<PAGE>
As filed with the Securities and Exchange Commission on December 27, 1996
Registration No. 333-_____________
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC. (Exact name of
Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 6162 87-0418807
- -------------------------------------- ------------------------------------ ----------------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
American Business Financial Services, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
Anthony J. Santilli, Jr.
Chairman, President, Chief Executive Officer,
Chief Operating Officer, Treasurer and Director
American Business Financial Services, Inc.
Balapointe Office Center
111 Presidential Boulevard
Suite 215
Bala Cynwyd, PA 19004
(610) 668-2440
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Frederick D. Lipman, Esquire Philip Ross Bevan, Esquire
Jane K. Storero, Esquire Elias, Matz, Tiernan & Herrick L.L.P.
Blank Rome Comisky & McCauley 734 15th Street, N.W.
1200 Four Penn Center Plaza 12th Floor
Philadelphia, Pennsylvania 19103 Washington, DC 20005
(215) 569-5500
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
===============================================================================
<PAGE>
If this Form is a post-effective registration statement filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434 please check the following box. [ ]
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========================================================================================================================
CALCULATION OF REGISTRATION FEE
Proposed maximum
Title of each class of Amount offering price Proposed maximum Amount of
securities to be registered to be registered(1) per share(2) offering price registration fee
===================================== ========================================= ========================================
<S> <C> <C> <C> <C>
Common Stock......................... 1,150,000 $19.56 $22,494,000 $6,817
- ------------------------------------- ----------------------------------------- ----------------------------------------
</TABLE>
(1) Includes 150,000 shares which the Underwriter has the option to
purchase to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee
based upon the average high and low bid prices of the Common Stock of $
19.56 as reported on the Philadelphia Stock Exchange on December
23, 1996.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
===============================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 27, 1996
PROSPECTUS
1,000,000 Shares
[LOGO] AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Common Stock
----------------------
All of the shares of the Common Stock, $.001 par value per share (the
"Common Stock"), offered hereby (the "Public Offering") are being sold by
American Business Financial Services, Inc. (together with its subsidiaries,
"ABFS" or the "Company").
The Common Stock is traded on the Philadelphia Stock Exchange ("PHLX")
under the symbol "AFX." On December 23, 1996, the last reported sales price of
the Common Stock was $19.56 per share. See "Market for Common Stock and Related
Stockholder Matters." The Common Stock has been approved for quotation on the
Nasdaq National Market System under the symbol " " upon commencement of the
Public Offering.
ABFS is not subject to state or federal statutes or regulations
applicable to banks and/or savings and loan associations with regard to deposit
insurance, the maintenance of reserves, the quality or condition of its assets
or other matters. THE SHARES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS
AND ARE NOT GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR ANY
OTHER ENTITY.
SEE "RISK FACTORS" ON PAGE 9 FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------------
<TABLE>
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=========================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company (2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................................... $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total (3).......................................... $ $ $
=========================================================================================================================
</TABLE>
(1) See "Underwriting" for information relating to the indemnification of the
Underwriters.
(2) Before deducting, expenses payable by the Company estimated to be
$445,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase from the Company up to 150,000
additional shares of Common Stock solely to cover over-allotments, if any.
To the extent that the option is exercised, the Underwriters will offer
the additional shares at the Price to Public shown above. If the option is
exercised in full, the total price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc., as
representative of the several Underwriters (the "Representative"), Arlington,
Virginia, or in book entry form through the book entry facilities of the
Depository Trust Company on or about , 1997.
---------------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1997.
1
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (together with all exhibits
and schedules thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the registration of the
Common Stock offered by this Prospectus. This Prospectus does not contain all of
the information set forth in such Registration Statement and the exhibits
thereto, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information pertaining to the
Company, the Common stock offered by this Prospectus and related matters,
reference is made to such Registration Statement, including the exhibits filed
as a part thereof. Each statement in this Prospectus referring to a document
filed as an exhibit to such Registration Statement is qualified by reference to
the exhibit for a complete statement of its terms and conditions.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Commission.
Following the Public Offering, the Company will continue to be subject to the
reporting requirements of the Exchange Act. So long as the Company is subject to
the reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
will furnish to its stockholders annual reports containing audited financial
statements and an opinion thereon expressed by the Company's independent
auditors and will make available copies of quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
The Registration Statement and any reports and other information filed
by the Company can be inspected and copied at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices located as follows:
Chicago Regional Office, Northwestern Atrium Center, 500 W. Madison Street,
Suite 1400, Chicago, IL 60661-2511; and New York Regional Office, 7 World Trade
Center, New York, NY 10048. Copies of such material can also be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such Web Site is http://www.sec.gov. In addition, such reports, proxy
statements and other information concerning the Company will also be available
for inspection at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, DC 20006.
The Company's Common Stock is traded on the PHLX under the symbol
"AFX." Reports, proxy statements and other information concerning the Company
can be inspected at the offices of the Philadelphia Stock Exchange located at
1900 Market Street, Philadelphia, Pennsylvania 19103.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER THE
COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and the consolidated
financial statements, including the notes thereto appearing elsewhere in this
Prospectus. Prospective investors of the shares of Common Stock offered hereby
should carefully consider the factors set forth under "Risk Factors." Except as
otherwise specified, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option. See "Underwriting."
General
ABFS is a financial services company operating primarily in the
mid-atlantic region of the United States. The Company, through its principal
direct and indirect subsidiaries, originates, sells and services loans to
businesses secured by real estate and other business assets ("Business Purpose
Loans") and non-conforming mortgage loans typically to credit impaired borrowers
secured by mortgages on single-family residences ("Home Equity Loans"). The
Company also originates small ticket leases (generally $10,000 to $150,000) for
the acquisition of business equipment ("Equipment Leases"). In addition, the
Company has recently entered into exclusive business arrangements with several
financial institutions pursuant to which the Company will purchase Home Equity
Loans that do not meet the underwriting guidelines of the selling institution
but meet the Company's underwriting criteria (the "Bank Alliance Program").
The Company's customers currently consist primarily of two groups. The
first category of customers includes credit impaired borrowers who are generally
unable to obtain financing from banks, savings and loan associations or other
finance companies that have historically provided loans only to individuals with
favorable credit characteristics. These borrowers generally have impaired or
unsubstantiated credit characteristics and/or unverifiable income and respond
favorably to the Company's marketing efforts. The second category of customers
includes borrowers who would qualify for loans from traditional lending sources
but elect to utilize the Company's products and services. The Company's
experience has indicated that these borrowers are attracted to the Company's
loan products as a result of its marketing efforts, the personalized service
provided by the Company's staff of highly trained lending officers and the
timely response to loan requests. Historically, both categories of customers
have been willing to pay the Company's origination fees and interest rates which
are generally higher than those charged by traditional lending sources.
Business Purpose Loans
The Company began operations in 1988 and initially offered Business
Purpose Loans. The Company currently originates Business Purpose Loans through a
retail network of salespeople in Pennsylvania, Delaware, New Jersey, New York,
Virginia, Maryland and Connecticut. The Company has taken the initial steps to
expand its business purpose lending program into the southeastern region of the
United States. The Company focuses its marketing efforts on small businesses who
do not meet all of the credit criteria of commercial banks and small businesses
that the Company's research indicates are predisposed to using the Company's
products and services.
The Business Purpose Loans originated by the Company are secured by
real estate. In substantially all cases, the Company receives additional
collateral in the form of, among other things, pledges of securities,
assignments of contract rights, life insurance and lease payments and liens on
business equipment and other business assets, as available. The Company's
Business Purpose Loans are generally originated with fixed rates and typically
have origination fees of 5.0% to 6.0%. The weighted average interest rate
received on the Business Purpose Loans originated by
3
<PAGE>
the Company was 15.96 % and 15.83% for the three months ended September 30, 1996
and the year ended June 30, 1996, respectively. Business Purpose Loans
typically have significant prepayment penalties which the Company believes tend
to extend the average life of such loans and make these loans more attractive
products to securitize. The Business Purpose Loans securitized in the last two
securitizations had a weighted average loan-to-value ratio (based solely upon
the real estate collateral securing the loans) of 59.82% at the time of
securitization.
The Company's strategy for expanding its business purpose lending
program focuses on motivating borrowers through the investment in retail
marketing and sales efforts rather than on emphasizing discounted pricing or a
reduction in underwriting standards. The Company utilizes a proprietary training
program involving extensive and on-going training of its lending officers. The
Company originated $7.4 million and $28.9 million of Business Purpose Loans for
the quarter ended September 30, 1996 and the year ended June 30, 1996,
respectively.
Home Equity Loans
ABFS entered the Home Equity Loan market in 1991. The Company
originates Home Equity Loans primarily to credit impaired borrowers through
retail marketing which includes telemarketing operations, direct mail and
television advertisements. The Company currently originates Home Equity Loans
primarily in Pennsylvania, New Jersey, Delaware, Maryland and Virginia. The
Company was recently granted licenses and expects to begin originating Home
Equity Loans on a limited basis in Georgia, North Carolina, South Carolina,
Connecticut and Florida during calendar 1997. The Company originated $12.7
million and $36.5 million of Home Equity Loans for the quarter ended September
30, 1996 and the year ended June 30, 1996, respectively. The weighted average
interest rate on Home Equity Loans originated by the Company was 11.50% and
9.94% for the three months ended September 30, 1996 and the year ended June 30,
1996, respectively.
The Company initiated its Bank Alliance Program in fiscal 1996. The
Company believes that the Bank Alliance Program is a unique method of increasing
the Company's production of Home Equity Loans. Currently, the Company has
entered into agreements with five financial institutions which provide the
Company with the opportunity to underwrite, process and purchase loans generated
by the branch networks of such institutions which consist of approximately 600
branches located in Pennsylvania, Delaware, New Jersey and Maryland. The Company
is also negotiating with other financial institutions regarding their
participation in the program.
Equipment Leases
ABFS began offering Equipment Leases in December 1994 to complement its
business purpose lending program. The Company originates leases on a nationwide
basis with a particular emphasis on the eastern portion of the United States.
The Company believes that cross-selling opportunities exist for offering lease
products to Business Purpose Loan customers and offering Business Purpose Loans
to lease customers. The weighted average interest rate received on the Equipment
Leases originated by the Company was 15.53% and 17.22% for the three months
ended September 30, 1996 and the year ended June 30, 1996, respectively. The
Company currently holds all Equipment Leases originated in its lease portfolio
to generate interest income. The Company recently hired a leasing officer with
over 20 years of experience in small ticket leasing to expand this area of the
Company's business. See "Business -- Lending and Leasing Activities."
The Company intends to continue to utilize funds generated from the
securitization of loans and the sale of subordinated debentures to increase its
loan and lease originations and to expand into
4
<PAGE>
new geographic markets, with an initial focus on expansion in the southeastern
region of the United States. The Company also intends to expand its Bank
Alliance Program with financial institutions across the United States.
From the inception of the Company's business in 1988 through September
30, 1996, the Company has experienced total net loan and lease losses of
approximately $300,000. The Company's losses on its total loan and lease
portfolio serviced totaled $50,000, $129,000, $88,000 and $10,000, respectively,
for the three months ended September 30, 1996 and the years ended June 30, 1996,
1995 and 1994. The Company's loans and leases delinquent over 30 days
represented 3.93% and 2.30% of the total loan and lease portfolio at September
30, 1996 and June 30, 1996, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset Quality."
The Company's ability to fund and subsequently securitize Business
Purpose Loans and Home Equity Loans has significantly improved its financial
performance and enabled it to both expand its marketing efforts and increase the
geographic scope of its products. Through September 30, 1996, the Company had
securitized an aggregate of $47.1 million of Business Purpose Loans and $26.0
million of Home Equity Loans. The Company retains the servicing rights on its
securitized loans. See "Business -- Securitizations."
In addition to securitizations, the Company funds its operations with
subordinated debentures that the Company markets directly to individuals from
the Company's principal operating office located in Pennsylvania and branch
offices located in Florida and Arizona. At September 30, 1996, the Company had
$37.9 million in subordinated debentures outstanding with a weighted average
coupon of 8.91% and a weighted average maturity of 25.6 months. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
5
<PAGE>
The Public Offering
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<CAPTION>
<S> <C>
Common Stock offered by the Company: 1,000,000 shares
Capital Stock to be Outstanding after the Public
Offering.............................................. 3,353,166 shares (1)(2)
Use of Proceeds............................................ The net proceeds resulting from the sale of the Common
Stock will be utilized by the Company for its general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market Symbol for the
Common Stock.......................................... "_____"
Risk Factors............................................... See "Risk Factors" for a discussion of certain material
factors that should be considered in connection with an
investment in the Common Stock offered hereby.
</TABLE>
(1) Assumes no exercise of the over-allotment option.
(2) Excludes 181,000 shares of Common Stock reserved for issuance upon the
exercise of options granted under the Company's stock option plans,
options to purchase 150,500 shares intended to be granted to the Company's
officers in connection with the Public Offering and 38,488 shares of
Common Stock reserved for issuance upon the exercise of options available
for grant under the Company's stock option plans. See
"Management--Executive Compensation" and "Description of Capital Stock."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The consolidated financial information set forth below for ABFS should be
read in conjunction with the more detailed consolidated financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- -----------
Statement of Income Data: (Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Gain on sale of loans..................... $ 4,373 $ 55 $ 9,005 $ 1,443 $ 110 $ 119 $ 83
Interest and fees......................... 1,135 889 3,351 4,058 2,367 1,619 1,534
Other..................................... 76 -- 23 143 156 306 103
---------- ----------- ---------- ---------- ----------- ---------- -----------
Total revenues............................... 5,584 944 12,379 5,644 2,633 2,044 1,720
Total expenses............................. 3,806 1,380 9,258 4,750 2,299 1,977 1,928
Operating income (loss) before income
taxes (recoverable), extraordinary item
and cumulative effect of accounting change 1,778 (436) 3,121 894 334 67 (208)
Income (loss) before extraordinary items and
cumulative effect of accounting change.... 1,156 (283) 2,319 581 137 41 (125)
Extraordinary item (net of income taxes of
$101) .................................... -- -- -- -- -- -- 157
Cumulative effect of accounting change
on prior years............................ -- -- -- -- (52) -- --
Net income (loss)............................ 1,156 (283) 2,319 581 85 41 2
Per Common Share Data:
Income (loss) before extraordinary item and
cumulative effect of accounting change. $ .47 $ (.13) $ 1.01 $ .27 $ .04 $ .02 $ (.08)
Extraordinary item ....................... -- -- -- -- -- -- .10
Net income (loss)......................... .47 (.13) 1.01 .27 .04 .02 .02
Cash dividends declared................... .015 -- 0.03 -- -- -- --
September 30, June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- -----------
Balance Sheet Data: (In Thousands)
Cash and cash equivalents.................... $ 8,812 $ 1,105 $ 5,345 $ 4,734 $ 83 $ 151 $ 270
Loan and lease receivables, net available for
sale....................................... 10,894 15,000 17,625 8,669 3,181 2,170 2,088
Other........................................ 579 485 534 328 5,538 2,963 1,491
Total assets................................. 51,975 25,367 46,894 22,175 12,284 7,270 5,368
Subordinated debentures ..................... 37,878 20,887 33,620 17,800 7,171 1,327 665
Total liabilities ........................... 46,463 23,507 42,503 20,031 10,721 5,801 4,322
Stockholders' equity......................... 5,512 1,860 4,392 2,143 1,562 1,469 1,045
Three Months Ended
September 30, Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- -----------
Other Data: (Dollars in Thousands)
Originations:
Business Purpose Loans.................... $ 7,421 $ 6,714 $28,872 $18,170 $ 11,793 $ 9,769 $ 5,773
Home Equity Loans......................... 12,663 5,082 36,479 16,963 22,231 22,017 34,462
Equipment Leases ......................... 1,970 1,309 5,967 2,220 -- -- --
Loans sold:
Securitizations........................... 26,916 -- 36,506 9,777 -- -- --
Other..................................... 864 950 19,438 31,948 30,562 29,036 40,310
Total Loan and Lease Portfolio Owned
and Serviced.............................. 79,080 24,503 59,891 17,774 8,719 5,134 3,578
Average loan/lease size:
Business Purpose Loans.................... 76 74 78 71 57 63 48
Home Equity Loans......................... 43 38 47 46 55 45 42
Equipment Leases.......................... 10 11 11 12 -- -- --
Weighted average interest rate on loans and
leases originated:
Business Purpose Loans .................. 15.96% 15.88% 15.83% 16.05% 16.03% 16.24% 16.45%
Home Equity Loans......................... 11.50 10.86 9.94 12.68 8.65 9.60 9.25
Equipment Leases.......................... 15.53 16.95 17.22 15.85 -- -- --
</TABLE>
7
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<TABLE>
<CAPTION>
At or For The
Three Months Ended
September 30, At or For the Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets (1)................ 9.35% (4.77)% 6.71% 3.37% 0.87% 0.65% 0.56%
Return on average equity (1)................ 63.76 (71.89) 70.96 31.36 5.58 3.29 (3.27)
Total delinquencies as a percentage of total
portfolio serviced, at end of period(2).. 3.93 3.67 2.30 3.84 6.85 5.97 5.39
Allowance for credit losses to total portfolio
serviced, at end of period............... 1.21 .81 1.18 .87 .89 .80 1.14
Real estate owned as a percentage of total
portfolio serviced, at end of period..... .23 3.21 .71 3.61 2.63 1.44 --
Loan and lease losses as a percentage of the average
total portfolio serviced during the period .08 -- .33 .66 .16 .47 .26
Pre-tax income (loss) as a percentage of
total revenues........................... 31.80 (46.16) 25.21 15.84 12.69 3.26 (12.10)
</TABLE>
(1) Annualized
(2) Total deliquencies includes loans and leases deliquent over 30 days,
exclusive of real estate owned.
8
<PAGE>
RISK FACTORS
In addition to the financial and other information contained in this
Prospectus, prospective investors should consider, among other things, the
following factors in connection with the purchase of the Common Stock.
Decline in Collateral Value May Adversely Affect Loan-to-Value Ratios
The Company's business may be adversely affected by declining real
estate values. Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made by the Company, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of a
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. As a result, there can be no
assurance that the market value of the real estate underlying such loans will at
any time be equal to or in excess of the outstanding principal amount of such
loans. See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Credit Impaired Borrowers May Result in Increased Delinquency Rates
The Company markets loans, in part, to borrowers who, for one reason or
another, are not able, or do not wish, to obtain financing from traditional
sources such as commercial banks. Loans made to such borrowers may entail a
higher risk of delinquency and losses than loans made to borrowers who utilize
traditional financing sources. As a result, the Company may experience higher
delinquency rates and losses in the event of adverse economic conditions than
those experienced by other lenders. At September 30, 1996 and June 30, 1996,
total delinquent loans as a percentage of the Company's total portfolio serviced
were 3.9% and 2.3%, respectively. While the Company utilizes underwriting
standards and collection procedures designed to mitigate the higher credit risk
associated with lending to such borrowers, no assurance can be given that such
standards or procedures will offer adequate protection against this risk. In the
event loans sold and serviced by the Company experience higher delinquencies,
foreclosures or losses than anticipated, the Company's results of operations or
financial condition could be adversely affected. See "Business."
Dependence upon Securitizations and Fluctuations in Operating Results
In recent periods, gain on sale of loans generated by the Company's
securitizations has represented a substantial majority of the Company's revenues
and net income. Gain on sale of loans resulting from securitizations as a
percentage of total revenues was 78.6% and 71.8% for the three months ended
September 30, 1996 and the year ended June 30, 1996, respectively. In addition,
the Company relies primarily on securitizations to generate cash proceeds for
repayment of its warehouse credit facilities and other borrowings and to enable
the Company to originate additional loans. Several factors affect the Company's
ability to complete securitizations, including conditions in the securities
markets generally, conditions in the asset-backed securities markets
specifically and the credit quality of the portfolio of loans serviced by the
Company. Any substantial reduction in the size or availability
9
<PAGE>
of the securitization market for the Company's loans could have a material
adverse effect on the Company's results of operations and financial condition.
The Company's revenues and net income have fluctuated in the past and
are likely to fluctuate in the future principally as a result of the timing and
size of its securitizations. The strategy of selling loans through
securitizations requires the Company to build an inventory of loans over time,
during which time the Company incurs costs and expenses. Since the Company does
not recognize gains on the sale of such loans until it consummates a
securitization thereof, which may not occur until a subsequent fiscal period,
the Company's operating results for a given period can fluctuate significantly
as a result of the timing and level of securitizations. If securitizations do
not close when expected, the Company could experience a loss for the period
which could have a materially adverse effect on the Company's results of
operations. In addition, due to the timing difference between the period when
costs are incurred in connection with the origination of loans and their
subsequent sale through the securitization process, the Company may operate on a
negative cash flow basis, which could adversely impact the Company's results of
operations and financial condition.
The Company has made estimates of the excess spread receivable to be
received in connection with its securitizations based upon certain prepayment
and default assumptions; however, its actual prepayment and default experience
may vary materially from such estimates. As a result, the gain recognized by the
Company upon the sale of loans may be overstated to the extent that actual
prepayments or losses are greater than estimated. Higher levels of future
prepayments, delinquencies and/or liquidations could result in decreased excess
spreads and the write down of the receivable, which would adversely affect the
Company's income in the period of adjustment. Conversely, if the estimated
average lives of the loans assumed for this purpose are shorter than the actual
life, the amount of cash actually received over the lives of the loans would
reduce the gain previously recognized at the time the loans were sold and the
Company would record a charge against earnings. See "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Ability of the Company to Sustain Recent Levels of Growth and Operating Results
During fiscal 1996 and the first quarter of fiscal 1997, the Company
experienced record levels of total revenues and net income as a result of
increases in loan originations and the securitization of loans. Total revenues
increased approximately $6.8 million, or 121.4%, between fiscal 1995 and 1996
while net income increased approximately $1.7 million, or 292.6%. Total revenues
and net income were $5.6 million and $1.2 million respectively, for the three
months ended September 30, 1996 as compared to $944,000 and $(283,000) for the
three months ended September 30, 1995. The Company's ability to sustain the
level of growth in total revenues and net income experienced during fiscal 1996
and the first quarter of fiscal 1997 is dependent upon a variety of factors
outside the control of the Company, including interest rates, economic
conditions in the Company's primary market area, competition and regulatory
restrictions. As a result, the rate of growth experienced in fiscal 1996 and the
three months ended September 30, 1996 may not be sustained in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<PAGE>
Ability of the Company to Implement its Growth Strategy
The Company's growth strategy is dependent upon its ability to increase
its loan volume through geographic expansion while maintaining its customary
origination fees, interest rate spreads and underwriting criteria with respect
to such increased loan volume. Implementation of this strategy will depend in
large part on the Company's ability to: (i) expand its offices in markets with a
sufficient concentration of borrowers meeting the Company's underwriting
criteria; (ii) obtain adequate financing on favorable terms to fund its growth
strategy; (iii) profitably securitize its loans in the secondary market on a
regular basis; (iv) hire, train and retain skilled employees; (v) successfully
implement its marketing campaigns; and (vi) continue to expand in the face of
increasing competition from other lenders. The Company's failure with respect to
any or all of these factors could impair its ability to successfully implement
its growth strategy which could have a material adverse effect on the Company's
results of operations and financial condition. See "Business."
Increased Competition Could Adversely Affect Results of Operations
The various segments of the Company's lending businesses are highly
competitive. Certain lenders against which the Company competes have
substantially greater resources, greater experience and lower cost of funds, as
well as a more established market presence than the Company. To the extent the
Company's competitors increase their marketing efforts to include the Company's
market niche of borrowers, the Company may be forced to reduce the rates and
fees it currently charges for such loans in order to maintain and expand its
market share. Any reduction in such rates or fees could have an adverse impact
on the Company's results of operations. In addition, even after the Company has
made a loan to a borrower, the borrower may refinance the loan with another
lender at more favorable rates and terms. Furthermore, the profitability of the
Company and other similar lenders is attracting additional competitors into this
market, with the possible effect of reducing the Company's ability to charge its
customary origination fees and interest rates. In addition, as the Company
expands into new geographic markets, it will face competition from lenders with
established positions in these areas. There can be no assurance that the Company
will be able to continue to compete successfully in the markets it serves. Such
an event could have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Competition."
Dependence Upon Debt Financing
For its ongoing operations, the Company is dependent upon borrowings
such as that represented by the Company's unsecured subordinated debentures and
the Company's warehouse credit facilities and lines of credit as well as funds
received from the securitization of loans. The Company had $37.9 million of
subordinated debentures outstanding at September 30, 1996 and was not utilizing
its lines of credit and credit facilities of $36.0 million. At September 30,
1996 subordinated debentures scheduled to mature during the twelve months ended
September 30, 1997 totaled $20.9 million. Any failure to renew or obtain
adequate funding under a warehouse credit facility, or other borrowings, or any
substantial reduction in the size of or pricing in the markets for the Company's
loans, could have a material adverse effect on the Company's results of
operations and financial
11
<PAGE>
condition. To the extent that the Company is not successful in maintaining or
replacing existing financing, it would have to curtail its loan production
activities or sell loans rather than securitizing them, thereby having a
material adverse effect on the Company's results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Changes in Interest Rates May Adversely Affect Profitability
The profitability of the Company is likely to be adversely affected
during any period of rapid changes in interest rates. Any future rise in
interest rates may adversely affect demand for the Company's products. In
addition, such increase in rates may increase the Company's cost of funds and
could adversely affect the spread between the rate of interest received on loans
and rates payable under the Company's outstanding credit facilities or the
pass-through rate for interests issued in connection with loans securitized. In
addition, any future decrease in interest rates will reduce the amounts which
the Company may earn on its newly originated loans and leases. A significant
decline in interest rates could also decrease the size of the loan portfolio
serviced by the Company by increasing the level of loan prepayments.
In an attempt to mitigate the effect of changes in interest rates on
its fixed-rate mortgage loan portfolio prior to securitization, the Company
implemented a hedging strategy in August 1995. An effective hedging strategy is
complex and no hedging strategy can completely insulate the Company from
interest rate risks. The nature and timing of hedging transactions may impact
the effectiveness of hedging strategies. Poorly designed strategies or
improperly executed transactions may increase rather than mitigate risk. In
addition, hedging involves transaction and other costs, and such costs could
increase as the period covered by the hedging protection increases or in periods
of rising and fluctuating interest rates. As a result, the Company may be
prevented from effectively hedging its interest rate risks without reducing
income in current periods.
The Company also experiences interest rate risk to the extent that a
portion of its liabilities are comprised of subordinated debentures with
scheduled maturities of one to ten years. At September 30, 1996, the Company had
17.0 million of subordinated debentures with scheduled maturities greater than
one year. To the extent that interest rates decrease in the future, the rates
paid on such liabilities could exceed the rates received on the Company's newly
originated loans resulting in a decrease in the Company's spread. Consequently,
fluctuations in interest rates may adversely affect the Company's results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Interest Rate Risk Management."
Geographic Concentration of Loans
The Company originates loans in a circumscribed geographic area which
primarily includes the states located in the mid-atlantic region of the United
States. This practice may subject the Company to the risk that a downturn in the
economy in this area of the country would more greatly affect the Company than
if its lending business were more geographically diversified. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
12
<PAGE>
Contingent Risks
Although the Company sells substantially all loans which it originates
on a nonrecourse basis through securitizations, the Company retains risk on
substantially all loans sold. During the period of time that loans are held
pending sale, the Company is subject to the various business risks associated
with the lending business including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers.
In addition, documents governing the Company's securitizations require
the Company to commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale. When
borrowers are delinquent in making monthly payments on loans included in a
securitization trust, the Company is required to advance interest payments with
respect to such delinquent loans to the extent that the Company deems such
advances will be ultimately recoverable. These advances require funding from the
Company's capital resources but have priority of repayment from the succeeding
month's collections.
In the ordinary course of its business, the Company is subject to
claims made against it by borrowers and private investors arising from, among
other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions by employees, officers and agents of the Company (including its
appraisers), incomplete documentation and failures by the Company to comply with
various laws and regulations applicable to its business. The Company believes
that any potential liability with respect to any currently asserted claims or
legal actions will not be material to the Company's results of operations or
financial condition; however, any claims asserted in the future may result in
legal expenses or liabilities which could have a material adverse effect on the
Company's results of operations and financial condition. See "Business -- Legal
Proceedings."
Diversification of the Company's Lending Business
The Company's involvement in home equity lending through the Bank
Alliance Program and equipment leasing is relatively new. Therefore, the Company
is not able to predict with any certainty whether it will be able to operate
such areas of the Company's business profitability either in the short or long
term. There are also risks inherent in such types of lending which in some cases
differ from those which exist in the business purpose lending area. While the
Equipment Leases made by the Company are secured by a lien on the equipment
leased, such equipment is subject to the risk of damage, destruction or
technological obsolescence prior to the termination of the lease. In the case of
the Company's fair market value leases, lessees may choose not to exercise their
option to purchase the equipment for its fair market value at the termination of
the lease, with the result that the Company may be required to sell such
equipment to third party buyers at a discount or otherwise dispose of such
equipment. See "Business -- Lending and Leasing Activities."
13
<PAGE>
Regulatory Restrictions and Licensing Requirements
The Company's home equity lending business is subject to extensive
regulation, supervision and licensing by federal, state and local governmental
authorities and is subject to various laws and judicial and administrative
decisions imposing requirements and restrictions on all or part of its
operations. The Company's home equity lending activities are subject to the
Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act and
Regulation B, as amended, the Federal Real Estate Settlement Procedures Act and
Regulation X, the Home Mortgage Disclosure Act and the Federal Debt Collection
Practices Act, as well as other federal and state statutes and regulations
affecting the Company's activities. The Company is also subject to examinations
by state regulatory authorities with respect to originating, processing,
underwriting, selling and servicing Home Equity Loans. These rules and
regulations, among other things, impose licensing obligations on the Company,
prohibit discrimination, regulate assessment, collection, foreclosure and claims
handling, payment features, mandate certain disclosures and notices to borrowers
and, in some cases, fix maximum interest rates, and fees. Failure to comply with
these requirements can lead to termination or suspension of licenses, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
The previously described laws and regulations are subject to
legislative, administrative and judicial interpretation, and certain of these
laws and regulations have been infrequently interpreted or only recently
enacted. Infrequent interpretations of these laws and regulations or an
insignificant number of interpretations of recently enacted regulations can
result in ambiguity with respect to permitted conduct under these laws and
regulations. Any ambiguity under the regulations to which the Company is subject
may lead to regulatory investigations or enforcement actions and private causes
of action, such as class action lawsuits, with respect to the Company's
compliance with the applicable laws and regulations.
Although the Company believes that it has implemented systems and
procedures to facilitate compliance with the foregoing requirements and believes
that it is in compliance in all material respects with applicable local, state
and federal laws, rules and regulations, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future that
could make compliance more difficult or expensive. See "Business -- Regulation."
Dependence on Key Personnel
The success of the Company's operations depend, to a large extent, upon
the management, lending, credit analysis and business skills of the senior level
management of the Company. If members of senior level management were for some
reason unable to perform their duties or were, for any reason, to leave the
Company, there can be no assurance that the Company would be able to find
capable replacements. The Company has entered into employment agreements with
its President, Anthony J. Santilli, Jr. and its Executive Vice President,
Beverly Santilli. The Company also holds "key-man" insurance for Anthony J.
Santilli, Jr. and Beverly Santilli. See "Management."
14
<PAGE>
Voting Control of the Board of Directors of the Company
The Board of Directors of the Company are the beneficial owners of
1,365,281 shares (excluding options) of the outstanding Common Stock. As a
result, upon completion of the Public Offering (assuming the Underwriters'
over-allotment option is not exercised), the Board of Directors of the Company
will hold approximately 40.7% of the Common Stock, which may allow it to control
all actions to be taken by the stockholders, including the election of all of
the directors to the Board of Directors. This voting control may have the effect
of discouraging hostile offers to acquire the Company because the consummation
of any such acquisition would require the consent of the current members of the
Board of Directors of the Company. In addition, the Board of Directors is
authorized to issue additional shares of Common Stock or shares of preferred
stock from time to time with such rights and preferences as the Board may
determine. Such preferred stock could be issued in the future with terms and
conditions that could further discourage hostile offers to acquire the Company.
See "Principal Stockholders" and "Description of Capital Stock."
Environmental Concerns
In the course of its business, the Company has acquired, and may
acquire in the future, properties securing loans which are in default. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such property, and may be held liable to a governmental entity or to third
parties for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. The liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not the facility is owned or operated
by such person. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
The ability of the Company to foreclose on the real estate
collateralizing its loans, if at any time such a foreclosure would be otherwise
appropriate, may be limited by the above-referenced environmental laws. While
the Company would not make a loan collateralized by real property as to which it
had knowledge of an environmental risk or problem, it is possible that such a
risk or problem could become known after the subject loan has been made. See
"Business -- Loan and Lease Servicing."
Limited Public Market for the Common Stock; Possible Volatility of Stock Price
The Common Stock has been traded on the PHLX since May 1996. However,
the Common Stock experienced a relatively low trading volume. Upon commencement
of the Public Offering, the Company's Common Stock will be traded on the Nasdaq
National Market System. There can be no
15
<PAGE>
assurance that an active trading market will develop or that the purchasers of
the Common Stock will be able to resell their Common Stock at prices equal to or
greater than the Public Offering price. The Public Offering price of the Common
Stock was determined through negotiations between the Company and the
Underwriters and may not reflect the market price of the Common Stock after the
Public Offering. See "Underwriting," for a discussion of factors considered in
determining the Public Offering price. The trading price of the Common Stock
could be subject to wide fluctuations in response to quarterly variations in
changes in financial estimates by securities analysts and other events or facts.
These broad market fluctuations may adversely affect the market price of the
Common Stock. See "Market for Common Stock."
Effect on Stock Price of Shares Available for Future Sale
The Board of Directors of the Company is the record and beneficial
holder of 1,365,281 shares of the outstanding shares of Common Stock and
currently holds options to purchase an additional 137,500 shares. In addition,
executive officers who are not also directors have been granted options to
purchase 7,500 shares and it is intended that such officers will be awarded
options to purchase 37,500 shares of Common Stock in connection with the Public
Offering. Such shares of Common Stock may be sold in the public market or
otherwise disposed of, subject to compliance with applicable securities laws.
The Company's Amended and Restated Certificate of Incorporation authorizes the
issuance of 9,000,000 shares of Common Stock. Upon completion of the Public
Offering, there will be 3,353,166 shares of Common Stock issued and outstanding
(assuming no exercise of the Underwriters' over-allotment option). Sales of a
substantial number of shares of Common Stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. See "Shares Eligible for Future Sale."
Dividend Policy
During fiscal 1996, the Company began paying dividends on its Common
Stock. Such dividends totaled approximately $71,000 in the aggregate. The
Company also paid a dividend of approximately $35,000 in the aggregate for the
three months ended September 30, 1996. The Company's continuing payment of
dividends in the future is in the sole discretion of the Board of Directors and
will depend, among other things, upon the Company's earnings, its capital
requirements and financial condition as well as other factors. As a result, no
prediction can be made as to whether the Company will continue to pay dividends
in the future or continue to pay dividends at the level it has in the past. See
"Dividend Policy" and "Description of Capital Stock."
Anti-Takeover Effect of Delaware Law
The Company is a Delaware corporation and is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law.
In general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of the Company's outstanding voting stock) from
engaging in a "business combination" with the Company for three years following
the date that person became an interested stockholder unless the business
combination is approved in a prescribed manner. This statute could make it more
difficult for a third party to acquire control of the Company without the
support of management. See "Description of Capital Stock--Certain Provisions of
Delaware Law."
16
<PAGE>
Forward Looking Statements
When used in this prospectus, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"projected" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to changes in interest rate, credit risk related to
ABFS's borrowers, market conditions and real estate values in ABFS's lending
area, lack of a pubic market for the Common Stock, competition, factors
affecting the Company's ability to implement its growth strategy, ABFS's
dependence on debt financing and securitizations to fund operations,
fluctuations in quarterly operating results, unseasoned nature of ABFS's home
equity loan and leasing portfolios, state and federal regulation and licensing
requirements applicable to ABFS's lending activities and environmental concerns
that could cause the Company's actual results to differ materially from
historical earnings and those presently anticipated or projected. Such factors,
which are discussed in "Risk Factors," "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the notes to
consolidated financial statements, could affect ABFS's financial performance and
could cause ABFS's actual results for future periods to differ materially from
any opinions or statements expressed with respect to future periods in this
prospectus. As a result, potential investors are cautioned not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. See "Business" and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
17
<PAGE>
THE COMPANY
The Company is a financial services company operating primarily
throughout the mid-atlantic region of the United States. ABFS, through its
principal direct and indirect subsidiaries, American Business Credit, Inc.
("ABC"), HomeAmerican Credit, Inc. (d/b/a Upland Mortgage and referred to herein
as "HAC" or "Upland"), American Business Leasing, Inc. ("ABL") and HomeAmerican
Consumer Discount Company ("HCDC"), originates, services and sells Business
Purpose Loans, Home Equity Loans and Equipment Leases. The Company also
underwrites, processes and purchases Home Equity Loans through the Bank Alliance
Program and originates a limited number of secured and unsecured consumer loans.
See "Business."
ABFS was incorporated in Delaware in 1985 and began operations as a
finance company in 1988, initially offering Business Purpose Loans to
customers whose borrowing needs the Company believed were not being adequately
serviced by commercial banks. Since its inception ABFS has significantly
expanded its product line and geographic scope and currently offers its loan and
lease products in more than ten states.
The Company's principal executive office is located at 103 Springer
Building, 3411 Silverside Road, Wilmington, Delaware 19810. The telephone number
at such address is (302) 478-6160. The Company's principal operating office and
the executive offices of its subsidiaries are located at Balapointe Office
Centre, 111 Presidential Boulevard, Suite 215, Bala Cynwyd, PA 19004. The
telephone number at such address is (610) 668-2440. See "Business."
USE OF PROCEEDS
The net proceeds resulting from the sale of the one million shares of
Common Stock offered hereby assuming a Public Offering price of $19.25 per
share, after deducting underwriting discounts and other estimated offering
expenses, will be utilized by the Company for its general corporate purposes.
General corporate purposes may include: (i) financing the future growth of the
Company's Business Purpose Loan, Home Equity Loan or Equipment Lease
portfolios; (ii) replacing some or all of the Company's outstanding debt; (iii)
the repayment of warehouse credit facilities and lines of credit; and (iv)
possible future acquisitions of related businesses or assets. The precise
amounts and timing of the application of such proceeds depends upon many
factors, including, but not limited to, the amount of any such proceeds, actual
funding requirements and the availability of other sources of funding. Until
such time as the proceeds are utilized, they will be invested in short and
long-term investments, including U.S. Treasury Bills, commercial paper,
certificates of deposit, securities issued by U.S. government agencies, money
market funds and repurchase agreements, depending on the Company's cash flow
requirements. The Company's investment policies permit significant flexibility
as to the types of such investments that may be made by the Company. The Company
may also maintain daily unsettled balances with certain broker-dealers. While
the Company may from time to time consider potential acquisitions, the Company
as of the date of this Prospectus had no commitments or agreements with respect
to any material acquisitions.
18
<PAGE>
DIVIDEND POLICY
During fiscal 1996, the Company began paying dividends on its Common
Stock. Such dividends totaled approximately $71,000 or $0.03 per share. For the
three months ended September 30, 1996, the Company paid a dividend which totaled
approximately $35,000, or $0.015 per share. The continuing payment of dividends
by the Company in the future is in the sole discretion of its Board of Directors
and will depend, among other things, upon the Company's earnings, capital
requirements and financial condition as well as other factors. As a result, no
assurance can be given that the Company will continue to pay dividends at the
same level in the future or continue to pay dividends as it has in the past
following the completion of the Public Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
As a Delaware corporation, the Company may not declare and pay
dividends on its capital stock if the amount paid exceeds an amount equal to the
excess of the Company's net assets over paid-in-capital or, if there is no
excess, its net profits for the current and/or immediately proceeding fiscal
year.
MARKET FOR COMMON STOCK
The Common Stock has been traded on the PHLX since May 1996. During
such period, the Common Stock has experienced a relatively low trading volume.
The Common Stock has been preliminarily approved for trading on the Nasdaq
National Market System under the symbol "____" upon commencement of the Public
Offering. Upon completion of the Public Offering, the Company intends to delist
its Common Stock from the PHLX. In order to be traded on the Nasdaq National
Market System there must be at least two market makers for the Common Stock. The
Underwriter has indicated its intention to make a market in the Company's Common
Stock following completion of the Public Offering. The Underwriter is not
obligated, however, to make a market in the Common Stock and any market making
thereby may be discontinued at any time. A second market maker has not yet been
secured by the Company. The Company anticipates that it will be able to secure
the two market makers necessary to enable the Common Stock to be traded on the
Nasdaq National Market System. However, a public trading market having the
desirable characteristics of depth, liquidity and orderliness depends upon the
presence in the marketplace of both willing buyers and sellers of the Common
Stock at any given time, which is not within the control of the Company or any
market maker. Accordingly, there can be no assurance that an active and liquid
market for the Common Stock will develop or be maintained, or that resales of
the Common Stock can be made at or above the Public Offering price after the
completion of the Public Offering. In addition, the trading price of the Common
Stock could be subject to wide fluctuations in response to quarterly variations
in changes in financial estimates by securities analysts and other events or
facts. These broad market fluctuations may adversely affect the market price of
the Common Stock. See "Risk Factors--Limited Public Market for the Common Stock;
Possible Volatility of Stock Price."
19
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of ABFS
as of September 30, 1996 and on an as adjusted basis giving effect to the sale
of 1,000,000 shares of Common Stock by the Company in the Public Offering
(assuming no exercise of the Underwriters' over-allotment option) at an assumed
Public Offering price of $19.25 per share of Common Stock after deducting
underwriting discounts and commissions and estimated expenses of the Public
Offering and the application of the estimated net proceeds therefrom. See "Use
of Proceeds." This information below should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto which
are included elsewhere herein. See also "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Capital Stock."
<TABLE>
<CAPTION>
At
September 30, 1996
-------------------------------------
As
Actual Adjusted
---------------- ----------------
(In Thousands)
<S> <C> <C>
Warehouse Credit Facilities..................................................... $ -- $ --
Long-term Debt:
Subordinated Debentures...................................................... 16,937 16,937
Notes payable................................................................ 12 12
---------------- ----------------
Total................................................................... 16,949 16,949
---------------- ----------------
Stockholders' equity:
Preferred Stock, $.001 par value per share; 1,000,000 shares
authorized; no shares outstanding....................................... -- --
Common Stock, $0.001 par value; 9,000,000 shares authorized;
2,353,166 shares issued and outstanding (actual);
3,353,166 shares issued and outstanding (as adjusted)(1)................ 2 3
Additional paid in capital................................................... 1,932 19,389
Retained earnings............................................................ 4,178 4,178
Less note receivable.................................................... 600 600
---------------- ----------------
Total stockholders' equity.............................................. 5,512 22,970
---------------- ----------------
Total capitalization.................................................... $ 22,461 $ 39,919
================ ================
</TABLE>
- -------------------
(1) Excludes 181,000 shares of Common Stock reserved for issuance upon the
exercise of options granted under the Company's stock option plans,
options to purchase 150,500 shares intended to be granted to the
Company's officers in connection with the Public Offering and 38,488
shares of Common Stock reserved for issuance upon the exercise of
options available for grant under the Company's stock option plans. See
"Management--Executive Compensation" and "Description of Capital Stock."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The financial information set forth below for ABFS and its subsidiaries
should be read in conjunction with the more detailed consolidated financial
statements, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- -----------
Statement of Income Data: (Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Gain on sale of loans..................... $ 4,373 $ 55 $9,005 $ 1,443 $ 110 $ 119 $ 83
Interest and fees......................... 1,135 889 3,351 4,058 2,367 1,619 1,534
Other..................................... 76 -- 23 143 156 306 103
---------- ----------- ---------- ---------- ----------- ---------- -----------
Total revenues............................... 5,584 944 12,379 5,644 2,633 2,044 1,720
Total expenses............................... 3,806 1,380 9,258 4,750 2,299 1,977 1,928
Operating income (loss) before income taxes
(recoverable), extraordinary item and
cumulative effect of accounting change.... 1,778 (436) 3,121 894 334 67 (208)
Income (loss) before extraordinary items and
cumulative effect of accounting change.... 1,156 (283) 2,319 581 137 41 (125)
Extraordinary item (net of income taxes of
$101) .................................... -- -- -- -- -- -- 157
Cumulative effect of accounting change
on prior years............................ -- -- -- -- (52) -- --
Net income (loss)............................ 1,156 (283) 2,319 581 85 41 2
Per Common Share Data:
Income (loss) before extraordinary item and
cumulative effect of accounting change. $ .47 $ (.13) $ 1.01 $ .27 $ .04 $ .02 $ (.08)
Extraordinary item ....................... -- -- -- -- -- -- .10
Net income (loss)......................... .47 (.13) 1.01 .27 .04 .02 .02
Cash dividends declared................... .015 -- 0.03 -- -- -- --
September 30, June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- -----------
Balance Sheet Data: (In Thousands)
Cash and cash equivalents.................... $ 8,812 $ 1,105 $ 5,345 $ 4,734 $ 83 $ 151 $ 270
Loan and lease receivables, net available
for sale................................... 10,894 15,000 17,625 8,669 3,181 2,170 2,088
Other........................................ 579 485 534 328 5,538 2,963 1,491
Total assets................................. 51,975 25,367 46,894 22,175 12,284 7,270 5,368
Subordinated debentures ..................... 37,878 20,887 33,620 17,800 7,171 1,327 665
Total liabilities ........................... 46,463 23,507 42,503 20,031 10,721 5,801 4,322
Stockholders' equity......................... 5,512 1,860 4,392 2,143 1,562 1,469 1,045
Three Months Ended
September 30, Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- -----------
Other Data: (Dollars in Thousands)
Originations:
Business Purpose Loans.................... $ 7,421 $ 6,714 $28,872 $18,170 $11,793 $ 9,769 $ 5,773
Home Equity Loans......................... 12,663 5,082 36,479 16,963 22,231 22,017 34,462
Equipment Leases ......................... 1,970 1,309 5,967 2,220 -- -- --
Loans sold:
Securitizations........................... 26,916 -- 36,506 9,777 -- -- --
Other..................................... 864 950 19,438 31,948 30,562 29,036 40,310
Total Loan and Lease Portfolio Owned
and Serviced.............................. 79,080 24,503 59,891 17,774 8,719 5,134 3,578
Average loan/lease size:
Business Purpose Loans.................... 76 74 78 71 57 63 48
Home Equity Loans......................... 43 38 47 46 55 45 42
Equipment Leases.......................... 10 11 11 12 -- -- --
Weighted average interest rate on loans and
leases originated:
Business Purpose Loans .................. 15.96% 15.88% 15.83% 16.05% 16.03% 16.24% 16.45%
Home Equity Loans......................... 11.50 10.86 9.94 12.68 8.65 9.60 9.25
Equipment Leases.......................... 15.53 16.95 17.22 15.85 -- -- --
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
At or For The
Three Months Ended
September 30, At or For the Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ----------- ---------- -----------
Financial Ratios:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Return on average assets (1)................ 9.35% (4.77)% 6.71% 3.37% 0.87% 0.65% 0.56%
Return on average equity (1)................ 63.76 (71.89) 70.96 31.36 5.58 3.29 (3.27)
Total delinquencies as a percentage of total
portfolio serviced, at end of period(2).. 3.93 3.67 2.30 3.84 6.85 5.97 5.39
Allowance for credit losses to total portfolio
serviced, at end of period............... 1.21 .81 1.18 .87 .89 .80 1.14
Real estate owned as a percentage of total
portfolio serviced, at end of period..... .23 3.21 .71 3.61 2.63 1.44 --
Loan and lease losses as a percentage of the
average total portfolio serviced during
the period .............................. .08 -- .33 .66 .16 .47 .26
Pre-tax income (loss) as a percentage of
total revenues........................... 31.80 (46.16) 25.21 15.84 12.69 3.26 (12.10)
</TABLE>
- -------------------
(1) Annualized
(2) Total deliquencies includes loans and leases deliquent over 30 days,
exclusive of real estate owned.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following financial review and analysis is intended to assist
prospective investors in understanding and evaluating the financial condition
and results of operations of the Company, for the years ended June 30, 1996,
1995 and 1994 and the quarters ended September 30, 1996 and 1995. This
information should be read in conjunction with the Company's Consolidated
Financial Statements and the accompanying notes thereto, "Selected Consolidated
Financial Data" and other detailed information appearing elsewhere in this
Prospectus. All operations of the Company are conducted through ABC and its
subsidiaries.
