<PAGE>
As filed with the Securities and Exchange Commission on February 4, 1997
Registration No. 333-18919
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
AMENDMENT NO. ONE
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 6162 87-0418807
- -------------------------------------- ------------------------------------ ----------------------------------
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
ANTHONY J. SANTILLI, JR.
Chairman, President, Chief Executive Officer,
Chief Operating Officer, Treasurer and Director
American Business Financial Services, Inc.
Balapointe Office Center
111 Presidential Boulevard
Suite 215
Bala Cynwyd, PA 19004
(610) 668-2440
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
FREDERICK D. LIPMAN, ESQUIRE PHILIP ROSS BEVAN, ESQUIRE
JANE K. STORERO, ESQUIRE Elias, Matz, Tiernan & Herrick L.L.P.
Blank Rome Comisky & McCauley 734 15th Street, N.W.
1200 Four Penn Center Plaza 12th Floor
Philadelphia, Pennsylvania 19103 Washington, DC 20005
(215) 569-5500
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
<PAGE>
If this Form is a post-effective registration statement filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to
Rule 434 please check the following box. / /
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
===============================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1997
PROSPECTUS
[LOGO] AMERICAN BUSINESS FINANCIAL SERVICES, INC.
1,000,000 SHARES OF COMMON STOCK
All of the shares of the Common Stock, $.001 par value per share (the "Common
Stock"), offered hereby (the "Public Offering") are being sold by American
Business Financial Services, Inc. (together with its subsidiaries, "ABFS" or the
"Company").
The Common Stock has been and is currently traded on the Philadelphia Stock
Exchange ("PHLX") under the symbol "AFX." On January 30, 1997, the last reported
sales price of the Common Stock was $22.75 per share. See "Market for Common
Stock and Related Stockholder Matters." The Common Stock has been approved for
quotation on the Nasdaq National Market System under the symbol "ABFI" upon
commencement of the Public Offering.
ABFS is not subject to state or federal statutes or regulations applicable to
banks and/or savings and loan associations with regard to deposit insurance, the
maintenance of reserves, the quality or condition of its assets or other
matters. THE SHARES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE
NOT GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR ANY OTHER
ENTITY.
See "Risk Factors" on page 8 for information that should be considered by
prospective purchasers of the Common Stock.
------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------
===============================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
Per Share..................... $ $ $
- -------------------------------------------------------------------------------
Total(3) .................... $ $ $
===============================================================================
(1) See "Underwriting" for information relating to the indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company, estimated to be
$445,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase from the Company up to 150,000
additional shares of Common Stock solely to cover over-allotments, if any.
To the extent that the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc., as
representative of the several Underwriters (the "Representative"), Arlington,
Virginia, or in book entry form through the book entry facilities of the
Depository Trust Company on or about , 1997.
------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (together with all exhibits
and schedules thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the registration of the
Common Stock offered by this Prospectus. This Prospectus does not contain all of
the information set forth in such Registration Statement and the exhibits
thereto, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information pertaining to the
Company, the Common Stock offered by this Prospectus and related matters,
reference is made to such Registration Statement, including the exhibits filed
as a part thereof. Each statement in this Prospectus referring to a document
filed as an exhibit to such Registration Statement is qualified by reference to
the exhibit for a complete statement of its terms and conditions.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission. Following
the Public Offering, the Company will continue to be subject to the reporting
requirements of the Exchange Act. So long as the Company is subject to the
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
will furnish to its stockholders annual reports containing audited financial
statements and an opinion thereon expressed by the Company's independent
auditors and will make available copies of quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
The Registration Statement and any reports and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices located as follows:
Chicago Regional Office, Northwestern Atrium Center, 500 W. Madison Street,
Suite 1400, Chicago, IL 60661-2511; and New York Regional Office, 7 World Trade
Center, New York, NY 10048. Copies of such material can also be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such Web Site is http://www.sec.gov. In addition, such reports, proxy
statements and other information concerning the Company will also be available
for inspection at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, DC 20006.
The Company's Common Stock has been and is currently traded on the PHLX under
the symbol "AFX." Reports, proxy statements and other information concerning the
Company can be inspected at the offices of the Philadelphia Stock Exchange
located at 1900 Market Street, Philadelphia, Pennsylvania 19103.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER THE
COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the consolidated financial
statements, including the notes thereto appearing elsewhere in this Prospectus.
Prospective investors of the shares of Common Stock offered hereby should
carefully consider the factors set forth under "Risk Factors." Except as
otherwise specified, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option. See "Underwriting."
GENERAL
ABFS is a financial services company operating primarily in the mid-atlantic
region of the United States. The Company, through its principal direct and
indirect subsidiaries, originates, sells and services loans to businesses
secured by real estate and other business assets ("Business Purpose Loans") and
non-conforming mortgage loans, typically to credit impaired borrowers, secured
by mortgages on single-family residences ("Home Equity Loans"). The Company also
originates small ticket leases (generally $10,000 to $150,000) for the
acquisition of business equipment ("Equipment Leases"). In addition, the Company
has recently entered into exclusive business arrangements with several financial
institutions pursuant to which the Company will purchase Home Equity Loans that
do not meet the underwriting guidelines of the selling institution but meet the
Company's underwriting criteria (the "Bank Alliance Program").
The Company's customers currently consist primarily of two groups. The first
category of customers includes credit impaired borrowers who are generally
unable to obtain financing from banks, savings and loan associations or other
finance companies that have historically provided loans only to individuals with
favorable credit characteristics. These borrowers generally have impaired or
unsubstantiated credit characteristics and/or unverifiable income and respond
favorably to the Company's marketing efforts. The second category of customers
includes borrowers who would qualify for loans from traditional lending sources
but elect to utilize the Company's products and services. The Company's
experience has indicated that these borrowers are attracted to the Company's
loan products as a result of its marketing efforts, the personalized service
provided by the Company's staff of highly trained lending officers and the
timely response to loan requests. Historically, both categories of customers
have been willing to pay the Company's origination fees and interest rates which
are generally higher than those charged by traditional lending sources.
BUSINESS PURPOSE LOANS
The Company began operations in 1988 and initially offered Business Purpose
Loans. The Company currently originates Business Purpose Loans through a retail
network of salespeople in Pennsylvania, Delaware, New Jersey, New York,
Virginia, Maryland and Connecticut. The Company has taken the initial steps to
expand its business purpose lending program into the southeastern region of the
United States. The Company focuses its marketing efforts on small businesses who
do not meet all of the credit criteria of commercial banks and small businesses
that the Company's research indicates are predisposed to using the Company's
products and services.
The Business Purpose Loans originated by the Company are secured by real
estate. In substantially all cases, the Company receives additional collateral
in the form of, among other things, pledges of securities, assignments of
contract rights, life insurance and lease payments and liens on business
equipment and other business assets, as available. The Company's Business
Purpose Loans are generally originated with fixed rates and typically have
origination fees of 5.0% to 6.0%. The weighted average interest rate received on
the Business Purpose Loans originated by 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 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.
3
<PAGE>
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 debentures to increase its
loan and lease originations and to expand into new geographic markets, with an
initial focus on expansion in the southeastern region of the United States. The
Company also intends to expand its Bank Alliance Program with financial
institutions across the United States.
From the inception of the Company's business in 1988 through 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."
4
<PAGE>
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."
THE PUBLIC OFFERING
Common Stock offered by the
Company...................... 1,000,000 shares
Common Stock to be Outstanding
after the Public Offering.... 3,353,166 shares(1)(2)
Use of Proceeds................ The net proceeds resulting from the sale of
the Common Stock will be utilized by the
Company for its general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol
for the Common Stock......... "ABFI"
Risk Factors................... See "Risk Factors" for a discussion of
certain material factors that should be
considered in connection with an investment
in the Common Stock offered hereby.
- ------
(1) Assumes no exercise of the over-allotment option.
(2) Excludes 181,000 shares of Common Stock reserved for issuance upon the
exercise of options granted under the Company's stock option plans, 150,500
shares of Common Stock issuable upon the exercise of options intended to be
granted to the Company's officers in connection with the Public Offering as
well as 38,488 shares of Common Stock reserved for issuance upon the
exercise of options available for grant under the Company's stock option
plans. See "Management--Executive Compensation" and "Description of Capital
Stock."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The consolidated financial information set forth below for ABFS should be
read in conjunction with the more detailed consolidated financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
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Six Months Ended
December 31, Year Ended June 30,
--------------------- -------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- -------- ---------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
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:
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 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
--------------------- ---------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
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>
6
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<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
--------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- -------- ---------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
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 -- -- --
</TABLE>
<TABLE>
<CAPTION>
At or For The
Six Months Ended
December 31, At or For the Year Ended June 30,
---------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets (1) ................ 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.
7
<PAGE>
RISK FACTORS
In addition to the financial and other information contained in this
Prospectus, prospective investors should consider, among other things, the
following factors in connection with the purchase of the Common Stock.
DECLINE IN COLLATERAL VALUE MAY ADVERSELY AFFECT LOAN-TO-VALUE RATIOS
The Company's business may be adversely affected by declining real estate
values. Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made by the Company, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of a
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. As a result, there can be no
assurance that the market value of the real estate underlying such loans will at
any time be equal to or in excess of the outstanding principal amount of such
loans. See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CREDIT IMPAIRED BORROWERS MAY RESULT IN INCREASED DELINQUENCY RATES
The Company markets loans, in part, to borrowers who, for one reason or
another, are not able, or do not wish, to obtain financing from traditional
sources such as commercial banks. Loans made to such borrowers may entail a
higher risk of delinquency and 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 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.
8
<PAGE>
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, 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."
9
<PAGE>
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 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 20 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."
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."
10
<PAGE>
CONTINGENT RISKS
Although the Company sells substantially all loans which it originates on a
nonrecourse basis through securitizations, the Company retains risk on
substantially all loans sold. During the period of time that loans are held
pending sale, the Company is subject to the various business risks associated
with the lending business including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers.
In addition, documents governing the Company's securitizations require the
Company to commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale. When
borrowers are delinquent in making monthly payments on loans included in a
securitization trust, the Company is required to advance interest payments with
respect to such delinquent loans to the extent that the Company deems such
advances will be ultimately recoverable. These advances require funding from the
Company's capital resources but have priority of repayment from the succeeding
month's collections.
In the ordinary course of its business, the Company is subject to claims made
against it by borrowers and private investors arising from, among other things,
losses that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, misrepresentations, errors and omissions by employees,
officers and agents of the Company (including its appraisers), incomplete
documentation and failures by the Company to comply with various laws and
regulations applicable to its business. 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 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.
11
<PAGE>
The previously described laws and regulations are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead to
regulatory investigations or enforcement actions and private causes of action,
such as class action lawsuits, with respect to the Company's compliance with the
applicable laws and regulations.
Although the Company believes that it has implemented systems and procedures
to facilitate compliance with the foregoing requirements and believes that it is
in compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.
See "Business -- Regulation."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's operations depend, to a large extent, upon the
management, lending, credit analysis and business skills of the senior level
management of the Company. If members of senior level management were for some
reason unable to perform their duties or were, for any reason, to leave the
Company, there can be no assurance that the Company would be able to find
capable replacements. The Company has entered into employment agreements with
its 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."
VOTING CONTROL OF THE BOARD OF DIRECTORS OF THE COMPANY
The Board of Directors of the Company are the beneficial owners of 1,365,281
shares (excluding options) of the outstanding Common Stock. As a result, upon
completion of the Public Offering (assuming the Underwriters' over-allotment
option is not exercised), the Board of Directors of the Company will hold
approximately 40.7% of the Common Stock, which may allow it to control actions
to be taken by the stockholders, including the election of directors to the
Board of Directors. This voting control may have the effect of discouraging
hostile offers to acquire the Company because the consummation of any such
acquisition would require the consent of the current members of the Board of
Directors of the Company. In addition, the Board of Directors is authorized to
issue additional shares of Common Stock or shares of preferred stock from time
to time with such rights and preferences as the Board may determine. Such
preferred stock could be issued in the future with terms and conditions that
could further discourage hostile offers to acquire the Company. See "Principal
Stockholders" and "Description of Capital Stock."
ENVIRONMENTAL CONCERNS
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans which are in default. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such property, and may be held liable to a governmental entity or to third
parties for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. The liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not the facility is owned or operated
by such person. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
12
<PAGE>
The ability of the Company to foreclose on the real estate collateralizing
its loans, if at any time such a foreclosure would be otherwise appropriate, may
be limited by the above-referenced environmental laws. While the Company would
not make a loan collateralized by real property as to which it had knowledge of
an environmental risk or problem, it is possible that such a risk or problem
could become known after the subject loan has been made. See "Business -- Loan
and Lease Servicing."
LIMITED PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE
The Common Stock has been and is currently traded on the PHLX. Since the
Common Stock began trading on the PHLX in May 1996, such stock has experienced a
relatively low trading volume. Upon commencement of the Public Offering, the
Company's Common Stock will be traded solely on the Nasdaq National Market
System. There can be no assurance that an active trading market will develop or
that the purchasers of the Common Stock will be able to resell their Common
Stock at prices equal to or greater than the Public Offering price. The Public
Offering price of the Common Stock was determined through negotiations between
the Company and the Underwriters and may not reflect the market price of the
Common Stock after the Public Offering. See "Underwriting," for a discussion of
factors considered in determining the Public Offering price. The trading price
of the Common Stock could be subject to wide fluctuations in response to
quarterly variations in changes in financial estimates by securities analysts
and other events or facts. These broad market fluctuations may adversely affect
the market price of the Common Stock. See "Market for Common Stock" and "Market
for Common Stock and Related Stockholder Matters."
EFFECT ON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE
The Board of Directors of the Company is the record and beneficial holder of
1,365,281 shares of the outstanding shares of Common Stock and currently holds
options to purchase an additional 137,500 shares. In addition, executive
officers who are not also directors have been granted options to purchase 7,500
shares and it is intended that such officers will be awarded options to purchase
37,500 shares of Common Stock in connection with the Public Offering. Such
shares of Common Stock may be sold in the public market or otherwise disposed
of, subject to compliance with applicable securities laws. The Company's Amended
and Restated Certificate of Incorporation authorizes the issuance of 9,000,000
shares of Common Stock. Upon completion of the Public Offering, there will be
3,353,166 shares of Common Stock issued and outstanding (assuming no exercise of
the Underwriters' over-allotment option). Sales of a substantial number of
shares of Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. See "Shares
Eligible for Future Sale."
DIVIDEND POLICY
During fiscal 1996, the Company began paying dividends on its Common Stock.
Such dividends totaled approximately $71,000 in the aggregate. The Company also
paid dividends of approximately $71,000 in the aggregate for the six months
ended December 31, 1996. The Company's continuing payment of dividends in the
future is in the sole discretion of the Board of Directors and will depend,
among other things, upon the Company's earnings, its capital requirements and
financial condition as well as other factors. As a result, no prediction can be
made as to whether the Company will continue to pay dividends in the future or
continue to pay dividends at the level it has in the past. See "Dividend Policy"
and "Description of Capital Stock."
ANTI-TAKEOVER EFFECT OF DELAWARE LAW
The Company is a Delaware corporation and is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prevents an "interested stockholder" (defined generally as a person
owning 15% or more of the Company's outstanding voting stock) from engaging in a
"business combination" with the Company for three years following the date that
person became an interested stockholder unless the business combination is
approved in a prescribed manner. This statute could make it more difficult for a
third party to acquire control of the Company without the support of management.
See "Description of Capital Stock--Certain Provisions of Delaware Law."
13
<PAGE>
FORWARD LOOKING STATEMENTS
When used in this prospectus, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "projected",
"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 lending
area, lack of a pubic market for the Common Stock, competition, factors
affecting the Company's ability to implement its growth strategy, ABFS's
dependence on debt financing and securitizations to fund its operations,
fluctuations in quarterly operating results, unseasoned nature of ABFS's Home
Equity Loan and Equipment Lease portfolios, state and federal regulation and
licensing requirements applicable to ABFS's lending activities and environmental
concerns that could cause the Company's actual results to differ materially from
historical earnings and those presently anticipated or projected. Such factors,
which are discussed in "Risk Factors," "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the notes to
consolidated financial statements, could affect ABFS's financial performance and
could cause ABFS's actual results for future periods to differ materially from
any opinions or statements expressed with respect to future periods in this
prospectus. As a result, potential investors are cautioned not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
14
<PAGE>
THE COMPANY
The Company is a financial services company operating primarily throughout
the mid-atlantic region of the United States. ABFS, through its principal direct
and indirect subsidiaries, American Business Credit, Inc. ("ABC"), HomeAmerican
Credit, Inc. (d/b/a Upland Mortgage and referred to herein as "HAC" or "Upland")
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 one million shares of Common
Stock offered hereby assuming a Public Offering price of $22.75 per share, after
deducting underwriting discounts and other estimated offering expenses, will be
utilized by the Company for its general corporate purposes. General corporate
purposes may include: (i) financing the future growth of the Company's Business
Purpose Loan, Home Equity Loan or Equipment Lease portfolios; (ii) the repayment
of warehouse credit facilities, lines of credit and the Company's maturing
subordinated debentures; 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 U.S. Treasury Bills,
commercial paper, certificates of deposit, securities issued by U.S. government
agencies, money market funds and repurchase agreements, depending on the
Company's cash flow requirements. The Company's investment policies permit
significant flexibility as to the types of such investments that may be made by
the Company. The Company may also maintain daily unsettled balances with certain
broker-dealers. While the Company may from time to time consider potential
acquisitions, the Company as of the date of this Prospectus had no commitments
or agreements with respect to any material acquisitions.
DIVIDEND POLICY
During fiscal 1996, the Company began paying dividends on its Common Stock.
Such dividends totaled approximately $71,000, or $0.03 per share. For the six
months ended December 31, 1996, the Company paid dividends totaling
approximately $71,000, or $0.03 per share. The continuing payment of dividends
by the Company in the future is in the sole discretion of its Board of Directors
and will depend, among other things, upon the Company's earnings, capital
requirements and financial condition as well as other factors. As a result, no
assurance can be given that the Company will continue to pay dividends in the
future or continue to pay dividends at the same level as it has in the past
following the completion of the Public Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
As a Delaware corporation, the Company may not declare and pay dividends on
its capital stock if the amount paid exceeds an amount equal to the excess of
the Company's net assets over paid-in-capital or, if there is no excess, its net
profits for the current and/or immediately preceeding fiscal year.
15
<PAGE>
MARKET FOR COMMON STOCK
The Common Stock has been and is currently traded on the PHLX. Since the
Common Stock began trading on the PHLX in May 1996, the Common Stock has
experienced a relatively low trading volume. The Common Stock has been approved
for trading on the Nasdaq National Market System upon commencement of the Public
Offering under the symbol "ABFI". Upon commencement of the Public Offering, the
Company intends to delist its Common Stock from the PHLX. In order to be traded
on the Nasdaq National Market System there must be at least two market makers
for the Common Stock. The Representative has indicated its intention to make a
market in the Company's Common Stock following completion of the Public
Offering. The Representative is not obligated, however, to make a market in the
Common Stock and any market making thereby may be discontinued at any time. The
Company anticipates that it will be able to secure the two market makers
necessary to enable the Common Stock to be traded on the Nasdaq National Market
System. However, a public trading market having the desirable characteristics of
depth, liquidity and orderliness depends upon the presence in the marketplace of
both willing buyers and sellers of the Common Stock at any given time, which is
not within the control of the Company or any market maker. Accordingly, there
can be no assurance that an active and liquid market for the Common Stock will
develop or be maintained, or that resales of the Common Stock can be made at or
above the Public Offering price after the completion of the Public Offering. In
addition, the trading price of the Common Stock could be subject to wide
fluctuations in response to quarterly variations in changes in financial
estimates by securities analysts and other events or facts. These broad market
fluctuations may adversely affect the market price of the Common Stock. See
"Risk Factors--Limited Public Market for the Common Stock; Possible Volatility
of Stock Price" and "Market for Common Stock and Related Stockholder Matters."
16
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of ABFS as of
December 31, 1996 and on an as adjusted basis giving effect to the sale of
1,000,000 shares of Common Stock by the Company in the Public Offering (assuming
no exercise of the Underwriters' over-allotment option) at an assumed Public
Offering price of $22.75 per share of Common Stock after deducting underwriting
discounts and commissions and estimated expenses of the Public Offering and the
application of the estimated net proceeds therefrom. See "Use of Proceeds." This
information below should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto which are included
elsewhere herein. See also "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of Capital Stock."
<TABLE>
<CAPTION>
At December 31, 1996
-----------------------
As
Actual Adjusted
--------- ----------
(In Thousands)
<S> <C> <C>
Warehouse credit facilities ................................ $ 6,310 $ 6,310
Long-term debt:
Subordinated debentures .................................. 20,486 20,486
--------- ----------
Total ................................................. 26,796 26,796
--------- ----------
Stockholders' equity:
Preferred Stock, $.001 par value per share; 1,000,000
shares authorized; no shares outstanding .............. -- --
Common Stock, $.001 par value per share; 9,000,000 shares
authorized; 2,353,166 shares issued and outstanding
(actual); 3,353,166 shares issued and outstanding (as
adjusted) (1) ......................................... 2 3
Additional paid in capital ............................... 1,932 22,643
Retained earnings ........................................ 5,287 5,287
Less note receivable .................................. 600 600
--------- ----------
Total stockholders' equity ............................ 6,621 27,333
--------- ----------
Total capitalization .................................. $27,107 $47,819
========= ==========
</TABLE>
- ------
(1) Excludes 181,000 shares of Common Stock reserved for issuance upon the
exercise of options granted under the Company's stock option plans, 150,500
shares of Common Stock issuable upon the exercise of options intended to be
granted to the Company's officers in connection with the Public Offering as
well as 38,488 shares of Common Stock reserved for issuance upon the
exercise of options available for grant under the Company's stock option
plans. See "Management--Executive Compensation" and "Description of Capital
Stock."
17
<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
--------- --------- --------- --------- --------- -------- ---------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
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:
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 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
--------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
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>
18
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
--------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- -------- ---------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
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 -- -- --
</TABLE>
<TABLE>
<CAPTION>
At or For The
Six Months Ended
December 31, At or For the Year Ended June 30,
--------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets (1) ................ 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.
19
<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
debentures 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 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
20
<PAGE>
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.
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 Standard ("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 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
debentures 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 debentures 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.
21
<PAGE>
June 30, 1996 compared to June 30, 1995. Total assets increased $24.7
million, or 111.3%, to $46.9 million at June 30, 1996 from $22.2 million at June
30, 1995. The primary reasons for the increase were increases in loan and lease
receivables, other receivables and other assets. Loan and lease receivables
available for sale increased $8.9 million, or 102.3%, to $17.6 million at June
30, 1996 from $8.7 million at June 30, 1995 as a result of the Company's
strategy of holding loans in its portfolio pending securitization. Other
receivables increased $9.9 million, or 235.7%, to $14.1 million at June 30, 1996
from $4.2 million at June 30, 1995 due to the Company's retention of the excess
spread in connection with its two loan securitizations. Other assets, consisting
primarily of subordinated interests resulting from the securitizations,
increased $3.6 million, or 124.1%, to $6.5 million at June 30, 1996 from $2.9
million at June 30, 1995 due primarily to an increase in subordinated interests
obtained as a result of the Company's securitizations.
Total liabilities increased $22.5 million, or 112.5%, to $42.5 million at
June 30, 1996 from $20.0 million at June 30, 1995 primarily due to an increase
in debt. The increase in debt was due to sales of subordinated debentures of
$19.7 million during the year ended June 30, 1996 combined with a net increase
in bank debt of $2.3 million. At June 30, 1996, the Company had approximately
$33.6 million of subordinated debentures outstanding. The Company's ratio of
total debt (subordinated debentures plus credit facilities) to equity at June
30, 1996 was 8.2:1.
June 30, 1995 compared to June 30, 1994. Total assets increased $9.9 million,
or 80.5%, to $22.2 million at June 30, 1995 from $12.3 million at June 30, 1994.
The primary reasons for the increase were an increase in cash and cash
equivalents, other receivables and other assets. Cash and cash equivalents
increased $4.6 million to $4.7 million at June 30, 1995 from $83,000 at June 30,
1994 as a result of increased sales of the Company's subordinated debentures.
