<PAGE>
As filed with the Securities and Exchange Commission on March 28, 1997
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)
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Delaware 6162 87-0418807
------------------------------- ---------------------------- ----------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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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:
JANE K. STORERO, ESQUIRE
Blank Rome Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, Pennsylvania 19103
(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. [X]
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. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed maximum
offering price
Title of each class of Amount per Subordinated Proposed maximum Amount of
securities to be registered to be registered Debenture(1) offering price registration fee
===========================================================================================================================
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Subordinated Debentures.......... $125,000,000 $2,500 $125,000,000 $37,879
- ----------------------------------------------------------------------------------------------------------------------------
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(1) Estimated solely for the purpose of calculating the registration.
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>
PROSPECTUS
$125,000,000 PRINCIPAL AMOUNT
[LOGO] AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Adjustable Rate Subordinated Money Market Notes
Three, Six, Eighteen and Thirty Month Subordinated Investment Notes;
One, Two, Three, Four, Five, Seven and Ten Year Subordinated Investment Notes
This Prospectus relates to the offer and sale of up to $125,000,000 in
principal amount (the "Offering") of unsecured, subordinated investment notes
(the "Investment Notes") and unsecured, adjustable rate, subordinated money
market notes (the "Money Market Notes" and when referred to, together with the
Investment Notes, "Subordinated Debentures") of American Business Financial
Services, Inc., a Delaware corporation ("ABFS" or the "Company"). The
Subordinated Debentures will be offered on an ongoing and continuous
"best-efforts" basis by ABFS. The Subordinated Debentures will be subordinated
to all "Senior Debt" (as hereinafter defined) of the Company (including its
subsidiaries). See "Prospectus Summary -- Securities Offered." As of the date of
this Prospectus, there was no Senior Debt outstanding. There is no limitation on
the amount of Senior Debt the Company may incur. Any indebtedness of the
subsidiaries of ABFS, other than the Senior Debt, will have rights upon
liquidation or dissolution of the particular subsidiary, prior to payment being
made to debtholders. As of the date hereof, there was $1.2 million of such
subsidiary debt outstanding. Any indebtedness of ABFS, other than the Senior
Debt, will have rights upon liquidation or dissolution of ABFS which ranks pari
passu (i.e. equally) in right of payment to the Subordinated Debentures offered
hereby. As of the date of this Prospectus, ABFS had an aggregate of
approximately $47.5 million in principal amount of indebtedness, which ranks
pari passu in right of payment with the Subordinated Debentures. The
Subordinated Debentures have no sinking fund. See "Description of Subordinated
Debentures -- Provisions Related to All Subordinated Debentures."
Investment Notes will be issued in the minimum amount of $1,000 and in
fully registered form. Purchasers of the Investment Notes will elect a maturity
when they subscribe for the Investment Notes. The Investment Notes may be
extended by the Company, at its option, for an identical term unless the holder
thereof requests payment within seven days after the original maturity. Interest
rates paid will depend on the term of the Investment Note.
The Money Market Notes will be issued in the minimum amount of $2,500.
The Accounts have no stated maturity and are redeemable in minimum amounts of
$500 (or any amount to close an account) at the option of the holder upon not
less than 10 business days written notice to the Company. The Money Market Notes
may also be redeemed by the Company upon 30 days written notice to the holder.
Interest rates on the Money Market Notes will be adjusted by the Company on the
first and fifteenth day of each calendar month and shall not be less than the
average yield of the 91 Day U.S. Treasury Bill over the preceding eight weeks as
published by the Federal Reserve Board. Accrued interest will be paid monthly in
the form of additional Money Market Notes. No interest will be paid on the Money
Market Notes for any day during which the principal balance of any account is
less than $1,000. The Money Market Notes are non-negotiable and will be issued
in book entry form. As a result, book-entry owners of the Money Market Notes
will not be entitled to physical delivery of the Money Market Notes purchased in
certificated form equal in amount to their respective book-entry accounts
maintained by the Company except in the limited circumstances described herein.
See "Prospectus Summary -- Securities Offered." (continued on next page)
ABFS is not subject to state or federal statutes or regulations
applicable to banks and/or savings and loan associations with regard to
insurance, the maintenance of reserves, the quality or condition of its assets
or other matters. THE SUBORDINATED DEBENTURES OFFERED HEREUNDER ARE NOT
CERTIFICATES OF DEPOSIT ("CDs"). PAYMENT OF PRINCIPAL AND INTEREST ON THE
SUBORDINATED DEBENTURES IS NOT GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE
INSURANCE FUND OR ANY OTHER ENTITY. THE COMPANY'S REVENUES FROM OPERATIONS,
INCLUDING THE SECURITIZATION OR SALE OF LOANS FROM ITS PORTFOLIO, THE COMPANY'S
WORKING CAPITAL, AND CASH GENERATED FROM ADDITIONAL DEBT FINANCING REPRESENT THE
COMPANY'S SOURCES OF FUNDS FOR THE REPAYMENT OF PRINCIPAL AT MATURITY AND THE
ONGOING PAYMENT OF INTEREST ON THE SUBORDINATED DEBENTURES.
THE SUBORDINATED DEBENTURES ARE SPECULATIVE SECURITIES AND AN
INVESTMENT HEREUNDER SHOULD BE UNDERTAKEN ONLY AFTER CAREFUL EVALUATION OF THE
RISK FACTORS AND THE OTHER INFORMATION SET FORTH IN THE PROSPECTUS. SEE "RISK
FACTORS" ON PAGE 13 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SUBORDINATED DEBENTURES.
---------------------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE SUBORDINATED
DEBENTURES OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT SETTING
FORTH THE INTEREST RATES THEN BEING OFFERED ON THE SUBORDINATED DEBENTURES OR
THE METHOD OF CALCULATING SUCH RATES.
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.
The date of this Prospectus is ________, 1997.
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Underwriting
Price Commissions and Proceeds to
to Public (1) Discounts (2) the Company (2)(3)
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Per Subordinated Debenture................. 100% -0- 100%
Total...................................... $125,000,000 -0- $125,000,000
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(1) The Investment Notes will be issued at their face principal value, without
discount.
(2) ABFS does not currently have any agreements concerning the use of the
services of any National Association of Securities Dealers, Inc. ("NASD")
member broker-dealer as an agent to assist in the sales of the Subordinated
Debentures and, accordingly, is not presently obligated to pay any
commissions in connection with the sale of the Subordinated Debentures. If
an agreement concerning the use of any broker-dealer is reached, ABFS may
pay NASD member broker-dealers, as agents, an estimated commission ranging
from .5% to 10% of the sale price of any Subordinated Debenture sold
through any such agent, depending on numerous factors. ABFS may agree to
indemnify such broker-dealers against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. ABFS may also
agree to reimburse such broker-dealers for costs and expenses, up to a
maximum percentage to be determined, based upon a percentage of Investment
Notes sold. See "Plan of Distribution."
(3) Before deducting other expenses incurred in connection with the Offering
payable by ABFS estimated at approximately $3.1 million.
The Company reserves the right to reject any subscription hereunder, in
whole or in part, for any reason. Subscriptions will be irrevocable upon receipt
by ABFS. In the event a subscription is not accepted by the Company, the
proceeds of such subscription will be promptly refunded to the subscriber
without deduction of any costs and without interest. The Company expects that
such subscriptions will be refunded within 48 hours after the Company has
received the subscription. No minimum amount of Subordinated Debentures must be
sold in the Offering. ABFS reserves the right to withdraw or cancel the Offering
at anytime. In the event of such withdrawal or cancellation, the Subordinated
Debentures previously sold will remain outstanding until maturity and pending
subscriptions will be irrevocable. See "Plan of Distribution."
It is presently anticipated that there will be no trading market for
the Subordinated Debentures. The Subordinated Debentures will not be
transferable without the prior written consent of the Company. Such consent will
be withheld in such circumstances as determined by the Company in its reasonable
discretion, including but not limited to the Company's determination that such
transfer might result in a violation of any state or Federal securities or other
applicable law. The Subordinated Debentures will be issued pursuant to an
Indenture of Trust between the Company and First Trust, N.A., as trustee. For a
full description of the terms and provisions of the Subordinated Debentures
offered hereby, see "Description of the Subordinated Debentures and The
Indenture."
No ABFS employee, broker-dealer, salesman or other person has been
authorized to give any oral information or to make any oral representation other
than those contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized by ABFS.
This Prospectus does not constitute an offer of any securities other than those
to which it relates or to any person in any jurisdiction where such offer would
be unlawful. The delivery of this Prospectus at any time does not imply that the
information herein is correct as of any time subsequent to its date.
2
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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
Subordinated Debentures 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 Subordinated Debentures 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.
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 debtholders 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.
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol "ABFI." Reports, proxy statements and other information
concerning the Company are available for inspection at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, DC 20006.
3
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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 Subordinated Debentures offered hereby
should carefully consider the factors set forth under "Risk Factors."
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 the Company was 15.91% and
15.83% for the six months ended December 31, 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
4
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and make these loans more attractive products to securitize. The Business
Purpose Loans securitized in the Company's last two securitizations had a
weighted average loan-to-value ratio (based upon the real estate collateral
securing the loans) of 59.8% 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 loan officers. The
Company originated $17.8 million and $28.9 million of Business Purpose Loans for
the six months ended December 31, 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, radio 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 $30.2
million and $36.5 million of Home Equity Loans for the six months ended December
31, 1996 and the year ended June 30, 1996, respectively. The weighted average
interest rate on Home Equity Loans originated by the Company was 11.67% and
9.94% for the six months ended December 31, 1996 and the year ended June 30,
1996, respectively.
The Company initiated the 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 to credit impaired borrowers.
Currently, the Company has entered into agreements with six financial
institutions which provide the Company with the opportunity to underwrite,
process and purchase Home Equity Loans generated by the branch networks of such
institutions which consist of approximately 800 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 16.10% and 17.22% for the six months ended
December 31, 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
25 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 debt 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.
5
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From the inception of the Company's business in 1988 through December
31, 1996, the Company has experienced total net loan and lease losses of
approximately $311,000. The Company's losses on its total loan and lease
portfolio serviced totaled $58,000, $129,000, $88,000 and $10,000, respectively,
for the six months ended December 31, 1996 and the years ended June 30, 1996,
1995 and 1994. The Company's loans and leases delinquent over 30 days (excluding
real estate owned) represented 1.64% and 2.30% of the total loan and lease
portfolio at December 31, 1996 and June 30, 1996, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset Quality."
Securitization of Loans
The ongoing securitization of loans is a central part of the Company's
current business strategy. 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 December 31,
1996, the Company had securitized an aggregate of $53.3 million of Business
Purpose Loans and $32.9 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 December 31, 1996, the Company had
$45.2 million in subordinated debentures outstanding with a weighted average
coupon of 8.99% and a weighted average maturity of 26.5 months. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Public Offering of Common Stock
In February 1997, the Company completed an underwritten public offering
of 1,150,000 shares of its Common Stock, par value $0.001 per share (the "Common
Stock"). The stock was sold at a price of $20.00 per share. The offering of the
Common Stock resulted in net proceeds of approximately $20.9 million. The net
proceeds from the Common Stock offering had the effect of increasing the
Company's stockholders' equity by approximately $20.9 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
6
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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.
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Six Months Ended
December 31, Year Ended June 30,
--------------------- -------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
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Statement of Income Data: (Dollars in Thousands, except per share data)
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Revenues:
Gain on sale of loans.................... $ 8,233 $ 3,919 $ 9,005 $ 1,443 $ 110 $ 119 $ 83
Interest and fees........................ 2,481 1,527 3,351 4,058 2,367 1,619 1,534
Other.................................... 192 56 23 143 156 306 103
Total revenues.............................. 10,906 5,502 12,379 5,644 2,633 2,044 1,720
Total expenses............................ 7,366 3,497 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................................... 3,540 2,005 3,121 894 334 67 (208)
Income (loss) before extraordinary item and
cumulative effect of accounting change... 2,300 1,303 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.................................. 2,300 1,303 2,319 581 85 41 32
Per Common Share Data(1):
Income (loss) before extraordinary item
and cumulative effect of accounting
change ............................... $ .93 $ .58 $ 1.01 $ .27 $ .04 $ .02 $ (.08)
Extraordinary item ...................... -- -- -- -- -- -- .10
Net income .............................. .93 .58 1.01 .27 .04 .02 .02
Cash dividends declared.................. .03 -- 0.03 -- -- -- --
December 31, June 30,
--------------------- -------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ---------- ----------- --------- ---------- -------- ----------
Balance Sheet Data: (In Thousands)
Cash and cash equivalents................... $ 3,035 $ 2,477 $ 5,345 $ 4,734 $ 83 $ 151 $ 270
Loan and lease receivables, net available
for sale ................................. 26,447 11,312 17,625 8,669 3,181 2,170 2,088
Other....................................... 883 399 534 328 5,538 2,963 1,491
Total assets................................ 67,463 34,479 46,894 22,175 12,284 7,270 5,368
Subordinated debentures .................... 45,245 24,746 33,620 17,800 7,171 1,327 665
Total liabilities........................... 60,842 31,033 42,503 20,031 10,721 5,801 4,322
Stockholders' equity........................ 6,621 3,446 4,392 2,143 1,562 1,469 1,045
</TABLE>
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(1) Per share information for fiscal years 1994, 1993 and 1992 has been
restated to reflect the 3 for 2 stock split effected on November 1, 1995.
7
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Six Months Ended
December 31, Year Ended June 30,
--------------------- -------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ---------- ----------- --------- ---------- -------- ----------
Other Data: (Dollars in Thousands)
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Originations:
Business Purpose Loans................... $ 17,772 $ 12,406 $ 28,872 $ 18,170 $ 11,793 $ 9,769 $ 5,773
Home Equity Loans........................ 30,181 11,399 36,479 16,963 22,231 22,017 34,462
Equipment Leases ........................ 3,806 2,476 5,967 2,220 -- -- --
Loans sold:
Securitizations.......................... 40,000 14,506 36,506 9,777 -- -- --
Other.................................... 2,039 7,409 19,438 31,948 30,562 29,036 40,310
Total loan and lease portfolio serviced..... 103,934 33,419 59,891 17,774 8,407 5,134 3,578
Average loan/lease size:
Business Purpose Loans................... 77 77 78 71 57 63 48
Home Equity Loans........................ 44 39 47 46 51 45 42
Equipment Leases......................... 10 11 11 12 -- -- --
Weighted average interest rate on loans
and leases originated:
Business Purpose Loans ................. 15.91% 15.82% 15.83% 16.05% 16.03% 16.24% 16.45%
Home Equity Loans........................ 11.67 11.01 9.94 12.68 8.65 9.60 9.25
Equipment Leases......................... 16.10 17.00 17.22 15.85 -- -- --
At or For The
Six Months Ended
December 31, At or For the Year Ended June 30,
--------------------- -------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ---------- ----------- --------- ---------- -------- ----------
Financial Ratios:
Return on average assets (1)............... 8.05% 9.20% 6.71% 3.37% 0.87% 0.65% 0.56%
Return on average equity (1)............... 83.55 93.24 70.96 31.36 5.58 3.29 (3.27)
Total delinquencies as a percentage of total
portfolio serviced, at end of period (2) 1.64 3.67 2.30 3.84 6.85 5.97 5.39
Allowance for credit losses to total portfolio
serviced, at end of period.............. 1.01 1.20 1.18 .87 .93 .80 1.14
Real estate owned as a percentage of total
portfolio serviced, at end of period.... .66 1.95 1.01 4.29 2.63 1.44 --
Loan and lease losses as a percentage of the
average total portfolio serviced during
the period ............................. .07 .18 .33 .66 .15 .47 .13
Pre-tax income (loss) as a percentage of
total revenues.......................... 32.45 36.44 25.21 15.84 12.69 3.26 (12.10)
</TABLE>
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(1) Annualized.
(2) Total delinquencies includes loans and leases delinquent over 30 days,
exclusive of real estate owned.
8
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Securities Offered
General. The Offering relates to $125,000,000 in principal amount of
Investment Notes and Money Market Notes issued by ABFS pursuant to an Indenture
of Trust between the Company and First Trust, National Association, a national
banking association as trustee (the "Indenture"). The Subordinated Debentures
are subordinated to the Senior Debt (as defined herein) of the Company and are
not insured, guaranteed or secured by any lien on any assets of ABFS. There are
no provisions for a sinking fund.
The Investment Notes and the Money Market Notes will be subordinated to
all Senior Debt of the Company. As of the date of this Prospectus, there was no
Senior Debt outstanding. There is no limitation on the amount of Senior Debt the
Company may incur. Senior Debt is defined for this purpose to include any
indebtedness (whether outstanding on the date hereof or hereafter created)
incurred in connection with borrowings by the Company (including its
subsidiaries) from a bank, trust company, insurance company, other institutional
lender or other entity which lends funds in connection with its primary business
activities, whether such indebtedness is or is not specifically designated by
the Company as being "Senior Debt" in its defining instruments. In addition, any
indebtedness of the subsidiaries of ABFS, other than the Senior Debt, will have
rights upon liquidation or dissolution of the particular subsidiary prior to
payment being made to the debtholders. Such debt totaled $1.2 million as of the
date hereof. Any indebtedness of ABFS, other than the Senior Debt, will have
rights upon liquidation or dissolution of ABFS which ranks pari passu (i.e.
equally) in right of payment to the Subordinated Debentures offered hereby. As
of the date of this Prospectus, the Company had $47.5 million of indebtedness
which ranks pari passu in right of payment with the Subordinated Debentures. See
"Description of Subordinated Debentures and Indenture -- Provisions Related to
All Subordinated Debentures."
Investment Notes. The Investment Notes are offered with fixed
maturities ranging from three months to ten years. Individual Investment Notes
will be issued as subscriptions are accepted. The Investment Notes are offered
in minimum denominations of $1,000. Purchasers thereof may choose any of the
following maturities: three months, six months, one year, eighteen months, two
years, thirty months, three years, four years, five years, seven years or ten
years.
The Investment Notes are non-negotiable instruments and will be issued
in fully registered form. Transfers of record ownership of the Investment Notes
may be made only with the prior written consent of ABFS. Such consent will be
withheld in such circumstances as determined by the Company in its reasonable
discretion, including but not limited to the Company's determination that such
transfer might result in a violation of any state or Federal securities or other
applicable law. The Company may also require a signature guarantee in connection
with such transfer.
The term of the Investment Notes may, with the consent of the Company,
be extended in accordance with the procedure set forth below. The Company
provides notice to the holder of a note regarding upcoming maturity dates. The
holder may request repayment for a period of up to seven days after the maturity
date of the Investment Note. As a courtesy, the Company provides a request for
repayment form with such notice. Use of such form by a holder is not a condition
of repayment. Requests for repayment may also be made to the Company by letter.
If the holder does not request repayment and the Company does not notify the
holder of its intention to repay the Investment Note, such note will be extended
for an identical term. If the Company intends to repay the Investment Note and
to not permit the holder to extend the term it will notify the holder of its
intention at least seven days prior to the expiration of the applicable term.
Any Investment Notes which are so extended will be extended at the interest rate
then being offered by the Company for newly issued Investment Notes of like term
and denomination. See "Terms of Subordinated Debentures Offered" on page 11
hereof.
9
<PAGE>
Money Market Notes. The Money Market Notes are offered in minimum
denominations of $2,500 and any amount in excess thereof. The Money Market Notes
offered have no stated maturity and are redeemable in minimum amounts of $500
(or any amount to close an account) at the option of the holder upon not less
than ten business days written notice to the Company. The Money Market Notes may
also be redeemed by the Company at any time upon thirty days written notice to
the holder.
The Money Market Notes are non-negotiable instruments and will be
issued only in book-entry form with the Company maintaining a record of each
holder's interest in the Money Market Notes through the establishment and
maintenance of an account for each purchaser of a Money Market Note. Except in
certain limited circumstances described herein, the Money Market Notes will not
be issuable in definitive certificated form to any holder. Upon subscription, a
transaction statement reflecting ownership will be issued to each purchaser upon
the Company's acceptance of the purchaser's subscription. Such statement is not
a negotiable instrument, and no rights of ownership in a Money Market Note may
be transferred by the endorsement and delivery of such statement to a purchaser.
Transfers of record ownership of the Money Market Notes may be made only with
the prior written consent of ABFS. Such consent will be withheld in such
circumstances as determined by the Company in its reasonable discretion,
including but not limited to the Company's determination that such transfer
might result in a violation of any state or Federal securities or other
applicable law. The Company may require a signature guarantee in connection with
such transfer. Upon transfer of a Money Market Note, the Company will provide
the transferee of the Money Market Note with a transaction statement which will
evidence the transfer of the ownership of the account on the Company's records.
The Company shall provide the Trustee with information regarding the
establishment of new accounts and transfers of existing accounts on a bi-weekly
basis.
Interest rates on the Money Market Notes will be adjusted by the
Company on the first and fifteenth day of each calendar month and shall not be
less than the average yield on the 91 Day U.S. Treasury Bill over the preceding
eight weeks as published by the Federal Reserve Board. Interest on the Money
Market Notes will be compounded daily and credited monthly on the last day of
each calendar month. In lieu of paying interest by check, accrued interest will
be paid in the form of additional Money Market Notes. No interest will be paid
on the Money Market Notes for any day during which the principal balance of an
account is less than $1,000.
The Company is required to provide the Trustee with quarterly reports
which shall include such information as the Trustee shall reasonably request,
including the outstanding balance, interest credited , withdrawals made and
interest rate paid on the Money Market Note accounts during the preceding
quarterly period. The Company will provide holders of the Money Market Notes
with a monthly statement which will indicate, among other things, such holder's
current balance (including interest credited and withdrawals made) and interest
rate paid on the Money Market Notes during the preceding calendar month. Such
statements will be mailed to such holders no later than the tenth business day
following each month end. See "Terms of the Subordinated Debentures Offered" on
page 11 hereof.
Use of Proceeds
The net proceeds resulting from the sale of the Subordinated Debentures
will be utilized by the Company for its general corporate purposes, including
financing the future growth of the Company's Business Purpose Loan, Home Equity
Loan and Equipment Lease Portfolios, the repayment of the Company's outstanding
debt and the possible unspecified acquisitions of related businesses or assets
(although none are currently contemplated). No specific allocation of such
proceeds has been determined as of the date of this Prospectus. See "Use of
Proceeds."
10
<PAGE>
HIGHLIGHTS OF TERMS OF SUBORDINATED DEBENTURES OFFERED
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Money Market
Investment Notes Notes
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Types of Security Offered.................. Unsecured, subordinated, fixed term Unsecured, adjustable rate, subordinated
notes notes
Denomination of Initial
Purchase and Additional Purchases.......... Minimum purchase: $1,000 per note or Minimum purchase: $2,5000 per note or
any amount in excess thereof. any amount in excess thereof.
Annual Interest Rate....................... Fixed upon issuance. Purchasers will Interest rate adjusts on the first and
elect a term length and the interest fifteenth day of each calendar month.
rate applicable to such note will be The rate shall not be less than the
based upon the term length chosen. average yield of the 91 Day U.S.
Treasury Bill over the preceding eight
weeks as published by the Federal Reserve
Board. No interest will be paid for any day
on which the principal balance in an
account is below $1,000.
Payment of Interest........................ Interest on notes with maturities Interest will be compounded daily and
of less than one year will be credited monthly at the end of each
compounded daily and paid at month. No checks will be issued in
maturity. Interest on notes with payment of interest. Accrued interest
maturities of one year or greater will be added to principal in each
will be compounded daily and, at account in the form of additional notes.
the election of the holder, paid at
maturity, monthly, quarterly,
semi-annually or annually.
Redemption by Holder....................... Notes with maturities of less than May be redeemed by the holder upon not
one year are not redeemable by the less than ten business days written notice
holder prior to maturity. Notes to the Company. Redemptions must be
with maturities of one year or at least $500, except for redemptions to
greater may be redeemed by the close an account.
holder following his/her Total
Permanent Disability, or by his/her
estate after death, at the
principal amount plus accrued
interest. Otherwise, the holder
will have no right to cause
redemption prior to maturity. (For
joint holders, see "Description of
Subordinated Debentures and
Indenture -- Provisions Related to
Investment Notes".)
Redemption by Company...................... Not redeemable until maturity. Redeemable upon 30 days written notice
to the holder.
Form....................................... In fully registered form and non- In book-entry form and non-negotiable.
negotiable. Not transferable (A monthly statement will be issued, not
without the Company's prior written an individual promissory note.) Not
consent. transferable without the Company's prior
written consent.
Maturity................................... Investment Notes are offered with No fixed maturity.
term to maturity of three, six,
eighteen and twenty months and one,
two, three, four, five, seven and
ten years.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Money Market
Investment Notes Notes
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Extension........................ If the Company does not notify the Not applicable.
holder of its intention to repay
the note at least seven days prior
to maturity or if not redeemed by
holder within seven days after its
maturity date, the note will be
extended automatically for a period
equal to the original term. Notes
to be extended will be extended at
a fixed rate equal to the rate then
being offered on newly-issued notes
of like tenor, term and
denomination at their respective
maturity dates.
Monthly Statements......................... None. Monthly statements detailing the current
balance and interest rate paid on each
account will be mailed to each holder no
later than the tenth business day
following each month end.
</TABLE>
THE SUBORDINATED DEBENTURES OFFERED HEREBY ARE UNSECURED OBLIGATIONS
SUBORDINATED TO THE SENIOR DEBT OF THE COMPANY. THE COMPANY IS NOT SUBJECT TO
STATE OR FEDERAL STATUTES OR REGULATIONS APPLICABLE TO COMMERCIAL BANKS AND/OR
SAVINGS AND LOAN ASSOCIATIONS WITH REGARD TO INSURANCE, THE MAINTENANCE OF
RESERVES, THE QUALITY OR CONDITION OF ITS ASSETS OR OTHER MATTERS. THE
SUBORDINATED DEBENTURES OFFERED HEREUNDER ARE NOT CERTIFICATES OF DEPOSIT.
PAYMENT OF PRINCIPAL AND INTEREST ON THE SUBORDINATED DEBENTURES IS NOT
GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR OTHER ENTITY. THE
COMPANY'S REVENUES FROM OPERATIONS, INCLUDING THE SECURITIZATION OR SALE OF
LOANS FROM ITS PORTFOLIO, THE COMPANY'S WORKING CAPITAL AND CASH GENERATED FROM
ADDITIONAL DEBT FINANCING REPRESENT THE COMPANY'S SOURCES OF FUNDS FOR THE
REPAYMENT OF PRINCIPAL, AT MATURITY, AND THE ONGOING PAYMENT OF INTEREST ON THE
SUBORDINATED DEBENTURES.
12
<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 Subordinated
Debentures.
Absence of Insurance and Regulation
The Subordinated Debentures are not insured by any governmental or
private agency and they are not guaranteed by any public or private entity.
Likewise, the Company is not regulated or subject to examination in the same
manner as commercial banks and thrift institutions. The Company is not a
commercial bank or savings/thrift institution. The Company is dependent upon
proceeds from the continuing sale of Subordinated Debentures and its
institutional lines of credit to conduct its ongoing operations. The Company's
revenues from operations, including the sale or securitization of loans from its
portfolio, the Company's working capital and cash generated from additional debt
financing represent the source of funds for repayment of principal at maturity
and the ongoing payment of interest on the Subordinated Debentures. See
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Subordination of Debt Represented by the Subordinated Debentures
The Subordinated Debentures will be subordinate in claim and right to
all Senior Debt of the Company. As of the date of this Prospectus there was no
Senior Debt outstanding. There is no limitation on the amount of Senior Debt the
Company can incur. Senior Debt is defined for this purpose to include any
indebtedness (whether outstanding on the date hereof or thereafter created)
incurred in connection with borrowings by the Company (including its
subsidiaries) from a bank, trust company, insurance company, or from any other
institutional lender, whether such indebtedness is or is not specifically
designated by the Company as being "Senior Debt" in its defining instruments. If
the Company were to become insolvent, such Senior Debt of the Company would have
a priority of right to payment in connection with the liquidation of the Company
and its assets. In addition, any indebtedness of the subsidiaries of ABFS, other
than the Senior Debt, will have rights upon liquidation or dissolution of the
particular subsidiary prior to payment being made to any debtholders. As of the
date hereof, such debt totaled $1.2 million. There can be no assurance that any
holder of the Company's Subordinated Debentures would be repaid upon a
liquidation of the Company. See "Description of the Subordinated Debentures and
the Indenture -- Provisions Related to All Subordinated Debentures."
Absence of Sinking Fund
The Subordinated Debentures are unsecured obligations of the Company
and no sinking fund (i.e., funds contributed on a regular basis to a separate
account to repay the Subordinated Debentures) exists for the benefit of
debtholders. See "Description of the Subordinated Debentures and the Indentures
- - General."
13
<PAGE>
Limited Liquidity -- Lack of Trading Market
The Subordinated Debentures offered hereby are non-negotiable and are
therefore not transferable without the prior written consent of the Company. Due
to the non-negotiable nature of the Subordinated Debentures and the lack of a
market for the sale of the Subordinated Debentures, even if the Company
permitted a transfer, investors may be unable to liquidate their investment even
if circumstances would otherwise warrant such a sale. See "Description of the
Subordinated Debentures and the Indenture."