Overview
The Company is a financial services company operating primarily in the
mid-atlantic region of the United States. ABFS, through its direct and indirect
subsidiaries, originates, sells and services Business Purpose Loans, Home Equity
Loans and Equipment Leases. The Company also underwrites, processes and
purchases Home Equity Loans through the Bank Alliance Program and originates a
limited number of secured and unsecured consumer loans. The Company's customers
include credit impaired borrowers and other borrowers who would qualify for
loans from traditional sources but who the Company believes are attracted to the
Company's loan and lease products due to the Company's personalized service and
timely response to loan applications. Since its inception, the Company has
significantly expanded its product line and geographic scope and currently
offers its loan and lease products in more than ten states. See "Business."
The ongoing securitization of loans is a central part of the Company's
business strategy. Prior to 1995, the Company sold substantially all of the
loans it originated in the secondary market with servicing released. Since such
time, the Company has sold loans through securitizations in order to fund
growing loan and lease originations. The Company has completed four
securitizations aggregating $47.1 million in Business Purposes Loans and $26.0
million in Home Equity Loans. Such securitizations generated gain on the sale of
loans of $4.4 million, $8.9 million and $1.4 million, respectively, for the
three months ended September 30, 1996 and for fiscal 1996 and 1995. See
"--Results of Operations."
The Company also relies upon funds generated by the sale of
subordinated debentures and other borrowings to fund its operations. At
September 30, 1996, the Company had $37.9 million of subordinated debt
outstanding and available credit facilities and lines of credit totaling $36.0
million, none of which were drawn upon on such date. The Company expects to
continue to rely on such borrowings to fund loans prior to securitization. See
"-- Liquidity and Capital Resources."
Accounting Considerations Related to the Securitizations
As a fundamental part of its current business strategy, the Company
sells substantially all of the loans it originates in securitizations to trusts
in exchange for certificates representing the senior interest and the excess
spread and, if applicable, a subordinated interest in the securitized loans held
by the trust. The senior certificates are subsequently sold to investors for
cash.
23
<PAGE>
As a result of securitizations, the Company's net income is
increasingly dependent upon realizing gains on the sale of loans due to the
excess spread associated with such loans at the time of sale. The excess spread
is calculated as the difference between (a) principal and interest paid by
borrowers and (b) the sum of (i) pass-through interest and principal to be paid
to the holders of the senior certificates and (ii) servicing trustee and
insurance fees and other costs. The Company's right to receive this excess
spread begins after a pre-determined over-collateralization amount or reserve is
established. Such over-collateralization amount is specific to each
securitization and is used as a means of credit enhancement.
When loans are sold in securitizations, the Company recognizes both
revenue and an associated receivable equal to the present value of the excess
spread expected to be realized over the anticipated average life of the loans
sold less future estimated credit losses relating to the loans sold, net of
origination costs and hedging results. These excess spreads and the associated
receivable are computed using prepayment, loss and discount rate assumptions
that the Company believes are reasonable. The Company periodically reviews these
assumptions in relation to actual experience and, if necessary, adjusts the
receivable.
The Company carries the excess spread on the pool of securitized loans
at fair value. As such, the carrying value of the excess spread is impacted by
changes in prepayment and loss experiences of the underlying loans. The Company
determines the fair value of the excess spread utilizing prepayment and credit
loss assumptions appropriate for each particular securitization. The range of
values attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective. The prepayment
assumptions used by the Company with respect to its Business Purpose Loans are
based upon the Company's historical experience due to the lack of any industry
wide historical prepayment rates for such loans. The prepayment assumptions with
respect to the Company's Home Equity Loans are based on historical experience in
the industry.
Although the Company believes it has made reasonable estimates of
prepayment rates and default assumptions, the actual prepayment and default
experience may materially vary from its estimates. The gain recognized by the
Company upon the sale of loans will have been overstated if prepayments or
losses are greater than estimated. To the extent that prepayments, delinquencies
and/or liquidations differ from the Company's estimates, adjustments of the
Company's gain on sale of loans during the period of adjustment may be required.
When loans are sold through a securitization, the Company retains the
servicing on the loans sold which is recognized as a separate asset for
accounting purposes. To determine the fair value of the mortgage servicing
rights, the Company projects net cash flows expected to be received from
servicing related income over the life of the loans. Such projections assume
certain servicing costs, prepayment rates and credit losses. These assumptions
are similar to those used by the Company to value the excess spread.
There can be no assurance that the Company's estimates and assumptions
used to determine the fair value of mortgage servicing rights will remain
appropriate for the life of each securitization. If actual loan prepayments or
credit losses exceed the Company's estimates, the carrying value of the
Company's mortgage servicing rights may have to be written down through a charge
against earnings.
24
<PAGE>
The Company will not write up such assets to reflect slower than expected
prepayments, although slower prepayments may increase future earnings as the
Company will receive cash flows in excess of those anticipated. Fluctuations in
interest rates may also result in a write-down of the Company's mortgage
servicing rights in subsequent periods. See "Risk Factors - Dependence upon
Securitizations and Fluctuations in Operating Results."
Balance Sheet Information
September 30, 1996 compared to June 30, 1996. Total assets increased
$5.1 million, or 10.9%, to $52.0 million at September 30, 1996 from $46.9
million at June 30, 1996 due to increases in cash and other receivables. Cash
increased $3.5 million, or 66.0%, to $8.8 million at September 30, 1996 from
$5.3 million at June 30, 1996 as a result of the net cash received from a
securitization of $17.0 million of Home Equity Loans and $9.9 million of
Business Purpose Loans and additional sales of subordinated debentures. Other
receivables, consisting primarily of the excess spread, increased $6.7 million,
or 47.5%, to $20.8 million at September 30, 1996, from $14.1 million at June 30,
1996 due to the Company's retention of the excess spread in connection with its
loan securitization. Loans receivable available for sale decreased $6.7 million
as a result of the securitization of such loans during the three months ended
September 30, 1996.
Total liabilities increased $4.0 million, or 9.4%, to $46.4 million at
September 30, 1996 from $42.5 million at June 30, 1996 primarily due to an
increase in debt. The increase in debt was due to net sales of subordinated
debentures of $4.2 million during the three months ended September 30, 1996
offset in part by a net decrease in institutional debt of $2.3 million. At
September 30, 1996, the Company had approximately $37.9 million of subordinated
debentures outstanding. The Company's ratio of total debt to equity at September
30, 1996 was 6.9:1 as compared to 8.2:1 at June 30, 1996.
June 30, 1996 compared to June 30, 1995. Total assets increased $24.7
million, or 111.3%, to $46.9 million at June 30, 1996 from $22.2 million at June
30, 1995. The primary reasons for the increase were increases in loan and lease
receivables, other receivables and other assets. Loan and lease receivables
available for sale increased $8.9 million, or 102.3%, to $17.6 million at June
30, 1996 from $8.7 million at June 30, 1995 as a result of the Company's
strategy of holding loans in its portfolio pending securitization. Other
receivables increased $9.9 million, or 235.7%, to $14.1 million at June 30, 1996
from $4.2 million at June 30, 1995 due to the Company's retention of the excess
spread in connection with its two loan securitizations. Other assets, consisting
primarily of subordinated interests resulting from the securitizations,
increased $3.6 million, or 124.1%, to $6.5 million at June 30, 1996 from $2.9
million at June 30, 1995 due primarily to an increase in subordinated interests
obtained as a result of the Company's securitizations.
Total liabilities increased $22.5 million, or 112.5%, to $42.5 million
at June 30, 1996 from $20.0 million at June 30, 1995 primarily due to an
increase in debt. The increase in debt was due to sales of subordinated
debentures of $19.7 million during the year ended June 30, 1996 combined with a
net increase in bank debt of $2.3 million. At June 30, 1996, the Company had
approximately $33.6 million of subordinated debentures outstanding. The
Company's ratio of total debt (subordinated debentures plus credit facilities)
to equity at June 30, 1996 was 8.2:1.
25
<PAGE>
June 30, 1995 compared to June 30, 1994. Total assets increased $9.9
million, or 80.5%, to $22.2 million at June 30, 1995 from $12.3 million at June
30, 1994. The primary reasons for the increase were an increase in cash and cash
equivalents, other receivables and other assets. Cash and cash equivalents
increased $4.6 million to $4.7 million at June 30, 1995 from $83,000 at June 30,
1994 as a result of increased sales of the Company's subordinated debentures.
Other receivables increased $3.3 million, or 351.4%, to $4.2 million at June 30,
1995 from $939,000 at June 30, 1994 due to the Company's retention of the excess
spread in connection with a securitization of $9.7 million of Business Purpose
Loans. Other assets increased $1.6 million, or 123.1%, to $2.9 million at June
30, 1995 from $1.3 million, at June 30, 1994, due primarily to the addition of a
subordinated certificate obtained as a result of a securitization and an
increase in foreclosed real estate held for sale.
Total liabilities increased $9.3 million, or 86.9%, to $20.0 million at
June 30, 1995 from $10.7 million at June 30, 1994, primarily due to an increase
in debt outstanding. The increase in debt was due to net sales of subordinated
debentures of $10.6 million during the year ended June 30, 1995 which more than
offset the net decrease in institutional debt of $2.2 million. At June 30, 1995,
the Company had approximately $17.8 million of subordinated debentures
outstanding. The Company's ratio of total debt to equity at June 30, 1995 was
8.3:1.
Results of Operations
During fiscal 1996 and the three months ended September 30, 1996, the
Company experienced record levels of total revenues and net income as a result
of increases in originations and securitizations. The Company's total revenues
increased $6.8 million, or 121.4%, between fiscal 1995 and 1996 while net income
increased $1.7 million, or 292.6%, during the same fiscal period. Total revenues
increased $4.6 million and net income increased $1.4 million for the three
months ended September 30, 1996 as compared to the same period in fiscal 1995.
Since the Company's securitization strategy requires the Company to
build an inventory of loans over time, the Company may experience fluctuations
in operating results as a consequence of incurring costs and expenses in a
fiscal period prior to the fiscal period in which the securitization is
consummated. As such, the results of operations for a given period may not be
indicative of results for subsequent comparable periods.
Three Months Ended September 30, 1996 Compared with the Three Months Ended
September 30, 1995
Total Revenues. Total revenues increased $4.6 million, or 487.3%, to
$5.6 million in the three months ended September 30, 1996 from $944,000 for the
three months ended September 30, 1995. The increase in total revenues was
primarily the result of gains on sales of loans through securitizations.
Gain on Sale of Loans. Gain on sale of loans increased $4.3 million to
$4.4 million for the three months ended September 30, 1996 from $55,000 for the
three months ended September 30,
26
<PAGE>
1995. This increase was the result of a sale of $9.9 million of Business Purpose
Loans and $17.0 million of Home Equity Loans through a securitization in
September of 1996. The Company recognized a gain of $4.4 million (representing
the fair value of the excess spread of $5.6 million less $1.2 million of costs
associated with the transaction) on the Company's participation in $26.9 million
of loans sold through a $40.0 million securitization. The balance of the
securitization of $13.1 million was in the form of a pre-funded account pursuant
to which the Company securitized loans to be originated in a future period which
was added to the trust in December 1996. See "Business -- Securitizations." The
Company did not participate in a securitization during the corresponding quarter
of the prior fiscal year.
Interest and Fee Income. Interest and fee income consists of interest
income, fee income and amortization of origination costs. Interest and fee
income increased $246,000, or 27.7%, to $1.1 million in the three months ended
September 30, 1996 from $889,000 in the three months ended September 30, 1995
due to an increase in interest income as a result of a larger amount of loans
retained in portfolio prior to the securitization.
Interest income consists of interest income the Company earns on the
loans and leases it holds in its portfolio. Interest income from loans and
leases held in portfolio increased $469,000 to $942,000 for the three months
ended September 30, 1996 or a 99.2% increase over the $473,000 reported for the
three months ended September 30, 1995. The increase was attributable to
increased originations of Business Purpose Loans, Home Equity Loans and
Equipment Leases, as well as management's decision to retain Home Equity Loans
in portfolio in contemplation of future securitizations.
During the three months ended September 30, 1996, the Company
originated approximately $12.7 million of Home Equity Loans, $7.4 million of
Business Purpose Loans and $1.9 million of Equipment Leases. During the three
months ended September 30, 1995, the Company originated $5.1 million of Home
Equity Loans, $6.7 million of Business Purpose Loans and $1.3 million of
Equipment Leases. The majority of the Home Equity Loans originated during the
three months ended September 30, 1995 were sold to third parties (with servicing
released). Beginning in October 1995, as part of the Company's securitization
strategy, the Company placed Home Equity Loans into its held for sale portfolio
until sold as part of a securitization. Prior to the implementation of the
securitization strategy, the Company originated and immediately sold such loans.
As a result of the Company's securitization strategy, the Company holds a
greater amount of Home Equity Loans in its portfolio thereby generating an
increase in interest income and a decrease in fee income, as described below.
Fee income, includes primarily premium and points earned when loans are
closed, funded and immediately sold to unrelated third party purchasers. Fee
income decreased $210,000 from $490,000 for the three months ended September 30,
1995 to $280,000 for the three months ended September 30, 1996. The reduction in
fee income was due to the Company's current strategy of building a portfolio of
loans and securitizing them. As a result of this strategy, the Company is
generally not selling loans upon origination, thereby reducing fee income.
27
<PAGE>
The third component of interest and fee income is amortization of
origination costs. During the three months ended September 30, 1996 amortization
of origination costs was $86,000 compared to $75,000 recognized during the three
months ended September 30, 1995. The increase was partly attributable to an
increase in the amortization of lease originations of $29,000 caused by growth
in the lease portfolio. Amortization of loan origination costs, not considering
the effect of leases, actually decreased by $18,000. The amount of origination
costs recognized is in part determined by the length of time a loan is held in
portfolio. During the three months ended September 30, 1996, the Company
securitized its loan portfolio on August 30, 1996 resulting in the average loan
being held in portfolio for approximately one month. No loans were securitized
during the comparable period in 1995 resulting in an average holding period of
approximately 1.5 months.
Total Expenses. Total expenses increased $2.4 million, or 171.4%, to
$3.8 million for the three months ended September 30, 1996 from $1.4 million for
the three months ended September 30, 1995. As described in more detail below,
this increase was primarily a result of increased interest and sales expense
attributable to the Company's continued sale of subordinated debentures. Also
contributing to the increase in total expenses was increases in provision for
credit losses, payroll, sales and marketing and general and administrative
expenses related to increased loan and lease originations.
Interest Expense. Interest expense increased $588,000, or 130.1%, to
$1.0 million for the three months ended September 30, 1996 from $452,000 for the
three months ended September 30, 1995. The increase was primarily attributable
to an increase in the amount of the Company's subordinated debentures
outstanding, the proceeds of which were utilized to fund the Company's loan
growth. Average subordinated debentures outstanding was $35.8 million during the
three months ended September 30, 1996 as compared to $19.9 million during the
three months ended September 30, 1995. Average interest rates paid on the
subordinated debentures increased to 8.99% for the three months ended September
30, 1996 from 8.81% for the three months ended September 30, 1995. Interest
expense on lines of credit utilized by the Company during the three months ended
September 30, 1996 was $139,000. The lines were not in use during the three
months ended September 30, 1995.
Allowance for Credit Losses. The Company maintains an allowance for
credit losses based upon management's estimate of the expected collectibility of
loans and leases outstanding. The allowance is determined based upon
management's estimate of potential losses in the portfolio in light of economic
conditions, the credit history of the borrowers, and the nature and
characteristics of the underlying collateral as well as the Company's historical
loss experience. Although the Company's historical loss experience has been
minimal, the increase in the allowance reflects the increase in originations.
Although the Company maintains its allowance for credit losses at the level it
considers adequate to provide for potential losses, there can be no assurances
that actual losses will not exceed the estimated amounts or that additional
provisions will not be required. The allowance is increased through a provision
for credit losses. The provision for credit losses increased by $255,000 to
$300,000 for the three months ended September 30, 1996 from $45,000 for the same
period in fiscal 1995. The Company had an allowance for credit losses of
$957,000 at September 30, 1996. The ratio of the allowance for credit losses to
total net loan and lease receivables serviced was 1.21% at September 30, 1996 as
compared to 0.81% at September 30, 1995. From the inception of the Company's
business in 1988 through September 30, 1996, the Company experienced a total of
approximately $300,000 in net loan and lease losses.
28
<PAGE>
Payroll and Related Costs. Payroll and related costs increased $68,000,
or 51.9%, to $199,000 for the three months ended September 30, 1996 from
$131,000 for the three months ended September 30, 1995. The increase was due to
both an increase in the number of administrative employees as a result of the
Company's growth in loan and lease originations and an increase in loans
serviced for others. Management anticipates that such expense will continue to
increase in the future as the Company's expansion and increasing originations
continue.
Sales and Marketing Expenses. Sales and marketing expenses increased
$877,000, or 178.3%, to $1.4 million for the three months ended September 30,
1996 from $492,000 in the three months ended September 30, 1995. The increase is
attributable to increases in advertising costs as a result of increased
newspaper, direct mail and radio advertising related to the Company's sales of
subordinated debentures and loan products. In addition, the Company initiated a
television advertising program for the sale of its home equity product. Subject
to market conditions, the Company plans to expand its service area throughout
the eastern United States. As a result, it is therefore anticipated that sales
and marketing expenses will continue to increase in the future.
General and Administrative Expenses. General and administrative
expenses increased $636,000, or 243.7%, to $897,000 for the three months ended
September 30, 1996 from $261,000 for the three months ended September 30, 1995.
The increase was primarily attributable to increases in rent, telephone, office
expense, professional fees and other expenses incurred as a result of previously
discussed increases in loan and lease originations and loan servicing
experienced during the three months ended September 30, 1996.
Income Taxes. Income taxes increased $775,000 to $622,000 for the three
months ended September 30, 1996 from a tax benefit of $153,000 for the three
months ended September 30, 1995 due to an increase in income before taxes.
Net Income. Net income increased $1.4 million to $1.2 million for the
three months ended September 30, 1996 as compared to a net loss of $283,000 for
the three months ended September 30, 1995 since the Company did not securitize
any loans during the 1995 period. As a result of the increase, earnings per
share increased to $0.47 on weighted average common shares outstanding of
2,448,301 compared to a loss per share of $0.13 on weighted average common
shares outstanding of 2,128,154.
Year Ended June 30, 1996 Compared with the Year Ended June 30, 1995
Total Revenues. Total revenues increased $6.8 million, or 121.4%, to
$12.4 million in the year ended June 30, 1996 from $5.6 million in the year
ended June 30, 1995. The increase in total revenues was primarily the result of
increased gains on sales of loans through securitizations.
Gain on Sale of Loans. Gain on sale of loans increased $7.6 million, or
542.9%, to $9.0 million for the year ended June 30, 1996 from $1.4 million for
the year ended June 30, 1995. This increase was the result of increased loan
sales through securitizations in the year ended June 30, 1996. The Company
consummated loan securitizations in October 1995 and May 1996 generating gain in
the aggregate on
29
<PAGE>
securitizations of $8.9 million (representing the fair value of the excess
spread of $10.4 million less $1.5 million of costs associated with the
transactions) on the Company's participation in $36.5 million of loans sold
through securitizations. Of the loans sold through securitizations during the
year ended June 30, 1996, $27.5 million were Business Purpose Loans and $9.0
million were Home Equity Loans.
Interest and Fee Income. Interest and fee income decreased $707,000, or
17.2%, to $3.4 million in the year ended June 30, 1996 from $4.1 million in the
year ended June 30, 1995 due to a decline in fee income as a result of the
implementation of the Company's securitization program discussed below.
Interest income from loans and leases held in portfolio increased
$777,000 to $2.2 million in the year ended June 30, 1996 or a 55.5% increase
over the $1.4 million reported for the year ended June 30, 1995. ABL, the
Company's leasing subsidiary, contributed $593,000 of the increase. The
remaining increase was attributable to increased originations of Business
Purpose Loans and Home Equity Loans as well as management's decision to retain
Home Equity Loans in portfolio in contemplation of the securitization thereof in
the future. During the year ended June 30, 1996, the Company originated
approximately $37.0 million of Home Equity Loans and $29.0 million of Business
Purpose Loans. During the year ended June 30, 1995, the Company originated
approximately $18.0 million of Home Equity Loans, the majority of which were
sold to third parties (with servicing released) and $18.2 million of Business
Purpose Loans. Beginning in October 1995, as part of the Company's
securitization strategy, the Company placed loans into its held for sale
portfolio until sold as part of a securitization. As a result of this strategy,
the Company holds a greater amount of Home Equity Loans in its portfolio thereby
generating an increase in interest income and a decrease in fee income.
Fee income decreased $1.7 million to $1.5 million for the year ended
June 30, 1996 from $3.2 million for the year ended June 30, 1995. The reduction
in fee income was due to the Company's current strategy of building a portfolio
of loans and securitizing them. As a result of this strategy, the Company is not
selling as many loans upon origination thereby reducing fee income in the form
of premiums received on the sale of loans.
Amortization of origination costs, the third component of interest and
fee income, decreased $223,000 to $305,000 for the year ended June 30, 1996 from
$528,000 for the year ended June 30, 1995. Amortization of origination costs
attributable to leasing activities increased $166,000 as ABL was only in
operation for approximately six months of the year ended June 30, 1995. However,
amortization of origination costs attributable to mortgage loans decreased
$374,000 in the year ended June 30, 1996. The amount of origination cost
recognized is in part determined by the length of time a loan is held in
portfolio. In the year ended June 30, 1995, the Company securitized its loan
portfolio in March 1995 resulting in the average loan being held in portfolio
for approximately 5.5 months. In the year ended June 30, 1996, loans were
securitized in October 1995 and May 1996, reducing the average holding period to
approximately three months.
Total Expenses. Total expenses increased $4.5 million, or 93.8%, to
$9.3 million in the year ended June 30, 1996 from $4.8 million in the year ended
June 30, 1995. As described in more detail below, this increase was primarily a
result of increases in interest and sales expenses attributable to
30
<PAGE>
the Company's continued sale of subordinated debentures, and increased payroll,
sales and marketing and general and administrative expenses related to increased
loan originations during the year ended June 30, 1996.
Interest Expense. Interest expense increased $1.5 million, or 125.0%,
to $2.7 million in the year ended June 30, 1996 from $1.2 million in the year
ended June 30, 1995. The increase was primarily attributable to an increase in
the amount of the Company's subordinated debentures outstanding. Management
utilized the proceeds from the sale of such subordinated debentures to fund the
increase in loan originations experienced during the year ended June 30, 1996.
Outstanding subordinated debentures which were issued for terms ranging from
three months to ten years and with rates ranging from 7% to 10.5%, increased to
an average of $25.0 million during the year ended June 30, 1996 from an average
of $12.0 million during the year ended June 30, 1995. The average interest rate
paid on the subordinated debentures increased to 9.02% for fiscal 1996 from
8.75% for fiscal 1995 due to an increase in market rates of interest.
Provision for Credit Losses. The provision for credit losses increased
to $681,000 in fiscal 1996 from $165,000 in fiscal 1995. The provision for
credit losses was increased due to the increase in the Company's loan and lease
portfolio. The Company's allowance for credit losses totaled $707,000 at June
30, 1996. The ratio of the allowance for credit losses to total net loan and
lease receivables serviced was 1.18% at June 30, 1996 as compared to 0.87% at
June 30, 1995.
Payroll and Related Costs. Payroll and related costs increased
$208,000, or 20.8%, to $1.2 million in the year ended June 30, 1996 from $1.0
million in the year ended June 30, 1995. This increase was primarily due to an
increase in the number of administrative employees as a result of the Company's
growth in loan originations, geographic expansion and increase in loans serviced
for others.
Sales and Marketing Expenses. Sales and marketing expenses increased
$1.2 million, or 80.0%, to $2.7 million in the year ended June 30, 1996 from
$1.5 million in the year ended June 30, 1995. The increase was attributable to
an increase in advertising costs as a result of increased newspaper and direct
mail advertising related to the Company's sale of debentures and loan products
and the initiation of a radio advertising program for the home equity loan
product. The increase in sales and marketing expenses was also due to the
expansion of the Company's service area during fiscal 1996 into Maryland, New
York City and Florida. During such period, the Company began offering its
subordinated debentures in Florida and Business Purpose Loans in Maryland and
New York City.
General and Administrative Expenses. General and administrative
expenses increased $1.1 million, or 127.0%, to $2.0 million in the year ended
June 30, 1996 from $866,000 in the year ended June 30, 1995. The increase was
primarily attributable to increases in rent, telephone, office expense,
professional fees and other expenses incurred as a result of the previously
discussed increase in loan originations and loan servicing experienced during
fiscal 1996.
Income Taxes. Income taxes increased from $313,000 for the year ended
June 30, 1995 to $802,000 for the year ended June 30, 1996 as a result of
increased earnings. At June 30, 1996, the Company had approximately $900,000 of
net operating loss carryforwards ("NOLs") available for
31
<PAGE>
federal income tax purposes (which the Company intends to utilize) and $1.6
million of NOLs available for state income tax purposes. If not utilized,
substantially all of the state NOLs will expire at various dates between June
30, 1997 and June 30, 1999. Based upon the relatively short carryforward periods
allowed by the states in which the Company operates and the Company's current
strategy of utilizing securitizations to manage portfolio size, it is not likely
that the Company will utilize all of the NOLs for state tax purposes. As a
result, the Company established a valuation reserve equal to 100% of the value
of this asset.
Net Income. Net income increased $1.7 million, or 292.6%, to $2.3
million for the year ended June 30, 1996 from $581,000 for the year ended June
30, 1995. As a result of the increase in income, earnings per share increased to
$1.01 on weighted average common shares outstanding of 2,296,913 in the year
ended June 30, 1996 compared to $0.27 on weighted average common shares
outstanding of 2,128,154 for the year ended June 30, 1995 representing a 274.1%
increase for the year ended June 30, 1996 from the year ended June 30, 1995.
Year Ended June 30, 1995 Compared with the Year Ended June 30, 1994
Total Revenues. Total revenues increased $3.0 million, or 115.4%, to
$5.6 million in the year ended June 30, 1995 from $2.6 million in the year ended
June 30, 1994. The increase in total revenues was the result of increased
interest and fee income combined with the recognition of gain on sale of loans
through a securitization.
Gain on Sale of Loans. Gain on sale of loans increased $1.3 million, or
1181.8%, to $1.4 million for the year ended June 30, 1995 from $110,000 for the
year ended June 30, 1994 as a result of increased loan sales through a
securitization in the year ended June 30, 1995. The Company consummated its
first securitization of $9.7 million in Business Purpose Loans in March 1995
generating gain on sale of loans of $1.4 million (representing the fair value of
the excess spread of $3.1 million less $1.7 million of costs associated with the
transaction).
Interest and Fee Income. Interest and fee income increased $1.7
million, or 70.8%, to $4.1 million in the year ended June 30, 1995 from $2.4
million in the year ended June 30, 1994 due primarily to an increase in fee
income earned in connection with the origination of Business Purpose Loans for
sale to unaffiliated lenders.
Interest income from loans and leases increased $390,000 to $1.4
million in the year ended June 30, 1995, or 39.0%, from $1.0 million for the
year ended June 30, 1994. ABL, the Company's leasing subsidiary which commenced
operations in December 1994, contributed $99,000 of the increase. The remaining
increase was attributable to higher average outstanding loan and lease
receivables caused by increased originations during fiscal 1995. During the year
ended June 30, 1995, the Company originated $18.2 million of Business Purpose
Loans and $17.0 million of Home Equity Loans. During the same period, $2.2
million of leases were originated. Average outstanding loan and lease
receivables increased to 9.9 million during the year ended June 30, 1995 from
$6.6 million during the year ended June 30, 1994.
32
<PAGE>
Fee income increased $1.3 million, or 68.4%, to $3.2 million for the
year ended June 30, 1995 from $1.9 million for the year ended June 30, 1994. The
increase in fee income was due to higher originations of Business Purpose Loans
on which the Company received higher fees than those received on Home Equity
Loans. Business Purpose Loans originated on behalf of unaffiliated lenders
increased to $15.0 million during the year ended June 30, 1995 from $9.5 million
for the year ended June 30, 1994.
Amortization of origination costs remained fairly constant during the
years ended June 30, 1995 and 1994 at approximately $500,000.
Total Expenses. Total expenses increased $2.5 million, or 108.7%, to
$4.8 million in the year ended June 30, 1995 from $2.3 million in the year ended
June 30, 1994. This increase was primarily the result of increased interest and
sales expenses attributable to the Company's sale of subordinated debentures,
and increased payroll, sales and marketing and general administrative expenses
related to increased loan originations during the year ended June 30, 1995.
Interest Expense. Interest expense increased $585,000, or 93.2%, to
$1.2 million in the year ended June 30, 1995 from $628,000 in the year ended
June 30, 1994 primarily due to an increase in the amount of the Company's
subordinated debentures outstanding as management utilized the proceeds from the
sale of such subordinated debentures to fund the increase in loan originations
during the year ended June 30, 1995. Outstanding subordinated debentures which
were issued for terms ranging from three months to ten years and with rates
ranging from 7.0% to 10.25% increased to an average of $12.0 million during the
year ended June 30, 1995 from an average $3.8 million during the year ended June
30, 1994. The average interest rate paid on the subordinated debentures remained
fairly constant during the two years at approximately 8.75%.
Provision for Credit Losses. The provision for credit losses increased
$117,000 to $165,000 for the year ended June 30, 1995 from $48,000 for the year
ended June 30, 1994. The provision for credit losses was increased due to the
increase in the Company's loan and lease portfolio. The allowance for credit
losses was $155,000 at June 30, 1995. The ratio of the allowance for credit
losses to total net loan and lease receivables serviced was 0.87% at June 30,
1995 as compared to 0.93% at June 30, 1994.
Payroll and Related Costs. Payroll and related costs increased
$584,000, or 142.1%, to $995,000 in the year ended June 30, 1995 from $411,000
in the year ended June 30, 1994. The increase was due to the hiring of
additional personnel in connection with the commencement of operations of ABL
and an increase in the number of administrative employees resulting from the
Company's growth in loan originations.
Sales and Marketing Expenses. Sales and marketing expenses increased
$849,000, or 128.4%, to $1.5 million in the year ended June 30, 1995 from
$661,000 in the year ended June 30, 1994. The increase was attributable to an
increase in advertising costs as a result of increased newspaper and direct mail
advertising related to the Company's sale of subordinated debentures and loan
products.
33
<PAGE>
General and Administrative Expenses. General and administrative
expenses increased $315,000, or 57.2%, to $866,000 in the year ended June 30,
1995 from $551,000 in the year ended June 30, 1994. The increase was primarily
attributable to increases in rent, telephone, office expense, professional fees
and other expenses incurred as a result of the commencement of operations of ABL
and the previously discussed increase in loan originations.
Income Taxes and Change in Accounting for Income Taxes. Income taxes
increased $115,000, or 58.1%, to $313,000 for the year ended June 30, 1995 from
$198,000 for the year ended June 30, 1994 due to increased income before taxes.
The Company adopted Statement of Financial Accounting Standard No. 109
("SFAS No. 109") in the fourth quarter of fiscal 1994 retroactive to July 1,
1993. The provisions of SFAS 109 require the liability method of accounting for
income taxes and among other things, recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary differences
between financial statement and income tax bases of assets and liabilities and
to NOLs, to the extent that realization of such benefits is more likely than
not. The adoption of SFAS No. 109 resulted in a $52,000 reduction in net income
for the year ended June 30, 1994.
At June 30, 1995, the Company had NOLs for state tax purposes of
approximately $1.4 million. Based upon the relatively short carryforward periods
allowed by the states in which the Company operates and the Company's current
strategy of utilizing securitizations to manage portfolio size, it is not likely
that the Company will utilize all of the NOLs for state tax purposes. As a
result, the Company established a valuation reserve equal to 100% of the value
of this asset.
Net Income. Net income increased $496,000, or 583.5%, to $581,000 for
the year ended June 30, 1995 from $85,000 for year ended June 30, 1994 primarily
due to the increase in the gain on sale of loans due to the Company's
securitizations. As a result of the increase, earnings per share increased to
$.27 on weighted average common shares outstanding of 2,128,154 for the year
ended June 30, 1995 compared to $0.04 on weighted average common shares
outstanding of 2,127,263 for the year ended June 30, 1994 representing a 575.0%
increase in earnings per share for the year ended June 30, 1995 from the year
ended June 30, 1994.
34
<PAGE>
Asset Quality
The following table provides data concerning delinquency experience,
real estate owned ("REO") and loss experience for the Company's loan and lease
portfolio serviced. There were no home equity or other loans included in REO
during the periods presented.
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996 June 30, 1995 June 30, 1994
-------------------- -------------------- -------------------- --------------------
Delinquency by Type Amount % Amount % Amount % Amount %
- --------------------------------- ---------- -------- --------- --------- ---------- -------- ---------- ---------
Business Purpose Loans (Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Portfolio Serviced......... $44,110 $37,950 $ 14,678 $ 8,170
======= ===== ======= ===== ======== ===== ======= ====
Period of delinquency
31-60 Days.................. $ 1,155 2.62% $ 37 .10% $ 141 .96% 71 .87%
61-90 Days.................. 311 .71 181 .48 75 .51 -- --
Over 90 Days................ 1,302 2.95 1,019 2.69 310 2.11 504 6.17
------- ----- -------- ----- --------- ------ ------- ----
Total Delinquencies......... $ 2,768 6.27% $ 1,237 3.26% $ 526 3.59% $ 575 7.05%
======= ===== ======= ===== ======== ===== ======= ====
REO.............................. $ 181 $ 444 $ 641 $ 220
======= ===== ======= ===== ======== ===== ======= ====
Home Equity Loans
Total Portfolio Serviced......... $28,842 $17,224 -- --
======= ===== ======= ===== ======== ===== ======= ====
Period of delinquency
31-60 Days.................. $ 14 .05% -- -- -- -- -- --
61-90 Days.................. 10 .04 -- -- -- -- -- --
Over 90 Days................ 94 .33 -- -- -- -- -- --
------- ----- -------- ----- --------- ------ -------- ----
Total Delinquencies......... $ 118 .42% -- -- -- -- -- --
======= ===== ======= ===== ======== ===== ======= ====
Equipment Leases
Total Portfolio Serviced......... $ 6,010 $ 4,607 $ 2,031 --
======= ===== ======= ===== ======== ===== ======= ====
Period of delinquency
31-60 Days.................. $ 82 1.36% $ 23 .51% $ 49 2.40% -- --
61-90 Days.................. 32 .53 14 .29 40 1.97 -- --
Over 90 Days................ 38 .63 41 .89 -- -- -- --
------- ----- -------- ----- --------- ----- -------- ----
Total Delinquencies......... $ 152 2.52 $ 78 1.69% $ 89 4.37% -- --
======= ===== ======= ===== ======== ===== ======= ====
Other Loans (1)
Total Portfolio Serviced......... $ 118 $ 110 $ 1,065 $ 237
======= ===== ======= ===== ======== ===== ======= ====
Period of delinquency
31-60 Days.................. $ -- --% $ -- --% $ 16 1.15% $ -- --%
61-90 Days.................. -- -- 18 16.55 30 2.82 -- --
Over 90 Days................ 70 59.74 50 45.82 21 1.97 -- --
------- ----- -------- ----- --------- ------ -------- ----
Total Delinquencies......... $ 70 59.74% $ 68 62.37% $ 67 6.30% $ -- --%
======= ===== ======= ===== ======== ===== ======= ====
Company Combined
- ---------------------------------
Total Portfolio Serviced......... $79,080 $59,891 $ 17,774 $ 8,407
======= ======= ======== =======
Period of delinquency
31-60 Days.................. $ 1,250 1.58% $ 62 .10% $ 206 1.16% $ 72 .85%
61-90 Days.................. 353 .45 213 .35 145 .82 -- --
Over 90 Days................ 1,504 1.90 1,110 1.85 331 1.86 504 6.00
------- ----- -------- ----- --------- ------ -------- ----
Total Delinquencies......... $ 3,107 3.93% $ 1,384 2.30% $ 682 3.84% $ 576 6.85%
======= ===== ======= ===== ======== ===== ======= ====
REO.............................. $ 181 .23% $ 444 .74% $ 641 3.61% $ 220 2.63%
======= ===== ======= ===== ======== ===== ======= ====
Losses Experienced
During the Period.............. $ 50 .06% $ 129 .22% $ 88 .49% $ 10 .13%
======= ===== ======= ===== ======== ===== ======= ====
Allowance for Credit Losses at end
of Period...................... $ 957 1.21% $ 707 1.18% $ 155 .87% $ 78 .93%
======= ===== ======= ===== ======== ===== ======= ====
</TABLE>
- ---------------------------------------
(1) Includes secured and unsecured consumer loans originated by HCDC.
35
<PAGE>
The following table sets forth the Company's loss experience for the
periods indicated.
<TABLE>
<CAPTION>
For the Three
Months Ended
September 30, For the Year Ended June 30,
-------------- --------------------------------------------
1996 1996 1995 1994
-------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Business Purpose Loans............................... $ 50 $ 129 $ 86 $ 10
Home Equity Loans.................................... -- -- -- --
Other Loans.......................................... -- -- 2 --
Leases............................................... -- -- -- --
-------------- -------------- -------------- --------------
Total Losses................................ $ 50 $ 129 $ 88 $ 10
============== ============== ============== ==============
</TABLE>
Although the Company's total delinquencies as a percentage of the total
loan and lease portfolio serviced did not increase during the years ended June
30, 1996 and 1995, the dollar amount of the total loan delinquencies increased
during such periods which is reflective of the increase in the Company's total
loan and lease portfolio serviced.
Interest Rate Risk Management
The Company's profitability is largely dependent upon the spread
between the effective rate of interest received on the loans originated or
purchased by the Company and interest rates payable pursuant to the Company's
credit facilities or the pass-through rate for interests issued in connection
with the securitization of loans. The Company's spread may be negatively
impacted to the extent it holds fixed-rate mortgage loans in its held for sale
portfolio prior to securitization. The adverse effect in the Company's spread
may be the result of increases in interest rates during the period the loans are
held prior to securitization or as result of an increase in the rate required to
be paid to investors in connection with the securitization.
In August 1995, the Company implemented an "interest-rate lock"
strategy in an attempt to mitigate the effect of changes in interest rates on
its fixed-rate mortgage loan portfolio between the date of origination and
securitization. This strategy involves short sales of a combination of U.S.
Treasury securities with an average life which closely match the average life of
the loans to be securitized. The settlement date of the short sale, as well as,
the buy back of the Treasury securities coincides with the anticipated
settlement date of the underlying securitization. At June 30, 1996, the Company
had sold short $15.0 million of U.S. Treasury securities. The deferred loss
related to these activities was approximately $27,000 at June 30, 1996. At
September 30, 1996, the Company had no outstanding hedges. During the three
months ended September 30, 1996, the Company incurred a loss of $34,000 on short
sales of securities. The Company also prefunds loan originations in connection
with its loan securitizations which enables the Company to determine in the
current period the rate to be received by the investors on loans to be
originated and securitized in a future period.
See "Business -- Securitizations."
36
<PAGE>
The nature and quantity of hedging transactions are determined by the
Company's management based on various factors, including market conditions and
the expected volume of mortgage loan originations and purchases.
The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against changes in market value of its
fixed-rate mortgage loans held for sale. However, an effective interest rate
risk management strategy is complex and no such strategy can completely insulate
the Company from interest rate changes. In addition, hedging involves
transaction and other costs, and such costs could increase as the period covered
by the hedging protection increases. In the event of a decrease in market
interest rates, the Company would experience a loss on the purchase of Treasury
securities involved in the interest rate lock transaction which would be
reflected on the Company's financial statements during the period in which the
buy back of the Treasury securities occurred. Such loss would be offset by the
income realized from the securitization in future periods. As a result, the
Company may be prevented from effectively hedging its fixed-rate loans held for
sale, without reducing the Company's income in current periods.
In the future, the Company intends to continue to engage in short sales
of Treasury securities as part of its interest rate risk management strategy.
The Company also experiences interest rate risk to the extent that as
of September 30, 1996 approximately $17.0 million of its liabilities are
comprised of subordinated debentures with scheduled maturities greater than one
year. To the extent that interest rates decrease in the future, the rates paid
on such liabilities could exceed the rates received on new loan originations
resulting in a decrease in the Company's spread. See "Risk Factors--Changes in
Interest Rates May Adversely Affect Profitability."
Liquidity and Capital Resources
The Company continues to fund its loans principally through (i) the
securitization and sales of loans which it originates, (ii) the sale of the
Company's registered subordinated debentures, (iii) institutional debt
financing, and (iv) retained earnings. The Company's cash requirements include
the funding of loan originations, payment of interest expense, funding
over-collateralization requirements, operating expenses and capital
expenditures.
To a limited extent, the Company presently intends to continue to
augment the interest and fee income it earns on its loan and lease portfolio,
from time to time, by selling loans either at the time of origination or from
its portfolio to unrelated third parties. These transactions also create
additional liquid funds available for lending activities.
In recent periods, the Company has significantly increased its reliance
on securitizations to generate cash proceeds for the repayment of debt and to
fund its ongoing operations. During fiscal 1995, the Company completed a
securitization of $9.7 million of Business Purpose Loans resulting in proceeds
of approximately $9.0 million. During fiscal 1996, the Company completed two
loan securitizations. These securitizations, which were consummated in October
1995 and May 1996, involved $14.5 million of Business Purpose Loans and $22.0
million of Business Purpose and Home Equity Loans, respectively. The
securitizations occurring during fiscal 1996 resulted in proceeds of
37
<PAGE>
approximately $34.2 million. During the three months ended September
30, 1996, the Company completed the initial portion of a loan securitization
involving $26.9 of Business Purpose Loans and Home Equity Loans. The
securitization has resulted in proceeds of approximately $26.7 million. The
Company has utilized the proceeds of the securitizations to fund the origination
of new loans and leases and to repay funds borrowed pursuant to the Company's
warehouse financing facilities. In accordance with the terms of the
securitizations, the Company will receive less cash flow from the portfolios of
loans securitized than it would otherwise receive absent securitizations.
The Company's sale of loans through securitizations has resulted in
gains on sale of loans recognized by the Company. For the fiscal years 1996 and
1995 and the three months ended September 30, 1996, the Company had gain on sale
of loans through securitizations of $8.9 million, $1.4 million and $4.4 million,
respectively. Substantially all of the proceeds of a securitization, net of fees
and costs of the securitization, are used to repay the warehouse credit
facilities. Additionally, in a securitization, the Company obtains the right to
receive excess cash flows generated by the securitized loans held in the trust
referred to herein as the excess spread and capitalizes mortgage servicing
rights, each of which creates non-cash taxable income. Consequently, the income
tax payable and the expenses related to the securitizations negatively impact
the Company's cash flow. As a result, the Company may operate on a negative
operating cash flow basis which could negatively impact the Company's results of
operations during such periods.
Additionally, pursuant to the terms of the securitizations, the Company
will act as the servicer of the loans and in that capacity will be obligated to
advance funds in certain circumstances in respect of each monthly loan interest
payment that accrued during the collection period for the loans but was not
received, unless the Company determines that such advances will not be
recoverable from subsequent collections in respect of the related loan. The
Company's obligation to advance funds in its capacity as servicer of the loans
may create greater demands on the Company's cash flow than either selling loans
or maintaining a portfolio of loans.
Subject to economic, market and interest rate conditions, the Company
intends to continue to implement additional securitizations of its loan
portfolios and may in the future securitize its lease portfolio. Adverse
conditions in the securitization market could impair the Company's ability to
sell loans through securitizations on a favorable or timely basis. Since the
sale of loans through securitizations is an important source of revenues, any
such delay or impairment could have a material adverse impact in the Company's
results of operations.
Despite its recent use of securitizations to fund loan originations,
the Company continues to rely on borrowings such as its subordinated debentures
and warehouse credit facilities or lines of credit to fund its operations. At
September 30, 1996, the Company had a total of $37.9 million of subordinated
debentures outstanding. On such date, the Company was not utilizing the
approximately $36.0 million of funds available to it under its credit
facilities.
Between 1990 and 1993, American Business Finance Corporation ("ABFC"),
an indirect subsidiary of ABFS, sold approximately $1.7 million in principal
amount of subordinated debentures which mature at varying times between
September 1996 and June 1998. In February 1994, the
38
<PAGE>
Company ceased selling subordinated debentures through ABFC. As of September 30,
1996, ABFC had approximately $1.3 million of subordinated debentures was
outstanding.