Other receivables increased $3.3 million, or 351.4%, to $4.2 million at June 30,
1995 from $939,000 at June 30, 1994 due to the Company's retention of the excess
spread in connection with a securitization of $9.7 million of Business Purpose
Loans. Other assets increased $1.6 million, or 123.1%, to $2.9 million at June
30, 1995 from $1.3 million, at June 30, 1994, due primarily to the addition of a
subordinated certificate obtained as a result of a securitization and an
increase in foreclosed real estate held for sale.
Total liabilities increased $9.3 million, or 86.9%, to $20.0 million at June
30, 1995, from $10.7 million at June 30, 1994 primarily due to an increase in
debt outstanding. The increase in debt was due to net sales of subordinated
debentures of $10.6 million during the year ended June 30, 1995 which more than
offset the net decrease in institutional debt of $2.2 million. At June 30, 1995,
the Company had approximately $17.8 million of subordinated debentures
outstanding. The Company's ratio of total debt to equity at June 30, 1995 was
8.3:1.
RESULTS OF OPERATIONS
During fiscal 1996 and the 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 the 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."
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.
22
<PAGE>
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 additional 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 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.
23
<PAGE>
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 debentures. Also contributing to
the increase in total expenses was increases in provision for credit losses,
payroll, sales and marketing and general and administrative expenses related to
increased loan and lease originations.
Interest Expense. Interest expense increased $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 debentures outstanding, the
proceeds of which were utilized to fund the Company's loan growth. Average
subordinated debentures 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 debentures
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
debentures with maturities of greater than one year which bear higher interest
rates than shorter term debentures. 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 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 debentures and loan products. In addition, the Company initiated a
television advertising program for the sale of its home equity product. Subject
to market conditions, the Company plans to expand its service area throughout
the eastern United States. As a result, it is therefore anticipated that sales
and marketing expenses will continue to increase in the future.
General and Administrative Expenses. General and administrative expenses
increased $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.
24
<PAGE>
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 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.
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.
25
<PAGE>
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 debentures, and increased payroll, sales and
marketing and general and administrative expenses related to increased loan
originations during the year ended June 30, 1996.
Interest Expense. Interest expense increased $1.5 million, or 125.0%, to $2.7
million in the year ended June 30, 1996 from $1.2 million in the year ended June
30, 1995. The increase was primarily attributable to an increase in the amount
of the Company's subordinated debentures outstanding. Management utilized the
proceeds from the sale of such subordinated debentures to fund the increase in
loan originations experienced during the year ended June 30, 1996. Outstanding
subordinated debentures which were issued for terms ranging from three months to
ten years and with rates ranging from 7% to 10.5%, increased to an average of
$25.0 million during the year ended June 30, 1996 from an average of $12.0
million during the year ended June 30, 1995. The average interest rate paid on
the subordinated debentures increased to 9.02% for fiscal 1996 from 8.75% for
fiscal 1995 due to an increase in market rates of interest.
Provision for Credit Losses. The provision for credit losses increased to
$681,000 in fiscal 1996 from $165,000 in fiscal 1995. The provision for credit
losses was increased due to the increase in the Company's loan and lease
portfolio. The Company's allowance for credit losses totaled $707,000 at June
30, 1996. The ratio of the allowance for credit losses to total net loan and
lease receivables serviced was 1.18% at June 30, 1996 as compared to 0.87% at
June 30, 1995.
Payroll and Related Costs. Payroll and related costs increased $208,000, or
20.8%, to $1.2 million in the year ended June 30, 1996 from $1.0 million in the
year ended June 30, 1995. This increase was primarily due to an increase in the
number of administrative employees as a result of the Company's growth in loan
originations, geographic expansion and increase in loans serviced for others.
Sales and Marketing Expenses. Sales and marketing expenses increased $1.2
million, or 80.0%, to $2.7 million in the year ended June 30, 1996 from $1.5
million in the year ended June 30, 1995. The increase was attributable to an
increase in advertising costs as a result of increased newspaper and direct mail
advertising related to the Company's sale of debentures and loan products and
the initiation of a radio advertising program for the home equity loan product.
The increase in sales and marketing expenses was also due to the expansion of
the Company's service area during fiscal 1996 into Maryland, New York City and
Florida. During such period, the Company began offering its subordinated
debentures in Florida and Business Purpose Loans in Maryland and New York City.
General and Administrative Expenses. General and administrative expenses
increased $1.1 million, or 127.0%, to $2.0 million in the year ended June 30,
1996 from $866,000 in the year ended June 30, 1995. The increase was primarily
attributable to increases in rent, telephone, office expense, professional fees
and other expenses incurred as a result of the previously discussed increase in
loan originations and loan servicing experienced during fiscal 1996.
Income Taxes. Income taxes increased from $313,000 for the year ended June
30, 1995 to $802,000 for the year ended June 30, 1996 as a result of increased
earnings. At June 30, 1996, the Company had approximately $900,000 of net
operating loss carryforwards ("NOLs") available for 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.
26
<PAGE>
YEAR ENDED JUNE 30, 1995 COMPARED WITH THE YEAR ENDED JUNE 30, 1994
Total Revenues. Total revenues increased $3.0 million, or 115.4%, to $5.6
million in the year ended June 30, 1995 from $2.6 million in the year ended June
30, 1994. The increase in total revenues was the result of increased interest
and fee income combined with the recognition of gain on sale of loans through a
securitization.
Gain on Sale of Loans. Gain on sale of loans increased $1.3 million, or
1181.8%, to $1.4 million for the year ended June 30, 1995 from $110,000 for the
year ended June 30, 1994 as a result of increased loan sales through a
securitization in the year ended June 30, 1995. The Company consummated its
first securitization of $9.7 million in Business Purpose Loans in March 1995
generating gain on sale of loans of $1.4 million (representing the fair value of
the excess spread of $3.1 million less $1.7 million of costs associated with the
transaction).
Interest and Fee Income. Interest and fee income increased $1.7 million, or
70.8%, to $4.1 million in the year ended June 30, 1995 from $2.4 million in the
year ended June 30, 1994 due primarily to an increase in fee income earned in
connection with the origination of Business Purpose Loans for sale to
unaffiliated lenders.
Interest income from loans and leases increased $390,000 to $1.4 million in
the year ended June 30, 1995, or 39.0%, from $1.0 million for the year ended
June 30, 1994. ABL, the Company's leasing subsidiary which commenced operations
in December 1994, contributed $99,000 of the increase. The remaining increase
was attributable to higher average outstanding loan and lease receivables caused
by increased originations during fiscal 1995. During the year ended June 30,
1995, the Company originated $18.2 million of Business Purpose Loans and $17.0
million of Home Equity Loans. During the same period, $2.2 million of leases
were originated. Average outstanding loan and lease receivables increased to
$9.9 million during the year ended June 30, 1995 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 debentures, and
increased payroll, sales and marketing and general administrative expenses
related to increased loan originations during the year ended June 30, 1995.
Interest Expense. Interest expense increased $585,000, or 93.2%, to $1.2
million in the year ended June 30, 1995 from $628,000 in the year ended June 30,
1994 primarily due to an increase in the amount of the Company's subordinated
debentures outstanding as management utilized the proceeds from the sale of such
subordinated debentures to fund the increase in loan originations during the
year ended June 30, 1995. Outstanding subordinated debentures which were issued
for terms ranging from three months to ten years and with rates ranging from
7.0% to 10.25% increased to an average of $12.0 million during the year ended
June 30, 1995 from an average $3.8 million during the year ended June 30, 1994.
The average interest rate paid on the subordinated debentures remained fairly
constant during the two years at approximately 8.75%.
Provision for Credit Losses. The provision for credit losses increased
$117,000 to $165,000 for the year ended June 30, 1995 from $48,000 for the year
ended June 30, 1994. The provision for credit losses was increased due to the
increase in the Company's loan and lease portfolio. The allowance for credit
losses was $155,000 at June 30, 1995. The ratio of the allowance for credit
losses to total net loan and lease receivables serviced was 0.87% at June 30,
1995 as compared to 0.93% at June 30, 1994.
27
<PAGE>
Payroll and Related Costs. Payroll and related costs increased $584,000, or
142.1%, to $995,000 in the year ended June 30, 1995 from $411,000 in the year
ended June 30, 1994. The increase was due to the hiring of additional personnel
in connection with the commencement of operations of ABL and an increase in the
number of administrative employees resulting from the Company's growth in loan
originations.
Sales and Marketing Expenses. Sales and marketing expenses increased
$849,000, or 128.4%, to $1.5 million in the year ended June 30, 1995 from
$661,000 in the year ended June 30, 1994. The increase was attributable to an
increase in advertising costs as a result of increased newspaper and direct mail
advertising related to the Company's sale of subordinated debentures and loan
products.
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
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.
28
<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 %
- -------------------------- ------------ --------- ----------- ---------- ------------ --------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Business Purpose Loans
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% -- --
============ ========= =========== ========== ============ ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
Company Combined
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.
29
<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.
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.
30
<PAGE>
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 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, 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.
31
<PAGE>
Subject to economic, market and interest rate conditions, the Company intends
to continue to implement additional securitizations of its loan portfolios and
may in the future securitize its lease portfolio. Adverse conditions in the
securitization market could impair the Company's ability to sell loans through
securitizations on a favorable or timely basis. Since the sale of loans through
securitizations is an important source of revenues, any such delay or impairment
could have a material adverse impact in the Company's results of operations. 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 debentures 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 debentures outstanding and available credit facilities
and lines of credit totaling $47.5 million, of which $6.3 million was drawn upon
on such date.
Between 1990 and 1993, American Business Finance Corporation ("ABFC"), an
indirect subsidiary of ABFS, sold approximately $1.7 million in principal amount
of subordinated debentures which mature at varying times between September 1996
and June 1998. In December 1993, the Company ceased selling subordinated
debentures through ABFC. As of December 31, 1996, ABFC had approximately $1.3
million of subordinated debentures outstanding.
In addition, between July 1, 1993 and December 31, 1996, ABFS sold $67.7
million in principal amount of subordinated notes (including redemptions and
repurchases by investors), pursuant to registered offerings with maturities
ranging between three months and ten years. As of December 31, 1996, ABFS had
approximately $43.9 million of subordinated debentures outstanding (excluding
the debt of ABFC). The proceeds of such sales of debentures have been used to
fund general operating and lending activities. The Company intends to meet its
obligations to repay such debentures as they mature with income generated
through its lending activities and funds generated through repayment of its
outstanding loans. The repayment of such obligations should not effect the
Company's operations.
During fiscal 1997, the Company intends to file a registration statement with
the Commission which would register up to $125.0 million of debt securities for
sale in a public offering. The Company anticipates offering such securities to
the public on a continuous basis over a 20 month period.
In April 1996, Upland entered into an Interim Warehouse and Security
Agreement with Prudential Securities Realty Funding Corporation. The credit
facility is for $25.0 million, bears interest at the 30 day London Inter-Bank
Offered Rate ("LIBOR") plus 1.25% and expires March 1997. Additionally, in May
1996, Upland entered into a $7.5 million Revolving Loan and Security Agreement
with BankAmerica Business Credit, Inc. The credit facility bears interest at the
bank's prime rate plus 1.25% and expires in May 1998. 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."
32
<PAGE>
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.
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 intends
to make awards of options to purchase 150,500 shares of Common Stock in
conjunction with the Public Offering to various officers of the Company. See
"Management" 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.
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.
33
<PAGE>
BUSINESS
GENERAL
ABFS is a financial services company operating primarily in the mid-atlantic
region of the United States. The Company, through its principal direct and
indirect subsidiaries, originates, sells and services Business Purpose Loans and
Home Equity Loans. The Company also originates Equipment Leases. In addition,
the Company recently commenced implementation of the Bank Alliance Program
pursuant to which it has entered into exclusive business arrangements with
several financial institutions pursuant to which the Company will purchase Home
Equity Loans that do not meet the underwriting guidelines of the selling
institution but that do meet the Company's underwriting criteria.
The Company's customers currently consist primarily of two groups. The first
category of customers includes credit impaired borrowers who are generally
unable to obtain financing from banks, savings and loan associations or other
finance companies that have historically provided loans only to individuals with
favorable credit characteristics. These borrowers generally have impaired or
unsubstantiated credit characteristics and/or unverifiable income and respond
favorably to the Company's marketing efforts. The second category of customers
includes borrowers who would qualify for loans from traditional lending sources
but elect to utilize the Company's products and services. The Company's
experience has indicated that these borrowers are attracted to the Company's
loan products as a result of its marketing efforts, the personalized service
provided by the Company's staff of highly trained lending officers and the
timely response to loan requests. Historically, both categories of customers
have been willing to pay the Company's origination fees and interest rates which
are generally higher than those charged by traditional lending sources.
The Company began operations in 1988 and initially offered Business Purpose
Loans. The Company currently originates Business Purpose Loans through a retail
network of salespeople in Pennsylvania, Delaware, New Jersey, New York,
Virginia, Maryland and Connecticut. The Company has taken the initial steps to
expand its business purpose lending program into the southeastern region of the
United States. The Company focuses its marketing efforts on small businesses
which generally do not meet all of the credit criteria of commercial banks and
small businesses that the Company's research indicates are predisposed to using
the Company's products and services.
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 59.79% 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, 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
34
<PAGE>
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 debentures to increase its
loan and lease originations and to expand into new geographic markets with an
initial focus on expansion in the southeastern region of the United States. The
Company also intends to expand its Bank Alliance Program with financial
institutions across the United States.
From the inception of the Company's business in 1988 through 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."
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 subsidiaries,
American Business Finance Corporation, Upland, Processing Service Center, Inc.,
HomeAmerican Consumer Discount Company ("HCDC"), ABL and ABC Holdings
Corporation (collectively, the "Company").
35
<PAGE>
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 subsidiaries, ABFS 1995-1, Inc., ABFS 1995-2, Inc., ABFS
1996-1, Inc. and ABFS 1996-2, Inc. are Delaware investment holding companies.
Such companies were incorporated to facilitate the Company's securitizations.
Such corporations do not engage in any business activity other than holding the
subordinated certificate, if any, and the excess spread. See
"--Securitizations." American Business Finance Corporation was incorporated in
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."
36
<PAGE>
The following chart sets forth organizational structure of ABFS.(1)
-----------------------
ABFS
(Holding Company)
-----------------------
----------------------------------
American Business
Credit, Inc.
(Originates and services Business
Purpose Loans)
----------------------------------
- --------------------------------------------------------------------------------
HOME PROCESSING AMERICAN HOME ABC AMERICAN
AMERICAN SERVICE BUSINESS AMERICAN HOLDINGS BUSINESS
CREDIT, INC. CENTER, LEASING, CONSUMER CORP. FINANCE
d/b/a INC. INC. DISCOUNT, CORP.
UPLAND (Processes (Originates INC.
MORTGAGE(2) Bank Alliance and services (Originates (Holds (Issued
(Originates, Program Equipment small foreclosed subordinated
purchases Home Equity Leases) consumer real debentures
and services Loans) installment estate) from 1990
Home Equity loans) to 1993)
Loans)
(1) In addition to the corporations pictured above, the Company organizes a
special purpose corporation for each of its securitizations. Such
corporations are direct subsidiaries of ABFS.
(2) Loans purchased by Upland represent loans acquired through Bank
Alliance Program.
37
<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 Iterest 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 ......................... 193 194 132 171
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>
38
<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.
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 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.
39
<PAGE>
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 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 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.
40
<PAGE>
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 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 "-- Loan and Leasing Activities -- Home Equity Lending."
The Company, through ABL, markets its Equipment Leases throughout the United
States with particular emphasis on the eastern portion of the United States. The
Company's marketing efforts in the leasing area are focused on the Company's
niche market of distributors of small to medium-sized office, industrial and
medical equipment. ABL primarily obtains its equipment leasing customers through
equipment manufacturers, brokers and vendors with whom it has a relationship and
through a direct sales force. The Company does not target any particular
industry or trade group and avoids the concentration of leases in one particular
industry group. The Company believes that its leasing activities will enhance
its cross-selling opportunities with its existing Business Purpose Loan
customers.
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.
41
<PAGE>
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 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.
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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%. 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.
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.
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."
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<PAGE>
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 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.
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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 executive offices are located. In addition, the Company leases an
executive suite in Boca Raton, Florida, expiring in February 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 and Chief
Operating Officer, Treasurer and a Director of the Company. Beverly Santilli is
President of ABC and an Executive Vice President and Secretary of ABFS. Jeffrey
M. Ruben is Senior Vice President and General Counsel of the Company. 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 54 Director
Harold E. Sussman 71 Director
Beverly Santilli 37 Executive Vice President and Secretary of ABFS and President of ABC
Jeffrey M. Ruben 33 Senior Vice President and General Counsel of ABFS
David M. Levin 52 Senior Vice President - Finance and Chief Financial Officer
</TABLE>
- ------
(1) As of December 31, 1996.
DIRECTORS
The Company's Amended and Restated Certificate of Incorporation fixes the
number of Directors to between one and fifteen as determined by resolution of
the Board of Directors. The Board of Directors of the Company is currently
comprised of five persons. Prior to the closing of the Public Offering, all
directors were elected each year for a one-year term and until their successors
were elected and qualified.
The Company's Amended and Restated Certificate of Incorporation provides that
the Board of Directors shall be divided into three classes following the closing
of the Public Offering of the Company's Common Stock. Accordingly, following the
close of the Public Offering, the initial directors of Class One will serve
until the first annual meeting of stockholders following the Public Offering; at
such first annual meeting of stockholders, the directors of Class One shall be
elected for a term of three years, and after expiration of such term, shall
thereafter be elected every three years for three-year terms. The initial
directors of Class Two shall serve until the second annual meeting of
stockholders following the Public Offering. At the second annual meeting of
stockholders following the Public Offering, the directors of Class Two shall be
elected for a term of three years and, after the expiration of such term, shall
thereafter be elected every three years for three-year terms. The initial
directors of Class Three shall serve until the third annual meeting of
stockholders after the Public Offering. At the third annual meeting of
stockholders following the Public Offering, the directors of Class Three shall
be elected for a term of three years and after the expiration of such term,
shall thereafter be elected every three years for three-year terms. Upon the
consummation of the Public Offering the Board shall determine the composition of
each class.
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<PAGE>
The following is a description of the business experience of the Company's
Board of Directors.
Anthony J. Santilli, Jr. is the Chairman, President, Chief Executive
Officer, Chief Operating Officer 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 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.
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<PAGE>
Executive Committee. The members of the Executive Committee are Messrs.
Santilli, Kaufman and Becker. The Executive Committee is empowered by the
Board to act in its stead between meetings of the Board. The Executive
Committee met four times during the year ended June 30, 1996.
EXECUTIVE OFFICERS WHO ARE NOT ALSO DIRECTORS
The following is a description of the business experience of each executive
officer who is not also a director.
Beverly Santilli 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 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
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<PAGE>
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 ByLaws also provide that,
if Delaware law is hereafter amended to authorize the further elimination or
limitation of the liability of the directors of ABFS, then the liability of such
directors shall be eliminated or limited to the fullest extent permitted by
applicable law. The effect of these provisions of the Company's Amended and
Restated Certificate of Incorporation and Bylaws is to eliminate the rights of
the Company and its stockholders (through stockholders' derivative suits on
behalf of the Company) to recover monetary damages against a director for breach
of the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in certain situations described
in Delaware General Corporation Law. This provision does not limit or eliminate
the rights of the Company or any stockholder to seek nonmonetary relief, such as
an injunction or recision, in the event of a breach of a director's duty of
care.
The Amended and Restated Certificate of Incorporation and the 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.
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<PAGE>
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").
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 1995 191,667 -- -- -- -- --
Executive Officer, Chief 1994 175,000 -- -- -- -- --
Operating Officer, Treasurer
and Director of ABFS
Beverly Santilli 1996 $120,000 $ 65,000 -- -- -- --
President of ABC and Executive 1995 86,892 -- -- -- -- --
Vice President and Secretary 1994 80,163 -- -- -- -- --
of ABFS
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 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
51
<PAGE>
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, the Company intends to grant incentive stock options to
purchase approximately 150,500 shares of Common Stock to certain of its
officers. Of this amount, options to purchase 12,500 shares of Common Stock are
intended to be awarded to each of Messrs. Ruben and Levin and Mrs. Santilli.
Such options will vest at a rate of 20% per year over a five-year period with
the first portion vesting on the first anniversary of the date of grant and the
exercise price per share will be the Public Offering price. Options to purchase
13,488 shares of the Company's Common Stock remained available for grant as of
December 31, 1996.
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 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.
52
<PAGE>
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 $2.67 per share.
53
<PAGE>
The following table sets forth information regarding options to purchase
shares of Common Stock granted to the Named Officers during fiscal 1996. No
stock appreciation rights ("SARs") were granted in fiscal 1996.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Potential
Number of % of Total Realized Value at
Securities Options/SARs Assumed Annual Rates of
Underlying granted to Stock Price Appreciation
Options/SARs Employees in Exercise or Base for Option Term
Name granted (#) Fiscal Year Price ($/sh) Expiration Date 5% ($) 10% ($)
- ------------------------------------ ------------ ----------- ----------------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 22,500(1) 100% $ 5.00 October 1, 2005 $70,751 $179,296
Chairman, President, Chief Executive
Officer, Chief Operating Officer,
Treasurer and Director of ABFS
Beverly Santilli -- -- -- -- -- --
President of ABC and Executive Vice
President and Secretary of ABFS
Jeffrey M. Ruben -- -- -- -- -- --
Senior Vice President and
General Counsel of ABFS
David M. Levin -- -- -- -- -- --
Senior Vice President - Finance and
Chief Financial Officer of ABFS
</TABLE>
- ------
(1) Represents an option to purchase 22,500 shares of Common Stock. Subsequent
to the end of fiscal 1996, Mr. Santilli received an option to purchase 5,000
shares 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 following completion of the Public Offering. Certain
of the terms of such agreements are described below.
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 the closing date of the Public Offering absent a change in control) or
seventieth birthday or (b) the later of: (i) the fifth year anniversary of the
execution of the agreement (or 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.
<PAGE>
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 employees'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 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. Santilli's and Mrs.
Santilli's agreements would continue to be in force for the remainder of their
term as described above.
54
<PAGE>
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 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.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 by (i) the
directors of the Company, (ii) the Named Officers, (iii) each person known by
the Company to be the beneficial owners of five percent or more of the Common
Stock of the Company, and all directors and executive officers of the Company as
a group. The table also sets forth the number and percentage of the outstanding
shares projected to be beneficially owned by each individual after the Public
Offering, assuming the sale of 1,000,000 shares of Common Stock by the Company
(assuming no exercise of the over-allotment option) and gives no effect to any
shares which may be purchased in the Public Offering.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1) Shares Beneficially Owned(1)
Name and Position Prior to Public Offering After Public Offering
----------------------------------------------------- ---------------------------- ------------------------------
Number Percent Number Percent
--------------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 904,544(2)(3) 38.0% 917,044(8) 27.3%
Chairman, President,
Chief Executive Officer, Chief Operating
Officer, Treasurer and Director of ABFS
and Beverly Santilli, President of ABC
and Executive Vice President and
Secretary of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Leonard Becker, Director of ABFS 131,230(4) 5.5 131,230 3.9
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Michael DeLuca, Director of ABFS 194,735(4) 8.2 194,735 5.8
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 170,561(4) 7.2 170,561 5.1
1126 Bryn Tyddyn Drive
Gladwyne, PA 19035
Harold Sussman, Director of ABFS 101,711(4) 4.3 101,711 3.0
Colliers, Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 7,500(5) (6) 20,000(9) (6)
Senior Vice President and General
Counsel of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
David M. Levin -- -- 12,500(10) (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 a group
(eight persons) 1,510,281(7) 60.5% 1,547,781(11) 43.8
</TABLE>
- ------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the 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.
56
<PAGE>
(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 Stock Option Plan.
(5) Represents an option to purchase 7,500 shares of the Company's Common Stock
granted pursuant to the Company's Plan.
(6) Less than one percent.
(7) Includes options to purchase 145,000 shares of the Company's Common
Stock.
