originating commercial
mortgage loans pursuant to government-sponsored and conduit loan programs, and
selling those loans, typically on a whole loan basis, to government-sponsored
entities or other secondary market investors, while retaining the servicing of
those loans for a fee. As compared to Customized Financing activities, the
Company's Permanent Loan activities generate a more stable and predictable flow
of revenue through servicing and other fee income. In addition, the Permanent
Loan activities keep the Company closely apprised of trends in the commercial
real estate market and provide an additional source for Customized Financing
opportunities. The Company primarily originates permanent loans pursuant to the
FNMA DUS Program, under which it is one of 28 approved lenders. To date, the
Company has had no credit losses on its commercial servicing portfolio.
The Chief Executive Officer and founding stockholder of the Company is Ivan
Kaufman, who was the co-founder, chairman and controlling stockholder of Old
Arbor, a publicly held, NASDAQ traded company that went public on August 7, 1992
and was subsequently sold in January 1995 to BankAmerica Corporation. From 1983
through 1994, under Mr. Kaufman's management, Old Arbor's residential mortgage
lending activities grew to 25 branches in eleven states, with approximately
1,000 employees, originating more than $4 billion of loans annually and
servicing nearly $5.5 billion. In connection with the sale of Old Arbor to
BankAmerica Corporation, the commercial mortgage lending operations were
acquired by Mr. Kaufman. Since this acquisition, the Company has evolved to
become a full service
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<PAGE>
provider of real estate financial services to owners and developers of
commercial and multifamily real estate properties. In anticipation of the
Offering, ANHI was formed in 1998 as a holding company for ANCM and ASF which
were reorganized into a single entity and then acquired by ANHI through an
exchange of equity. See "Prospectus Summary--Recent Developments" and
"Prospectus Summary-- Reorganization Transactions."
INDUSTRY OVERVIEW
The Company believes that the financing of commercial and multifamily real
estate offers significant growth opportunities. Commercial and multifamily real
estate encompass a wide spectrum of assets including multifamily, office,
industrial, retail and hospitality. These assets are financed by an estimated
$1.0 trillion of outstanding commercial real estate debt, and the Company
estimates that $125 billion to $150 billion in commercial real estate mortgages
are refinanced each year in addition to the mortgage financing of new
construction.
Commercial mortgage banks have arranged a significant portion of the debt
financing for commercial real estate. However, since the early 1990s, the
commercial mortgage banking industry has experienced significant change, in part
due to expensive technological demands, increasingly standardized underwriting
requirements, more demanding borrowers and lenders and the growth of a market
for securitized commercial real estate mortgage pools. Many of the existing
firms lack the capital and financial sophistication to compete effectively in
today's rapidly changing market, and as a result the commercial mortgage banking
industry is moving toward greater consolidation. Moreover, lenders such as banks
and life insurance companies which have traditionally been the primary source
for commercial real estate financing, are increasingly constraining borrowers
due to their relatively inflexible underwriting standards, including lower
loan-to-value ratios, thereby creating significant demand for mezzanine and
other forms of gap financing. Accordingly, the Company believes that the
emerging market leaders in the real estate finance sector will be fully
integrated finance companies capable of originating, underwriting, structuring,
managing and retaining real estate risk.
COMPETITIVE ADVANTAGES
- BREADTH OF PRODUCT OFFERINGS--Since the Company offers both short-term and
long-term funding capabilities, as well as the skills and expertise to
develop creative, flexible financing structures, the Company can present
itself as a single-source financing alternative, attracting individual
clients with diverse and complex needs.
- FOCUS ON UNDERSERVED MARKET--The Company specializes in Customized
Financing transactions under $20 million, particularly the $1 million to
$5 million range, which larger financial institutions will not consider,
or, because of organizational constraints, cannot offer on terms
comparable to those provided by the Company.
- ORIGINATION SYNERGIES--The Company's participation in Permanent Loan
programs provides significant synergies with the Customized Financing
business. The Permanent Loan programs create a stream of opportunities
that require transitional financing to position the underlying property
for a Permanent Loan while providing an effective exit strategy for
Customized Financing transactions generated from other sources.
- RAPID EXECUTION CAPABILITY--The Company's in-house expertise enables it to
act on proposals quickly and decisively and analyze opportunities, provide
commitments and close transactions within a few weeks and sometimes days,
if required. The Company believes its reputation for rapid execution
attracts, from both borrowers and other lenders, opportunities that would
not otherwise be available.
29
<PAGE>
- CONTINUITY AND EXPERIENCE OF MANAGEMENT--The four senior executive
officers of the Company (including Mr. Kaufman) have an average of more
than twelve years of experience in real estate finance and investing,
while the 21 vice presidents and regional directors average almost sixteen
years of relevant industry experience. Eleven members of the Company's
management team worked with Mr. Kaufman at Old Arbor. The remainder have
been recruited because of their particular product specialization and
expertise in analyzing and structuring complex financial transactions in
commercial real estate.
- COMMITMENT OF SENIOR MANAGEMENT AND KEY EMPLOYEES--In addition to the
substantial ownership of the Company by Mr. Kaufman, all senior executives
and eighteen key employees have made significant equity investments in the
Company which align their interests with those of the Company's other
stockholders.
- NETWORK OF RELATIONSHIPS--In addition to the market presence represented
by its full-service and satellite offices, the Company generates
significant opportunities through referrals from an extensive network of
strategic relationships with investment banking firms, brokers,
developers, real estate owners and operators and other financial
institutions.
BUSINESS STRATEGIES
- INCREASE CUSTOMIZED FINANCING OPPORTUNITIES by using the additional
capital from this Offering to offer an expanded range of maturities and
other terms suitable for various borrowers and projects.
- GROW THE COMPANY'S STREAM OF INTEREST INCOME by using the additional
capital from this Offering to permit longer retention of bridge and
mezzanine loans on the Company's balance sheet.
- DIVERSIFY THE COMPANY'S ORIGINATIONS AND INVESTMENTS beyond loans on
multifamily properties to include financings of assisted-living
facilities, hotels and other types of commercial property developments.
- CONTINUE THE COMPANY'S GEOGRAPHIC EXPANSION into selected major real
estate markets throughout the United States to expand its originations
capabilities by increasing local awareness of the Company's capabilities
and improving the Company's ability to monitor local activity for suitable
opportunities.
- INCREASE THE AVERAGE OUTSTANDING LOAN BALANCE of Customized Financing
activities through the utilization of the additional capital from this
Offering to fund larger transactions in the under $20 million market.
- LEVERAGE THE COMPANY'S CORE COMPETENCIES TO EXPAND ITS SERVICES and
develop related products, such as the FHA-insured multifamily and
healthcare financing program, as well as acquiring or developing in-house
property management capabilities.
CUSTOMIZED FINANCING ACTIVITIES
Through its Customized Financing activities, the Company actively pursues
lending and investment opportunities with real estate owners and property
developers who need interim financing until permanent financing can be obtained.
The Company targets transactions under $20 million, particularly in the $1
million to $5 million range, where the Company believes it has competitive
advantages, particularly its lower cost structure and its in-house capabilities.
These loans generally are not intended to be "permanent" in nature, but rather
are intended to be of a relatively short-term duration, with extension options
as deemed appropriate, and generally require a balloon payment of principal and
interest at maturity. The Company's customized loans generally yield higher
interest rates and fee income than Permanent Loans. Borrowers in the market for
these types of loans include, but are not limited to, owners or developers
30
<PAGE>
seeking either to acquire or refurbish real estate or to pay down debt and
reposition a property for permanent financing.
The Company targets borrowers with reputations for enhancing value, but who
may lack the financial capacity to qualify for bank financing beyond a certain
level. Loan structures vary as they are customized to fit the characteristics
and purpose of the financing. The bridge and mezzanine loans are underwritten in
accordance with guidelines designed to evaluate the borrowers' ability to
satisfy the repayment conditions of the loan. See "Underwriting." The Company
evaluates the various exit strategies for converting the short term financing
into a Permanent Loan, thereby increasing the volume of loans generated for the
Company's Permanent Loan program. As part of the determination to proceed with
the short term financing, the Company will include terms such as exit and other
fees that give the borrower strong incentives to obtain permanent financing
through the Company.
For the years ended December 31, 1997, and 1996, the Company originated $174
million and $74 million of Customized Financing transactions, respectively. In
addition to the interest and fee income earned on these originations, additional
Customized Financing transactions have provided the Company with the opportunity
to earn significant fee income without having to close on such transactions.
Some of these situations have involved providing, for a fee, commitments or
back-up commitments to borrowers, often with a strong likelihood that such
commitments would not be utilized, to enable such borrowers to consummate
commercial real estate transactions. Other situations have involved acquiring,
and selling at a profit prior to closing, contracts to purchase loans and
commercial properties. The Company expects that it will continue to generate
significant revenue from activities that do not involve the actual funding of a
loan (and a corresponding increase in origination volume), although no assurance
can be given that any such activities will occur. During 1997, the Company
earned $418,500 in fee income without closing any loans held as a result of such
transactions.
The Customized Financing team is comprised of ten employees with an average
of fifteen years of experience in structuring these types of transactions. This
group reports directly to Mr. Kaufman, who is actively involved in many of these
transactions.
MEZZANINE LOANS. The Company believes that there is a growing need for
mezzanine capital (i.e. capital representing the level between 65% and 90% of
property value) as a result of current commercial mortgage lending practices
setting loan-to-value targets as low as 65%. The Company's mezzanine financing
may take the form of subordinated loans, commonly known as second mortgages, or,
in the case of loans originated for securitization, partnership loans (also
known as pledge loans) or preferred equity investments with terms up to 60
months. For example, on a commercial property subject to a first lien mortgage
loan with a principal balance equal to 70% of the value of the property, the
Company could lend the borrower (typically a partnership) an additional 15% to
20% of the value of the property. In some instances, the Company may provide
mezzanine financing for construction projects where a third party lender has
provided only 85% to 90% of the total project costs. The Company believes that
as a result of (i) the significant changes in the lending practices of
traditional commercial real estate lenders, primarily relating to more
conservative loan-to-value ratios, and (ii) the significant increase in
securitized lending with strict loan-to-value ratios imposed by the rating
agencies, there will be an increasing demand for mezzanine capital by borrowers.
Typically, the borrower will pledge to the Company either the property
subject to the first lien (giving the Company a second lien position typically
subject to an inter-creditor agreement) or an equity interest in the borrower.
If the borrower's equity interest is pledged, then the Company would be in a
position to take over the operation of the property in the event of a default by
the borrower. The Company may also require additional collateral such as
personal guarantees, letters of credit or other collateral unrelated to the
subject property. By borrowing against the additional value in their properties,
borrowers obtain an additional level of liquidity to apply to property
improvements or alternative uses.
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<PAGE>
Mezzanine loans generally provide the Company with the right to receive a
stated interest rate on the loan balance plus various commitment and exit fees.
In certain instances, the Company will negotiate to receive a percentage of net
operating income or gross revenues from the property, payable to the Company on
an ongoing basis, and a percentage of any increase in value of the property,
payable upon maturity or refinancing of the loan, or the Company will otherwise
seek terms to allow the Company to charge an interest rate that would provide an
attractive risk-adjusted return. Alternatively, mezzanine loans can take the
form of a non-voting preferred equity investment in a single purpose entity
borrower with substantially similar terms.
BRIDGE LOANS. The Company provides short-term financing to fund
opportunistic property acquisitions by a borrower or to fund the rehabilitation
of an owned property to enable the borrower to perform upgrades and other
property management enhancements, thereby increasing the property's value prior
to qualifying for a Permanent Loan. The Company is typically approached by a
borrower who has identified an undervalued property (i.e. an under-managed
property or a property located in a recovering market) and who is in need of
immediate financing to capitalize on the opportunity. The bridge facility allows
the borrower to focus on the purchase of the property without the concern of
negotiating long-term financing at the same time. Moreover, traditional lenders
will often constrain the amounts available for long-term financing to the
"as-is" value of the property, while the Company, through the bridge loan, is
able to give consideration to the potential stabilized value of the asset.
The Company's bridge loans are secured by first lien mortgages on the
property with terms generally up to 36 months and are subject to its customary
underwriting analysis. See "--Underwriting." As with mezzanine loans, bridge
loans generally provide the Company with commitment, exit and other fees and
interest at a rate that would provide an attractive risk-adjusted return.
NOTE ACQUISITIONS. The Company acquires real estate notes from borrowers
interested in restructuring and repositioning their short term debt and from
traditional lenders, who for a variety of reasons, (such as risk mitigation or
other strategic reasons) wish to divest certain assets from their portfolio. In
most circumstances the Company is able to acquire these notes at a discount. In
certain instances, the Company may seek joint venture partners with larger
balance sheet capability to purchase such notes. The Company's strategy upon
acquisition of notes from either a borrower or a traditional lender is to use
its management resources to resolve any dispute concerning the note or the
property securing it, and to identify and resolve any existing operational or
any other problems at the property. The Company will then either restructure the
debt obligation for immediate resale or sale at a later date or reposition it
for permanent financing. In some instances, the Company may take fee title to
the property underlying the real estate note. See "--Investment in Real Estate
and Other Investments."
LOANS HELD FOR INVESTMENT. At March 31, 1998, the Company's portfolio of
loans held for investment amounted to $56 million, or 60% of the Company's total
assets. Loans held for investment, net, principally bridge, mezzanine and note
acquisitions, are carried at amortized cost less unearned income and allowance
for loan losses. The net book value of loans held for investments, net,
represents fair value at each date.
As of March 31, 1998, 46.9% of the Company's portfolio loans held for
investment consisted of three loans of $11.1 million, $5.5 million and $10.4
million. These loans were held by two unrelated borrowers and secured by
individual properties or interests in investment partnerships. To date, the
Company has not experienced any losses on its portfolio of loans held for
investment. As of March 31, 1998 there was one delinquent loan in this portfolio
with an outstanding principal balance of approximately $300,000. The Company
anticipates repayment of this loan in full. See "Risk Factors--Credit
Concentration of Loans Held for Investment."
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<PAGE>
LOANS HELD FOR INVESTMENT, NET
BY TYPE OF LOAN
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, 1998 DECEMBER 31, 1997
------------------------------------------ -------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
STATED TERM TO STATED
# INTEREST MATURITY # INTEREST
-- AMOUNT RATE(1)(2) IN MONTHS -- AMOUNT RATE(1)(2)
---------- ------------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bridge Loans....................... 10 $37,167,868 11.2% 9 10 $32,049,330 10.7%
Mezzanine.......................... 4 6,275,416 11.6 16 3 6,177,891 11.7
Note Acquisitions & Mortgages...... 22 12,773,453 9.7 30 26 32,031,121 9.8
Other.............................. 2 1,300,000 15.0 13 2 1,300,000 15.0
-- -- --
---------- --- ---------- ---
Total............................ 38 57,516,737 11.0% 14 41 71,558,342 10.4%
-- -- --
-- -- --
--- ---
--- ---
Less: Unearned Income.............. (505,416) (2,270,403)
Allowance for loan losses.......... (738,032) (678,033)
---------- ----------
LOANS HELD FOR INVESTMENT, NET..... $56,273,289 $68,609,906
---------- ----------
---------- ----------
<CAPTION>
AS OF
DECEMBER 31, 1996
------------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
REMAINING AVERAGE REMAINING
TERM TO STATED TERM TO
MATURITY # INTEREST MATURITY
IN MONTHS -- AMOUNT RATE(1)(2) IN MONTHS
--------------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Bridge Loans....................... 9 4 $1,015,947 10.8% 11
Mezzanine.......................... 18 4 3,410,000 11.1 24
Note Acquisitions & Mortgages...... 15 24 35,801,781 10.0 24
Other.............................. 16 2 728,137 15.0 28
-- -- --
---------- ---
Total............................ 13 34 40,955,865 10.2% 24
-- -- --
-- -- --
---
---
Less: Unearned Income.............. (1,801,750)
Allowance for loan losses.......... (468,551)
----------
LOANS HELD FOR INVESTMENT, NET..... $38,685,564
----------
----------
</TABLE>
- ------------------------
(1) The weighted average stated interest rate does not include commitment, exit
and other fees.
(2) The weighted average stated interest rates are primarily six-month LIBOR
based.
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<PAGE>
PERMANENT LOANS
Through its Permanent Loan activities, the Company originates, underwrites,
warehouses and sells into the secondary markets commercial real estate loans,
principally multifamily loans. The Company generally sells its mortgage loans on
a servicing retained basis, which generates a stable and predictable source of
fee revenue, and on a non-recourse basis, except for standard FNMA DUS
requirements described below. The average size of these loans is $4.5 million.
The Company funds these loans using its warehouse lines of credit and repurchase
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
For the years ended December 31, 1997 and 1996, the Company originated $216
million and $244 million of Permanent Loans, respectively. The Permanent Loan
team is comprised of seven loan originators and twenty underwriters having an
average of eleven and six years of experience, respectively, in FNMA DUS and
conduit loan programs. Underwriting standards are established by the Company's
Chief Underwriter, who has over seventeen years of underwriting, sales and
product experience. Additionally, in the last two years the Company has expanded
its FHA/HUD lending activities by adding a dedicated team of four loan
originators and two underwriters with between six and twenty years of
experience. The FHA group is led by a former Vice President and Manager of
Insured Loans for GMAC Commercial Mortgage Corp.
Below is a description of the types of Permanent Loan programs in which the
Company participates:
FNMA DUS. In October, 1995, the Company became an approved FNMA DUS
originator. An approved FNMA DUS lender is delegated the authority to approve,
commit and close loans for multifamily mortgages on a national basis with a
standby commitment from Fannie Mae that it will purchase the loans. In contrast
to a "prior approval" lender, FNMA DUS lenders do not need to obtain the
approval of Fannie Mae prior to making the loan. In return for the delegated
authority to make loans and the commitment to purchase such loans by Fannie Mae,
FNMA DUS lenders must maintain a minimum capital base and retain a certain level
of credit risk on the loans they make. The FNMA DUS lender takes first loss risk
up to 5% of the loan amount, and above 5%, Fannie Mae and the FNMA DUS lender
share the loss, with the FNMA DUS lender's maximum loss capped at 20% of the
original loan amount. In return for sharing the risk of loss, the participants
receive a servicing fee that is significantly higher than what is typically
found in the industry. See "--Servicing."
The Company is one of only 28 currently approved FNMA DUS lenders. The
Company believes that as one of these few FNMA DUS lenders, it has certain
competitive advantages in the multifamily mortgage origination business. These
advantages include the competitive-tiered pricing afforded by Fannie Mae's
position as the largest purchaser of housing related mortgages in the nation,
the ability to commit and close mortgages without the delay and the accompanying
market risks of such delay for an approval process by the mortgage purchaser.
The Company expects Fannie Mae loan originations will continue to be a
significant part of its commercial mortgage banking activities. The Company
originated $149 million and $168 million of FNMA DUS mortgages for the years
ended December 31, 1997 and 1996, respectively. The Company, as a FNMA DUS
lender, has experienced no losses or delinquencies on its portfolio of FNMA DUS
loans as of March 31, 1998.
CONDUIT. The Company's conduit program involves the origination for sale
(on a non-recourse basis) and servicing of commercial mortgage loans typically
for B-C quality commercial credits, primarily multifamily properties, but also
for office buildings, retail centers, hotels, warehouses and assisted living
facilities. Mortgage loans are sold to institutional investors, including Fannie
Mae. Since the Company maintains a number of Wall Street relationships,
borrowers are assured of competitive rates. Mortgages originated under this
program are underwritten in accordance with investor guidelines designed to
evaluate the borrower's ability to satisfy the repayment conditions of the loan.
See "--Underwriting." The Company originated $40 million and $67 million of
conduit mortgages for the years ended December 31, 1997 and 1996, respectively.
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<PAGE>
FHA MULTIFAMILY AND HEALTHCARE. The Company is an approved lender in the
FHA/HUD mortgage insurance program. The FHA group of professionals implement the
origination, underwriting and processing of FHA/HUD insured financing
nationwide. The uses for financing provided through the FHA/HUD mortgage
insurance programs consist of the acquisition, refinancing, new construction and
substantial rehabilitation of multifamily housing, assisted living and nursing
home facilities nationwide. Upon receiving HUD's firm commitment to insure the
mortgage, the Company issues Government National Mortgage Association backed
securities that are sold primarily to investment banking institutions and
pension funds. The Company will usually retain the right to service the loans on
behalf of the purchasers for a continuing servicing fee. See "--Servicing." The
Company has recently begun actively seeking transactions under the FHA/HUD
mortgage insurance program. The Company currently has a pipeline of
approximately $100 million of FHA/HUD products at various stages of processing.
SALE PROCEDURES. Permanent Loans are often committed to be sold prior to
the time the loan is funded. The Company typically completes the sale of a
Permanent Loan to an investor within ten to 60 days following the closing of a
loan. The actual length of time a loan is held prior to sale into the secondary
market is determined by the Company's capital markets group. The objective of
the capital markets group is to maximize the Company's gain on sale of the loan
while also earning a favorable yield during the holding period.
In connection with such sales, the Company makes certain representations and
warranties to investors covering matters such as title to mortgaged property,
lien priority, environmental reviews and certain other matters. See "Risk
Factors -- Retained Risks of Loans Sold." The Company bases these
representations and warranties on representations and warranties from borrowers
and its own due diligence. The Company may also retain certain other liabilities
with respect to loans it sells to investors, as it does under the FNMA DUS
Program as described above. See also "Risk Factors -- Risk of Loss on Mortgage
Loans Sold Under the FNMA DUS Program." After selling a mortgage loan, the
Company typically retains the right to service the loan. See "--Servicing."
INVESTMENT IN REAL ESTATE AND OTHER INVESTMENTS
From time to time the Company is presented with or otherwise identifies real
estate investment opportunities. In these situations, the Company may act solely
on its own behalf, through a wholly owned subsidiary or in partnership with
other investors. Typically these transactions are analyzed with the expectation
that the Company will have the ability to sell the property within a six to
twenty-four month time horizon, with a significant return on invested capital.
The Company currently retains the services of third-party management companies,
but may in the future decide to manage such real property interests itself.
The Company may also pursue investments in, among other assets, construction
loans, distressed loans, property development and finance-related assets,
operating companies in real estate-related busi-
nesses (such as loan origination, loan servicing and property management
companies) and fee interests in real property.
MARKETING AND SOURCING
The Company serves its markets directly through its network of six full
services offices located in Atlanta, Boston, Chicago, Dallas, San Francisco and
Uniondale, New York, as well as through three satellite offices located in
Miami, Los Angeles and Florence, Kentucky (greater Cincinnati, Ohio). These
offices are staffed by approximately fifteen loan originators who solicit
property owners, developers and mortgage loan brokers. In some instances, the
originators will accept loan applications meeting the Company's underwriting
criteria from a select group of mortgage loan brokers. Mortgage loan brokers act
as intermediaries between property owners and the Company in arranging real
estate loans and earn a fee, generally paid by the borrower, based upon the
principal amount of each loan funded. Since a large
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<PAGE>
portion of the Company's marketing effort in its branches is through the
development of relationships with borrowers and brokers, the Company does not
incur significant expenses in the form of advertising its lending services to
the general public.
Once potential borrowers have been identified, the Company determines which
of its financing products best meets the borrowers needs. Loan originators in
every branch office have access to and are able to offer borrowers the full
array of both Customized Financing and Permanent Loan products. After
identifying a suitable product, the Company works with the borrower to prepare a
loan application. Upon completion by the borrower, the application is forwarded
to the Company's underwriters for due diligence or, in the case of FHA insured
loans, to the FHA, which conducts the due diligence and makes decisions on
commitments. See "--Underwriting."
UNDERWRITING
The Company's loan originators work in conjunction with underwriters whose
responsibility is to perform due diligence on all Customized Financing and
Permanent Loans prior to approval and commitment. The Company's underwriters
complete a comprehensive assessment of the proposed loan including a review of
(1) borrower financial position and credit history, (2) past operating
performance of the underlying collateral, (3) potential changes in project
economics and (4) third party appraisal, environmental, and engineering studies.
Additionally, underwriters complete an independent market assessment which
includes a property inspection, review of tenant and lease files, survey of
market comparables and an analysis of area economic and demographic trends.
Key factors considered in credit decisions include, but are not limited to,
debt service coverage, loan-to-value ratios, property financial and operating
performance, quality of property management, borrower credit history and tenant
profile. With respect to Permanent Loans, specific underwriting guidelines are
set by Fannie Mae and other investors. These standards vary from investor to
investor and may include a subjective element based on the totality of
circumstances relating to the credit risk and generally do not involve
mechanical application of a set formula. With respect to Customized Financing,
additional consideration is given to other factors, such as alternative forms of
collateral and identifying a potential exit strategy. The Company refines its
underwriting criteria based on actual loan portfolio experience and as market
conditions and investor requirements evolve.
The Company utilizes the underwriting criteria established by the FHA to
recommend loans for FHA insurance. The Company provides the FHA with the
requisite information necessary for its credit review. These loans are then
examined by the FHA, which makes the decision as to whether to approve the loan.
LOAN APPROVAL PROCESS
PERMANENT LOANS. A comprehensive written report is prepared on every loan
application submitted to the Company's Permanent Loan committee for approval.
The four members of the committee have an average of over seventeen years of
industry experience. All loans require approval by a majority of the committee.
This presentation includes a description of the prospective borrower and any
guarantors, the collateral, and the proposed use of loan proceeds, as well as
borrower and property financial statements and analysis. Each application is
evaluated from a number of underwriting perspectives. Since Permanent Loans are
limited or non-recourse to the borrower, primary emphasis is placed on the
property's economic performance, physical condition and local housing market,
along with prudent application of debt service coverage and loan-to-value
ratios. Even so, the Company also examines, when circumstances warrant, borrower
liquidity, net worth, cash investment, income, credit history and operating
experience.
The Company's loan originators, in conjunction with regional office
underwriters, the Company's Chief Underwriter and its Vice President-Capital
Markets, are primarily responsible for initial reviews of borrowers, properties
and loan terms. Upon the borrower's execution of the loan application, the
36
<PAGE>
Company's underwriting group conducts due diligence under the direct supervision
of the Chief Underwriter. The underwriter assigned to the case presents the
transaction to the Permanent Loan committee with the advice, consent and support
of the Chief Underwriter. Following loan approval and prior to funding, the
Company's underwriting and servicing departments assure that all loan approval
terms have been satisfied, that they conform with lending policies (including
authorized exceptions) and that all required documentation is present and in
proper form.
CUSTOMIZED FINANCING. As with Permanent Loans, a written report is
generated for every customized loan transaction the Company is considering
financing. The guidelines utilized to prepare these reports do not depart
substantially from those used for Permanent Loans. Each loan is reviewed and
approved by executives in the Customized Financing group and, if approved,
presented for final approval by Mr. Kaufman. Following the approval of any such
loan, the Company's underwriting and servicing departments assure that all loan
approval terms have been satisfied and that they conform with lending
requirements established for that particular transaction.
SERVICING
The Company services an expanding loan portfolio which contributes a
relatively predictable and stable source of cash flow. The Company's loan
servicing operations are designed to provide prompt customer service and
accurate and timely information for account follow-up, financial reporting and
management review. The Company's loans are serviced through the loan
administration department located in the Company's Boston office. Following the
funding of an approved loan, all pertinent loan data is entered into the
Company's data processing system, which provides monthly billing statements,
tracks payment performance and processes contractual interest rate adjustments
on variable rate loans. Regular loan service efforts include payment processing
and collection follow-up, as well as tracking the performance of additional
borrower obligations with respect to the maintenance of casualty insurance
coverage, payment of property taxes and senior liens, if applicable. On a
quarterly basis, the Company obtains and analyzes operating statements and
detailed rent rolls on the properties securitizing the commercial loans
serviced. In addition, inspections of the property are performed annually or
more frequently if necessary, e.g. properties undergoing major improvements. The
Company has in-house asset management expertise to assist in the inspection
process. With these procedures already in place, if loans become delinquent or
non-performing the Company has current information about the underlying
collateral and can react quickly by changing management companies, commencing
foreclosure proceedings and negotiating workouts with the borrowers on behalf of
the investors.
COMMERCIAL SERVICING PORTFOLIO. The Company's commercial servicing
portfolio represents commercial loans serviced for third parties for a fee and
does not include loans held for investment. Yield maintenance and lockout
provisions tend to discourage and, in the case of a lockout provision, prevent
early loan payoffs by the borrower. These provisions enable the Company to
better determine future cash flow from its existing portfolio and to calculate
the potential to refinance maturing loans. In addition, the Company receives its
pro rata share of the servicing fee (calculated on a present value basis) for
loans that are prepaid under the FNMA DUS Program. To date, the Company's
commercial servicing portfolio has not experienced any losses. As of March 31,
1998, there was one delinquent loan with an outstanding principal balance of
less than $100,000.
37
<PAGE>
COMMERCIAL SERVICING PORTFOLIO
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FNMA WAREHOUSE
DECEMBER 31, 1997 DUS CONDUIT & OTHER TOTAL
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Unpaid principal balance.................................. $ 291.9 $ 180.4 $ 57.7 $ 530.0
Weighted average interest rate............................ 8.07% 9.12% 7.81% 8.40%
Weighted average servicing fee............................ 0.45% 0.27% 0.42% 0.38%
Remaining months to maturity.............................. 129 74 140 111
Number of loans serviced.................................. 51 66 16 133
DECEMBER 31, 1996
Unpaid principal balance.................................. $ 136.3 $ 193.6 $ 55.6 $ 385.5
Weighted average interest rate............................ 8.12% 9.28% 9.71% 8.93%
Weighted average servicing fee............................ 0.45% 0.21% 0.45% 0.33%
Remaining months to maturity.............................. 126 83 143 107
Number of loans serviced.................................. 26 72 12 110
</TABLE>
On March 31, 1998, the Company had a portfolio of $536 million of commercial
loans serviced for a fee. The characteristics of the portfolio on that date were
substantially similar to those of the December 31, 1997 portfolio.
INTEREST RATE MANAGEMENT TECHNIQUES
In general, when the Company establishes an interest rate on a loan held for
sale, it attempts to contemporaneously lock in an interest yield to the
institutional investor purchasing that loan. By selling these loans shortly
following origination the Company limits its exposure to interest rate
fluctuations. However, the Company will accumulate some loans for bulk sale and
in these circumstances the Company hedges its interest rate risk with forward
commitments and put options. The Company does not hedge its loans held for
investment because these loans are generally variable rate loans which are based
on short term LIBOR. However, the operations and profitability of the Company
are 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 originate
loans.
38
<PAGE>
COMPETITORS
The Permanent Loan and Customized Financing industries are highly
competitive and the Company competes with companies which may have greater
financial resources and lower costs of capital available to them. Although
management believes that the Company is well positioned to continue to compete
effectively in each facet of its business, there can be no assurance that it
will do so or that the Company will not encounter further increased competition
in the future which could limit its ability to compete in its Permanent Loan and
Customized Financing activities.
EMPLOYEES
As of May 31, 1998, the Company had 83 employees, including four senior
executives, 46 employees directly involved in the production of loan
transactions and 33 administrative, servicing and corporate personnel. None of
the employees are represented by collective bargaining agreements, and
management believes that it has good relations with its employees.
PROPERTIES
The Company believes that its current facilities are adequate for its
present needs and that it would not have any difficulty in obtaining additional
or alternate space at prevailing rates if necessary. The Company's current
facilities are as follows:
<TABLE>
<CAPTION>
SQUARE LEASE
LOCATION FEET EXPIRATION CHARACTER OF USE
- -------------------------------------------- --------- ------------------ --------------------------------------
<S> <C> <C> <C>
Uniondale, NY............................... 18,200 May, 2004 Executive, production and
administrative offices
Boston, MA.................................. 6,800 June, 2003 Production, servicing and
administrative offices
San Francisco, CA........................... 2,500 January, 2001 Production office
Los Angeles, CA............................. 300 November, 1998 Production office
Miami Beach, FL............................. 1,200 May, 2001 Production office
Atlanta, GA................................. 2,600 March, 2001 Production office
Burr Ridge (Chicago), IL.................... 1,800 March, 1999 Production office
Florence, KY (greater Cincinnati, Ohio)..... 1,200 December, 1999 Production office
Dallas, TX.................................. 3,500 November, 2001 Production office
</TABLE>
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is from time to time
subject to litigation. The Company does not believe that any litigation to which
the Company is currently subject is likely, individually or in the aggregate, to
have a material adverse effect on the financial condition of the Company.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR NOMINEES
The following table sets forth certain information with respect to the
director, director nominees and executive officers of the Company. It is
anticipated that all such persons will continue to serve in such capacities
following the completion of this Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ivan Kaufman......................................... 37 Chairman of the Board, President, Chief Executive
Officer and Director
Joseph Martello...................................... 42 Senior Vice President, Chief Financial Officer and
Director Nominee
Walter K. Horn....................................... 55 Senior Vice President, General Counsel and Secretary
Elliot Silverman..................................... 47 Senior Vice President--Human Resources, Organization
Development, Marketing and Management Information
Systems
Richard A. Lippe, Esq................................ 59 Director Nominee
Larry Swedroe........................................ 46 Director Nominee
Scott Rudolph........................................ 40 Director Nominee
</TABLE>
IVAN KAUFMAN is the founding stockholder, Chairman of the Board, President,
Chief Executive Officer and Director of the Company. From 1983 until its sale in
1995, Mr. Kaufman was the co-founder, President and Chief Executive Officer of
Old Arbor. Mr. Kaufman served on the National Advisory Board of Fannie Mae in
1994. He has also served on Fannie Mae's regional advisory and technology
boards, as well as the Board of Directors of the Empire State Mortgage Bankers
Association. Mr. Kaufman is a director of Star Multicare Services, Inc., a
publicly traded placement service for registered and licensed nurses and home
health care aides. From 1990 to 1995, Mr. Kaufman was the Tri-State regional
spokesperson for Global Relief, a nationwide environmental effort spearheaded by
the American Forestry Association. Mr. Kaufman currently serves on the Executive
Board of the North Shore Hebrew Academy and is a Board Trustee of the Great Neck
Synagogue. He also serves as Treasurer of the Israeli Tribute Committee and is a
Trustee of Dowling College and the Walt Frasier Foundation. Mr. Kaufman earned a
Juris Doctor degree from Hofstra University School of Law and a Bachelor of Arts
in Business Administration from Boston University.
JOSEPH MARTELLO has been Senior Vice President and Chief Financial Officer
of the Company since 1995 and is a director nominee for the Company. From 1990
until its sale in 1995, Mr. Martello was Vice President and Chief Financial
Officer of Old Arbor. Mr. Martello is a cum laude graduate from Hofstra
University and became a certified public accountant in New York in 1980.
