UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the fiscal year
ended December 31, 1998
Commission File Number 0-21912
FIRST CHESAPEAKE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1624428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 East Oregon Avenue
Philadelphia, Pennsylvania 19148
(Address of principal executive offices)
(215) 755-5691
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
Securities registered pursuant to section 12(g) of the Act:
Common stock, no par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were: $231,000.00.
The aggregate market value of the issuer's voting stock held as of June 21,
1999, by nonaffiliates of the issuer was approximately $2,700,000.
As of June 30, 1999, issuer had 6,345,000 shares of its no par common stock
outstanding.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
<PAGE>
SUPPLEMENTAL INFORMATION
Since the end of 1997, the Company substantially restructured its
business operations. The reader is advised that the Company is concurrently
filing its 10-KSB for 1998 and 10-QSB for the first quarter of 1999. The reader
is cautioned that prior to making any investment decisions, the reader should
carefully review all publicly available information, including the Company's
10-KSB for 1998 and 10-QSB for the first quarter of 1999.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
First Chesapeake Financial Corporation (the "Company" or "First
Chesapeake") is a Virginia corporation which was closed in 1997 following
several years of unprofitable operations.
A new Board of Directors and new management have reopened the Company
and are currently building a fully integrated mortgage origination organization
through internal growth and acquisition.
In 1998, the Company established a new mortgage banking subsidiary, and
subsequently in 1999 the Company has expanded its mortgage banking operations
through acquisition and internal growth.
It is First Chesapeake's goal to develop a vertically integrated
financial services company that can provide mortgage origination, homeowner's
insurance, title insurance, home warranties, among other financial services,
consumer direct, wholesale and through the Internet. However, no assurance can
be given that the Company will be successful in its efforts to implement its
strategic plan.
Company History
The Company was originally incorporated in Virginia in 1992 to engage
in the mortgage banking business. In 1997, the Company's management resigned and
the Company closed all mortgage banking operations after several years of
substantial losses. Following removal of management and its closure in 1997, the
Company elected a new Board of Directors, installed new management and commenced
implementation of a new strategic plan to re-establish the Company as a provider
of financial services initially within the mortgage banking segment.
In the period from 1995 through 1997, the Company also invested in four
companies which were outside its core financial services business. In 1998, the
newly-elected Board of Directors examined the Company's non-financial services
related businesses and their viability within the Company's overall strategic
plan and subsequently decided to exit these businesses. As a result, two of
these businesses were closed or became inactive, one business was sold to its
management, and the fourth business remains viable subject to the Board of
Directors' determination of its final divestiture (see National Archives, Inc.
discussion in "Previous Non-Mortgage Banking Businesses" section below).
In 1998, the Company's Board of Directors elected to refocus on the
financial services business, initially through the creation of a new
wholly-owned mortgage banking subsidiary and adoption of an acquisition and
expansion strategy to create a national retail and wholesale mortgage banking
business.
In the 3rd quarter of 1998, the Company formed First Chesapeake Funding
Corporation, ("First Chesapeake Funding"), a wholly-owned subsidiary to perform
wholesale and retail mortgage banking operations at its Plantation, FL location
and to serve as the administrative and core platform for a to-be-developed
national retail and wholesale mortgage banking operation.
In the 1st quarter of 1999, the Company established First Chesapeake
Acquisition Corporation ("First Chesapeake Acquisition") and commenced its first
retail mortgage banking operation through formation of a wholly-owned
<PAGE>
subsidiary, Collateral One Mortgage Corporation ("Collateral One"), to acquire
certain assets of Mortgage Concepts, Inc., an established originator of
primarily subprime and alternate documentation residential mortgage loans
operating in five central and Midwestern states. In the 2nd quarter of 1999,
Collateral One concluded the Mortgage Concepts, Inc. acquisition and the Company
opened a retail mortgage banking operation in Southern Florida, recruiting two
established managers and several experienced loan officers and staff. In the 2nd
quarter of 1999, the Company also embarked on a major expansion of First
Chesapeake Funding, its wholesale mortgage banking subsidiary, and hired an
experienced mortgage banking executive to manage the growing operation.
In addition to these business activities, the Company intends to
aggressively seek out and pursue other synergistic business opportunities
(whether early stage or mature) and investments within the mortgage banking and
related financial services industries. However, no assurance can be given that
the Company will be successful in its efforts to acquire profitable business
opportunities and investments.
The Company has not been the subject of any bankruptcy, receivership or
similar proceeding.
Forward Looking Statements
This Form 10-KSB contains certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Company. These forward-looking statements involve certain risks and
uncertainties. When used in this Quarterly Report on Form 10-KSB or future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder communications, or in
oral statements made with the approval of an authorized executive officer, the
words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", "believe", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities, and competitive and
regulatory factors could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected.
The Company does not undertake and specifically disclaims any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements
Mortgage Banking Business
First Chesapeake is a financial services company providing a broad
array of residential mortgage products and related products and services to its
customers through its wholly owned subsidiaries First Chesapeake Funding,
Collateral One, and First Chesapeake Acquisition.
The Company offers a full menu of residential mortgage products to
customers of ranging from prime credit borrowers seeking conventional or FHA/VA
loans to less credit-worthy customers who qualify for non-conventional,
alternate documentation and/or subprime loans through both its retail and
wholesale operations. Retail operations originate loans directly from the
consumer, while wholesale operations provide an efficient market for retail
mortgage loans originated by the Company's retail operations as well as through
purchase of loans from third party loan originators.
The Company funds its mortgage banking activities in large part through
warehouse lines of credit, and its ability to continue to originate and
wholesale residential mortgages is dependent upon continued access to capital on
acceptable terms. Borrowings under these lines are repaid with the proceeds
received by the Company from the sale of the loans to institutional investors.
The Company's committed warehouse lines at December 31, 1998 allowed the Company
to borrow up to $10 million; subsequently in 1999 borrowing availability has
<PAGE>
increased to $26 million. The warehouse lines expire within the next twelve
months, but are generally renewable, however, no assurances are given that the
Company can renew its warehouse lines or that such renewals can be made on equal
or more favorable terms to the Company. The Company sells its originated and
purchased loans, including all servicing rights, for cash to institutional
investors, usually on a non-recourse basis, with proceeds applied to reduce
corresponding warehouse line outstandings.
At December 31, 1998, the Company's mortgage banking operations
consisted solely of its First Chesapeake Funding wholesale operation. The
Company's retail operations currently consist of twelve retail offices in seven
states, with applications pending to expand into five additional states and the
stated goal to expand nationwide through both internal growth and acquisition.
The Company originates loans in Florida, Indiana, Kentucky, Missouri, North and
South Carolina and Tennessee, with applications for approval pending in Georgia,
Kansas, New Jersey, Ohio, and Pennsylvania.
The Company's strategy is to offer a full range of mortgage products to
borrowers of various credit levels and distribute these loans in a risk averse
manner through either bulk secondary market sales, loan sales to specific
institutional investors, or brokering of individual loans to "niche" investors.
Through this strategy, the Company anticipates profitability and continued
expansion with reduced exposure to interest rate and credit risks.
The Company derives revenues from fees charged upon the origination of
mortgage loans, premiums received on the sale of mortgage loans, interest earned
during the period the Company holds the mortgage loans for sale, and various
"junk" fees associated with retail and wholesale mortgage banking.
The Company also anticipates deriving an increased portion of its
revenues from its participation in various joint venture or strategic alliance
partnerships with groups offering title insurance, property/casualty insurance,
life and disability insurance, and home warranty products.
Another projected loan origination and revenue source is expected to
arise from the Company's Internet presence, currently under development. In 1999
the Company entered into a binding letter of intent with an established Internet
sales and marketing group which currently offers secured and unsecured credit
cards though its Internet site. Mortgage and home equity loan originations will
be offered by the Internet sales and marketing group through a direct link to
First Chesapeake's pending Internet site. Each potential sales lead will be
coordinated by either a Company or qualified third party loan officer, with
compensation paid on a closed loan basis to the referring Internet sales and
marketing group within all state and federal guidelines. Direct marketing of the
pending Company Web site is expected to further increase the percentage of
mortgage loans originated via Internet, which is expected to account for a
substantial portion of the total mortgage origination marketplace within the
next three to five years.
Previous Mortgage Banking Businesses
The Company's original 1992 business plan was to be a servicer of
mortgage loans, purchasing mortgage loan servicing either through brokers or
directly from holders of such servicing. Beginning in 1992, the Company
purchased the rights to service bulk loan portfolios from the originators of the
loans. This business was never profitable, and in 1995 the Company sold its
remaining servicing portfolio at a substantial loss.
In 1993, the Company decided to originate mortgage loans as well as
service them. Accordingly, the Company acquired Waterford Mortgage Corporation
("Waterford"), a residential mortgage loan origination operation located in
McLean, Virginia. This business was also unprofitable, and in 1995 and 1996 the
Company closed Waterford as well as a second mortgage loan origination
subsidiary, First Chesapeake Mortgage Corporation, at significant loss.
In 1994, the Company pursued the origination of nonconforming mortgage
loans where the borrower had some credit issue that did not allow the borrower
to obtain traditional mortgage financing (commonly referred to as "B paper"
loans) through formation of a subsidiary, American Mortgage Express, Inc.
("AME"). Due to lack of profitability, this subsidiary was closed in 1997.
Also, in 1995 and 1996, the Company attempted to acquire a federal
savings bank, and entered into a Stock Purchase Agreement subject to, among
other things, regulatory approval. The Company was unable to obtain regulatory
approval and, in 1997 withdrew its Application for Change of Control with the
<PAGE>
Office of Thrift Supervision. In 1996 the Company wrote off material amounts in
capitalized expenses related to this failed transaction.
For the period 1992 to the December 1997 closure, the Company reported
cumulative losses totaling $10,548,000 primarily comprised of operating losses
of the previous mortgage business:
<TABLE>
<CAPTION>
- -------------------------- ------------- --------------- --------------- --------------- -------------- --------------
DECEMBER 31, 1992 1993 1994 1995 1996 1997
- -------------------------- ------------- --------------- --------------- --------------- -------------- --------------
<S> <C>
Revenues $714,000 $3,809,000 $3,260,000 $1,718,000 $368,000 $104,000
Net Income/(Loss) (372,000) (1,015,000) (3,308,000) (2,539,000) (1,346,000) (1,968,000)
Shareholders' Equity 1,789,000 9,016,000 5,708,000 3,168,000 1,822,000 95,000
- -------------------------- ------------- --------------- --------------- --------------- -------------- --------------
</TABLE>
For a more complete description of the Company's previous businesses,
the reader is encouraged to review all publicly available information, including
the Company's 10-KSB for 1997 and preceding years.
Previous Non-Mortgage Banking Businesses
In the period from 1995 through 1997, the Company invested in four
companies which were outside its core financial services business:
NATIONAL ARCHIVES, INC. In late 1995, the Company acquired a 60%
interest in a startup company, National Archives, Inc., formerly known as
National Business Archives, Inc. ("National Archives"), a Pennsylvania
corporation, for a purchase price of $150,000 in cash and certain furniture and
equipment valued at approximately $38,000. National Archives is located in
Philadelphia, Pennsylvania and provides document archive services from a rented
warehouse. National Archives has been slow in attracting new customers and has
not yet attained profitable operations. The Company's Board of Directors
continues to examine this business but has yet to reach a final determination of
National Archives' divestiture or its viability within the Company's overall
strategic plan.
PREMIERE QUALITY FOODS, INC. Premiere Quality Foods, Inc. ("Premiere
Quality Foods") is a wholly owned subsidiary of the Company which was closed in
1998. Premiere Quality Foods was organized by the Company in 1997 to acquire,
package, distribute and sell imported Spanish olive oil and related specialty
foods products to the growing North American market. Sales and marketing efforts
failed to meet projections, and in the 4th quarter of 1998, as part of its
overall refocus on the financial services businesses, the Company closed this
operation due to poor sales and uncertainties regarding the availability of an
ongoing supply of imported product.
PREMIERE CHEMICAL PRODUCTS, INC. Premiere Chemical Products, Inc.
("Premiere Chemical Products") was a wholly-owned subsidiary of the Company that
was sold as of January 1, 1999. Premiere Chemical Products was organized by the
Company in 1997 to develop, manufacture, distribute and market its proprietary
formulation of laundry detergent and related products. Marketing and initial
sales efforts commenced early in 1998 yet failed to meet projections. In the 4th
quarter of 1998, as part of its overall refocus on the financial services
businesses, the Company agreed to sell the stock of Premiere Chemical Products
to its management in exchange for assumption of liabilities of the subsidiary.
This sale was completed in 1999.
FEDEOLIVA INTERNATIONAL, LTD. Fedeoliva International, Ltd.
("Fedeoliva") is a 50% owned subsidiary of the Company which was closed in 1997.
Fedeoliva was organized in 1997 to acquire an ownership interest in a joint
venture from Hampton Financial Services, Inc. a company controlled by Mark
Mendelson, who was at that time an outside Director of the Company. All
activities of Fedeoliva were transferred to Premiere Quality Foods upon
the formation of that subsidiary in 1997.
As discussed previously, in 1998 the Board of Directors examined the
Company's non-financial services related businesses and their viability within
the Company's overall strategic plan and subsequently decided to exit certain of
these businesses.
For a more complete description of the Company's previous businesses,
the reader is encouraged to review all publicly available information, including
<PAGE>
the Company's 10-KSB for the fiscal year ended December 31, 1997 and preceding
years.
Competition
The Company's financial services businesses are faced with a large
group of competitors. The mortgage banking business is highly competitive, and
consists of several well-capitalized national firms and thousands of smaller
loan brokers. The Company believes, however, that there is the opportunity for
the Company's mortgage banking subsidiaries to grow and gain market share.
However, many of the Company's competitors are considerably larger and have
financial resources that are substantially greater than those of the Company.
Sources and Availability of Raw Materials
Raw materials are not applicable to the Company's mortgage banking
business.
Year 2000 Compliance
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 ("Y2000") compliance. The Company's
existing infrastructure is essentially Y2000 compliant, and does not anticipate
any material disruption of its operations as a result of a failure of by the
Company to be compliant. However, there can be no assurance that there will not
be a delay in, or increased costs associated with, the need to address Y2000
issues. The Company also relies, directly and indirectly, on other businesses
such as third party service providers, creditors, financial institutions and
governmental entities. Even if the Company's computer systems are not materially
adversely affected by the Y2000 issue, the Company's business and operations
could be materially adversely affected by disruptions in the operations of other
entities with which the Company interacts.
Regulation
Mortgage banking is a highly regulated industry. The industry is
subject to the rules and regulations of, and examinations by HUD, FNMA, FHLMC,
FHA, GNMA and the VA and state regulatory authorities with respect to
originating, processing, underwriting, selling and securitizing residential
mortgage loans. In addition, there are other federal and state statutes and
regulations affecting such activities. These rules and regulations require
originators to obtain or maintain licenses, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspections and appraisals
of properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates, fees and loan amounts.
Failure to comply with these requirements can lead to a loss of approved status,
demands for indemnification or loan repurchases, class action law suits and
administrative enforcement actions. There can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future, which
could make compliance more difficult or expensive, and restrict the Company's
ability to originate or sell mortgage loans, further limit or restrict the
amount of interest and other charges earned from loans originated or purchased
by the Company, or otherwise adversely affect the business or prospects of the
Company.
Seasonality
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general pattern of resales of homes which typically
peak during the spring and summer. Mortgage refinancings tend to be less
seasonal and more closely tied to overall interest rates.
Environmental Matters
In the course of its business, the Company takes title (for security
purposes) or may foreclose on residential properties securing its mortgage
loans. To date, the Company has not been required to perform any investigation
or remediation activities, nor has it been subject to any environmental claims
relating to these activities. There can be no assurance, however, that this will
remain the case in the future.
<PAGE>
Employees
As of December 31, 1998, the Company had fourteen employees, including
six employees of First Chesapeake Funding Corporation, the Company's Plantation,
Florida based mortgage banking operation, five employees at the various
non-mortgage banking subsidiaries, and three full-time employees at the
Company's headquarters in Philadelphia, Pennsylvania. Currently, the Company has
approximately 80 employees, with the increase from year-end solely attributable
to the growth within the Company's mortgage banking operations. None of the
Company's employees are represented by unions. The Company considers its
relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate and administrative headquarters are located in
Philadelphia, Pennsylvania, which comprise approximately 5,000 square feet of
leased office and warehouse space. The leased property is owned by an entity
controlled by the Company's Chief Executive Officer, and is extended on a month
to month basis with no current rental payments.
The Company's subsidiary, First Chesapeake Funding, leases 2,400 square
feet of office space in Plantation, Florida under a five year lease with annual
lease payments of $49,000.
The Company's subsidiary formed in 1999, Collateral One, leases
approximately 20,000 square feet of office space at locations in Louisville, KY,
Lexington, KY, Evansville, IN, Indianapolis, IN, Charlotte, NC, Raleigh, NC,
Nashville, TN, Greensboro, NC, and Memphis, TN under leases which were assumed
in 1999 and are short term in nature with aggregate annual lease payments of
approximately $200,000.
The Company's subsidiary formed in 1999, First Chesapeake Acquisition,
leases approximately 2,000 square feet of office space in Coral Gables, FL under
a three year lease which commenced in 1999 with annual lease payments of
$48,000.
The Company's 60% subsidiary, National Archives, leases approximately
15,000 square feet of warehouse and office space in Philadelphia, PA. The
property is owned by an entity controlled by the Company's Chief Executive
Officer, and is extended on a month to month basis with no current rental
payments.
Management believes that the Company's current facilities are suitable
and adequate for its business as well as to meet its near term expansion plans.
The Company has no plans to purchase any properties.
ITEM 3. LEGAL PROCEEDINGS
The Company was involved in a lawsuit with Robert L. Nichols and John
J. Morrissey (the "Lawsuit"). The Lawsuit was concluded during 1997, and all
costs related to the litigation were recorded in 1997. The reader is encouraged
to review the Company's 10-KSB for the fiscal year ended December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting on December 29, 1998. At the annual
meeting, the shareholders elected Mark Mendelson, Richard Chakejian, Jr., Mark
Glatz, Matthew Coppolino, John Papandon, and James Greenfield to serve on the
Board of Directors. No other matters were voted upon.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not listed on any exchange. However,
market quotes for the Company's common stock (under the symbol "FCFK") may be
obtained from the National Association of Securities Dealers through the NASD
OTC Bulletin Board, its automated system for reporting non-NASDAQ quotes. The
following table sets forth, for the indicated calendar periods, the high and low
bid prices (as reported by the OTC Bulletin Board) for the Company's common
stock through December 31, 1998:
Bid Price
High Low
1997
First Quarter 1/2 3/32
Second Quarter 3/16 1/16
Third Quarter 3/32 1/16
Fourth Quarter 15/16 1/8
1998
First Quarter 3/16 1/8
Second Quarter 13/16 1/16
Third Quarter 13/16 1/4
Fourth Quarter 2-3/4 5/8
1999
First Quarter 3-5/8 1-3/16
Second Quarter 2 1
The prices set forth in this table represent quotes between dealers and
do not include commissions, mark-ups or mark-downs, and may not necessarily
represent actual transactions.
As of June 30, 1999, there were 278 stockholders of record; however,
the Company believes there were over 1,500 beneficial stockholders of the
Company's common stock.
The Company has never declared or paid a dividend on its common stock
and management expects that the substantial portion of the Company's earnings,
if any, for the foreseeable future will be retained for expansion or development
of the Company's business. The decision to pay dividends, if any, in the future
is within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements, financial condition and other
relevant factors such as loan covenants or other contractual obligations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The following discussion should be read in conjunction with the audited
financial statements and the notes thereto included elsewhere in this report.
Overview
First Chesapeake Financial Corporation (the "Company" or "First
Chesapeake") is a Virginia corporation which was closed in 1997 following
several years of unprofitable operations.
<PAGE>
A new Board of Directors and new management has reopened the Company
and is currently building a fully integrated mortgage origination organization
through internal growth and acquisition.
In 1998, the Company established a new mortgage banking subsidiary, and
subsequently in 1999 the Company has expanded its mortgage banking operations
through acquisition and internal growth.
It is First Chesapeake's goal to develop a vertically integrated
financial services company that can provide mortgage origination, homeowner's
insurance, title insurance, home warranties, among other financial services,
consumer direct, wholesale and through the Internet. However, no assurance can
be given that the Company will be successful in its efforts to implement its
strategic plan.