(8) Includes an option to purchase 12,500 shares of the Company's Common
Stock intended to be awarded to Mrs. Santilli in connection with the
Public Offering as well as the shares and options previously granted to
Mr. and Mrs. Santilli.
(9) Includes an option to purchase 12,500 shares of the Company's Common
Stock intended to be awarded to Mr. Ruben in connection with the Public
Offering as well as options previously granted to Mr. Ruben.
(10) Includes an option to purchase 12,500 shares of the Company's Common Stock
intended to be awarded to Mr. Levin in connection with the Public Offering.
(11) Includes options to purchase 182,500 shares of the Company's Common
Stock.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 1,000,000 shares
of preferred stock, $0.001 par value ("Preferred Stock") and (ii) 9,000,000
shares of Common Stock.
COMMON STOCK
As of the date hereof, there are 2,353,166 shares of Common Stock issued and
outstanding. Of such 2,353,166 shares, 1,365,281 shares are beneficially owned
by the Board of Directors of the Company. Upon completion of the Public
Offering, there will be 3,353,166 shares of Common Stock issued and outstanding
(assuming no exercise of the Underwriters' over-allotment option). The issued
and outstanding shares of Common Stock have been, and the shares of Common Stock
offered hereby will be, duly authorized, validly issued, fully paid and
non-assessable.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution, or winding up of
the Company, the holders of Common Stock are entitled to share ratably in any
corporate assets remaining after payment of all debts, subject to any
preferential rights of any outstanding Preferred Stock. See "Dividend Policy."
Holders of Common Stock have no preemptive, conversion, or redemption rights
and are not subject to further calls or assessments by the Company.
Immediately after the Public Offering, the Board of Directors of the Company
will hold shares of Common Stock constituting approximately 40.7% of the voting
power of the outstanding Common Stock, which may allow them to control actions
to be taken by the stockholders, including the election of the directors to the
Board of Directors. See "Principal Stockholders" and "Risk Factors--Voting
Control of the Board of Directors of the Company."
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "ABFI." See "Market for Common Stock."
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority to issue up to 1,000,000 shares of Preferred Stock
in one or more series with such designations, rights, preferences and voting
rights as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights that adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In the event of issuance, the Preferred Stock could
be utilized, under certain circumstances, as a way of discouraging, delaying or
preventing an acquisition or change in control of the Company. The Company does
not currently intend to issue any shares of its Preferred Stock.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person became an interested stockholder unless: (i)
before that person became an interested stockholder, the Board approved the
transaction in which the interested stockholder became an interested stockholder
or
58
<PAGE>
approved the business combination; (ii) upon completion of the transaction that
resulted in the interested stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the Company
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the Company and by employee stock plans that
do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) on or following the date on which that person became an interested
stockholder, the business combination is approved by the Company's Board and
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least 66 2/3 % of the outstanding voting stock of the Company not owned by
the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors (but not less than one) who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
Pursuant to Section 161 of the Delaware General Corporation Law, the Board of
Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing a
change of control of the Company. Other than pursuant to the Public Offering,
the Company has no plan or arrangement for the issuance of any shares of capital
stock other than in the ordinary course or pursuant to the Company's stock-based
plans.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws may be deemed to have an anti-takeover effect and may
delay, deter or prevent a merger, tender offer, proxy contest or other takeover
attempt. The following discussion is a general summary of certain of these
provisions which might be determined to have a potential "anti-takeover" effect.
Reference should be made in each case to such Certificate and Bylaws. See
"Additional Information" for information regarding how to obtain a copy of these
documents.
The Company's Amended and Restated Certificate of Incorporation provides that
the stockholders may act only in a meeting that has been duly called and
noticed, except that stockholders may approve by written consent any proposal
that has already been approved by the Board of Directors.
The Company's Amended and Restated Certificate of Incorporation fixes the
number of Directors between one and fifteen as determined by resolution of the
Board of Directors. The Board of Directors of the Company is currently comprised
of five members. Prior to the closing of the Public Offering, all directors were
elected each year for a one-year term and until their successors were elected
and qualified.
The Company's Amended and Restated Certificate of Incorporation provides that
the Board shall be divided into three classes following the closing of the
Public Offering of the Company's Common Stock. Accordingly, following the close
of the Public Offering, the initial directors of Class One will serve until the
first annual meeting of stockholders following the Public Offering; at such
first annual meeting of stockholders, the directors of Class One shall be
elected for a term of three years, and after expiration of such term, shall
thereafter be elected every three years for three-year terms. The initial
directors of Class Two shall serve until the second annual meeting of
stockholders following the Public Offering. At the second annual meeting of
stockholders following the Public Offering, the directors of Class Two shall be
elected for a term of three years and, after the expiration of such term, shall
thereafter be elected every three years for three-year terms. The initial
directors of Class Three shall serve until the third annual meeting of
stockholders after the Public Offering. At the third annual meeting of
stockholders following the Public Offering, the directors of Class Three shall
be elected for a term of three years and after the expiration of such term,
shall thereafter be elected every three years for three-year terms. Upon the
consummation of the Public Offering the Board shall determine the composition of
each class.
59
<PAGE>
Stockholders are not entitled to cumulate their votes in connection with the
election of directors. As a result, a person or a group controlling the majority
of shares of Common Stock can elect all of the directors. Following the Public
Offering, the Board of Directors of the Company will own 1,365,281 shares of
Common Stock constituting 40.7% of the issued and outstanding Common Stock which
may allow it to control actions taken by stockholders, including the election of
directors. See "Principal Stockholders" and "Risk Factors -- Voting Control of
the Board of Directors of the Company."
The Company's Bylaws provide that special meetings of stockholders may only
be called by the Board of Directors, the Chairman or by stockholders entitled to
cast at least 50% of the votes entitled to be cast at a particular meeting.
The Amended and Restated Certificate of Incorporation and Bylaws of the
Company contain certain provisions permitted under the Delaware General
Corporation Law relating to the liability of directors. These provisions
eliminate the directors' liability for monetary damages for a breach of
fiduciary duty, except in certain circumstances involving wrongful acts,
including the breach of a director's duty of loyalty or acts or omissions which
involve intentional misconduct or a knowing violation of a law. The Company's
Amended and Restated Certificate of Incorporation and Bylaws also contain
provisions which provide for the indemnification of its directors and officers
to the fullest extent permitted by the Delaware General Corporation Law.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
9,000,000 shares of Common Stock. Upon completion of the Public Offering, there
will be outstanding 3,353,166 shares of Common Stock (assuming no exercise of
the Underwriters' over-allotment option).
The 1,000,000 shares of Common Stock to be sold in the Public Offering
(1,150,000 shares if the Underwriters' over-allotment option is exercised in
full), will be available for resale in the public market without restriction or
further registration under the Securities Act, except for shares purchased by
affiliates of the Company (in general, any person who has a control relationship
with the Company), which shares will be subject to the resale limitations of
Rule 144 promulgated under the Securities Act ("Rule 144"). In addition,
approximately 225,012 shares of the Common Stock are deemed to be "restricted
securities" as the term is defined in Rule 144 and are eligible for resale to
the public in compliance with Rule 144.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years is entitled to sell, within any three month period, a number of shares
which does not exceed the greater of 1% of the then-outstanding shares of the
Company's Common Stock (33,532 shares immediately after the Public Offering
assuming no exercise of the Underwriters' over-allotment option) or the average
weekly trading volume of the Company's Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 may also be subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted securities" under Rule 144 for at
least three years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitation, manner of sale provisions, public information
requirements or notice requirements.
The Commission has published a notice of proposed rule-making that, if
adopted as proposed, would shorten the two-year holding under Rule 144 to one
year and would shorten the three-year holding period under Rule 144 to two
years. The Company cannot predict whether or in what form such amendment will be
adopted.
The Company and its directors and executive officers who are stockholders
have agreed, subject to certain limited exceptions, not to offer, sell or
otherwise dispose of any shares of Common Stock for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Underwriter. Following
60
<PAGE>
the expiration of such 180-day period, directors and executive officers of the
Company will hold an aggregate of 1,365,281 shares (excluding options) of Common
Stock. The Company's directors and executive officers also hold options to
purchase an aggregate of 145,000 shares of Common Stock.
Prior to this Public Offering, there has been a limited public market for the
Common Stock. Sales of substantial amounts of Common Stock in the public market
could adversely affect market prices for the Common Stock and make it more
difficult for the Company to sell equity securities in the future at a time and
price which it deems appropriate. See "Market for Common Stock."
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been approved for listing on the NASDAQ
National Market System upon commencement of the Public Offering under the symbol
"ABFI." Upon commencement of the Public Offering, the Company intends to delist
its Common Stock from the PHLX. See "Market for Common Stock."
The Company's Common Stock has been and is currently traded on the PHLX under
the symbol "AFX". Such Common Stock began trading on the PHLX on May 13, 1996.
Prior to the commencement of trading on the PHLX, there was no active trading
market for the Common Stock. As a result, stock price information for the Common
Stock is not available for any period prior to May 13, 1996. The following table
sets forth the high and low sales prices of the Common Stock from the date on
which the Common Stock commenced trading on the PHLX through December 31, 1996.
On January 30, 1997 the closing price of the Common Stock on the PHLX was
$22.75.
<TABLE>
<CAPTION>
Quarter Ended High Low
----------------------------------------- -------- --------
<S> <C> <C>
June 30, 1996((1)) ...................... $ 17.00 $10.00
September 30, 1996 ...................... 19.50 11.13
December 31, 1996 ....................... 20.00 17.25
March 31, 1996 (through January 30, 1997) 22.75 18.75
</TABLE>
- ------
(1) Represents the period May 13, 1996 through June 30, 1996.
As of December 31, 1996, there were 103 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 declared and paid dividends of $0.03
per share for the six months ended December 31, of fiscal 1996. 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. See "Dividend Policy."
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. See
"Dividend Policy."
As of the date hereof, there were 181,000 shares of Common Stock subject to
options. In addition, options covering 150,500 shares of Common Stock subject to
options are intended to be granted in connection with the Public Offering. In
addition, there were an additional 38,488 shares reserved for issuance under the
Company's option plans. See "Management."
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
Underwriters named below (the "Underwriters"), through their Representative,
have severally agreed to purchase from the Company the following respective
number of shares of Common Stock at the Public Offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------------------------------- ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc
----------------
Total .......................... 1,000,000
================
</TABLE>
The underwriting agreement provides that obligations of the several
Underwriters thereunder are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of the Common Stock offered hereby
if any of such shares are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the Public Offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $________ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $____ per share to certain other dealers. After the Common Stock has been
released for sale to the public, the offering price and other selling terms may
be changed by the Representative.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 150,000
additional shares of Common Stock at the Public Offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Common Stock offered hereby.
To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the table above bears to 1,000,000
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters as set forth in the above table. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,000,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act. The Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by the Underwriters in connection with the shares of
Common Stock offered hereby, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of competent jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Company and the Company's directors and executive officers who are
stockholders of the Company and who, immediately following the Public Offering
(assuming no exercise of the Underwriters' over-allotment option) collectively
will beneficially own an aggregate of 1,365,281 shares (excluding options) of
Common Stock have agreed that for a period of 180 days after the effective date
of the Public Offering they will not, without the prior written consent of the
Underwriters, directly or indirectly offer, offer for sale, sell, contract to
sell, pledge, grant an option to purchase or otherwise sell or dispose of any
shares of Common stock or any securities convertible into, or exchangeable or
exercisable for shares of Common Stock except for the grant of options to
purchase shares of Common Stock pursuant to the Company's option plans described
herein or the exercise of options (but not the sale of the shares received upon
the exercise thereof) granted pursuant to such plans.
62
<PAGE>
The Underwriters have advised the Company that the Underwriters do not intend
to confirm sales to any account over which they exercise discretionary
authority.
Prior to the Public Offering, there has been a limited public trading market
for the Common Stock. Consequently, the initial Public Offering price of the
Common Stock has been determined by negotiations between the Company and the
Underwriters. Among the factors to be considered in such negotiations were the
historical trading price of the Common Stock, the history of, and the prospects
for, the Company and the industry in which the Company competes, an assessment
of the Company's management, its financial condition, its past and present
earnings and the trend of such earnings, the prospects for future earnings of
the Company, the present state of the Company's development, the general
condition of the economy and the securities markets at the time of the Public
Offering and the market prices of and demand for publicly traded common stock of
comparable companies in recent periods.
The Representative intends to make a market in the Common Stock upon
completion of the Public Offering, subject to compliance with applicable laws
and regulations. The Representative may, however, discontinue its market
making activities at any time. See "Market for Common Stock."
LEGAL MATTERS
The validity of the Common Stock being offered hereby has been passed upon
for the Company by Blank Rome Comisky & McCauley, Four Penn Center Plaza,
Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the
Underwriters by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.
EXPERTS
The Consolidated Financial Statements of ABFS and subsidiaries as of June 30,
1996 and for the year ending June 30, 1996 included in this Prospectus, have
been audited by BDO Seidman, LLP, independent certified public accountants, as
set forth in their report appearing herein and have been included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The Consolidated Financial Statements of ABFS and subsidiaries as of June 30,
1995 and 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company, Brooklyn, New York.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
and Subsidiaries
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1996, and the
related consolidated statements of operations and stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1996, and the
consolidated results of their operations, stockholders' equity and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
-------------------------
BDO Seidman, LLP
Philadelphia, Pennsylvania
August 23, 1996
F-2
<PAGE>
Stockholders and Directors
American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of AMERICAN
BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES as of June 30, 1995, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the two years in the period ended June 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Business Financial Services, Inc. and Subsidiaries as of June 30, 1995,
and the consolidated results of their operations and their consolidated cash
flows for each of the two years in the period ended June 30, 1995, in conformity
with generally accepted accounting principles.
The Company changed its method of accounting for income taxes as of July 1,
1993.
/s/ Fishbein & Company, P.C.
-------------------------------
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
September 20, 1995
F-3
<PAGE>
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>
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
-------------- -------------- --------------- -------------- --------------
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>
<PAGE>
- ------
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 Total
------------- ------------- ------------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate secured loans $1,175,085 $ 369,635 $ 422,257 $422,529 $477,495 $10,093,228 $12,960,229
Leases .................. 1,785,696 1,280,863 767,481 415,126 144,547 -- 4,393,713
Other loans ............. 23,921 28,184 32,847 19,660 5,114 -- 109,726
Unamortized organization
costs/fees ............ 614,865 132,547 70,126 34,644 13,712 3,040 868,934
------------- ------------- ------------- ----------- ---------- ------------- --------------
Total loans receivable .. $3,599,567 $1,811,229 $1,292,711 $891,959 $640,868 $10,096,268 $18,332,602
============= ============= ============= =========== ========== ============= ==============
</TABLE>
3. ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
<S> <C>
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
seniorindebtedness. ..................................... $ 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 $14,2- 67,
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.
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
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 - (Continued)
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.
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.
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 - (Continued)
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 does not constitute an offer to sell or
solicitation of any offer to buy the Common Stock by anyone in any
jurisdictions in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation of any offer to buy the
Common Stock is not qualified to do so, or to any person to whom it is unlawful
to make such an offer or solicitation.
-----------------
TABLE OF CONTENTS
-----------------
Page
Available Information ............................ 2
Prospectus Summary ............................... 3
Risk Factors ..................................... 8
The Company ...................................... 15
Use of Proceeds .................................. 15
Dividend Policy .................................. 15
Market for Common Stock .......................... 16
Capitalization ................................... 17
Selected Consolidated Financial Data ............. 18
Management's Discussion and Analysis of Financial
Condition and Results of
Operations ...................................... 20
Business ......................................... 34
Management ....................................... 47
Certain Relationships and Related Transactions ... 55
Principal Stockholders ........................... 56
Description of Capital Stock ..................... 58
Shares Eligible for Future Sale .................. 60
Market for Common Stock and Related
Stockholder Matters ............................. 61
Underwriting ..................................... 62
Legal Matters .................................... 63
Experts .......................................... 63
Transfer Agent and Registrar ..................... 63
Index to Consolidated Financial Statements ....... F-1
Consolidated Financial Statements ................ F-2
Until _____________, 1997, all dealers effecting transactions in the Common
Stock, whether or not participating in this distribution, may be required to
deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
===============================================================================
<PAGE>
===============================================================================
1,000,000 SHARES
[LOGO]
AMERICAN BUSINESS
FINANCIAL SERVICES,
INC.
COMMON STOCK
----------
PROSPECTUS
----------
FRIEDMAN, BILLINGS
RAMSEY & CO., INC.
___________, 1997
===============================================================================s
<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 Common Stock, other than underwriting
discounts and commissions, all of which will be borne by ABFS:
II-1
<PAGE>
SEC Registration Fee*..................................... 6,817
NASD Filing Fee*.......................................... 2,749
NASDAQ Listing Fee*....................................... 22,516
Expenses of Underwriter................................... 15,000
Fees and Expenses of Underwriter's Counsel................ 125,000
Printing and Engraving ................................... 35,000
Legal Fees and Expenses................................... 125,000
Accounting Fees and Expenses.............................. 75,000
Transfer Agent Fees and Expenses.......................... 5,000
Blue Sky Fees and Expenses................................ 15,000
Miscellaneous............................................. 17,918
------------
TOTAL............................................. $445,000
============
- ----------
* Exact; all other fees and expenses are estimates
Item 26. Recent Sales of Unregistered Securities.
On September 29, 1995, ABFS issued 225,012 shares of common stock to
Anthony J. Santilli, President of ABFS, upon the exercise of stock options at a
price of $2.67 per share.
Exemption from registration for the issuance described above was claimed
pursuant to Section 4(2) of the Securities Act, in reliance upon the fact that
such sales did not involve a public offering. Therefore, such securities are
subject to certain transfer restrictions.
Item 27. Financial Statements and Exhibits
The following documents were filed as part of this Registration Statement.
(a) Financial Statements:
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Reports of Independent Certified Public Accountants
II-2
<PAGE>
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 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
-------------- -----------
1 Form of Underwriting Agreement.
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.*
4.1 Specimen of Common Stock Certificate.
4.2 Form of Unsecured Investment Note (Incorporated by
reference from Exhibit 4.1 of Amendment No. 1 to Form
SB-2 filed April 29, 1994, Registration Number 33-76390
(the "Form SB-2")).
4.3 Form of Unsecured Investment Note issued pursuant
to Indenture with First Trust National
Association. (Incorporated by reference from
Exhibit 4.5 of Amendment No. One to the Form SB-2
filed on December 14, 1995, Registration Number
33-98636 (the "1996 Form SB-2")).
- ------------------------
*Previously Filed
II-3
<PAGE>
Regulation S-B
Exhibit Number Description
-------------- -----------
4.4 Form of Indenture by and between ABFS and First Trust
National Association (Incorporated by reference from
Exhibit 4.6 of the Form SB- 2 filed on October 26,
1995, Registration Number 33-98636).
5 Opinion of Blank Rome Comisky & McCauley.*
10.1 Loan and Security Agreement between Upland Mortgage and
BankAmerica Business Credit, Inc. dated May 23, 1996
(Incorporated by reference from the 1996 Form 10-KSB).
10.2 Amended and Restated Stock Option Plan.*
10.3 Stock Option Award Agreement (Incorporated by reference
from Exhibit 10.1 of the Registration Statement on Form
S-11 filed on February 26, 1993, Registration No.
33-59042 ("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 on Form SB-2 filed on April 29, 1993,
Registration No. 33-59042 (the "1993 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 SB-2).
10.6 1995 Stock Option Plan for Non-Employee Directors.
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).
- ------------------------
*Previously Filed
II-4
<PAGE>
Regulation S-B
Exhibit Number Description
-------------- -----------
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).
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
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 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 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 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.
10.16 Management Incentive Plan.*
10.17 Loan and Security Agreement dated December 12, 1996
between American Business Credit, Inc. and Finova
Capital Corporation.*
10.18 Form of Option Award Agreement for Non-Employee
Directors Plan for Non-Formula Awards.
- ------------------------
*Previously Filed
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 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
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.*
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).
27 Financial Data Schedule
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-B for a Registration Statement on Form SB-2.
- ------------------------
*Previously Filed
II-6
<PAGE>
Item 28. Undertakings.
(a) 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 registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(b) The undersigned hereby undertakes:
(1) that for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant under
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective; and
(2) that for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and that offering of such
securities at that time shall be deemed as the initial bona fide
offering of those securities.
- ------------------------
*Previously Filed
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Philadelphia, Commonwealth of Pennsylvania on
February 3, 1997.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: February 3, 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 has been duly signed below by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE Capacity Date
- -------------------------------------- ----------------------------------------------- -----------------------
<S> <C> <C>
/s/ Anthony J. Santilli, Jr. Chairman, President, Chief Executive Officer, February 3, 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
- -------------------------------------- Financial Officer (Principal Financial and February 3, 1997
David M. Levin Accounting Officer)
/s/ Leonard Becker
- -------------------------------------- Director February 3, 1997
Leonard Becker
- -------------------------------------- Director
Richard Kaufman
/s/ Michael DeLuca
- -------------------------------------- Director February 3, 1997
Michael DeLuca
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
S-B Exhibit Numbers Description
- ------------------- -----------
<S> <C>
1 Form of Underwriting Agreement.
3.2 Bylaws of ABFS.*
4.1 Specimen Common Stock Certificate.
5 Opinion of Blank Rome Comisky & McCauley.*
10.2 Amended and Restated Stock Option Plan.*
10.6 1995 Stock Option Plan for Non-Employee Directors.
10.15 Form of Employment Agreement with Anthony J. Santilli, Jr.,
Beverly Santilli and Jeffrey M. Ruben.
10.16 Management Incentive Plan.*
10.17 Loan and Security Agreement dated December 12, 1996 between
American Business Credit, Inc. and Finova Capital Corporation.*
10.18 Form of Option Award Agreement for Non-Employee Directors Plan
for Non-Formula Awards.
21 Subsidiaries of the Company.*
23.1 Consent of Fishbein & Company, P.C.
23.2 Consent of Blank Rome Comisky & McCauley (See Exhibit 5).*
23.3 Consent of BDO Seidman LLP.
24.1 Power of attorney (included on signature page).
27 Financial Data Schedule.
</TABLE>
- ------------------------
*Previously Filed
<PAGE>
American Business Financial Services, Inc.
1,000,000 Shares(1)
COMMON STOCK
UNDERWRITING AGREEMENT
February ____, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
American Business Financial Services, Inc., a Delaware corporation (the
"Company") hereby confirms its agreement with you (the "Underwriter") as set
forth below.
1. Securities. Subject to the terms and conditions herein contained,
the Company proposes to issue and sell to the Underwriters named in Schedule 1
hereto (the "Underwriters"), for whom you have been duly authorized to act as
representative (in such capacity, the "Representative") 1,000,000 shares (the
"Firm Securities") of the Company's Common Stock $.001 par value per share (the
"Common Stock"). The Company also proposes to issue and sell to the Underwriters
not more than 150,000 additional shares of Common Stock if requested by, and
pursuant to the option of, the Representative as provided in Section 3 of this
Agreement. Any and all shares of Common Stock to be purchased by the Underwriter
pursuant to such option are referred to herein as the "Option Securities." The
Firm Securities and any Option Securities are collectively referred to herein as
the "Securities."
The Representative has advised the Company that the Underwriters
propose to make a public offering of the Securities on the effective date of the
registration statement hereinafter referred to, or as soon thereafter as in the
Representative's judgment is advisable (the "Offering").
2. Representations, Warranties and Agreements of the Company.
The Company represents and warrants to and agrees with the several
Underwriters that:
- --------
(1) Plus an option to purchase from American Business Financial Services, Inc.
up to 150,000 additional shares to cover over-allotments.
<PAGE>
(a) A registration statement on Form SB-2 (File No.
333-18919 with respect to the Securities, including a prospectus
subject to completion, has been prepared by the Company in material
compliance with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations of the Securities
and Exchange Commission (the "Commission") thereunder (the "Rules and
Regulations") and has been filed by the Company with the Commission
under the Act and one or more amendments to such registration statement
may have been so filed. The Company will next file with the Commission
one of the following: (i) prior to effectiveness of such registration
statement, a further amendment thereto, including the form of final
prospectus, or (ii) a final prospectus in accordance with Rules 430A
and 424(b) of the Rules and Regulations. As filed, such amendment and
form of final prospectus, or such prospectus, shall include all Rule
430A Information, as hereinafter defined, and, except to the extent
that the Representative shall agree in writing to a modification, shall
be in all substantive respects in the form furnished to the
Representative prior to the date and time that this Agreement was
executed and delivered by the parties hereto, or, to the extent not
completed at such date and time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus, as hereinafter defined) as the Company
shall have previously advised the Underwriter in writing would be
included or made therein.