WALTER K. HORN, Esq. has been Senior Vice President, Secretary and General
Counsel of the Company since 1995. Previously, Mr. Horn was General Counsel and
Secretary of Old Arbor from 1991 until its sale in 1995, and was Vice President
of Old Arbor from 1992 until its sale in 1995. Mr. Horn has a Juris Doctor
degree from St. John's University School of Law and was admitted to the New York
State Bar in 1968.
ELLIOT SILVERMAN has been Senior Vice President--Human Resources,
Organization Development, Marketing and Management Information Systems of the
Company since February 1998. Prior to joining the Company, Mr. Silverman was
Vice President of Human Resources of Barnes Jewish Hospital from 1996-1998; and
the Executive Vice President, Human Resources and Communications for Prudential
Home Mortgage from 1993 to 1996; and the Vice President--Human Resources for
Bankers Trust Company from 1981 to 1992. Mr. Silverman received a Master degree
in Education from Columbia University and a Bachelor of Arts degree in
Psychology from Queens College.
40
<PAGE>
NON-EMPLOYEE DIRECTOR NOMINEES
LARRY SWEDROE is a director nominee of the Company. Since 1996, Mr. Swedroe
has been a principal of Buckingham Asset Management, a privately held financial
advisory firm. From 1986 to 1996, Mr. Swedroe was Vice Chairman of Prudential
Home Mortgage and prior to that he was a Senior Vice President of Citicorp
Homeowners, Inc. Mr. Swedroe is a director of Amerin Corp., a mortgage insurance
company, and a director of Mobile Application Servers, a software company. Mr.
Swedroe received a Masters of Business Administration in Finance from New York
University and a Bachelor of Arts degree in Finance from Bernard Baruch College.
RICHARD A. LIPPE, Esq. is a director nominee of the Company. For more than
the past five years, Mr. Lippe has been a practicing attorney in the State of
New York and is a stockholder and officer of Meltzer, Lippe, Goldstein, Wolf and
Schlissel, P.C., a law firm. Mr. Lippe is Chairman of the Board of Silicon
Island Equities, LLC, a privately held investment banking firm, and is a
director of OmniCorder Technologies, Inc., a privately held company which
develops breast cancer detection equipment and Collaborative Laboratories, Inc.,
a privately held contract research and manufacturing biotechnology company. Mr.
Lippe was a director of Old Arbor from 1993 until its sale in 1995. Mr. Lippe is
the Managing Trustee of the Keene Asbestos Liquidating Trust. Mr. Lippe has a
Juris Doctor degree from the University of Pennsylvania Law School and was
admitted to the New York State Bar in 1964.
SCOTT RUDOLPH is a director nominee of the Company. Mr. Rudolph has been the
Chairman of the Board and Chief Executive Officer since 1993 and President since
1986 of NBTY, Inc., a publicly traded vitamin, mineral and food supplement mail
order business. Mr. Rudolph is the Chairman of the Dowling College Board of
Trustees. He received a Bachelor of Arts degree in Marketing from Dowling
College.
COMPENSATION OF DIRECTORS
Each of the non-employee director nominees will receive a retainer for 1998
of 1,000 shares of Common Stock for their services. Subsequent to 1998, each
non-employee director will receive an annual retainer of $15,000 which shall be
payable, at the election of such director, either 50% in shares of Common Stock
and 50% in cash or 100% in shares of Common Stock. In addition, non-employee
directors receive a fee of $750 for each committee meeting attended in person,
unless the committee meeting is held on the same day as the meeting of the Board
of Directors, and a fee of $250 for each telephonic meeting attended.
Non-employee directors are also reimbursed for reasonable expenses incurred to
attend meetings. The non-employee director nominees will receive, upon initial
election to the Board of Directors, an option to purchase 3,000 shares of Common
Stock, and thereafter will receive annually an option to purchase 1,000 shares
of Common Stock. All such options are priced at 100% of the market price at
grant and become exercisable over the two year period following the date of
grant expiring ten years from the date of grant.
The Board of Directors intends to have both a standing Audit Committee and a
standing Compensation Committee. The Audit Committee, which is anticipated to be
comprised of Messrs. Lippe (Chair), Swedroe and Rudolph, assists the Board of
Directors in exercising its fiduciary responsibilities for oversight of audit
and related matters, including corporate accounting, reporting and control
practices. It is responsible for recommending to the Board of Directors the
independent auditors for the following year. The Audit Committee intends to meet
periodically with management, financial personnel and the independent auditors
to review internal accounting controls and auditing and financial reporting
matters.
The Compensation Committee, which is anticipated to be comprised of Larry
Swedroe (Chair) and Richard Lippe, is responsible for overseeing the Company's
executive compensation programs. It shall administer certain compensation and
benefit plans and approves annual compensation and recommends to the Board of
Directors long-term incentive compensation to be granted pursuant to the
Company's 1998 Stock Plan for executive officers, directors, employees and
consultants of the Company.
41
<PAGE>
REMUNERATION OF EXECUTIVE OFFICERS--SUMMARY COMPENSATION TABLE
The following table discloses compensation paid by the Company for the
services of the chief executive officer and the four other most highly paid
executive officers of the Company for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(1)
--------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AWARDS
ANNUAL COMPENSATION --------------------------------------
---------------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS
- ------------------------- --------- --------- --------- ------------------- --------------------- ---------------
Ivan Kaufman (2)......... 1997 $ 120,000 -- -- -- --
Chairman of the 1996 120,000 -- -- -- --
Board, President and 1995 -- $ 140,000 -- -- --
Chief Executive Officer
Joseph Martello (2)(3)... 1997 $ 50,000 -- -- -- --
Senior Vice President and 1996 31,250 -- -- -- --
Chief Financial 1995 -- -- -- -- --
Officer
Walter K. Horn (2)(3).... 1997 $ 50,000 -- -- -- --
Senior Vice President, 1996 31,250 -- -- -- --
General 1995 -- -- -- -- --
Counsel and Secretary
Dana Eng................. 1997 $ 110,000(4) -- -- -- --
Former Senior Vice 1996 54,000 -- -- -- --
President, Marketing 1995 -- -- -- -- --
Scott Brown.............. 1997 $ 63,301(5) -- -- -- --
Former Senior Vice 1996 125,000 -- -- -- --
President, Capital 1995 20,832 $ 120,833 -- -- --
Markets
<CAPTION>
<S> <C> <C>
PAYOUTS
-------------
NAME AND PRINCIPAL LTIP ALL OTHER
POSITION PAYOUTS COMPENSATION
- ------------------------- ------------- -------------
Ivan Kaufman (2)......... -- --
Chairman of the -- --
Board, President and -- --
Chief Executive Officer
Joseph Martello (2)(3)... -- --
Senior Vice President and -- --
Chief Financial --
Officer
Walter K. Horn (2)(3).... -- --
Senior Vice President, -- --
General -- --
Counsel and Secretary
Dana Eng................. -- --
Former Senior Vice -- --
President, Marketing -- --
Scott Brown.............. -- $ 100,000(6)
Former Senior Vice -- --
President, Capital -- --
Markets
</TABLE>
- ------------------------
(1) During the fiscal years ended December 31, 1997, 1996 and 1995, the Company
paid no long-term compensation to any of the named executive officers.
However, in June 1998, the Company's Board of Directors adopted the 1998
Stock Plan, an omnibus long-term incentive plan under which the Compensation
Committee of the Board of Directors recommends for approval by the Board of
Directors, grants of stock options, restricted stock or stock appreciation
rights for officers, directors, employees or consultants of the Company. The
Company anticipates that long-term compensation may be issued to certain
officers, directors, employees and consultants of the Company in the future
as and when approved by the Board of Directors. See "--Compensation of
Directors" and "--Employee Benefit Plans."
(2) Beginning January 1, 1999, the employment agreements of Messrs. Kaufman,
Martello and Horn will require them to devote substantially all of their
business time to rendering services to the Company. Accordingly, pursuant to
such employment agreements, the salaries expensed to the Company of Messrs.
Kaufman, Martello and Horn will increase in the future as a result of them
devoting more time to the Company. See "--Employment Agreements."
(3) Compensation reported for Messrs. Martello and Horn represents compensation
paid to them for services rendered to or for the Company during the periods
indicated. During 1996 and 1997, Messrs. Martello and Horn (and during 1996,
Ms. Eng) also devoted a substantial portion of their business time to
rendering services for an affiliate of the Company, for which time they
received additional compensation from the affiliate consisting of a salary,
bonus and certain perquisites, including 401(k) contributions.
(4) Ms. Eng resigned in March 1998.
(5) Represents compensation paid to Mr. Brown until his resignation in June
1997.
(6) Represents severance payment to Mr. Brown.
EMPLOYMENT AGREEMENTS
IVAN KAUFMAN. Mr. Kaufman entered into an employment agreement with the
Company, dated June , 1998. The term of employment is through December 31,
2003. The salary for 1998 is $175,000 per
42
<PAGE>
annum and increases to $250,000 per annum beginning January 1, 1999, with a 10%
yearly increase thereafter. Commencing January 1, 1999, Mr. Kaufman is required
to devote substantially all his full business time and attention to the affairs
of the Company. Prior thereto he is required to devote no less than 75% of his
business time and attention to the affairs of the Company. Mr. Kaufman will
receive an initial grant of stock options at an exercise price equal to
the proposed Offering price of the Company's Common Stock. These options shall
be non-qualified options and shall remain exercisable for ten years from the
date of grant. Such options will become fully vested seven years from the date
of grant, subject to acceleration if within three years of the date of grant,
the Company's Common Stock sustains a target price which is two times the
Offering price for a period of twenty consecutive trading days or in the event
of a change in control of the Company or the death or disability of Mr. Kaufman.
Mr. Kaufman's employment under the agreement may be terminated by the Company at
any time for cause or upon Mr. Kaufman's death or disability. Mr. Kaufman is
restricted from competing with the Company for three years after the termination
of his employment in the event that he resigns or is terminated for cause.
Should Mr. Kaufman's employment be wrongfully terminated, he is entitled to
receive severance equal to three times his base salary plus three times the
highest annual bonus paid to him, if any. The Agreement also provides for
disability and insurance benefits.
JOSEPH MARTELLO. Mr. Martello entered into an employment agreement with the
Company, dated June , 1998. The term of employment is through December 31,
2001. Commencing January 1, 1999, Mr. Martello is required to devote
substantially all of his full business time and attention to the affairs of the
Company. Prior thereto, he may engage in activities not related to the Company,
provided that these activities do not interfere with his responsibilities to the
Company as determined by the Chief Executive Officer. The per annum salary is
$175,000 for the term of the contract. Mr. Martello will receive an initial
grant of stock options at an exercise price equal to the proposed Offering
price of the Company's Common Stock. These options shall be incentive stock
options, shall remain exercisable for ten years from the date of grant and will
become fully vested [ ] years from the date of grant. Mr. Martello's employment
under the agreement may be terminated by the Company at any time for cause or
upon Mr. Martello's death or disability. Mr. Martello is restricted from
competing with the Company for one year after the termination of his employment
in the event that he resigns or is terminated for cause provided that the
Company pays Mr. Martello a sum equal to his per annum base salary during the
non-competition period.
WALTER K. HORN, ESQ. Mr. Horn entered into an employment agreement with the
Company, dated June , 1998. The term of employment is through December 31,
2001. Commencing January 1, 1999, Mr. Horn is required to devote substantially
all of his full business time and attention to the affairs of the Company. Prior
thereto, he may engage in activities not related to the Company, provided that
these activities do not interfere with his responsibilities to the Company as
determined by the Chief Executive Officer. The per annum salary is $175,000 for
the term of the contract. Mr. Horn will receive an initial grant of stock
options at an exercise price equal to the proposed Offering price of the
Company's Common Stock. These options shall be incentive stock options, shall
remain exercisable for ten years from the date of grant and will become fully
vested [ ] years from the date of grant. Mr. Horn's employment under the
agreement may be terminated by the Company at any time for cause or upon Mr.
Horn's death or disability. Mr. Horn is restricted from competing with the
Company for one year after the termination of his employment in the event that
he resigns or is terminated for cause, provided that the Company pays Mr. Horn a
sum equal to his per annum base salary during the non-competition period.
ELLIOT SILVERMAN. Mr. Silverman entered into an employment agreement with
the Company, dated June , 1998. The term of employment is through December
31, 2001. Commencing January 1, 1999, Mr. Silverman is required to devote
substantially all of his full business time and attention to the affairs of the
Company. Prior thereto, he may engage in activities not related to the Company,
provided that these activities do not interfere with his responsibilities to the
Company as determined by the Chief Executive Officer. The per annum salary is
$175,000 for the term of the contract. Mr. Silverman will receive an initial
grant of stock options at an exercise price equal to the proposed Offering
price of the Company's
43
<PAGE>
Common Stock. These options shall be incentive stock options, shall remain
exercisable for ten years from the date of grant and will become fully vested
[ ] years from the date of grant. Mr. Silverman's employment under the
agreement may be terminated by the Company at any time with or without cause or
upon Mr. Silverman's death or disability. Mr. Silverman is restricted from
competing with the Company for one year after the termination of his employment
in the event that he resigns or is terminated for cause provided that the
Company pays Mr. Silverman a sum equal to his per annum base salary during the
non-competition period. Mr. Silverman is also entitled to certain relocation and
severance benefits.
EMPLOYEE BENEFIT PLANS
1998 STOCK PLAN. In July 1998, the Company adopted the 1998 Stock Plan which
will be presented for stockholder approval at the Company's annual meeting of
stockholders to be held on or about May 1999. The purpose of the 1998 Stock Plan
is to enable the Company to attract, retain and motivate key employees,
directors, and, on occasion, consultants, by providing them with stock options,
restricted or deferred stock and/or certain other equity based incentives.
Options granted under the 1998 Stock Plan may be either incentive stock options,
as defined in Section 422A of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options. The Company has reserved shares of Common
Stock for issuance under the 1998 Stock Plan. It is intended that, as of the
effective date, options to purchase an aggregate of shares will be granted
to Mr. Kaufman and an aggregate of shares will be granted to other
employees at an exercise price equal to the Offering Price.
The 1998 Stock Plan will be administered by the Compensation Committee of
the Board. The Compensation Committee has the power to determine the terms of
any options granted thereunder, including the exercise price, the number of
shares subject to the option, and the exercisability thereof. Options granted
under the 1998 Stock Plan are generally not transferable, and each option is
generally exercisable during the lifetime of the optionee only by such optionee.
The exercise price of all stock options granted under the 1998 Stock Plan must
be at least equal to the fair market value of the shares of Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of stock of the Company, the
exercise price of any incentive stock option granted must be equal at least 110%
of the fair market value on the grant date. The term of all options under the
1998 Stock Plan may not exceed ten years. The specific terms of each option
grant will be reflected in a written stock option agreement.
44
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock, as of the date of this Prospectus, after giving effect to the
Exchange Transaction, of (i) each person known by the Company to beneficially
own 5% or more of the shares of outstanding Common Stock, (ii) each of the
Company's executive officers, directors and director nominees, and (iii) all of
the Company's executive officers, directors and director nominees as a group.
Except as otherwise indicated, all shares are beneficially owned, and sole
investment and sole voting power is held by the persons named as owners.
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OWNERSHIP
NATURE OF SHARES ------------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
- ------------------------------------------------------------------------ ----------------- ----------- -----------
<S> <C> <C> <C>
The Ivan and Lisa Kaufman Family Trust(2)(3)............................ 4,163,049 55.51% %
Ivan Kaufman(3)(4)...................................................... 1,910,662 25.48
The Ivan Kaufman Grantor Retained Annuity Trust(3)(5)................... 276,810 3.69
Richard A. Lippe, Esq.(6)(9)(10)........................................ 176,306 2.35
Walter K. Horn, Esq.(3)................................................. 131,236 1.75
Elliot Silverman(3)..................................................... 102,099 1.36
Joseph Martello(3)(9)................................................... 96,380 1.29
Larry Swedroe(7)(9)(11)................................................. 14,586 0.19
Scott Rudolph(8)(9)..................................................... -- --
All officers and directors as a group (7 persons)(12)................... 6,871,128 91.62% %
</TABLE>
- ------------------------
(1) Assumes no exercise of the Underwriter's over-allotment option. See
"Underwriting."
(2) This is a trust created by Mr. Kaufman for the benefit of his family.
Richard A. Lippe is the sole trustee of this trust.
(3) The address for each of these persons is 333 Earle Ovington Boulevard,
Uniondale, New York 11553.
(4) Does not include 276,810 shares held by the Ivan Kaufman Grantor Retained
Annuity Trust and 4,163,049 held by the Ivan and Lisa Kaufman Family Trust.
Includes 43,609 shares held by Arbor Management, which is wholly-owned by
Ivan Kaufman and his spouse.
(5) This is a trust created by Mr. Kaufman for the benefit of his family. Ivan
Kaufman and Richard A. Lippe are co-trustees of this trust.
(6) The address for this person is 190 Willis Avenue, Mineola, New York 11501.
(7) The address for this person is 403 Conway Village Drive, St. Louis, Missouri
63141.
(8) The address for this person is 90 Orville Drive, Bohemia, New York 11716.
(9) Director nominee.
(10) Does not include 4,163,049 shares held by the Ivan and Lisa Kaufman Family
Trust and 276,810 shares held by the Ivan Kaufman Grantor Retained Annuity
Trust. Includes 176,306 shares held by Camila Bellick, the spouse of Richard
A. Lippe, for which shares Mr. Lippe has disclaimed beneficial ownership.
(11) Represents 14,586 shares held by Mona Swedroe, the spouse of Larry Swedroe.
(12) Prior to its acquisition by ANCM (See "Prospectus Summary--Recent
Developments"), ASF, an indirect wholly owned subsidiary of ANCM, provided
certain members of ANCM financing to acquire their membership interests. As
a result of the ASF Transactions and the Exchange Transaction, ASF, as
pledgee, shares beneficial ownership of a total of 892,251 shares (or
11.9%). The total listed for all officers and directors as a group includes
374,785 shares owned by certain officers listed above and does not include
517,466 shares owned by other employees of the Company.
45
<PAGE>
DESCRIPTION OF SECURITIES
CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $.01 par value per share. The following summary description relating to
the capital stock does not purport to be complete. Reference is made to the
Certificate of Incorporation and the By-laws of the Company, which are filed as
exhibits to the Registration Statement of which this Prospectus forms a part,
for a detailed description of the provisions thereof summarized below.
COMMON STOCK
GENERAL. The Company has 30,000,000 authorized shares of Common Stock,
7,500,000 of which were issued and outstanding prior to the Offering. All shares
of Common Stock currently outstanding are validly issued, fully paid and
non-assessable, and all shares which are the subject of this Prospectus, when
issued and paid for pursuant to this offering, will be validly issued, fully
paid and non-assessable.
VOTING RIGHTS. Each share of Common Stock entitles the holder thereof to
one vote, either in person or by proxy, at meetings of shareholders. The holders
are not permitted to vote their shares cumulatively. Accordingly, the holders of
more than fifty percent (50%) of the issued and outstanding shares of Common
Stock can elect all of the Directors of the Company. See "Security Ownership of
Certain Beneficial Owners and Management."
DIVIDEND POLICY. All shares of Common Stock are entitled to participate
ratably in dividends when and as declared by the Company's Board of Directors
out of the funds legally available therefor. Any such dividends may be paid in
cash, property or additional shares of Common Stock. The Company has not paid
any dividends since its inception and presently anticipates that all earnings,
if any, will be retained for development of the Company's business and that no
dividends on the shares of Common Stock will be declared in the foreseeable
future. Any future dividends will be subject to the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
the operating and financial condition of the Company, its capital requirements,
general business conditions and other pertinent facts. Therefore there can be no
assurance that any dividends on the Common Stock will be paid in the future. See
"Dividend Policy."
MISCELLANEOUS RIGHTS AND PROVISIONS. Holders of Common Stock have no
preemptive or other subscription right, conversion rights, redemption or sinking
fund provisions. In the event of the liquidation or dissolution, whether
voluntary or involuntary, of the Company, each share of Common Stock is entitled
to share ratably in any assets available for distribution to holders of the
equity of the Company after satisfaction of all liabilities, subject to the
rights of holders of Preferred Stock.
PREFERRED STOCK
The Board of Directors is authorized by the Company's Certificate of
Incorporation to authorize and issue up to 10,000,000 shares of Preferred Stock,
$.01 par value, in one or more series. No shares of Preferred Stock have been
authorized for issuance by the Board of Directors and the Company has no present
plans to issue any such shares. In the event that the Board of Directors does
issue Preferred Stock, it may exercise its discretion in establishing the terms
of the Preferred Stock. In the exercise of such discretion, the Board of
Directors may determine the voting rights, if any, of the series of Preferred
Stock being issued, which could include the right to vote separately or as a
single class with the Common Stock and/or other series of Preferred Stock; to
have more or less voting power per share than that possessed by the Common Stock
or other series of Preferred Stock; and to vote on certain specified matters
presented to the shareholders or on all of such matters or upon the occurrence
of any specified event or condition.
46
<PAGE>
Upon liquidation, dissolution or winding up of the Company, the holders of
Preferred Stock may be entitled to receive preferential cash distributions fixed
by the Board of Directors when creating the particular series thereof before the
holders of the Common Stock are entitled to receive anything. Preferred Stock
authorized by the Board of Directors could be redeemable or convertible into
shares of any other class or series of stock of the Company.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of shares of Common Stock by, among other things,
establishing preferential dividends, liquidation rights or voting power. The
issuance of Preferred Stock could be used to discourage or prevent efforts to
acquire control of the Company through the acquisition of shares of Common
Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer and Trust Company 6201 15th Avenue, Brooklyn, New York 11219.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Elliot Silverman, Senior Vice President-Human Resources and Organization
Development of the Company, is indebted to the Company in an amount equal to
$200,000. This indebtedness arose on April 1, 1998 in connection with Mr.
Silverman's purchase of a membership interest in ANCM and is evidenced by a
seven year promissory note payable to the Company, which bears interest at prime
and will be secured by the shares of Common Stock issued to Mr. Silverman
pursuant to the Exchange Agreement. See "Prospectus Summary--Reorganization
Transactions."
Joseph Martello, the Company's Senior Vice President, Chief Financial
Officer and a director nominee, is indebted to the Company in an amount equal to
$100,000. This indebtedness arose on April 1, 1998, in connection with Mr.
Martello's purchase of a membership interest in ANCM and is evidenced by a seven
year promissory note payable to the Company, which bears interest at prime and
will be secured by the shares of Common Stock issued to Mr. Martello pursuant to
the Exchange Agreement. See "Prospectus Summary--Reorganization Transactions."
Camila Bellick, the wife of Richard A. Lippe, Esq., a director nominee of
the Company, is indebted to the Company in an amount equal to $275,000.
Indebtedness of $75,000 arose on April 1, 1998, in connection with Ms. Bellick's
purchase of a membership interest in ANCM and is evidenced by a seven year
promissory note payable to the Company, which bears interest at prime.
Indebtedness of $200,000 arose in June of 1998 and is evidenced by a prommisory
note payable to the Company on October 1, 1998, which bears interest at prime.
The aggregate indebtedness of $275,000 will be secured by the shares of Common
Stock issued to Ms. Bellick pursuant to the Exchange Agreement. See "Prospectus
Summary-- Reorganization Transactions."
Arbor Management, which is entirely owned by Ivan Kaufman and his wife,
provides office space and various services to the Company, including management
services, bookkeeping, human resources and information system support. In 1997,
the Company paid Arbor Management an aggregate of $504,000 for these services, a
rate which the Company believes is at or below market.
Anivan, Inc. ("Anivan"), which is owned by a relative of Mr. Kaufman,
identifies loan portfolios owned by third parties for possible acquisition by
the Company. Anivan pays its own expenses and assumes all risks in connection
with identification, preliminary review and the underwriting of these loan
portfolios. The gains and losses generated from the subsequent sales of the
loans and servicing income are shared by the Company with Anivan on an
approximately equal basis. In connection with the purchase of a $26 million loan
portfolio in 1997, the Company paid Anivan fees and compensation of
approximately $200,000.
47
<PAGE>
Historically, the Company has borrowed funds from Mr. Kaufman. Borrowings
outstanding from
Mr. Kaufman (and/or the Trust and the Kaufman Grantor Trust effective March 31,
1998) totaled $13.7 million at March 31, 1998, $28.8 million at December 31,
1997 and $25.4 million at December 31, 1996. Interest on virtually all of the
Company's borrowings from Mr. Kaufman is at the prime interest rate plus 1%, or
9.5% at March 31, 1998. The borrowings from Mr. Kaufman are subordinate to the
warehouse facility. The Company plans to repay the total balance of outstanding
borrowings from Mr. Kaufman with the proceeds from this Offering. See "Use of
Proceeds."
ASF has entered into a loan agreement dated January 5, 1998 with President
R.C.--St. Regis Management Company ("Regis") (the "Loan Agreement") pursuant to
which the Company agreed to provide a line of credit in the amount of
$14,800,000 to Regis. The general partner of Regis is Massena Management, LLC,
of which Mr. Kaufman is President and sole member. Borrowings under the line of
credit bear interest at 13.5% per annum, are secured by the accounts, equipment,
inventory and intangibles of Regis, and are repayable on the earlier of (i) 60
months following the Opening Date of the Project (each is defined in the
"Management Agreement," as defined in the Loan Agreement or (ii) upon an Event
of Default (as defined in the Loan Agreement). As of May 31, 1998, no amount was
outstanding under the Loan Agreement. This commitment is covered by Mr.
Kaufman's indemnification. See "Prospectus Summary--Recent Developments."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have shares of
Common Stock outstanding ( shares if the Underwriters' over-allotment
option is exercised in full). The shares offered hereby ( shares if
the Underwriter's over-allotment option is exercised in full) will be freely
tradeable without restrictions or further registration under the Securities Act.
An aggregate of 7,500,000 are held by "affiliates" of the Company within the
meaning of the Securities Act and other former members of ANCM and are not
covered by an effective registration statement, which shares will be subject to
the resale limitations of Rule 144.
In general, under Rule 144, a person who has beneficially owned shares for
at least one year, including an "affiliate," as that term is defined in the
Securities Act, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then-outstanding
shares of Common Stock (approximately shares after the completion of the
Offering), or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information, manner of notice of sale.
In addition, affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirement, in order to
sell shares of Common Stock which are not restricted securities. Under Rule
144(k), a person who is not an affiliate and has not been an affiliate for at
least three months prior to the sale and who has beneficially owned restricted
shares for at least a two-year holding period may resell such shares without
compliance with the foregoing requirements.
The Company, its executive officers and directors have agreed that they will
not, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, pledge, grant of any option to purchase
or other sale or disposition of) any shares of Common Stock or other capital
stock of the company or any other securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock, or other capital stock of the
Company, for a period of 180 days from the date of this Prospectus, without the
prior written consent of Lehman Brothers, on behalf of the Underwriters. Lehman
Brothers may, in its sole discretion, at any time and without notice, release
all or any portion of the securities subject to such lock-up agreements. See
"Underwriting."
Under Rule 144, the stockholders of the Company prior to the Offering will
not be able to sell any of their shares in the public market until one year
after the closing of the Offering. The Company has agreed
48
<PAGE>
to register shares held by certain stockholders of the Company (approximately
1,125,000 shares) for resale twelve months after the Offering.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of such shares for future sale will
have on the market price of the Common Stock prevailing from time to time. Sale
of substantial amounts of Common Stock (including shares issued upon the
exercise of outstanding options), or the perception that such sales could occur,
could adversely affect prevailing market prices for the Common Stock.
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
underwriting agreement relating to the offering of shares of Common Stock in the
United States and Canada (the "Underwriting Agreement"), the form of which is
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, between the Company and each of the underwriters named below (the
"Underwriters"), for whom Lehman Brothers Inc. and Friedman, Billings, Ramsey &
Co., Inc. are acting as representatives (the "Representatives"), the
Underwriters have severally agreed to purchase from the Company, and the Company
has agreed to sell to each Underwriter, the aggregate number of shares of Common
Stock set forth opposite the name of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------------------ -----------------
<S> <C>
Lehman Brothers Inc...................................................................................
Friedman, Billings, Ramsey & Co., Inc.................................................................
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the initial public offering price
on the cover page of this Prospectus, and to certain dealers at such price less
a selling concession not in excess of $. per share to certain other
Underwriters or to certain other brokers or dealers. After the initial offering
to the public, the offering price and other selling terms may be changed by the
Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to certain conditions and that if any of the above
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement all the shares of Common Stock agreed to be purchased by
either the Underwriters as the case may be, pursuant to the Underwriting
Agreement must be so purchased.
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payment that the Underwriters may be
required to make in respect thereof.
The Company has granted to the Underwriters a 30-day option to purchase up
to an additional shares of Common Stock on the same terms and conditions
as set forth above to cover over allotments, if any. To the extent that such
option is exercised, each Underwriter will be committed, subject to certain
conditions, to purchase a number of the additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding tables.
Pursuant to the terms of lock-up agreements, the holders of [ ] shares of
the Company's Common Stock have agreed, for a period of up to 180 days after the
date of this Prospectus, that, subject to certain exceptions, they will not
contract to sell or otherwise dispose of any shares of Common Stock, any options
or warrants to purchase shares of Common Stock or any securities convertible
into, or exchangeable for, shares of Common Stock, owned directly by such
holders or with respect to which they have the power of disposition, without the
prior written consent of Lehman Brothers Inc., on behalf of the Representatives.
Lehman Brothers Inc. may, in its sole discretion, and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. Under Rule 144, the shares of Common Stock subject to
49
<PAGE>
lock-up agreements will not, in any event, be eligible for sale in the public
market, until twelve months after the Offering.
In addition, the Company and the directors and executive officers of the
Company have agreed that until 180 days after the date of this Prospectus
subject to certain exceptions, the Company will not, without prior written
consent of Lehman Brothers Inc., on behalf of the Representatives, offer, sell
contract to sell or otherwise dispose of any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this Offering, the issuance of shares of Common
Stock upon the exercise of outstanding options and warrants and the grant of
options to purchase shares of Common Stock under existing employee stock option
or stock purchase plans. Furthermore, the Company has agreed not to file any
registration statements on Form S-8 to register the [ ] shares of Common
Stock reserved for issuance pursuant to its Stock Option Plans until at least 90
days after the date of this Prospectus. See "Management--Stock Options Plans"
and "Shares Eligible for Future Sale."
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby will be determined through negotiations between the Company
and the Representatives. Among the factors to be considered in such negotiations
are prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment options described herein.
In general, purchase of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other matters
will be passed on for the Company by Pryor Cashman Sherman & Flynn LLP, New
York, New York as special counsel to the Company. Certain legal matters will
also be passed on for the Company by Meltzer, Lippe, Goldstein, Wolf &
Schlissel, P.C., Mineola, New York. Richard A. Lippe, a member of such firm, is
a director nominee of the Company and may be deemed to beneficially own certain
shares of Common Stock. See "Security
50
<PAGE>
Ownership of Certain Beneficial Owners and Management." Certain legal matters
will be passed on for the Underwriters by Skadden, Arps, Slate, Meagher & Flom
LLP.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31, 1997, except
Arbor National Commercial Mortgage, LLC and subsidiary as of December 31, 1996
and for the year ended December 31, 1996 and ten months ended December 31, 1995,
appearing in this Prospectus and Registration Statement, have been audited by
Grant Thornton LLP, independent certified public accountants, whose report which
expresses reliance upon the work of another auditor appears elsewhere herein.
The financial statements of Arbor National Commercial Mortgage, LLC and
subsidiary (combined with those of the Company and not presented separately
herein) as of December 31, 1996 and for the year ended December 31, 1996 and ten
months ended December 31, 1995, have been audited by Ernst & Young LLP,
independent auditors, as stated in their report as appears elsewhere herein.
Such financial statements of the Company are included herein in reliance upon
the respective reports of such firms given upon the authority as such experts in
accounting and auditing.
51
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Certified Public Accountants.................................................. F-2
Report of Independent Auditors...................................................................... F-3
Financial Statements:
Combined Balance Sheets at December 31, 1997 and 1996, and at
March 31, 1998 (Unaudited)...................................................................... F-4
Combined Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 and for the
Three Months Ended (Unaudited)
March 31, 1998 and 1997......................................................................... F-5
Combined Statements of Equity for the Years Ended December 31, 1997, 1996 and 1995 and for the
Three Months Ended March 31, 1998 (Unaudited)................................................... F-6
Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 and for the
Three Months Ended (Unaudited)
March 31, 1998 and March 31, 1997............................................................... F-7
Notes to Combined Financial Statements.............................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Members of
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC AND SUBSIDIARIES AND AFFILIATE
We have audited the accompanying combined balance sheet of Arbor National
Commercial Mortgage, LLC and Subsidiaries and Affiliate as of December 31, 1997,
and the related combined statements of operations, equity, and cash flows for
the year then ended. These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Arbor National
Commercial Mortgage, LLC and Subsidiaries and Affiliate as of December 31, 1997,
the combined results of their operations and their combined cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
We have audited the balance sheet of Arbor Secured Funding, Inc., a member of
the combined group, as of December 31, 1996, and the related statements of
operations, equity, and cash flows for the years ended December 31, 1996 and
1995. The contribution of Arbor Secured Funding, Inc. to combined total assets
and net income represented 34 percent of combined total assets at December 31,
1996, and 35 percent and 44 percent of combined net income for the years ended
December 31, 1996 and 1995, respectively. We have also audited the statements of
operations, equity, and cash flows of Arbor National Commercial Mortgage
Corporation, the other member of the combined group, for the two months ended
February 28, 1995. The contribution of Arbor National Commercial Mortgage
Corporation to net income represented 0 percent of combined net income for the
year ended December 31, 1995. Separate financial statements of Arbor National
Commercial Mortgage, LLC and Subsidiary, the other member of the combined group,
as of December 31, 1996 and for the year ended December 31, 1996 and the ten
months ended December 31, 1995, included in the December 31, 1996 combined
balance sheet and combined statements of operations, equity, and cash flows for
the years ended December 31, 1996 and 1995, were audited and reported on
separately by other auditors.
We also have audited the combination of the accompanying combined balance sheet
as of December 31, 1996 and the related combined statements of operations,
equity, and cash flows for the years ended December 31, 1996 and 1995. In our
opinion, such combined statements have been properly combined on the basis
described in Note 1 of the notes to the combined financial statements.
/s/ Grant Thornton LLP
Grant Thornton LLP
New York, New York
May 28, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members
Arbor National Commercial Mortgage, LLC
We have audited the consolidated balance sheets of Arbor National Commercial
Mortgage, LLC and subsidiary (the "Company") as of December 31, 1996 and the
related consolidated statements of income, equity and cash flows for the year
ended December 31, 1996 and the ten months ended December 31, 1995 (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arbor National
Commercial Mortgage, LLC at December 31, 1996 and the consolidated results of
their operations and their cash flows for the year ended December 31, 1996 and
the ten months ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 3 to the consolidated financial statements, in 1996
the Company changed its method of accounting for mortgage servicing rights.
