<PAGE>
As filed with the Securities and Exchange Commission on January 22, 1998
Registration No. 333-24115
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO THE FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
Delaware 6162 87-0418807
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
ANTHONY J. SANTILLI, JR.
Chairman, President, Chief Executive Officer,
Chief Operating Officer and Director
American Business Financial Services, Inc.
Balapointe Office Center
111 Presidential Boulevard
Suite 215
Bala Cynwyd, PA 19004
(610) 668-2440
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
JANE K. STORERO, ESQUIRE
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, Pennsylvania 19103-6998
(215) 569-5500
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective registration statement filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective registration statement filed pursuant
to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [X]
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>
[LOGO] AMERICAN BUSINESS FINANCIAL SERVICES, INC.
$125,000,000 Principal Amount
Adjustable Rate Subordinated Money Market Notes
Three, Six, Eighteen and Thirty Month Subordinated Investment Notes;
One, Two, Three, Four, Five, Seven and Ten Year Subordinated Investment Notes
This Prospectus relates to the offer and sale of up to $125,000,000 in
principal amount (the "Offering") of unsecured, subordinated investment notes
(the "Investment Notes") and unsecured, adjustable rate, subordinated money
market notes (the "Money Market Notes" and when referred to, together with the
Investment Notes, the "Notes") of American Business Financial Services, Inc., a
Delaware corporation ("ABFS" or the "Company"). The Notes will be offered on an
ongoing and continuous "best-efforts" basis by ABFS. The Notes will be
subordinated to all "Senior Debt" (as hereinafter defined) of the Company
(including its subsidiaries). See "Prospectus Summary -- Securities Offered." As
of January 9, 1998, there was $49.4 million of Senior Debt outstanding. There is
no limitation on the amount of Senior Debt the Company may incur. Any
indebtedness of the subsidiaries of ABFS, other than the Senior Debt, will have
rights upon liquidation or dissolution of the particular subsidiary, prior to
payment being made to holders of the Notes. Any indebtedness of ABFS, other than
the Senior Debt, will have rights upon liquidation or dissolution of ABFS which
ranks pari passu (i.e. equally) in right of payment to the Notes offered hereby.
As of January 9, 1998, ABFS had an aggregate of approximately $91.4 million in
principal amount of indebtedness, which ranks pari passu in right of payment
with the Notes (including $39.4 million of Notes sold pursuant to this
Offering). The Notes have no sinking fund. See "Description of the Notes and the
Indenture -- Provisions Related to All Notes." (continued on next page)
ABFS is not subject to state or federal statutes or regulations
applicable to banks and/or savings and loan associations with regard to
insurance, the maintenance of reserves, the quality or condition of its assets
or other matters. THE NOTES OFFERED HEREUNDER ARE NOT CERTIFICATES OF DEPOSIT
("CDs"). THE PAYMENT OF PRINCIPAL AND INTEREST ON THE NOTES IS NOT GUARANTEED BY
ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR ANY OTHER ENTITY. THE COMPANY'S
REVENUES FROM OPERATIONS, INCLUDING THE SECURITIZATION OR SALE OF LOANS FROM ITS
PORTFOLIO, THE COMPANY'S WORKING CAPITAL, AND CASH GENERATED FROM ADDITIONAL
DEBT FINANCING REPRESENT THE COMPANY'S SOURCES OF FUNDS FOR THE REPAYMENT OF
PRINCIPAL AT MATURITY AND THE ONGOING PAYMENT OF INTEREST ON THE NOTES.
THE NOTES ARE SPECULATIVE SECURITIES AND AN INVESTMENT HEREUNDER SHOULD
BE UNDERTAKEN ONLY AFTER CAREFUL EVALUATION OF THE RISK FACTORS AND THE OTHER
INFORMATION SET FORTH IN THE PROSPECTUS. SEE "RISK FACTORS" ON PAGE 15 FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
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.
---------------------------------
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========================================================================================================================
Price Underwriting Commissions Proceeds to
to Public (1) and Discounts (2) the Company (2)(3)
- ------------------------------------------------------------------------------------------------------------------------
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Per Note.................................... 100% -0- 100%
- ------------------------------------------------------------------------------------------------------------------------
Total....................................... $125,000,000 -0- $125,000,000
=======================================================================================================================
</TABLE>
(1) The Notes will be issued at their face principal value, without
discount.
(2) ABFS does not currently have any agreements concerning the use of the
services of any National Association of Securities Dealers, Inc.
("NASD") member broker-dealer as an agent to assist in the sales of the
Notes and, accordingly, is not presently obligated to pay any
commissions in connection with the sale of the Notes. If an agreement
concerning the use of any broker-dealer is reached, ABFS may pay NASD
member broker-dealers, as agents, an estimated commission ranging from
.5% to 10% of the sale price of any Note sold through any such agent,
depending on numerous factors. ABFS may agree to indemnify such
broker-dealers against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. ABFS may also agree to reimburse
such broker-dealers for costs and expenses, up to a maximum percentage
to be determined, based upon a percentage of Notes sold. See "Plan of
Distribution."
(3) Before deducting other expenses incurred in connection with the Offering
payable by ABFS estimated at approximately $3.1 million.
-----------------------------------------
The date of this Prospectus is _________, 1998
<PAGE>
The Investment Notes will be issued in minimum denominations of $1,000
and in fully registered form. Purchasers of the Investment Notes will elect a
maturity when they subscribe for the Investment Notes. The Investment Notes may
be extended by the Company, at its option, for an identical term unless the
holder thereof requests payment within seven days after the original maturity.
Interest rates paid will depend on the term of the Investment Note.
The Money Market Notes will be issued in minimum denominations of
$1,000. The Money Market Notes have no stated maturity and are redeemable in
minimum amounts of $500 (or in lesser amounts to close an account) at the option
of the holder upon written notice to the Company. The payment due upon
redemption shall be made within 10 business days of the Company's receipt of
such notice from the holder. The Money Market Notes may also be redeemed by the
Company upon 30 days written notice to the holder. The interest rate paid on the
Money Market Notes will be adjusted by the Company from time to time in its sole
discretion, provided that such rate shall not be less than 4.0% per year.
The Company will provide written notice to all holders of the Money
Market Notes at least 14 days prior to any decrease in the interest rate to be
paid thereon, which notice shall set forth the new interest rate to be paid and
the effective date of such change. The Company reserves the right to increase
the interest rate paid on the Money Market Notes at any time without prior
notice to the holders of the Money Market Notes. Accrued interest will be paid
monthly in the form of additional Money Market Notes. No interest will be paid
on the Money Market Notes for any day during which the principal balance of any
account is less than $1,000. The Money Market Notes are non-negotiable and will
be issued in book entry form. As a result, book-entry owners of the Money Market
Notes will not be entitled to physical delivery of the Money Market Notes
purchased in certificated form equal in amount to their respective book-entry
accounts maintained by the Company except in the limited circumstances described
herein. See "Prospectus Summary -- Securities Offered."
The Company reserves the right to reject any subscription hereunder, in
whole or in part, for any reason. Subscriptions will be irrevocable upon receipt
by ABFS. In the event a subscription is not accepted by the Company, the
proceeds of such subscription will be promptly refunded to the subscriber
without deduction of any costs and without interest. The Company expects that
such subscriptions will be refunded within 48 hours after the Company has
received the subscription. No minimum amount of Notes must be sold in the
Offering. ABFS reserves the right to withdraw or cancel the Offering at any
time. In the event of such withdrawal or cancellation, the Notes previously sold
will remain outstanding until maturity and pending subscriptions will be
irrevocable. See "Plan of Distribution."
It is presently anticipated that there will be no trading market for the
Notes. The Notes will not be transferable without the prior written consent of
the Company. Such consent will be withheld in such circumstances as determined
by the Company in its reasonable discretion, including but not limited to the
Company's determination that such transfer might result in a violation of any
state or federal securities or other applicable law. The Notes will be issued
pursuant to an Indenture of Trust between the Company and First Trust, N.A., as
trustee. For a full description of the terms and provisions of the Notes offered
hereby, see "Description of the Notes and the Indenture."
No ABFS employee, broker-dealer, salesman or other person has been
authorized to give any oral information or to make any oral representation other
than those contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized by ABFS.
This Prospectus does not constitute an offer of any securities other than those
to which it relates nor to any person in any jurisdiction where such offer would
be unlawful. The delivery of this Prospectus at any time does not imply that the
information contained herein is correct as of any time subsequent to its date.
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 Securities
and Exchange Commission (the "Commission"). So long as the Company is subject to
the reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
will furnish to its debtholders annual reports containing audited financial
statements and an opinion thereon expressed by the Company's independent
auditors and will make available copies of quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE NOTES
OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT SETTING FORTH THE
INTEREST RATES THEN BEING OFFERED ON THE NOTES.
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with 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 Notes 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 Notes 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 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, Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located
as follows: Chicago Regional Office, Citicorp Center, 500 W. Madison Street,
Suite 1400, Chicago, IL 60661-2511; and New York Regional Office, 7 World Trade
Center, Suite 1300, New York, NY 10048. Copies of such material can also be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such web site is http://www.sec.gov.
The Company's common stock, par value $0.001 per share (the "Common
Stock"), is traded on the NASDAQ National Market System under the symbol "ABFI."
Reports, proxy statements and other information concerning the Company are
available for inspection at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.
3
<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 Notes offered hereby should carefully
consider the factors set forth under "Risk Factors."
General
ABFS is a financial services company operating primarily in the eastern
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"),
non-conforming mortgage loans typically to credit-impaired borrowers, secured by
first and second mortgages on single-family residences ("Home Equity Loans") and
conforming and jumbo loans secured by first mortgages on one-to four-unit
residential properties ("First Mortgage Loans"). The Company also originates
small ticket leases (generally $10,000 to $150,000) and, to a lesser extent,
middle market leases (generally $150,001 to $1.0 million) 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. The
Company also markets First Mortgage Loans to borrowers with favorable credit
histories.
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, Connecticut, North Carolina and Ohio. 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.
4
<PAGE>
The Business Purpose Loans originated by the Company are secured by
real estate. In substantially all cases, the Company receives additional
collateral in the form of, among other things, 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. 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 15.97%
and 15.91% for the three months ended September 30, 1997 and the year ended June
30, 1997, 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 solely upon the real estate
collateral securing the loans) of 60.0% 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 $10.4 million and $38.7 million of Business Purpose Loans for
the three months ended September 30, 1997 and the year ended June 30, 1997,
respectively. See "Business -- Lending and Leasing Activities -- Business
Purpose Lending."
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 in
Pennsylvania, New Jersey, New York, Delaware, Maryland, Virginia, Georgia, North
Carolina, South Carolina, Florida, Connecticut, Illinois, Ohio, Indiana and
Tennessee. The Company originated $43.8 million and $91.8 million of Home Equity
Loans for the three months ended September 30, 1997 and the year ended June 30,
1997, respectively. The weighted average interest rate on Home Equity Loans
originated by the Company was 12.12% and 11.69% for the three months ended
September 30, 1997 and the year ended June 30, 1997, 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 eight 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 1,000 branches located in
Pennsylvania, Delaware, New Jersey and Maryland. The Company is also negotiating
with other financial institutions regarding their participation in the program.
The Company intends to expand its Bank Alliance Program with financial
institutions across the United States. See "Business -- Lending and Leasing
Activities -- Home Equity Lending."
5
<PAGE>
First Mortgage Lending
ABFS began offering First Mortgage Loans in October 1997 in connection
with its acquisition of New Jersey Mortgage and Investment Corp. The Company
originates First Mortgage Loans for sale in the secondary market with servicing
released. The Company's first mortgage lending market area includes 15 states.
See "Business -- Lending and Leasing Activities -- First Mortgage Lending."
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 Company originated $4.5 million and $8.0 million of
Equipment Leases, respectively, during the three months ended September 30, 1997
and the year ended June 30, 1997. The weighted average interest rate received on
the Equipment Leases originated by the Company was 13.47% and 15.48% for the
three months ended September 30, 1997 and the year ended June 30, 1997,
respectively. The Company currently holds all Equipment Leases originated in its
lease portfolio to generate interest income. The Company intends to attempt to
securitize its Equipment Lease portfolio in the future subject to market and
economic conditions. See "Business -- Lending and Leasing Activities -- Leasing
Activities."
Securitization of Loans and the Subordinated Debenture Program
The ongoing securitization of loans is a central part of the Company's
current business strategy. Through September 30, 1997, the Company had
securitized an aggregate of $87.4 million of Business Purpose Loans and $133.5
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 debt that the Company markets directly to individuals from the
Company's principal operating office located in Pennsylvania and branch offices
located in Florida and Arizona. At September 30, 1997, the Company had $70.1
million in subordinated debt outstanding with a weighted average coupon of 9.23%
and a weighted average maturity of 24.2 months. Of this amount, $17.3 million
represents Notes sold pursuant to this Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company intends to continue to utilize funds generated from the
securitization of loans and the sale of subordinated debt to increase its loan
and lease originations and to expand into new geographic markets, with an
initial focus on the continued expansion in the southeastern region of the
United States and initial entry into the midwestern region of the United States.
6
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Asset Quality
From the inception of the Company's business in 1988 through September
30, 1997, the Company has experienced total net loan and lease losses of
approximately $450,000. The Company's losses on its total loan and lease
portfolio serviced totaled $100,000, $98,000 and $129,000 respectively, for the
three months ended September 30, 1997 and the years ended June 30, 1997 and
1996. The Company's loans and leases delinquent over 30 days (excluding real
estate owned) represented 2.86% and 2.15% of the loan and lease portfolio
serviced at September 30, 1997 and June 30, 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset Quality."
Acquisition of New Jersey Mortgage and Investment Corp. and Subsidiaries
Effective October 1, 1997, the Company acquired all of the outstanding
stock of New Jersey Mortgage and Investment Corp. ("NJMIC"), a mortgage and
leasing company based in Roseland, New Jersey, and its subsidiaries for a
combination of cash and common stock. NJMIC is a full-service diversified
residential lender, which directly and through its subsidiaries offers a broad
range of loan and lease products, including Home Equity Loans, First Mortgage
Loans, and Equipment Leases. Historically, NJMIC originated loans for sale to
third parties with servicing released. The Company intends that NJMIC will
continue to originate First Mortgage Loans for sale in the secondary market and
the Home Equity Loans originated by NJMIC will be securitized and sold pursuant
to the Company's current securitization program. Loans originated by NJMIC are
secured by properties located in 15 states. Such loans are originated through
its network of six branch sales offices and three satellite offices located in
eight states. NJMIC's Home Equity Loan customers primarily include
credit-impaired borrowers while borrowers on its First Mortgage Loans are
generally borrowers with favorable credit histories.