As used in Agreement, the term "Registration
Statement" means the registration statements referred to above filed
relating to the Securities, as amended at the time when they were or
are declared effective or otherwise became effective, including all
financial schedules and exhibits thereto and including any information
omitted therefrom pursuant to Rule 430A under the Act and included in
the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means the prospectus first filed with
the Commission pursuant to Rule 424(b) under the Act or, if no
prospectus is required to be filed pursuant to Rule 424(b) under the
Act, the form of final prospectus included in the Registration
Statement at the time such Registration Statement becomes effective;
and the term "Rule 430A Information" means information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A of the Rules and Regulations.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus. When
any Preliminary Prospectus was filed with the Commission it (A)
contained all statements required to be stated therein in material
compliance with, and complied in all material respects with the
requirements of, the Act and the Rules and Regulations and (B) did not
include any
2
<PAGE>
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. When the
Registration Statement or any amendment thereto was or is declared
effective, and at all times subsequent thereto up to and including the
Firm Closing Date and any Option Closing Date, as the case may be, each
as hereinafter defined, it (A) contained or will contain all statements
required to be stated therein in material compliance with, and complied
or will comply in all material respects with the requirements of the
Act and the Rules and Regulations and (B) did not or will not include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading. When the
Prospectus or any amendment or supplement to the Prospectus is filed
with the Commission pursuant to Rule 424(b) (or, if the Prospectus or
any part thereof or such amendment or supplement is not required to be
so filed, when the Registration Statement or the amendment thereto
containing such amendment or supplement to the Prospectus was or is
declared effective) and at all times subsequent thereto up to and
including the Firm Closing Date and any Option Closing Date, as the
case may be, the Prospectus, as amended or supplemented at any such
time, (A) contained or will contain all statements required to be
stated therein in material compliance with, and complied or will comply
in all material respects with the requirements of, the Act and the
Rules and Regulations and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (ii) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration
Statement or any amendment thereto or the Prospectus or any amendment
or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representative specifically for use therein.
(c) The Company has been duly incorporated and is
validly existing and in good standing as a corporation under the laws
of its jurisdiction of organization, with full corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and Prospectus (or
if the Prospectus is not in existence, the most recent Preliminary
Prospectus); and the Company is duly qualified to do business and in
good standing as a foreign corporation in all other jurisdictions where
its ownership or leasing of properties or the conduct of its business
requires such qualification, except where the failure to so qualify
would not result in a material adverse change in the condition
(financial or otherwise), earnings, prospects, business, properties, or
results of operations of the Company and its Subsidiaries (as
hereinafter defined) taken as a whole (hereinafter, a "Material Adverse
Effect").
(d) Except for stock holdings occurring from the
liquidation of loan collateral, the Company does not own or control
over 50% of the voting stock,
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directly or indirectly, of any corporation, association or other entity
other than ABFS 1995-1 Inc., ABFS 1995-2 Inc., ABFS 1996-1, ABFS 1996-2
and American Business Credit, Inc. ("ABC") and its wholly owned
subsidiaries, HomeAmerican Credit, Inc. d/b/a Upland Mortgage ("HAC"),
Processing Service Center, Inc. ("PSC"), American Business Leasing,
Inc. ("ABL"), Home American Consumer Discount, Inc. ("HACD"), ABC
Holdings Corp. ("AHC") and American Business Finance Corp. ("ABFC").
ACB, HAC, PSC, ABL, HACD, AHC, ABFC, ABFS 1995-1, ABFS 1995-2, ABFS
1996-1 and ABFS 1996-2 are individually referred to as "Subsidiary" and
collectively referred to herein as the "Subsidiaries". Except for stock
holdings occurring from the liquidation of loan collateral, neither the
Company nor the Subsidiaries own more than a 50% equity interest in any
firm or partnership, association or other entity except as disclosed in
the Prospectus.
(e) Each Subsidiary has been duly incorporated and
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with full corporate power and
authority to own, lease and operate its properties and conduct its
business as described in the Registration Statement and the Prospectus;
all of the issued and outstanding shares of capital stock of the
Subsidiaries have been duly authorized and are validly issued, are
fully paid and nonassessable, and are directly or indirectly owned by
the Company free and clear of any security interest, claim, lien,
charge and encumbrance; each of the Company and the Subsidiaries are in
possession of and operating in compliance with all authorizations,
licenses, permits, consents, certificates and orders necessary for the
conduct of their respective businesses, all of which are valid and in
full force and effect (except where the failure to hold any such
authorization, license, permit, consent, certificate or order would not
have a Material Adverse Effect) and neither the Company nor any such
Subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse
Effect, except as described in or contemplated by the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus); each Subsidiary is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction in which
the ownership or leasing of properties or the conduct of its business
requires such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect. The Company has
full power (corporate and other) and authority to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it.
(f) The Company has, and upon consummation of the
Offering, will have, an authorized, issued and outstanding
capitalization as set forth in the Prospectus under the caption
"Capitalization" (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus). All of the issued shares of Common
Stock of the Company have been duly authorized and validly issued and
are
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<PAGE>
fully paid and nonassessable. The description of the Company's stock
option plans and the options to be granted thereunder, set forth in the
Prospectus, accurately and fairly presents the information required to
be shown with respect to such plans and options.
(g) The Securities to be sold by the Company
hereunder have been duly authorized and, when issued, delivered and
paid for in the manner set forth in this Agreement, will be validly
issued, fully paid and nonassessable, and will conform to the
description thereof contained in the Prospectus. Good title to the
Securities will be transferred from the Company to the purchasers
thereof against payment therefor. No preemptive rights or other rights
to subscribe for or purchase exist with respect to sale of the
Securities by the Company pursuant to this Agreement. The certificates
used to evidence shares of Common Stock are in due and proper form. The
Common Stock of the Company conforms to the description thereof
contained in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(h) Except as disclosed in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding (A) securities or obligations of
the Company or the Subsidiaries convertible into or exchangeable for
any capital stock of the Company or any such Subsidiary, (B) warrants,
rights or options to subscribe for or purchase from the Company or any
such Subsidiary any such capital stock or any such convertible or
exchangeable securities or obligations, or (C) obligations of the
Company or any such Subsidiary to issue any shares of capital stock,
any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
(i) The consolidated financial statements and
schedules of the Company included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present the financial position of the
Company and the Subsidiaries and the results of operations and changes
in financial condition as of the dates and for the periods therein
specified. Such financial statements and schedules have been prepared
in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as
otherwise noted therein) as expressed in opinions by the independent
accountants named in subsection (j). The selected financial data set
forth under the captions "Summary Consolidated Financial Data" and
"Selected Consolidated Financial Date" in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present, on the basis stated in the Prospectus (or such
Preliminary Prospectus), the information included therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
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<PAGE>
(j) BDO Seidman, LLP and Fishbein & Company, P.C.,
who have expressed their opinion on certain financial statements of the
Company and its consolidated Subsidiaries and delivered their opinions
with respect to the audited consolidated financial statements and
schedules included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants as required by the Act
and the applicable rules and regulations thereunder.
(k) The Company has full legal right, power and
authority to enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly and validly
authorized by the Company and upon due execution and delivery by the
Company and the other parties hereto will constitute the valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, except to the extent that such
enforceability may be subject to bankruptcy, insolvency,
reorganization, moratorium, or other similar laws, regulations or
procedures of general applicability relating to or affecting creditors'
or other obligees' rights generally, or by general equitable
principles. The making and performance of this Agreement by the Company
and the consummation of the transactions herein contemplated will not
violate any provisions of the certificate of incorporation or bylaws,
or other organization documents of the Company or the Subsidiaries and
will not conflict with, result in the breach of violation of, or
constitute, either by itself or upon notice or the passage of time or
both, a default under any material agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to
which the Company or any of the Subsidiaries is a party or by which the
Company or the Subsidiaries or any of their respective properties may
be bound or affected, any statute or any authorization, judgment,
decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the
Company or any of the Subsidiaries or any of their respective
properties. No consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental
body or any other third party is required for the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for compliance with the Act, the Securities
Exchange Act of 1934, as amended ("Exchange Act"), the blue sky laws
applicable to the public offering of the Securities by the
Underwriters, the clearance of such offering with the National
Association of Securities Dealers, Inc. (the "NASD"), and the listing
of the Common Stock to be sold by the Company on the Nasdaq National
Market.
(l) No contract or other document is required to be
described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement that is not described
therein (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or filed as required. The contracts so
described in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) are in full force and effect on
the date hereof;
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<PAGE>
the descriptions thereof or references thereto are correct in all
material respects, and neither the Company nor any of the Subsidiaries,
nor, to the knowledge of the Company, any other party, is in breach of
or default under any of such contracts.
(m) Other than routine legal proceedings in the
ordinary course of business, no legal or governmental proceedings are
pending to which the Company or any of the Subsidiaries is a party or
to which the property of the Company or any of the Subsidiaries is
subject that are required to be described in the Registration Statement
or the Prospectus and are not described therein (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), and, to
the Company's knowledge, no such proceedings have been threatened
against the Company or the Subsidiaries or with respect to any of their
respective properties. Except as disclosed in the Registration
Statement, no enforcement proceedings, whether formal or informal, have
been commenced against the Company or any of the Subsidiaries by the
Commission or any other governmental authority, nor have any such
proceedings been instituted, threatened or recommended. Except as
disclosed in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), neither the Company nor any of
the Subsidiaries, or any of their respective officers, employees or
directors is a party or subject to the provisions of any regulatory
action, injunction, judgment, decree or order of any court, regulatory
body, administrative agency or other governmental body affecting the
business of the Company or any of the Subsidiaries and, except as
disclosed in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), there is no charge, action,
suit, proceeding, or investigation before or by any court or
regulatory, administrative or governmental agency or body pending or,
to the Company's knowledge, threatened which might affect the
performance of this Agreement.
(n) No further approval, consent or authority of the
stockholders of the Company or the Board of Directors of the Company
will be required for the issuance and sale of the Securities to be sold
by the Company as contemplated herein, except such as have been
obtained.
(o) Since the respective dates as of which
information is given in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and except as described in or specifically contemplated by
the Prospectus: (i) the Company and the Subsidiaries have not incurred
any material liabilities or obligation, indirect, direct or contingent,
or entered into any material verbal or written agreement or other
transaction whether or not arising in the ordinary course of business
or which could result in a material reduction in the future earnings of
the Company and the Subsidiaries (taken as a whole); (ii) there has not
been any material increase in the long-term debt of the Company and the
Subsidiaries (taken as a whole) or in the aggregate dollar or principal
amount of the assets of the Company and the Subsidiaries (taken as a
whole) which are 31 days or more past due or real estate acquired by
foreclosure;
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<PAGE>
(iv) there has not been any material adverse change in the consolidated
stockholders' equity of the Company and the Subsidiaries (taken as a
whole); (v) there has been no material adverse change in the Company's
and the Subsidiaries' relationship with its insurance carriers,
including, without limitation, cancellation or other termination of the
Company's or the Subsidiaries' fidelity bond or any other type of
insurance coverage; (vi) there has been no material change in
management of the Company or the Subsidiaries; (vii) the Company and
the Subsidiaries are not in default in the payment of principal or
interest on any outstanding debt obligations; (viii) there has not been
any change in the Common Stock (other than upon the sale of the
Securities hereunder); and (ix) there has not been any Material Adverse
Effect.
(p) Neither the Company nor any of the Subsidiaries
is in violation of any directive from the Commission or any other
regulatory, administrative or governmental agency or body regarding the
method of conducting its business; the Company and the Subsidiaries
have conducted and are conducting their respective businesses in a
manner so as to comply in all material respects with all applicable
Federal and state statutes and regulations that regulate or are
concerned with their respective businesses, including without
limitation, the Truth-in-Lending Act and Regulation Z, the Equal
Credit Opportunity Act and Regulation B, the Real Estate Settlement
Procedures Act and Regulation X, the Home Mortgage Disclosure Act and
the Debt Collection Practices Act and all regulations, directives and
orders of the Commission.
(q) The offer and sale of subordinated debentures by
the Company and ABFC have been conducted in compliance in all material
respects with all applicable federal and state laws and regulations
including, but not limited to, the Act, the Exchange Act and the Rules
and Regulations.
(r) The Company is not an investment company under
the Investment Company Act of 1940, as amended, and the Offering will
not cause the Company to become an investment company subject to
registration under such act.
(s) The Company and the Subsidiaries have filed all
requested and obtained foreign, federal, state and local tax returns
that are requested to be filed or has requested and obtained extensions
thereof and has paid all taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any
of the foregoing is due and payable, except for any such assessment,
fine or penalty that is currently being contested in good faith or as
described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) except
where the failure to take such actions would not have a Material
Adverse Effect on the Company or its Subsidiaries (taken as a whole).
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<PAGE>
(t) The Company and the Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(u) Except as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), no default exists,
and no event has occurred which, with notice or lapse of time or both
would constitute a default under any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or
any of the Subsidiaries is a party or by which the Company or the
Subsidiaries or any of their respective properties is bound or may be
affected which would have a Material Adverse Effect on the Company and
its Subsidiaries (taken as a whole).
(v) The description of past securitization
transactions effected by the Company, as contained in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), is true and
complete in all material respects and to the Company's best knowledge,
no event or series of events has occurred that would result in any of
the securities issued in connection with any of such transactions being
downgraded or placed on a watch list with negative implications by any
rating agency or similar organization, or that would impair the
Company's or its Subsidiaries' ability to consummate future
securitization transactions upon economic terms consistent with past
securitization transactions (assuming no change in the securitization
market in general) or otherwise cause the Company and its Subsidiaries
to suffer any Material Adverse Effect with respect to any past or
future securitization transaction (other than any such event or series
of events described in the Prospectus, or, if the Prospectus is not yet
in existence, the most recent Preliminary Prospects).
(w) The Company has not distributed and, prior to
the later of (A) the Firm Closing Date or the Option Closing Date, as
the case may be, and (B) the completion of the distribution of the
Securities, will not distribute any offering material in connection
with the offering and sale of Common Stock other than the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or other materials,
if any, permitted by the Act.
(x) No labor dispute with the employees of the
Company or the Subsidiaries exists or, to the Company's knowledge, is
threatened or imminent that
9
<PAGE>
could result in a Material Adverse Effect, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(y) The Company and each of the Subsidiaries are
insured by insurers of recognized financial responsibility as rated by
A. M. Best against such losses and risks and in such amounts as are
prudent and customary in the businesses in which they are engaged;
neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor
any such subsidiary has any reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a
Material Adverse Effect, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(z) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), neither the Company nor any of its Subsidiaries has
sustained any loss or interference with their respective businesses or
properties having or resulting in a Material Adverse Effect from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding and there has not been any event, circumstance, or
development that results in, or that the Company believes would result
in, a Material Adverse Effect, except in each case as described in or
contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(aa) Neither the Company nor its Subsidiaries own
any items of real property other than real property obtained as a
result of the exercise of remedies under deeds of trust, deeds in lieu
of foreclosure or mortgages securing loans made in the ordinary course
of business by the Company or its Subsidiaries, and each of them has
good and marketable title to all personal property owned by each of
them, in each case free and clear of any security, liens, encumbrances,
equities, claims and other defects, except such as do not have a
Material Adverse Effect on the value of such property and do not
interfere with the use made or proposed to be made of such property by
the Company or such Subsidiary, and any real property and buildings
held under lease by the Company or any such Subsidiary are held under
valid, subsisting and enforceable leases, with such exceptions as are
not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or such Subsidiary,
in each case except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
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<PAGE>
(ab) The Company and its Subsidiaries own or
possess, or can acquire on reasonable terms, all material trademarks,
service marks, trade names, licenses, copyrights and proprietary or
other confidential information currently employed by them in connection
with their respective businesses, and neither the Company nor any such
Subsidiary has received any notice of infringement of or conflict with
asserted rights of any third party with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable
decisions, ruling or finding, would have a Material Adverse Effect,
except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus).
(ac) None of the Company, the Subsidiaries or, to
the Company's knowledge, any employee of the Company or the
Subsidiaries have, directly or indirectly, at any time during the last
five years, made any payment of funds of the Company or any Subsidiary
or received or retained any funds in violation of any law, rule or
regulation.
(ad) All material transactions occurring during the
two most recent completed fiscal years between the Company and the
Subsidiaries and the officers, directors and major stockholders of the
Company that are required to be disclosed under the Act and the Rules
and Regulations have been accurately disclosed in the Prospectus (or if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(ae) The Company has complied in all material
respects with the provisions under the Act and the Securities Exchange
Act of 1934, as amended ("Exchange Act").
(af) Except as disclosed in the Registration
Statement, neither the Company nor the Subsidiaries have: (i) placed
any securities within the last 18 months (except for notes evidencing
subordinate indebtedness of the Company); (ii) had any material
dealings with any member of the NASD or any person related to or
associated with such member, other than discussions and meetings
relating to the proposed Offering and routine purchases and sales of
U.S. Government and agency securities and other assets; (iii) entered
into a financial or management consulting agreement except as
contemplated hereunder and except for the engagement letter with
Friedman, Billings, Ramsey & Co., Inc., dated November 20, 1996; or
(iv) engaged any intermediary between the Underwriters and the Company
in connection with the Offering, and no person is being compensated in
any manner for such service.
(ag) The Company has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or
which has constituted or which
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<PAGE>
reasonably might be expected to constitute, the stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Stock.
(ah) The Company has not relied and will not rely
upon the Representative or legal counsel for the Representative for any
legal, tax or accounting advice in connection with the Offering (except
with respect to the qualification of the Securities for offering and
sale under the securities laws of certain states).
To the extent that any statements or omissions made in the
Registration Statement, the Prospectus or any amendment or supplement thereto
are made in reliance upon and in conformity with written information furnished
to the Company by the Principal Stockholders specifically for use therein, the
Registration Statement and the Prospectus and any amendments or supplements to
the Registration Statement or the Prospectus will not, when they become
effective or are filed with the Commission, as the case may be, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
Any certificate signed by an officer of the Company and
delivered to you or to your counsel shall be deemed a representation and
warranty by the Company to you as to the matters covered thereby. Any
certificate delivered by the Company to its counsel for purposes of enabling
such counsel to render the opinions referred to in Section 7(c)(i) will also be
furnished to the Representative and its counsel and shall be deemed to be
additional representations and warranties by the Company to the several
Underwriters as to the matters covered thereby and the Underwriters and their
counsel are entitled to rely thereon.
4. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to the several Underwriters, and the
Underwriters agree to purchase from the Company, at a purchase price of
$________ per share, the number of Firm Securities set forth opposite the name
of each Underwriter in Schedule 1 hereto. One or more certificates in definitive
form for the Firm Securities that each Underwriter has agreed to purchase
hereunder, and in such denomination or denominations and registered in such name
or names as the Representative requests upon notice to the Company at least 48
hours prior to the Firm Closing Date, shall be delivered by or on behalf of the
Company to the Representative for the account of each such Underwriter, against
payment by or on behalf of the Underwriters of the aggregate purchase price
therefor by wire transfer or certified or official bank check or checks payable
in federal (same day) funds, to the order of the Company. Such delivery of and
payment for the Firm Securities shall be made at the offices of Friedman,
Billings, Ramsey & Co., Inc., Potomac Tower, 1001 Nineteenth Street North,
Arlington, Virginia 22209 at 9:30 A.M., Washington D.C. time, on ____________,
1997, or at such other place, time or date as the Representative and the Company
may agree upon
12
<PAGE>
or as the Representative may determine, pursuant to Section 9 hereof, such time
and date of delivery against payment being herein referred to as the "Firm
Closing Date." The Company will make such certificate or certificates for the
Firm Securities available for checking and packaging by the Representative at
the offices in New York of the Company's transfer agent or registrar at least 24
hours prior to the Firm Closing Date. Time shall be of the essence, and delivery
at the time and place specified in the Agreement is a further condition to the
obligations of the Underwriters.
(b) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, on the basis of the representations, warranties, agreements and
covenants herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, severally and not
jointly, an option to purchase the Option Securities. The purchase price to be
paid for any Option Securities shall be the same price per share as the price
per share for the Firm Securities set forth above in paragraph (a) of this
Section 3. The option granted hereby may be exercised as to all or any part of
the Option Securities once at any time within thirty days after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such option. The Underwriters may
exercise the option granted hereby by notice from the Representative in writing
or by telephone (confirmed in writing) to the Company setting forth the
aggregate number of Option Securities as to which the Underwriters are
exercising the option and the date and time for delivery of and payment for such
Option Securities. Such date of delivery shall be determined by the
Representative but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representative and the
Company may agree upon or as the Representative may determine pursuant to
Section 9 hereof, is herein called the "Option Closing Date" with respect to
such Option Securities. If the option is exercised as to all or any portion of
the Option Securities, one or more certificates in definitive form for such
Option Securities, and payment therefor, shall be delivered on the related
Option Closing Date in the manner, and upon the terms and conditions, set forth
in paragraph (a) of this Section 3, except that reference therein to Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph 3(b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) It is understood that you, individually and not as the
Representative, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
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<PAGE>
(d) The Company hereby acknowledges that the wire transfer by or on
behalf of the Underwriters of the purchase price for any Securities does not
constitute closing of a purchase and sale of the Securities. Only execution and
delivery of a receipt (by facsimile or otherwise) for the Securities by the
Underwriters indicates completion of the closing of a purchase of the Securities
from the Company. Furthermore, in the event that the Underwriters wire funds to
the Company prior to the completion of the closing of a purchase of Securities,
the Company hereby acknowledges that until the Underwriters execute and deliver
a receipt for the Securities, by facsimile or otherwise, the Company will not by
entitled to the wired funds and shall return the wired funds to the Underwriters
as soon as practical (by wire transfer of same-day funds) upon demand. In the
event that the closing of a purchase of Securities is not completed and the wire
funds are not returned by the Company to the Underwriters on the same day the
wired funds were received by the Company, the Company agrees to pay to the
Underwriters in respect of each day the wire funds are not returned by it, in
same-day funds, interest at the Prime Rate as stated in the Wall Street Journal
on the date hereof on the amount of such wire funds.
4. Offering by the Underwriters. Upon the authorization by the
Representative of the release of the Firm Securities, the several Underwriters
propose to offer the Firm Securities for sale to the public upon the terms and
conditions set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to the Representative
of such timely filing. The Company will promptly advise the Representative in
writing (i) of the receipt of any comments of the Commission, (ii) of any
request of the Commission for amendment of or supplement to the Registration
Statement (either before or after it becomes effective), any Preliminary
Prospectus or the Prospectus or for additional information, (iii) when the
Registration Statement shall have become effective and (iv) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution of any proceedings for the purpose. If
the Commission shall enter any such stop order at any time, the Company will use
its best efforts to obtain the lifting of such order at the earliest possible
moment. The Company will not file any amendment or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which the Representative has not
been furnished with a copy a reasonable time prior to such filing or to which
the Representative reasonably objects or which is not in compliance with the Act
and Rules and Regulations.
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<PAGE>
(b) The Company will prepare and file with the Commission, promptly
upon the Representative's request, any amendments or supplements to the
Registration Statement or the Prospectus which in the Representative's
reasonable judgment may be necessary or advisable to enable the Underwriters to
continue the distribution of the Securities and will use its best efforts to
cause the same to become effective as promptly as possible. The Company will
comply in all material respects with the provisions of Rule 430A of the Rules
and Regulations with respect to information omitted from the Registration
Statement in reliance upon such Rule.
(c) The Company shall cooperate with the Representative and counsel to
the Underwriters in order to qualify or register the Securities for sale under
(or obtain exemptions from the application of) the blue sky laws of such
jurisdictions as the Representative designates, will comply with such laws and
will continue such qualifications, registrations and exemptions in effect so
long as reasonably required for the distribution of the Securities. The Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any such jurisdiction where it is not presently
qualified or where it would by subject to taxation as a foreign corporation. The
Company will advise you promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Securities for offering,
sale or trading in any jurisdiction or any initiation or threat of any
proceeding for any such purpose, and in the event of the issuance of any order
suspending such qualification, registration or exemption, the Company, with your
cooperation, will use its best efforts to obtain the withdrawal thereof.