In addition, between July 1, 1993 and September 30, 1996, ABFS sold
$56.7 million in principal amount of subordinated notes (including redemptions
and repurchases by investors), pursuant to registered offerings with maturities
ranging between three months and ten years. As of September 30, 1996, ABFS had
approximately $36.6 million of subordinated debentures outstanding (excluding
the debt of ABFC). The proceeds of such sales of debentures have been used to
fund general operating and lending activities. The Company intends to meet its
obligations to repay such debentures as they mature with income generated
through its lending activities and funds generated through repayment of its
outstanding loans. The repayment of such obligations should not effect the
Company's operations.
During fiscal 1997, the Company intends to file a registration
statement with the Commission which would register up to $100.0 million of debt
securities for sale in a public offering. The Company anticipates offering such
securities to the public on a continuous basis over an eighteen month period.
In April 1996, Upland entered into an Interim Warehouse and Security
Agreement with Prudential Securities Realty Funding Corporation. The credit
facility is for $25.0 million, bears interest at the 30 day London Inter-Bank
Offered Rate ("LIBOR") plus 1.25% and expires March 1997. Additionally, in May
1996, Upland entered into a $7.5 million Revolving Loan and Security Agreement
with BankAmerica Business Credit, Inc. The credit facility bears interest at the
bank's prime rate plus 1.25% and expires in May 1998. None of these credit
facilities were being utilized at September 30, 1996. In addition, in December
1996, ABC entered into a Loan and Security Agreement with Finova Capital
Corporation. This line of credit is in the amount of $15.0 million and expires
in December 1999. This line of credit bears interest at the Prime Rate plus 1.0%
and is guaranteed by the Company.
The Company is currently discussing the possibility of obtaining
additional lines of credit with other lenders and providers of credit.
As of September 30, 1996, the Company had $20.9 million of debt
scheduled to mature during the twelve months ending September 30, 1997 which was
comprised solely of maturing subordinated debentures. The Company currently
expects to refinance the $20.9 million of maturing debt through extensions of
maturing debentures or new debt financing and, if necessary, may retire the debt
through cash flow from operations and loan sales or securitizations. Despite the
Company's current use of securitizations to fund loan growth, the Company is
also dependent upon borrowings to fund a portion of its operations. As a result,
the Company intends to continue to utilize debt financing to fund its operations
in the future.
From time to time, the Company considers potential acquisitions of
related businesses or assets which could have a material impact upon the
Company's results of operations and liquidity position.
39
<PAGE>
The Company leases certain of its facilities under a five-year
operating lease expiring in November 2000 at a minimum annual rental of
$430,637. The lease contains a renewal option for an additional period at
increased annual rental. See "Business -- Property."
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on the Company's operations. These pronouncements should be read
in conjunction with the significant accounting policies which the Company has
adopted that are set forth in the Company's notes to consolidated financial
statements.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123") establishing financial
accounting and reporting standards for stock-based employee compensation plans.
SFAS No. 123 encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which generally does not result
in compensation expense recognition for most plans. Companies that elect to
remain with the existing accounting are required to disclose in a footnote to
the financial statements pro forma net income, and if presented, earnings per
share, as if SFAS No. 123 had been adopted. The accounting requirements of this
Statement are effective for transactions entered into during fiscal years that
begin after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994. The Company intends to continue to utilize the intrinsic
value method of accounting for stock based compensation as permitted by SFAS No.
123. Subject to the approval of stockholders, the Company amended its existing
option plan to increase the number of options available for issuance thereunder
from 78,988 to 163,988 shares, of which the Company intends to make awards of
options to purchase 150,500 shares of Common Stock in conjunction with the
Public Offering to various officers of the Company. See "Management."
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). Pursuant to SFAS No. 125, after a transfer of financial assets, an entity
would be required to recognize all financial assets and servicing it controls
and liabilities it has incurred and, conversely, would not be required to
recognize financial assets when control has been surrendered and liabilities
when extinguished. SFAS No. 125 provides standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 will be effective with respect to the transfer and servicing of
financial assets and the extinguishment of liabilities occurring after December
31, 1996, with earlier application prohibited. The Company has not completed an
analysis of the potential effects of SFAS No. 125 on the Company's financial
condition or results of operations.
40
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars (except with respect to securities which are carried
at market value), without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
BUSINESS
General
ABFS is a financial services company operating primarily in the
mid-atlantic region of the United States. The Company, through its principal
direct and indirect subsidiaries, originates, sells and services Business
Purpose Loans and Home Equity Loans. The Company also originates Equipment
Leases. In addition, the Company recently commenced implementation of the Bank
Alliance Program pursuant to which it has entered into exclusive business
arrangements with several financial institutions pursuant to which the Company
will purchase Home Equity Loans that do not meet the underwriting guidelines of
the selling institution but that do meet the Company's underwriting criteria.
The Company's customers currently consist primarily of two groups. The
first category of customers includes credit impaired borrowers who are generally
unable to obtain financing from banks, savings and loan associations or other
finance companies that have historically provided loans only to individuals with
favorable credit characteristics. These borrowers generally have impaired or
unsubstantiated credit characteristics and/or unverifiable income and respond
favorably to the Company's marketing efforts. The second category of customers
includes borrowers who would qualify for loans from traditional lending sources
but elect to utilize the Company's products and services. The Company's
experience has indicated that these borrowers are attracted to the Company's
loan products as a result of its marketing efforts, the personalized service
provided by the Company's staff of highly trained lending officers and the
timely response to loan requests. Historically, both categories of customers
have been willing to pay the Company's origination fees and interest rates which
are generally higher than those charged by traditional lending sources.
The Company began operations in 1988 and initially offered Business
Purpose Loans. The Company currently originates Business Purpose Loans through a
retail network of salespeople in Pennsylvania, Delaware, New Jersey, New York,
Virginia, Maryland and Connecticut. The Company has taken the initial steps to
expand its business purpose lending program into the southeastern region of the
United States. The Company focuses its marketing efforts on small businesses
which generally do not meet all of the credit criteria of commercial banks and
small businesses that the Company's research indicates are predisposed to using
the Company's products and services.
41
<PAGE>
The Business Purpose Loans originated by the Company are secured by
real estate. In substantially all cases, the Company receives additional
collateral in the form of, among other things, pledges of securities,
assignments of contract rights, life insurance and lease payments and liens on
business equipment and other business assets, as available. The Company's
Business Purpose Loans are typically originated with fixed rates and typically
have origination fees of 5.0% to 6.0%. The weighted average interest rate on the
Business Purpose Loans originated by the Company were 15.96 % and 15.83% for the
three months ended September 30, 1996 and the year ended June 30, 1996,
respectively. The Business Purpose Loans typically have significant prepayment
penalties which the Company believes tend to extend the average life of such
loans and make these loans more attractive products to securitize. The Business
Purpose Loans securitized in the last two securitizations had a weighted average
loan-to-value ratio (based solely upon the real estate collateral securing the
loans) of 59.82% at the time of securitization.
The Company's strategy for expanding its business purpose lending
program focuses on motivating borrowers through the investment in retail
marketing and sales efforts rather than on emphasizing discounted pricing or a
reduction in underwriting standards. The Company utilizes a proprietary training
program involving extensive and on-going training of its lending officers. The
Company originated $7.4 million and $28.9 million of Business Purpose Loans for
the quarter ended September 30, 1996 and the year ended June 30, 1996,
respectively.
ABFS entered the Home Equity Loan market in 1991. The Company
originates Home Equity Loans primarily to credit impaired borrowers through
retail marketing which includes telemarketing operations, direct mail and
television advertisements. The Company currently originates Home Equity Loans
primarily in Pennsylvania, New Jersey, Delaware, Maryland and Virginia. The
Company was recently granted licenses and expects to begin originating Home
Equity Loans on a limited basis in Georgia, North Carolina, South Carolina,
Connecticut and Florida during calendar 1997. The Company originated $12.7
million and $36.5 million of Home Equity Loans for the quarter ended September
30, 1996 and the year ended June 30, 1996, respectively. The weighted average
interest rate on Home Equity Loans originated by the Company was 11.50% and
9.94% for the three months ended on September 30, 1996 and the year ended June
30, 1996, respectively.
The Company initiated its Bank Alliance Program in fiscal 1996. The
Company believes that the Bank Alliance Program is a unique method of increasing
the Company's production of Home Equity Loans. Currently, the Company has
entered into agreements with five financial institutions which provide the
Company with the opportunity to underwrite, process and purchase loans generated
by the branch networks of such institutions which consist of approximately 600
branches located in Pennsylvania, Delaware, New Jersey and Maryland. The Company
is also negotiating with other financial institutions regarding their
participation in the program.
ABFS began offering Equipment Leases in December 1994 to complement its
business purpose lending program. The Company originates leases on a nationwide
basis with a particular emphasis on the eastern portion of the United States.
The Company believes that cross-selling opportunities may exist for offering
lease products to Business Purpose Loan customers and offering Business Purpose
Loans to lease customers. The weighted average interest rate received on the
Equipment Leases originated by the Company was 15.53% and 17.22% for the three
months ended
42
<PAGE>
September 30, 1996 and the year ended June 30, 1996, respectively. The Company
currently holds all Equipment Leases originated in its lease portfolio to
generate interest income. The Company recently hired a leasing officer with over
20 years of experience in small ticket leasing to expand this area of the
Company's business.
The Company intends to continue to utilize funds generated from the
securitization of loans and the sale of subordinated debentures to increase its
loan and lease originations and to expand into new geographic markets with an
initial focus on expansion in the southeastern region of the United States. The
Company also intends to expand its Bank Alliance Program with financial
institutions across the United States.
From the inception of the Company's business in 1988 through September
30, 1996, the Company has experienced total net loan and lease losses of
approximately $300,000. The Company's losses on its loan and lease portfolio
serviced totaled $50,000, $129,000, $88,000 and $10,000, respectively, for the
three months ended September 30, 1996 and the years ended June 30, 1996, 1995
and 1994. The Company's loans and leases delinquent over 30 days represented
3.93% and 2.30% of the total loan and lease portfolio serviced at September 30,
1996 and June 30, 1996, respectively. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Asset Quality."
The Company's ability to fund and subsequently securitize Business
Purpose Loans and Home Equity Loans has significantly improved its financial
performance and enabled it to both expand its marketing efforts and increase the
geographic scope of its products. Through September 30, 1996, the Company had
securitized an aggregate of $47.1 million of Business Purpose Loans and $26.0
million of Home Equity Loans. The Company retains the servicing rights on its
securitized loans.
In addition to securitizations, the Company funds its operations with
subordinated debentures that the Company markets directly to individuals from
the Company's operating office located in Pennsylvania and branch offices
located in Florida and Arizona. At September 30, 1996, the Company had $37.9
million in subordinated debentures outstanding with a weighted average coupon of
8.91% and a weighted average maturity of 25.6 months.
American Business Financial Services Inc.'s only activity as of the
date hereof has been: (i) acting as the holding company for its operating
subsidiaries and (ii) raising capital for use in the Company's lending
operations. ABFS is the parent holding company of ABC and its subsidiaries,
American Business Finance Corporation, HomeAmerican Credit, Inc., Processing
Service Center, Inc.,HCDC, ABL and ABC Holdings Corporation (collectively, the
"Company").
ABC, a Pennsylvania corporation incorporated in 1988 and acquired by
the Company in 1993, originates, services and sells Business Purpose Loans. HAC,
a Pennsylvania corporation incorporated in 1991, originates and sells Home
Equity Loans. HAC acquired Upland in 1996 and since such time has conducted
business as "Upland Mortgage." Upland also purchases Home Equity Loans through
the Bank Alliance Program. Processing Service Center, Inc. processes Home Equity
Loan applications
43
<PAGE>
for financial institutions as part of the Bank Alliance Program. Incorporated in
1994, ABL commenced operations in 1995 and originates and services Equipment
Leases.
ABC Holdings Corporation was incorporated to hold properties acquired
through foreclosure. HCDC was incorporated in 1993 for the purpose of offering
secured and unsecured small consumer loans (i.e., loans up to $15,000) for sale
to third party investors. Collateral securing such loans includes residential
real estate, automobiles, boats and other personal property. As of September 30,
1996, HCDC maintained a portfolio of consumer loans of approximately $100,000.
The Company does not intend to emphasize this area of its business in the
future.
The Company's subsidiaries, ABFS 1995-1, Inc., ABFS 1995-2, Inc., ABFS
1996-1, Inc. and ABFS 1996-2, Inc. are Delaware investment holding companies.
Such companies were incorporated to facilitate the Company's securitizations.
Such corporations do not engage in any business activity other than holding the
subordinated certificate, if any, and the excess spread. See
"--Securitizations." American Business Finance Corporation was incorporated in
connection with the issuance of subordinated debentures in 1990 through 1993.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
44
<PAGE>
The following chart sets forth organizational structure of ABFS.(1)
-----------------------
ABFS
(Holding Company)
-----------------------
----------------------------------
American Business
Credit, Inc.
(Originates and services Business
Purpose Loans)
----------------------------------
- --------------------------------------------------------------------------------
HOME PROCESSING AMERICAN HOME ABC AMERICAN
AMERICAN SERVICE BUSINESS AMERICAN HOLDINGS BUSINESS
CREDIT, INC. CENTER, LEASING, CONSUMER CORP. FINANCE
d/b/a INC. INC. DISCOUNT, CORP.
UPLAND (Processes (Originates INC.
MORTGAGE(2) Bank Alliance and services (Originates (Holds (Issued
(Originates, Program Equipment small foreclosed subordinated
purchases Home Equity Leases) consumer real debentures
and services Loans) installment estate) from 1990
Home Equity loans) to 1993)
Loans)
(1) In addition to the corporations pictured above, the Company organizes a
special purpose corporation for each of its securitizations. Such
corporations are direct subsidiaries of ABFS.
(2) Loans purchased by Upland represent loans acquired through Bank
Alliance Program.
45
<PAGE>
Lending and Leasing Activities
General. The following table sets forth certain information concerning
the loan and lease origination, purchase and sale activities of the Company for
the three months ended September 30, 1996 and the years ending June 30, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
Three Months
Ended
September 30, Year Ended June 30,
------------- ------------------------------------------
1996 1996 1995 1994
------------- ------------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loans/Leases Originated/Purchased
(Net of Refinances)
Business Purpose Loans..................... $ 7,421 $ 28,872 $ 18,170 $ 11,793
Home Equity Loans.......................... $ 12,663 $ 36,479 $ 16,963 $ 22,231
Equipment Leases........................... $ 1,970 $ 5,967 $ 2,220 $ --
Other Loans................................ $ 26 $ 240 $ 1,108 $ 242
Number of Loans/Leases Originated/Purchased
Business Purpose Loans..................... 98 371 257 206
Home Equity Loans.......................... 286 772 365 493
Equipment Leases........................... 199 530 193 --
Other Loans................................ 7 52 237 55
Average Loan/Lease Size
Business Purpose Loans..................... $ 76 $ 78 $ 71 $ 57
Home Equity Loans.......................... $ 43 $ 47 $ 46 $ 55
Equipment Leases........................... $ 10 $ 11 $ 12 $ --
Other Loans................................ $ 4 $ 5 $ 5 $ 4
Weighted Average Interest Rate on Loans/Leases
Originated
Business Purpose Loans..................... 15.96% 15.83% 16.05% 16.03%
Home Equity Loans.......................... 11.50% 9.94% 12.68% 8.65%
Equipment Leases........................... 15.53% 17.22% 15.85% --%
Other Loans................................ 21.37% 24.50% 24.51% 24.92%
Weighted Average Term (in months)
Business Purpose Loans..................... 172 169 173 168
Home Equity Loans.......................... 185 194 132 171
Equipment Leases........................... 38 42 40 --
Other Loans................................ 41 50 53 25
Loans/Leases Sold
Business Purpose Loans..................... $ 9,909 $ 28,252 $ 24,762 $ 8,331
Home Equity Loans.......................... $ 17,872 $ 24,325 $ 16,963 $ 22,231
Equipment Leases........................... $ -- $ 2,259 $ -- $ --
Other Loans................................ $ -- $ 1,108 $ -- $ --
Number of Loans/Leases Sold
Business Purpose Loans..................... 133 378 384 98
Home Equity Loans.......................... 380 512 365 438
Equipment Leases........................... -- 193 -- --
Other Loans................................ -- 252 -- --
Weighted Average Rate on Loans/Leases Originated.... 13.37% 12.97% 14.85% 11.30%
</TABLE>
The following table sets forth information regarding the average
loan-to-value ratios for loans originated by the Company during the periods
indicated.
46
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------------ ------------------------
Loan Type 1996 1996
- ---------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Business Purpose Loans.................................... 60.38% 58.93%
Home Equity Loans......................................... 68.34 68.82
</TABLE>
The following table shows the geographic distribution of the Company's
loan and lease originations and purchases during the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended September 30, Year Ended June 30,
------------------------------------ ------------------------------------------------------
State 1996 % 1995 % 1996 % 1995 % 1994 %
- ---------------------- --------- -------- -------- -------- --------- ----------------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania.......... $ 10,583 47.93% $ 6,879 51.99% $ 33,324 46.57% $17,913 46.57% $18,246 53.25%
New Jersey............ 6,899 31.25 3,449 26.07 20,986 29.33 16,300 42.38 15,540 45.35
Virginia.............. 1,291 5.85 4 0.03 104 0.15 111 0.29 -- --
New York.............. 1,261 5.71 1,678 12.68 7,417 10.36 1,534 3.99 -- --
Maryland.............. 637 2.88 550 4.16 4,408 6.16 1,191 3.10 -- --
Delaware.............. 384 1.74 130 0.98 2,724 3.81 481 1.25 480 1.40
Florida............... 368 1.67 118 0.89 674 0.94 149 0.39 -- --
North Carolina........ 124 0.56 19 0.14 78 0.11 6 0.02 -- --
Georgia............... 72 0.33 110 0.83 181 0.25 98 0.25 -- --
Connecticut........... 58 0.26 4 0.03 87 0.12 5 0.01 -- --
Other................. 402 1.82 290 2.20 1,575 2.20 673 1.75 -- --
--------- -------- -------- -------- --------- ----------------- -------- -------- --------
Total........... $ 22,080 100.00% 13,231 100.00% 71,558 100.00% 38,461 1 00.00% 34,266 100.00%
========= ======== ======== ======== ========= ================= ======== ======== ========
</TABLE>
Business Purpose Lending. Through its subsidiary, ABC, the Company
originates Business Purpose Loans to corporations, partnerships, sole
proprietors and other business entities for various business purposes including,
but not limited to, working capital, business expansion, equipment acquisition
and debt-consolidation. The Company does not target any particular industries or
trade groups and, in fact, takes precautions against concentrations of loans in
any one industry group. All Business Purpose Loans are collateralized by a first
or second mortgage lien on a principal residence or some other parcel of real
property, such as office and apartment buildings and mixed use buildings, owned
by the borrower, a principal of the borrower, or a guarantor of the borrower. In
addition, such loans are generally further collateralized by pledges of
securities, assignments of contract rights, life insurance and lease payments
and liens on business equipment and other business assets, as available.
Business Purpose Loans generally range from $15,000 to $350,000 and had
an average balance of approximately $70,000 at September 30, 1996. Generally,
Business Purpose Loans are made at fixed rates and for terms ranging from five
to 15 years. Such loans generally have origination fees of 5.0% to 6.0% of the
aggregate loan amount. For the three months ended September 30, 1996, the
weighted average interest rate received on such loans was 15.96% and the average
loan-to-value ratio was 60.38% for the loans originated by the Company during
such period. From June 30, 1994 through September 30, 1996, the Company
originated $66.3 million of Business Purpose Loans.
47
<PAGE>
Generally, the Company computes interest due on its outstanding loans
using the simple interest method. Where permitted by applicable law, a
prepayment penalty is imposed. Although prepayment penalties imposed vary based
upon applicable state law, prepayment penalties generally range from 8% to 20%
of the outstanding loan balance. The Company believes that such prepayment terms
tend to extend the average life of such loans and make such loans more
attractive products to securitize. Whether a prepayment fee is imposed and the
amount of such fee, if any, is negotiated between the Company and the individual
borrower prior to consummation of the loan. See "-- Securitizations."
Home Equity Lending. The Company originates Home Equity Loans primarily
to credit impaired borrowers through Upland. Historically, Home Equity Loans
originated and funded by the Company were sold to one of several third party
lenders, at a premium and with servicing released. Currently, the Company builds
portfolios of Home Equity Loans for the purpose of securitizing such loans.
Home Equity Loan applications are obtained from potential borrowers
over the phone and in person. The loan request is then processed and closed. The
loan processing staff generally provides its home equity borrowers with a loan
approval within 24 hours and closes its Home Equity Loans within approximately
seven days of obtaining a loan approval.
Home Equity Loans generally range from $15,000 to $250,000 and had an
average balance of approximately $43,000 for the period ended September 30,
1996. Generally, Home Equity Loans are made at fixed rates of interest and for
terms ranging from 15 to 30 years. Such loans generally have origination fees of
up to 2.5% of the aggregate loan amount. For the three months ended September
30, 1996, the weighted average interest rate received on such loans was 11.50%
and the average loan-to-value ratio was 68.34% for the loans originated by the
Company during such period. The Company attempts to maintain its interest and
other charges on Home Equity Loans competitive with the lending rates of other
finance companies and banks. Where permitted by applicable law, a prepayment
penalty may be imposed; however, for competitive reasons such penalties are
generally not charged to the borrower on the prepayment of a Home Equity Loan.
In fiscal 1996, Upland, in conjunction with the Processing Center,
Inc., implemented the Bank Alliance Program which is designed to provide an
additional source of Home Equity Loans. The Bank Alliance Program targets
traditional financial institutions, such as banks, which because of their strict
underwriting and credit guidelines have generally provided mortgage financing
only to the most credit-worthy borrowers. The program enables such financial
institutions to originate loans to credit impaired borrowers in order to achieve
certain community reinvestment objectives and subsequently sell such loans to
Upland.
Under the program, a borrower who fails to meet a financial
institution's underwriting guidelines will be referred to the Processing Service
Center, Inc. which will process the loan application and underwrite the loan
pursuant to Upland's underwriting guidelines. If the borrower qualifies under
Upland's underwriting standards, the loan will be originated by the financial
institution and subsequently sold to Upland.
48
<PAGE>
Since the introduction of this program, agreements have been entered
into with five financial institutions which provide the Company with the
opportunity to underwrite, process and purchase loans generated by the branch
networks of such institutions which consist of approximately 600 branches
located in Pennsylvania, Delaware, New Jersey and Maryland. During fiscal 1996
and the three months ended September 30, 1996, $6.2 million and $546,000,
respectively, of loans were purchased pursuant to this program. The Company
continues to market this program to other regional and national banking
institutions. The Company is also negotiating with other financial institutions
regarding their participation in the program.
Leasing Activities. The Company through its subsidiary, ABL, originates
Equipment Leases to corporations, partnerships, other entities and sole
proprietors on various types of business equipment including, but not limited
to, computer equipment, phone systems, copiers, construction equipment and
medical equipment. The Company generally does not target credit impaired
borrowers. All such lessees must meet certain specified financial and credit
criteria. The Company originates leases throughout the United States with
primary emphasis on the eastern portion of the United States. In addition, the
Company recently hired a leasing officer with over 20 years of experience in
small ticket leasing to expand this area of the Company's leasing business.
Generally, the Company's Equipment Leases are of two types: (i) finance
leases which have a term of twelve to sixty months and provide a purchase option
exercisable by the lessee at $1.00 at the termination of the lease and (ii) fair
market value or true leases which have a similar term but provide a purchase
option exercisable by the lessee at the fair market value of the equipment at
the termination of the lease. The Company's Equipment Leases generally range in
size from $3,000 to $100,000, with an average lease size of approximately
$12,000 at September 30, 1996. The Company's leases generally have maximum terms
of five years. The weighted average interest rate received on such leases for
the three months ended September 30, 1996 was 15.53%. Generally, the interest
rates and other terms and conditions of the Company's Equipment Leases are
competitive with the leasing terms of other leasing companies in its market
area.
Currently, all leases originated are generally held in the Company's
lease portfolio. At September 30, 1996, the Company's lease portfolio totaled
$6.0 million. All leases are serviced by ABL. It is anticipated that in the
future, ABL may develop relationships with third party purchasers of leases and
will sell a portion of the leases it originates to such third parties. The sale
of leases to third party purchasers may or may not require ABL to retain the
servicing rights to such leases. The Company may, in the future, attempt to
securitize its lease portfolio provided financial and economic conditions
warrant such activity.
Marketing Strategy
The Company concentrates its marketing efforts on two potential
customer groups, one of which, based on historical profiles, displays a
pre-disposition for being customers of the Company's loan and lease products and
the other being credit impaired borrowers that satisfy the Company's
underwriting guidelines.
49
<PAGE>
The Company's marketing efforts for Business Purpose Loans focus on the
Company's niche market of selected small businesses located in the Company's
market area which generally includes the mid-atlantic region of the United
States. The Company targets businesses which it believes would qualify for loans
from traditional lending sources but would elect to utilize the Company's
products and services. The Company's experience has indicated that these
borrowers are attracted to the Company as a result of its marketing efforts, the
personalized service provided by the Company's staff of highly trained lending
officers and the timely response to loan applications. Historically, such
customers have been willing to pay the Company's origination fees and interest
rates which are generally higher than those charged by traditional lending
sources.
The Company markets Business Purpose Loans through various forms of
advertising, and a direct sales force. Advertising media utilized includes large
direct mail campaigns and newspaper and radio advertising. The Company's
commissioned sales staff, which consists of full-time highly trained sales
persons, are responsible for converting advertising leads into loan
applications. The Company utilizes a proprietary training program involving
extensive and on-going training of its lending officers. The Company's sales
staff utilizes significant person-to-person contact to convert direct mail
advertising into loan applications and maintains contact with the borrower
throughout the application process.
Through its subsidiary, Upland, the Company markets Home Equity Loans
through direct mail campaigns as well as television, radio and newspaper
advertisements. The Company's television advertising campaign initiated in
September 1996 was designed to complement the other forms of advertising
utilized by the Company. The Company's integrated approach to media advertising
is intended to maximize the effect of the Company's advertising campaigns.
Upland's marketing efforts are currently concentrated in the
mid-atlantic states; however, the Company expects to begin originating loans in
Georgia, North Carolina, Florida and Connecticut in calendar 1997 and may open
sales offices in such states in the future with loan processing and collection
procedures performed at the Company's main office. Upland also utilizes the Bank
Alliance Program as an additional source of loans. See "-- Loan and Leasing
Activities -- Home Equity Lending."
The Company, through ABL, markets its Equipment Leases throughout the
United States with particular emphasis on the eastern portion of the United
States. The Company's marketing efforts in the leasing area are focused on the
Company's niche market of distributors of small to medium-sized office,
industrial and medical equipment. ABL primarily obtains its equipment leasing
customers through equipment manufacturers, brokers and vendors with whom it has
a relationship and through a direct sales force. The Company does not target any
particular industry or trade group and avoids the concentration of leases in one
particular industry group. The Company believes that its leasing activities will
enhance its cross-selling opportunities with its existing Business Purpose Loan
customers.
50
<PAGE>
Loan and Lease Servicing
Generally, the Company services the loans and leases it maintains in
its portfolio or which are securitized by the Company in accordance with its
established servicing procedures. Servicing includes collecting and transmitting
payments to investors, accounting for principal and interest, collections and
foreclosure activities, and disposing of real estate owned. At September 30,
1996, the Company's total servicing portfolio included 2,351 loans and leases
with an aggregate outstanding balance of $79.1 million. The Company generally
receives servicing fees of 0.50% to 0.75% per annum based upon the outstanding
balance of loans serviced and the Company's responsibilities related to
collections and accounting for such loans.
In servicing its loans and leases, the Company typically sends an
invoice to borrowers on a monthly basis advising them of the required payment
and its due date. The Company initiates the collection process one day after a
borrower fails to make a monthly payment. When a loan or lease becomes
forty-five to sixty days delinquent, it is transferred to the Company's work-out
department. The work-out department attempts to reinstate a delinquent loan or
lease, seek a payoff, or occasionally enter into a modification agreement with
the borrower to avoid foreclosure. All proposed work-out arrangements are
evaluated on a case-by-case basis, based upon the borrower's past credit
history, current financial status, cooperativeness, future prospects and the
reasons for the delinquency. If the loan or lease becomes delinquent 61 days or
more and a satisfactory work-out arrangement with the borrower is not achieved
or borrower declares bankruptcy, the matter is immediately referred to counsel
for collection. Legal action may be initiated prior to a loan or lease becoming
delinquent over 60 days if management determines that the circumstances warrant
such action.
The Company believes that the low level of delinquencies experienced by
the Company during prior periods is due, in large part, to the Company's
maintenance of a high level of borrower contact and a servicing relationship
appropriate to the Company's borrowing base.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until it is sold. When property
is acquired or expected to be acquired by foreclosure or deed in lieu of
foreclosure, it is recorded at the lower of cost or estimated fair value, less
estimated cost of disposition. After acquisition, all costs incurred in
maintaining the property are expensed.
The Company's ability to foreclose on certain properties may be
affected by state and federal environmental laws which impose liability on the
property owner for the costs related to the investigation and clean up of
hazardous or toxic substances or chemicals released on the property. Although
the Company's loans are primarily secured by residential real estate, there is a
risk that the Company could be required to investigate or clean up an
environmentally damaged property which is discovered after acquisition by the
Company. To date, the Company has not been required to perform any investigation
or clean up activities nor has it been subject to any environmental claims.
See "Risk Factors -- Environmental Concerns."
51
<PAGE>
The Company in its capacity as the servicer of securitized loans is
obligated to advance funds (an "Advance") in respect of each monthly loan
interest payment that accrued during the collection period for the loans but was
not received, unless the Company determines that such Advances will not be
recoverable from subsequent collections in respect to the related loans.
Underwriting Procedures and Practices
Summarized below are certain of the policies and practices which are
followed in connection with the origination of Business Purpose Loans and Home
Equity Loans and the origination of Equipment Leases. It should be noted that
such policies and practices will be altered, amended and supplemented as
conditions warrant. The Company reserves the right to make changes in its
day-to-day practices and policies in its sole discretion.
The Company's loan underwriting standards are applied to evaluate
prospective borrowers' credit standing and repayment ability and the value and
adequacy of the mortgaged property as collateral. Initially, the borrower is
required to fill out a detailed application providing pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower is required to provide information concerning assets, liabilities,
income, credit, employment history and other demographic and personal
information. If the application demonstrates the borrower's ability to repay the
debt as well as sufficient income and equity, loan processing personnel obtain
and review an independent credit bureau report on the credit history of the
borrower and verification of the borrower's income by obtaining and reviewing
one or more of the borrower's pay stubs, income tax returns, checking account
statements, W-2 tax forms or verification of business or employment forms. Once
all applicable employment, credit and property information is obtained, a
determination is made as to whether sufficient unencumbered equity in the
property exists and whether the prospective borrower has sufficient monthly
income available to meet the borrower's monthly obligations.
Generally, Business Purpose Loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the independent
appraised fair market value of the real estate collateral securing the loan) on
the properties collateralizing the loans of no greater than seventy-five (75%)
percent. Business Purpose Loan collateralized by commercial real estate must
generally have an overall loan-to-value ratio (based solely on the independent
appraised fair market value of the real estate collateral securing the loan) of
no greater than sixty (60%) percent. In addition, in substantially all
instances, the Company also receives additional collateral in the form of, among
other things, pledges of securities, assignments of contract rights, life
insurance and lease payments and liens on business equipment and other business
assets, as available. The Business Purpose Loans originated by the Company had
an average loan-to-value ratio of 60.38% and 58.93% for the three months ended
September 30, 1996 and the year ended June 30, 1996, respectively.
The maximum required loan-to-value ratio for Home Equity Loans is 90%.
The Home Equity Loans originated by the Company had an average loan-to-value
ratio of 68.34% and 68.82% for the three months ended September 30, 1996 and the
year ended June 30, 1996, respectively. Occasionally, exceptions to these
maximum loan-to-value ratios are made if other collateral is available or if
there are other compensating factors. Title insurance is generally obtained in
connection with all real estate secured loans.
52
<PAGE>
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraisal is
completed by an independent qualified appraiser and generally includes pictures
of comparable properties and pictures of the subject property's interior. With
respect to Home Equity Loans, the appraisal is completed by a qualified
appraiser on a Federal National Mortgage Association ("FNMA") form.
In the leasing area, while a security interest in and to the equipment
is retained in connection with the origination of the lease, the lease is not
dependent on the value of the equipment as the principal means of securing the
lease. The underwriting standards applicable to leases place primary emphasis on
the borrower's financial strength and its credit history. The Company's lease
underwriting criteria includes a review of the subject company's credit reports,
financial statements, bank references and trade references, as well as, the
credit history and financial statements of the principals of the borrower. The
Company typically obtains personal guarantees on its Equipment Leases.
Securitizations
The sale of the Company's Business Purpose Loans and Home Equity Loans
through securitizations is an important objective of the Company. In furtherance
of this objective, since 1995 the Company has sold in the secondary market
senior interests in four pools of loans it securitized. The four pools of loans
securitized were comprised of $47.1 million of Business Purpose Loans and $26.0
million of Home Equity Loans.
Generally, a securitization involves the transfer by the Company of
receivables representing a series of loans to a single purpose trust in exchange
for certificates or securities issued by the trust. The certificates represent
an undivided ownership interest in the loans transferred to the trust. The
certificates consist of a class of senior certificates and the excess spread and
may also include a class of subordinated certificates. In connection with
securitizations, the senior certificates are sold to investors and the
subordinate certificates, if any, and the excess spread are typically retained
by the Company. As a result of the sale of the senior certificates, the Company
receives a cash payment representing a substantial portion of the principal
balance of the loans held by the trust. The senior certificates entitle the
holder to be repaid the principal of its purchase price and the certificates
bear interest at a stated rate of interest. The stated rate of interest is
typically substantially less than the interest rate required to be paid by the
borrowers with respect to the underlying loans. As a consequence, the Company is
able to receive cash for a portion of its portfolio and to pay the principal and
interest required by the senior certificates with the cash flows from the
underlying loans owned by the trust. However, since the interest in the loans
held by the Company (the subordinate certificate and the excess spread) is
subordinate to the senior certificate, the Company retains a portion of the risk
that the full value of the underlying loans will not be realized. Additionally,
the holder of the senior certificates will receive certain additional payments
on account of principal in order to reduce the balance of the senior
certificates in proportion to the subordinated amount held by the Company. The
additional payments of principal are designed to increase the senior certificate
holder's protection against loan losses. In the typical subordination structure,
the Company, as the holder of the excess spread will be entitled to receive all
of the remaining interest in the loans at the time of the termination of the
trust.
53
<PAGE>
The pooling and servicing agreements that govern the distribution of
cash flows from the loans included in the securitization trusts require the
overcollateralization of the senior certificates by using interest receipts on
the loans to reduce the outstanding principal balance of the senior certificates
to a pre-set percentage of the loans. The overcollateralization percentage may
be reduced over time according to the delinquency and loss experience of the
loans. The Company's interest in each overcollateralized amount is reflected in
the Company's financial statements as a portion of the excess spread. To the
extent that a loss is realized on the loans, losses will be paid first out of
the excess spread received and ultimately out of the overcollateralization
amount available to the excess spread, and the subordinated certificates, if
available. If losses exceed the Company's projected amount, the excess losses
will result in a reduction in the value of the excess spread held by the
Company. See "Risk Factors -- Dependence upon Securitizations and Fluctuations
in Operating Results."
The Company may be required either to repurchase or to replace loans
which do not conform to the representations and warranties made by the Company
in the pooling and servicing agreements entered into when the loans are pooled
and sold through securitizations. As of September 30, 1996, the Company had not
been required to repurchase or replace any such loans.
The Company generally retains the servicing rights with respect to all
loans securitized. Such loans are serviced by ABC, a subsidiary of the Company.
See "-- Loan and Lease Servicing."
The Company's securitizations are often structured to provide for a
portion of the loans included in the trust to be funded with loans originated by
the Company during a period subsequent to the securitization. The amount of the
aggregate trust value to be funded in the future is referred to as the
"prefunded account." The loans to be included in such account must be
substantially similar in terms of collateral, size, term, interest rate,
geographic distribution and loan-to-value ratio as the loans initially
transferred to the trust. To the extent the Company fails to originate a
sufficient number of qualifying loans for the prefunding account within the
specified time period, the Company's earnings during the quarter in which the
funding was to occur would be reduced.
The securitization of loans during the three months ended September 30,
1996 and the years ended June 30, 1996 and 1995 generated gain on sale of loans
of $4.4 million, $8.9 million and $1.4 million, respectively. Such gains
resulted in the Company's record levels of revenue and net income during such
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Subject to market conditions, the Company anticipates that it will
continue to build portfolios of Business Purpose Loans and Home Equity Loans and
enter into securitizations of these portfolios. The Company may also consider
the securitization of Equipment Leases in the future. The Company believes that
a securitization program provides a number of benefits by allowing the Company
to diversify its funding base, provide liquidity and lower its cost of funds.
54
<PAGE>
Competition
The Company competes for Business Purpose Loans against many other
finance companies and financial institutions. Although many other entities
originate Business Purpose Loans, the Company has focused its lending efforts on
its niche market of businesses which may qualify for loans from traditional
lending sources but who the Company believes are attracted to the Company's
products as a result of the Company's marketing efforts and responsive customer
service and rapid processing and closing periods.
The Company has significant competition for Home Equity Loans. Through
Upland, the Company competes with banks, thrift institutions and other financial
companies, which may have greater resources and name recognition. The Company
attempts to mitigate these factors through a highly trained staff of
professionals, rapid response to prospective borrowers' requests and maintaining
an average loan processing time of approximately seven days. In addition, the
Company recently implemented the Bank Alliance Program in order to generate
additional loan volume. See "-- Lending and Leasing Activities -- Home Equity
Lending."
The Company has significant competition for Equipment Leases. Through
ABL, the Company competes with banks, leasing and financial companies with
greater resources, capitalization and name recognition throughout its market
area. It is the intention of the Company to capitalize on its vendor
relationships, cross-selling opportunities, and the efforts of its direct sales
force to combat these competitive factors. See "Risk Factors -- Increased
Competition Could Adversely Affect Results of Operations."
Regulation
General. The home equity lending business is highly regulated by both
federal and state laws. All Home Equity Loans must meet the requirements of
among other statutes, the Federal Truth in Lending Act ("TILA"), the Federal
Real Estate Settlement Procedures Act ("RESPA"), the Equal Credit Opportunity
Act of 1974, as amended ("ECOA") and their accompanying Regulations Z, X and B,
respectively.
Truth in Lending. The TILA and Regulation Z promulgated thereunder
contain certain disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loans and credit transactions in order to give them the ability to compare
credit terms. TILA also guarantees consumers a three day right to cancel certain
transactions and imposes specific loan feature restrictions on loans of the type
originated by Upland. Management of the Company believes that it is in
compliance with TILA in all material respects. If the Company were found not to
be in compliance with TILA, aggrieved borrowers could have the right to rescind
their loans and to demand, among other things, the return of finance charges and
fees paid to the Company.
Other Lending Laws. The Company is also required to comply with the
ECOA, which prohibits creditors from discriminating against applicants on
certain prohibited bases, including race, color, religion, national origin, sex,
age or marital status. Regulation B promulgated under ECOA
55
<PAGE>
restricts creditors from obtaining certain types of information from loan
applicants. Among other things, it also requires certain disclosures by the
lender regarding consumer rights and requires lenders to advise applicants of
the reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for loans increases as a result of information
obtained from a consumer credit agency, another statute, the Fair Credit
Reporting Act of 1970, as amended, requires lenders to supply the applicant with
the name and address of the reporting agency. In addition, Upland is subject to
the Fair Housing Act and regulations thereunder, which broadly prohibit certain
discriminatory practices in connection with the Company's home equity lending
business. Upland is also subject to RESPA.
RESPA imposes, among other things, limits on the amount of funds a
borrower can be required to deposit with the Company in any escrow account for
the payment of taxes, insurance premiums or other charges.
In addition, the Company is subject to various other federal and state
laws, rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with such
laws, as well as with the laws described above, may result in civil and criminal
liability.
Upland is licensed and regulated by the departments of banking or
similar entities in the various states in which it is licensed. Upland maintains
compliance with the various federal and state laws through its in-house and
outside counsel which continually review Upland's documentation and procedures
and monitor and apprise Upland on various changes in the laws. See "Risk Factors
- -- Regulatory Restrictions and Licensing Requirements."
Employees
At September 30, 1996, the Company employed 145 people on a full time
basis and two people on a part-time basis. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.
Property
Except for real estate acquired in foreclosure as part of the Company's
normal course of business, neither ABFS nor its subsidiaries presently hold
title to any real estate for operating purposes. The interests which the Company
presently holds in real estate are in the form of mortgages against parcels of
real estate owned by HAC's or ABC's borrowers or affiliates of HAC's or ABC's
borrowers and real estate acquired through foreclosure.
The Company presently leases office space at 111 Presidential
Boulevard, Bala Cynwyd, Pennsylvania, just outside the city limits of
Philadelphia. The Company is currently leasing its office space under a five
year lease with a current year annual rental of approximately $431,000. Such
lease contains a five-year renewal option at an increased annual rental amount.
The Company is currently negotiating with its landlord to lease additional
office space in the building where its executive offices
56
<PAGE>
are located. In addition, the Company leases an executive suite in Boca Raton,
Florida, expiring in February 1997.
The Company leases its New Jersey office located in Cherry Hill, New
Jersey.
Legal Proceedings
On or about February 17, 1995, ABL was served with a Writ of Summons
captioned Montgomery Leasing Company v. American Business Leasing, Inc.,
American Business Credit, Inc. and American Business Financial Services, Inc.,
Court of Common Pleas of Montgomery County (Pennsylvania), No. 95-03554. In
connection therewith, on or about May 18, 1995, ABL was served a complaint
captioned Montgomery Leasing Company v. American Business Leasing, American
Business Credit, American Business Financial Services, Inc., Donna Wesemann and
Christine Adams, Court of Common Pleas of Montgomery County (Pennsylvania) No.
95-07219. The complaint alleges that the named defendants acted in a conspiracy
to damage the plaintiff; misappropriated assets of the plaintiff; interfered
with the plaintiff's contractual relationships and with plaintiff's prospective
business opportunities.
Additionally, on or about August 24, 1995, ABL filed a complaint
against Montgomery Leasing Company, the above named plaintiff, Uriel and Arlene
Yogev, shareholders and officers of Montgomery Leasing Company, and Mark
Halpern, Georgeann Fusco and Furnan & Halpern, P.C. attorneys for Montgomery
Leasing Company. The complaint is captioned American Business Leasing v.
Montgomery Leasing Company, Uriel Yogev, Arlene Yogev, Furman & Halpern, P.C.,
Mark Halpern and Georgeann Fusco, Court of Common Pleas of Montgomery County
(Pennsylvania). The ABL complaint seeks damages from the defendants based on
abuse of process as a result of their malicious filing of their above referenced
complaint and conspiracy to drive ABL out of business. The complaint also seeks
damages from Montgomery Leasing Company and the Yogevs for interfering with
contractual relationships and prospective business opportunities and defamation
based on statements made by the Yogev's and Montgomery Leasing Company as to
ABL.
A settlement agreement has been entered into between the parties with
respect to the suits described above. Mutual releases and payment of the agreed
upon settlement amount are being held in escrow pending completion of all of the
conditions of the settlement agreement on the part of the plaintiffs. The
Company has complied with all of its obligations under the settlement agreement.
The Company is involved as plaintiff or defendant in various other
legal proceedings arising in the normal course of its business. While the
ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's financial position,
results of operations or liquidity.
57
<PAGE>
MANAGEMENT
General
The present management structure of the Company is as follows: Anthony
J. Santilli, Jr. is Chairman, President, Chief Executive Officer and Chief
Operating Officer, Treasurer and a Director of the Company. Beverly Santilli is
President of ABC and an Executive Vice President and Secretary of ABFS. Jeffrey
M. Ruben is Senior Vice President and General Counsel of the Company and is
responsible for compliance and other legal matters. David M. Levin, CPA is the
Senior Vice President - Finance and Chief Financial Officer and is responsible
for the Company's accounting functions. Harold Sussman, Michael DeLuca, Richard
Kaufman and Leonard Becker are directors of the Company but take no part in the
day-to-day operating activities of the Company. All directors and executive
officers of the Company hold office during the term for which they are elected
and until their successors are elected and qualified.
The following table sets forth information regarding the Company's
Board of Directors and the executive officers:
<TABLE>
<CAPTION>
Name Age(1) Position
---- ----- --------
<S> <C> <C>
Anthony J. Santilli, Jr. 54 Chairman, President, Chief
Executive Officer, Chief
Operating Officer, Treasurer
and Director
Leonard Becker 73 Director
Michael DeLuca 65 Director
Richard Kaufman 54 Director
Harold E. Sussman 71 Director
Beverly Santilli 37 Executive Vice President
and Secretary of ABFS and
President of ABC
Jeffrey M. Rubin 33 Senior Vice President and
General Counsel of ABFS
David M. Levin 52 Senior Vice President -
Finance and Chief Financial
Officer
</TABLE>
- -------------------------
(1) As of October 31, 1996
Directors
The Company's Amended and Restated Certificate of Incorporation fixes
the number of Directors to between one and fifteen as determined by resolution
of the Board of Directors. The Board of Directors of the Company is currently
comprised of five persons. Prior to the closing of the Public Offering, all
directors were elected each year for a one-year term and until their successors
were elected and qualified.
The Company's Amended and Restated Certificate of Incorporation
provides that the Board shall be divided into three classes following the
closing of a public offering of the Company's Common Stock.
Following the close of the Public Offering, the initial directors of
Class One will serve until the first Annual Meeting of Stockholders following
the Public Offering; at such first Annual Meeting of Stockholders, the directors
of Class One shall be elected for a term of three years, and after expiration of
such term, shall thereafter be elected every three years for three year terms.
The initial directors of Class Two shall serve until the second Annual Meeting
of Stockholders following the Public Offering. At the second Annual Meeting of
Stockholders following the Public Offering, the directors of Class Two shall be
elected for a term of three years and, after the expiration of such term, shall
thereafter be elected every three years for three year terms. The initial
directors of Class Three shall serve until the third Annual Meeting of
Stockholders after the Public Offering. At the third Annual Meeting of
Stockholders following the Public Offering, the directors of Class Three shall
be elected for a term of three years and after the expiration of such term,
shall thereafter be elected every three years for three year terms. Upon the
consummation of the Public Offering the Board shall determine the composition of
each class.
58
<PAGE>
The following is a description of the business experience of the
Company's Board of Directors.