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 loss 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 December 31, 1996 and June 30, 1996,
total delinquent loans as a percentage of the Company's total portfolio serviced
were 1.64% 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 75.5% and 72.7% for the six months ended
December 31, 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
14
<PAGE>
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 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 six months ended December 31, 1996, 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 $10.9 million and $2.3 million respectively, for
the six months ended December 31, 1996 as compared to $5.5 million and $1.3
million for the six months ended December 31, 1995. The Company's ability to
sustain the level of growth in total revenues and net income experienced during
fiscal 1996 and the six months ended December 31, 1996 is dependent upon a
variety of factors outside the control of the Company, including interest rates,
conditions in the asset-backed securities markets, economic conditions in the
Company's primary market area,
15
<PAGE>
competition and regulatory restrictions. As a result, the rate of growth
experienced in fiscal 1996 and the six months ended December 31, 1996 may not be
sustained in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 or
expand into new geographic markets. 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 $45.2 million of
subordinated debentures outstanding at December 31, 1996 and had lines of credit
and credit facilities of $47.5 million, of which $6.3 million was being utilized
on such
16
<PAGE>
date. At December 31, 1996, subordinated debentures scheduled to mature during
the twelve months ended December 31, 1997 totaled $24.7 million. In addition, in
fiscal 1997, the Company intends to register up to $125.0 million of debt
securities for sale to the public over approximately twenty months. 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 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 December 31, 1996, the Company had
$20.5 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."
17
<PAGE>
Geographic Concentration of Loans
The Company currently 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 such region 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."
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. Although there are no
currently asserted material claims or legal actions asserted against the
Company, 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 Business
The Company's involvement in equipment leasing is relatively new.
Therefore, the Company is not able to predict with any certainty whether it will
be able to engage in this area of its business profitability either in the short
or long term. There are also risks inherent in this type of activity which
differ in certain respects from those which exist in the Company's lending
activities. 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
18
<PAGE>
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."
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 home
equity lending activities. 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
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to find capable replacements. The Company has entered into employment agreements
with its Chairman, President and Chief Executive Officer, Anthony J. Santilli,
Jr., its Executive Vice President, Beverly Santilli, and its Senior Vice
President and General Counsel, Jeffrey M. Ruben. The Company also holds
"key-man" insurance for Anthony J. Santilli, Jr. and Beverly Santilli. See
"Management."
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."
Management Discretion Over Substantial Amount of the Proceeds of the Offering
and Possible Use for Future Unspecified Acquisitions
The net proceeds from the sale of the Subordinated Debentures will be
utilized for general corporate purposes, including financing the future growth
of the Company's Business Purpose Loan, Home Equity Loan and Equipment Lease
Portfolios, the repayment of the Company's outstanding debt and the possible
unspecified acquisitions of related businesses or assets (although none are
currently contemplated). No specific allocation of such proceeds has been
determined as of the date of this Prospectus. Management will have broad
discretion in allocating the proceeds of the Offering. See "Use of Proceeds."
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Forward Looking Statements
When used in this Prospectus, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"projected", "intends to" 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 rates, credit
risk related to ABFS's borrowers, market conditions and real estate values in
ABFS's primary lending area, lack of a pubic market for the Subordinated
Debentures, competition, factors affecting the Company's ability to implement
its growth strategy, ABFS's dependence on debt financing and securitizations to
fund its operations, fluctuations in quarterly operating results, unseasoned
nature of ABFS's Equipment Lease portfolio, 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
Condition and Results of Operations."
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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") and American Business Leasing, Inc. ("ABL"), 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 Subordinated Debentures
(estimated to be approximately $121.9 million net of estimated offering expenses
if all of the Subordinated Debentures offered hereby are sold) 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) the repayment of
warehouse credit facilities, lines of credit and the Company's maturing debt;
and (iii) 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 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.
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DESCRIPTION OF THE SUBORDINATED DEBENTURES AND THE INDENTURE
General
The Subordinated Debentures will be issued pursuant to an Indenture
(the "Indenture") between the Company and First Trust, National Association, a
national banking association as trustee (the "Trustee"). The terms of the
Subordinated Debentures include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"Trust Indenture Act"), in effect on the date the Indenture is qualified
thereunder. The Subordinated Debentures are subject to all such terms, and
holders of Subordinated Debentures are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following includes a summary of
certain provisions of the Indenture, a copy of which is available from the
Company. This summary does not purport to be complete and is qualified in its
entirety by reference to the Indenture, including the definitions therein of
certain terms used below.
The Subordinated Debentures will be subordinated in right of payment to
the prior payment in full of all Senior Debt (as herein defined) of the Company,
whether outstanding on the date of the Indenture or thereafter incurred. There
is no limit on the amount of Senior Debt the Company may incur. See
"--Provisions Related to All Subordinated Debentures."
The Subordinated Debentures are not secured by any collateral or lien.
There are no provisions for a sinking fund applicable to such debt. See "Risk
Factors - Absences of Sinking Fund."
The Investment Notes are offered by the Company at maturities ranging
from three months to ten years. The term of each Investment Note will be chosen
by the purchaser of such note upon subscription.
The Money Market Notes have no stated maturity and are redeemable at
any time in minimum amounts of $500 (except to close an account) at the option
of the holder upon not less than ten business days written notice to the
Company.
Provisions Relating to Investment Notes
Form and Denominations. The Investment Notes will be issued in fully
registered form. The Investment Notes are not negotiable instruments, and no
rights of record ownership therein can be transferred without the prior written
consent of the Company. Ownership of an Investment Note may be transferred on
the Company register only by written notice to the Company signed by the
owner(s) or such owner's duly authorized representative on a form to be supplied
by the Company and with the prior written consent by the Company (which consent
shall not be unreasonably withheld). The Company may also, in its discretion,
require an opinion from such noteholder's counsel that the proposed transfer
will not violate any applicable securities laws and/or a signature guarantee in
connection with such transfer. See "Prospectus Summary -- Securities Offered."
An Investment Note may be purchased in the minimum amount of $1,000 or any
amount in excess thereof. Separate purchases may not be accumulated to satisfy
the minimum denomination requirement.
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Interest. The interest rates payable on the Investment Notes offered
hereby will be established by the Company from time to time based on market
conditions and the Company's financial requirements. The Company constantly
re-evaluates its interest rates based on such analysis. Once determined, the
rate of interest payable on an Investment Note will remain fixed for the
original term of the Investment Note. The interest rate payable on an Investment
Note will be determined based upon the maturity date and term established for
such Investment Note upon subscription.
Interest on Investment Notes will be computed on the basis of an actual
calendar year and will compound daily. Interest on Investment Notes with terms
of less than twelve months will be paid at maturity. Purchasers of Investment
Notes with terms of one year or greater may elect to have interest paid monthly,
quarterly, semiannually, annually or at maturity. This election may be changed
one time by the holder during the term of these longer term notes. Requests to
change such election are required to be made to the Company in writing. No
specific form of change of election is required to be submitted to the Company.
Any interest not otherwise paid on an interest payment date will be paid at
maturity.
The Company reserves the right to vary from time to time, in its
discretion, the interest rates it offers on the Investment Notes based on
numerous factors other than length of term to maturity. Such factors may
include, but are not limited to: the desire to attract new investors; Investment
Notes in excess of certain principal amounts; Investment Notes purchased for IRA
and/or Keough accounts; rollover investments; and Investment Notes beneficially
owned by persons residing in particular geographic localities. As of the date of
this Prospectus, the Company is not offering varying interest rates to investors
on the Investment Notes of identical maturity. However, the Company may make a
decision to vary interest rates in the future based on its fund raising
objectives including, but not limited to, the attraction of new investors in
particular regions and the encouragement of the rollover of Investment Notes by
current holders, circumstances in the financial markets and the economy and
other factors, including, but not limited to, any additional costs incurred by
the Company in selling Investment Notes in a particular jurisdiction which may
at the time be relevant to the Company's operations.
Interest Accrual Date. Interest on the Investment Notes will accrue
from the date of purchase, which is deemed to be, for accepted subscriptions,
the date the Company receives funds, if received prior to 3:00 p.m. on a
business day, or the next business day if the Company receives such funds on a
non-business day or after 3:00 p.m. on a business day. For this purpose, the
Company's business days will be deemed to be Monday through Friday, except for
Delaware legal holidays.
Interest Withholding. With respect to those investors who do not
provide the Company with a fully executed Form W-8 or Form W-9, the Company will
withhold 31% of any interest paid. Otherwise, no interest will be withheld,
except on accounts held by foreign business entities. It is the Company's policy
that no sale will be made to anyone refusing to provide a fully executed Form
W-8 or Form W-9.
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Automatic Extension. At least seven days prior to an Investment Note's
stated maturity date, the Company will notify the registered holder in writing
of such maturity date and of its intention to repay, or if the Company does not
intend to repay, reminding the holder of the automatic extension. If at such
time, the Company does not notify the holder of its intention to repay, subject
to the holder's demand for repayment, the term of such note will be
automatically extended. If, within seven days after an Investment Note's
maturity date, the holder thereof has not demanded repayment of such note, and
the Company has not notified the holder of its intention to repay such note,
such note shall be extended for a term identical to the term of the original
Investment Note. The Investment Notes will continue to renew as described herein
absent some action permitted under the Indenture and the Investment Notes by
either the holder or the Company. Interest shall continue to accrue from the
first day of such renewed term. Such note, as renewed, will continue in all its
provisions, including provisions relating to payment, except that the interest
rate payable during any renewed term shall be the interest rate which is then
being offered by the Company on similar Investment Notes being offered as of the
renewal date. If similar Investment Notes are not then being offered, the
interest rate upon renewal will be the rate specified by the Company on or
before the maturity date, or the note's current rate if no such rate is
specified. If the Company gives notice to a noteholder of the Company's
intention to repay an Investment Note at maturity, no interest will accrue after
the date of maturity. Otherwise, if a noteholder requests repayment within seven
days after its maturity date, the Company will pay interest during the period
after its maturity date and prior to repayment at the lower of (i) the lowest
interest rate then being paid on debt securities being offered by the Company to
the general public or (ii) the rate being paid on such note immediately prior to
its maturity. As a courtesy, the Company provides a request for repayment form
with such notice. Use of such form by a holder is not a condition of repayment.
Requests for repayment may also be made to the Company by letter or telephone.
Place and Method of Payment. Principal and interest on the Investment
Notes will be payable at the principal executive office of the Company, as it
may be established from time to time, or at such other place as the Company may
designate for that purpose; provided, however, that payments may be made at the
option of the Company by check or draft mailed to the person entitled thereto at
his/her address appearing in the register which the Company maintains for that
purpose.
Redemption by the Company. The Company will have no right to prepay an
Investment Note. The holder has no right to require the Company to prepay any
such note prior to its maturity date as originally stated or as it may be
extended, except as indicated below.
Redemption by the Holder upon Death or Total Permanent Disability.
Except for Investment Notes with maturities of less than 12 months, an
Investment Note may be redeemed at the election of the holder following his/her
Total Permanent Disability, as established to the satisfaction of the Company,
or by his estate following his death. The redemption price, in the event of such
a death or disability, will be the principal amount of the Investment Note, plus
interest accrued and not previously paid, to the date of redemption. If spouses
are joint record owners of an Investment Note, the election to redeem will apply
when either record owner dies or becomes subject to a Total Permanent
Disability. In other cases of Investment Notes jointly held, the election will
not apply.
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The Company may modify the foregoing policy on redemption after death
or disability. However, no such modification will affect the right of redemption
applicable to any then outstanding Investment Note. Should the Company modify
such policy at a future date, written notice of such modification will be sent
to all owners of those outstanding Investment Notes which were purchased while
the policy was in effect (but such notice will not affect the right to redeem
such outstanding Investment Notes after the owner's death or disability.)
For the purpose of determining the right of a holder to demand early
repayment of an Investment Note, Total Permanent Disability shall mean a
determination by a physician chosen by the Company that the holder, who was
gainfully employed on a full time basis at the time of purchase, is unable to
work on a full time basis, defined as working at least forty hours per week,
during the succeeding twenty-four months.
Service Charges. The Company reserves the right to assess service
charges for replacing any lost or stolen Investment Note (for which an affidavit
from the holder will be required), changing the registration of any Subordinated
Debenture when such change is occasioned by a change in name of the holder, or a
transfer (whether by operation of law or otherwise) of any Subordinated
Debenture by the holder to another person.
Provisions Relating to Money Market Notes
Form and Denominations. The Money Market Notes are not negotiable
instruments and will be issued only in book-entry form. See "--Book Entry
System." Upon subscription, a transaction statement reflecting the ownership of
a Money Market Note will be issued to each purchaser upon Company's acceptance
of the subscription. Such statement is not a negotiable instrument, and no
rights of record ownership therein can be transferred without the prior written
consent of the Company. Each holder of a Money Market Note will receive a
monthly statement indicating any transactions in the holder's account, as well
as, interest credited. Ownership of a Money Market Note may be transferred on
the Company's register only by written notice to the Company signed by the
owner(s) or such owner's duly authorized representative on a form to be supplied
by the Company and with the prior written consent by the Company (which consent
shall not be unreasonably withheld). The Company may also, in its discretion,
require an opinion from such noteholder's counsel that the proposed transfer
will not violate any applicable securities laws and/or signature guarantee in
connection with such transfer. Upon transfer of a Money Market Note, the Company
will provide the new owner of the Money Market Note with a transaction statement
which will evidence the transfer of the account on the Company's records.
Money Market Notes have no stated maturity and may be purchased in the
minimum amount of $2,500 or any amount in excess thereof. Separate purchases may
not be accumulated to satisfy the minimum denomination requirement.
Book-Entry System. Upon acceptance of a purchaser's order, the Company
will credit its book-entry registration and transfer system to the accounts of
purchasers of the Money Market Notes, the principal amount of such Money Market
Notes owned of record by such purchaser. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such
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<PAGE>
securities in definitive form. Such legal requirements may impair the ability to
transfer the record ownership in the Money Market Notes.
The record owners of the Money Market Notes issued in a book-entry
interest form will not receive or be entitled to receive physical delivery of
the Money Market Notes owned. The registered owners of the accounts established
by the Company in connection with the purchase or transfer of Money Market Notes
shall be deemed to be the owners of the Money Market Notes under the Indenture.
Such person holding a book-entry interest in the Money Market Notes must rely
upon the procedures established by the Trustee to exercise any rights of a
holder of the Money Market Notes under the Indenture. The Company shall provide
the Trustee with information regarding the establishment of new accounts and the
transfer of existing accounts on a bi-weekly basis.
The information regarding the total amount of any principal and/or
interest (which shall be paid in the form of additional notes) due to book-entry
owners with regard to the Money Market Notes on any interest payment date or
upon redemption will be made available by the Company to the Trustee upon the
Trustee's request. On each interest payment date, the Company will credit each
account on the applicable interest payment date based upon the applicable
interest rate due on such note and the amount of Money Market Notes held of
record in the account. The Company shall have the responsibility for determining
the interest payments to be made to the book-entry accounts and for maintaining,
supervising or reviewing any records relating to book-entry beneficial interests
in the Money Market Notes.
Book-entry interests in the accounts evidencing ownership of the Money
Market Notes are exchangeable for Money Market Notes in denominations of $2,500
and any amount in excess thereof and fully registered in such names as the
Company directs if: (i) the Company at its option advises the Trustee in writing
of its election to terminate the book-entry system, or (ii) after the occurrence
of an Event of Default, holders of the Money Market Notes aggregating more than
50% of the aggregate outstanding amount of the Money Market Notes advise the
Trustee in writing that the continuation of a book-entry system is no longer in
the best interests of the holders of Money Market Notes and the Trustee notifies
all holders of the Money Market Notes, of the occurrence of any such event and
the availability of definitive notes to holders of the Money Market Notes
requesting such notes. Subject to the foregoing, the book-entry interests in the
Money Market Notes shall not otherwise be exchangeable for fully registered
Money Market Notes.
Reports to Trustee. The Company shall provide the Trustee with
quarterly reports which shall contain such information as the Trustee shall
reasonably request including information regarding the outstanding balance,
interest credited, withdrawals made and interest rate paid on each Money Market
Note account maintained by the Company during the preceding quarterly period.
Monthly Statements. The Company shall provide holders of the Money
Market Notes with monthly statements which will indicate, among other things,
the current account balance (including interest credited and withdrawals made,
if any) and the interest rate paid on the Money Market Notes as of the month end
preceding the issuance of the statement. Such statements will be mailed not
later than the tenth business day following each month end. The Company shall
provide additional statements as the holders of the Money Market Notes may
reasonably request from time to time.
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Holders requesting such additional statements may be required to pay all charges
incurred by the Company in providing such additional statements.
Interest. The interest rates payable on the Money Market Notes offered
hereby will be adjusted by the Company on the first and fifteenth day of each
calendar month and shall not be less than the average yield of the 91 Day U.S.
Treasury Bill over the preceding eight week period as reported by the Federal
Reserve Board. While the foregoing is the minimum at which the rate will be set,
the actual rate may be above the minimum. Investors may inquire about the
interest rate then being paid on the outstanding Money Market Notes by calling
the Company at (610) 668-2440.
Interest on each account with a balance of at least $1,000 accrues
daily and is credited monthly on the last day of each calendar month. Interest
accrued during each monthly period will not be paid by check but will be added
to the noteholder's principal balance of the account in the form of additional
Money Market Notes. Interest will continue to accrue on the principal balance of
each Money Market Note through the date of redemption. If a holder redeems the
Money Market Note in full, the principal balance of the account (including
accrued interest) will be paid by check as soon as practicable. No interest
shall be paid for any day the principal amount in any account is less than
$1,000.
Subject to the limitations set forth herein, the Company may vary, in
its discretion, the interest rates it offers on the Money Market Notes based on
numerous factors. Such factors may include, but are not limited to: the desire
to attract new investors; Money Market Notes in excess of certain principal
amounts; Money Market Notes purchased for IRA and/or Keough accounts; rollover
investments; and Money Market Notes beneficially owned by persons residing in
particular geographic localities. As of the date hereof, the Company is not
offering Money Market Notes at varying rates to different investors. However,
the Company may make a decision to vary interest rates in the future based on
its fund raising objectives including, but not limited to, the attraction of new
investors in particular regions and circumstances in the financial markets and
the economy and other factors, including, but not limited to, any additional
costs incurred by the Company in selling Money Market Notes in a particular
jurisdiction which may at the time be relevant to the Company's operations.
Interest Accrual Date. Interest on the Money Market Notes will accrue
from the date of purchase, which is deemed to be, for accepted subscriptions,
the date the Company receives funds, if received prior to 3:00 p.m. on a
business day, or the next business day if the Company receives such funds on a
non-business day or after 3:00 p.m. on a business day. For this purpose, the
Company's business days will be deemed to be Monday through Friday, except for
Delaware legal holidays.
Interest Withholding. With respect to those investors who do not
provide the Company with a fully executed Form W-8 or Form W-9, the Company will
withhold 31% of any interest paid. Otherwise, no interest will be withheld,
except on Money Market Notes held by foreign business entities. It is the
Company's policy that no sale will be made to anyone refusing to provide a fully
executed Form W-8 or Form W-9.
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Redemption by the Holder of Money Market Notes. The holder of each
Money Market Note may redeem the Money Market Note at any time in minimum
amounts of $500 (or any amount to close an account) upon not less than 10
business days written notice to the Company.
To the extent holders of the Money Market Notes redeem the Money Market
Notes and purchase new ones, the redemptions are treated as being made on a
first-in, first-out basis.
Redemption by the Company. The Company will have the right to redeem a
Money Market Note at any time upon thirty days written notice to the holder
thereof.
Place and Method of Payment upon Redemption. Payments upon the
redemption of the Money Market Notes will be payable at the principal executive
office of the Company, as it may be established from time to time, or at such
other place as the Company may designate for that purpose; provided however,
that payments may be made at the option of the Company by check or draft mailed
to the person entitled thereto at his/her address appearing in the register
which the Company maintains for that purpose.
Provisions Related to All Subordinated Debentures
Subordination. The indebtedness evidenced by the Subordinated
Debentures, and any interest thereon, are subordinated to all Senior Debt of the
Company. The term Senior Debt is defined for this purpose to include any
indebtedness (whether outstanding on the date hereof or thereafter created)
incurred by the Company in connection with borrowings by the Company (including
its subsidiaries) from a bank, trust company, insurance company, or from any
other institutional lender, whether such indebtedness is or is not specifically
designated by the Company as being "Senior Debt" in its defining instruments. As
of the date of this Prospectus, there was no Senior Debt outstanding. There is
no limitation under the Indenture on the amount of Senior Debt the Company can
incur. The Subordinated Debentures are not guaranteed by any subsidiaries of
ABFS. Accordingly, in the event of a liquidation or dissolution of a subsidiary
of ABFS, the law requires that creditors of that subsidiary be paid, or
provision for such payment be made, from the assets of that subsidiary prior to
distributing any remaining assets to ABFS as a shareholder of that subsidiary.
Therefore, in the event of liquidation or dissolution of a subsidiary, creditors
of such subsidiary will receive payment of their claims prior to any payment to
the debtholders as of the date of this prospectus there was $1.2 million of such
debt outstanding. Any indebtedness of ABFS, other than that described as Senior
Debt and the debt of the subsidiaries, will have rights upon liquidation or
dissolution of ABFS which ranks pari passu (i.e. equally) in right of payment to
the Subordinated Debentures offered hereby. As of the date of this prospectus,
the Company had $47.5 million of debt outstanding which ranks pari passu in
right of payment to the Subordinated Debentures offered.
For a discussion of the Company's status as a holding company and the
lack of insurance or guarantees in support of the Subordinated Debentures, see
"Risk Factors - Absence of Insurance and Regulation."
In the event of any liquidation, dissolution or any other winding up of
the Company, or of any receivership, insolvency, bankruptcy, readjustment,
reorganization or similar proceeding under
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the Federal Bankruptcy Code or any other applicable federal or state law
relating to bankruptcy or insolvency, or during the continuation of any Event of
Default (as described below), no payment may be made on the Subordinated
Debentures until all Senior Debt has been paid. In any such event, holders of
Senior Debt may also submit claims on behalf of debtholders and retain the
proceeds for their own benefit until they have been fully paid, and any excess
will be turned over to the debtholders. If any distribution is nonetheless made
to debtholders, the money or property distributed to them must be paid over to
the holders of the Senior Debt to the extent necessary to pay Senior Debt in
full. See "Risk Factors - Subordination of Debt Represented by the Subordinated
Debentures."
Events of Default. The Indenture provides that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment of
interest when due on the Subordinated Debentures (whether or not prohibited by
the subordination provisions of the Indenture); (ii) default in payment of
principal when due on the Subordinated Debentures (whether or not prohibited by
the subordination provisions of the Indenture) and continuation thereof for 30
days; (iii) failure by the Company to observe or perform any covenant, condition
or agreement with respect to the liquidation, consolidation or merger or other
disposition of substantially all of the assets of the Company (after notice and
provided such default is not cured within 60 days after receipt of notice); (iv)
failure by the Company for 60 days after notice to comply with certain other
agreements in the Indenture or the Subordinated Debentures; and (v) certain
events of bankruptcy or insolvency with respect to the Company.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least a majority in principal amount of the then outstanding
Subordinated Debentures may declare the unpaid principal of and any accrued
interest on the Subordinated Debentures to be due and payable immediately;
provided, however, that so long as any Senior Debt is outstanding, such
declaration shall not become effective until the earlier of (x) the day which is
five Business Days after the receipt by representatives of Senior Debt of such
written notice of acceleration or (y) the date of acceleration of any Senior
Debt. In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, all outstanding
Subordinated Debentures will become due and payable without further action or
notice. Holders of the Subordinated Debentures may not enforce the Indenture or
the Subordinated Debentures except as provided in the Indenture. Subject to
certain limitations, holders of a majority in principal amount of the then
outstanding Subordinated Debentures may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from holders of the Subordinated
Debentures notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the
Subordinated Debentures then outstanding by notice to the Trustee may on behalf
of the holders of all of the Subordinated Debentures waive any existing Default
or Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal of,
the Subordinated Debentures.
30
<PAGE>
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
Amendment, Supplement and Waiver. Except as provided herein, the
Indenture or the Subordinated Debentures may be amended or supplemented with the
consent of the holders of at least a majority in principal amount of the
Subordinated Debentures then outstanding, and any existing Default or compliance
with any provision of the Indenture or the Subordinated Debentures may be waived
with the consent of the holders of a majority in principal amount of the then
outstanding Subordinated Debentures.
Without the consent of each holder of the Investment Notes affected, an
amendment or waiver may not (with respect to any Investment Notes held by a
nonconsenting holder of Investment Notes) (i) reduce the principal amount of the
Investment Note whose holder must consent to an amendment, supplement or waiver,
(ii) reduce the principal of or change the fixed maturity of any note or alter
the redemption provisions thereof or the price at which the Company shall offer
to repurchase the Investment Note, (iii) reduce the rate of or change the time
for payment of interest, including default interest, on any Investment Note,
(iv) waive a Default or Event of Default in the payment of principal or premium,
if any, or interest on or redemption payment with respect to the Investment
Notes (except a rescission of acceleration of the Investment Notes by the
holders of at least a majority in aggregate principal amount of the Investment
Notes and a waiver of the payment default that resulted from such acceleration),
(v) make any Investment Note payable in money other than that stated in the
Investment Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of Investment
Notes to receive payments of principal of or interest on the Investment Notes,
(vii) make any change to the subordination provisions of the Indenture that
adversely affects holders of Investment Notes, (viii) modify or eliminate
holders redemption rights (provided that no modification or elimination is
permitted as to any securities issued with such right), or (ix) make any change
in the foregoing amendment and waiver provisions.
Without the consent of each holder of the Money Market Notes affected,
an amendment or waiver may not (with respect to any Money Market Notes held by a
nonconsenting holder of Money Market Notes) (i) reduce the principal amount of
Money Market Notes whose holders must consent to an amendment, supplement or
waiver (other than as a result of withdrawals made by the holder thereof), (ii)
reduce the principal of any Money Market Note (other than as a result of
withdrawals made by the holder thereof) or alter the redemption provisions
thereof or the price at which the Company shall offer to repurchase the Money
Market Note, (iii) reduce the rate of interest on the Money Market Notes, other
than the rate adjustments provided for pursuant to the terms of the Money Market
Notes or change the time for payment of interest, including default interest, on
any Money Market Note, (iv) waive a Default or Event of Default in the payment
of principal or premium, if any, or interest on or redemption payment with
respect to the Money Market Notes (except a rescission of acceleration of the
Money Market Notes by the holders of at least a majority in aggregate principal
amount of the Money Market Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Money Market Note payable in
money other than that stated in the Money Market Notes, (vi) make any change in
the provisions of the Indenture relating
31
<PAGE>
to waivers of past Defaults or the rights of holders of Money Market Notes to
receive payments of principal of or interest on the Money Market Notes, (vii)
make any change to the subordination provisions of the Indenture that adversely
affects holders of Money Market Notes, (viii) modify or eliminate redemption
right of noteholders, or (ix) make any change in the foregoing amendment and
waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of the
Subordinated Debentures, the Company and/or the Trustee may amend or supplement
the Indenture or the Subordinated Debentures to cure any ambiguity, defect or
inconsistency; to provide for assumption of the Company's obligations to holders
of the Subordinated Debentures in the case of a merger or consolidation to
provide for additional certificates or certificated securities ; to make any
change that would provide any additional rights or benefits to the holders of
the Subordinated Debentures or that does not adversely affect the legal rights
under the Indenture of any such holder, including an increase in the aggregate
dollar amount of Subordinated Debentures which may be outstanding under the
Indenture; to modify the Company's policy to permit redemptions of the
Investment Notes upon the death or Total Permanent Disability of any holder of
the Investment Notes (but such modification shall not adversely affect any then
outstanding security); or to comply with requirements of the Commission in order
to effect or maintain the qualification of the Indenture under the Trust
Indenture Act.
The Trustee. The Indenture contains certain limitations on the rights
of the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions with the Company.
The holders of a majority in principal amount of the then outstanding
Subordinated Debentures will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Subordinated Debentures, unless such holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense.
No Personal Liability of Directors, Officers, Employees and
Stockholders. No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Subordinated Debentures, the Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
the Subordinated Debentures by accepting a Subordinated Debenture waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Subordinated Debentures. Such waiver may not
be effective to waive liabilities under the federal securities laws and it is
the view of the Securities and Exchange Commission that such a waiver is against
public policy.
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<PAGE>
Reports. The Company publishes annual reports containing audited
financial statements and quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year. Copies of such
reports will be sent to debtholders.
Additional Securities. The Company may offer from time to time
additional classes of securities with terms and conditions different from the
Subordinated Debentures offered hereby. The Company will amend this Prospectus
if and when it decides to offer to the public any additional class of security
hereunder.
Variations by State. The Company reserves the right to offer different
securities and to vary the terms and conditions of the offer (including, but not
limited to, additional interest payments and service charges for all
Subordinated Debentures) depending upon the state where the purchaser resides.
33
<PAGE>
SELECTED 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>
Six Months Ended
December 31, 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..................... $ 8,233 $ 3,919 $ 9,005 $ 1,443 $ 110 $ 119 $ 83
Interest and fees......................... 2,481 1,527 3,351 4,058 2,367 1,619 1,534
Other..................................... 192 56 23 143 156 306 103
Total revenues............................... 10,906 5,502 12,379 5,644 2,633 2,044 1,720
Total expenses............................. 7,366 3,497 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... 3,540 2,005 3,121 894 334 67 (208)
Income (loss) before extraordinary item and
cumulative effect of accounting change.... 2,300 1,303 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................................... 2,300 1,303 2,319 581 85 41 32
Per Common Share Data(1):
Income (loss) before extraordinary item and
cumulative effect of accounting change. $ .93 $ .58 $ 1.01 $ 27 $ .04 $ .02 $ (.08)
Extraordinary item ....................... -- -- -- -- -- -- .10
Net income ............................... .93 .58 1.01 .27 .04 .02 .02
Cash dividends declared................... .03 -- 0.03 -- -- -- --
December 31, June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- --------- ----------- ---------- -----------
Balance Sheet Data: (In Thousands)
Cash and cash equivalents.................... $ 3,035 $ 2,477 $ 5,345 $ 4,734 $ 83 $ 151 $ 270
Loan and lease receivables, net available
for sale .................................. 26,447 11,312 17,625 8,669 3,181 2,170 2,088
Other........................................ 883 399 534 328 5,538 2,963 1,491
Total assets................................. 67,463 34,479 46,894 22,175 12,284 7,270 5,368
Subordinated debentures ..................... 45,245 24,746 33,620 17,800 7,171 1,327 665
Total liabilities............................ 60,842 31,033 42,503 20,031 10,721 5,801 4,322
Stockholders' equity......................... 6,621 3,446 4,392 2,143 1,562 1,469 1,045
</TABLE>
- --------
(1) Per share information for fiscal years ended 1994, 1993 and 1992 has been
restated to reflect the 3 for 2 stock split effected on November 1, 1995.