Through its subsidiary, NJMIC originates Equipment Leases throughout
the United States. Such leases are generally sold through securitizations with
servicing retained. ABFS intends to continue to securitize these leases in the
future subject to economic and market conditions.
The Company's acquisition of NJMIC and its subsidiaries expands the
geographic scope of the Company's loan origination activities to include states
in the midwestern part of the United States and leasing activities to include
the entire United States. The Company believes that certain cross marketing
opportunities exist between the two companies with respect to the products and
services offered. See "Business -- Subsidiaries."
On October 1, 1997, NJMIC had total assets of $18.5 million, total
liabilities of $18.7 million, including subordinated debt of $6.9 million, and
stockholders' deficit of $200,000. See "Business."
7
<PAGE>
Summary Consolidated Financial Data
The consolidated financial information set forth below for ABFS should
be read in conjunction with the more detailed consolidated financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
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Three Months Ended
September 30, Year Ended June 30,
------------- -------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
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Statement of Income Data: (Dollars in Thousands, except per share data)
Revenues:
Gain on sale of loans................... $ 8,521 $ 4,073 $ 20,043 $ 8,721 $ 1,350 $ 110 $ 119
Interest and fees....................... 2,304 1,135 5,896 3,351 4,058 2,367 1,619
Other................................... 381 77 544 23 143 156 306
Total revenues............................. 11,206 5,284 26,482 12,094 5,551 2,633 2,044
Total expenses............................. 6,431 3,506 17,480 8,974 4,657 2,299 1,977
Operating income (loss) before income
taxes and cumulative effect
of accounting change.................... 4,775 1,778 9,002 3,121 894 334 67
Income (loss) before cumulative effect
of accounting change.................... 3,152 1,156 5,940 2,319 581 137 41
Cumulative effect of accounting change
on prior years.......................... -- -- -- -- -- (52) --
Net income................................. 3,152 1,156 5,940 2,319 581 85 41
Per Common Share Data(1):
Income (loss) before cumulative effect of
accounting change................... $ .87 $ .47 $ 2.05 $ 1.01 $ .27 $ .04 $ .02
Net income ............................. $ .87 $ .47 $ 2.05 $ 1.01 $ .27 $ .04 $ .02
Cash dividends declared................. .015 .015 .06 0.03 -- -- --
September 30, June 30,
------------- --------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Balance Sheet Data: (In Thousands)
Cash and cash equivalents.................. $ 3,932 $ 8,813 $ 5,014 $ 5,345 $ 4,734 $ 83 $ 151
Loan and lease receivables, net available 25,370 10,894 35,712 18,003 8,669 3,181 2,170
for sale..................................
Other...................................... 1,218 579 1,144 534 328 5,538 2,963
Total assets............................... 124,344 51,975 103,989 46,894 22,175 12,284 7,270
Subordinated debt ......................... 70,125 37,876 56,486 33,620 17,800 7,171 1,327
Total liabilities.......................... 90,333 46,463 73,077 42,503 20,031 10,721 5,801
Stockholders' equity....................... 34,011 5,512 30,912 4,392 2,143 1,562 1,469
</TABLE>
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(1) Per share information for fiscal years 1994 and 1993 have been restated to
reflect the 3 for 2 stock split effected on November 1, 1995.
8
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Three Months Ended
September 30, Year Ended June 30,
------------- -------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
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Other Data: (Dollars in Thousands)
Originations:
Business Purpose Loans.................. $ 10,667 $ 7,421 $ 38,721 $ 28,872 $ 18,170 $ 11,793 $ 9,769
Home Equity Loans....................... 43,771 12,663 91,819 36,479 16,963 22,231 22,017
Equipment Leases ....................... 4,512 1,970 8,004 5,967 2,220 -- --
Loans sold:
Securitizations......................... 59,722 26,845 115,000 36,506 9,777 -- --
Other................................... 6,509 935 3,876 19,438 31,948 30,562 29,036
Total loan and lease portfolio serviced.... 214,458 79,080 176,651 59,891 17,774 8,407 5,134
Average loan/lease size:
Business Purpose Loans.................. 8 76 78 78 71 57 63
Home Equity Loans....................... 49 43 51 47 46 51 45
Equipment Leases........................ 10 10 11 11 12 -- --
Weighted average interest rate on loan
and leases originated:
Business Purpose Loans .................. 15.97% 15.96% 15.91% 15.83% 16.05% 16.03% 16.24%
Home Equity Loans........................ 12.12 11.50 11.69 9.94 12.68 8.65 9.60
Equipment Leases......................... 13.47 15.53 15.48 17.22 15.85 -- --
At or For The
Three Months Ended
September 30, At or For the Year Ended June 30,
------------- ---------------------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets (1).............. 11.04% 9.35% 7.87% 6.71% 3.37% 0.87% 0.65%
Return on average equity (1).............. 38.83 93.35 33.65 70.96 31.36 5.58 3.29
Total delinquencies as a percentage of total
portfolio serviced, at end of period (2) 2.86 2.30 2.15 2.30 3.84 6.85 5.97
Allowance for credit losses to total
portfolio serviced, at end of period... 1.04 1.00 1.00 1.18 .87 .93 .80
Real estate owned as a percentage of total
portfolio serviced, at end of period... .51 .61 .34 1.01 4.29 2.63 1.44
Loan and lease losses as a percentage of
the average total portfolio serviced
during the period...................... .05 .07 .08 .33 .66 .15 .47
Pre-tax income (loss) as a percentage of
total revenues......................... 42.61 33.65 33.99 25.21 15.84 12.69 3.26
</TABLE>
- -------------
(1) Annualized.
(2) Total delinquencies includes loans and leases delinquent over 30 days,
exclusive of real estate owned.
9
<PAGE>
Securities Offered
General. The Offering relates to $125,000,000 in principal amount of
Investment Notes and Money Market Notes issued by ABFS pursuant to an Indenture
of Trust between the Company and First Trust National Association, a national
banking association as trustee (the "Indenture"). The Notes are subordinated to
the Senior Debt (as defined herein) of the Company and are not insured,
guaranteed or secured by any lien on any assets of ABFS. There are no provisions
for a sinking fund.
The Investment Notes and the Money Market Notes will be subordinated to
all Senior Debt of the Company. As of January 9, 1998, there was $49.4 million
of Senior Debt outstanding. There is no limitation on the amount of Senior Debt
the Company may incur. Senior Debt is defined for this purpose to include any
indebtedness (whether outstanding on the date hereof or hereafter created)
incurred in connection with borrowings by the Company (including its
subsidiaries) from a bank, trust company, insurance company, other institutional
lender or other entity which lends funds in connection with its primary business
activities, whether such indebtedness is or is not specifically designated by
the Company as being "Senior Debt" in its defining instruments. In addition, any
indebtedness of the subsidiaries of ABFS, other than the Senior Debt, will have
rights upon liquidation or dissolution of the particular subsidiary prior to
payment being made to the holders of the Notes. Such debt totaled $10.2 million
as of January 9, 1998. Any indebtedness of ABFS, other than the Senior Debt,
will have rights upon liquidation or dissolution of ABFS which ranks pari passu
(i.e. equally) in right of payment to the Notes offered hereby. As of January 9,
1998, the Company had $91.4 million of indebtedness which ranks pari passu in
right of payment with the Notes, including $39.4 million of Notes sold pursuant
to this Offering. See "Description of the Notes and the Indenture -- Provisions
Related to All Notes."
Investment Notes. The Investment Notes are offered with fixed
maturities ranging from three months to ten years. Individual Investment Notes
will be issued as subscriptions are accepted. The Investment Notes are offered
in minimum denominations of $1,000. Purchasers thereof may choose any of the
following maturities: three months, six months, one year, eighteen months, two
years, thirty months, three years, four years, five years, seven years or ten
years.
The Investment Notes are non-negotiable instruments and will be issued
in fully registered form. Transfers of record ownership of the Investment Notes
may be made only with the prior written consent of ABFS. Such consent will be
withheld in such circumstances as determined by the Company in its reasonable
discretion, including but not limited to the Company's determination that such
transfer might result in a violation of any state or federal securities or other
applicable law. The Company may also require a signature guarantee in connection
with such transfer.
10
<PAGE>
The term of the Investment Notes may, with the consent of the Company,
be extended in accordance with the procedure set forth below. The Company
provides notice to the holder of a Note regarding the upcoming maturity date.
The holder may request repayment for a period of up to seven days after the
maturity date of the Investment Note. As a courtesy, the Company provides a
request for repayment form with such notice. (Use of such form by a holder is
not a condition of repayment.) Requests for repayment may also be made to the
Company by letter. If the holder does not request repayment and the Company does
not notify the holder of its intention to repay the Investment Note, such Note
will be extended for an identical term. If the Company intends to repay the
Investment Note and to not permit the holder to extend the term it will notify
the holder of its intention at least seven days prior to the expiration of the
applicable term. Any Investment Notes which are so extended will be extended at
the interest rate then being offered by the Company for newly issued Investment
Notes of like term and denomination. See "Highlights of Terms of the Notes
Offered" on page 13 hereof.
Money Market Notes. The Money Market Notes are offered in minimum
denominations of $1,000 and any amount in excess thereof. The Money Market Notes
have no stated maturity and are redeemable in minimum amounts of $500 (or in
lesser amounts to close an account) at the option of the holder upon written
notice to the Company. The payment due upon redemption shall be made within 10
business days of the Company's receipt of such notice from the holder. The Money
Market Notes may also be redeemed by the Company at any time upon thirty days
written notice to the holder.
The Money Market Notes are non-negotiable instruments and will be
issued only in book-entry form with the Company maintaining a record of each
holder's interest in the Money Market Notes through the establishment and
maintenance of an account for each purchaser of a Money Market Note. Except in
certain limited circumstances described herein, the Money Market Notes will not
be issuable in definitive certificated form to any holder. Upon subscription, a
transaction statement reflecting ownership will be issued to each purchaser upon
the Company's acceptance of the purchaser's subscription. Such statement is not
a negotiable instrument, and no rights of ownership in a Money Market Note may
be transferred by the endorsement and delivery of such statement to a purchaser.
Transfers of record ownership of the Money Market Notes may be made only with
the prior written consent of ABFS. Such consent will be withheld in such
circumstances as determined by the Company in its reasonable discretion,
including but not limited to the Company's determination that such transfer
might result in a violation of any state or federal securities or other
applicable law. The Company may require a signature guarantee in connection with
such transfer. Upon transfer of a Money Market Note, the Company will provide
the transferee of the Money Market Note with a transaction statement which will
evidence the transfer of the ownership of the account on the Company's records.
The Company shall provide the Trustee with information regarding the
establishment of new accounts and transfers of existing accounts on a bi-weekly
basis.
11
<PAGE>
The interest rate paid on the Money Market Notes will be adjusted by
the Company from time to time in its sole discretion provided that such rate
shall not be less than 4.0% per year. The Company will provide written notice to
all holders of the Money Market Notes at least 14 days prior to any decrease in
the interest rate to be paid thereon, which notice shall set forth the new
interest rate to be paid and the effective date of such change. The Company
reserves the right to increase the interest rate paid on the Money Market Notes
at any time without the prior notice to the holders of the Money Market Notes.
Interest on the Money Market Notes will be compounded daily and credited monthly
on the last day of each calendar month. In lieu of paying interest by check,
accrued interest will be paid in the form of additional Money Market Notes. No
interest will be paid on the Money Market Notes for any day during which the
principal balance of an account is less than $1,000.
The Company is required to provide the Trustee with quarterly reports
which shall include such information as the Trustee shall reasonably request,
including the outstanding balance, interest credited, withdrawals made and
interest rate paid on the Money Market Note accounts during the preceding
quarterly period. The Company will provide holders of the Money Market Notes
with a monthly statement which will indicate, among other things, such holder's
current balance (including interest credited and withdrawals made) and interest
rate paid on the Money Market Notes during the preceding calendar month. Such
statements will be mailed to such holders no later than the tenth business day
following each month end. See "Highlights of Terms of the Notes Offered" on page
13 hereof.
Use of Proceeds
The net proceeds resulting from the sale of the Notes will be utilized
by the Company for its general corporate purposes, including financing the
future growth of the Company's loan and lease portfolios, the repayment of the
Company's outstanding debt and the possible unspecified acquisitions of related
businesses or assets (although none are currently contemplated). No specific
allocation of such proceeds has been determined as of the date of this
Prospectus. See "Use of Proceeds."
12
<PAGE>
HIGHLIGHTS OF TERMS OF THE NOTES OFFERED
<TABLE>
<CAPTION>
Investment Notes Money Market Notes
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Types of Security Offered............... Unsecured, subordinated, fixed Unsecured, adjustable rate,
term notes subordinated notes
- --------------------------------------------------------------------------------------------------------------------
Denomination of Initial Purchase and
Additional Purchases.................... Minimum purchase: $1,000 per note Minimum purchase: $1,000 per note
or any amount in excess thereof. or any amount in excess thereof.
- --------------------------------------------------------------------------------------------------------------------
Annual Interest Rate.................... Fixed upon issuance. Purchasers The interest rate paid will be
will elect a term length and the adjusted by the Company from time
interest rate applicable to such to time in its sole discretion
note will be based upon the term provided that such rate shall not
length chosen. be less than 4.0% per year.
Holders will be notified in writing
at least 14 days prior to any
decrease in the interest rate to be
paid. No interest will be paid for
any day on which the principal
balance in an account is below
$1,000.
- --------------------------------------------------------------------------------------------------------------------
Payment of Interest..................... Interest on notes with maturities Interest will be compounded daily
of less than one year will be and credited monthly at the end
compounded daily and paid at of each month. No checks will be
maturity. Interest on Notes with issued in payment of interest.
maturities of one year or greater Accrued interest will be added to
will be compounded daily and, at principal in each account in the
the election of the holder, paid form of additional notes.
at maturity, monthly, quarterly,
semi-annually or annually.