Anthony J. Santilli, Jr. is the Chairman, President, Chief Executive
Officer, Chief Operating Officer, Treasurer and a Director of the Company and is
an executive officer of its subsidiaries. He has held the positions with the
Company since early 1993 when the Company became the parent company of ABC and
the positions with the subsidiaries since the formation of ABC in June 1988.
Prior to the founding of ABC in 1988, Mr. Santilli was Vice President
and Department Head of the Philadelphia Savings Fund Society ("PSFS"). As such,
Mr. Santilli was responsible for PSFS' commercial relationships with small and
middle market business customers. Mr. Santilli also served as the secretary of
PSFS' Asset/Liability Committee and Policy Committee from May 1983 to June 1985
and June 1986 to June 1987, respectively.
Leonard Becker is a former 50% owner and officer of the SBIC of the
Eastern States, Inc., a federally licensed small business corporation which made
medium term loans to small business concerns. For the last 30 years, Mr. Becker
has been heavily involved in the investment in and management of real estate;
and, has been involved in the ownership of numerous shopping centers, office
buildings and apartments. Mr. Becker formerly served as a Director for Eagle
National Bank and Cabot Medical Corp.
Michael DeLuca was President, Chairman of the Board, Chief Executive
Officer and a former owner of Bradford-White Corporation, a manufacturer of
plumbing products for a period of approximately thirty years. Presently, Mr.
DeLuca serves as a Director of BWC-West, Inc., Bradford-White International and
is Chief Executive Officer and a Director of Lux Products Corporation.
Richard Kaufman has been self employed since 1982 and involved in
making and managing investments for his own benefit. From 1976 to 1982, Mr.
Kaufman was President and Chief Operating Officer of Morlan International, Inc.,
a cemetery and financial services conglomerate. From 1970 to 1976, Mr. Kaufman
served as a Director and Vice President-Real Estate and Human Services Division
of Texas International, Inc., an oil and gas conglomerate.
59
<PAGE>
Harold E. Sussman is currently a principal in the real estate firm of
Lanard & Axilbund, Inc., a major commercial and industrial real estate brokerage
and management firm in the Philadelphia area, with which he has been associated
since 1972.
Committees of the Board of Directors
The Board of Directors of the Company held four meetings during the
year ended June 30, 1996. During fiscal 1996, no director attended fewer than
75% of the aggregate of the total number of Board meetings and the total number
of meetings held by committees of the Board of Directors on which he served.
The following is a description of each of the committees of the Board of
Directors of the Company.
Audit Committee. The members of the Audit Committee are Messrs. DeLuca,
Sussman and Becker. The Audit Committee reviews the Company's audited financial
statements and makes recommendations to the Board concerning the Company's
accounting practices and policies and the selection of independent accountants.
The Audit Committee met twice during the year ended June 30, 1996.
Compensation Committee. The members of the Compensation Committee are
Messrs. DeLuca, Sussman and Kaufman. The Compensation Committee is responsible
for establishing salaries, bonuses and other compensation for the executive
officers and administers the Company's stock option plans. The Compensation
Committee met once during the year ended June 30, 1996.
Finance Committee. The members of the Finance Committee are Messrs.
Santilli, Becker, Kaufman and DeLuca. The Finance Committee monitors and makes
suggestions as to the interest rate paid by the Company on its debt instruments,
develops guidelines and sets policy relating to the amount and maturities of
investments to be accepted by the Company and performs cash management
functions. The Finance Committee met four times during the year ended June 30,
1996.
Executive Committee. The members of the Executive Committee are Messrs.
Santilli, Kaufman and Becker. The Executive Committee is empowered by the Board
to act in its stead between meetings of the Board. The Executive Committee met
four times during the year ended June 30, 1996.
Executive Officers who are not also Directors
The following is a description of the business experience of each
executive officer who is not also a director.
Beverly Santilli, age 37, is Executive Vice President and Secretary of
ABFS and President of ABC. Mrs. Santilli is responsible for all sales, marketing
and human resources for ABC and for the day-to-day operation of ABC. Prior to
joining ABC and from September 1984 to November 1987, Mrs. Santilli was
affiliated with the Philadelphia Savings Fund Society initially as an Account
Executive and later as a Commercial Lending Officer with such institution's
Private Banking Group. Mrs. Santilli is the wife of Anthony J. Santilli, Jr.
60
<PAGE>
Jeffrey M. Ruben, age 33, is Senior Vice President and General Counsel
of ABFS and its subsidiaries. Mr. Ruben is responsible for the Company's legal
and regulatory compliance matters. From June 1990 until he joined the Company in
April 1992, Mr. Ruben was an attorney with the law firm of Klehr, Harrison,
Harvey, Branzburg & Ellers in Philadelphia, Pennsylvania. From December 1987
until June 1990, Mr. Ruben was employed as a credit analyst with the CIT Group
Equipment Financing, Inc. From July 1985 until December 1987, Mr. Ruben was a
Portfolio Administrator with LFC Financial Corp. in Radnor, Pennsylvania. Mr.
Ruben is a member of the Pennsylvania and New Jersey Bar Associations. Mr. Ruben
holds both a New Jersey Mortgage Banker License and a New Jersey Secondary
Mortgage Banker License.
David M. Levin, age 52, is Senior Vice President - Finance of the
Company and its subsidiaries and Chief Financial Officer of the Company. He has
held these positions since May 1995 and October 1995, respectively. Prior to
joining the Company, Mr. Levin was associated with Fishbein & Company, P.C.,
Certified Public Accountants (previous auditors for the Company), as a staff
member from 1983 to 1988 and as a shareholder from 1989 to 1995. Mr. Levin is a
Certified Public Accountant.
Compensation of Directors
Non-employee directors of the Company receive an annual stipend of
$5,000 and a monthly stipend of $1,000. No director may receive more than
$17,000 per year. Mr. Santilli, the only director who is also an officer of the
Company, does not receive any separate fee for acting as a director.
The Company adopted a Non-Employee Director Stock Option Plan (the
"Non-Employee Director Plan") in order to attract, retain and motivate
non-employee directors and to encourage such individuals to increase their
ownership interest in the Company. The Non-Employee Director Plan was adopted by
the Board of Directors on September 12, 1995 and became effective upon its
ratification by the stockholders at the Annual Meeting held on May 31, 1996.
Such plan provides for the award of options to purchase up to 135,000 shares of
the Company's Common Stock from the Company's authorized but unissued shares.
The Non-Employee Director Plan is administered by the Board of
Directors of the Company who shall have the exclusive right to determine the
amount and conditions applicable to the options issued pursuant to such plan.
Options granted under the Non-Employee Director Plan are not incentive
stock options as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). The exercise price of the stock options granted under the
Non-Employee Director Plan shall be equal to the fair market value of the
Company's Common Stock on the date of grant. Payment of the exercise price for
options granted under the Non-Employee Director Plan may be made in cash, shares
of Common Stock, or a combination of both. All options granted pursuant to the
Non-Employee Plan are exercisable in accordance with a vesting schedule
determined at the time of issuance of the option and may not be exercised more
than ten years from the date of the grant. If a non-employee director ceases to
be a director of the Company within three years of the option grant, the Company
has the right to repurchase shares received pursuant to the
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<PAGE>
exercise of options granted under the Non-Employee Director Plan for a period of
six months from the date the optionee ceases to be a director of the Company.
All unexercised options terminate three months following the date on which an
optionee ceases to be a director of the Company but in no event shall an option
be exercisable after ten years from the date of grant thereof.
In connection with the adoption of such plan, each non-employee
director of the Company received an option to purchase 22,500 shares of Common
Stock at an exercise price of $5.00 per share. Each new outside director elected
subsequent to the adoption of the plan would also receive an option to purchase
22,500 shares of Common Stock, subject to availability, at the exercise price on
the date of grant. On October 22, 1996, each non-employee director received an
option to purchase 5,000 shares of the Company's Common Stock. Such options had
a weighted average exercise price of $7.32 per share. As of the date hereof,
25,000 shares remain available for future issuances under this plan.
Indemnification of Directors and Officers
The Company's Amended and Restated Certificate of Incorporation and
Bylaws provide that to the fullest extent permitted by Delaware law, directors
of the Company shall not be personally liable to the Corporation or stockholders
of the Company for monetary damages for breach of fiduciary duty as a director.
ABFS's Amended and Restated Certificate of Incorporation and ByLaws also
provide that, if Delaware law is hereafter amended to authorize the further
elimination or limitation of the liability of the directors of ABFS, then the
liability of such directors shall be eliminated or limited to the fullest extent
permitted by applicable law. The effect of these provisions of the Company's
Amended and Restated Certificate of Incorporation and Bylaws is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior), except in certain
situations described in Delaware General Corporation Law. This provision does
not limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or recision in the event of a breach of
a director's duty of care.
The Amended and Restated Certificate of Incorporation and the Amended
and Restated Bylaws of ABFS provide that the Company shall, to the full extent
permitted by the laws of the State of Delaware, as amended from time to time,
indemnify all persons whom they may indemnify pursuant thereto, including
advancement of expenses. The Bylaws of ABFS also provide that the Company may
obtain insurance on behalf of such persons, which the Company currently
maintains.
Executive Compensation
ABFS has no direct salaried employees. Each of the executive officers
of ABFS is an executive officer of the Company's principal operating subsidiary,
ABC, and is a salaried employee of such entity.
62
<PAGE>
The following table sets forth information regarding compensation paid
by ABFS and its subsidiaries to the Chief Executive Officer and each other
executive officer who made in excess of $100,000 during fiscal 1996 (the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------------------------------ --------------------------------------
Restricted Underlying
Name and Fiscal Other Annual Stock Options/ All Other
Principal Position Year Salary Bonus Compensation(2) Award(s) SARS (#) Compensation
- ------------------------------------ ----- --------- -------- --------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 1996 $237,500 $300,000(1) -- -- 22,500(3) --
Chairman, President, Chief Executive 1995 191,667 -- -- -- -- --
Officer, Chief Operating Officer, 1994 175,000 -- -- -- -- --
Treasurer and Director of ABFS
Beverly Santilli 1996 $120,000 $ 65,000 -- -- -- --
President, ABC and Executive Vice 1995 86,892 -- -- -- -- --
President and Secretary of ABFS 1994 80,163 -- -- -- -- --
Jeffrey M. Ruben 1996 $ 96,125 $ 50,000 -- -- -- --
Senior Vice President and 1995 80,353 -- -- -- 7,500(4) --
General Counsel of ABFS 1994 75,228 -- -- -- -- --
David M. Levin 1996 $ 85,000 $ 20,000 -- -- -- --
Senior Vice President - Finance and 1995(5) -- -- -- -- -- --
Chief Financial Officer of ABFS 1994(5) -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) This represents Mr. Santilli's yearly bonus of $250,000 plus a one-time
bonus of $50,000 paid in October 1995.
(2) Excludes perquisites and other personal benefits that do not exceed
$50,000 or 10% of each officer's total salary and bonus.
(3) Represents an option to purchase 22,500 shares of Common Stock granted to
Mr. Santilli at an exercise price of $5.00 per share.
(4) Represents an option to purchase 7,500 shares of Common Stock granted to
Mr. Ruben at an exercise price of $2.67 per share.
(5) No disclosure of salary information is included for Mr. Levin for fiscal
1995 and 1994 as he was not an executive officer at such time.
During fiscal 1996, the Company paid cash bonuses to certain officers
and employees based upon the Company's achievement of certain established
performance targets. Bonuses paid for fiscal 1996 to the Named Officers are
included in the Summary Compensation Table above.
During the first quarter of fiscal 1997, the Board of Directors adopted
a Management Incentive Plan for the benefit of certain officers of the Company
and its subsidiaries, including certain of the Company's executive officers. The
plan is intended to motivate management toward the achievement of the Company's
business goals and objectives by rewarding management in the form of an annual
cash bonus if certain established Company and individual goals are attained.
Officers eligible to participate in the plan include selected officers at the
level of Vice President and above.
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<PAGE>
Bonuses are determined based upon the achievement of qualitative and
quantitative individual, departmental and Company goals pursuant to an
established formula under which the various factors are weighted based upon each
individual's position, years of service and contribution to the overall
performance of the Company or a subsidiary thereof. The maximum annual bonus
awarded can range from 35% to 225% of an individual's annual salary. For
example, if 80% of an individual's goal is met, a bonus of 50% of the
individual's salary is payable under the plan. If 100% of the individual's goal
is reached, a bonus equal to 100% of the individual's salary is payable under
the plan. No bonuses will be paid in any year where the Company fails to meet at
least 80% of its performance goals. Bonuses will be prorated to the extent an
eligible participant has not been employed by the Company for a full 12 month
period.
In 1993, the Company adopted, and the stockholders approved, the
Company's Stock Option Plan (the "Plan"). The purpose of the Plan is to attract
and retain qualified management officials. Pursuant to the terms of the Plan,
375,000 shares (as adjusted for the Company's stock split) of Common Stock were
reserved for issuance upon the exercise of options granted under the Plan. Of
such amount, options to purchase 78,988 shares of the Company's Common Stock
were still remaining to be granted as of the date hereof. Subject to the
approval of the Company's stockholders, during fiscal 1997 the Company amended
its Stock Option Plan to increase the amount of authorized but unissued shares
of Common Stock available for issuance thereunder by 85,000 shares. In
connection with the Public Offering, the Company intends to grant incentive
stock options to purchase approximately 150,500 shares of Common Stock to
certain of its officers. Of this amount, options to purchase 12,500 shares of
Common Stock are intended to be awarded to each of Messrs. Ruben and Levin and
Mrs. Santilli, respectively. Such options will vest at a rate of 20% per year
over a five year period with the first portion vesting on the first anniversary
of the date of grant and the exercise price per share will be the offering
price.
The Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has the discretion to interpret the
provisions of the Plan; to determine the officers to receive under the Plan; to
determine the type of awards to be made and the amount, size and terms of each
such award; to determine the time when awards shall be granted; and to make all
other determinations necessary or advisable for the administration of the Plan.
Options granted under the Plan may be incentive stock options intended
to qualify under Section 422 of the Code, or options not intended to so qualify.
The Plan requires the exercise price of all stock options to be at least equal
to the fair market value of the Common Stock on the date of the grant. In the
case of incentive stock options granted to a stockholder owning, directly or
indirectly, in excess of 10% of the Common Stock, the option exercise price must
be at least equal to 110% of the fair market value of the Common Stock on the
date of grant and such options may not be exercised more than five years from
the date of grant. Payment of the exercise price for options granted under the
Plan may be made in cash, shares of Common Stock, or a combination of both. All
options granted pursuant to the Plan are exercisable in accordance with a
vesting schedule which is set at the time of grant and, except as indicated
below, may not be exercised more than ten years from the date of the grant.
All unexercised options terminate three months following the date on
which an optionee's employment by the Company terminates, other than by reason
of disability or death. An exercisable option held by an optionee who dies or
who ceases to be employed by the Company because of disability may be exercised
by the employee or his representative within one year after the employee dies or
becomes disabled (but not later than the scheduled option termination date).
Options granted
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<PAGE>
pursuant to the Plan are not transferable except to the decedent's estate in
the event of death of the optionee.
The following table sets forth information regarding options exercised
by the Named Officers during fiscal 1996 and option values of options held by
such individuals at fiscal year end.
AGGREGATED OPTIONS/SAR EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/ SARs at Options/SARs at
Shares Acquired Value Fiscal Year End Fiscal Year End
Name on Exercise(#) Realized($) Exercisable/ Unexercisable Exercisable/ Unexercisable
- ------------------------------- -------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 225,012 0 22,500/0 $143,438/0(1)
Chairman, President, Chief
Executive Officer, Chief Operating
Officer, Treasurer and Director of
ABFS
Beverly Santilli 0 0 N/A N/A
President, ABC and Executive
Vice President Secretary of ABFS
Jeffrey M. Ruben 0 0 7,500/0 $ 65,288/0(2)
Senior Vice President and
General Counsel of ABFS
David M. Levin 0 0 N/A N/A
Senior Vice President - Finance
and Chief Financial Officer of
ABFS
</TABLE>
- --------------------------
(1) This represents the aggregate market value (market price of the Common
Stock less the exercise price) of the options granted based upon the
closing sales price per share of $11.375 on June 30, 1996. The exercise
price of the options held by Mr. Santilli is $5.00 per share.
(2) This represents the aggregate market value (market price of the Common
Stock less the exercise price) of the options granted based upon the
closing sales price per share of $11.375 on June 30, 1996. The exercise
price of the options held by Mr. Ruben is $2.67 per share.
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<PAGE>
The following table sets forth information regarding options to
purchase shares of Common Stock granted to the Named Officers during fiscal
1996. No stock appreciation rights ("SARs") were granted in fiscal 1996.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Potential Realized Value at
Number of % of Total Assumed Annual Rates of
Securities Options/SARs Stock Price Appreciation
Underlying granted to for Option Term
Options/SARs Employees in Exercise or Base ---------------------------
Name granted (#) Fiscal Year Price ($/sh) Expiration Date 5% ($) 10% ($)
- ---------------------------------------- ------------ ------------- ------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 22,500(1) 100% $5.00 October 1, 2005 $ 70,751 $ 179,296
Chairman, President, Chief Executive
Officer, Chief Operating Officer,
Treasurer and Director of ABFS
Beverly Santilli -- -- -- -- -- --
President of ABC and Executive Vice
President and Secretary of ABFS
Jeffrey M. Ruben -- -- -- -- -- --
Senior Vice President and
General Counsel of ABFS
David M. Levin -- -- -- -- -- --
Senior Vice President - Finance and Chief
Financial Officer of ABFS
</TABLE>
- ----------------
(1) Represents an option to purchase 22,500 shares of Common Stock. Subsequent
to the end of fiscal 1996, Mr. Santilli received an option to purchase
5,000 shares.
Employment Agreements
In , the Company entered into employment agreements with
each of Anthony J. Santilli, Jr. and Beverly Santilli pursuant to which they are
entitled to receive annual salaries of $300,000 and $200,000, respectively,
subject to increase but not decrease, on an annual basis based upon the Consumer
Price Index. The employment agreements are designed to assist the Company in
maintaining a stable and competent management team following completion of the
Public Offering. Certain of the terms of such agreements are described below.
Each agreement terminates upon: (a) the earlier of the employee's
death, permanent disability, termination of employment for cause, voluntary
resignation (provided that no voluntary resignation may occur within three years
of the closing date of the Public Offering absent a change in control) or
seventieth birthday or (b) the later of: (i) the fifth year anniversary of the
execution of the agreement; or (ii) five years from the date of notice to the
employee of the Company's intention to terminate the agreement.
Each employment agreement also provides for the cash payment to the
employee equal to a maximum of 299% of the last five years' average annual
compensation in the event of a change in control of the Company during the term
of this agreement to which the employee does not consent. For
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<PAGE>
purposes of the employment agreements, a "change in control" of the Company
shall include: (a) a change in the majority of the members of the Board of
Directors within a two year period, excluding a change due to the election of
additional Board members, with the consent of the Chairman of the Board of
Directors, or the retirement or death of any Board member, or (b) a person or
group of persons acting in concert (as defined in Section 13(a) of the Exchange
Act) acquires beneficial ownership, within the meaning of Rule 13(d)(3) of the
Rules and Regulations of the SEC promulgated pursuant to the Exchange Act, of a
number of voting shares of the Company which constitutes (i) 50% or more of the
Company's shares voted in the election of directors, or (ii) more than 25% of
the Company's outstanding voting shares. Based upon their current salaries, if
Mr. and Mrs. Santilli had been terminated as of September 30, 1996, under
circumstances entitling them to change in control payments as discussed above,
Mr. and Mrs. Santilli would have been entitled to receive a lump sum payment of
$734,000 and $292,000, respectively.
Each employment agreement also prohibits the employee from divulging
confidential information regarding the Company's business to any other party and
prohibits the employee, during the term of the agreement, from engaging in a
business or being employed by a competitor of the Company without the prior
written consent of the Company.
Each employment agreement provides for the payment of an annual cash
bonus of up to 225% of the employee's base salary to the extent certain Board
established targets are met. Each employment agreement also provides the
employees with certain other benefits including a company car, payment of
certain health and insurance disability payments and reimbursement for all
reasonable expenses incurred by the employee in the performance of his or her
duties.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company does not have any formal policy concerning the direct or
indirect pecuniary interest of any of its officers, directors, security holders
or affiliates in any investment to be acquired or disposed of by the Company or
in any transaction to which the Company is a party or has an interest. The
Company will not enter into any such transactions unless approved by a majority
of the entire Board of Directors, not including any interested director.
On September 29, 1995, the Company made a loan in the amount of
$600,032 to Anthony J. Santilli, Jr., its President and Chief Executive Officer.
The proceeds of the loan were used to exercise 225,012 stock options of the
Company at a price of $2.67 per share. The loan bears interest at the rate of
6.46% with interest due annually or at maturity and the principal due September
2005. The loan is secured by the stock purchased with the proceeds of the loan
as well as additional shares of Common Stock owned by Mr. Santilli such that the
value of the collateral is equal to twice the outstanding loan amount.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of November 29, 1996 by
(i) the directors of the Company, (ii) the Named Officers, (iii) each person
known by the Company to be the beneficial owners of five percent or more of the
Common Stock of the Company, and all directors and executive officers of the
Company as a group. The table also sets forth the number and percentage of the
outstanding shares projected to be beneficially owned by each stockholder after
the Public Offering, assuming the sale of 1,000,000 shares of Common Stock by
the Company.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1) Shares Beneficially Owned(1)
Name and Position Prior to Public Offering After Public Offering
- -------------------------------------------- --------------------------------- --------------------------------
Number Percent Number Percent
------------------ ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 904,544 (2)(3) 38.0% 917,044 (8) 27.3%
Chairman, President,
Chief Executive Officer, Chief Operating
Officer Treasurer and Director of ABFS
and Beverly Santilli, President of ABC
and Executive Vice President and
Secretary of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Leonard Becker, Director of ABFS 131,230 (4) 5.5 131,230 3.9
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Michael DeLuca, Director of ABFS 194,735 (4) 8.2 194,735 5.8
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 170,561 (4) 7.2 170,561 5.1
c/o Presidential Securities
3 Bala Plaza
East Suite 415
Bala Cynwyd, PA 19004
Harold Sussman, Director of ABFS 101,711 (4) 4.3 101,711 3.0
Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 7,500 (5) (6) 20,000 (9) (6)
Senior Vice President and General
Counsel of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned(1) Shares Beneficially Owned(1)
Name and Position Prior to Public Offering After Public Offering
- -------------------------------------------- --------------------------------- --------------------------------
Number Percent Number Percent
------------------ ------------- ----------------- -------------
<S> <C> <C> <C> <C>
David M. Levin
Senior Vice President - Finance and Chief -- -- 12,500(10) (6)
Financial Officer of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
All executive officers and directors as a 1,510,281 (7) 60.5% 1,547,781 45.7
group (eight persons)
</TABLE>
- ----------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly they may
include securities owned by or for, among others, the wife and/or minor
children or the individual and any other relative who has the same home as
such individual, as well as other securities as to which the individual has
or shares voting or investment power or has the right to acquire under
outstanding stock options within 60 days after the date of this table.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) Shares listed are held in joint tenancy by Mr. and Mrs. Santilli.
(3) Includes options to purchase 22,500 shares of the Company's Common Stock
awarded to Mr. Santilli pursuant to the Company's Plan.
(4) Includes options to purchase 22,500 shares of the Company's Common Stock
awarded to each non-employee director of the Company pursuant to the
Company's Non-Employee Director Stock Option Plan.
(5) Represents an option to purchase 7,500 shares of the Company's Common Stock
granted pursuant to the Company's Plan.
(6) Less than one percent.
(7) Includes options to purchase 145,000 shares of the Company's Common Stock.
(8) Includes an option to purchase 12,500 shares of the Company's Common Stock
intended to be awarded to Mrs. Santilli in connection with the Public
Offering as well as the shares and options previously granted to Mr. and
Mrs. Santilli.
(9) Includes an option to purchase 12,500 shares of the Company's Common Stock
intended to be awarded to Mr. Ruben in connection with the Public Offering
as well as options previously granted to Mr. Ruben.
(10) Includes an option to purchase 12,500 shares of the Company's Common Stock
intended to be awarded to Mr. Levin in connection with the Public Offering.
The directors and executive officers of the Company do not intend to
purchase any additional shares of Common Stock in the Public Offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of (i) 1,000,000
shares of preferred stock, $0.001 par value ("Preferred Stock") and (ii)
9,000,000 shares of Common Stock.
Common Stock
As of the date hereof, there are 2,353,166 shares of Common Stock
issued and outstanding. Of such 2,353,166 shares, 1,365,281 shares are
beneficially owned by the Board of Directors of the Company. Upon completion of
the Public Offering, there will be 3,353,166 shares of Common Stock issued and
outstanding (assuming no exercise of the Underwriters' over-allotment option).
The issued and outstanding shares of Common Stock have been, and the shares of
Class A Common Stock offered hereby will be, duly authorized, validly issued,
fully paid and nonassessable. The rights, preferences and limitations of each
class of Common Stock of the Company described below were determined by the
Company's Board of Directors.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution, or winding up of
the Company, the holders of Common Stock are entitled to share ratably in any
corporate assets remaining after payment of all debts, subject to any
preferential rights of any outstanding Preferred Stock. See "Dividend Policy."
Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company.
Immediately after the Public Offering, the Board of Directors of the
Company will hold shares of Common Stock constituting approximately 40.7% of the
voting power of the outstanding Common Stock, which may allow them to control
actions to be taken by the stockholders, including the election of all of the
directors to the Board of Directors. See "Principal Stockholders" and "Risk
Factors--Voting Control of the Board of Directors of the Company."
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<PAGE>
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "___." See "Market for Common Stock."
Preferred Stock
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority to issue up to 1,000,000 shares of Preferred Stock
in one or more series with such designations, rights, preferences and voting
rights as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights that adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In the event of issuance, the Preferred Stock could
be utilized, under certain circumstances, as a way of discouraging, delaying or
preventing an acquisition or change in control of the Company. The Company does
not currently intend to issue any shares of its Preferred Stock.
Certain Provisions of Delaware Law
The Company is a Delaware corporation and is subject to Section 203 of
the Delaware General Corporation Law ("Section 203"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person became an interested stockholder unless: (i)
before that person became an interested stockholder, the Board approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination; (ii) upon completion of the transaction
that resulted in the interested stockholders becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the Company
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the Company and by employee stock plans that
do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) on or following the date on which that person became an interested
stockholder, the business combination is approved by the Company's Board and
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least 66 2/3% of the outstanding voting stock of the Company not owned by
the interested stockholder.
Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the Company and a person who was not an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the Company's directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors (but not
less than one) who were directors before any person became an interested
stockholder in the previous three years or who were recommended for election or
elected to succeed such directors by a majority of such directors then in
office.
Pursuant to Section 162 of the Delaware General Corporation Law, the
Board of Directors of the Company can, without stockholder approval, issue
shares of capital stock, which may have the effect of delaying, deferring or
preventing a change of control of the Company. Other than pursuant
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<PAGE>
to the Public Offering, the Company has no plan or arrangement for the issuance
of any shares of capital stock other than in the ordinary course or pursuant to
the Company's stock-based plans.
Certain Certificate of Incorporation and Bylaw Provisions
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws may be deemed to have an anti-takeover effect and may
delay, deter or prevent a merger, tender offer, proxy contest or other takeover
attempt. The following discussion is a general summary of certain of these
provisions which might be determined to have a potential "anti-takeover" effect.
Reference should be made in each case to such Certificate and Bylaws. See
"Additional Information" for information regarding how to obtain a copy of these
documents.
The Company's Amended and Restated Certificate of Incorporation
provides that the stockholders may act only in a meeting that has been duly
called and noticed, except that stockholders may approve by written consent any
proposal that has already been approved by the Board of Directors.
The Company's Amended and Restated Certificate of Incorporation fixes
the number of Directors to between one and fifteen as determined by resolution
of the Board of Directors. The Board of Directors of the Company is currently
comprised of five members. Prior to the closing of the Public Offering, all
directors were elected each year for a one-year term and until their successors
were elected and qualified.
The Company's Amended and Restated Certificate of Incorporation
provides that the Board shall be divided into three classes following the
closing of the Public Offering of the Company's Common Stock. Following the
close of the Public Offering, the initial directors of Class One will serve
until the first Annual Meeting of Stockholders following the Public Offering; at
such first Annual Meeting of Stockholders, the directors of Class One shall be
elected for a term of three years, and after expiration of such term, shall
thereafter be elected every three years for three year terms. The initial
directors of Class Two shall serve until the second Annual Meeting of
Stockholders following the Public Offering. At the second Annual Meeting of
Stockholders following the Public Offering, the directors of Class Two shall be
elected for a term of three years and, after the expiration of such term, shall
thereafter be elected every three years for three year terms. The initial
directors of Class Three shall serve until the third Annual Meeting of
Stockholders after the Public Offering. At the third Annual Meeting of
Stockholders following the Public Offering, the directors of Class Three shall
be elected for a term of three years and after the expiration of such term,
shall thereafter be elected every three years for three year terms. Upon the
consummation of the Public Offering the Board shall determine the composition of
each class.
Stockholders are not entitled to cumulate their votes in connection
with the election of directors. As a result, a person or a group controlling,
the majority of shares of Common Stock can elect all of the directors. Following
the Public Offering, the Board of Directors of the Company will own 1,365,281
shares of Common Stock constituting 40.7% of the issued and outstanding Common
Stock which may allow it to control actions taken by stockholders, including the
election of directors. See "Principal Stockholders" and "Risk Factors -- Voting
Control of the Board of Directors of the Company."
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<PAGE>
The Company's Bylaws provide that special meetings of stockholders may
only be called by the Board of Directors, the Chairman or by stockholders
entitled to cast at least 50% of the votes entitled to be cast at a particular
meeting.
The Amended and Restated Certificate of Incorporation and Bylaws of the
Company contain certain provisions permitted under the Delaware General
Corporation Law relating to the liability of directors. These provisions
eliminate the directors' liability for monetary damages for a breach of
fiduciary duty, except in certain circumstances involving wrongful acts,
including the breach of a director's duty of loyalty or acts or omissions which
involve intentional misconduct or a knowing violation of a law. The Company's
Amended and Restated Certificate of Incorporation and Bylaws also contain
provisions which provide for the indemnification of its directors and officers
to the fullest extent permitted by the Delaware General Corporation Law.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
9,000,000 shares of Common Stock. Upon completion of the Public Offering, there
will be outstanding 3,353,166 shares of Common Stock (assuming no exercise of
the Underwriters' over-allotment option).
The 1,000,000 shares of Common Stock to be sold in the Public Offering
(1,150,000 shares if the Underwriters' over-allotment option is exercised in
full), will be available for resale in the public market without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for shares purchased by affiliates of the Company (in
general, any person who has a control relationship with the Company), which
shares will be subject to the resale limitations of Rule 144 promulgated under
the Securities Act ("Rule 144"). In addition, approximately 225,012 shares of
the Common Stock are deemed to be "restricted securities" as the term is defined
in Rule 144 and are eligible for resale to the public in compliance with Rule
144.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least two years is entitled to sell, within any three month period, a number of
shares which does not exceed the greater of 1% of the then-outstanding shares of
the Company's Common Stock (33,532 shares immediately after the Public Offering
assuming no exercise of the Underwriters' over-allotment option) or the average
weekly trading volume of the Company's Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 may also be subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted securities" under Rule 144 for at
least three years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitation, manner of sale provisions, public information
requirements or notice requirements.
The Commission has published a notice of proposed rule-making that, if
adopted as proposed, would shorten the two-year holding under Rule 144 to one
year and would shorten the three-year holding period under Rule 144 to two
years. The Company cannot predict whether or in what form such amendments will
be adopted.
The Company and its directors and executive officers who are
stockholders have agreed, subject to certain limited exceptions, not to offer,
sell or otherwise dispose of any shares of Common
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<PAGE>
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of the Underwriter. Following the expiration of such
180-day period, directors and executive officers of the Company will hold an
aggregate of 1,365,281 shares (excluding options) of Common Stock. The Company's
directors and executive officers also hold options to purchase an aggregate of
145,000 shares of Common Stock.
Prior to this Public Offering, there has been a limited public market
for the Common Stock. Sales of substantial amounts of Common Stock in the public
market could adversely affect market prices for the Common Stock and make it
more difficult for the Company to sell equity securities in the future at a time
and price which it deems appropriate. See "Market for Common Stock."
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been approved for listing on the NASDAQ
National Market System under the symbol "________" upon commencement of the
Public Offering. Upon completion of the Public Offering, the Company intends to
delist its Common Stock from the PHLX.
The Company's Common Stock is currently traded on the PHLX under the
symbol "AFX". Such Common Stock began trading on the PHLX on May 13, 1996. Prior
to the commencement of trading on the PHLX, there was no active trading market
for the Common Stock. As a result, stock price information for the Common Stock
is not available for any period prior to May 13, 1996. The following table sets
forth the high and low sales prices of the Common Stock from the date on which
the Common Stock commenced trading on the PHLX through December 31, 1996. On
December 23, 1996 the closing price of the Common Stock on the PHLX was
$19.56.
Quarter Ended High Low
- -------------------------------------------- -------------- ------------
June 30, 1996(1)............................ $17.00 $10.00
September 30, 1996.......................... 19.50 11.13
December 31, 1996 (2)....................... 19.875 17.25
- --------------
(1) Represents the period May 13, 1996 through June 30, 1996.
(2) Through December 23, 1996.
As of September 30, 1996, there were approximately 120 record holders
and approximately 500 beneficial holders of the Common Stock.
During fiscal 1996, the Company paid dividends on its Common Stock then
outstanding of $0.03 per share, for an aggregate dividend payment of $71,000.
Subsequent to fiscal year end, the Company declared and paid a dividend of
$0.015 per share for the fourth quarter of fiscal 1996. The
74
<PAGE>
continuing payment by the Company of dividends in the future is in the sole
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, its capital requirements and financial condition, as
well as other relevant factors.
As a Delaware corporation, the Company may not declare and pay
dividends on its capital stock if the amount paid exceeds an amount equal to the
excess of the Company's net assets over paid-in-capital or, if there is no
excess, its net profits for the current and/or immediately proceeding fiscal
year. See "Dividend Policy."
As of the date hereof, there were 181,000 shares of Common Stock
subject to options and options to purchase 150,500 shares intended to be granted
in connection with the Public Offering. In addition, there were an additional
38,488 shares reserved for issuance under the Company's option plans. See
"Management."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), represented by Friedman,
Billings, Ramsey & Co., Inc. (the "Representative"), have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock at the Public Offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
Underwriters Number of Shares
- --------------------------------------------------------------------------- ------------------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc......................................
------------------------------
Total.................................................... 1,000,000
==============================
</TABLE>
The Underwriting Agreement provides that obligations of the several
Underwriters thereunder are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of the Common Stock offered hereby
if any of such shares are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the Public Offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $________ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $____ per share to certain other dealers. After the Common Stock has been
released for sale to the public, the offering price and other selling terms may
be changed by the Representative.
75
<PAGE>
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 150,000
additional shares of Common Stock at the Public Offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Common Stock offered hereby.
To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the table above bears to 1,000,000
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters as set forth in the above table. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,000,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act. The Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by the Underwriters in connection with the shares of
Common Stock offered hereby, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of competent jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Company and the Company's officers and directors who are also
stockholders of the Company and who, immediately following the Public Offering
(assuming no exercise of the Underwriters' over-allotment option) collectively
will beneficially own an aggregate of 1,365,281 shares of Common Stock have
agreed that for a period of 180 days after the effective date of the Public
Offering they will not, without the prior written consent of the Underwriters,
directly or indirectly offer for sale, sell, solicit an offer to sell, contract
or grant an option to sell, pledge, transfer, establish an open put equivalent
position or otherwise dispose of any shares of Common stock, options or warrants
to acquire shares of Common Stock. The Company has also agreed not to issue,
offer, sell, grant options to purchase or otherwise dispose of any of the
Company's equity securities or any other securities convertible into or
exchangeable with its Common Stock for a period of 180 days after the effective
date of the Public Offering without the prior written consent of the
Underwriter, subject to limited exceptions and grants and exercises of stock
options.
The Underwriters have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to the Public Offering, there has been a limited public trading
market for the Common Stock. Consequently, the initial Public Offering price of
the Common Stock has been determined by negotiations between the Company and the
Underwriters. Among the factors to be considered in such negotiations were the
historical trading price of the Common Stock, the history of, and the prospects
for, the Company and the industry in which the Company competes, an assessment
of the Company's management, its financial condition, its past and present
earnings and the trend of such earnings, the prospects for future earnings of
the Company, the present state
76
<PAGE>
of the Company's development, the general condition of the economy and the
securities markets at the time of the Public Offering and the market prices of
and demand for publicly traded common stock of comparable companies in recent
periods.
The Underwriter intends to make a market in the Common Stock upon
completion of the Public Offering, subject to compliance with applicable laws
and regulations. The Underwriter may, however, discontinue its market making
activities at any time. See "Market for Common Stock."
LEGAL MATTERS
The validity of the Common Stock being offered hereby have been passed
upon for the Company by Blank Rome Comisky & McCauley, Four Penn Center Plaza,
Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the
Underwriters by Elias, Matz, Tiernan & Herrick L.L.P., Washington, DC.
EXPERTS
The Consolidated Financial Statements of ABFS and subsidiaries as of
June 30, 1996 and for the year ending June 30, 1996 included in this Prospectus,
have been audited by BDO Seidman, LLP, independent certified public accountants,
as set forth in their report appearing herein and have been included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The Consolidated Financial Statements of ABFS and subsidiaries as of
June 30, 1995 and 1994, and for the years ended June 30, 1995 and 1994 included
in this Prospectus, have been audited by Fishbein & Company, P.C., independent
certified public accountants, as set forth in their report appearing herein and
have been included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
On March 11, 1996, the Company engaged the firm of BDO Seidman, LLP as
independent certified public accountants replacing the firm of Fishbein &
Company, P.C. This change in independent certified public accountants was
recommended by the Audit Committee and subsequently approved by the Board of
Directors.
There were no disagreements between the Company or its subsidiaries and
Fishbein & Company, P.C. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure in connection
with the audit of the consolidated financial statements for the two years ended
June 30, 1995 and subsequent period through March 11, 1996 which, if not
resolved to the satisfaction of Fishbein & Company, P.C., would have caused them
to make reference to the subject matter of the disagreement(s) in connection
with the reports of Fishbein & Company, P.C. on the consolidated financial
statements of the Company for the two years ended June 30, 1995. Such reports
did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In addition, there has not been any
77
<PAGE>
"reportable events" as defined by Item 304(a)(1)(iv)(B) of Regulation S-B during
the periods referred to above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer & Trust Company, Brooklyn, New York.
78
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS...........................F-2
INDEPENDENT AUDITOR'S REPORT.................................................F-3
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1996 AND 1995 AND
SEPTEMBER 30, 1996 (UNAUDITED)............................................F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996,
1995 AND 1994 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)...............................................................F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
JUNE 30, 1996, 1995 AND 1994 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)...............................................................F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996,
1995 AND 1994 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)...............................................................F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...........................F-11 - F-28
F-1
<PAGE>
Report of Independent Certified Public Accountants
American Business Financial Services, Inc.
and Subsidiaries
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of American Business
Financial Services, Inc. and subsidiaries as of June 30, 1996, and the related
consolidated statements of operations and stockholders' 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 these 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 financial position of American Business
Financial Services, Inc. and subsidiaries as of June 30, 1996, and the
consolidated results of their operations, stockholders' equity and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
August 23, 1996
F-2
<PAGE>
Stockholders and Directors
American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of AMERICAN
BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES as of June 30, 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the two years in the period ended June 30, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Business Financial Services, Inc. and Subsidiaries as of June 30, 1995,
and the consolidated results of their operations and their consolidated cash
flows for each of the two years in the period ended June 30, 1995, in conformity
with generally accepted accounting principles.
The Company changed its method of accounting for income taxes as of July
1, 1993.
/s/ Fishbein & Company, P.C.
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
September 20, 1995
F-3
<PAGE>
<TABLE>
<CAPTION>
American Business Financial
Services, Inc. and Subsidiaries
Balance Sheets
- -------------------------------------------------------------------------------------------------------------------
September 30, June 30, June 30,
1996 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
Assets
<S> <C> <C> <C>
Cash and cash equivalents $ 8,812,590 $ 5,345,269 $ 4,734,368
Loan and lease receivables, net
Available for sale 10,894,302 17,625,178 8,668,956
Other 579,134 534,325 328,401
Other receivables 20,762,050 14,090,542 4,237,072
Prepaid expenses 2,476,037 1,341,160 594,046
Property and equipment, net of accumulated
depreciation and amortization 1,577,699 1,452,895 687,678
Other assets 6,873,364 6,504,794 2,924,375
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 51,975,176 $ 46,894,163 $ 22,174,896
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Debt $ 37,876,268 $ 35,987,401 $ 17,824,007
Accounts payable and accrued expenses 4,286,597 3,132,170 1,117,930
Deferred income taxes 2,128,539 1,506,271 704,304
Other liabilities 2,171,913 1,876,806 385,241
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 46,463,317 42,502,648 20,031,482
- -------------------------------------------------------------------------------------------------------------------
Commitment and contingencies
Stockholders' equity
Preferred stock, no par value
Authorized 1,000,000 shares
Issued and outstanding none - - -
Common stock, par value $.001
Authorized 9,000,000 shares
Issued and outstanding 2,353,166 shares in
1996 and 2,128,154 shares in 1995 2,353 2,353 2,128
Additional paid-in capital 1,931,699 1,931,699 1,331,892
Retained earnings 4,177,839 3,057,495 809,394
- -------------------------------------------------------------------------------------------------------------------
6,111,891 4,991,547 2,143,414
Less note receivable 600,032 600,032 -
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,511,859 4,391,515 2,143,414
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 51,975,176 $ 46,894,163 $ 22,174,896
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Operations
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30, Year Ended June 30,
--------------------------- ------------------------------------
1996 1995 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Gain on sales of loans and leases $ 4,373,235 $ 55,362 $ 9,005,193 $1,442,961 $ 110,378
Interest and fees 1,135,228 888,674 3,350,716 4,057,643 2,366,366
Other income 75,647 466 22,824 143,473 155,923
- -------------------------------------------------------------------------------------------------------------------
Total revenues 5,584,110 944,502 12,378,733 5,644,077 2,632,667
- -------------------------------------------------------------------------------------------------------------------
Expenses
Interest 1,041,659 451,790 2,667,858 1,213,111 628,240
Provision for credit losses 300,000 44,824 681,228 165,143 47,692
Payroll and related costs 198,611 130,593 1,203,260 995,215 411,048
Sales and marketing 1,369,253 492,219 2,685,173 1,510,227 660,755
General and administrative 896,678 261,030 2,020,551 866,478 550,792
- -------------------------------------------------------------------------------------------------------------------
Total expenses 3,806,201 1,380,456 9,258,070 4,750,174 2,298,527
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) and cumulative effect
of accounting changes 1,777,909 (435,954) 3,120,663 893,903 334,140
Income taxes (benefit) 622,268 (152,584) 801,967 312,866 197,563
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change 1,155,641 (283,370) 2,318,696 581,037 136,577
Cumulative effect of accounting
change on prior years - - - - (51,933)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,155,641 $ (283,370) $ 2,318,696 $ 581,037 $ 84,644
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Operations
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30, Year Ended June 30,
---------------------- -----------------------------------
1996 1995 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Earnings (loss) per share
Income (loss) before cumulative
effect of accounting change $ .47 $ (.13) $ 1.01 $ .27 $ .06
Cumulative effect of accounting
change on prior years - - - - (.02)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .47 $ (.13) $ 1.01 $ .27 $ .04
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of
shares outstanding 2,448,031 2,128,154 2,296,913 2,128,154 2,127,263
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------- Additional Total
Number of Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1993 2,115,018 $ 2,115 $ 1,323,350 $ 143,713 $ 1,469,178
Public offering 12,525 12 7,241 - 7,253
Conversion of subordinated
debentures 611 1 1,301 - 1,302
Net income - - - 84,644 84,644
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 2,128,154 2,128 1,331,892 228,357 1,562,377
Net income - - - 581,037 581,037
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 2,128,154 2,128 1,331,892 809,394 2,143,414
Options exercised 225,012 225 599,807 - 600,032
Cash dividends
($.03 per share) - - - (70,595) (70,595)
Net income - - - 2,318,696 2,318,696
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 2,353,166 2,353 1,931,699 3,057,495 4,991,547
Cash dividend ($.015
per share) (unaudited) - - - (35,297) (35,297)
Net income (unaudited) - - - 1,155,641 1,155,641
- -------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996
(unaudited) 2,353,166 $ 2,353 $ 1,931,699 $ 4,177,839 $ 6,111,891
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30, Year Ended June 30,
------------------------- ----------------------------------------
1996 1995 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 1,155,641 $ (283,370) $ 2,318,696 $ 581,037 $ 84,644
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities
Gain on sales of loans/leases (4,373,235) (55,362) (8,969,880) (1,442,961) (110,378)
Amortization of origination
fees and costs 86,321 75,058 305,136 528,554 529,573
Amortization of deferred
servicing rights 51,643 - 69,489 - -
Provision for credit losses 300,000 44,824 681,228 165,143 47,692
Accounts written off (50,443) - (129,063) (87,885) (10,838)
Depreciation and amortization of
property and equipment 106,980 68,472 318,493 177,632 116,007
Amortization of financing and
organization costs 127,933 109,840 505,012 436,260 190,012
(Increase) decrease in accrued
interest and fees on loan and
lease receivables (44,809) (72,097) (268,010) 119,407 (129,751)
Decrease (increase) in
other receivables (1,083,286) 365,267 683,797 (328,081) (444,321)
(Increase) in prepaid expenses (1,134,877) (216,585) (747,114) (241,164) (133,721)
Decrease (increase) in other assets 299,466 (28,447) 332,009 (117,992) (253,668)
Increase in accounts payable and
accrued expenses 1,154,427 262,450 2,014,240 328,022 488,350
Increase (decrease) in deferred
income taxes 622,268 (152,584) 801,967 285,791 247,636
Increase in other liabilities 295,107 279,968 1,491,565 316,868 39,262
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by operating activities (2,486,864) 397,434 (592,435) 720,631 660,499
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30, Year Ended June 30,
------------------------------ ------------------------------------
1996 1995 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities
Loans and leases originated $ (22,971,918) $(7,876,031) $(60,472,812) $(15,408,775) $(6,674,527)
Loans repurchased - - - - (21,393)
Loan and lease payments received 856,130 355,338 4,549,979 3,065,676 1,084,159
Proceeds of loans and leases sold 26,676,311 958,413 40,627,246 8,747,265 1,607,233
Purchase of property and equipment (231,783) (477,338) (1,022,926) (382,154) (274,837)
Decrease in securitization gain
receivable - 14,839 58,693 9,958 -
Principal receipts on investments 16,245 5,245 33,307 3,567 -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 4,344,985 (7,019,534) (16,226,513) (3,964,463) (4,279,365)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Financing costs incurred (244,368) (92,225) (662,950) (483,732) (597,167)
Net proceeds of (principal payments on)
revolving line of credit (2,348,465) - 2,348,465 (1,999,431) (965,103)
Proceeds of term note payable, bank - - - - 64,000
Principal payments on term notes
payable, bank - - - (245,555) (21,183)
Dividends paid (35,297) - (70,595) - -
Principal payments on note
payable, other (104) (5,606) (4,814) (1,652) (104)
Proceeds of notes payable,
related parties - - - - 807,444
Principal payments on notes
payable, related parties - - - - (1,589,011)
Proceeds from public offering,
net of related costs of $26,147 - - - - 7,253
Proceeds from issuance of subordinated
debentures 5,945,884 3,724,674 19,687,982 12,049,581 6,107,478
Principal payments on subordinated
debentures (1,708,450) (637,976) (3,867,447) (1,420,432) (262,102)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities 1,609,200 2,993,177 17,429,849 7,895,617 3,549,957
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30, Year Ended June 30,
------------------------------ --------------------------------------
1996 1995 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in
cash and cash equivalents $ 3,467,321 $(3,628,923) $ 610,901 $ 4,651,785 $ (68,909)
Cash and cash equivalents,
beginning of period 5,345,269 4,734,368 4,734,368 82,583 151,492
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 8,812,590 $ 1,105,445 $ 5,345,269 $ 4,734,368 $ 82,583
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 888,622 $ 211,580 $ 1,183,745 $ 706,506 $ 510,916
- -------------------------------------------------------------------------------------------------------------------
Income taxes $ - $ 75,000 $ 78,475 $ 8,250 $ 12,364
- -------------------------------------------------------------------------------------------------------------------
Noncash transactions recorded in
connection with the sale of and
foreclosure on loans receivable
Increase in other receivables,
securitization gains $ 5,563,603 $ 9,405 $ 10,595,960 $ 3,271,770 $ -
Increase in other assets
Investment, held to maturity - - 2,332,247 684,380 -
Foreclosed real estate held
for sale - - 111,890 448,801 -
Other holdings held for sale - - 308,933 - -
Transfer from loans and leases,
other - - (62,085) - -
Deferred servicing rights 574,210 - 1,165,000 - -
Increase in fixed assets - 51,425 - - -
- -------------------------------------------------------------------------------------------------------------------
$ 6,137,813 $ 60,830 $ 14,451,945 $ 4,404,951 $ -
- -------------------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and financing activities
- -------------------------------------------------------------------------------------------------------------------
During the year ended June 30, 1994, subordinated debentures of $1,302 were
converted to 611 shares of common stock.