Plan of Operation - Mortgage Banking Business
First Chesapeake is a financial services company providing a broad
array of residential mortgage products and related products and services to its
customers through its wholly owned subsidiaries First Chesapeake Funding,
Collateral One, and First Chesapeake Acquisition.
The Company offers a full menu of residential mortgage products to
customers of ranging from prime credit borrowers seeking conventional or FHA/VA
loans to less credit-worthy customers who qualify for non-conventional,
alternate documentation and/or subprime loans through both its retail and
wholesale operations. Retail operations originate loans directly from the
consumer, while wholesale operations provide an efficient market for retail
mortgage loans originated by the Company's retail operations as well as through
purchase of loans from third party loan originators.
The Company funds its mortgage banking activities in large part through
warehouse lines of credit, and its ability to continue to originate and
wholesale residential mortgages is dependent upon continued access to capital on
acceptable terms. Borrowings under these lines are repaid with the proceeds
received by the Company from the sale of the loans to institutional investors.
The Company's committed warehouse lines at December 31, 1998 allowed the Company
to borrow up to $10 million; subsequently in 1999 borrowing availability has
increased to $26 million. The warehouse lines expire within the next twelve
months, but are generally renewable, however, no assurances are given that the
Company can renew its warehouse lines or that such renewals can be made on equal
or more favorable terms to the Company. The Company sells its originated and
purchased loans, including all servicing rights, for cash to institutional
investors, usually on a non-recourse basis, with proceeds applied to reduce
corresponding warehouse line outstandings.
At December 31, 1998, the Company's mortgage banking operations
consisted solely of its First Chesapeake Funding wholesale operation. The
Company's retail operations currently consist of twelve retail offices in seven
states, with applications pending to expand into five additional states and the
stated goal to expand nationwide through both internal growth and acquisition.
The Company originates loans in Florida, Indiana, Kentucky, Missouri, North and
South Carolina and Tennessee, with applications for approval pending in Georgia,
Kansas, New Jersey, Ohio, and Pennsylvania.
The Company's strategy is to offer a full range of mortgage products to
borrowers of various credit levels and distribute these loans in a risk averse
manner through either bulk secondary market sales, loan sales to specific
institutional investors, or brokering of individual loans to "niche" investors.
Through this strategy, the Company anticipates profitability and continued
expansion with reduced exposure to interest rate and credit risks.
The Company derives revenues from fees charged upon the origination of
mortgage loans, premiums received on the sale of mortgage loans, interest earned
during the period the Company holds the mortgage loans for sale, and various
"junk" fees associated with retail and wholesale mortgage banking.
The Company also anticipates deriving an increased portion of its
revenues from its participation in various joint venture or strategic alliance
partnerships with groups offering title insurance, property/casualty insurance,
life and disability insurance, and home warranty products.
<PAGE>
Another projected loan origination and revenue source is expected to
arise from the Company's Internet presence, currently under development. In 1999
the Company entered into a binding letter of intent with an established Internet
sales and marketing group which currently offers secured and unsecured credit
cards though its Internet site. Mortgage and home equity loan originations will
be offered by the Internet sales and marketing group through a direct link to
First Chesapeake's pending Internet site. Each potential sales lead will be
coordinated by either a Company or qualified third party loan officer, with
compensation paid on a closed loan basis to the referring Internet sales and
marketing group within all state and federal guidelines. Direct marketing of the
pending Company Web site is expected to further increase the percentage of
mortgage loans originated via Internet, which is expected to account for a
substantial portion of the total mortgage origination marketplace within the
next three to five years.
FINANCIAL CONDITION
Assets of the Company decreased from $254,000 at December 31, 1997 to
$99,000 at December 31, 1998, a decrease of $155,000. This decrease was
primarily due to the closure of the non-mortgage banking operations, namely, the
write-off of a $94,000 loan to related party and $63,000 of inventory of two
discontinued non-mortgage banking subsidiaries, as well as depreciation of fixed
assets during the period. At December 31, 1998, the Company's primary assets
consist of receivables of $38,000 and fixed assets, net of accumulated
depreciation, of $54,000. Liabilities amounted to $1,344,000 versus $159,000 at
December 31, 1997, of which $635,000 represented subordinated debenture notes
payable, $260,000 represented deferred salaries to the new management and
$411,000 represented accounts payable and accruals. The subordinated debenture
notes are unsecured, bear interest at 12% per annum, and are due and payable in
the fourth quarter of 2001. Up to 20% of the subordinated debenture notes are
convertible, at any time at option of the holder, into the Company's common
stock at a price of $2.00 per share. The $635,000 includes $350,000 of
subordinated debentures issued to certain officers of the Company in exchange
for a similar reduction in amounts due officers.
RESULTS OF OPERATIONS
Current Year Performance and Earnings Outlook
The Company incurred a loss of $1,463,000 for the year ended December
31, 1998. This loss is a result of expenses of closing down the Company's former
operations as well as startup losses associated with the new subsidiary First
Chesapeake Funding.
As discussed previously, in 1997 the Company closed all its mortgage
banking activities, and in 1998 the Board of Directors examined the Company's
non-financial services businesses and decided to exit these businesses. Also, in
1998 the Company re-entered the mortgage-related business through creation of a
new wholly-owned subsidiary and adoption of an acquisition and expansion
strategy to create a national retail and wholesale mortgage banking business.
The Company is actively seeking operational opportunities in the financial
services industry or other suitable investment opportunities. However, no
assurance can be given that management will be able to find a suitable business
opportunity or attain profitable operations.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
The Company incurred a loss from continuing operations of $1,274,000
for the year ended December 31, 1998 compared to a loss of $1,968,000 for the
year ended December 31, 1997. An incremental loss from discontinued operations
of $189,000 resulted in the net loss of $1,463,000 for 1998.
Total revenues for the year ended December 31, 1998 amounted to
$231,000 representing an increase of $125,000 when compared to 1997's revenues
of $106,000. The increase in revenue is primarily attributable to the
commencement of operations of First Chesapeake Funding in late 1998.
Total expenses from continuing operations for 1998 amounted to
$1,505,000 as compared to $2,073,000 in 1997, a decrease of $568,000 or 26%. Net
<PAGE>
of various write-offs and a legal settlement in 1997, operating expenses were
relatively consistent year-to-year due to the minimal levels of operations in
1997 and the first three quarters of 1998 (prior to commencement of operations
of First Chesapeake Funding subsidiary in late 1998).
Liquidity and Capital Resources
The Company's primary liquidity requirements have been the
establishment, funding and expansion of its mortgage banking operations.
As discussed previously, the Company funds its mortgage banking
activities in large part through warehouse lines of credit, and its ability to
continue to originate and wholesale residential mortgages is dependent upon
continued access to capital on acceptable terms. Borrowings under these lines
are repaid with the proceeds received by the Company from the sale of the loans
to institutional investors. The Company's committed warehouse lines at December
31, 1998 allowed the Company to borrow up to $10 million; subsequently in 1999
borrowing availability has increased to $26 million. The warehouse lines expire
within the next twelve months, but are generally renewable, however, no
assurances are given that the Company can renew its warehouse lines or that such
renewals can be made on equal or more favorable terms to the Company. The
Company sells its originated and purchased loans, including all servicing
rights, for cash to institutional investors, usually on a non-recourse basis,
with proceeds applied to reduce corresponding warehouse line outstandings.
The Company raised $635,000 under a subordinated debenture offering in
1998 and borrowed $1,500,000 from a bank in the first quarter of 1999 secured by
the personal guarantees of several officers and directors of the Company and one
outside investor to partially finance the Collateral One acquisition and for
working capital needs. The Company is seeking additional capital infusion to
fund its mortgage banking acquisitions and expansion. While the Company believes
it can attract the necessary capital to provide the liquidity necessary to
pursue new business opportunities, no assurance can be given that it will in
fact be able to do so.
Cash and cash equivalents at December 31, 1998 amounted to $1,000 as
compared to $13,000 at December 31, 1997, or a decrease of $12,000.
During 1998, the Company's operating activities utilized $883,000 as
compared to utilizing $1,091,000 in 1997. The utilization of cash resources from
operating activities in both years resulted from the Company's net losses for
each year, offset by the issuance of common stock as compensation, various
write-offs of former and non-mortgage banking businesses, and changes in working
capital and other accounts.
The Company's investing activities were negligible in both 1998 and
1997.
Financing activities provided $877,000 of capital in 1998 including the
$635,000 subordinated debenture offering and $260,000 of deferred compensation
due officers, versus minimal financing activities in 1997.
Seasonality
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general pattern of resales of homes which typically
peak during the spring and summer. Mortgage refinancings tend to be less
seasonal and more closely tied to overall interest rates.
Regulation
Mortgage banking is a highly regulated industry. The industry is
subject to the rules and regulations of, and examinations by HUD, FNMA, FHLMC,
FHA, GNMA and the VA and state regulatory authorities with respect to
originating, processing, underwriting, selling and securitizing residential
mortgage loans. In addition, there are other federal and state statutes and
regulations affecting such activities. These rules and regulations require
originators to obtain or maintain licenses, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspections and appraisals
<PAGE>
of properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates, fees and loan amounts.
Failure to comply with these requirements can lead to a loss of approved status,
demands for indemnification or loan repurchases, class action law suits and
administrative enforcement actions. There can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future, which
could make compliance more difficult or expensive, and restrict the Company's
ability to originate or sell mortgage loans, further limit or restrict the
amount of interest and other charges earned from loans originated or purchased
by the Company, or otherwise adversely affect the business or prospects of the
Company.
Inflation
The Company's mortgage banking operations may be affected by inflation
primarily through its impact on interest rates. During periods of rising
inflation, interest rates generally increase, causing mortgage loan origination
volumes, particularly refinancing activity, to decline. Conversely, during
periods of declining inflation, interest rates generally decline, resulting in
increased mortgage loan origination volume and mortgage loan refinancing
activity.
Year 2000
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 ("Y2000") compliance. The Company's
existing infrastructure is essentially Y2000 compliant, and does not anticipate
any material disruption of its operations as a result of a failure of by the
Company to be compliant. However, there can be no assurance that there will not
be a delay in, or increased costs associated with, the need to address Y2000
issues. The Company also relies, directly and indirectly, on other businesses
such as third party service providers, creditors, financial institutions and
governmental entities. Even if the Company's computer systems are not materially
adversely affected by the Y2000 issue, the Company's business and operations
could be materially adversely affected by disruptions in the operations of other
entities with which the Company interacts.
ITEM 7. FINANCIAL STATEMENTS
See the Audited Financial Statements set forth at the end of this
report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In a report on Form 8-K dated June 8, 1999 the Company announced a
change in Registrant's certifying accountant from BDO Seidman, LLP to Grant
Thornton LLP as of June 8, 1999. The Company's Form 8-K dated June 8, 1999 is
incorporated by reference.
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FIRST CHESAPEAKE FINANCIAL CORPORATION
AND SUBSIDIARIES
DECEMBER 31, 1998 AND 1997
<PAGE>
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIENCY) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
First Chesapeake Financial Corporation
We have audited the accompanying consolidated balance sheet of First
Chesapeake Financial Corporation (the Company) and Subsidiaries as of December
31, 1998, and the related consolidated statements of operations, stockholders'
(deficiency) equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Chesapeake Financial Corporation and Subsidiaries as of December 31, 1998,
and their consolidated results of operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements, the Company incurred a net loss of $1,463,094 for the year
ended December 31, 1998 and, as of that date, its total liabilities exceeded its
total assets by $1,244,959. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Note A to the consolidated financial
statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
July 6, 1999
Philadelphia, Pennsylvania
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------------- --------------
<S> <C>
Cash and cash equivalents $ 969 $ 12,845
Note and accounts receivable 38,119 16,746
Furniture and equipment, net 53,943 121,627
Loans to related parties - 94,240
Other assets 6,210 8,095
-------------- --------------
Total assets $ 99,241 $ 253,553
============== ==============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
LIABILITIES
Note payable $ - $ 17,795
Accounts payable 359,429 26,355
Accrued expenses 51,470 114,659
Due to officers 259,860 -
Subordinated junior debentures 635,000 -
Liabilities of discontinued operations 38,441 -
--------------- --------------
Total liabilities 1,344,200 158,809
-------------- --------------
STOCKHOLDERS' (DEFICIENCY) EQUITY
Convertible preferred stock; no par value; $1 stated value per
share; 5,000,000 shares authorized; no shares issued - -
Common stock; no par value; 20,000,000 shares authorized;
5,775,000 and 5,500,000 shares issued and outstanding in
1998 and 1997, respectively 10,956,125 10,832,734
Accumulated deficit (12,201,084) (10,737,990)
--------------- --------------
Total stockholders' (deficiency) equity (1,244,959) 94,744
--------------- --------------
Total liabilities and stockholders' (deficiency) equity $ 99,241 $ 253,553
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C>
REVENUES $ 231,346 $ 105,707
------------- --------------
EXPENSES
Compensation and employee benefits 837,273 552,318
Professional fees 260,516 495,854
Occupancy 49,232 60,455
Loss on joint venture - 112,983
Legal settlement - 260,276
Write-off of investment and advances to joint venture - 212,169
Depreciation and amortization 55,420 129,888
Other operating expenses 268,522 247,358
Interest expense 34,240 1,936
----------- ------------
Total expenses 1,505,203 2,073,237
----------- ------------
Loss from continuing operations (1,273,857) (1,967,530)
Loss from discontinued operations (189,237) -
----------- ------------
NET LOSS $(1,463,094) $ (1,967,530)
=========== ============
Basic and diluted loss per share
Continuing operations $ (.23) $ (.41)
Discontinued operations (.03) -
----------- ------------
$ (.26) $ (.41)
=========== ============
Weighted average shares outstanding 5,627,329 4,822,654
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Total
Common stockholders'
Common stock Accumulated (deficiency)
stock warrants deficit equity
----------- ------------ ------------- ------------
<S> <C>
Balance at December 31, 1996 $10,542,458 $ 50,000 $(8,770,460) $ 1,821,998
Issuance of common stock 250,000 - - 250,000
Repurchase of common stock (9,724) - - (9,724)
Warrant expiration 50,000 (50,000) - -
Net loss - - (1,967,530) (1,967,530)
------------ ------------ ------------ ------------
Balance at December 31, 1997 10,832,734 - (10,737,990) 94,744
Issuance of common stock 123,391 - - 123,391
Net loss - - (1,463,094) (1,463,094)
------------ ------------ ------------ ------------
Balance at December 31, 1998 $10,956,125 $ - $(12,201,084) $ (1,244,959)
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C>
Operating Activities
Net loss $(1,463,094) $(1,967,530)
Adjustments to reconcile net loss to net cash
used in operating activities
Common stock issued as compensation 123,391 125,000
Write-off of investment and advances to joint venture - 212,169
Depreciation and amortization 55,420 129,888
Net decrease in loans held for sale - 91,532
Loss on disposal of assets 17,796 38,235
Increase in note and accounts receivable (21,373) -
Decrease in loans to related parties 94,240 -
Decrease in other assets 1,885 226,800
Increase (decrease) in trade accounts payable 333,074 (36,673)
(Decrease) increase in accrued expenses (63,189) 89,659
Increase in liabilities from discontinued operations 38,441 -
------------ ------------
Net cash used in operating activities (883,409) (1,090,920)
----------- ------------
Investing activities
Purchase of furniture and equipment (5,532) (1,086)
------------- -------------
Net cash used in investing activities (5,532) (1,086)
------------- -------------
Financing activities
Repayment of bank loans (17,795) (15,214)
Increase in amounts due to officers 259,860 -
Proceeds from subordinated junior debentures 635,000 -
------------- -------------
Net cash provided by (used in) financing activities 877,065 (15,214)
Net decrease in cash and cash equivalents (11,876) (1,107,220)
Cash and cash equivalents at beginning of period 12,845 1,120,065
------------- -------------
Cash and cash equivalents at end of period $ 969 $ 12,845
============= =============
Supplemental cash flow disclosures
Cash payments of interest expense $ 14,407 $ 1,936
============= ============
Supplemental disclosure of non-cash financing activities
Common stock issued in exchange for equity interest in joint venture $ - $ 125,000
============= =============
Transfer of related party loan to investment in joint venture $ - $ 135,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
On May 18, 1992, First Chesapeake Financial Corporation (the Company) was
incorporated in the Commonwealth of Virginia as a mortgage banking company
to engage in the servicing of mortgage loans.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, First Chesapeake Funding Corporation (FCFC),
Premiere Quality Foods, Inc. (Premiere Foods), and Premiere Chemical
Products, Inc. (Premiere Chemical), and a 60% owned subsidiary, National
Archives, Inc. (NAI). All material intercompany transactions and accounts
have been eliminated in consolidation.
FCFC was incorporated in July 1998 to operate as a wholesale and retail
mortgage banking operation and to serve as the administrative and core
platform for developing national wholesale and retail mortgage banking
operation.
Premiere Foods acquires, packages, distributes and sells imported Spanish
olive oil and related specialty food products within North America. The
company was formed during 1997 and operations ceased during 1998.
Premiere Chemical develops, manufactures, distributes and markets its
proprietary formulation of laundry detergent and related products. Premiere
Chemical was formed during 1997. In January 1999, the Company sold its
holdings in Premiere Chemical to its management.
NAI provides document archive services to the government and businesses
primarily located in the Philadelphia area.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. During the year ended
December 31, 1998, the Company incurred a net loss of $1,463,094; as of
December 31, 1998, the Company's total liabilities exceeded its total assets
by $1,244,959.
The Company's continuation as a going concern is dependent upon its ability
to implement its strategic plan of developing a retail and wholesale
mortgage banking operation through acquisition and internal growth as a step
toward developing a vertically integrated financial services company that
can provide mortgage origination, homeowner's insurance, title insurance and
home warranties, among other financial services, consumer direct, wholesale
and through the Internet. The Company has acquired substantially all of the
assets of a retail real estate financing entity (note L2) and continues to
expand its mortgage banking operations, and is pursuing other potential
business opportunities consistent with its strategic plan. However, there
are no assurances that the Company will be able to successfully implement
all aspects of its strategic plan.
The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the possible inability of the Company to continue as a going concern.
8
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and Cash Equivalents
-------------------------
For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an initial maturity of three
months or less to be cash equivalents.
2. Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by using
accelerated methods over the estimated useful lives of the individual
assets. Ordinary maintenance and repairs are charged to operations as
incurred.
3. Income Recognition
------------------
Revenue from mortgage origination is recognized when the loans are sold to
an investor and the Company has no further obligation to fulfill. To date,
the majority of loans originated has been sold (or will be sold in the case
of loans held for sale) and servicing has been released.
Gains or losses on loan sales are recognized at the time of sale and are
determined by the difference between net sales proceeds and the carrying
value of the loans sold.
4. Income Taxes
------------
From inception through December 31, 1998, the Company has incurred net
operating losses and, accordingly, has made no provision for income taxes.
5. Basic and Diluted Loss Per Share
--------------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share" in 1997. SFAS No. 128 provides for the calculation
of basic and diluted earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution of
securities that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock.
Shares issuable for stock options and warrants have been excluded from the
computation of loss per share for the years ended December 31, 1998 and
1997, as their inclusion would the anti-dilutive.
(Continued)
9
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
7. Stock-Based Compensation
------------------------
The Company accounts for stock options under SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the date of grant based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro-forma disclosures of net
income and earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. The Company's stock
options plans are accounted for under APB Opinion No. 25.
NOTE C - FURNITURE AND EQUIPMENT
<TABLE>
<CAPTION>
Furniture and equipment consist of the following:
1998 1997
-------------- --------------
<S> <C>
Leasehold improvements $ 22,138 $ 22,138
Furniture and fixtures 102,672 102,672
Machinery and equipment 192,103 186,571
Vehicles - 36,521
------------- --------------
316,913 347,902
Less accumulated depreciation and amortization (262,970) (226,275)
------------- --------------
$ 53,943 $ 121,627
============= ==============
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998 and 1997, was $55,420 and $119,550, respectively.
10
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE D - DEBT
Note payable at December 31, 1997, consisted of a vehicle loan, which was
satisfied during 1998.
In 1998, the Company issued $635,000 of convertible subordinated debentures.