34
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- --------- ----------- ---------- -----------
Other Data: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Originations:
Business Purpose Loans.................... $ 17,772 $ 12,406 $ 28,872 $ 18,170 $ 11,793 $ 9,769 $ 5,773
Home Equity Loans......................... 30,181 11,399 36,479 16,963 22,231 22,017 34,462
Equipment Leases ......................... 3,806 2,476 5,967 2,220 -- -- --
Loans sold:
Securitizations........................... 40,000 14,506 36,506 9,777 -- -- --
Other..................................... 2,039 7,409 19,438 31,948 30,562 29,036 40,310
Total loan and lease portfolio serviced...... 103,934 33,419 59,891 17,774 8,407 5,134 3,578
Average loan/lease size:
Business Purpose Loans.................... 77 77 78 71 57 63 48
Home Equity Loans......................... 44 39 47 46 51 45 42
Equipment Leases.......................... 10 11 11 12 -- -- --
Weighted average interest rate on loans and
leases originated:
Business Purpose Loans .................. 15.91% 15.82% 15.83% 16.05% 16.03% 16.24% 16.45%
Home Equity Loans......................... 11.67 11.01 9.94 12.68 8.65 9.60 9.25
Equipment Leases.......................... 16.10 17.00 17.22 15.85 -- -- --
At or For The
Six Months Ended
December 31, At or For the Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ----------- ---------- --------- ----------- ---------- -----------
Financial Ratios:
Return on average assets (1)................ 8.05% 9.20% 6.71% 3.37% 0.87% 0.65% 0.56%
Return on average equity (1)................ 83.55 93.24 70.96 31.36 5.58 3.29 (3.27)
Total delinquencies as a percentage of total
portfolio serviced, at end of period (2) 1.64 3.67 2.30 3.84 6.85 5.97 5.39
Allowance for credit losses to total portfolio
serviced, at end of period............... 1.01 1.20 1.18 .87 .93 .80 1.14
Real estate owned as a percentage of total
portfolio serviced, at end of period..... .66 1.95 1.01 4.29 2.63 1.44 --
Loan and lease losses as a percentage of the
average total portfolio serviced during
the period .............................. .07 .18 .33 .66 .15 .47 .13
Pre-tax income (loss) as a percentage of
total revenues........................... 32.45 36.44 25.21 15.84 12.69 3.26 (12.10)
</TABLE>
- ----------
(1) Annualized.
(2) Total delinquencies includes loans and leases delinquent over 30 days,
exclusive of real estate owned.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 six months ended December 31, 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 regarding the Company 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
current 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 $53.3 million in Business Purposes Loans and $32.9
million in Home Equity Loans. Such securitizations generated gain on the sale of
loans of $7.0 million, $8.9 million and $1.4 million, respectively, for the six
months ended December 31, 1996 and for fiscal years ended June 30, 1996 and
1995. See "--Results of Operations."
The Company also relies upon funds generated by the sale of
subordinated debt and other borrowings to fund its operations. At December 31,
1996, the Company had $45.2 million of subordinated debt outstanding and credit
facilities and lines of credit totaling $47.5 million, of which $6.3 million was
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 in the securitized
loans held by the trust and the excess spread and, if applicable, a
36
<PAGE>
subordinated interest in the securitized loans held by the trust. The senior
certificates are subsequently sold to investors for cash.
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 experience 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.
37
<PAGE>
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. To the extent that prepayments,
delinquencies and/or liquidations differ from the Company's estimates,
adjustments of the Company's mortgage servicing rights during the period of
adjustment may be required. Mortgage servicing rights will be accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 125.
See "- Recent Accounting Pronouncements," "Risk Factors - Dependence Upon
Securitizations and Fluctuations in Operating Results" and "Business -
Securitizations."
Balance Sheet Information
December 31, 1996 compared to June 30, 1996. Total assets increased
$20.6 million, or 43.9%, to $67.5 million at December 31, 1996 from $46.9
million at June 30, 1996 due primarily to increases in loan and lease
receivables, other receivables and other assets. Loan and lease receivables
available for sale increased $8.8 million as a result of increased originations
primarily due to increased originations of Home Equity Loans. Other receivables,
consisting primarily of the excess spread related to the Company's
securitizations, increased $9.0 million, or 63.8%, to $23.1 million at December
31, 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. Other assets
increased $3.4 million, or 52.3%, to $9.9 million at December 31, 1996 from $6.5
million at June 30, 1996 due primarily to an increase in mortgage servicing
rights obtained in connection with the Company's loan securitizations. See
"--Results of Operations - Six Months Ended December 31, 1996 Compared with the
Six Months Ended December 31, 1995."
Total liabilities increased $18.3 million, or 43.1%, to $60.8 million
at December 31, 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 debt
of $11.6 million during the six months ended December 31, 1996 and a net
increase in institutional debt of $6.3 million as the Company utilized its lines
of credit to fund loan demand. At December 31, 1996, the Company had $45.2
million of subordinated debt outstanding. The Company's ratio of total debt to
equity at December 31, 1996 was 7.8:1 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.
38
<PAGE>
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 debt 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 debt outstanding. The Company's ratio of total
debt (subordinated debt plus credit facilities) to equity at June 30, 1996 was
8.2:1.
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 debt. 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
debt 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 debt 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 six months ended December 31, 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 $5.4 million and net income increased $1.0 million for the six months
ended December 31, 1996 as compared to six months ended December 31, 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. See "Risk Factors
- --Dependence Upon Securitizations and Fluctuations in Operating Results" and
"--Ability of the Company to Sustain Recent Levels of Growth and Operating
Results."
39
<PAGE>
Six Months Ended December 31, 1996 Compared with the Six Months Ended December
31, 1995
Total Revenues. Total revenues increased $5.4 million, or 98.2%, to
$10.9 million in the six months ended December 31, 1996 from $5.5 million for
the six months ended December 31, 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
$8.2 million for the six months ended December 31, 1996 from $3.9 million for
the six months ended December 31, 1995. The increase was the result of a sale of
$16.1 million of Business Purpose Loans and $23.9 million of Home Equity Loans
through a securitization in September of 1996. The Company recognized a gain of
$7.0 million (representing the fair value of the excess spread of $7.9 million
less $900,000 of costs associated with the transaction) on the Company's
participation in the $40.0 million of loans sold through this securitization.
The Company recognized $1.2 million of gain on sale of loans through excess
mortgage servicing rights received in connection with prior securitizations.
Given the unseasoned nature of the loans securitized and the lack of supporting
financial information thereon, the Company was previously unable to reasonably
estimate the value of such excess mortgage servicing rights. The recognition of
excess mortgage servicing rights will be included in the gain on sale of loans
sold through securitizations occurring in future periods in accordance with SFAS
No. 125. See "--Recent Accounting Pronouncements" and Note 1 of the Notes to
Consolidated Financial Statements.
Interest and Fee Income. Interest and fee income consists of interest
income, fee income and amortization of origination costs. Interest and fee
income increased $1.0 million, or 66.7%, to $2.5 million in the six months ended
December 31, 1996 from $1.5 million in the six months ended December 31, 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 $921,000 to $1.9 million for the six months
ended December 31, 1996 or a 94.2% increase over the $978,000 reported for the
six months ended December 31, 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 six months ended December 31, 1996, the Company originated
approximately $30.2 million of Home Equity Loans, $17.8 million of Business
Purpose Loans and $3.8 million of Equipment Leases. During the six months ended
December 31, 1995, the Company originated $11.4 million of Home Equity Loans,
$12.4 million of Business Purpose Loans and $2.5 million of Equipment Leases.
The majority of the Home Equity Loans originated during the six months ended
December 31, 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
40
<PAGE>
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 $6,000 from $753,000 for the six months ended December 31, 1995
to $747,000 for the six months ended December 31, 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.
The third component of interest and fee income is amortization of
origination costs. During the six months ended December 31, 1996, amortization
of origination costs was $166,000 compared to $149,000 recognized during the six
months ended December 31, 1995. The increase was attributable to an increase in
the amortization of lease origination costs of $55,000 resulting from an
increase in the lease portfolio. This increase was partially offset by the
amortization of loan origination costs which decreased by $38,000. The decrease
in amortization of loan origination costs resulted from the Company's change in
its amortization policy, effective October 1, 1996, to exclude loans originated
or purchased which were designated to be sold within the following twelve
months.
Total Expenses. Total expenses increased $3.9 million, or 111.4%, to
$7.4 million for the six months ended December 31, 1996 from $3.5 million for
the six months ended December 31, 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 debt. 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 $1.1 million, or 100.0%,
to $2.2 million for the six months ended December 31, 1996 from $1.1 million for
the six months ended December 31, 1995. The increase was primarily attributable
to an increase in the amount of the Company's subordinated debt outstanding, the
proceeds of which were utilized to fund the Company's loan growth. Average
subordinated debt outstanding were $38.8 million during the six months ended
December 31, 1996 as compared to $21.2 million during the six months ended
December 31, 1995. Average interest rates paid on the subordinated debt
increased to 9.03% for the six months ended December 31, 1996 from 8.89% for the
six months ended December 31, 1995 due to an increase in the volume of debt with
maturities of greater than one year which bear higher interest rates than
shorter term debt. Interest expense on lines of credit utilized by the Company
during the six months ended December 31, 1996 was $401,000, as compared to
$173,000 during the six months ended December 31, 1995. The increase was due to
the Company's partial utilization of its $25.0 million warehouse line of credit
to fund Home Equity Loans.
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
41
<PAGE>
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 $108,000 to $400,000 for the six months ended
December 31, 1996 from $292,000 for the six months ended December 31, 1995. The
Company had an allowance for credit losses of $1.0 million at December 31, 1996.
The ratio of the allowance for credit losses to total net loan and lease
receivables serviced was 1.0% at December 31, 1996 as compared to 1.2% at
December 31, 1995. From the inception of the Company's business in 1988 through
December 31, 1996, the Company has experienced a total of approximately $311,000
in net loan and lease losses.
Payroll and Related Costs. Payroll and related costs increased
$210,000, or 67.5%, to $521,000 for the six months ended December 31, 1996 from
$311,000 for the six months ended December 31, 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
$1.7 million, or 154.5%, to $2.8 million for the six months ended December 31,
1996 from $1.1 million in the six months ended December 31, 1995. The increase
was 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 debt 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 $681,000, or 94.7%, to $1.4 million for the six months ended
December 31, 1996 from $719,000 for the six months ended December 31, 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 six months ended December 31, 1996.
Income Taxes. Income taxes increased $498,000 to $1.2 million for the
six months ended December 31, 1996 from $702,000 for the six months ended
December 31, 1995 due to an increase in income before taxes.
Net Income. Net income increased $1.0 million to $2.3 million for the
six months ended December 31, 1996 as compared to $1.3 million for the six
months ended December 31, 1995. As a result of the increase, earnings per share
increased to $.93 on weighted average common shares
42
<PAGE>
outstanding of 2,468,045 compared to $0.58 on weighted average common shares
outstanding of 2,240,660.
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 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.
43
<PAGE>
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 the Company's
continued sale of subordinated debt, 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 debt outstanding. Management utilized
the proceeds from the sale of such subordinated debt to fund the increase in
loan originations experienced during the year ended June 30, 1996. Outstanding
subordinated debt 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 debt 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 subordinated debt and loan
44
<PAGE>
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 debt 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 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).
45
<PAGE>
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 to
$6.6 million during the year ended June 30, 1994.
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 $8.3 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 debt, 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 debt outstanding as management utilized the proceeds from the sale
of such subordinated debt to fund the increase in loan originations during the
year ended June 30, 1995. Outstanding subordinated debt 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 debt 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
46
<PAGE>
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 debt and loan
products.
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 SFAS No. 109 in the fourth quarter of fiscal 1994
retroactive to July 1, 1993. The provisions of SFAS No. 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
47
<PAGE>
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.
48
<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>
December 31, 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> <C> <C> <C> <C>
Total portfolio serviced........ $ 52,483 $37,950 $ 14,678 $ 8,170
========= ======= ========= ========
Period of delinquency
31-60 days................ $ 788 1.50% $ 86 .23% $ 141 .96% 71 .87%
61-90 days................ 338 .64 118 .31 75 .51 -- --
Over 90 days.............. 404 .77 1,033 2.72 310 2.11 504 6.17
--------- ---- ------- ---- --------- ---- -------- ----
Total delinquencies....... $ 1,530 2.91% $ 1,237 3.26% $ 526 3.59% $ 575 7.04%
========= ==== ======= ==== ========= ==== ======== ====
REO............................. $ 690 $ 608 $ 762 $ 220
========= ======= ========= ========
Home Equity Loans
Total portfolio serviced........ $ 44,243 $17,224 -- --
========= ======= ========= ========
Period of delinquency
31-60 days................ -- -- -- -- -- -- -- --
61-90 days................ -- -- -- -- -- -- -- --
Over 90 days.............. -- -- -- -- -- -- -- --
--------- ---- ------- ---- --------- ---- -------- ----
Total delinquencies....... -- -- -- -- -- -- -- --
========= ==== ======= ==== ========= ==== ======== ====
Equipment Leases
Total portfolio serviced........ $ 7,128 $ 4,607 $ 2,031 --
========= ======= ========= ========
Period of delinquency
31-60 days................ $ 50 .70% $ 23 .50% $ 49 2.40% -- --
61-90 days................ 17 .24 14 .30 40 1.97 -- --
Over 90 days.............. 94 1.32 41 .89 -- -- -- --
--------- ---- ------- ---- --------- ---- -------- ----
Total delinquencies....... $ 161 2.26% $ 78 1.69% $ 89 4.37% -- --
========= ==== ======= ==== ========= ==== ======== ====
Other Loans (1)
Total portfolio serviced........ $ 80 $ 110 $ 1,065 $ 237
========= ======= ========= ========
Period of delinquency
31-60 days................ $ -- --% $ -- --% $ 16 1.51% -- --
61-90 days................ -- -- 18 16.36 30 2.82 -- --
Over 90 days.............. 18 22.50 50 45.45 21 1.97 -- --
--------- ---- ------- ---- --------- ---- -------- ----
Total delinquencies....... $ 18 22.50% $ 68 61.81% $ 67 6.30% -- --
========= ==== ======= ==== ========= ==== ======== ====
Company Combined
- --------------------------------
Total portfolio serviced........ $ 103,934 $59,891 $ 17,774 $ 8,407
========= ======= ========= ========
Period of delinquency
31-60 days................ $ 838 .80% $ 109 .18% $ 206 1.16% $ 72 .85%
61-90 days................ 355 .34 150 .25 145 .82 -- --
Over 90 days.............. 516 .50 1,124 1.87 331 1.86 504 6.00
--------- ---- ------- ---- --------- ---- -------- ----
Total delinquencies....... $ 1,709 1.64% $ 1,383 2.30% $ 682 3.84% $ 576 6.85%
========= ==== ======= ==== ========= ==== ======== ====
REO............................. $ 690 $ 608 $ 762 $ 220
========= ======= ========= ========
Losses experienced
during the period............ $ 58 .06% $ 129 .22% $ 88 .49% $ 10 .12%
========= ==== ======= ==== ========= ==== ======== ====
Allowance for credit losses at
end of period................ $ 1,049 1.01% $ 707 1.18% $ 155 .87% $ 78 .93%
========= ==== ======= ==== ========= ==== ======== ====
</TABLE>
- --------------------------
(1) Includes secured and unsecured consumer loans originated by HCDC.
49
<PAGE>
The following table sets forth the Company's loss experience for the
periods indicated.
<TABLE>
<CAPTION>
For the Six
Months Ended
December 31, For the Year Ended June 30,
-------------- --------------------------------------------
1996 1996 1995 1994
-------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Business Purpose Loans............................... $ 58 $ 92 $ 86 $ 10
Home Equity Loans.................................... -- -- -- --
Other Loans.......................................... -- 37 2 --
Leases............................................... -- -- -- --
-------------- -------------- -------------- --------------
Total losses................................ $ 58 $ 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 and the six months ended December 31, 1996, 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 a result of an increase in the rate required
to be paid to investors in connection with the securitization.
In August 1995, the Company implemented a hedging 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 December 31, 1996, the
Company had sold short $30.0 million of U.S. Treasury securities. The deferred
loss related to these activities was approximately $221,000 at December 31,
1996. During the six months ended December 31, 1996, the Company incurred a loss
of approximately $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."
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.
50
<PAGE>
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 December 31, 1996 approximately $20.5 million of its liabilities are
comprised of subordinated debentures with scheduled maturities of 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
approximately $34.3 million. During the six months ended December 31, 1996, the
Company completed a securitization involving $40.0 million of Business Purpose
Loans and Home Equity Loans. The securitization resulted in net proceeds of
approximately $38.8 million. The Company
51
<PAGE>
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. As a result of 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 six months ended December 31, 1996, the Company had gain on sale of
loans through securitizations of $8.9 million, $1.4 million and $7.0 million,
respectively. The Company uses a portion 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. See "Risk Factors -
Dependence Upon Securitizations and Fluctuations in Operating Results."
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 on the Company's
results of operations. See "Risk Factors - Changes in Interest Rates May
Adversely Affect Profitability."
Despite its use of a portion of the proceeds of the securitizations to
fund loan originations, the Company continues to rely on borrowings such as its
subordinated debt and warehouse credit facilities or lines of credit to fund its
operations. At December 31, 1996, the Company had a total of $45.2 million of
subordinated debt outstanding and available credit facilities and lines of
credit totaling $47.5 million, of which $6.3 million was drawn upon on such
date.
In February 1997, the Company completed an underwritten public offering
of 1,150,000 shares of its Common Stock. The stock was sold at a price of $20.00
per share. The offering of the Common Stock resulted in net proceeds of
approximately $20.9 million. The net proceeds from the Common Stock offering had
the effect of increasing the Company's stockholders' equity by approximately
$20.9 million.
52
<PAGE>
Between 1990 and 1993, American Business Finance Corporation ("ABFC"),
an indirect subsidiary of ABFS, sold approximately $1.7 million in principal
amount of subordinated debt which mature at varying times between September 1996
and June 1998. In December 1993, the Company ceased selling subordinated debt
through ABFC. As of December 31, 1996, ABFC had approximately $1.3 million of
subordinated debt outstanding.
In addition, between July 1, 1993 and December 31, 1996, ABFS sold
$67.7 million in principal amount of subordinated debt (including redemptions
and repurchases by investors), pursuant to registered offerings with maturities
ranging between three months and ten years. As of December 31, 1996, ABFS had
approximately $43.9 million of subordinated debt outstanding (excluding the debt
of ABFC). The proceeds of such sales of debt 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.
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. 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. At December 31, 1996, $6.3 million of these
credit facilities were being utilized.
The Company is currently discussing the possibility of obtaining
additional lines of credit with other lenders and providers of credit.
As of December 31, 1996, the Company had $31.0 million of debt
scheduled to mature during the twelve months ending December 31, 1997 which was
comprised of $24.7 million of maturing subordinated debentures and credit
facilities totaling $6.3 million. The Company currently expects to refinance the
$24.7 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. The credit facility is expected to
be repaid from funds obtained through the Company's next loan securitization.
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. See "Risk Factors - Dependence Upon Debt
Financing."
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.
53
<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 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 made
awards of options to purchase 150,000 shares of Common Stock in conjunction with
the public offering of the Company's Common Stock to various officers of the
Company. See "Management" and Note 9 of the Notes to Consolidated Financial
Statements.
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. See Note 1 of the Notes to Consolidated
Financial Statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("SFAS No. 128"). SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and
54
<PAGE>
applies to entities with publicly held common stock or potential common stock.
SFAS No. 128 simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS No. 128 will be effective for
financial statements for both interim and annual periods ending after December
15, 1997. Based upon the Company's analysis of SFAS No. 128, the Company does
not believe that the implementation of SFAS No. 128 will have a material effect
on the computation of its earnings per share.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129"). SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure. SFAS
No. 129 will be effective for financial statements for periods ending after
December 15, 1997. Based upon the Company's current capital structure, the
Company does not believe that the implementation of SFAS No. 129 will be a
material effect on the Company's disclosure of information regarding its capital
structure.
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.
55
<PAGE>
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.
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 15.91% and 15.83% for the
six months ended December 31, 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 59.8% 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 loan officers. The
Company originated $17.8 million and $28.9 million of Business Purpose Loans for
the six months ended December 31, 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
56
<PAGE>
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 $30.2 million and $36.5 million of Home Equity Loans for the
six months ended December 31, 1996 and the year ended June 30, 1996,
respectively. The weighted average interest rate on Home Equity Loans originated
by the Company was 11.67% and 9.94% for the six months ended on December 31,
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 to credit impaired borrowers.
Currently, the Company has entered into agreements with six financial
institutions which provide the Company with the opportunity to underwrite,
process and purchase Home Equity Loans generated by the branch networks of such
institutions which consist of approximately 800 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 16.10% and 17.22% for the six
months ended December 31, 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 25 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 debt 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 December
31, 1996, the Company has experienced total net loan and lease losses of
approximately $311,000. The Company's losses on its loan and lease portfolio
serviced totaled $ 58,000, $129,000, $88,000 and $10,000, respectively, for the
six months ended December 31, 1996 and the years ended June 30, 1996, 1995 and
1994. The Company's loans and leases delinquent over 30 days represented 1.64%
and 2.30% of the total loan and lease portfolio (excluding real estate owned)
serviced at December 31, 1996 and June 30, 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset Quality."
57
<PAGE>
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 December 31, 1996, the Company had
securitized an aggregate of $53.3 million of Business Purpose Loans and $32.9
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 December 31, 1996, the Company had $45.2
million in subordinated debentures outstanding with a weighted average coupon of
8.99% and a weighted average maturity of 26.5 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 primary
subsidiaries, American Business Finance Corporation, Upland, Processing Service
Center, Inc., HomeAmerican Consumer Discount Company ("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 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 December 31,
1996, HCDC maintained a portfolio of consumer loans of approximately $80,000.
The Company does not intend to emphasize this area of its business in the
future.
The Company's indirect 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. The stock of such subsidiaries is held by ABC and Upland
Mortgage. 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
1990 in order to issue subordinated debentures in 1990 through 1993. Since
December 1993, American Business Finance Corporation has been inactive. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
58
<PAGE>
The following chart sets forth organizational structure of ABFS.(1)
ABFS
(Holding Company)
(Issues Subordinated Debentures)
|
|
AMERICAN BUSINESS CREDIT, INC.
(Originates and services Business Purpose Loans)
|
|
---------------------------------------------------------------------
| | | | | |
| | | | | |
HOME HOME
AMERICAN PROCESSING AMERICAN AMERICAN AMERICAN
CREDIT, INC. SERVICE BUSINESS CONSUMER ABC BUSINESS
d b a CENTER, LEASING, DISCOUNT HOLDINGS FINANCE
UPLAND INC. INC. COMPANY CORP. CORP.
MORTGAGE(2)
(Originates, (Process (Originates (Originates (Holds (Issued
purchases and Bank Alliance and services and sells foreclosed subordi-
services Home Program Home Equipment small real nated
Equity Loans) Equity Loans) Leases) consumer estate) debentures
installment from 1990
loans) to 1993)
(1) In addition to the corporations pictured above, the Company organized a
special purpose corporation for each of its securitizations. Such
corporations are indirect subsidiaries of ABFS.
(2) Loans purchased by Upland represent loans acquired through the Bank Alliance
Program.
59
<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 six months ended December 31, 1996 and the years ending June 30, 1996, 1995
and 1994.
<TABLE>
<CAPTION>
Six Months
Ended
December 31, 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..................... $ 17,772 $ 28,872 $ 18,170 $ 11,793
Home Equity Loans.......................... $ 30,181 $ 36,479 $ 16,963 $ 22,231
Equipment Leases........................... $ 3,806 $ 5,967 $ 2,220 $ --
Other Loans................................ $ 27 $ 240 $ 1,108 $ 242
Number of Loans/Leases Originated/Purchased
Business Purpose Loans..................... 231 371 257 206
Home Equity Loans.......................... 686 772 365 438
Equipment Leases........................... 398 530 193 --
Other Loans................................ 8 52 237 51
Average Loan/Lease Size
Business Purpose Loans..................... $ 77 $ 78 $ 71 $ 57
Home Equity Loans.......................... $ 44 $ 47 $ 46 $ 55
Equipment Leases........................... $ 10 $ 11 $ 12 $ --
Other Loans................................ $ 3 $ 5 $ 5 $ 4
Weighted Average Interest Rate on Loans/Leases
Originated
Business Purpose Loans..................... 15.91% 15.83% 16.05% 16.03%
Home Equity Loans.......................... 11.67% 9.94% 12.68% 8.65%
Equipment Leases........................... 16.10% 17.22% 15.85% --%
Other Loans................................ 21.36% 24.50% 24.51% 24.92%
Weighted Average Term (in months)
Business Purpose Loans..................... 188 169 173 168
Home Equity Loans.......................... 193 194 212 171
Equipment Leases........................... 38 42 40 --
Other Loans................................ 40 50 53 25
Loans/Leases Sold
Business Purpose Loans..................... $ 16,809 $ 28,252 $ 24,762 $ 8,331
Home Equity Loans.......................... $ 25,230 $ 24,325 $ 16,963 $ 22,231
Equipment Leases........................... $ -- $ 2,259 $ -- $ --
Other Loans................................ $ -- $ 1,108 $ -- $ --
Number of Loans/Leases Sold
Business Purpose Loans..................... 208 378 384 98
Home Equity Loans.......................... 577 512 365 438
Equipment Leases........................... -- 193 -- --
Other Loans................................ -- 252 -- --
Weighted Average Rate on Loans/Leases Originated.... 13.46% 12.97% 14.85% 11.30%
</TABLE>
60
<PAGE>
The following table sets forth information regarding the average
loan-to-value ratios for loans originated by the Company during the periods
indicated.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
------------------------ ------------------------
Loan Type 1996 1996
- ---------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Business Purpose Loans.................................... 59.3% 58.9%
Home Equity Loans......................................... 69.0 68.8
</TABLE>
The following table shows the geographic distribution of the Company's
loan and lease originations and purchases during the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended December 31, 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.......... $22,685 43.81% $12,978 49.06% $ 33,324 46.57% $17,913 46.57% $18,246 53.25%
New Jersey............ 15,495 29.92 7,640 28.88 20,986 29.33 16,300 42.38 15,540 45.35
New York.............. 4,357 8.41 2,742 10.37 7,417 10.36 1,534 3.99 -- --
Virginia.............. 2,667 5.15 4 .02 104 0.15 111 0.29 -- --
Maryland.............. 1,878 3.63 1,413 5.34 4,408 6.16 1,191 3.10 -- --
North Carolina........ 1,848 3.57 50 0.19 78 0.11 6 0.02 -- --
Delaware.............. 1,046 2.02 634 2.40 2,724 3.81 481 1.25 480 1.40
Florida............... 649 1.25 223 0.84 674 0.94 149 0.39 -- --
Georgia............... 140 0.27 114 0.43 181 0.25 98 0.25 -- --
Connecticut........... 73 0.14 49 0.19 87 0.12 5 0.01 -- --
Other................. 948 1.83 604 2.28 1,575 2.20 673 1.75 -- --
--------- -------- -------- -------- --------- ----------------- -------- -------- --------
Total........... $51,786 100.00% $26,451 100.00% $ 71,558 100.00% $38,461 100.00% $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 personal
guarantees, 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 $77,000 for the loans originated during the
six months ended at December 31, 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 six months ended December 31, 1996, the weighted average interest rate
received on such loans was 15.91% and the average loan-to-value ratio was 59.3%
for the loans originated by the Company during such period. From July 1, 1993
through December 31, 1996, the Company originated $76.6 million of Business
Purpose Loans.
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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, the prepayment penalties provided for in the
Company's Business Purpose Loan documents generally an amount to a significant
portion 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 $44,000 for the loans originated during the six
months ended December 31, 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 2.0% of the aggregate loan amount. For the
six months ended December 31, 1996, the weighted average interest rate received
on such loans was 11.67% and the average loan-to-value ratio was 69.0% 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 and are generally charged to
the borrower on the prepayment of a Home Equity Loan except in the event the
borrower refinances a Home Equity Loan with the Company.
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
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qualifies under Upland's underwriting standards, the loan will be originated by
the financial institution and subsequently sold to Upland.
Since the introduction of this program, agreements have been entered
into with six 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 800 branches
located in Pennsylvania, Delaware, New Jersey and Maryland. During fiscal 1996
and the six months ended December 31, 1996, $6.2 million and $3.0 million,
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 25 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
$10,000 for the leases originated during the six months ended December 31, 1996.
The Company's leases generally have maximum terms of five years. The weighted
average interest rate received on such leases for the six months ended December
31, 1996 was 16.10%. 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 December 31, 1996, principal value of the Company's lease
portfolio totaled $6.7 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
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loan and lease products and the other being credit impaired borrowers that
satisfy the Company's underwriting guidelines.
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.
The Company markets Home Equity Loans through telemarketing, 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.