- -------------------------------------------------------------------------------------------------------------------
During the year ended June 30, 1994, a note payable of $30,529 was incurred for
the acquisition of property and equipment.
- -------------------------------------------------------------------------------------------------------------------
During the year ended June 30, 1996, stock options for 225,012 shares of common
stock were exercised. Shares with a total price of $600,032 were issued in
exchange for a note receivable of the same amount.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
1. Summary of Principles of Consolidation and Nature of Business
Significant
Accounting The accompanying consolidated financial statements include
Policies the accounts of American Business Financial Services,
Inc. ("ABFS") and its wholly-owned subsidiaries (the
"Company"). All significant intercompany transactions and
balances have been eliminated.
The Company makes secured loans in the Mid-Atlantic Region
and is subject to the risks of the real estate market in
that area. The Company also makes business equipment leases
and unsecured consumer loans. The Company securitizes its
secured loans.
Cash Equivalents
Cash equivalents consist of short-term investments
purchased with an initial maturity of three months or less.
Loan and Lease Receivables Available for Sale
Loan and lease receivables available for sale represent
receivables that the Company generally intends to sell or
securitize within the next twelve months. These assets are
stated at the lower of cost (principal balance including
unamortized origination costs/fees) or estimated market
value in the aggregate. Market value is determined by most
recent sale or securitization transactions.
The Company sells loans through securitizations and is
subject to certain limited recourse provisions. Income is
recorded at the time of sale approximately equal to the
present value of the anticipated future cash flows
("residuals"), offset by unamortized loan origination
costs/fees, related transaction expenses and estimated
credit losses ("excess spread receivables"). Subsequent to
the initial sale, securitization income is recorded in
proportion to the actual cash flow received. To the extent
that the anticipated cash flows differ from actual cash
flows, adjustments are recognized through the use of an
allowance account, as needed.
F-11
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
Allowance for Credit Losses
The allowance for credit losses is based upon the Company's
estimate of expected collectibility of loans and leases
outstanding. The allowance is increased by periodic charges
to operations as necessary.
Mortgage Servicing Rights
Effective July 1, 1995, the Company adopted Financial
Accounting Standards Board Statement No. 122, "Accounting
for Mortgage Servicing Rights". The Statement amends
Statement No. 65 to require recognition as a separate asset
the rights to service mortgage loans for others, however
those servicing rights are acquired. The Statement requires
the assessment of capitalized mortgage servicing rights for
impairment to be based on the current fair value of those
rights. Mortgage servicing rights are amortized in
proportion to and over the period of the estimated net
servicing income.
Origination Costs and Fees and Amortization
Direct origination costs, net of origination fees, are
deferred and amortized over the contractual life of the
receivable using the interest method. Unamortized amounts
are recognized as (expense) income when the receivable is
sold or paid in full.
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line and
declining balance methods over the estimated useful lives
of the assets (ranging from 5 to 10 years). Expenditures
for additions, renewals and betterments are capitalized;
expenditures for maintenance and repairs are charged to
expense as incurred.
Financing Costs and Amortization
Costs incurred in obtaining revolving lines of credit are
amortized using the straight-line method over the terms of
the agreements.
Financing costs incurred in connection with public
offerings of debentures are amortized using the interest
method over the term of the related debentures.
F-12
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
Investments, Held to Maturity
The investments classified as held to maturity consist of
mortgage-backed securities that the Company has the
positive intent and ability to hold to maturity. These
investments are stated at amortized cost, which
approximates market.
Foreclosed property held for sale is stated at the lower of
cost or fair market value.
Interest Income
Interest income from loan and lease receivables is
recognized using the interest method. Accrual of interest
income is suspended when the receivable is contractually
delinquent for ninety days or more. The accrual is resumed
when the receivable becomes contractually current, and past
due interest income is recognized at that time. In
addition, a detailed review of receivables will cause
earlier suspension if collection is doubtful.
Income Taxes
The Company files a consolidated federal income tax return.
The Company uses the liability method in accounting for
income taxes.
Principal differences between the Company's financial and
income tax reporting include amortization of loan and lease
origination costs/fees, the allowance for credit losses,
depreciation and amortization of property and equipment,
securitization gains, servicing rights and net operating
losses.
Earnings Per Share
Earnings per share are based on the weighted average number
of shares outstanding. Earnings per share amounts for the
quarter ending September 30, 1996 assume the exercise of
all stock options having an exercise price less than the
average market price of the common stock using the treasury
method. The effect of outstanding stock options is not
dilutive for years ended June 30, 1996, 1995 and 1994 and
for the quarter ended September 30, 1995.
F-13
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
Reclassifications
Certain amounts in the 1995 and 1994 financial statements
have been reclassified to conform to the 1996 presentation.
Unaudited Interim Financial Information
The unaudited interim consolidated financial statements as
of September 30, 1996 and for the three month periods ended
September 30, 1996 and 1995 reflect, in the opinion of
management, all adjustments (which include cash flows as of
and for the periods presented). The results for the interim
periods presented are not necessarily indicative of results
to be expected for the full year.
<TABLE>
<CAPTION>
2. Loan and September 30, June 30, June 30,
Lease 1996 1996 1995
Receivables ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate secured loans $ 5,365,40 $ 12,960,229 $ 4,761,778
Leases (net of unearned
income of $1,410,664,
$1,136,621 and
$557,880) 5,700,134 4,393,713 2,034,981
Other loans 132,065 109,726 1,134,742
Unamortized origination
costs/fees 653,677 868,934 892,713
-----------------------------------------------------------------------------------
11,851,283 18,332,602 8,824,214
Less allowance for
credit losses 956,981 707,424 155,258
-----------------------------------------------------------------------------------
Loan and lease
receivables, net $ 10,894,302 $ 17,625,178 $ 8,668,956
-----------------------------------------------------------------------------------
</TABLE>
Substantially, all of the leases are sales-type leases
whereby the lessee has the right to purchase the leased
equipment at the lease expiration for a nominal amount.
F-14
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
The Company sells real estate secured loans through
securitizations and retains collection and administrative
responsibilities as servicer for the trusts holding the
loans. Under terms of the sales, the purchasers have
limited recourse ($2,818,578 at September 30, 1996 and
$2,834,783 at June 30, 1996) should certain amounts of the
loans prove to be uncollectible. However, the Company
believes that allowances established for these off-balance
sheet instruments are adequate to provide for any amounts
found to be uncollectible. At September 30, 1996, the
uncollected balance of receivables securitized was
approximately $67,500,000. At June 30, 1996, the
uncollected balance of receivables securitized was
approximately $42,100,000.
At September 30, 1996, the accrual of interest income was
suspended on real estate secured loans of $508,617. At June
30, 1996, the accrual of interest income was suspended on
real estate secured loans of $599,564. Based on its
evaluation of the collateral related to these loans, the
Company expects to collect all contractual interest and
principal.
At June 30, 1996, the contractual maturities of loan and
lease receivables are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate secured loans $1,175,085 $ 369,635 $ 422,257 $422,529 $477,495 $10,093,228 $12,960,229
Leases 1,785,696 1,280,863 767,481 415,126 144,547 - 4,393,713
Other loans 23,921 28,184 32,847 19,660 5,114 - 109,726
Unamortized organization
costs/fees 614,865 132,547 70,126 34,644 13,712 3,040 868,934
- -------------------------------------------------------------------------------------------------------------------
Total loans receivable $3,599,567 $1,811,229 $1,292,711 $891,959 $640,868 $10,096,268 $18,332,602
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
3. Allowance Balance, July 1, 1993 $ 41,146
for Credit Provision for credit losses 47,692
Losses Accounts written off (10,838)
-----------------------------------------------------------
Balance June 30, 1994 78,000
Provision for credit losses 165,143
Accounts written off (87,885)
-----------------------------------------------------------
Balance, June 30, 1995 155,258
Provision for credit losses 681,228
Accounts written off (129,062)
-----------------------------------------------------------
Balance, June 30, 1996 707,424
Provision for credit losses 300,000
Accounts written off (50,443)
-----------------------------------------------------------
Balance, September 30, 1996 $956,981
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
4. Other September 30, June 30, June 30,
Receivables 1996 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales of loans $ 93,055 $ 86,090 $ 415,521
Home equity loan fees 40,508 121,874 506,236
Excess spread 20,235,897 13,447,674 2,969,812
Other 392,590 434,904 345,503
--------------------------------------------------------------------------------
$20,762,050 $14,090,542 $4,237,072
--------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. Property September 30, June 30, June 30,
and 1996 1996 1995
Equipment ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer equipment and
software $ 1,453,887 $ 1,296,769 $ 754,732
Office furniture and
equipment 871,432 803,445 393,423
Leasehold improvements 179,154 171,542 49,999
----------------------------------------------------------------------------------
2,504,473 2,271,756 1,198,154
Less accumulated depreciation
and amortization 926,774 818,861 510,476
----------------------------------------------------------------------------------
$ 1,577,699 $ 1,452,895 $ 687,678
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
6. Other September 30, June 30, June 30,
Assets 1996 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Deposits $ 296,582 $ 296,582 $ 113,483
Financing costs, debt
offerings, net of
accumulated amortization
of $1,083,699, $1,074,212
and $581,324 1,256,642 1,138,455 968,393
Investments, held to maturity
(mature in September 2004
through April 2011) 2,818,538 2,834,783 680,813
Foreclosed property held
for sale 180,591 607,905 761,523
Servicing rights 1,910,077 1,387,511 -
Other 410,934 239,558 400,163
----------------------------------------------------------------------------------
$6,873,364 $6,504,794 $2,924,375
----------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
<TABLE>
<CAPTION>
7. Debt September 30, June 30, June 30,
1996 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Subordinated debentures,
due September 1996
through June 1998;
interest at rates
ranging from 8% to
12% payable quarterly;
subordinated to all of
the Company's senior
indebtedness. $ 1,345,421 $ 1,345,421 $ 1,422,421
Subordinated debentures,
due July 1996 through
September 2006; interest
at rates ranging from 7%
to 10.50%; subordinated
to all of the Company's
senior indebtedness. 36,532,442 32,275,058 16,377,523
Note payable, $25,000,000
revolving line of credit
expiring September 1996;
interest at LIBOR plus
1 1/4% (an effective rate
of 6 3/4% at June 30,
1996) payable monthly;
collateralized by loans
receivable. - 2,348,465 -
Note payable in monthly
installments of $655
including interest at
11.8%; final payment
due in March 1999;
collateralized by
related equipment. 18,405 18,457 24,063
-----------------------------------------------------------------------------------
$37,876,268 $ 35,987,401 $17,824,007
-----------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
Principal payments on debt for the next five years are due
as follows: year ending June 30, 1997 - $21,206,784; 1998 -
$4,329,462; 1999 - $2,884,971; 2000 - $1,995,153 and 2001 -
$2,557,366.
Effective December 18, 1995, the Company authorized the
issuance through a public offering of up to $50,000,000 of
unsecured, subordinated debentures to be offered on an
ongoing and continuous basis. During the year ended June
30, 1996, subordinated debentures of $16,810,707 were
issued through this offering.
At June 30, 1996, the Company has available unused
revolving lines of credit of $7,500,000 and $3,500,000,
respectively. The lines expire in December 1996 and May
1998, respectively. At September 30, 1996, the Company has
available unused revolving lines of credit of $3,500,000,
$25,000,000 and $7,500,000. The lines expire in December,
1996, March 1997 and May, 1998, respectively. Advances
under the lines, if any, are collateralized by certain
loans receivable. One of the loan agreements contains
various restrictive covenants, including the following: the
Company must maintain (on a consolidated basis) a ratio of
subordinated debt to bank debt (as defined) of not less
than 1.50:1, a ratio of senior indebtedness to capital
funds (as defined) of not more than .95:1, minimum capital
funds (as defined) of $23,200,000, and minimum pre-tax
income of $3,000,000, and may not pay any dividends in
excess of the lesser of 33% of current year net income or
$250,000.
8. Common and On May 31, 1996, the stockholders approved an amended and
Preferred restated Certificate of Incorporation which increased the
Stock authorized common shares from five million shares to nine
million shares and established a class of preferred shares
with one million shares authorized.
On September 12, 1995, the Board of Directors declared a 3
for 2 stock split of common stock to stockholders of record
on October 1, 1995. The stock split has been reflected in
the accompanying consolidated financial statements.
F-19
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
9. Stock On May 31, 1996, the stockholders approved a non-employee
Options director stock option plan which authorizes the grant to
non-employee directors of options to purchase 135,000
shares of common stock at a price equal to the market price
of the stock at the date of grant. Options are fully vested
when granted and expire ten years after grant. At September
30, 1996, 45,000 shares were available for future grants
under this plan. Transactions under this plan were as
follows:
<TABLE>
<CAPTION>
Number of Price Per
Shares Share
-----------------------------------------------------------
<S> <C> <C>
Options granted and
outstanding, June 30, 1996 90,000 $ 5.00
-----------------------------------------------------------
Options granted - -
Options exercised - -
-----------------------------------------------------------
Options outstanding,
September 30, 1996 90,000 $ 5.00
-----------------------------------------------------------
</TABLE>
The Company has an employee stock option plan which
authorizes the grant to employees of options to purchase
375,000 shares of common stock at a price equal to the
market price of the stock at the date of grant. Options are
fully vested when granted and expire five to ten years
after grant. At September 30, 1996, 83,988 shares were
available for future grants under this plan. Transactions
under the plan were as follows:
<TABLE>
<CAPTION>
Number of Price Per
Shares Share
-----------------------------------------------------------
<S> <C> <C>
Options outstanding,
July 1, 1994 225,012 $ 2.67
Options granted 43,500 2.67
------------------------------------------------------------
Options outstanding,
June 30, 1995 268,512 2.67
</TABLE>
F-20
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Price Per
Shares Share
-----------------------------------------------------------
<S> <C> <C>
Options granted 22,500 $ 5.00
Options exercised (225,012) 2.67
-----------------------------------------------------------
Options outstanding,
June 30, 1996 66,000 2.67-5.00
-----------------------------------------------------------
Options granted - -
Options exercised - -
-----------------------------------------------------------
Options outstanding,
September 30, 1996 66,000 $2.67-$5.00
-----------------------------------------------------------
</TABLE>
On September 29, 1995, options for 225,012 shares were
exercised at $2.67 per share by an officer of the Company.
The purchase price of $600,032 was advanced to the officer,
by the Company, on a ten year loan with interest at 6.46%,
payable annually. The loan is secured by 450,000 shares of
the Company's stock (at the date of exercise, market value
of collateral was approximately $1,200,000) and is shown as
a reduction of stockholders' equity on the accompanying
balance sheet.
10. Income Taxes The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995
------------------------------------------------------------
<S> <C> <C>
Current
Federal $ - $ 27,075
State - -
------------------------------------------------------------
- 27,075
------------------------------------------------------------
</TABLE>
F-21
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995
-----------------------------------------------------------
<S> <C> <C>
Deferred
Federal $ 858,617 $ 457,439
State (56,650) (171,648)
-----------------------------------------------------------
801,967 285,791
-----------------------------------------------------------
$ 801,967 $ 312,866
-----------------------------------------------------------
</TABLE>
The current provision for federal income taxes for the year
ended June 30, 1995 is net of the tax benefit of
approximately $249,000 from the utilization of net
operating loss carryforwards.
The cumulative temporary differences resulted in net
deferred income tax assets or liabilities consisting
primarily of:
<TABLE>
<CAPTION>
Three Months
Ended
September 30, Year Ended June 30,
1996 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax assets
Allowance for credit losses $ 388,534 $ 287,214 $ 62,568
Net operating loss carryforwards 326,284 461,954 126,435
Loan and lease receivable 70,176 68,058 -
Accrued expenses - 246,500 -
------------------------------------------------------------------------------
784,994 1,063,726 189,003
Less valuation allowance 148,500 148,500 126,435
------------------------------------------------------------------------------
636,494 915,226 62,568
------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months
Ended
September 30, Year Ended June 30,
1996 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax liabilities
Loan and lease origination
costs/fees, net $ 231,161 $ 368,849 $365,679
Book over tax basis of property
and equipment 152,151 131,751 54,965
Other receivables 1,732,295 1,548,423 346,228
Servicing rights 649,426 372,474 -
------------------------------------------------------------------------------------
2,765,033 2,421,497 766,872
------------------------------------------------------------------------------------
Net deferred income tax
liabilities $2,128,539 $1,506,271 $704,304
------------------------------------------------------------------------------------
</TABLE>
The valuation allowance represents the income tax effect of
State net operating loss carryforwards of the Company which
are not presently expected to be utilized.
A reconciliation of income taxes at federal statutory rates
to the Company's tax provision is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995
-----------------------------------------------------------
<S> <C> <C>
Federal income tax at
statutory rates $ 1,061,005 $303,927
State income tax, net
of federal tax benefit - (48,614)
Nondeductible expenses 13,545 11,080
Increase in state tax
valuation allowance - 46,453
Other, net (272,583) 20
------------------------------------------------------------
$ 801,967 $312,866
------------------------------------------------------------
</TABLE>
F-23
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
For income tax reporting, the Company has net operating
loss carryforwards aggregating approximately $1,650,000
available to reduce future state income taxes for various
states as of June 30, 1996. If not used, substantially all
of the carryforwards will expire at various dates from June
30, 1997 to June 30, 1999.
11. Commitment Commitment
and
Contingencies The Company leases certain of its facilities under a
five-year operating lease expiring in November 2000, at a
minimum annual rental of $430,637. The lease contains a
renewal option for an additional five year period at an
increased annual rental. Rent expense under all operating
leases for such facilities was $373,694 and $199,368 for
the years ended June 30, 1996 and 1995, respectively. Rent
expense under all operating leases for such facilities was
$132,619 and $57,586 for the three months ended September
30, 1996 and 1995, respectively.
Contingencies
A subsidiary of the Company makes home equity loans on
behalf of unaffiliated lenders for a fee equal to a
percentage of the loan amount. Certain agreements require
that all or a portion of the fee be refunded if the loan is
paid off during the first six to twelve months after
origination.
At September 30, 1996 approximately $131,000 of income is
subject to this provision. The actual amount of the fee
refunded during the three months ended September 30, 1996
which was recorded as income prior to July 1, 1996 was
$16,800. At June 30, 1996 and 1995, approximately $292,000
and $394,000, respectively, of fee income is subject to
this provision. The actual amount of the fee refunded
during the years ended June 30, 1996 and 1995, which was
recorded as income prior to July 1, 1995 and 1994, was
$138,187 and $14,267, respectively.
The Company is a defendant in a lawsuit filed by one of its
competitors for alleged interference with existing
contractual relations between the competitor and its
customers and vendors. Currently, the Company is
negotiating a settlement which is expected to be immaterial
to the Company's operations.
F-24
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
12. Fair Value No market exists for certain of the Company's assets and
of Financial liabilities, therefore, fair value estimates are based on
Instruments judgments regarding credit risk, investor expectation of
future economic conditions, normal cost of administration
and other risk characteristics, including interest rates
and prepayment risk. These estimates are subjective in
nature and involve uncertainties and matters of judgment
and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates.
In addition, the fair value estimates presented do not
include the value of assets and liabilities that are not
considered financial instruments.
The table below summarizes the information about the fair
value of the financial instruments recorded on the
Company's financial statements at June 30, 1996.
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------
Carrying Fair
Value Value
-----------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,345,269 $ 5,345,269
Loans and leases available
for sale 18,332,602 20,800,000
Excess spread 13,447,674 13,447,674
Servicing rights 1,387,511 1,387,511
Liabilities
Borrowings under revolving
lines of credit $ 2,348,465 $ 2,348,465
Subordinated debentures 33,620,479 33,620,479
</TABLE>
F-25
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
The methodology and assumptions utilized to estimate the
fair value of the Company's financial instruments are as
follows:
Cash and Cash Equivalents - For these short-term
instruments the carrying amount approximates fair value.
Loans and Leases Available for Sale - The Company has
estimated the fair values reported based upon recent sales
and securitizations.
Excess Spread - Fair value is determined using estimated
discounted future cash flows taking into consideration
anticipated prepayment rates.
Servicing Rights - Fair value is determined using estimated
discounted future cash flows taking into consideration
anticipated prepayment rates.
Borrowings Under Revolving Lines of Credit - The carrying
value reported approximates the fair value due to the
short-term nature of the borrowings, and the variable rate
of interest charged on the borrowings.
Subordinated Debt - The fair value of fixed maturity
subordinated debentures is estimated using the rates
currently offered for debentures of similar maturities.
13. Hedging The Company regularly securitizes and sells fixed rate
Transactions mortgage loans. To offset the effects of interest rate
fluctuations on the value of its fixed rate loans held for
sale, the Company in certain cases will hedge its interest
rate risk related to the loans held for sale by selling
U.S. Treasury securities short. The Company classifies
these sales as hedges of specific loans held for sale and
does not record the derivative securities on its financial
statements. The gain or loss derived from these sales is
deferred and recognized as an adjustment to gain on sale of
loans when the loans are securitized.
At June 30, 1996, the Company sold short $15,000,000 of
U.S. Treasury securities due June 30, 1998 to settle on
September 30, 1996. The deferred loss at June 30, 1996 was
approximately $27,000.
F-26
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
During the year ended June 30, 1996, the Company included a
gain of $35,312 on short sales of U.S. Treasury securities
as part of gains on sales of loans.
During the three months ended September 30, 1996, the
Company included a loss of $34,180 on short sales of U. S.
Treasury securities as part of gains on sales of loan.
14. Use of The preparation of financial statements in conformity with
Estimates generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Although the Company believes that it has made reasonable
estimates of the excess spread receivables likely to be
realized, the rate of prepayment and the amount of defaults
realized by the Company are estimates and actual experience
may vary from its estimates. Higher levels of future
prepayments, delinquencies and/or liquidations could result
in decreased excess spreads and the write down of the
receivable, which would adversely affect the Company's
income in the period of adjustment.
The Company's revenues and net income have fluctuated in
the past and may fluctuate in the future principally as a
result of the timing and size of its securitizations. Since
the Company does not recognize gains on the sale of such
loans until it consummates a securitization thereof, the
Company's operating results for a given period can
fluctuate significantly as a result of the timing and level
of securitizations.
F-27
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the Three
Months Ended September 30, 1996 and 1995 is unaudited)
- --------------------------------------------------------------------------------
15. Recent In October 1995, the Financial Accounting Standards Board
Accounting ("FASB") issued Statement of Financial Accounting Standards
Pronounce- ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
ments ("SFAS No. 123"), establishing financial accounting and
reporting standards for stock-based employee compensation
plans. SFAS No. 123 encourages all entities to adopt a new
method of accounting to measure compensation cost of all
employee stock compensation plans based on the estimated
fair value of the award at the date it is granted.
Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value
based method of accounting, which generally does not result
in compensation expense recognition for most plans. The
Company expects to remain with the existing accounting and
will disclose in a footnote to the financial statements pro
forma net income and, earnings per share, as if SFAS No.
123 had been adopted. The accounting requirements of this
Statement are effective for transactions entered into
during fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for
awards granted in their first fiscal year beginning after
December 15, 1994. The Company intends to utilize the
intrinsic value method of accounting.
In June 1996, the Financial Accounting Standards Board
("FASB") issued Statements of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 125"). Pursuant to SFAS No. 125,
after a transfer of financial assets, an entity would be
required to recognize all financial assets and servicing it
controls and liabilities it has incurred and, conversely,
would not be required to recognize financial assets when
control has been surrendered and liabilities when
extinguished. SFAS No. 125 provides standards for
distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 125
will be effective with respect to the transfer and
servicing of financial assets and the extinguishment of
liabilities occurring after December 31, 1996, with earlier
application prohibited. The Company has not completed its
analysis of the impact SFAS No. 125 may have on the
financial condition and results of operations of the
Company.
F-28
<PAGE>
===============================================================================
No person is authorized to give any information or to make any representation
not contained or incorporated by reference in this Prospectus, and if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any sale
made in connection herewith shall, under any circumstances, create any
implication that there has been no change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof. This
Prospectus, does not constitute an offer to sell or solicitation of any offer to
buy the Common Stock by anyone in any jurisdictions in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation of any offer to buy the Common Stock is not qualified to do so, or
to any person to whom it is unlawful to make such an offer or solicitation.
-------------------
TABLE OF CONTENTS
-------------------
Page
Available Information................................... 2
Prospectus Summary...................................... 3
Summary Consolidated Financial Data..................... 7
Risk Factors............................................ 9
The Company.............................................. 18
Use of Proceeds.......................................... 18
Dividend Policy.......................................... 19
Market for Common Stock.................................. 19
Capitalization........................................... 20
Selected Consolidated Financial Data..................... 21
Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 23
Business................................................. 41
Management............................................... 58
Certain Relationships and Related Transactions........... 67
Principal Stockholders................................... 68
Description of Capital Stock............................. 70
Shares Eligible for Future Sale.......................... 73
Market for Common Stock and Related
Stockholder Matters................................... 74
Underwriting............................................. 75
Legal Matters............................................ 77
Experts.................................................. 77
Transfer Agent and Registrar............................. 78
Index to Consolidated Financial Statements................ F-1
Consolidated Financial Statements......................... F-4
Until _____________, 1997, all dealers effecting transactions in the Common
Stock, whether or not participating in this distribution, may be required to
deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
===============================================================================
<PAGE>
===============================================================================
1,000,000 Shares
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
Common Stock
----------
PROSPECTUS
----------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1997
----------------
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Amended and Restated Certificate of Incorporation (the "Certificate
of Incorporation") and the Amended and Restated Bylaws (the "Bylaws") of ABFS
provide for indemnification of its directors and officers to the full extent
permitted by Delaware law. In the event that the Delaware General Corporation
Law (the "Corporation Law") is amended to authorize corporate action further
eliminating or limiting the personal liability of directors and officers, the
Certificate of Incorporation and Bylaws provide the personal liability of the
directors and officers of ABFS shall be so eliminated or limited.
Section 145 of the Corporation Law provides, in substance, that
Delaware corporations shall have the power, under specified circumstances, to
indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding.
Section 145 of the Corporation Law provides that a company may pay the
expenses incurred by an officer or director in defending any civil, criminal,
administrative, or investigative action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding upon an undertaking by or
on behalf of such director or officer to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by the corporation.
The Certificate of Incorporation and Bylaws of ABFS provide that ABFS shall pay
such expenses.
The Company has obtained insurance to cover the Company's directors and
executive officers for liabilities which may be incurred in connection with the
offer, sale and registration of the Common Stock.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Common Stock, other than underwriting
discounts and commissions, all of which will be borne by ABFS:
II-1
<PAGE>
SEC Registration Fee*................................ $ 6,817
NASD Filing Fee*..................................... 2,749
NASDAQ Listing Fee*.................................. 10,750
Expenses of Underwriter.............................. 15,000
Fees and Expenses of Underwriters Counsel............ 125,000
Printing and Engraving .............................. 45,000
Legal Fees and Expenses.............................. 140,000
Accounting Fees and Expenses......................... 50,000
Transfer Agent Fees and Expenses..................... 5,000
Blue Sky Fees and Expenses........................... 15,000
Miscellaneous........................................ 29,684
--------
TOTAL........................................ $445,000
========
- -------------------
*Exact; all other fees and expenses are estimates
Item 26. Recent Sales of Unregistered Securities.
On September 29, 1995, ABFS issued 225,012 shares of common stock to
Anthony J. Santilli, President of ABFS, upon the exercise of stock options at a
price of $2.67 per share.
Exemption from registration for the issuance described above was
claimed pursuant to Section 4(2) of the Securities Act, in reliance upon the
fact that such sales did not involve a public offering. Therefore, such
securities are subject to certain transfer restrictions.
Item 27. Financial Statements and Exhibits
The following documents were filed as part of this Registration
Statement.
(a) Financial Statements:
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Reports of Independent Certified Public Accountants
Consolidated balance sheets as of June 30, 1996 and 1995
and September 30, 1996 (unaudited)
II-2
<PAGE>
Consolidated statements of operations for the years ended
June 30, 1996, 1995 and 1994 and the three months ended
September30, 1996 and 1995 (unaudited)
Consolidated statements of stockholders' equity for the years
ended June 30, 1996, 1995 and 1994 and the three months
ended September30, 1996 (unaudited)
Consolidated statements of cash flows for the years ended
June 30, 1996, 1995 and 1994 and the three months ended
September30, 1996 and 1995 (unaudited)
Notes to Consolidated Financial Statements
(b) Exhibits:
Regulation S-B
Exhibit Number Description
-------------- -----------
1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference from Exhibit 3.1 of
the Annual Report on Form 10-KSB of ABFS for the
fiscal year ended June 30, 1996, File No.
0-22472, filed on September 27, 1996 (the "1996
Form 10-KSB")).
3.2 Bylaws of ABFS.
4.1 Specimen of Common Stock Certificate.
4.2 Form of Unsecured Investment Note (Incorporated
by reference to Exhibit 4.1 of Amendment No.1 to
Form SB-2 Filed April 29, 1994, Registration
Number 33-76390 (the "Form SB-2")).
*To be filed by Amendment.
II-3
<PAGE>
Regulation S-B
Exhibit Number Description
-------------- -----------
4.3 Form of Unsecured Investment Note issued pursuant
to Indenture with First Trust National
Association. (Incorporated by reference to
Exhibit 4.5 of Amendment No. One to the Form SB-2
filed on December 14, 1995, Registration Number
33-98636 (the "1996 Form SB-2").
4.4 Form of Indenture by and between ABFS and First
Trust National Association (Incorporated by
reference to Exhibit 4.6 of the Form SB-2 filed
on October 26, 1995, Registration Number
33-98636).
5 Opinion of Blank Rome Comisky& McCauley.
10.1 Loan and Security Agreement between Upland
Mortgage and BankAmerica Business Credit, Inc.
dated May 23, 1996 (Incorporated by reference
from the 1996 Form 10-KSB).
10.2 Amended and Restated Stock Option Plan.
10.3 Stock Option Award Agreement (Incorporated by
reference to Exhibit 10.1 of the Registration
Statement on Form S-11, Registration No. 33-59042
filed on February 26, 1993 ("Form S-11")).
10.4 Line of Credit Agreement by and between American
Business Credit, Inc. and Eagle National Bank
(Incorporated by reference to Exhibit 10.4 of
Amendment No. 1 on Form SB-2, Registration No.
33-59042, filed on April 29, 1993 (the "1993
SB-2")).
10.5 Agreement dated April 12, 1993 between American
Business Credit, Inc. and Eagle National Bank
(Incorporated by reference to Exhibit 10.5 of the
1993 SB-2).
10.6 1995 Stock Option Plan for Non-Employee
Directors.
10.7 Form of Option Award Agreement for Non-Employee
Directors Plan (Incorporated by reference from
Exhibit 10.13 of the 1996 Form 10-KSB).
II-4
<PAGE>
Regulation S-B
Exhibit Number Description
-------------- -----------
10.8 Interim Warehouse and Security Agreement between
Upland Mortgage and Prudential Securities Realty
Funding Corporation dated April 25, 1996
(Incorporated by reference from Exhibit 10.14 of
the 1996 Form 10-KSB).
10.9 Lease dated January 7, 1994 by and between TWC
Realty Fund IV Pennsylvania Trust and ABFS
(Incorporated by reference from Registration
Statement on Form SB-2 filed March 15, 1994, File
No. 33-76390).
10.10 First Amendment to Agreement of Lease by and
between TCW Realty Fund IV Pennsylvania Trust and
ABFS dated October 24, 1994. (Incorporated by
reference from Exhibit 10.9 to ABFS' Form 10-KSB
for the fiscal year ended June 30, 1995 (the
"1995 10-KSB")).
10.11 Second Amendment to Agreement of Lease by and
between TWC Realty Fund IV Pennsylvania Trust and
ABFS dated December 23, 1994 (Incorporated by
reference from Exhibit 10.10 to the 1995 10-KSB).
10.12 Third Amendment to Lease between TWC Realty Fund
IV Pennsylvania Trust and ABFS dated July 25,
1995 (Incorporated by reference from Exhibit
10.11 to the 1995 10-KSB).
10.13 Revolving Credit and Security Agreement dated
August 12, 1994 between ABFS, American Business
Credit, Inc., HomeAmerican Credit, Inc. and
Meridian Bank (Incorporated by reference from
Exhibit 10.7 to the 1995 10-KSB).
10.14 Promissory Note of Anthony J. Santilli, Jr. and
Stock Pledge Agreement dated September 29, 1995
(Incorporated by reference to Exhibit 10.14 of
the 1996 Form SB-2).
10.15 Form of Employment Agreement with Anthony J.
Santilli, Jr. and Beverly Santilli.*
*To be filed by Amendment.
II-5
<PAGE>
Regulation S-B
Exhibit Number Description
-------------- -----------
10.16 Management Incentive Plan.
10.17 Loan and Security Agreement dated December 12,
1996 between American Business Credit, Inc. and
Finova Capital Corporation.
16 Letter on Change in Certifying Accountant
(Incorporated by reference from ABFS' Current
Report on Form 8-K dated March 11, 1996, File No.
0-22472).
21 Subsidiaries of the Company.
23.1 Consent of Fishbein & Company, P.C.
23.2 Consent of Blank Rome Comisky& McCauley (See
Exhibit 5.1).
23.3 Consent of BDO Seidman LLP.
24.1 Power of attorney (included on signature page).
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-B for a Registration Statement on Form SB-2.
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described in Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-6
<PAGE>
(b) The undersigned hereby undertakes:
(1) that for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the Registration Statement as of the time it was
declared effective; and
(2) that for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Philadelphia, Commonwealth of Pennsylvania on December
26, 1996.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: December 26, 1996 By:/s/ Anthony J. Santilli, Jr.
-----------------------------------------------
Anthony J. Santilli, Jr., Chairman, President,
Chief Executive Officer, Chief Operating
Officer, Treasurer and Director (Duly
Authorized Officer)
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Anthony J. Santilli, his true and lawful
attorney-in-fact and agent with full power of substitution or resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documentation in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been duly signed below by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Capacity Date
- -------------------------------------- ----------------------------------------------- -----------------------
<S> <C> <C>
/S/ Anthony J. Santilli, Jr.
- --------------------------------- Chairman, President, Chief Executive Officer, December 26, 1996
Anthony J. Santilli, Jr. Chief Operating Officer, Treasurer and Director
(Principal Executive and Operating Officer)
/s/ David M. Levin
- --------------------------------- Senior Vice President-Finance and Chief December 26, 1996
David M. Levin Financial Officer (Principal Financial and
Accounting Officer)
/s/ Leonard Becker
- --------------------------------- Director December 26, 1996
Leonard Becker
- --------------------------------- Director
Richard Kaufman
/s/ Michael DeLuca
- --------------------------------- Director December 26, 1996
Michael DeLuca
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
S-B Exhibit Numbers Description
- ------------------- -----------
1 Form of Underwriting Agreement*
3.2 Bylaws
4.1 Specimen Common Stock Certificate
5 Opinion of Blank Rome Comisky & McCauley
10.2 Amended and Restated Stock Option Plan
10.6 1995 Stock Option Plan for Non-Employee Directors
10.15 Form of employment agreement with Anthony J. Santilli,
Jr. and Beverly Santilli*
10.16 Management Incentive Plan
10.17 Loan and Security Agreement dated December 12, 1996
between American Business Credit, Inc. and Finova
Capital Corporation
21 Subsidiaries of the Company
23.1 Consent of Fishbein & Company, P.C.
23.2 Consent of Blank Rome Comisky & McCauley (See Exhibit 5)
23.3 Consent of BDO Seidman LLP
*To be filed by Amendment.
<PAGE>
BYLAWS
OF
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
These Bylaws are supplemental to the Delaware General
Corporation Law, as the same shall from time to time be in
effect, and are subject to any contrary provisions contained
in the Certificate of Incorporation of this Corporation, as
amended from time to time.
ARTICLE I. NAME AND SEAL.
Section 101. Name. The name of the Corporation is American
Business Financial Services, Inc.
Section 102. State of Incorporation. The Corporation has
been incorporated under the laws of the State of Delaware.
Section 103. Seal. The corporate seal of the Corporation shall
have inscribed thereon the name of the Corporation, the year of its
organization, the words "Corporate Seal", and the name of the State of
Incorporation. The seal may be used by any person authorized by the Board of
Directors of the Corporation or by these Bylaws by causing the seal or a
facsimile thereof to be impressed or affixed, or in any manner reproduced.
ARTICLE II. REGISTERED AND PRINCIPAL OFFICES
Section 201. Registered Office. The registered office of the
Corporation shall be located within the State of Delaware, at such place as the
Board of Directors shall, from time to time, determine.
Section 202. Offices. The principal office of the Corporation
and any other offices of the Corporation shall be located at such places, within
and without the State of Delaware, as the Board of Directors may from time to
time determine or as the business of the Corporation may require.
1
<PAGE>
ARTICLE III. MEETINGS OF SHAREHOLDERS.
Section 301. Place of Meetings. All meetings of the
shareholders shall be held at such place or places, within or without the State
of Delaware, as shall be determined by the Board of Directors from time to time.
Section 302. Annual Meetings. The annual meeting of the
shareholders for the election of directors and the transaction of such other
business as may properly come before the meeting shall be held in each calendar
year at such place and at such time as the Board of Directors shall fix, or if
the Board of Directors fails to set a date and time, on the third Wednesday of
May at ten o'clock a.m., if not a legal holiday, and if such day is a legal
holiday, then such meeting shall be held on the next business day. Any business
which is a proper subject for shareholder action may be transacted at the annual
meeting, irrespective of whether the notice of said meeting contains any
reference thereto, except as otherwise provided by applicable statute or
regulation.
Section 303. Special Meetings. Special meetings of the
shareholders may be called at any time by the Board of Directors, the Chairman
of the Board, or by shareholders entitled to cast at least fifty percent (50%)
of the vote which all shareholders are entitled to cast at the particular
meeting.
Section 304. Conduct of Shareholders' Meetings. The Chairman
of the Board shall preside at all shareholders' meetings, or, in his absence,
the Chief Executive Officer, or in his absence, the President. The officer
presiding over a shareholders' meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of the meetings at
which he presides, including, without limitation, the establishment of the
procedures for the maintenance of order, safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to any such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls. The
revocation of a proxy shall not be effective until written notice thereof has
been given to the Secretary of the Corporation.
ARTICLE IV. DIRECTORS AND BOARD MEETINGS.
Section 401. Management by Board of Directors. The business
and affairs of the Corporation shall be managed by its Board of Directors,
subject to any contrary provisions contained in the Certificate of
Incorporation, as amended from time to time. The Board of Directors may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation (as amended from time to
time) or by these Bylaws directed or required to be exercised or done by the
shareholders.
Section 402. Nomination for Directors. Nominations for
election to the Board of Directors may be made by the Board of Directors or by
any stockholder of any outstanding class of
2
<PAGE>
capital stock of the Corporation entitled to vote for the election of Directors,
subject to any contrary provisions contained in the Certificate of
Incorporation, as amended from time to time. Nominations, other than those made
by or on behalf of the existing management of the Corporation, shall be made in
writing, and shall be delivered to the Chairman of the Board of the Corporation
not less than 14 days nor more than 50 days prior to any meeting of shareholder
called for the election of directors; shall be accompanied by the written
consent of the proposed nominee; and shall contain the following information to
the extent known to the notifying shareholder:
(a) The name and address of each proposed nominee;
(b) The principal occupation of each proposed nominee;
(c) The total number of shares of capital stock of the
Corporation that will be voted for each of the proposed nominees;
(d) The name and residence address of the notifying
shareholder;
(e) The number of shares of capital stock of the
corporation owned by the notifying shareholder;
(f) The information regarding the proposed nominee which
would be required to be disclosed in a proxy statement filed under the
Securities Exchange Act of 1934.
Nominations not made in accordance herewith may be disregarded by
the Chairman of the meeting and, upon his instructions, the judges of elections
may disregard all votes cast for each such nominee.
Section 403. Number of Directors and Terms. The number of
directors and terms of the directors shall be as set forth in the Certificate of
Incorporation, as amended from time to time.
Section 404. Resignations. Any director may resign at any
time. Such resignation shall be in writing, but the acceptance thereof shall not
be necessary to make it effective.
Section 405. Compensation of Directors. No director shall be
entitled to any salary as such; but the Board of Directors may fix, from time to
time, a reasonable fee to be paid each director for his services in attending
meetings of the Board.
Section 406. Regular Meetings. A regular meeting of the Board
of Directors shall be held annually, immediately following the annual meeting of
shareholders at the place where such meeting of the shareholders is held or at
such other place, date and hour as the new Board of Directors may designate. At
such meeting the Board of Directors shall elect officers of the Corporation. In
addition to such regular meeting, the Board of Directors shall have the power to
fix by resolution the place, date and hour of other regular meetings of the
Board of Directors. Notice of a regular meeting of the Board of Directors need
not be given unless the same is held at other than the time or place for holding
such meetings as fixed in accordance with this Section, in which event notice
shall be given at least 24 hours (in the case of notice by telephone, telex, TWX
or telecopier) or 48 hours (in the case of notice by telegraph, courier service
or express mail) or five days (in the case of notice by first class mail) before
the time at which the meeting is to be held.
3
<PAGE>
Section 407. Special Meetings. Special meetings of the Board
of Directors shall be held whenever called by the Chairman of the Board or
directors entitled to cast two or more votes at a meeting of directors. Notice
of every special meeting of the Board of Directors shall be given to each
director by telephone or in writing at least 24 hours (in the case of notice by
telephone, telex, TWX or telecopier) or 48 hours (in the case of notice by
telegraph, courier service or express mail) or five days (in the case of notice
by first class mail) before the time at which the meeting is to be held. Every
such notice shall state the time and place of the meeting. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of the
Board of Directors need be specified in a notice of the meeting.
Section 408. Reports and Records. The reports of officers and
committees shall be filed with the Secretary of the Board. The Board of
Directors shall keep complete records of its proceedings in a minute book kept
for that purpose. When a director shall request it, the vote of each director
upon a particular question shall be recorded in the minutes.
Section 409. Executive Committee. The Board of Directors may,
without limiting its right to establish other committees, establish an Executive
Committee of the Board which shall consist of any one or more directors. The
Executive Committee shall have and exercise the authority of the Board of
Directors in the management and affairs of the Corporation, except as otherwise
provided in the resolution establishing the Executive Committee.
Section 410. Absence or Disqualification of Committee Members.
In the absence or disqualification of any member of any committee or committees
established by the Board of Directors, the member or members thereof present at
any meeting of such committee or committees, and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
director to act at the meeting in the place of any such absent or disqualified
member.
ARTICLE V. OFFICERS.
Section 501. Election and Office. The officers of the
Corporation shall be the Chairman of the Board, the Chief Executive Officer, the
President, one or more other Vice-Presidents, the Secretary and the Treasurer,
who shall be elected by the Board of Directors. The Board of Directors may also
elect one or more Executive Vice-Presidents and one or more assistant officers
to any office named herein. Any two or more offices may be held by the same
person.
Section 502. Term. The officers and any elected assistant
officer shall each serve at the pleasure of the Board of Directors until the
next annual meeting of the Board of Directors following the annual meeting of
shareholders and, if later, until his successor shall have been elected and
shall qualify, even though his term of office as herein provided has otherwise
expired, except in the event of his earlier death, resignation or removal.
4
<PAGE>
Section 503. Powers and Duties of the Chairman of the Board.