Up to 20% of the subordinated debenture notes are convertible, at any time
at option of the holder, into the Company's common stock at a price of $2.00
per share. The $635,000 includes $350,000 of subordinated debentures issued
to certain officers of the Company in exchange for a similar reduction in
amounts due to officers.
FCFC has a warehouse line of credit with maximum borrowings of $10,000,000.
At December 31, 1998, no amounts were outstanding under this line.
NOTE E - INCOME TAXES
The Company and its wholly owned subsidiaries file a consolidated income tax
return. The Company incurred net operating losses for federal income tax
purposes of approximately $1,400,000 and $1,680,000 for the years ended
December 31, 1998 and 1997, respectively, resulting in total net operating
loss carryforwards of approximately $3,100,000 which expire beginning in
2007 through 2013, if not utilized. The difference between the Company's net
operating loss carryforwards for tax and financial reporting purposes
results primarily from temporary differences related to depreciation and
amortization.
At December 31, 1998 and 1997, the Company recorded a valuation allowance
for the total amount of the net deferred tax asset which was composed
primarily of the net operating loss carryforwards.
NOTE F - STOCK OPTIONS
In May 1992, the Board of Directors adopted an Incentive Stock Option Plan
(the 1992 Plan). Pursuant to the 1992 Plan, 500,000 shares of the Company's
common stock were made available for awards. The 1992 Plan allows for
Incentive Stock Options intended to qualify as Incentive Stock Options
within the meaning of Section 422 of the Internal Revenue Code of 1986, and
for Non-qualified Stock Options not intended to qualify as Incentive Stock
Options. Incentive Stock Options may be granted only to employees of the
Company. Non-qualified Stock Options may be granted to employees, as well as
non-employee directors and consultants to the Company. Exercise prices under
the 1992 Plan must be at fair market value per share at date of grant or, in
the case of Incentive Stock Options granted to employees who own more than
10% of the voting power of all classes of stock of the Company, at 110% of
the fair market value per share at date of grant.
No 1992 Plan options have been exercised as of December 31, 1998. In the
first quarter of 1999, options to 150,000 shares were exercised by holders.
(Continued)
11
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE F - STOCK OPTIONS - Continued
In July 1998, the Board of Directors adopted a Non-Qualified Stock Option
Plan (the 1998 Plan). Pursuant to the 1998 Plan, 1,000,000 shares of the
Company's common stock were made available for awards. The 1998 Plan allows
for Non-Qualified Stock Options not intended to qualify as Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code of
1986. Non-Qualified Stock Options may be granted to employees, as well as
non-employee directors and consultants to the Company. Exercise prices under
the 1998 Plan must be at fair market value per share at date of grant.
530,000 option shares at an exercise price of $.60 were granted during 1998,
of which 500,000 were granted to certain executive officers, and 30,000 were
granted to certain outside directors.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C>
Outstanding options at beginning of year 200,000 460,000
Options granted 530,000 -
Options cancelled - (260,000)
--------------- -------------
Outstanding options at end of year 730,000 200,000
=============== =============
Exercise prices
Low $ 0.25 $ 0.25
=============== =============
High $ 0.60 $ 0.50
=============== =============
Latest expiration date July 9, 2003 May 1, 2001
</TABLE>
Had compensation cost been determined based on the fair value of the options
at the grant date consistent with the provisions of SFAS No. 123, the
Company's 1998 net loss and net loss per share would have been reported as
follows:
Net loss
As reported $ (1,463,094)
Pro forma $ (1,696,294)
Loss per share
As reported $ (0.26)
Pro forma $ (0.30)
The fair value of options granted during 1998 was estimated on the date of
grant using the Black-Sholes options pricing model with the following
assumptions; risk-free interest rate of 5.325%; no dividend yield; expected
weighted average term of 5 years; and volatility of 140%.
(Continued)
12
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE F - STOCK OPTIONS - Continued
At December 31, 1998, there were 730,000 options outstanding with a weighted
average exercise price of $.51 and a remaining maturity of approximately 3.7
years.
At December 31, 1997, there were 200,000 options outstanding with an
exercise price of $.27 and a remaining maturity of approximately 2.5 years.
There were no options granted, or related expense, in 1997.
NOTE G - STOCKHOLDERS' EQUITY
On August 4, 1993, the Company completed an initial public offering of its
securities through the sale of 1,250,000 units at a purchase price of $8.00
per unit. Each unit consisted of one share of the Company's common stock, no
par value, one Redeemable Class A Warrant and one Redeemable Class B
Warrant. Each Class A Warrant entitles its holder to purchase one share of
the Company's common stock at a purchase price of $9.00 per share and each
Class B Warrant entitles its holder to purchase one share of common stock at
a price of $10.00 per share. The Class A and Class B Warrants were
exercisable by the holders until July 15, 1998.
In May 1992, the Company issued a warrant to purchase 500,000 shares of
common stock at an exercise price of $2.00 per share. This warrant, together
with 1,000,000 shares of common stock, were issued to a founding stockholder
of the Company for proceeds of $425,000. The Company had assigned a value of
$50,000 to the warrant. The warrant expired unexercised during 1997, and the
$50,000 was transferred to common stock.
During 1997, the Company issued 500,000 shares of common stock to acquire an
interest in a joint venture (see note I) and 500,000 shares as compensation
to an officer of the Company that joined the Company during 1997. The shares
were recorded at the fair value of the Company's common stock at the
respective issue dates.
During 1998, the Company issued 275,000 shares as compensation to an officer
of the Company that joined the Company during 1998. The shares were recorded
at the fair value of the Company's common stock at the issue date, less a
discount due to the restricted nature of the stock.
NOTE H - COMMITMENTS AND CONTINGENCIES
Litigation
----------
The Company was involved in a lawsuit with Robert L. Nichols and John J.
Morrissey (the Lawsuit). The Lawsuit was concluded during 1997, and all
costs related to the litigation were recorded in 1997.
(Continued)
13
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
Leases
------
The Company and its subsidiaries lease office facilities under
noncancellable leases. In addition to minimum rentals, several leases
provide for the Company to pay its pro-rata share of operating expenses.
Future minimum lease payments under noncancellable leases are as follows:
1999 $ 193,917
2000 223,156
2001 137,029
2002 16,722
NOTE I - JOINT VENTURE
During 1997, the Company obtained a 50% interest in a joint venture,
Fedeoliva International LTD., from a company wholly owned by one of its
Board members in exchange for extinguishment of a $135,000 (including
accrued interest) note receivable due from that Board member and issuance of
500,000 (estimated fair value of $125,000 at issuance date) shares of common
stock. The remaining 50% is owned by Fedeoliva, S.C.A., a Spanish olive oil
production cooperative. Fedeoliva International LTD. is a company that was
created to acquire, package, distribute and sell imported Spanish olive oil
and related products in the United States. During 1997, the Company loaned
Fedeoliva International, LTD. $250,000 so that it could obtain the rights to
sell certain olive oil of Fedeoliva, S.C.A. held in the United States. The
joint venture experienced significant losses during the year, and as a
result, the Company wrote-off its investment and the remaining unpaid note
receivable balance ($150,000 plus accrued interest) as of December 31, 1997.
As of the end of January 1998, the joint venture ceased operations and
remaining obligations were transferred to Fedeoliva, S.C.A.
NOTE J - DISCONTINUED OPERATIONS
During 1998, management decided to cease operations at Premiere Foods and
sell Premiere Chemical to its management, effective January 1, 1999.
Accordingly, the results of operations of these discontinued entities are
presented separately in the accompanying consolidated statements of
operations.
14
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE K - LINES OF BUSINESS
The Company's business consists of two principal activities: (a) mortgage
banking operations and (b) non-mortgage banking operations. The following
table sets forth certain 1998 information concerning these activities:
<TABLE>
<CAPTION>
Mortgage Non-mortgage
banking banking Corporate Consolidated
operations operations operations operations
------------- ------------ ------------- -------------
<S> <C>
Revenues $ 84,000 $ 180,000 $ 20,000 $ 284,000
Operating expenses
Compensation and employee
benefits 140,000 139,000 614,000 893,000
Professional fees 2,000 2,000 257,000 261,000
Occupancy 21,000 7,000 23,000 51,000
Other operating expenses 69,000 185,000 82,000 336,000
----------- ---------- ------------ -----------
232,000 333,000 976,000 1,541,000
Operating loss (148,000) (153,000) (956,000) (1,257,000)
Income (expense)
Depreciation/amortization (1,000) (25,000) (30,000) (56,000)
Interest expense - - (34,000) (34,000)
Other income (expense) (11,000) (121,000) 16,000 (116,000)
----------- ---------- ------------ -----------
Net (loss) $ (160,000) $ (299,000) $(1,004,000) $(1,463,000)
=========== ========== ========== ===========
</TABLE>
In managing its business, the Company does not allocate corporate expenses to
its various activities.
NOTE L - SUBSEQUENT EVENTS
1. Sale of Premiere Chemical
-------------------------
On January 1, 1999, the Company sold its investment in Premiere Chemical to
a family member of one of its officers in exchange for purchaser's
assumption of substantially all of Premiere Chemical's net liabilities; the
transaction resulted in a gain of approximately $38,000.
(Continued)
15
<PAGE>
First Chesapeake Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE L - SUBSEQUENT EVENTS - Continued
2. Acquisition
-----------
On February 9, 1999, the Company acquired substantially all of the assets of
Mortgage Concepts, Inc., an entity engaged in retail real estate financing
activities, for $4,100,000, subject to reduction if certain financial
benchmarks, as outlined in the Asset Purchase Agreement (the Agreement), are
not attained by Mortgage Concepts, Inc. The $4,100,000 purchase price
consists of $3,612,500 of cash and $487,500 of Company common stock, payable
over a period of time specified in the Agreement. The acquisition will be
accounted for under the purchase method of accounting. Had this transaction
occurred on January 1, 1997, unaudited pro forma operating results would
have been as follows:
1998 1997
-------------- --------------
Net loss $ (1,121,037) $ (999,613)
============== ==============
Loss per share $ (0.19) $ (0.19)
============== ===============
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisition been consummated at that time.
3. Financing
---------
On February 5, 1999, the Company borrowed $1,500,000 from a bank; $1,200,000
of such borrowings was used in conjunction with the aforementioned
acquisition. The loan, guaranteed by certain officers of the Company and
other individuals, bears interest at 9.75% and matures February 5, 2000.
Under the terms of the loan agreement, the Company is required to sell to
the bank at least $1,000,000 of nonconforming mortgages originated by the
Company monthly; in the event of failure to do so, the Company is subject to
an additional interest charge of 1% on the amount, based on the bank's
wholesale pricing structure of loans sold under $1,000,000.
In connection with this financing, the Company entered into loan guaranty
agreements with the individuals guaranteeing the loan, whereby such
individuals received shares and options of the Company's common stock as
compensation for their guarantees.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The names, positions, ages and backgrounds of the directors and
executive officers of the Company at December 31, 1998 are set forth below.
<TABLE>
<CAPTION>
Name Age Position
<S> <C>
Mark Mendelson 42 Chairman of the Board of Directors and Chief Executive Officer. Mr.
Mendelson has been a Director of the Company since August 1996.
Since 1984, Mr. Mendelson has served as Chairman and Chief Executive
Officer of Hampton Real Estate Group, Inc., a diversified
professional real estate brokerage, development, and management firm
specializing in commercial and residential properties throughout the
United States. Mr. Mendelson is a former director and past chairman
of the Audit Committee of Equimark Bank Corporation (currently known
as Integra) and sits on the boards of a variety of civic and
philanthropic institutions.
Richard N. Chajekian, Jr. 37 Director and President. Mr. Chakejian is experienced in the food,
laundry products and chemical industries. Mr. Chakejian has an
extensive background in field management, sales, marketing and
research.
Matthew Coppolino 70 Director. Mr. Coppolino is the senior Judge in the Municipal Court
of the City of Philadelphia
Mark Glatz 37 Director and Chief Financial Officer. Mr. Glatz is experienced in
finance, banking, and a wide array of industries, and holds a
degree in accounting and an MBA in financial management.
James Greenfield 48 Director and Secretary. Mr. Greenfield is an attorney with experience
in private practice, emphasizing municipal law, real estate
matters, and complex commercial litigation and arbitration.
John Papandon 37 Director. Mr. Papandon is an attorney and Certified Public
Accountant with a Masters degree in taxation with 15 years experience in the
accounting industry.
</TABLE>
Richard Chakejian, Sr., the father of the President, is manager and
sole employee of Premiere Chemical Products, and was the purchaser of the stock
of this subsidiary upon its divestiture as of January 1, 1999. Mr. Chakejian,
Sr. formerly owned and operated businesses engaged in several aspects of
laundering, dry cleaning, and institutional linen services, and was responsible
for product introduction, sales, marketing and general management of the
wholly-owned subsidiary prior to divestiture of the business.
There are no other family relationships among any of the Directors or
executive officers of the Company or its subsidiaries.
Directors are elected at each annual meeting of stockholders and serve
until the next annual meeting. The bylaws of the Company require a minimum of
seven Directors. Executive officers are elected annually at a meeting of the
Board of Directors and, subject to individual contractual arrangements, serve at
the pleasure of the Board of Directors.
<PAGE>
To date, there have been no events under the bankruptcy act, criminal
proceedings, and orders, judgments, decrees, injunctions or findings of any
court or federal or state authority material to the evaluation of the ability
and integrity of any Director or executive officer of the Company.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16 (a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file reports of
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission
("SEC") and the National Association of Security Dealers. Officers, directors
and greater than ten percent (10%) beneficial owners are required by SEC
regulation to furnish the Company with copies of all forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received, the Company believes that all its officers, directors and greater than
ten percent (10%) beneficial owners complied with all filing requirements
applicable to them with respect to transactions during the fiscal year ended
December 31, 1998; however, certain filings of forms 3, 4, and/or 5 for Messrs.
Chakejian, Mendelson and Papandon which were due in 1999 have yet to be filed.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Directors
Directors who are not executive officers of the Company ("Outside
Directors"), namely Messrs. Coppolino, Greenfield and Papandon, are entitled to
receive compensation of $2,000 per calendar quarter served. As of July 9, 1998,
each of the three Outside Directors was awarded stock options to purchase 10,000
shares at $0.60 per share expiring July 9, 2003.
Compensation of Executive Officers
The following table sets forth, for the three years ended December 31,
1998, certain information as to the total remuneration paid to each of the
Company's executive officers whose total annual salary and bonus exceeded
$100,000 for services in all capacities:
SUMMARY COMPENSATION SCHEDULE
<TABLE>
<CAPTION>
Annual Compensation Other All Other
Name Salary Other Reimb. Compensation
Principal Position (F1) Year (F2) (F3) (F4) (F5)
----------------------- ---- ------ ----- ------ -------------
<S> <C>
Mark Mendelson 1998 $ 75,000 $100,000 $ 9,000 $ 12,000
Chairman and CEO 1997 $ 0 $ 0 $ 0 $ 0
1996 $ 0 $ 0 $ 0 $ 0
Richard N. Chakejian, Jr. 1998 $ 50,000 $100,000 $ 9,000 $ 12,000
President 1997 $ 0 $ 0 $ 0 $125,000
1996 $ 0 $ 0 $ 0 $ 0
Mark E. Glatz 1998 $ 50,000 $ 50,000 $ 9,000 $ 12,000
Chief Financial Officer 1997 $ 0 $ 0 $ 0 $ 0
1996 $ 0 $ 0 $ 0 $ 0
</TABLE>
(F1) No other executive officer had compensation whose salary and bonus exceeded
$100,000.
(F2) All 1998 salaries to the three executive officers, Messrs. Mendelson,
Chakejian, Jr. and Glatz, have been deferred.
(F3) Includes amounts converted to subordinated debentures in 1998.
(F4) Includes perquisites, including automobile and incidental expense
allowance.
(F5) Includes premiums paid or reimbursed for health, disability and life (where
the spouse is the beneficiary) insurance.
Employment Agreements
There are no employment agreements with the above-named executive
officers.
<PAGE>
Stock Option Plans
In May 1992, the Board of Directors adopted an Incentive Stock Option
Plan (the "1992 Plan"). Pursuant to the 1992 Plan, 500,000 shares of the
Company's common stock were made available for awards. The 1992 Plan allows for
Incentive Stock Options intended to qualify as Incentive Stock Options within
the meaning of Section 422 of the Internal Revenue Code of 1986, and for
Nonqualified Stock Options not intended to qualify as Incentive Stock Options.
Incentive Stock Options may be granted only to employees of the Company.
Non-qualified Stock Options may be granted to employees as well as non-employee
directors and consultants to the Company. Exercise prices under the Plan must be
at fair market value per share at date of grant or, in the case of Incentive
Stock Options granted to employees who own more than 10% of the voting power of
all classes of stock of the Company, at 110% of the fair market value per share
at date of grant.
No 1992 Plan options have been exercised as of December 31, 1998.
Through June 30, 1999, options to purchase 150,000 shares were exercised by
holders, and the remaining 50,000 shares were outstanding at that date.
In July 1998, the Board of Directors adopted a Non-Qualified Stock
Option Plan (the "1998 Plan"). Pursuant to the 1998 Plan, 1,000,000 shares of
the Company's common stock were made available for awards. The 1998 Plan allows
for Nonqualified Stock Options not intended to qualify as Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code of 1986.
Non-qualified Stock Options may be granted to employees as well as non-employee
directors and consultants to the Company. Exercise prices under the Plan must be
at fair market value per share at date of grant.
In July 1998, the Executive Compensation Committee awarded 500,000
option shares to three executive officers of the Company.
In July 1998, the Board of Directors awarded 30,000 option shares to
three outside directors of the Company.
No 1998 Plan options have been exercised as of December 31, 1998.
In 1998, the Company issued $635,000 of convertible subordinated
debentures. Up to 20% of the subordinated debenture notes are convertible, at
any time at option of the holder, into the Company's common stock at a price of
$2.00 per share (for a total of 63,500 option shares of common stock). The
$635,000 includes $350,000 of subordinated debentures issued to certain officers
of the Company in exchange for a similar reduction in amounts due officers.
No subordinated debenture options have been exercised as of December
31, 1998.
Option activity under the above plans is summarized following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C>
Outstanding options at
beginning of year 200,000 460,000 460,000
1992 Plan options granted -0- -0- 50,000
1998 Plan options granted 530,000 -0- -0-
Subordinated debenture options granted 63,500 -0- -0-
1992 Plan options canceled -0- (260,000) (50,000)
--------- --------- --------
Outstanding options at
end of year 793,500 200,000 460,000
========= ======== ========
Exercise prices
Low $ .25 $ .25 $ .25
High 2.00 .50 2.50
Latest expiration date July 9, 2003 May 1, 2001 May 1, 2001
</TABLE>
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of
Securities % of Total
Underlying Options/SARs to Exercise or Latest
Options/SARs Employees in Base Price Expiration
Granted Fiscal Year ($/share) Date
------------ --------------- ----------- ----------
<S> <C>
Mark Mendelson 300,000 50.5% $0.60 July 9, 2003
20,000 3.4% $2.00 July 9, 2001
Richard Chakejian, Jr. 100,000 16.8% $0.60 July 9, 2003
10,000 1.7% $2.00 July 9, 2001
Mark E. Glatz 100,000 16.8% $0.60 July 9, 2003
5,000 0.8% $2.00 July 9, 2001
</TABLE>
The following table presents information concerning each exercise of
stock options during the fiscal year ended December 31, 1998 by each of the
named executive officers and the value of unexercised options at December 31,
1998:
<TABLE>
<CAPTION>
Number of Shares Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options at FY-End Options at FY-End
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---- -------- -------- ----------------- -----------------
<S> <C>
Mark Mendelson 0 0 420,000/-0- $267,500/-0-
Richard N. Chakejian, Jr. 0 0 110,000/-0- $ 58,750/-0-
Mark E. Glatz 0 0 105,000/-0- $ 58,750/-0-
</TABLE>
Subsequently, in 1999, the Company issued 100,000 option shares at an
exercise price of $2.00 per share and 100,000 option shares at an exercise price
of $5.00 per share as partial compensation to seven individuals, including three
executive officers, one subsidiary officer, two Outside Directors of the Company
and one unaffiliated individual, for personally guaranteeing a $1,500,000 bank
loan to the Company.
In 1999, the Company agreed to issue 10,000 option shares and 5,000
option shares, respectively, to two managers as signing bonuses under multi-year
employment agreements. These option shares will bear an exercise price of $1.375
with vesting over three years and expiring after five years.