(d) If at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the Rules and
Regulations thereunder, the Company will promptly notify the Representative
thereof and, subject to Section 5(a) hereof, will prepare and file with the
Commission, at the Company's expense, an amendment to the Registration Statement
or an amendment or supplement of the Prospectus that corrects such statement or
omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the Representative
and to counsel for the Underwriters a copy of the Registration Statement
originally filed with respect to the Securities and each amendment thereto (in
each case including exhibits thereto) and (ii) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many copies of
each Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto as the Representative may reasonably request; without limiting the
application of clause (ii) of this sentence, the Company, not later than (A)
8:00 P.M., Washington, D.C. time, on the date of determination of the public
offering price, if
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<PAGE>
such determination occurred at or prior to 10:00 A.M., Washington, D.C. time, on
such date, or (B) 2:00 P.M., Washington, D.C. time, on the business day
following the date of determination of the public offering price if such
determination occurred after 10:00 A.M., Washington, D.C. time, on such date,
will deliver to the Representative, without charge, as many copies of the
Prospectus and any amendment or supplement thereto as the Representative may
reasonably request for purposes of confirming orders that are expected to settle
on the Firm Closing Date.
(f) The Company shall promptly prepare and file with the Commission
from time to time, such reports as may be required to be filed by the Act and
the Exchange Act including, without limitation, reports with respect to the sale
of the Securities and the application of the proceeds thereof as may be required
in accordance with Rule 463 under the Act. The Company will provide or cause to
be provided to the Representative, a copy of each report on Form SR filed by the
Company as required by Rule 463 under the Act.
(g) The Company, as soon as practicable, but not later than 45 days
after the end of the first quarter ending after one year following the
"effective date of the Registration Statement" (as defined in Rule 158(c) of the
Rules and Regulations), will make generally available to its security holders
and to the Representative a consolidated earnings statement of the Company and
the Subsidiaries that satisfies the provisions of Section 11(a) of the Act and
Rule 158 thereunder.
(h) The Company will apply the net proceeds from the sale of the
Securities to be sold by the Company as set forth under "Use of Proceeds" in the
Prospectus.
(i) The Company will not, directly or indirectly, without the
Representative's prior written consent, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exchangeable or exercisable for, shares
of Common Stock for a period of 180 days after the date hereof, except pursuant
to this Agreement or as otherwise set forth in the Prospectus and except for the
grant of options to purchase an aggregate of 150,500 shares of Common Stock
under the Company's stock option plans as disclosed in the Prospectus.
(j) The Company will obtain the agreements described in Section 7(c)(v)
hereof prior to the Firm Closing Date.
(k) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
16
<PAGE>
person any compensation for soliciting another to purchase any other securities
of the Company.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in the Representative's opinion the market price of the Common
Stock has been or is likely to be materially affected (regardless of whether
such rumor, publication or event necessitates a supplement to or amendment of
the Prospectus), the Company will, after written notice from the Representative
advising the Company to the effect set forth above, forthwith prepare, consult
with the Representative concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to the
Representative, counsel of the Representative and counsel to the Company
responding to or commenting on such rumor, publication or event.
(m) The Company will cause the Common Stock to be duly included for
quotation on the Nasdaq National Market prior to the commencement of the
Offering. The Company will use its best efforts to ensure that the Securities
remain included for quotation on the Nasdaq National Market following the
commencement of the Offering.
(n) During the period of three years hereafter, the Company will
furnish to the Representative: (i) as soon as practicable after the end of each
fiscal year and the public release of such material, copies of the Annual Report
of the Company containing the consolidated balance sheet of the Company and
Subsidiaries as of the close of such fiscal year and consolidated statements of
operations, stockholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent public accountants; (ii) as soon as
practicable after filing thereof, copies of each proxy statement, Annual Report
on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report
filed by the Company with the Commission, the NASD or any securities exchange;
(iii) as soon as available, copies of any report or communication of the Company
mailed generally to holders of its Common Stock; (iv) as soon as practicable
after the filing thereof, copies of each non-confidential report or other
statement or document filed by the Company with the Commission, or with any
national securities exchange or quotation system on which any securities of the
Company may be listed or quoted; and (v) from time to time, such other
non-confidential information concerning the Company as the Representative may
reasonably request.
(o) The Company shall continue to maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary in order to permit
preparation of financial statements in accordance with generally accepted
accounting principles and to maintain accountability for assets; and (iii)
access to material assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability for
assets is compared with the
17
<PAGE>
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
The Representative may, in its sole discretion, waive in writing the
performance by the Company of any one or more of the foregoing covenants or
extend the time for their performance.
6. Expenses. The Company will pay all costs and expenses incident to
the authorization, issuance, sale and delivery of the Securities and the
performance of its obligations under this Agreement, and any taxes payable in
that connection, whether or not the actions contemplated herein are consummated
or this Agreement is terminated pursuant to Section 12 hereof, including all
costs and expenses incident (i) to the printing or other production of documents
with respect to the transactions contemplated by this Agreement, including any
costs of printing the Registration Statement originally filed with respect to
the Securities and any amendment thereto, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement and any blue
sky memoranda, (ii) all arrangements relating to the delivery to the
Representative of copies of the foregoing documents, (iii) the costs of
distributing the terms of agreement relating to the organization of the
underwriting syndicate and selling group to the members thereof by mail, telex
or other means of communication, (iv) the fees and disbursements of the counsel,
the accountants and any other experts or advisors retained by the Company, (v)
preparation, issuance and delivery to the Representative of any certificates
evidencing the Common Stock, including transfer agent's and registrar's fees,
(vi) the qualification of the Common Stock under state securities and blue sky
laws, including filing fees and fees and disbursements of counsel for the
Underwriters relating thereto not to exceed $10,000, (vii) the filing fees of
the Commission and the NASD relating to the Common Stock, (viii) any quotation
of the Securities on the Nasdaq National Market, (ix) any meetings with
prospective investors in the Common Stock including travel and out-of-pocket
expenses of the Company's personnel (other than as shall have been specifically
approved by the Representative to be paid for by the Representative), (x)
advertising relating to the offering of the Common Stock (other than as shall
have been specifically approved by the Representative to be paid for by the
Representative), (xi) the cost of preparing bound volumes of the documents
relating to the offering for the Representative and counsel for the
Underwriters, and (xii) the Representative's actual out-of-pocket expenses,
including the reasonable fees and disbursements of the counsel for the
Underwriters, provided, however that the total amount of reimbursement under
this subsection (xii) shall not exceed $125,000. If the sale of the Securities
provided for herein is not consummated because any condition to the obligations
of the several Underwriters set forth in Section 5 hereof is not satisfied,
because this Agreement is terminated pursuant to Section 9 hereof or because of
any failure, refusal or inability on the part of the Company to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder other than by reason of a default by the Underwriters, the Company
will reimburse the Underwriters upon demand for all out-of-pocket expenses
(including counsel fees and disbursements) that shall have been incurred by the
Representative in connection with the proposed purchase and sale of
18
<PAGE>
the Securities, subject to the limitation set forth in subsection (xii) above.
The Company shall not in any event be liable to the Representative for the loss
of anticipated profits from the transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of he
Underwriters to purchase and pay for the Firm Securities shall be subject, in
the Underwriters' sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as the date hereof and as of the Firm
Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of
the statements of the Company's officers made pursuant to the provisions hereof,
to the performance by the Company of its covenants and agreements hereunder and
to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., Washington, D.C. time, on the date of this Agreement, or at such
later time as shall have been consented to by the Representative; if the filing
of the Prospectus, or any supplement thereto, is required pursuant to Rule
424(b) of the Rules and Regulations, the Prospectus shall have been filed in the
manner and within the time period required by Rule 424(b) of the Rules and
Regulations; and prior to the Firm Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or,
to the knowledge of the Company or the Representative, shall be contemplated by
the Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to the Representative's reasonable satisfaction.
(b) The Representative shall be reasonably satisfied that since the
respective dates as of which information is given in the Registration Statement
and Prospectus, (i) there shall not have been any change in the Common Stock of
the Company or any material change in the indebtedness (other than in the
ordinary course of business) of the Company, (ii) except as set forth or
contemplated by the Registration Statement or the Prospectus, no material verbal
or written agreement or other transaction shall have been entered into by the
Company, which is not in the ordinary course of business and which could result
in a material reduction in the future earnings of the Company, (iii) no loss or
damage (whether or not insured) to the property of the Company shall have been
sustained which has or would have a Material Adverse Effect, (iv) no legal or
governmental action, suit or proceeding affecting the Company which is material
to the Company or which affects or may affect the transactions contemplated by
this Agreement shall have been instituted or threatened, (v) no enforcement
proceeding, whether formal or informal, shall have been commenced against the
Company or any of the Subsidiaries by the Commission, or any other governmental
agency nor shall any such proceeding have been instituted, threatened or
recommended, and (vi) there shall not have been any Material Adverse Effect
which makes it impractical or inadvisable in the reasonable judgment of the
Representative to proceed with the public offering or purchase the Common Stock
as contemplated hereby.
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<PAGE>
(c) There shall have been furnished to the Representative in form and
substance reasonably satisfactory to counsel for the Underwriters:
(i) An opinion of Blank, Rome, Comisky & McCauley, counsel for
the Company, addressed to the Underwriters and dated the Firm Closing
Date, or the Option Closing Date, as the case may be, in the form of
Exhibit A to this Agreement which may be relied upon by counsel for the
Underwriters in giving their opinion. In rendering opinions set forth
in clauses ____, _____, _____ and _____ of Exhibit A hereto, such
counsel may rely to the extent such counsel deems necessary and proper
on opinions of such other counsel as are reasonably acceptable to the
Representative, provided, however, that such counsel shall state that
they believe that they and counsel for the underwriters' are justified
in relying on such counsel. As to matters of fact, such counsel may
rely on certificates of officers and directors of the Company and
certificates of public officials.
(ii) Such opinion of Elias, Matz, Tiernan & Herrick L.L.P.,
counsel for the Underwriters, dated the Firm Closing Date or the Option
Closing Date, as the case may be, with respect to the sufficiency of
all corporate proceedings and other legal matters relating to this
Agreement, the validity of the Common Stock, the Registration Statement
and the Prospectus and other related matters as the Representative may
reasonably require, and such counsel shall have received such documents
and shall have had exhibited to them such papers and records as they
may reasonably request for the purpose of enabling them to pass upon
such matters. In connection with such opinions, such counsel may rely
on representations or certificates of officers of the Company, the
Principal Stockholders and governmental officials.
(iii) Certificate of the Company executed by the President and
the Chief Financial Officer, dated the Firm Closing Date or the Option
Closing Date, as the case may be, to the effect that:
(1) The representations and warranties of the Company
set forth in Section 2 of this Agreement are true and correct in all
material respects as of the date of this Agreement and as of the Firm
Closing Date or the Option Closing Date, as the case may be, and the
Company has complied in all material respects with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied on or prior to such Closing Date;
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the best of the
knowledge of the respective signers, no proceedings for that purpose
have been instituted or are pending or contemplated under the Act;
20
<PAGE>
(3) Neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein, or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(4) Since the initial date on which the Registration
Statement was filed with the Commission, no material agreement, written
or oral, transaction or event has occurred which should have been set
forth in an amendment to the Registration Statement or in a supplement
to or amendment of any prospectus which has not been disclosed in such
a supplement or amendment;
(5) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus
and except as disclosed in or contemplated by the Prospectus, the
Company and the Subsidiaries have not sustained a material loss or
damage by strike, fire, flood, windstorm, accident or other calamity
(whether or not insured), or from any labor dispute or any legal or
governmental proceeding, and there has not been any event,
circumstance, or development that results in, or that the Company
believes would result in, a Material Adverse Effect, except in each
case as described in or contemplated by the Prospectus (exclusive of
any amendment or supplement thereto).
(iv) On the date immediately preceding the date this Agreement
is executed and also on the Firm Closing Date and the Option Closing
Date, if applicable, a letter addressed to the Underwriter, from BDO
Seidman, L.L.P., independent accountants, the first one to be dated the
day before the date of this Agreement, the second one to be dated the
Firm Closing Date and the third one to be dated the Option Closing
Date, if applicable, in form and substance reasonably satisfactory to
the Representative, to the effect that:
(1) they are independent accountants with respect to
the Company and the Subsidiaries within the meaning of the Act and the
applicable Rules and Regulations thereunder;
(2) in their opinion, the audited consolidated
financial statements examined by them and included in the Registration
Statement and the Prospectus comply in form in all material respects
with the applicable accounting requirements of the Act and the Rules
and Regulations;
(3) on the basis of carrying out certain specified
procedures, a reading of the minute books of the stockholders, the
board of directors and any committees thereof of the Company and each
of its Subsidiaries, and inquiries of certain officials of the Company
and its Subsidiaries who have responsibility for financial and
accounting matters, nothing came to their attention that caused them to
believe that
21
<PAGE>
at a specific date not more than five business days prior to the date
of such letter, there were any changes in the capital stock or total
debt of the Company and its Subsidiaries or any decreases in total
assets or stockholders' equity from the amounts shown on the December
31, 1996 consolidated balance sheet included in the Registration
Statement and the Prospectus, or for the period from January 1, 1997 to
such specified date there were any decreases, as compared with
$__________ or $___________ in total revenues or net income,
respectively, of the Company and its Subsidiaries, except in all
instances for changes, decreases or increases set forth in such letter;
and
(4) they have carried out certain specified
procedures, not constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the general
accounting records of the Company and its Subsidiaries and are included
in the Registration Statement and the Prospectus, and have compared
such amounts, percentages and financial information with such records
of the Company and its Subsidiaries and with information derived from
such records and have found them to be in agreement, excluding any
questions of legal interpretation.
In the event the letters referred to above set forth any such changes,
decreases or increases which, in the reasonable judgement of the Representative,
are likely to result in a Material Adverse Effect, it shall be a further
condition to the obligations of the Underwriters that such letters shall be
accompanied by a written explanation of the Company as to the significance
thereof, unless the Representative deems such explanation unnecessary.
References to the Registration Statement and the Prospectus in
subsection (iv) with respect to either letter referred to above shall include
any amendment or supplement thereto at the date of such letter.
(v) The Representative shall have received from each person
who is a director or officer of the Company an agreement to the effect that such
person will not, except to the extent otherwise specifically permitted by the
terms of each such person's agreement, directly or indirectly, without the prior
written consent of the Representative, which consent may be withheld in the
reasonable discretion of the Representative, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of an option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of 180 days after the date of this
Agreement except for options covering up to 150,500 shares of Common Stock to be
granted pursuant to the Company's stock option plans in connection with the
Offering as described in the Prospectus or the exercise of options (but not the
sale of shares of Common Stock received upon the exercise thereof) granted
pursuant to the Company's stock option plan.
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<PAGE>
(vii) On or before the Firm Closing Date, the Representative
and counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(viii) Prior to the commencement of the offering of the
Securities, the Securities shall have been included for trading on the Nasdaq
National Market.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to the Representative and to Elias, Matz, Tiernan & Herrick L.L.P., counsel for
the Underwriters. The Company shall furnish the Representative with such
manually signed or conformed copies of such opinions, certificates, letters and
documents as the Representative reasonably request.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the Firm Closing Date is not so satisfied, this
Agreement at the Representative's election will terminate upon written
notification by the Representative to the Company without liability on the part
of any Underwriter or the Company, except for the expenses to be paid or
reimbursed by the Company pursuant to Sections 6 and 8 hereof and except to the
extent provided in Section 12 hereof.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls an Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by
the Company in, or the breach of, Section 2 of this Agreement;
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the
Securities under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange
(each an "Application");
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any
23
<PAGE>
amendment or supplement thereto, or any Application a material fact
required to be stated therein or necessary to make the statements
therein not misleading;
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films, tape recordings;
(v) any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner
to, the Securities or the Offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon matters covered by
clause (i) above;
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by each Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such Registration Statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by the
Representative specifically for use therein; and provided, further, that the
Company will not be liable to the Underwriters or any person controlling an
Underwriter with respect to any such untrue statement or omission made in any
Preliminary Prospectus that is corrected in the Prospectus (or any amendment or
supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Securities from an Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company with Section 5(d) or (e) of this
Agreement. This indemnity agreement will be in addition to any liability which
the Company or the Principal Stockholders may otherwise have. The Company will
not, without the prior written consent of the Underwriters, settle or compromise
or consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not any Underwriter or any person who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of all the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
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<PAGE>
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities to which the Company or any such
director, officer of the Company, or controlling person of the Company may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application or (ii) the omission or the alleged omission to state therein
a material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by the Representative specifically for use therein;
and, subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person thereof in
connection with investigating or defending any such loss, claim, damage,
liability or any action in respect thereof. This indemnity agreement will be in
addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8, except to the extent it was unaware of such action and has been
prejudiced in any material respect by such failure or otherwise forfeits
substantive rights or defenses by reason of such failure or from liability which
it may have to any identified party other than under the provisions of Section 8
hereof. In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After such notice from the indemnifying party to such
indemnified party of its
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<PAGE>
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the Representative in the case of paragraph (a) of this Section 8,
representing the indemnified parties under such paragraph (a) who are parties to
such action or actions) or (ii) the indemnifying party does not promptly retain
counsel satisfactory to the indemnified party or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. After such notice from the indemnifying party
to such indemnified party, the indemnifying party will not be liable for the
costs and expenses, of any settlement of such action effected by such
indemnified party without the consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the Offering of the Securities or (ii) if,
but only if, the allocation provided by the foregoing clause (i) is not
permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions or
alleged statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the Offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and commissions
(but excluding expense reimbursement) received by the Underwriters. The relative
fault of the parties shall be determined by reference to, among other things,
whether the untrue, or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in the
circumstances. The Company and the Underwriters agree that it would not be
equitable if the amount of such contribution were determined by pro rata or per
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<PAGE>
capita allocation or by any other method of allocation that does not take into
account the equitable considerations referred to above in this Section 8(d).
Notwithstanding any other provision of this Section 8, no Underwriter shall be
obligated to make contributions hereunder that in the aggregate exceed the total
public offering price of the Securities purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion to
their respective underwriting obligations and not joint, and the contributions
among Underwriters shall be governed by the provisions of the Representative's
Agreement Among Underwriters. For the purposes of this Section 8(d), each
person, if any, who controls an Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company or within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, shall have the same rights to contribution as
the Company.
9. Default of Underwriters. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may make
arrangements satisfactory to the Representative for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of shares of Securities that is more than ten percent of the aggregate
number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and within 36 hours
after such default by any Underwriter, the Representative does not arrange for
the purchase of such Securities, then the Company shall be entitled to a further
period of 36 hours within which to procure another party or other parties
reasonably satisfactory to the Representative to purchase such Securities. In
the event that, within the respective prescribed periods, the Representative
notifies the Company that the Representative has so arranged for the purchase of
such Securities or the Company notifies the Representative that it has so
arranged for the purchase of such Securities, the Representative or the Company
shall have the right to postpone the Firm Closing Date or the Option Closing
Date, as the case may be, for a period of not more than seven days in order that
any necessary changes may be made in the arrangements or documents for the
purchase and
27
<PAGE>
delivery of the Firm Securities or Option Securities, as the case may be. If
arrangements satisfactory to the Representative are not made within 36 hours
after such default for the purchase by other persons (who may include one more
of the non-defaulting Underwriters, including the Representative) of the
Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company except for the expenses to be paid by the Company pursuant to Section 6
hereof and except to the extent provided in Section 8 hereof. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 9. Nothing herein shall relieve any defaulting
Underwriter from liability for its default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers and the
several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of any investigation made by or on behalf of the Company, any
of its officers or directors, any Underwriter or any controlling person, as the
case may be, and will survive delivery of and payment for the Securities sold
hereunder and any termination of the Agreement. Without limiting the generality
of the foregoing, the respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. Effective Date. This Agreement shall become effective at 11:00
A.M., Washington, D.C. time, on the first full business day following the date
this Agreement is executed, or at such earlier time after the Registration
Statement becomes effective as the Representative shall release the Firm
Securities for the public offering. The Representative shall notify the Company
immediately after it has taken any action which causes this Agreement to become
effective. Until this Agreement is effective, it may be terminated by the
Company by notice to the Representative or by the Representative by notice to
the Company. For purposes of this Agreement, the release of the public offering
of the Securities shall be deemed to have been made when the Representative
releases, by telegram or otherwise, firm offers of the Securities to securities
dealers or releases for publication a newspaper advertisement relating to the
Securities, whichever occurs first.
12. Termination. Without limiting the right to terminate this Agreement
pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you or
by you by notice to the Company at any time prior to the time this Agreement
shall become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company to any Underwriter (except for
the expenses to be paid or reimbursed by the Company pursuant to Section 6
hereof and except to the extent provided in Section 8 hereof) or of any
Underwriter to the Company (except to the extent provided in Section 8 hereof).
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<PAGE>
(b) This Agreement may also be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the Representative
by notice to the Company given prior to the Firm Closing Date or the related
Option Closing Date, respectively, in the event that the Company shall have
failed, refused or been unable to perform all obligations and satisfy all
conditions on their part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Firm Closing Date or such Option Closing Date,
respectively,
(i) the Company or the Subsidiaries shall have, in the sole
judgment of the Representative, sustained any material loss or interference with
their respective businesses or properties from fire, flood, hurricane, accident
or other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding or there shall have been any
event. change, or development which has or prospectively could have a Material
Adverse Effect, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto);
(ii) a banking moratorium shall have been declared by New York
or United States authorities; or
(iii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange or Nasdaq National Market shall have been
suspended or minimum or maximum prices shall have been established on either
such exchange or market system;
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an outbreak or
escalation of any other insurrection or armed conflict involving the United
States or (C) any other calamity or crisis or material adverse change in general
economic, political or financial conditions having an effect on the U.S.
financial markets that, in the sole judgment of the Representative, makes it
impractical or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement, as amended as
of the date hereof.
13. Information Supplied by the Underwriter. The statements set forth
in the Prospectus (i) on the cover page with respect to price, underwriting
discounts and commissions and terms of the offering, (ii) under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus and (iii) on the
inside cover page in any Preliminary Prospectus or the Prospectus pertaining to
stabilization (to the extent such statements relate to the Underwriters)
constitute the only information furnished by and on behalf of the Representative
or the Underwriters to the Company for use in connection with the preparation of
the Registration Statement and the Prospectus. The Representative confirms that
such statements (to such extent) are correct in all material respects.
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<PAGE>
14. Notices. All communications hereunder shall be in writing and, if
sent to the Underwriter, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to Friedman, Billings, Ramsey & Co., Inc.,
Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209,
Attention: James R. Kleeblatt with a copy to Elias, Matz, Tiernan & Herrick
L.L.P., 734 15th Street, N.W., 12th Floor, Washington, D.C. 20005, Attention:
Philip R. Bevan, Esq.; if sent to the Company, shall be delivered or sent by
mail, telex confirmed in writing to the Company at 111 Presidential Boulevard,
Suite 215, Bala Cynwyd, Pennsylvania 19004, Attention: Anthony J. Santilli, Jr.
Chairman, President and Chief Executive Officer with a copy to Blank, Rome,
Comisky & McCauley, 4 Penn Center Plaza, 11-4, Philadelphia, Pennsylvania 19103,
Attention: Frederick D. Lipman, Esq.
15. Successors. This Agreement shall inure to the benefit of and shall
be binding upon the Underwriter, the Company and their respective successors and
legal representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities and
contribution agreements of the Company contained in Section 8 of this Agreement
shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8
of this Agreement shall also be for the benefit of the directors of the Company,
the officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
16. Applicable Law. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein shall be governed by and construed
in accordance with the laws of the Commonwealth of Virginia, without giving
effect to any provisions relating to conflicts of laws.
17. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the Commonwealth of
Virginia, and by execution and delivery of this Agreement, the Company accepts
for itself and in connection with its properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agree to be bound by any judgment rendered
thereby in connection with this Agreement. The Company designates and appoints
_____________ and such other persons as may hereafter be selected by the Company
irrevocably agreeing in writing to so serve, as its agents to receive on its
behalf service of all process in any such proceedings in any such court, such
service being hereby acknowledged by the Company to be effective and binding
service in every respect. A copy
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<PAGE>
of any such process so served shall be mailed by registered mail to the Company
at its address provided in Section 14 hereof; provided, however, that, unless
otherwise provided by applicable law, any failure to mail such copy shall not
affect the validity of service of such process. If any agent appointed by the
Company refuses to accept service, the Company hereby agrees that service of
process sufficient for personal jurisdiction in any action against the Company
in the Commonwealth of Virginia may be made by registered or certified mail,
return receipt requested, to the Company at the address provided in Section 14
hereof, and the Company acknowledges that such service shall be effective and
binding in every respect. Nothing herein shall affect the right to serve process
in any other manner permitted by law or shall limit the right of any Underwriter
to bring proceedings against the Company in the courts of any other
jurisdiction.
18. General. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not effect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by writing signed by the Company and the Representative.
If the foregoing correctly sets forth our understanding please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and the
Representative.
Very truly yours,
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
By:
-----------------------------------------
Anthony J. Santilli, Jr.
Chairman, President and Chief Executive
Officer
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<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
---------------------------------
Name: James R. Kleeblatt
Title: Managing Director
As Representative of the several
Underwriters named in Schedule
1 hereto
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<PAGE>
Schedule 1
UNDERWRITER
Number of Firm Securities
Underwriters to be Purchased
- ------------ -------------------------
Friedman, Billings, Ramsey & Co., Inc.
-----------
Total 1,000,000
===========
33
<PAGE>
EXHIBIT A
FORM OF OPINION OF BLANK, ROME, COMISKY & McCAULEY
(i) The Company and each of its Subsidiaries have been duly organized
and are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses required
such qualification, except where the failure to be so qualified does not or
would not have a material adverse effect on the financial condition, business,
properties or results of operation of the Company and its Subsidiaries (taken as
a whole) (thereinafter, a "Material Adverse Effect").
(ii) The Company and each of the Subsidiaries have the corporate power
to own or lease their respective properties and conduct their respective
businesses as described in the Registration Statement and the Prospectus, and
the Company has corporate power to enter into this Agreement and to carry out
all the terms and provisions thereof to be carried out by them.
(iii) To our knowledge, except for stock holdings occurring from the
liquidation of loan collateral, the Company does not own or control more than
50% of the voting stock, directly or indirectly, any corporation, association or
other entity other than its Subsidiaries. All of the issued and outstanding
shares of capital stock of the Subsidiaries have been duly authorized and are
validly issued, fully paid and nonassessable, and are directly or indirectly
owned by the Company free and clear of any security interest, claim, lien,
charge and encumbrance. Neither the Company nor the Subsidiaries own any equity
interests in any firm or partnership, association or other entity except as
disclosed in the Prospectus.
(iv) Each of the Company and the Subsidiaries has obtained and is
operating in compliance with all authorizations, licenses, permits, consents,
certificates and orders of federal and state regulatory agencies material to the
conduct of their respective businesses, all of which are valid and in full force
and effect (except where the failure to obtain or to comply with such
certificates, licenses, authorizations or permits would not have a Material
Adverse Effect) and neither the Company nor the Subsidiaries have received any
notice of proceedings relating to the revocation or modification of any such
certificate, license, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would have a
Material Adverse Effect.
(vi) As of the date of the Prospectus, the Company had an authorized,
issued and outstanding capitalization as set forth in the Prospectus under the
caption "Capitalization" under the heading "Actual," and at the Firm Closing
Date the Company will have an authorized and outstanding capitalization as set
forth in the Prospectus under the caption "Capitalization" under the heading "As
Adjusted." All of the issued shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable and were
not issued in violation of or subject to any preemptive rights or
<PAGE>
other rights to subscribe for or purchase securities. The description of the
Company's stock option plans and the options to be granted and exercised
thereunder, set forth in the Prospectus, accurately and fairly presents the
information shown with respect to such plans.
(vii) The Common Stock to be sold by the Company pursuant to the
Agreement has been duly authorized and, when issued, delivered and paid for in
the manner set forth in the Agreement, will be validly issued, fully paid and
nonassessable, and will conform in all material respects to the description
thereof contained in the Prospectus. Good title to the Common Stock will be
transferred from the Company to the Purchasers thereof against payment therefor,
subject to such claims as may be asserted against the purchasers thereof by
third-party claimants. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the sale of the Common Stock by the Company
pursuant to the Agreement.
(viii) Except as disclosed in the Prospectus, there are no outstanding
(a) securities or obligations of the Company or the Subsidiaries convertible
into or exchangeable for any capital stock of the Company or any such
Subsidiary, (b) warrants, rights or options to subscribe for or purchase from
the Company or any such subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations other than the
overallotment option set forth in the Agreement, or (c) obligations of the
Company or any such Subsidiary to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(ix) The Company has the legal right power and authority to enter into
the Agreement and to perform the transactions contemplated thereby. The
Agreement has been duly authorized by the Company and upon due execution and
delivery by the Company and the other parties thereto will constitute a valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except to the extent the enforceability thereof may
be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, receivership, conservatorship, or other similar laws, regulations or
procedures of general applicability now or hereafter in effect relating to or
affecting creditors, or other obligees' rights generally and (ii) general equity
principles and to the discretion of the court, regardless of whether such
enforceability is considered in a proceeding in equity or at law. The execution,
delivery and performance of the Agreement by the Company and the consummation of
the transactions therein contemplated will not violate any provisions of the
certificate of incorporation or bylaws, or other organizational documents of the
Company or the Subsidiaries, and will not conflict with, result in the breach or
violation of, or constitute, either by itself or upon notice or the passage of
time or both, a default under any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument known to us to which
the Company or any of the Subsidiaries is a party or by which the Company or the
Subsidiaries or any of their respective properties may be bound or affected, any
federal or state statute or any authorization, judgment, decree, order, rule or
regulation of any federal or state court or any federal or state regulatory
agency applicable to the Company or any of the Subsidiaries
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<PAGE>
(other than state securities or blue sky laws as to which we express no opinion)
or any of their respective properties, except where any violation, conflict,
breach of default would not have a Material Adverse Effect. No consent,
approval, authorization or other order of any federal or state court or federal
or state regulatory agency is required for the execution and delivery of the
Agreement or the consummation of the transactions contemplated thereby, except
for compliance with the Act, the blue sky laws applicable to the public offering
of the Securities, the clearance of such offering with NASD, and the listing of
the Common Stock on the Nasdaq Stock Market as well as such consents, approvals
or authorizations, as have been obtained and are in full force and effect.
(x) Other than litigation incident to the conduct of the business
conducted by the Company and the Subsidiaries, no legal or governmental
proceedings are pending to which the Company or any of the Subsidiaries is a
party or to which the property of the Company or any of the Subsidiaries is
subject that are required to be described in the Registration Statement or the
Prospectus and are not described therein, and, to the knowledge of counsel, no
such proceedings have been threatened against the Company or the Subsidiaries or
with respect to any of their respective properties. No legal or governmental
proceedings, whether formal or informal, have been commenced against the Company
or any of the Subsidiaries by any federal or state regulatory agency nor have
any such proceedings been instituted or, to the knowledge of counsel, have any
such proceedings been threatened or recommended. Neither the Company nor any of
the Subsidiaries, nor to such counsel's knowledge, any of their respective
officers, employees or directors, is a party or subject to the provisions of any
regulatory action, injunction, judgment, decree or order of any federal or state
court or federal or state regulatory agency, and there is no charge, action,
suit proceeding or investigation before or by any federal or state court or
federal or state regulatory agency pending or, to the knowledge of counsel,
threatened which might affect the performance of the Agreement.
(xi) No further approval, consent or authority of the stockholders of
the Company or the Board of Directors of the Company is required for the
issuance and sale of the Securities by the Company as contemplated in the
Agreement, except such as have been obtained.
(xii) The Company is not in breach of its certificate of incorporation
or bylaws and to such counsel's knowledge, the Company is not in default and no
event has occurred which, with notice or lapse of time or both, would constitute
a default under any contract, indenture, mortgage, loan agreement, note, lease
or other instrument known to such counsel to which the Company is a party or by
which the Company or any of its properties may be bound, the result of which
could have a Material Adverse Effect.
(xiii) The offer and sale by the Company and ABFC of the notes
evidencing subordinated indebtedness thereof have been conducted in compliance
in all material respects with all applicable federal and state laws and
regulations including, but not limited to, the Act and the Rules and
Regulations.
3
<PAGE>
(xiv) To such counsel's knowledge, there are no contracts, agreements
or other documents of a type required to be described or referred to in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement other than those described or referred to therein or
filed as exhibits thereto, and the description in the Prospectus of all
contracts, agreements and other documents therein fairly presents in all
material respects the information shown.
(xv) The description of past securitization transactions effected by
the Company (other than the financial data as to which such counsel need express
no opinion), as contained in the Registration Statement and the Prospectus, is
true and complete in all material respects.
(xvi) The Registration Statement, the Prospectus and each amendment or
supplement thereto, other than the financial statements, the notes thereto,
financial tables and other financial and statistical data included therein, as
to which such counsel need express no opinion, comply as to form in all material
respects with the requirements of the Act and the Rules and Regulations. The
statements contained in the Prospectus under the captions "Risk Factors -
Regulatory Restrictions and Licensing Requirements," "Environmental Concerns, "-
Anti-takeover Effect of Delaware Law, "Business-Regulation," "Description of
Capital Stock " - Certain Provisions of Delaware Law," - "Certain Certificate of
Incorporation Bylaw Provisions", "Shares Eligible for Future Sale" and
"Additional Information," to the extent such statements relate to statements of
law or legal conclusions, have been reviewed by such counsel and are accurate in
all material respects.
(xvii) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration Statement has
been issued by the Commission, and no proceedings for such purpose have been
instituted or, to such counsel's knowledge, threatened by the Commission. Any
required filing of the Prospectus and any supplement thereto pursuant to Rule
424(b) of the Rules and Regulations has been made in the manner and within the
time period required by such Rule 424(b).
(xviii) The Securities have been approved for quotation on the Nasdaq
National Market upon notice of issuance.
(xix) Neither the Company nor any of the Subsidiaries is in violation
of any directive from the Commission, or any other federal or state regulatory
agency regarding the method of conducting its business; the Company and the
Subsidiaries are conducting their business in a manner so as to comply with all
applicable federal or state statutes and regulations that regulate its business,
except where the failure to so be in such compliance would not have a Material
Adverse Effect.
(xx) To such counsel's knowledge, all material transactions between the
Company and the Subsidiaries and the officers, directors and major stockholders
of the Company that
4
<PAGE>
are required to be disclosed under the Act and the Rules and Regulations have
been accurately disclosed in the Prospectus in all material respects.
(xxi) The Company is not an "investment company" as such term is deemed
in the Investment Company Act of 1940, as amended and the Offering will not
cause the Company to become an investment company subject to registration under
such Act.
(xxii) To such counsel's knowledge, subsequent to the respective dates
as of which information is given in the Registration Statement and the
Prospectus, (1) the Company and its Subsidiaries have not incurred any material
liability or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; and (2) the Company has not
purchased any of its outstanding capital stock, nor declared, paid or otherwise
made any dividend or distribution of any kind on its capital stock, except in
each case ads described in or contemplated by the Prospectus.
(xxiii) If the Company elects to rely on Rule 434, the Prospectus is
not "materially different," as such term in used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including such
information that is permitted to be omitted pursuant to Rule 430 A).
(xxiv) The specimen stock certificate of the Company filed as an
exhibit to the Registration Statement is in due and proper form to evidence
shares of Common Stock, has been duly authorized and approved by the Board of
Directors of the Company and complies with all legal requirements applicable
under the Delaware General Corporation Law.
Such counsel shall also state in a separate letter that no facts have
come to such counsel's attention that would lead such counsel to believe that
the Registration Statement, at the time it was declared effective by the
Commission, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or that the Prospectus as of the date it was filed with the
Commission and as of the date hereof, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading, it being understood that such counsel need
make no comment with respect to the financial statements, the notes thereto,
financial tables or any other financial or statistical data or information
regarding the Underwriter included in the Registration Statement or Prospectus,
and provided, further, that such counsel may state that (i) they have not
independently verified the accuracy, completeness or fairness of the financial
statements and the notes thereto contained in the Registration Statement and the
Prospectus or in any amendments or supplements thereto, (ii) they have not
independently calculated or verified the accuracy, completeness or fairness of
any financial, statistical or accounting data contained in the Registration
Statement and the Prospectus or in any amendments or supplements thereto, and
(iii) the limitations
5
<PAGE>
inherent in their participation in the preparation of the Registration Statement
and the Prospectus and the knowledge available to them are such that they are
unable to assume, and do not assume, any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus or any amendment or supplement thereof (except as
set forth in clause (xvi) above).
6
<PAGE>
NUMBER_____________
COMMON STOCK
CUSIP No. 024768 10 6
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER
SHARE OF
American Business Financial Services, Inc. (the "Corporation"), a Delaware
corporation. The shares represented by this certificate are transferable only on
the stock transfer books of the Corporation by the holder of record hereof, or
by his duly authorized attorney or legal representative, upon the surrender of
this certificate properly endorsed. This certificate is not valid until
countersigned and registered by the Corporation's transfer agent and registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
DATED_______________________
- ---------------------------- -------------------------------
Beverly Santilli, Anthony J. Santilli, Jr.
Executive Vice President Chairman, President
and Corporate Secretary and Chief Executive Officer
[Seal]
Countersigned and Registered:
American Stock Transfer & Trust Company
Transfer Agent and Registrar
By:
--------------------------------
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
The shares represented by this certificate are issued subject to all
the provisions of the Amended and Restated Certificate of Incorporation
(Certificate of Incorporation) and the Bylaws ("Bylaws") of American Business
Financial Services, Inc. (the "Company") as from time to time amended (copies of
which are on file at the principal executive offices of the Company).
The Company will furnish to any stockholder upon request and without
charge a full statement of the powers, designations, preferences and relative
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made to the Corporation or to its Transfer
Agent and Registrar.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT __________ Custodian ___________
TEN ENT - as tenants by the entirety (Cust) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gift to Minors Act - ________________
survivorship and not as tenants (State)
in common. UNIF TRANS MIN ACT _________ Custodian ____________
(Cust) (Minor)
Under Uniform Transfers to Minors Act - ___________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received,_____________________________ hereby sell, assign
and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
| |
--------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------ Shares
of Common Stock represented by the within certificate, and do hereby irrevocably
constitute and appoint
- ----------------------------------------------------------------------- Attorney
- -------------------------------------------------------------------------------
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------- -------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATSOEVER.
SIGNATURE(S) GUARANTEED:
By
--------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
1995 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
1. Purpose of Plan
The purpose of the 1995 Stock Option Plan for Non-Employee
Directors (the "Plan") contained herein is to enhance the ability of American
Business Financial Services, Inc. and its current and future subsidiaries
(collectively the "Companies") to attract, retain and motivate members of their
respective Boards of Directors and to provide additional incentive to members of
their respective Boards of Directors by encouraging them to invest in shares of
American Business Financial Services, Inc. (the "Company") common stock and
thereby acquire a proprietary interest in the Company and an increased personal
interest in the Companies' continued success and progress, to the mutual benefit
of directors, employees and stockholders.
2. Aggregate Number of Shares
135,000 shares of the Company's common stock, par value $.001
per share ("Common Stock"), shall be the aggregate number of shares which may be
issued under this Plan. Notwithstanding the foregoing, in the event of any
change in the outstanding shares of the Common Stock of the Company by reason of
a stock dividend, stock split (other than the 3 for 2 stock split effective
October 1, 1995 for which no adjustment shall be made), combination of shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what the Board of Directors deems in its sole discretion to be
similar circumstances, the aggregate number and kind of shares which may be
issued under this Plan shall be appropriately adjusted in a manner determined in
the sole discretion of the Board of Directors. Reacquired shares of the
Company's Common Stock, as well as unissued shares, may be used for the purpose
of this Plan. Common Stock of the Company subject to options which have
terminated unexercised, either in whole or in part, shall be available for
future options granted under this Plan.
3. Participation
Any director of the Companies who is not also an employee of
the Companies is eligible to participate in the Plan and may be selected by the
Board of Directors to receive awards under the Plan. In addition, each person
who is, as of October 1, 1995, a director of the Company and is not as of such
date an employee of the Company or any subsidiary corporation, shall, as of
October 1, 1995, automatically be granted an option to purchase 22,500 shares of
the Company's Common Stock (such figure to be subject to adjustment for the same
events described in Section 2 hereof, but not for the 3 for 2 stock split
effective October 1, 1995). Each person who (a) is not a
<PAGE>
director of the Company or any subsidiary corporation as of October 1, 1995, and
(b) is not an employee of the Company or any subsidiary corporation and who
after October 1, 1995 is first elected or appointed as a director of the Company
or any subsidiary corporation shall, as of the date of such election or
appointment, automatically be granted an option to purchase 22,500 shares of the
Company's Common Stock (such figure to be subject to adjustment for the same
events described in Section 2 hereof), subject, however, to the provisions of
Section 6 hereof.
4. Administration of Plan
This Plan shall be administered by the Board of Directors of
the Company. The Board of Directors shall, in addition to its other authority
and subject to the provisions of this Plan, determine which individuals shall in
fact be granted an option or options, the number of shares to be subject to each
of the options, the time or times at which the options shall be granted, the
rate of option exercisability, and the price at which each of the options is
exercisable and the duration of the option. The Board of Directors of the
Company shall adopt such rules for the conduct of its business and
administration of this Plan as it considers desirable. A majority of the members
of the Board of Directors of the Company shall constitute a quorum for all
purposes. The vote or written consent of a majority of the members of the Board
of Directors of the Company on a particular matter shall constitute the act of
the Board of Directors of the Company on such matter. The Board of Directors of
the Company shall have the exclusive right to construe the Plan and the options
issued pursuant to it, to correct defects and omissions and to reconcile
inconsistencies to the extent necessary to effectuate the purpose of this Plan
and the options issued pursuant to it, and such action shall be final, binding
and conclusive upon all parties concerned. No member of the Board of Directors
of the Company shall be liable for any act or omission (whether or not
negligent) taken or omitted in good faith, or for the exercise of any authority
or discretion granted in connection with the Plan to the Board of Directors, or
for the acts or omissions of any other members of the Board of Directors.
5. Non-Qualified Stock Options, Option Price and Term
(a) Options issued pursuant to this Plan shall be
non-qualified stock options. A non-qualified stock option is an option which
does not satisfy the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). The option price for the non-qualified stock
options issued under this Plan shall be equal to the fair market value, as
determined by the Board of Directors of the Company, of the Company's Common
Stock on the date of the grant of the option, except that options issued as of
October 1, 1995 shall have an exercise price equal to the higher of (i) the fair
market value at October 1, 1995 or (ii) the price at which the Company's Common
Stock is, to the knowledge of the Company, first traded within six months after
October 1, 1995. The fair market value of the Company's Common Stock on any
particular date shall mean the last reported sale price of a share of the
Company's Common Stock on any stock exchange on which such stock is then listed
or admitted to trading, or on the NASDAQ National Market System or Small Cap
NASDAQ, on such date, or if no sale took place on such day, the last such date
on which a sale took place, or if the Common Stock is not then quoted on the
NASDAQ National Market System or Small Cap NASDAQ, or listed or admitted to
trading on any stock exchange, the average of the bid and asked prices in the
over-the-counter market on such date, or if none of the
<PAGE>
foregoing, a price determined by the Board of Directors.
(b) Options issued pursuant to this Plan shall be issued
substantially in the form set forth in Appendix I, or with respect to options
awarded after October 1, 1995, Appendix II hereof, which form is hereby
incorporated by reference and made a part hereof, and shall contain
substantially the terms and conditions set forth therein. Options shall expire
ten years after the date they are granted, unless terminated earlier as provided
herein.
6. Expiration, Amendment, Supplement Suspension and Termination
Options shall not be granted pursuant to this Plan after the
expiration of eight years from and after the date this Plan is approved by the
stockholders of the Company. The Board of Directors of the Company reserves the
right at any time, and from time to time, to amend or supplement this Plan in
any way, or to suspend or terminate it, effective as of such date, which date
may be either before or after the taking of such action, as may be specified by
the Board of Directors of the Company; provided, however, that such action shall
not affect options granted under the Plan prior to the actual date on which such
action occurred. Notwithstanding the foregoing, if Rule 16b-3 of the Securities
Exchange Act of 1934 is applicable to the Company, the Plan provisions specified
in Rule 16b-3(c)(2)(ii)(A) under the Securities Exchange Act of 1934, as
amended, or any future corresponding rule may not be amended or supplemented
more than once every six months, except as permitted by Rule 16b-3(c)(2)(ii)(B).
If the Board of Directors voluntarily submits a proposed amendment, supplement,
suspension or termination for stockholder approval, such submission shall not
require any future amendments (whether or not relating to the same provision or
subject matter), supplements, suspensions or terminations to be similarly
submitted for stockholder approval.
7. Effectiveness of Plan
This Plan shall become effective on the date of its adoption
by the Company's Board of Directors, subject however to approval by the holders
of the Company's Common Stock in the manner described in Rule 16b-3(b) under the
Securities Exchange Act of 1934, as amended, or any future corresponding rule.
8. General Conditions
(a) Nothing contained in this Plan or any option granted
pursuant to this Plan shall confer upon any director the right to continue as a
director of any of the Companies or interfere in any way with the rights of the
Companies to terminate him as a director.
(b) Corporate action constituting an offer of stock for sale
to any director under the terms of the options to be granted hereunder shall be
deemed complete as of October 1, 1995, or as of the automatic grant date
hereunder after October 1, 1995, regardless of when the option is actually
delivered to the non-employee director or acknowledged or agreed to by him.
(c) The use of the masculine pronoun shall include the
feminine gender whenever appropriate.
<PAGE>
EMPLOYMENT AGREEMENT
Agreement made as of this 29th day of January, 1997, by and
between American Business Financial Services, Inc., a Delaware corporation (the
"Company"), and Anthony J. Santilli, Jr., an individual (the "Executive").
BACKGROUND
The Executive is currently employed by the Company in the
position of President and Chief Executive Officer. The Company and the Executive
desire to provide for the future employment of the Executive as more fully set
forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, the parties agree as
follows:
1. Duties. During the Term (as hereinafter defined), the Executive
shall be the Chairman and Chief Executive Officer of the Company, shall have
such executive duties as are reasonably determined from time to time by the
Company's Board of Directors, and shall be entitled to the powers and authority
normally incident to the office of President and Chief Executive Officer. The
Executive shall devote his full time and attention to the business of the
Company and use his best efforts to promote the interests of the Company. The
principal place of business of the Executive shall be located within 30 miles of
City Hall in the City of Philadelphia.
2. Term.
(a) This Agreement shall continue for a period beginning on
the date hereof and ending on the earliest of the following dates (the "Term"):
(i) the date the Executive dies or becomes permanently disabled (as hereinafter
defined); (ii) the date of termination of the Executive's employment with the
Company for cause (as hereinafter defined); (iii) the date of the voluntary
termination by the Executive of the Executive's employment with the Company by
resignation as provided in Section 5 hereof; (iv) the date the Executive reaches
70 years of age; or (v) the later of (A) five years from the date hereof or (B)
five years from the latest anniversary of the date hereof, except that if the
Company gives written notice to the Executive of its intention to terminate this
Agreement without cause five years from the date of such notice, this Agreement
shall terminate five years from the date of such notice.
(b) For purposes of this Agreement the Executive shall be
deemed to be disabled upon his failure, even after reasonable accommodation, to
render services of the character which he had previously rendered to the Company
because of his physical or mental illness or other incapacity beyond his control
for a continuous period of twelve months or for shorter periods aggregating
twelve months in any two year period);
(c) For purposes of this Agreement, the term "cause" shall
mean (i) conviction of the Executive for any felony, fraud or embezzlement or
(ii) the Executive being guilty of willful
-1-
<PAGE>
or malicious misconduct in connection with the performance of his duties for the
Company and the Executive continues such misconduct beyond twenty days after
receiving written notice from the Company's Board of Directors specifying such
misconduct.