Unless otherwise determined by the Board of Directors, the Chairman of the Board
of Directors, if any, shall preside at all meetings of the Board of Directors
and shareholders. He shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meetings at which he presides,
including, without limitation, the establishment of the procedures for the
maintenance of order, safety, limitations on the time allotted to questions or
comments on the affairs of the Corporation, restrictions on entry to any such
meeting after the time prescribed for the commencement thereof, and the opening
and closing of the voting polls. In the event of the absence or disability of
the Chief Executive Officer, the Chairman of the Board shall perform the duties
and have the powers and authorities of the Chief Executive Officer. He shall
have such other powers and duties as may be assigned to him by the Board of
Directors.
Section 504. Powers and Duties of the Chief Executive Officer.
The Chief Executive Officer shall have general supervision of all of the
departments and business of the Corporation. The Chief Executive Officer shall
be responsible for having all orders and resolutions of the Board of Directors
carried into effect. The Chief Executive Officer shall execute on behalf of the
Corporation and may affix or cause to be affixed a seal to all authorized
documents and instruments requiring such execution, except to the extent that
signing and execution thereof shall have been delegated to some other officer or
agent of the Corporation by the Board of Directors or by the Chief Executive
Officer. The Chief Executive Officer shall be a member of the Board of
Directors.
Section 505. Powers and Duties of the President. The President
shall perform such duties as are prescribed by the Board of Directors or the
Chief Executive Officer. In the event of the absence or disability of the Chief
Executive Officer and the Chairman of the Board, the President shall perform the
duties and have the powers and authorities of the Chief Executive Officer. The
President shall execute on behalf of the Corporation and may affix or cause to
be affixed a seal to all authorized documents and instruments requiring such
execution, except to the extent that signing and execution thereof shall have
been delegated to some other officer or agent of the Corporation by the Board of
Directors or the Chief Executive Officer. The President need not be a member of
the Board of Directors.
Section 506. Powers and Duties of the Vice-Presidents. Each
Vice-President shall have the powers and perform the duties as may be designated
by the Board of Directors. Any Vice-President designated as having
responsibility for a specific area of the Corporation's affairs shall rank
superior to the other Vice-Presidents in relation to matters within that area.
Section 507. Powers and Duties of the Secretary. The Secretary
shall be responsible for the keeping of the minutes of all meetings of the Board
of Directors, shareholders and all committees, in books provided for that
purpose, and for the giving and serving of all notices for the Corporation. He
shall have charge of the corporate seal, the certificate books, transfer books
and stock ledgers, and other such books and papers as the Board of Directors may
direct. He shall perform all other duties ordinarily incident to the office of
5
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Secretary and shall have such other powers and perform such other duties as may
be assigned to him by the Board of Directors.
Section 508. Powers and Duties of the Treasurer. Unless
otherwise determined by the Board of Directors, the Treasurer shall have charge
of all the funds and securities of the Corporation which may come into his
hands. When necessary or proper, unless otherwise determined by the Board of
Directors, he shall endorse for collection on behalf of the Corporation checks,
notes, and other obligations, and shall deposit the same to the credit of the
Corporation in such banks or depositories as the Board of Directors may
designate and shall sign all receipts and vouchers for payments made to the
Corporation. He shall be responsible for the regular entry, in books of the
Corporation to be kept for such purpose, of a full and accurate account of all
funds and securities received and paid by him on account of the Corporation.
Whenever required by the Board of Directors, he shall render a statement of the
financial condition of the Corporation. He shall have such other powers and
shall perform such other duties as may be assigned to him from time to time by
the Board of Directors.
Section 509. Powers and Duties of the Assistant Officers.
Unless otherwise determined by the Board of Directors, each assistant officer,
if elected, shall have the powers and perform the duties as may be designated by
his respective superior officer.
Section 510. Delegation of Office. The Board of Directors may
delegate the powers or duties of any officer of the Corporation to any other
person from time to time.
Section 511. Vacancies. The Board of Directors shall have the
power to fill any vacancies in any officer occurring from whatever reason.
Section 512. Compensation. The Board of Directors shall
determine the compensation of the Chief Executive Officer and President.
ARTICLE VI. PERSONAL LIABILITY OF DIRECTORS AND INDEMNIFICATION.
Section 601. Personal Liabilities of Directors. The personal
liability of directors shall be limited as stated in the Certificate of
Incorporation, as amended from time to time.
Section 602. Mandatory Indemnification of Directors and
Officers. The Corporation shall, to the fullest extent permitted by applicable
law, indemnify its directors and executive officers who were or are a party or
are threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or investi
gative (whether or not such action, suit or proceeding arises or arose by or in
the right of the Corporation or other entity) by reason of the fact that such
director or executive officer is or was a director or executive officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, general partner, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise (including
6
<PAGE>
service with respect to employee benefit plans), against expenses (including,
but not limited to, attorneys' fees and costs), judgments, fines (including
excise taxes assessed on a person with respect to any employee benefit plan) and
amounts paid in settlement actually and reasonably incurred by such director or
officer in connection with such action, suit or proceeding, except as otherwise
provided in Section 604 hereof. Persons who were directors or officers of the
Corporation prior to the date this Section is approved by shareholders of the
Corporation, but who do not hold such office on or after such date, shall not be
covered by this Section 602. A director or executive officer of the Corporation
entitled to indemnification under this Section 602 is hereafter called a "person
covered by Section 602 hereof." The term "executive officer" as used herein
shall refer to the Chairman of the Board, Chief Executive Officer, President and
other officers as the Board of Directors may by resolution designate as
"executive officers" for purposes of this Article VI.
Section 603. Expenses. Expenses incurred by a person covered
by Section 602 hereof in defending a threatened, pending or completed civil or
criminal action, suit or proceeding shall be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Corporation, except as otherwise provided in Section 604.
Section 604. Exceptions. No indemnification under Section 602
or advancement or reimbursement of expenses under Section 603 shall be provided
to a person covered by Section 602 hereof (a) with respect to expenses or the
payment of profits arising from the purchase or sale of securities of the
Corporation in violation of Section 16(b) of the Securities Exchange Act of
1934; (b) if a final unappealable judgment or award establishes that such
director or officer engaged in wilful misconduct or recklessness; (c) for
expenses or liabilities of any type whatsoever (including, but not limited to,
judgments, fines, and amounts paid in settlement) which have been paid directly
to, or for the benefit of, such person by an insurance carrier under a policy of
officers' and directors' liability insurance whose premiums are paid for by the
Corporation or by an individual or entity other than such director or officer;
and (d) for amounts paid in settlement of any threatened, pending or completed
action, suit or proceeding without the written consent of the Corporation, which
written consent shall not be unreasonably withheld. The Board of Directors of
the Corporation is hereby authorized, at any time by resolution, to add to the
above list of exceptions from the right of indemnification under Section 602 or
advancement or reimbursement of expenses under Section 603, but any such
additional exception shall not apply with respect to any event, act or omission
which has occurred prior to the date that the Board of Directors in fact adopts
such resolution. Any such additional exception may, at any time after its
adoption, be amended, supplemented, waived or terminated by further resolution
of the Board of Directors of the Corporation.
Section 605. Continuation of Rights. The indemnification and
advancement or reimbursement of expenses provided by, or granted pursuant to,
this Article shall continue as to a person who has ceased to be a director or
officer of the Corporation, and shall inure to the benefit of the heirs,
executors and administrators of such person.
7
<PAGE>
Section 606. General Provisions.
(a) The term "to the fullest extent permitted by applicable
law," as used in this Article, shall mean the maximum extent permitted by public
policy, common law or statute. Any person covered by Section 602 hereof may, to
the fullest extent permitted by applicable law, elect to have the right to
indemnification or to advancement or reimbursement of expenses, interpreted, at
such person's option, (i) on the basis of the applicable law on the date this
Article was approved by shareholders, or (ii) on the basis of the applicable law
in effect at the time of the occurrence of the event or events giving rise to
the action, suit or proceeding, or (iii) on the basis of the applicable law in
effect at the time indemnification is sought.
(b) The right of a person covered by Section 602 hereof to be
indemnified or to receive an advancement or reimbursement of expenses pursuant
to Section 603 (i) may also be enforced as a contract right pursuant to which
the person entitled thereto may bring suit as if the provisions hereof were set
forth in a separate written contract between the Corporation and such person,
(ii) to the fullest extent permitted by applicable law, is intended to be
retroactive and shall be available with respect to events occurring prior to the
adoption hereof, and (iii) shall continue to exist after the rescission or
restrictive modification (as determined by such person) of this Article with
respect to events, acts or omissions occurring before such rescission or
restrictive modification is adopted.
(c) If a request for indemnification or for the advancement or
reimbursement of expenses pursuant hereto is not paid in full by the Corporation
within thirty days after a written claim has been received by the Corporation
together with all supporting information reasonably requested by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim (plus interest at the
prime rate announced from time to time by the Corporation's primary banker) and,
if successful in whole or in part, the claimant shall be entitled also to be
paid the expenses (including, but not limited to, attorney's fees and costs) of
prosecuting such claim. Neither the failure of the Corporation (including its
Board of Directors, independent legal counsel, or its shareholders) to have made
a determination prior to the commencement of such action that indemnification of
or the advancement or reimbursement of expenses to the claimant is proper in the
circumstances, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel, or its shareholders) that the
claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses, shall be a defense to the action or create a
presumption that the claimant is not so entitled.
(d) The indemnification and advancement or reimbursement of
expenses provided by, or granted pursuant to, this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement or reimbursement of expenses may be entitled under any by-law,
agreement, vote of shareholders or directors or otherwise, both as to action in
such director or officer's official capacity and as to action in another
capacity while holding that office.
8
<PAGE>
(e) Nothing contained in this Article shall be construed to
limit the rights and powers the Corporation possesses under the Delaware General
Corporation Law or otherwise, including, but not limited to, the powers to
purchase and maintain insurance, create funds to secure or insure its
indemnification obligations, and any other rights or powers the Corporation may
otherwise have under applicable law.
(f) The provisions of this Article may, at any time (and
whether before or after there is any basis for a claim for indemnification or
for the advancement or reimbursement of expenses pursuant hereto), be amended,
supplemented, waived, or terminated, in whole or in part, with respect to any
person covered by Section 602 hereof by a written agreement signed by the
Corporation and such person.
(g) The Corporation shall have the right to appoint the
attorney for a person covered by Section 602 hereof, provided such appointment
is not unreasonable under the circumstances.
Section 607. Optional Indemnification. The Corporation may, to
the fullest extent permitted by applicable law, indemnify, and advance or
reimburse expenses for, persons in all situations other than that covered by
this Article.
ARTICLE VII. SHARES OF CAPITAL STOCK.
Section 701. Authority to Sign Share Certificates. Every share
certificate shall be signed by the Chairman of the Board, Chief Executive
Officer, President or one of the Vice Presidents and by the Secretary or one of
the Assistant Secretaries.
Section 702. Lost or Destroyed Certificates. Any person
claiming a share certificate to be lost, destroyed or wrongfully taken shall
receive a replacement certificate if said shareholder shall have: (a) requested
such replacement certificate before the Corporation has notice that the shares
have been acquired by a bona fide purchaser; (b) provided the Corporation with
an indemnity agreement satisfactory in form and substance to the Board of
Directors; and (c) satisfied any other reasonable requirements (including,
without limitation, providing a surety bond) fixed by the Board of Directors.
ARTICLE VIII. GENERAL.
Section 801. Fiscal Year. The fiscal year of the Corporation
shall be determined by the Board of Directors. In the absence of such
determination, the fiscal year shall be the calendar year.
9
<PAGE>
Section 802. Signing Checks. All checks or demands for money
and notes of the Corporation shall be signed by such officer, officers, or other
person or persons as the Board of Directors may from time to time designate.
Section 803. Text of Proposed Resolution in Written Notice.
Whenever the language of a proposed resolution is included in a written notice
to shareholders, the shareholders' meeting considering the resolution may adopt
it with such clarifying or other amendments as do not enlarge its original
purpose, without further notice to shareholders not present in person or by
proxy.
Section 804. Absentee Participation in Meetings. One or more
directors or shareholders may participate in a meeting of the Board of
Directors, or of a committee of the Board, or a meeting of the shareholders, by
means of a conference, telephone or similar communications equipment, by means
of which all persons participating in the meeting can hear each other.
Section 805. Emergency Bylaws. In the event of any emergency
resulting from warlike damage or an attack on the United States or any nuclear
or atomic disaster, and until the termination of such emergency, the following
Bylaw provisions shall be in effect, notwithstanding any other provisions of
these Bylaws:
(a) A special meeting of the Board of Directors may be called
by any officer or director upon one hour's notice, and
(b) The director or directors in attendance at the meeting
shall constitute a quorum.
Section 806. Severability. If any provision of these bylaws is
illegal or unenforceable as such, such illegality or unenforceability shall not
affect any other provision of these bylaws and such other provisions shall
continue in full force and effect.
Section 807. Gender. The masculine gender of pronouns includes
the feminine and neuter.
ARTICLE IX. AMENDMENT OR REPEAL.
Section 901. Amendment or Repeal by Shareholders. These Bylaws
may be amended or repealed, in whole or in part, by the affirmative vote of a
majority of all of the shares of common stock of the Corporation issued and
outstanding at any annual or special meeting of the shareholders duly convened
after notice to the shareholders of that purpose.
Section 902. Amendment or Repeal by the Board of Directors.
These Bylaws may be amended or repealed, in whole or in part, by the affirmative
vote of a majority of the votes cast
10
<PAGE>
by all members of the Board of Directors at any regular or special meeting of
the Board duly convened.
Section 903. Recording Amendments and Repeals. The text of all
amendments and repeals to these Bylaws shall be attached to the Bylaws with a
notation of the date of each such amendment or repeal and a notation of whether
such amendment or repeal was adopted by the shareholders or the Board of
Directors.
ARTICLE X. ADOPTION OF BYLAWS AND RECORD OF AMENDMENTS AND REPEALS.
Section 1001. Adoption and Effective Date. These Bylaws have
been adopted as the Bylaws of the Corporation this 10th day of December, 1996,
and shall be effective as of said date.
Section 1002. Amendments or Repeals.
Date Amended
Section Involved or Repealed Adopted By
---------------- ----------- ----------
11
<PAGE>
NUMBER _____________
COMMON STOCK
CUSIP No. 024768 10 6
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER
SHARE OF
American Business Financial Services, Inc. (the "Corporation"), a Delaware
corporation. The shares represented by this certificate are transferable only on
the stock transfer books of the Corporation by the holder of record hereof, or
by his duly authorized attorney or legal representative, upon the surrender of
this certificate properly endorsed. This certificate is not valid until
countersigned and registered by the Corporation's transfer agent and registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
DATED ___________________________
_________________________ _________________________
Beverly Santilli, Anthony J. Santilli, Jr.
Executive Vice President President and
and Corporate Secretary Chief Executive Officer
[Seal]
Countersigned and Registered:
American Stock Transfer & Trust Company
Transfer Agent and Registrar
By:_____________________________________
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
The shares represented by this certificate are issued subject to all
the provisions of the Amended and Restated Certificate of Incorporation
("Certificate of Incorporation") and the Amended and Revised Bylaws ("Bylaws")
of American Business Finances, Inc. (the "Company") as from time to time amended
(copies of which are on file at the principal executive offices of the Company).
The Company will furnish to any stockholder upon request and without
charge a full statement of the powers, designations, preferences and relative
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made to the Corporation or to its Transfer
Agent and Registrar.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT________Custodian___________
TEN ENT - as tenants by the (Cust) (Minor)
entirety Under Uniform Gift to Minors Act -____________
JT TEN - as joint tenants with (State)
right of survivorship UNIF TRANS MIN ACT_________Custodian__________
and not as tenants (Cust) (Minor)
in common. Under Uniform Transfers to Minors Act -_______
Additional abbreviations may also be used though not in the above list.
For Value Received,_____________________________ hereby sell, assign
and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
__________________________________________________________________________Shares
of Class A Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated__________________________ _____________________________
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
By_____________________________
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C.
RULE 17Ad-15.
<PAGE>
December 27 , 1996
American Business Financial Services, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, DE 19810
Re: American Business Financial Services, Inc.
Common Stock
Registration Statement on Form SB-2
-----------------------------------
Gentlemen:
We have acted as counsel to American Business Financial Services, Inc.
(the "Company") in connection with the Registration Statement on Form SB-2 (the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the offer
and sale by the Company of up to 1,150,000 shares of Common Stock, par value
$0.001, per share (the "Common Stock"). This opinion is being furnished pursuant
to the requirements of Item 601(b)(5) of Regulation S-B.
In rendering this opinion, we have examined only the documents listed
on Exhibit "A" attached hereto. We have not performed any independent
investigation other than the document examination described. Our opinion is
therefore qualified in all respects by the scope of that document examination.
We have assumed and relied, as to questions of fact and mixed questions of law
and fact, on the truth, completeness, authenticity and due authorization of all
certificates, documents and records examined, and the genuineness of all
signatures.
This opinion is limited to the laws of the State of Delaware and no
opinion is expressed as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that the
shares of Common Stock of the Company which are being offered and sold by the
Company pursuant to the Registration
<PAGE>
American Business Financial Services, Inc.
December 27, 1996
Page 2
Statement, when sold in the manner and for the consideration contemplated by the
Registration Statement, will be legally issued, fully paid and non-assessable.
The opinions expressed herein are qualified in all respects by the
following: (a) no opinion is rendered as to the availability of equitable
remedies including, but not limited to, specific performance and injunctive
relief; (b) the effect of bankruptcy, reorganization, insolvency, fraudulent
conveyance, moratorium and other similar laws or equitable principles affecting
creditors' rights or remedies; and (c) the effect of applicable law and court
decisions which may now or hereafter limit or render unenforceable certain
rights and remedies.
This opinion is given as of the date hereof. We assume no obligation to
update or supplement this opinion to reflect any facts or circumstances which
may hereafter come to our attention or any changes in laws which may hereafter
occur.
This opinion is strictly limited to the matters stated herein and no
other or more extensive opinion is intended, implied or to be inferred beyond
the matters expressly stated herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus, which is part of the Registration Statement.
Sincerely,
/s/ Blank Rome Comisky & McCauley
---------------------------------
BLANK ROME COMISKY & McCAULEY
<PAGE>
EXHIBIT "A"
-----------
1. The Company's Amended and Restated Certificate of Incorporation.
2. The Company's Amended and Restated Bylaws.
3 The Company's Minute Books from June 1988 through the date hereof.
4. Form of Stock Certificate filed as an exhibit to the Registration Statement.
5. The Registration Statement.
6. Good Standing Certificate from the Secretary of State of the
State of Delaware.
<PAGE>
Exhibit 10.2
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
1. Purpose. The purpose of the American Business Financial Services,
Inc. Amended and Restated Stock Option Plan (the "Plan") is to further the
earnings of American Business Financial Services, Inc. (the "Company"). The Plan
provides for the award of long-term incentives to those officers and other key
employees who make substantial contributions to the Company by their loyalty,
industry, and invention. The Company intends that the Plan will facilitate
attracting, retaining, and motivating management employees of high caliber and
potential.
2. Administration. The Plan shall be administered by a committee (the
"Committee") of the Board of Directors of American Business Financial Services,
Inc. (the "Board"). The Committee shall consist of three (3) or more persons
selected by the Board of Directors, each of whom shall be (i)an outside director
as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor section; and (ii)a "non-employee" director within
the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as
amended, or any corresponding rule, except that failure of the Committee for any
reason to be composed solely of non-employee directors for any reason shall not
prevent any option from being considered granted under this Plan. Without
limiting the foregoing, the Committee shall have full and final authority in its
discretion to interpret the provisions of the Plan and to decide all questions
of fact arising in its application; to determine the employees to whom awards
shall be made under the Plan; to determine the type of awards to be made and the
amount, size and terms of each such award; to determine the time when awards
shall be granted; and to make all other determinations necessary or advisable
for the administration of the Plan.
3. Stock Subject to the Plan. The shares that may be issued under the
Plan shall not exceed in the aggregate more than 460,000 shares of common stock,
par value $.001 per share (the "Common" Stock) of the Company. Such shares may
be authorized and unissued shares or treasury shares. Except as otherwise
provided herein, any shares subject to an outstanding option or right which for
any reason expires or is terminated unexercised as to such shares shall again be
available under the Plan.
4. Eligibility to Receive Awards. Persons eligible to receive awards
under the Plan shall be limited to those officers and other key employees of the
Company who are in positions in which their decisions, actions and counsel will
have a significant impact upon the profitability and success of the Company.
Directors of the Company who are not otherwise officers or employees of the
Company shall not be eligible to participate in the Plan. Notwithstanding
anything to this Plan to the contrary, no individual shall receive option awards
with respect to more than 75% of the shares reserved for issuance under the
Plan.
5. Form of Awards. Awards may be made from time to time by the
Committee in the form of stock options to purchase shares of Common Stock. Stock
options may be options which are intended to qualify as incentive stock options
within the meaning of Section 422 of the
<PAGE>
Code, or any amendment or substitute thereto ("Incentive Stock Options") or
options which are not intended to so qualify ("Non-Qualified Stock Options").
6. Stock Options. Stock options for the purchase of Common Stock shall
be evidenced by written agreements in such form not inconsistent with the Plan
as the Committee shall approve from time to time, which shall contain, in
substance, the following terms and conditions:
(a) Type of Option. Each option agreement shall identify the
options represented thereby as Incentive Stock Options or Non-Qualified Stock
Options, as the case may be.
(b) Option Price. Subject to the restrictions set forth below
regarding Incentive Stock Options, the purchase price of stock subject to an
option shall be no less than the fair market value at the time of grant, as
determined by the Committee.
(c) Exercise Term. Each option agreement shall state the
period or periods of time within which the option may be exercised, in whole or
in part, which shall be such period or periods of time as may be determined by
the Committee, provided that no option shall be exercisable after ten (10) years
from the date of grant thereof. The Committee may, in its discretion, provide in
the option agreement circumstances under which the option shall become
immediately exercisable, and may, notwithstanding the foregoing, accelerate the
exercisability of any option at any time.
(d) Payment for Shares. The purchase price of the shares with
respect to which an option is exercised shall be payable in full at the time of
exercise in cash, Common Stock of the Company (valued at the fair market value
thereof), or a combination thereof, as the Committee may determine and subject
to such terms and conditions prescribed by the Committee for such purpose.
(e) Rights Upon Termination of Employment. The award agreement
shall specify a Participants rights upon termination of employment. In the case
of Incentive Stock Options, the restrictions set forth below must be followed .
(f) Nontransferability. Each option agreement shall state that
the option is not transferable other than by will or the laws of descent and
distribution, and that during the lifetime of the optionee the option is
exercisable only by him.
(g) Incentive Stock Options. In the case of an Incentive Stock
Option, each option agreement shall contain such other terms, conditions and
provisions as the Board determines necessary or desirable in order to qualify
such option as a tax favored option (within the meaning of Section 422 of the
Code, or any amendment or substitute thereto or regulation thereunder) including
without limitation, the following:
<PAGE>
(i) The purchase price of stock subject to an Incentive Stock
Option shall not be less than 100% of the fair market value of such stock on the
date the option is granted, as determined by the Committee;
(ii) The aggregate fair market value (determined as of the
time the option is granted) of the stock with respect to which Incentive Stock
Options are exercisable for the first time by any employee during any calendar
year (under all plans of the Company) shall not exceed One Hundred Thousand
($100,000) Dollars;
(iii) No Incentive Stock Option shall be granted to any
employee if at the time the option is granted the individual owns stock
possessing more than ten (10%) percent of the total combined voting power of all
classes of stock of the Company or subsidiary corporation unless at the time
such option is granted the option price is at least one hundred ten (110%)
percent of the fair market value of the stock subject to the option and such
option by its terms is not exercisable after the expiration of five (5) years
from the date of grant; and
(iv) In the event that the recipient of an Incentive Stock
Option ceases to be an employee of the Company for any cause other than death or
disability, his Incentive Stock Options shall terminate ninety (90) days
following termination. In the event that such an optionee dies or becomes
disabled prior to the expiration of his Incentive Stock Options and without
having fully exercised such options, the optionee or his successor shall have
the right to exercise such options during its term but in no event later than
twelve (12) months after termination of death or termination due to disability
to the extent that such option was exercisable at the time of termination, or
within such other period, and subject to such terms and conditions, as may be
specified by the Committee.
7. General Restrictions. Each award under the Plan shall be subject to
the requirement that if at any time the Committee shall determine the (i)the
listing, registration or qualification of the shares of Common Stock subject or
related thereto upon any securities exchange or under any state or federal law,
or (ii)the consent or approval of any government regulatory body, or (iii)an
agreement by the recipient of an award with respect to the disposition of shares
of Common Stock is necessary or desirable as a condition of or in connection
with the granting of such award or the issuance or purchase of shares of Common
Stock thereunder, such award shall not be consummated in whole or in part unless
such listing, registration, qualification, consent, approval or agreement shall
have been effected or obtained, free of any conditions not acceptable to the
Committee.
8. Single or Multiple. Multiple forms of awards or combinations thereof
may be evidenced by a single agreement or multiple agreements, as determined by
the Committee.
9. Rights of a Shareholder. The recipient of any award under the Plan,
unless otherwise provided by the Plan, shall have no rights as a shareholder
with respect thereto unless and until certificates for shares of Common Stock
are issued to him.
<PAGE>
10. Rights to Terminate Employment. Nothing in the Plan or in any
agreement entered into pursuant to the Plan shall confer upon any participant
the right to continue in the employment of the Company or affect any right which
the Company may have to terminate the employment of such participant.
11. Withholding. Wherever the Company proposes or is required to issue
or transfer shares of Common Stock under the Plan, the Company shall have the
right to require the recipient to remit to the Company an amount sufficient to
satisfy any federal, state or local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares.
12. Non-Assignability. No award under the Plan shall be assignable or
transferable by the recipient thereof except by will or by the laws of descent
and distribution or by such other means as the Committee may approve in writing.
During the life of the recipient, such award shall be exercisable only by such
person or by such person's guardian or legal representative.
13. Non-Uniform Determinations. The Committee's determination under the
Plan (including without limitation, determinations of the persons to receive
awards, the form, amount and timing of such awards, the terms and provisions of
such awards and the agreements evidencing same, and the establishment of values)
need not be uniform and may be made selectively among persons who receive, or
are eligible to receive, awards under the Plan, whether or not such persons are
similarly situated.
14. Adjustments.
(a) In the event of any change in the outstanding stock of the
Company, by reason of a stock dividend or distribution, supplemental offering of
shares, recapitalization, merger, consolidation, split-up, combination, exchange
of shares or the like, the Committee may, in its discretion, adjust the number
of shares of Common Stock which may be issued under the Plan.
(b) The number of shares of Common Shares purchasable upon the
exercise of the outstanding stock options ("Options") and the option price shall
be subject to adjustment from time to time as provided in this paragraph 14.
(i) If the Company shall pay or make a dividend or
other distribution on any class of capital stock of the Company in Common Stock,
the number of shares of Common Stock purchasable upon exercise of an Option
shall be increased by multiplying such number of shares by a fraction of which
the denominator shall be the number of shares of Common Stock outstanding at the
close of business on the day immediately preceding the date of such distribution
and the numerator shall be the sum of such number of shares and the total number
of shares constituting such dividend or other distribution, such increase to
become effective immediately after the opening of business on the date following
such distribution.
(ii) If the outstanding shares of Common Stock shall
be subdivided into a greater number of shares of Common Stock, the number of
shares of Common Stock
<PAGE>
purchasable upon exercise of an Option at the opening of business on the day
following the day upon which such subdivision becomes effective shall be
proportionately increased, and, conversely, if outstanding shares of Common
Stock shall each be combined into a smaller number of shares of Common Stock,
the number of shares of Common Stock purchasable upon exercise of an Option at
the opening of business on the day following the day upon which such combination
becomes effective shall be proportionately decreased, such increase or decrease,
as the case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or combination
becomes effective.
(iii) The reclassification of Common Stock into
securities (other than Common Stock) and/or cash and/or other consideration
shall be deemed to involve a subdivision or combination, as the case may be, of
the number of shares of Common Stock outstanding immediately prior to such
reclassification into the number or amount of securities and/or cash and/or
other consideration outstanding immediately thereafter and the effective date of
such reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or "the day upon which such combination becomes effective",
as the case may be, within the meaning of the clause (ii) above.
(iv) The Committee may in its discretion make such
increases in the number of shares of Common Stock purchasable upon exercise of
an Option, in addition to those required by this subparagraph (b), as shall be
determined by the Company's Board of Directors to be advisable in order to
achieve an equitable result or to avoid taxation so far as practicable of any
dividend of stock or stock rights or any event treated as such for federal
income tax purposes to the recipients.
(c) Whenever the number of shares of Common Stock purchasable
upon exercise of an Option is adjusted as provided in this paragraph 14, the
option price shall be adjusted by a fraction in which the numerator is equal to
the number of shares of Common Stock purchasable prior to this adjustment and
the denominator is equal to the number of shares of Common Stock purchasable
after the adjustment.
(d) For the purpose of this paragraph 14, the term "Common
Stock" shall include any shares of the Company of any class or series which has
no preference or priority in the payment of dividends or in the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of the Company and which is not subject to redemption by the Company.
15. Amendment. The Committee may terminate or amend the Plan at any
time, except without shareholder approval, the Committee may not increase the
maximum number of shares which may be issued under the Plan (other than
increases pursuant to paragraph 14 hereof), extend the period during which any
award may be exercised, extend the term of the Plan or change the minimum option
price (other than pursuant to paragraph 14 hereof). The termination or any
modification or amendment of the Plan shall not, without the consent of a
participant, affect his rights under an award previously granted.
<PAGE>
16. Effect on Other Plans. Participation in this Plan shall not affect
an employee's eligibility to participate in any other benefit or incentive plan
of the Company. Any awards made pursuant to this Plan shall not be used in
determining the benefits provided under any other plan of the Company unless
specifically provided.
17. Duration of the Plan. The Plan shall remain in effect until all
awards under the Plan have been satisfied by the issuance of shares, but no
award shall be granted more than ten years after the earlier of the date the
Plan is adopted by the Company or is approved by the Companys shareholders.
Adopted February 9, 1993
by the Board of Directors of
American Business Financial Services, Inc.
Amended October 22, 1996 by the Board
of Directors of American Business Financial
Services, Inc.
Amended and Restated December 10, 1996
by the Board of Directors of
American Business Financial Services, Inc.
/s/ Anthony J. Santilli
--------------------------------------
Anthony J. Santilli, Jr., President
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
1995 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
1. Purpose of Plan
The purpose of the 1995 Stock Option Plan for Non-Employee
Directors (the "Plan") contained herein is to enhance the ability of American
Business Financial Services, Inc. and its current and future subsidiaries
(collectively the "Companies") to attract, retain and motivate members of their
respective Boards of Directors and to provide additional incentive to members of
their respective Boards of Directors by encouraging them to invest in shares of
American Business Financial Services, Inc. (the "Company") common stock and
thereby acquire a proprietary interest in the Company and an increased personal
interest in the Companies' continued success and progress, to the mutual benefit
of directors, employees and stockholders.
2. Aggregate Number of Shares
135,000 shares of the Company's common stock, par value $.001
per share ("Common Stock"), shall be the aggregate number of shares which may be
issued under this Plan. Notwithstanding the foregoing, in the event of any
change in the outstanding shares of the Common Stock of the Company by reason of
a stock dividend, stock split (other than the 3 for 2 stock split effective
October 1, 1995 for which no adjustment shall be made), combination of shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what the Board of Directors deems in its sole discretion to be
similar circumstances, the aggregate number and kind of shares which may be
issued under this Plan shall be appropriately adjusted in a manner determined in
the sole discretion of the Board of Directors. Reacquired shares of the
Company's Common Stock, as well as unissued shares, may be used for the purpose
of this Plan. Common Stock of the Company subject to options which have
terminated unexercised, either in whole or in part, shall be available for
future options granted under this Plan.
3. Participation
Each person who is, as of October 1, 1995, a director of the
Company and is not as of such date an employee of the Company or any subsidiary
corporation, shall, as of October 1, 1995, automatically be granted an option to
purchase 22,500 shares of the Company's Common Stock (such figure to be subject
to adjustment for the same events described in Section 2 hereof, but not for the
3 for 2 stock split effective October 1, 1995). Each person who (a) is not a
director of the Company or any subsidiary corporation as of October 1, 1995, and
(b) is not an employee of the Company or any subsidiary corporation and who
after October 1, 1995 is first elected or appointed as a director of the Company
or any subsidiary corporation shall, as of the date of such election or
appointment, automatically be granted an option to purchase 22,500 shares of the
<PAGE>
Company's Common Stock (such figure to be subject to adjustment for the same
events described in Section 2 hereof), subject, however, to the provisions of
Section 6 hereof.
4. Administration of Plan
This Plan shall be administered by the Board of Directors of
the Company. The Board of Directors shall, in addition to its other authority
and subject to the provisions of this Plan, determine which individuals shall in
fact be granted an option or options, the number of shares to be subject to each
of the options, the time or times at which the options shall be granted, the
rate of option exercisability, and the price at which each of the options is
exercisable and the duration of the option. The Board of Directors of the
Company shall adopt such rules for the conduct of its business and
administration of this Plan as it considers desirable. A majority of the members
of the Board of Directors of the Company shall constitute a quorum for all
purposes. The vote or written consent of a majority of the members of the Board
of Directors of the Company on a particular matter shall constitute the act of
the Board of Directors of the Company on such matter. The Board of Directors of
the Company shall have the exclusive right to construe the Plan and the options
issued pursuant to it, to correct defects and omissions and to reconcile
inconsistencies to the extent necessary to effectuate the purpose of this Plan
and the options issued pursuant to it, and such action shall be final, binding
and conclusive upon all parties concerned. No member of the Board of Directors
of the Company shall be liable for any act or omission (whether or not
negligent) taken or omitted in good faith, or for the exercise of any authority
or discretion granted in connection with the Plan to the Board of Directors, or
for the acts or omissions of any other members of the Board of Directors.
5. Non-Qualified Stock Options, Option Price and Term
(a) Options issued pursuant to this Plan shall be
non-qualified stock options. A non-qualified stock option is an option which
does not satisfy the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). The option price for the non-qualified stock
options issued under this Plan shall be equal to the fair market value, as
determined by the Board of Directors of the Company, of the Company's Common
Stock on the date of the grant of the option, except that options issued as of
October 1, 1995 shall have an exercise price equal to the higher of (i) the fair
market value at October 1, 1995 or (ii) the price at which the Company's Common
Stock is, to the knowledge of the Company, first traded within six months after
October 1, 1995. The fair market value of the Company's Common Stock on any
particular date shall mean the last reported sale price of a share of the
Company's Common Stock on any stock exchange on which such stock is then listed
or admitted to trading, or on the NASDAQ National Market System or Small Cap
NASDAQ, on such date, or if no sale took place on such day, the last such date
on which a sale took place, or if the Common Stock is not then quoted on the
NASDAQ National Market System or Small Cap NASDAQ, or listed or admitted to
trading on any stock exchange, the average of the bid and asked prices in the
over-the-counter market on such date, or if none of the foregoing, a price
determined by the Board of Directors.
(b) Options issued pursuant to this Plan shall be issued substantially
in the form set forth in Appendix I hereof, which form is hereby incorporated by
reference and made a part hereof, and shall contain substantially the terms and
<PAGE>
conditions set forth therein. Options shall expire ten years after the date they
are granted, unless terminated earlier as provided herein.
6. Expiration, Amendment, Supplement Suspension and Termination
Options shall not be granted pursuant to this Plan after the
expiration of eight years from and after the date this Plan is approved by the
stockholders of the Company. The Board of Directors of the Company reserves the
right at any time, and from time to time, to amend or supplement this Plan in
any way, or to suspend or terminate it, effective as of such date, which date
may be either before or after the taking of such action, as may be specified by
the Board of Directors of the Company; provided, however, that such action shall
not affect options granted under the Plan prior to the actual date on which such
action occurred. Notwithstanding the foregoing, if Rule 16b-3 of the Securities
Exchange Act of 1934 is applicable to the Company, the Plan provisions specified
in Rule 16b-3(c)(2)(ii)(A) under the Securities Exchange Act of 1934, as
amended, or any future corresponding rule may not be amended or supplemented
more than once every six months, except as permitted by Rule 16b-3(c)(2)(ii)(B).
If the Board of Directors voluntarily submits a proposed amendment, supplement,
suspension or termination for stockholder approval, such submission shall not
require any future amendments (whether or not relating to the same provision or
subject matter), supplements, suspensions or terminations to be similarly
submitted for stockholder approval.
7. Effectiveness of Plan
This Plan shall become effective on the date of its adoption
by the Company's Board of Directors, subject however to approval by the holders
of the Company's Common Stock in the manner described in Rule 16b-3(b) under the
Securities Exchange Act of 1934, as amended, or any future corresponding rule.
8. General Conditions
(a) Nothing contained in this Plan or any option granted
pursuant to this Plan shall confer upon any director the right to continue as a
director of any of the Companies or interfere in any way with the rights of the
Companies to terminate him as a director.
(b) Corporate action constituting an offer of stock for sale
to any director under the terms of the options to be granted hereunder shall be
deemed complete as of October 1, 1995, or as of the automatic grant date
hereunder after October 1, 1995, regardless of when the option is actually
delivered to the non-employee director or acknowledged or agreed to by him.
(c) The use of the masculine pronoun shall include the
feminine gender whenever appropriate.
<PAGE>
APPENDIX I
NON-QUALIFIED STOCK OPTION
To: ______________________________
Name
______________________________
Address
Date: _________________
You are hereby granted an option, effective as of the date hereof, to
purchase 22,500 shares of common stock (par value $.001 per share) ("Common
Stock") of American Business Financial Services, Inc. (the "Company") at a price
of $_____ per share pursuant to the Company's 1995 Stock Option Plan for
Non-Employee Directors (the "Plan").
Your option may first be exercised on and after the date hereof for up
to 100% of the total number of shares of Common Stock which are subject to this
option minus the number of shares previously purchased by exercise of the option
(as adjusted for any change in the outstanding shares of the Common Stock of the
Company by reason of a stock dividend, stock split, combination shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what the Board of Directors deems in its sole discretion to be
similar circumstances).
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check; (b) (unless
prohibited by the Board of Directors) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Board of Directors) any combination of cash and Common
Stock of the Company valued as provided in clause (b). Any assignment of stock
shall be in a form and substance satisfactory to the Secretary of the Company,
including guarantees of signature(s) and payment of all transfer taxes if the
Secretary deems such guarantees necessary or desirable. Notwithstanding the
foregoing, if you exercise your option within three years after the date hereof,
the option may only be exercised with cash.
If you exercise your option and cease to be a director of the Company
for any reason whatsoever (except your death) prior to three years after the
date hereof, the Company will have an option to repurchase any Unvested Shares
of Common Stock which you acquired under this option at a purchase price equal
to the option exercise price which you paid to the Company under this option
plus interest thereon at the rate of 8% per annum, such interest to commence on
the date the Company received the option exercise price from you. The term
"Unvested Shares" shall refer to the following number of shares of Common Stock
<PAGE>
acquired under this option: if you cease to be a director during the first one
year period after the date hereof, any shares acquired in excess of 40% of the
total number of shares of Common Stock subject to this option; if you cease to
be a director during the second one year period after the date hereof, any
shares acquired in excess of 60% of the total number of shares subject to this
option; if you cease to be a director during the third one year period after the
date hereof, any shares acquired in excess of 80% of the total number of shares
subject to this option. The Company's option must be exercised within six (6)
months after the date you ceased to be a director of the Company for any reason
whatsoever (except your death) provided such cessation occurred within three
years after the date hereof.
In the event that the Plan is not approved by the stockholders of the
Company, the Company shall repurchase, and you shall sell to the Company, all
shares of Common Stock acquired pursuant to the exercise of this option prior to
the stockholders meeting at which the Plan was submitted for stockholder
approval, at a purchase price equal to the option exercise price which you paid
to the Company plus interest thereon at the rate of 8% per annum.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which you cease to be a director of the
Company or a subsidiary corporation (whether by death, disability, resignation,
removal, failure to be reelected or otherwise and regardless of whether the
failure to continue as a director was for cause or otherwise), but in no event
later than ten years from the date this option is granted. After the date you
cease to be a director, you may exercise this option only for the number of
shares which you had a right to purchase and did not purchase on the date you
ceased to be a director. If you are a director of a subsidiary corporation, your
directorship shall be deemed to have terminated on the date such company ceases
to be a subsidiary corporation, unless you are also a director of the Company or
another subsidiary corporation, or on that date became a director of the Company
or another subsidiary corporation. Your directorship shall not be deemed to have
terminated if you cease being a director of the Company or a subsidiary
corporation but are or concurrently therewith become a director of the Company
or another subsidiary corporation.
If you die while a director of the Company or a subsidiary corporation,
executor or administrator, as the case may be, may, at any time within three
months after the date of your death (but in no event later than ten years from
the date this option is granted), exercise the option as to any shares which you
had a right to purchase and did not purchase during your lifetime. If your
directorship with the Company or a subsidiary corporation is terminated by
reason of your becoming disabled, you or your legal guardian or custodian may at
any time within three months after the date of such termination (but in no event
later than 10 years from the date this option is granted), exercise the option
as to any shares which you had a right to purchase and did not purchase prior to
such termination. Your executor, administrator, guardian or custodian must
present proof of his authority satisfactory to the Company prior to being
allowed to exercise this option.
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Board of Directors deems in its sole
discretion to be similar circumstances, the number and kind of shares subject to
this option and the option price of such shares shall be appropriately adjusted
<PAGE>
in a manner to be determined in the sole discretion of the Board of Directors.
Notwithstanding the foregoing, there shall be no adjustment made to the number
of shares subject to this option and the option price with respect to the stock
split effective October 1, 1995.
This option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you or such
trust, you do not have any rights as a stockholder of the Company. The Company
reserves the right not to deliver to you the shares purchased by virtue of
exercise of this option during any period of time in which the Company deems, in
its sole discretion, that such delivery may not be consummated without violating
a federal, state, local or securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this option
is not exercisable during any period of time in which the Company deems that the
exercisability of this option, the offer to sell the shares optioned hereunder,
or the sale thereof, may violate a federal, state, local or securities exchange
rule, regulation or law, or may cause the Company to be legally obligated to
issue or sell more shares than the Company is legally entitled to issue or sell.
The following two paragraphs shall be applicable if, on the date of
exercise of this option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that
he will acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgments and agreements as the
Company may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
<PAGE>
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
Commonwealth of Pennsylvania.
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions.
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
(SEAL) By:________________________
I hereby acknowledge receipt of a copy of the foregoing stock option
and, having read it hereby signify my understanding of, and my agreement with,
its terms and conditions.
______________________________ __________________
(Signature) (Date)
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
MANAGEMENT INCENTIVE PLAN
OVERVIEW
October 22, 1996
<PAGE>
Plan Objectives 1
- --------------------------------------------------------------------------------
The American Business Financial Services, Inc. Management Incentive Plan is
designed to:
o Provide a competitive total cash compensation opportunity for managers.
o Focus management attention on the key business goals and objectives of
American Business Financial Services, Inc.
o Motivate individual and team actions toward the achievement of those
objectives.
o Reward managers based on the relative achievement of those objectives as
compared to budget.
o Create consistent performance goals and rewards for all executives.
<PAGE>
Plan Participation 2
- --------------------------------------------------------------------------------
The following executives will be eligible to participate in the plan. Target
bonus amounts (earned at 100 percent performance) will be determined based on
competitive market rates and an assessment of individual potential made by the
CEO.
President H.A.C. VP Leasing
SVP & General Counsel VP Debentures/Investor Relations
Chief Financial Officer VP Debentures/Physical Plant
SVP Marketing VP Comptroller
SVP Administration VP Management Information Systems
VP Corporate Development
o Employees who are new hires or promoted into an eligible position will be
eligible to participate on a prorated basis based on the months eligible as
follows:
prorate factor = months eligible/12
o Employees who terminate due to death or disability during the plan year
will, based on performance, be eligible for a prorated share of the annual
award.
o Employees who terminate for any other reason will forfeit any award unless
continued participation is specified by employment contract, or unless an
award is authorized by the Chairman of the Board.
<PAGE>
Performance Measurement 3
- --------------------------------------------------------------------------------
o Three major performance categories for each Participant.
Corporate Department Individual Total
Net Income Before Taxes Differentiate by Based on individual
(NBIT) Department Examples: and company needs
Examples:
(Same as executive plan) -- Loan Production
-- New Leads Generated -- Training Courses
-- Cost Ratio vs. Budget -- Special Projects as
-- etc. Assigned by CEO
-- Staff Development
30 to 50% weight 30 to 50% weight 10 to 20% weight 100%
o Annual performance calculation by category.
o Category "weights" determined by impact on the business as assigned by
the CEO.
o Total performance equals sum of category performance.
= (Corporate + Department + Individual)
o No awards unless Corporate (NIBT) threshold is reached
<PAGE>
Award Attainment 4
- --------------------------------------------------------------------------------
Incentive awards will be calculated as soon as practical at the end of the
fiscal year and the receipt of audited financial results.
= (performance x weight x target bonus)
o No awards are paid for performance below 80 percent of the performance
goal.
o For 80 percent goal attainment, 50 percent of the target incentive is
earned.
o For 100 percent goal attainment, 100 percent of the target incentive is
earned.
o Awards for each incentive performance goal will be calculated
independently.
o Final annualized award is the sum of the award components.
<PAGE>
LOAN AND SECURITY AGREEMENT
Borrower: AMERICAN BUSINESS CREDIT, INC.
Address: 111 Presidential Boulevard, Suite 215
Bala Cynwyd, Pennsylvania 19004
Date: December 12, 1996
- --------------------------------------------------------------------------------
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), whose corporate
address is Dial Tower, Dial Corporate Center, Phoenix, Arizona 85077 and whose
Corporate Finance Office address is 355 South Grand Avenue, Suite 2400, Los
Angeles, CA 90071, and the borrower named above (the "Borrower"), whose chief
executive office is located at the above address ("Borrower's Address").
1. DEFINITIONS
1.1. ACCOUNT DEBTOR. The term "Account Debtor" shall mean any person or
persons that are an obligor in any contractual arrangement with Borrower or any
co- signor in respect of any Receivable.
1.2. AGREEMENT. The term "Agreement" shall mean this Loan and Security
Agreement and any amendment, modifications or extension hereof.
1.3. BORROWER'S LOAN. The term "Borrower's Loan" shall mean the mortgage
loans made to consumers or non-consumers who are customers of the Borrower and
which are evidenced by a Borrower's Note.
1.4. BORROWER'S NOTE. The term "Borrower's Note" shall mean a promissory
note or other similar instrument evidencing indebtedness, made payable to the
Borrower and secured by a Mortgage.