In 1999, the Company also entered into an employment agreement with a
manager which includes incentive compensation of 5,000 option shares per quarter
subject to exceeding quarterly performance targets, plus an additional 5,000
option shares per year subject to exceeding annual performance targets, for a
maximum grant of 100,000 options over a four year period. These option shares
will also bear an exercise price of 10% above the closing price at each
quarter-end date and will vest over three years and expire after five years.
In 1999, the Company agreed to issue a total of 16,000 option shares to
fourteen key mortgage banking operation managers and employees of its Collateral
One and First Chesapeake Funding subsidiaries. These option shares will also
bear an exercise price of $1.50 per share and will vest over three years and
expire after five years.
Stock Appreciation Rights and Long Term Incentive Plans
The Company did not grant (nor has it ever granted) any stock
appreciation rights or long-term incentives to any of the executive officers
named in the preceding table during the fiscal year ended December 31, 1998.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of December 31, 1998 by i)
each person known by the Company to own beneficially 5% of such stock, ii) each
Director of the Company, iii) each executive officer of the Company, and iv) all
Directors and executive officers of the Company as a group. Except as listed
below, the address for each of the listed individuals is: 12 E. Oregon Avenue,
Philadelphia, Pennsylvania 19148.
<TABLE>
<CAPTION>
Number of Shares Percent
Name of Beneficial Owner (F1) Beneficially Owned of Total
- ----------------------------- ------------------ --------
<S> <C>
Mark Mendelson (F2),(F3), (F5), (F9).......................... 2,941,000 48.7%
John E. Dell (F3) ........................................... 450,000 7.5%
c/o Gallagher Broidy & Butler, Attn: Thomas P. Gallagher
212 Carnegie Center, Suite 402, Princeton, NJ 08540
Richard N. Chakejian, Jr. (F6), (F10)......................... 801,500 13.3%
Mark E. Glatz (F4), (F7), (F10)............................... 605,000 10.0%
Les Salzman................................................... 275,000 4.6%
Matthew Coppolino (F8)........................................ 10,000 0.2%
James Greenfield (F8)......................................... 10,000 0.2%
John Papandon (F8)............................................ 10,000 0.2%
- ------------------ ------ ----
All Directors and officers as a group (seven persons)......... 4,652,500 77.0%
</TABLE>
(F1) Unless otherwise indicated, each person has sole voting and investment
powers with respect to the shares specified opposite his or her name.
(F2) Includes option to purchase 100,000 shares of common stock at $0.275
per share; these options were exercised in the first quarter of 1999.
(F3) Consists of 450,000 shares of common stock owned by Mr. Dell which is
subject to an irrevocable voting trust which is voted by Mr. Mendelson.
(F4) Consists of 500,000 shares of common stock privately purchased by
Mr. Glatz and to be re-allocated among certain executive officers of
the Company.
(F5) Includes options to purchase 20,000 shares under the conversion rights
associated with subordinated debenture subscriptions.
(F6) Includes options to purchase 10,000 shares under the conversion rights
associated with subordinated debenture subscriptions.
(F7) Includes options to purchase 5,000 shares under the conversion rights
associated with subordinated debenture subscriptions.
(F8) Includes options to purchase 10,000 shares under the Outside Director
Options of the 1998 Plan
(F9) Includes options to purchase 300,000 shares under the Management
Options of the 1998 Plan
(F10) Includes options to purchase 100,000 shares under the Management
Options of the 1998 Plan
Subsequently, in 1999, the Company issued 200,000 shares of common
stock as partial compensation to certain individuals, including six officers and
Directors of the Company and one outsider, for personally guaranteeing a
$1,500,000 bank loan to the Company (see Item 12 below).
Subsequently, in 1999, the Company issued 50,000 shares of common stock
to James Greenfield and 50,000 shares of common stock to John Papandon, both
Directors of the Company, for prior services rendered in lieu of cash payments.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, 500,000 shares of common stock were issued to Mr.
Chakejian, Jr. in consideration of the transfer of his rights, title, and
interests in all proprietary formulas, processes, materials, know-how, and
methods of manufacture of a soap detergent and related product.
In October 1997, 500,000 shares of common stock were issued to Mr.
Mendelson and a cash payment of $135,000 was made to Mr. Mendelson in
consideration for a 50% interest in Fedeoliva International, Ltd. which Mr.
Mendelson, through Hampton Financial Services, Inc., transferred to the Company.
In January 1999, the Company issued 200,000 shares of common stock,
options to purchase 100,000 shares at $2.00 per share, and options to purchase
100,000 shares at $5.00 per share as compensation to certain individuals for
personally guaranteeing a $1,500,000 bank loan to the Company. The guarantors
included the three executive officers of the Company and two Outside Directors
of the Company, as well as Lester W. Salzman, President of First Chesapeake
Funding, a wholly-owned subsidiary of the Company, as follows:
<TABLE>
<CAPTION>
Number of Number of Option Number of Option
Shares Shares at $2.00 Shares at $5.00
Issued Issued Issued
------ ------ ------
<S> <C>
Mark Mendelson 50,000 25,000 25,000
Richard N. Chakejian, Jr. 20,000 10,000 10,000
Mark E. Glatz 20,000 10,000 10,000
John Papandon 20,000 10,000 10,000
James Greenfield 20,000 10,000 10,000
Lester W. Salzman 20,000 10,000 10,000
(Unrelated party) 50,000 25,000 25,000
----------------- ------ ------ ------
Totals 200,000 100,000 100,000
</TABLE>
In January 1999, the Company issued 50,000 shares of common stock to
James Greenfield and 50,000 shares of common stock to John Papandon, both
Directors of the Company, for prior services rendered in lieu of cash payments.
All future transactions with officers, Directors or five percent (5%)
stockholders of the Company will be approved by the independent disinterested
members of the Company's Board of Directors and be on terms no less favorable to
the Company than could otherwise be obtained from unaffiliated third parties.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (3) List of Exhibits Required by Item 601 Of Regulation S-B
<TABLE>
<CAPTION>
Exhibit #
<S> <C>
1.1 Revised Form of Underwriting Agreement between the Company and Hibbard Brown &
Company, Inc. (1)
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 By-laws of the Company. (1)
3.3 Form of Stock Certificate. (1)
9.1 Irrevocable Voting Proxy dated March 9, 1994 between John E. Dell and Max E. Gray (2)
9.2 Appointment of Mark Mendelson as of January 1, 1998 as holder of Irrevocable Voting Proxy
dated March 9, 1994 between John E. Dell and Max E. Gray.
10.1 1992 Stock Option Plan. (1)
10.2 Agreement between the Company and Lester W. Salzman dated June 5, 1998.
10.3 Share Purchase Agreement dated as of January 1, 1999 between the Company and Richard N. Chakejian, Sr.
10.4 Warehouse Loan Agreement dated March 1999 between the Company and Priority Bancorp, Inc.
10.5 Participation Agreement dated May 25, 1999 between the Company and Sterling Bank and Trust.
21
(a) National Archives, Inc., incorporated in the state of Pennsylvania (60%)
(b) Premiere Quality Foods, Inc., incorporated in the state of Virginia (100%)
(c) Premiere Chemicals, Inc., incorporated in the state of Virginia (100%)
(d) First Chesapeake Funding Corporation, incorporated in the state of Virginia (100%)
(e) First Chesapeake Acquisition Corporation, incorporated in the state of Virginia (100%)
(f) Collateral One Mortgage Corporation, incorporated in the state of Virginia (100%)
27 Financial Data Schedule (electronic filing only).
</TABLE>
---------------------------
(1) Incorporated by reference to the correspondingly numbered
exhibit to the Registration Statement on Form S-1,
Registration No. 33-59726, filed by the Company with the
Securities and Exchange Commission (the "Commission") on March
18, 1993, and Amendments Nos. 1, 2, 3 and 4 thereto filed with
the Commission on May 19, June 25, July 8 and July 15, 1993,
respectively.
(2) Incorporated by reference to the correspondingly numbered
exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1993 filed with the Commission on
March 31, 1994.
(b) Reports on Form 8-K.
In a report on Form 8-K dated October 7, 1998 the Company announced the
signing of a letter of intent to purchase an established wholesale lending
platform that specializes in conventional (conforming) loans.
In a report on Form 8-K dated December 21, 1998 the Company announced
it reached final agreement to acquire FMB Mortgage of Daytona Beach, Florida.
The firm specializes in wholesale conventional and government lending. (In 1999,
the Company decided not to conclude this acquisition, and is currently involved
in negotiations with the party to terminate the agreement.)
<PAGE>
In a report on Form 8-K dated February 11, 1999 the Company announced
the acquisition of an undisclosed Eastern U.S. mortgage banking firm with retail
mortgage origination operations in five states, Kentucky, Indiana, Missouri,
North Carolina and Tennessee. The identity of the firm will be disclosed upon
obtaining final regulatory approval.
In a report on Form 8-K dated April 14, 1999 the Company announced a
definitive option agreement to purchase a substantial block of common stock held
by a former Director of the Company. Hampton Financial Services, Inc., an entity
controlled by Mark Mendelson, Chairman of the Board of Directors and Chief
Executive Officer, or its designee has entered into a definitive option
agreement to purchase 450,000 shares of common stock from John E. Dell. These
shares represent over 6% of the Company's fully diluted common stock. Mr. Dell
was a Director of First Chesapeake in 1992 at which time he purchased 1,000,000
shares of the Company's common stock with attached warrants (since expired). In
1994, Mr. Dell entered into a liquidating trust agreement whereby he sold
550,000 shares of common stock and granted an irrevocable proxy to vote his
remaining 450,000 shares to Max E. Gray, the former President of the Company.
This liquidating trust was established to, among other things, expedite the
approval of the Company's licensing application under the Virginia Mortgage
Lender and Broker Act. Effective January 1, 1998, following Mr. Gray's
resignation from the Company, the Board of Directors appointed Mark Mendelson to
replace Mr. Gray as holder of the proxy. This block of stock represents the last
remaining shares held by former management and/or Directors of the Company.
First Chesapeake was formed in 1992 and closed in 1997 following several years
of unprofitable operations. (This option was not exercised and expired in June
1999.)
In a report on Form 8-K dated May 11, 1999 the Company announced the
completion of the acquisition of Mortgage Concepts, Inc. of Louisville, KY.
Mortgage Concepts, Inc., which now conducts business under the name Collateral
One Mortgage, is a mortgage banking firm with retail mortgage origination
operations in five states including Kentucky, Indiana, Missouri, North Carolina
and Tennessee. Applications are also pending for approval to originate loans in
Ohio, Georgia, Kansas, Pennsylvania and New Jersey. Upon completion of these
approvals, First Chesapeake and its holdings will have mortgage origination
operations in a total of 11 states.
In a report on Form 8-K dated June 8, 1999 the Company announced a
change in accountant from BDO Seidman, LLP to Grant Thornton LLP as of that
date. The reports of BDO Seidman, LLP on the financial statements for the fiscal
years ended December 31, 1996 and 1997 contained no adverse opinion or
disclaimer of opinion and were not qualified or modifies as to uncertainty,
audit scope or accounting principle, except that their report for the fiscal
year ended December 31, 1997 contained an explanatory paragraph regarding the
substantial doubt about the Company's ability to continue as a going concern.
The Company's Audit Committee recommended and approved the decision to change
independent accountants. In connection with its audits for the two most recent
fiscal years and through June 8, 1999, there have been no disagreements with BDO
Seidman, LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of BDO Seidman, LLP, would have caused them to
make reference thereto in their report on the financial statements for such
years. BDO Seidman, LLP has furnished a letter addressed to the Securities and
Exchange Commission stating that it agrees with the above statements.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 24, 1999 First Chesapeake Financial Corporation,
a Virginia corporation
By: /s/ Mark Mendelson
--------------------------------------
Mark Mendelson, Chairman and Chief
Executive Officer
By: /s/ Richard N. Chakejian, Jr.
--------------------------------------
Richard N. Chakejian, Jr. Director and
President
By: /s/ Mark E. Glatz
---------------------------------------
Mark E. Glatz, Director and Chief Financial
Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Date Name and Title Signature
- ---- -------------- ---------
<S> <C>
August 24, 1999 Mark Mendelson, Chairman and /s/ Mark Mendelson
------------------
Chief Executive Officer Mark Mendelson
August 24, 1999 Richard N. Chakejian, Jr., /s/ Richard N. Chakejian. Jr.
-----------------------------
Director and President Richard N. Chakejian, Jr.
August 24, 1999 Mark E. Glatz /s/ Mark E. Glatz
-----------------
Director and Chief Financial Officer Mark E. Glatz
August 24, 1999 Matthew Coppolino /s/ Matthew Coppolino
---------------------
Director Matthew Coppolino
August 24, 1999 James Greenfield /s/ James Greenfield
--------------------
Director and Secretary James Greenfield
August 24, 1999 John Papandon /s/ John Papandon
-----------------
Director John Papandon
</TABLE>
Exhibit 10.2
AGREEMENT
AGREEMENT dated as of May , 1998, between First Chesapeake Financial
Corporation, a Virginia corporation ("First Chesapeake"); and Lester W. Salzman
("Salzman").
RECITALS
First Chesapeake is a corporation organized under the laws of the
Commonwealth of Virginia;
First Chesapeake wishes to form a wholly-owned subsidiary to
engage in the mortgage origination and brokerage business;
The parties wish for Salzman and certain members of Salzman's
management team to operate the new subsidiary as set forth below; and
First Chesapeake wishes to transfer to Salzman and certain members of
Salzman's management team certain authorized shares of First Chesapeake's
capital stock on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the covenants and agreements herein
set forth and in reliance on the representations and warranties contained
herein, the parties agree as follows:
SECTION 1. FORMATION OF MORTGAGE BROKERAGE SUBSIDIARY
1.1 Formation. First Chesapeake agrees to form a wholly-owned
subsidiary prior to the Closing Date to engage in the wholesale and retail
mortgage origination and brokerage business (the "Subsidiary"). The Subsidiary
will be incorporated under the laws of the Commonwealth of Virginia and will
issue to First Chesapeake 100 shares of capital stock, no par value.
1.2 Board of Directors. The initial Board of Directors of the
Subsidiary shall consist of the same persons who are members of the Board of
Directors of First Chesapeake on the Closing Date. On the Closing Date, the
current members of the Board of Directors of First Chesapeake shall cause
Salzman to be elected as a member of the Board of Directors of First Chesapeake
to fill one of the vacancies on such Board. Pursuant to the Bylaws of First
Chesapeake, Salzman shall serve as a Director until the next annual meeting of
First Chesapeake at which time he shall stand for re-election with the other
Directors.
1.3 Officers. Salzman shall serve as President of the Subsidiary and
shall recommend to the Subsidiary's Board of Directors a slate of suitable
candidates to serve as the other officers of the Subsidiary.
1.4 Compensation of Officers and Management Team. The officers of the
Subsidiary shall be compensated pursuant to a compensation schedule agreeable to
the parties. Other employees of Subsidiary shall be compensated as directed by
the Board of Directors of the Subsidiary.
<PAGE>
SECTION 2. ISSUANCE OF STOCK OF FIRST CHESAPEAKE
2.1 Issuance of First Chesapeake Stock.
----------------------------------
(a) On the Closing Date, First Chesapeake shall issue to
Salzman 275,000 shares of First Chesapeake common stock. On the date two
calendar years after the Closing Date, the Board of First Chesapeake shall
determine in good faith whether Subsidiary has met the goals set forth in the
Business Plan of Subsidiary. If Subsidiary has failed to meet or exceed the
goals set forth in the Business Plan of Subsidiary, the parties agree that any
shares issued to Salzman pursuant to this Agreement shall be returned to, or
canceled by, First Chesapeake and shall be deemed to have been forfeited to
First Chesapeake for no monetary consideration.
(b) On the date two calendar years after the Closing Date,
the Board of First Chesapeake shall determine in good faith whether Subsidiary
has met the goals set forth in the Business Plan of Subsidiary. If Subsidiary
has met or exceeded the goals set forth in such Business Plan, First Chesapeake
shall issue to Salzman and members of Subsidiary's management team, no later
than thirty (30) days after such two year anniversary date, an additional number
of shares of First Chesapeake common stock equal to five percent (5%) of First
Chesapeake's issued and outstanding common stock as of the two year anniversary
date of the Closing Date. Such issued stock shall be distributed to Salzman and
Subsidiary's management team as directed by Salzman, with the concurrence of
First Chesapeake's Board of Directors.
(c) If First Chesapeake, within four (4) years after the
Closing Date, issues additional shares of authorized common stock for the
purpose of acquiring an interest in a company engaged in the same line of
business as Subsidiary (a "Qualifying Issuance"), First Chesapeake shall issue
to each Eligible Employee that number of unregistered shares of First Chesapeake
common stock such that the Eligible Employee's proportional amount of First
Chesapeake's issued and outstanding common stock immediately prior to the
issuance is equal to the Eligible Employee's proportional amount immediately
after such issuance. For the purposes of this section 2.1(c), "Eligible
Employee" shall mean an employee of Subsidiary who is employed by Subsidiary at
the time of a Qualifying Issuance and who has received shares of First
Chesapeake common stock pursuant to this Agreement prior to the Qualifying
Issuance.
(d) For purposes of this section 2.1, the "Business Plan"
shall mean the Business Plan attached to this Agreement as Exhibit B and
approved by the Board of Directors of First Chesapeake prior to the Closing
Date.
(e) No shares shall be issued pursuant to this Agreement to
Salzman or any other individual unless the individual has executed the
Employment and Noncompetition Agreement described in Section 5.1 of this
Agreement.
2.2 Effect of Termination of Employment. If the employment of Salzman
or any employee of First Chesapeake who receives shares of First Chesapeake
stock pursuant to this Agreement (collectively "Employee Shareholder") is
terminated "for cause" within two (2) years after any issuance of stock pursuant
to this Agreement, the parties agree that any shares issued to the terminated
Employee Shareholder within such two (2) year period shall be returned to, or
canceled by, First Chesapeake and shall be deemed to have been forfeited to
First Chesapeake for no monetary consideration. For purposes of this Section
2.3, "for cause" shall be defined in accordance with the Employment and
Noncompetition Agreement described in Section 5.1 of this Agreement.
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<PAGE>
2.3 Restrictions on Transfer. No shares issued to Salzman or any
employee of Subsidiary pursuant to this Agreement shall be sold, transferred,
assigned, pledged, encumbered, or otherwise alienated or hypothicated, for two
(2) years after issuance. The parties agree that any individual receiving shares
of stock pursuant to this Agreement will enter into a mutually acceptable Stock
Transfer Restriction Agreement reflecting the restrictions contained in this
Agreement. The parties agree that the stock certificates evidencing shares
issued pursuant to this Agreement shall bear a legend reflecting such
restrictions.
SECTION 3. CAPITAL CONTRIBUTION
3.1 Capital Contribution. On the Closing Date, in consideration of
the services to be provided by Salzman and the other officers of Subsidiary,
First Chesapeake will contribute not less than Two Hundred Fifty Thousand and
no/100 Dollars ($250,000.00) to Subsidiary, which will be used for the initial
capitalization and operation of Subsidiary. First Chesapeake agrees to
contribute such additional capital to Subsidiary as may be reasonable and
necessary, as determined by the Board of First Chesapeake in its sole
discretion.
SECTION 4. WAREHOUSE FACILITY
4.1 Warehouse Facility. Salzman and First Chesapeake will use their
good faith, commercially reasonable efforts to obtain a warehouse facility for
Subsidiary after the Closing Date.
SECTION 5. EMPLOYMENT AND NONCOMPETITION AGREEMENTS
5.1 At the Closing, Salzman and each employee of Subsidiary shall
execute Employment and Noncompetition Agreements with Subsidiary and First
Chesapeake in the form attached hereto as Exhibit A.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE PARTIES
6.1 First Chesapeake represents and warrants that:
(a) First Chesapeake is a corporation duly organized, validly
existing and in good standing under the laws of Commonwealth of Virginia, and
has the corporate power to own its property and conduct its business in the
manner in which such business is now being conducted. On the Closing Date,
Subsidiary will be a corporation duly organized, validly existing and in good
standing under the laws of Commonwealth of Virginia, and will have the corporate
power to own its property and conduct its business in the manner in which such
business is now contemplated.