- -------------------------------------------- -----------------------------------------------------------------------
Redemption by Holder.................... Notes with maturities of less May be redeemed by the holder
than one year are not redeemable upon written notice to the
by the holder prior to maturity. Company with payment to be made
Notes with maturities of one year within 10 business days of the
or greater may be redeemed by the Company's receipt of such notice
holder following his/her Total from the holder. Redemptions
Permanent Disability, or by must be at least $500, except for
his/her estate after death, at redemptions to close an account.
the principal amount plus accrued
interest. Otherwise, the holder
will have no right to cause
redemption prior to maturity. (For
joint holders, see "Description of
the Notes and the Indenture --
Provisions Related to Investment
Notes".)
- --------------------------------------------------------------------------------------------------------------------
Redemption by Company................... Not redeemable until maturity. Redeemable upon 30 days written
notice to the holder.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Form.................................... In fully registered form and In book-entry form and
non-negotiable. Not transferable non-negotiable. (A monthly
without the Company's prior statement will be issued, not an
written consent. individual promissory note.) Not
transferable without the
Company's prior written consent.
- --------------------------------------------------------------------------------------------------------------------
Maturity................................ Investment Notes are offered with No fixed maturity.
terms to maturity of three, six,
eighteen and thirty months and
one, two, three, four, five,
seven and ten years.
- --------------------------------------------------------------------------------------------------------------------
Automatic Extension..................... If the Company does not notify Not applicable.
the holder of its intention to
repay the Note at least seven
days prior to maturity or if not
redeemed by holder within seven
days after its maturity date, the
Note will be extended
automatically for a period equal
to the original term. Notes to be
extended will be extended at a
fixed rate equal to the rate then
being offered on newly issued
Notes of like tenor, term and
denomination at their respective
maturity dates.
- --------------------------------------------------------------------------------------------------------------------
Periodic Statements..................... Quarterly statements detailing Monthly statements detailing the
the current balance and interest current balance and interest rate
rate paid on each Note will be paid on each account will be
mailed to each holder no later mailed to each holder no later
than the tenth business day than the tenth business day
following the end of each following each month end.
calendar quarter.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
THE NOTES OFFERED HEREBY ARE UNSECURED OBLIGATIONS SUBORDINATED TO THE SENIOR
DEBT OF THE COMPANY. THE COMPANY IS NOT SUBJECT TO STATE OR FEDERAL STATUTES OR
REGULATIONS APPLICABLE TO COMMERCIAL BANKS AND/OR SAVINGS AND LOAN ASSOCIATIONS
WITH REGARD TO INSURANCE, THE MAINTENANCE OF RESERVES, THE QUALITY OR CONDITION
OF ITS ASSETS OR OTHER MATTERS. THE NOTES OFFERED HEREUNDER ARE NOT CERTIFICATES
OF DEPOSIT. PAYMENT OF PRINCIPAL AND INTEREST ON THE NOTES IS NOT GUARANTEED BY
ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR OTHER ENTITY. THE COMPANY'S
REVENUES FROM OPERATIONS, INCLUDING THE SECURITIZATION OR SALE OF LOANS FROM ITS
PORTFOLIO, THE COMPANY'S WORKING CAPITAL AND CASH GENERATED FROM ADDITIONAL DEBT
FINANCING REPRESENT THE COMPANY'S SOURCES OF FUNDS FOR THE REPAYMENT OF
PRINCIPAL, AT MATURITY, AND THE ONGOING PAYMENT OF INTEREST ON THE NOTES.
14
<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 Notes.
Absence of Insurance and Regulation
The Notes are not insured by any governmental or private agency and
they are not guaranteed by any public or private entity. Likewise, the Company
is not regulated or subject to examination in the same manner as commercial
banks and thrift institutions. The Company is not a commercial bank or
savings/thrift institution. The Company is dependent upon proceeds from the
continuing sale of Notes and its institutional lines of credit to conduct its
ongoing operations. The Company's revenues from operations, including the sale
or securitization of loans from its portfolio, the Company's working capital and
cash generated from additional debt financing represent the sources of funds for
repayment of principal at maturity and the ongoing payment of interest on the
Notes. See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Subordination of Debt Represented by the Notes
The Notes will be subordinate in claim and right to all Senior Debt of
the Company. As of January 9, 1998, there was $49.4 million of Senior Debt
outstanding. There is no limitation on the amount of Senior Debt the Company can
incur. Senior Debt is defined for this purpose to include any indebtedness
(whether outstanding on the date hereof or thereafter created) incurred in
connection with borrowings by the Company (including its subsidiaries) from a
bank, trust company, insurance company, or from any other institutional lender,
whether such indebtedness is or is not specifically designated by the Company as
being "Senior Debt" in its defining instruments. If the Company were to become
insolvent, such Senior Debt of the Company would have a priority of right to
payment in connection with the liquidation of the Company and its assets. In
addition, any indebtedness of the subsidiaries of ABFS, other than the Senior
Debt, will have rights upon liquidation or dissolution of the particular
subsidiary prior to payment being made to the holders of the Notes. As of
January 9, 1998, such debt totaled $10.2 million. There can be no assurance that
any holder of the Company's Notes would be repaid upon a liquidation of the
Company. See "Description of the Notes and the Indenture -- Provisions Related
to All Notes."
Absence of Sinking Fund
The Notes are unsecured obligations of the Company and no sinking fund
(i.e., funds contributed on a regular basis to a separate account to repay the
Notes) exists for the benefit of the holders of the Notes. See "Description of
the Notes and the Indenture - General."
Limited Liquidity -- Lack of Trading Market
The Notes offered hereby are non-negotiable and are therefore not
transferable without the prior written consent of the Company. Due to the
non-negotiable nature of the Notes and the lack
15
<PAGE>
of a market for the sale of the Notes, even if the Company permitted a transfer,
investors may be unable to liquidate their investment even if circumstances
would otherwise warrant such a sale. See "Description of the Notes and the
Indenture."
Decline in Collateral Value May Adversely Affect Loan-to-Value Ratios
The Company's business may be adversely affected by declining real
estate values. Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made by the Company, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of a
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. As a result, there can be no
assurance that the market value of the real estate underlying such loans will at
any time be equal to or in excess of the outstanding principal amount of such
loans. See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Credit-Impaired Borrowers May Result in Increased Delinquency Rates
The Company markets loans, in part, to borrowers who, for one reason or
another, are not able, or do not wish, to obtain financing from traditional
sources such as commercial banks. Loans made to such borrowers may entail a
higher risk of delinquency and loss than loans made to borrowers who utilize
traditional financing sources. As a result, the Company may experience higher
delinquency rates and losses in the event of adverse economic conditions than
those experienced by other lenders. At September 30, 1997 and June 30, 1997,
total delinquent loans as a percentage of the Company's total portfolio serviced
were 2.86% and 2.15%, 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 76.0% and 75.7% for the three months ended
September 30, 1997 and the year ended June 30, 1997, 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.
16
<PAGE>
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 material adverse effect on the Company's results of
operations. In addition, due to the timing difference between the period when
costs are incurred in connection with the origination of loans and their
subsequent sale through the securitization process, the Company may operate on a
negative cash flow basis, which could adversely impact the Company's results of
operations and financial condition.
The Company has made estimates of the interest only and residual strips
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 the
decreased value of interest only and residual strips which would adversely
affect the Company's income in the period of adjustment. 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 the three months ended September 30, 1997 and fiscal 1997 and
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 $5.9 million and net income increased $2.0 million for
the three months ended September 30, 1997 as compared to the three months ended
September 30, 1996. Total revenues increased approximately $14.4 million, or
119.0%, between fiscal 1996 and 1997 while net income increased approximately
$3.6 million, or 156.5%. 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%. The Company's ability to sustain the level of growth in
total revenues and net income experienced during the three months ended
September 30, 1997 and fiscal 1996 and 1997 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 the three months ended September 30, 1997 and
fiscal 1997 and 1996 may not be sustained in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
17
<PAGE>
Ability of the Company to Implement its Growth Strategy
The Company's growth strategy is dependent upon its ability to increase
its loan volume through geographic expansion while maintaining its customary
origination fees, interest rate spreads and underwriting criteria with respect
to such increased loan volume. Implementation of this strategy will depend in
large part on the Company's ability to: (i) expand its offices in markets with a
sufficient concentration of borrowers meeting the Company's underwriting
criteria; (ii) obtain adequate financing on favorable terms to fund its growth
strategy; (iii) profitably securitize its loans in the secondary market on a
regular basis; (iv) hire, train and retain skilled employees; (v) successfully
implement its marketing campaigns; and (vi) continue to expand in the face of
increasing competition from other lenders. The Company's failure with respect to
any or all of these factors could impair its ability to successfully implement
its growth strategy which could have a material adverse effect on the Company's
results of operations and financial condition. See "Business."
Increased Competition Could Adversely Affect Results of Operations
The various segments of the Company's lending businesses are highly
competitive. Certain lenders against which the Company competes have
substantially greater resources, greater experience and lower cost of funds, as
well as a more established market presence than the Company. To the extent the
Company's competitors increase their marketing efforts to include the Company's
market niche of borrowers, the Company may be forced to reduce the rates and
fees it currently charges for such loans in order to maintain and expand its
market share. Any reduction in such rates or fees could have an adverse impact
on the Company's results of operations. In addition, even after the Company has
made a loan to a borrower, the borrower may refinance the loan with another
lender at more favorable rates and terms. Furthermore, the profitability of the
Company and other similar lenders may attract additional competitors into this
market, with the possible effect of reducing the Company's ability to charge its
customary origination fees and interest rates. In addition, as the Company
expands into new geographic markets, it will face competition from lenders with
established positions in these areas. There can be no assurance that the Company
will be able to continue to compete successfully in the markets it serves or
expand into new geographic markets. Such an event could have a material adverse
effect on the Company's results of operations and financial condition. See
"Business -- Competition."
Dependence Upon Debt Financing
For its ongoing operations, the Company is dependent upon borrowings
such as that represented by the Company's unsecured subordinated debt and the
Company's warehouse credit facilities and lines of credit as well as funds
received from the securitization of loans. The Company had $70.1 million of
subordinated debt outstanding at September 30, 1997 and had lines of credit and
credit facilities of $150.0 million, none of which was being utilized on such
date. At September 30, 1997, subordinated debt scheduled to mature during the
twelve months ended September 30, 1998 totaled $39.2 million. Any failure to
renew or obtain adequate funding under a warehouse credit facility, or other
borrowings, or any substantial reduction in the size of or pricing in the
markets for the Company's loans, could have a material adverse effect on the
Company's results of operations and financial condition. To the extent that the
Company is not successful in
18
<PAGE>
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 debt with scheduled
maturities of one to ten years. At September 30, 1997, the Company had $30.9
million of subordinated debt 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 eastern 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."
19
<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."
Risks Associated with Leasing Activities
The Company began offering Equipment Leases in December 1994. There are
risks inherent in the Company's leasing activities 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
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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 Fair 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 and First Mortgage Loans.
These rules and regulations, among other things, impose licensing obligations on
the Company, prohibit discrimination, regulate 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, among other remedies, termination or
suspension of licenses, certain rights of rescission for mortgage loans, class
action lawsuits and administrative enforcement actions.
The previously described laws and regulations are subject to
legislative, administrative and judicial interpretation, and certain of these
laws and regulations have been infrequently interpreted or only recently
enacted. Infrequent interpretations of these laws and regulations or an
insignificant number of interpretations of recently enacted regulations can
result in ambiguity with respect to permitted conduct under these laws and
regulations. Any ambiguity under the regulations to which the Company is subject
may lead to regulatory investigations or enforcement actions and private causes
of action, such as class action lawsuits, with respect to the Company's
compliance with the applicable laws and regulations.
Although the Company believes that it has implemented systems and
procedures to facilitate compliance with the foregoing requirements and believes
that it is in compliance in all material respects with applicable local, state
and federal laws, rules and regulations, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future that
could make compliance more difficult or expensive. See "Business -- Regulation."
Dependence on Key Personnel
The success of the Company's operations depend, to a large extent, upon
the management, lending, credit analysis and business skills of the senior level
management of the Company. If members of senior level management were for some
reason unable to perform their duties or were, for any reason, to leave the
Company, there can be no assurance that the Company would be able to find
capable replacements. The Company has entered into employment agreements with
its Chairman, President and Chief Executive Officer, Anthony J. Santilli, Jr.,
its Executive Vice President, Beverly Santilli, and its Senior Vice President
and General Counsel, Jeffrey M. Ruben. The Company also holds "key-man"
insurance for Anthony J. Santilli, Jr. and Beverly Santilli. See "Management."
Environmental Concerns
In the course of its business, the Company has acquired, and may
acquire in the future, properties securing loans which are in default. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such property, and may be held liable to a governmental entity or to third
parties for property damage,
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personal injury and investigation and cleanup costs incurred by such parties in
connection with the contamination. The liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation of responsibility. The costs of investigation,
remediation or removal of such substances may be substantial, and the presence
of such substances, or the failure to properly remediate such property, may
adversely affect the owner's ability to sell or rent such property or to borrow
using such property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
whether or not the facility is owned or operated by such person. In addition,
the owner or former owners of a contaminated site may be subject to common law
claims by third parties based on damages and costs resulting from environmental
contamination emanating from such property.
The ability of the Company to foreclose on the real estate
collateralizing its loans, if at any time such a foreclosure would be otherwise
appropriate, may be limited by the above-referenced environmental laws. While
the Company would not make a loan collateralized by real property as to which it
had knowledge of an environmental risk or problem, it is possible that such a
risk or problem could become known after the subject loan has been made. See
"Business -- Loan and Lease Servicing."
Management Discretion Over Substantial Amount of the Proceeds of the Offering
and Possible Use for Future Unspecified Acquisitions
The net proceeds from the sale of the Notes will be utilized for
general corporate purposes, including financing the future growth of the
Company's loan and lease portfolios, the repayment of the Company's outstanding
debt and the possible unspecified acquisitions of related businesses or assets
(although none are currently contemplated). No specific allocation of such
proceeds has been determined as of the date of this Prospectus. Management will
have broad discretion in allocating the proceeds of the Offering. See "Use of
Proceeds."