Ernst & Young LLP
New York, New York
January 17, 1997
F-3
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, December 31,
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
PRO FORMA
1998 1998 1997 1996
------------- ------------- -------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 2,380,899 $ 2,261,337 $ 1,903,405 $ 782,252
Restricted cash.................................... 2,417,863 2,417,863 2,362,822 1,639,930
Loans held for sale, net........................... 11,826,971 11,826,971 46,482,348 45,729,204
Loans held for investment, net..................... 54,821,182 56,273,289 68,609,906 38,685,564
Other investments.................................. 1,250,000 1,250,000 500,000 3,032,046
Investment in real estate held for sale............ 11,248,703 11,248,703 10,790,930 --
Investment in real estate joint ventures........... 1,375,305 1,375,305 1,307,652 --
Capitalized mortgage servicing rights, net......... 5,457,721 5,457,721 5,031,854 2,534,529
Other receivables and deferred costs............... 2,228,789 1,713,197 2,675,081 1,989,803
Property and equipment, net........................ 483,969 483,969 517,760 368,284
------------- ------------- -------------- -------------
Total assets....................................... $ 93,491,402 $ 94,308,355 $ 140,181,758 $ 94,761,612
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
LIABILITIES AND EQUITY
Notes payable and repurchase agreements............ $ 44,879,927 $ 44,879,927 $ 81,392,653 $ 50,484,303
Note payable--Class A member....................... 13,685,303 13,685,303 28,835,294 25,425,485
Accounts payable and accrued expenses.............. 5,731,526 5,803,526 5,293,116 3,957,180
Allowance for possible losses under the DUS product
line............................................. 1,652,005 1,652,005 1,474,635 686,500
Unearned revenue................................... 1,832,288 1,832,288 152,478 745,010
Distribution payable............................... 6,000,000 -- -- --
Deferred tax liability, net........................ 2,207,000 -- -- --
------------- ------------- -------------- -------------
Total liabilities.................................. 75,988,049 67,853,049 117,148,176 81,298,478
------------- ------------- -------------- -------------
Commitments and contingencies
Equity............................................. 17,503,353 26,455,306 23,033,582 13,463,134
------------- ------------- -------------- -------------
Total liabilities and equity....................... $ 93,491,402 $ 94,308,355 $ 140,181,758 $ 94,761,612
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED MARCH 31, For the years ended December 31,
-------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
------------ ------------ ------------- ------------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest earned.................................... $ 2,529,979 $ 1,672,747 $ 9,641,121 $ 6,783,312 $ 3,725,904
Fee-based services, including gain on sale of loans
and real estate.................................. 4,373,022 2,340,814 12,686,908 8,794,147 2,627,716
Servicing revenue, net............................. 539,241 305,253 1,957,983 1,082,699 394,461
Income from investment in real estate held for
sale, net of operating expenses.................. 540,334 -- -- -- --
------------ ------------ ------------- ------------- ------------
Total revenues....................................... 7,982,576 4,318,814 24,286,012 16,660,158 6,748,081
------------ ------------ ------------- ------------- ------------
Expenses:
Interest expense................................... 1,944,208 925,038 6,242,616 4,048,947 2,188,687
Employee compensation and benefits................. 1,231,366 1,053,338 4,920,495 3,893,873 1,876,897
Selling and administrative......................... 1,137,522 827,068 3,493,022 3,499,691 1,560,834
Provision for loan losses.......................... 237,370 337,500 997,617 915,051 406,856
------------ ------------ ------------- ------------- ------------
Total expenses....................................... 4,550,466 3,142,944 15,653,750 12,357,562 6,033,274
------------ ------------ ------------- ------------- ------------
Net income..................................... $ 3,432,110 $ 1,175,870 $ 8,632,262 $ 4,302,596 $ 714,807
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
Unaudited pro forma information:
Pro forma income before income taxes............... $ 3,432,110 $ 1,175,870 $ 8,632,262 $ 4,302,596 $ 714,807
Pro forma provision for income taxes............... 1,383,244 479,548 3,468,648 1,753,788 299,523
------------ ------------ ------------- ------------- ------------
Pro forma net income............................... $ 2,048,866 $ 696,322 $ 5,163,614 $ 2,548,808 $ 415,284
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------------- PAID-IN EARNINGS
SHARES PAR VALUE CAPITAL (DEFICIT)
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance--December 31, 1994........................................... 92,500 $ 925 $ 7,606,418 $ (639,612)
Net income........................................................... 714,807
Issuance of common stock............................................. 100 1,000
--------- ----------- ------------ ------------
Balance--December 31, 1995........................................... 92,600 1,925 7,606,418 75,195
Change in legal structure............................................ (92,500) (925) (7,606,418) 192,085
--------- ----------- ------------ ------------
Balance--January 1, 1996............................................. 100 1,000 -- 267,280
Capital contributions................................................
Net income........................................................... 1,499,502
--------- ----------- ------------ ------------
Balance--December 31, 1996........................................... 100 1,000 -- 1,766,782
Capital contributions................................................
Withdrawals and distributions........................................
Net income........................................................... 1,510,454
--------- ----------- ------------ ------------
Balance--December 31, 1997........................................... 100 1,000 -- 3,277,236
CAPITAL CONTRIBUTIONS................................................
WITHDRAWALS AND DISTRIBUTIONS........................................
NET INCOME........................................................... 1,864,584
--------- ----------- ------------ ------------
BALANCE--MARCH 31, 1998.............................................. 100 $ 1,000 $ -- $ 5,141,820
--------- ----------- ------------ ------------
--------- ----------- ------------ ------------
<CAPTION>
MEMBERS' CAPITAL
---------------------------
CLASS A CLASS B TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Balance--December 31, 1994........................................... $ 6,967,731
Net income........................................................... 714,807
Issuance of common stock............................................. 1,000
------------- ------------ -------------
Balance--December 31, 1995........................................... -- -- 7,683,538
Change in legal structure............................................ $ 7,415,258 --
------------- ------------ -------------
Balance--January 1, 1996............................................. 7,415,258 7,683,538
Capital contributions................................................ $ 1,477,000 1,477,000
Net income........................................................... 2,332,029 471,065 4,302,596
------------- ------------ -------------
Balance--December 31, 1996........................................... 9,747,287 1,948,065 13,463,134
Capital contributions................................................ 2,000,000 636,000 2,636,000
Withdrawals and distributions........................................ (963,499) (734,315) (1,697,814)
Net income........................................................... 5,974,848 1,146,960 8,632,262
------------- ------------ -------------
Balance--December 31, 1997........................................... 16,758,636 2,996,710 23,033,582
CAPITAL CONTRIBUTIONS................................................ -- --
WITHDRAWALS AND DISTRIBUTIONS........................................ (10,386) (10,386)
NET INCOME........................................................... 1,567,526 3,432,110
------------- ------------ -------------
BALANCE--MARCH 31, 1998.............................................. $ 16,758,636 $ 4,553,850 $ 26,455,306
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED MARCH 31, For the years ended December 31,
------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................. $ 3,432,110 $ 1,175,870 $ 8,632,262 $ 4,302,596 $ 714,807
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 156,809 19,500 93,230 63,256 41,550
Amortization of capitalized mortgage servicing
rights.............................................. 162,358 95,741 584,420 237,273 43,893
Capitalization of mortgage servicing rights........... (588,225) (1,056,170) (3,148,981) (2,958,029) --
Write-off of capitalized mortgage servicing rights
from servicing sales................................ -- -- 67,236 312,454 --
Provision for loan losses............................. 237,370 337,500 997,617 915,051 406,856
Deferred income taxes................................. -- -- -- -- (24,000)
Changes in operating assets and liabilities:
Loans held for sale, net............................ 34,655,377 17,294,239 (753,144) (10,379,314) (28,678,342)
Loans held for investment, net...................... 12,276,617 (447,008) (30,133,824) (2,883,676) (31,630,568)
Other receivables and deferred costs................ 961,884 (86,754) (685,278) 411,908 126,105
Accounts payable and accrued expenses............... 510,410 (257,323) 1,335,936 629,581 2,600,213
Unearned revenue.................................... 1,679,810 78,150 (592,532) 224,190 520,820
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities..... 53,484,520 17,153,745 (23,603,058) (9,124,710) (55,878,666)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Other investments....................................... (750,000) (181,954) 2,532,046 (911,458) (2,120,588)
Investment in real estate held for sale, net............ (457,773) -- (10,790,930) -- --
Investment in real estate joint ventures, net........... (67,653) -- (1,307,652) -- --
Additions to property and equipment..................... (123,018) (35,134) (242,706) (158,618) (69,362)
Increase in restricted cash............................. (55,041) (313,941) (722,892) (1,639,930) --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities............... (1,453,485) (531,029) (10,532,134) (2,710,006) (2,189,950)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Increase (decrease) in notes payable and repurchase
agreements, net....................................... (36,512,726) (18,600,457) 30,908,350 15,064,634 28,848,570
Increase (decrease) in note payable --Class A member.... (15,149,991) 2,800,584 3,409,809 (7,549,613) 32,171,029
Capital contributions by members........................ -- 240,000 2,636,000 1,477,000 --
Withdrawals and distributions of members' capital....... (10,386) (1,697,814) (1,697,814) -- --
Issuance of common stock................................ -- -- -- -- 1,000
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by financing activities... (51,673,103) (17,257,687) 35,256,345 8,992,021 61,020,599
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash........................... 357,932 (634,971) 1,121,153 (2,842,695) 2,951,983
Cash at beginning of period............................... 1,903,405 782,252 782,252 3,624,947 672,964
----------- ----------- ----------- ----------- -----------
Cash at end of period..................................... $ 2,261,337 $ 147,281 $ 1,903,405 $ 782,252 $ 3,624,947
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................ $ 1,450,623 $ 545,411 $ 4,323,327 $ 2,333,418 $ 1,263,465
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income taxes........................................ $ 57,666 $ 56,794 $ 72,415 $ 69,834 $ 3,854
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REORGANIZATION
Arbor National Holdings, Inc. ("ANHI"), a New York corporation, was organized in
June 1998 to own 100% of Arbor National Commercial Mortgage, LLC ("Arbor").
Arbor is a fully integrated real estate financial services company which funds,
on a negotiated basis, high-yielding lending and investment opportunities in
commercial real estate through mezzanine loans, bridge loans, note acquisitions
and other customized financing structures. It also derives substantial revenue
from the origination for sale and servicing of government-sponsored and conduit
mortgage loans for multifamily and other types of commercial properties.
Upon the effective date of the offering, all members of Arbor, pursuant to the
terms of the Exchange Agreement, will contribute their ownership interest in the
Company to ANHI in exchange for 7,500,000 shares of Common Stock (the
"Exchange") of ANHI, which will constitute all of the shares of Common Stock
outstanding prior to this Offering.
ORGANIZATION
Effective April 1, 1998, Arbor Secured Funding Inc. ("ASF") distributed a
dividend of certain assets which were not consistent with the intended business
of the Company to Ivan Kaufman, its sole stockholder, and immediately
thereafter, the outstanding common stock of ASF was sold to the Ivan and Lisa
Kaufman Family Trust. Immediately thereafter, the Ivan and Lisa Kaufman Family
Trust contributed the stock of ASF, with a book value of approximately $3.7
million, which approximates fair value, to Arbor in exchange for ownership
interest in Arbor. Arbor and ASF are collectively referred to as the "Company"
or "Companies" prior to the reorganization.
Arbor, a New York limited liability company, is the successor to Arbor National
Commercial Mortgage Corporation (the "Corporation"). Effective January 1, 1996,
the Corporation liquidated and distributed its assets to its stockholder.
Immediately thereafter, the stockholder contributed these assets and liabilities
to Arbor. This change in legal structure resulted in no change to the carrying
value of assets and liabilities.
In October 1995, the Company was approved by the Federal National Mortgage
Association ("FNMA") as a Delegated Underwriting and Servicing ("DUS") lender.
Under the FNMA DUS program, the Company originates, underwrites, sells and
services mortgage loans on multifamily properties. The Company assumes
responsibility for a portion of any loss that may result from borrower defaults,
based on FNMA loss sharing formulas. Generally, the Company is responsible for
the first 5% of the unpaid principal balance and a portion of any additional
losses to an overall maximum of 20% of the original principal balance. FNMA
bears any remaining loss.
Under the terms of the Master Loss Sharing Agreement between FNMA and the
Company, the Company is responsible for funding 100% of mortgagor delinquency
(principal and interest) and servicing advances (taxes, insurance and
foreclosure costs) until the amounts advanced exceed 5% of the unpaid principal
balance at the date of default. Thereafter, the Company may request interim loss
sharing adjustments which allow the Company to fund 25% of such advances until
final settlement under the Master Loss Sharing Agreement.
F-8
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's loan origination business also includes originating mortgages for
sale into conduit programs and originating mezzanine, bridge loans, and note
acquisitions for its own investment. Mortgages originated under conduit programs
are sold to nationally recognized broker/dealers and are subsequently
securitized. The Company usually retains the right to service these mortgages
for a fee.
The Company also buys or enters into joint ventures to buy real estate
properties which it holds for sale or for its own investment.
PRINCIPLES OF COMBINATION
Voting control of Arbor and ASF is vested principally in the same shareholder
and the Companies are under common management. Because of these relationships,
the financial statements of the Companies have been prepared as if they were a
single entity. Arbor includes certain subsidiaries. All significant transactions
either between Arbor, its subsidiaries or the combined Companies have been
eliminated in combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
RECLASSIFICATION
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks and short-term
investments with maturities of three months or less at purchase.
RESTRICTED CASH
Restricted cash is composed of cash and cash equivalents which are being
maintained as collateral for possible losses resulting from loans originated
under the FNMA DUS program in accordance with the terms of the Master Loss
Sharing Agreement between FNMA and the Company. For cash flow purposes,
restricted cash is not considered a cash equivalent.
LOANS HELD FOR SALE
Loans held for sale are collateralized multifamily real estate loans and are
reported at the lower of cost or market, on an aggregate basis.
F-9
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR INVESTMENT
Loans held for investment are typically collateralized by multifamily and
residential real estate which the Company intends to hold to maturity. These
loans are carried at cost.
INVESTMENT IN REAL ESTATE HELD FOR SALE
Investment in real estate held for sale represents multifamily real estate
properties which the Company intends to sell.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets ranging from three to seven years.
Leasehold improvements are amortized over the lesser of the useful life of the
asset or the remaining lease period.
REVENUE RECOGNITION
Fee-based services include commitment fees, broker fees, loan origination fees
and gain on sale of loans and real estate. Revenue recognition occurs when the
related services are performed, unless significant contingencies exist, and for
the sale of loans, when all the incidence of ownership passes to the buyer.
The Company also buys and sells notes and real estate properties. Revenue
recognition from the sale, which is included in fee-based services, occurs when
all the incidence of ownership passes to the buyer. In some circumstances, the
Company elects to retain an interest in the property. When this occurs, the
investment in real estate is recorded at the Company's original cost and revenue
is recognized on the percentage of the property sold.
INTEREST EARNED
Included in interest earned is income generated from an investment in a limited
partnership. The underlying assets invested in this limited partnership were
mortgage derivatives and principally generate interest income. For the years
ended December 31, 1997, 1996 and 1995, income earned from the investment in
this limited partnership was approximately $700,000, $900,000 and $120,000,
respectively. Income from this limited partnership for the three months ended
March 31, 1998 and March 31, 1997, was $0 and $182,000, respectively. The
Company sold its limited partnership interest in December 1997.
CAPITALIZED MORTGAGE SERVICING RIGHTS
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS No. 125 supersedes but generally
retains the requirements of SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS, which the Company adopted on January 1, 1996. Both statements require
that an entity recognize, as separate assets, rights to service mortgage loans
for others irrespective of how those servicing rights are
F-10
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acquired, whether purchased or originated, by allocating the total cost of the
loans between the loans and the servicing rights thereto based on their relative
fair values. In addition, SFAS No. 125 eliminates the distinction between normal
and excess servicing to the extent the servicing fee does not exceed that
specified in the contract. The adoption of SFAS No. 125 did not have a material
impact on the Company's financial position or results of operations for the
three months ended March 31, 1998 and for the year ended December 31, 1997.
SFAS No. 125 requires that Capitalized Mortgage Servicing Rights ("MSRs") be
assessed for impairment based on the fair value of those rights. Fair values are
estimated considering market prices for similar MSRs, when available, and by the
estimated discounted future net cash flows of the capitalized MSRs. For purposes
of impairment evaluation and measurement, the MSRs are stratified based on
predominant risk characteristics of the underlying loans, which the Company has
identified as loan type, geographic location and note rate. To the extent that
the carrying value of the MSRs exceeds fair value by individual stratum, a
valuation allowance is established. The allowance may be adjusted in the future
as the values of MSRs increase or decrease. The cost of MSRs is amortized over
the period of estimated net servicing income.
FINANCIAL INSTRUMENTS
The Company uses financial instruments having off-balance sheet risk in the
normal course of business in order to reduce the Company's exposure to
fluctuations in interest rates and market prices. Included in Note 9 are
disclosures relating to financial instruments having off-balance sheet risk.
These disclosures indicate the magnitude of the Company's involvement in such
activities and reflect the instruments at their face, contract or notional
amounts which do not necessarily represent the credit risk of such instruments.
In connection with the Company's hedging and loan sale programs, the Company has
credit risk exposure to the extent purchasers are unable to meet the terms of
their forward purchase contracts. None of the forward payment obligations of any
of the Company's counterparties is secured or subject to margin requirements.
The Company enters into options on forward delivery contracts and
mortgage-backed securities (collectively referred to as hedging contracts) for
the purpose of minimizing its exposure to movements of interest rates on
rate-locked loan commitments and loans held for sale. Option premiums are
deferred when paid and recognized as an adjustment to gains or losses on sales
of loans over the lives of the options on a straight-line basis.
INCOME TAXES
Arbor is a limited liability company ("LLC") as of January 1, 1996 (which is
taxed as a partnership), and accordingly, the taxable income or loss of Arbor is
includable in the Federal and state income tax returns of Arbor's individual
members. Arbor will incur state income taxes in those states where it is not
recognized as an LLC. Prior to becoming an LLC, Arbor was an S corporation from
March 1, 1995 to December 31, 1995. Prior to March 1, 1995, Arbor was a C
corporation.
ASF was an S corporation as of October 1, 1995. As a result, ASF income is taxed
directly to its shareholder. Prior to October 1, 1995, ASF was a C corporation.
F-11
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Simultaneous with the Exchange, Arbor will no longer be recognized as an LLC for
tax purposes and simultaneous with the ASF contribution, ASF will cease to be
treated as an S corporation.
INTERIM PERIOD INFORMATION
The unaudited combined financial statements as of March 31, 1998 and for the
three-month periods ended March 31, 1998 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instruction to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
consisting of normal recurring accruals considered necessary for a fair
presentation of the results for the interim period have been included.
2. LOANS HELD FOR SALE
Loans held for sale consist of:
<TABLE>
<CAPTION>
December 31,
MARCH 31, ----------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Principal....................................... $ 12,004,566 $ 46,834,819 $ 46,171,004
Unearned discount, net.......................... (177,595) (352,471) (441,800)
------------- ------------- -------------
Loans held for sale, net........................ $ 11,826,971 $ 46,482,348 $ 45,729,204
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
3. CAPITALIZED MORTGAGE SERVICING RIGHTS
SFAS No. 125 requires that Capitalized MSRs be assessed for impairment based on
the fair value of those rights. Fair values are estimated considering market
prices for similar MSRs, when available, and by estimating the discounted future
net cash flows of the capitalized MSRs.
The estimated fair value of the Capitalized MSRs as of March 31, 1998, December
31, 1997 and December 31, 1996 was approximately $6.2 million, $5.8 million and
$3.0 million, respectively, which was in excess of book value and did not
require a valuation allowance to be established.
F-12
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
3. CAPITALIZED MORTGAGE SERVICING RIGHTS (CONTINUED)
Capitalized MSRs and the related valuation allowance activity as of March 31,
1998 and December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31,
MARCH 31, --------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period.......................................... $ 5,031,854 $ 2,534,529 $ 126,227
Additions............................................................... 588,225 3,148,981 2,958,029
Amortization............................................................ (162,358) (584,420) (237,273)
Servicing sale.......................................................... -- (67,236) (312,454)
------------ ------------ ------------
Balance at end of period................................................ 5,457,721 5,031,854 2,534,529
Valuation allowance
Balance at beginning of period.......................................... -- -- --
Additions............................................................... -- -- --
Reductions.............................................................. -- -- --
------------ ------------ ------------
Balance at end of period................................................ -- -- --
------------ ------------ ------------
Capitalized mortgage servicing rights, net.............................. $ 5,457,721 $ 5,031,854 $ 2,534,529
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of :
<TABLE>
<CAPTION>
December 31,
MARCH 31, --------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Furniture and equipment................................................. $ 885,961 $ 762,943 $ 520,598
Leasehold improvements.................................................. 13,280 13,280 13,280
------------ ------------ ------------
899,241 776,223 533,878
Accumulated depreciation and amortization............................... (415,272) (258,463) (165,594)
------------ ------------ ------------
Property and equipment, net............................................. $ 483,969 $ 517,760 $ 368,284
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
5. MORTGAGE SERVICING
At March 31, 1998, December 31, 1997 and 1996, the Company was servicing, for a
fee, commercial loans of approximately $536 million, $530 million and $386
million, respectively. Cash held in escrow by the Company for certain of these
loans at March 31, 1998, December 31, 1997 and 1996, was approximately $14.9
million, $15.3 million and $11.7 million, respectively. These cash balances and
related escrow liabilities are not reflected in the accompanying balance sheets.
These escrows are maintained in separate accounts at two federally insured
depository institutions. At March 31, 1998, December 31, 1997 and 1996, the
Company's servicing portfolio included FNMA DUS loans of approximately $327
million, $292 million and $136 million, respectively. Properties securing the
loans in the Company's servicing portfolio at
F-13
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
5. MORTGAGE SERVICING (CONTINUED)
March 31, 1998 are located throughout the United States with approximately 22%
in Texas and 18% in Colorado.
6. NOTES PAYABLE AND REPURCHASE AGREEMENTS
The Company utilizes a warehouse line of credit and repurchase agreements in
conjunction with the origination and sale of loans. Borrowings underlying these
arrangements are secured by the Company's loans held for sale and held for
investment.
<TABLE>
<CAPTION>
December 31,
MARCH 31, ----------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Warehouse line of credit, commercial banks, $90 million committed
line, expiration November 1998, interest is variable based on
the Federal funds rate, the weighted average note rate was
7.18%, 7.51% and 7.33%, respectively. $ 26,926,482 $ 36,306,212 $ 26,760,000
Repurchase agreement, financial institution, $40 million
committed line, expiration March 1997, interest is variable
based on LIBOR, the weighted average note rate was 6.31%. 12,600,000
Repurchase agreement, financial institution, uncommitted line,
interest is variable based on LIBOR, the weighted average note
rate was 6.13%, 5.56% and 5.42%, respectively. 7,500,544 27,375,420 6,042,733
Repurchase agreement, financial institution, uncommitted line,
interest is variable based on the Federal funds rate, the
weighted average note rate was 7.43%, 7.63% and 7.40%,
respectively. 8,900,000 16,650,000 5,000,000
Other borrowings, interest is variable based on LIBOR, the
weighted average note rate was 5.59%, 5.18% and 5.95%,
respectively. 1,552,901 1,061,021 81,570
------------- ------------- -------------
Notes payable and repurchase agreements $ 44,879,927 $ 81,392,653 $ 50,484,303
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The warehouse facility contains various financial covenants and restrictions,
including minimum net worth, debt-to-equity ratio and a minimum servicing
portfolio.
7. NOTE PAYABLE--CLASS A MEMBER
Note payable--Class A member is an unsecured demand note with interest
predominantly at 9.5% and is subordinated to the warehouse facility. The Company
periodically borrows from the Class A member for working capital and investment
purposes. Total interest expense incurred by the Company and paid to the Class A
member was approximately $531,000 and $423,000 for the three months ended March
31, 1998 and 1997, respectively, and $2,379,000, $334,000 and $994,000,
respectively, for the years ended December 31, 1997, 1996 and 1995.
F-14
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
8. MEMBERS' CAPITAL
The Class A member has full voting rights and effective control of the Company
and has the power to direct the Company's management and policies. The Class B
members consist primarily of employees of the Company who do not have voting
rights except in certain limited instances.
9. COMMITMENTS AND CONTINGENCIES
Minimum annual operating lease payments under leases with a term in excess of
one year in effect as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998...................................... $ 334,947
1999...................................... 207,474
2000...................................... 162,180
2001...................................... 80,753
---------
$ 785,354
---------
---------
</TABLE>
Total rent expense for the three months ended March 31, 1998 and 1997 was
$75,000 and $51,000, respectively, and for the years ended December 31, 1997,
1996 and 1995 was $243,000, $224,000 and $103,000, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company enters into financial instruments with off-balance sheet risk in the
normal course of business through the origination and sale of mortgage loans and
the management of potential loss exposure caused by fluctuations of interest
rates. Financial instruments with off-balance sheet risk include commitments to
extend credit, forward commitments, firm takeouts, and put options. These
instruments involve, to varying degrees, elements of credit and interest rate
risk. Credit risk is managed by the Company by entering into agreements only
with Wall Street investment bankers having primary dealer status and with
permanent investors meeting the standards of the Company. At any time, the risk
to the Company, in the event of default by the purchaser, is the difference
between the contract price and current market prices.
At March 31, 1998, December 31, 1997 and 1996, the Company had $19.3 million,
$38.9 million and $42.9 million, respectively, in notional amounts of mandatory
forward commitments, and firm takeouts outstanding. Unrealized gains and losses
on these instruments are included in the lower of cost or market valuation of
loans held for sale.
Until a locked interest rate commitment is extended by the Company to a
borrower, there is no market risk to the Company. Total commitments outstanding
to borrowers totaled approximately $98.5 million as of March 31, 1998, $5.4
million of which had locked interest rates. As of March 31, 1998, the Company
also had outstanding a backup commitment to purchase real estate of $87.5
million and a commitment to lend up to $14.8 million to an entity owned by the
Class A member.
LITIGATION
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the financial position or the results of
operations of the Company.
F-15
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATION OF BORROWER RISK
The Company is subject to concentration risk in that, as of March 31, 1998,
December 31, 1997 and 1996, the unpaid principal balance relating to 3, 8, and
10 loans represented approximately 46.9%, 41.9%, and 63.1% of total loans held
for investment, respectively. As of March 31, 1998, December 31, 1997 and 1996
the above amounts are with two unrelated borrowers. The total number of loans
held for investment by the Company were 38, 41, and 34 as of March 31, 1998,
December 31, 1997 and 1996, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying values and the estimated fair values
of financial instruments, as of March 31, 1998, December 31, 1997 and 1996, in
accordance with the requirements of SFAS No. 107, Disclosures About Fair Value
of Financial Instruments. Fair value estimates are dependent upon subjective
assumptions and involve significant uncertainties resulting in variability in
estimates with changes in assumptions.
<TABLE>
<CAPTION>
MARCH 31, 1998 December 31, 1997 December 31, 1996
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
CARRYING ESTIMATED Carrying Estimated Carrying Estimated
VALUE FAIR VALUE value fair value value fair value
---------- ---------- ---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents............ $2,261,337 $2,261,337 $1,903,405 $1,903,405 $ 782,252 $ 782,252
Restricted cash...................... 2,417,863 2,417,863 2,362,822 2,362,822 1,639,930 1,639,930
Loans held for sale, net............. 11,826,971 12,118,514 46,482,348 47,356,788 45,729,204 46,426,406
Loans held for investment, net....... 56,273,289 56,273,289 68,609,906 68,609,906 38,685,564 38,685,564
Other investments.................... 1,250,000 1,250,000 500,000 500,000 3,032,046 3,032,046
Capitalized mortgage servicing
rights, net........................ 5,457,721 6,176,160 5,031,854 5,769,562 2,534,529 2,971,986
Off-balance sheet instruments used
for hedging purposes............... (91,726) (74,364) -- (120,000) -- (10,163)
Financial liabilities:
Notes payable and repurchase
agreements......................... 44,879,927 44,879,927 81,392,653 81,392,653 50,484,303 50,484,303
Note payable -- Class A member....... 13,685,303 13,685,303 28,835,294 28,835,294 25,425,485 25,425,485
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS: Fair value approximates the carrying value
reported in the balance sheets.
RESTRICTED CASH: Fair value approximates the carrying value reported in
the balance sheets.
LOANS HELD FOR SALE, NET: Fair values of loans held for sale are based on
a pricing model using current market assumptions.
LOANS HELD FOR INVESTMENT, NET: Fair values of variable-rate loans with
no significant change in credit risk are based on carrying values. Fair
values of other loans are estimated using discounted cash flow
methodology, using discount rates, which, in the opinion of management,
best reflect current market interest rates that would be offered for
loans with similar characteristics and credit quality.
F-16
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS: Fair value approximates the carrying value reported in
the balance sheets.
CAPITALIZED MORTGAGE SERVICING RIGHTS, NET: Fair values of capitalized
mortgage servicing rights are estimated using a discounted future net
cash flow methodology.
OFF-BALANCE SHEET INSTRUMENTS USED FOR HEDGING PURPOSES: Fair values of
the off-balance sheet instruments (put options, and forward commitments)
are based on pricing models using current market assumptions.
NOTES PAYABLE AND REPURCHASE AGREEMENTS: Fair value of variable-rate
notes payable and repurchase agreements approximates the carrying values
reported in the balance sheets.
NOTE PAYABLE--CLASS A MEMBER: Fair value approximates the carrying value
reported in the balance sheets.
11. RELATED-PARTY TRANSACTIONS
At March 31, 1998, December 31, 1997 and 1996, the Company serviced loans owned
by the Class A member and certain family members totaling approximately $1.4
million, $1.4 million and $1.6 million, respectively.
For the three months ended March 31, 1998 and the years ended December 31, 1997,
1996 and 1995, the Company participated in several shared functions, including
office space, financial management, marketing, information systems and human
resources with other companies owned by the Class A member. The Company paid
management fees of $255,000 and $126,000 for the three months ended March 31,
1998 and 1997, respectively, and $504,000, $300,000, and $0, respectively, for
the years ended December 31, 1997, 1996 and 1995.
Anivan, Inc. ("Anivan"), which is owned by a party related to the Class A
member, identifies loan portfolios owned by third parties for possible
acquisition by the Company. Anivan pays its own expenses and assumes all risks
in connection with identification, preliminary review and the underwriting of
these loan portfolios. The gains and losses generated from the subsequent sales
of these loans and servicing income are shared with Anivan on an approximately
equal basis. During the three months ended March 31, 1998 and 1997, the Company
purchased loan portfolios of $0 and $22,680, respectively, and for the years
ended December 31, 1997, 1996 and 1995, loan portfolios of $26 million, $10
million and $17 million, respectively. The Company paid Anivan fees and
compensation of $14,000 and $17,000 for the three months ended March 31, 1998
and 1997, and $200,000, $220,000 and $240,000, respectively, for the years ended
December 31, 1997, 1996 and 1995.
12. EMPLOYEE BENEFITS
The Company maintains a 401(k) profit sharing plan (the "401(k) Plan") which was
created effective January 1, 1995 for all employees who have completed six
months of continuous service. The Company matches 25% of the first 6% of each
employee's contribution. The Company has the option to increase the employer
match based on Company operating results. The Company's 401(k) Plan expense was
F-17
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
12. EMPLOYEE BENEFITS (CONTINUED)
approximately $9,000 and $9,000, respectively, for the three months ended March
31, 1998 and 1997, and $59,000, $45,000 and $12,000, respectively, for the years
ended December 31, 1997, 1996 and 1995.
13. NET WORTH
Due to the nature of the Company's mortgage banking activities, the Company is
subject to supervision by certain regulatory agencies. Among other things, these
agencies require the Company to meet certain minimum net worth requirements as
defined. The Company's adjusted net worth at March 31, 1998, December 31, 1997
and 1996 exceeded these requirements.
14. SUBSEQUENT EVENTS
In June 1998, the Company entered into a 50/50 joint venture with a Wall Street
investment banking firm pursuant to which each of the joint venture partners
agreed to contribute up to $25 million in equity to the joint venture. In
addition, the Wall Street firm agreed to provide $200 million of financing to
fund customized financing activities, including $75 million for mezzanine loans
to the joint venture in the form of a repurchase agreement. The interest rate
charge for the financing is LIBOR plus 2%. The repurchase agreement expires in
June 2000. The Company believes that this joint venture will greatly enhance the
Company's ability to increase its customized financing activities in the future.
15. UNAUDITED PRO FORMA INFORMATION
INCOME TAXES
Pro forma adjustments for income taxes represent the difference between
historical income taxes and the income taxes that would have been reported had
the Company filed income tax returns as a taxable C corporation for each of the
periods presented using a pro forma income tax rate of 40%. As a result of the
Company's election to terminate its LLC and S corporation status, the Company is
required to record a deferred tax liability for the tax effect of temporary
differences between financial reporting and tax reporting. The net deferred tax
liability recorded at March 31, 1998 was $2,207,000. The principal components of
the Company's net deferred tax liability consists of capitalized mortgage
servicing rights, deferred gain on sale of an investment and the allowance for
loan losses.
PRO FORMA COMBINED BALANCE SHEET
The accompanying unaudited pro forma combined balance sheet at March 31, 1998
gives effect to (i) the distribution of $1,462,000 of ASF assets to Ivan
Kaufman, the sole stockholder on April 1, 1998, (ii) the net contribution of
$717,062 in capital by members on April 1, 1998, which includes a distribution
of capital to a former employee of $152,938, and (iii) the establishment of a
$6,000,000 distribution payable for previously undistributed earnings which is
intended to be distributed. The pro forma balance sheet at March 31, 1998 does
not reflect the sale of shares in the initial public offering.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITY TO ANY PERSON IN ANY JURISDICTION WHERE AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 15
Capitalization............................................................ 16
Dividend Policy........................................................... 17
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 28
Management................................................................ 40
Security Ownership of Certain Beneficial/ Owners and Management........... 44
Description of Securities................................................. 46
Certain Relationships and Related Transactions............................ 47
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 49
Legal Matters............................................................. 50
Experts................................................................... 51
Index to Financial Statements............................................. F-1
</TABLE>
SHARES
[LOGO]
NATIONAL HOLDINGS, INC.