(b) On the Closing Date, the execution and delivery of this
Agreement and the performance of the transactions contemplated hereby have been
duly authorized and approved by all necessary corporate action of First
Chesapeake unless otherwise provided in this Agreement. First Chesapeake has
full corporate power to enter into and perform this Agreement and the
transactions contemplated hereby, and this Agreement constitutes a valid and
binding agreement of First Chesapeake enforceable in accordance with its terms.
(c) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated do not and will not
conflict with, or result in a breach of any term or provision of, or constitute
a default under, or result in the creation of any lien or encumbrance upon the
property or assets of First Chesapeake pursuant to the Articles of Incorporation
or Bylaws of First Chesapeake or any agreement, indenture, mortgage, deed of
trust or other instrument to which First Chesapeake is a party or by which it is
bound or to which its properties are subject, or any law, rule, regulation,
judgment, order or decree. All consents by third parties that are required to
prevent or eliminate every such conflict, breach, default, lien and encumbrance
shall have been validly obtained before the Closing and at the Closing shall be
in full force and effect and valid and sufficient for such purpose.
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<PAGE>
6.2 Salzman represents and warrants that:
(a) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated do not and will not
conflict with, or result in a breach of any term or provision of, or constitute
a default under any agreement (employment, consulting or otherwise), indenture,
mortgage, deed of trust or other instrument to which Salzman and/or any
potential employees of Subsidiary are a party or by which any of them are bound
or to which their properties are subject, or any law, rule, regulation,
judgment, order or decree. All consents by third parties that are required to
prevent or eliminate every such conflict, breach, default, lien and encumbrance
shall have been validly obtained before the Closing and at the Closing shall be
in full force and effect and valid and sufficient for such purpose.
SECTION 7. COVENANTS AND FURTHER AGREEMENTS
7.1. Brokers and Consultants. The parties represent and warrant to
each other that the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not give rise to any
valid claim for a finder's fee, brokerage commission, or other like payment.
7.2. Reliance Upon and Survival of Representations and Warranties.
Notwithstanding any investigation at any time conducted by any of the parties
hereto, each of the parties hereto shall be entitled to rely on the
representations and warranties of the other parties set forth herein or in any
schedule, exhibit, or other document delivered pursuant hereto. The
representations, warranties, covenants, and agreements of the parties shall be
true and accurate as of, and shall survive for a period of one (1) year after
the Closing Date.
7.3. Further Assurances. The parties hereto agree to execute and
deliver or cause to be executed and delivered at the Closing or at other
reasonable times and places such additional instruments as another party hereto
may reasonably request for the purpose of carrying out this Agreement.
7.4. Indemnification.
----------------
(a) First Chesapeake covenants and agrees to indemnify, defend
and hold harmless Salzman from and against any loss, claim, liability,
obligation or expense (including reasonable attorneys' fees) (i) incurred or
sustained by Salzman on account of any misrepresentation or breach of any
warranty, covenant, or agreement of First Chesapeake contained in this Agreement
or made in connection herewith, or (ii) incurred or sustained on account of the
nonfulfillment by First Chesapeake of any of the conditions or covenants of this
Agreement as contemplated hereby. If any claim is asserted against Salzman for
which indemnification may be sought under the provisions of this Section 7.4,
Salzman shall promptly notify First Chesapeake of such claim and thereafter
shall permit First Chesapeake at its expense to participate in the negotiation
and settlement of any such claim and to join in the defense of any legal action
arising therefrom.
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<PAGE>
(b) Salzman covenants and agrees to indemnify, defend and hold
harmless First Chesapeake from and against any loss, claim, liability,
obligation or expense (including reasonable attorneys' fees) (i) incurred or
sustained on account of any misrepresentation or breach of any warranty,
covenant or agreement of Salzman and/or the Management Team contained in this
Agreement or made in connection herewith, or (ii) incurred or sustained on
account of the nonfulfillment by Salzman of any of the conditions or covenants
of this Agreement as contemplated hereby. If any claim is asserted against First
Chesapeake for which indemnification may be sought under the provisions of this
Section 7.4, First Chesapeake shall promptly notify Salzman of such claim and
thereafter shall permit Salzman at his expense to participate in the negotiation
and settlement of any such claim and to join in the defense of any legal action
arising therefrom.
7.5. Expenses. Each party shall pay its own expenses and costs,
including without limitation, counsel fees and transfer taxes incurred in
connection with the consummation of this Agreement and the transactions
contemplated hereby. However, First Chesapeake shall pay all fees and costs
associated with forming Subsidiary.
SECTION 8. CONDITIONS TO OBLIGATION OF SALZMAN
The obligations of Salzman at the Closing to consummate the
transactions herein contemplated are subject to the fulfillment at or prior to
the Closing Date of each of the following conditions:
8.1. Truth of Representations and Warranties. The representations and
warranties of First Chesapeake contained in this Agreement and in any exhibit or
other document delivered pursuant hereto shall be true and correct on and as of
the Closing Date with the same effect as though such representations and
warranties had been made on and as of such date, and Salzman shall have received
a certificate to this effect dated the Closing Date and signed by First
Chesapeake.
8.2. Performance of Agreements. Each agreement of First Chesapeake to
be performed on or before the Closing Date pursuant to the terms hereof or as
contemplated herein shall have been duly performed, and Salzman shall have
received a certificate to this effect dated the Closing Date and signed by First
Chesapeake.
8.3 Formation of Subsidiary. First Chesapeake shall have formed the
Subsidiary reasonably satisfactory to Salzman.
SECTION 9. CONDITIONS TO THE OBLIGATIONS OF FIRST CHESAPEAKE.
The obligations of First Chesapeake to consummate the transactions
herein contemplated are subject to the satisfaction on or before the Closing
Date of each of the following conditions:
9.1. Truth of Representations and Warranties. The representations and
warranties of Salzman contained in this Agreement and in any exhibit or other
document delivered pursuant hereto shall be true and correct on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date, and First Chesapeake shall have received
certificates to this effect dated the Closing Date and signed by Salzman.
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<PAGE>
9.2 Performance of Agreements. Each agreement of Salzman to be
performed on or before the Closing Date pursuant to the terms hereof or as
contemplated herein shall have been duly performed, and First Chesapeake shall
have received certificates to this effect dated the Closing Date and signed by
Salzman.
9.3 Approval of Transaction. The approval of the transactions set
forth in this Agreement by the Board of First Chesapeake.
SECTION 10. CLOSING
10.1 The closing (the "Closing") under this Agreement shall be held on
or before June 30, 1998 (the "Closing Date"), at such other place as the parties
may mutually agree.
SECTION 11. BENEFITS.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their assigns and successors in interest.
SECTION 12. NOTICES.
Any notice or other communication required or permitted hereunder shall
be sufficiently given if sent by certified mail, postage prepaid, addressed as
follows:
To Salzman: 2551 Jardin
Weston Hills, Florida 33327
To First Chesapeake 12 East Oregon Avenue
Philadelphia, Pennsylvania 19148
Attn: President
Any such notice or communication shall be deemed to have been given as of the
date so mailed.
SECTION 13. ENTIRE AGREEMENT
The certificates and other documents to be furnished in connection
herewith are an integral part of this Agreement. All understandings and
agreements between the parties are merged into this Agreement which fully and
completely expresses their agreements and supersedes any prior agreement or
understanding relating to the subject matter, including the letter of intent
among the parties, and no party has made any representations or warranties,
express or implied, not herein expressly set forth. This Agreement shall not be
changed or terminated except by written amendment signed by the parties hereto.
SECTION 14. GOVERNING LAW
This Agreement and the agreements contemplated hereby shall be
construed in accordance with and governed by the laws of Commonwealth of
Virginia, without regard to its conflict of laws provisions.
SECTION 15. COUNTERPARTS
This Agreement may be executed in several counterparts, all of which
taken together shall constitute one instrument.
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<PAGE>
SECTION 16. SEVERABILITY
If any clause, provision or section of this Agreement shall be held
illegal or invalid by any court, the illegality or invalidity of such clause,
provision or section shall not affect the remainder of this Agreement which
shall be construed and enforced as if such illegal or invalid clause, provision
or section had not been contained in this Agreement. If any agreement or
obligation contained in this Agreement is held to be in violation of law, then
such agreement or obligation shall be deemed to be the agreement or obligation
of the respective party hereto only to the extent permitted by law.
SECTION 17. DESCRIPTIVE HEADINGS
The descriptive headings of the several sections of this Agreement are
inserted for convenience only and shall not be deemed to affect the meaning or
construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their representative duly authorized officers, all as of the day and
year first above written.
FIRST CHESAPEAKE
FINANCIAL CORPORATION,
a Virginia corporation
By: -----------------------
Richard N. Chakegian
President and Director
By: ------------------------
Mark Mendelson
Chairman
SALZMAN
----------------------------
Lester W. Salzman
7
<PAGE>
EXHIBIT A
FORM OF EMPLOYMENT AGREEMENT
EXHIBIT B
APPROVED BUSINESS PLAN
EXHIBIT C
APPROVED COMPENSATION AND BONUS PLAN
8
Exhibit 10.3
SHARE PURCHASE AGREEMENT
Agreement dated as of January 1, 1999, among First Chesapeake Financial
Corporation, a Virginia corporation ("SELLER"), and Richard N. Chakejian, Sr.
("BUYER").
WITNESSETH:
WHEREAS, SELLER owns all outstanding shares (the "Shares") of Premier Chemical
Co., Inc. ("the Company"), par value ______________ (__) per share, which SELLER
wishes to sell to BUYER and BUYER (who is currently the President and a Director
of the Company) wishes to purchase from SELLER, all on the terms hereinafter set
forth;
NOW, THEREFORE, the parties hereby agree as follows.
1. The Closing.
1.1 The Closing will take place within fifteen (15) business days
after SELLER gives notice to BUYER (the "Closing Notice") that the following
condition precedent to the Closing has been satisfied:
1.11 The Board of Directors of SELLER shall vote to approve the
transaction in accordance with SELLER's By-Laws.
The Company will give the Closing Notice promptly after the condition
precedent has been satisfied.
1.2 The Closing will take place on a business day approved by SELLER
and BUYER, but in the absence of such approval, it will take place at 10:30 a.m.
on the 15th business day following the day on which the Closing Notice is given
to BUYER, at the offices of SELLER's Pennsylvania counsel. As used in this
Agreement, the term "business day" is a day on which banks are open for business
in Pennsylvania.
1.3 If the condition precedent described in section 1.1 has not been
satisfied by April 15, 1999, this agreement shall be null and void and shall be
of no force and effect.
2. Sale of Shares.
2.1 At the Closing, SELLER will sell the Shares to BUYER, and BUYER
will purchase the Shares from SELLER, in exchange for the following
consideration:
2.11 BUYER shall assume and be fully responsible for all debts,
accounts payable, judgments, liabilities, claims, suits and obligations of any
kind which have been asserted or entered against the Company as of the date of
Closing, except that SELLER shall pay a debt currently owed by the Company to
National Clothesline in the amount of $3,780.00.
2.12 BUYER shall fully indemnify, defend and hold harmless SELLER and
its officers, directors, affiliates, shareholders, agents and attorneys from and
against all claims, suits and actions of any kind relating to any debts,
accounts payable, judgments, liabilities, claims, suits and obligations of any
kind which have been asserted or entered against BUYER or the Company as of the
date of Closing.
<PAGE>
2.13 BUYER releases and covenants not to sue SELLER and its officers,
directors, affiliates, shareholders, agents and attorneys from and for any claim
or cause of action which BUYER might have had against any of them, arising from
the beginning of the world to the date of Closing.
3. Covenants of SELLER.
3.1 From the date of this Agreement until the second anniversary of
the Closing, SELLER will not engage directly or indirectly in any activity
relating to the formulation, creation, manufacture or distribution of chemicals
or substances used in the cleaning of garments, linens or fabrics ("the
Business"), and SELLER will not invest in or provide loans or other credit
facilities to any person, corporation, partnership or other entity which engages
directly or indirectly in any aspect of the Business; but this covenant will not
preclude SELLER from acquiring securities which are traded publicly.
3.2 SELLER will not use or disclose any trade secrets or other
proprietary or confidential information pertaining to any aspect of the
Business.
3.3 SELLER acknowledges that violation of any of the provisions of
this Section 3 will cause irreparable loss and harm to both the Company and
BUYER which cannot be reasonably or adequately compensated by damages in an
action at law. Accordingly, in the event of a breach or threatened breach by
SELLER of any of the provisions of this Section 3, each of the Company and BUYER
shall be entitled to injunctive and other equitable relief to prevent or cure
any breach or threatened breach thereof, and SELLER agrees that it will not be a
defense to any request for such relief that the Company or BUYER has an adequate
remedy at law. Notwithstanding the foregoing, the Company and BUYER shall have
other legal remedies as may be appropriate under the circumstances including,
inter alia, recovery of damages occasioned by such breach. For purposes of any
proceeding under or with respect to this Section 3, SELLER, the Company and
BUYER submit to the non-exclusive jurisdiction of the courts of the Commonwealth
of Pennsylvania, and each agrees not to raise and waives any objection to or
defense based on the venue of any such court or forum non conveniens.
3.4 A court of competent jurisdiction, if it determines any of the
provisions of this Section 3 to be unreasonable in scope, time or geography, is
hereby authorized by SELLER, the Company and BUYER to enforce the same in such
narrower scope, shorter time or lesser geography as such court determines to be
reasonable under all the circumstances.
4. Representations and Warranties of SELLER.
4.1 SELLER represents and warrants to the BUYER as follows.
(a) SELLER and the Company are both duly incorporated and
validly existing under the laws of Virginia and Pennsylvania, respectively; the
Company is duly qualified to conduct business in all jurisdictions where it is
required to qualify, to wit: Pennsylvania; and SELLER has the corporate power
and authority to execute, deliver and perform this Agreement and any other
agreement or document executed by SELLER under or in connection with this
Agreement. This Agreement constitutes, and any such other agreement or document
when executed will constitute, the legal, valid and binding obligations of
SELLER, enforceable against SELLER in accordance with its terms, subject to the
condition precedent recited in section 1.11 hereof.
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<PAGE>
(b) All authorizations, consents or approvals of, or
exemptions by, any governmental, judicial or public body or authority of or in
Virginia or Pennsylvania required to authorize, or required in connection with
(i) the execution, delivery and performance of this Agreement by SELLER, or (ii)
any of the transactions contemplated by this Agreement, or (iii) any of the
certificates, instruments or agreements executed by SELLER in connection with
this Agreement, or (iv) the taking of any action by SELLER, have been or at the
Closing will have been obtained and at the Closing will be in full force and
effect.
(c) SELLER is the sole owner of the Shares and of all rights
in and to the Shares; the Shares are represented by share certificates
______________, and SELLER may sell the Shares to BUYER pursuant to this
Agreement without the consent or approval of any person, corporation,
partnership, governmental authority or other entity except for the approvals of
SELLER's Board of Directors, which SELLER will use its best efforts to obtain;
the Shares are fully paid and non-assessable and, except as provided in this
Agreement, SELLER has not sold, transferred or assigned any of its rights in or
to any of the Shares; the Shares are free and clear of any liens, claims,
encumbrances and restrictions of any kind except for the approvals noted above.
(d) There is no option, warrant, privilege, or other right
outstanding with respect to any unissued shares of the Company, whether treasury
shares or otherwise, and there is no option, warrant, privilege or other right
outstanding with respect to any of the Shares; the Company has issued and
outstanding ________ shares of common stock, par value ________ (__) per share,
all of which are owned by SELLER.
4.2 Knowledge by BUYER of any event, circumstance or fact will not
vitiate or otherwise impair any of the warranties of SELLER or any of the rights
and remedies available to BUYER with respect to such warranties.
5. Representations and Warranties of BUYER.
5.1 BUYER represents and warrants to SELLER as follows.
(a) This Agreement constitutes the legal, valid and binding
obligations of BUYER enforceable against BUYER in accordance with its terms.
(b) Neither the execution nor delivery of this Agreement, nor
the transactions contemplated herein, nor compliance with the terms and
conditions of this Agreement will:
(i) contravene any provision of law or any statute,
decree, rule or regulation binding upon BUYER or contravene any judgment,
decree, franchise, order or permit applicable to BUYER;
(ii) conflict with or result in any breach of any
terms, covenants, conditions or provisions of, or constitute a default (with or
without the giving of notice or passage of time or both) under any agreement or
other instrument to which BUYER is a party or by which it is bound.
5.2 Knowledge by SELLER of any event, circumstance or fact will not
vitiate or otherwise impair any of the representations or warranties of BUYER or
any of the rights and remedies available to SELLER with respect to such
representations and warranties.
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<PAGE>
6. Indemnities.
6.1 The representations and warranties of SELLER and BUYER will be
deemed made on execution of this Agreement and at the Closing, and all of those
representations and warranties and all of the covenants and obligations of the
parties under this Agreement will survive the Closing.
6.2 BUYER will hold SELLER and its officers, directors, affiliates,
shareholders, agents and attorneys harmless from, and pay any loss, damage, cost
or expense (including, without limitation, legal fees and court costs) which
SELLER incurs by reason of, any representation or warranty of BUYER being
incorrect or by reason of any breach by BUYER of any of its covenants or
obligations under this Agreement.
6.3 SELLER will hold BUYER harmless from and pay any loss, damage,
cost or expense (including, without limitation, legal fees and court costs)
which BUYER incurs by reason of any representation or warranty of SELLER being
incorrect or by reason of any breach by SELLER of any of its covenants or
obligations under this Agreement.
7. Additional Covenants of SELLER.
7.1 SELLER will use its best efforts to have the condition precedent
under Sections 1.11 satisfied.
7.2 Prior to the Closing, the Company will continue to conduct, and
SELLER will cause the Company to continue to conduct, its business in accordance
with the Company's normal and past practices.
7.3 Prior to the Closing, the Company will not do, and SELLER and
BUYER will not permit the Company to do, any of the following:
(a) issue any shares, or issue any rights or privileges to acquire
any shares or other securities of the Company, or issue any other securities;
(b) change the nature of its business;
(c) declare or pay any dividend or make any other distribution or
payment in respect of any of its shares or purchase or redeem any of its shares;
(d) amend its Articles of Incorporation or By-Laws;
(e) merge or consolidate with any corporation or other entity or
liquidate or dissolve;
(f) adopt or agree to adopt any plan providing for its
reorganization;
(g) make any loan or other extension of credit or issue any guaranty
or otherwise incur any contingent liability, except for extensions of credit not
exceeding thirty (30) days to trade creditors in accordance with past practices
and in the normal course of business;
(h) sell, pledge, transfer, assign or grant a security interest in
any of its assets, property, contracts or rights;
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<PAGE>
(i) enter into or terminate any contract;
(j) employ anyone or terminate anyone's employment;
(k) pay any compensation other than the current monthly payroll,
raise or agree to raise anyone's compensation, or pay or agree to pay any bonus
or other special compensation.
8. Transactions to be Completed at Closing.
8.1 The following requirements will be completed or satisfied, as the
case may be, at the Closing.
(a) SELLER will deliver to BUYER share certificates ____________
____________ representing the Shares, which certificates will be duly endorsed
by SELLER to BUYER.
(b) BUYER will be furnished with a certificate by an officer or
director of SELLER certifying (i) that the representations and warranties of
SELLER under this Agreement are true and correct as of the Closing, and (ii)
that there has been no breach of any covenant of SELLER under this Agreement.
(c) SELLER will be furnished with a certificate by BUYER certifying
that the representations and warranties of BUYER under this Agreement are true
and correct as of the Closing and that there has been no breach of any covenant
of BUYER under this Agreement.
(d) SELLER will furnish to BUYER a certificate (i) certifying
the adoption by SELLER's directors and, if necessary, by their shareholders, of
resolutions authorizing the execution, delivery and performance of this
Agreement and any other agreements and documents in connection herewith, and
(ii) also certifying the names, positions and signatures of the persons
authorized to sign on their behalf.
8.2 The agreements, certificates, consents and other documents to be
executed and delivered at the Closing shall be dated the date of the Closing.
8.3 Completion or satisfaction, as the case may be, of all of the
requirements under Section 8.1 (including the correctness of the statements in
the certificates and other documents delivered) are conditions precedent to
completing the Closing under this Agreement. No part of the Closing under this
Agreement will be deemed completed unless all requirements under this Agreement
shall have been completed or satisfied.