The Company's marketing efforts for Home Equity Loans are currently
concentrated in the mid-atlantic region of the United States; however, the
Company has recently began originating loans in Georgia, North Carolina, Florida
and Connecticut and may open sales offices in such states in the future with
loan processing and collection procedures performed at the Company's main
office. The Company also utilizes the Bank Alliance Program as an additional
source of loans. See "-- Lending 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.
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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 December 31,
1996, the Company's total servicing portfolio included 2,497 loans and leases
with an aggregate outstanding balance of $103.9 million. The Company generally
receives servicing fees of 0.50% to 0.75% per annum based upon the outstanding
balance of securitized 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 45 to 60
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 the
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."
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
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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 75%. Business
Purpose Loans 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
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 59.3% and 58.9% for the six months ended December 31, 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 69.0% and 68.8%for the six months ended December 31, 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.
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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 Business Purpose and 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 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 $53.3 million of Business Purpose Loans and $32.9
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.
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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 December 31, 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 prefunded 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 six months ended December 31,
1996 and the years ended June 30, 1996 and 1995 generated gain on sale of loans
of $7.0 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.
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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
a short average loan processing time. 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 finance 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
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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 December 31, 1996, the Company employed 159 people on a full-time
basis and 11 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 Upland's or ABC's borrowers or affiliates of Upland'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
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executive offices are located. In addition, the Company leases an executive
suite in Boca Raton, Florida, expiring in August 1997, and Phoenix, Arizona,
expiring in April 1997.
The Company leases its New Jersey office located in Cherry Hill, New
Jersey.
Legal Proceedings
The Company is involved as plaintiff or defendant in various 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.
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MANAGEMENT
General
The present management structure of the Company is as follows: Anthony
J. Santilli, Jr. is Chairman, President, Chief Executive Officer, 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. David M.
Levin, CPA is the Senior Vice President - Finance and Chief Financial Officer.
Harold Sussman, Michael DeLuca, Richard Kaufman and Leonard Becker are
non-employee directors of the Company and 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 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 55 Director
Harold E. Sussman 71 Director
Beverly Santilli 37 Executive Vice President and Secretary
of ABFS and President of ABC
Jeffrey M. Ruben 34 Senior Vice President and General
Counsel of ABFS
David M. Levin 52 Senior Vice President - Finance and
Chief Financial Officer
</TABLE>
- -----------------------
(1) As of March 1, 1997.
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 February 20, 1997, the closing of the public
offering of the Company's Common Stock, 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 of Directors shall be divided into three classes
following the closing of the public offering of the
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Company's Common Stock. Accordingly, prior to the next annual meeting of
stockholders (the first annual meeting of stockholders following the closing of
the public offering of the Company's Common Stock) the Board shall determine the
composition of each class. The initial directors of Class One will serve until
the next annual meeting of stockholders; at such 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 of the
Company's Common Stock. At the second annual meeting of stockholders following
the public offering of the Company's Common Stock, 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 of the Company's Common Stock. At the
third annual meeting of stockholders following the public offering of the
Company's Common Stock, 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.
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 and Treasurer 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 of 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 is Chairman and Chief Executive Officer of Academy
Industries, Inc., a paper converting company, a position he has held since
December 1996. From 1982 to 1996, he
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was self employed 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.
Harold E. Sussman is currently a principal in and Chairman of the Board
of the real estate firm of Colliers, Lanard & Axilbund, 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 rates 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.
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<PAGE>
Beverly Santilli 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 PSFS 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.
Jeffrey M. Ruben 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 is Senior Vice President - Finance 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 in his capacity 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.
Any non-employee director of the Company or its subsidiaries is eligible to
participate in 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
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<PAGE>
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 (i) in cash, or (ii) unless prohibited by
the Board of Directors, in shares of Common Stock, or a combination of cash and
shares. Except in the event of death or disability of the director as described
below, all options granted pursuant to the Non-Employee Director Plan are
exercisable during the lifetime of the director only by the director and may not
be exercised more than ten years from the date of the grant. Unless terminated
earlier as provided in the Non-Employer Director Plan, 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 the event that a non-employee director
dies or becomes disabled during the option term, the director's executor or
legal guardian, as applicable, may exercise such option during the three month
period following such event to the same extent that the director was entitled to
exercise such option prior to his death or disability but in no event later than
ten years from the date of grant.
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 (the "Formula Award"). Pursuant to
the terms of such Formula Awards, 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 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. Each new outside
director elected subsequent to the adoption of the Non-Employee Director 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. In addition, on
October 22, 1996, the Board of Directors awarded each non-employee director 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 December 31, 1996,
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 Company 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 also Bylaws 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.
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The Amended and Restated Certificate of Incorporation and the 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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, 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.
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.
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").
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<PAGE>
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 of 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. 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
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<PAGE>
to the overall performance of the Company or a subsidiary thereof. Based upon
these criteria, a maximum potential bonus is established for each individual
eligible to participate in such plan. The maximum annual bonus awarded can range
from 15% to 225% of an individual's annual salary. For example, if 80% of an
individual's goals are met, a bonus of 50% of the individual's potential bonus
is payable under the plan. If 100% of the individual's goal is reached, a bonus
equal to 100% of the individual's potential bonus 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 may 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.
Subject to the approval of the Company's stockholders, during fiscal 1997 the
Company amended its 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 of the Company's Common Stock, the Company
granted incentive stock options to purchase approximately 150,000 shares of
Common Stock to certain of its officers. Of this amount, options to purchase
12,500 shares of Common Stock were awarded to each of Messrs. Ruben and Levin
and Mrs. Santilli. 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. Options to purchase 13,988 shares of the Company's Common Stock
remained available for grant as of March 24, 1997.
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 options 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. Except as
set forth below, all options granted pursuant to the Plan are exercisable in
accordance with a vesting schedule which is established at the time of grant and
may not be exercised more than ten years from the date of the grant. No
individual may receive more than 75% of the shares reserved for issuance under
the Plan. 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 as determined by the Compensation Committee.
All unexercised incentive stock 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
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<PAGE>
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 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
Fiscal Year End Fiscal Year End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable (#) Unexercisable ($)
- ------------------------------- --------------- ----------- ----------------------- -----------------------
<S> <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 of 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 $2.67 per share.
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The following table sets forth information regarding options to
purchase shares of Common Stock granted to the Named Officers during fiscal
1996. No stock appreciation rights ("SARs") were granted in fiscal 1996.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Number of % of Total Potential Realized Value at
Securities Options/SARs Assumed Annual Rates of
Underlying granted to Stock Price Appreciation
Options/SARs Employees in Exercise or Base for Option Term
Name granted (#) Fiscal Year Price ($/sh) Expiration Date 5% ($) 10% ($)
- ------------------------------------------------ ------------ --------------- ---------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 22,500(1) 100% $5.00 October 1, $ 70,751 $ 179,296
Chairman, President, Chief Executive 2005
Officer, Chief Operating Officer,
Treasurer and Director of ABFS
Beverly Santilli --(2) -- -- -- -- --
President of ABC and Executive Vice
President and Secretary of ABFS
Jeffrey M. Ruben --(3) -- -- -- -- --
Senior Vice President and
General Counsel of ABFS
David M. Levin --(4) -- -- -- -- --
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 of Common Stock.
(2) Subsequent to the end of fiscal 1996, Mrs. Santilli received an option to
purchase 12,500 shares of Common Stock.
(3) Subsequent to the end of fiscal 1996, Mr. Ruben received an option to
purchase 12,500 shares of Common Stock.
(4) Subsequent to the end of fiscal 1996, Mr. Levin received an option to
purchase 12,500 shares of Common Stock.
Employment Agreements
On January 29, 1997, the Company entered into employment agreements
with each of Anthony J. Santilli, Jr., Beverly Santilli and Jeffrey M. Ruben
pursuant to which they are entitled to receive annual salaries of $300,000,
$200,000 and $125,000, respectively, during the term of the agreements. The
salaries of Mr. and Mrs. Santilli are subject to increase but not decrease, on
an annual basis based upon the Consumer Price Index. Mr. Ruben's salary is
subject to increase on an annual basis based upon the Consumer Price Index and
may also be increased from time to time by Mr. Santilli. Once increased, Mr.
Ruben's salary may not be decreased following a "change in control" of the
Company. The employment agreements are designed to assist the Company in
maintaining a stable and competent management team. Certain of the terms of such
agreements are described below.
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<PAGE>
The term of each agreement terminates upon the earlier of: (a) the
employee's death, permanent disability, termination of employment for cause,
voluntary resignation (provided that no voluntary resignation may occur within
three years of February 20, 1997, the closing date of the public offering of the
Company's Common Stock 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 three years in the case of Mr. Ruben); or (ii) five years (or three years in
the case of Mr. Ruben) from the date of notice to the employee of the Company's
intention to terminate the agreement. To the extent the Company gives Mr. or
Mrs. Santilli notice of its intent to terminate their agreements, other than for
cause, such individuals would be entitled to receive their salaries and certain
benefits for five years. To the extent Mr. Ruben is terminated without cause
during the term of his agreement, he would be entitled to receive his salary for
three years except that if such termination occurs while Mr. Santilli is Chief
Executive Officer of the Company, he shall receive a termination payment equal
to the current year's base salary.
The employment agreements with each of Mr. and Mrs. Santilli also
provide for a cash payment to each employee equal to 299% of the last five
years' average annual compensation as calculated in accordance with Section 280G
of the Code (in addition to any other payments and benefits due under the
agreements) in the event of a "change in control" (as defined in such
agreements), of the Company during the term of the agreements to which such
employee does not consent in such individual's capacity as a director or
stockholder of the Company. Mr. Ruben's agreement provides for a similar cash
payment only if his employment is terminated in the event of a "change in
control," which payment shall be in lieu of any additional payment which may be
due pursuant to the terms of his agreement. The agreements with Mr. Ruben and
Mrs. Santilli also provide that in the event of a "change in control" of the
Company each employee's stock options shall vest in full (provided, that in the
case of Mrs. Santilli, she does not consent to such "change in control"). The
vesting of options and the receipt of other payments and benefits provided for
under the agreements upon a "change in control" of the Company may subject an
employee to the payment of an excise tax equal to 20% of all payments contingent
upon a "change in control" made in excess of the employee's base compensation.
Under the terms of the agreements, in such event the Company will pay the
employees an additional amount such that the net amount of payments retained by
the employees after the payment of any excise tax and any federal, state and
local income and employment taxes and the excise tax on the additional amount
paid by the Company shall be equal to the total payments or benefits to be
received by the employees under their respective agreements. The Company is not
entitled to a deduction for any payments subject to the excise tax made to
employees pursuant to the terms of the agreements. For purposes of all 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 voluntary retirement or death of
any board member (with respect to Mr. Ruben's agreement, no "change in control"
as a result of a change in the majority of the directors will be deemed to occur
under the terms of his agreement if Mr. Santilli remains Chairman of the Board),
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 Commission 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
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Mrs. Santilli and Mr. Ruben had been terminated as of January 1, 1997 under
circumstances entitling them to change in control payments (excluding the value
realized upon the exercise of options or any excise tax and other payments
described above, which amounts may vary based upon a variety of factors,
including but not limited to, the acquisition price and the timing of the change
in control), Mr. Santilli, Mrs. Santilli and Mr. Ruben would have been entitled
to receive a lump sum payment of $780,000, $319,000 and $279,000, respectively.
In addition, Mr. and Mrs. Santilli's agreements would continue to be in force
for the remainder of their term as described above.
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. The Company may extend the non-compete
provisions of any of the agreements at its option (or in the case of Mr. Ruben,
with his consent) for up to one year following the termination of such agreement
upon payment to the employee of an amount equal to the highest annual salary and
bonus received by the employee during the term of the agreement; provided,
however, that the non-compete provisions of Mr. Ruben's contract shall be
automatically extended for one year in the event he is terminated without cause
and receives a severance payment pursuant to the terms of his agreement unless
he returns a pro rata portion of the severance payment received from the
Company.
The employment agreements with Mr. and Mrs. Santilli also provide 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. Mr. Ruben's agreement
provides for his participation in the Company's bonus plan established by the
Board of Directors. Each employment agreement also provides the employees with
certain other benefits including a company car for each of Mr. and Mrs.
Santilli, payment of certain life, health (including the payment of health
insurance benefits for the family of Mr. and Mrs. Santilli) and disability
insurance payments and reimbursement for all reasonable expenses incurred by the
employee in the performance of his or her duties. In the event Mr. Santilli
becomes disabled (as defined in the agreement) during the term of his agreement,
such employment agreement also provides for the payment of monthly disability
payments to him in an amount equal to his monthly salary prior to the disability
less any disability benefits received by Mr. Santilli pursuant to any disability
insurance paid for, in whole or in part, by the Company for the period of his
disability, but in no event beyond the date Mr. Santilli reaches 65 years of
age.
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
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<PAGE>
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 March 1, 1997 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 individual.
<TABLE>
<CAPTION>
Number of Shares
Name and Position Beneficially Owned(1) Percentage of Class
- ----------------------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Anthony J. Santilli, Jr. 917,044(2)(3) 25.9%
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) 3.7
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Michael DeLuca, Director of ABFS 194,735(4) 5.5
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 170,561(4) 4.8
1126 Bryn Tyddyn Drive
Gladwyne, PA 19035
Harold Sussman, Director of ABFS 101,711(4) 2.9
Colliers, Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 20,500(5) (6)
Senior Vice President and General
Counsel of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
David M. Levin 12,500(7) (6)
Senior Vice President - Finance and Chief
Financial Officer of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
All executive officers and directors as 1,548,281(8) 42.0%
a group (eight persons)
</TABLE>
- ------------------
85
<PAGE>
(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 Commission. Accordingly they may include securities
owned by or for, among others, the spouse 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 27,500 shares of the Company's Common Stock
awarded to Mr. Santilli pursuant to the Company's Plan. Includes an option
to purchase 12,500 shares of the Company's Common Stock awarded to Mrs.
Santilli.
(4) Includes options to purchase 27,500 shares of the Company's Common Stock
awarded to each non-employee director of the Company pursuant to the
Company's Non-Employee Director Plan.
(5) Includes 500 shares held directly, as well as an option to purchase 20,000
shares of the Company's Common Stock awarded to Mr. Ruben pursuant to the
Company's Plan.
(6) Less than one percent.
(7) Includes an option to purchase 12,500 shares of the Company's Common Stock
awarded to Mr. Levin.
(8) Includes options to purchase 182,500 shares of the Company's Common Stock.
86
<PAGE>
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the NASDAQ National
Market System under the symbol "ABFI." The Common Stock began trading on the
NASDAQ National Market System on February 14, 1997. Prior to February 14, 1997,
the Common Stock had been traded on the PHLX under the symbol "AFX" since 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 March 24, 1997. On March 24, 1997 the closing price of the Common
Stock on the NASDAQ National Market System was $22.00.
Quarter Ended High Low
- ------------------------------------------ -------------- ----------
June 30, 1996(1).......................... $17.00 $11.38
September 30, 1996........................ 19.50 11.13
December 31, 1996 ........................ 20.00 17.25
March 31, 1997 (through
March 24, 1997)........................... 22.50 21.875
- ---------------
(1) Represents the period May 13, 1996 through June 30, 1996.
As of March 1, 1997, there were 104 record holders and approximately
600 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 paid dividends of $0.03 per share
during the six months ended December 31, of fiscal 1996. The Company paid a
dividend of $0.015 during the third quarter of fiscal 1997. The 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 preceding fiscal
year.
87
<PAGE>
As of the date hereof, there were 331,500 shares of Common Stock
subject to options. In addition, there were an additional 38,488 shares reserved
for issuance under the Company's option plans. See "Management."
PLAN OF DISTRIBUTION
It is presently anticipated that ABFS will not employ the services of a
broker-dealer or dealers as an agent to assist in the sales of the Subordinated
Debentures offered hereby. [CONFIRM] ABFS may in the future employ the services
of an NASD member broker-dealer for purposes of offering the Subordinated
Debentures on a "best-efforts" or agency basis. [What is status?] If an
agreement concerning the use of the services of any broker-dealer is reached,
ABFS may pay any such broker-dealers an estimated commission ranging from .5% to
10% of the sale price [CONFIRM] of any Subordinated Debentures sold through any
such agent, depending on numerous factors. ABFS may also agree to indemnify such
broker-dealer against certain liabilities, including liabilities under the
Securities Act of 1933, as amended and to reimburse such broker-dealer for its
costs and expenses, up to a maximum to be determined, based upon the total
dollar value of the Subordinated Debentures sold. ABFS will otherwise offer the
Subordinated Debentures through its employees in accordance with Rule 3a4-1
under the Securities Exchange Act of 1934.
The Company reserves the right to reject any subscription hereunder, in
whole or in part, for any reason. Subscriptions will be irrevocable upon receipt
by ABFS. In the event a subscription is not accepted by ABFS, the proceeds of
such subscription will be promptly refunded to the subscriber, without deduction
of any costs and without interest. ABFS expects that such subscriptions will be
refunded within 48 hours after ABFS has received the subscription. Once a
subscriber's subscription has been accepted by ABFS, the applicable subscription
funds will be promptly deposited for benefit of the Company. A receipt will be
sent to the subscriber as soon as practicable thereafter. [CONFIRM] No minimum
number of Subordinated Debentures must be sold in the Offering. A subscriber
will not know at the time of subscription whether ABFS will be successful in
completing the sale of any or all of the Subordinated Debentures offered hereby.
ABFS reserves the right to withdraw or cancel the Offering at anytime. In the
event of such withdrawal or cancellation, subscriptions previously received will
be irrevocable and no subscription funds will be refunded.
LEGAL MATTERS
The validity of the Subordinated Debentures being offered hereby has
been passed upon for the Company by Blank Rome Comisky & McCauley, Four Penn
Center Plaza, Philadelphia, Pennsylvania.
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
88
<PAGE>
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 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 have not been any "reportable events" as defined by Item
304(a)(1)(iv)(B) of Regulation S-B during the periods referred to above.
89
<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....................................F-4
CONSOLIDATED STATEMENTS OF OPERATIONS..........................F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY................F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS..........................F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.....................F-9
F-1
<PAGE>
LOGO BDO Seldman, LLP 1601 Market Street
Accountants and Consultants Philadelphia, Pennsylvania 191-2311
Telephone (215) 241-1500
Fax: (215)997-8314
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.
BDO Seidman, LLP
Philadelphia, Pennsylvania
August 23, 1996
F-2
<PAGE>
LOGO Elkins Park Square - Suite 200
8080 Old York Road
Elkins Park, PA 19027-1455
215-635-3100
Fax: 215-635-5788
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.
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
September 20, 1995
F-3
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1996 1996 1995
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ............................ $ 3,034,952 $ 5,345,269 $ 4,734,368
Loan and lease receivables, net
Available for sale ................................. 26,396,556 17,625,178 8,668,956
Other .............................................. 882,632 534,325 328,401
Other receivables .................................... 23,078,793 14,090,542 4,237,072
Prepaid expenses ..................................... 2,437,487 1,341,160 594,046
Property and equipment, net of accumulated
depreciation and amortization ...................... 1,759,430 1,452,895 687,678
Other assets ......................................... 9,873,618 6,504,794 2,924,375
-------------- -------------- --------------
Total assets .................................. $67,463,468 $46,894,163 $22,174,896
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Debt ............................................... $51,554,991 $35,987,401 $17,824,007
Accounts payable and accrued expenses .............. 3,924,998 3,132,170 1,117,930
Deferred income taxes .............................. 2,744,909 1,506,271 704,304
Other liabilities .................................. 2,617,322 1,876,806 385,241
-------------- -------------- --------------
Total liabilities ............................. 60,842,220 42,502,648 20,031,482
-------------- -------------- --------------
Commitment and contingencies
Stockholders' equity
Preferred stock, par value $.001
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 .................................. 5,287,228 3,057,495 809,394
-------------- -------------- --------------
7,221,280 4,991,547 2,143,414
Less note receivable ............................... 600,032 600,032 --
-------------- -------------- --------------
Total stockholders' equity .................... 6,621,248 4,391,515 2,143,414
-------------- -------------- --------------
Total liabilities and stockholders' equity .... $67,463,468 $46,894,163 $22,174,896
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
December 31, 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 ...... $ 8,232,594 $3,918,843 $ 9,005,193 $1,442,961 $ 110,378
Interest and fees ...................... 2,480,910 1,527,115 3,350,716 4,057,643 2,366,366
Other income ........................... 192,287 55,785 22,824 143,473 155,923
------------- ------------- ------------- ------------- -----------
Total revenues .................... 10,905,791 5,501,743 12,378,733 5,644,077 2,632,667
------------- ------------- ------------- ------------- -----------
Expenses
Interest ............................... 2,150,843 1,115,692 2,667,858 1,213,111 628,240
Provision for credit losses ............ 400,000 291,751 681,228 165,143 47,692
Payroll and related costs .............. 521,049 310,524 1,203,260 995,215 411,048
Sales and marketing .................... 2,846,537 1,060,468 2,685,173 1,510,227 660,755
General and administrative ............. 1,447,952 718,683 2,020,551 866,478 550,792
------------- ------------- ------------- ------------- -----------
Total expenses .................... 7,366,381 3,497,118 9,258,070 4,750,174 2,298,527
------------- ------------- ------------- ------------- -----------
Income before income taxes and cumulative
effect of accounting changes .............. 3,539,410 2,004,625 3,120,663 893,903 334,140
Income taxes ................................ 1,239,082 701,619 801,967 312,866 197,563
------------- ------------- ------------- ------------- -----------
Income before cumulative effect of accounting
change .................................... 2,300,328 1,303,006 2,318,696 581,037 136,577
Cumulative effect of accounting change on
prior years ............................... -- -- -- -- (51,933)
------------- ------------- ------------- ------------- -----------
Net income .................................. $ 2,300,328 $1,303,006 $ 2,318,696 $ 581,037 $ 84,644
============= ============= ============= ============= ===========
Earnings per share
Income before cumulative
effect of accounting change .............. $ .93 $ .58 $ 1.01 $ .27 $ .06
Cumulative effect of accounting change on
prior years .............................. -- -- -- -- (.02)
------------- ------------- ------------- ------------- -----------
Net income per share ........................ $ .93 $ .58 $ 1.01 $ .27 $ .04
============= ============= ============= ============= ===========
Weighted average number of shares
outstanding ............................... 2,468,045 2,240,660 2,296,913 2,128,154 2,127,263
============= ============= ============= ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional Total
Number of Paid-In Retained Note Stockholders'
Shares Amount Capital Earnings Receivable Equity
----------- --------- ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1993 .......... 2,115,018 $2,115 $1,323,350 $ 143,713 $ -- $1,469,178
Public offering ................ 12,525 12 7,241 -- -- 7,253
Conversion of subordinated
debentures .................... 611 1 1,301 -- -- 1,302
Net income ..................... -- -- -- 84,644 -- 84,644
----------- --------- ------------- ------------- ------------ ---------------
BALANCE, June 30, 1994 ......... 2,128,154 2,128 1,331,892 228,357 -- 1,562,377
Net income ..................... -- -- -- 581,037 -- 581,037
----------- --------- ------------- ------------- ------------ ---------------
BALANCE, June 30, 1995 ......... 2,128,154 2,128 1,331,892 809,394 -- 2,143,414
Options exercised .............. 225,012 225 599,807 -- -- 600,032
Note receivable on options
exercised ..................... (600,032) (600,032)
Cash dividends ($.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 (600,032) 4,391,515
Cash dividend ($.03 per share)
(unaudited) ................... -- -- -- (70,595) -- (70,595)
Net income (unaudited) ......... -- -- -- 2,300,328 -- 2,300,328
----------- --------- ------------- ------------- ------------ ---------------
BALANCE, December 31, 1996
(unaudited) ................... 2,353,166 $2,353 $1,931,699 $5,287,228 $(600,032) $6,621,248
=========== ========= ============= ============= ============ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
------------------------------ --------------------------------------------
1996 1995 1996 1995 1994
------------- ------------- ------------- ------------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income ............................. $ 2,300,328 $ 1,303,006 $ 2,318,696 $ 581,037 $ 84,644
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities
Gain on sales of loans/leases ....... (8,198,414) (3,918,843) (8,969,880) (1,442,961) (110,378)
Amortization of origination fees and
costs ............................. 165,773 149,357 305,136 528,554 529,573
Amortization of deferred servicing
rights ............................ 151,031 5,389 69,489 -- --
Provision for credit losses ......... 400,000 291,751 681,228 165,143 47,692
Accounts written off ................ (58,335) (46,492) (129,063) (87,885) (10,838)
Depreciation and amortization of
property and equipment ............ 223,821 135,111 318,493 177,632 116,007
Amortization of financing and
organization costs ................ 285,441 233,262 505,012 436,260 190,012
(Increase) decrease in accrued
interest and fees on loan and lease
receivables ....................... (684,226) (70,529) (268,010) 119,407 (129,751)
Decrease (increase) in other
receivables ....................... (9,634) 626,134 683,797 (328,081) (444,321)
(Increase) in prepaid expenses ...... (921,892) (372,481) (747,114) (241,164) (133,721)
Decrease (increase) in other assets . 129,177 109 332,009 (117,992) (253,668)
Increase in accounts payable and
accrued expenses .................. 792,828 1,178,228 2,014,240 328,022 488,350
Increase (decrease) in deferred
income taxes ...................... 1,238,638 (128,435) 801,967 285,791 247,636
Increase in other liabilities ....... 740,516 507,759 1,491,565 316,868 39,262
------------- ------------- ------------- ------------- -----------
Net cash (used in) provided by operating
activities ............................. (3,444,978) (106,674) (592,435) 720,631 660,499
============= ============= ============= ============= ===========
</TABLE>
F-7
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
December 31, 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 .. $(53,750,073) $ 20,967,495) $(60,472,812) $(15,408,775) $(6,674,527)
Loans repurchased ............ -- -- -- -- (21,393)
Loan and lease payments
received ................... 1,594,235 758,136 4,549,979 3,065,676 1,084,159
Proceeds of loans and leases
sold ....................... 40,000,000 9,068,162 40,627,246 8,747,265 1,607,233
Purchase of property and
equipment .................. (530,356) (196,188) (1,022,926) (382,154) (274,837)
Decrease in securitization
gain receivable ............ -- 29,564 58,693 9,958 --
Principal receipts on
investments ................ 36,287 11,784 33,307 3,567 --
Initial overcollateralization
of loans ................... (1,200,000) -- -- -- --
-------------- -------------- --------------- -------------- ---------------
Net cash (used) in
investing activities .. (13,849,907) (11,296,037) (16,226,513) (3,964,463) (4,279,365)
-------------- -------------- --------------- -------------- ---------------
Cash flows from financing
activities
Financing costs incurred ..... (512,457) (297,831) (662,950) (483,732) (597,167)
Net proceeds of (principal
payments on) revolving lines
of credit .................. 3,961,041 2,500,000 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 ............... (70,595) -- (70,595) -- --
Principal payments on note
payable, other ............. (18,457) (2,912) (5,606) (4,814) (1,652)
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 .... 14,609,499 8,186,981 19,687,982 12,049,581 6,107,478
Principal payments on
subordinated debentures .... (2,984,493) (1,240,800) (3,867,447) (1,420,432) (262,102)
-------------- -------------- --------------- -------------- ---------------
Net cash provided by
financing activities .. 14,984,538 9,145,438 17,429,849 7,895,617 3,549,957
-------------- -------------- --------------- -------------- ---------------
Net increase (decrease)
in cash and cash
equivalents ........... $ (2,310,317) $ (2,257,273) $ 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 ................ $ 3,034,952 $ 2,477,095 $ 5,345,269 $ 4,734,368 $ 82,583
-------------- -------------- --------------- -------------- ---------------
Supplemental disclosures
of cash flow
information Cash paid
during the year for:
Interest ........... $ 1,156,639 $ 474,607 $ 1,183,745 $ 706,506 $ 510,916
-------------- -------------- --------------- -------------- ---------------
Income taxes ....... $ -- $ 78,475 $ 78,475 $ 8,250 $ 12,364
-------------- -------------- --------------- -------------- ---------------
</TABLE>
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
-------------------------------- ---------------------------------------------------
1996 1995 1996 1995 1994
-------------- -------------- --------------- -------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Noncash transactions recorded in
connection with the sale of and
foreclosure on loans receivable
Increase in other receivables,
securitization gains ....... $ 8,793,425 $ 10,662,924 $ 10,595,960 $ 3,271,770 $ --
Increase in other assets
Investment, held to
maturity .............. -- 1,261,285 2,332,247 684,380 --
Foreclosed real estate
held for sale ......... 134,280 -- 111,890 448,801 --
Other holdings held for
sale .................. 73,442 -- 308,933 -- --
Transfer from loans and
leases, other ......... 250,380 -- (62,085) -- --
Mortgage servicing rights 3,000,201 -- 1,165,000 -- --
Increase in fixed assets -- 51,425 -- -- --
-------------- -------------- --------------- -------------- ---------------
$ 12,251,728 $ 11,975,634 $ 14,451,945 $ 4,404,951 $ --
</TABLE>
- ------
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.
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF BUSINESS
The accompanying consolidated financial statements include 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.
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.
At December 31, 1996, servicing rights include $1,287,434 on prior
securitizations. These additional servicing rights were recognized as the
securitizations seasoned and the supporting information was available to
estimate such servicing rights.
F-9
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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.
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 six months ending December
31, 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 six months ended December 31,
1995.
F-10
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 December 31,
1996 and for the six month periods ended December 31, 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.
2. LOAN AND LEASE RECEIVABLES
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1996 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Real estate secured loans ............................. $19,075,604 $12,960,229 $4,761,778
Leases (net of unearned income of $1,626,368,
$1,136,621 and $557,880) ............................. 6,740,299 4,393,713 2,034,981
Other loans ........................................... 79,903 109,726 1,134,742
Unamortized origination costs/fees .................... 1,549,839 868,934 892,713
-------------- -------------- -------------
27,445,645 18,332,602 8,824,214
Less allowance for credit losses ...................... 1,049,089 707,424 155,258
-------------- -------------- -------------
Loan and lease receivables, net ....................... $26,396,556 $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.