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 absence of insurance of the Notes,
subordination of debt represented by the Notes, absence of a sinking fund for
the repayment of the Notes, credit risk related to ABFS's borrowers, market
conditions and real estate values in ABFS's primary lending area, lack of a
public market for the Notes, competition, factors affecting the Company's
ability to implement its growth strategy, ABFS's dependence on debt financing to
fund its operations, dependence on securitizations and fluctuations in operating
results, the Company's ability to sustain levels of growth, geographic
concentration of the Company's loans, risks associated with leasing activities,
contingent risks, 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
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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."
THE COMPANY
The Company is a financial services company operating primarily
throughout the eastern region of the United States. ABFS, through its principal
direct and indirect subsidiaries, American Business Credit, Inc. ("ABC"),
HomeAmerican Credit, Inc. (d/b/a Upland Mortgage and referred to herein as "HAC"
or "Upland"), American Business Leasing, Inc. ("ABL"), New Jersey Mortgage and
Investment Corp. ("NJMIC") and Federal Leasing Corp. ("Federal"), originates,
services and sells Business Purpose Loans, Home Equity Loans, First Mortgage
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 products in
fifteen states and its lease products throughout the United 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, other than NJMIC and Federal, 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 Notes (estimated to be
approximately $121.9 million net of estimated offering expenses if all of the
Notes offered hereby are sold) will be utilized by the Company for its general
corporate purposes. General corporate purposes may include: (i) financing the
future growth of the Company's loan and lease portfolios; (ii) the repayment of
warehouse credit facilities, lines of credit and the Company's maturing debt;
and (iii) possible future acquisitions of related businesses or assets. The
precise amounts and timing of the application of such proceeds depends upon many
factors, including, but not limited to, the amount of any such proceeds, actual
funding requirements and the availability of other sources of funding. Until
such time as the proceeds are utilized, they will be invested in short and
long-term investments, including but not limited to 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
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types of such investments that may be made by the Company. The Company may also
maintain daily unsettled balances with certain broker-dealers. While the Company
may from time to time consider potential acquisitions, the Company as of the
date of this Prospectus had no commitments or agreements with respect to any
material acquisitions.
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DESCRIPTION OF THE NOTES AND THE INDENTURE
General
The Notes will be issued pursuant to the Indenture between the Company
and First Trust National Association, a national banking association, as trustee
(the "Trustee"). The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act"), in effect on the date the Indenture is
qualified thereunder. The Notes are subject to all such terms, and holders of
the Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following includes a summary of certain provisions of the
Indenture, a copy of which is available from the Company. This summary does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below.
The Notes will be subordinated in right of payment to the prior payment
in full of all Senior Debt (as herein defined) of the Company, whether
outstanding on the date of the Indenture or thereafter incurred. There is no
limit on the amount of Senior Debt the Company may incur. See "-- Provisions
Related to All Notes."
The Notes are not secured by any collateral or lien. There are no
provisions for a sinking fund applicable to such debt. See "Risk Factors -
Absence of Sinking Fund."
The Investment Notes are offered by the Company at maturities ranging
from three months to ten years. The term of each Investment Note will be chosen
by the purchaser of such note upon subscription.
The Money Market Notes have no stated maturity and are redeemable at
any time in minimum amounts of $500 (except to close an account) at the option
of the holder upon not less than ten business days written notice to the
Company.
Provisions Relating to Investment Notes
Form and Denominations. The Investment Notes will be issued in fully
registered form. The Investment Notes are not negotiable instruments, and no
rights of record ownership therein can be transferred without the prior written
consent of the Company. Ownership of an Investment Note may be transferred on
the Company register only by written notice to the Company signed by the
owner(s) or such owner's duly authorized representative on a form to be supplied
by the Company and with the prior written consent of the Company (which consent
shall not be unreasonably withheld). The Company may also, in its discretion,
require an opinion from such noteholder's counsel that the proposed transfer
will not violate any applicable securities laws and/or a signature guarantee in
connection with such transfer. See "Prospectus Summary -- Securities Offered."
An Investment Note may be purchased in the minimum amount of $1,000 or any
amount in excess thereof. Separate purchases may not be accumulated to satisfy
the minimum denomination requirement. See "Prospectus Summary -- Securities
Offered."
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Interest. The interest rates payable on the Investment Notes offered
hereby will be established by the Company from time to time based on market
conditions and the Company's financial requirements. The Company constantly
re-evaluates its interest rates based on such analysis. Once determined, the
rate of interest payable on an Investment Note will remain fixed for the
original term of the Investment Note. The interest rate payable on an Investment
Note will be determined based upon the maturity date and term established for
such Investment Note upon subscription.
Interest on Investment Notes will be computed on the basis of an actual
calendar year and will compound daily. Interest on Investment Notes with terms
of less than twelve months will be paid at maturity. Purchasers of Investment
Notes with terms of one year or greater may elect to have interest paid monthly,
quarterly, semiannually, annually or at maturity. This election may be changed
one time by the holder during the term of these longer term notes. Requests to
change such election are required to be made to the Company in writing. No
specific form of change of election is required to be submitted to the Company.
Any interest not otherwise paid on an interest payment date will be paid at
maturity.
The Company reserves the right to vary from time to time, in its
discretion, the interest rates it offers on the Investment Notes based on
numerous factors other than length of term to maturity. Such factors may
include, but are not limited to: the desire to attract new investors; Investment
Notes in excess of certain principal amounts; Investment Notes purchased for IRA
and/or Keough accounts; rollover investments; and Investment Notes beneficially
owned by persons residing in particular geographic localities. As of the date of
this Prospectus, the Company is not offering varying interest rates to investors
on the Investment Notes of identical maturity. However, the Company may make a
decision to vary interest rates in the future based on its fund raising
objectives including, but not limited to, the attraction of new investors in
particular regions, the encouragement of the rollover of Investment Notes by
current holders, circumstances in the financial markets and the economy,
additional costs which may be incurred by the Company in selling Investment
Notes in a particular jurisdiction which may at the time be relevant to the
Company's operations and other factors.
Interest Accrual Date. Interest on the Investment Notes will accrue
from the date of purchase, which is deemed to be, for accepted subscriptions,
the date the Company receives funds, if received prior to 3:00 p.m. on a
business day, or the next business day if the Company receives such funds on a
non-business day or after 3:00 p.m. on a business day. For this purpose, the
Company's business days will be deemed to be Monday through Friday, except for
Delaware legal holidays.
Interest Withholding. With respect to those investors who do not
provide the Company with a fully executed Form W-8 or Form W-9, the Company will
withhold 31% of any interest paid. Otherwise, no interest will be withheld,
except on the Investment Notes held by foreign business entities. It is the
Company's policy that no sale will be made to anyone refusing to provide a fully
executed Form W-8 or Form W-9.
Automatic Extension. At least seven days prior to an Investment Note's
stated maturity date, the Company will notify the registered holder in writing
of such maturity date and of its intention
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to repay, or if the Company does not intend to repay, reminding the holder of
the automatic extension. If at such time, the Company does not notify the holder
of its intention to repay, subject to the holder's demand for repayment, the
term of such note will be automatically extended. If, within seven days after an
Investment Note's maturity date, the holder thereof has not demanded repayment
of such note, and the Company has not notified the holder of its intention to
repay such note, such note shall be extended for a term identical to the term of
the original Investment Note. The Investment Notes will continue to renew as
described herein absent some action permitted under the Indenture and the
Investment Notes by either the holder or the Company. Interest shall continue to
accrue from the first day of such renewed term. Such note, as renewed, will
continue in all its provisions, including provisions relating to payment, except
that the interest rate payable during any renewed term shall be the interest
rate which is then being offered by the Company on similar Investment Notes
being offered as of the renewal date. If similar Investment Notes are not then
being offered, the interest rate upon renewal will be the rate specified by the
Company on or before the maturity date, or the note's current rate if no such
rate is specified. If the Company gives notice to a noteholder of the Company's
intention to repay an Investment Note at maturity, no interest will accrue after
the date of maturity. Otherwise, if a noteholder requests repayment within seven
days after its maturity date, the Company will pay interest during the period
after its maturity date and prior to repayment at the lower of (i) the lowest
interest rate then being paid on debt securities being offered by the Company to
the general public or (ii) the rate being paid on such note immediately prior to
its maturity. As a courtesy, the Company provides a request for repayment form
with such notice. Use of such form by a holder is not a condition of repayment.
Requests for repayment may also be made to the Company by letter.
Place and Method of Payment. Principal and interest on the Investment
Notes will be payable at the principal executive office of the Company, as it
may be established from time to time, or at such other place as the Company may
designate for that purpose; provided, however, that payments may be made at the
option of the Company by check or draft mailed to the person entitled thereto at
his/her address appearing in the register which the Company maintains for that
purpose.
Redemption by the Company. The Company will have no right to prepay an
Investment Note. The holder has no right to require the Company to prepay any
such note prior to its maturity date as originally stated or as it may be
extended, except as indicated below.
Redemption by the Holder upon Death or Total Permanent Disability.
Except for Investment Notes with maturities of less than 12 months, an
Investment Note may be redeemed at the election of the holder following his/her
Total Permanent Disability, as established to the satisfaction of the Company,
or by his/her estate following his/her death. The redemption price, in the event
of such a death or disability, will be the principal amount of the Investment
Note, plus interest accrued and not previously paid, to the date of redemption.
If spouses are joint record owners of an Investment Note, the election to redeem
will apply when either record owner dies or becomes subject to a Total Permanent
Disability. In other cases of Investment Notes jointly held, the election will
not apply.
The Company may modify the foregoing policy on redemption after death
or disability. However, no such modification will affect the right of redemption
applicable to any then outstanding Investment Note. Should the Company modify
such policy at a future date, written notice of such modification will be sent
to all owners of those outstanding Investment Notes which were purchased
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while the policy was in effect (but such notice will not affect the right to
redeem such outstanding Investment Notes after the owner's death or disability.)
For the purpose of determining the right of a holder to demand early
repayment of an Investment Note, Total Permanent Disability shall mean a
determination by a physician chosen by the Company that the holder, who was
gainfully employed on a full time basis at the time of purchase, is unable to
work on a full time basis, defined as working at least forty hours per week,
during the succeeding twenty-four months.
Provisions Relating to Money Market Notes
Form and Denominations. The Money Market Notes are not negotiable
instruments and will be issued only in book-entry form. See "--Book Entry
System." Upon subscription, a transaction statement reflecting the ownership of
a Money Market Note will be issued to each purchaser upon the Company's
acceptance of the subscription. Such statement is not a negotiable instrument,
and no rights of record ownership therein can be transferred without the prior
written consent of the Company. Each holder of a Money Market Note will receive
a monthly statement indicating any transactions in the holder's account, as well
as interest credited. Ownership of a Money Market Note may be transferred on the
Company's register only by written notice to the Company signed by the owner(s)
or such owner's duly authorized representative on a form to be supplied by the
Company and with the prior written consent by the Company (which consent shall
not be unreasonably withheld). The Company may also, in its discretion, require
an opinion from such noteholder's counsel that the proposed transfer will not
violate any applicable securities laws and/or a signature guarantee in
connection with such transfer. Upon transfer of a Money Market Note, the Company
will provide the new owner of the Money Market Note with a transaction statement
which will evidence the transfer of the account on the Company's records.
Money Market Notes have no stated maturity and may be purchased in the
minimum amount of $1,000 or any amount in excess thereof. Separate purchases may
not be accumulated to satisfy the minimum denomination requirement.
Book-Entry System. Upon acceptance of a purchaser's order, the Company
will credit its book-entry registration and transfer system to the account of
the purchaser of the Money Market Note, the principal amount of such Money
Market Note owned of record by such purchaser. The laws of some jurisdictions
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such legal requirements may impair the ability to
transfer the record ownership of the Money Market Notes.
The record owners of the Money Market Notes issued in a book-entry
interest form will not receive or be entitled to receive physical delivery of
the Money Market Notes owned. The registered owners of the accounts established
by the Company in connection with the purchase or transfer of Money Market Notes
shall be deemed to be the owners of the Money Market Notes under the Indenture.
Such person holding a book-entry interest in the Money Market Notes must rely
upon the procedures established by the Trustee to exercise any rights of a
holder of the Money Market Notes under the Indenture. The Company shall provide
the Trustee with information regarding the establishment of new accounts and the
transfer of existing accounts on a bi-weekly basis.
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The information regarding the total amount of any principal and/or
interest (which shall be paid in the form of additional Money Market Notes) due
to book-entry owners with regard to the Money Market Notes on any interest
payment date or upon redemption will be made available by the Company to the
Trustee upon the Trustee's request. On each interest payment date, the Company
will credit each account on the applicable interest payment date based upon the
applicable interest rate due on such note and the amount of Money Market Notes
held of record in the account. The Company shall have the responsibility for
determining the interest payments to be made to the book-entry accounts and for
maintaining, supervising and reviewing any records relating to book-entry
beneficial interests in the Money Market Notes.
Book-entry interests in the accounts evidencing ownership of the Money
Market Notes are exchangeable for Money Market Notes in denominations of $1,000
and any amount in excess thereof and fully registered in such names as the
Company directs if: (i) the Company at its option advises the Trustee in writing
of its election to terminate the book-entry system, or (ii) after the occurrence
of an Event of Default, holders of the Money Market Notes aggregating more than
50% of the aggregate outstanding amount of the Money Market Notes advise the
Trustee in writing that the continuation of a book-entry system is no longer in
the best interests of the holders of Money Market Notes and the Trustee notifies
all holders of the Money Market Notes, of the occurrence of any such event and
the availability of definitive notes to holders of the Money Market Notes
requesting such notes. Subject to the foregoing, the book-entry interests in the
Money Market Notes shall not otherwise be exchangeable for fully registered
Money Market Notes.
Reports to Trustee. The Company shall provide the Trustee with
quarterly reports which shall contain such information as the Trustee shall
reasonably request including information regarding the outstanding balance,
interest credited, withdrawals made and interest rate paid on each Money Market
Note account maintained by the Company during the preceding quarterly period.