COMMON STOCK
----------------------
PROSPECTUS
JUNE , 1998
----------------------
LEHMAN BROTHERS
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated amount of various expenses in
connection with the issuance and distribution of the securities being
registered, other than underwriting commissions and discounts:
<TABLE>
<S> <C>
SEC registration fee.............................................................. $ 16,927
NASD filing fee................................................................... 5,750
Nasdaq Listing Application Fee.................................................... 52,500
Transfer agent's fee and expenses *............................................... 15,000
Accounting/Tax fees and expenses *................................................ 125,000
Legal fees and expenses *......................................................... 350,000
"Blue Sky" fees and expenses (including legal fees) *............................. 75,000
Costs of printing and engraving *................................................. 75,000
Miscellaneous *................................................................... 97,823
---------
Total *....................................................................... $ 813,000
---------
---------
</TABLE>
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under provisions of the Certificate of Incorporation and the By-Laws of the
Company, each person who is or was a director or officer of the Company may be
indemnified by the Company to the full extent permitted or authorized by the
Business Corporation Law of New York.
Under such law, to the extent that such person is successful on the merits
of defense of a suit or proceeding brought against him by reason of the fact
that he is a director or officer of the Company, he shall be indemnified against
expenses (including attorneys' fees) reasonably incurred in connection with such
action.
If unsuccessful in defense of a third-party civil suit or if a criminal suit
is settled, such a person may be indemnified under such law against both (1)
expenses (including attorneys' fees) and (2) judgments, fines and amounts paid
in settlement if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Company, and with respect
to any criminal action, had no reasonable cause to believe his conduct was
unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Company, or if such suit is settled, such a person may be indemnified under such
law against costs of settlement and expenses (including attorneys' fees)
incurred in the defense or settlement of such suit if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company except that if such a person is adjudged to be liable
in such suit for negligence or misconduct in the performance of his duty to the
Company, he cannot be made whole even for expenses unless the court determines
that he is fairly and reasonably entitled to indemnity for such costs of
settlement and expenses.
[Upon the effectiveness of this Registration Statement] The Company and its
officers and directors will be covered by officers' and directors' liability
insurance. The policy coverage is $[ ], which includes reimbursement for
costs and fees. There is a maximum deductible under the policy of $[ ] for
each claim.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In January 1996, April 1997 and April 1998, ANCM issued membership interests
to 13, 10 and 14 purchasers thereof, respectively. The aggregate consideration
received in each transaction was $8,500,000, $2,500,000 and $4,600,000 ,
respectively. These securities were issued in reliance on Section 4(2) of the
Securities Act.
As of June , 1998, all of the members of ANCM have entered into the
Exchange Agreement, pursuant to which, effective on the closing of the Offering,
all of the previously outstanding membership interests in ANCM will be exchanged
for 7,500,000 shares of Common Stock. The Common Stock will be issued in
reliance upon the exemption from the registration requirements of the Securities
Act provided by Section 4(2).
ANCM may have failed to comply with certain requirements of Section 4(2) of
the Securities Act in connection with its sales of membership interests. In
connection with the execution of the Exchange Agreement, each member of ANCM was
given the opportunity to rescind the purchase of such member's membership
interest and have such member's capital contribution returned.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Company.**
3.2 By-laws of the Company.
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Pryor Cashman Sherman & Flynn LLP*
10.1 Form of 1998 Stock Incentive Plan
10.2 Form of 1998 Stock Incentive Plan for Non-Employee Directors.
10.3 Exchange Agreement.
10.4 Employment Agreement between the Company and Ivan Kaufman, dated as of June 30, 1998.
10.5 Employment Agreement between the Company and Joseph Martello, dated as of June 30, 1998.
10.6 Employment Agreement between the Company and Walter K. Horn, dated as of June 30, 1998.
10.7 Employment Agreement between the Company and Elliot Silverman, dated as of June 30, 1998.
10.8 Office Lease Agreement dated August 31, 1993 between Arbor National Mortgage, Inc. and HMCC Associates.*
10.9 Sublease Agreement dated August 1, 1995 between Bank of America Mortgage and Arbor National Commercial
Mortgage, LLC.*
10.10 Ivan Kaufman Indemnification
11 Computation of Earnings per share and Fully Diluted Earnings per Common Share.*
21 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP.**
23.2 Consent of Ernst & Young LLP.**
23.3 Consent of Pryor Cashman Sherman & Flynn LLP (included in Exhibit 5.1).*
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Uniondale, state of New York on July 7, 1998.
<TABLE>
<S> <C> <C>
ARBOR NATIONAL HOLDINGS, INC.
By: /s/ IVAN KAUFMAN
-----------------------------------------
Ivan Kaufman
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 to be signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman, President, Chief
/s/ IVAN KAUFMAN Executive Officer and
- ------------------------------ Director (Principal July 7, 1998
Ivan Kaufman Executive Officer)
Senior Vice President and
Chief Financial Officer
/s/ JOSEPH MARTELLO and Director Nominee
- ------------------------------ (Principal Financial and July 7, 1998
Joseph Martello Principal Accounting
Officer)
II-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Members of
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC AND SUBSIDIARIES AND AFFILIATE
In connection with our audit of the combined financial statements of Arbor
National Commercial Mortgage, LLC and Subsidiaries and Affiliate referred to in
our report dated May 28, 1998, which is included in the Prospectus constituting
Part I of this Registration Statement, we have also audited Schedule II for each
of the three years in the period ended December 31, 1997. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
Grant Thornton LLP
New York, New York
May 28, 1998
S-1
<PAGE>
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
SCHEDULE II--VALUATION ALLOWANCE ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN E
------------ ----------- COLUMN D ------------
COLUMN A BALANCE AT CHARGED TO ------------ BALANCE AT
- ----------------------------------------------------------- BEGINNING COSTS AND DEDUCTIONS-- END OF
DESCRIPTION OF YEAR EXPENSES WRITE-OFFS YEAR
- ----------------------------------------------------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
1997
Loans held for investment................................ $ 468,551 $ 209,482 $ -- $ 678,033
Allowance for possible losses under the DUS product
line................................................... 686,500 788,135 -- 1,474,635
------------ ----------- ------------ ------------
$ 1,155,051 $ 997,617 $ -- $ 2,152,668
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
1996
Loans held for investment................................ $ 240,000 $ 228,551 $ -- $ 468,551
Allowance for possible losses under the DUS product
line................................................... -- 686,500 -- 686,500
------------ ----------- ------------ ------------
$ 240,000 $ 915,051 $ -- $ 1,155,051
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
1995
Loans held for investment................................ $ 50,000 $ 406,856 $ (216,856) $ 240,000
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
S-2
<PAGE>
Exhibit 3.2
BYLAWS
of
ARBOR NATIONAL HOLDINGS, INC.
a New York corporation (the "Corporation")
ARTICLE I - OFFICES
Section 1.1. Location. The address of the principal office of the
Corporation shall be in the city, incorporated village or town and the county
within the State of New York as specified in the Certificate of Incorporation
or, if subsequently changed, as specified in the most recent certificate
of change filed pursuant to law. The Corporation may also have other
offices at such places within or without the State of New York as the
Board of Directors may from time to time designate or the business of the
Corporation may require.
Section 1.2. Additional Offices. The Corporation may also have offices
at such places within or without the State of New York, as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II - MEETINGS OF SHAREHOLDERS
Section 2.1. Annual Meeting. The annual meeting of the shareholders of
the Corporation for the election of directors and for the transaction of such
other business as may properly come before the meeting shall be held at the
principal office of the Corporation in New York State, or at such other place
within or without the State of New York as the Board of Directors may fix, at
10 o'clock A.M. on the 1st Wednesday in May of each year commencing with
the year 1999, but if such a date is a legal holiday, then on the next
succeeding business day. At an annual meeting of shareholders,
only such business shall be conducted, and only such proposals shall be acted
upon, as shall have been brought before the annual meeting (a) by, or at the
direction of, a majority of the directors, or (b) by any shareholder of the
Corporation, permitted by law to bring such proposal, and who complies with
the notice procedures set forth in Section 2.8 of these bylaws. No
amendment, repeal, or provisions inconsistent with the provisions of
this Section 2.1 or provision in the Certificate of Incorporation
addressing the subject matter of this Section 2.1 shall be adopted unless
it is approved by the vote of not less than seventy-five percent of the
Total Voting Power (as defined in Section 2.4 of these Bylaws) entitled
to vote in an election of directors.
Section 2.2. Special Meetings. Special meetings of shareholders, unless
otherwise prescribed by law, may be called at any time by the Chief Executive
Officer or at the request of a majority of the Whole Board (as defined in
Section 3.2 below). Special meetings of shareholders shall be held at
such place within or without the State
<PAGE>
of New York as shall be designated in the notice of meeting. At any
special meeting, only such business may be transacted which is related to the
purpose or purposes set forth in the notice requirements of Sections 2.3 and
2.8 of these Bylaws, and is proposed in accordance with such provisions.
Section 2.3 Notice of Meetings. (a) Written notice of each annual and
special meeting of shareholders, other than any meeting the giving of notice
of which is otherwise prescribed by law, stating the place, date and hour of
the meeting, and, in the case of a special meeting, indicating that it is
being issued by or at the direction of the person or persons calling the
meeting and stating the purpose or purposes for which the meeting is called,
shall be given personally or by first class mail to each shareholder entitled
to vote thereat, not less than ten (10) nor more than sixty (60) days prior
to the meeting. If mailed, such notice shall be deemed given when deposited
in the United States mail, postage prepaid, directed to such shareholder at
his address as it appears on the record of shareholders of the Corporation
or, if he shall have filed with the Secretary of the Corporation a written
request that notices to him be mailed to some other address, then directed to
him at such other address. An affidavit of either the Secretary or other person
giving the notice or the transfer agent of the Corporation that notice has
been given shall be evidence of the facts stated therein.
(b) Notice of any meeting need not be given to any shareholder who submits
a signed waiver of notice, whether before or after the meeting. The attendance
of any shareholder at a meeting, in person or by proxy, without protesting
prior to the conclusion of the meeting the lack of notice of such meeting,
shall constitute a waiver of notice by him.
(c) When a meeting is adjourned to another time or place, it shall not be
necessary, unless these Bylaws require otherwise, to give any notice of the
adjourned meeting if the time and place to which the meeting is adjourned are
announced at the meeting at which the adjournment is taken, and at the
adjourned meeting any business may be transacted that might have been
transacted on the original date of the meeting. However, if after the
adjournment the Board fixes a new record date for the adjourned meeting, a
notice of the adjourned meeting shall be given to each shareholder of record
on the new record date entitled to notice as provided for in this
Section 2.3(a).
Section 2.4. Quorum. Unless otherwise prescribed by law or by the
Certificate of Incorporation or these Bylaws, the holders of record
stock entitled to vote or act at such meeting and holding shares of capital
stock representing at least a majority of the total number of votes able to
be cast with respect to shares outstanding on the record date (such total
number of votes hereinafter referred to as the "Total Voting Power")
shall be necessary to and shall constitute a quorum for
the transaction of any business at all meetings of the shareholders;
provided, however, that when a specified item of business is required to be
voted on by a class or series, voting as a class, the holders of shares
issued and outstanding representing a majority of the Total Voting Power
of such class or series and entitled to vote thereat shall constitute a
quorum for transaction of such specified item of business. If a quorum
shall not be present at any meeting of the shareholders, the holders of
shares representing a majority of the Total Voting Power present
in person or represented by proxy, shall have power to adjourn the
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meeting from time to time, until a quorum shall be present. At any such
adjourned meeting at which a quorum may be present, any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 2.5. Voting. (a) At any meeting of the shareholders every
shareholder having the right to vote shall be entitled to vote in person or
by proxy. Each shareholder shall have one (1) vote for each share of stock
having voting power which is registered in his name on the books of the
Corporation, unless otherwise provided in the Certificate of Incorporation or
any Certificate of Amendment filed by the Board pursuant to Section 805 of
the New York Business Corporation Law ("NYBCL").
(b) Unless otherwise provided by law or by the Certificate of
Incorporation or these Bylaws, all elections of directors shall be decided by
a plurality of the votes cast, and all other matters shall be decided by a
majority of the votes cast.
Section 2.6. Proxies. A proxy may be executed in the manner provided in
Section 609 of the NYBCL. No proxy shall be valid after the expiration of
eleven (11) months from the date thereof, unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure of the shareholder
executing it, except in those cases where an irrevocable proxy is permitted
by law.
Section 2.7. Action by Consent of Shareholders. Unless otherwise
provided by law or by the Certificate of Incorporation or these Bylaws,
whenever shareholders are required or permitted to take any action by vote,
such action may be taken without a meeting on written consent, setting forth
the action so taken, signed by the holders of all outstanding shares entitled
to vote thereon. No amendment, repeal, or provisions inconsistent with the
provisions of this Section 2.7 nor any provision in the Certificate of
Incorporation of the Corporation addressing the subject matter of this
Section 2.7 shall be adopted unless it is approved by the vote of the
holders of not less than seventy-five percent of the Total Voting Power
entitled to vote in an election of directors.
Section 2.8. Advance Notice of Proposed Shareholder Nominations and
Proposals. Advance notice of proposed shareholder nominations for the
election of directors (other than by the Board of Directors) and of any
proposals to be brought before the Annual Meeting of shareholders (other
than by the Board of Directors) must be given to the Company by the date
which is not less than 120 days before the date the proxy statement
released to shareholders in connection with the previous year's annual
meeting of shareholders, or, in the case of proposals to be brought before a
special meeting, not less than 120 days before a proxy solicitation is
made with respect to such proposal. No amendment, repeal, or
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provisions inconsistent with the provisions of this Section 2.8 or
provision in the Certificate of Incorporation addressing the subject matter
of this Section 2.8 of the Corporation shall be adopted unless it is approved
by the vote of the holders not less than seventy-five percent of the
Total Voting Power entitled to vote in an election of directors.
ARTICLE III - BOARD OF DIRECTORS
Section 3.1. General Powers. The property, business and affairs of the
Corporation shall be managed by the Board of Directors. The Board of
Directors may exercise all such powers of the Corporation and have such
authority and do all such lawful acts and things as are permitted by law, the
Certificate of Incorporation or these Bylaws.
Section 3.2. Number of Directors. The Board of Directors of the
Corporation shall consist initially of one member; the exact number of
directors which shall constitute the Whole Board of Directors ("Whole Board")
shall be fixed, increased or decreased from time to time by resolution
adopted by at least two-thirds of the number of directors then in office (any
vacancies shall not be counted for this purpose).
Section 3.3. Qualification. Directors need not be shareholders of the
Corporation.
Section 3.4. Election. Unless otherwise provided by law or the
Certificate of Incorporation or these Bylaws, after the sole director
appointed by the sole incorporator has appointed the initial Board of
Directors, directors of the Corporation (except directors appointed to
fill vacancies) shall be elected in each year at the annual meeting of
shareholders. The voting on directors at any such meeting need not be by
written ballot unless otherwise so requested by any shareholder.
Section 3.5. Term. Each director shall hold office until his successor
is duly elected and qualified, except in the event of the earlier termination
of his term of office by reason of death, resignation, removal, retirement,
disqualification or other reason.
Section 3.6. Resignation and Removal. Any director may resign at any
time upon written notice to the Board of Directors, the President or the
Secretary. The shareholders may remove from office any director with or
without cause. This Bylaw may only be amended by a vote of 75% of the Total
Voting Power entitled to vote in an election of directors.
Section 3.7. Vacancies. Unless otherwise provided by law or by the
Certificate of Incorporation or these Bylaws, if any vacancies occur in the
Board of Directors by reason of the death, resignation, retirement or
disqualification or if any new directorships are created, all of the
directors then in office, although less than a quorum, may, by majority
vote, choose a successor or successors, or fill the newly created
directorships, and the directors so chosen shall hold office until the
next annual meeting of the shareholders and until their successors shall
be duly elected and qualified, unless sooner displaced; provided, however,
that if in the event of any such vacancy, the directors remaining in
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office shall be unable, by majority vote, to fill such vacancy within thirty
(30) days of the occurrence thereof, the President or the Secretary may call
a special meeting of the shareholders at which such vacancy shall be filled.
Any vacancy resulting from the removal of a director by vote of the
shareholders shall be filled by the shareholders at the meeting at which
such director is removed, by a vote of a plurality of the votes cast at the
meeting at which such removal is effected.
Section 3.8. Quorum and Voting. (a) Unless otherwise provided by law,
the Certificate of Incorporation or these Bylaws, at all meetings of the Board
of Directors a majority of the Whole Board shall constitute a quorum for the
transaction of business. A director interested in a contract or transaction
may be counted in determining the presence of a quorum at a meeting of the
Board of Directors which authorizes the contract or transaction.
(b) If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time until a quorum shall be present. Notice of any such adjournment shall be
given to any directors who were not present and, unless announced at the
meeting, to the other directors.
(c) Unless otherwise provided in these Bylaws or, the Certificate of
Incorporation, the vote of a majority of the directors present at a meeting
at which a quorum is present shall be the act of the Board of Directors.
Section 3.9. Regulations. The Board of Directors may hold its meetings
and cause the books and records of the Corporation to be kept at such place
or places within or without the State of New York as the Board of Directors
may from time to time determine. A member of the Board of Directors shall, in
the performance of his duties, be fully protected in relying in good faith
upon the books of account or reports made to the Corporation by any of its
officers, by an independent Certified Public Accountant or by an appraiser
selected with reasonable care by the Board of Directors or any committee of
the Board of Directors or in relying in good faith upon other records of the
Corporation.
Section 3.10. Annual Meeting of Board of Directors. An annual meeting of
the Board of Directors shall be called and held for the purpose of
organization, election of officers and transaction of any other business. If
such meeting is held promptly after and at the place specified for the annual
meeting of shareholders, no notice of the annual meeting of the Board of
Directors need be given. Otherwise such annual meeting shall be held at such
time (not more than thirty days after the annual meeting of shareholders) and
place as may be specified in a notice of the meeting.
Section 3.11. Regular Meetings. Regular meetings of the Board of
Directors shall be held at the time and place, within or without the State of
New York, as shall from time to time be determined by the Board of Directors.
After there has been such determination and notice thereof has been given to
each member of the Board of Directors, no further notice shall be required
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for any such regular meeting. Except as otherwise provided by law, any
business may be transacted at any regular meeting.
Section 3.12. Special Meetings. Special meetings of the Board of
Directors may, unless otherwise prescribed by law, be called from time to
time by the President, and shall be called by the President or the Secretary
upon the written request of the Chairman or any two directors. Except as
provided in Section 3.13, notice of any special meeting of the Board of
Directors, stating the time, place and purpose of such special meeting,
shall be given to each director.
Section 3.13. Notice of Meetings. (a) Notice of any meeting of the Board
of Directors shall be deemed to be duly given to a director (i) if mailed to
such director, by certified or registered mail, return receipt requested,
to him at his address as it appears upon the books of the Corporation
or at the address last made known in writing to the Corporation by
such director as the address to which such notices are to be sent, at least
five days before the day on which such meeting is to be held, (ii) if sent
to him at such address by telecopier, telex or telegraph, not later than
the day before the day on which such meeting is to be held provided that
confirmation of delivery is mailed to such director on the same day as
given or (iii) if delivered to him personally or orally, by telephone or
otherwise, not later than the day before the day on which such meeting is
to be held provided that an affidavit of such notice is filed with the
records of the meeting. Each such notice shall state the time and place
of the meeting and the purposes thereof.
(b) Notice of any meeting of the Board of Directors need not be given to
any director if waived by him in writing (or by telecopier, telex or telegram
and confirmed in writing) whether before or after the holding of such meeting
or if such director is present at such meeting. Any meeting of the Board of
Directors shall be a duly constituted meeting without any notice thereof
having been given if all directors then in office shall be present thereat.
Section 3.14. Committees of Directors. The Board of Directors may, by
resolution or resolutions passed by a majority of the Whole Board, designate
one or more committees, each committee to consist of one or more of the
directors of the Corporation.
Vacancies in membership of any committee shall be filled by the vote of
the majority of the directors, then in office if less than a quorum. The
Board of Directors by vote of a majority of the directors then in office, may
designate one or more directors as alternate members of any committee, who
may replace any vacancy in such committee. Members of a committee shall hold
office for such period as may be fixed by a resolution adopted by a majority
of the Board of Directors then in office (not counting vacancies), subject,
however, to the removal from office with or without cause by the shareholders
of the Corporation or by the act of the Board. A removal of a director from
his capacity as director shall also constitute removal from any position as a
member of a committee.
Section 3.15. Powers and Duties of Committees. Any committee, to the
extent
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provided in the resolution or resolutions creating such committee, shall have
and may exercise the powers of the Board of Directors in the management of
the business and affairs of the Corporation and may authorize the seal of the
Corporation to be affixed to all papers which may require it. No such
committee shall have the power or authority with regard to amending the
Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the shareholders the sale, lease or exchange
of all or substantially all of the Corporation's property and assets,
recommending to the shareholders a dissolution of the Corporation or a
revocation of a dissolution, amending or repealing of the Bylaws, or the
adoption of new Bylaws, filling of vacancies in the Board of Directors or any
committee, submission to shareholders of any action that requires
shareholders' approval under the NYBCL, the Certificate of Incorporation or
these Bylaws, the fixing of compensation of the directors for serving on the
Board of Directors or any committee thereof, or any other action prohibited
by Section 712 of the NYBCL, as same may be amended.
Section 3.16. Compensation of Directors. The Board of Directors may from
time to time, in its discretion, fix the amounts which shall be payable to
directors and to members of any committee of the Board of Directors for
attendance at the meetings of the Board of Directors or of such committee and
for services rendered to the Corporation.
Section 3.17. Action Without Meeting. Unless otherwise provided in the
Certificate of Incorporation, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting if a written consent thereto is signed by all members
of the Board of Directors or of such committee, as the case may be, and such
written consent is filed with the minutes of proceedings of the Board of
Directors or such committee.
Section 3.18. Action by Conference Telephone. Any one or more members of
the Board of Directors or any committee thereof may participate in a meeting
of the Board of Directors or such committee by means of a conference
telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.
Section 3.19. Contracts. No contract or other transaction between this
Corporation and any other Corporation shall be impaired, affected or
invalidated nor shall any director be liable in any way by reason of the fact
that any one or more of the directors of this Corporation is or are
interested in, or is a director or officer, or are directors or officers of
such other corporation, provided that such contract is approved in the manner
provided in the NYBCL, as amended, including, if applicable, Sections 505,
713 or 714 thereof. This Section shall not be construed to impair or
invalidate or in any way affect any contract or other transaction which would
otherwise be valid under the law (common, statutory or otherwise) applicable
thereto.
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ARTICLE IV - OFFICERS
Section 4.1. Principal Officers. The principal officers of the
Corporation shall be elected by the Board of Directors and shall include a
Chief Executive Officer, and a Secretary and may, at the discretion of the
Board of Directors, also include a President, one or more Vice Presidents, a
Treasurer and a Controller. Except as otherwise provided by law, in the
Certificate of Incorporation or these Bylaws, one person may hold the offices
and perform the duties of any two or more of said principal offices. The
Chief Executive Officer shall also be the Chairman of the Board of Directors.
Section 4.2. Election of Principal Officers; Term of Office. The
principal officers of the Corporation shall be elected annually by the Board
of Directors at each annual meeting of the Board of Directors. Failure to
elect annually any principal officer shall not dissolve the Corporation. If
the Board of Directors shall fail to fill any principal office at an annual
meeting, if any vacancy in any principal office shall occur or if any
principal office shall be newly created, such principal office may be filled
at any regular or special meeting of the Board of Directors. Each principal
officer shall hold office until his successor is duly elected and qualified,
or until his earlier death, resignation or removal.
Section 4.3. Subordinate Officers, Agents and Employees. In addition to
the principal officers, the Corporation may have one or more Assistant
Treasurers, Assistant Secretaries, Assistant Controllers and such other
subordinate officers, agents and employees as the Board of Directors may deem
advisable, each of whom shall hold office for such period and have such
authority and perform such duties as the Board of Directors, the Chief
Executive Officer or any officer designated by the Board of Directors may
from time to time determine. The Board of Directors at any time may appoint
or may delegate to any principal officer the power to appoint any
subordinate officer, agent or employee of the Corporation.
Section 4.4. Delegation of Duties of Officers. The Board of Directors
may delegate the duties and powers of any officer of the Corporation to any
other officer or to any director for a specified period of time for any
reason that the Board of Directors may deem sufficient.
Section 4.5. Removal of Officers. Any officer of the Corporation may be
removed with or without cause by the Chief Executive Officer, or any other
officer to whom the Board of Directors has delegated the power of removal
or by resolution adopted by the Board of Directors.
Section 4.6. Compensation. The compensation of all principal officers of
the Corporation shall be fixed by the Board of Directors, and the compensation
of agents shall either be so fixed or shall be fixed by officers thereunto
duly authorized.
Section 4.7. Resignations. Any officer may resign at any time by giving
written notice of resignation to the Board of Directors or to the Chief
Executive Officer. Any such resignation shall take effect upon receipt of
such notice or at any later time specified therein, subject to the terms of
any employment agreement with such officer. Unless otherwise specified in the
notice, the acceptance of a resignation shall not be necessary to make the
resignation effective.
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Section 4.8. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of shareholders and of the Board of Directors at
which he is present. The Chairman of the Board shall have such other powers
and perform such other duties as may be assigned to him from time to time by
the Board of Directors.
Section 4.9. Chief Executive Officer. The Chief Executive Officer (if a
different person than the Chairman of the Board) shall, in the absence of the
Chairman of the Board, preside at all meetings of the shareholders and of the
Board of Directors and shall have general supervision over the business of
the Corporation. Except as otherwise provided by resolution of the Board
of Directors, the President shall be the Chief Executive Officer
of the Corporation.
Section 4.10. The President. The President shall be the Chief Operating
Officer of the Corporation, shall have all powers and duties usually incident
to the office of President except as specifically limited by a resolution of
the Board of Directors, and shall have such other powers and perform such
other duties as may be assigned to him from time to time by the Board of
Directors or the Chief Executive Officer. If a different person from the
Chief Executive Officer, the President shall report to the Chief
Executive Officer.
Section 4.11. Vice President. In the absence or disability of both
the Chief Executive Officer and the President or if the offices of both the
Chief Executive Officer and President are vacant, then the Vice Presidents, in
the order determined by the Board of Directors, or if no such determination
has been made, in the order of their seniority, shall perform the duties
and exercise the powers of the President, subject to the right of the
Board of Directors at any time to extend or confine such powers and duties
or to assign them to others. Any Vice President may have such additional
designation in his title as the Board of Directors may determine. The Vice
Presidents shall generally assist the Chief Executive Officer or the
President in such manner as the Chief Executive Officer or President shall
direct. Each Vice President shall have such other powers and perform such
other duties as may be assigned to him from time to time by the
Board of Directors, the Chief Executive Officer or the President.
Section 4.12. Secretary. The Secretary shall act as Secretary of all
meetings of shareholders and of the Board of Directors at which he is
present, shall record all the proceedings of all such meetings in a
minute book to be kept for that purpose, shall have supervision over the
giving and service of notices of the Corporation and shall have supervision
over the care and custody of the records and seal of the Corporation.
The Secretary shall be empowered to affix the corporate seal to documents,
the execution of which on behalf of the Corporation under its seal is duly
authorized, and when so affixed may attest the same. The Secretary shall
have all powers and duties usually incident to the office of Secretary
except as specifically limited by a resolution of the Board of Directors.
The Secretary shall have such other powers and perform such other duties
as may be assigned to him from time to time by the Board of Directors or
the Chief Executive Officer.
Section 4.13. The Assistant Secretary. During the absence or disability
of
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the Secretary, any Assistant Secretary, or if there be more than one, the one
so designated by the Secretary or by the Board of Directors, shall have all
the powers and functions of the Secretary.
Section 4.14. Treasurer. The Treasurer shall have general supervision
over the care and custody of the funds and other valuable effects, including
securities, and shall keep full and accurate accounts of receipts and
disbursements of the Corporation and shall cause the funds and other valuable
effects, of the Corporation to be deposited in the name of the Corporation
in such banks or other depositaries as the Board of Directors may
designate. The Treasurer shall have supervision over the care and
safekeeping of the securities of the Corporation. The Treasurer shall
have all powers and duties usually incident to the office of Treasurer
except as specifically limited by a resolution of the Board of Directors.
The Treasurer shall have such other powers and perform such other
duties as may be assigned to him from time to time by the Board of Directors
or the Chief Executive Officer.
Section 4.15. The Assistant Treasurer. During the absence or disability
of the Treasurer, any Assistant Treasurer, or if there be more than one, the
one so designated by the Treasurer or by the Board of Directors, shall have
all the powers and functions of the Treasurer.
Section 4.16. Controller. The Controller shall be the chief accounting
officer of the Corporation and shall have supervision over the maintenance
and custody of the accounting operations of the Corporation, including the
keeping of accurate accounts of all receipts and disbursements and all other
financial transactions. The Controller shall have all powers and duties
usually incident to the office of Controller except as specifically limited
by a resolution of the Board of Directors. The Controller shall have such
other powers and perform such other duties as may be assigned to him from
time to time by the Board of Directors or the President.
Section 4.17. Bond. In case the Board of Directors shall so require, any
officer or agent of the Corporation shall give the Corporation a bond for
such term, in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession
or under his control belonging to the Corporation.
ARTICLE V - CAPITAL STOCK
Section 5.1. Issuance of Certificates for Stock. Each shareholder of the
Corporation shall be entitled to a certificate or certificates in such form
as shall be approved by the Board of Directors certifying the number of
shares of capital stock of the Corporation owned by such shareholder.
Section 5.2. Signatures on Stock Certificates. Certificates for shares
of capital stock of the Corporation shall be signed by, or in the name of the
Corporation by, the Chairman of the
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Board, the Chief Executive Officer or a Vice President and by the Secretary,
the Treasurer, an Assistant Secretary or an Assistant Treasurer. Any of or all
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate is issued, such certificate may be
issued by the Corporation with the same effect as if such signer were such
officer, transfer agent or registrar at the date of issue.
Section 5.3. Stock Ledger. (a) A record of all certificates for capital
stock issued by the Corporation shall be kept by the Secretary or any other
officer or employee of the Corporation designated by the Secretary or by any
transfer clerk or transfer agent appointed pursuant to Section 5.4 of these
Bylaws. Such record shall show the name and address of the person, firm or
corporation in which certificates for capital stock are registered, the
number of shares represented by each such certificate, the date of each such
certificate and in case of certificates which have been canceled the dates of
cancellation thereof. Uncertified shares shall be similarly recorded.
(b) The Corporation shall be entitled to treat the holder of record of
shares of capital stock as shown on the stock ledger as the owner thereof and
as the person entitled to receive dividends thereon, to vote such shares and
to receive notice of meetings and for all other purposes. The Corporation
shall not be bound to recognize any equitable or other claim to or interest
in any share of capital stock on the part of any other person whether or not
the Corporation shall have express or other notice thereof.
Section 5.4. Regulations Relating to Transfer. The Board of Directors
may make such rules and regulations as it may deem expedient, not
inconsistent with law, the Certificate of Incorporation or these Bylaws,
concerning issuance, transfer and registration of certificates for shares of
capital stock of the Corporation. The Board of Directors may appoint, or
authorize any principal officer to appoint, one or more transfer clerks or
one or more transfer agents and one or more registrars and may require all
certificates for capital stock to bear the signature or signatures of any of
them.
Section 5.5. Transfers. Transfers of capital stock shall be made on the
books of the Corporation only upon delivery to the Corporation or its
transfer agent of (i) a written direction of the registered holder named in
the certificate or such holder's attorney lawfully constituted in writing,
(ii) the certificate for the shares of capital stock being transferred
(except as provided in Section 5.7 of these Bylaws) and (iii) a written
assignment of the shares of capital stock evidenced thereby.
Section 5.6. Cancellation. Each certificate for capital stock
surrendered to the Corporation for exchange or transfer shall be cancelled
and no new certificate or certificates shall be issued in exchange for any
existing certificate (other than pursuant to Section 5.7 of these Bylaws)
until such existing certificate shall have been cancelled.
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Section 5.7. Lost, Destroyed, Stolen and Mutilated Certificates. In the
event that any certificate for shares of capital stock of the Corporation
shall be mutilated the Corporation shall issue a new certificate in place of
such mutilated certificate. In case any such certificate shall be lost,
stolen or destroyed the Corporation may, in the discretion of the Board of
Directors or a committee designated thereby with power so to act, issue a new
certificate for capital stock in the place of any such lost, stolen or
destroyed certificate. The applicant for any substituted certificate or
certificates shall surrender any mutilated certificate or, in the case of any
lost, stolen or destroyed certificate, furnish satisfactory proof of such
loss, theft or destruction of such certificate and of the ownership thereof.
The Board of Directors or such committee may, in its discretion, require the
owner of a lost or destroyed certificate or his representatives to furnish to
the Corporation a bond with an acceptable surety or sureties and in such sum
as will be sufficient to indemnify the Corporation against any claim that may
be made against it on account of the lost, stolen or destroyed certificate or
the issuance of such new certificate. A new certificate may be issued without
requiring a bond when, in the judgment of the Board of Directors, it is
proper to do so.
Section 5.8. Fixing of Record Dates. (a) The Board of Directors may fix,
in advance, a record date, which shall not be more than sixty nor less than
ten days before the date of any meeting of shareholders nor more than sixty
days prior to any other action, for the purpose of determining shareholders
entitled to notice of or to vote at such meeting of shareholders or any
adjournment thereof, to express consent or dissent to corporate action in
writing without a meeting or to receive payment of any dividend or other
distribution or allotment of any rights, or to exercise any rights in respect
of any change, conversion or exchange of stock or for the purpose of any
other lawful action.
(b) If no record date is fixed by the Board of Directors:
(i) the record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be either at the close of
business on the day next preceding the day on which notice is given,
or if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held;
(ii) the record date for determining shareholders entitled to
express consent to corporate action in writing without a meeting when no
prior action by the Board of Directors is necessary shall be the day on
which the first consent is expressed; and
(iii) the record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board
of Directors adopts the resolution relating thereto.
(c) A determination of shareholders of record entitled to notice of
or to vote at a meeting of shareholders shall apply to any adjournment of the
meeting; provided that the Board of
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Directors may fix a new record date for the adjourned meeting.
ARTICLE VI - INDEMNIFICATION
Section 6.1. Indemnification of Directors and Officers. Any person made
or threatened to be made, a party to an action or proceeding (other than one
by or in the right of the Corporation to procure a judgment in its favor),
whether civil or criminal, including an action by or in the right of any
other corporation of any type or kind, domestic or foreign, or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
which such person served in any capacity at the request of the Corporation, by
reason of the fact that he, such person, his testator or interstate is or was a
Director or Officer of the Corporation, or served such other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
in any capacity, shall be indemnified by the Corporation against the judgment,
fines, amounts paid in settlement and reasonable expenses (including
attorney's fees) actually and necessarily incurred by him as a result of such
action or proceeding, or any appeal therein, to the full extent permissible
under Sections 722-725 of the NYBCL. Insurance may be purchased by the
Corporation to satisfy its indemnification obligations, to the extent
provided in Section 726 of the NYBCL, as the same may be amended.