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 ($2,798,496 at December 31, 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 December 31, 1996, the uncollected balance of receivables
securitized was approximately $77,600,000. At June 30, 1996, the uncollected
balance of receivables securitized was approximately $42,100,000.
At December 31, 1996, the accrual of interest income was suspended on real
estate secured loans of $329,904. 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.
F-11
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
2. LOAN AND LEASE RECEIVABLES - (Continued)
At June 30, 1996, the contractual maturities of loan and lease receivables
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter
------------- ------------- ------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Real estate secured loans $1,175,085 $ 369,635 $ 422,257 $422,529 $477,495 $10,093,228
Leases ................... 1,785,696 1,280,863 767,481 415,126 144,547 --
Other loans .............. 23,921 28,184 32,847 19,660 5,114 --
Unamortized organization
costs/fees .............. 614,865 132,547 70,126 34,644 13,712 3,040
------------- ------------- ------------- ----------- ---------- -------------
Total loans receivable ... $3,599,567 $1,811,229 $1,292,711 $891,959 $640,868 $10,096,268
============= ============= ============= =========== ========== =============
</TABLE>
<TABLE>
<CAPTION>
Total
-------------
<S> <C>
Real estate secured loans $12,960,229
Leases ................... 4,393,713
Other loans .............. 109,726
Unamortized organization
costs/fees .............. 868,934
-------------
Total loans receivable ... $18,332,602
=============
</TABLE>
3. ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
<S> <C>
Balance, July 1, 1993 .................................... $ 41,146
Provision for credit losses .............................. 47,692
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 .............................. 400,000
Accounts written off .................................... (58,335)
------------
Balance, December 31, 1996 ............................... $1,049,089
============
</TABLE>
4. OTHER RECEIVABLES
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1996 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Sales of loans ....... $ 230,781 $ 86,090 $ 415,521
Home equity loan fees 38,813 121,874 506,236
Excess spread ........ 22,241,099 13,447,674 2,969,812
Other ................ 568,100 434,904 345,503
-------------- ------------- ------------
$23,078,793 $14,090,542 $4,237,072
============== ============= ============
</TABLE>
F-12
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1996 1996 1995
-------------- ------------ -----------
<S> <C> <C> <C>
Computer equipment and software ............... $1,684,165 $1,296,769 $ 754,732
Office furniture and equipment ................ 938,110 803,445 393,423
Leasehold improvements ........................ 179,835 171,542 49,999
-------------- ------------ -----------
2,802,110 2,271,756 1,198,154
-------------- ------------ -----------
Less accumulated depreciation and amortization 1,042,680 818,861 510,476
-------------- ------------ -----------
$1,759,430 $1,452,895 $ 687,678
============== ============ ===========
</TABLE>
6. OTHER ASSETS
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1996 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Deposits ............................................. $ 266,582 $ 296,582 $ 113,483
Financing costs, debt offerings, net of accumulated
amortization of $1,356,548, $1,074,212 and $581,324 . 1,368,576 1,138,455 968,393
Investments, held to maturity (mature in September
2004 through April 2011) ............................ 2,798,496 2,834,783 680,813
Foreclosed property held for sale .................... 689,780 607,905 761,523
Servicing rights ..................................... 4,236,681 1,387,511 --
Other ................................................ 513,503 239,558 400,163
-------------- ------------ ------------
$9,873,618 $6,504,794 $2,924,375
============== ============ ============
</TABLE>
7. DEBT
<TABLE>
<CAPTION>
December 31, 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. ........................................... $ 1,269,721 $ 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. 43,975,764 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. ............ 6,309,506 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. .................... -- 18,457 24,063
-------------- -------------- --------------
$51,554,991 $35,987,401 $17,824,007
============== ============== ==============
</TABLE>
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.
F-13
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
7. DEBT - (Continued)
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 December 31, 1996, the Company
has available unused revolving lines of credit of $25,000,000, $7,500,000 and
$15,000,000. The lines expire in March 1997, May, 1998 and December, 1999,
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 PREFERRED STOCK
On May 31, 1996, the stockholders approved an amended and restated
Certificate of Incorporation which increased the 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.
9. STOCK OPTIONS
On May 31, 1996, the stockholders approved a non-employee 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 December 31, 1996, 25,000 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 ............................... 20,000 17.75
Options exercised ............................. -- --
----------- --------------
Options outstanding, December 31, 1996 ........ 110,000 $5.00-$17.75
=========== ==============
</TABLE>
F-14
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
9. STOCK OPTIONS - (Continued)
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
December 31, 1996, 78,988 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
----------- --------------
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 ...................... 5,000 17.75
Options exercised .................... -- --
----------- --------------
Options outstanding, December 31, 1996 71,000 $2.67-$17.75
=========== ==============
</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.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its employee stock option plan. Accordingly, no compensation
cost has been recognized. Had compensation cost for the Company's employee
stock option plan been determined based on the fair value at the grant date
for awards under the plan consistent with the method of FASB Statement 123,
the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Six months Six months Year
ended ended ended
December 31, December 31, June 30,
1996 1995 1996
-------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net income
As reported ..... $2,300,328 $1,303,006 $2,318,696
Pro forma ....... 2,250,078 1,239,218 2,254,908
Earnings per shares
As reported ..... .93 .58 1.01
Pro forma ....... .91 .55 .98
</TABLE>
The Company intends to amend its employee stock option plan to allow for
the granting of 150,500 options to certain officers and employees upon the
successful completion of a public offering.
F-15
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
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
----------- -----------
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>
Six Months
Ended
December 31, Year Ended June 30,
1996 1996 1995
-------------- ------------- -----------
<S> <C> <C> <C>
Deferred income tax assets
Allowance for credit losses ............... $ 425,930 $ 287,214 $ 62,568
Net operating loss carryforwards .......... 780,821 461,954 126,435
Loan and lease receivable ................. 68,058 68,058 --
Accrued expenses .......................... -- 246,500 --
-------------- ------------- -----------
1,274,809 1,063,726 189,003
Less valuation allowance .................. 148,500 148,500 126,435
-------------- ------------- -----------
1,126,309 915,226 62,568
-------------- ------------- -----------
Deferred income tax liabilities
Loan and lease origination costs/fees, net $ 526,946 $ 368,849 $365,679
Book over tax basis of property and
equipment .............................. 131,751 131,751 54,965
Other receivables ......................... 1,866,010 1,548,423 346,228
Servicing rights .......................... 1,346,511 372,474 --
-------------- ------------- -----------
3,871,218 2,421,497 766,872
-------------- ------------- -----------
Net deferred income tax liabilities ......... $2,744,909 $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.
F-16
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
10. INCOME TAXES - (Continued)
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>
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 AND CONTINGENCIES
COMMITMENT
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 $279,988 and $140,347 for the six months ended December 31,
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 December 31, 1996 approximately $65,000 of income is subject to this
provision. The actual amount of the fee refunded during the six months ended
December 31, 1996 which was recorded as income prior to July 1, 1996 was
$17,195. 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.
As of December 31, 1996, the lawsuit was settled for an immaterial amount.
F-17
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
No market exists for certain of the Company's assets and liabilities,
therefore, fair value estimates are based on 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>
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.
F-18
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
13. HEDGING TRANSACTIONS
The Company regularly securitizes and sells fixed rate 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.
At December 31, 1996, the Company sold short $30,000,000 of U.S. Treasury
securities due June 30, 2000 to settle on March 31, 1997. The deferred loss
at December 31, 1996 was approximately $221,000.
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 six months ended December 31, 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 ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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-19
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information as of December 31, 1996 and for the
Six Months Ended December 31, 1996 and 1995 is unaudited)
15. RECENT ACCOUNTING PRONOUNCEMENTS
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. 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 require ments 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-20
<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, even when accompanied by an appropriate Prospectus Supplement, does
not constitute an offer to sell or solicitation of any offer to buy the
Subordinated Debentures 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 Subordinated Debentures 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........................................3
Prospectus Summary...........................................4
Highlights of Terms of Subordinated
Debentures Offered........................................11
Risk Factors................................................13
The Company.................................................22
Use of Proceeds.............................................22
Description of the Subordinated Debentures
and the Indenture........................................23
Selected Consolidated Financial Data........................34
Management's Discussion and Analysis of
Financial Condition and Results of Operations............36
Business....................................................55
Management..................................................72
Certain Relationships and Related Transactions..............83
Principal Stockholders......................................85
Market for Common Stock and Related
Stockholder Matters......................................87
Plan of Distribution........................................88
Legal Matters...............................................88
Experts.....................................................88
Index to Consolidated Financial Statements.................F-1
Consolidated Financial Statements..........................F-2
==============================================================================
<PAGE>
===============================================================================
Subordinated Investment Notes
Adjustable Rate Subordinated
Money Market Notes
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
[LOGO]
PROSPECTUS
________, 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 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 Investment Notes and the Money Market
Investment Accounts, other than underwriting discounts and commissions, which
ABFS does not anticipate paying:
II-1
<PAGE>
SEC Registration Fee*.............................. $ 37,879
NASD Filing Fee.................................... 0
Printing, Engraving and Mailing ................... 30,000
Legal Fees and Expenses............................ 20,000
Accounting Fees and Expenses....................... 15,000
Blue Sky Fees and Expenses......................... 10,000
Miscellaneous...................................... 2,987,121
----------
TOTAL................................... $3,100,000
==========
- ----------
* 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 December
31, 1996 (unaudited)
Consolidated statements of operations for the years ended June 30,
1996, 1995 and 1994 and the six months ended December 31, 1996
and 1995 (unaudited)
Consolidated statements of stockholders= equity for the years ended
June 30, 1996, 1995 and 1994 and the six months
II-2
<PAGE>
ended December 31, 1996 (unaudited)
Consolidated statements of cash flows for the years ended June 30,
1996, 1995 and 1994 and the six months ended December 31, 1996
and 1995 (unaudited)
Notes to Consolidated Financial Statements
(b) Exhibits:
Regulation S-B
Exhibit Number Description
-------------- -----------
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference from Exhibit 3.1 of
ABFS' Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1996 filed on September 27,
1996, File No. 0-22472 (the "1996 Form 10-KSB")).
3.2 Bylaws of ABFS (Incorporated by reference from
Exhibit 3.2 of the Registration Statement on Form
SB-2 filed December 27, 1996, Registration Number
333-18919 (the "1997 Form SB-2")).
4.1 Form of Unsecured Investment Note (Incorporated
by reference from Exhibit 4.1 of Amendment No. 1
to the Registration Statement on Form SB-2 filed
April 29, 1994, Registration Number 33-76390 (the
"Form SB-2")).
4.2 Form of Unsecured Investment Note issued pursuant
to Indenture with First Trust, National
Association, a national banking association.
(Incorporated by reference from Exhibit 4.5 of
Amendment No. One to the Registration Statement
on Form SB-2 filed on December 14, 1995,
Registration Number 33-98636 (the "1996 Form
SB-2")).
4.3 Form of Indenture by and between ABFS and First
Trust, National Association, a national banking
association (Incorporated by reference from
Exhibit 4.6 of the Registration Statement on Form
SB-2 filed on October 26, 1995, Registration
Number 33-98636).
4.4 Form of Indenture by and between ABFS and First
Trust, National Association, a national banking
association.
4.5 Form of unsecured Investment Note.
5 Opinion of Blank Rome Comisky & McCauley.*
- ---------
* To be filed by Amendment
II-3
<PAGE>
Regulation S-B
Exhibit Number Description
-------------- -----------
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
(Incorporated by reference from Exhibit 10.2 of
the 1997 Form SB-2).
10.3 Stock Option Award Agreement (Incorporated by
reference from Exhibit 10.1 of the Registration
Statement on Form S-11 filed on February 26,
1993, Registration No. 33-59042 (the "Form S-11")).
10.4 Line of Credit Agreement by and between American
Business Credit, Inc. and Eagle National Bank
(Incorporated by reference from Exhibit 10.4 of
Amendment No. 1 to the Registration Statement on
Form SB-2 filed on April 29, 1993, Registration
No. 33-59042 (the "1993 Form SB-2")).
10.5 Agreement dated April 12, 1993 between American
Business Credit, Inc. and Eagle National Bank
(Incorporated by reference from Exhibit 10.5 of
the 1993 Form SB-2).
10.6 1995 Stock Option Plan for Non-Employee Directors
(Incorporated by reference from Exhibit 10.6 of
the Amendment No. 1 to the 1997 Form SB-2 filed
on February 4, 1997 Registration No. 333-18919
(the "Amendment No. 1 to the 1997 Form SB-2")).
10.7 Form of Option Award Agreement for Non-Employee
Directors Plan for Formula Awards (Incorporated
by reference from Exhibit 10.13 of the 1996 Form
10-KSB).
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 Exhibit 10.9 of
the Registration Statement on Form SB-2 filed
March 15, 1994, File No. 33-76390).
II-4
<PAGE>
Regulation S-B
Exhibit Number Description
-------------- -----------
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 of ABFS' Annual
Report on Form 10-KSB for the fiscal year ended
June 30, 1995 (the "1995 Form 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 of the 1995 Form
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 of the 1995 Form 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 of the 1995 Form 10-KSB).
10.14 Promissory Note of Anthony J. Santilli, Jr. and
Stock Pledge Agreement dated September 29, 1995
(Incorporated by reference from Exhibit 10.14 of
the 1996 Form SB-2).
10.15 Form of Employment Agreement with Anthony J.
Santilli, Jr., Beverly Santilli and Jeffrey M.
Ruben (Incorporated by reference from Exhibit
10.15 of the Amendment No. 1 to the 1997 Form
SB-2).
10.16 Management Incentive Plan (Incorporated by
reference from Exhibit 10.16 of the 1997 Form
SB-2).
10.17 Loan and Security Agreement dated December 12,
1996 between American Business Credit, Inc. and
Finova Capital Corporation (Incorporated by
reference from Exhibit 10.17 of the 1997 Form
SB-2).
10.18 Form of Option Award Agreement for Non-Employee
Directors Plan for Non-Formula Awards
(Incorporated by reference from Exhibit 10.18 of
the Amendment No. 1 to the 1997 Form SB-2).
II-5
<PAGE>
Regulation S-B
Exhibit Number Description
-------------- -----------
10.19 Form of Pooling and Servicing Agreement related
to the Company's loan securitizations
(Incorporated by reference from Exhibit 4.1 of
ABFS' Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1995 (the "March 31, 1995
Form 10-QSB")).
10.20 Form of Sales and Contribution Agreement related
to the Company's loan securitizations
(Incorporated by reference from Exhibit 4.1 of
the March 31, 1995 Form 10-QSB).
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 (Incorporated by
reference from Exhibit 21 of ABFS' Amended Annual
Report on Form 10-KSB/A, for the fiscal year
ended June 30, 1996 filed on February 27, 1997,
File No. 000-22472).
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.
24.1 Power of attorney (included on signature page).
25 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939 on Form T-1.
27 Financial Data Schedule (Incorporated by
reference from Exhibit 27 of the Amendment No. 1
to the 1997 Form SB-2).
99.1 Form of Prospectus Supplement.*
99.2 Advertising Materials.*
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-B for a Registration Statement on Form SB-2.
- ----------
* To be filed by Amendment
II-6
<PAGE>
Item 28. Undertakings.
(a) As to Rule 415.
The small business issuer will:
(1) File, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together,
represent a fundamental change in the
information in the registration statement;
and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new
registration statement of the securities offered, and
the offering of the securities at that time to be the
initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold
at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer 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 small business issuer 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.
(c) The small business issuer hereby will:
(1) For determining any liability under the Securities
Act, treat 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
II-7
<PAGE>
filed by the small business issuer under Rule
424(b)(1), or (4) or 497(h) under the Securities Act
as part of this registration statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities
Act, treat each post-effective amendment that
contains a form of prospectus as a new registration
statement for the securities offered in the
registration statement, and that offering of the
securities at that time as the initial bona fide
offering of those securities.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, the City of
Philadelphia, Commonwealth of Pennsylvania on March 27, 1997.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: March 27, 1997 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 was signed 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, March 27, 1997
------------------------------------- Chief Operating Officer, Treasurer and --------------
Anthony J. Santilli, Jr. Director (Principal Executive and Operating
Officer)
/s/ DAVID M. LEVIN Senior Vice President-Finance and Chief March 27, 1997
------------------------------------- Financial Officer (Principal Financial and --------------
David M. Levin Accounting Officer)
/s/ LEONARD BECKER Director March 27, 1997
------------------------------------- --------------
Leonard Becker
/s/ RICHARD KAUFMAN Director March 27, 1997
------------------------------------- --------------
Richard Kaufman
/s/ MICHAEL DELUCA Director March 27, 1997
------------------------------------- --------------
Michael DeLuca
/s/ HAROLD SUSSMAN Director March 27, 1997
------------------------------------- --------------
Harold Sussman
</TABLE>
<PAGE>
EXHIBIT INDEX
S-B Exhibit Numbers Description
- ------------------- -----------
4.4 Form of Indenture
4.5 Form of Investment Note
5 Opinion of Blank Rome Comisky & McCauley*
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
24.1 Power of Attorney (included on signature page)
25 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 on
Form T-1
99.1 Form of Prospectus Supplement*
99.2 Advertising Materials*
----------
* To be filed by Amendment
<PAGE>
INDENTURE
AMERICAN BUSINESS FINANCIAL SERVICES, INC., as Obligor
$125,000,000.00
Unsecured, Subordinated Investment Notes
and
Unsecured, Adjustable Rate Subordinated Money Market Notes
-----------------------
-----------------------
FIRST TRUST, NATIONAL ASSOCIATION, a national banking association
as Trustee
Dated as of _______________, 1997
-----------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE............................................................1
Section 1.1 Definitions............................................................................1
Section 1.2 Other Definitions......................................................................5
Section 1.3 Incorporation by Reference of Trust Indenture Act......................................5
Section 1.4 Rules of Construction..................................................................5
ARTICLE II. THE SECURITIES.......................................................................................6
Section 2.1 Form and Dating........................................................................6
Section 2.2 Execution and Authentication...........................................................8
Section 2.3 Registrar and Paying Agent.............................................................8
Section 2.4 Paying Agent to Hold Money in Trust....................................................9
Section 2.5 Securityholder Lists...................................................................9
Section 2.6 Transfer and Exchange.................................................................10
Section 2.7 Payment of Principal and Interest; Principal and Interest Rights
Preserved...........................................................................11
Section 2.8 Replacement Securities................................................................13
Section 2.9 Outstanding Securities................................................................13
Section 2.10 Treasury Securities...................................................................13
Section 2.11 Temporary Securities.................................................................14
Section 2.12 Cancellation..........................................................................14
Section 2.13 Defaulted Interest....................................................................14
Section 2.14 Book Entry Registration...............................................................14
Section 2.15 Initial and Monthly Statements........................................................15
ARTICLE III. REDEMPTION.........................................................................................16
Section 3.1 Redemption of Investment Notes........................................................16
Section 3.2 Redemption of Money Market Notes......................................................16
ARTICLE IV. COVENANTS...........................................................................................17
Section 4.1 Payment of Securities.................................................................17
Section 4.2 Maintenance of Office or Agency.......................................................17
Section 4.3 SEC Reports and Other Reports.........................................................18
Section 4.4 Compliance Certificate................................................................19
Section 4.5 Stay, Extension and Usury Laws........................................................19
Section 4.6 Liquidation...........................................................................20
ARTICLE V. SUCCESSORS...........................................................................................20
Section 5.1 When the Company May Merge. etc.......................................................20
Section 5.2 Successor Corporation Substituted.....................................................20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VI. DEFAULTS AND REMEDIES...............................................................................21
Section 6.1 Events of Default.....................................................................21
Section 6.2 Acceleration..........................................................................22
Section 6.3 Other Remedies........................................................................22
Section 6.4 Waiver of Past Defaults...............................................................22
Section 6.5 Control by Majority...................................................................23
Section 6.6 Limitation on Suits...................................................................23
Section 6.7 Rights of Holders to Receive Payment..................................................23
Section 6.8 Collection Suit by Trustee............................................................24
Section 6.9 Trustee May File Proofs of Claim......................................................24
Section 6.10 Priorities............................................................................25
Section 6.11 Undertaking for Costs.................................................................25
ARTICLE VII. TRUSTEE............................................................................................25
Section 7.1 Duties of Trustee.....................................................................25
Section 7.2 Rights of Trustee.....................................................................26
Section 7.3 Individual Rights of Trustee..........................................................27
Section 7.4 Trustee's Disclaimer..................................................................27
Section 7.5 Notice of Defaults....................................................................27
Section 7.6 Reports by Trustee to Holders.........................................................28
Section 7.7 Compensation and Indemnity............................................................28
Section 7.8 Replacement of Trustee................................................................29
Section 7.9 Successor Trustee by Merger, etc......................................................30
Section 7.10 Eligibility; Disqualification.........................................................30
Section 7.11 Preferential Collection of Claims Against Company.....................................30
ARTICLE VIII. DISCHARGE OF INDENTURE............................................................................30
Section 8.1 Termination of Company's Obligations..................................................30
Section 8.2 Application of Trust Money............................................................32
Section 8.3 Repayment to Company..................................................................32
Section 8.4 Reinstatement.........................................................................32
ARTICLE IX. AMENDMENTS..........................................................................................32
Section 9.1 Without Consent of Holders............................................................32
Section 9.2 With Consent of Holders...............................................................33
Section 9.3 Compliance with Trust Indenture Act...................................................35
Section 9.4 Revocation and Effect of Consents.....................................................35
Section 9.5 Notation on or Exchange of Investment Notes...........................................35
Section 9.6 Trustee to Sign Amendments, etc.......................................................36
ARTICLE X. SUBORDINATION........................................................................................36
Section 10.1 Agreement to Subordinate..............................................................36
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 10.2 Liquidation: Dissolution: Bankruptcy..................................................36
Section 10.3 Default of Designed Senior Debt.......................................................37
Section 10.4 When Distribution Must Be Paid Over...................................................38
Section 10.5 Notice by Company.....................................................................38
Section 10.6 Subrogation...........................................................................39
Section 10.7 Relative Rights.......................................................................39
Section 10.8 Subordination May Not Be Impaired by the Company or Holders of
Senior Debt.........................................................................39
Section 10.9 Distribution or Notice to Representative..............................................40
Section 10.10 Rights of Trustee and Paying Agent....................................................41
Section 10.11 Authorization to Effect Subordination.................................................41
Section 10.12 Article Applicable to Paying Agent....................................................41
Section 10.13 Miscellaneous.........................................................................41
ARTICLE XI. MISCELLANEOUS.......................................................................................42
Section 11.1 Trust Indenture Act Controls..........................................................42
Section 11.2 Notices...............................................................................42
Section 11.3 Communication by Holders with Other Holders...........................................43
Section 11.4 Certificate and Opinion as to Conditions Precedent....................................43
Section 11.5 Statements Required in Certificate or Opinion.........................................44
Section 11.6 Rules by Trustee and Agents...........................................................44
Section 11.7 Legal Holidays........................................................................44
Section 11.8 No Recourse Against Others............................................................44
Section 11.9 Duplicate Originals...................................................................45
Section 11.10 Governing Law.........................................................................45
Section 11.11 No Adverse Interpretation of Other Agreements.........................................45
Section 11.12 Successors............................................................................45
Section 11.13 Severability..........................................................................45
Section 11.14 Counterpart Originals.................................................................45
Section 11.15 Table of Contents, Headings, etc......................................................45
</TABLE>
iii
<PAGE>
CROSS-REFERENCE TABLE*
- ----------------------
Trust Indenture
Act Section Indenture Section
----------- -----------------
310(a)(1)............................................................7.10
(a)(2)...............................................................7.10
(a)(3)...............................................................N.A.
(a)(4)...............................................................N.A.
(a)(5)...............................................................N.A.
(b).............................................................7.8; 7.10
(c)..................................................................N.A.
311(a)...............................................................7.11
(b)..................................................................7.11
(c)..................................................................N.A.
312(a)................................................................2.5
(b)..................................................................11.3
(c)..................................................................11.3
313(a)................................................................7.6
(b)(1)...............................................................N.A.
(b)(2)................................................................7.6
(c).............................................................7.6; 11.2
(d)...................................................................7.6
314(a).....................................................4.3; 4.4; 11.2
(b)..................................................................N.A.
(c)(1)...............................................................11.4
(c)(2)...............................................................11.4
(c)(3)...............................................................N.A.
(d)..................................................................N.A.
(e)..................................................................11.5
(f)..................................................................N.A.
315(a).............................................................7.1(b)
(b).............................................................7.5; 11.2
(c)................................................................7.1(a)
(d)................................................................7.1(c)
(e)..................................................................6.11
316(a)(last sentence)................................................2.10
(a)(1)(A).............................................................6.5
(a)(1)(B).............................................................6.4
(a)(2)...............................................................N.A.
(b)...................................................................6.7
(c)..................................................................N.A.
317(a)(1).............................................................6.8
(a)(2)................................................................6.9
(b)...................................................................2.4
318(a)...............................................................11.1
N.A. means not applicable
* This Cross Reference Table is not part of the Indenture
iv
<PAGE>
INDENTURE dated as of ___________, 1997, by American Business Financial
Services, Inc., a Delaware corporation (the "Company"), and First Trust,
National Association, a national banking association, a member of the First Bank
System and a Minnesota Trust Company, as trustee (the "Trustee").
The Company and the Trustee agree as follows for the benefit of each
other and for the equal and ratable benefit of the Holders of the Unsecured,
Subordinated Investment Notes and the Unsecured Adjustable Rate Subordinated
Money Market Notes of the Company issued pursuant to the Company's registration
statement on Form SB-2 declared effective by the Securities and Exchange
Commission on or about ____________, 1997 (collectively, the "Notes"):
ARTICLE I.
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.1 Definitions.
"Account" means the record of beneficial ownership of a Money Market
Note maintained by the Company.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise.
"Agent" means any Registrar, Paying Agent or co-registrar of the Notes.
"Board of Directors" means the Board of Directors of the Company or any
authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Company" means American Business Financial Services, Inc., unless and
until replaced by a successor in accordance with Article V hereof and thereafter
means such successor.
"Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date as of which this
Indenture is originally dated, located at 180 East 5th Street, Saint Paul,
Minnesota 55101, Attention: Mr. Richard Prokosch, Corporate Finance.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means, as of any date, generally accepted accounting principles
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Holder" or "Securityholder" means a Person in whose name a Security is
registered.
"Indebtedness" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or representing the
balance deferred and unpaid of the purchase price of any property (including
capital Lease obligations) or representing any hedging obligations, except any
such balance that constitutes an accrued expense or a trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
hedging obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, and also includes, to the extent not
otherwise included, (a) the Guarantee of items that would be included within
this definition, and (b) liability for items that would arise by operation of a
Person's status as a general partner of a partnership.
"Indenture" means, this Indenture as amended or supplemented from time
to time.
"Interest Accrual Date" means with respect to any Security, the date
the Company accepts funds for the purchase of the Security if such funds are
received by 3:00 p.m. (EDT) on a Business Day, or if such funds are not so
received, on the next Business Day.
"Interest Accrual Period" means, as to each Security, the period from
the later of the Issue Accrual Date of such Security or the day after the last
Payment Date upon which an interest payment was made until the following Payment
Date during which interest accrues on each Security with respect to any Payment
Date.
"Investment Notes" or "Investment Note" means the Company's Unsecured
Subordinated Investment Note(s) issued under this Indenture.
"Issue Date" means, with respect to an Investment Note, the date on
which such Investment Note is first executed, authenticated and delivered and,
with respect to a Money Market Note, the date on which such Money Market Note is
initially registered on the books and records of the Registrar.
2
<PAGE>
"Maturity Date" means, with respect to any Security, the date on which
the principal of such Security becomes due and payable as therein provided.
"Maturity Record Date" means, with respect to any Security, as of 11:59
p.m. of the date fifteen days prior to the Maturity Date or Redemption Date
applicable to such Security.
"Money Market Notes" or "Money Market Note" means the Company's
Unsecured Adjustable Rate, Subordinated Money Market Note(s) issued pursuant to
this Indenture.
"Notes" means the Company's Unsecured, Subordinated Investment Notes
and the Unsecured, Adjustable Rate, Subordinated Money Market Notes issued under
this Indenture.
"Obligations" means any principal, interest (including Post-Petition
Interest), penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Officer" means the Chairman of the Board or principal executive
officer of the Company, the President or operating officer of the Company, the
Chief Financial Officer or principal financial officer of the Company, the
Treasurer, any Assistant Treasurer, Controller or principal officer of the
Company, Secretary or any Vice-President of the Company.
"Officers' Certificate" means a certificate signed by two Officers, one
of whom must be the principal executive officer, principal operating officer,
principal financial officer or principal accounting officer of the Company.
"Opinion of Counsel" means an opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Payment Date" means the last day of each calendar month or such other
date as determined by the Holder and the Company as set forth in the Investment
Note or if such day is not a Business Day, the Business Day immediately
following such day and, with respect to a specific Security, the Maturity Date
or Redemption Date of such Security.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Post-Petition Interest" means interest accruing after the commencement
of any bankruptcy or insolvency case or proceeding with respect to the Company
or any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, at the rate applicable to such Indebtedness,
whether or not such interest is an allowable claim in any such proceeding.
"Redemption Date" has the meaning given in Article III hereof.
3
<PAGE>
"Redemption Price" means, with respect to any Security to be redeemed,
the principal amount of such Security plus the interest accrued but unpaid
during the Interest Accrual Period up to the Redemption Date for such security.