3. Compensation. During the Term, the Executive shall be entitled to a
minimum base annual salary of not less than $300,000. The foregoing figure shall
be adjusted in January of each calendar year during the Term for any increase in
the cost of living (based upon the Consumer Price Index, Philadelphia, PA - New
Jersey: all items, 1982-84=100, as published by the U.S. Department of Labor)
from May, 1996 to November of the immediately preceding calendar year. The
minimum base annual salary of the Executive, as adjusted for the cost of living,
shall be reviewed annually, and may be increased from time to time by the
Company's Board of Directors during the Term, and once increased may not
thereafter be decreased. The Board of Directors shall establish a cash bonus
plan which provides for the following bonuses to be paid for each fiscal year
during the Term: (a) if the Executive achieves 80% of the targets approved by
the Board of Directors for the fiscal year (the "Targets"), a cash bonus equal
to 50% of base annual salary; (b) if the Executive achieves 100% of the Targets,
a cash bonus equal to 100% of base annual salary, and if the Executive achieves
more than 80% and less than 100% of the Targets, the cash bonus will be
proportional to the achievement (e.g., if 90% of the Targets are achieved, the
cash bonus would equal 75% of base annual salary); (c) if the Executive achieves
more than 100% of the Targets, the cash bonus will be 100% of the base annual
salary plus an additional 2.5% for each 1% over 100% of the Targets actually
achieved (for example, if the Executive achieves 120% of the Targets, the cash
bonus would equal 150% of the base annual salary), provided that in no event can
the cash bonus exceed 225% of base annual salary. The Targets established by the
Board of Directors may not be increased by more than twenty-five percent (25%)
from one fiscal year to the next subsequent fiscal year and may not be increased
after a Change of Control (as defined in Section 6 hereof) to which the
Executive does not give his written consent as provided in Section 6. The
Executive shall also be entitled to such stock options and other incentive
payments as are determined from time to time by the Company's Board of
Directors.
4. Other Benefits. During the Term, in addition to the compensation set
forth in Section 3 hereof, the Executive shall be entitled, at a minimum, to the
following benefits from the Company:
(i) a leased car at a rental cost to the Company not
exceeding $600 per month (as adjusted for changes in the cost of living
as provided in Section 3 hereof) plus insurance, gasoline and
maintenance costs (it being understood that the Executive may choose to
contribute to any cost exceeding such figure);
(ii) family medical, hospital, life and disability
insurance which are no less than the amount of these benefits received
by the Executive immediately prior to the date hereof; and
(iii) reimbursement for all reasonable expenses
incurred by the Executive in the performance of his duties under this
Agreement.
-2-
<PAGE>
If the Executive becomes permanently disabled (as defined in Section
2(b) hereof) during the Term, the Company shall pay to the Executive (even
though the Term of this Agreement has otherwise expired) during the period of
such disability but not beyond the date the Executive reaches age 65, monthly
disability benefits in an amount computed as follows: (i) compute the
Executive's base annual salary immediately prior to such disability; (ii) divide
the figure set forth in clause (i) by 12; (iii) reduce the result of clause (ii)
by the amount of the monthly disability benefits received by the Executive under
any disability insurance paid for in whole or in part by the Company.
5. Voluntary Resignation. The Executive may voluntarily resign at any
time during the Term, provided that the Executive may not terminate his
employment for three years after the first closing date of an initial public
offering of the Company's common stock unless there is a Change of Control (as
defined in Section 6 hereof) during such three year period to which the
Executive does not give his written consent as provided in Section 6 hereof.
6. Change of Control.
(a) In the event of a Change of Control (as hereafter defined)
of the Company during the Term to which the Executive does not give his written
consent in his capacity as a director or shareholder of the Company, the
Executive shall receive (in addition to the payments and benefits due pursuant
to Sections 3 and 4 hereof, respectively), within thirty (30) days after the
date of such Change of Control, a cash payment equal 2.99 times the "base
amount," as said term is defined in Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended (the "Code"), less the aggregate present value of other
payments required to be taken into account under Section 280G(b)(2)(ii) of the
Code. The outside auditor for the Company shall determine the amount due
hereunder and such determination shall be final and conclusive upon all parties.
The payment due under this Section 6(a) shall be in addition to any other
payment which may otherwise become due pursuant to this Agreement.
(b) A "Change of Control" shall be deemed to have occurred
upon the happening of any of the following events: (i) a change within a two
year period in a majority of the members of the Board of Directors of the
Company (other than as a result of voluntary retirement or death); or (ii) a
person or group acting in concert as described in Section 13(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") acquires
beneficial ownership within the meaning of Rule 13(d)(3) promulgated under the
Exchange Act of a number of voting shares of the Company which constitute either
(i) more than fifty percent (50%) of the total votes which were voted in the
election of directors of the Company at the shareholders' meeting immediately
preceding such determination or (ii) more than twenty-five percent (25%) of the
total votes which may be cast by all of the Company's outstanding voting shares.
-3-
<PAGE>
7. Confidentiality and Non-Competition.
(a) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, he will not, during the Term or
at any time thereafter, except with the express prior written consent of the
Company or pursuant to the lawful order of any judicial or administrative agency
of government, directly or indirectly, disclose, communicate or divulge to any
person, or use for the benefit of any person, any knowledge or information with
respect to the conduct or details of the Company's business which he, acting
reasonably, believes or should believe to be of a confidential nature and the
disclosure of which not to be in the Company's interest.
(b) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, he will not, during the Term
except with the express prior written consent of the Company, directly or
indirectly, whether as employee, owner, partner, consultant, agent, director,
officer, shareholder or in any other capacity, engage in or assist any person to
engage in any act or action which he, acting reasonably, believes or should
believe would be harmful or inimical to the interests of the Company.
(c) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, he will not, during the Term
except with the express prior written consent of the Company, in any capacity
(including, but not limited to, owner, partner, shareholder, consultant, agent,
employee, officer, director or otherwise), directly or indirectly, for his own
account or for the benefit of any person, engage or participate in or otherwise
be connected with any competitor, except that the foregoing shall not prohibit
the Executive from owning as a shareholder less than 1% of the outstanding stock
of an issuer whose stock is publicly traded.
(d) The Company may elect to extend the period of the
covenants set forth in Section 7(b) and Section 7(c) for a period ending one
year after the last day of the Term, provided the Company has previously
complied with the provisions of this Agreement and provided the Company during
such one year period continues to pay to the Executive the highest annual
compensation (consisting of annual base salary and cash bonus) the Executive
previously received for any fiscal year during the Term.
(e) The parties agree that any breach by the Executive of any
of the covenants or agreements contained in this Section 7 will result in
irreparable injury to the Company for which money damages could not adequately
compensate the Company and therefore, in the event of any such breach, the
Company shall be entitled (in addition to any other rights and remedies which it
may have at law or in equity) to have an injunction issued by any competent
court enjoining and restraining the Executive and/or any other person involved
therein from continuing such breach. The existence of any claim or cause of
action which the Executive may have against the Company or any other person
(other than a claim for the Company's breach of this Agreement for failure to
make payments hereunder) shall not constitute a defense or bar to the
enforcement of such covenants. In the event of an alleged breach by the
Executive of any of the covenants or agreements contained in this Section 7, the
Company shall continue any and all of the payments due the Executive under this
-4-
<PAGE>
Agreement until such time as a Court shall enter a final and unappealable order
finding such a breach; provided, that the foregoing shall not preclude a Court
from ordering the Executive to repay such payments made to him for the period
after the breach is determined to have occurred or from ordering that payments
hereunder be permanently terminated in the event of a material and willful
breach.
(f) If any portion of the covenants or agreements contained in
this Section 7, or the application hereof, is construed to be invalid or
unenforceable, the other portions of such covenant(s) or agreement(s) or the
application thereof shall not be affected and shall be given full force and
effect without regard to the invalid or enforceable portions to the fullest
extent possible. If any covenant or agreement in this Section 7 is held
unenforceable because of the area covered, the duration thereof, or the scope
thereof, then the court making such determination shall have the power to reduce
the area and/or duration and/or limit the scope thereof, and the covenant or
agreement shall then be enforceable in its reduced form.
(g) For purposes of this Section 7, the term "the Company"
shall include the Company, any successor to the Company under Section 8 hereof,
and all present and future direct and indirect subsidiaries and affiliates of
the Company.
8. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of the Company which will
acquire, directly or indirectly, by merger, consolidation, purchase, or
otherwise, all or substantially all of the assets of the Company, and shall
otherwise inure to the benefit of and be binding upon the parties hereto and
their respective heirs, executors, administrators, successors and assigns.
Nothing in the Agreement shall preclude the Company from consolidating or merger
into or with or transferring all or substantially all of its assets to another
person. In that event, such other person shall assume this Agreement and all
obligations of the Company hereunder. Upon such a consolidation, merger, or
transfer of assets and assumption, the term "the Company" as used herein, shall
mean such other person and this Agreement shall continue in full force and
effect.
9. Withholding. The Company may withhold from any benefits payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
10. Gross-Up for Excise Tax. If any payments or benefits to be received
by the Executive hereunder (such payments or benefits, excluding the Gross-Up
Payment described herein, being hereinafter referred to as the "Total
Payments"), will be subject to any excise tax imposed under Section 4999 of the
Code (the "Excise Tax"), the Company shall pay to the Executive an additional
amount (the "Gross-Up Payment"), such that the net amount retained by the
Executive after deduction of any Excise Tax on the Total Payments and any
Federal, state and local income and employment taxes and Excise Tax upon the
Gross-Up Payment, shall be equal to the Total Payments. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay Federal income tax at the highest marginal rate of Federal income taxation
in the
-5-
<PAGE>
calendar year in which the Gross-Up Payment is to be made, and state and local
income taxes at the highest marginal rate of taxation in the state and locality
of the Executive's residence on the date on which the Gross-Up Payment is
calculated for purposes of this Section 10, net of the maximum reduction in
Federal income taxes which could be obtained from the deduction of such state
and local taxes. The Executive and the Company shall each reasonably cooperate
with the other in connection with any administrative or judicial proceedings
concerning the existence or amount of liability for Excise Tax with respect to
the Total Payments.
11. (a) Nonassignability. Neither this Agreement or any right or
interest hereunder shall be assignable by the Executive or his legal
representatives without the Company's prior written consent.
(b) Attachment. Except as required by law, the right to receive
payments under this Agreement shall not be subject to anticipation, sale,
encumbrance, charge, levy, or similar process or assignment by operation of law.
12. Waivers Not to be Continued. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver or
as a consent to any subsequent breach by the other party.
13. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice:
A. If to the Executive, to:
Anthony J. Santilli, Jr.
c/o American Business Financial Services, Inc.
BalaPointe Office Centre
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
B. If to the Company, to:
American Business Financial Services, Inc.
BalaPointe Office Centre
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Attn: Board of Directors
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With a copy to: Frederick D. Lipman, Esquire
Blank Rome Comisky & McCauley
Four Penn Center Plaza
Philadelphia, PA 19103-2599
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
14. Jurisdiction. Company and the Executive consent to the exclusive
jurisdiction of the courts of the Commonwealth of Pennsylvania and the United
States District Court for the Eastern District of Pennsylvania in any and all
actions arising hereunder and irrevocably consent to service of process as set
forth in Section 13 hereof.
15. Acceleration. If the Company fails to pay the Executive any of the
amounts due to him under Sections 3, 4 or 6 hereof, thirty (30) days after
having received written notice from the Executive of such failure to pay, the
Executive shall have the right to accelerate future payments of all sums due the
Executive under Sections 3, 4 and 6 hereof, without discount.
16. Indemnity; No Mitigation. If the Company fails to pay the Executive
any of the amounts due to him under Sections 3 or 6 hereof or fails to provide
the Executive with any of the benefits due to him under Section 4 hereof, thirty
(30) days after having received written notice from the Executive of such
failure, the Executive shall be entitled to full reimbursement from the Company
for all costs and expenses (including reasonable attorneys fees) incurred by the
Executive in enforcing his rights under this Agreement, plus interest at the
rate of 9% per annum on the improperly withheld amounts or improperly withheld
benefits due to the Executive under Sections 3, 4 or 6 hereof. In the event of a
material breach of this Agreement by the Company, the Executive shall have no
duty to mitigate damages and any income earned by the Executive from other
employment after such breach shall not reduce the damages otherwise due to the
Executive by reason of such breach.
17. General Provisions.
(a) This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof, and supersedes and
replaces all prior agreements between the parties. No amendment, supplement,
waiver or termination of any of the provisions hereof shall be effective unless
in writing and signed by the party against whom it is sought to be enforced. Any
written amendment, supplement, waiver or termination hereof executed by the
Company and the Executive shall be binding upon them and upon all other persons,
without the necessity of securing the consent of any other person and no person
shall be deemed to be a third party beneficiary under this Agreement.
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(b) The term "person" as used in this Agreement means a
natural person, joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or any other
legally cognizable entity.
(c) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
(d) No failure on the part of any party hereto to exercise and
no delay in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
remedy hereunder preclude any other or further exercise thereof or the exercise
of any other rights, power or remedy.
(e) The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
(f) This Agreement shall be governed and construed and the
legal relationships of the parties determined in accordance with the laws of the
Commonwealth of Pennsylvania applicable to contracts executed and to be
performed solely in the Commonwealth of Pennsylvania.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Corporate Seal) By: /s/ David M. Levin
--------------------------------------
Attest: /s/ Jeffrey M. Ruben, SVP
---------------------------------
Witness: /s/ Jeffrey M. Ruben
--------------------
/s/ Anthony J. Santilli, Jr. (SEAL)
----------------------------------
ANTHONY J. SANTILLI, JR.
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EMPLOYMENT AGREEMENT
Agreement made as of this 29th day of January, 1997, by and
between American Business Financial Services, Inc., a Delaware corporation (the
"Company"), and Beverly Santilli, an individual (the "Executive").
BACKGROUND
The Executive is currently employed by the Company in the
position of Executive Vice President and Secretary. The Company and the
Executive desire to provide for the future employment of the Executive as more
fully set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, the parties agree as
follows:
1. Duties. During the Term (as hereinafter defined), the Executive
shall be the Executive Vice President and Secretary of the Company, shall have
such executive duties as are reasonably determined from time to time by the
Company's Board of Directors, and shall be entitled to the powers and authority
normally incident to the office of Executive Vice President and Secretary. The
Executive shall devote her full time and attention to the business of the
Company and use her best efforts to promote the interests of the Company. The
principal place of business of the Executive shall be located within 30 miles of
City Hall in the City of Philadelphia.
2. Term.
(a) This Agreement shall continue for a period beginning on
the date hereof and ending on the earliest of the following dates (the "Term"):
(i) the date the Executive dies or becomes permanently disabled (as hereinafter
defined); (ii) the date of termination of the Executive's employment with the
Company for cause (as hereinafter defined); (iii) the date of the voluntary
termination by the Executive of the Executive's employment with the Company by
resignation as provided in Section 5 hereof; (iv) the date the Executive reaches
70 years of age; or (v) the later of (A) five years from the date hereof or (B)
five years from the latest anniversary of the date hereof, except that if the
Company gives written notice to the Executive of its intention to terminate this
Agreement without cause five years from the date of such notice, this Agreement
shall terminate five years from the date of such notice.
(b) For purposes of this Agreement the Executive shall be
deemed to be disabled upon her failure, even after reasonable accommodation, to
render services of the character which she had previously rendered to the
Company because of her physical or mental illness or other incapacity beyond her
control for a continuous period of twelve months or for shorter periods
aggregating twelve months in any two year period);
(c) For purposes of this Agreement, the term "cause" shall
mean (i) conviction of the Executive for any felony, fraud or embezzlement or
(ii) the Executive being guilty of willful
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or malicious misconduct in connection with the performance of her duties for the
Company and the Executive continues such misconduct beyond twenty days after
receiving written notice from the Company's Board of Directors specifying such
misconduct.
3. Compensation. During the Term, the Executive shall be entitled to a
minimum base annual salary of not less than $200,000. The foregoing figure shall
be adjusted in January of each calendar year during the Term for any increase in
the cost of living (based upon the Consumer Price Index, Philadelphia, PA - New
Jersey: all items, 1982-84=100, as published by the U.S. Department of Labor)
from May, 1996 to November of the immediately preceding calendar year. The
minimum base annual salary of the Executive, as adjusted for the cost of living,
shall be reviewed annually, and may be increased from time to time by the
Company's Board of Directors during the Term, and once increased may not
thereafter be decreased. The Board of Directors shall establish a cash bonus
plan which provides for the following bonuses to be paid for each fiscal year
during the Term: (a) if the Executive achieves 80% of the targets approved by
the Board of Directors for the fiscal year (the "Targets"), a cash bonus equal
to 50% of base annual salary; (b) if the Executive achieves 100% of the Targets,
a cash bonus equal to 100% of base annual salary, and if the Executive achieves
more than 80% and less than 100% of the Targets, the cash bonus will be
proportional to the achievement (e.g., if 90% of the Targets are achieved, the
cash bonus would equal 75% of base annual salary); (c) if the Executive achieves
more than 100% of the Targets, the cash bonus will be 100% of the base annual
salary plus an additional 2.5% for each 1% over 100% of the Targets actually
achieved (for example, if the Executive achieves 120% of the Targets, the cash
bonus would equal 150% of the base annual salary), provided that in no event can
the cash bonus exceed 225% of base annual salary. The Targets established by the
Board of Directors may not be increased by more than twenty-five percent (25%)
from one fiscal year to the next subsequent fiscal year and may not be increased
after a Change of Control (as defined in Section 6 hereof) to which the
Executive does not give her written consent as provided in Setion 6. The
Executive shall also be entitled to such stock options and other incentive
payments as are determined from time to time by the Company's Board of
Directors.
4. Other Benefits. During the Term, in addition to the compensation set
forth in Section 3 hereof, the Executive shall be entitled, at a minimum, to the
following benefits from the Company:
(i) a leased car at a rental cost to the Company not
exceeding $600 per month (as adjusted for changes in the cost of living
as provided in Section 3 hereof) plus insurance, gasoline and
maintenance costs (it being understood that the Executive may choose to
contribute to any cost exceeding such figure);
(ii) family medical, hospital, life and disability
insurance which are no less than the amount of these benefits received
by the Executive immediately prior to the date hereof; and
(iii) reimbursement for all reasonable expenses
incurred by the Executive in the performance of her duties under this
Agreement.
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5. Voluntary Resignation. The Executive may voluntarily resign at any
time during the Term, provided that the Executive may not terminate her
employment for three years after the first closing date of an initial public
offering of the Company's common stock unless there is a Change of Control (as
defined in Section 6 hereof) during such three year period to which the
Executive does not give her written consent as provided in Section 6 hereof.
6. Change of Control.
(a) In the event of a Change of Control (as hereafter defined)
of the Company during the Term to which the Executive does not give her written
consent in her capacity as a director or shareholder of the Company, the
Executive's stock options shall vest in full and the Executive shall receive (in
addition to the payments and benefits due pursuant to Sections 3 and 4 hereof,
respectively), within thirty (30) days after the date of such Change of Control,
a cash payment equal 2.99 times the "base amount," as said term is defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code"), less the aggregate present value of other payments required to be taken
into account under Section 280G(b)(2)(ii) of the Code. The outside auditor for
the Company shall determine the amount due hereunder and such determination
shall be final and conclusive upon all parties. The payment due under this
Section 6(a) shall be in addition to any other payment which may otherwise
become due pursuant to this Agreement.
(b) A "Change of Control" shall be deemed to have occurred
upon the happening of any of the following events: (i) a change within a two
year period in a majority of the members of the Board of Directors of the
Company (other than as a result of voluntary retirement or death); or (ii) a
person or group acting in concert as described in Section 13(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") acquires
beneficial ownership within the meaning of Rule 13(d)(3) promulgated under the
Exchange Act of a number of voting shares of the Company which constitute either
(i) more than fifty percent (50%) of the total votes which were voted in the
election of directors of the Company at the shareholders' meeting immediately
preceding such determination or (ii) more than twenty-five percent (25%) of the
total votes which may be cast by all of the Company's outstanding voting shares.
7. Confidentiality and Non-Competition.
(a) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, she will not, during the Term
or at any time thereafter, except with the express prior written consent of the
Company or pursuant to the lawful order of any judicial or administrative agency
of government, directly or indirectly, disclose, communicate or divulge to any
person, or use for the benefit of any person, any knowledge or information with
respect to the conduct or details of the Company's business which she, acting
reasonably, believes or should believe to be of a confidential nature and the
disclosure of which not to be in the Company's interest.
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(b) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, she will not, during the Term
except with the express prior written consent of the Company, directly or
indirectly, whether as employee, owner, partner, consultant, agent, director,
officer, shareholder or in any other capacity, engage in or assist any person to
engage in any act or action which she, acting reasonably, believes or should
believe would be harmful or inimical to the interests of the Company.
(c) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, she will not, during the Term
except with the express prior written consent of the Company, in any capacity
(including, but not limited to, owner, partner, shareholder, consultant, agent,
employee, officer, director or otherwise), directly or indirectly, for her own
account or for the benefit of any person, engage or participate in or otherwise
be connected with any competitor, except that the foregoing shall not prohibit
the Executive from owning as a shareholder less than 1% of the outstanding stock
of an issuer whose stock is publicly traded.
(d) The Company may elect to extend the period of the
covenants set forth in Section 7(b) and Section 7(c) for a period ending one
year after the last day of the Term, provided the Company has previously
complied with the provisions of this Agreement and provided the Company during
such one year period continues to pay to the Executive the highest annual
compensation (consisting of annual base salary and cash bonus) the Executive
previously received for any fiscal year during the Term.
(e) The parties agree that any breach by the Executive of any
of the covenants or agreements contained in this Section 7 will result in
irreparable injury to the Company for which money damages could not adequately
compensate the Company and therefore, in the event of any such breach, the
Company shall be entitled (in addition to any other rights and remedies which it
may have at law or in equity) to have an injunction issued by any competent
court enjoining and restraining the Executive and/or any other person involved
therein from continuing such breach. The existence of any claim or cause of
action which the Executive may have against the Company or any other person
(other than a claim for the Company's breach of this Agreement for failure to
make payments hereunder) shall not constitute a defense or bar to the
enforcement of such covenants. In the event of an alleged breach by the
Executive of any of the covenants or agreements contained in this Section 7, the
Company shall continue any and all of the payments due the Executive under this
Agreement until such time as a Court shall enter a final and unappealable order
finding such a breach; provided, that the foregoing shall not preclude a Court
from ordering the Executive to repay such payments made to her for the period
after the breach is determined to have occurred or from ordering that payments
hereunder be permanently terminated in the event of a material and willful
breach.
(f) If any portion of the covenants or agreements contained in
this Section 7, or the application hereof, is construed to be invalid or
unenforceable, the other portions of such covenant(s) or agreement(s) or the
application thereof shall not be affected and shall be given full force and
effect without regard to the invalid or enforceable portions to the fullest
extent possible.
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<PAGE>
If any covenant or agreement in this Section 7 is held unenforceable because of
the area covered, the duration thereof, or the scope thereof, then the court
making such determination shall have the power to reduce the area and/or
duration and/or limit the scope thereof, and the covenant or agreement shall
then be enforceable in its reduced form.
(g) For purposes of this Section 7, the term "the Company"
shall include the Company, any successor to the Company under Section 8 hereof,
and all present and future direct and indirect subsidiaries and affiliates of
the Company.
8. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of the Company which will
acquire, directly or indirectly, by merger, consolidation, purchase, or
otherwise, all or substantially all of the assets of the Company, and shall
otherwise inure to the benefit of and be binding upon the parties hereto and
their respective heirs, executors, administrators, successors and assigns.
Nothing in the Agreement shall preclude the Company from consolidating or merger
into or with or transferring all or substantially all of its assets to another
person. In that event, such other person shall assume this Agreement and all
obligations of the Company hereunder. Upon such a consolidation, merger, or
transfer of assets and assumption, the term "the Company" as used herein, shall
mean such other person and this Agreement shall continue in full force and
effect.