Section 6.2. Contract of Indemnification. The provisions of Section 6.1
of these Bylaws shall be deemed a contract between the
Corporation and each Director and officer who serves in such capacity at any
time while such Section and the relevant provisions of the NYBCL and
other applicable law, if any, are in effect, and any repeal or modification
thereof shall not affect any rights or obligations of such Director or
Officer with respect to (a) any state of facts then or theretofore
existing or (b) any action or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
Section 6.3. Nonexclusivity of Statutory Provisions for Indemnification
of Directors and Officers. The indemnification and advancement of expenses
granted pursuant to, or provided by, this Article VI and the relevant
provisions of the NYBCL and other applicable law, if any, shall not be deemed
exclusive of any other rights to which a Director or Officer seeking
indemnification or advancement of expenses may be entitled by a resolution of
shareholders, a resolution of directors, or an agreement providing for such
indemnification, provided that no indemnification may be made to or on behalf
of any Director or Officer if a judgment or other final adjudication adverse
to the Director or Officer establishes that his acts were committed in bad
faith or were the result of active and deliberate dishonesty and were
material to the cause of action so adjudicated, or that he personally gained
in fact a financial profit or other advantage to which he was not legally
entitled.
Section 6.4. Advancement of Expenses. All expenses incurred in defending
a civil or criminal action or proceeding may be paid by the Corporation
in advance of the final disposition of such action or proceeding upon
receipt of an undertaking to repay such amount as, and to the extent,
required by Section 725(a) of the NYBCL.
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Section 6.5. Indemnification of Other Persons. The Board, in its
discretion, shall have power on behalf of the Corporation to indemnify any
person, other than a Director or officer, made a party to any action or
proceeding by reason of the fact that he, his testator or interstate, is or
was an employee of the Corporation.
ARTICLE VII - MISCELLANEOUS PROVISIONS
Section 7.1. Corporate Seal. The seal of the Corporation shall be
circular in form with the name of the Corporation in the circumference and
the words and figures "Corporate Seal - 1998 New York" in the center. The
seal may be used by causing it to be affixed or impressed, or a facsimile
thereof may be reproduced or otherwise used, in such manner as the Board of
Directors may determine.
Section 7.2. Fiscal Year. The fiscal year of the Corporation shall be
from the 1st day of January to the 31st day of December, inclusive, in each
year, or such other twelve consecutive months as the Board of Directors may
designate.
Section 7.3. Waiver of Notice. (a) Whenever any notice is required to be
given under any provision of law, the Certificate of Incorporation or these
Bylaws, a written waiver thereof, signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be deemed
equivalent to notice.
(b) Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting at the beginning of the meeting to the transaction of
any business because the meeting is not lawfully called or convened.
Section 7.4. Execution of Instruments, Contracts, etc. (a) All checks,
drafts, bills of exchange, notes or other obligations or orders for the
payment of money shall be signed in the name of the Corporation by such
officer or officers or person or persons as the Board of Directors may from
time to time designate.
(b) Except as otherwise provided by law or these Bylaws, the Board
of Directors, any committee given specific authority in the premises by the
Board of Directors or any committee given authority to exercise generally the
powers of the Board of Directors during the intervals between meetings of the
Board of Directors may authorize any officer, employee or agent, in the name
of and on behalf of the Corporation, to enter into or execute and deliver
deeds, bonds, mortgages, contracts and other obligations or instruments, and
such authority may be general or confined to specific instances.
(c) All applications, written instruments and papers required by or
filed with any
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department of the United States Government or any state, county, municipal or
other governmental official or authority may if permitted by applicable law
be executed in the name of the Corporation by any principal officer or
subordinate officer of the Corporation or, to the extent designated for such
purpose from time to time by the Board of Directors, by an employee or agent
of the Corporation. Such designation may contain the power to substitute, in
the discretion of the person named, one or more other persons.
ARTICLE VIII - AMENDMENTS
Section 8.1. These Bylaws may be amended or repealed by authorization of
a majority of votes cast at a meeting of shareholders, or by action of a
majority of the Board of Directors present at a meeting at which a quorum
is present or by unanimous written consent of the Directors then in
office. Any Bylaws adopted, amended or repealed by the Board of Directors
may be amended or repealed by the shareholders entitled to vote thereon as
herein provided. Any Bylaw adjusted, amended or repealed by the shareholders
(other than the initial Bylaws so approved) may not be amended as repealed by
the Board of Directors.
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EXHIBIT 10.1
ARBOR NATIONAL HOLDINGS, INC.
1998 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE, DEFINITIONS.
The purpose of the Arbor National Holdings, Inc. 1998 Stock Incentive Plan
(the "Plan") is to enable Arbor National Holdings, Inc. (the "Company") to
attract, retain and reward key employees and consultants of the Company and its
Subsidiaries and Affiliates, and strengthen the mutuality of interests between
such persons and the Company's shareholders, by offering such persons
performance-based stock incentives and/or other equity interests or equity-based
incentives in the Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Affiliate" means any entity other than the Company and its Subsidiaries
that is designated by the Board as a participating employer under the Plan,
provided that the Company directly or indirectly owns at least twenty
percent (20%) of the combined voting power of all classes of stock of such
entity or at least twenty percent (20%) of the ownership interests in such
entity.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means a felony conviction of a participant or the failure of a
participant to contest prosecution for a felony, or a participant's willful
or gross misconduct or dishonesty, any of which is directly and materially
harmful to the business or reputation of the Company or any Subsidiary or
Affiliate.
(d) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
(e) "Committee" means the Committee referred to in Section 2 of the Plan. If
at any time no Committee shall be in office, then the functions of the
Committee specified in the Plan shall be exercised by the Board.
(f) "Company" means Arbor National Holdings, Inc., a corporation organized
under the laws of the State of New York, or any successor corporation.
(g) "Deferred Stock" means the right to receive Stock at the end of a specified
deferral period pursuant to Section 8.
(h) "Disability" means disability as determined under procedures established by
the Committee for purposes of this Plan.
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(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor thereto.
(j) "Fair Market Value" means, as of any given date, unless otherwise
determined by the Committee in good faith, the mean between the highest and
lowest quoted selling price, regular way, of the Stock on the NASDAQ on
such date, or, if the Stock is not traded on such date, the immediately
preceding trading day, or, if no such sale of Stock occurs on the NASDAQ on
such date or such immediately preceding trading day, the fair market value
of the Stock as determined by the Committee in good faith.
(k) "Incentive Stock Option" means any Stock Option intended to be and
designated in writing as an "Incentive Stock Option" within the meaning of
Section 422 of the Code.
(l) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(m) "Other Stock-Based Award" means an award under Section 10 below that is
valued in whole or in part by reference to, or is otherwise based on,
Stock.
(n) "Performance-Related Award" means an award made pursuant to Section 9
below.
(o) "Plan" means this Arbor National Holdings, Inc. 1998 Stock Incentive Plan,
as it may be amended from time to time.
(p) "Restricted Stock" means shares of Stock that are subject to restrictions
under Section 7 below.
(q) "SIP Award" means any award made under Section 5, 6, 7, 8, 9 or 10 of the
Plan.
(r) "Stock" means the Common Stock, $0.01 par value per share, of the Company.
(s) "Stock Appreciation Right" means the right pursuant to an award granted
under Section 6 below to surrender to the Company all (or a portion) of a
Stock Option in exchange for an amount equal to the difference between: (i)
the Fair Market Value, as of the date such Stock Option (or such portion
thereof) is surrendered, of the shares of Stock covered by such Stock
Option (or such portion thereof), subject, where applicable, to the pricing
provisions in Section 6(b)(ii); and (ii) the aggregate exercise price of
such Stock Option (or such portion thereof).
(t) "Stock Option" or "Option" means any option to purchase shares of Stock
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(including Restricted Stock and Deferred Stock, if the Committee so
determines) granted pursuant to Section 5 below.
(u) "Subsidiary" means any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in the
chain.
In addition, the terms "Performance Criteria" and "Change in Control" shall
have the meanings set forth, respectively, in Sections 9 and 11(b) below.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by a committee of not less than two members
of the Board, who shall be appointed by, and serve at the pleasure of, the
Board. In selecting the members of the Committee, the Board shall take into
account the requirements for the members of the Committee to be treated as
"Outside Directors" within the meaning of Section 162(m) of the Code and
"Non-Employee Directors" for purposes of Rule 16b-3, as promulgated under
Section 16 of the Exchange Act. The functions of the Committee specified in the
Plan shall be exercised by the Board, if and to the extent that no Committee
exists which has the authority to so administer the Plan, or to the extent that
the Committee is not comprised solely of Non-Employee Directors for purposes of
Rule 16b-3, as promulgated under Section 16 of the Exchange Act.
The Committee shall have full authority to grant, pursuant to the terms of
the Plan, to officers and other key employees and consultants eligible under
Section 4: (i) Non-Qualified Stock Options and, in the case of employees,
Incentive Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock,
(iv) Deferred Stock, (v) Performance-Related Awards, (vi) and/or Other
Stock-Based Awards.
In particular the Committee shall have the authority:
(a) to select the officers and other key employees and consultants of the
Company and its Subsidiaries and Affiliates to whom SIP Awards may
from time to time be granted hereunder;
(b) to determine whether and to what extent SIP Awards, or any combination
thereof, are to be granted hereunder to one or more eligible employees
or consultants;
(c) subject to the provisions of Sections 3, 5 and 9, to determine the
number of shares to be covered by each such award granted hereunder;
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(d) to determine the terms and conditions, not inconsistent with the terms
of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any
full or pro rata vesting acceleration or waiver of forfeiture
restrictions regarding any Stock Option or other award and/or the
shares of Stock relating thereto, based in each case on such factors
as the Committee shall determine in its sole discretion);
(e) to determine whether, to what extent and under what circumstances (if
any) a Stock Option may be settled in Restricted Stock and/or Deferred
Stock under Section 5(k), as applicable, instead of Stock;
(f) to determine whether, to what extent and under what circumstances (if
any) Option grants and/or other awards under the Plan are to be made,
and operate, on a tandem basis vis-a-vis other awards under the Plan
and/or awards made outside of the Plan, or on an additive basis;
(g) to determine whether, to what extent and under what circumstances
Stock and other amounts payable with respect to an award under the
Plan shall be deferred either automatically or at the election of the
participant (including providing for and determining the amount (if
any) of any deemed earnings on any deferred amount during any deferral
period);
(h) to determine the terms and restrictions applicable to Other
Stock-Based Awards and any Stock relating to such Awards;
(k) with respect to an award of Restricted Stock, to determine whether the
right to vote will be granted with such award and/or whether the
per-share equivalent of any dividends declared with respect to the
Company's Common Stock will be paid in cash, additional Restricted
Stock or Deferred Stock, or not at all;
(l) with respect to an award of Deferred Stock, to determine whether the
per-share equivalent of any dividends declared with respect to the
Company's Common Stock will be paid in cash, Restricted Stock or
additional Deferred Stock, or not at all; and
(m) to determine the terms and conditions pursuant to which an SIP Award
may be terminated.
The Committee shall have the authority: to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
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All decisions made by the Committee pursuant to the provisions of the Plan
shall be made in the Committee's sole discretion and shall be final and binding
on all persons, including the Company and Plan participants.
SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for distribution
under the Plan shall be ___________ shares. Such shares may consist, in whole
or in part, of authorized and unissued shares or treasury shares.
Subject to Section 6(b)(iv) below, if any shares of Stock that have been
optioned cease to be subject to a Stock Option, or if any such shares of Stock
that are subject to any Restricted Stock or Deferred Stock award, any
Performance-Related Award or any Other Stock-Based Award granted hereunder are
forfeited or any such award otherwise terminates without a payment being made to
the participant in the form of Stock or cash equivalent value, such shares shall
again be available for distribution in connection with future awards under the
Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted under
the Plan, and in the number of shares subject to other outstanding awards
granted under the Plan as may be determined to be appropriate by the Committee,
in its sole discretion, provided that the number of shares subject to any award
shall always be a whole number. Such adjusted option price shall also be used
to determine the amount payable by the Company upon the exercise of any Stock
Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY.
Officers and other key employees and consultants of the Company and its
Subsidiaries and Affiliates (but excluding members of the Committee and any
person who serves only as a director) who are responsible for, or contribute to,
the management, growth and/or profitability of the business of the Company
and/or its Subsidiaries and Affiliates are eligible for awards under the Plan.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone, in addition to, or in tandem with,
other awards granted under the Plan. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve.
Stock Options granted under the Plan may be of two types: (i) Incentive
Stock
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Options; and (ii) Non-Qualified Stock Options.
The Committee shall have the authority to grant to any optionee Incentive
Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in
each case with or without Stock Appreciation Rights); provided that, in no event
shall the number of shares of Stock subject to any Stock Options granted to any
employee during any calendar year exceed 500,000 shares, as such number may be
adjusted pursuant to Section 3.
Options granted under the Plan shall be subject to the following terms and
conditions and to such additional terms and conditions, not inconsistent with
the terms of the Plan, as the Committee shall deem desirable (as set forth in
the applicable Stock Option agreement):
(a) OPTION PRICE. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at the time of
grant, but shall not be less than 100% of the Fair Market Value of such
share at grant (110% in the case of Incentive Stock Options granted to any
person owning 10% or more of the total combined voting power of the
Company's Stock).
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten (10)
years after the date the Option is granted (five (5) years in the case of
Incentive Stock Options granted to any person owning 10% or more of the
total combined voting power of the Company's Stock).
(c) EXERCISABILITY. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by
the Committee (as set forth in the applicable Stock Option agreement),
provided, however, that except as determined by the Committee, no Stock
Option shall be exercisable prior to the first anniversary date of the
granting of the Option. If the Committee provides, in its sole discretion,
that any Stock Option is exercisable only in installments, the Committee
may waive such installment exercise provisions at any time in whole or in
part, based on such factors as the Committee shall determine, in its sole
discretion.
(d) METHOD OF EXERCISE. Subject to whatever installment exercise
provisions apply under Section 5(c) and subject to whatever restrictions
may be imposed by the Company, Stock Options may be exercised in whole or
in part at any time during the option period, by giving written notice of
exercise to the Company specifying the number of shares to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price. Without limiting the generality of the foregoing, payment of the
option price may be made: (i) in cash or its equivalent; (ii) if and to the
extent expressly so
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provided in the applicable Stock Option agreement, by exchanging shares of
Stock owned by the optionee (which are not the subject of any pledge or
other security interest); (iii) if and to the extent expressly so provided
in the applicable Stock Option agreement, by executing a note; (iv) through
an arrangement with a broker approved by the Company whereby payment of the
exercise price is accomplished with the proceeds of the sale of Stock; or
(v) by any combination of the foregoing, provided that the combined value
of all cash and cash equivalents paid and the Fair Market Value of any such
Stock so tendered to the Company, valued as of the date of such tender, is
at least equal to such option price.
No shares of Stock shall be issued upon exercise of a stock option
until full payment therefor has been made. An optionee shall generally
have the rights to dividends or other rights of a shareholder with respect
to shares subject to the Option when the optionee has given written notice
of exercise, has paid in full for such shares, and, if requested, has given
the representation described in Section 14(a).
(e) TRANSFERABILITY OF OPTIONS. Unless and except to the extent that
the Committee shall expressly provide in the applicable Stock Option
agreement (on such terms and conditions as it shall establish) that a given
Option may be transferred to a member of the Participant's immediate family
or to a trust or similar vehicle for the benefit of such immediate family
members, no Option shall be assignable or transferable except by will or
the laws of descent and distribution, and except to the extent required by
law, no right or interest of any Participant shall be subject to any lien,
obligation or liability of the Participant.
(f) TERMINATION BY DEATH. Subject to Section 5(j) below, unless and
except to the extent that the Committee shall expressly otherwise provide
in the applicable Stock Option agreement, if an optionee's employment by
the Company and any Subsidiary or Affiliate terminates by reason of death,
any Stock Option held by such optionee may thereafter be exercised, to the
extent such Option was exercisable at the time of death (or on such
accelerated basis as the applicable Stock Option agreement may provide), by
the legal representative of the optionee's estate or by the legatee of the
optionee under the will of the optionee for a period of one year from the
date of death or, if earlier, until the expiration of the stated term of
such Stock Option.
(g) TERMINATION BY REASON OF DISABILITY. Subject to Section 5(j)
below, unless and except to the extent that the Committee shall expressly
otherwise provide in the applicable Stock Option agreement, if an
optionee's employment by the Company and any Subsidiary or Affiliate
terminates by reason of Disability, any Stock Option held by such optionee
may thereafter be exercised by the optionee, to the extent such Option was
exercisable at the time
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of such termination (or on such accelerated basis as the applicable Stock
Option agreement may provide), for a period of one year (or such other
period as the Committee may provide at grant) from the date of such
termination or, if earlier, the expiration of the stated term of such Stock
Option, provided, however, that, if the optionee dies within such one-year
period (or such other period as may be specified in the Stock Option
agreement), any unexercised Stock Option held by such optionee at death, to
the extent otherwise exercisable at the time of death, shall thereafter be
exercisable for a period of one year from the date of death or, if earlier,
until the expiration of the stated term of such Stock Option. In the event
of termination of employment by reason of Disability, if an Incentive Stock
Option is exercised after the expiration of the exercise periods that apply
for purposes of Section 422 of the Code, such Stock Option will thereafter
be treated as a Non-Qualified Stock Option.
(h) OTHER TERMINATION. Unless otherwise determined by the Committee
and provided in the applicable Stock Option agreement, if an optionee's
employment by the Company or any Subsidiary or Affiliate terminates for any
reason other than death, Disability, the Stock Option shall thereupon
immediately terminate, except that, if the optionee's employment is
terminated by the Company without Cause, such Stock Option may be
exercised, to the extent otherwise then exercisable, for the lesser of
three (3) months or the balance of the Option's stated term.
(i) INCENTIVE STOCK OPTIONS. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options
shall be interpreted, amended or altered, nor shall any discretion or
authority granted under the Plan be so exercised, so as to disqualify the
Plan under Section 422 of the Code, or, without the consent of the
optionee(s) affected, to disqualify any Incentive Stock Option under such
Section 422.
(j) SETTLEMENT PROVISIONS. If the option agreement so provides at
grant or is amended after grant, and prior to the exercise, to so provide
(with the optionee's consent), the Committee may require that all or part
of the shares to be issued with respect to the spread value of an exercised
Option take the form of Deferred or Restricted Stock, which shall be valued
on the date of exercise on the basis of the Fair Market Value (as
determined by the Committee) of such Deferred or Restricted Stock
determined without regard to the deferral limitations and/or the forfeiture
restrictions involved.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Stock Option. In the case of an Incentive
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Stock Option, such rights may be granted only at the time of grant of such Stock
Option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, subject to such
provisions as the Committee may specify at grant where a Stock Appreciation
Right is granted with respect to less than the full number of shares covered by
a related Stock Option.
A Stock Appreciation Right may be exercised by an optionee, subject to
Section 6(b), in accordance with the procedures established by the Committee for
such purposes. Upon such exercise, the optionee shall be entitled to receive an
amount determined in the manner prescribed in Section 6(b). Stock Options
relating to exercised Stock Appreciation Rights shall no longer be exercisable
to the extent that the related Stock Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee (as set forth in the
applicable Stock Option agreement), including the following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall
be exercisable in accordance with the provisions of Section 5 and this
Section 6 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be
entitled to receive an amount in cash and/or shares of Stock equal in value
to the excess of the Fair Market Value of one share of Stock over the
option price per share specified in the related Stock Option multiplied by
the number of shares in respect of which the Stock Appreciation Right shall
have been exercised, with the Committee having the right to determine the
form of payment. When payment is to be made in shares, the number of
shares to be paid shall be calculated on the basis of the Fair Market Value
of the shares on the date of exercise.
(iii) Stock Appreciation Rights shall be transferable only if, when and to
the extent that the underlying Stock Option would be transferable under
Section 5(e) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or
part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth
in Section 3 of the Plan on the number of shares of Stock exercised under
the Plan, but only to the extent of the number of shares issued under the
Stock Appreciation Right at the time of exercise based on the value of the
Stock Appreciation Right at such time.
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(v) The Committee, in its sole discretion, may provide that, in the event
of a Change in Control and/or a Potential Change in Control, the amount to
be paid upon the exercise of a Stock Appreciation Right shall be based on
the Change in Control Price, subject to such terms and conditions as the
Committee may specify at grant.
SECTION 7. RESTRICTED STOCK.
(a) ADMINISTRATION. Shares of Restricted Stock may be issued either
alone, in addition to, or in tandem with, other awards granted under the Plan
and/or awards made outside of the Plan. The Committee shall determine the
eligible persons to whom, and the time or times at which, grants of Restricted
Stock will be made, the number of shares to be awarded, the price (if any) to be
paid by the recipient of Restricted Stock (subject to Section 7(b)), the time or
times within which such awards may be subject to forfeiture, and all other terms
and conditions of the awards.
The Committee may condition the grant of Restricted Stock upon the
attainment of specified Performance Criteria or such other factors as the
Committee may determine, in its sole discretion.
The provisions of Restricted Stock awards need not be the same with respect
to each recipient.
(b) AWARDS AND CERTIFICATES. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless and
until the Company and such recipient have executed an agreement evidencing the
award and the recipient has delivered a fully executed copy thereof to the
Company, and has otherwise complied with the applicable terms and conditions of
such award.
(i) The purchase price for shares of Restricted Stock shall be equal to or
less than their par value and may be zero.
(ii) Awards of Restricted Stock must be accepted within a reasonable
period (or such specific period as the Committee may specify at grant)
after the award date, by executing a Restricted Stock award agreement and
paying whatever price (if any) is required under Section 7(b)(i).
(iii) Each participant receiving a Restricted Stock award shall be issued
a stock certificate in respect of such shares of Restricted Stock. Such
certificate shall be registered in the name of such participant, and shall
bear an appropriate legend referring to the terms, conditions and
restrictions applicable to such award.
(iv) The Committee shall require that the stock certificates evidencing
such shares be held in custody by the Company until the restrictions
thereon shall
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have lapsed, and that, as a condition of any Restricted Stock award, the
participant shall have delivered a stock power, endorsed in blank, relating
to the Stock covered by such award.
(c) TERMS AND CONDITIONS. The shares of Restricted Stock awarded pursuant
to this Section 7 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the award agreement, during
a period set by the Committee commencing with the date of such award (the
"Restriction Period"), the participant shall not be permitted to sell,
transfer, pledge or assign shares of Restricted Stock awarded under the
Plan. Within these limits, the Committee, in its sole discretion, may
provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions in whole or in part, based on
service, Performance Criteria and/or such other factors as the Committee
may determine, in its sole discretion.
(ii) If and when the Restriction Period expires without a prior forfeiture
of the Restricted Stock subject to such Restriction Period, certificates
for an appropriate number of unrestricted shares of Stock shall be
delivered to the participant promptly.
(iii) The voting rights and/or dividend rights, if any, of the Restricted
Stock award shall be established by the Committee pursuant to Section 2(i).
SECTION 8. DEFERRED STOCK.
(a) ADMINISTRATION. Deferred Stock may be awarded either alone, in
addition to, or in tandem with, other awards granted under the Plan and/or
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom and the time or times at which Deferred Stock shall be awarded,
the number of shares of Deferred Stock to be awarded to any person, the duration
of the period (the "Deferral Period") during which, and the conditions under
which, receipt of the Stock will be deferred, and the other terms and conditions
of the award in addition to those set forth in Section 8(b).
The Committee may condition the grant of Deferred Stock upon the attainment
of specified Performance Criteria or such other factors or criteria as the
Committee shall determine, in its sole discretion.
The provisions of Deferred Stock awards need not be the same with respect
to each recipient.
(b) TERMS AND CONDITIONS. The shares of Deferred Stock awarded pursuant
to this Section 8 shall be subject to the following terms and conditions:
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(i) Subject to the provisions of this Plan and the award agreement
referred to in Section 8(b)(iv) below, Deferred Stock awards may not be
sold, assigned, transferred, pledged or otherwise encumbered during the
Deferral Period. At the expiration of the Deferral Period (or the Elective
Deferral Period referred to in Section 8(b)(iii), where applicable), stock
certificates shall be delivered to the participant, or his legal
representative, in a number equal to the shares covered by the Deferred
Stock award.
(ii) Based on service, Performance Criteria and/or such other factors as
the Committee may determine, the Committee may accelerate the vesting of
all or any part of any Deferred Stock award and/or waive the deferral
limitations for all or any part of such award.
(iii) A participant may elect to further defer receipt of an award (or an
installment of an award) for a specified period or until a specified event
(the "Elective Deferral Period"), subject in each case to such terms as are
determined by the Committee, all in its sole discretion. Subject to any
exceptions adopted by the Committee, such election must generally be made
at least twelve (12) months prior to completion of the Deferral Period for
such Deferred Stock award (or such installment).
(iv) Each award shall be confirmed by, and subject to the terms of, a
Deferred Stock agreement executed by the Company and the participant.
(v) The dividend rights, if any, of the Deferred Stock award established
by the Committee pursuant to Section 2(j).
SECTION 9. PERFORMANCE-RELATED AWARDS.
(a) PERFORMANCE OBJECTIVES. The Committee may provide at the time of
grant that a Restricted Stock award, Deferred Stock award or Other Stock-Based
Award to an executive officer or other key employee shall become vested, if at
all, only upon the determination by the Committee that specific performance
objectives established by the Committee pursuant to this Section 9 have been
attained, in whole or in part (a "Performance Award").
Such performance objectives shall be determined by reference to a
measurement period or periods established by the Committee prior to grant and
shall be based on at least one of the following criteria, which may be
determined solely by reference to the performance of: (i) the Company, (ii) a
Subsidiary, (iii) an Affiliate, and/or (iv) a division or unit of any of the
foregoing or based on comparative performance of any of the foregoing relative
to past performance or to other companies: (A) return on equity, (B) total
shareholder return, (C) revenues, (D) cash flows, revenues and/or earnings
relative to other parameters (e.g., net or gross assets), (E) operating income,
(F) return on investment, (G) changes in the value of the Company's
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Common Stock, and/or (H) return on assets (collectively, the "Performance
Criteria").
Excluding Stock Options and/or Stock Appreciation Rights granted hereunder,
the maximum number of shares of Stock that may be subject to any such
Performance Award granted to any key employee in any calendar year shall not
exceed 250,000 shares, as such number may be adjusted pursuant to Section 3.
(b) INTERPRETATION. Notwithstanding anything else contained in the Plan
to the contrary, to the extent required to so qualify any Performance Award
intended to qualify as "performance based compensation" within the meaning of
Section 162(m)(4)(C) of the Code, the Committee shall not be entitled to
exercise any discretion otherwise authorized under the Plan (such as the right
to accelerate vesting without regard to the achievement of the relevant
performance objectives) with respect to such Performance Award if the ability to
exercise such discretion (as opposed to the exercise of such discretion) would
cause such award to fail to qualify as "performance based compensation" for such
purposes.
SECTION 10. OTHER STOCK-BASED AWARDS.
(a) ADMINISTRATION. Other awards of Stock and other awards that are
valued in whole or in part by reference to, or are otherwise based on, Stock
("Other Stock-Based Awards"), including, without limitation, stock purchase
rights, convertible preferred stock, convertible debentures, exchangeable
securities and Stock awards or options valued by reference to book value or
subsidiary performance, may be granted either alone, in addition to, or in
tandem with, Stock Options, Stock Appreciation Rights, Restricted Stock,
Deferred Stock or Performance-Related Awards granted under the Plan and/or cash
awards made outside of the Plan.
Subject to the provisions of the Plan, the Committee shall have authority
to determine the persons to whom and the time or times at which such awards
shall be made, the amount of such awards, and all other conditions of the awards
including any dividend and/or voting rights. The Committee may also provide for
the grant of Stock upon the completion of a specified performance period.
The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
(b) TERMS AND CONDITIONS. Other Stock-Based Awards made pursuant to this
Section 10 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the award agreement
referred to in Section 10(b)(ii) below, awards made under this Section 10
may not be sold, assigned, transferred, pledged or otherwise encumbered
prior to the date on which any shares are issued or amounts are paid, or,
if later, the date on which any applicable restriction, performance or
deferral period lapses.
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(ii) Each award under this Section 10 shall be confirmed by, and subject
to the terms of, an agreement evidencing the award.
(iii) Stock (including securities convertible into Stock) issued on a
bonus basis under this Section 10 may be issued for no cash consideration.
Stock (including securities convertible into Stock) purchased pursuant to a
purchase right awarded under this Section 10 shall be purchased at price(s)
determined by the Committee, in its sole discretion.
SECTION 11. CHANGE IN CONTROL PROVISIONS.
(a) IMPACT OF EVENT. In the event of a "Change in Control" as defined in
Section 11(b) below, but only if and to the extent so determined by the
Committee, in its sole discretion, in writing at, or prior to, the time of such
Change in Control, and subject to the approval of the Board:
(i) Any Stock Options awarded under the Plan not previously exercisable
and vested shall become fully exercisable and vested;
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock, Deferred Stock, Performance-Related Awards and Other
Stock-Based Awards, in each case to the extent not already vested under the
Plan, shall lapse and such shares and awards shall be deemed fully vested
and any Performance Criteria shall be deemed met at target; and
(iii) The value of all outstanding SIP Awards to the extent vested may, at
the sole discretion of the Committee at or after grant but prior to any
Change in Control, subject to the approval of the Board be cashed out as of
the date such Change in Control is determined to have occurred or such
other date as the Committee may determine prior to the Change in Control.
(b) DEFINITION OF "CHANGE IN CONTROL". For purposes of Section 11(a), a
"Change in Control" means the happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of the Exchange Act
and as used in Sections 13(d) and 14(d) thereof (including a "group" as
defined in Section 13(d) of the Exchange Act, but excluding the Company,
any Subsidiary or any employee benefit plan sponsored or maintained by the
Company or any Subsidiary (including any trustee of such plan acting as
trustee), and also excluding Ivan Kaufman ("IK"), any IK-led entity or
group or any IK affiliate) directly or indirectly, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
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Exchange Act, as amended from time to time), of securities of the Company
representing both (i) 25% or more of the combined voting power of the
Company's then outstanding securities, and (ii) a greater ownership of the
Company's securities as measured by combined voting power than IK, any
IK-led entity or group, and any IK affiliate;
(ii) The individuals who, as of the Effective Date of this Plan,
constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the Effective Date of the Plan
whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation
of proxies or consents by or on behalf of a person other than the Board,
unless such individual was approved by a two-thirds majority of the
Incumbent Board; or
(iii) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the
Company or the acquisition of assets of another corporation (a "Business
Combination"), in each case, unless, following such Business Combination:
(A) all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the then outstanding shares of Stock of
the Company and the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors immediately prior to such Business Combination beneficially own,
directly or indirectly, more than sixty percent (60%) of, respectively, the
then outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly or through one
or more subsidiaries); and
(B) no person (excluding any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Business Combination
and also excluding IK, any IK-led entity group or any IK affiliate)
beneficially owns, directly or indirectly, ____% or more of, respectively,
the then outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination; or
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(iv) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
SECTION 12. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of an
optionee or participant under a SIP Award previously granted and still
outstanding, without the optionee's or participant's consent.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices.
Subject to the above provisions, the Board shall have broad authority to
amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.
SECTION 13. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize
the creation of trusts or other arrangements to meet the obligations created
under the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder; provided, however, that, unless the Committee otherwise determines
with the consent of the affected participant, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan.
SECTION 14. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant to a
Stock Option or other award under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
All certificates for shares of Stock or other securities delivered under
the Plan shall be subject to such stock-transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations, and other
requirements of the
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Securities and Exchange Commission, any stock exchange upon which the Stock is
then listed, and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required, and such arrangements may be either generally
applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of the
Company or any Subsidiary or Affiliate any right to continued employment with
the Company or a Subsidiary or Affiliate, as the case may be, nor shall it
interfere in any way with the right of the Company or a Subsidiary or Affiliate
to terminate the employment of any of its employees at any time.
(d) Except as the participant and the Company may otherwise agree, no later
than the date as of which an amount first becomes includible in the gross income
of the participant for federal income tax purposes with respect to any award
under the Plan, the participant shall pay to the Company, or make arrangements
satisfactory to the Committee regarding the payment of, any federal, state, or
local taxes of any kind required by law to be withheld with respect to such
amount. Unless otherwise determined by the Committee, withholding obligations
may be settled with Stock, including Stock that is part of the award that gives
rise to the withholding requirement. The obligations of the Company under the
Plan shall be conditional on such payment or arrangements, and the Company and
its Subsidiaries or Affiliates shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
participant.
(e) The actual or deemed reinvestment of dividends or dividend equivalents
in additional Restricted Stock (or in Deferred Stock or other types of Plan
awards) at the time of any dividend payment shall only be permissible if
sufficient shares of Stock are available under Section 3 for such reinvestment
(taking into account then outstanding Stock Options and other Plan awards).
(f) The Committee may permit a participant to postpone the delivery of
Stock under any award, including a Stock Option, under the Plan upon such terms
and conditions as the Committee shall determine.
(g) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of New York,
applied without regard to conflict of law principles.
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SECTION 15. EFFECTIVE DATE OF PLAN.
The Plan was adopted by the Board on July __, 1998, and shall be effective
as of such date, conditioned on and subject to the approval of the Plan (and any
pre-approval grants thereunder) by the Company's shareholders at the Company's
annual meeting of stockholders to be held on or about May 1999.
SECTION 16. TERM OF PLAN.
No SIP Award shall be granted pursuant to the Plan on or after the tenth
anniversary of the date of shareholder approval, but awards granted prior to
such tenth anniversary may extend beyond that date, in accordance with the terms
of such awards.
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EXHIBIT 10.2
ARBOR NATIONAL HOLDINGS, INC.
1998 NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
SECTION 1. PURPOSE, DEFINITIONS.
The purpose of the Arbor National Holdings, Inc. 1998 Non-Employee Director
Stock Incentive Plan (the "Plan") is to enable Arbor National Holdings, Inc.
(the "Company") to attract, retain and reward non-employee directors to serve on
its Board of Directors, and strengthen the mutuality of interests between such
persons and the Company's shareholders, by offering such persons equity-based
incentives in the Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means a felony conviction of a participant or the failure of a
participant to contest prosecution for a felony, or a participant's willful
or gross misconduct or dishonesty, any of which is directly and materially
harmful to the business or reputation of the Company or any Subsidiary or
Affiliate.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
(d) "Company" means Arbor National Holdings, Inc., a corporation organized
under the laws of the State of New York, or any successor corporation.