1.5. BUSINESS DAY. The term "Business Day" shall mean a day, other than a
Saturday or Sunday, on which commercial banks are open for business to the
public in Phoenix, Arizona and New York, New York.
1.6. CODE. The term "Code" shall mean the Uniform Commercial Code as adopted
and in effect in the State of Arizona from time to time.
1.7. COLLATERAL. The term "Collateral" shall have the meaning set forth in
Section 3.1. hereof.
-1-
<PAGE>
1.8. DEFAULT. The term "Default" shall mean an event which after the giving
of notice, if required herein, or the passage of time or both would constitute
an Event of Default (as defined in Section 7.1).
1.9. ELIGIBLE RECEIVABLES. The term "Eligible Receivables" shall mean those
Receivables of Borrower that are acceptable to Lender, in its reasonable
discretion, and, in each case, that meet, at a minimum, all of the following
requirements: (i) arise from the extension of credit, the rendering of services
in the ordinary course of Borrower's business; (ii) represent a valid and
binding obligation enforceable in accordance with its terms for the amount
outstanding thereof without offset, counterclaim or defense (whether actual or
alleged); (iii) comply in all respects with all applicable laws and regulations,
including, but not limited to, truth in lending and credit disclosure laws and
regulations; (iv) all amounts and information appearing thereon or furnished to
Lender by Borrower in connection therewith are true and correct and undisputed
by the Account Debtor thereon or any guarantor thereof; (v) Borrower and the
Account Debtor are not engaged in any litigation regarding nonpayment of the
Receivable; (vi) to the best knowledge of Borrower neither the Account Debtor
thereon nor any guarantor thereof is subject to any receivership, insolvency or
bankruptcy proceeding, is insolvent or has failed to meet its debts as they
mature; (vii) Borrower has good and sufficient right to pledge, assign and
deliver the Receivable free from all liens, claims, encumbrances or security
interests whatsoever; (viii) neither the Account Debtor thereon nor any
guarantor thereof is employed by, related to or affiliated with Borrower; (ix)
to the best knowledge of Borrower no condition exists that materially or
adversely affects the value of each individual Receivable or jeopardizes any
security therefor; (x) to the best knowledge and belief of Borrower the
collateral securing the Receivable is not subject to dangerous levels of
contaminates, oils, asbestos, radon, PCB's, hazardous substances or waste as
defined by federal, state or local environmental laws, regulations or
administrative orders or other materials, the removal of which is required or
the maintenance of which is prohibited, regulated or penalized by any federal,
state or local governmental authority; (xi) is not a renewal or extension of any
Receivable previously ineligible hereunder; (xii) the original principal amount
thereof does not exceed the Maximum Amount of an Eligible Receivable (Schedule
Sections 1.9.A.) and the original term thereof does not exceed the Maximum Term
of an Eligible Receivable (Schedule Section 1.9.B.); (xiii) meets the
Eligibility Test and has been reported to Lender in compliance with the Aging
Procedures (Schedule Section 1.9.C.); (xiv) is not evidenced by a judgment or
has not been reduced to judgment; (xv) is not an open account or a revolving
credit facility; (xvi) is evidenced by a written payment agreement, bearing
interest or containing a time price differential, which has been executed by the
Account Debtor; (xvii) to the best knowledge of Borrower, the Account Debtor
thereunder is a legal resident of the United States; (xviii) payments under the
Receivable are to be made in United States dollars; (xix) the contractual number
of days between payment dates of a Receivable does not exceed thirty-one (31)
days; and (xxi) the Receivable conforms to Borrower's "Credit Policy and
Guidelines" as delivered to Lender and accepted by Lender, except as
specifically allowed in Schedule Section 1.9.A.; and (xxii) with respect to such
Receivable, Borrower shall have complied with the term of Section 3.2 hereof.
<PAGE>
1.10. ERISA. The term "ERISA" shall mean the
Employee Retirement Income Security Act of 1974, as amended from time to time.
1.11. ERISA AFFILIATE. The term "ERISA Affiliate" shall means each trade or
business (whether or not incorporated and whether or not foreign) which is or
may hereafter become a member of a group of which Borrower is a member and which
is treated as a single employer under ERISA Section 4001(b)(1), or IRC Section
414.
1.12. GAAP. The term "GAAP" shall mean generally
accepted accounting principles and other standards as
promulgated by the American Institute of Certified Public
Accountants, consistently applied and maintained.
1.13. GUARANTOR. The term "Guarantor" shall mean any person, persons, entity
or entities, excluding a Validity Guarantor, who execute a guaranty agreement in
favor of Lender with respect to the repayment of the Borrower's Indebtedness to
Lender (Schedule Section 1.14).
1.14. GUARANTY AGREEMENT. The term "Guaranty
Agreement" shall mean that certain agreement, other than
a Validity Guaranty, executed by the Guarantor, in a form
and substance approved by Lender.
1.15. GOVERNING RATE. The term "Governing Rate" shall mean the "Prime" rate
publicly announced by Citibank N.A., New York, New York (or such other "money
center" bank as Lender, in its sole discretion, may select from time to time,
but shall not be more than the highest rate of the five largest banks in the
Continental United States as their respective corporate base, reference, prime
or similar benchmark rate), provided however, that such rate may not be the
lowest rate charged to such bank's customers.
1.16. INDEBTEDNESS. The term "Indebtedness" shall mean all present and future
loans, advances, debts, liabilities, obligations, covenants, duties and
indebtedness at any time owing by Borrower to Lender, whether evidenced by this
Agreement, any note or other instrument or document, whether arising from an
extension of credit, opening of a letter of credit, banker's acceptance, loan,
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guaranty, indemnification or otherwise, whether direct or indirect (including,
without limitation, those acquired by assignment and any participation by Lender
in Borrower's debts owing to others), absolute or contingent, due or to become
due, including, without limitation, all interest, charges, expenses, fees,
attorney's fees, expert witness fees, examination fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees, termination fees,
minimum interest charges and any other sums chargeable to Borrower hereunder or
under any other agreement with Lender.
1.17. IRC. The term "IRC" shall mean the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
1.18. LOAN DOCUMENTS. The term "Loan Documents" shall mean this Agreement,
the Note, the Schedule, the Guaranty, Agency and Custodian Agreements and all
other documents executed in connection with this Agreement, together with any
and all renewals, amendments, restatements or replacements of such documents.
1.19. LOAN PARTY. The term "Loan Party" shall mean any guarantor hereunder,
including but not limited to the Guarantor and Validity Guarantor.
1.20. MAXIMUM RATE. The term "Maximum Rate" shall mean the highest lawful
and nonusurious rate of interest applicable to the Note made and delivered by
Borrower to Lender in connection herewith, that at any time or from time to time
may be contracted for, taken, reserved, charged, or received on the Note and the
Indebtedness under the laws of the United States and the laws of such states as
may be applicable thereto, that are in effect or, to the extent allowed by such
laws, that may be hereafter in effect and that allow a higher maximum
nonusurious and lawful interest rate than would any applicable laws now allow.
1.21. MORTGAGE. The term "Mortgage" shall mean a mortgage or other security
deed in land and interests in real property, structures, improvements, fixtures
and buildings located on or used in connection with real property or rights and
interests in real property which secures a Borrower's Loan.
1.22. MULTIEMPLOYER PLAN. The term "Multiemployer Plan" shall mean a
"Multiemployer plan" as defined in ERISA Sections 3(37) or 4001(a)(3) or IRC
Section 414(f) which covers employees of Borrower or any ERISA Affiliate.
<PAGE>
1.23. NET INCOME. The term "Net Income" shall mean with respect to any
fiscal period, the consolidated net earnings of American Business Financial
Services, Inc., a Pennsylvania corporation ("ABFS") (excluding all extraordinary
gains or nonrecurring income) after provision for income taxes for such fiscal
period of ABFS, all as reflected on the financial statements of ABFS supplied to
Lender pursuant to Sections 4.4(A) and 4.4(B) hereof.
1.24. NOTE. The term "Note" shall mean the promissory note of even date
herewith, and all renewals, extensions, or modifications executed by Borrower
and payable to the order of Lender.
1.25. PLAN. The term "Plan" shall mean any pension plan that is covered by
Title IV of ERISA and with respect to which Borrower or an ERISA Affiliate is an
"Employer" as defined in Section 3(5) of ERISA.
1.26. PROHIBITED TRANSACTION. The term "Prohibited Transaction" shall mean
any transaction described in Section 406 of ERISA which is not exempt by reason
of Section 408 of ERISA, and any transaction described in Section 4975(c) of the
IRC which is not exempt by reason of Section 4975(c)(2) of the IRC.
1.27. RECEIVABLES. The term "Receivables" shall mean any and all
indebtedness or obligations evidenced by Borrower's Notes, promissory notes,
bonds and other instruments and interests therein, now or hereafter owned, made,
purchased or otherwise acquired by the Borrower, which are secured by a Mortgage
and which are specifically, now or hereafter at any time, pledged, hypothecated,
assigned, transferred or conveyed, and/or a security interest is specifically
granted therein to the Lender, as evidenced by the assignment and delivery to
the Lender of the note or other instrument evidencing such indebtedness, the
mortgage, deed of trust or other instrument evidencing pledge of the collateral
securing such indebtedness, the title policy insuring the title of such
collateral and the assignment instrument that collaterally assigns such
indebtedness and such pledged instrument to Lender to secure the Indebtedness
hereunder.
1.28. REPORTABLE EVENT. The term "Reportable Event" shall mean a reportable
event described in Section 4043 of ERISA or the regulations thereunder, a
withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of
operations described in Section 4068(f) of ERISA
1.29. REQUEST FOR ADVANCE. The term "Request for Advance" shall mean a
written request for an advance in the form of Exhibit "A" attached hereto and
made a part hereof.
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1.30. SCHEDULE. The term "Schedule" shall mean the schedule executed in
conjunction with this Agreement of even date herewith, as may be amended from
time to time, upon written agreement of Lender and Borrower.
1.31. TANGIBLE NET WORTH. The term "Tangible Net Worth" shall mean, at any
time of determination, the consolidated shareholders' equity of ABFS determined
in accordance with GAAP minus all assets consisting of obligations due to AFBS
from shareholders, directors, officers, or any affiliate of AFBS or any other
Guarantor or Validity Guarantor hereunder.
1.32. VALIDITY GUARANTOR. The term "Validity Guarantor" shall mean any
person or persons who execute a Validity Guaranty agreement in favor of Lender
(Schedule Section 1.32).
1.33. VALIDITY GUARANTY. The term "Validity Guaranty" shall mean that
certain "validity guaranty" agreement executed by a Validity Guarantor, in a
form and substance approved by Lender.
2. LOAN
2.1. AMOUNT OF LOAN. Subject to the terms, covenants and conditions
hereinafter set forth, Lender agrees upon the Borrower's request from time to
time, until the Maturity Date, to make advances to Borrower (collectively, the
"Loan"), in an aggregate amount not to exceed at any time outstanding the lesser
of the following: (a) the Amount of Revolving Credit Line (Schedule Section
2.1.A.) or (b) the Availability on Eligible Receivables (Schedule Section
2.1.B.). Within the limits of this Section 2.1, Borrower may borrow, repay and
reborrow the advances. The Loan shall be evidenced by the Note.
2.2. INTEREST RATE. The outstanding principal balance of Loan shall bear
interest at the Stated Interest Rate (Schedule Section 2.2). If Lender is ever
prevented from charging or collecting interest at the rate set forth in Stated
Interest Rate Section (i) because interest at such rate would exceed interest at
the Maximum Rate, then the rate set forth in Stated Interest Rate Section (i)
shall continue to be the Maximum Rate until Lender has charged and collected the
full amount of interest chargeable and collectable had interest at the rate set
forth in Stated Interest Rate Section (i) always been lawfully chargeable and
collectible. As the Governing Rate changes, the rate set forth in Stated
Interest Rate Section (i) shall be increased or decreased (subject to the
Maximum Rate) on the first day of each calendar month to correspond with the
change in the Governing Rate then in effect and shall remain fixed at such rate
until the first day of the next succeeding calendar month, notwithstanding
fluctuations in the Governing Rate during the month. All changes in the
Governing Rate shall be made without notice to Borrower. The monthly interest
due on the principal balance of the Loan outstanding shall be computed for the
actual number of days elapsed during the month in question on the basis of a
year consisting of three hundred sixty (360) days and shall be calculated by
determining the average daily principal balance outstanding for each day of the
month in question. The daily rate shall be equal to 1/360th times the Stated
Interest Rate (but shall not exceed the Maximum Rate).
<PAGE>
2.3. INTEREST AFTER EVENT OF DEFAULT. Upon the occurrence and during the
continuation of an Event of Default, at Lender's option, at Lender's sole
discretion, Lender may increase the Stated Rate of Interest, as set forth in
Schedule Section 2.2.(i), up to an additional two percent (2%) per annum, but
not in excess of the Maximum Rate, and shall provide Borrower contemporaneous
administrative written notice.
2.4. PAYMENTS. All payments to Lender shall be payable at FINOVA Capital
Corporation, 1060 First Avenue, Suite 100, King of Prussia, Pennsylvania 19406
All payments received pursuant to this Agreement shall be applied to Borrower's
Indebtedness on the Business Day of actual receipt of such payment by Lender's
depository bank upon such payment being credited to Lender's account. The
Indebtedness shall be due and payable as follows:
A. Accrued but unpaid interest for each calendar month during the term
hereof shall be due and payable, in arrears, by check or wire transfer on or
before the fifteenth (15th) day of the immediately succeeding calendar month
("Interest Payment Due Date"). If the accrued but unpaid interest for any month
is not received by Lender by the Interest Payment Due Date, such payment shall
be paid by Lender by an advance hereunder, provided Borrower has availability
hereunder for such advance. If such accrued but unpaid interest for the
preceding month is not received by the first day of the immediately succeeding
calendar month, such unpaid interest shall be added to the Indebtedness. The
first interest payment due on the Interest Payment Due Date shall be in the
calendar month immediately following the calendar month in which the initial
advance is made pursuant to this Agreement.
B. Costs, fees and expenses payable pursuant to this Agreement shall be due
and payable by Borrower to Lender or to such other person(s) designated by
Lender in writing on demand; and
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C. The entire outstanding balance of the Indebtedness shall be due and
payable, if not prepaid, on the Maturity Date (Schedule Section 2.4.).
2.5. PAYMENT DUE ON A NON-BUSINESS DAY. If any payment of the Indebtedness
falls due on a day other than a Business Day, then such due date shall be
extended to the next succeeding Business Day.
2.6. MANDATORY PAYMENTS. Provided that Borrower is not otherwise in Default
hereunder, if at any time the amount advanced by Lender to Borrower exceeds the
maximum amount of the Loan allowed pursuant to Section 2.1, Borrower shall
immediately and without notice repay to Lender an amount sufficient to eliminate
such excess (provided however that if such overadvance and /or overline is
discovered by Lender prior to the discovery or knowledge of Borrower, Lender
shall provide written notice to Borrower of such overadvance and/or overline),
or, at Lender's option, assign and deliver additional Eligible Receivables
sufficient for such purpose. In the event Borrower sells, transfers, assigns or
otherwise disposes of all or any portion of its Receivables, other than in the
ordinary course of business, Borrower shall apply all proceeds of any such sale,
transfer, assignment or other disposition to reduce the outstanding balance of
the Indebtedness.
2.7. VOLUNTARY PREPAYMENTS. Borrower may, at its option, voluntarily prepay
the Indebtedness (a) in part at any time, (b) in full at any time and request a
termination of Lender's security interest in all or part of the Receivables in
conjunction with a securitization or sale of such Receivables, if Borrower does
not voluntarily terminate this Agreement and enter into a credit facility with
another secured lender prior to the Maturity Date and (c) in full at any time,
request a termination of Lender's security interest in all of the Collateral and
terminate this Agreement in conjunction with such payment in full, provided,
however, that Borrower has given Lender sixty (60) days' written notice of any
such intention to prepay the Indebtedness in full and that Borrower intends to
terminate this Agreement, requests Lender to terminate its security interest in
all of the Collateral and as liquidated damages, not as a penalty, pays to
Lender the amount of liquidated damages ("Liquidated Damages") (Schedule Section
2.7). Borrower may not make such prepayment in subsection (c) hereinabove prior
to the expiration of such sixty (60)-day period. Upon written notice of
prepayment and termination in subsection (c) hereinabove, the commitment by
Lender to advance funds to Borrower and all the obligations of Lender shall
terminate on the expiration of said sixty (60)- day notice period, and the
entire amount of the Indebtedness and the Liquidated Damages shall be due and
payable on such date.
<PAGE>
2.8. MAXIMUM INTEREST; CONTROLLING AGREEMENT. The contracted for rate of
interest of the Loan without limitation, shall consist of the following: (i) the
Stated Interest Rate, calculated and applied to the principal balance of the
Note in accordance with the provisions of the Note and this Agreement; (ii)
Interest After Event of Default or due date, calculated and applied to the
amounts due under the Note in accordance with the provisions thereof; and (iii)
all Additional Sums (as herein defined), if any. Borrower agrees to pay an
effective contracted for rate of interest which is the sum of the
above-referenced elements.
All fees, charges, goods, things in action or any other sums or things of
value (other than amounts described in the immediately previous paragraph), paid
or payable by Borrower (collectively, the "Additional Sums"), whether pursuant
to the Note, this Agreement or any other documents or instruments in any way
pertaining to this lending transaction, or otherwise with respect to this
lending transaction, that under any applicable law may be deemed to be interest
with respect to this lending transaction, for the purpose of any applicable law
that may limit the maximum amount of interest to be charged with respect to this
lending transaction, shall be payable by Borrower as, and shall be deemed to be,
additional interest and for such purposes only, the agreed upon and "contracted
for rate of interest" of this lending transaction shall be deemed to be
increased by the rate of interest resulting from the inclusion of the Additional
Sums.
It is the intent of the parties to comply with the usury law ("Applicable
Usury Law") applicable pursuant to the terms of the preceding paragraph or such
other usury law which is applicable if the law chosen by the parties is not
applicable. Accordingly, it is agreed that notwithstanding any provisions to the
contrary in the Loan Documents, or in any of the documents securing payment
hereof or otherwise relating hereto, in no event shall the Loan Documents or
such documents require the payment or permit the collection of interest in
excess of the maximum contract rate permitted by the Applicable Usury Law. In
the event (a) any such excess of interest otherwise would be contracted for,
charged or received from Borrower or otherwise in connection with the loan
evidenced hereby, or (b) the maturity of the indebtedness evidenced by the Loan
Documents is accelerated in whole or in part, or (c) all or part of the
principal or interest of the Loan Documents shall be prepaid, so that under any
of such circumstances the amount of interest contracted for, charged or received
in connection with the loan evidenced hereby, would exceed the maximum contract
rate permitted by the Applicable Usury Law, then in any such event (1) the
provisions of this paragraph shall govern and control, (2) neither Borrower nor
any other person or entity now or hereafter liable for the payment hereof will
be obligated to pay the amount of such interest to the extent that it is in
excess of the maximum contract rate permitted by the Applicable Usury Law, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount hereof, unpaid fees, unpaid
interest or other unpaid charges of any nature or refunded to Borrower, at
Lender's option, and (4) the effective rate of interest will be automatically
reduced to the maximum amount of interest permitted by the Applicable Usury
Law.
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It is further agreed, without limiting the generality of the foregoing, that to
the extent permitted by the Applicable Usury Law; (x) all calculations of
interest which are made for the purpose of determining whether such rate would
exceed the maximum contract rate permitted by the Applicable Usury Law shall be
made by amortizing, prorating, allocating and spreading during the period of the
full stated term of the Loan evidenced hereby, all interest at any time
contracted for, charged or received from Borrower or otherwise in connection
with such Loan; and (y) in the event that the effective rate of interest on the
Loan should at any time exceed the maximum contract rate allowed under the
Applicable Usury Law, such excess interest that would otherwise have been
collected had there been no ceiling imposed by the Applicable Usury Law shall be
paid to Lender from time to time, if and when the effective interest rate on the
loan otherwise falls below the maximum amount permitted by the Applicable Usury
Law, to the extent that interest paid to the date of calculation does not exceed
the maximum contract rate permitted by the Applicable Usury Law, until the
entire amount of interest which would have otherwise been collected had there
been no ceiling imposed by the Applicable Usury Law has been paid in full.
Borrower further agrees that should the maximum contract rate permitted by the
Applicable Usury Law be increased at any time hereafter because of a change in
the law, then to the extent not prohibited by the Applicable Usury Law, such
increases shall apply to all indebtedness evidenced hereby regardless of when
incurred; but, again to the extent not prohibited by the Applicable Usury Law,
should the maximum contract rate permitted by the Applicable Usury Law be
decreased because of a change in the law, such decreases shall not apply to the
Indebtedness evidenced hereby regardless of when incurred.
2.9. STATEMENT OF ACCOUNT. Lender shall provide Borrower, each month, with a
statement of Borrower's account, prepared from Lender's records, which shall
conclusively be deemed correct and accepted by Borrower, unless Borrower gives
Lender a written statement of exceptions within ten (10) days after Borrower's
receipt of such statement.
2.10. INITIAL ADVANCE. The obligation of Lender to make the initial advance
hereunder is subject to the fulfillment, to the satisfaction of Lender and its
counsel, of each of the following conditions prior to the initial advance
hereunder:
<PAGE>
A. Loan Documents. Lender shall have received each of the following Loan
Documents: (i) this Loan and Security Agreement executed by the respective
parties; (ii) Schedule to Loan and Security Agreement executed by the respective
parties; (iii) the Note executed by Borrower; (iv) Guaranty Agreement and
Validity Guaranty Agreement executed by the respective Guarantor and Validity
Guarantor; (v) Agency and Custodial Agreement executed by Borrower, Lender and a
custodian acceptable to both Borrower and Lender; and (vi) such other documents,
instruments and agreements in connection herewith as Lender shall require,
executed, certified and/or acknowledged by such parties as Lender shall
designate;
B. Terminations by Existing Lender. Borrower's existing lender(s) shall have
executed and delivered UCC termination statements and other documentation
evidencing the termination of its liens and security interests in the Collateral
in form and substance satisfactory to Lender in its sole discretion;
C. Charter Documents. Lender shall have received copies of Borrower's
By-laws and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
D. Good Standing. Lender shall have received a certificate of corporate
status with respect to Borrower and each corporate Guarantor, dated within ten
(10) days of the Closing Date, by the Secretary of State of the state of
incorporation of Borrower and such Guarantor, which certificate shall indicate
that Borrower and such Guarantor are in good standing in such state;
E. Foreign Qualification. Lender shall have received certificates of
corporate status with respect to Borrower and each corporate Guarantor, each
dated within ten (10) days of the Closing Date, issued by the Secretary of State
of each state in which such party's failure to be duly qualified or licensed
would have a material adverse effect on its financial condition or assets,
indicating that such party is in good standing;
F. Authorizing Resolutions and Incumbency. Lender shall have received a
certificate from the Secretary of Borrower and each corporate Guarantor
attesting to (i) the adoption of resolutions of each respective Board of
Directors authorizing the borrowing of money from Lender or the guaranty of the
Indebtedness, as the case may be, and execution and delivery of this Agreement
and the other Loan Documents to which Borrower and Guarantor are a party, and
authorizing specific officers of Borrower and Guarantor to execute same, and
(ii) the authenticity of original specimen signatures of such officers;
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G. Initial Availability Report. Lender shall have received an initial
Availability Report from Borrower executed by an authorized corporate office of
Borrower;
H. Insurance. Lender shall have received the insurance certificates and
certified copies of policies required by Section 3.2 hereof.
I. Searches; Certificates of Title. Lender shall have received searches
reflecting the filing of its financing statements and other filings in such
jurisdictions as it shall determine, and shall have received certificates of
title with respect to the Collateral which shall have been duly executed in a
manner sufficient to perfect all of the security interests granted to Lender;
J. Fees. Borrower shall have paid all fees payable by it on the Closing Date
pursuant to this Agreement;
K. Opinion of Counsel. Lender shall have received an opinion of Borrower's
counsel covering such matters as Lender shall determine in its sole discretion;
L. Officer Certificate. Lender shall have received a certificate of the
President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
M. Solvency Certificate. If requested by Lender, a signed certificate of the
Borrower's duly elected Chief Financial Officer concerning the solvency and
financial condition of Borrower, on Lender's standard form;
N. Blocked Accounts. The Blocked Account, referred to in Sections 3.9 and
3.8 hereof, shall have been established to the satisfaction of Lender in its
sole discretion; and
O. Other Matters. All other documents and legal matters in connection with
the transactions contemplated by this Agreement shall have been delivered,
executed and recorded and shall be in form and substance reasonably satisfactory
to Lender and its counsel.
2.11. SUBSEQUENT ADVANCES. The obligation of Lender to make any advance
hereunder (including the initial advance) shall be subject to the further
conditions precedent that, on and as of the date of such advance: (a) the
representations and warranties of Borrower set forth in this Agreement shall be
accurate, before and after giving effect to such advance or issuance and to the
application of any proceeds thereof; (b) no Default or Event of Default has
<PAGE>
occurred and is continuing, or would result from such advance or issuance or
from the application of any proceeds thereof; (c) no material adverse change has
occurred in the Borrower's business, operations, financial condition, or assets
or in the prospect of repayment of the Indebtedness; (d) Lender shall have
received such other approvals, opinions or documents as Lender shall reasonably
request; and (e) Borrower shall submit to Lender a completed Request for Advance
Report in the form and substance of Exhibit "A" attached hereto, Collateral and
Loan Report in the form and substance of Exhibit "B" attached hereto and the
Schedule of Receivables in the form and substance of Exhibit "C" attached
hereto, on the date such advance is requested.
2.12. ALL ADVANCES TO CONSTITUTE ONE LOAN. All evidences of credit, loans
and advances made by Lender to Borrower under this Agreement and any other
documents or instruments executed in connection herewith shall constitute one
loan, and all indebtedness and obligations of Borrower to Lender under this
Agreement and all other such documents and instruments shall constitute one
general obligation secured by Lender's security interest in all of the
Collateral and by all other security interests, liens, claims and encumbrances
heretofore, now, or at any time or times hereafter granted by Borrower to
Lender. Borrower agrees that all of the rights of Lender set forth in this
Agreement shall apply to any modification of or supplement to this Agreement and
any other such documents and instruments.
2.13. ADVANCES. Lender shall have the right in Lender's discretion, subject
to availability hereunder on behalf of and with notice to Borrower (provided
that notice shall not be required to be given with respect to an advance to pay
accrued but unpaid interest as set forth in Section 2.4.A.), to make and use
advances to pay Lender for any amounts due to Lender pursuant to this Agreement
or otherwise, to cure any default hereunder, after the expiration of any
applicable cure period.
2.14. APPLICATION OF PAYMENTS. Borrower does hereby irrevocably agree that
Lender shall have the continuing exclusive right to apply and reapply any and
all payments and collections at any time or times hereafter received by Lender
against the Indebtedness, in such manner as Lender may determine, unless a
provision of this Agreement requires otherwise.
2.15. FACILITY FEE. Borrower agrees to pay Lender a Facility Fee (Schedule
Section 2.15) for and in consideration of Lender's extension of the credit
facility. Borrower hereby acknowledges and agrees that this Facility Fee is
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fully earned upon the execution of this Agreement. This Facility Fee is due and
payable on the date of execution of this Agreement.
3. SECURITY AGREEMENT
3.1. SECURITY INTEREST. To secure the prompt payment to Lender of the
Indebtedness and any and all other obligations now existing or hereinafter
arising owed by Borrower to Lender, Borrower hereby irrevocably grants to Lender
a first and continuing security interest in the following property and interests
in property of Borrower, whether now owned or existing or hereafter acquired or
arising and wheresoever located, subject to release in accordance with the
provisions of this Agreement:
A. All right, title and interest of the Borrower in and to the Receivables,
participation agreements, participation certificates, or other instruments or
agreements which evidence the Receivables;
B. All right, title and interest of the Borrower in and to all Borrower's
Notes, Mortgages, deeds of trust, security agreements, chattel mortgages,
assignments of rent and other security instruments whether now or hereafter
owned, acquired or held by the Borrower which secure (or constitute collateral
for any note, instrument or agreement securing) any of the Borrower's Notes or
other instruments or agreements which evidence any of the Receivables;
C. All right, title and interest of the Borrower in and to all Financing
Statements perfecting the security interest of any of the foregoing;
D. All right, title and interest of the Borrower in and to all Guaranties
and other instruments by which the persons or entities executing the same
guarantee, among other things, the payment or performance of the Receivables;
E. All right, title and interest of the Borrower in and to all title
insurance policies, title insurance binders, commitments or reports insuring or
relating to the foregoing;
F. All right, title and interest of the Borrower in and to all surveys,
bonds, hazard and liability insurance policies, participation agreements and any
other agreement, instrument or document pertaining to, affecting, obtained by
the Borrower in connection with, or arising out of, the Receivables;
G. All right, title and interest of the Borrower in and to all commitments
and other agreements to purchase any Receivables;
<PAGE>
H. All right, title and interest of the Borrower in and to all collections
on, and proceeds of or from, any and all of the foregoing (hereafter
collectively called "Collections");
I. All files, surveys, certificates, correspondence, appraisals, computer
programs, tapes, discs, cards, accounting records, and other records,
information, and data of the Borrower relating to the Receivables (including all
information, data, programs, tapes, discs and cards necessary to administer and
service such Receivables);
J. All contract rights, accounts, rights to payment of money, and general
intangibles, relating to such documents and contracts described in A. through I.
above and as to all such Collateral described in A. through this subparagraph J.
whether now existing or hereafter at any time acquired or arising; and
K. All monies, securities and property, now or hereafter held, received by,
or intrusted to, in the possession or under the control of Lender or a bailee of
Lender;
L. All accessions to, substitutions for and all replacements, products and
proceeds of the foregoing, including, without limitation, proceeds of insurance
policies pledged pursuant to Section 3.1. hereinabove (including but not limited
to claims paid and premium refunds); and
M. All books and records (including, without limitation, customer lists,
credit files, tapes, ledger cards, computer software and hardware, electronic
data processing software, computer printouts and other computer materials and
records) of Borrower relating only to the pledged Collateral evidencing or
containing information regarding any of the foregoing.
3.2. FINANCING STATEMENTS, ASSIGNMENTS OF LIEN AND FURTHER ASSURANCES.
Borrower hereby agrees to execute UCC-1 Financing Statements and Assignments of
Lien ("Assignments of Lien"), in the form and substance of Exhibit "D-1" and
"D-2" hereto, and any other instruments or documents reasonably necessary to
evidence, preserve or protect Lender's security interest in the Collateral.
Borrower agrees that financing statements shall be filed covering all of
Borrower's locations (Schedule Section 3.2.) and an Assignment of Lien shall be
delivered to Lender or the Custodian, if applicable, covering each Receivable.
Borrower agrees to deliver to Lender, at such places as Lender may
reasonably designate, schedules executed by Borrower, listing all Receivables
and fully and correctly specifying in adequate detail the aggregate unmatured
unpaid face amount of each Receivable. These schedules shall be in form and
tenor satisfactory to or supplied by Lender.
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Borrower shall deliver certain Collateral documentation and other
agreements, as set forth in Section 4.2, to a custodian, as designated by Lender
and Borrower, pursuant to the terms of a certain Agency and Custodial Agreement,
to be executed in conjunction with the execution of this Agreement.
Borrower further warrants and agrees that in each case the Borrower or the
Account Debtor named in such Receivable shall place or carry fire insurance or
other insurance in respect of the assets or property to which such Receivable
relates, the Borrower shall or shall cause the Account Debtor to maintain such
insurance until the full amount of such obligation is collected and if not,
Lender, at its option, may place and maintain such insurance, charging the cost
thereof to Borrower.
Additionally, Lender's interest shall be covered on all title insurance
issued on the collateral securing each Receivable, by including a reference to
Borrower, its successor and assigns, as their respective interests may appear.
3.3. FAILURE TO DELIVER. Failure to deliver physical possession of any
instruments, documents or writings in respect of any Receivable to Lender shall
not invalidate Lender's security interest therein. To the extent that possession
may be required by applicable law for the perfection of Lender's security
interest, the original chattel paper and instruments representing the
Receivables shall be deemed to be held by Lender, although kept by the Borrower
as the custodial agent of Lender.
3.4. NOTICE OF COLLATERAL ASSIGNMENT. In addition to the Assignment of Lien,
all contracts, documents or instruments representing or evidencing the
indebtedness with respect to a Receivable shall have attached to it by way of
allonge or other method satisfactory to Lender the following language: "Assigned
to FINOVA Capital Corporation as Collateral", or in the case of the instrument
or note that evidences the primary obligation to the Borrower, "Pay to the order
of , ____________________________________without recourse". If such documents do
not contain or have attached such above provisions, such Receivable shall not be
an Eligible Receivable hereunder.
Notwithstanding any provision contained in the Loan Documents to the
contrary, the "without recourse" language contained in the attached endorsement
in the form of an allonge or other method satisfactory to Lender to be attached
to the primary obligations that evidence Receivables hereunder, shall be solely
for the purpose of such allonge or other method and shall in no manner effect or
limit the Borrower's, Validity Guarantor's or Guarantor's liabiity pursuant to
the Loan Documents.
<PAGE>
3.5. LOCATION OF RECEIVABLES. Borrower shall, at any reasonable time and at
Borrower's own expense, upon Lender's request, physically deliver to Lender all
Receivables (including any instruments, documents or writings in respect of any
Receivable together with all instruments, documents or writings in respect of
any collateral securing each Receivable) assigned to Lender to any reasonable
place or places designated by Lender. All Receivables shall, regardless of their
location, be deemed to be under Lender's dominion and control (with files so
labeled) and deemed to be in Lender's possession.
3.6. RECORDS AND INSPECTIONS. Borrower shall at all times keep complete and
accurate records pertaining to the Collateral, which records shall be current on
a daily basis and located only at the locations (Schedule Section 3.2.). Lender
by or through any of its officers, agents, employees, attorneys or accountants,
shall have the right to enter any such locations, at any reasonable time or
times during Borrower's regular business hours, for so long as Lender may
desire, to inspect the Collateral and to inspect, audit and make extractions or
copies from the books, records, journals, orders, receipts, correspondence or
other data relating to the Collateral or this Agreement. Notwithstanding the
foregoing, if Borrower and Lender are opposing parties in litigation, other than
the reports required herein and other information necessary to conduct Lender's
audits with respect to the Receivables, during the pendency of such litigation,
all extractions or copies shall be governed by the rules of procedure and
discovery with respect to such litigation.
Notwithstanding any provisions contained herein to the contrary, upon a
Default or an Event of Default and provided such is continuing, Lender shall
have the right to inspect the collateral that secures the repayment of any
Receivable.
3.7. ADDITIONAL DOCUMENTS. Borrower hereby agrees to execute any additional
documents or financing statements which Lender deems necessary in its reasonable
discretion in order to evidence Lender's security interest in the Collateral.
Borrower shall not allow any financing statement or notice of assignment of
accounts receivable or Assignment of Lien with respect to any Receivable, other
than those executed in connection with this Agreement, to be on file in any
public office covering any Collateral, proceeds thereof or other matters subject
to the security interest granted to Lender.
3.8. COLLECTION. Borrower agrees at its own expense to promptly and
diligently collect each installment of all Receivables in trust for the
exclusive account of Lender, to hold Lender harmless from any and all loss,
damage, penalty, liability, fine or expense arising from such collection by
Borrower or its agents and to faithfully account therefor to Lender. Upon the
occurrence of an Event of Default, Lender expressly retains the unqualified
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right at any time it so elects to take over the collection of the Receivables
and notify the respective Account Debtors to direct payments directly to Lender
or Lender's designated agent. If Lender elects to take over the collections of
the Receivables, Lender shall indemnify and hold harmless and defend Borrower
against any and all claims, liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever, asserted by an Account Debtor, which may be imposed
on, incurred by or asserted against Borrower, or any of its officers, directors,
employees or agents (including accountants, attorneys or other professionals
hired by Borrower) arising solely out of the actions of Lender relating to the
collection of the Receivables.
Prior to the activation of the blocked account set forth in Section 3.9
hereinbelow, Borrower shall deposit all collections from all Receivables to a
bank account with a bank where Lender has opened the Second Account, as defined
hereinbelow. Upon the execution of this Agreement, Lender shall open a second
bank account ("Second Account") with the bank wherein Borrower has its primary
depository account.. If Lender elects to exercise its rights pursuant to Section
3.9 hereunder, Lender may, at its sole discretion, require and direct that all
proceeds from all Receivables be deposited into the Second Account and direct
Account Debtor to make payments directly to the Second Account or as otherwise
directed by Lender. Lender shall have the right, in Lender's sole discretion, to
transfer the proceeds from the Second Account to Lender as a payment on the
outstanding balance of the Indebtedness.
3.9. BLOCKED ACCOUNTS. Upon the occurrence of an Event of Default, at
Lender's request, any checks, notes, drafts or any other payment upon and/or
proceeds of the Collateral received by Borrower (or any subsidiaries, divisions,
affiliates, proprietorships, shareholders, directors, officers, employees,
agents or those persons acting for or in concert with Borrower), shall no later
than the next Business Day following receipt thereof, be deposited into the
Second Account or delivered to Lender, at Lender's address set forth above, for
application on account of the Indebtedness and shall be reflected in the
Statement of Account as provided in Section 2.9 herein. Borrower shall (i)
deposit or cause all Items, as defined below, to be deposited in the Second
Account or other special account so established by Lender or transfer all Items
to Lender for application on account of the Indebtedness and to be reflected in
the Statement of Account as provided in Section 2.9 herein and (ii) maintain
copies of all checks or other items of payment and deposit slips related
thereto, together with a collection report in a form satisfactory to Lender. All
<PAGE>
cash payments, checks, drafts, or similar items of payment upon and/or proceeds
of the Receivables (collectively "Items") by or for the account of Borrower
shall be the sole and exclusive property of Lender immediately upon the earlier
of the receipt of such Items by Lender or the receipt of such Items by Borrower;
provided, however, that no such item received by Lender shall constitute payment
to Lender and be applied to reduce the Indebtedness until the later of: (i)
three (3) Business Days from collection of such Item by Lender's depository
bank, or (ii) such Item being actually collected by Lender's depository bank and
such collection being credited to Lender's account. Notwithstanding anything to
the contrary herein, all such items of payment shall be deemed not received if
the same is subsequently dishonored or not duly credited to Lender's depository
account for any reason whatsoever, unless attributed to conduct of Lender.
3.10. PROTECTION OF RECEIVABLE RECORDS. Borrower hereby agrees to take the
following protective actions to prevent destruction of Borrower's Collateral and
records pertaining to such Collateral: (i) if Borrower maintains its Collateral
records on a manual system such records shall be kept in a fire proof cabinet or
on no less than a monthly basis, a record of all payments on Receivables and all
other matters relating to the Collateral shall be placed in an off site safety
deposit box (and Lender shall have access to such safety deposit box); or (ii)
if the Collateral records are computerized, Borrower agrees to create a tape or
diskette "back-up" of the computerized information and upon the request of
Lender, provide Lender with a tape or diskette copy of such "back-up"
information.
3.11. USE OF COLLECTIONS AND MODIFICATION OF RECEIVABLES. Provided that
Lender has not required that Borrower remit all collections or proceeds of
Collateral to Lender, Borrower may use or dispose of the funds received on the
Receivables in the ordinary course of business (including returned or
repossessed goods), collect or compromise accounts or obligations and accept
returned goods or make repossessions, as Borrower shall determine based upon its
reasonable discretion.
3.12. USE OF PROCEEDS. Borrower shall use the proceeds of the Loan as
follows: (i) the initial advance shall be to pay off certain secured lenders
with respect to certain mortgages held by Borrower that are to be assigned as
Eligible Receivables as of the date hereof, as designated by Borrower, in
writing, upon the execution date hereof; (ii) after the initial advance
hereunder, to finance mortgages, in the ordinary course of Borrower's business;
or (iii) for payments to Lender hereunder.
3.13. RETURN OF COLLATERAL. Upon the payment in full or renewal of any
Receivable to which the written documents evidencing such Receivable are held by
Lender, Borrower shall submit all requests for the return of such documents
pursuant to the "Request For Return of Collateral" form, a copy of which is
attached hereto as Exhibit "C".
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3.14. LENDER'S PAYMENT OF CLAIMS. Lender may, in its sole discretion,
discharge or obtain the release of any security interest, lien, claim or
encumbrance asserted by any person against the Collateral. All sums paid by
Lender in respect thereof shall be payable, on demand, by Borrower to Lender and
shall be a part of the Indebtedness.
4. REPORTING REQUIREMENTS
4.1. ACCOUNTING PRACTICES. Borrower shall maintain (i) a modern system of
accounting in accordance with GAAP or other systems of accounting acceptable to
Lender and (ii) standard operating procedures applicable to all of its locations
with respect to the handling and disposition of cash receipts and other proceeds
of Collateral on a daily basis, including the depositing thereof, aging of
account receivables, record keeping and such other matters as Lender may
reasonably request. For the purpose of determining compliance with the covenants
and representations in the Loan Documents, Lender shall have the right, solely
for Lender's determination of financial covenants and information required in
this Agreement, to recast any financial statement or report presented to Lender
by or on behalf of Borrower to comply with GAAP, to the extent, if any, such
statements or reports do not comply with GAAP.
4.2. PLEDGE OF RECEIVABLES. Borrower hereby agrees to pledge all Receivables
and Borrower shall deliver to Lender or Lender's designated agent all documents
evidencing such Receivables, immediately following the closing and funding of
such Receivable by Borrower. Documents to be delivered to Lender, or a custodian
designated by Lender and Borrower, are the Note, Mortgage, original title policy
and Assignment of Lien with respect to each Receivable.
4.3. ACCOUNT DEBTORS' ADDRESSES. Borrower agrees to furnish to Lender from
time to time, promptly upon request, a list of all Account Debtors' names and
their most current addresses , as known to Borrower. Borrower agrees that Lender
may from time to time, consistent with standard or generally accepted auditing
practices, verify the validity, amount and any other matters relating to the
Receivables by means of mail, telephone or otherwise, in the name of Borrower
and upon the occurrence of an Event of Default in the name of Lender or such
other name as Lender may choose. Notwithstanding the foregoing to the contrary,
<PAGE>
Lender agrees to restrict contact with any Account Debtor, prior to an Event of
Default, as follows: (i) audits shall only be conducted in months other than May
and June, (ii) audits shall be in writing and confirming only the principal
balance due, in a form and substance approved by Borrower, except that Lender
may make contact, in a manner other than in writing, at any time prior to the
initial advance hereunder or after an Event of Default, (iii) audits shall only
be conducted at a time when a Receivable or Receivables are pledged to Lender
hereunder and (iv) all information shall be kept confidential.
4.4. FINANCIAL REPORTS. Borrower shall furnish to Lender the following
financial statements and reports, in a form satisfactory to Lender:
A. As soon as practicable and in any event mailed within ten (10) days after
the end of each fiscal month: (i) "Availability Report," in the form and
substance of Exhibit "E" attached hereto; (ii) Statement of Accounts Receivable
showing the detailed aging of each Receivable according to the procedures
(Schedule Section 1.9.C.). Notwithstanding the foregoing to the contrary, at any
time during which Borrower does not have any Receivables pledged to Lender
hereunder, Borrower shall not be required to provide to Lender the reports set
forth in (i) and (ii) above in this paragraph.
As soon as practicable and in any event mailed within thirty (30) days after
the end of each fiscal month, a monthly Profit and Loss Statement and Balance
Sheet of Borrower, certified by Borrower's chief financial officer or equivalent
duly elected officer of Borrower.
As soon as practicable and in any event mailed within forty-five (45) days
after the end of each fiscal month and each fiscal quarter, a consolidated
Profit and Loss Statement and Balance Sheet of Guarantor, certified by
Guarantor's chief financial officer or equivalent duly elected officer of
Guarantor.
B. Within ninety (90) days after the end of Guarantor's and Borrower's
fiscal years, (i) annual consolidated financial statements of Guarantor,
including Borrower, and (ii) annual internally prepared statement of Borrower,
prepared in accordance with GAAP, consistently applied and certified by its
chief financial officer or equivalent duly elected officer. The financial
statements shall be prepared by and under the method acceptable to Lender and
shall consist of a balance sheet as of the end of such fiscal year and
comparative statements of earnings, cash flows, and change in stockholders'
equity for such fiscal year (Schedule Section 4.4.).
C. Upon Lender's request, with reasonable promptness, such other financial
data that is reasonably available to Borrower, as reasonably requested,
including but not limited to tax returns, business plans and reports.
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<PAGE>
Together with each delivery of financial statements required by subsections
A, B and C above, Borrower shall deliver to Lender and shall cause each of its
subsidiaries to deliver to Lender, if requested by Lender, a certificate in form
satisfactory to Lender, certifying that no Default or Event of Default exists
under this Agreement as of the date of such certificate, or if a Default or an
Event of Default exists, specifying the nature and period of existence thereof
and what action Borrower proposes to take with respect thereto.
4.5. NOTICE OF CHANGES. Borrower shall promptly notify Lender in writing of
any change of its officers, directors or key employees; change of location of
its principal offices, change of location of any of its principal assets; any
acquisition, disposition or reorganization of any corporate subsidiary,
affiliate or parent of Borrower; change of Borrower's name; death or withdrawal
of any partner (if Borrower is a partnership); any sale or purchase out of the
regular course of Borrower's business; litigation with a material adverse claim
exceeding One Hundred Fifty Thousand Dollars ($150,000.00), excluding
enforcement and collection actions including, but not limited to, actions in
mortgage foreclosure, of which Borrower or a Guarantor is a party; and any other
material change in the business or financial affairs of Borrower.
4.6. VALIDITY GUARANTORS. All requests, reports and other information
("Lender's Information") to be provided herein to Lender by Borrower shall be
certified by an officer of Borrower. Validity Guarantor hereby acknowledges and
agrees, consistent with the terms of the Validity and Support Agreement, that
all Lender's Information shall be true and correct and Lender can rely upon such
information to be true and correct. Validity Guarantor shall, consistent with
the terms of the Validity and Support Agreement, indemnify and hold Lender
harmless from any damages Lender incurs with respect to the Indebtedness, based
upon Lender's reliance on the information provided to Lender by Borrower.
5. REPRESENTATIONS AND WARRANTIES OF BORROWERS AND GUARANTOR.
5.1. REPRESENTATIONS AND WARRANTIES. Borrower and Guarantor, each separately
only as to itself and jointly as to the Validity Guarantor in the
representations and warranties set forth below, hereby continuously represent
and warrant to Lender as follows:
A. Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation, is duly qualified to
<PAGE>
do business and is in good standing as a foreign corporation in all states where
such qualification is required, has all necessary corporate power and authority
to enter into this Agreement and each of the documents and instruments relating
hereto and to perform all of its obligations hereunder and thereunder.