9. Governing Law.
This Agreement will be governed by and construed in accordance with the
law of Pennsylvania.
10. Amendment and Waiver.
10.1 This Agreement may not be amended or terminated except by an
instrument in writing signed by the parties hereto.
10.2 No provision of this Agreement and no right or obligation under
this Agreement may be waived except by an instrument in writing signed by the
party waiving the provision, right or obligation in question.
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<PAGE>
11. Assignment. No party may transfer or assign any of its rights or
obligations under this Agreement and any attempt thereat shall be null and void.
12. Notices.
12.1 Any notice, request, demand, waiver, consent, approval, or other
communication which is required or permitted to be given to any party under this
Agreement shall be in writing and shall be given to that party with copy at the
addresses or fax numbers set forth below or, in the event of a change in any
address or fax number, then to such other address or fax number as to which
notice of the change is given:
(a) If to SELLER:
Mark Mendelson
Chairman
First Chesapeake Financial Corp.
541 Hamilton Street
Allentown, PA 18101
Fax No.: 610-433-8186
With a copy to (which shall not constitute notice):
James J. Greenfield, Esquire
Two Radnor Station Building
Suite 102-108
290 King of Prussia Road
Radnor, PA 19087
Fax No.: 610-341-0556
(b) If to BUYER:
Richard N. Chakejian, Sr.
Premiere Chemical Co.
12 E. Oregon Ave.
Philadelphia, PA 19148
Fax No.: 215-334-8717
With a copy to (which shall not constitute notice):
Lawrence F. Flick, Esquire
536 Swede St.
P.O. Box 1140
Norristown, PA 19404-1140
Fax No.: 610-279-3342
12.2 Notice shall be deemed given on receipt.
13. Section Headings.
Section headings are for convenient reference only and shall not affect
the meaning or have any bearing on the interpretation of any provision of this
Agreement.
14. Entire Agreement.
This Agreement constitutes the entire agreement among the parties with
respect to the matters described herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
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<PAGE>
SELLER: BUYER:
FIRST CHESAPEAKE FINANCIAL CORP.
By: /s/Mark Mendelson /s/Richard N. Chakejian, Sr.
----------------- ----------------------------
Mark Mendelson Richard N. Chakejian, Sr.
Chairman
7
Exhibit 10.4
WAREHOUSE LOAN AGREEMENT
I. THIS WAREHOUSE LOAN AGREEMENT ('This Agreement") is made and entered
into in the State of Ohio by and between First Chesapeake Funding Corporation, a
corporation organized and existing under the laws of the State of Virginia
(herein Called "Borrower"), and The Provident BW, an Ohio banking corporation
(herein called Mender"), for and in consideration of TEN DOLLARS ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged.
II. This Agreement, under which from rime to time Borrower my request
Lender to fund and Lender may agree to fund, pursuant to the terms of this
Agreement, certain loans evidenced by promissory notes and secured by mortgages,
deeds of trust, or deeds to secure debt conveying interests in real estate
(collectively such documents and low referred to as "Mortgages" and,
individually, "mortgage") shall be subject to the warranties, representations
and agreements set forth herein. Provided, however, Lender shall be under no
obligation to fund any Mortgage unless Leader notifies Borrower, in writing, of
its intent to fund an individual Mortgage,
III. Borrower represents and warrants to Lender as follows:
A. Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the State of
B. The execution, delivery and performance of this Agreement has been duly
authorized by Borrower and all corporate proceedings necessary to consummate all
the transactions contemplated by this Agreement have been taken by Borrower.
C. Borrower is fully licensed, qualified to do business, and in good
standing in each state in Which it does business and in which is located the
real property securing any Mortgage offered by Borrower to Lender hereunder.
D. The execution and delivery of this Agreement and sale of any and all
Mortgages hereunder are not and will not be a breach, violation or event of
default (or an event which would become an event of default with the lapse of
time or notice or both) under any judgment, decree, note, agreement, indenture
or other instrument to which Borrower is a party or otherwise subject.
E. Neither the making of a Mortgage nor the consummation of the
transactions contemplated by th1s Agreement will result in a violation or
infraction by Borrower of any applicable federal, state or local law, rule or
regulation.
F. Upon execution and delivery of this Agreement, it shall be a valid and
binding obligation of Borrower, enforceable in accordance with its terms.
G. As of the date of this Agreement, there is no pending or threatened
litigation, adverse claim or action, of any kind or nature against Borrower.
Borrower agrees to promptly notify Lender of the subsequent existence of any
such pending or threatened litigation, adverse claim or action.
H. Each Mortgage funded by Lender hereunder shall constitute a valid,
genuine and enforceable first or second lien against the real property conveyed
thereunder, will have been duly executed, acknowledged and filed for recording
Or recorded prior to the date of sale to Lender, will not be in default, and is
and will continue to be free from all claims, defenses, setoffs, and
counterclaims. The property that is the subject of a Mortgage shall not be
damaged by fire, wind or other cause or loss and there shall not be any
condemnation proceedings pending. To the best knowledge of
<PAGE>
I. Borrower, no improvement on any property that is the subject of a
Mortgage is in violation of any applicable zoning law or regulation, Borrower
has the sole, fall and complete title to each Mortgage and each instrument and
document relating thereto, which Mortgage and any other interest conveyed by
Borrower to Lender shall be free and clear of all claims of any other person or
entity, and Borrower, as may be required, has full power and authority to sell,
transfer and assign the same on the terms herein set forth; and there has been
no assignment, sale or hypothecation thereof by Borrower.
J. The full principal amount of the Mortgage has been advanced to the
mortgagor, either by payment made directly to the mortgagor or by payment made
on mortgagor's request or approval; the original unpaid balance outstanding
under the Mortgage is as stated in the applicable loan documents; all costs,
fees and expenses incurred in making, closing and recording the Mortgage have
been paid; neither the mortgaged property, nor any portion thereof, has been
released from the Mortgage; the terms of the Mortgage have in no way been
changed, amended or modified; and the Mortgage is current and not in default.
K. All signatures, names and addresses, amounts and other statements of
fact, including descriptions of the property, appearing on the credit
application and other related documents relating to each Mortgage are true and
correct and the mortgagor named thereon were, as of the date of each such
document upon which signatures appear, of majority age, and had the legal
capacity to enter into the Mortgage. Neither this Agreement nor any statement,
report or other document furnished or to be furnished pursuant to this Agreement
or in connection with the Mortgage transactions contemplated hereby, whether
originating with the Borrower or any other party, contains any untrue statement
of fact or omits to state a fact necessary to make the statements contained
therein misleading. Borrower has reviewed, and will review, all of the Mortgage
documents, and all the related documents thereto, and has made, and will make,
such inquiries as it deems necessary to make and confirm the accuracy of the
representations set forth herein and throughout this Agreement.
L. Borrower will have paid or caused to be paid when due any and all
applicable taxes or fees to any governmental entity arising out of the making,
acquisition, collection, holding or assignment of such Mortgage or the
underlying property (except taxes measured by Lender's net income). Borrower has
not dealt with any broker or agent or other person who might bc entitled to a
fee, commission or compensation in connection with a Mortgage, or the sale of a
Mortgage to Under, other than as previously disclosed w Leader in writing.
M. Each Mortgage which Borrower warrants is insured by a private mortgage
insurance company shall be so insured.
N. If required by Lender pursuant to the warehouse program Borrower
operates under with Lender, Borrower shall provide evidence satisfactory to
Lender that each Mortgage has been pre-approved by a third parry investor (each
such investor shall herein be called a "Third Party Investor") and that all such
terms and conditions required by any such Third Party Investor to be performed
or met by Borrower or any other party have been met prior to the closing of each
such Mortgage.
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<PAGE>
O. All Mortgages, and Borrower's activities related thereto, shall comply
with all applicable federal and state laws and regulations including, but not
limited to, the Equal Credit Opportunity Act, the Real Estate Settlement
Procedures Act, the Federal Fair Housing Act, the National Flood Insurance Act.
the Truth-In-Lending Act and the Fair Credit Reporting Act.
P. Each Mortgage funded by Lender hereunder shall be accompanied by all
documentation required under all applicable federal and state laws and
regulations regarding loans funded or purchased by insured financial
institutions. Borrower knows of nothing involving the Mortgage, the real
property secured thereby, the mortgagor or the mortgagor's credit standing that
can reasonably be expected to came the Mortgage to become delinquent or
adversely affect the Mortgage's value or marketability.
Q. Each Mortgage and note conveyed shall have been closed by an attorney
or title agency or title company who is an approved agent of an American Land
Title Association Company ("ALTA").
R. Borrower has previously furnished Lender with copies of its respective
financial statements (the "Financial Statements"). Borrower represents and
warrants that the Financial Statements were prepared in accordance with
generally accepted accounting principles and accurately portray Borrower's
financial condition as of the date of this Agreement. Borrower will within
thirty (30) days of the conclusion of each of its fiscal quarters furnish Lender
with a copy of its quarterly financial statements. Borrower will within
seventy-five (75) days of the conclusion of its fiscal year furnish Lender with
a copy of its annual financial statements. Such annual financial statements will
be certified or audited by independent public accountants, will conform with
generally accepted accounting standards and will be furnished directly to Lender
by Borrower's independent public accountants.
S. Borrower agrees to notify Leader in writing within fifteen (15)
calendar days of any proposed change of control in the ownership of its capital
stock or any proposed, or completed, change in the executive management of
Borrower, including, but not limited to, any management change in the offices of
president, vice-president, or any change in the management of Borrower's
underwriting department, Borrower further agrees to notify Lender in writing at
least thirty (30) days in advance of any change in location of its principal
place of business or of any proposed change in the name of Borrower or the
opening or closing of any office.
All the warranties and representations of Borrower contained herein shall be
deemed to be material to Lender and to have been relied upon by Lender and shall
continue throughout the term of this Agreement and shall survive this Agreement.
IV. Borrower agrees to do all acts necessary to perfect title to the
Mortgages, and shall deliver to Lender with respect to the funding of each
Mortgage the following documents, all subject to the approval of Lender as to
proper form and execution:
A. The original Mortgage note properly endorsed in blank by Borrower.
Borrower hereby makes and appoints any officer or employee of Lender as
Borrower's true and lawful attorney-in-fact to: (i) endorse each original
Mortgage note to the respective Third Party Investor that provides the funds to
Leader to fund the Mortgage pursuant to Section V. below, or (ii) endorse any
such original Mortgage note to Lender should Borrower, or a Third Party
Investor, default in its funding or take-out obligations hereunder, or (iii) do
and perform every act as Lender may request to be done to put Lender, or its
assigns, in position to enforce the payment of any Mortgage, or (iiii) to
prosecute any and all choses in action or claims as assigned in Section XI in
the name of the Borrower. Borrower hereby agrees to cooperate with Lender to
execute, create or assign any and all documents necessary for the prosecution.
of any such claims, without limitation and in the name of the Borrower as Lender
may request.
3
<PAGE>
Contemporaneously with the execution of this agreement, Borrower shall execute
and deliver to Lender recordable Powers of Attorney for each state or
jurisdiction in which Borrower does business for the purposes listed herein,
B. A certified copy of the original Mortgage, Deed of Trust, or Deed to
Secure Debt accompanied by those documents and instruments necessary to record
and perfect ownership.
C. A mortgagee title insurance policy or commitment in an amount equal w
the note and mortgage, on a current ALTA form or other generally accepted form,
with any and all exceptions set forth therein being subject to the approval of
Lender, insuring Borrower and its successors and assigns, a first and best lien
on the Mortgage property, save permitted exceptions. The title policy may insure
a second and best lien, save permitted exceptions, when approved by Me Lender.
D. A copy of a survey of the real Property securing each Mortgage note,
identifying the property by name, address and legal description.
E. Copies of hazard and casualty insurance replacement policies meeting
standard specifications and providing fire and extended coverages for an amount
at least equal to the outstanding amount of the Mortgage, unless prohibited by
state law.
F. A complete copy of the loan application package for each Mortgage
meeting normal current market/investor conditions as required by the commitment
letter described below.
G. A copy of the appraisal of the real estate securing each Mortgage note,
which appraisal shall meet requirements established by the Federal Deposit
Insurance Corporation, applicable state laws and regulations, and the Lender.
H. Insured closing letter issued by an ALTA approved insurance company
satisfactory to Lender, insuring the closing agent selected and approved in
accordance with section III.Q. hereof. Such insured closing letter shall insure
acts and omissions, and contain only those exclusions from coverage as Lender
may deem appropriate. Borrower also acknowledges that Leader may seek coverage
from such ALTA approved insurance companies in its own name for the same acts or
omissions of any such approved closing agents,
I. An original Transfer and Assignment with respect to each Mortgage
executed by Borrower in favor of Lender in recordable form to be recorded at The
sole option of Leader.
J. A copy of the Third Party Investor commitment letter, Or letter of
predelegated authority acceptable to Lender, or Borrower's underwriting
approval, as applicable.
K, A copy of the closing instructions from Borrower and/or Third Party
Investor on behalf of Borrower, as applicable. Borrower shall so instruct, for
each and every closing, that the original note and entire security package shall
be delivered directly to Lender within 24 hours after disbursement of the loan
proceeds. Borrower shall not handle or possess the original note and security
package, or otherwise give any instructions inconsistent herewith. Borrower also
acknowledges that Lender may issue closing instructions, either directly or by a
master instruction, either directly to each approved attorney or closing agent
or to the insurance company, containing the directions to deliver the original
note and security package directly to the Lender and will not give any
instruction in conflict with such instruction.
4
<PAGE>
L. Copy of the Mortgage payment notification or transfer of servicing
notification.
M. Such other instruments, documents, Or assurances that, in the sole
discretion of Lender.. may be required by Lender to more effectively confirm,
secure or evidence The obligations of Borrower hereunder.
V. The procedures for the handling and funding of each Mortgage are as
follows:
A. Upon the funding of each Mortgage by Lender, as described in Section
V.B. below, Borrower shall pay to Lender a handling fee on each Mortgage funded
by Lender as set forth on the Cost and Fee Schedule, attached hereto as Schedule
A (the "Handling Fee"). from and after the date of such funding through the date
The respective Third Party Investor delivers a funds to Lender, on behalf of
Borrower, required to purchase such Mortgage, Borrower shall pay interest on the
amount funded by Lender at a per annum rate as set forth on Schedule A, adjusted
for product type, and adjusted daily. Unless otherwise agreed in writing by and
between the parties hereto, Borrower shall pay to Lender all accrued interest on
the amount so funded no later than the number of days set forth on the attached
Schedule A allowed for that particular type of loan under the heading "Days
Allowed for Purchase by Third Party Investor. "
B. After approval by Lender and the respective Third Party Investor of
each Mortgage submitted to Lender far funding, each such Mortgage shall be
closed by an attorney or closing agent selected by Borrower and approved by
Lender, Subsequent to such approvals being obtained by Borrower, and after
Borrower provides notice of such closing to Lender, which notice shall be given
not less than twenty-four (24) hours prior to closing, Lender shall provide
closing funds (the "Closing Funds") as provided below-
(a) Lender shall deposit the closing Funds in a trust account with
Lender or an attorney's or closing agent's trust account at a
bank other than Lender (upon payment of a processing fee subject
to increase as set forth in Schedule A) in the name of the
closing attorney or closing agent upon receiving notice from the
attorney or closing agent that all closing documents, as required
herein, have been prepared and the Mortgage will be closed within
one business day; and
(b) The Closing Funds shall equal the face amount of the promissory
note executed by such mortgagor.
C. At closing and contemporaneously with the funding of each Mortgage
hereunder, Borrower shall endorse the note in blank to Lender and execute the
transfer and assignment described in Section IV hereof. Lender, upon receipt of
notice from Borrower and Borrower's satisfaction of its obligations under this
Agreement, and further provided that Borrower is not in default under the tem of
this Agreement or under The terms of any other agreement with the Lender, shall
endorse and deliver said note to the appropriate Third Party Investor.
5
<PAGE>
Borrower hereby agrees cause to be delivered or to deliver such original note to
arrive the next business day after closing by express courier to Lender as
directed, and shall not take possession of the original note, or to the Third
Party Investor with instructions to such investor to hold such note in trust for
Lender until fall payment for such Mortgage has been received by Lender. Lender
reserves ft option, at its sale and absolute discretion, to require a bail
agreement from each Third Party Investor whereby such investors agree to hold
all notes, assignments and Mortgage documents presented thereto in trust and
Belmont for Lender until full payment is made therefor, and Borrower hereby
agrees to assist Lender in obtaining bailee agreements from such Third Party
Investor. Funding by the Third Party Investor which has pre-approved each such
Mortgage will be made to Under by wire transfer or delivery of a certified check
to Lender at the time that such investor purchases each such Mortgage. Upon
receipt of funds, and the satisfaction of all Borrower's obligations to Lender,
Lender shall remit any surplus to Borrower.
D. Borrower shall maintain with Lender a demand deposit account (The
"Operating Account") for the purpose of effecting debit and credit adjustments
hereunder between the parties. In the case of each Mortgage funded by Lender,
Lender may deduct from the balance contained in the Operating Account the
handling fee described in Section V.A. hereof and the amount of interest due
from Lender as also set forth in Section V.A. hereof, as well as the wire fee
(if any) described in Schedule A attached hereto. After funding of each Mortgage
by the Third Party Investor thereof, Lender shall remit the surplus (if any)
with
E. respect to such Mortgage as described in Section V.C. by depositing the
amount of such surplus into the Operating Account. Lender's determination of the
amount of each such adjustment to be debited or credited to the Operating
Account shall be conclusive, absent manifest error. Borrower agrees to maintain
the Operating Account with deposits sufficient, in the reasonable discretion of
Leader, to cover the amounts of such adjustments.
F. In the event a mortgage has been purchased by a Third Party Investor
and the funds for that purchase have been settled. Borrower may request a return
of settled funds to the Third Party Investor, in writing giving specific
directions for the return. Lender will not honor requests of the Third Party
Investor without the written consent of the Borrower. Before the funds are
returned, Lender must receive from the Third Party Investor the original
documents, the loan must be again approved by underwriting and Lender will
charge the same fees as if a new loan to be placed on the Line of Credit.
VI. Promptly upon demand of Lender, Borrower shall repurchase at the
Repurchase Price (as hereinafter defined), without recourse, any Mortgage with
respect to which, either:
A. Any representation or warranty of Borrower contained in this
Agreement shall prove at any time to be incorrect in any material respect; or
B. Any contention shall have been raised by mortgagor, or on behalf of
mortgagor or a Third Party Investor, that there has been a violation of, or
failure to comply with, any federal or state law or regulation which would give
rise to a right of a mortgagor to refuse further payment of a Mortgage and/or
seek a refund of amounts previously paid and/or claim a penalty or additional
rescission rights of any kind or nature; or
C. The respective Third Party Investor has not purchased the Mortgage in
accordance with its commitment letter, as provided in Section IV.J. hereof,
within the required number of days (as set forth on Schedule A for the
applicable product type) after Lender has funded such Mortgage.
6
<PAGE>
VII. Borrower agrees to fulfill its obligation to repurchase any loan
described above in Section VI hereof by paying to Lender the Repurchase Price,
which shall equal The total unpaid balance thereof, including principal, earned
interest, and accrued charges, fees and penalties plus all costs and expense,
including without limitation, reasonable attorney's fees and expenses, and
collection, Mortgage foreclosure and sales expenses, if any, theretofore
incurred by Lender in enforcing its rights in such Mortgage or in enforcing its
rights pursuant to this Agreement. Lender's prior knowledge of any breach by
Borrower of any of the foregoing prior to or at the time of funding. or any time
thereafter, or any delay by Lender in making demand hereunder, shall neither
impair Borrower's obligation hereunder nor constitute a waiver of Lender's
rights hereunder.
VIII. Upon receipt of such Repurchase Price from Borrower pursuant to Section
VII hereof, Lender shall transfer to Borrower the Note, Mortgage and Lender's
right, title and interest in the Mortgage property described therein by separate
written endorsements and assignments, if necessary, which shall be without
recourse to Lender and without any warranties. expressed or implied. Until such
time as Lender has received such Repurchase Price in full, Lender may continue
to liquidate the Mortgage, and Borrower shall remain liable for any deficiency,
including all of Lender's expenses.