(e) "Deferred Stock" means any right to receive Stock at the end of a specified
deferral period pursuant to Section 8.
(f) "Disability" means disability as determined under procedures established by
the Board for purposes of this Plan.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor thereto.
(h) "Fair Market Value" means, as of any given date, unless otherwise
determined by the Board in good faith, the mean between the highest and
lowest quoted selling price, regular way, of the Stock on the NASDAQ on
such date, or, if the
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Stock is not traded on such date, the immediately preceding trading day,
or, if no such sale of Stock occurs on the NASDAQ on such date or such
immediately preceding trading day, the fair market value of the Stock as
determined by the Board in good faith.
(i) "Plan" means this Arbor National Holdings, Inc. 1998 Non-Employee Director
Stock Incentive Plan, as it may be amended from time to time.
(j) "Stock" means the Common Stock, $0.01 par value per share, of the Company.
(k) "Stock Option" or "Option" means any option to purchase shares of Stock
pursuant to Section 5 below.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Board, which shall the full power and
authority to administer grants made, pursuant to the terms of the Plan, to
non-employee directors on the Company's Board.
In particular the Board shall have the authority:
(a) to decide all eligibility issues;
(b) to determine the terms and conditions, not inconsistent with the terms
of the Plan, of any award granted hereunder; and
(c) to determine the terms and conditions pursuant to which an award under
the Plan may be terminated.
The Board shall have the authority: to adopt, alter and repeal such rules,
guidelines and practices governing the Plan as it shall, from time to time, deem
advisable; to interpret the terms and provisions of the Plan and any award
issued under the Plan (and any agreements relating thereto); and to otherwise
supervise the administration of the Plan.
All decisions made by the Board pursuant to the provisions of the Plan
shall be made in the Board's sole discretion and shall be final and binding on
all persons, including the Company and Plan participants.
SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for distribution
under the Plan shall be ___________ shares. Such shares may consist, in whole
or in part, of authorized and unissued shares or treasury shares.
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Subject to Section 6(b)(iv) below, if any shares of Stock that have been
optioned cease to be subject to a Stock Option, or if any such shares of Stock
that are subject to any Deferred Stock award granted hereunder are forfeited or
any such award otherwise terminates without a payment being made to the
participant in the form of Stock or cash equivalent value, such shares shall
again be available for distribution in connection with future awards under the
Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted under
the Plan, and in the number of shares subject to other outstanding awards
granted under the Plan as may be determined to be appropriate by the Board, in
its sole discretion, provided that the number of shares subject to any award
shall always be a whole number.
SECTION 4. ELIGIBILITY.
All non-employee directors on the Board are eligible for awards under the
Plan.
SECTION 5. STOCK OPTIONS.
Each non-employee director on the Board as of the effective date of the
Company's 1998 initial public offering (the "IPO") shall receive an Option to
purchase 3,000 shares of Stock priced at the IPO offering price.
Each non-employee director first elected to the Board after the effective
date of the Company's 1998 IPO shall receive an Option to purchase 3,000 shares
of Stock priced at the IPO offering price on the date of their election to the
Board.
Each subsequent year after the calendar year in which he or she was
initially elected to the Board, each non-employee director still in service as
of the date of the Company's annual shareholders' meeting for such subsequent
year shall receive an Option to purchase 1,000 shares of Stock priced at the
Fair Market Value of the Stock on such date.
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Options granted under the Plan shall be subject to the following terms
andconditions and to such additional terms and conditions, not inconsistent with
the terms of the Plan, as the Board shall deem desirable (as set forth in the
applicable Stock Option agreement):
(a) OPTION PRICE. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Board in accordance with
the above provisions.
(b) OPTION TERM. The term of each Stock Option shall be ten (10)
years after the date the Option is granted.
(c) EXERCISABILITY. Stock Options shall vest and become exercisable
in 25% installments on each of the first four (4) anniversaries of the date
of grant, provided that the non-employee director is still in service on
the Board.
(d) METHOD OF EXERCISE. Subject to whatever installment exercise
provisions apply under Section 5(c) and subject to whatever restrictions
are imposed under or pursuant to this Section 5, Stock Options may be
exercised in whole or in part at any time during the option period, by
giving written notice of exercise to the Company specifying the number of
shares to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price. Without limiting the generality of the foregoing, payment of the
option price may be made: (i) in cash or its equivalent; (ii) if and to the
extent expressly so provided in the applicable Stock Option agreement, by
exchanging shares of Stock owned by the optionee (which are not the subject
of any pledge or other security interest); (iii) if and to the extent
expressly so provided in the applicable Stock Option agreement, by
executing a note; (iv) through an arrangement with a broker approved by the
Company whereby payment of the exercise price is accomplished with the
proceeds of the sale of Stock; or (v) by any combination of the foregoing,
provided that the combined value of all cash and cash equivalents paid and
the Fair Market Value of any such Stock so tendered to the Company, valued
as of the date of such tender, is at least equal to such option price.
No shares of Stock shall be issued upon exercise of a stock option
until full payment therefor has been made. An optionee shall generally
have the rights to dividends or other rights of a shareholder with respect
to shares subject to the Option when the optionee has given written notice
of exercise, has paid in full for such shares, and, if requested, has given
the representation described in Section 9(a).
(e) TRANSFERABILITY OF OPTIONS. No Option shall be assignable or
transferable except by will or the laws of descent and distribution, and
except to
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the extent required by law, no right or interest of any Participant shall
be subject to any lien, obligation or liability of the Participant.
(f) TERMINATION BY DEATH. Subject to Section 5(j) below, if an
optionee's service on the Board terminates by reason of death, any Stock
Option held by such optionee may thereafter be exercised, to the extent
such Option was exercisable at the time of death, by the legal
representative of the optionee's estate or by the legatee of the optionee
under the will of the optionee for a period of one year from the date of
death or, if earlier, until the expiration of the stated term of such Stock
Option.
(g) TERMINATION BY REASON OF DISABILITY. Subject to Section 5(j)
below, if an optionee's service on the Board terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be
exercised by the optionee, to the extent such Option was exercisable at the
time of such termination, for a period of one year from the date of such
termination or, if earlier, the expiration of the stated term of such Stock
Option, provided, however, that, if the optionee dies within such one-year
period, any unexercised Stock Option held by such optionee at death, to the
extent otherwise exercisable at the time of death, shall thereafter be
exercisable for a period of one year from the date of death or, if earlier,
until the expiration of the stated term of such Stock Option.
(h) OTHER TERMINATION. Unless otherwise determined by the Board and
provided in the applicable Stock Option agreement, if an optionee's service
on the Board terminates for any reason other than death, Disability, the
Stock Option shall thereupon immediately terminate, except that, if the
optionee's service is terminated by the optionee voluntarily other than in
a Cause situation, such Stock Option may be exercised, to the extent
otherwise then exercisable, for the lesser of three (3) months or the
balance of the Option's stated term.
SECTION 6. RETAINER-RELATED STOCK GRANTS.
Each non-employee director on the Board as of the effective date of the
Company's 1998 initial public offering (the "IPO") shall receive a grant of
1,000 shares of Stock for 1998, in lieu of any cash retainer for services
rendered in 1998 as director on the Board, and in addition to any meeting fees
received for such services.
For each calendar year after 1998, each non-employee director on the Board
as of June 30 and December 31 of such year shall receive, with respect to the
six (6) month period ending on such date, a retainer payment in the amount of
$7,500, 50% of which will be paid in the form of Stock having a Fair Market
Value on such date of $3,750, and 50% of which will be paid in the form of cash
unless the director elects, on at least 10 business days prior notice to the
Company, to have such 50% also paid in the form of Stock. Notwithstanding the
above, any amount otherwise payable as a
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fractional share will be paid in the form of cash. Any retainer paid hereunder
will be in addition to any meeting fees received for director services for the
period in question.
SECTION 7. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no
amendment,alteration or discontinuation shall be made which would impair the
rights of an participant under an award previously granted and still
outstanding, without the optionee's or participant's consent.
The Board may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent.
Subject to the above provisions, the Board shall have broad authority to
amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.
SECTION 8. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Board may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder; provided, however, that, unless the Board otherwise determines with
the consent of the affected participant, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 9. GENERAL PROVISIONS.
(a) The Board may require each person purchasing shares pursuant to a Stock
Option or other award under the Plan to represent to and agree with the Company
in writing that the optionee or participant is acquiring the shares without a
view to distribution thereof. The certificates for such shares may include any
legend which the Board deems appropriate to reflect any restrictions on
transfer.
All certificates for shares of Stock or other securities delivered under
the Plan shall be subject to such stock-transfer orders and other restrictions
as the Board may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed, and any applicable federal or state securities
law, and the Board may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
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(b) Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required, and such arrangements may be either generally
applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any director any right
to continue to be a director, nor shall it interfere in any way with the right
of the Company to terminate the service of any director.
(d) Each participant shall pay to the Company, or make
arrangementssatisfactory to the Board regarding the payment of, any federal,
state, or local taxes of any kind required by law to be withheld with respect to
such amount. Unless otherwise determined by the Board, withholding obligations
may be settled with Stock, including Stock that is part of the award that gives
rise to the withholding requirement. The obligations of the Company under the
Plan shall be conditional on such payment or arrangements, and the Company
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the participant.
(e) The Board may permit a participant to postpone the delivery of Stock
under any award, including a Stock Option, under the Plan upon such terms and
conditions as the Board shall determine.
(f) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of New York,
applied without regard to conflict of law principles.
SECTION 10. EFFECTIVE DATE OF PLAN.
The Plan was adopted by the Board on July ___, 1998, and shall be effective
as of such date, conditioned on and subject to the approval of the Plan (and any
pre-approval grants thereunder) by the Company's shareholders no later than the
annual shareholders meeting for 1999.
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SECTION 11. TERM OF PLAN.
No award shall be granted pursuant to the Plan on or after the tenth
anniversary of the date of shareholder approval, but awards granted prior to
such tenth anniversary may extend beyond that date, in accordance with the terms
of such awards.
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Exhibit 10.3
SALE AND EXCHANGE AGREEMENT
SALE AND EXCHANGE AGREEMENT, dated as of the 4th day of June, 1998, by
and among ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC ("ANCM"), a New York
limited liability company organized on January 25, 1995 and operating under a
Restated and Amended Operating Agreement (the "Operating Agreement") dated as
of January 1, 1996; the individuals and entities as set forth in Appendix A
attached hereto (the "Members"), who hold membership interests in ANCM; ARBOR
MANAGEMENT LLC, a New York limited liability company and the Manager of ANCM
("Management"); ARBOR SECURED FUNDING, INC., a New York corporation which is
a subsidiary of ANCM ("ASF"); and ARBOR NATIONAL HOLDINGS, INC., a New York
Corporation, formed on June 12, 1998 ("ANHI").
W I T N E S S E T H:
WHEREAS, the undersigned Members, who constitute all of the Members of ANCM,
desire to irrevocably sell, transfer, assign and convey to ANHI all of the
membership interests of ANCM (each, a "Membership Interest" and, collectively,
the "Membership Interests") in exchange for shares (the "Exchange Shares") of
common stock of ANHI (the "Common Stock"), upon the terms and conditions further
described hereinbelow;
WHEREAS, ANHI desires to acquire the Membership Interests in exchange for
the Exchange Shares, as hereinafter provided;
WHEREAS, the parties intend that, after completion of the transactions
described herein, ANHI will own all of the Membership Interests of ANCM, free
and clear of all Liens (as defined in Section 3(a) hereof); and ANCM will become
a single-member limited liability company and a wholly-owned subsidiary of ANHI;
<PAGE>
WHEREAS, certain Members identified on Appendix A (the "Financed Members")
have pledged their Membership Interests (the "Pledged Interests") as collateral
for loans obtained from ASF (the "ASF Loans");
WHEREAS, ASF is prepared to release its security interest in the Pledged
Interests, upon receipt by it of certificates representing the Exchange Shares
issuable to the Financed Members, to be held by ASF as substitute collateral for
the ASF Loans;
WHEREAS, Management and each Member, by execution of this Agreement, are
prepared to consent to the sale, assignment and transfer to ANHI of the
Membership Interests pursuant to the terms and conditions of this Agreement and
the substitution of ANHI as a Substituted Member in satisfaction of the
requirements of the Operating Agreement; and
WHEREAS, the closing of the sale and exchange described in this Agreement is
expressly conditioned upon the closing (the "IPO Closing") of an initial public
offering (the "Initial Public Offering") of Common Stock registered pursuant to
a registration statement (the "IPO Registration Statement") which is expected to
be filed on or about June 15, 1998;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Sale and Exchange. Subject to the terms and conditions set forth herein,
each Member hereby irrevocably and unconditionally agrees to sell, transfer,
assign, convey and set over to ANHI, and ANHI hereby irrevocably and
unconditionally agrees to purchase, all of such Members' right, title and
interest in such Member's Membership Interest; provided, however, that the
closing (the "Exchange Closing") of the transfer of such Member's Membership
Interest and
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the issuance and delivery of the proper number of Shares in exchange therefor
(together, the "Exchange Transaction") shall only take place simultaneously with
the IPO Closing. If the IPO Closing does not occur on or prior to May 31, 1999,
this Agreement shall terminate without further liability or obligation of any
party hereto.
2. Consideration. As consideration for the sale by all Members of 100% of
the Membership Interests, ANHI shall issue to the Members an aggregate of 7.5
million Shares (the "Total Consideration"). ANCM and all Members agree that the
Total Consideration shall be allocated among the Members in the same proportion
which such Member's capital account in ANCM bears to the aggregate capital
accounts of all Members. By execution hereof, each Member acknowledges receipt
from ANCM of the information necessary to calculate such proportion and the
number of Exchange Shares issuable with respect to such Member's Membership
Interest at the Exchange Closing (the "Proration Calculation"). ANCM shall
provide each Member promptly (but in any event prior to the Exchange Closing)
with any information which would result in a modification of the Proration
Calculation.
3. Representations of Members. Each Member hereby represents and warrants to
ANHI for such Member (and not for any other Member) as follows:
(a) Title to Interest. Such Member owns such Member's Membership
Interest free and clear of all liens, claims, options, charges, pledges and
encumbrances ("Liens"), except (as to each Financed Member) for the pledge of
such Financed Member's Membership Interest as collateral for such Member's ASF
Loan (the "ASF Lien").
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(b) Organization and Standing. If an entity, such Member is duly
organized and validly existing under the laws of its state of organization, is
in good standing under such laws and has all requisite power and authority to
execute, deliver and perform its obligations under the terms of this Agreement.
(c) Authorization. (i) If an entity, all action on the part of such
Member, its directors, managers or trustees and its equity owners has been taken
which is necessary for the authorization, execution, delivery, performance by
such Member of this Agreement and the consummation of the transactions
contemplated herein.
(ii) This Agreement is a legal, valid and binding obligation of
such Member, enforceable in accordance with its terms, subject to (i) applicable
bankruptcy, insolvency, reorganization and moratorium laws and other laws of
general application affecting enforcement of creditors' rights generally and
(ii) the availability of equitable remedies as such remedies may be limited by
equitable principles of general applicability (regardless of whether enforcement
is sought in a proceeding in equity or at law).
(d) No Conflict. The execution, delivery and performance by such Member
of this Agreement and such Member's compliance therewith does not and will not
result in any violation of and will not conflict with, or result in a breach of,
any of the terms of, or constitute a default under, any provision of state or
federal or other law to which such Member is subject, such Member's
organizational documents (if an entity), or any mortgage, indenture, agreement,
instrument, judgment, decree, order, rule or regulation or other restriction to
which such Member is a party or by which such Member is bound or to which such
Member's properties are subject.
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(e) Receipt of All Information Requested. In connection with the
issuance of such Member's pro rata share of the Total Consideration, such Member
hereby acknowledges that such Member and such Member's attorney, accountant,
purchaser representative or tax advisor, if any, has received and reviewed a
draft preliminary prospectus represented to be in the form included in the IPO
Registration Statement (the "Draft Preliminary Prospectus"), a copy of which is
attached as Appendix B, and each of them has been afforded the opportunity to
ask questions of and receive answers from duly authorized officers or other
representatives of ANHI concerning the terms and conditions of the Exchange
Transaction and the Public Offering. Such Member understands that, as of the
date hereof, neither the Securities and Exchange Commission ("SEC") nor any
securities commission or regulatory authority of any state of the United States
has approved the issuance of the Exchange Shares or the Public Offering nor has
any of them passed upon or endorsed the merits of the Exchange Transaction or
the Public Offering or confirmed or determined the accuracy or adequacy of this
Agreement or of any information contained in the Draft Preliminary Prospectus.
Such Member further understands that, as of the date hereof, the information
provided to such Member has not been reviewed by any federal, state, foreign or
other regulatory authority. Such Member (together with such Member's advisors,
if any) has such knowledge and experience in financial and business matters that
such Member is capable of evaluating the merits and risks of the Exchange
Transaction.
(f) Restricted Securities. Such Member understands that the Exchange
Shares such Member will be receiving are restricted securities under the
Securities Act of 1933, as amended (the "Securities Act"), and that restricted
securities may not be resold in the absence of registration or an exemption
therefrom. Such Member understands and acknowledges that, as of the date hereof,
the Exchange Shares have not been registered under the Act and there is
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<PAGE>
currently no public market for the Exchange Shares in the United States. Such
Member further understands and acknowledges that even if the IPO Registration
Statement is filed with the SEC, there can be no assurance that the IPO
Registration Statement will be declared effective or, if it is declared
effective, that a public market will develop. Even if the IPO Registration
Statement becomes effective and a public market develops, such Member will have
to wait at least one year before selling such Member's Exchange Shares into the
public market, unless ANHI files a separate registration statement covering such
Member's Exchange Shares (as provided in Section 7(b) hereof) or an exemption
from registration is available under the Securities Act. Each Financed Member
acknowledges that such Financed Member will be able to resell such Financed
Member's Exchange Shares to the public only if the Exchange Shares are
registered pursuant to a registration statement or if the sale is one year after
the earlier of (A) the date such Financed Member's ASF Loan is repaid or (B) the
date collateral other than such Financed Member's Exchange Shares is pledged to
secure such Financed Member's ASF Loan. Resales of Exchange Shares by each
Member who is an "affiliate" (as defined under the Securities Act) of ANHI
(generally, directors, officers and holders of over 10% of the outstanding
Common Stock) will be subject indefinitely by the volume limitations of Rule 144
promulgated under the Securities Act so long as such Member remains an
affiliate.
Each Member also understands that the certificates representing
Exchange Shares will be legended to reflect the above restrictions.
(g) No Distribution. Such Member is acquiring the Common Stock to be
issued and sold hereunder for such Member's own account for investment and
(except as contemplated by Section 7(b) hereof) not with a view to distribution
thereof. Any sale, transfer or other disposition of Shares by such Member shall
be made in conformity with this Agreement and all
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applicable requirements of the Securities Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations of the SEC
promulgated thereunder.
(h) No Reliance on Tax Advice. Such Member has been given the
opportunity to review with such member's own tax advisors the federal, state and
local tax consequences of the transactions contemplated by this Agreement.
Except for matters addressed in the tax opinion to be provided to such Member
pursuant to Section 7(d) hereof, such Member is relying solely on such advisors,
if any, and not on any statements or representations of ANHI or any of its
agents. Such Member understands that such Member (and not ANHI) shall be
responsible for such Member's own tax liability that may arise as a result of
the transactions contemplated by this Agreement. In particular, such Member, by
execution of this Agreement, agrees and acknowledges that such Member has been
given the opportunity to discuss with such Member's tax advisors, and
understands, the following:
ANCM is treated as a partnership for federal and most state income tax
purposes. ANHI is a corporation for federal and state income tax purposes.
Consequently, the Members will be exchanging what are in effect partnership
interests for shares of a corporation, and will be taxed differently on the
shares received from that of the interests given up in the exchange.
Partnerships are pass-through entities for tax purposes. Therefore,
partnerships are not subject to tax at the entity level. Rather, all tax
items, including items of income, gain, loss, deduction and credit, pass
through to the individual partners (or members, in the case of a limited
liability company). Members must report such items on their individual
income tax returns, and are taxed annually on their distributive share of
income from the partnership, regardless of whether such income is actually
distributed to the Members.
Under the Internal Revenue Code of 1986, as amended, corporations and
their shareholders are subject to two levels of tax. The corporation itself
pays an annual corporate level tax on its income. If the corporation chooses
to distribute earnings and profits to its shareholders in the form of
dividends, the shareholders who receive such dividends (whether in cash or
property) must include the value of the dividend in their gross income, and
are therefore subject to tax at their individual rates on the value of the
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<PAGE>
dividend. If the corporation does not choose to distribute earnings or
profits to its shareholders, no tax would be paid by the shareholders on
such earnings or profits.
(i) Independent Legal Advice. Such Member acknowledges that such Member
has had the opportunity to review this Agreement and the transactions
contemplated by this Agreement with its own legal counsel. Such Member is
relying solely on such counsel for legal advice with respect to this investment
and the transactions contemplated by this Agreement.
(j) Reliance on Representations. This Agreement is made by ANHI with
such Member in reliance upon such Member's representations and covenants made in
this Section 3, which by its execution of this Agreement such Member hereby
confirms.
4. Representations of ANHI. ANHI hereby represents, warrants and covenants
to each Member, on the date hereof, as follows:
(a) Organization and Standing. ANHI is a corporation duly incorporated
and validly existing under the laws of the State of New York and is in good
standing under such laws. ANHI has furnished such Member and its counsel with
true, correct and complete copies of its Certificate of Incorporation, By-Laws
and all amendments thereto to the date hereof.
(b) Corporate Power. ANHI has all requisite corporate power and
authority to execute, deliver and perform its obligations under the terms of
this Agreement and to issue the Exchange Shares.
(c) Authorization. No shares of ANHI have been, or will be, issued
prior to the Exchange Transaction. All corporate action on the part of ANHI and
its directors necessary for the authorization, execution, delivery and
performance by ANHI of this
8
<PAGE>
Agreement and the consummation of the transactions contemplated herein, and for
the authorization, issuance and delivery of the Exchange Shares, has been taken.
The Agreement is a legal, valid and binding obligation of ANHI, enforceable in
accordance with its terms, subject to (i) applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws of general application
affecting enforcement of creditors' rights generally and (ii) the availability
of equitable remedies as such remedies may be limited by equitable principles of
general applicability (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(d) Validity of Exchange Shares. The Exchange Shares have been duly
authorized for issuance and, when issued to such Member for the consideration
set forth herein, will be duly and validly issued, fully paid, non-assessable
and free of preemptive rights, with no personal liability attaching to the
ownership thereof. At the Closing, such Member will acquire good and valid title
to the number of Exchange Shares determined by the Proration Calculation, in
each case free and clear of any and all liens, claims, charges and encumbrances,
restrictions on voting or alienation or otherwise, or adverse interests.
(e) No Conflict. The execution, delivery and performance by ANHI of
this Agreement and ANHI's compliance therewith and the issuance and sale of the
Exchange Shares in accordance with the terms of this Agreement does not and will
not result in any violation of and will not conflict with, or result in a breach
of, any of the terms of, or constitute a default under, any provision of state
or federal or other law to which ANHI is subject, ANHI's Certificate of
Incorporation or By-laws, or any mortgage, indenture, agreement, instrument,
judgment, decree, order, rule or regulation or other restriction to which ANHI
is a party or by which it is bound or to which its properties are subject.
9
<PAGE>
(f) Governmental Approvals. Except for any of the following required by
applicable federal and State securities laws, all of which have been or will be
obtained or made in a timely manner, no authorization, consent, approval,
license, exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality is or will be
necessary for (i) the execution and delivery by ANHI of this Agreement, (ii) the
offer, issue, sale and delivery of the Exchange Shares, or (iii) the performance
by ANHI of its obligations under this Agreement or with respect to the Exchange
Shares.
(g) No Business Conducted. Except for preparation and filing of the IPO
Registration Statement and the authorization, execution and performance of this
Agreement, ANHI has conducted no business, owns no assets and has incurred no
liabilities.
(h) Reliance on Representations. This Agreement is made by such Member
with ANHI in reliance upon ANHI's representations and covenants made in this
Section 4, which by execution of this Agreement ANHI hereby confirms.
5. Members' Conditions of Closing. The transfer of a Member's Membership
Interest to ANHI is subject to the completion of the IPO Closing and to the
delivery to such Member (or, as to the Financed Members, to ASF pursuant to
Section 7(g) hereof) of stock certificates representing the Exchange Shares
issuable to such Member under this Agreement.
6. ANHI's Conditions of Closing. The issuance by ANHI of Exchange Shares to
a Member is subject to the completion of the IPO Closing.
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<PAGE>
7. Certain Covenants of the Parties. (a) No Violation of Representations.
Neither ANHI nor any Member shall hereafter take any action which would cause
any representation or warranty of such party made herein to be untrue on or as
of the Effective Date.
(b) Registration of Exchange Shares. (i) As soon as practicable after
ANHI satisfies the requirements to register Common Stock on Form S-3 promulgated
under the Securities Act (expected to be 12 months after the IPO Closing), ANHI
shall file a registration statement on Form S-3 (the "Resale Registration
Statement") covering any and all Exchange Shares owned by all Class B Members
for which ANHI receives Registration Requests (as defined below). ANHI shall, at
least thirty (30) days prior to such filing, notify each Member in writing of
its intention so to do at such Member's address as it appears in the stock
records of ANHI (the "Filing Notice"). If a Member desires to include any or all
of such Member's Exchange Shares in the Resale Registration Statement, it shall
(within ten (10) days after delivery of the Filing Notice) provide ANHI with a
notice specifying the number of Exchange Shares, if any, it wishes to include in
such registration statement ("Registration Request"). Upon receipt of a
Registration Request, ANHI shall include such Exchange Shares among the
securities covered by the Resale Registration Statement. To the extent permitted
by law, ANHI agrees to pay all costs and expenses in connection with the
preparation and filing of the Resale Registration Statement, except underwriting
discounts and commissions attributable to the Exchange Shares registered by such
Member.
(ii) When ANHI files the Resale Registration Statement, the Resale
Registration Statement shall comply with the Securities Act and the rules and
regulations thereunder, and ANHI shall: (A) use its best efforts to cause the
Resale Registration Statement
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<PAGE>
to become effective and remain effective for the period required to permit the
public offering and sale of the Exchange Shares covered by the Resale
Registration Statement (but not for more than 180 days following the effective
date of the Resale Registration Statement), and, for such period of time, and as
permitted by applicable rules and regulations, file amendments or supplements to
the Resale Registration Statement or related prospectus covering the Exchange
Shares as shall be necessary so that neither the Resale Registration Statement,
nor any related prospectus, nor any amendment or supplement to either thereof,
shall contain any material misstatement or omission and so that the Resale
Registration Statement, prospectus, amendment and supplement will otherwise
comply with all applicable legal requirements, (B) furnish to each Member such
reasonable number of copies of the Resale Registration Statement and any related
preliminary and final prospectuses, and any such amendments or supplements, as
each Member may request, (C) use its best efforts to register or qualify the
Exchange Shares of each Member included in the Resale Registration Statement
under the securities or "blue sky" laws of such states as each Member may
reasonably designate, to the extent that such registration or qualification
shall be required; provided, however, that ANHI shall not be required to
undertake such registration or qualification in any jurisdiction where it shall
be necessary for ANHI to execute a general consent to service or to qualify to
do business or otherwise subject itself to taxation by virtue of such
registration or qualification, and (D) indemnify and hold harmless each Member
and each underwriter (within the meaning of the Securities Act) acting in
connection with the offering or sale of securities by each Member, and each
person, if any, who controls (within the meaning of the Securities Act) each
Member or such underwriter, against any and all losses, claims, damages,
expenses or liabilities, joint or several, to which each Member, such
underwriter or controlling person may become subject under the Securities Act or
under any federal or state
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<PAGE>
securities law, or at common law, or otherwise, insofar as such losses, claims,
damages, expenses or liabilities arise out of or based upon an untrue statement
or an alleged untrue statement of a material fact contained in the Resale
Registration Statement, in any related prospectus or in any amendment, or
supplement to, either thereof, or arise out of or are based upon an omission or
an alleged omission to state in any thereof a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, provided, however, that the indemnity contained in this clause (D)
shall not apply to any such loss, claim, damage, expense or liability arising
out of or based upon any such untrue statement or omission made in reliance upon
and in conformity with written information furnished to ANHI by each Member or
by such underwriter or controlling person expressly for use in the preparation
of such registration statement, related prospectus, amendment or supplement.
(iii) Each Member whose Exchange Shares are included in the Resale
Registration Statement will indemnify ANHI, each of its directors, each of its
officers who has signed the Resale Registration Statement and each person, if
any, who controls (within the meaning of the Securities Act) ANHI against any
and all losses, claims, damages, expenses or liabilities to which ANHI, such
director, officer or controlling person may become subject under the Securities
Act or under any federal or state securities law, or at common law, or
otherwise, insofar as such losses, claims, damages, expenses or liabilities
arise out of or are based upon an untrue statement or an alleged untrue
statement of a material fact contained in the Resale Registration Statement, in
any related prospectus or in any amendment of, or supplement to, either thereof,
or arise out of or are based upon an omission or an alleged omission to state in
any thereof a material fact required to be stated therein or necessary in order
to make the statements therein not misleading, in each case to the extent, but
only to the extent, that such untrue
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statement or alleged untrue statement or omission or alleged omission was so
made in reliance upon and in conformity with written information furnished to
ANHI by such Member expressly for use in the preparation of the Resale
Registration Statement, or any related prospectus, amendment or supplement.
(iv) Each Member whose Exchange Shares are included in the Resale
Registration Statement hereby agrees to cooperate to any reasonable extent with
ANHI in the preparation of the Resale Registration Statement, any related
prospectus, or any amendment or supplement to either thereof, referred to in
this Section 7(b), and to the extent such Member's Shares are to be included in
the Resale Registration Statement, to supply ANHI with such information relating
to such Member and to the proposed terms of the public offering concerning such
Member's Shares as is customarily required of a selling shareholder in a
registration statement such as the Resale Registration Statement.
(c) Effect of the Exchange Closing on ANCM. Effective on the Exchange
Closing:
(i) ANHI shall become the sole Member of ANCM;
(ii) All Schedules in the Operating Agreement referring to Members
shall be deemed amended to reflect the substitution of ANHI as the sole Class A
Member and the sole Class B Member of ANCM;
(iii) Management shall withdraw as Manager of ANCM;
(iv) ANHI, as holder of all of the Membership Interests in ANCM, will
vote to continue the business of the ANCM pursuant to the terms and conditions
of the Operating Agreement; and
(v) ANHI will be substituted as the new Manager of ANCM.
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(d) Tax Opinion. On or before June 30, 1998, ANHI shall furnish to each
Member an opinion of Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C., counsel
to ANHI, that the Exchange Transaction contemplated hereby will not be a taxable
event to such Member.
(e) Further Assurances. (i) The Members agree that they will at their
own expense do, execute and deliver, or will cause to be done, executed and
delivered, all such further acts, documents or instruments which shall be
necessary and appropriate to vest in or confirm as belonging to ANHI, its
successors and assigns, the Membership Interests assigned hereunder or which
ANHI may reasonably request from time to time to carry our the purposes and
intent of this Agreement.
(ii) ANHI agrees that it will at its expense do, execute and deliver,
or will cause to be done, executed and delivered, all such further acts,
documents or instruments which shall be necessary and appropriate to vest in or
confirm as belonging to each Member, such Member successors and assigns, the
Exchange Shares issuable to such Member hereunder or which such Member may
reasonably request from time to time to carry out the purposes and intent of
this Agreement.
(f) Determination of Value of Total Consideration. Each Member
acknowledges that the number of shares of Common Stock to be issued in the
Public Offering (the "Public Shares") and the price per share of the Public
Shares have not yet been determined and that the determination of such number
and price will affect the aggregate percentage of ANHI owned by all Members and
the market value of the Total Consideration but should not affect the amount of
the Total Consideration which such Member receives relative to the amounts
received by the other Members. Each Member further acknowledges and agrees that
the
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Class A Members will make the final determinations of such number and price,
that such determinations will be final and binding on all Members and that such
determinations shall not modify, limit or otherwise affect the obligations of
any Member under this Agreement, provided, that such determinations shall not
change the number (or the basis for calculating the number) of Shares issuable
to such Member pursuant to the Proration Calculation.
(g) Covenants Regarding Pledged Interests. Each Financed Member hereby
authorizes and directs ANCM to deliver to ASF copies of all information
pertaining to such Member's Proration Calculation and authorizes and directs
ANHI, upon issuance of such Financed Member's Exchange Shares, to deliver the
certificates representing such Exchange Shares to ASF. ASF agrees to accept and
hold such Exchange Shares as collateral to secure repayment of such Financed
Member's ASF Loan in substitution for such Financed Member's Pledged Interests.
Upon delivery to ASF of the certificates representing such Exchange Shares, the
ASF Lien on such Financed Member's Pledged Interest shall be deemed released,
terminated and of no further force and effect. Each Financed Member, ANHI and
ASF shall at its own expense do, execute and deliver, or will cause to be done,
executed or delivered, all such further acts, documents or instruments as shall
be necessary and appropriate, or which may reasonably be requested, to carry out
the purposes and intent of this paragraph (g).
(h) Lock-up Agreement. Each Member agrees to execute, upon request by
ANH, a lock-up agreement restricting sale of such Member's Exchange Sales for a
period of six months after the IPO Closing, substantially in the form annexed
hereto as Appendix C.
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8. Miscellaneous
(a) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any person other than the parties and their respective
successors and permitted assigns.
(b) Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements, or representations by or among the parties,
written or oral, with respect to the subject matter hereof.
(c) Succession, Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties named herein and their respective successors
and permitted assigns. No party may assign either this Agreement or any of such
party's rights, interests, or obligations hereunder without the prior written
approval of the other parties.
(d) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(e) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then five
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient at the
addresses set forth on Appendix A hereto. Any party may send any
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notice, request, demand, claim, or other communication hereunder to the intended
recipient at the address set forth on Appendix A hereto using any other means
(including personal delivery, expedited courier messenger service, telecopier,
telex, ordinary mail or electronic mail), but no such notice, request, demand,
claim, or other communication shall be deemed to have been duly given unless and
until it actually is received by the intended recipient or actual delivery is
refused by the addressee upon presentation. Any party may change the address to
which notices, requests, demands, claims, and other communications hereunder are
to be delivered by giving the other parties notice in the manner herein set
forth.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of New York without giving effect
to any choice or conflict of law provision or rule (whether of the State of New
York or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of New York.