"Regular Record Date" means, with respect to a particular Payment Date,
as of 11:59 p.m. of the date fifteen days prior to such Payment Date.
"Responsible Officer" when used with respect to the Trustee, means any
officer in its Corporate Trust Office, or any other assistant officer of the
Trustee in its Corporate Trust Office customarily performing functions similar
to those performed by the Persons who at the time shall be such officers,
respectively, or to whom any corporate trust matter is referred because of his
or her knowledge of and familiarity with the particular subject.
"SEC" means the Securities and Exchange Commission.
"Securities" means, the Notes issued pursuant to this Indenture.
"Senior Debt" means any Indebtedness (whether outstanding on the date
hereof or thereafter created) incurred by the Company in connection with
borrowings by the Company (including its subsidiaries) from a bank, trust
company, insurance company, any other institutional lender or other entity which
lends funds in connection with its primary business activities whether such
Indebtedness is or is not specifically designated by the Company as being
"Senior Debt" in its defining instruments.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA.
"Total Permanent Disability" means a determination by a physician
chosen by the Company that the Holder of a Security, who was gainfully employed
on a full time basis at the Issue Date of such security is unable to work on a
full time basis during the succeeding twenty-four months. For purposes of this
definition, "working on a full time basis" shall mean working at least forty
hours per week.
"Trustee" means First Trust, National Association, a national banking
association, until a successor replaces it in accordance with the applicable
provisions of this Indenture and thereafter means the successor serving
hereunder.
"U.S. Government Obligations" means direct obligations of the United
States of America, or any agency or instrumentality thereof for the payment of
which the full faith and credit of the United States of America is pledged.
4
<PAGE>
Section 1.2 Other Definitions.
Defined in
Term Section
---- -------
"Bankruptcy Law"................................................6.1
"Custodian".....................................................6.1
"Event of Default"..............................................6.1
"Legal Holiday"................................................11.7
"Paying Agent"..................................................2.3
"Payment Blockage Period"......................................10.3
"Payment Notice"...............................................10.3
"Registrar".....................................................2.3
Section 1.3 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee;
"obligor" on the Securities means the Company or any successor
obligor upon the Securities.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
Section 1.4 Rules of Construction.
Unless the context otherwise requires:
1. a term has the meaning assigned to it;
2. an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
5
<PAGE>
3. references to GAAP, as of any date, shall mean GAAP in
effect in the United States as of such date;
4. "or" is not exclusive,
5. words in the singular include the plural, and in the plural
include the singular; and
6. provisions apply to successive events and transactions.
ARTICLE II.
THE SECURITIES
Section 2.1 Form and Dating.
The Investment Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto, the terms of which are
incorporated in and made a part of this Indenture. The outstanding aggregate
principal amount of Securities outstanding at any time is limited to $125.0
million, provided, however, that the Company and the Trustee may, without the
consent of any Holder, increase such aggregate principal amount of Securities
which may be outstanding at any time. The Securities may have notations, legends
or endorsements required by law, stock exchange rule, agreements to which the
Company is subject or usage. Each Investment Note shall be dated the date of its
authentication. Each Investment Note shall be in such denomination as may be
designated from time to time by the Company but in no event in a denomination
less than $1,000. Each Investment Note shall have a term of not less than three
months and not greater than ten years as shall be designated by the Company from
time to time.
Except as provided in Section 2.14 hereof, each Money Market Note shall
not be evidenced by a promissory note. The record of beneficial ownership of the
Money Market Notes shall be maintained and updated by the Company through the
establishment and maintenance of Accounts. Each Money Market Note shall be in
such denominations as may be designated from time to time by the Company but in
no event in an original denomination less than $2,500. Each Money Market Note
shall have no stated term to maturity and shall be redeemable in increments of
$500 (except in the case of the redemption of the entire account) at the option
of the Holder upon not less than 10 Business Days written notice to the Company
as provided in Article III of this Indenture. Each Money Market Note shall also
be redeemable by the Company upon 30 days written notice to the Holder thereof.
Each Security shall bear interest from and commencing on its Interest
Accrual Date at such rate of interest as the Company shall determine from time
to time; provided, however, that the interest rate will be fixed for the term of
the Investment Notes upon issuance, subject to change upon extension and the
interest rate on the Money Market Notes shall adjust on the first and fifteenth
day of each calendar month provided that such interest rate shall not be less
than the average yield of the 91 day U.S. Treasury Bill for the preceding
eight-week period as published by the Federal Reserve Board.
6
<PAGE>
Interest on an Investment Note with a term of six (6) months or less
will compound daily and be payable at maturity. Interest on an Investment Note
of longer duration will compound daily and the Holder thereof may elect to have
interest paid monthly, on the fifteenth day of each calendar month, quarterly,
on January 15, April 15, July 15 and October 15, semi-annually, on January 15
and July 15, annually, on January 15, or upon maturity. A Holder may change this
election once during the term of the Investment Note.
Interest on a Money Market Note shall compound daily and will be
payable in the form of additional notes. Interest shall be payable on a monthly
basis at the end of each calendar month on any Account with a balance of $1,000
or more. No interest will be paid on any Account for any day during which the
principal balance of such account is less than $1,000.
The Company will give each Holder of an Investment Note (existing as of
the applicable Maturity Record Date) a written notice at least seven days prior
to the Maturity Date of the Investment Note held by such Holder reminding such
Holder of the pending maturity of the Investment Note and noticing the Holder of
the Company's intention to repay, or if the Company does not intend to repay the
Investment Note, reminding the Holder that the automatic extension provision
described in the next paragraph will take effect unless the Holder requests
payment. Such notice shall also state that payment of principal of an Investment
Note be made upon presentation and surrender of such Investment Note and shall
specify the place where such Investment Note may be presented and surrendered
for the making of such payment. If the Company gives notice to a Holder of the
Company's intention to repay an Investment Note at maturity, no interest will
accrue after the Maturity Date for such Investment Note. Otherwise, if a Holder
requests repayment within seven days after the Maturity Date, the Company will
pay interest on the Investment Note during the period after the Investment
Note's Maturity Date and prior to redemption at the lower of (i) the lowest
interest rate then being paid on Investment Notes being offered by the Company
to the general public or (ii) the rate being paid on such Investment Note
immediately prior to its maturity.
If, within seven days after the Maturity Date of an Investment Note, a
Holder of such Investment Note has not demanded repayment of the Investment
Note, and the Company has not noticed its intention to repay such Security at
least seven days prior to maturity, such Investment Note shall be extended
automatically for the same term, and shall be deemed to have been renewed by the
Holder thereof as of the Maturity Date. An Investment Note will continue to
renew as described herein absent some permitted action be either the Holder or
the Company. Interest shall continue to accrue from the first day of such
renewed term. Such Investment Note, as renewed, will continue in all its
provisions, including provisions relating to payment, except that the interest
rate payable during any renewed term shall be the interest rate which is being
offered by the Company on similar Investment Notes as of the renewal date. If
similar Investment Notes are not then being issued, the interest rate upon
renewal will be the rate specified by the Company on or before the Maturity Date
of such Investment Note, or the Investment Note's current rate if no such rate
is specified.
Investment Notes with a duration of greater than six (6) months are
subject to early repayment at the election (a) of the Holder only upon the
occurrence cf a Total Permanent Disability of such Holder (or if such Investment
Note is held jointly by a husband and wife, upon the Total Permanent
7
<PAGE>
Disability of one of such spouses), (b) of a Holder's estate after a Holder's
death or (c) if such Investment Note is held jointly by a husband and wife, of a
Holder upon the death of such Holder's spouse. Otherwise, Holders will have no
right to demand early repayment.
The terms and provisions contained in the Investment Notes shall
constitute, and are hereby expressly made, a part of this Indenture and to the
extent applicable, the Company and the Trustee, by their execution and delivery
of this Indenture, and the Holders by accepting the Investment Notes, expressly
agree to such terms and provisions and to be bound thereby. In case of a
conflict, the provisions of this Indenture shall control.
Section 2.2 Execution and Authentication.
Two Officers of the Company shall sign the Investment Notes for the
Company by manual or facsimile signature. The Company's seal shall be reproduced
on the Investment Notes.
If an Officer whose signature is on an Investment Note no longer holds
that office at the time the Security is authenticated by the Trustee, the
Investment Note shall nevertheless be valid.
An Investment Note shall not be valid until authenticated by the
authorized manual signature of the Trustee. The signature of the Trustee shall
be conclusive evidence that the Investment Note has been authenticated under
this Indenture.
The Trustee shall, upon a written order of the Company signed by two
Officers of the Company, authenticate Investment Notes for original issue. The
aggregate principal amount of Investment Notes outstanding at any time may not
exceed the amount set forth in Section 2.1 hereof. Such order shall specify the
amount of the Investment Notes to be authenticated and the date(s) upon which
the original issue thereof is to be authenticated.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Investment Notes. Unless limited by the terms of such
appointment, an authenticating agent may authenticate an Investment Note
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company.
A Money Market Note shall not be validly issued until a transaction
statement executed by a duly authorized officer of the Company is sent to the
purchaser or transferee thereof and an Account is established by the Company in
the name of such purchaser or transferee.
Section 2.3 Registrar and Paying Agent.
The Company shall maintain (i) an office or agency where Securities may
be presented for registration of transfer or for exchange ("Registrar") and (ii)
an office or agency where Securities may be presented for payment ("Paying
Agent"). The Registrar shall keep a register of the Securities and of their
transfer and exchange. The Company may appoint one or more co-registrars and one
or more
8
<PAGE>
additional paying agents. The term "Registrar" includes any co-registrar, and
the term "Paying Agent" includes any additional paying agent. The Company may
change any Paying Agent or Registrar without prior notice to any Securityholder;
provided that the Company shall promptly notify the Securityholders of the name
and address of any Agent not a party to this Indenture. The Company may act as
Paying Agent and/or Registrar. In the event the Company utilizes any Agent other
than the Company or the Trustee, the Company shall enter into an appropriate
agency agreement with such Agent, which agreement shall incorporate the
provisions of the TIA. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee of the
name and address of any such Agent. If the Company fails to maintain a Registrar
or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as
such, and shall be entitled to appropriate compensation in accordance with
Section 7.7 hereof.
The Company shall be the initial Registrar and Paying Agent. The
Company initially appoints Trustee as agent for service of notices and demands
in connection with the Securities. The Company shall act as Registrar and Paying
Agent until such time as the Company gives the Trustee written notice to the
contrary.
Section 2.4 Paying Agent to Hold Money in Trust.
Prior to each due date of the principal or interest on any Security,
the Company shall deposit with the Paying Agent sufficient funds to pay
principal, premium, if any, and interest then so becoming due and payable in
cash. The Company shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent will hold in trust for the benefit of
Securityholders or the Trustee all money held by the Paying Agent for the
payment of principal or interest on the Securities, and will notify the Trustee
promptly in writing of any default by the Company in making any such payment.
While any such default continues, the Trustee shall require a Paying Agent (if
other than the Company) to pay all money held by it to the Trustee. The Company
at any time may require a Paying Agent to pay all money held by it to the
Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the
Company) shall have no further liability for the money delivered to the Trustee.
If the Company acts as Paying Agent, it shall segregate and hold in a separate
trust fund for the benefit of the Securityholders all money held by it as Paying
Agent. The Company shall notify the Trustee in writing at least 5 days before
the Payment Date of the name and address of the Paying Agent if a person other
than the Company is named Paying Agent at any time or from time to time.
Section 2.5 Securityholder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders and shall otherwise comply with TIA Section 312(a). If the
Trustee is not the Registrar, the Company shall furnish to the Trustee each
quarter during the term of this Indenture and at such other times as the Trustee
may request in writing, a list in such form and as of such date as the Trustee
may reasonably require of the names and addresses of Securityholders, and the
aggregate principal amount outstanding and the Company shall otherwise comply
with TIA Section 312(a).
9
<PAGE>
Section 2.6 Transfer and Exchange.
1. Transfer and Exchange of Investment Notes. The Investment Notes are
not negotiable instruments and cannot be transferred by mere endorsement and
delivery. No rights of record ownership to a Security may be transferred without
the prior written consent of the Company (which consent shall not be
unreasonably withheld). When Investment Notes are presented to the Registrar
with the request:
(x) to register the transfer of the Investment Notes, or
(y) to exchange the Investment Notes for an equal
principal amount of Securities of other authorized
denominations, the Registrar shall register the
transfer or make the exchange as requested if its
requirements for such transactions are met; provided,
however, that the Investment Notes presented or
surrendered for register of transfer or exchange:
(i) shall be duly endorsed or accompanied by a
written instruction of transfer in form
satisfactory to the Registrar duly executed
by the Holder thereof or by his attorney,
duly authorized in writing;
(ii) shall be accompanied by the written consent
of the Company to such transfer or exchange;
and
(iii) if requested by the Company, an opinion of
Holder's counsel (which counsel shall be
reasonably acceptable to the Company) that
the transfer does not violate any applicable
securities laws and\or signature guarantee.
2. Transfer and Exchange of Money Market Notes. The Money Market Notes
are not negotiable instruments and cannot be transferred without the prior
written consent of the Company (which consent shall not be unreasonably
withheld). Requests to Registrar for the transfer of the Accounts maintained for
the benefit of the Holders of the Money Market Notes shall be:
(i) made to the Registrar in writing on a form supplied
by the Company;
(ii) duly executed by the current holder of the Account,
as reflected on the Company's records as of the date
of receipt of such transfer request, or his attorney
duly authorized in writing;
(iii) accompanied by the written consent of the Company to
the transfer; and
(iv) if requested by the Company, an opinion of Holder's
counsel (which counsel shall be reasonably acceptable
to the Company) that the transfer does not violate
any applicable securities laws and/or a signature
guarantee.
10
<PAGE>
Upon transfer of a Money Market Note, the Company will provide the new
registered owner of the Money Market Note with an initial transaction statement
which will evidence the transfer of the account on the Company's records. Such
initial transaction statement shall meet the applicable requirements of Section
8-408 of the Delaware Uniform Commercial Code or any successor provision.
(b) Obligations with respect to Transfers and Exchanges of Securities.
(i) To permit registrations of transfers and
exchanges, the Company shall execute and the
Trustee shall authenticate Investment Notes
at the Registrar's written request.
(ii) The Company may assess service charges to a
Holder for any registration or transfer or
exchange, and the Company may require
payment of a sum sufficient to cover any
transfer tax or similar governmental charge
payable in connection therewith (other than
any such transfer taxes or similar
governmental charge payable upon exchange
pursuant to Section 9.5 hereof).
(iii) All Investment Notes issued upon any
registration of transfer or exchange of
Investment Notes shall be the valid
obligations of the Company, evidencing the
same debt, and entitled to the same benefits
under the Indenture, as the Investment Notes
surrendered upon such registration of
transfer or exchange.
(iv) Prior to due presentment for registration of
transfer of any Investment Note, the
Trustee, any Agent and the Company may deem
and treat the person in whose name any
Investment Note is registered as the
absolute owner of such Investment Note for
the purpose of receiving payment of
principal of and interest on such Investment
Note and for all other purposes whatsoever,
whether such Investment Note is overdue, and
neither the Trustee, any Agent nor the
Company shall be affected by notice to the
contrary.
(v) The Company shall treat the individual or
entity listed on each Account maintained by
the Company as the absolute owner of the
Money Market Note represented thereby for
purposes of receiving payments thereon and
for all other purposes whatsoever.
Section 2.7 Payment of Principal and Interest; Principal and Interest
Rights Preserved.
(a) Each Security shall accrue interest at the rate specified for such
Security and such interest shall be payable on each Payment Date following the
Issue Date for such Security, until the principal thereof becomes due and
payable. Any installment of interest payable on a Security that is caused to be
punctually paid or duly provided for by the Company on the applicable Payment
Date
11
<PAGE>
shall be paid to the Holder in whose name such Security is registered in the
Security Register on the applicable Regular Record Date: (i) with respect to the
Investment Notes outstanding, by check mailed to such Holder's address as it
appears in the Security Register on such Regular Record Date, and (ii) with
respect to the Money Market Notes outstanding, by crediting the Account of each
Holder of a Money Market Note as of the last day of each calendar date month
following the Issue Date with additional Money Market Notes in an amount equal
to the interest due on the balance maintained in the Account during the
preceding calendar month provided that no interest shall accrue for any day in
which the balance in an Account is less than $1,000. The payment of any interest
payable in connection with the payment of any principal payable with respect to
such Security on a Maturity Date or Redemption Date shall be payable as provided
below. Any funds with respect to which such checks were issued which remain
uncollected shall be held in accordance with Section 8.3 hereof. Any installment
of interest not punctually paid or duly provided for shall be payable in the
manner and to the Holders specified in Section 2.13 hereof.
(b) Each of the Investment Notes shall have stated maturities of
principal as shall be indicated in each such Security. The principal of each
Investment Note shall be paid in full no later than the Maturity Date thereof
unless the term of such Security is extended pursuant to Section 2.1 hereof or
such Investment Note becomes due and payable at an earlier date by acceleration,
redemption or otherwise. Interest rates on the Money Market Notes shall be
adjusted by the Company on the first and fifteenth day of each calendar month
and shall not be less than the average yield of the 91 Day U.S. Treasury Bill
over the preceding eight weeks as published by the Federal Reserve Board.
Interest on each Security shall be due and payable on each Payment Date
at the interest rate applicable to such Security for the Interest Accrual Period
related to such Security and such Payment Date.
Notwithstanding any of the foregoing provisions with respect to
payments of principal of and interest on the Securities, if the Securities have
become or been declared due and payable following an Event of Default, then
payments of principal of and interest on the Securities shall be made in
accordance with Article 6 hereof.
The principal payment made on any Investment Note on any Maturity Date
(or the Redemption Price of any Security required to be redeemed), and any
accrued interest thereon, shall be payable only upon presentation and surrender
of such Investment Note on or after the Maturity Date or Redemption Date
therefor at the office or agency of the Company maintained by it for such
purpose pursuant to Section 2.3 hereof or at the office of any Paying Agent for
such Investment Note.
The principal payment made on any Money Market Note on any Redemption
Date and any accrued interest thereon, shall be payable upon no more than 10
Business Days written notice to the Company executed by the Holder or his duly
authorized representative on a form acceptable to the Company at the office or
agency of the Company maintained by it for such purpose pursuant to Section 2.3
hereof or at the office of any Paying Agent for such Money Market Notes. All
such payments made upon redemption of the Money Market Notes shall be made in
U.S. dollars.
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(c) All computations of interest due with respect to any Security shall
be made, unless otherwise specified in the Security, based upon the actual
number of days (e.g., 365 or 366) in the applicable year.
Section 2.8 Replacement Securities.
If any mutilated Investment Note is surrendered to the Company, or the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Investment Note, the Company shall issue and
the Trustee, upon the written order of the Company signed by two Officers of the
Company if required by the Trustee, shall authenticate a replacement Security if
the Trustee's requirements for replacements of Investment Notes are met. If
required by the Trustee or the Company, an unsecured indemnity agreement must be
supplied by the Holder that is sufficient in the judgment of the Trustee and the
Company to protect the Company, the Trustee, any Agent or any authenticating
agent from any loss which any of them may suffer if an Investment Note is
replaced. The Company and the Trustee may charge for their expenses in replacing
an Investment Note.
Every replacement security is an additional obligation of the Company
and shall be entitled to all benefits of this Indenture equally and
proportionately with all other Investment Notes duly issued hereunder.
Section 2.9 Outstanding Securities.
The Securities outstanding at any time are (i) all the Investment Notes
authenticated by the Trustee except for those canceled by it, those delivered to
it for cancellation, and those described in this Section as not outstanding, and
(ii) the outstanding balances of all of the Accounts representing the Money
Market Notes maintained by the Company or such other entity as the Company
designates as Registrar, and those described in this Section as not outstanding.
If an Investment Note is replaced pursuant to Section 2.8 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Investment Note is held by a bona fide purchaser.
If the principal amount of any Security is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
Subject to Section 2.10 hereof, a Security does not cease to be
outstanding because the Company or an Affiliate of the Company holds the
Security.
Section 2.10 Treasury Securities.
In determining whether the holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company or any Affiliate of the Company shall be considered as though not
outstanding, except that for purposes of determining whether the Trustee shall
be protected in relying on any such direction, waiver or consent, only
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Securities that a Responsible Officer of the Trustee actually knows to be so
owned shall be so disregarded.
Section 2.11 Temporary Securities.
Until the Investment Notes are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Investment Notes. Temporary
Investment Notes shall be substantially in the form of Investment Notes but may
have variations that the Company and the Trustee consider appropriate for
temporary Investment Notes. Without unreasonable delay, the Company shall
prepare and the Trustee, upon receipt of the written order of the Company signed
by two Officers of the Company, shall authenticate the Investment Notes in
exchange for temporary Investment Notes. Until such exchange, temporary
Investment Notes shall be entitled to the same rights, benefits and privileges
as Investment Notes.
Section 2.12 Cancellation.
The Company at any time may deliver Investment Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Investment Notes surrendered to them for registration of transfer, exchange or
payment. The Trustee shall cancel all Investment Notes surrendered for
registration of transfer, exchange, payment, replacement or cancellation and
shall destroy cancelled Investment Notes (subject to the record retention
requirement of the Exchange Act) unless the Company directs them to be returned
to it. All cancelled Investment Notes held by the Trustee shall be destroyed and
certification of their destruction delivered to the Company unless by a written
order, signed by one Officer of the Company, the Company shall direct that
cancelled Investment Notes be returned to it.
Section 2.13 Defaulted Interest.
If the Company defaults in a payment of interest on any Security, it
shall pay the defaulted interest plus, to the extent lawful, any interest
payable on the defaulted interest, to the Holder of such Security on a
subsequent special record date, which date shall be at the earliest practicable
date but in all events at least 5 Business Days prior to the payment date, in
each case at the rate provided in the Security. The Company shall, with written
notification to the Trustee, fix or cause to be fixed each such special record
date and payment date. At least 15 days before any such special record date, the
Company (or the Trustee, in the name of and at the expense of the Company) shall
mail to Securityholder(s) a notice that states the special record date, the
related payment date and the amount of such interest to be paid.
Section 2.14 Book Entry Registration.
The Registrar shall maintain a book entry registration and transfer
system through the establishment of Accounts for the benefit of Holders of Money
Market Notes as the sole method of recording the ownership and transfer of
ownership interests in such Money Market Notes. The registered owners of the
Accounts established by the Company in connection with the purchase or
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transfer of the Money Market Notes shall be deemed to be the Holders of the
Money Market Notes outstanding for all purposes under this Indenture. The
Company shall promptly notify the Registrar of the acceptance of a subscriber's
order to purchase a Money Market Note and the Registrar shall credit its
book-entry registration and transfer system to the Account of each Money Market
Note purchaser, the principal amount of such Money Market Note owned of record
by the purchaser. The total amount of any principal and/or interest (which shall
be paid in the form of additional notes) due and payable to book entry owners of
the Accounts maintained by the Company as provided in this Indenture shall be
credited to such Accounts by the Company within the time frames provided in this
Indenture.
The Company shall notify the Trustee no less frequently than bi-weekly
of the establishment of new accounts and the transfer of existing accounts.
Book-entry accounts representing interests in the Money Market Notes
shall not be exchangeable for Money Market Notes in denominations of $2,500 and
any amount in excess thereof and fully registered in the names as the Company
directs unless (a) the Company at its option advises the Trustee in writing of
its election to terminate the book-entry system, or (b) after the occurrence of
any Event of Default, Holders of a majority of the Money Market Notes then
outstanding (as determined based upon the latest quarterly statement provided to
the Trustee pursuant to Section 4.3(d) hereof) advise the Trustee in writing
that the continuation of the book-entry system is no longer in the best
interests of such holders and the Trustee notifies all Holders of the Money
Market Notes of such event and the availability of definitive notes to the
Holders of Money Market Notes requesting such notes in definitive form.
Section 2.15 Initial and Monthly Statements.
(1) The Company shall provide initial transaction statements which meet
the applicable requirements of Section 8-408 of Article 8 of the Delaware
Uniform Commercial Code or any successor section to initial purchasers,
registered owners, registered pledgees, former registered owners and former
pledgees, as required by Section 8-408, within two business days of the
occurrence of the events specified in such section.
(2) The Company shall send each Holder of a Money Market Note (and each
registered pledgee) via U.S. mail not later than ten business days after each
month end in which such Holder had an outstanding balance in such holder's
Account, a statement which indicates as of the calendar month end preceding the
mailing: (a) the balance of such Account; (b) interest credited; (c) withdrawals
made, if any; and (d) the interest rate paid on such Account during the
preceding calendar month. Such monthly statements shall also include, among
other things, the information required by the applicable provisions of Section
8-408 of Article 8 of the Delaware Uniform Commercial Code or any successor
section. The Company shall provide additional statements as the holders or
registered pledgees of the Money Market Notes may reasonably request from time
to time. The Company may charge such holders or pledgees requesting such
statements a fee to cover the charges incurred by the Company in providing such
additional statements.
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ARTICLE III.
REDEMPTION
Section 3.1 Redemption of Investment Notes.
The Company may not redeem, in whole or in part, any Investment Note
prior to the scheduled Maturity Date of the Security. In addition, except as
provided in this Article III, the Company shall have no mandatory redemption or
sinking fund obligations with respect to any of the Investment Notes.
Upon the death or Total Permanent Disability of a Holder of an
Investment Note, the estate of such Holder (in the event of death) or such
Holder (in the event of Total Permanent Disability) may require the Company to
redeem, in whole and not in part, the Investment Note held by such Holder by
delivering to the Company an irrevocable election (a "Redemption Election")
requiring the Company to make such redemption. In the event an Investment Note
is held jointly by two or more Persons, the Company shall not be required to
redeem such Investment Note until each joint holder of such Investment Note has
either died or suffered a Total Permanent Disability. Notwithstanding the
foregoing sentence, if an Investment Note is held jointly by a husband and wife,
such Investment Note shall be subject to the elective redemption provisions of
this Article III upon the death or Total Permanent Disability of either spouse.
Upon receipt of a Redemption Election, the Company shall designate the
Redemption Date for such Investment Note, which Redemption Date shall be no more
than fifteen days after the Company's receipt of the Redemption Election, and
shall pay the Redemption Price to the estate of the Holder or the Holder, as the
case may be, in accordance with the provisions set forth in Section 2.7 hereof.
No interest shall accrue on an Investment Note to be redeemed under this Article
III for any period of time after the Redemption Date for such Investment Note
and after the Company has tendered the Redemption Price to the Estate of the
Holder or to the Holder, as the case may be.
Section 3.2 Redemption of Money Market Notes.
The Company may not redeem, in whole or in part, any Money Market Note
except upon 30 days prior written notice to the Holder thereof listed on the
records maintained by the Company. In addition, except as provided in this
Article III, the Company shall have no mandatory redemption or sinking fund
obligations with respect to any of the Money Market Notes.
Any Holder of a Money Market Note may require the Company to redeem, in
whole and or in part, in increments of $500 (except in the case of redemption of
an entire account), the Money Market Note held by such Holder by delivering to
the Company an irrevocable election (a "Redemption Election") requiring the
Company to make such redemption. Upon receipt of a Redemption Election, the
Company shall designate the Redemption Date for such Money Market Note, which
Redemption Date shall be no more than 10 Business Days after the Company's
receipt of the Redemption Election, and shall pay the Redemption Price to the
Holder or his duly authorized attorney in fact, as the case may be, in
accordance with the provisions set forth in Section 2.7 hereof. No interest
shall accrue on a Money Market Note to be redeemed under this Section 3.2 of
Article III
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for any period of time after the Redemption Date for such Money Market Note and
after the Company has tendered the Redemption Price to the Holder of the Money
Market Note or his duly authorized attorney in fact.
ARTICLE IV.
COVENANTS
Section 4.1 Payment of Securities.
The Company shall duly pay the principal of and interest on each
Security on the dates and in the manner provided in the note evidencing the
Investment Notes, or in the case of the Money Market Notes, as described in the
Prospectus related to such securities. Principal and interest (to the extent
such interest is paid in cash) shall be considered paid on the date due if the
Paying Agent, if other than the Company, holds at least one Business Day before
that date money deposited by the Company in immediately available funds and
designated for and sufficient to pay all principal and interest then due;
provided, however, that principal and interest shall not be considered paid
within the meaning of this Section 4.1 if money is held by the Paying Agent for
the benefit of holders of Senior Debt pursuant to the provisions of Article 10
hereof. The payment of interest on the Money Market Notes shall be paid in the
form of additional notes as provided for in Section 2.1 hereof. Such Paying
Agent shall return to the Company, no later than 5 days following the date of
payment, any money (including accrued interest) that exceeds such amount of
principal and interest paid on the Securities in accordance with this
Section 4.1.
To the extent lawful, the Company shall pay interest (including
Post-Petition Interest in any proceeding under any Bankruptcy Law) on overdue
principal at the rate borne by the Securities, compounded semi-annually; it
shall pay interest (including Post-Petition Interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest (without regard to any
applicable grace period) at the same rate, compounded semi-annually.
Section 4.2 Maintenance of Office or Agency.
The Company will maintain an office or agency (which may be an office
of the Trustee, Registrar or coregistrar) where Securities may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Company will give prompt written notice to the Trustee of the location, and
any change in the location, of such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other office or
agency.
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The Company hereby designates its office at Balapointe Office Centre,
111 Presidential Boulevard, Bala Cynwyd, Pennsylvania as one such office or
agency of the Company in accordance with Section 2.3.
Section 4.3 SEC Reports and Other Reports.