IX. Borrower hereby unconditionally guarantees to Lender the full and
prompt payment of any and all sums due under each and every promissory note in
connection with a Mortgage, together with any interest, costs, reasonable legal
fees, or charges incurred by Lender to collect any monies or indebtedness owed
to Lender pursuant to a Mortgage. Borrower does hereby agree that if any
mortgagor, pursuant to a Mortgage note, fails to perform any of its obligations
under such Mortgage note in accordance with its terms, or if any and all sum
which are now or may hereafter become due from mortgagor under a Mortgage note
are not paid by such mortgagor in accordance with the terms of the Mortgage
note, Borrower will immediately make such payments to Lender or complete and
remedy any failure to perform by the mortgagor. The liability of Borrower under
this guaranty shall be direct and immediate and not conditional or contingent
upon the pursuit of any remedies against the mortgagor under a Mortgage note, or
any other person. Borrower waives any right to require that an action be brought
against the mortgagor under a Mortgage note. This guaranty shall be binding upon
Borrower and its successors, successors-in-title, legal representatives and
assigns and shall inure only to the benefit of Lender, its successors and
assigns, but shall not be binding upon Borrower to any Third Party Investor upon
a usual and ordinary transfer of the Mortgage note by Lender as contemplated by
this Agreement.
X. Lender may, at any rime and with no prior notice to Borrower, terminate
this Agreement as to Mortgages being funded, demand Borrower to immediately
remove or repurchase any and all loans then on the line and deduct all fees,
charges, interest or loan principal amounts from the Operating Account, as
established by Item V (D) herein, and demand any and all deficiencies or amounts
owing be immediately due and payable, if:
A. Borrower, in the sole discretion of Leader, fails to perform its
obligations hereunder; or
B. Borrower becomes insolvent or bankrupt or is placed under
conservatorship or receivership; or
A. Borrower assigns or attempts to assign its rights and obligations
hereunder, without written consent of Lender; or
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<PAGE>
D. Lender, in its sole opinion, determines that it Is in Lender's best
interest to terminate this Agreement.
Borrower may terminate this Agreement as to the future acceptance of Mortgages
by giving thirty (30) days prior written notice to Lender. Any such termination
by Lender or Borrower shall not in any respect change or modify the obligations
of Borrower with respect to the Mortgages already accepted.
XI. To secure all loans, advances and other amounts owing at any time under
this Agreement and all extensions, modifications and renewals thereof, Borrower
hereby pledges, assigns, transfers and grants a first perfected security
interest in the following described collateral to Lender (all of which is
sometimes collectively referred to herein. as the "Collateral"):
(a) All of Borrower's right, title and interest in and to the promissory
notes, mortgages, deeds of trust, deeds to secure debt, security
agreements, title, hazard, mortgage and liability insurance policies,
legal opinions, FHA insurance, VA guarantees, and all other rights,
interest and documents given to or originated or procured by Borrower,
or to which Borrower is entitled, in conjunction or connection with the
purchase or making by Borrower of a Mortgage which from time to dine
are delivered, or caused to be delivered, to Lender;
(b) All now existing and hereafter arising rights to service, receive
payment and fees, administer and collect Mortgages submitted to and
held by or on behalf of Leader;
(c) All now existing and hereafter arising accounts, impounds, deposits,
guarantees, personal property, contract rights and general intangibles
constituting or relating to any of the foregoing Collateral,
(d) All now existing and hereafter acquired files, documents, instruments,
surveys, certificates, correspondence, appraisals, computer programs,
tapes, discs, cards, accounting records and other books, records,
information and data of Borrower relating to the foregoing Collateral
(including all information, records, dam, programs, tapes, discs, W
cards necessary or helpful In the administration or servicing of the
foregoing Collateral);
(e) All rights of Borrower (but not its obligations) under all Third Party
Investor purchase Commitments, take-outs, or pre-approvals, now
existing or hereafter arising, covering any part of the foregoing
Collateral, all rights to deliver Mortgages to Third Party Investors or
other purchasers and all proceeds resulting from the disposition of
such Collateral pursuant thereto;
(f) The proceeds and products of the foregoing Collateral; and
(g) All of Borrower's right, title and interest in and to all other
collateral assigned to Lender.
Contemporaneously herewith, Borrower has delivered to and deposited with Lender
all promissory notes received or procured by it evidencing any and all Mortgages
(the 'Underlying Loan Notes"). Lender's security interests In a Mortgage and
servicing rights to a Mortgage shall terminate automatically upon the receipt by
Leader of the amount previously advanced to Borrower by Lender for such Mortgage
and the payment of accrued interest and all other fees attributable to that
advance; provided, however, that there has been no "Event of default as defia3ed
hereafter. Upon the request of Lender, Borrower shall execute any Amber document
or instrument requested by Leader to further evidence of effectuate Lender's
security interest and assignments set forth herein.
8
<PAGE>
A. Borrower agrees with Lender that Borrower:
(a) Will defend the Collateral against the claims and demands of all
persons
(b) Will maintain accurate books and records relating to the Collateral and
will permit Lender and its agents to inspect the Collateral W such
books and records of Borrower at all reasonable times and from time to
time.
(c) Will not permit any part of the Collateral or any of the records
concerning same to be removed from the business locations of Borrower
referred to previously within this Agreement without the prior written
consent of Lender. As a condition To granting such consent, Lender may
require trust receipts for such Collateral be given to Lender.
(d) Will not: (i) permit any liens or security interests (other than
Lender's security interest granted herein) to attach To any of the
Collateral; (ii) permit any of the Collateral to be levied upon under
any legal process; or (iii) di3pose of the Collateral, except for sales
of Underlying Loan Notes and related documents to Third Party Investors
in the ordinary course of Borrower's business.
(e) Hereby irrevocably appoints Leader as Borrower's attorney-in-fact to do
all acts and things which Lender may deem necessary by this Agreement
and to protect the Collateral, including, but not limited to, the
execution in Borrower's name as attorney-in-fact of UCC-1 Financing
Statements covering the Collateral and filing and recording of same
whatever Lender deems appropriate, with Borrower to reimburse Lender
immediately for all filing and recording fees and taxes in connection
therewith.
(f) Will immediately deliver to and deposit with Under any and all
additional and/or replacement Underlying Loan Notes received or
procured by Borrower in conjunction with the purchase or making by it
of a Mortgage.
(g) Will deliver to Lender such other information concerning the Collateral
as Lender may from time to time request.
(h) Will repay the advances for each Mortgage and all other indebtedness
and obligations of Borrower to Lender in accordance with their terms.
(i) Will comply in all respects with this Agreement.
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<PAGE>
XII. Upon (i) the occurrence of any default in or breach of any covenant,
agreement, representation or warranty by Borrower under the provisions of this
Agreement, or any related document, or (ii) any default in the payment of
principal fees or interest by Borrower of a funding or advance by Lender
pursuant to a Mortgage or any other indebtedness of the Borrower to Lender (each
of which Is referred to herein as an "Event of Default"), then and in any of
such events, Lender shall have all rights and remedies in and against the
Collateral and otherwise of a secured party under the Uniform Commercial Code of
Ohio (and all such other states where any part of the Collateral may be located,
if applicable) or other applicable law and all rights provided in ibis Agreement
and in all other instruments securing or related to the liabilities or
obligations of Borrower to Lender, 0 of which rights and remedies shall, to the
full extend permitted by law, be cumulative, including, but not limited to, the
right of Lender to declare immediately due and payable, and forthwith collect,
any and all sums advanced to Borrower under this Agreement, or any other related
document, together with all unpaid interest accrued thereon and fees
outstanding. Further, at any time after the occurrence of any Event of Default,
Lender may transfer into its own name or that of its nominee, any or all of the
Collateral; and Lender may receive all payments made an the Underlying I= Notes
or any other Collateral; and 1=&r may receive all payments made on the
Underlying Loan Notes or any other Collateral, with or without transferring the
Collateral in its name or the name of its nominee; and Leader may Take
possession of (and Borrower agrees to deliver to Lender) all books, records and
other documents or instruments relating to The Collateral; and Leader may notify
and cause (and Borrower agrees to instruct and use its best efforts to cause)
all persons directly or contingently liable on the Underlying Loan Notes or
other Collateral to thereafter make all payments to Lender or its nominee; and
Lender may make or enter into any compromise or settlement it deems desirable in
its sole discretion with any obligor(s) of or on any of the Collateral, and may
extend the time for payment or otherwise modify or amend the terms and
conditions of any of the Underlying Loan Notes or other Collateral, but Lender
shall at no time be under any obligation or duty with respect to the protection,
preservation or servicing of the Collateral or enforcement of Borrower's rights
and liabilities thereunder while any of the Collateral or income on amounts
arising therefrom are in the actual possession of Lender. Further, Lender shall
have the right to sell the Collateral at public or private sale. Borrower will
pay Lender, as part of the indebtedness hereby secured, all amounts, including,
but not limited to, Lender's attorneys' fees permitted by applicable law, with
interest thereon at the rate provided in this Agreement, paid by Lender (i) for
taxes, levies, insurance and prior liens of the Collateral, and (ii) in Taking
possession of, disposing of, or preserving the Collateral.
The requirement of reasonable notice of the time and place of disposition of
Collateral by Lender shall be conclusively met if such notice is mailed, postage
prepaid, to Borrower's address specified in this Agreement at least Ten (10)
days before the taw of the sale or disposition. Lender may bid upon and purchase
any or all of The Collateral at any public sale thereof. Lender may dispose of
all or any part of the Collateral at one or more times and from time to Time and
in one or more lots or parcels, and upon such terms and conditions, including a
credit sale, as it determines in its sole discretion. Lender shall apply the net
proceeds of any such disposition of the Collateral or any par51 thereof, after
deducting all costs incurred in connection therewith, or incidental to the
holding, preparing fore sale, in whole or in part, of the Collateral, including
Lender's attorney fees, first to the repayment of the principal and interest
accrued under advances and fundings of Mortgages, and then to the other
liabilities and obligations or Borrower secured hereunder, and any remaining
proceeds shall be paid To Borrower or other party entitled thereto.
XIII. If any Event of Default, or event, condition or Thing which
constitutes, or which, with a lapse of time or the giving of notice, or both,
would constitute an Event of Default, shall occur or begin to exist, Lender
shall have the right then, or at any Time thereafter during the continuance of
such event, condition or thing, unless remedied To the reasonable satisfaction
of lender, to set off against, and to appropriate and apply toward the payment
of, the indebtedness then owed by Borrower to Lender, as evidenced by the
aggregate advances and fundings of Mortgages, whether or not such indebtedness
shall have then matured or be due and payable and whether or not Lender has
declared this Agreement in default, any and all deposit balances and other sums
and indebtedness then held or owed by Lender to or for the credit and account of
Borrower, all without notice to or demand on Borrower or any other person, all
such notices and demands being hereby expressly waived.
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<PAGE>
XIV. This Agreement secures all future advances that may be made at any time
to Lender w Borrower pursuant to this Agreement, There is included with the term
"collateral", as used herein, all other property and all interest therein of any
kind hereafter acquired by Borrower meeting or falling within the description of
the Collateral set forth above and also the proceeds and products thereof.
XV. Borrower agrees to promptly indemnify Lender from and hold Lender
harmless against, and on demand by Leader, pay Lender for, any damages, losses,
costs, penalties, fines, legal fees and related com, judgments, and my other
costs and expenses resulting from or arising out of a breach of any
representation, warranty or obligation of Borrower contained in or made pursuant
to this Agreement or from any act or omission of Borrower under this Agreement,
or from any claim, demand, defense, or assertion against or involving Lender,
including without limitation. from Lender's assignee or transferee with respect
to any Mortgage, based on or grounded upon. or resulting from such breach or a
breach of any representation, warranty or obligation made by Lender in reliance
upon any representation, warranty or obligation made or undertaken by Borrower
contained in or pursuant to this Agreement. The obligations of Borrower under
this indemnification shall survive delivery and payment for any Mortgage and
Termination of this Agreement or the expiration hereof. Attorneys' fees and
disbursements incurred in enforcing, or on appeal from, a judgment pursuant
hereto shall be recoverable separately from and in addition to any other amount
included in such judgment, and this clause is intended to be severable from the
other provisions of this Agreement and to survive and not be merged into such
judgment,
XVI. This Agreement shall be construed In accordance with the laws of the
State of Ohio except that the provisions of this Agreement with respect to
remedies regarding the Mortgages are intended to comply with the laws of the
jurisdiction where such Mortgages are recorded, and any provisions hereof, or of
the Mortgages, not so complying shall be deemed to be modified accordingly in
the manner and to the extent which shall best effect the intentions and purposes
reflected in and contemplated by this Agreement. The invalidity or
enforceability of any provision or provisions of the Mortgages or this Agreement
shall not affect the validity or enforceability of any other provisions thereof
and hereof.
XVII. In the event of a dispute between the parties hereto, or their
successors, arising out of this Agreement, such dispute shall be sealed by
arbitration in accordance with the commercial arbitration rules of the American
Arbitration Association and judgment upon the award rendered by the arbitrator
may be entered in any Court having jurisdiction thereof. Unless otherwise
required by said rules, the arbitration shall be conducted by a single
arbitrator who shall not be authorized to award punitive or exemplary damages to
either party. The arbitration shall be held in Cincinnati, Ohio. The award of
the arbitrator shall be final and binding. Each party shall bear its own
attorneys' fees associated with the arbitration and other costs and expenses of
the arbitration shall be born as provided by the rules of the American
Arbitration Association.
XVII. This Agreement shall bind and benefit the respective successors and
assigns of Borrower and Lender. No other person or entity is intended to be
benefited hereby. Notwithstanding the foregoing, Borrower shall have no power or
right to assign this Agreement or any of its rights or obligations hereunder and
any attempt to do so without prior written consent of Lender, shall be voidable
by Lender at its option.
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<PAGE>
XIX. All notices required or permitted to be given hereunder shall be given
in writing and sent by telecopier, personal delivery, express courier service,
or by registered or certified United States mail, return receipt requested,
Postage prepaid, addressed as follows (or to such other address as to which my
Party hereto shall have given the other written notice):
Borrower: First Chesapeake Funding Corporation
8551 W. Sunrise Blvd,
Plantation, FL 33322
Attn: Les Salzman, President
Lender: The Provident Bank
One East Fourth Street, Mail Stop 265D
Cincinnati, OH 45202
Attn: Ken Logan, Vice President
All notices hereunder shall be deemed given upon the earliest of (a) actual
delivery in person or by telecopier, (b) one business day after delivery to an
express courier service, or (c) three business days after having been deposited
in the United States mail, in accordance with the foregoing.
XX. Lender's omission or delay to exercise any of its optimal or absolute
rights to remedy under this Agreement shall not constitute. a waiver by Lender,
nor operate to bar Lender from the exercise of any such rights. Any waiver by
Lender and any default shall not operate as a waiver of any other subsequent
default. All rights and remedies provided to Lender herein are not exclusive of
any other remedies at law or equity, are cumulative and not alternative, and may
be exercised by Lender simultaneously or in such order as Lender deems to be in
its interest.
XXI. This Agreement contains the entire agreement relative to the subject
matter hereof between the parties hereto, and cannot be modified in any respect
except by an amendment in writing signed by both parties. There are no unwritten
or oral agreements between the parties. This Agreement supersedes any and all
prior commitments, arrangements, representations, understandings and agreements
between the parties pertaining to the subject matter hereof.
XXIII. This Agreement shall not be deemed to constitute Borrower and Lender as
partners or joint venturers, nor shall any party be deemed to designate the
other party as its agent. Lender does not assume any liability or incur any
obligations of Borrower by the execution of this Agreement. No payment or
consideration paid from Borrower to Lender shall be considered a fee paid for
the goodwill of Lender.
XXVI. As may be applicable, should any Mortgage subsequently be purchased by
Lender from Borrower, Borrower agrees for the time period of thirty-six (36)
months beginning from the applicable settlement date, not to take any action to
directly solicit individual mortgagors in order to effect the refinancing of any
Mortgage previously purchased by Lender. In the event a mortgagee elects to
refinance with Borrower a Mortgage purchased by Lender from Borrower, and such
Mortgage is currently owned or serviced by Lender or Lender otherwise retains a
financial interest in the Mortgage, Lender will have the right of first refusal
on the purchasing of the refinancing.
XXV. Time is of the essence under the terms of this Agreement.
IN WITNESS WHEREOF, each party has caused its corporate seal to be affixed
hereto and this instrument to be signed in its corporate name on its behalf by
its proper officials duly authorized.
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<PAGE>
This 15th day of March, 1999.
First Chesapeake Funding Corporation
- ------------------------------------
"Borrower"
By: /s/Lester W. Salzman
----------------------
Its: President
---------
THE PROVIDENT BANK PRIORITY BANCORP, INC.
"Lender" "Administrator"
By: /s/ By: /s/
---------- -----
13
Exhibit 10.5
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT (the "Agreement") Is hereby made as of the 25th
day of May 1999 by and between First Chesapeake Acquisition Corporation (the
"Mortgage Originator"), with all address of 8551 W. Sunrise Blvd, Ste,# 106.
Plantation. FL 33322 . and STERLING BANK ANDTRUST, FSB (the "Participant"),
with all address of One Towne Square, l7th Floor, Southfield, Michigan
48076.
WITNESSETH
The Mortgage Originator is the holder from time to time of various mortgage
loans (the "Mortgage Loans) evidenced by notes and Secured by first
mortgages and/or deeds of trust (referred to collectively herein as
"mortgages") on improved one- to four-family residential real properties.
The Mortgage Loans will be eligible for purchase in the secondary market by
FNMA or FHLMC or other investors, or are eligible to serve as collateral for
mortgage-backed securities issued by GNMA. The Mortgage Originator desires
to sell a senior participation interest (each a "Participation") in each of
the Mortgage Loans from time to time to the Participant, and the Participant
is willing to purchase such Participations under the terms and conditions
hereof.
NOW, THEREFORE, in consideration of the premises and mutual promises
herein contained, it is agreed:
1. Purchase of Participations. The Participant agrees to purchase from
time to time from the Mortgage Originator, but only in accordance with the
terms and conditions hereof, one or more loan participation certificates
(the "Participation Certificates"), substantially in the form of Exhibit A
hereto, each of which represents the Participant's Participation in a
Mortgage originated by the Mortgage Originator. The principal balance of
each Participation (the "Participation Principal Balance") shall be set out
in the related Participation Certificate and shall decrease as any portion
of the principal collections with respect to the Mortgage Loans are paid to
the Participant. The principal terms relating to the purchase of each
Participation, Including but not limited to the maximum participation
percentage, the purchase price and the interest rate of the Participation
Principal Balance may be set out in the terms addendum attached hereto as
Exhibit B, as the same may be amended from time to time (the "Terms
Addendum"). Each Participation shall bear interest of the related
Participation Principal Balance at the rate specified as the "Interest Rate"
of the Terms Addendum; provided, however, that 1from the date of which any
Event Of Default (defined below) shall be deemed to have occurred until the
earlier of (i) the date of which the default is, in Participant's sole
discretion, waived in writing or (ii) the date on which the Participation is
paid in full, the Participation shall bear interest at the Default Rate set
forth on the Terms Addendum. The aggregate outstanding principal balance of
all Participations on any day shall not exceed the amount specified as the
"Maximum Participation Amount" on the Terms Addendum.
2. Mechanics of Purchase and Repurchase. The Mortgage Loan subject to a
Participation shall be listed on Schedule I to the related Participation
Certificate (the "Mortgage Loan Schedule"). The Mortgage Originator shall be
responsible for delivering a Mortgage Loan Schedule.
<PAGE>
(a) From time to time prior to the termination of this Agreement,
the Mortgage Originator may request that the Participant purchase a
Participation. If no Event of Default exists or no event that with the
passage of time would become all Event of Default, the Participant, in its
sole discretion, may accept the Participation for purchase and the
Participant shall pay the Mortgage Originator or, on behalf of the Mortgage
Originator, a settlement agent, in the Participant's sole discretion, an
amount equal to the purchase price.
(b) The Mortgage Originator shall deliver the Participation
Certificate simultaneously with the documents referenced in Section 10 and
if Participant accepts the same, Participant shall make the payment
referenced in Section 2(a) above. The Participation Certificate and the
documents referenced in Section 10 shall be forwarded to Participant, or
they may, in the sole discretion of the Participant, be delivered to a
settlement agent approved by Participant. The Mortgage Originator shall
submit the names of settlement agents for approval by Participant,
accompanied by such information regarding the settlement agents as
Participant shall require. Each such settlement agent shall execute all
escrow instruction letter with Participant on terms satisfactory to
Participant.