B. Guarantor is a corporation duly incorporated, validly existing and in
good standing under the laws of the state of its incorporation, is duly
qualified to do business and is in good standing as a foreign corporation in all
states where such qualification is required, has all necessary corporate power
and authority to enter into this Agreement and each of the documents and
instruments relating hereto and to perform all of its obligations hereunder and
thereunder.
C. Borrower operates its business only under the assumed names (Schedule
Section 5.1.) and has not used any other assumed name for the operation of its
business activities for the previous seven (7) years.
D. Borrower has all requisite corporate right and power and is duly
authorized and empowered to enter into, execute, deliver and perform this
Agreement and all documents and instruments relating hereto and this Agreement
and all documents and instruments relating hereto are the legal, valid and
binding obligations of Borrower and are enforceable against Borrower in
accordance with their terms, subject to the operation and effect of any and all
limitations or restrictions pursuant to any applicable insolvency laws or other
similar laws relating to or affecting the rights of creditors generally.
E. Guarantor has all requisite corporate right and power and is duly
authorized and empowered to enter into, execute, deliver and perform this
Agreement and all documents and instruments relating hereto and this Agreement
and all documents and instruments relating hereto are the legal, valid and
binding obligations of Borrower and are enforceable against Guarantor in
accordance with their terms, subject to the operation and effect of any and all
limitations or restrictions pursuant to any applicable insolvency laws or other
similar laws relating to or affecting the rights of creditors generally.
F. Each Guarantor and Validity Guarantor is competent to enter into this
Agreement and the Guaranty and Validity Guaranty, respectively, and to perform
all of their respective obligations thereunder.
G. The execution, delivery and performance by Borrower of this Agreement
does not, and upon future representations and warranties made by Borrower in
connection with future advances hereunder or otherwise shall not, (i) violate
any provision of any law, rule, regulation, order, writ, judgment, injunction,
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<PAGE>
decree, determination or award presently in effect having applicability to
Borrower; (ii) violate any provision of its Articles of Incorporation or Bylaws;
or (iii) result in a breach of or constitute a default under any indenture or
loan or credit agreement or any other agreement, lease or instrument to which
Borrower is a party or by which it or any of its assets or properties may be
bound or affected; and Borrower is not in default of any such law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award or
any such indenture, agreement, lease or instrument.
H. With respect to Borrower, no consent, approval, license, exemption of or
filing or registration with, giving of notice to, or other authorization of or
by, any court, administrative agency or other governmental authority is or shall
be required in connection with the execution, delivery or performance by
Borrower for the valid consummation of the transactions contemplated by this
Agreement.
I. No event has occurred and is continuing which constitutes a Default or an
Event of Default, as defined in this Agreement. To the best of Borrower's
knowledge, there is no action, suit, proceeding or investigation pending or
threatened against or affecting Borrower before or by any court, administrative
agency or other governmental authority that brings into question the validity of
the transactions contemplated hereby, or that might result in any material
adverse change in the businesses, assets, properties or financial conditions of
Borrower or Guarantor.
J. Borrower is not in default in the payment of any taxes levied or assessed
against either of them or any of their assets or properties, except for taxes
being contested in good faith and by appropriate proceedings.
K. Borrower has good and marketable title to its assets and properties as
reflected in its financial statements furnished to Lender.
L. Each of the financial statements furnished to Lender by the Borrower and
Guarantor was prepared in accordance with GAAP and fairly and accurately
reflects their financial condition as of the date thereof; and each hereby
certifies that there have been no material adverse changes in their condition,
financial or otherwise, since the date of such statements, and there are no
contingent liabilities not provided for or disclosed in such statements.
M. Neither this Agreement, any Availability Report or any statement or
document referred to herein or delivered to Lender by Borrower and/or Guarantor
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements made herein or therein not misleading.
<PAGE>
N. Borrower has good, indefeasible and merchantable title to and ownership
of the Collateral, free and clear of all liens, claims, security interests and
encumbrances, except those of Lender and except where such liens, claims,
charges, security interests and encumbrances are removed contemporaneously with
the execution of this Agreement or are subordinate to those of Lender, in a form
and substance acceptable to Lender.
O. All books, records and documents relating to the Collateral are and shall
be genuine and in all respects what they purport to be; the original amount and
the unpaid balance of each Receivable shown on the books and records of Borrower
and in the schedules represented as owing by each Account Debtor is and shall be
the correct amount actually owing or to be owing by such Account Debtor at
maturity; to the best of Borrower's knowledge, each Account Debtor liable upon
the Receivables had the capacity to contract; Borrower has no knowledge of any
fact which would impair the validity or collectibility of any of the
Receivables; and the payments shown to have been made by each Account Debtor on
the books and records of Borrower shall reflect the amounts of and dates on
which said payments were actually made.
P. Borrower has places of business only at the locations (Schedule Section
3.2.). Borrower shall not begin or do business (either directly or through
subsidiaries) at other locations or cease to do business at any of the above
locations or at Borrower's principal place of business without first notifying
Lender. This provision is not intended to prevent or restrict Borrower from
freely conducting or ceasing to conduct business in any location or
jurisdiction.
Q. The present value of all benefits vested under all Plans of Borrower or
any ERISA Affiliate (based on the assumptions used to fund the Plans) did not,
as of the last annual valuation date (which in case of any Plan was not earlier
than December 31, 1982) exceed the value of the assets of the Plan applicable to
such vested benefits.
R. The liability to which Borrower or any ERISA Affiliate would become
subject under Sections 4063 or 4064 of ERISA if Borrower or any ERISA Affiliate
were to withdraw from all Multiemployer Plans or if such Multiemployer Plans
were to be terminated as of the valuation date most closely preceding the date
hereof, is not in excess of One Thousand Dollars ($1,000.00);
S. Borrower is not engaged nor shall it engage, principally or as one of its
important activities, in a business of extending credit for the purpose of
"purchasing" or "carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulations G or X of the Board of Governors of
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the Federal Reserve System as now and from time to time hereafter in effect. No
part of the proceeds of any advances hereunder shall be used for "purchasing" or
"carrying" "margin stock" as so defined or for any purpose which violates, or
which would be inconsistent with, the provisions of the Regulations of such
Board of Governors. If requested by Lender, Borrower shall furnish to Lender a
statement in conformity with the requirement of Federal Reserve Form G-3
referred to in said Regulation G to the foregoing effect. All of the outstanding
securities of Borrower have been offered, issued, sold and delivered in
compliance with, or are exempt from, all federal and state laws and rules and
regulations of federal and state regulatory bodies governing the offering,
issuance, sale and delivery of securities.
T. Borrower is not an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
U. Each of the Exhibits and Schedules to this Agreement contain true,
complete and correct information.
V. To the best of Borrower's knowledge, the land and improvements owned or
leased by Borrower for use in its business operations are free of dangerous
levels of contaminates, oils, asbestos, radon, PCB's, hazardous substances or
waste as defined by federal, state or local environmental laws, regulations or
administrative orders or other materials, the removal of which is required or
the maintenance of which is prohibited, regulated or penalized by any federal,
state or local governmental authority.
W. To the best of Borrower's and Guarantor's knowledge, Guarantor is
solvent, generally able to pay its obligations as they become due, has
sufficient capital to carry on its business and transactions and all businesses
and transactions in which it presently intends to engage, and the current value
of Guarantor's assets, at fair saleable valuation, exceeds the sum of its
liabilities. Guarantor and Borrower shall not be rendered insolvent by the
execution and delivery of the Loan Documents and the consummation of the
transactions contemplated thereby and the capital remaining in Borrower is not
now and shall not foreseeably become unreasonably small to permit Borrower to
carry on its business and transactions and all businesses and transactions in
which it is about to engage. Borrower does not intend to, nor does it reasonably
believe it shall, incur debts beyond its ability to repay the same as they
mature.
X. Lender has a perfected security interest in favor of Lender in all of
Borrower's right, title and interest in the Collateral, prior and superior to
any other security interest or lien, except any statutory or constitutional lien
<PAGE>
for taxes not yet due and payable, subject to the operation and effect of any
and all limitations or restrictions pursuant to any applicable insolvency laws
or other similar laws relating to or affecting the rights of creditors
generally.
Y. To the best of Borrower's knowledge, there are no material actions, suits
or proceedings pending, or threatened against or affecting the assets of
Borrower or the consummation of the transactions contemplated hereby, at law, or
in equity, or before or by any governmental authority or instrumentality or
before any arbitrator of any kind. Neither Borrower nor Guarantor is subject to
any judgment, order, writ, injunction or decree of any court or governmental
agency. There is not a reasonable likelihood of an adverse determination of any
pending proceeding which would, individually or in the aggregate, have a
material adverse effect on the business operations or financial condition of
Borrower or Guarantor.
5.2. WARRANTIES AND REPRESENTATIONS AS TO ELIGIBLE RECEIVABLES. With respect
to Eligible Receivables, Borrower and Guarantor continuously warrant and
represent to Lender that during the term of this Agreement and so long as any of
the Indebtedness remains unpaid: (i) in determining which Receivables are
"Eligible Receivables," Lender may rely upon all statements or representations
made by Borrower; and (ii) those Receivables designated as Eligible Receivables
meet each requirement set forth below at the time any request for advance is
provided to Lender.
A. The Eligible Receivables are genuine; are in all respects what they
purport to be; and are evidenced by at least one executed original instrument,
agreement, contract or document which has been or shall be delivered to Lender;
B. The Eligible Receivables represent undisputed, bona fide transactions
completed in accordance with the terms and provisions contained in any documents
related thereto;
C. The amounts of the face value shown on any schedule of Receivables
provided to Lender, and/or all invoices or statements delivered to Lender with
respect to any Eligible Receivables, are actually and absolutely owing to
Borrower and are not contingent for any reason;
D. No set-offs, counterclaims or disputes as to payments or liability
thereon exist or have been asserted with respect thereto and Borrower has not
made any agreement with any Account Debtor thereunder for any deduction
therefrom, except a discount or allowance allowed by Borrower in the ordinary
course of its business for prompt payment, all of which discounts or allowances
are reflected in the calculation of the outstanding amount of the Receivable;
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E. To the best of Borrower's knowledge, no facts, events or occurrences
exist that, in any way, impair the validity or enforcement thereof or reduce the
amount payable thereunder from the amount of the Receivable shown on any
schedule, or on all contracts, invoices or statements delivered to Lender with
respect thereto;
F. To the best of Borrower's knowledge, all Account Debtors in connection
with Eligible Receivables: (i) had the capacity to contract at the time any
contract or other document giving rise to the Receivable was executed; and (ii)
generally have the ability to pay their debts as become due;
G. To the best of Borrower's knowledge, no proceedings or actions are
pending against any Account Debtor that might result in any material adverse
change in the Account Debtor's financial condition;
H. The Eligible Receivables have not been assigned or pledged to any other
person or entity;
I. The aging of Receivables shall be delivered to Lender by Borrower
hereunder as determined pursuant to the Aging Procedures and Eligibility Test
(Schedule Section 1.9.C.).
6. COVENANTS AND OTHER AGREEMENTS
6.1. AFFIRMATIVE COVENANTS. During the term of this Agreement and so long as
any of the Indebtedness remains unpaid, Borrower agrees and covenants, that
Borrower shall:
A. Pay or cause to be paid currently all of their expenses, including all
payments on their obligations whenever due, as well as all payments of any and
all taxes of whatever nature when due. This provision shall not apply to taxes
or expenses which are due, but which are challenged in good faith.
B. Maintain, preserve, and protect the Collateral, including, but not
limited to, keeping documents, instruments or other written records otherwise
evidencing the Collateral in a fire proof cabinet.
C. Furnish to Lender written notice as to the occurrence of any Default or
Event of Default hereunder, upon learning of such Default or Event of Default.
D. Furnish to Lender notice of: (i) any development related to the business,
financial condition, properties or assets of Borrower or Guarantor, that would
have or has a materially adverse affect on such business, financial condition,
properties or assets, or ability to perform their obligations under this
Agreement and (ii) any material and adverse litigation or investigation to which
either of them may be a party.
<PAGE>
E. Carry on and conduct their business in the same manner and in the same
fields of enterprise as they are presently engaged, and Borrower shall preserve
its corporate existence, licenses or qualifications as a domestic corporation in
the jurisdiction of its incorporation and as a foreign corporation in every
jurisdiction in which the character of its assets or properties or the nature of
the business transacted by it at any time makes qualification as a foreign
corporation necessary, and to maintain all other material corporate rights and
franchises, provided, however, nothing herein shall be construed to prevent
Borrower from closing any location in the good faith exercise of its business
judgment.
F. Comply, and cause each affiliate to comply, with all statutes,
governmental rules and regulations reasonably applicable to them.
G. Permit and authorize Lender, without notifying Borrower or Guarantor, to
make such inquiries through business credit or other credit reporting services
concerning Borrower or Guarantor as Lender shall deem appropriate.
H. Provide Lender with evidence of insurance, as required in the insurance
requirements letter, dated September, 1996.
I. Provide Lender sixty (60) days' prior written notice of Borrower
initiating any activities in any state, other than the States of Delaware,
Maryland, New Jersey, New York, Pennsylvania and Virginia. Lender shall not
provide financing for any Receivable generated in a state other than the States
of Delaware, Maryland, New Jersey, New York, Pennsylvania and Virginia, until
Lender's counsel has reviewed applicable lending and homestead laws in such new
state and Lender has approved activities in such new state.
6.2. NEGATIVE COVENANTS. During the term of this Agreement and until the
Indebtedness secured hereby has been paid in full, Borrower covenants and agrees
that Borrower shall not, without Lender's prior written consent, which consent
shall not be unreasonably withheld, conditioned or delayed, do any of the
following:
A. Incur or permit to exist any mortgage, pledge, title retention lien or
other lien, encumbrance or security
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interest with respect to the Collateral now owned or hereafter acquired by
Borrower, except liens in favor of Lender.
B. Delegate, transfer or assign any of their obligations or liabilities
under this Agreement, or any part thereof, to any other person or entity.
C. Be a party to or participate in: (i) any merger or consolidation; (ii)
any purchase or other acquisition of all or substantially all of the assets or
properties or shares of any class of, or any partnership or joint venture
interest in, any other corporation or entity, except that Borrower may acquire,
in a single fiscal year, up to an aggregate purchase price not to exceed Five
Hundred Thousand Dollars ($500,000.00), assets or properties [but not including
any loan portfolios], provided that if Borrower requests to purchase assets or
properties that include a loan portfolio or that the aggregate purchase price,
in such fiscal year, exceeds Five Hundred Thousand Dollars ($500,000.00), Lender
shall have the right to review and consent to such purchase and such consent
shall not be unreasonably withheld ; (iii) any sale, transfer, conveyance or
lease of all or substantially all of Borrower's assets or properties, except for
the sale of obsolete furniture, fixtures and equipment or non-obsolete
furniture, fixtures and equipment if reasonably replaced; or (iv) any sale or
assignment with or without recourse of any Receivables, without the prior
written consent, which consent may be granted or withheld in Lender's sole
discretion, excluding securitization of Receivables by Borrower or a sale of
Receivables by Borrower, in the ordinary course of Borrower's business, upon the
condition that the sales price of such Receivables is equal to or greater than
Lender's effective advance rate with respect to all Eligible Receivables
("Effective Advance Rate"), immediately prior to such sale, and the proceeds of
such sale in an amount not less than the Effective Advance Rate as applied to
such sold Receivables are delivered by Lender to reduce the outstanding balance
of the Indebtedness. For the purposes of this Section, the term "Effective
Advance Rate" shall mean a percentage determined by dividing the outstanding
balance of the Indebtedness, on the date of determination, by the aggregate
unmatured and unpaid amount due to Borrower from the Account Debtor named
thereon, excluding all unearned finance charges, time price differentials,
insurance fees and other fees and charges pursuant to all Eligible Receivables.
Notwithstanding the provisions of this Section 6.2.C. to the contrary,
Borrower may acquire mortgage loans from any financial institution with which
Borrower has a joint marketing or similar arrangement, provided that each
mortgage loan purchased by Borrower is documented on forms approved by Borrower,
underwritten by Borrower and purchased by Borrower within thirty (30) days of
such mortgage loan's origination date.
<PAGE>
D. Cause or take any of the following actions with respect to Borrower: (i)
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
Borrower's outstanding securities; (ii) purchase or acquire, directly or
indirectly, any shares of capital stock, evidences of indebtedness or other
securities of any person or entity (other than stock or securities that are
pledged to Borrower as part of the collateral that secures a Receivable); (iii)
have any subsidiaries after June 30, 1997, other than a wholly-owned subsidiary
operated solely for the purpose of holding, operating and selling collateral
that previously secured a Receivable pursuant to which Borrower exercised
Borrower's remedies to obtain such collateral and such was acquired by or
transferred to this subsidiary.
E. Amend, supplement or otherwise modify Borrower's Articles of
Incorporation or Bylaws which would have a material adverse affect on the
condition and operations, prospects or financial condition of the Borrower.
F. Incur, assume or suffer to exist any debt (including capitalized leases)
other than (i) the Indebtedness, (ii) accounts payable incurred in the ordinary
course of business, (iii) other Debt consented to in writing by Lender, (iv)
obligations that exist as of the date of this Agreement with respect to any
subsidiary of Borrower for which Borrower has no direct or indirect liability
for such obligations, (v) capital leases that the aggregate additional liability
to Borrower, on a fiscal year basis, is less than Two Hundred Thousand
($200,000.00) annually, (vi) debt to Eagle National Bank, in an outstanding
principal amount not to exceed Three Hundred Thousand Dollars ($300,000.00) and
notwithstanding any provision to the contrary contained herein, Borrower shall
be allowed to pledge mortgage loans, other than a Receivable, to secure such
debt due to Eagle National Bank, or (v) debt to Corestates, N.A. that shall be
paid in full and terminated on the earlier of (a) December 31, 1996 or (b) the
date of the initial advance hereunder.
G. Directly or indirectly make loans to, invest in, extend credit to, or
guaranty the debt of any person or entity, other than in the ordinary course of
Borrower's business.
H. Amend, modify, or otherwise change in any respect any material agreement,
instrument, or arrangement (written or oral) by which Borrower, or any of its
assets, are bound.
I. Allow Borrower to be owned by an entity other than the Guarantor.
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J. Permit the Net Income to be less than the Minimum Net Income (Schedule
Section 6.2.A.).
K. Permit the Tangible Net Worth to be less than the Minimum Tangible Net
Worth (Schedule Section 6.2.A.).
L. Enter into any transaction with any entity or person affiliated with
Borrower, Guarantor or Validity Guarantor, or any officer, director and
shareholder thereof, directly or indirectly, which is on terms more favorable to
either party than a transaction between parties that are not affiliated.
7. EVENTS OF DEFAULT AND REMEDIES
7.1. EVENTS OF DEFAULT. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
A. Borrower fails to pay within five (5) days after the date any payment,
pursuant to the Loan Documents, is due and payable, at stated maturity, upon
acceleration or otherwise (notwithstanding the foregoing to the contrary, only
one (1) payment due pursuant to the Loan Documents, within the immediately
preceding six (6) month period from any date of determination, may use the above
five (5) day grace period, and therefore, if two (2) or more payments, within
any six (6) month period of determination, are made after the applicable due
date, the second of such payments may not make use of the above five (5) day
grace period and such late payment shall be an Event of Default hereunder);
B. Borrower or any other Loan Party fails or neglects to perform, keep, or
observe any Indebtedness including, but not limited to, term, provision,
condition, covenant or agreement contained in any Loan Document to which
Borrower or such other Loan Party is a party and, provided that if such failure
or neglect can be cured within five (5) Business Days from the date on which
Borrower knew or reasonably should have known of such failure or neglect, such
failure or neglect is not cured within five (5) Business Days of the date on
which Borrower knew or reasonably should have know of such failure or neglect
(notwithstanding the foregoing to the contrary, only one (1) failure or neglect
pursuant to this Section 7.1.B., within the immediately preceding six (6) month
period from any date of determination, may use the above five (5) Business Days
cure period, and therefore, if two (2) or more such failures or neglects occur,
within any six (6) month period of determination, the second of such failures or
neglects may not make use of the above five (5) Business Days cure period and
such second failure or neglect shall be an Event of Default hereunder);
<PAGE>
C. Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise;
D. The prospect of repayment of any portion of the Indebtedness or the
market value or priority of Lender's security interest in the Collateral is
materially impaired, provided that if such can reasonably be cured within five
(5) Business Days, that Lender has given Borrower five (5) Business Days' prior
written notice and opportunity to cure;
E. Any material portion of Borrower's assets is seized, attached, subjected
to a writ or distress warrant, is levied upon or comes into the possession of
any judicial officer;
F. Borrower shall generally not pay its debts as they become due or shall
enter into any agreement (whether written or oral), or offer to enter into any
agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation of
such creditors or their representatives in the supervision, management or
control of the business of Borrower;
G. Any bankruptcy or other insolvency proceeding is commenced by Borrower,
or any such proceeding is commenced against Borrower and remains undischarged or
unstayed for sixty (60) days;
H. Any notice of lien, levy or assessment is filed of record with respect to
any of the Collateral and not withdrawn within two (2) Business Days of
Borrower's knowledge of such notice, or with respect to any other of Borrower
assets, other than the Collateral, a notice of lien, levy or assessment in
excess of One Hundred Fifty Thousand Dollars ($150,000.00), which is not
withdrawn within ninety (90) days;;
I. Any judgments are entered against Borrower in an aggregate amount
exceeding One Hundred Fifty Thousand Dollars ($150,000.00);
J. Any default shall occur under any material agreement between Borrower and
any third party including, without limitation, any default which would result in
a right by such third party to accelerate the maturity of any Indebtedness of
Borrower to such third party;
K. Any representation or warranty made by Borrower, any affiliate or any
other party in any Loan Document or any other statement, document or report made
or delivered to Lender in connection therewith shall prove to have been
misleading in any material respect;
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L. Any Guarantor terminates or attempts to terminate its Guaranty or any
security therefor or becomes subject to any bankruptcy or other insolvency
proceeding;
M. Any Validity Guarantor dies, terminates or attempts to terminate his
Validity Guaranty or any security therefor or becomes subject to any bankruptcy
or other insolvency proceeding;
N. Any Prohibited Transaction or Reportable Event shall occur with respect
to a Plan which could have a material adverse effect on the financial condition
of Borrower; any lien upon the assets of Borrower in connection with any Plan
shall arise; Borrower or any of its ERISA Affiliates shall fail to make full
payment when due of all amounts which Borrower or any of its ERISA Affiliates
may be required to pay to any Plan or any Multiemployer Plan as one or more
contributions thereto; Borrower or any of its ERISA Affiliates creates or
permits the creation of any accumulated funding deficiency, whether or not
waived; or
O. Any transfer of more than ten percent (10%) of the issued and outstanding
shares of common stock or other evidence of ownership of Borrower.
7.2. REMEDIES. Upon the occurrence of an Event of Default, Lender may, at
its option and in its sole discretion and in addition to all of its other rights
under the Loan Documents, terminate this Agreement and declare all of the
Indebtedness to be immediately payable in full. Lender shall also have all of
its rights and remedies under applicable law, including, without limitation, the
default rights and remedies of a secured party under the Code. Further, Lender
may, at any time, take possession of the Collateral and keep it on Borrower's
premises, at no cost to Lender, or remove any part of it to such other place(s)
as Lender may desire, or Borrower shall, upon Lender's demand, at Borrower's
sole cost, assemble the Collateral and make it available to Lender at a place
reasonably convenient to Lender. Lender may sell and deliver any Collateral at
public or private sales, for cash, upon credit or otherwise, at such prices and
upon such terms as Lender deems advisable, but upon commercially reasonably
terms, at Lender's discretion, and may, if Lender deems it reasonable, postpone
or adjourn any sale of the Collateral by an announcement at the time and place
of sale or of such postponed or adjourned sale without giving a new notice of
sale. Borrower agrees that Lender has no obligation to preserve rights to the
Collateral or marshall any Collateral for the benefit of any Person. For that
limited purpose, Lender is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, name, trade secrets,
trade names, trademarks and advertising matter, or any similar property, in
<PAGE>
completing production, advertising or selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Lender's
benefit. Any requirement of reasonable notice shall be met if such notice is
given pursuant to Section 8.2 hereof to Borrower at its address set forth in the
Schedule (Schedule Section 8.2) at least five (5) days before sale or other
disposition. The proceeds of sale shall be applied, first, to all attorneys fees
and other expenses of sale, and second, to the Indebtedness in such order as
Lender shall elect, in its sole discretion. Lender shall return any excess to
Borrower and Borrower shall remain liable for any deficiency to the fullest
extent permitted by law.
Notwithstanding the foregoing, if Lender notifies Borrower that Lender
intends to pursue its rights to foreclose Lender's security interest in the
Receivables and such foreclosure is based solely upon an Event of Default
pursuant Section 7.1.B., Borrower shall have ninety (90) days from the date of
such notice from Lender ("Standstill Period") to sell Receivables, at a sales
price of not less than the Effective Advance Rate with respect to such
Receivables, in order to pay the outstanding balance of the Indebtedness in
full. Lender may, at Lender's sole discretion, upon written notice to Borrower,
reduce or eliminate the Standstill Period. If ownership of Lender changes
hereafter wherein a single individual or entity owns fifty percent (50%) or
more, then in that event, in order for Lender to reduce or eliminate the
Standstill Period, such reduction or elimination of the Standstill Period shall
be based upon Lender's reasonable discretion. Upon the expiraton of the
Standstill Period, as may be reduced or eliminated hereunder, Lender shall have
the right to pursue its rights and remedies hereunder.
7.3. INTEREST AFTER DEFAULT. Upon the occurrence and during the continuation
of an Event of Default, Borrower shall pay Lender interest on the daily
outstanding balance of Borrower's loan account at a rate per annum which is two
percent (2%) in excess of the rate which would otherwise be applicable thereto
pursuant to the Schedule (Schedule Section 2.2).
7.4. STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Lender agree that the following conduct by Lender with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by Lender, including, but not limited to, Lender's use in its
sole discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not necessarily be deemed to be
unreasonable): Any public or private disposition: (i) as to which on no later
than the fifth calendar day prior thereto written notice thereof is given as set
forth in Section 8.2 hereof to Borrower and, with respect to any public
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disposition, on no later than the fifth calendar day prior thereto notice
thereof describing in general nonspecific terms, the Collateral to be disposed
of is published once in a newspaper of general circulation in the county where
the sale is to be conducted (provided that no notice of any public or private
disposition need be given to the Borrower or published if the Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market); (ii) which is conducted at any place designated by
Lender, with or without the Collateral being present; and (iii) which commences
at any time between 9:00 a.m. and 5:00 p.m. Without limiting the generality of
the foregoing, Borrower expressly agrees that, with respect to any disposition
of accounts, instruments and general intangibles, it shall be commercially
reasonable for Lender to direct any prospective purchaser thereof to ascertain
directly from Borrower any and all information concerning the same, including,
but not limited to, the terms of payment, aging and delinquency, if any, the
financial condition of any obligor or account debtor thereon or guarantor
thereof, and any collateral therefor.
7.5. ACCELERATION OF THE INDEBTEDNESS. Upon and after an Event of Default,
the outstanding principal balance together with all accrued but unpaid interest
on the Indebtedness and all other sums due and payable by Borrower to Lender
may, at the option of Lender and without demand, presentment, notice of
dishonor, notice of intent to demand or accelerate payment, diligence in
collecting, grace, notice and protest or a legal process of any kind, all of
which are hereby expressly waived, be declared, and immediately shall become due
and payable.
7.6. NO WAIVER. No delay, failure or omission of Lender to exercise any
right upon the occurrence of any Default or Event of Default shall impair any
such right or shall be construed to be a waiver of any such Default or Event of
Default or an acquiescence therein. Lender may, from time to time, in a writing
waive compliance by the other parties with any of the terms of this Agreement
and its rights and remedies upon any Default or Event of Default, and, Borrower
agrees that no waiver by Lender shall ever be legally effective unless such
waiver shall be acknowledged and agreed in writing by Lender. No waiver of any
Default or Event of Default shall impair any right or remedy of Lender not
specifically waived. No single, partial or full exercise of any right of Lender
shall preclude any other or further exercise thereof. No modification or
amendment of or supplement to this Agreement or any other written agreement
between the parties hereto shall be valid or effective (or serve as a basis of
reliance by way of estoppel) unless the same is in writing and signed by all
parties hereto. The acceptance by Lender at any time and from to time of a
partial payment or partial performance of any of Borrower's obligations set
<PAGE>
forth herein shall not be deemed a waiver, reduction, modification or release
from any Default or Event of Default then existing. No waiver by Lender of any
Default or Event of Default shall be deemed to be a waiver of any other existing
or any subsequent Default or Event of Default.
7.7. GENERAL INDEMNIFICATION. Borrower hereby agrees to indemnify and hold
Lender harmless from and against any and all claims, liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements (collectively "Claim" or "Claims") of any kind or nature
whatsoever, asserted by any party other than Borrower, or with respect to
Borrower only as otherwise provided in this Agreement or pursuant to applicable
law regarding Lender's obligations to Borrower, which may be imposed on,
incurred by or asserted against Lender, or any of its officers, directors,
employees or agents (including accountants, attorneys or other professionals
hired by Lender, provided that Borrower shall not indemnify Lender for Claims
arising out of an act of malpractice by such professionals) in any way relating
to or arising out of the Loan Documents or any action taken or omitted by
Lender, or any of its officers, directors, employees or agents (including
accountants, attorneys or other professionals hired by Lender, provided that
Borrower shall not indemnify Lender for Claims arising out of an act of
malpractice by such professionals) under the Loan Documents, except to the
extent such indemnified matters are finally found by a court to have been caused
by Lender's gross negligence or wilful misconduct. Notwithstanding the
foregoing, Borrower indemnification of Lender shall not apply to any Claim or
Claims that arise solely from the action or actions of Lender.
7.8. APPLICATION OF PROCEEDS. After an Event of Default shall have occurred
and is continuing after the expiration of all applicable grace or cure periods,
all amounts received by Lender on account of any Indebtedness and realized by
Lender with respect to the Collateral, including any sums which may be held by
Lender, or the proceeds of any thereof, shall be applied in the same manner as
proceeds of Collateral as set forth in Section 7.2 hereof.
7.9. APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Borrower irrevocably
designates, makes, constitutes and appoints Lender (and all persons reasonably
designated by Lender), with full power of substitution, as Borrower's true and
lawful attorney-in-fact (and not agent-in-fact) and Lender, or Lender's agent,
may, without notice to Borrower, and at such time or times thereafter as Lender
or said agent, in its discretion, may determine, in Borrower's or Lender's name,
at no duty or obligation on Lender, do the following:
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A. All acts and things necessary to fulfill Borrower's administrative duties
pursuant to this Agreement, including, but not limited to, the execution of
financing statements;
B. Upon the occurrence of any Default, all acts and things necessary to
fulfill Borrower's obligations under this Agreement and the Loan Documents,
except as set forth in Section 7.9.C below, at the reasonable cost and expense
of Borrower.
C. In addition to, but not in limitation of the foregoing, at any time or
times upon the occurrence of an Event of Default, Lender shall have the right:
(i) to enter upon Borrower's premises and to receive and open all mail directed
to Borrower and remove all payments to Borrower on the Receivables; however,
Lender shall turn over to Borrower all of such mail not relating to Receivables;
(ii) in the name of Borrower, to notify the Post Office authorities to change
the address for the delivery of mail addressed to Borrower to such address as
Lender may designate (notwithstanding the foregoing, for the purposes of notice
and service of process to or upon Borrower as set forth in this Agreement,
Lender's rights to change the address for the delivery of mail shall not give
Lender the right to change the address for notice and service of process to or
upon Borrower in this Agreement); (iii) demand, collect, receive for and give
renewals, extensions and the reasonable discharge and/or release of any
Receivable; (iv) institute and prosecute legal and equitable proceedings to
realize upon the Receivables; (v) settle, compromise, compound or adjust claims
in respect of any Receivable or any legal proceedings brought in respect
thereof; (vi) generally, sell in whole or in part for cash, credit or property
to others or to itself at any public or private sale, assign, make any agreement
with respect to or otherwise deal with any of the Receivables as fully and
completely as though Lender were the absolute owner thereof for all purposes,
except to the extent limited by any applicable laws and subject to any
requirements of notice to Borrower or other persons under applicable laws; (vii)
take possession and control in any manner and in any place of any cash or
non-cash items of payment or proceeds of Receivables; (viii) endorse the name of
Borrower upon any notes, acceptances, checks, drafts, money orders, chattel
paper or other evidences of payment of Receivables that may come into Lender's
possession; and (ix) sign Borrower's name on any instruments or documents
relating to any of the Collateral, or on drafts against Account Debtors; .
The appointment of Lender as attorney-in-fact for Borrower is coupled with an
interest and is irrevocable, except upon the termination or release of this
Agreement, unless such termination or release is subsequently reinstated by
order of a court of competent jurisdiction in which case the power of attorney
shall be reinstated, coupled with an interest and irrevocable, as herein
provided.
<PAGE>
8. MISCELLANEOUS
8.1. REIMBURSEMENT FOR EXPENSES. Except as specifically set forth in the
Schedule Section 8.1. (if the terms of Schedule Section 8.1 conflict with the
terms set forth in this Agreement, the terms set forth in Schedule Section 8.1
shall prevail), Borrower agrees to reimburse Lender, upon demand, for all
reasonable out-of-pocket expenses (including costs of establishing and
maintaining accounts or arrangements set forth in Section 3.9, attorney's fees,
expert witness fees and legal expenses) incurred in connection with the
evaluation of collateral, preservation of collateral, or collection of the
indebtedness.
8.2. NOTICES. All notices, demands, billings, requests and other written
communications hereunder shall be deemed to have been properly given: (i) upon
personal delivery; (ii) on the third Business Day following the day sent, if
sent by registered or certified mail; (iii) on the next Business Day following
the day sent, if sent by overnight express courier; or (iv) on the day sent or
if such day is not a Business Day on the next Business Day after the day sent if
sent by telecopy providing the receiving party has acknowledged receipt by
return telecopy, in each case, to Lender, Borrower, Guarantor or Validity
Guarantor at its address and/or telecopy number as set forth in this Agreement
or Schedule Section 8.2, or at such other address and/or telecopy number as
either party may designate for such purpose in a written notice given to the
other party.
Lender shall have the right, on or after initial funding pursuant to the
terms of this Agreement, to issue a press release or other brochure announcing
the consummation of the Loan Documents and to distribute that information to
third parties in the normal course of Lender's business, at no cost to Borrower.
8.3. PARTICIPATIONS. Borrower, Guarantor and Validity Guarantor acknowledge
and agree, with the prior written consent of Borrower, which shall not be
unreasonably withheld by Borrower, that Lender may from time to time sell or
offer to sell interests in the Indebtedness and the Loan Documents to one or
more participants. Borrower, Guarantor and Validity Guarantor authorize Lender
to disseminate any information it has pertaining to the Indebtedness, including
without limitation, complete and current credit information on Borrower and any
of its principals, Validity Guarantor and Guarantor to any such participant or
prospective participant, provided that such potential participant has executed a
confidentiality agreement, in substance and form reasonably acceptable to
Borrower.
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<PAGE>
8.4. SURVIVAL OF AGREEMENTS. All of the various representations, warranties,
covenants and agreements of Borrower (including without limitation, any
agreements to pay costs and expenses and to indemnify Lender) in the Loan
Documents shall survive the execution and delivery of the Loan Documents and the
performance under such Loan Documents, and shall further survive until one (1)
year and one (1) month after all of the Indebtedness is paid in full to Lender
and this Agreement is terminated.
8.5. NO OBLIGATION BEYOND MATURITY. Borrower agrees and acknowledges that
upon the Maturity Date, Lender shall have no obligation to renew, extend, modify
or rearrange the Loan and shall have the right to require all amounts due and
owing under the Loan to be paid in full upon such date.
8.6. PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and
only agreement of the parties hereto and supersedes any prior understandings or
written or oral agreements between the parties respecting the subject matter of
this Agreement. No provision of this Agreement or other document or instrument
relating hereto may be modified, waived or terminated except by instrument in
writing executed by all parties.
8.7. PARTIES BOUND. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, permitted successors and assigns, except
as otherwise expressly provided for herein. Borrower, Guarantor and Validity
Guarantor shall not assign any of their respective rights or obligations
pursuant this Agreement.
8.8. NUMBER AND GENDER. Whenever used herein, the singular number shall
include the plural and the plural the singular, and the use of any gender shall
be applicable to all genders. The duties, covenants, obligations and warranties
of Borrower in this Agreement shall be joint and several obligations of Borrower
and of each Borrower if more than one.
8.9. NO THIRD PARTY BENEFICIARY. This Agreement is for the sole benefit of
Lender and Borrower and is not for the benefit of any third party.
8.10. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed to be an original, and
all of which taken together shall constitute but one and the same instrument.
<PAGE>
8.11. SEVERABILITY OF PROVISIONS. Any provision which is determined to be
unconscionable, against public policy or any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
8.12. HEADINGS. The Article and Section headings used in this Agreement are
for convenience only and shall not affect the construction of this Agreement.
8.13. SCHEDULES AND EXHIBITS. Any and all exhibits hereto are hereby
expressly incorporated by reference as though fully set forth at that point
verbatim. All terms and provisions as defined or set forth in Article 1 and in
any Schedule are hereby incorporated into and made a part of this Agreement.
Each reference in this Agreement and the Schedule hereto to any information or
definitions contained in Article 1 or the Schedule shall mean and refer to the
information or definitions as set forth in Article 1 and the Schedule unless the
context specifically requires otherwise. Any terms used in Article 1 and in the
Schedule which are not defined shall have the meanings ascribed to such terms,
as of the date of this Agreement, by the Code to the extent the same are defined
therein.
8.14. FURTHER INSTRUMENTS. Borrower, Guarantor and Validity Guarantor shall
from time to time execute and deliver all such amendments, supplements and other
modifications hereto and to the other Loan Documents and all such financing
statements or continuation statements, instruments of further assurance and any
other instruments, and shall take such other actions, as Lender reasonably
requests and deems necessary or advisable in furtherance of the agreements
contained herein.
8.15. LENDER'S EXPENSES AND ATTORNEY'S FEES. UPON AND AFTER AN EVENT OF
DEFAULT, LENDER SHALL BE ENTITLED TO RECOVER FROM BORROWER, VALIDITY GUARANTOR
AND/OR GUARANTOR ALL OF LENDER'S REASONABLE COSTS AND EXPENSES AND ATTORNEY'S
FEES INCURRED IN THE EXERCISE OF LENDER'S RIGHTS SET FORTH IN THIS AGREEMENT,
AND ALL DAMAGES SUSTAINED BY LENDER BY REASON OF MISREPRESENTATION, BREACH OF
WARRANTY OR BREACH OF COVENANT OF BORROWER HEREIN, EXPRESSED OR IMPLIED, WHETHER
CAUSED BY THE ACTS OR DEFAULTS OF BORROWER OR ACCOUNT DEBTORS; INCLUDING WITHOUT
LIMITATION, ALL ATTORNEY'S FEES ARISING FROM SUCH SERVICES, EXPERT WITNESS FEES
AND ANY EXPENSES, COSTS AND CHARGES RELATING THERETO, AND ALL OF THE
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<PAGE>
FOREGOING SHALL CONSTITUTE PART OF THE INDEBTEDNESS SECURED BY THE COLLATERAL
AND SHALL BE PAYABLE ON DEMAND.
8.16. GOVERNING LAW. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED BY
BORROWER, VALIDITY GUARANTOR AND GUARANTOR AND ACCEPTED BY LENDER IN MARICOPA
COUNTY, ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF
ARIZONA.
8.17. JURISDICTION AND VENUE. TO INDUCE THE LENDER TO ENTER INTO THIS
AGREEMENT, BORROWER, VALIDITY GUARANTOR, GUARANTOR AND LENDER IRREVOCABLY AGREE
THAT, SUBJECT TO THE LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY,
MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS
WITHIN THE COUNTY OF MARICOPA, STATE OF ARIZONA. BORROWER, VALIDITY GUARANTOR,
GUARANTOR AND LENDER HEREBY CONSENT AND SUBMIT TO THE JURISDICTION OF ANY LOCAL,
STATE OR FEDERAL COURT LOCATED WITHIN SAID COUNTY AND STATE AND WAIVE PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND AGREE THAT ALL SUCH SERVICE OF
PROCESS MAY BE MADE BY REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS SET
FORTH IN SCHEDULE SECTION 8.17 AND SERVICE SO MADE SHALL BE DEEMED TO BE
COMPLETED UPON ACTUAL RECEIPT THEREOF.
8.18. WAIVER. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT AND TO THE
EXTENT NOT PROHIBITED BY APPLICABLE LAW, BORROWER AND EACH VALIDITY GUARANTOR
AND GUARANTOR HEREBY WAIVES (i) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF
PRESENTMENT, PROTEST, DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE,
SETTLEMENT, AND ONE OR MORE EXTENSIONS OR RENEWALS OF ANY OR ALL ACCOUNTS,
CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY
TIME HELD BY THE LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY
RATIFIES AND CONFIRMS WHATEVER THE LENDER MAY DO IN THIS REGARD; (ii) ALL RIGHTS
TO NOTICE AND HEARING PRIOR TO THE LENDER'S TAKING POSSESSION OR CONTROL OF, OR
THE LENDER'S REPLEVIN, ATTACHMENT OR LEVY ON OR OF THE COLLATERAL OR ANY BOND OR
<PAGE>
SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE LENDER TO
EXERCISE ANY OF THE LENDER'S REMEDIES; AND (iii) THE BENEFIT OF ALL VALUATION,
APPRAISEMENT OR EXEMPTION LAWS.
8.19. ADVICE OF COUNSEL. BORROWER, VALIDITY GUARANTOR AND GUARANTOR
ACKNOWLEDGES THAT THEY HAVE BEEN REPRESENTED AND ADVISED BY INDEPENDENT LEGAL
COUNSEL WITH RESPECT TO THE NEGOTIATION, EXECUTION AND ACCEPTANCE OF THIS
AGREEMENT AND THE TRANSACTION GOVERNED BY THIS AGREEMENT AND SPECIFICALLY WITH
RESPECT TO THE PROVISIONS CONTAINED IN SECTIONS 7.3, 8.15, 8.16, 8.17, 8.18,
8.19 and 8.20 HEREOF AND HAS RELIED UPON THE ADVICE OF ITS INDEPENDENT LEGAL
COUNSEL IN AGREEING TO THE TERMS AND CONDITIONS HEREIN AND IN EXECUTING AND
DELIVERING THIS AGREEMENT, AND THAT THEY HAVE FREELY AND VOLUNTARILY ENTERED
INTO THIS AGREEMENT AS THE PRODUCT OF ARMS' LENGTH NEGOTIATIONS.
8.20. WAIVER OF RIGHT TO TRIAL BY JURY. LENDER, BORROWER, VALIDITY GUARANTOR
AND GUARANTOR HEREBY COVENANT AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING
IN RESPECT OF ANY MATTER ARISING OUT OF THIS AGREEMENT, THE DOCUMENTS EXECUTED
IN CONNECTION HEREWITH, ANY WRITTEN AGREEMENT BETWEEN THE PARTIES HERETO,
WHETHER NOW EXISTING OR HEREAFTER ARISING OR IN ANY WAY RELATED TO, CONNECTED
WITH OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE, TRIAL SHALL BE TO A COURT OF COMPETENT JURISDICTION AND NOT TO A
JURY; LENDER, BORROWER, VALIDITY GUARANTOR AND GUARANTOR HEREBY EXPRESSLY WAIVE
ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY. ANY PARTY MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
8.21. TIME OF ESSENCE. Time is of the essence for the performance of the
obligations set forth in this Agreement and the Loan Documents.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first set forth above.
BORROWER:
AMERICAN BUSINESS CREDIT, INC.
By: /s/ Beverly Santilli
______________________________________________
(Signature)
Beverly Santilli, President 12/12/96
________________________________________ ________
(Printed Name and Title) (Date)
________________________________
Tax Payer Identification No.
GUARANTOR:
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
By: /s/ Anthony J. Santilli, Jr.
______________________________________________
(Signature)
Anthony J. Santilli, Jr., President 12/12/96
________________________________________ ________
(Printed Name and Title) (Date)
________________________________
Tax Payer Identification No.
VALIDITY GUARANTOR:
/s/ Anthony J. Santilli, Jr.
________________________________
Anthony J. Santilli, Jr.
- -
________________________________
Social Security No.
<PAGE>
LENDER:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
/s/ John M. Sorher
By:______________________________________________
(Signature)
John M. Sorher, Assistant Vice-President 12/12/96
________________________________________ ________
(Printed Name and Title) (Date)
________________________________
Tax Payer Identification Number
-23-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
JURISDICTION
PARENT SUBSIDIARY OF INCORPORATION
- ------------------------------- ----------------------------------------------- ------------------------------
<S> <C> <C>
American Business American Business Credit, Inc. ("ABC") Pennsylvania
Financial Services, Inc.
("ABFS")
ABFS ABFS Securities, Inc. Delaware
ABC Processing Service Center, Inc. Pennsylvania
ABC HomeAmerican Credit, Inc.(1) Pennsylvania
ABC HomeAmerican Consumer Discount, Inc. Pennsylvania
ABC American Business Leasing, Inc. Pennsylvania
ABC ABC Holdings Corporation Pennsylvania
ABC American Business Finance Corporation Delaware
ABFS ABFS 1995-1, Inc. Delaware
ABFS ABFS 1995-2, Inc. Delaware
ABFS ABFS 1996-1, Inc. Delaware
ABFS ABFS 1996-2, Inc. Delaware
</TABLE>
(1) HomeAmerican Credit, Inc. is doing business as Upland Mortgage.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
We hereby consent to the use in this Registration Statement on Form
SB-2 of our report dated September 20, 1995, relating to the consolidated
financial statements of American Business Financial Services, Inc. and
subsidiaries. We also consent to the reference to our firm under the caption
"Experts" in the Prospectus.
/s/ Fishbein & Company, P.C.
____________________________
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
December 26, 1996
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
Bala Cynwyd, PA
We hereby consent to the use in this Registration Statement on Form
SB-2 of our report dated August 23, 1996, relating to the consolidated financial
statements of American Business Financial Services, Inc. and subsidiaries.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
/s/ BDO SEIDMAN, LLP
_____________________
Philadelphia, Pennsylvania BDO Seidman, LLP
December 26, 1996