(a) The Company shall file with the Trustee, within 15 days after
filing with the SEC, copies of the annual reports and of the information,
documents, and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) that the Company is required
to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If the
Company is not subject to the requirements of such Section 13 or 15(d) of the
Exchange Act, the Company shall continue to file with the SEC and the Trustee on
the same timely basis such reports, information and other documents as it would
file if it were subject to the requirements of Section 13 or 15(d) of the
Exchange Act. The Company shall also comply with the provisions of TIA Section
314(a). Notwithstanding anything contrary herein the Trustee shall have no duty
to review such documents for purposes of determining compliance with any
provisions of the Indenture.
(b) So long as any of the Securities remain outstanding, the Company
shall cause an annual report to stockholders and each quarterly or other
financial report furnished by it generally to stockholders to be filed with the
Trustee at the time of such mailing or furnishing to stockholders. If the
Company is not required to furnish annual or quarterly reports to its
stockholders pursuant to the Exchange Act, the Company shall cause its financial
statements, including any notes thereto (and, with respect to annual reports, an
auditors' report by the Company's certified independent accountants) and a
"Management's Discussion and Analysis of Financial Condition or Plan of
Operations," comparable to that which would have been required to appear in
annual or quarterly reports filed under Section 13 or 15(d) of the Exchange Act
to be so filed with the Trustee within 120 days after the end of each of the
Company's fiscal years and within 60 days after the end of each of the first
three quarters of each such fiscal year.
(c) Whether or not required by the rules and regulations of the SEC,
the Company shall file a copy of all such information with the SEC for public
availability and make such information available to investors who request it in
writing.
(d) The Company, or such other entity as the Company shall designate as
Registrar for the Money Market Notes as provided in Section 7.3 hereof, shall
provide the Trustee with quarterly management reports which provide the Trustee
with such information regarding the Accounts maintained by the Company for the
benefit of the Holders of the Money Market Notes as the Trustee may reasonably
request which information shall include at least the following: (1) the
outstanding balance of each Account; (2) interest credited or withdrawals made
for the period; (3) the amount of interest paid in the form of additional notes
at each month end and (3) the interest rate paid on each Account maintained by
the Company during the preceding quarterly period.
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Section 4.4 Compliance Certificate.
(a) The Company shall deliver to the Trustee, within 120 days after the
end of each fiscal year (October 28 if the Company has a June 30 year end), an
Officers' Certificate stating that a review of the activities of the Company
during the preceding fiscal year has been made under the supervision of the
signing Officers with a view to determining whether each has kept, observed,
performed and fulfilled its obligations under this Indenture, and further
stating, as to each such Officer signing such certificate, that to the best of
his knowledge each has kept, observed, performed and fulfilled each and every
covenant contained in this Indenture and is not in default in the performance or
observance of any of the terms, provisions and conditions hereof (or, if a
Default or Event of Default shall have occurred, describing all such Defaults or
Events of Default of which he may have knowledge and what action each is taking
or proposes to take with respect thereto) and that to the best of his knowledge
no event has occurred and remains in existence by reason of which payments on
account of the principal of or interest, if any, on the Securities are
prohibited or if such event has occurred, a description of the event and what
action each is taking or proposes to take with respect thereto.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the annual financial
statements delivered pursuant to Section 4.3 above shall be accompanied by a
written statement of the Company's independent public accountants that in making
the examination necessary for certification of such financial statements nothing
has come to their attention which would lead them to believe that the Company
has violated the provisions of Section 4. 1 of this Indenture or, if any such
violation has occurred, specifying the nature and period of existence thereof,
it being understood that such accountants shall not be liable directly or
indirectly to any Person for any failure to obtain knowledge of any such
violation.
(c) The Company will, so long as any of the Securities are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of any Default
or Event of Default, an Officers' Certificate specifying such Default or Event
of Default and what action the Company is taking or proposes to take with
respect thereto.
Section 4.5 Stay, Extension and Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all beneficial advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or
impede the execution of any power herein granted to the Trustee, but will suffer
and permit the execution of every such power as though no such law has been
enacted.
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Section 4.6 Liquidation.
The Board of Directors or the stockholders of the Company may not adopt
a plan of liquidation that provides for, contemplates or the effectuation of
which is preceded by (a) the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company otherwise than substantially
as an entirety (Section 5.1 of this Indenture being the Section hereof which
governs any such sale, lease, conveyance or other disposition substantially as
an entirety) and (b) the distribution of all or substantially all of the
proceeds of such sale, lease, conveyance or other disposition and of the
remaining assets of the Company to the holders of capital stock of the Company,
unless the Company, prior to making any liquidating distribution pursuant to
such plan, makes provision for the satisfaction of the Company's Obligations
hereunder and under the Securities as to the payment of principal and interest.
ARTICLE V.
SUCCESSORS
Section 5.1 When the Company May Merge, etc.
The Company may not consolidate or merge with or into (whether or not
the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to another corporation, Person or
entity unless (a) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (b) the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company) or the entity or Person to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made assumes all the obligations of the Company pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the Securities
and this Indenture; and (c) immediately after such transaction no Default or
Event of Default exists.
The Company shall deliver to the Trustee prior to the consummation of
the proposed transaction an Officers' Certificate to the foregoing effect and an
Opinion of Counsel stating that the proposed transaction and such supplemental
indenture comply with this Indenture. The Trustee shall be entitled to
conclusively rely upon such Officers' Certificate and Opinion of Counsel.
Section 5.2 Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 5.1, the successor corporation formed by such
consolidation or into or with which the Company, is merged or to which such
sale, lease, conveyance or other disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person has been named
as the Company herein; provided, however, that the Company
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shall not be released or discharged from the obligation to pay the principal of
or interest on the Securities.
ARTICLE VI.
DEFAULTS AND REMEDIES
Section 6.1 Events of Default.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest
on a Security when the same becomes due and payable and the
Default continues for a period of 30 days, whether or not such
payment is prohibited by the provisions of Article 10 hereof;
(2) the Company defaults in the payment of the
principal of any Security when the same becomes due and
payable at maturity, upon a required redemption or otherwise,
and the Default continues for a period of 30 days, whether or
not prohibited by the provisions of Article 10 hereof;
(3) the Company fails to observe or perform any
covenant, condition or agreement on the part of the Company to
be observed or performed pursuant to Section 4.6 or 5.1
hereof;
(4) the Company fails to comply with any of its other
agreements or covenants in, or provisions of, the Securities
or this Indenture and the Default continues for the period and
after the notice specified below;
(5) the Company pursuant to or within the meaning of
any Bankruptcy Law (a) commences a voluntary case; (b)
consents to the entry of an order for relief against it in an
involuntary case; (c) consents to the appointment of a
Custodian of it or for all or substantially all of its
property; (d) makes a general assignment for the benefit of
its creditors; or (e) admits in writing its inability to pay
debts as the same become due; or
(6) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that (a) is for relief
against the Company in an involuntary case; (b) appoints a
Custodian of the Company or for all or substantially all of
its property; (c) orders the liquidation of the Company, and
the order or decree remains unstayed and in effect for 120
consecutive days; and
The term "Bankruptcy Law" means title II, U.S. Code or any similar
Federal or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.
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A Default under clause (3) or (4) of Section 6.1 is not an Event of
Default until the Trustee or the Holders of at least a majority in principal
amount of the then outstanding Securities notify the Company of the Default and
the Company does not cure the Default or such Default is not waived within 60
days after receipt of the notice. The notice must specify the Default, demand
that it be remedied and state that the notice is a "Notice of Default."
Section 6.2 Acceleration.
If an Event of Default (other than an Event of Default specified in
clauses (5) or (6) of Section 6.1) occurs and is continuing, the Trustee by
notice to the Company or the Holders of at least a majority in principal amount
of the then outstanding Securities by written notice to the Company and the
Trustee may declare the unpaid principal of and any accrued interest on all the
Securities to be due and payable. Upon such declaration the principal and
interest shall be due and payable immediately; provided, however, that if any
Indebtedness or Obligation is outstanding pursuant to the Senior Debt, upon a
declaration of acceleration by the Holders, all principal and interest under
this Indenture shall be due and payable upon the earlier of (x) the day which is
5 Business Days after the receipt by each of the Company and the holders of
Senior Debt of such written notice of acceleration or (y) the date of
acceleration of any Indebtedness under any Senior Debt. If an Event of Default
specified in clause (5) or (6) of Section 6.1 occurs, such an amount shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder. The Holders of a majority in
principal amount of the then outstanding Securities by written notice to the
Trustee may rescind an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
(except nonpayment of principal or interest that has become due solely because
of the acceleration) have been cured or waived.
Section 6.3 Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal or interest on
the Securities or to enforce the performance of any provision of the Securities
or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
Section 6.4 Waiver of Past Defaults.
Holders of a majority in principal amount of the then outstanding
Securities by notice to the Trustee may waive an existing Default or Event of
Default and its consequences except a continuing Default or Event of Default in
the payment of the principal of or interest on any Security held by a
non-consenting Holder. Upon actual receipt of any such notice of waiver by a
Responsible Officer of the Trustee, such Default shall cease to exist, and any
Event of Default arising therefrom shall be
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deemed to have been cured for every purpose of this Indenture; but no such
waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
Section 6.5 Control by Majority.
The Holders of a majority in principal amount of the then outstanding
Securities may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on it, provided, that indemnification for the Trustee's fees and
expenses, in a form reasonably satisfactory to the Trustee, shall have been
provided. However, the Trustee may refuse to follow any direction that conflicts
with law or this Indenture, that the Trustee determines may be unduly
prejudicial to the rights of other Securityholders, or that may involve the
Trustee in personal liability.
Section 6.6 Limitation on Suits.
A Securityholder may pursue a remedy with respect to this Indenture or
the Securities only if:
(1) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(2) the Holders of at least a majority in principal amount of
the then outstanding Securities make a written request to the Trustee
to pursue the remedy;
(3) such Holder or Holders offer and, if requested, provide to
the Trustee indemnity satisfactory to the Trustee against any loss,
liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer and, if requested, the
provision of indemnity; and
(5) during such 60 day period the Holders of a majority in
principal amount of the then outstanding Securities do not give the
Trustee a direction inconsistent with the request.
A Securityholder may not use this Indenture to prejudice the rights of another
Securityholder or to obtain a preference or priority over another
Securityholder.
Section 6.7 Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, but subject to
Article 10 hereof, the right of any Holder of a Security to receive payment of
principal and interest on the Security, on or after the respective due dates
expressed in the Security, or to bring suit for the enforcement of any such
payment on or after such respective dates, shall not be impaired or affected
without the consent of the Holder.
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Section 6.8 Collection Suit by Trustee.
If an Event of Default specified in Section 6.1 (1) or (2) occurs and
is continuing, the Trustee is authorized to recover judgment in its own name and
as trustee of an express trust against the Company for the whole amount of
principal and interest remaining unpaid on the Securities and interest on
overdue principal and, to the extent lawful, interest and such further amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
Section 6.9 Trustee May File Proofs of Claim.
The Trustee is authorized to file such proofs of claim and other papers
or documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Securityholders allowed in any judicial proceedings relative to the Company (or
any other obligor upon the Securities), its creditors or its property and shall
be entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Securityholder to make such
payments to the Trustee, and in the event that the Trustee shall consent to the
making of such payments directly to the Securityholders, to pay to the Trustee
any amount due to it for the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, and any other amounts due
the Trustee under Section 7.7 hereof. To the extent that the payment of any such
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.7 hereof out
of the estate in any such proceeding, shall be denied for any reason, payment of
the same shall be secured by a lien on, and shall be paid out of, any and all
distributions, dividends, money, securities and other properties which the
Holders of the Securities may be entitled to receive in such proceeding whether
in liquidation or under any plan of reorganization or arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Securityholder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Securityholder in any such proceeding.
If the Trustee does not file a proper claim or proof of debt in the
form required in any such proceeding prior to 30 days before the expiration of
the time to file such claims or proofs, then any holder of Senior Debt shall
have the right to demand, sue for, collect and receive the payments and
distributions in respect of the Securities which are required to be paid or
delivered to the holders of Senior Debt as provided in Article 10 hereof and to
file and prove all claims therefor and to take all such other action in the name
of the Holders or otherwise, as such holder of Senior Debt may determine to be
necessary or appropriate for the enforcement of the provisions of Article 10.
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Section 6.10 Priorities.
If the Trustee collects any money pursuant to this Article, it shall,
subject to the provisions of Article 10 hereof, pay out the money in the
following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.7, including payment of all compensation, expenses and liabilities
incurred, and all advances made, if any, by the Trustee and the costs and
expenses of collection;
Second: to holders of Senior Debt to the extent required by Article 10
hereof;
Third: to Securityholders for amounts due and unpaid on the Securities
for principal and interest, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Securities for principal and
interest, respectively; and
Fourth: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Securityholders.
Section 6.11 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.7, or a suit by Holders of more than 10% in principal
amount of the then outstanding Securities.
ARTICLE VII.
TRUSTEE
Section 7.1 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) The duties of the Trustee shall be determined solely by
the express provisions of this Indenture and the Trustee need perform
only those duties that are specifically set forth
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in this Indenture and no others, and no implied covenants or
obligations shall be read into this Indenture against the Trustee.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon resolutions,
statements, reports, documents, orders, certificates, opinions or other
instruments furnished to the Trustee and conforming to the requirements
of this Indenture. However, in the case of any of the above that are
specifically required to be furnished to the Trustee pursuant to this
Indenture, the Trustee shall examine them to determine whether they
substantially conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liabilities for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (2)
of this Section.
(2) The Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.5.
(d) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to paragraphs
(a), (b) and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or incur any liability. The Trustee may refuse to perform
any duty or exercise any right or power unless it receives indemnity
satisfactory to it against any loss, liability or expense.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
Section 7.2 Rights of Trustee.
(a) The Trustee may conclusively rely upon any document believed by it
to be genuine and to have been signed or presented to it by the proper Person.
The Trustee need not investigate any fact or matter stated in the document. The
Trustee shall have no duty to inquire as to the performance of the Issuers'
covenants in Article 4. In addition, the Trustee shall not be deemed to have
knowledge of any Default or any Event of Default except any Default or Event of
Default of which the Trustee shall have received written notification or
obtained actual knowledge.
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(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel and the written advice of such counsel or any Opinion of Counsel shall
be full and complete authorization and protection from liability in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon.
(c) The Trustee may act through agents, attorneys, custodians or
nominees and shall not be responsible for the misconduct or negligence or the
supervision of any agents, attorneys, custodians or nominees appointed by it
with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(f) The Trustee shall not be deemed to have notice of an Event of
Default for any purpose under this Indenture unless notified of such Event of
Default by the Company, the Paying Agent (if other than the Company) or a Holder
of the Securities.
Section 7.3 Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or an
Affiliate of the Company with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However, the Trustee is
subject to Sections 7.10 and 7.11.
Section 7.4 Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no representation as
to the validity or adequacy of this Indenture or the Securities, it shall not be
accountable for the Company's use of the proceeds from the Securities or any
money paid to the Company or upon the Company's direction under any provision
hereof, it shall not be responsible for the use or application of any money
received by any Paying Agent other than the Trustee and it shall not be
responsible for any statement or recital herein or any statement in the
Securities or any other document in connection with the sale of the Securities
or pursuant to this Indenture other than its certificate of authentication.
Section 7.5 Notice of Defaults.
If a Default or Event of Default occurs and is continuing and if it is
known to a Responsible Officer of the Trustee, the Trustee shall mail to
Securityholders a notice of the Default or Event of Default within 90 days after
it occurs. At least 5 Business Days prior to the mailing of any notice to
Securityholders under this Section 7.5, the Company shall provide the Company
with notice of its
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intent to mail such notice. Except in the case of a Default or Event of Default
in payment on any Security, the Trustee may withhold the notice if and so long
as the Responsible Officers of the Trustee in good faith determines that
withholding the notice would have no material adverse effect on the
Securityholders.
Section 7.6 Reports by Trustee to Holders.
Within 60 days after the end of each fiscal year beginning with the
June 30, 1997 fiscal year, the Trustee shall mail to Securityholders a brief
report dated as of such reporting date that complies with TIA Section 313(a)
(but if no event described in TIA Section 313(a) has occurred within the 12
months preceding the reporting date, no report need be prepared or transmitted).
The Trustee also shall comply with TIA Section 313(b). The Trustee shall also
transmit by mail all reports as required by TIA Section 313(c).
Commencing at the time this Indenture is qualified under the TIA, a
copy of each report mailed to Securityholders under this Section 7.6 (at the
time of its mailing to Securityholders) shall be filed with the SEC and each
stock exchange, if any, on which the Securities are listed. The Company shall
promptly notify the Trustee when the Securities are listed on any stock
exchange.
Section 7.7 Compensation and Indemnity.
The Company shall pay to the Trustee from time to time reasonable
compensation for its acceptance of this Indenture and its performance of the
duties and services required hereunder. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee against any and all losses,
liabilities or expenses incurred by it arising out of or in connection with the
acceptance or administration of its duties under this Indenture, except as set
forth in the second next paragraph. The Trustee shall notify the Company
promptly of any claim for which it may seek indemnity. Failure by the Trustee to
so notify the Company shall not relieve the Company of its obligations
hereunder, except to the extent the Company is prejudiced thereby. The Company
shall defend the claim and the Trustee shall reasonably cooperate in such
defense. The Trustee may have separate counsel and the Company shall pay the
reasonable fees and expenses of such one counsel. The Company need not pay for
any settlement made without its consent, which consent shall not be unreasonably
withheld.
The obligations of the Company under this Section 7.7 shall survive the
satisfaction and discharge of this Indenture.
The Company need not reimburse any expense or indemnify against any
loss or liability incurred by the Trustee through its own negligence or bad
faith.
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To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on the Securities. Such lien shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(5) or (6) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
Section 7.8 Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.8.
The Trustee may resign at any time and be discharged from the trust
hereby created by so notifying the Company. The Holders of a majority in
principal amount of the then outstanding Securities may remove the Trustee by so
notifying the Trustee and the Company in writing. The Company may remove the
Trustee if.
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(3) a Custodian or public officer takes charge of the Trustee
or its property;
(4) the Trustee becomes incapable of acting as Trustee under
this Indenture, or
(5) the Company so elects, provided such replacement Trustee
is qualified and reasonably acceptable.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Securities may appoint
a different successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 30 days after notice
that the Trustee has resigned or has been removed, the Company or the Trustee or
the Holders of at least a majority in principal amount of the then outstanding
Securities may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
If the Trustee after written request by any Securityholder who has been
a Securityholder for at least 6 months fails to comply with Section 7.10, such
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
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A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to all Securityholders. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, provided all sums
owing to the Trustee hereunder have been paid and subject to the lien provided
for in Section 7.7. Notwithstanding replacement of the Trustee pursuant to this
Section 7.8, the Company's obligations under Section 7.7 hereof shall continue
for the benefit of the retiring Trustee.
Section 7.9 Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another corporation,
the successor corporation without any further act shall be the successor
Trustee.
Section 7.10 Eligibility; Disqualification.
There shall at all times be a Trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America or of any state or territory thereof or of the District of Columbia
authorized under such laws to exercise corporate trustee power, shall be subject
to supervision or examination by Federal, state, territorial or District of
Columbia authority and shall have a combined capital and surplus of at least
$500,000 as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1). The Trustee is subject to TIA Section
310(b).
Section 7.11 Preferential Collection of Claims Against Company.
The Trustee is subject to TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE VIII.
DISCHARGE OF INDENTURE
Section 8.1 Termination of Company's Obligations.
This Indenture shall cease to be of further effect (except that the
Company's obligations under Section 7.7 and 8.4, and the Company's, Trustee's
and Paying Agent's obligations under Section 8.3 shall survive) when all
outstanding Investment Notes theretofore authenticated and issued have been
delivered (other than destroyed, lost or stolen Investment Notes which have been
replaced or paid) to the Trustee for cancellation and all outstanding Money
Market Notes redeemed and the Company has
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paid all sums payable by the Company hereunder. In addition, the Company may
terminate all of their obligations under this Indenture if:
(1) the Company irrevocably deposits in trust with the Trustee
or at the option of the Trustee, with a trustee reasonably satisfactory
to the Trustee and the Company under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee, money or
U.S. Government Obligations sufficient (as certified by an independent
public accountant designated by the Company) to pay principal and
interest on the Securities to maturity or redemption, as the case may
be, and to pay all other sums payable by it hereunder, provided that
(i) the trustee of the irrevocable trust shall have been irrevocably
instructed to pay such money or the proceeds of such U.S. Government
Obligations to the Trustee and (ii) the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to the payment of said principal and interest
with respect to the Securities;
(2) the Company delivers to the Trustee an Officers'
Certificate stating that all conditions precedent to satisfaction and
discharge of this Indenture have been complied with; and
(3) no Event of Default or event (including such deposit)
which, with notice or lapse of time, or both, would become an Event of
Default with respect to the Securities shall have occurred and be
continuing on the date of such deposit.
Then, this Indenture shall cease to be of further effect (except as provided in
this paragraph), and the Trustee, on demand of the Company, shall execute proper
instruments acknowledging confirmation of and discharge under this Indenture.
The Company may make the deposit only if Article X hereof does not prohibit such
payment. However, the Company's obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7,
2.8, 4.1, 4.2, 4.3, 7.7, 7.8, 8.3 and 8.4 and the Trustee's and Paying Agent's
obligations in Section 8.3 shall survive until the Securities are no longer
outstanding. Thereafter, only the Company's obligations in Section 7.7 and 8.4
and the Company's, Trustee's and Paying Agent's obligations in Section 8.3 shall
survive.
After such irrevocable deposit made pursuant to this Section 8.1 and
satisfaction of the other conditions set forth herein, the Trustee upon written
request shall acknowledge in writing the discharge of the Company's obligations
under this Indenture except for those surviving obligations specified above.
In order to have money available on a payment date to pay principal or
interest on the Securities, the U.S. Government Obligations shall be payable as
to principal or interest at least one Business Day before such payment date in
such amounts as will provide the necessary money. U.S. Government Obligations
shall not be callable at the issuer's option.
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Section 8.2 Application of Trust Money.
The Trustee or a trustee satisfactory to the Trustee and the Company
shall hold in trust money or U.S. Government Obligations deposited with it
pursuant to Section 8. 1. It shall apply the deposited money and the money from
U.S. Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of principal and interest on the Securities.
Section 8.3 Repayment to Company.
The Trustee and the Paying Agent shall promptly pay to the Company upon
written request any excess money or securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of principal or interest that
remains unclaimed for two years after the date upon which such payment shall
have become due; provided, however, that the Company shall have either caused
notice of such payment to be mailed to each Securityholder entitled thereto no
less than 30 days prior to such repayment or within such period shall have
published such notice in a newspaper of widespread circulation published in the
City of Philadelphia. After payment to the Company, Securityholders entitled to
the money must look to the Company for payment as general creditors unless an
applicable abandoned property law designates another Person, and all liability
of the Trustee and such Paying Agent with respect to such money shall cease.
Section 8.4 Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with Section 8.2 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 8.1 until
such time as the Trustee or Paying Agent is permitted to apply all such money or
U.S. Government Obligations in accordance with Section 8.2; provided, however,
that if the Company has made any payment of interest on or principal of any
Securities because of the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive such
payment, as long as no money is owed to the Trustee by the Company, from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE IX.
AMENDMENTS
Section 9.1 Without Consent of Holders.
The Company and the Trustee may amend this Indenture or the Securities
without the consent of any Securityholder:
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(1) to cure any ambiguity, defect or inconsistency;
(2) to comply with Section 5.1;
(3) to provide for additional uncertificated Securities or
certificated Securities;
(4) to make any change that does not adversely affect the
legal rights hereunder of any Securityholder, including but not limited
to an increase in the aggregate dollar amount of Securities which may
be outstanding under this Indenture;
(5) make any change in the second paragraph of Article 3;
provided, however, that no such change shall adversely affect the
rights of any outstanding Security; or
(6) to comply with any requirements of the SEC in connection
with the qualification of this Indenture under the TIA.
Section 9.2 With Consent of Holders.
The Company and the Trustee may amend this Indenture or the Securities
with the written consent of the Holders of at least a majority in principal
amount of the then outstanding Securities. The Holders of a majority in
principal of the then outstanding Securities may also waive any existing default
or compliance with any provision of this Indenture or the Securities. However,
without the consent of the Holder of each Investment Note affected, an amendment
or waiver under this Section may not (with respect to any Investment Note held
by a nonconsenting Holder):
(1) reduce the principal amount of Investment Notes whose
Holders must consent to an amendment, supplement or waiver;
(2) reduce the rate of or change the time for payment of
interest, including default interest, on any Investment Note;
(3) reduce the principal of or change the fixed maturity of
any Investment Note or alter the redemption provisions or the price at
which the Company shall offer to purchase such Investment Note pursuant
to Section 3.1 of Article III hereof;
(4) make any Investment Note payable in money other than that
stated in the Investment Note;
(5) Modify or eliminate the right of the estate of a Holder or
a Holder to cause the Company to redeem an Investment Note upon the
death or Total Permanent Disability of a Holder pursuant to Article
III; provided, however, that the Company may not modify or eliminate
such right, as it may be in effect on the Issue Date, of any Investment
Note which was issued with such right. After an amendment under this
subsection 9.1(5) becomes
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effective, the Company shall mail to the Holders of each Investment
Note then outstanding a notice briefly describing the amendment.
(6) make any change in Section 6.4 or 6.7 hereof or in this
sentence of this Section 9.2;
(7) make any change in Article X that adversely affects the
rights of any Securityholders; or
(8) waive a Default or Event of Default in the payment of
principal of, or premium, if any, or interest on, or redemption payment
with respect to, any Security (except a rescission of acceleration of
the Investment Notes by the Holders of at least a majority in aggregate
principal amount of the Investment Notes and a waiver of the payment
default that resulted from such acceleration).
Without the consent of each Holder of Money Market Notes affected, an amendment
or waiver under this Section may not (with respect to any Money Market Note held
by a nonconsenting Holder):
(1) reduce the principal amount (other than as a result of
withdrawals made by the Holder) of a Money Market Note whose Holder
must consent to an amendment, supplement or waiver;
(2) reduce the rate of interest paid on the Money Market
Notes, other than interest rate adjustments as provided for in Article
II hereof, or change the time for payment of interest, including
default interest, on any Security;
(3) reduce the principal of (other than as a result of
withdrawals made by the Holder) or alter the redemption provisions or
the price at which the Company shall offer to purchase such Money
Market Note pursuant to Section 3.2 of Article III hereof;
(4) make any Money Market Note payable in money other than
that stated in this Indenture;
(5) make any change in Section 6.4 or 6.7 hereof or in this
sentence of this Section 9.2;
(6) make any change in Article 10 that adversely affects the
rights of any Securityholders; or
(7) waive a Default or Event of Default in the payment of
principal of, or premium, if any, or interest on, or redemption payment
with respect to, any Money Market Note (except a rescission of
acceleration of the Money Market Notes by the Holders of at least a
majority in aggregate principal amount of the Money Market Notes and a
waiver of the payment default that resulted from such acceleration).
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It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment or waiver, but
it shall be sufficient if such consent approves the substance thereof.
After an amendment or waiver under this Section becomes effective, the
Company shall mail to the Holders of each Security affected thereby a notice
briefly describing the amendment or waiver. Any failure of the Company to mail
such notice, or any defect therein, shall not, however, in any way impair or
affect the validity of any such supplemental indenture or waiver. Subject to
Sections 6.4 and 6.7 hereof, the Holders of a majority in principal amount of
the Securities then outstanding may waive compliance in a particular instance by
the Company with any provision of this Indenture or the Securities.
Section 9.3 Compliance with Trust Indenture Act.
If at the time this Indenture shall be qualified under the TIA, every
amendment to this Indenture or the Securities shall be set forth in a
supplemental indenture that complies with the TIA as then in effect.
Section 9.4 Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to it by a
Holder of a Security is a continuing consent by the Holder and every subsequent
Holder of a Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if notation of the consent is not made on
any Security. An amendment or waiver becomes effective in accordance with its
terms and thereafter binds every Securityholder.
The Company may fix a record date for determining which Holders must
consent to such amendment or waivers. If the Company fixes a record date, the
record date shall be fixed at (i) the later of 30 days prior to the first
solicitation of such consent or the date of the most recent list of Holders
furnished to the Trustee prior to such solicitation pursuant to Section 2.5, or
(iii) such other date as the Company shall designate.
Section 9.5 Notation on or Exchange of Investment Notes.
The Trustee may place an appropriate notation about an amendment or
waiver on any Investment Note thereafter authenticated. The Company in exchange
for all Investment Notes may issue and the Trustee shall authenticate new
Investment Notes that reflect the amendment or waiver.
Failure to make the appropriate notation or issue a new Investment Note
shall not affect the validity and effect of such amendment or waiver.
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Section 9.6 Trustee to Sign Amendments, etc.
The Trustee shall sign any amendment or supplemental indenture
authorized pursuant to this Article 9 if, in the Trustee's reasonable
discretion, the amendment does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but need
not, sign it. In signing or refusing to sign such amendment or supplemental
indenture, the Trustee shall be entitled to receive, if requested, an indemnity
reasonably satisfactory to it and to receive and, subject to Section 7.1, shall
be fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel (or written advice of counsel) as conclusive evidence that such
amendment or supplemental indenture is authorized or permitted by this
Indenture, that it is not inconsistent herewith, and that it will be valid and
binding upon the Company in accordance with its terms. The Company may not sign
an amendment or supplemental indenture until its Board of Directors approves it.
ARTICLE X.
SUBORDINATION
Section 10.1 Agreement to Subordinate.
The Company agrees, and each Securityholder by accepting a Security
consents and agrees, that the Indebtedness evidenced by the Securities and the
payment of the principal of and interest on the Securities is subordinated in
right of payment, to the extent and in the manner provided in this Article, to
the prior payment in full, in cash, cash equivalents or otherwise in a manner
satisfactory to the holders of Senior Debt, of all Obligations due in respect of
Senior Debt of the Company whether outstanding on the date hereof or hereafter
incurred, and that the subordination is for the benefit of the holders of Senior
Debt.