Monthly Statements. The Company shall provide holders of the Money
Market Notes with monthly statements which will indicate, among other things,
the current account balance (including interest credited and withdrawals made,
if any) and the interest rate paid on the Money Market Notes as of the month end
preceding the issuance of the statement. Such statements will be mailed not
later than the tenth business day following each month end. The Company shall
provide additional statements as the holders of the Money Market Notes may
reasonably request from time to time. Holders requesting such additional
statements may be required to pay all charges incurred by the Company in
providing such additional statements.
Interest. The interest rates payable on the Money Market Notes offered
hereby will be adjusted by the Company from time to time in its sole discretion
provided that such rate shall not be less than 4.0% per year. The Company will
provide written notice to all holders of the Money Market Notes at least 14 days
prior to any decrease in the interest rate to be paid thereon, which notice
shall set forth the new interest rate to be paid and the effective date of such
change. The Company reserves the right to increase the interest rate paid on the
Money Market Notes at any time without prior notice to the holders of the Money
Market Notes. Investors may inquire about the interest rate then being paid on
the outstanding Money Market Notes by calling the Company at (610) 668-2440.
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Interest on each account with a balance of at least $1,000 accrues
daily and is credited monthly on the last day of each calendar month. Interest
accrued during each monthly period will not be paid by check but will be added
to the noteholder's principal balance of the account in the form of additional
Money Market Notes. Interest will continue to accrue on the principal balance of
each Money Market Note through the date of redemption. If a holder redeems the
Money Market Note in full, the principal balance of the account (including
accrued interest) will be paid by check as soon as practicable. No interest
shall be paid for any day the principal amount in any account is less than
$1,000.
Subject to the limitations set forth herein, the Company may vary, in
its discretion, the interest rates it offers on the Money Market Notes based on
numerous factors. Such factors may include, but are not limited to: the desire
to attract new investors; Money Market Notes in excess of certain principal
amounts; Money Market Notes purchased for IRA and/or Keough accounts; rollover
investments; and Money Market Notes beneficially owned by persons residing in
particular geographic localities. As of the date hereof, the Company is not
offering Money Market Notes at varying rates to different investors. However,
the Company may make a decision to vary interest rates in the future based on
its fund raising objectives including, but not limited to, the attraction of new
investors in particular regions, circumstances in the financial markets and the
economy, any additional costs which may be incurred by the Company in selling
Money Market Notes in a particular jurisdiction which may at the time be
relevant to the Company's operations and other factors.
Interest Accrual Date. Interest on the Money Market Notes will accrue
from the date of purchase, which is deemed to be, for accepted subscriptions,
the date the Company receives funds, if received prior to 3:00 p.m. on a
business day, or the next business day if the Company receives such funds on a
non-business day or after 3:00 p.m. on a business day. For this purpose, the
Company's business days will be deemed to be Monday through Friday, except for
Delaware legal holidays.
Interest Withholding. With respect to those investors who do not
provide the Company with a fully executed Form W-8 or Form W-9, the Company will
withhold 31% of any interest paid. Otherwise, no interest will be withheld,
except on Money Market Notes held by foreign business entities. It is the
Company's policy that no sale will be made to anyone refusing to provide a fully
executed Form W-8 or Form W-9.
Redemption by the Holder of Money Market Note. The holder of each Money
Market Note may redeem the Money Market Note at any time in minimum amounts of
$500 (or any amount to close an account) upon not less than 10 business days
written notice to the Company.
To the extent a holder of the Money Market Notes redeems the Money
Market Notes and purchases new ones, the redemptions are treated as being made
on a first-in, first-out basis.
Redemption by the Company. The Company will have the right to redeem a
Money Market Note at any time upon thirty days written notice to the holder
thereof.
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Place and Method of Payment upon Redemption. Payments upon the
redemption of the Money Market Notes will be payable at the principal executive
office of the Company, as it may be established from time to time, or at such
other place as the Company may designate for that purpose; provided however,
that payments may be made at the option of the Company by check or draft mailed
to the person entitled thereto at his/her address appearing in the register
which the Company maintains for that purpose.
Provisions Related to All Notes
Subordination. The indebtedness evidenced by the Notes, and any
interest thereon, are subordinated to all Senior Debt of the Company. The term
Senior Debt is defined for this purpose to include any indebtedness (whether
outstanding on the date hereof or thereafter created) incurred by the Company in
connection with borrowings by the Company (including its subsidiaries) from a
bank, trust company, insurance company, or from any other institutional lender,
whether such indebtedness is or is not specifically designated by the Company as
being "Senior Debt" in its defining instruments. As of January 9, 1998, there
was $49.4 million of Senior Debt outstanding. There is no limitation under the
Indenture on the amount of Senior Debt the Company can incur. The Notes are not
guaranteed by any subsidiaries of ABFS. Accordingly, in the event of a
liquidation or dissolution of a subsidiary of ABFS, the law requires that
creditors of that subsidiary be paid, or provision for such payment be made,
from the assets of that subsidiary prior to distributing any remaining assets to
ABFS as a shareholder of that subsidiary. Therefore, in the event of liquidation
or dissolution of a subsidiary, creditors of such subsidiary will receive
payment of their claims prior to any payment to the holders of the Notes. As of
January 9, 1998, there was $10.2 million of such debt outstanding. Any
indebtedness of ABFS, other than that described as Senior Debt and the debt of
the subsidiaries, will have rights upon liquidation or dissolution of ABFS which
ranks pari passu (i.e. equally) in right of payment to the Notes offered hereby.
As of January 9, 1998, the Company had $91.4 million of debt outstanding which
ranks pari passu in right of payment to the Notes offered, including $39.4
million of Notes sold pursuant to this Offering.
For a discussion of the Company's status as a holding company and the
lack of insurance or guarantees in support of the Notes, see "Risk Factors -
Absence of Insurance and Regulation."
In the event of any liquidation, dissolution or any other winding up of
the Company, or of any receivership, insolvency, bankruptcy, readjustment,
reorganization or similar proceeding under the Federal Bankruptcy Code or any
other applicable federal or state law relating to bankruptcy or insolvency, or
during the continuation of any Event of Default (as described below), no payment
may be made on the Notes until all Senior Debt has been paid. In any such event,
holders of Senior Debt may also submit claims on behalf of holders of the Notes
and retain the proceeds for their own benefit until they have been fully paid,
and any excess will be turned over to the holders of the Notes. If any
distribution is nonetheless made to holders of the Notes, the money or property
distributed to them must be paid over to the holders of the Senior Debt to the
extent necessary to pay Senior Debt in full. See "Risk Factors - Subordination
of Debt Represented by the Notes."
Events of Default. The Indenture provides that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment of
interest when due on the Notes (whether or not prohibited by the subordination
provisions of the Indenture); (ii) default in payment of principal
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when due on the Notes (whether or not prohibited by the subordination provisions
of the Indenture) and continuation thereof for 30 days; (iii) failure by the
Company to observe or perform any covenant, condition or agreement with respect
to the liquidation, consolidation or merger or other disposition of
substantially all of the assets of the Company (after notice and provided such
default is not cured within 60 days after receipt of notice); (iv) failure by
the Company for 60 days after notice to comply with certain other agreements in
the Indenture or the Notes; and (v) certain events of bankruptcy or insolvency
with respect to the Company.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least a majority in principal amount of the then outstanding Notes
may declare the unpaid principal of and any accrued interest on the Notes to be
due and payable immediately; provided, however, that so long as any Senior Debt
is outstanding, such declaration shall not become effective until the earlier of
(x) the day which is five Business Days after the receipt by representatives of
Senior Debt of such written notice of acceleration or (y) the date of
acceleration of any Senior Debt. In the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the Notes
then outstanding by notice to the Trustee may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
Amendment, Supplement and Waiver. Except as provided herein, the
Indenture or the Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Notes then
outstanding, and any existing Default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the holders of a
majority in principal amount of the then outstanding Notes.
Without the consent of each holder of the Investment Notes affected, an
amendment or waiver may not (with respect to any Investment Notes held by a
nonconsenting holder of Investment Notes) (i) reduce the principal amount of the
Investment Note whose holder must consent to an amendment, supplement or waiver,
(ii) reduce the principal of or change the fixed maturity of any note or alter
the redemption provisions thereof or the price at which the Company shall offer
to repurchase the Investment Note, (iii) reduce the rate of or change the time
for payment of interest, including default interest, on any Investment Note,
(iv) waive a Default or Event of Default in the payment of principal or premium,
if any, or interest on or redemption payment with respect to the
32
<PAGE>
Investment Notes (except a rescission of acceleration of the Investment Notes by
the holders of at least a majority in aggregate principal amount of the
Investment Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Investment Note payable in money other than that
stated in the Investment Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of holders of
Investment Notes to receive payments of principal of or interest on the
Investment Notes, (vii) make any change to the subordination provisions of the
Indenture that adversely affects holders of Investment Notes, (viii) modify or
eliminate holders' redemption rights (provided that no modification or
elimination is permitted as to any securities issued with such right), or (ix)
make any change in the foregoing amendment and waiver provisions.
Without the consent of each holder of the Money Market Notes affected,
an amendment or waiver may not (with respect to any Money Market Notes held by a
nonconsenting holder of Money Market Notes) (i) reduce the principal amount of
Money Market Notes whose holders must consent to an amendment, supplement or
waiver (other than as a result of withdrawals made by the holder thereof), (ii)
reduce the principal of any Money Market Note (other than as a result of
withdrawals made by the holder thereof) or alter the redemption provisions
thereof or the price at which the Company shall offer to repurchase the Money
Market Note, (iii) reduce the rate of interest on the Money Market Notes, other
than the rate adjustments provided for pursuant to the terms of the Money Market
Notes or change the time for payment of interest, including default interest, on
any Money Market Note, (iv) waive a Default or Event of Default in the payment
of principal or premium, if any, or interest on or redemption payment with
respect to the Money Market Notes (except a rescission of acceleration of the
Money Market Notes by the holders of at least a majority in aggregate principal
amount of the Money Market Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Money Market Note payable in
money other than that stated in the Money Market Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of holders of Money Market Notes to receive payments of principal of or
interest on the Money Market Notes, (vii) make any change to the subordination
provisions of the Indenture that adversely affects holders of Money Market
Notes, (viii) modify or eliminate redemption right of holders of the Money
Market Notes, or (ix) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Company and/or the Trustee may amend or supplement the Indenture or
the Notes to cure any ambiguity, defect or inconsistency; to provide for
assumption of the Company's obligations to holders of the Notes in the case of a
merger or consolidation to provide for additional certificates or certificated
securities; to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not adversely affect the legal
rights under the Indenture of any such holder, including an increase in the
aggregate dollar amount of Notes which may be outstanding under the Indenture;
to modify the Company's policy to permit redemptions of the Investment Notes
upon the death or Total Permanent Disability of any holder of the Investment
Notes (but such modification shall not adversely affect any then outstanding
security); or to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
33
<PAGE>
Periodic Statements. The Company intends to provide the holders of the
Notes with periodic statements which will detail the current balance and
interest rate paid on the Notes. Such statements will be mailed to the holders
of the Money Market Notes on a monthly basis no later than the tenth business
day following each month end and to the holders of the Investment Notes on a
quarterly basis no later than the tenth business day following the end of each
calendar quarter.
The Trustee. The Indenture contains certain limitations on the rights
of the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions with the Company.
The holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any holder of Notes, unless such holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
No Personal Liability of Directors, Officers, Employees and
Stockholders. No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of the Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
Service Charges. The Company reserves the right to assess service
charges for replacing any lost or stolen Investment Note (for which an affidavit
from the holder will be required), changing the registration of any Note when
such change is occasioned by a change in name of the holder, or a transfer
(whether by operation of law or otherwise) of any Note by the holder to another
person.
Additional Securities. The Company may offer from time to time
additional classes of securities with terms and conditions different from the
Notes offered hereby. The Company will amend this Prospectus if and when it
decides to offer to the public any additional class of security hereunder.
Variations by State. The Company reserves the right to offer different
securities and to vary the terms and conditions of the offer (including, but not
limited to, additional interest payments and service charges for all Notes)
depending upon the state where the purchaser resides.
34
<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>
Three Months Ended
September 30, Year Ended June 30,
------------- -------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data: (Dollars in Thousands, except per share data)
Revenues:
Gain on sale of loans................... $ 8,521 $ 4,073 $ 20,043 $ 8,721 $ 1,350 $ 110 $ 119
Interest and fees....................... 2,304 1,135 5,896 3,351 4,058 2,367 1,619
Other................................... 381 77 544 23 143 156 306
Total revenues............................. 11,206 5,284 26,482 12,094 5,551 2,633 2,044
Total expenses........................... 6,431 3,506 17,480 8,974 4,657 2,299 1,977
Operating income (loss) before income
taxes and cumulative effect
of accounting change.................... 4,775 1,778 9,002 3,121 894 334 67
Income (loss) before cumulative effect
of accounting change.................... 3,152 1,156 5,940 2,319 581 137 41
Cumulative effect of accounting change
on prior years.......................... -- -- -- -- -- (52) --
Net income................................. 3,152 1,156 5,940 2,319 581 85 41
Per Common Share Data(1):
Income (loss) before cumulative effect of
accounting change................... $ .87 $ .47 $ 2.05 $ 1.01 $ .27 $ .04 $ .02
Net income ............................. $ .87 $ .47 $ 2.05 $ 1.01 $ .27 $ .04 $ .02
Cash dividends declared................. .015 .015 .06 0.03 -- -- --
September 30, June 30,
------------- --------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Balance Sheet Data: (In Thousands)
Cash and cash equivalents.................. $ 3,932 $ 8,813 $ 5,014 $ 5,345 $ 4,734 $ 83 $ 151
Loan and lease receivables, net available
for sale.................................. 25,370 10,894 35,712 18,003 8,669 3,181 2,170
Other...................................... 1,218 579 1,144 534 328 5,538 2,963
Total assets............................... 124,344 51,975 103,989 46,894 22,175 12,284 7,270
Subordinated debt ......................... 70,125 37,876 56,486 33,620 17,800 7,171 1,327
Total liabilities.......................... 90,333 46,463 73,077 42,503 20,031 10,721 5,801
Stockholders' equity....................... 34,011 5,512 30,912 4,392 2,143 1,562 1,469
</TABLE>
- ----------
(1) Per share information for fiscal years 1994 and 1993 have been restated to
reflect the 3 for 2 stock split effected on November 1, 1995.