(h) Amendments And Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
party alleged to be bound thereby. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(i) Severability. If in any jurisdiction, any provision of this
Agreement or its application to any party or circumstance is restricted,
prohibited or unenforceable, such provision shall, as to such jurisdiction, be
ineffective only to the extent of such restriction, prohibition or
unenforceability without invalidating the remaining provisions hereof and
without affecting the
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validity or enforceability of such provision in any other jurisdiction or its
application to other parties or circumstances.
(j) Construction. Any reference to any federal, state or local statute
or law shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word "including" shall
mean including without limitation. The parties intend that each representation,
warranty, and covenant contained herein shall have independent significance. If
any party has breached any representation, warranty, or covenant contained
herein in any respect, the fact that there exists another representation,
warranty, or covenant relating to the same subject matter (regardless of the
relative levels of specificity) which the party has not breached shall not
detract from or mitigate the fact that the party is in breach of the first
representation, warranty, or covenant.
(k) Incorporation of Appendices. The Appendices identified in this
Agreement are incorporated herein by reference and made a part hereof.
(l) Specific Performance. Each of the Parties acknowledges and agrees
that the other party would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
sections or otherwise are breached. Accordingly, each of the parties agrees that
the other party shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
parties and the matter (subject to the provisions set forth in paragraph (m) of
this Section 8), in addition to any other remedy to which they may be entitled
at law or in equity.
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(m) Submission to Jurisdiction. Each of the parties submits to the
jurisdiction of any state or federal court sitting in Nassau County, New York,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court. Subject to paragraph (l) of this Section 8, each
party also agrees not to bring any action or proceeding arising out of or
relating to this Agreement in any other court. Each of the parties waives any
defense of inconvenient forum to the maintenance of any action or proceeding so
brought and waives any bond, surety, or other security that might be required of
any other party with respect thereto. Parties expressly and irrevocably agree
(i) that they each waive any objection to venue in the Federal or state courts
located in the State of New York so that any action in law or equity in respect
of this Agreement and the transactions contemplated hereby may be brought and
maintained in any such court; and (ii) that service of process in any such
action may be effected against either party by certified or registered mail or
as may otherwise be permitted by applicable federal Rules of Civil Procedure or
rules of the Courts of the State of New York. In addition, each of the parties
hereto hereby expressly and irrevocably (x) waives in respect of any action in
any federal or State court located in the State of New York or any resulting
judgment any objection to the jurisdiction of any such court and (y) agrees not
to attempt to change the situs of such action on the ground that any other court
in any other jurisdiction is more suitable forum for the hearing and
adjudication of any claim or dispute raised in such action.
9. Revision Rights. Each Member acknowledges that ANCM has offered to such
Member the opportunity to rescind such Members' purchase of such Member's
Membership Interest and to recover the consideration paid or contributed by such
Member for such
20
<PAGE>
Membership Interest with interest thereon, less the amount of any income
received thereon. By EXECUTION OF THIS AGREEMENT, SUCH MEMBER ELECTS NOT TO
RESCIND AND TO CONFIRM SUCH MEMBER'S PURCHASE OF SUCH MEMBERSHIP INTEREST.
[Remainder of this page intentionally left blank.]
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ARBOR NATIONAL HOLDINGS, INC. ARBOR NATIONAL COMMERCIAL
MORTGAGE, LLC
By: Arbor Management, LLC
By: /s/ Ivan Kaufman
----------------------------
Ivan Kaufman, President
By: /s/ Ivan Kaufman
------------------------------
Ivan Kaufman, President
ARBOR SECURED FUNDING, INC.
By: /s/ Ivan Kaufman
----------------------------
Ivan Kaufman, President
CLASS A MEMBERS:
/s/ Ivan Kaufman
- ------------------------------- IVAN KAUFMAN GRANTOR RETAINED ANNUITY TRUST
Ivan Kaufman
Trust pursuant to the TRUST By: /s/ Ivan Kaufman
AGREEMENT dated as of the 22nd day of -------------------------------
MARCH, 1994, made by IVAN Ivan Kaufman, Trustee
KAUFMAN and LISA KAUFMAN, as
Grantors and RICHARD A. LIPPE as
Trustee. ARBOR MANAGEMENT, LLC
By: /s/ Richard A. Lippe By: /s/ Ivan Kaufman
---------------------------- -------------------------------
Richard A. Lippe, Trustee Ivan Kaufman, President
22
<PAGE>
CLASS B MEMBERS:
/s/ Walter K. Horn /s/ Camila Bellick
- ------------------------------- -------------------------------
Walter K. Horn Camila Bellick
/s/ Joseph Martello /s/ Robert Schooley
- ------------------------------- -------------------------------
Joseph Martello Robert Schooley
/s/ R. Dennis Cullen /s/ Paul Elenio
- ------------------------------- -------------------------------
R. Dennis Cullen Paul Elenio
/s/ Douglas M. Kramer /s/ Mona Swedroe
- ------------------------------- -------------------------------
Douglas M. Kramer Mona Swedroe
/s/ John Caulfield /s/ Elliot Silverman
- ------------------------------- -------------------------------
John Caulfield Elliot Silverman
/s/ John Natalone /s/ James Boris
- ------------------------------- -------------------------------
John Natalone James Boris
/s/ Ellen Segal /s/ Daniel Palmier
- ------------------------------- -------------------------------
Ellen Segal Daniel Palmier
/s/ Thomas Gurney /s/ Terence Baydala
- ------------------------------- -------------------------------
Thomas Gurney Terence Baydala
/s/ Paul F. Morehouse, Jr.
- -------------------------------
Paul F. Morehouse, Jr.
/s/ Staci Mankoff
- -------------------------------
Staci Mankoff
/s/ Ralph Daruns
- -------------------------------
Ralph Daruns
23
<PAGE>
/s/ Angela Mirizzi /s/ David Queen
- ------------------------------- -------------------------------
Angela Mirizzi David Queen
/s/ Victor P. Bove /s/ J. Van Provosty
- ------------------------------- -------------------------------
Victor P. Bove J. Van Provosty
24
<PAGE>
APPENDIX A
Names and Addresses of Members
------------------------------
Name Address/Telephone/Telecopier Financed (Y/N)
- ---- ---------------------------- --------------
CLASS A MEMBERS:
Arbor Management, LLC 333 Earle Ovington Blvd. No
Uniondale, NY 11553
516 832-8002
516 832-8045 Fax
Ivan and Lisa Kaufman 333 Earle Ovington Blvd. No
Family Trust Uniondale, NY 11553
516 832-8002
516 832-8045 Fax
Ivan Kaufman Grantor 333 Earle Ovington Blvd. No
Retained Annuity Trust Uniondale, NY 11553
516 832-8002
516 832-8045 Fax
Ivan Kaufman 17 Steven Lane No
Kings Point, NY 11024
516 829-1509
516 773-8078 Fax
CLASS B MEMBERS:
Walter K. Horn 121 Weyford Terrace No
Garden City, NY 11530
516 741-5466
516 873-1181 Fax
Joseph Martello 32 Burham Drive Yes
Smithtown, NY 11787
516 724-8169
516 361-7064 Fax
R. Dennis Cullen 56 Curtis Place Yes
Maplewood, NJ 07040
201 762-4160
<PAGE>
Name Address/Telephone/Telecopier Financed (Y/N)
- ---- ---------------------------- --------------
Douglas Kramer 329 East Penn Street Yes
Long Beach, NY 11561
516 889-3734
John Caulfied 12 Heidie Court No
St. James, NY 11570
516 862-0185
John Natalone 19 Fowler Lane Yes
Mt. Sinai, NY 11766
516 474-8273
Ellen Segal 42 Nobscot Road No
Newton, MA 02159
617 527-3333
Thomas Gurney 4055 Aldrich Lane Yes
P.O. Box 271
Laurel, NY 11948
516 298-0061
Paul F. Morehouse, Jr. 3 Wayside Lane Yes
Canton, MA 02021
617 828-6928
Staci Mankoff 5330 Pebblebrook Drive No
Dallas, TX 75229
214 361-5705
Ralph Daruns 4943 Stony Ford Yes
Dallas, TX 75287
972 267-1345
Camila Bellick 20 Juneau Blvd. Yes
Woodbury, NY 11797
516 692-9505
516 367-2169 Fax
Robert Schooley 290 Lombard Street Yes
San Francisco, CA 94133
415 989-0717
<PAGE>
Name Address/Telephone/Telecopier Financed (Y/N)
- ---- ---------------------------- --------------
Paul Elenio 10 Cornell Avenue Yes
Hicksville, NY 11801
516 822-8148
Mona Swedroe 403 Conway Village No
St. Louis, MO 63141
314 878-0922
314 878-0982 Fax
Elliot Silverman 21 Broadview Farm Road Yes
St. Louis, MO 63141
314 576-6965
314 576-2978
James F. Boris III 77 Trent Court Yes
Burr Ridge, IL 60532
630 325-5994
Daniel Palmier 349 Sound Beach Avenue Yes
Old Greenwich, CT 06870
203 698-0662
Terence Baydala 82 Bulson Road Yes
Rockville Centre, NY 11570
516 766-0959
Angela Mirizzi 303 Woodbine Yes
Staten Island, NY 10314
718 370-9208
Victor P. Bove 90 Gray Street Yes
North Andover, MA 01845
508 686-7765
David Queen 3 Heron Hill Yes
Stonybrook, NY 11790
516 751-7168
J. Van Provosty 4040 Whitewater Creek Road No
Atlanta, GA 30327
404 237-6269
<PAGE>
APPENDIX B
Draft Preliminary Prospectus
<PAGE>
APPENDIX C
FORM OF LOCK-UP LETTER AGREEMENT
Lehman Brothers Inc.
Friedman, Billings, Ramsay & Co., Inc.
As Representatives of the
several underwriters
c/o Lehman Brothers Inc.
Three World Financial Center
New York, NY 10285
Dear Sirs:
The undersigned understands that Lehman Brothers Inc. and Friedman,
Billings, Ramsey & Co., Inc., as representatives (the "Representatives") of the
several underwriters (the "Underwriters") propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") providing for the purchase by the
Underwriters, including the Representatives, of shares (the "Shares") of Common
Stock, par value $__ per share (the "Common Stock"), of Arbor National Holdings,
Inc. (the "Company"), and that the Underwriters propose to reoffer the Shares to
the public (the "Offering").
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that, without the prior written consent of Lehman
Brothers Inc., on behalf of the Representatives, the undersigned will not,
directly or indirectly, (1)* offer for sale, sell, pledge, or otherwise dispose
of (or enter into any transaction or device that is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock (including, without limitation, shares of Common
Stock that may be deemed to be beneficially owned by the undersigned in
accordance with the rules and regulations of the Securities and Exchange
Commission and shares of Common Stock that may be issued upon exercise of any
option or warrant) or securities convertible into or exchangeable for Common
Stock (other than the Shares) owned by the undersigned on the date of execution
of this Lock-Up Letter Agreement or on the date of the completion of the
Offering, or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or risks
of ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, for a period of 180 days after
the date of the final Prospectus relating to the Offering.
In furtherance of the foregoing, the Company and its Transfer Agent are
hereby authorized to decline to make any transfer of securities if such transfer
would constitute a violation or breach of this Lock-Up Letter Agreement.
It is understood that, if the Company notifies you that it does not intend
to proceed with the Offering, if the Underwriting Agreement does not become
effective, or if the Underwriting
<PAGE>
Agreement (other than the provisions thereof which survive termination) shall
terminate or be terminated prior to payment for and delivery of the Shares, we
will be released from our obligations under this Look-Up Letter Agreement.
The undersigned understands that the Company, the Underwriters and the
stockholders selling shares in the Offering will proceed with the Offering in
reliance on this Lock-Up Letter Agreement.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lock-Up Letter Agreement and that,
upon request, the undersigned will execute any additional documents necessary in
connection with the enforcement hereof. Any obligations of the undersigned
shall be binding upon the heirs, personal representatives, successors and
assigns of the undersigned.
Very truly yours,
------------------------------------------
Name of Holder
------------------------------------------
Signature
Dated:
----------------------------
* except for shares of Common Stock pledgd to Arbor Secured Funding, Inc. as
of the date hereof.
<PAGE>
Exhibit 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of June 10, 1998 between Arbor
National Holdings, Inc., a New York corporation (the "Company"), and Ivan
Kaufman (the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive accepts employment with
the Company, upon the following terms and conditions:
1.1 EMPLOYMENT.
(a) The Company hereby employs Executive, and Executive agrees to
serve, as the President and Chief Executive Officer of the Company and as
President and Chief Executive Officer of the Company's subsidiaries including
Arbor National Commercial, LLC and Arbor Secured Funding, Inc. (such
subsidiaries together with such other subsidiaries and/or affiliated entities as
the Company's Board of Directors may designate are collectively called the
"Subsidiaries") during the Employment Term (herein defined) of this Agreement.
Subject to the Board of Directors of the Company and the Board of Directors of
each Subsidiary, the Executive shall actively manage, and have responsibility
for and supervision over, the business activities and affairs of the Company and
the Subsidiaries, and he shall, manage, supervise and
1
<PAGE>
direct its and their officers, employees and agents.
(b) Commencing January 1, 1999, the Executive agrees to devote
substantially his full business time and attention and best efforts to the
affairs of the Company and the Subsidiaries. Prior thereto and after the
effective date of the Company's Initial Public Offering, the Executive will
devote no less than three quarters of his business time and attention and best
efforts to the affairs of the Company and the subsidiaries.
(c) The Company agrees that during the Employment Term it will not,
without the prior written consent of Executive, (i) relocate its headquarters
more than fifteen (15) miles from its present location in Uniondale, L.I., New
York; (ii) assign to Executive any duties materially inconsistent with those
contemplated by Article I of this Agreement; or (iii) reduce Executive's base
salary or otherwise fail to comply with any financial or other material
obligation to Executive imposed on the Company by this Agreement.
(d) The Company agrees that during the Employment Term it will use
its best efforts to cause the Executive to be nominated and elected as the
Chairman of the Company's Board of Directors, and will vote its stock to elect
the Executive as the Chairman of the Board of Directors of each subsidiary.
(e) Executive represents and warrants to the Company that he is free
to accept employment with the Company as contemplated herein and has no other
written or oral obligations or commitments of any kind or nature which would in
any way
2
<PAGE>
interfere with his acceptance of employment pursuant to the terms hereof or the
full performance of his obligations hereunder or the exercise of his best
efforts in his employment hereunder or which would otherwise pose any conflict
of interest.
1.2 TERM. Subject to the provisions for earlier termination set forth in
Article IV hereof, this Agreement shall commence on the effective date of the
Company's Initial Public Offering and thereafter continue for the period ending
December 31, 1998 (the "Interim Period"). It shall thereafter be extended until
the close of business on December 31, 2003 (the "Permanent Period"). The
Interim Period and the Permanent Period are collectively referred to as the
"Employment Term".
ARTICLE II
COMPENSATION
2.1 ANNUAL SALARY; BONUS.
(a) During the Interim Period, the Company shall pay to the
Executive, on a pro rata basis, a base annual salary of $175,000. For the
Permanent Period, the Company shall pay to the Executive a base annual salary of
$250,000, which shall increase at a rate of 10% per year. The "Base Salary"
shall be payable in accordance with the Company's customary procedures.
(b) The Executive shall be entitled to participate in the bonus pool
and any other compensation plans established for executive officers.
3
<PAGE>
(c) The Executive shall receive such award of stock incentives
pursuant to the Company's 1998 Long-Term Incentive Plan as described on Exhibit
"A" annexed hereto.
2.2 REIMBURSEMENT OF EXPENSES. The Executive shall be entitled to receive
prompt reimbursement of all reasonable expenses incurred by the Executive in
performing services hereunder, including all expenses of travel, entertainment
and living expenses while away from home on business at the request of, or in
the service of, the Company or any Subsidiary, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company.
2.3 AUTOMOBILE. At the Executive's option, the Company shall pay
directly, or shall reimburse the Executive, for the full cost of leasing one
automobile selected by the Executive up to a monthly sum of $1,500. The Company
shall also pay directly, or reimburse the Executive, for all reasonable costs
and expenses incurred by the Executive in connection with the maintenance,
insurance and operation of the automobile.
2.4 BENEFITS. The Company shall pay the Executive as additional salary
the annual cost of a disability insurance policy which provides for payments
equal to 75% of Base Salary during the term of disability, with payments
commencing six months after the
4
<PAGE>
commencement of the disability. The Executive shall be entitled to participate
in and be covered by all health, insurance, pension and other employee plans and
benefits established by the Company (collectively referred to herein as the
"Company Benefit Plans") for its executive employees generally, subject to
meeting applicable eligibility requirements.
2.5 VACATIONS AND HOLIDAYS. The Executive shall be entitled to an annual
vacation leave of six (6) weeks at full pay. The Executive shall be entitled to
such holidays as are established by the Company for all employees.
2.6 KEY-MAN INSURANCE. The Company shall obtain a life insurance policy
or policies on the life of Executive, in amounts determined by the Board of
Directors of the Company, but in no event less than $5,000,000. Executive
agrees to make himself available for such physical examinations and will execute
such applications and other documents and otherwise cooperate with the Company,
as may be necessary to facilitate the issuance of such policy or policies. In
the event that the Company does obtain an insurance policy (the "Policy") on the
life of Executive, all proceeds payable in respect thereof shall be the property
solely of the Company. In the event that Executive's employment terminates for
any reason other than Executive's death, Executive may request that the Policy
be assigned to Executive by giving written notice to the Company to that effect.
Subject to
5
<PAGE>
obtaining any requisite consent from the insurer, the Company shall, if
Executive has so requested, assign the Policy to Executive subject to
Executive's reimbursement to the Company of any premiums paid by the Company
which relate to any period following the date of termination of Executive's
employment together with any cash value of the Policy.
ARTICLE III
CONFIDENTIALITY; NONDISCLOSURE; NON-COMPETE
3.1 CONFIDENTIALITY. Executive understands and acknowledges that during
his employment with the Company he will be exposed to Confidential information
(as defined below), all of which is proprietary and which will rightfully belong
to the Company. Executive shall hold in a fiduciary capacity for the benefit of
the Company such Confidential Information obtained by Executive during his
employment with the Company and shall not, directly or indirectly, at any time,
either during or after his employment with the Company, without the Company's
prior written consent, use any of such Confidential Information or disclose any
of such Confidential Information to any individual or entity other than the
Company or its employees, except as required in the performance of his duties
for the Company or as otherwise required by law. Executive shall take all
reasonable steps to safeguard such Confidential Information and to protect such
Confidential Information against disclosure, misuse, loss or theft. The term
6
<PAGE>
"Confidential Information" shall mean any information not generally known in the
relevant trade or industry or otherwise not generally available to the public,
which was obtained by Executive from the Company, its subsidiary, or which was
learned, discovered, developed, conceived, originated or prepared by Executive
during or as a result of the performance of any services by Executive on behalf
of the Company. For purposes of this Article III, the Company shall be deemed
to include any entity which is controlled, directly or indirectly, by the
Company and any entity of which a majority of the economic interest is owned,
directly or indirectly, by the Company.
3.2 NON-SOLICITATION. The Executive agrees that for a period of three (3)
years following his termination of employment with the Company, the Executive
will not, on behalf of himself or any other party, directly or indirectly,
solicit, recruit, hire or cause to be hired, any individual or individuals who
are employed by or act as agents or contractors for the Company or its
subsidiaries/affiliates on or after his date of termination.
3.3 RETURN OF DOCUMENTS. Except for such items which are of a personal
nature to Executive (E.G., daily business planner), all writings, records, and
other documents and things containing any Confidential Information shall be the
exclusive property of the Company and shall not be copied, summarized, extracted
from or removed from the premises of the Company, except in pursuit of the
7
<PAGE>
business of the Company at the direction of the Company and shall be delivered
to the Company, without retaining any copies, upon the termination of
Executive's employment or at any time thereafter as requested by the Company.
3.4 NON-COMPETE. During the Employment Term and for the "Non-Compete
Period" (herein defined), the Executive will not, directly or indirectly: (i)
own, manage, operate, join, control, or participate in or be connected with, as
an officer, employee partner, stockholder, director, adviser, consultant, or
agent (whether paid or unpaid), any business, individual, partnership, firm or
corporation (collectively "Entity"), which is at the time engaged in a business
which is, directly or indirectly, in competition with the business of the
Company or any Subsidiary; the foregoing provision being also intended to
prohibit the Executive from acquiring or holding more than one (1%) percent of
any issue of stock or securities of any Entity which has any securities listed
on a national securities exchange or quoted in the daily listing of
over-the-counter market securities; or (ii) solicit any person or entity to
terminate such person's or entity's contractual and/or business relationship
with the Company or any Subsidiary.
For the purposes of this Paragraph, the term "Non-Compete Period"
shall mean (i) in the case the Executive's employment is terminated for Cause
pursuant to Paragraph "4.2" hereof, a three (3) year period from the date of
termination, and
8
<PAGE>
(ii) in the case the Executive terminates his employment pursuant to paragraph
"4.3" without Good Reason a three (3) year period from the date of termination.
3.5 RIGHT TO INJUNCTIVE AND EQUITABLE RELIEF. The Executive's obligations
not to disclose or use Confidential Information and to refrain from the
non-solicitation and non-compete activities described in this Article III are of
a special and unique character which gives them a peculiar value, and which is
supported by valuable consideration. The Company cannot be reasonably or
adequately compensated in damages in an action at law in the event Executive
breaches such obligations. Therefore, the Executive expressly agrees that the
Company shall be entitled to injunctive and other equitable relief without bond
or other security in the event of such breach in addition to any other rights or
remedies which the Company may possess. Furthermore, the obligations of the
Executive and the rights and remedies of the Company under this Article III are
cumulative and in addition to, and not in lieu of, any obligations, rights, or
remedies created by applicable law relating to mis-appropriation or theft or
trade secrets of confidential information.
ARTICLE IV
TERMINATION
9
<PAGE>
4.1 DEFINITIONS. For purposes of this Article IV, the
following definitions shall apply to the Terms set forth below:
"Cause" shall mean only the following:
(i) the willful and continued failure by the Executive to
substantially perform his duties hereunder (other than
such failure resulting from the Executive's incapacity
due to physical or mental illness) after demand for
performance is delivered by the Company that
specifically identifies the manner in which the Company
believes the Executive has not substantially performed
his duties.
(ii) personal dishonesty, incompetence or willful misconduct
by the Executive (which includes a willful, material
breach of this Agreement by the Executive) which is
materially injurious to the Company;
(iii) a willful violation of any law, rule or regulation, as
determined by the final judgement of an agency or court
of competent jurisdiction, which violation is
materially injurious to the Company or any Subsidiary
or the imposition of a
10
<PAGE>
final order issued by any regulatory authority against
Company which prohibits the Executive from holding the
position of President and Chief Executive Officer of
the Company.
(iv) the willful violation by Executive of the provisions of
Article III.
(a) For purposes of this Agreement, no act, or failure to act, on the
Executive's part shall be considered "willful" unless done, or omitted to be
done, by the Executive in bad faith and without a reasonable belief that such
action or omission by the Executive was in the best interests of the Company.
Notwithstanding anything to the contrary in this Agreement, no termination or
other action shall be considered to be for Cause under this Agreement unless (i)
the Executive first shall have received at least 30 days written notice setting
forth the reasons for the Company's intention to terminate or take other action
and shall have been provided an opportunity to appear, accompanied by counsel,
and be heard before the Board of Directors; (ii) after such appearance before
the Board, the Board of Directors shall have duly adopted by a majority of the
Directors of the Company then in office, and shall have provided to the
Executive a certified resolution finding that in the good faith opinion of such
Directors the Executive was found to have committed conduct constituting Cause,
as set forth above, and specifying the
11
<PAGE>
particulars thereof in detail; and (iii) the Executive shall have failed to cure
or remedy the event constituting Cause within thirty (30) days after the
Executive's receipt of such certified resolution from the Board of Directors.
Notwithstanding the generality of the foregoing, if the Company's Board of
Directors believes that Cause for Executive's termination exists and that the
continued performance by Executive of his duties hereunder pending the
completion of the actions contemplated by this paragraph "4.1" could be
injurious to the Company, the Company's Board of Directors shall have the right
to suspend Executive's performance hereunder, effective as of the date on which
the Company so notifies Executive, provided that Executive shall remain entitled
to receive the compensation provided for in this Agreement from the date of any
such suspension through the date of the Board of Director's final determination
of whether Cause exists in accordance with the procedures set forth in this
paragraph "4.1".
(b) "Permanent Disability" shall mean a physical or mental incapacity
as a result of which the Executive becomes totally unable to continue the
performance of his duties hereunder for a period of one hundred eighty (180)
consecutive days or a period of an aggregate of two hundred seventy (270) days
in any consecutive twenty-four (24) month period. A determination of Permanent
Disability shall be subject to the certification of a qualified medical doctor
agreed to by the Company and the Executive or, in the event of the Executive's
incapacity to
12
<PAGE>
designate a doctor, the Executive's legal representative. In the absence of
agreement between the Company and the Executive, each party shall nominate a
qualified medical doctor and the two doctors so nominated shall select a third
doctor, who shall make the determination as to the occurrence and continuance of
a Permanent Disability.
4.2 TERMINATION BY COMPANY. The Company may only terminate the
Executive's employment hereunder for Cause and because of the Executive's
permanent disability.
4.3 TERMINATION BY EXECUTIVE. The Executive may voluntarily terminate
this Agreement[ upon ninety (90) days written notice to the Company, which
termination shall be deemed to be without Good Reason. The Executive may also
terminate this Agreement on thirty (30) days written notice to the Company with
Good Reason in the event the Company has materially breached its material
obligations to the Executive. In this case, the Executive shall state the
specific facts and circumstances of such breach in the written notice provided
to the Company.
4.4 DEATH OF EXECUTIVE. This Agreement shall terminate immediately upon
the death of the Executive.
4.5 SEVERANCE BENEFITS RECEIVED UPON TERMINATION.
13
<PAGE>
(a) If (i) the Executive's employment is terminated by death, or by
the Company for Cause or permanent disability, or (ii) the Executive terminates
his employment without Good Reason, then the Company shall pay the Executive his
Base Salary through the end of the month during which such termination occurs
(or at the Executive's election, the rate in effect on the first day of the
month preceding the month in which the date of termination occurs) plus credit
for any vacation earned but not taken and the Company shall thereafter have no
further obligations to the Executive under this Agreement; PROVIDED, HOWEVER,
that the Company will continue to honor any obligations that may have accrued
under the existing Company Benefit Plans or any other agreements or arrangements
applicable to the Executive.
(b) If the Executive's employment is wrongfully terminated by the
Company or by the Executive with Good Reason because the Company has materially
breached its material obligations to the Executive as set forth in this
Agreement, then the Company shall:
(1) pay to the Executive within two business days following the
date of termination his Base Salary through the end of the
month during which such Termination occurs (or at the
Executive's election, the rate in effect on the first day of
the month preceding the month in which the date of
Termination occurs) plus credit for any vacation earned
14
<PAGE>
but not taken;
(2) pay to the Executive as liquidated damages, severance pay in
a lump sum, in cash, within five business days following the
date of termination, an amount equal to (i) three times the
Executive's annual Base Salary in effect as of the date of
termination; and (ii) an amount equal to three times the
highest annual bonus received by the Executive from the
Company, pursuant to this Agreement during any of the
previous two years. The payment to Executive of severance
pay as liquidated damages shall be Executive's sole remedy
for any claim against the Company for wrongful termination
or breach of this Agreement by the Company. Executive and
Company agree that such amount is a reasonable approximation
of damages to the Executive in the event of a breach, and
that Executive and the Company are agreeing to this amount
in advance to avoid the need for costly or protracted
litigation on this issue; and,
(3) maintain, at the Company's expense, in full force and
effect, for the Executive's continued benefit until the
earlier of (i)
15
<PAGE>
eighteen (18) months after the date of termination or
(ii) the Executive's commencement of full time employment
with a new employer, all Company Benefit Plans and other
programs or arrangements in which the Executive was entitled
to participate immediately prior to the date of termination,
provided that the Executive's continued participation is
possible under the general terms and provisions of such
plans and programs. In the event that the Executive's
participation in any such plan or program is barred, the
Company shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was
entitled to receive under such plans or programs.
4.6 NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall not be
required to mitigate damages for the amount of any payment provided for under
this Agreement in the case where the Executive terminates his employment because
the Company has materially breached its obligations hereunder, and no payment
provided for under this Agreement shall be reduced by any compensation earned by
the Executive as the result of employment by another employer after the date of
termination.
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ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
5.1 ASSUMPTION OF OBLIGATIONS. The Company will require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement.
As used in this Agreement, "Company" shall mean the Company, as hereinbefore
defined and any successor or assign to its business and/or assets as aforesaid
which is required to execute and deliver the agreement provided for in this
Article V or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. In such event, the Company agrees that it
shall pay or shall cause such employer to pay any amounts owed to the Executive
pursuant to this Agreement.
5.2 BENEFICIAL INTERESTS. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal and
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legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts are still payable to him or her hereunder, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other designee or, if there be
no such designee, to the Executive's estate.
ARTICLE VI
GENERAL PROVISIONS
6.1 NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt required, postage prepaid, as follows:
If to the Company:
Arbor National Holdings, Inc.
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attn.: Chairman, Compensation Committee of
Board of Directors
If to the Executive:
Ivan Kaufman
17 Stevens Lane
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Kings Point, New York 11024
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
6.2 NO WAIVERS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
6.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflicts of laws.
6.4 SEVERABILITY OF PARTIAL INVALIDITY. The invalidity or
un-enforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
6.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original
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but all of which together will constitute one and the same instrument.
6.6 LEGAL FEES AND EXPENSES. Should any party institute any action or
proceeding to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
6.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete and
20
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exclusive statement of its terms and that no extrinsic evidence may be
introduced in any judicial proceeding involving this Agreement.
6.8 HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute a part hereof and
shall not affect the validity or interpretation of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ARBOR NATIONAL HOLDINGS, INC.
a New York corporation
By: /s/ Walter Horn
-----------------------------------
IVAN KAUFMAN
/s/ Ivan Kaufman
--------------------------------------
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Exhibit 10.5
EXECUTIVE EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of June 30, 1998 between Arbor
National Holdings, Inc., a Delaware corporation (the "Company"), and Joseph
Martello (the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive accepts employment with
the Company, upon the following terms and conditions:
1.1 EMPLOYMENT.
(a) The Company hereby employs Executive, and Executive agrees to
serve, as the Senior Vice President and Chief Financial Officer of the Company.
(b) Commencing January 1, 1999, the Executive agrees to devote
substantially his full business time and attention and best efforts to the
affairs of the Company and the Subsidiaries. Prior thereto, the Executive may
engage in activities not related to the Company, provided that these activities
do not interfere with the Executive's responsibilities to the Company as
determined by the Chief Executive Officer.
(c) Executive represents and warrants to the Company that he is free
to accept employment with the Company as contemplated herein and has no other
written or oral obligations
1
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or commitments of any kind or nature which would in any way interfere with his
acceptance of employment pursuant to the terms hereof or the full performance of
his obligations hereunder or the exercise of his best efforts in his employment
hereunder or which would otherwise pose any conflict of interest.
1.2 TERM. Subject to the provisions for earlier termination set forth in
Article IV hereof, this Agreement shall commence on the effective date of the
Company's initial public offering, and it shall continue until the close of
business on December 31, 2001 (the "Employment Term").
ARTICLE II
COMPENSATION
2.1 ANNUAL SALARY; BONUS.
(a) During the Employment Term, the Company shall pay to the
Executive a base annual salary of $175,000. The "Base Salary" shall be reviewed
annually and shall be payable in accordance with the Company's customary
procedures.
(b) The Executive shall be entitled to participate in the bonus pool
and any other compensation plans established for executive officers.
(c) The Executive shall receive such award of stock incentives
pursuant to the Company's 1998 Long-Term Incentive Plan as described on
Exhibit "A" annexed hereto.
2
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2.2 REIMBURSEMENT OF EXPENSES. The Executive shall be entitled to receive
prompt reimbursement of all reasonable expenses incurred by the Executive in
performing services hereunder, including all expenses of travel, entertainment
and living expenses while away from home on business at the request of, or in
the service of, the Company or any Subsidiary, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company.
2.3 BENEFITS. The Executive shall be entitled to participate in and be
covered by all health, insurance, pension and other employee plans and benefits
established by the Company (collectively referred to herein as the "Company
Benefit Plans") for its executive employees generally, subject to meeting
applicable eligibility requirements.
2.4 VACATIONS AND HOLIDAYS. The Executive shall be entitled to an annual
vacation leave of four (4) weeks at full pay. The Executive shall be entitled
to such holidays as are established by the Company for all employees.
3
<PAGE>
ARTICLE III
CONFIDENTIALITY; NONDISCLOSURE; NON-COMPETE
3.1 CONFIDENTIALITY. Executive understands and acknowledges that during
his employment with the Company he will be exposed to Confidential information
(as defined below), all of which is proprietary and which will rightfully belong
to the Company. Executive shall hold in a fiduciary capacity for the benefit of
the Company such Confidential Information obtained by Executive during his
employment with the Company and shall not, directly or indirectly, at any time,
either during or after his employment with the Company, without the Company's
prior written consent, use any of such Confidential Information or disclose any
of such Confidential Information to any individual or entity other than the
Company or its employees, except as required in the performance of his duties
for the Company or as otherwise required by law. Executive shall take all
reasonable steps to safeguard such Confidential Information and to protect such
Confidential Information against disclosure, misuse, loss or theft. The term
"Confidential Information" shall mean any information not generally known in the
relevant trade or industry or otherwise not generally available to the public,
which was obtained by Executive from the Company, its subsidiary, or which was
learned, discovered, developed, conceived, originated or prepared by
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Executive during or as a result of the performance of any services by Executive
on behalf of the Company. For purposes of this Article III, the Company shall
be deemed to include any entity which is controlled, directly or indirectly, by
the Company and any entity of which a majority of the economic interest is
owned, directly or indirectly, by the Company.
3.2 NON-SOLICITATION. The Executive agrees that for a period of one (1)
year following his termination of employment with the Company, the Executive
will not, on behalf of himself or any other party, directly or indirectly,
solicit, recruit, hire or cause to be hired, any individual or individuals
who are employed by or act as agents or contractors for the Company or its
subsidiaries/affiliates on or after Executive's date of termination.
3.3 RETURN OF DOCUMENTS. Except for such items which are of a personal
nature to Executive (E.G., daily business planner), all writings, records, and
other documents and things containing any Confidential Information shall be the
exclusive property of the Company and shall not be copied, summarized, extracted
from or removed from the premises of the Company, except in pursuit of the
business of the Company at the direction of the Company and shall be delivered
to the Company, without retaining any copies, upon the termination of
Executive's employment or at any time thereafter as requested by the Company.