For purposes of the Article 10, a payment or distribution on account of
the Securities may consist of cash, property or securities, by set-off or
otherwise, and a payment or distribution on account of any of the Securities
shall include, without limitation, any redemption, purchase or other acquisition
of the Securities.
Section 10.2 Liquidation: Dissolution: Bankruptcy.
(a) Upon any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to creditors upon
(i) any dissolution or winding-up or total or partial liquidation or
reorganization of the Company whether voluntary or involuntary and whether or
not involving insolvency or bankruptcy or (ii) any bankruptcy or insolvency case
or proceeding or any receivership, liquidation, reorganization or other similar
case or proceeding in connection therewith, relative to the Company or to its
assets, (iii) any assignment for the benefit of creditors or any other
marshaling of assets of the Company, all obligations due, or to become due, in
respect of Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt) shall first
interfeasibly be paid in full, or provision shall have been made for such
payment, in cash, cash equivalents or otherwise in a manner satisfactory to the
holders of Senior Debt, before any payment is made on account of the principal
of, premium, if any, or interest
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on the Securities, except that Securityholders may receive securities that are
subordinated to at least the same extent as the Securities are to (x) Senior
Debt and (y) any securities issued in exchange for Senior Debt. Upon any such
dissolution winding-up, liquidation or reorganization, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, to which the Holders of the Securities or the Trustee
under this Indenture would be entitled, except for the provisions hereof, shall
be paid by the Company or by any receiver, trustee in bankruptcy, liquidating
trustee, agent or other Person making such payment or distribution, or by the
Holders of the Securities or by the Trustee under this Indenture if received by
them, directly to the holders of Senior Debt (pro rata to such holders on the
basis of the amounts of Senior Debt held by such holders) or their
Representative or Representatives, or to the trustee or trustees under any
indenture pursuant to which any of such Senior Debt may have been issued, as
their interests may appear, for application to the payment of Senior Debt
remaining unpaid until all such Senior Debt has been indefeasibly paid in full,
or provisions shall have been made for such payment, in cash, cash equivalents
or otherwise in a manner satisfactory to the holders of Senior Debt, after
giving effect to any concurrent payment, distribution or provision therefor to
or for the holders of Senior Debt.
(b) For purposes of this Article X, the words "cash, property or
securities" shall not be deemed to include securities of the Company or any
other corporation provided for by a plan of reorganization or readjustment which
are subordinated, to at least the same extent as the Securities, to the payment
of all Senior Debt then outstanding or to the payment of all securities issued
in exchange therefor to the holders of Senior Debt at the time outstanding. The
consolidation of the Company with, or the merger of the Company with or into,
another corporation or the liquidation or dissolution of the Company following
the conveyance or transfer of its property as an entirety, or substantially as
an entirety, to another corporation upon the terms and conditions provided in
Article 5 shall not be deemed a dissolution, winding-up, liquidation or
reorganization for the purposes of this Section if such other corporation shall,
as part of such consolidation, merger, conveyance or transfer, comply with the
conditions stated in Article V.
Section 10.3 Default of Designed Senior Debt.
(a) In the event and during the continuation of any default in the
payment of principal of (or premium, if any) or interest on any Senior Debt, or
any amount owing from time to time under or in respect of Senior Debt or in the
event that any nonpayment event of default with respect to any Senior Debt shall
have occurred and be continuing and shall have resulted in such Senior Debt
becoming or being declared due and payable prior to the date on which it would
otherwise have become due and payable, or (b) in the event that any other
nonpayment event of default with respect to any Senior Debt shall have occurred
and be continuing permitting the holders of such Senior Debt (or a trustee on
behalf of the holders thereof) to declare such Senior Debt due and payable prior
to the date on which it would otherwise have become due and payable, then the
Company shall make no payment, direct or indirect (including any payment which
may be payable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Securities) (other than securities that
are subordinated to at least the same extent as the Securities are to (x) Senior
Debt and (y) any securities issued in exchange for Senior Debt) unless and until
(i) such event of default shall have been cured or waived or shall have ceased
to exist or such acceleration shall have been
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rescinded or annulled, or (ii) in case of any nonpayment event of default
specified in (b), during the period (a "Payment Blockage Period") commencing on
the date the Company and the Trustee receive written notice (a "Payment Notice")
of such event of default (which notice shall be binding on the Trustee and the
Securityholders as to the occurrence of such an event of default) from a holder
of the Senior Debt to which such default relates and ending on the earliest of
(A) 179 days after such date, (B) the date, if any, on which such Senior Debt to
which such default relates is discharged or such default is waived by the
holders of such Senior Debt or otherwise cured and (C) the date on which the
Trustee receives written notice from the holder of such Senior Debt to which
such default relates terminating the Payment Blockage Period. No new Payment
Blockage Period may be commenced within 360 days after the receipt by the
Trustee of any prior Payment Blockage Notice. For all purposes of this Section
10.3, no Event of Default which existed or was commencing with respect to the
Senior Debt to which a Payment Blockage Period relates on the date such Payment
Blockage Period commenced shall be or be made the basis for the commencement or
any subsequent Payment Blockage Period unless such event of default is cured or
waived for a period of not less than 180 consecutive days.
Section 10.4 When Distribution Must Be Paid Over.
If the Trustee or any Securityholder receives any payment with respect
to the Securities, whether in cash property or securities (other than securities
that are subordinated to at least the same extent of the Securities are to (x)
Senior Debt and (y) any securities issued in exchange for Senior Debt at a time
when such payment is prohibited by Article X hereof), such payment shall be held
by the Trustee or such Securityholder, in trust for the benefit of, and shall be
paid forthwith over and delivered to, the holders of Senior Debt (pro rata to
such holders on the basis of the amount of Senior Debt held by such holders) for
application to the payment of all Obligations with respect to Senior Debt
remaining unpaid to the extent necessary to pay such Obligations in full, in
cash, cash equivalents or otherwise in a manner satisfactory to the holders of
Senior Debt, in accordance with the terms of such Senior Debt, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically set
forth in this Article 10, and no implied covenants or obligations with respect
to the holders of Senior Debt shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of Securityholders or the
Company or any other Person money or assets to which any holders of Senior Debt
shall be entitled by virtue of this Article X, except if such payment is made as
a result of the willful misconduct or gross negligence of the Trustee.
Section 10.5 Notice by Company.
The Company shall promptly notify the Trustee and the Paying Agent in
writing of any facts known to the Company that would cause a payment of any
Obligations with respect to the Company
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to violate this Article, but failure to give such notice shall not affect the
subordination of the Securities to the Senior Debt provided in this Article.
Section 10.6 Subrogation.
After all Senior Debt is paid in full, in cash, cash equivalents or
otherwise in a manner satisfactory to the holders of such Senior Debt, and until
the Securities are paid in full, Securityholders shall be subrogated (equally
and ratably with all other Indebtedness pari passu with the Securities) to the
rights of holders of Senior Debt to receive distributions applicable to Senior
Debt to the extent that distributions otherwise payable to the Securityholders
have been applied to the payment of Senior Debt. A distribution made under this
Article to holders of Senior Debt which otherwise would have been made to
Securityholders is not, as between the Company and Securityholders, a payment by
the Company on the Senior Debt.
Section 10.7 Relative Rights.
This Article defines the relative rights of Securityholders and holders
of Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Securityholders, the
obligations of the Company, which are absolute and unconditional, to
pay principal of and interest on the Securities in accordance with
their terms;
(2) affect the relative rights of Securityholders and
creditors of the Company other than their rights in relation to holders
of Senior Debt; or
(3) prevent the Trustee or any Securityholder from exercising
its available remedies upon a Default or Event of Default, subject to
the rights of holders and owners of Senior Debt to receive
distributions and payments otherwise payable to Securityholders.
If the Company fails because of this Article to pay principal of or
interest on a Security on the due date, the failure is still a Default or Event
of Default.
Section 10.8 Subordination May Not Be Impaired by the Company or Holders
of Senior Debt.
No right of any present or future holder of Senior Debt to enforce the
subordination of the Indebtedness evidenced by the Securities and the
Obligations related thereto shall be prejudiced or impaired by any act or
failure to act by any such holder or by the Company, the Trustee or any Agent or
by the failure of the Company to comply with this Indenture, regardless of any
knowledge thereof which any such holder may have or otherwise be charged with.
Without limiting the effect of the preceding paragraph, any holder of
Senior Debt may at any time and from time to time without the consent of or
notice to any other holder or to the Trustee,
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without impairing or releasing any of the rights of any holder of Senior Debt
under this Indenture, upon or without any terms or conditions and in whole or in
part:
(a) change the manner, place or term of payment, or change or extend
the time of payment of, renew or alter any Senior Debt or any other liability of
the Company to such holder, any security therefor, or any liability incurred
directly or indirectly in respect thereof, and the provisions of this Article X
shall apply to the Securities as so changed, extended, renewed or altered;
(b) notwithstanding the provisions of Section 5.1 hereof, sell,
exchange, release, surrender, realize upon or otherwise deal with in any manner
and in any order any property by whomsoever at any time pledged or mortgaged to
secure, or howsoever securing, any Senior Debt or any other liability of the
Company to such holder or any other liabilities incurred directly or indirectly
in respect thereof or hereof or any offset thereagainst;
(c) exercise or refrain from exercising any rights or remedies against
the Company or others or otherwise act or refrain from acting or, for any
reason, fail to file, record or otherwise perfect any security interest in or
lien on any property of the Company or any other Person; and
(d) settle or compromise any Senior Debt or any other liability of the
Company to such holder, or any security therefor, or any liability incurred
directly or indirectly in respect thereof.
All rights and interests under this Indenture of any holder of Senior
Debt and all agreements and obligations of the Trustee, the Holders, and the
Company under Article 6 and under this Article 10 shall remain in full force and
effect irrespective of (i) any lack of validity or enforceability of any
agreement or instrument relating to any Senior Debt or (ii) any other
circumstance that might otherwise constitute a defense available to, or a
discharge of, the Trustee, any Holder, or the Company.
Any holder of Senior Debt hereby authorized to demand specific
performance of the provisions of this Article 10, whether or not the Company
shall have complied with any of the provisions of this Article 10 applicable to
it, at any time when the Trustee or any Holder shall have failed to comply with
any of these provisions. The Trustee and the Holders irrevocably waive any
defense based on the adequacy of a remedy at law that might be asserted as a bar
to such remedy of specific performance.
Section 10.9 Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
representative.
Upon any payment or distribution of assets of the Company referred to
in this Article X, the Trustee and the Securityholders shall be entitled to rely
upon any order or decree made by any court of competent jurisdiction in which
bankruptcy, dissolution, winding-up, liquidation or reorganization proceedings
are pending or upon any certificate of any representative of any holder of
Senior Debt or
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<PAGE>
of the liquidating trustee or agent or other Person making any distribution,
delivered to the Trustee or to the Securityholders, for the purpose of
ascertaining the Persons entitled to participate in such distribution, the
holders of the Senior Debt and other indebtedness of the Company, the amount
thereof or payable thereon, the amount or amounts paid or distributed thereon
and all other facts pertinent thereto or to this Article X.
Section 10.10 Rights of Trustee and Paying Agent.
Notwithstanding the provisions of this Article X or any other provision
of this Indenture, the Trustee shall not be charged with knowledge of the
existence of any facts which would prohibit the making of any payment or
distribution by the Trustee, or the taking of any action by the Trustee, and the
Trustee or Paying Agent may continue to make payments on the Securities unless
it shall have received at its Corporate Trust Division at least 5 Business Days
prior to the date of such payment written notice of facts that would cause the
payment of any Obligations with respect to the Securities to violate this
Article, which notice, unless specified by a holder of Senior Debt as such,
shall not be deemed to be a Payment Notice. The Trustee may conclusively rely on
such notice. Only the Company or a holder of Senior Debt may give the notice.
Nothing in this Article X shall apply to amounts due to, or impair the claims
of, or payments to, the Trustee under or pursuant to Section 7.7 hereof.
The Trustee in its individual or any other capacity may hold Senior
Debt with the same rights it would have if it were not Trustee. Any Agent may do
the same with like rights.
Section 10.11 Authorization to Effect Subordination.
Each Holder of a Security by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate, as between the holders of Senior Debt and the
Securityholders, the subordination as provided in this Article X, and appoints
the Trustee his attorney-in-fact for any and all such purposes.
Section 10.12 Article Applicable to Paying Agent.
In case at any time any Paying Agent (other than the Trustee or the
Company) shall have been appointed by the Company and be then acting hereunder,
the term "Trustee" as used in this Article X shall in such case (unless the
context otherwise requires) be construed as extending to and including such
Paying Agent within its meaning as fully for all intents and purposes as if such
Paying Agent were named in this Article X in addition to or in place of the
Trustee.
Section 10.13 Miscellaneous.
(a) The agreements contained in this Article 10 shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any of the Senior Debt is rescinded or must otherwise be returned by any holder
of Senior Debt upon the insolvency, bankruptcy or reorganization of the Company
or otherwise, all as though such payment had not been made.
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(b) The Trustee shall notify all holders of Senior Debt (of whose
identity the Trustee has received reasonable advance written notice) of the
existence of any Default or Event of Default under Section 6.1 promptly after a
Responsible Officer of the Trustee actually becomes aware thereof; provided,
however, that at least 5 Business Days prior to the notification of any holder
of Senior Debt under this Section 7.5, the Company shall provide the Company
with notice of its intent to provide such notification.
ARTICLE XI.
MISCELLANEOUS
Section 11.1 Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by TIA Section 318(c), the imposed duties shall control.
Section 11.2 Notices.
Any notice, instruction, direction, request or other communication by
the Company, the Trustee or any other holder of Senior Debt to the others is
duly given if in writing and delivered in person or mailed by first-class mail
(registered or certified, return receipt requested), telex, telecopier or
overnight air courier guaranteeing next day delivery, to the other's address:
If to the Company:
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Balapointe Office Centre
111 Presidential Boulevard
Bala Cynwyd, PA 19004
Attention: Anthony J. Santilli, Jr.
Chairman, President and Chief Executive Officer
Telecopier: (215) 668-1468
With a copy to:
BLANK ROME COMISKY & McCAULEY
4 Penn Center Plaza
Philadelphia, Pennsylvania 19103-2599
Attention: Jane K. Storero, Esquire
Telecopier: (215) 569-5555
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If to the Trustee:
FIRST TRUST, NATIONAL ASSOCIATION, a national banking association
180 East 5th Street
Saint Paul, Minnesota 55101
Attention: Mr. Richard Prokosch, Corporate Finance
Telecopier: (612) 244-0711
If to a holder of Senior Debt, such address as such holder of Senior
Debt shall have provided in writing to the Company and the Trustee.
The Company, the Trustee or a holder of Senior Debt by notice to the
Company and the Trustee may designate additional or different addresses for
subsequent notices or communications.
All notices and communications (other than those sent to
Securityholders) shall be deemed to have been duly given: at the time delivered
by hand, if personally delivered; 5 Business Days after being deposited in the
mail, postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Securityholder shall be mailed by
first-class mail, certified or registered, return receipt requested, to his
address shown on the register kept by the Registrar. Failure to mail a notice or
communication to a Securityholder or any defect in it shall not affect its
sufficiency with respect to other Securityholders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Securityholders, it
shall mail a copy to the Trustee and each Agent at the same time.
Section 11.3 Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b) with
other Securityholders with respect to their rights under this Indenture or the
Securities. The Trustee is subject to Section 312(b). The Company, the Trustee,
the Registrar and anyone else shall have the protection of TIA Section 312(c).
Section 11.4 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 11.5) stating that, in the
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<PAGE>
opinion of the signers, all conditions precedent and covenants, if any,
provided for in this Indenture relating to the proposed action have
been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 11.5) stating that, in the opinion of such counsel,
all such conditions precedent and covenants have been complied with.
Section 11.5 Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA Section 314(a)(4)) shall include:
(1) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion whether such covenant or condition has been
complied with; and
(4) a statement whether, in the opinion of such Person, such
condition or covenant has been complied with.
Section 11.6 Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a meeting of
Securityholders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
Section 11.7 Legal Holidays.
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions in the City of Wilmington or at a place of payment are authorized
or obligated by law, regulation or executive order to remain closed. If a
payment date is a Legal Holiday at a place of payment, payment may be made at
that place on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period.
Section 11.8 No Recourse Against Others.
No director, officer, employee, agent, manager or stockholder of the
Company as such, shall have any liability for any obligations of the Company
under the Securities or this Indenture or for any
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claim based on, in respect of or by reason of such obligations or their
creation. Each Securityholder by accepting a Security waives and releases all
such liability.
Section 11.9 Duplicate Originals.
The parties may sign any number of copies of this Indenture. One signed
copy is enough to prove this Indenture.
Section 11.10 Governing Law.
THE INTERNAL LAW OF THE STATE OF DELAWARE SHALL GOVERN THIS
INDENTURE AND THE SECURITIES, WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS THEREOF.
Section 11.11 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company. Any such indenture, loan or debt agreement may
not be used to interpret this Indenture.
Section 11.12 Successors.
All agreements of the Company in this Indenture and the Securities
shall bind its successors. All agreements of the Trustee in this Indenture shall
bind its successor.
Section 11.13 Severability.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 11.14 Counterpart Originals.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
Section 11.15 Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions thereof.
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<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, as of the day and year first written above.
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
(SEAL) By: ____________________________
Name:
Title:
Attest:
- -------------------------
FIRST TRUST, NATIONAL ASSOCIATION,
a national banking association, as Trustee
(SEAL) By: ____________________________
Name:
Title:
Attest:
- -------------------------
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
[COMPANY LOGO]
SUBORDINATED INVESTMENT NOTE
NUMBER _______________________ DATE ISSUED ___________________
PRINCIPAL AMOUNT $____________ TERM __________________________
INTEREST RATE PER ANNUM _____% MATURITY DATE _________________
INTEREST COMPOUNDED DAILY
PAYABLE ________________
AMERICAN BUSINESS FINANCIAL SERVICES, INC., a Delaware corporation herein called
the Company, for value received, hereby promises to pay to:
_______________________________________________________________________________
(the "Holder" or "Noteholder")
Interest payments shall be made by check delivered by mail to the
address of the Holder appearing on the Note register maintained by the Registrar
(which address may be changed from time to time by notice given by Holder in
writing to the Registrar) on the Regular Record Date preceding the subject
payment Date; principal and interest payment at the end of the term hereof shall
be made in person to Holder at the offices or agency of the Payment Agent in
exchange for this Note. Holder shall be notified prior to such payment of the
address at which such payment shall occur.
All payments hereunder shall be made in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.
All interest on the Notes will be compounded daily and computed on the
basis of a calendar year.
This Note is being issued pursuant to an Indenture dated as of
_________, 1997 ("Indenture") between the Company and First Trust, National
Association, a national banking association, as Trustee and in connection with
an offering by the Company of an aggregate of $125,000,000 U.S. principal amount
Unsecured, Subordinated Investment Notes ("Notes") and Unsecured, Adjustable
<PAGE>
Rate, Subordinated Money Market Notes as described in the Company's Prospectus
dated ___________, 1997, as amended and supplemented from time to time, and a
current interest rate supplement thereto. The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb)
("TIA"). The Notes are subject to all such terms, and Holder is referred to the
Indenture and such Act for a statement of such terms. All capitalized terms not
otherwise defined herein shall have the meaning given to such terms in the
Indenture.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
IN WITNESS WHEREOF, American Business Financial Services, Inc. has
caused this Note to be signed on the date first above written.
ISSUER:
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(SEAL) BY: _____________________________________________
Anthony J. Santilli, Jr., Chairman, President
and Chief Executive Officer
Attest: _________________________________________
Officer of Company
COUNTERSIGNED AND REGISTERED BY
FIRST TRUST, NATIONAL ASSOCIATION, a
national banking association
BY: ______________________________________________
Authorized Signature
-2-
<PAGE>
[REVERSE SIDE OF NOTE]
1. Subordination. The indebtedness evidenced by the Note shall be
postponed and subordinated and is subject in right of payment, to the extent and
in the manner set forth in the Indenture, to the prior payment in full of all
"Senior Debt" of the Company. "Senior Debt" means any indebtedness (whether
outstanding on the date of issuance of this Note or thereafter created) incurred
by the Company in connection with borrowings by the Company (including its
subsidiaries) from a bank, trust company, insurance company, other institutional
lender or other entity which lends funds in connection with its primary business
activities whether such indebtedness is or is not specifically designated by the
Company as being "Senior Debt" in its defining instruments. The Company agrees,
and Holder by accepting this Note consents and agrees, to the subordination
provided for in the Indenture and authorizes the Trustee to give it effect.
2. Subrogation. As more fully set forth in the Indenture, subject to
the payment in full of all Senior Debt of the Company, Holder shall be
subrogated to the rights of the holders of Senior Debt of the Company to receive
payments or distributions of assets of the Company made on the Senior Debt of
the Company until the principal of and interest on this Note shall be paid in
full, and for purposes of such subrogation, no such payment or distributions of
the holders of Senior Debt of the Company of cash, property or securities, which
otherwise would be payable or distributable to Holder, shall be between the
Company, its creditors other than the holders of Senior Debt of the Company, and
Holder, be deemed to be a payment by the Company to or on account of this Note,
it being understood that the provisions of this paragraph are intended solely
for the purpose of defining the relative rights of Holder, on the one hand, and
the holders of Senior Debt of the Company, on the other hand.
3. Nonimpairment. Nothing contained in this Note is intended to or
shall impair, as between the Company, the Company's creditors other than the
holders of Senior Debt of the Company, and Holder, the obligation of the
Company, which is absolute and unconditional, to pay to Holder the principal of
and interest on this Note, as and when the same shall become due and payable in
accordance with its terms, and which, subject to the rights under Article X of
the Indenture of the holders of Senior Debt of the Company, is intended to rank
equally with all other general obligations of the Company. In addition, nothing
contained in this Note is intended to or shall affect the relative rights of
Holder and creditors of the Company other than the holders of Senior Debt of the
Company, nor shall anything herein or therein prevent the Holder of this Note
from exercising all remedies otherwise permitted by the Indenture and applicable
law upon the occurrence of an Event of Default, subject to the rights, if any,
under Article X of the Indenture of the holders of Senior Debt of the Company in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy.
4. Mandatory Redemption. Except as provided in Article III of the
Indenture with respect to the Company's obligation to redeem Notes at the
request of certain Holders (in the event of such Holder's Total Permanent
Disability), the estate of a Holder (in the event of Holder's death) or a
jointholder (in the event this Note is held jointly by a husband and wife and
one spouse suffers
-3-
<PAGE>
a Total Permanent Disability or dies), the Company has no mandatory redemption
or sinking fund obligations with respect to this Note.
5. Events of Default. An event of Default is:
(a) Default in the payment of any interest upon this Note when
it becomes due and payable and continuance of such default for a period of 30
days; or
(b) Default in the payment of principal of this Note when it
becomes due and payable at maturity, upon redemption or otherwise and
continuance of such default for 30 days; or
(c) Failure by the Company to comply with any of its
agreements upon a liquidation, consolidation, merger or transfer of
substantially all of the Company's assets; or
(d) Failure by the Company for 60 days after notice to comply
with any of its other agreements in the Indenture or this Note; or
(e) Certain events of bankruptcy or insolvency.
If an Event of Default occurs and is continuing, the Trustee or the
holders of at least a majority in principal amount of the then outstanding Notes
may declare all the Notes to be due and payable immediately, except that in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, all outstanding Notes become due and payable immediately without
further action or notice. Holders of Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. The Trustee may require indemnity
satisfactory to it before it enforces the Indenture or the Notes. Subject to
certain limitations, holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or powers.
The Trustee may withhold from Noteholders notice of any continuing default
(except a default in payment of principal or interest) if it determines that
withholding notice would have no material adverse effect on the Noteholders. The
Company must furnish an annual compliance certificate to the Trustee.
6. Transfer and Exchange. The transfer of Notes may be registered and
Notes may be exchanged as provided in the Indenture. This Note may not be
assigned, transferred or otherwise alienated without the prior written consent
of the Company (which shall not be unreasonably withheld) and shall be subject
to the Company's right to demand and receive an opinion of Holder's legal
counsel (which counsel shall be reasonably acceptable to the Company) that the
transfer does not violate any applicable securities laws and/or a signature
guarantee.
7. Automatic Extension. At least seven (7) days prior to a Note's
stated maturity date, the Company will notify the registered Noteholder of such
maturity date. If at such time, the Company does not notify the Noteholder of
its intention to repay, subject to the Noteholder's demand for repayment, the
term of such Note will be automatically extended. If, within seven days after a
-4-
<PAGE>
Note's maturity date, the Noteholder thereof has not demanded repayment of such
Note, and the Company has not notified the Noteholder of its intention to repay
such Note, such Note shall be extended for the same term identical to the term
of the original Note. The Note will continue to renew as described herein absent
some action permitted under the Indenture and the Notes by either the Noteholder
or the Company. Interest shall continue to accrue from the first day of such
renewal term. Such Note, as renewed, will continue in all its provisions,
including provisions relating to payment, except that the interest rate payable
during any renewed term shall be the interest rate which is then being offered
by the Company on similar Notes being offered as of the renewed date. If similar
Notes are not then being offered, the interest rate upon renewal will be the
rate specified by the Company on or before the maturity date, or the Note's
current rate if no such rate is specified. If the Company gives notice to a
Noteholder of the Company's intention to repay a Note at maturity no interest
will accrue after the date of maturity. Otherwise, if a Noteholder requests
repayment within seven days after its maturity date, the Company will pay
interest during the period after its maturity date and prior to repayment at the
lower of (i) the lowest interest rate then being paid on debt securities being
offered by the Company to the general public or (ii) the rate being paid on such
Note immediately prior to its maturity.
8. Persons Deemed Owners. The registered Holder of a Note may be
treated as its owner for all purposes.
9. Amendments and Waivers. Subject to certain exceptions, the Indenture
or the Notes may be amended or supplemented and any existing Default under, or
compliance with any provision of, the Indenture may be waived with the written
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding. Without the consent of any Holder, the Company and the Trustee
may amend or supplement the Indenture or the Notes to cure any ambiguity, defect
or inconsistency; to provide for uncertificated Securities in addition to or in
place of certificated Securities; to comply with Section 5.1 of the Indenture;
to change the elective redemption provisions applicable upon the death or Total
Permanent Disability of a Holder (but only to the extent such change does not
alter such rights with respect to any outstanding Note); to make any change that
would provide any additional rights or benefits to the Holder; or to comply with
requirements of the SEC in order effect or maintain the qualification of the
Indenture under the TIA.
10. Trustee Dealings with Company. So long as done in accordance with
the TIA, the Trustee, in its individual or any other capacity, may make loans
to, accept deposits from, and perform services for the Company or its
affiliates, and may otherwise deal with the Company or its Affiliates, as if it
were not Trustee.
11. No Recourse Against Others. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
-5-
<PAGE>
12. Authentication. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to:
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
BALAPOINTE OFFICE CENTRE
111 PRESIDENTIAL BLVD., SUITE 215
BALA CYNWYD, PA 19004
--------------------------------------
The following abbreviations, when used in the inscription on the face
of the within Note, shall be construed as though they were written out if full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in common
UNIF GIFT MIN ACT - __________ Custodian __________
(Cust) (Minor)
under Uniform Gifts/Transfers to Minors
Act ____________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
--------------------------------------
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE:
_____________________________________
_______________________________________________________________________________
(NAME AND ADDRESS OF ASSIGNEE, INCLUDING ZIP CODE,
MUST BE TYPEWRITTEN)
_______________________________________________________________________________
the within Note, and all rights thereunder, hereby irrevocably
-6-
<PAGE>
_______________________________________________________________________________
constitute and appoint
____________________________________________________________________ Attorney
to transfer said Note on the books of the Company, with full power of
substitution in the premises.
Dated:
________________________________
NOTICE: The signature to this assignment must correspond with the name as it
appears upon the face of the within Note in every particular, without alteration
or enlargement, or any change whatever.
-7-
<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
March 27, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania
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
--------------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
March 27, 1997
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM T-1
Statement of Eligibility Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST TRUST NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0257700
(State of Incorporation) (I.R.S. Employer
Identification No.)
First Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 87-0418807
(State of Incorporation) (I.R.S. Employer
Identification No.)
Balapointe Office Center
111 Presidential Boulevard, Suite 215
Bala Cynwyd, Pennsylvania 19004
(Address of Principal Executive Offices) (Zip Code)
Subordinated Investment Notes and Adjustable Rate
Subordinated Money Market Notes
(Title of the Indenture Securities)
<PAGE>
GENERAL
1. General Information Furnish the following information as to the Trustee.
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement
of eligibility and qualification. Each of the exhibits listed below is
incorporated by reference from registration number 333-20901.
1. Copy of Articles of Association.
2. Copy of Certificate of Authority to Commence Business.
3. Authorization of the Trustee to exercise corporate trust powers
(included in Exhibits 1 and 2; no separate instrument).
4. Copy of existing By-Laws.
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the act.
7. Copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority.
<PAGE>
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Trust National Association, an Association organized and existing
under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Saint Paul and State of Minnesota on the 24th day of March, 1997.
FIRST TRUST NATIONAL ASSOCIATION
[SEAL]
/s/ Richard H. Prokosch
-----------------------
Richard H. Prokosch
Trust Officer
/s/ Kathe Barrett
- -----------------------
Kathe Barrett
Assistant Secretary
<PAGE>
Exhibit 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned. FIRST TRUST NATIONAL ASSOCIATION hereby consents that reports
of examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: March 24, 1997
FIRST TRUST NATIONAL ASSOCIATION
/s/ Richard H. Prokosch
-------------------------------------
Richard H. Prokosch
Trust Officer