35
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------- -------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data: (Dollars in Thousands)
Originations:
Business Purpose Loans.................. $ 10,667 $ 7,421 $ 38,721 $ 28,872 $ 18,170 $ 11,793 $ 9,769
Home Equity Loans....................... 43,771 12,663 91,819 36,479 16,963 22,231 22,017
Equipment Leases ....................... 4,512 1,970 8,004 5,967 2,220 -- --
Loans sold:
Securitizations......................... 59,722 26,845 115,000 36,506 9,777 -- --
Other................................... 6,509 935 3,876 19,438 31,948 30,562 29,036
Total loan and lease portfolio serviced.... 214,458 79,080 176,651 59,891 17,774 8,407 5,134
Average loan/lease size:
Business Purpose Loans.................. 8 76 78 78 71 57 63
Home Equity Loans....................... 49 43 51 47 46 51 45
Equipment Leases........................ 10 10 11 11 12 -- --
Weighted average interest rate on loan
and leases originated:
Business Purpose Loans ................ 15.97% 15.96% 15.91% 15.83% 16.05% 16.03% 16.24%
Home Equity Loans....................... 12.12 11.50 11.69 9.94 12.68 8.65 9.60
Equipment Leases........................ 13.47 15.48 17.22 15.85 -- --
15.53
At or For The
Three Months Ended
September 30, At or For the Year Ended June 30,
------------- ---------------------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets (1).............. 11.04% 9.35% 7.87% 6.71% 3.37% 0.87% 0.65%
Return on average equity (1).............. 38.83 93.35 33.65 70.96 31.36 5.58 3.29
Total delinquencies as a percentage of total
portfolio serviced, at end of period (2) 2.86 2.30 2.15 2.30 3.84 6.85 5.97
Allowance for credit losses to total
portfolio serviced, at end of period... 1.04 1.00 1.00 1.18 .87 .93 .80
Real estate owned as a percentage of total
portfolio serviced, at end of period... .51 .61 .34 1.01 4.29 2.63 1.44
Loan and lease losses as a percentage of
the average total portfolio serviced
during the period...................... .05 .07 .08 .33 .66 .15 .47
Pre-tax income (loss) as a percentage of
total revenues......................... 42.61 33.65 33.99 25.21 15.84 12.69 3.26
</TABLE>
- -------------
(1) Annualized.
(2) Total delinquencies includes loans and leases delinquent over 30 days,
exclusive of real estate owned.
36
<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, 1997 and
1996 and the three months ended September 30, 1997 and September 30, 1996. 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
eastern region of the United States. ABFS, through its direct and indirect
subsidiaries, originates, sells and services Business Purpose Loans, Home Equity
Loans, First Mortgage 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 products in fifteen states and
its lease products throughout the United States. See "Business."
Effective October 1, 1997, the Company acquired all of the outstanding
stock of NJMIC, a mortgage and leasing company located in Roseland, New Jersey,
for a combination of cash and ABFS Common Stock. The operations of NJMIC and its
subsidiaries will be incorporated with those of ABFS and its subsidiaries for
periods commencing subsequent to September 30, 1997. See "-- Liquidity and
Capital Resources."
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 six
securitizations aggregating $87.4 million in Business Purposes Loans and $133.5
million in Home Equity Loans. Such securitizations generated gain on the sale of
loans of $8.5 million, $20.0 million, $8.7 million and $1.3 million,
respectively, for the three months ended September 30, 1997 and for fiscal years
ended June 30, 1997, 1996 and 1995. See Risk Factors -- Dependence Upon
Securitizations and Fluctuations in Operating Results" and "-- Results of
Operations."
The Company also relies upon funds generated by the sale of
subordinated debt and other borrowings to fund its operations. At September 30,
1997, the Company had $70.1 million of subordinated debt outstanding and credit
facilities and lines of credit totaling $150.0 million, none of which was drawn
upon on such date. The Company expects to continue to rely on such borrowings
37
<PAGE>
to fund loans prior to securitization. See "Risk Factors -- Dependence Upon Debt
Financing" and "-- 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
interest only and residual strip associated with such loans at the time of sale.
The interest only and residual strip 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 interest only and residual strip 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 interest
only and residual strip expected to be realized over the anticipated average
life of the loans sold less future estimated credit losses relating to the loans
sold, net of origination costs and hedging results. These interest only and
residual strips 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 interest only and residual strips on the pool
of securitized loans at fair value. As such, the carrying value of the interest
only and residual strips is impacted by changes in prepayment and loss
experience of the underlying loans. The Company determines the fair value of the
interest only and residual strips 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.
Higher levels of future prepayments, delinquencies and/or liquidations could
result in decreased interest only and residual strips
38
<PAGE>
which would adversely affect the Company's income in the period of adjustment.
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 interest only and residual
strips.
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 are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 125.
See Note 1 of the Notes to Consolidated Financial Statements, "Risk Factors -
Dependence Upon Securitizations and Fluctuations in Operating Results" and
"Business - Securitizations."
Balance Sheet Information
September 30, 1997 compared to June 30, 1997. Total assets increased
$20.4 million, or 19.5%, to $124.3 million at September 30, 1997 from $104.0
million at June 30, 1997 due primarily to increases in other receivables and
other assets partially offset by a decrease in loans and leases available for
sale. Other receivables, consisting primarily of interest only and residual
strips created in connection with the Company's securitizations, increased $14.2
million, or 37.9%, to $51.7 million at September 30, 1997 from $37.5 million at
June 30, 1997 as the Company funded $60.0 million of loans as part of a $100.0
million securitization during the period ended September 30, 1997. Other assets
increased $14.3 million, or 77.7%, to $32.7 million at September 30, 1997 from
$18.4 million at June 30, 1997 due primarily to a $12.0 million increase in
investments held for sale and a $2.1 million increase in mortgage servicing
rights obtained in connection with the Company's loan securitization. Loans and
leases available for sale decreased $10.3 million, or 28.9%, from $35.7 million
at June 30, 1997 to $25.4 million at September 30, 1997 due to a decrease in
loans available for sale used to fund $60.0 million of a $100.0 million
securitization. The Company anticipates funding the remaining $40.0 million of
loans during the second quarter of fiscal 1998.
Total liabilities increased $17.2 million, or 23.5%, to $90.3 million
at September 30, 1997 from $73.1 million at June 30, 1997 due primarily to an
increase in outstanding debt and to a lesser extent, increases in accounts
payable and accrued expenses and deferred income taxes. The increase in debt of
$13.6 million was due to net sales of subordinated debt. At September 30, 1997,
the Company had $70.1 million of subordinated debt outstanding. The Company's
ratio of total debt to equity at September 30, 1997 was 2.1:1 compared to 1.8:1
at June 30, 1997. Accounts payable and accrued expenses increased $1.7 million,
or 27.9%, to $7.8 million at September 30, 1997 from
39
<PAGE>
$6.1 million at June 30, 1997 due to growth in the Company's lending and leasing
activities resulting in longer accruals for interest expense and other operating
expenses. Deferred income taxes increased $1.7 million, or 37.0%, to $6.3
million at September 30, 1997 from $4.6 million at June 30, 1997 due to tax
accruals on the Company's income for the three months ended September 30, 1997.
Stockholders' equity increased $3.1 million to $34.0 million at
September 30, 1997 from $30.9 million at June 30, 1997 due to net income for the
three months ended September 30, 1997 of $3.2 million partially offset by
dividends paid.
June 30, 1997 compared to June 30, 1996. Total assets increased $57.1
million, or 121.7%, to $104.0 million at June 30, 1997 from $46.9 million at
June 30, 1996 due primarily to increases in loan and lease receivables available
for sale, other receivables and other assets. The increase in loan and lease
receivables available for sale of $17.7 million, or 98.3%, to $35.7 million at
June 30, 1997 from $18.0 million at June 30, 1996 was due to the Company's
strategy of building an inventory of loans for ultimate sale in securitizations.
Other receivables consist primarily of the interest only and residual strips
created in connection with the Company's securitizations. The interest only and
residual strips increased $25.5 million, or 190.3%, to $38.9 million at June 30,
1997, from $13.4 million at June 30, 1996. Other assets increased $11.9 million,
or 183.1%, to $18.4 million at June 30, 1997 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.
Total liabilities increased $30.6 million, or 72.0%, to $73.1 million
at June 30, 1997 from $42.5 million at June 30, 1996 due primarily to a net
increase in outstanding debt and to a lesser extent, increases in other
liabilities. The net increase in debt of $20.5 million was due to net sales of
subordinated debt of $22.8 million during the year ended June 30, 1997 and a
decrease in institutional debt of $2.3 million as the Company repaid its
institutional debt with proceeds from its securitizations. At June 30, 1997, the
Company had $56.5 million of subordinated debt outstanding. The Company's ratio
of total debt to equity at June 30, 1997 was 1.8:1 compared to 8.2:1 at June 30,
1996. This decrease was due to additional equity raised during a public offering
in February 1997. Accounts payable and accrued expenses increased $3.0 million,
or 96.8%, to $6.1 million at June 30, 1997 from $3.1 million at June 30, 1996
due to growth in the Company's lending and leasing activities resulting in
larger accruals for interest expense and other operating expenses. Deferred
income taxes increased $3.1 million, or 206.7%, to $4.6 million at June 30, 1997
from $1.5 million at June 30, 1996 due to tax accruals on the Company's income
for the year ended June 30, 1997.
Stockholders' equity increased $26.5 million to $30.9 million at June
30, 1997 from $4.4 million at June 30, 1996 due to a public offering of the
Company's Common Stock and an increase in net income which was slightly offset
by dividends paid. On February 14, 1997 the Company raised, net of expenses,
$20.7 million of equity through the sale of 1,150,000 shares of its Common Stock
in an underwritten public offering. Net income increased by $3.6 million, or
156.5%, to $5.9 million for the year ended June 30, 1997 from $2.3 million for
the year ended June 30, 1996.
40
<PAGE>
Results of Operations
During the three months ended September 30, 1997 and fiscal 1997 and
1996, the Company experienced record levels of total revenues and net income as
a result of increases in originations and securitizations. Total revenues
increased $5.9 million, and net income increased $2.0 million for the three
months ended September 30, 1997 as compared to the three months ended September
30, 1996. Total revenues increased $14.4 million, or 119.0%, between fiscal 1997
and 1996 while net income increased $3.6 million, or 156.5%, during the same
fiscal period. 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. The Company's ability to sustain the level of growth in
total revenues and net income experienced during these periods 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 during the three months ended September
30, 1997 and fiscal 1997 and 1996 may not be sustained in the future. See "Risk
Factors -- Ability of the Company to Sustain Recent Levels of Growth and
Operating Results."
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."
Three Months Ended September 30, 1997 Compared with the Three Months Ended
September 30, 1996
Total Revenues. Total revenues increased $5.9 million, or 111.3%, to
$11.2 million for the three months ended September 30, 1997 from $5.3 million
for the three months ended September 30, 1996. The increase in total revenue was
primarily the result of gains on sale of loans through securitization.
Gain on Sale of Loans. Gain on sale of loans increased $4.4 million, or
107.3%, to $8.5 million for the three months ended September 30, 1997 from $4.1
million for the three months ended September 30, 1996. The increase was the
result of sales of $12.0 million of loans secured by real estate and other
business assets ("Business Purpose Loans") and $48.0 million of loans secured by
real estate on single family residences ("Home Equity Loans") through a
securitization in September 1997, as compared to the sale of $9.9 million of
Business Purpose Loans and $17.0 million of Home Equity Loans through a
securitization in September 1996. During the three months ended September 30,
1997, the Company recognized a gain of $8.5 million (representing the fair value
of the interest only and residual strips of $11.1 million less $2.6 million of
costs associated with the transaction) on the Company's initial funding of $60.0
million of loans sold pursuant to a $100.0 million securitization. The remaining
$40.0 million of loans was in the form of a pre-funded account which the Company
anticipates funding in the second quarter of fiscal 1998.
41
<PAGE>
Interest and Fee Income. Interest and fee income consists of interest
income, fee income and amortization of origination costs. Interest and fee
income increased $1.2 million, or 109.1%, to $2.3 million for the three months
ended September 30, 1997 from $1.1 million for the three months ended September
30, 1996. The increase in interest and fee income was the result of an increase
in the amount of loans and leases originated and retained in the Company's
portfolio prior to securitization.
Interest income consists primarily of interest income the Company earns
on loans and leases held in its portfolio. Interest income increased $800,000,
or 88.9%, to $1.7 million for the months ended September 30, 1997 from $900,000
for the three months ended September 30, 1996. The increases were attributable
to increased originations of Business Purpose Loans, Home Equity Loans and small
ticket leases for the acquisition of business equipment ("Equipment Leases").
During the three months ended September 30, 1997, the Company
originated approximately $43.8 million of Home Equity Loans, $10.4 million of
Business Purpose Loans and $4.5 million of Equipment Leases. During the three
months ended September 30, 1996, the Company originated $12.7 million of Home
Equity Loans, $7.4 million of Business Purpose Loans and $1.9 million of
Equipment Leases.
Fee income, includes primarily premium and points earned when loans are
closed, funded and immediately sold to unrelated third party purchasers and
ancillary fees collected on loan originations. Fee income increased $307,000 to
$587,000 for the three months ended September 30, 1997 from $280,000 for the
three months ended September 30, 1996. The increase in fee income was due to an
increase in ancillary fees collected in connection with increased originations
partially offset by a reduction in fees earned on the sale of loans to third
parties.
The third component of interest and fee income is amortization of
origination costs. During the three months ended September 30, 1997,
amortization of origination costs increased to $168,000 compared to $86,000
recognized during the comparable period of fiscal 1997. The increase was
attributable to an increase in the amortization of lease origination costs
resulting from an increase in the Company's Equipment Lease portfolio.
Total Expenses. Total expenses increased $2.9 million, or 82.9%, to
$6.4 million for the three months ended September 30, 1997 from $3.5 million for
the three months ended September 30, 1996. As described in more detail below,
this increase was a result of increased interest attributable to the Company's
continued sale of subordinated debt and increases in payroll, sales and
marketing and general and administrative expenses related to increase loan and
lease originations.