(c) If the Mortgager Originator delivers to the Participant the
Participation Certificate and other documents referenced in Section 10 at
the time Participant makes the payment referenced in Section 2(a) above,
then the purchase is referred to in this Agreement (and in exhibits hereto
and other documentation relating to the Purchase and sale of Participations
by Participant and Mortgage Originator) as a "Dry Funding." If the Mortgager
Originator delivers to the settlement agent pursuant to Section 2(b) above
the Participation Certificate and other documents referenced in Section 10
at the time Participant makes the payment referenced in Section 2(a) above,
then the purchase Is referred to in this Agreement (and in exhibits hereto
and other documentation relating to the purchase and sale of Participations
by Participant and Mortgage Originator) as a "Wet Funding."
(d) From time to time prior to the termination of this Agreement,
the Mortgage Originator may request to repurchase a Participation by (i)
delivering a written request to the Participant, substantially in the form
attached as Exhibit C, and (ii) tendering to the Participant the related
"Repurchase Amount" for each such Participation. The request for repurchase
shall specify that the Participation is being repurchased for one of the
following reasons: (A) the Mortgage Loan has been paid in full; (B) the
Mortgage Loan is being sold Pursuant to a Takeout Commitment; (C) the
Participation has been Outstanding for more than ninety (90) days; (D) a
representation or warranty contained or provided for in Section 8 or 9 of
this Agreement has been breached; (E) the Mortgage Loan has become more than
thirty (30) days delinquent; or (F) foreclosure proceedings are being
started with respect to the Mortgage Loan. If the Participant permits Such
repurchase, which it may (to III its sole discretion, upon receipt of the
Repurchase Amount, the Participant shall return to the Mortgage Originator
(or such other party as the Mortgage Originator may direct) the related
note, mortgage and assignment of mortgage, to the extent such documents were
delivered to the Participant and have not previously been redelivered to the
Mortgage Originator.
(e) For purposes hereof, the "Repurchase Amount" means the amount
set forth in Section 13(c).
3. Restrictions on Transfer by Mortgage Originator. The Mortgage
Originator shall not sell, transfer or assign its retained interest in the
Mortgage Loans without the prior written consent of the Participant.
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<PAGE>
4. Required Repurchase. The Participant, in its sole discretion, may
require the Mortgage Originator to repurchase a Participation, in accordance
with Section 2(d) above, (i) if any Mortgage Loan underlying a Participation
becomes more than thirty (30) days delinquent, (ii) if ally representation
or warranty pertaining to a Mortgage Loan is Untrue, (iii) if any legal
action is initiated or threatened which, if successful, would in any way
impair the value Of Participant's interest in the Participation, as
determined by the Participant in its sole judgment, or (iv) if a
Participation has been outstanding for a period of more than ninety (90)
days. In the event that Participant requires Mortgage Originator to
repurchase a Participation, the Repurchase Amount Must be received by
Participant within ten (10) days after Participant sends notice to Mortgage
Originator.
5. Applications of Unscheduled Payments and Takeout Proceeds. If a
Mortgage Loan is foreclosed upon or is otherwise liquidated or if the
Mortgage Loan is to be sold to a takeout investor, the related Participation
shall be repaid in full, together with any accrued interest thereon, from
the proceeds of such liquidation, foreclosure or takeout sale prior to the
payment of any amount to the Mortgage Originator with respect to such
Mortgage Loan.
6. Servicing. In consideration of the Participant's agreement to purchase
Participations from the Mortgage Originator, the Mortgage Originator hereby
agrees to act as the servicer of the Mortgage Loans subject to each
Participation. So long as any indebtedness remains outstanding on any of the
Mortgage Loans, the Mortgage Originator shall service such Mortgage Loans
until all payments due with respect to the related Participation are paid in
full, and to that end will, by way of illustration only and without
limitation:
(a) Proceed with reasonable diligence to collect all payments on
the Mortgage Loans as and when they shall become due and payable, exercising
the same standard of care and using the same methods that the Mortgage
Originator would use in servicing mortgage loans held in its portfolio or,
if higher, the standard of care and methods used in the mortgage loan
servicing industry for the servicing of loans held by others;
(b) Remit to the Participant on or before the tenth day of each
month, except as Participant may change this due day in any billing schedule
or other written notice sent to the Mortgage Originator, (i) the
Participant's pro rata share of the amount Of principal collected on each of
the outstanding Mortgage Loans during the previous month and (ii) accrued
interest on the outstanding Participation Principal Balance for each
Participation as set forth in Section I above; provided, however, that if
any collections on a Mortgage Loan are due to foreclosure or other
liquidation of the Mortgage Loan, then such collections shall be applied in
accordance with Section 5 above;
(c) Cause the related mortgagor to maintain hazard Insurance
policies, including but limited to policies of flood insurance if required,
covering the mortgaged premises in ail amount at least equal to the
outstanding mortgage balance;
(d) Keep records pertaining to each mortgage note and the
collections thereon and permit the Participant to examine these and other
records pertaining to each of the Mortgage Loans at such times as the
Participant may elect during the Mortgage Originator's business hours; and
3
<PAGE>
(e) Cause the taxes on the mortgaged premises securing each
Mortgage Loan to be examined annually and report any delinquent taxes to the
Participant.
7. Servicing Compensation. The Mortgage Originator shall be entitled to
retain, as its sole compensation for servicing the Mortgage Loans Subject to
Participations hereunder, all late charges payable and collected under the
terms of the Mortgage Loans. The Mortgage Originator shall not be entitled
to any additional fees for the performance of its duties as servicer of any
Mortgage Loan.
8. Representations and-Warranties with Respect to Mortgage Loans. The
Mortgage Originator represents and warrants to the Participant as to each
Mortgage Loan as of the date of the Purchase of the related Participation
that:
(a) proceeds equal to the note amount have been disbursed to or for
the account of the mortgagor;
(b) it holds a mortgage title insurance policy or a valid first
lien letter from a title insurance company acceptable to Participant with
ail insured closing letter from the underwriter, showing the related
mortgage to be a first mortgage lien on the mortgaged premises subject only
to such easements, restrictions, title irregularities and similar matters
which do not have any adverse effect on the ownership, appraised value or
use of the mortgaged premises;
(c) no more than three (3) days have elapsed between the closing of
the Mortgage Loan and the related Participation being presented to
Participant for purchase;
(d) the note and mortgage are genuine instruments binding and
enforceable against the mortgagor and Subject to no defenses of any kind or
nature;
(e) there are no defaults existing under the note or mortgage;
(f) the mortgage has been duty recorded or has been forwarded to
(lie proper governmental office (and is in the proper form and accompanied
by appropriate fees) for recording;
(g) the principal balance remaining unpaid is the amount shown on
the Mortgage Loan Schedule attached to the related Participation
Certificate;
(h) it holds a policy of Insurance covering the mortgaged premises
insuring against loss or damage by fire and other hazards not less extensive
than extended coverage insurance, with an appropriate mortgagee loss payable
endorsement in favor of the Mortgage Originator and its assigns as
mortgagee;
(i) at all times each Mortgage Loan and each party was in
compliance with all of the applicable provisions of applicable federal and
state law and regulations: by way of illustration and not limitation, all
Mortgage Loans which are subject to Section 226.32 of Federal Reserve
Regulation Z have been accurately identified, accurate disclosures have been
provided to the Mortgagor and Participant with respect to Such Mortgage
Loans, such Mortgage Loan (to not contain any prohibited terms as specified
in Section 226.32(d) and the Mortgage Originator has not engaged in any
prohibited acts or practices as specified in specified in Section 226.32(e);
4
<PAGE>
(j) all information provided to the Participant with respect to
each Mortgage Loan is true, complete and accurate and no person or entity
involved in the origination or servicing of the Mortgage Loan has made any
false representation or has failed to provide information that is true,
complete and accurate In connection with such transaction;
(k) the mortgage Securing the Mortgage Loan is a valid, existing
and enforceable first lien on the mortgaged property;
(l) the Mortgage Originator has no knowledge of any circumstances
or condition with respect to the Mortgage Loan or the related mortgagor's
credit standing that can reasonably be expected to cause the Mortgage Loan
to become an unacceptable investment or delinquent or to adversely affect
the value of any Participation;
(m) the Mortgage Originator is the sole owner and holder of the
Mortgage Loan, the Mortgage Originator has not assigned or pledged the
Mortgage Loan to secure any obligation other than the related Participation
and the Mortgage Originator has good and marketable title to the Mortgage
Loan;
(n) the Mortgage Loan is subject to a contractual arrangement
between the Mortgage Originator and a takeout investor, the arrangement and
takeout investor both being acceptable to the Participant In Its sole
discretion (Including an agency of the United States government, a
self-servicer approved by an agency of the United States government or any
other institutional investor) pursuant to which such purchaser agrees to
purchase Such Mortgage Loan of, guarantee another party's purchase of the
Mortgage Loan (a "Takeout Commitment");
(o) the Mortgage Loan has been underwritten in accordance with
standard underwriting requirements as specified by the Participant or the
related takeout investor, whichever are more stringent;
(p) the Mortgage Loan complies with all requirements set forth in
the Participant's seller-servicer guide as amended from time to time; and
(q) the Mortgage Loan is not Subject to any right of rescission,
setoff, recoupment, abatement, counterclaim or defense (including the
defense of usury), other than any Such rights provided under applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws,
flow or hereafter in effect, affecting the enforcement of creditors rights
in general and general principles of equity, and none of the Mortgagor or
takeout investor has asserted or manifested an Intention to assert any right
of rescission, setoff, recoupment, counterclaim or defense, affecting any
Mortgage Loan or Takeout Commitment which is related to the Participation.
The Mortgage' Originator covenants that it shall notify the Participant if
it receives notice that any Mortgagor or takeout investor asserts or
manifests any intention to assert any such right.
9. Further Assurances. The Mortgage Originator agrees to make such further
representations an(] warranties with respect to each Mortgage Loan and to
take such actions in connection with each Mortgage Loan (Including the
reaffirmation of the representations and warranties contained herein) as the
Participant may require.
10. Delivery of Documents. Simultaneously with the purchase of any
Participation, or, in file case of a Wet Funding, no later than five (5)
days after file closing of the Mortgage Loan, the Mortgage Originator shall
deliver to the Participant, or the settlement agent in accordance with
Section 2(b) hereof), with respect to each Mortgage Loan, the following
documents:
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<PAGE>
(a) The original, fully executed Mortgage note for such Mortgage
Loan, endorsed in blank without recourse, which note Is hereby pledged to
file Participant to secure the performance of all of the Mortgage
Originator's obligations to the Participant incurred hereunder, The
Participant will from time to time, at the request of the Mortgage
Originator and in accordance with this Agreement, return to the Mortgage
Originator such notes as have been paid by the mortgagor or, as determined
by Participant in its sole discretion, are otherwise needed by the Mortgage
Originator to facilitate the servicing of the Mortgage Loans.
(b) The fully executed mortgage with respect to such Mortgage Loan,
with evidence of' recording thereon, or, if such document has not been
returned by thee applicable recording office, a certified true and complete
copy of such document.
(c) A fully executed assignment of mortgage in recordable form of
the individual mortgage which secures the Mortgage Loan. Assignments
delivered under this Agreement may be recorded by the Participant at any
time in the sole discretion of the Participant.
(d) A copy of the Takeout Commitment relating to Such Mortgage
Loan, the rights under such Takeout Commitment being hereby assigned to the
Participant.
(e) All title Insurance, hazard and/or homeowners insurance, PMI,
and other policies (or copies thereof) relating to the Mortgage Loan.
11. Assignment of Rights. By the sale of each Participation to the
Participant, the Mortgage Originator hereby assigns to Participant those
instruments and documents set forth in Section 10 above (but, with respect
to the Takeout Commitment, only Mortgage Originator's rights therein), and
all Mortgage Originator's rights thereunder, and further conveys and
transfers to the Participant all right, title and interest ill any property
(real or personal) including cash, deeds or titles received ill exchange for
all or part of the Mortgage Loan.
12. Events of Default. The Mortgage Originator shall be lit default upon
the occurrence of any one or more of the following events (each, all "Event
of Default"):
(a) The Mortgage Originator shall fail to remit to the Participant
any principal or interest on a Participation as Such amounts become due and
payable under the terms of this Agreement;
(b) The Mortgage Originator shall fail to timely repurchase a
Participation whose repurchase is required under Section 4 of this
Agreement;
(c) In the case of any Wet Funding, Participant shall not have
received the documents set forth in Section 10 within live (5) days after
the closing of the Mortgage Loan.
(d) The Mortgage Originator Shall default in the performance of any
other agreement herein contained and such default continues for twenty-one
(21) days after written notice thereof shall be given the Mortgage
Originator by the Participant;
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<PAGE>
(e) The Mortgage Originator shall become insolvent or bankrupt, or
make all assignment for the benefit of its creditors, or a receiver or
trustee is appointed for the Mortgage Originator, or if bankruptcy,
reorganization or liquidation proceedings are instituted by or against the
Mortgage Originator; or
(f) Any license or registration reasonably necessary for the
conduct of the Mortgage Originator's business shall be revoked, Suspended,
or otherwise limited by any state or federal regulatory, administrative, or
quasi-governmental agency (including, without limitation, FNMA and FHLMC),
or any such state or federal regulatory, administrative, or
quasi-governmental agency in any way restricts Mortgage Originator's
authority to conduct its business in any state.
13. Remedies. Upon the Occurrence of an Event of Default by the Mortgage
Originator:
(a) The Participant's commitment to purchase Participations under
this Agreement shall cease to be in effect.
(b) The Participant may, at its option, take record title to each
Mortgage Loan, may endorse the notes in its favor, may record the
assignments of mortgage and shall have the right to service each of the
Mortgage Loans. For such purposes, the Mortgage Originator agrees that upon
demand by the Participant, it will turn over to the Participant all of its
records pertaining to the Mortgage Loans and all documents pertaining
thereto, including, but not limited to, title insurance policies, hazard
insurance policies, mortgages, surveys and related papers. In addition, the
Mortgage Originator hereby grants full power and authority to the
Participant, acting in its name alone, or if its name as attorney-in-fact
for the Mortgage Originator, to do and perform any and all of the
undertakings of the Mortgage Originator hereunder, and in addition hereto,
the power and authority to demand, collect, sue for all monies due or to
become due on any of the Mortgage Loans, to foreclose any of the Mortgage
Loans by exercise of the power of sale Or by Court action, and to exercise
any and all other powers and rights that the Mortgage Originator may now
have or hereafter acquire with respect to any of the Mortgage Loans. This
power is declared to be coupled with an interest and is irrevocable so long
as the Participant shall have any interest in a Participation hereunder.
(c) The Participant shall be entitled, at the Participant's option,
to require the Mortgage Originator to repurchase the Participation
Certificate relating to any Participation at an amount equal to the related
Participation Principal Balance as of the date of repurchase plus (1) any
accrued and unpaid interest on such Participation Principal Balance, (1i)
any accrued and unpaid fees owed to the Participant, and (111) any
out-of-pocket expenses paid by the Participant for which the Participant is
entitled to be reimbursed under the terms of this Agreement.
14. Operations Training Manual. Participant may provide to Mortgage
Originator from time to time an Operations Training Manual (the "Manual")
setting forth guidelines and conditions applicable to Mortgage Loans and to
the purchase and sale of Participations under this Agreement. Such
guidelines and conditions may include, without limitation, reporting and
monitoring requirements to be observed by Mortgage Originator and
Participant's reservation of rights to audit and verify information
pertaining to the purchase and sale of Participations under this Agreement.
The Manual Is hereby incorporated into this Agreement. Participant may, in
its discretion, amend the Manual from time to time. The amended Manual shall
apply to all Mortgage Loans and to all matters relating to the purchase and
sale of Participations under this Agreement twenty-one (21) days after
Participant sends the amendment to the Mortgage Originator.
7
<PAGE>
15. Guaranty and Security. The Mortgage Originator's obligations hereunder
shall be guarantied and secured in a manner satisfactory to the Participant;
provided that any guaranty shall be deemed satisfactory if substantially in
the form of Exhibit D.
16. Servicing by Participant. When the Participant is servicing the
Mortgage Loans or exercising the power and authority granted by Section 13
above, it shall be entitled to receive the late charges referred to in
Section 7 above.
17. Fees and Expenses. Upon the purchase or repurchase of a Participation,
the Mortgage Originator shall pay to the Participant the fees and expenses
set forth in the Terms Addendum.
18. Governing Law THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OFTHE STATE OF MICHIGAN WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
19. Entire Agreement: Severability. This Agreement shall supersede any
existing agreement and shall constitute the entire agreement between the
parties relating to the subject matter hereof each provision and agreement
herein shall be treated as separate and independent from any other provision
or agreement herein and shall be enforceable notwithstanding the
unenforceability of any such other provision or agreement.
20. Notices and Other Communications. Any and all notices, statements,
demands or other communications hereunder may be given by a party to the
other by mail, facsimile, telegraph, messenger or otherwise to the address
listed below, or such other address as may be specified in a notice or
change of address hereafter received by the other:
MORTGAGE ORIGINATOR:
First Chesapeake Funding Corporation
8551 W. Sunrise Blvd.
Plantation, FL 33322
Attention: Les Salzman
Telephone: 954-385-8400
Facsimile: 9540474-2438
PARTICIPANT:
Sterling Bank and Trust, FSB
OneTowne Square, l7th Floor
Southfield, Michigan 48076
Attention: Robert R. Denton
Telephone: 248-948-8717
Facsimile: 248-948-8733
With copy to:
Sterling Bank and Trust, FSB
Office of the General Counsel
One Towne Square, l7th Floor
Southfield, Michigan 48076
Telephone: 248-351-3425
Facsimile: 248-948-8751
8
<PAGE>
All notices, demands and requests hereunder may be made orally, to be
confirmed promptly In writing, or by other communication as specified in the
preceding sentence.
21. Waiver; Amendment. No express or implied waiver of any Event of Default
by either party shall constitute a waiver of any other Event of Default and
no exercise of any remedy hereunder by any party shall Constitute a waiver
of its right to exercise any other remedy hereunder. No modification or
waiver of any provision of this Agreement and no consent by any party to a
departure herefrom shall be effective unless in writing and duly executed by
both of the parties hereto.
22. Termination of Agreement; Renewal(s).
(a) If this Agreement has not otherwise been terminated pursuant to
its terms or by all act of the Participant or Mortgage Originator, this
Agreement shall terminate 6 months from the date hereof. The Mortgage
Originator or Participant may terminate this Agreement by written notice to
the other of its intent to do so, which notice shall take effect not sooner
than ninety (90) days after such notice is given. If either the Mortgage
Originator or the Participant delivers notice of intent to terminate this
Agreement, or if the termination date described in (lie first sentence of
this Section passes without renewal of this Agreement pursuant to Section
22(b), the Mortgage Originator shall not be entitled to sell Participations
after the earlier of the date so described or the termination date specified
in such notice. Notwithstanding termination of this Agreement, however, the
Mortgage Originator's obligations hereunder shall not be terminated until
the Participant has received all amounts due with respect to all
Participations.
(b) This Agreement may be renewed in Participant's discretion for
an additional like period of time as set forth in Section 22(a) (A) upon
delivery by Mortgage Originator to Participant of (i) a complete copy of
'Mortgage Originator's financial statements, (ii) copies of reports arising
from any regulatory audits conducted by any state or federal regulatory,
administrative, or quasi-governmental agency (including, without limitation,
FNMA and FIILMC), On) proof that the Mortgage Originator has in full force
and effect errors and omissions Insurance at a coverage level appropriate in
light of the Mortgage Originator's business activity and loss history, and
(IV) Such other documentation and information as Participant may require;
and (B) upon satisfaction of such other conditions as Participant may
require.
IN WITNESS WHEREOF, the parties hereto have caused this
Participation Agreement to be duly executed by their authorized officers the
day and year first above written.
First Chesapeake Acquisition Corporation as "Mortgage Originator"
by: /s/ Lester W. Salzman
---------------------
its: President
Sterling Bank and Trust, FSB as "Participant"
by: /s/ Robert R. Denton
--------------------
its: Managing Director, Mortgage Banking Division
9
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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0
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