9. Withholding. The Company may withhold from any benefits payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
10. Gross-Up for Excise Tax. If any payments or benefits to be received
by the Executive hereunder (such payments or benefits, excluding the Gross-Up
Payment described herein, being hereinafter referred to as the "Total
Payments"), will be subject to any excise tax imposed under Section 4999 of the
Code (the "Excise Tax"), the Company shall pay to the Executive an additional
amount (the "Gross-Up Payment"), such that the net amount retained by the
Executive after deduction of any Excise Tax on the Total Payments and any
Federal, state and local income and employment taxes and Excise Tax upon the
Gross-Up Payment, shall be equal to the Total Payments. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay Federal income tax at the highest marginal rate of Federal income taxation
in the calendar year in which the Gross-Up Payment is to be made, and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the date on which the Gross-Up Payment
is calculated for purposes of this Section 10, net of the maximum reduction in
Federal income taxes which could be obtained from the deduction of such state
and local taxes. The Executive and the Company shall each reasonably cooperate
with the other in connection with any administrative or judicial proceedings
concerning the existence or amount of liability for Excise Tax with respect to
the Total Payments.
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11. (a) Nonassignability. Neither this Agreement or any right or
interest hereunder shall be assignable by the Executive or her legal
representatives without the Company's prior written consent.
(b) Attachment. Except as required by law, the right to receive
payments under this Agreement shall not be subject to anticipation, sale,
encumbrance, charge, levy, or similar process or assignment by operation of law.
12. Waivers Not to be Continued. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver or
as a consent to any subsequent breach by the other party.
13. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice:
A. If to the Executive, to:
Beverly Santilli
c/o American Business Financial Services, Inc.
BalaPointe Office Centre
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
B. If to the Company, to:
American Business Financial Services, Inc.
BalaPointe Office Centre
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Attn: Board of Directors
With a copy to: Frederick D. Lipman, Esquire
Blank Rome Comisky & McCauley
Four Penn Center Plaza
Philadelphia, PA 19103-2599
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
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14. Jurisdiction. Company and the Executive consent to the exclusive
jurisdiction of the courts of the Commonwealth of Pennsylvania and the United
States District Court for the Eastern District of Pennsylvania in any and all
actions arising hereunder and irrevocably consent to service of process as set
forth in Section 13 hereof.
15. Acceleration. If the Company fails to pay the Executive any of the
amounts due to her under Sections 3, 4 or 5 hereof, thirty (30) days after
having received written notice from the Executive of such failure to pay, the
Executive shall have the right to accelerate future payments of all sums due the
Executive under Sections 3, 4 and 6 hereof, without discount.
16. Indemnity; No Mitigation. If the Company fails to pay the Executive
any of the amounts due to her under Sections 3 or 6 hereof or fails to provide
the Executive with any of the benefits due to her under Section 4 hereof, thirty
(30) days after having received written notice from the Executive of such
failure, the Executive shall be entitled to full reimbursement from the Company
for all costs and expenses (including reasonable attorneys fees) incurred by the
Executive in enforcing her rights under this Agreement, plus interest at the
rate of 9% per annum on the improperly withheld amounts or improperly withheld
benefits due to the Executive under Sections 3, 4 or 5 hereof. In the event of a
material breach of this Agreement by the Company, the Executive shall have no
duty to mitigate damages and any income earned by the Executive from other
employment after such breach shall not reduce the damages otherwise due to the
Executive by reason of such breach.
17. General Provisions.
(a) This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof, and supersedes and
replaces all prior agreements between the parties. No amendment, supplement,
waiver or termination of any of the provisions hereof shall be effective unless
in writing and signed by the party against whom it is sought to be enforced. Any
written amendment, supplement, waiver or termination hereof executed by the
Company and the Executive shall be binding upon them and upon all other persons,
without the necessity of securing the consent of any other person and no person
shall be deemed to be a third party beneficiary under this Agreement.
(b) The term "person" as used in this Agreement means a
natural person, joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or any other
legally cognizable entity.
(c) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
(d) No failure on the part of any party hereto to exercise and
no delay in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any
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single or partial exercise of any right, power or remedy hereunder preclude any
other or further exercise thereof or the exercise of any other rights, power or
remedy.
(e) The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
(f) This Agreement shall be governed and construed and the
legal relationships of the parties determined in accordance with the laws of the
Commonwealth of Pennsylvania applicable to contracts executed and to be
performed solely in the Commonwealth of Pennsylvania.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Corporate Seal) By: /s/ David M. Levin
--------------------------------------
Attest: /s/ Jeffrey M. Ruben SVP
---------------------------------
Witness: /s/ Jeffrey M. Ruben
--------------------
/s/ Beverly Santilli (SEAL)
----------------------------------
BEVERLY J. SANTILLI
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EMPLOYMENT AGREEMENT
Agreement made as of this 29th day of January, 1997, by and
between American Business Financial Services, Inc., a Delaware corporation (the
"Company"), and Jeffrey M. Ruben, an individual (the "Executive").
BACKGROUND
The Executive is currently employed by the Company in the
position of Senior Vice President and General Counsel. The Company and the
Executive desire to provide for the future employment of the Executive as more
fully set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, the parties agree as
follows:
1. Duties. During the Term (as hereinafter defined), the Executive
shall be the Senior Vice President and General Counsel of the Company, shall
have such executive duties as are reasonably determined from time to time by the
Company's Chief Executive Officer and shall be entitled to the powers and
authority normally incident to the office of Senior Vice President and General
Counsel. The Executive shall devote his full time and attention to the business
of the Company and use his best efforts to promote the interests of the Company.
2. Term.
(a) This Agreement shall continue for a period beginning on
the date hereof and ending on the earliest of the following dates (the "Term"):
(i) the date the Executive dies or becomes permanently disabled (as hereinafter
defined); (ii) the date of termination of the Executive's employment with the
Company for cause (as hereinafter defined); (iii) the date of the voluntary
termination by the Executive of the Executive's employment with the Company by
resignation as provided in Section 5 hereof; (iv) the date the Executive reaches
70 years of age; or (v) the later of (A) three years from the date hereof or (B)
three years from the latest anniversary of the date hereof, except that if the
Company gives written notice to the Executive of its intention to terminate this
Agreement without cause three years from the date of such notice, this Agreement
shall terminate three years from the date of such notice; provided, however,
during the period when Anthony J. Santilli, Jr. is serving as Chief Executive of
the Company this Agreement may be terminated without cause upon the payment by
the Company to Executive of an amount equal to the Executive's base salary for
the year in which such termination occurs.
(b) For purposes of this Agreement the Executive shall be
deemed to be disabled upon his failure, even after reasonable accommodation, to
render services of the character which he had previously rendered to the Company
because of his physical or mental illness or other incapacity beyond his control
for a continuous period of twelve months or for shorter periods aggregating
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twelve months in any two year period);
(c) For purposes of this Agreement, the term "cause" shall
mean (i) conviction of the Executive for any felony, fraud or embezzlement or
(ii) the Executive being guilty of willful or malicious misconduct in connection
with the performance of his duties for the Company and the Executive continues
such misconduct beyond twenty days after receiving written notice from the
Company's Board of Directors specifying such misconduct.
3. Compensation. During the Term, the Executive shall be entitled to a
minimum base annual salary of not less than $125,000. The foregoing figure shall
be adjusted in January of each calendar year during the Term for any increase in
the cost of living (based upon the Consumer Price Index, Philadelphia, PA - New
Jersey: all items, 1982-84=100, as published by the U.S. Department of Labor)
from May, 1996 to November of the immediately preceding calendar year. The
minimum base annual salary of the Executive, as adjusted for the cost of living,
shall be reviewed annually, and may be increased from time to time by Anthony J.
Santilli, Jr. during the Term, and once increased may not after a Change in
Control thereafter be decreased. The Board of Directors shall establish a cash
bonus plan in which Executive shall participate. The Executive shall also be
entitled to such stock options and other incentive payments as are determined
from time to time by the Company's Board of Directors.
4. Other Benefits. During the Term, in addition to the compensation set
forth in Section 3 hereof, the Executive shall be entitled, at a minimum, to the
following benefits from the Company:
(i) medical, hospital, life and disability insurance
for Executive which are no less than the amount of these benefits
received by the Executive immediately prior to the date hereof; and
(ii) reimbursement for all reasonable expenses
incurred by the Executive in the performance of his duties under this
Agreement.
5. Voluntary Resignation. The Executive may voluntarily resign at any
time during the Term, provided that the Executive may not terminate his
employment for three years after the first closing date of an initial public
offering of the Company's common stock unless there is a Change of Control (as
defined in Section 6 hereof) during such three year period.
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6. Change of Control.
(a) In the event of a Change of Control (as hereafter defined)
of the Company during the Term, Executive's stock options shall vest in full. In
addition, if Executive's employment is terminated in connection with such Change
in Control, the Executive shall receive, within thirty (30) days after the date
of such termination, a cash payment equal 2.99 times the "base amount," as said
term is defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"), less the aggregate present value of other payments
required to be taken into account under Section 280G(b)(2)(A)(ii) of the Code.
The outside auditor for the Company shall determine the amount due hereunder and
such determination shall be final and conclusive upon all parties. The payment
due under this Section 6(a) shall be in lieu of any other payment which may
otherwise become due pursuant to this Agreement.
(b) A "Change of Control" shall be deemed to have occurred
upon the happening of any of the following events: (i) a change within a two
year period in a majority of the members of the Board of Directors of the
Company (other than as a result of voluntary retirement or death) unless
Anthony J. Santilli, Jr. remains Chairman of the Board; or (ii) a person or
group acting in concert as described in Section 13(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") acquires beneficial
ownership within the meaning of Rule 13(d)(3) promulgated under the Exchange Act
of a number of voting shares of the Company which constitute either (i) more
than fifty percent (50%) of the total votes which were voted in the election of
directors of the Company at the shareholders' meeting immediately preceding such
determination or (ii) more than twenty-five percent (25%) of the total votes
which may be cast by all of the Company's outstanding voting shares.
7. Confidentiality and Non-Competition.
(a) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, he will not, during the Term or
at any time thereafter, except with the express prior written consent of the
Company or pursuant to the lawful order of any judicial or administrative agency
of government, directly or indirectly, disclose, communicate or divulge to any
person, or use for the benefit of any person, any knowledge or information with
respect to the conduct or details of the Company's business which he, acting
reasonably, believes or should believe to be of a confidential nature and the
disclosure of which not to be in the Company's interest.
(b) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, he will not, during the Term
except with the express prior written consent of the Company, directly or
indirectly, whether as employee, owner, partner, consultant, agent, director,
officer, shareholder or in any other capacity, engage in or assist any person to
engage in any act or action which he, acting reasonably, believes or should
believe would be harmful or inimical to the interests of the Company.
(c) The Executive covenants and agrees that, so long as the
Company complies with its obligations hereunder, he will not, during the Term
except with the express prior written
-3-
<PAGE>
consent of the Company, in any capacity (including, but not limited to, owner,
partner, shareholder, consultant, agent, employee, officer, director or
otherwise), directly or indirectly, for his own account or for the benefit of
any person, engage or participate in or otherwise be connected with any
competitor, except that the foregoing shall not prohibit the Executive from
owning as a shareholder less than 1% of the outstanding stock of an issuer whose
stock is publicly traded.
(d) In the event Executive's employment is terminated without
cause and he receives a cash payment as herein provided, the period of the
covenants set forth in Section 7(b) and 7(c) shall be extended for one year
unless the Executive returns a pro rata portion of the termination payment to
the Company. With Executive's consent, which Executive may withhold, in the
event of any other termination, the Company may elect to extend the period of
the covenants set forth in Section 7(b) and Section 7(c) for a period ending one
year after the last day of the Term, provided the Company has previously
complied with the provisions of this Agreement and provided the Company during
such one year period continues to pay to the Executive the highest annual
compensation (consisting of annual base salary and cash bonus) the Executive
previously received for any fiscal year during the Term.
(e) The parties agree that any breach by the Executive of any
of the covenants or agreements contained in this Section 7 will result in
irreparable injury to the Company for which money damages could not adequately
compensate the Company and therefore, in the event of any such breach, the
Company shall be entitled (in addition to any other rights and remedies which it
may have at law or in equity) to have an injunction issued by any competent
court enjoining and restraining the Executive and/or any other person involved
therein from continuing such breach. The existence of any claim or cause of
action which the Executive may have against the Company or any other person
(other than a claim for the Company's breach of this Agreement for failure to
make payments hereunder) shall not constitute a defense or bar to the
enforcement of such covenants. In the event of an alleged breach by the
Executive of any of the covenants or agreements contained in this Section 7, the
Company shall continue any and all of the payments due the Executive under this
Agreement until such time as a Court shall enter a final and unappealable order
finding such a breach; provided, that the foregoing shall not preclude a Court
from ordering the Executive to repay such payments made to him for the period
after the breach is determined to have occurred or from ordering that payments
hereunder be permanently terminated in the event of a material and willful
breach.
-4-
<PAGE>
(f) If any portion of the covenants or agreements contained in
this Section 7, or the application hereof, is construed to be invalid or
unenforceable, the other portions of such covenant(s) or agreement(s) or the
application thereof shall not be affected and shall be given full force and
effect without regard to the invalid or enforceable portions to the fullest
extent possible. If any covenant or agreement in this Section 7 is held
unenforceable because of the area covered, the duration thereof, or the scope
thereof, then the court making such determination shall have the power to reduce
the area and/or duration and/or limit the scope thereof, and the covenant or
agreement shall then be enforceable in its reduced form.
(g) For purposes of this Section 7, the term "the Company"
shall include the Company, any successor to the Company under Section 8 hereof,
and all present and future direct and indirect subsidiaries and affiliates of
the Company.
8. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of the Company which will
acquire, directly or indirectly, by merger, consolidation, purchase, or
otherwise, all or substantially all of the assets of the Company, and shall
otherwise inure to the benefit of and be binding upon the parties hereto and
their respective heirs, executors, administrators, successors and assigns.
Nothing in the Agreement shall preclude the Company from consolidating or merger
into or with or transferring all or substantially all of its assets to another
person. In that event, such other person shall assume this Agreement and all
obligations of the Company hereunder. Upon such a consolidation, merger, or
transfer of assets and assumption, the term "the Company" as used herein, shall
mean such other person and this Agreement shall continue in full force and
effect.
9. Withholding. The Company may withhold from any benefits payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
10. Gross-Up for Excise Tax. If any payments or benefits to be received
by the Executive hereunder (such payments or benefits, excluding the Gross-Up
Payment described herein, being hereinafter referred to as the "Total
Payments"), will be subject to any excise tax imposed under Section 4999 of the
Code (the "Excise Tax"), the Company shall pay to the Executive an additional
amount (the "Gross-Up Payment"), such that the net amount retained by the
Executive after deduction of any Excise Tax on the Total Payments and any
Federal, state and local income and employment taxes and Excise Tax upon the
Gross-Up Payment, shall be equal to the Total Payments. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay Federal income tax at the highest marginal rate of Federal income taxation
in the calendar year in which the Gross-Up Payment is to be made, and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the date on which the Gross-Up Payment
is calculated for purposes of this Section 10, net of the maximum
-5-
<PAGE>
reduction in Federal income taxes which could be obtained from the deduction of
such state and local taxes. The Executive and the Company shall each reasonably
cooperate with the other in connection with any administrative or judicial
proceedings concerning the existence or amount of liability for Excise Tax with
respect to the Total Payments.
11. (a) Nonassignability. Neither this Agreement or any right or
interest hereunder shall be assignable by the Executive or his legal
representatives without the Company's prior written consent.
(b) Attachment. Except as required by law, the right to receive
payments under this Agreement shall not be subject to anticipation, sale,
encumbrance, charge, levy, or similar process or assignment by operation of law.
12. Waivers Not to be Continued. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver or
as a consent to any subsequent breach by the other party.
13. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice:
A. If to the Executive, to:
Jeffrey M. Ruben, Esq.
c/o American Business Financial Services, Inc.
BalaPointe Office Centre
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
B. If to the Company, to:
American Business Financial Services, Inc.
BalaPointe Office Centre
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Attn: Board of Directors
With a copy to: Frederick D. Lipman, Esquire
Blank Rome Comisky & McCauley
Four Penn Center Plaza
Philadelphia, PA 19103-2599
-6-
<PAGE>
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
14. Jurisdiction. Company and the Executive consent to the exclusive
jurisdiction of the courts of the Commonwealth of Pennsylvania and the United
States District Court for the Eastern District of Pennsylvania in any and all
actions arising hereunder and irrevocably consent to service of process as set
forth in Section 13 hereof.
15. Acceleration. If the Company fails to pay the Executive any of the
amounts due to him under Sections 3, 4 or 6 hereof, thirty (30) days after
having received written notice from the Executive of such failure to pay, the
Executive shall have the right to accelerate future payments of all sums due the
Executive under Sections 3, 4 and 6 hereof, without discount.
16. Indemnity; No Mitigation. If the Company fails to pay the Executive
any of the amounts due to him under Sections 3 or 6 hereof or fails to provide
the Executive with any of the benefits due to him under Section 4 hereof, thirty
(30) days after having received written notice from the Executive of such
failure, the Executive shall be entitled to full reimbursement from the Company
for all costs and expenses (including reasonable attorneys fees) incurred by the
Executive in enforcing his rights under this Agreement, plus interest at the
rate of 9% per annum on the improperly withheld amounts or improperly withheld
benefits due to the Executive under Sections 3, 4 or 6 hereof. In the event of a
material breach of this Agreement by the Company, the Executive shall have no
duty to mitigate damages and any income earned by the Executive from other
employment after such breach shall not reduce the damages otherwise due to the
Executive by reason of such breach.
17. General Provisions.
(a) This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof, and supersedes and
replaces all prior agreements between the parties. No amendment, supplement,
waiver or termination of any of the provisions hereof shall be effective unless
in writing and signed by the party against whom it is sought to be enforced. Any
written amendment, supplement, waiver or termination hereof executed by the
Company and the Executive shall be binding upon them and upon all other persons,
without the necessity of securing the consent of any other person and no person
shall be deemed to be a third party beneficiary under this Agreement.
(b) The term "person" as used in this Agreement means a
natural person, joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or any other
legally cognizable entity.
(c) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
-7-
<PAGE>
(d) No failure on the part of any party hereto to exercise and
no delay in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
remedy hereunder preclude any other or further exercise thereof or the exercise
of any other rights, power or remedy.
(e) The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
(f) This Agreement shall be governed and construed and the
legal relationships of the parties determined in accordance with the laws of the
Commonwealth of Pennsylvania applicable to contracts executed and to be
performed solely in the Commonwealth of Pennsylvania.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Corporate Seal) By: /s/ Anthony J. Santilli, Jr.
--------------------------------------
Attest: /s/ Beverly Santilli
---------------------------------
Witness: /s/ Beverly Santilli
-----------------------
/s/ Jeffrey M. Ruben (SEAL)
----------------------------------
JEFFREY M. RUBEN
-8-
<PAGE>
APPENDIX II
NON-QUALIFIED STOCK OPTION
To:
---------------------------------------------------------
Name
---------------------------------------------------------
Address
Date:
----------------------
You are hereby granted an option, effective as of the date hereof, to
purchase _______ shares of common stock (par value $.001 per share) ("Common
Stock") of American Business Financial Services, Inc. (the "Company") at an
exercise price of $_____ per share pursuant to the Company's 1995 Stock Option
Plan for Non-Employee Directors (the "Plan").
Your option may first be exercised on and after the date hereof for up
to 100% of the total number of shares of Common Stock which are subject to this
option minus the number of shares previously purchased by exercise of the option
(as adjusted for any change in the outstanding shares of the Common Stock of the
Company by reason of a stock dividend, stock split, combination shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what the Board of Directors deems in its sole discretion to be
similar circumstances).
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check; (b) (unless
prohibited by the Board of Directors) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Board of Directors) any combination of cash and Common
Stock of the Company valued as provided in clause (b). Any assignment of stock
shall be in a form and substance satisfactory to the Secretary of the Company,
including guarantees of signature(s) and payment of all transfer taxes if the
Secretary deems such guarantees necessary or desirable.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which you cease to be a director of the
Company or a subsidiary corporation (whether by death, disability, resignation,
removal, failure to be reelected or otherwise and regardless of whether the
failure to continue as a director was for cause or otherwise), but in no event
later than ten years from the date this option is granted. After the date you
cease to be a director, you may exercise this option only for the number of
shares which you had a right to purchase and did not
II-1
<PAGE>
purchase on the date you ceased to be a director. If you are a director of a
subsidiary corporation, your directorship shall be deemed to have terminated on
the date such company ceases to be a subsidiary corporation, unless you are also
a director of the Company or another subsidiary corporation, or on that date
became a director of the Company or another subsidiary corporation. Your
directorship shall not be deemed to have terminated as long as you are a
director of either the Company or any direct or indirect subsidiary corporation
thereof.
If you die while a director of the Company or a subsidiary corporation,
your executor or administrator, as the case may be, may, at any time within
three months after the date of your death (but in no event later than ten years
from the date this option is granted), exercise the option as to any shares
which you had a right to purchase and did not purchase during your lifetime. If
your directorship with the Company or a subsidiary corporation is terminated by
reason of your becoming disabled, you or your legal guardian or custodian may at
any time within three months after the date of such termination (but in no event
later than 10 years from the date this option is granted), exercise the option
as to any shares which you had a right to purchase and did not purchase prior to
such termination. Your executor, administrator, guardian or custodian must
present proof of his authority satisfactory to the Company prior to being
allowed to exercise this option.
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Board of Directors deems in its sole
discretion to be similar circumstances, the number and kind of shares subject to
this option and the option price of such shares shall be appropriately adjusted
in a manner to be determined in the sole discretion of the Board of Directors.
This option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you or such
trust, you do not have any rights as a stockholder of the Company. The Company
reserves the right not to deliver to you the shares purchased by virtue of
exercise of this option during any period of time in which the Company deems, in
its sole discretion, that such delivery may not be consummated without violating
a federal, state, local or securities exchange rule, regulation or law.
II-2
<PAGE>
Notwithstanding anything to the contrary contained herein, this option
is not exercisable during any period of time in which the Company deems that the
exercisability of this option, the offer to sell the shares optioned hereunder,
or the sale thereof, may violate a federal, state, local or securities exchange
rule, regulation or law, or may cause the Company to be legally obligated to
issue or sell more shares than the Company is legally entitled to issue or sell.
The following two paragraphs shall be applicable if, on the date of
exercise of this option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that
he will acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgments and agreements as the
Company may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
II-3
<PAGE>
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
Commonwealth of Pennsylvania.
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions.
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
(SEAL) By:
-----------------------------------
I hereby acknowledge receipt of a copy of the foregoing stock option
and, having read it hereby signify my understanding of, and my agreement with,
its terms and conditions.
---------------------------------------
(Signature)
---------------------------------------
(Date)
II-4
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
We hereby consent to the use in this Amendment No.1 to the 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
January 31, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
Bala Cynwyd, PA
We hereby consent to the use in this Amendment No. 1 to the Registration
Statement on Form SB-2 of our report dated August 23, 1996, relating to the
consolidated financial statements of American Business Financial Services, Inc.
and subsidiaries.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
January 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of American Business Financial Services, Inc.
and Subsidiaries as of December 31, 1996 and the six months then ended and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 3,034,952
<SECURITIES> 0
<RECEIVABLES> 28,328,277
<ALLOWANCES> 1,049,089
<INVENTORY> 0
<CURRENT-ASSETS> 33,529,321
<PP&E> 2,802,110
<DEPRECIATION> 1,042,680
<TOTAL-ASSETS> 67,463,468
<CURRENT-LIABILITIES> 35,088,326
<BONDS> 0
0
0
<COMMON> 2,353
<OTHER-SE> 6,618,895
<TOTAL-LIABILITY-AND-EQUITY> 67,463,468
<SALES> 0
<TOTAL-REVENUES> 10,905,791
<CGS> 0
<TOTAL-COSTS> 7,366,381
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 400,000
<INTEREST-EXPENSE> 2,150,843
<INCOME-PRETAX> 3,539,410
<INCOME-TAX> 1,239,082
<INCOME-CONTINUING> 2,300,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,300,328
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