Interest Expense. Interest expense increased $818,000, or 81.8%, to
$1.9 million for the three months ended September 30, 1997 from $1.0 million for
the three months ended September 30, 1996. The increase was primarily
attributable to an increase in the amount of the Company's subordinated debt
outstanding during that period, the proceeds of which were used to fund the
Company's loan and lease growth. Average subordinated debt outstanding was $62.7
million during the three months ended September 30, 1997 compared to $35.8
million during the three months ended September 30, 1996. Average interest rates
paid on the subordinated debt increased to 9.29% from 8.99%. As a result of the
higher rates offered during the first quarter of fiscal 1998 in order
42
<PAGE>
to attract additional funds. Interest expense on lines of credit utilized by the
Company for the three months ended September 30, 1997 was $393,000, compared to
$139,000 for the three months ended September 30, 1996. The increase was due to
the higher utilization of warehouse lines of credit to fund Home Equity Loans
and Business Purpose Loans.
Provision 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 managed 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 Company had an allowance for credit losses of $2.2
million at September 30, 1997 as compared to $1.8 million at June 30, 1997. The
provision for credit losses was $31,000 for the three months ended September 30,
1997 as compared to no provision for the three months ended September 30, 1996.
The ratio of the allowance for credit losses to net loan and lease receivables
serviced was 1.03% at September 30, 1997 and 1.00% at June 30, 1997. Total
delinquencies were $6.1 million at September 30, 1997 as compared to $3.8
million at June 30, 1997. The Company's delinquency rate as a percentage of the
total portfolio serviced was 2.86% at September 30, 1997 as compared to 2.15% at
June 30, 1997.
Payroll and Related Costs. Payroll and related costs increased
$652,000, or 327.6%, to $851,000 for the three months ended September 30, 1997
from $199,000 for the three months ended September 30, 1996. The increase was
due to an increase in the number of administrative employees as a result of the
Company's growth in loan and lease originations as well as an increase in loans
and leases serviced. Management anticipates that these expenses will continue to
increase in the future as the Company's geographic expansion continues.
Sales and Marketing Expenses. Sales and marketing expenses increased
$900,000, or 64.3%, to $2.3 million for the three months ended September 30,
1997 from $1.4 million for the three months ended September 30, 1996. The
increases were attributable to increases in advertising costs as a result of
increased newspaper, direct mail and radio advertising related to the Company's
sales of subordinated debt and loan products. Subject to market conditions, the
Company plans to continue to expand its service area throughout the eastern
United States. As a result, it is anticipated that sales and marketing expenses
will continue to increase in the future.
General and Administrative Expenses. General and administrative
expenses increased $503,000, or 56.1%, to $1.4 million for the three months
ended September 30, 1997 from $897,000 for the three months ended September 30,
1996. This increase was primarily attributable to increases in rent, telephone,
office expense, professional fees and other expenses incurred as a result of
previously discussed increases in loan and lease originations and loan servicing
experienced during the three months ended September 30, 1997.
43
<PAGE>
Income Taxes. Income taxes increased $1.0 million to $1.6 million for
the three months ended September 30, 1997 from $622,000 for the three months
ended September 30, 1996. The increases were due to increases in income before
taxes.
Net Income. Net income increased $2.0 million to $3.2 million for the
three months ended September 30, 1997 from $1.2 million for the three months
ended September 30, 1996. Earnings per share increased to $0.87 on weighted
average common shares outstanding of 3,642,972 for the three months ended
September 30, 1997 compared to $.47 per share on weighted average common shares
outstanding of 2,448,031 for the three months ended September 30, 1996.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Total Revenues. Total revenues increased $14.4 million, or 119.0%, to
$26.5 million for the year ended June 30, 1997 from $12.1 million for the year
ended June 30, 1996. The increase in total revenues was primarily the result of
gains on sales of loans through securitizations.
Gain on Sale of Loans. Gain on sale of loans increased $11.3 million,
or 129.9%, to $20.0 million for the year ended June 30, 1997 from $8.7 million
for the year ended June 30, 1996. The increase was primarily the result of sales
of $38.1 million of Business Purpose Loans and $76.9 million of Home Equity
Loans through securitizations in September 1996 and March 1997 compared to the
sale of $27.5 million of Business Purpose Loans and $9.0 million of Home Equity
Loan through securitizations in October 1995 and May 1996. The Company
recognized net gains of $20.0 million (representing the fair value of the
interest only and residual strips of $21.5 million less $2.7 million of costs
associated with these transactions) on the Company's participation in the $115.0
million of loans sold through securitizations during the year ended June 30,
1997. The Company recognized $1.2 million of gain on sale of loans through
mortgage servicing rights received in connection with prior securitizations.
Given the unseasoned nature of the loans securitized, the Company lacked
sufficient experience to estimate and record the value of late and other
ancillary fees.
Interest and Fee Income. Interest and fee income consists of interest
income, fee income and amortization of origination costs. Interest and fee
income increased $2.5 million, or 73.5%, to $5.9 million for the year ended June
30, 1997 from $3.4 million for the year ended June 30, 1996 due to an increase
in interest income as a result of an increased amount of loans retained in
portfolio prior to securitization.
Interest income consists primarily of interest income the Company earns
on the loans and leases held in its portfolio. Interest income increased $2.5
million, or 113.6%, to $4.7 million for the year ended June 30, 1997 as compared
to $2.2 million for the year ended June 30, 1996. The increase was attributable
to increased originations of Business Purpose Loans, Home Equity Loans and
Equipment Leases described below, as well as management's decision to retain
such loans and leases in portfolio in contemplation of future securitizations.
During the year ended June 30, 1997, the Company originated
approximately $91.8 million of Home Equity Loans, $38.7 million of Business
Purpose Loans and $8.0 million of Equipment Leases. During the year ended June
30, 1996, the Company originated $36.5 million of Home
44
<PAGE>
Equity Loans, $28.9 million of Business Purpose Loans and $6.0 million of
Equipment Leases. Approximately $15.3 million of Home Equity Loans originated
during fiscal 1996 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 ultimate
sale 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 premium and points earned when loans are closed or
funded and immediately sold to unrelated third party purchasers as well as other
ancillary fees collected in connection with loan and lease originations. Fee
income increased $100,000, or 6.7%, from $1.5 million for the year ended June
30, 1996 to $1.6 million for the year ended June 30, 1997. The increase in fee
income was due to an increase in ancillary fees collected in connection with
increased originations partially offset by a reduction in fees earned upon the
sale of loans to third parties.
The third component of interest and fee income is amortization of
origination costs. During the year ended June 30, 1997, amortization of
origination costs was $418,000 compared to $305,000 recognized during the year
ended June 30, 1996. The increase was attributable to an increase in the
amortization of lease origination costs resulting from an increase in the
Equipment Lease portfolio.
Total Expenses. Total expenses increased $8.5 million, or 94.4%, to
$17.5 million for the year ended June 30, 1997 from $9.0 million for the year
ended June 30, 1996. This increase was related to the increase in loan and lease
originations for the year ended June 30, 1997 as well as the costs associated
with a larger portfolio of loans and leases serviced and the opening of several
new office locations.
Interest Expense. Interest expense increased $2.5 million, or 92.6%, to
$5.2 million for the year ended June 30, 1997 from $2.7 million for the year
ended June 30, 1996. The increase was primarily attributable to an increase in
the amount of the Company's subordinated debt outstanding. Average subordinated
debt outstanding was $44.4 million during the year ended June 30, 1997 compared
to $25.0 million during the year ended June 30, 1996. Average interest rates
paid on the subordinated debt increased to 9.29% for the year ended June 30,
1997 from 9.02% for the year ended June 30, 1996 due to an increase in the
volume of debt with maturities of greater than one year which bear higher
interest rates than shorter term debt. Interest expense on lines of credit
utilized by the Company for the year ended June 30, 1997 was $461,000 compared
to $120,000 for the year ended June 30, 1996. The increase was due to the
Company's utilization of its warehouse lines of credit to fund Home Equity Loans
and Business Purpose Loans.
Provision for Credit Losses. The provision for credit losses increased
by $473,000, or 71.4%, to $1.2 million (includes a $100,000 provision related to
the Company's loan and lease portfolio and a $1.1 million provision related to
the Company's securitizations) for the year ended June 30, 1997 from $681,000
(includes a $397,000 provision related to the Company's loan and lease portfolio
and a $284,000 provision related to the Company's securitizations) for the year
ended June 30, 1996. See Note 3 of the Notes to Consolidated Financial
Statements. The ratio of the allowance for credit losses to total net loan and
lease receivables serviced was 1.00% at June 30,
45
<PAGE>
1997 and 1.18% at June 30, 1996. From the inception of the Company's business in
1988 through June 30, 1997, the Company has experienced a total of approximately
$351,000 in net loan and lease losses. The Company's delinquency rate as a
percentage of the total portfolio serviced was 2.15% at June 30, 1997 and 2.30%
at June 30, 1996.
Payroll and Related Costs. Payroll and related costs increased
$400,000, or 33.3%, to $1.6 million for the year ended June 30, 1997 from $1.2
for the year ended June 30, 1996. The increase was due to an increase in the
number of employees as a result of the Company's growth in loan and lease
originations and an increase in loans and leases serviced. Management
anticipates that these expenses 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
$4.3 million, or 159.3%, to $7.0 million for the year ended June 30, 1997 from
$2.7 million for the year ended June 30, 1996. The Company increased its
advertising costs for newspaper, direct mail and radio campaigns related to the
its business purpose and home equity loan products. In addition, the Company
initiated a television advertising program for the sale of its home loan equity
products. Subject to market conditions, the Company plans to continue to expand
its service area throughout the eastern United States. As a result, it is
anticipated that sales and marketing expenses will continue to increase in the
future.
General and Administrative Expenses. General and administrative
expenses increased $1.6 million, or 80.0%, to $3.6 million for the year ended
June 30, 1997 from $2.0 million for the year ended June 30, 1996. This 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 servicing experienced
during the year ended June 30, 1997.
Income Taxes. Income taxes increased $2.3 million, or 287.5%, to $3.1
million for the year ended June 30, 1997 from $802,000 for the year ended June
30, 1996 due to an increase in income before taxes and an increase in the
effective tax rate from 25.7% for the year ended June 30, 1996 to 34.0% for the
year ended June 30, 1997.
Net Income. Net income increased $3.6 million, or 156.5%, to $5.9
million for the year ended June 30, 1997 as compared to $2.3 million for the
year ended June 30, 1996. Earnings per share increased to $2.05 on weighted
average common shares outstanding of 2,903,754 million for the year ending June
30, 1997 compared to $1.01 on weighted average common shares outstanding of
2,296,913 for the year ended June 30, 1996. The increase in weighted average
common shares outstanding resulted primarily from the public offering of
1,150,000 shares of the Company's Common Stock.
46
<PAGE>
Asset Quality
The following table provides data concerning delinquency experience,
real estate owned ("REO") and loss
experience for the Company's loan and lease portfolio serviced. There were no
home equity or other loans included in REO during the periods presented.
<TABLE>
<CAPTION>
September 30, June 30,
------------------ ------------------------------------------------------
1997 1997 1996 1995
----------------- ----------------- ---------------- ----------------
Delinquency by Type Amount % Amount % Amount % Amount %
- ------------------------------------ ------- ------ -------- ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Business Purpose Loans
Total portfolio serviced............ $ 76,387 $ 68,979 $37,950 $14,678
======== ======== ======= =======
Period of delinquency
31-60 days...................... $ 1,292 1.69% $ 1,879 2.72% $ 86 .23% $ 141 .96%
61-90 days...................... 450 .59 462 .67 118 .31 75 .51
Over 90 days.................... 1,920 2.51 718 1.04 1,033 2.72 310 2.11
-------- ----- -------- ----- ------- ----- ------- -----
Total delinquencies............. $ 3,662 4.79% $ 3,059 4.43% $ 1,237 3.26% $ 526 3.59%
======== ===== ======== ===== ======= ===== ======= =====
REO................................. $ 954 1.24 $ 605 $ 608 $ 762
======== ===== ======== ======= =======
Home Equity Loans
Total portfolio serviced............ $125,603 $ 98,179 $17,224 $ --
======== ======== ======= =======
Period of delinquency
31-60 days...................... $ 1,206 .96% $ 262 .27% -- -- -- --
61-90 days...................... 435 .35 341 .35 -- -- -- --
Over 90 days.................... 603 .48 83 .08 -- -- -- --
-------- ----- -------- ----- ------- ----- ------- -----
Total delinquencies............. $ 2,244 1.79% $ 686 .70% -- -- -- --
======== ===== ======== ===== ======= ===== ======= =====
REO................................. $ 144 .11
======== =====
Equipment Leases
Total portfolio serviced............ $ 12,436 $ 9,461 $ 4,607 $ 2,031
======== ======== ======= =======
Period of delinquency
31-60 days...................... $ 172 1.38% $ 29 .31% $ 23 .50% $ 49 2.40%
61-90 days...................... 4 .03 -- -- 14 .30 40 1.97
Over 90 days.................... 22 .18 4 .04 41 .89 -- --
-------- ----- -------- ----- ------- ----- ------- -----
Total delinquencies............. $ 198 1.59% $ 33 .35% $ 78 1.69% $ 89 4.37%
======== ===== ======== ===== ======= ===== ======= =====
Other Loans(1)
Total portfolio serviced............ $ 32 $ 32 $ 110 $ 1,065
======== ======== ======= =======
Period of delinquency
31-60 days...................... $ -- -- $ -- -- $ -- --% $ 16 1.51%
61-90 days...................... -- -- -- -- 18 16.36 30 2.82
Over 90 days.................... 32 100.00% 32 100.00% 50 45.45 21 1.97
-------- ------ -------- ----- ------- ----- ------- -----
Total delinquencies............. $ 32 100.00% $ 32 100.00% $ 68 61.81% $ 67 6.30%
======== ====== ======== ===== ======= ===== ======= =====
Company Combined
- ------------------------------------
Total portfolio serviced............ $214,458 $176,651 $59,891 $17,774
======== ======== ======= =======
Period of delinquency...............