5
<PAGE>
3.4 NON-COMPETE. During the Employment Term and for the "Non-Compete
Period" (herein defined), the Executive will not, directly or indirectly: (i)
own, manage, operate, join, control, or participate in or be connected with, as
an officer, employee partner, stockholder, director, adviser, consultant, or
agent (whether paid or unpaid), any business, individual, partnership, firm or
corporation (collectively "Entity"), which is at the time engaged in a business
which is, directly or indirectly, in competition with the business of the
Company or any Subsidiary; the foregoing provision being also intended to
prohibit the Executive from acquiring or holding more than one (1%) percent of
any issue of stock or securities of any Entity which has any securities listed
on a national securities exchange or quoted in the daily listing of
over-the-counter market securities; or (ii) solicit or assist any person or
entity to terminate such person's or entity's contractual and/or business
relationship with the Company or any Subsidiary.
For the purposes of this Paragraph, the term "Non-Compete Period"
shall mean (i) in the case the Executive's employment is terminated pursuant
to Paragraph "4.1" and "4.2" hereof, a one (1) year period from the date of
termination, and (ii) in the case the Executive terminates his employment
pursuant to paragraph "4.3" without Good Reason a one (1) year period from
the date of termination.
6
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The Executive agrees that the salary and benefits received by
Executive during the Employment Term is adequate consideration for the
non-competition covenants of Executive specified above. However, in order to
prevent undue hardship of Executive, the Company agrees that if, due to the
Executive's compliance with the non-competition covenants specified above,
Executive is unable to find suitable employment after the Employment Term and
demonstrates same to the Company's chief executive officer, then, if and to the
extent that the Company insists on compliance by Executive with this paragraph
3.4, then Company shall pay Executive an amount equal to his last annual base
salary, pro rata, for so long as Company insists on compliance by Executive with
the provisions of this paragraph 3.4.
3.5 RIGHT TO INJUNCTIVE AND EQUITABLE RELIEF. The Executive's obligations
not to disclose or use Confidential Information and to refrain from the
non-solicitation and non-compete activities described in this Article III are of
a special and unique character which gives them a peculiar value, and which is
supported by valuable consideration. The Company cannot be reasonably or
adequately compensated in damages in an action at law in the event Executive
breaches such obligations. Therefore, the Executive expressly agrees that the
Company shall be entitled to injunctive and other equitable relief without bond
or other security in the event of such breach in addition to any other rights or
remedies which the Company may possess. Furthermore,
7
<PAGE>
the obligations of the Executive and the rights and remedies of the Company
under this Article III are cumulative and in addition to, and not in lieu of,
any obligations, rights, or remedies created by applicable law relating to
mis-appropriation or theft or trade secrets of confidential information.
ARTICLE IV
TERMINATION
4.1 TERMINATION BY COMPANY FOR CAUSE. The Company may terminate
Executive's employment for cause on 30 days written notice (i) in the event of
default, non-performance or violation by Executive of any of the covenants,
provisions or terms of this agreement, (ii) Executive's conviction of any felony
or misdemeanor involving moral turpitude, (iii) Executive's repeated failure to
abide by reasonable requests of the Company's chief executive officer, and (iv)
Executive's failure to adequately perform his duties as determined by the
Company's chief executive officer.
4.2 PERMANENT DISABILITY. The Company may terminate Executive's
employment due to Executive's permanent disability. "Permanent Disability"
shall mean a physical or mental incapacity as a result of which the Executive
becomes totally unable to continue the performance of his duties hereunder
for a period of one hundred eighty (180) consecutive days or a period of an
aggregate of two hundred seventy (270) days in any consecutive twenty-four
(24) month
8
<PAGE>
period. A determination of Permanent Disability shall be subject to the
certification of a qualified medical doctor agreed to by the Company and the
Executive or, in the event of the Executive's incapacity to designate a doctor,
the Executive's legal representative. In the absence of agreement between the
Company and the Executive, each party shall nominate a qualified medical doctor
and the two doctors so nominated shall select a third doctor, who shall make the
determination as to the occurrence and continuance of a Permanent Disability.
4.3 TERMINATION BY EXECUTIVE. The Executive may voluntarily terminate
this Agreement upon ninety (90) days written notice to the Company, which
termination shall be deemed to be without Good Reason. The Executive may also
terminate this Agreement on thirty (30) days written notice to the Company with
Good Reason in the event the Company has materially breached its material
obligations to the Executive. In this case, the Executive shall state the
specific facts and circumstances of such breach in the written notice provided
to the Company.
4.4 DEATH OF EXECUTIVE. This Agreement shall terminate immediately
upon the death of the Executive.
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4.5 SEVERANCE BENEFITS RECEIVED UPON TERMINATION.
(a) If (i) the Executive's employment is terminated by death, or due
to permanent disability, or by the Company for cause pursuant to paragraph 4.1,
or (ii) the Executive terminates his employment without Good Reason, then the
Company shall pay the Executive his Base Salary through the end of the month
during which such termination occurs (or at the Executive's election, the rate
in effect on the first day of the month preceding the month in which the date of
termination occurs) plus credit for any vacation earned but not taken and the
Company shall thereafter have no further obligations to the Executive under this
Agreement; PROVIDED, HOWEVER, that the Company will continue to honor any
obligations that may have accrued under the existing Company Benefit Plans or
any other agreements or arrangements applicable to the Executive.
(b) If the Executive's employment is wrongfully terminated by the
Company or by the Executive with Good Reason because the Company has materially
breached its material obligations to the Executive as set forth in this
Agreement, then the Company shall:
(1) pay to the Executive within seven business days following
the date of termination his Base Salary through the end of
the month during which such Termination occurs (or at the
Executive's election, the rate in effect on the first day of
the month preceding the
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<PAGE>
month in which the date of Termination occurs) plus credit
for any vacation earned but not taken;
(2) pay to the Executive as liquidated damages severance pay in
a lump sum, in cash, within five business days following the
date of termination, an amount equal to twelve months base
salary. The payment to Executive of severance pay as
liquidated damages shall be Executive's sole remedy for any
claim against the Company for wrongful termination or breach
of this Agreement by the Company. Executive and Company
agree that such amount is a reasonable approximation of
damages to the Executive in the event of a breach, and that
Executive and the Company are agreeing to this amount in
advance to avoid the need for costly or protracted
litigation on this issue.
ARTICLE V
GENERAL PROVISIONS
5.1 BENEFICIAL INTERESTS. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors,
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heirs, distributees, devisees and legatees. If the Executive should die while
any amounts are still payable to him or her hereunder, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other designee or, if there be
no such designee, to the Executive's estate.
5.2 NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt required, postage prepaid, as follows:
If to the Company:
Arbor National Holdings, Inc.
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attn.: Chairman, Compensation Committee of
Board of Directors
If to the Executive:
Mr. Joseph Martello
32 Burham Drive
Smithtown, New York 11787
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
12
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5.3 NO WAIVERS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
5.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflicts of laws.
5.5 SEVERABILITY OF PARTIAL INVALIDITY. The invalidity or
un-enforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
5.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
5.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties and supersedes all prior written
13
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or oral and all contemporaneous oral agreements, understandings, and
negotiations between the parties with respect to the subject matter hereof.
This Agreement is intended by the parties as the final expression of their
agreement with respect to such terms as are included in this Agreement and may
not be contradicted by evidence of any prior or contemporaneous agreement. The
parties further intend that this Agreement constitutes the complete and
exclusive statement of its terms and that no extrinsic evidence may be
introduced in any judicial proceeding involving this Agreement.
5.8 HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute a part hereof and
shall not affect the validity or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ARBOR NATIONAL HOLDINGS, INC.
a New York corporation
By: /s/ Ivan Kaufman
---------------------------------
/s/ Joseph Martello
------------------------------------
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Exhibit 10.6
EXECUTIVE EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of June 30, 1998 between Arbor
National Holdings, Inc., a Delaware corporation (the "Company"), and Walter Horn
(the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive accepts employment with
the Company, upon the following terms and conditions:
1.1 EMPLOYMENT.
(a) The Company hereby employs Executive, and Executive agrees to
serve, as the Senior Vice President and General Counsel of the Company.
(b) Commencing January 1, 1999, the Executive agrees to devote
substantially his full business time and attention and best efforts to the
affairs of the Company and the Subsidiaries. Prior thereto, the Executive may
engage in activities not related to the Company, provided that these activities
do not interfere with the Executive's responsibilities to the Company as
determined by the Chief Executive Officer.
(c) Executive represents and warrants to the Company that he is free
to accept employment with the Company as contemplated herein and has no other
written or oral obligations
1
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or commitments of any kind or nature which would in any way interfere with his
acceptance of employment pursuant to the terms hereof or the full performance of
his obligations hereunder or the exercise of his best efforts in his employment
hereunder or which would otherwise pose any conflict of interest.
1.2 TERM. Subject to the provisions for earlier termination set forth in
Article IV hereof, this Agreement shall commence on the effective date of the
Company's initial public offering, and it shall continue until the close of
business on December 31, 2001 (the "Employment Term").
ARTICLE II
COMPENSATION
2.1 ANNUAL SALARY; BONUS.
(a) During the Employment Term, the Company shall pay to the
Executive a base annual salary of $175,000. The "Base Salary" shall be reviewed
annually and shall be payable in accordance with the Company's customary
procedures.
(b) The Executive shall be entitled to participate in the bonus pool
and any other compensation plans established for executive officers.
(c) The Executive shall receive such award of stock incentives
pursuant to the Company's 1998 Long-Term Incentive Plan as described on
Exhibit "A" annexed hereto.
2
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2.2 REIMBURSEMENT OF EXPENSES. The Executive shall be entitled to receive
prompt reimbursement of all reasonable expenses incurred by the Executive in
performing services hereunder, including all expenses of travel, entertainment
and living expenses while away from home on business at the request of, or in
the service of, the Company or any Subsidiary, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company.
2.3 BENEFITS. The Executive shall be entitled to participate in and be
covered by all health, insurance, pension and other employee plans and benefits
established by the Company (collectively referred to herein as the "Company
Benefit Plans") for its executive employees generally, subject to meeting
applicable eligibility requirements.
2.4 VACATIONS AND HOLIDAYS. The Executive shall be entitled to an annual
vacation leave of four (4) weeks at full pay. The Executive shall be entitled
to such holidays as are established by the Company for all employees.
3
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ARTICLE III
CONFIDENTIALITY; NONDISCLOSURE; NON-COMPETE
3.1 CONFIDENTIALITY. Executive understands and acknowledges that during
his employment with the Company he will be exposed to Confidential information
(as defined below), all of which is proprietary and which will rightfully belong
to the Company. Executive shall hold in a fiduciary capacity for the benefit of
the Company such Confidential Information obtained by Executive during his
employment with the Company and shall not, directly or indirectly, at any time,
either during or after his employment with the Company, without the Company's
prior written consent, use any of such Confidential Information or disclose any
of such Confidential Information to any individual or entity other than the
Company or its employees, except as required in the performance of his duties
for the Company or as otherwise required by law. Executive shall take all
reasonable steps to safeguard such Confidential Information and to protect such
Confidential Information against disclosure, misuse, loss or theft. The term
"Confidential Information" shall mean any information not generally known in the
relevant trade or industry or otherwise not generally available to the public,
which was obtained by Executive from the Company, its subsidiary, or which was
learned, discovered, developed, conceived, originated or prepared
4
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by Executive during or as a result of the performance of any services by
Executive on behalf of the Company. For purposes of this Article III, the
Company shall be deemed to include any entity which is controlled, directly or
indirectly, by the Company and any entity of which a majority of the economic
interest is owned, directly or indirectly, by the Company.
3.2 NON-SOLICITATION. The Executive agrees that for a period of one
(1) year following his termination of employment with the Company, the
Executive will not, on behalf of himself or any other party, directly or
indirectly, solicit, recruit, hire or cause to be hired, any individual or
individuals who are employed by or act as agents or contractors for the
Company or its subsidiaries/affiliates on or after Executive's date of
termination.
3.3 RETURN OF DOCUMENTS. Except for such items which are of a personal
nature to Executive (E.G., daily business planner), all writings, records, and
other documents and things containing any Confidential Information shall be the
exclusive property of the Company and shall not be copied, summarized, extracted
from or removed from the premises of the Company, except in pursuit of the
business of the Company at the direction of the Company and shall be delivered
to the Company, without retaining any copies, upon the termination of
Executive's employment or at any time thereafter as requested by the Company.
5
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3.4 NON-COMPETE. During the Employment Term and for the "Non-Compete
Period" (herein defined), the Executive will not, directly or indirectly: (i)
own, manage, operate, join, control, or participate in or be connected with, as
an officer, employee partner, stockholder, director, adviser, consultant, or
agent (whether paid or unpaid), any business, individual, partnership, firm or
corporation (collectively "Entity"), which is at the time engaged in a business
which is, directly or indirectly, in competition with the business of the
Company or any Subsidiary; the foregoing provision being also intended to
prohibit the Executive from acquiring or holding more than one (1%) percent of
any issue of stock or securities of any Entity which has any securities listed
on a national securities exchange or quoted in the daily listing of
over-the-counter market securities; or (ii) solicit or assist any person or
entity to terminate such person's or entity's contractual and/or business
relationship with the Company or any Subsidiary.
For the purposes of this Paragraph, the term "Non-Compete Period"
shall mean (i) in the case the Executive's employment is terminated pursuant
to Paragraph "4.1" and "4.2" hereof, a one (1) year period from the date of
termination, and (ii) in the case the Executive terminates his employment
pursuant to paragraph "4.3" without Good Reason a one (1) year period from
the date of termination.
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The Executive agrees that the salary and benefits received by
Executive during the Employment Term is adequate consideration for the
non-competition covenants of Executive specified above. However, in order to
prevent undue hardship of Executive, the Company agrees that if, due to the
Executive's compliance with the non-competition covenants specified above,
Executive is unable to find suitable employment after the Employment Term and
demonstrates same to the Company's chief executive officer, then, if and to the
extent that the Company insists on compliance by Executive with this paragraph
3.4, then Company shall pay Executive an amount equal to his last annual base
salary, pro rata, for so long as Company insists on compliance by Executive with
the provisions of this paragraph 3.4.
3.5 RIGHT TO INJUNCTIVE AND EQUITABLE RELIEF. The Executive's obligations
not to disclose or use Confidential Information and to refrain from the
non-solicitation and non-compete activities described in this Article III are of
a special and unique character which gives them a peculiar value, and which is
supported by valuable consideration. The Company cannot be reasonably or
adequately compensated in damages in an action at law in the event Executive
breaches such obligations. Therefore, the Executive expressly agrees that the
Company shall be entitled to injunctive and other equitable relief without bond
or other security in the event of such breach in addition to any other rights or
remedies which the Company may possess. Furthermore,
7
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the obligations of the Executive and the rights and remedies of the Company
under this Article III are cumulative and in addition to, and not in lieu of,
any obligations, rights, or remedies created by applicable law relating to
mis-appropriation or theft or trade secrets of confidential information.
ARTICLE IV
TERMINATION
4.1 TERMINATION BY COMPANY FOR CAUSE. The Company may terminate
Executive's employment for cause on 30 days written notice (i) in the event of
default, non-performance or violation by Executive of any of the covenants,
provisions or terms of this agreement, (ii) Executive's conviction of any felony
or misdemeanor involving moral turpitude, (iii) Executive's repeated failure to
abide by reasonable requests of the Company's chief executive officer, and (iv)
Executive's failure to adequately perform his duties as determined by the
Company's chief executive officer.
4.2 PERMANENT DISABILITY. The Company may terminate Executive's
employment due to Executive's permanent disability. "Permanent Disability"
shall mean a physical or mental incapacity as a result of which the Executive
becomes totally unable to continue the performance of his duties hereunder
for a period of one hundred eighty (180) consecutive days or a period of an
aggregate of two hundred seventy (270) days in any consecutive twenty-four
(24) month
8
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period. A determination of Permanent Disability shall be subject to the
certification of a qualified medical doctor agreed to by the Company and the
Executive or, in the event of the Executive's incapacity to designate a doctor,
the Executive's legal representative. In the absence of agreement between the
Company and the Executive, each party shall nominate a qualified medical doctor
and the two doctors so nominated shall select a third doctor, who shall make the
determination as to the occurrence and continuance of a Permanent Disability.
4.3 TERMINATION BY EXECUTIVE. The Executive may voluntarily terminate
this Agreement upon ninety (90) days written notice to the Company, which
termination shall be deemed to be without Good Reason. The Executive may also
terminate this Agreement on thirty (30) days written notice to the Company with
Good Reason in the event the Company has materially breached its material
obligations to the Executive. In this case, the Executive shall state the
specific facts and circumstances of such breach in the written notice provided
to the Company.
4.4 DEATH OF EXECUTIVE. This Agreement shall terminate immediately
upon the death of the Executive.
9
<PAGE>
4.5 SEVERANCE BENEFITS RECEIVED UPON TERMINATION.
(a) If (i) the Executive's employment is terminated by death, or due
to permanent disability, or by the Company for cause pursuant to paragraph 4.1,
or (ii) the Executive terminates his employment without Good Reason, then the
Company shall pay the Executive his Base Salary through the end of the month
during which such termination occurs (or at the Executive's election, the rate
in effect on the first day of the month preceding the month in which the date of
termination occurs) plus credit for any vacation earned but not taken and the
Company shall thereafter have no further obligations to the Executive under this
Agreement; PROVIDED, HOWEVER, that the Company will continue to honor any
obligations that may have accrued under the existing Company Benefit Plans or
any other agreements or arrangements applicable to the Executive.
(b) If the Executive's employment is wrongfully terminated by the
Company or by the Executive with Good Reason because the Company has materially
breached its material obligations to the Executive as set forth in this
Agreement, then the Company shall:
(1) pay to the Executive within seven business days following
the date of termination his Base Salary through the end of
the month during which such Termination occurs (or at the
Executive's election, the rate in effect on the first day of
the month preceding the
10
<PAGE>
month in which the date of Termination occurs) plus credit
for any vacation earned but not taken;
(2) pay to the Executive as liquidated damages severance pay in
a lump sum, in cash, within five business days following the
date of termination, an amount equal to twelve months base
salary. The payment to Executive of severance pay as
liquidated damages shall be Executive's sole remedy for any
claim against the Company for wrongful termination or breach
of this Agreement by the Company. Executive and Company
agree that such amount is a reasonable approximation of
damages to the Executive in the event of a breach, and that
Executive and the Company are agreeing to this amount in
advance to avoid the need for costly or protracted
litigation on this issue.
ARTICLE V
GENERAL PROVISIONS
5.1 BENEFICIAL INTERESTS. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors,
11
<PAGE>
heirs, distributees, devisees and legatees. If the Executive should die while
any amounts are still payable to him or her hereunder, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other designee or, if there be
no such designee, to the Executive's estate.
5.2 NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt required, postage prepaid, as follows:
If to the Company:
Arbor National Holdings, Inc.
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attn.: Chairman, Compensation Committee of
Board of Directors
If to the Executive:
Mr. Walter Horn
121 Weyford Terrace
Garden City, New York 11530
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
12
<PAGE>
5.3 NO WAIVERS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
5.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflicts of laws.
5.5 SEVERABILITY OF PARTIAL INVALIDITY. The invalidity or
un-enforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
5.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
5.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties and supersedes all prior written
13
<PAGE>
or oral and all contemporaneous oral agreements, understandings, and
negotiations between the parties with respect to the subject matter hereof.
This Agreement is intended by the parties as the final expression of their
agreement with respect to such terms as are included in this Agreement and may
not be contradicted by evidence of any prior or contemporaneous agreement. The
parties further intend that this Agreement constitutes the complete and
exclusive statement of its terms and that no extrinsic evidence may be
introduced in any judicial proceeding involving this Agreement.
5.8 HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute a part hereof and
shall not affect the validity or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ARBOR NATIONAL HOLDINGS, INC.
a New York corporation
By: /s/ Ivan Kaufman
--------------------------------
/s/ Walter Horn
-----------------------------------
14
<PAGE>
EXHIBIT 10.7
STANDARD FORM
EXECUTIVE EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of June 30, 1998 between Arbor
National Holdings, Inc., a Delaware corporation (the "Company"), and Elliot
Silverman (the "Executive").
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive, and Executive accepts employment with
the Company, upon the following terms and conditions:
1.1 EMPLOYMENT.
(a) The Company hereby employs Executive, and Executive agrees to
serve, as the Senior Vice President- Human Resources, Organization Development,
Marketing and Management Information Systems of the Company.
(b) Commencing January 1, 1999, the Executive agrees to devote
substantially his full business time and attention and best efforts to the
affairs of the Company and the Subsidiaries. Prior thereto, the Executive may
engage in activities not related to the Company, provided that these activities
do not interfere with the Executive's responsibilities to the Company as
determined by the Chief Executive Officer.
(c) Executive represents and warrants to the Company that he is free
to accept employment with the Company as
1
<PAGE>
contemplated herein and has no other written or oral obligations or commitments
of any kind or nature which would in any way interfere with his acceptance of
employment pursuant to the terms hereof or the full performance of his
obligations hereunder or the exercise of his best efforts in his employment
hereunder or which would otherwise pose any conflict of interest.
1.2 TERM. Subject to the provisions for earlier termination set forth in
Article IV hereof, this Agreement shall commence on the effective date of the
Company's initial public offering, and it shall continue until the close of
business on December 31, 2001 (the "Employment Term").
ARTICLE II
COMPENSATION
2.1 ANNUAL SALARY; BONUS.
(a) During the Employment Term, the Company shall pay to the
Executive a base annual salary of $175,000. The "Base Salary" shall be reviewed
annually and shall be payable in accordance with the Company's customary
procedures.
(b) The Executive shall be entitled to participate in the bonus pool
and any other compensation plans established for executive officers.
(c) The Executive shall receive such award of stock incentives
pursuant to the Company's 1998 Long-Term Incentive Plan
2
<PAGE>
as described on Exhibit "A" annexed hereto.
2.2 REIMBURSEMENT OF EXPENSES. (a) The Executive shall be entitled to
receive prompt reimbursement of all reasonable expenses incurred by the
Executive in performing services hereunder, including all expenses of travel,
entertainment and living expenses while away from home on business at the
request of, or in the service of, the Company or any Subsidiary, provided that
such expenses are incurred and accounted for in accordance with the policies and
procedures established by the Company.
(b) The Executive shall be entitled to receive all of the relocation
benefits set forth in the Company's Offer Letter dated January 28, 1998.
2.3 BENEFITS. The Executive shall be entitled to participate in and be
covered by all health, insurance, pension and other employee plans and benefits
established by the Company (collectively referred to herein as the "Company
Benefit Plans") for its executive employees generally, subject to meeting
applicable eligibility requirements.
2.4 VACATIONS AND HOLIDAYS. The Executive shall be entitled to an annual
vacation leave of four (4) weeks at full pay. The Executive shall be entitled
to such holidays as are
3
<PAGE>
established by the Company for all employees.
ARTICLE III
CONFIDENTIALITY; NONDISCLOSURE; NON-COMPETE
3.1 CONFIDENTIALITY. Executive understands and acknowledges that during
his employment with the Company he will be exposed to Confidential information
(as defined below), all of which is proprietary and which will rightfully belong
to the Company. Executive shall hold in a fiduciary capacity for the benefit of
the Company such Confidential Information obtained by Executive during his
employment with the Company and shall not, directly or indirectly, at any time,
either during or after his employment with the Company, without the Company's
prior written consent, use any of such Confidential Information or disclose any
of such Confidential Information to any individual or entity other than the
Company or its employees, except as required in the performance of his duties
for the Company or as otherwise required by law. Executive shall take all
reasonable steps to safeguard such Confidential Information and to protect such
Confidential Information against disclosure, misuse, loss or theft. The term
"Confidential Information" shall mean any information not
4
<PAGE>
generally known in the relevant trade or industry or otherwise not generally
available to the public, which was obtained by Executive from the Company, its
subsidiary, or which was learned, discovered, developed, conceived, originated
or prepared by Executive during or as a result of the performance of any
services by Executive on behalf of the Company. For purposes of this
Article III, the Company shall be deemed to include any entity which is
controlled, directly or indirectly, by the Company and any entity of which a
majority of the economic interest is owned, directly or indirectly, by the
Company.
3.2 NON-SOLICITATION. The Executive agrees that for a period of one (1)
year following his termination of employment with the Company, the Executive
will not, on behalf of himself or any other party, directly or indirectly,
solicit, recruit, hire or cause to be hired, any individual or individuals who
are employed by or act as agents or contractors for the Company or its
subsidiaries/affiliates on or after Executive's date of termination.
3.3 RETURN OF DOCUMENTS. Except for such items which are of a personal
nature to Executive (E.G., daily business planner), all writings, records, and
other documents and things containing any Confidential Information shall be the
exclusive property of the Company and shall not be copied, summarized, extracted
from or removed from the premises of the Company, except in pursuit of the
5
<PAGE>
business of the Company at the direction of the Company and shall be delivered
to the Company, without retaining any copies, upon the termination of
Executive's employment or at any time thereafter as requested by the Company.
3.4 NON-COMPETE. During the Employment Term and for the "Non-Compete
Period" (herein defined), the Executive will not, directly or indirectly: (i)
own, manage, operate, join, control, or participate in or be connected with, as
an officer, employee partner, stockholder, director, adviser, consultant, or
agent (whether paid or unpaid), any business, individual, partnership, firm or
corporation (collectively "Entity"), which is at the time engaged in a business
which is, directly or indirectly, in competition with the business of the
Company or any Subsidiary; the foregoing provision being also intended to
prohibit the Executive from acquiring or holding more than one (1%) percent of
any issue of stock or securities of any Entity which has any securities listed
on a national securities exchange or quoted in the daily listing of
over-the-counter market securities; or (ii) solicit or assist any person or
entity to terminate such person's or entity's contractual and/or business
relationship with the Company or any Subsidiary.
For the purposes of this Paragraph, the term "Non-Compete Period"
shall mean (i) in the case the Executive's employment is terminated pursuant to
Paragraph "4.1" and "4.2" hereof, a one (1) year period from the date of
termination, and
6
<PAGE>
(ii) in the case the Executive terminates his employment pursuant to paragraph
"4.3" without Good Reason a one (1) year period from the date of termination.
The Executive agrees that the salary and benefits received by
Executive during the Employment Term is adequate consideration for the
non-competition covenants of Executive specified above. However, in order to
prevent undue hardship of Executive, the Company agrees that if, due to the
Executive's compliance with the non-competition covenants specified above,
Executive is unable to find suitable employment after the Employment Term and
demonstrates same to the Company's chief executive officer, then, if and to the
extent that the Company insists on compliance by Executive with this paragraph
3.4, then Company shall pay Executive an amount equal to his last annual base
salary, pro rata, for so long as Company insists on compliance by Executive with
the provisions of this paragraph 3.4.
3.5 RIGHT TO INJUNCTIVE AND EQUITABLE RELIEF. The Executive's obligations
not to disclose or use Confidential Information and to refrain from the
non-solicitation and non-compete activities described in this Article III are of
a special and unique character which gives them a peculiar value, and which is
supported by valuable consideration. The Company cannot be reasonably or
adequately compensated in damages in an action at law in the event Executive
breaches such obligations. Therefore, the Executive expressly agrees that the
Company shall be entitled
7
<PAGE>
to injunctive and other equitable relief without bond or other security in the
event of such breach in addition to any other rights or remedies which the
Company may possess. Furthermore, the obligations of the Executive and the
rights and remedies of the Company under this Article III are cumulative and in
addition to, and not in lieu of, any obligations, rights, or remedies created by
applicable law relating to mis-appropriation or theft or trade secrets of
confidential information.
ARTICLE IV
TERMINATION
4.1 TERMINATION BY COMPANY WITH OR WITHOUT CAUSE. The Company may
terminate Executive's employment for cause on 30 days written notice.
4.2 PERMANENT DISABILITY. The Company may terminate Executive's
employment due to Executive's permanent disability. "Permanent Disability"
shall mean a physical or mental incapacity as a result of which the Executive
becomes totally unable to continue the performance of his duties hereunder for a
period of one hundred eighty (180) consecutive days or a period of an aggregate
of two hundred seventy (270) days in any consecutive twenty-four (24) month
period. A determination of Permanent Disability shall be subject to the
certification of a qualified medical doctor agreed to by the Company and the
Executive or, in
8
<PAGE>
the event of the Executive's incapacity to designate a doctor, the Executive's
legal representative. In the absence of agreement between the Company and the
Executive, each party shall nominate a qualified medical doctor and the two
doctors so nominated shall select a third doctor, who shall make the
determination as to the occurrence and continuance of a Permanent Disability.
4.3 TERMINATION BY EXECUTIVE. The Executive may voluntarily terminate
this Agreement upon ninety (90) days written notice to the Company, which
termination shall be deemed to be without Good Reason. The Executive may also
terminate this Agreement on thirty (30) days written notice to the Company with
Good Reason in the event the Company has materially breached its material
obligations to the Executive. In this case, the Executive shall state the
specific facts and circumstances of such breach in the written notice provided
to the Company.
4.4 DEATH OF EXECUTIVE. This Agreement shall terminate immediately upon
the death of the Executive.
4.5 SEVERANCE BENEFITS RECEIVED UPON TERMINATION.
(a) If (i) the Executive's employment is terminated by death, or due
to permanent disability, or by the Company for cause pursuant to paragraph 4.1,
or (ii) the Executive terminates his employment without Good Reason, then the
Company shall pay the Executive his Base Salary through the end of the month
during
9
<PAGE>
which such termination occurs (or at the Executive's election, the rate in
effect on the first day of the month preceding the month in which the date of
termination occurs) plus credit for any vacation earned but not taken and the
Company shall thereafter have no further obligations to the Executive under this
Agreement; PROVIDED, HOWEVER, that the Company will continue to honor any
obligations that may have accrued under the existing Company Benefit Plans or
any other agreements or arrangements applicable to the Executive.
(b) If the Executive's employment is terminated by the Company
without cause the Executive will be payed severance as follows:
(1) Executive's base pay, subject to standard witholdings, is
guaranteed and will continue to be paid on a semi-monthly
basis for a period of twelve (12) months from the date of
Executive's termination;
(2) In the event that Executive shall not have been employed
during said initial twelve (12) month period, and shall
continue not to be employed during the thirteenth to
twenty-fourth months from the date of Executive's
termination, Executive will be paid his base salary, subject
to standard withholding, on a semi-monthly basis until
Executive becomes employed or until the end of twenty-four
(24)
10
<PAGE>
months from the date of Executive's termination, whichever
comes first. For purposes of this Agreement, employment
shall be defined to include employment as a consultant or
independent contractor.
ARTICLE V
GENERAL PROVISIONS
5.1 BENEFICIAL INTERESTS. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts are still payable to
him or her hereunder, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee or, if there be no such designee, to the
Executive's estate.
5.2 NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt required, postage prepaid, as follows:
If to the Company:
Arbor National Holdings, Inc.
11
<PAGE>
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attn.: Chairman, Compensation Committee of
Board of Directors
If to the Executive:
Mr. Elliot Silverman
21 Broadview Farm Road
St. Louis, Mo. 63141
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
5.3 NO WAIVERS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
5.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflicts of laws.
5.5 SEVERABILITY OF PARTIAL INVALIDITY. The invalidity or
12
<PAGE>
un-enforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
5.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
5.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete and exclusive statement of its terms and that no
extrinsic evidence may be introduced in any judicial proceeding involving this
Agreement.
5.8 HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute a part hereof and
shall not affect the validity or interpretation of this Agreement.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ARBOR NATIONAL HOLDINGS, INC.
a New York corporation
By: /s/ Ivan Kaufman
-----------------------------------
/s/ Elliot Silverman
---------------------------------------
14
<PAGE>
EXHIBIT 10.10
INDEMNIFICATION AGREEMENT
AGREEMENT made this _____ day of June, 1998, by and between Ivan Kaufman,
residing at 17 Steven Lane, Kings Point, New York 11024 ("Indemnitor") and Arbor
National Commercial Mortgage, LLC, whose principal place of business is 333
Earle Ovington Boulevard, Uniondale, New York 11553 ("Indemnitee").
WHEREAS, prior to April 1, 1998, Indemnitor was the sole shareholder of
Arbor Secured Funding, Inc. ("ASF"); and
WHEREAS, effective April 1, 1998, Indemnitor sold all of his right, title
and interest in the outstanding common stock of ASF to a trust for the benefit
of his family members (the "Trust") for the purchase price of approximately
$3,680,000 (the "Price"); and
WHEREAS, effective April 1, 1998, the Trust contributed the outstanding
common stock of ASF to the Indemnitee in exchange for a 14.31643% membership
interest in the Indemnitee (the "Membership Interest"); and
WHEREAS, Indemnitor desires to ensure that the Indemnitee receives full
value of the outstanding common stock so transferred to the extent of the Price;
and
WHEREAS, prior to April 1, 1998, ASF had outstanding certain commitments to
lend money (the "Loan Commitments"); and
WHEREAS, effective April 1, 1998, all of the outstanding common stock of
ASF was acquired by the Indemnitee; and
WHEREAS, Indemnitor desires to indemnify and hold the Indemnitee harmless
from and against any losses incurred by the Indemnitee by virtue of the funding
of any Loan Commitments.
NOW THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the adequacy of which both parties agree upon, the
parties agree as follows:
Indemnitor shall, at his sole cost and expense, indemnify, protect and save
the Indemnitee harmless against and from any and all damages, losses,
liabilities, costs and expenses, obligations, penalties, fines, fees, claims,
litigation (including, without limitation, reasonable attorneys' fees) of any
kind or nature whatsoever, which may at any time be imposed upon, incurred by or
asserted or awarded against the Indemnitee and arising from or attributable to
or by reason of: (a) the failure of the Indemnitee to receive value equivalent
to the Price in exchange for the grant of the Membership Interest and (b) any
loss incurred by the Indemnitee as a result of the funding of any Loan
Commitments that existed or may exist as of April 1, 1998.
/s/ Ivan Kaufman
------------------------------------------
IVAN KAUFMAN, INDEMNITOR
ARBOR NATIONAL COMMERCIAL MORTGAGE,
LLC INDEMNITEE
BY:/s/ Walter K. Horn
---------------------------------------
WALTER K. HORN, SENIOR VICE PRESIDENT
<PAGE>
Exhibit 21
Subsidiary State of Incorporation
- ---------- ----------------------
Arbor National Commercial Mortgage, LLC New York
Lynwood, LLC New York
Rittenhouse, LLC New York
Chelsea 736, LLC New York
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