31-60 days...................... $ 2,670 1.24% $ 2,170 1.23% $ 109 .18% $ 206 1.16%
61-90 days...................... 889 .42 803 .45 150 .25 145 .82
Over 90 days.................... 2,577 1.20 837 .47 1,124 1.87 331 1.86
-------- ----- -------- ----- ------- ----- ------- -----
Total delinquencies............. $ 6,136 2.86% $ 3,810 2.15% $ 1,383 2.30% $ 682 3.84%
======== ===== ======== ===== ======= ===== ======= =====
REO................................. $ 1,098 .51% $ 605 $ 608 $ 762
======== ===== ======== ======= =======
Losses experienced during
the period...................... $ 100 .05% $ 98 .06% $ 129 .22% $ 88 .49%
======== ==== ======== ==== ======= ==== ======= ===
Allowance for credit losses
at end of period................ $ 2,232 1.04% $ 1,764 1.00% $ 707 1.18% $ 155 .87%
======== ==== ======== ==== ======= ==== ======= ===
</TABLE>
(1) Includes secured and unsecured consumer loans originated by HCDC.
47
<PAGE>
The following table sets forth the Company's loss experience for the periods
indicated.
<TABLE>
<CAPTION>
For the Three
Months Ended For the Year
September 30, Ended June 30,
-------------- ----------------------------------
<S> <C> <C> <C> <C>
1997 1997 1996 1995
-------------- ----------------------------------
(In Thousands)
Business Purpose Loans........... $ 49 $ 34 $ 92 $ 86
Home Equity Loans................ -- -- -- --
Other Loans...................... -- -- 37 2
Leases........................... 51 64 -- --
---- ----- ----- ----
Total losses............ $100 $ 98 $ 129 $ 88
==== ===== ===== ====
</TABLE>
The Company's total delinquencies as a percentage of the total loan and
lease portfolio serviced decreased from June 30, 1995 to June 30, 1996 while the
dollar amount of loans and leases delinquent increased, which increase is
reflective of the increase in the Company's total loan and lease portfolio
serviced. Similarly, the increase in the dollar amount of the Company's loans
and leases delinquent at June 30, 1997 as compared to June 30, 1996 reflects the
continued growth of the Company's managed loan and lease portfolio. Total
delinquencies, as a percentage of the total loan and lease portfolio serviced
were 2.15% at June 30, 1997 as compared to 2.30% at June 30, 1996. Total
delinquencies increased from $3.8 million at June 30, 1997 to $6.1 million at
September 30, 1997 due to the continued seasoning of the Company's Home Equity
Loan portfolio. The Company's delinquency rate as a percentage of the total loan
and lease portfolio serviced was 2.86% at September 30, 1997 as compared to
2.15% at June 30, 1997.
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 on 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, 1997, the Company had sold short $20.0
million of U.S. Treasury securities. The deferred loss related to these
activities was approximately $200,000 at June 30, 1997. During the year ended
June 30, 1997, the Company incurred a loss of approximately $31,000 on short
sales of securities. During the three months ended September 30, 1997, the
Company incurred a loss of approximately $1.3 million on short sales of
securities. The Company also prefunds loan originations in connection with its
loan securitizations
48
<PAGE>
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.
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. 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. 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 due to the costs associated with the Company's hedging
activities.
In the future, the Company intends to continue to engage in short sales
of Treasury securities as part of its interest rate risk management strategy.
The Company also experiences interest rate risk to the extent that as
of September 30, 1997 approximately $30.9 million of its liabilities were
comprised of subordinated debt 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.
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 debt, (iii) institutional debt financing, and
(iv) retained earnings. In addition, during the year ended June 30, 1997, the
Company utilized the capital market to sell additional shares of its Common
Stock. 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.
49
<PAGE>
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 1996, the Company completed two loan
securitizations involving $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 fiscal June 30, 1997, the Company completed
two securitizations involving $115.0 million of Business Purpose Loans and Home
Equity Loans. These securitizations resulted in net proceeds of approximately
$111.6 million. During the three months ended September 30, 1997, the Company
securitized $12.1 million of Business Purpose Loans and $47.6 million of Home
Equity Loans. This securitization resulted in net proceeds of approximately
$58.5 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 three months ended
September 30, 1997 and the fiscal years 1997 and 1996, the Company had net gain
on sale of loans through securitizations of $8.5 million, $20.0 million and $8.6
million, respectively. The Company uses a portion of the proceeds of a
securitization, net of fees and costs of the securitization, are used to repay
its 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 interest only and residual
strips and capitalizes mortgage servicing rights, each of which creates non-cash
taxable income. Consequently, the income tax payable and the expenses related to
the securitizations negatively impact the Company's cash flow. As a result, the
Company may operate on a negative operating cash flow basis which could
negatively impact the Company's results of operations during such periods. See
"Risk Factors -- Dependence Upon Securitizations and Fluctuations in Operating
Results."
Additionally, pursuant to the terms of the securitizations, the Company
will act as the servicer of the loans and in that capacity will be obligated to
advance funds in certain circumstances in respect of each monthly loan interest
payment that accrued during the collection period for the loans but was not
received, unless the Company determines that such advances will not be
recoverable from subsequent collections in respect of the related loan. The
Company's obligation to advance funds in its capacity as servicer of the loans
may create greater demands on the Company's cash flow than either selling loans
or maintaining a portfolio of loans.
Subject to economic, market and interest rate conditions, the Company
intends to continue to implement additional securitizations of its loan
portfolios and may in the future securitize its Equipment Lease portfolio.
Adverse conditions in the securitization market could impair the Company's
ability to sell loans through securitizations on a favorable or timely basis.
Since the sale of loans through securitizations is an important source of
revenues, any such delay or impairment could have a material adverse impact on
the Company's results of operations. See "Risk Factors -- Changes In Interest
Rates May Adversely Affect Profitability."
50
<PAGE>
Despite its use of a portion of the proceeds of the securitizations to
fund loan originations, the Company continues to rely on borrowings such as its
subordinated debt and warehouse credit facilities or lines of credit to fund its
operations. At September 30, 1997, the Company had a total of $70.1 million of
subordinated debt outstanding, including $17.3 million of Notes sold pursuant to
this Offering. The Company also had available credit facilities and lines of
credit totaling $150.0 million, none of which was drawn upon on such date.
In February 1997, the Company completed an underwritten public offering
of 1,150,000 shares of its Common Stock. The stock was sold at a price of $20.00
per share. The offering of the Common Stock resulted in net proceeds of
approximately $20.7 million.
Between 1990 and 1993, American Business Finance Corporation ("ABFC"),
an indirect subsidiary of ABFS, sold approximately $1.7 million in principal
amount of subordinated debt at rates ranging from 8.0% to 14.0%. In December
1993, the Company ceased selling subordinated debt through ABFC. As of September
30, 1997, ABFC had approximately $908,000 of the subordinated debt outstanding.
This debt is currently maturing and will be fully extinguished by October 1998.
In addition, between July 1, 1997 and September 30, 1997, ABFS sold
$16.7 million in principal amount of subordinated debt (including redemptions
and repurchases by investors), pursuant to registered public offerings with
maturities ranging between one day and ten years. As of September 30, 1997, ABFS
had approximately $69.2 million of subordinated debt outstanding (excluding the
debt of ABFC). The proceeds of such sales of debt have been used to fund general
operating and lending activities. The Company intends to meet its obligations to
repay such debt as it matures with income generated through its lending
activities and funds generated from repayment of outstanding loans. The
repayment of such obligations should not adversely affect the Company's
operations.
The Company's subsidiaries have an aggregate $50.0 million Interim
Warehouse and Security Agreement with Prudential Securities Realty Funding
Corporation. In July 1997, the Company and certain of its subsidiaries obtained
a $100.0 million warehouse credit facility from a syndicate of banks led by
Chase Manhattan Bank/Chase Bank of Texas, NA ("CBT"). Under this warehouse
facility, the Company may obtain advances, subject to certain conditions,
including sublimits, based upon the type of collateral securing the advance. The
Company's obligations under the CBT warehouse facility are collateralized by
certain pledged loans and leases and other collateral related thereto. The CBT
warehouse facility also requires the Company to meet certain financial ratios
and contains restrictive covenants, including covenants limiting loans to and
transactions with affiliates, the incurrence of additional debt, and the types
of investments that can be made by the Company and its subsidiaries. The CBT
warehouse facility has a term of two years. At September 30, 1997, neither of
these credit facilities was being utilized.
The Company is currently discussing the possibility of obtaining
additional lines of credit with other lenders and providers of credit.
As of September 30, 1997, the Company had $39.2 million of debt
scheduled to mature during the twelve months ending September 30, 1998 which was
comprised of maturing
51
<PAGE>
subordinated debt. The Company currently expects to refinance the maturing debt
through extensions of maturing debt or new debt financing and, if necessary, may
retire the debt through cash flow from operations and loan sales or
securitizations. Despite the Company's current use of securitizations to fund
loan growth, the Company is also dependent upon other borrowings to fund a
portion of its operations. As a result, the Company intends to continue to
utilize debt financing to fund its operations in the future. See "Risk Factors -
Dependence Upon Debt Financing."
From time to time, the Company considers potential acquisitions of
related businesses or assets which could have a material impact upon the
Company's results of operations and liquidity position. Effective October 1,
1997, the Company acquired NJMIC, a Roseland, New Jersey based mortgage and
leasing company. The purchase price for the NJMIC stock consisted of an initial
payment of $11.0 million in cash and 20,240 shares of the Company's Common Stock
and included a contingent payment of up to an additional $9.0 million to be paid
in the future if NJMIC achieves certain performance targets. The acquisition of
NJMIC was accounted for using the purchase method of accounting and accordingly,
the purchase price was allocated to assets acquired and liabilities assumed
based on the fair values at the date of acquisition. Since the fair value of
NJMIC's assets approximated the liabilities assumed, the majority of the
purchase price was recorded as goodwill. On October 1, 1997, NJMIC had a $3.0
million note outstanding issued to N.M. Rothschild & Sons. This note matures on
July 1, 2002. See "Business." See Note 15 of the Notes to Consolidated Financial
Statements for additional information regarding the Company's acquisition of
NJMIC.
The Company leases certain of its facilities under a five-year
operating lease expiring in January 2003 at a minimum annual rental of
approximately $700,000. The lease contains a renewal option for an additional
period at increased annual rental. See "Business - Properties."
Many existing computer programs, including those utilized by the
Company, use only two digits to identify a year in the date field. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000 (the "Year 2000
Issue"). The Company has evaluated the costs associated with addressing the Year
2000 Issue and has determined that such cost is not reasonably likely to affect
the Company's future financial results, nor is it likely to cause the Company's
reported financial information not to be necessarily indicative of future
operating results or future financial condition.
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 February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("SFAS No. 128"). SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 simplifies the standards
for computing earnings per share previously found in APB Opinion No. 15,
52
<PAGE>
Earnings per Share, and makes them comparable to international EPS standards.
SFAS No. 128 replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS No. 128 will be effective for financial statements for both interim and
annual periods ending after December 15, 1997. Based upon the Company's analysis
of SFAS No. 128, the Company does not believe that the implementation of SFAS
No. 128 will have a material effect on the computation of its earnings per
share. See Note 14 of the Notes to Consolidated Financial Statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129"). SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure. SFAS
No. 129 will be effective for financial statements for periods ending after
December 15, 1997. Based upon the Company's current capital structure, the
Company does not believe that the implementation of SFAS No. 129 will have a
material effect on the Company's disclosure of information regarding its capital
structure.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive
Income". ("SFAS No. 130") establishes standards for the reporting and display of
comprehensive income in a full set of general purpose financial statements. The
provisions of SFAS No. 130 are effective for fiscal years beginning after
December 15, 1997.
In June 1997, FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131") requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to stockholders. SFAS No. 131
also requires that public business enterprises report certain information about
their products and services, the geographical areas in which they operate and
their major customers. The provisions of SFAS No. 131 are effective for fiscal
years beginning after December 15, 1997.
Due to the recent issuance of these pronouncements, the Company has not
completed its analysis of the impact of SFAS No. 130 and SFAS No. 131.
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.
53
<PAGE>
BUSINESS
General
ABFS is a financial services company operating primarily in the eastern
region of the United States. The Company, through its principal direct and
indirect subsidiaries, originates, sells and services Business Purpose Loans,
Home Equity Loans and First Mortgage 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 also markets First Mortgage Loans to borrowers with favorable credit
histories.
The Company was incorporated in Delaware in 1985 and 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, Connecticut,
North Carolina and Ohio. 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, 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. 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 15.97%
and 15.91% for the three months ended September 30, 1997 and the year ended June
30, 1997, 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
54
<PAGE>
the Company's last two securitizations had a weighted average loan-to-value
ratio (based solely upon the real estate collateral securing the loans) of 60.0%
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 $10.4 million and $38.7 million of Business Purpose Loans for
the three months ended September 30, 1997 and the year ended June 30, 1997,
respectively. See "--Lending and Leasing Activities --Business Purpose Lending."
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 in
Pennsylvania, New Jersey, New York, Delaware, Maryland, Virginia, Georgia, North
Carolina, South Carolina, Florida, Connecticut, Illinois, Ohio, Indiana and
Tennessee. The Company originated $43.8 million and $91.8 million of Home Equity
Loans for the three months ended September 30, 1997 and the year ended June 30,
1997, respectively. The weighted average interest rate on Home Equity Loans
originated by the Company was 12.12% and 11.69% for the three months ended
September 30, 1997 and the year ended June 30, 1997, 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 eight 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 1,000 branches located in
Pennsylvania, Delaware, New Jersey and Maryland. The Company is also negotiating
with other financial institutions regarding their participation in the program.
The Company intends to expand its Bank Alliance Program with financial
institutions across the United States. See "--Lending and Leasing Activities --
Home Equity Lending."
ABFS began offering First Mortgage Loans in October 1997 in connection
with its acquisition of NJMIC. The Company originates First Mortgage Loans for
sale in the secondary market with servicing released. The Company's first
mortgage lending market area includes 15 states. See "-- Lending and Leasing
Activities -- First Mortgage Lending."
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 Company originated $4.5 million and $8.0 million of
Equipment Leases, respectively, during the three months ended September 30, 1997
and the year ended June 30, 1997. The weighted average interest rate received on
the Equipment Leases originated by the Company was 13.47% and 15.48% for the
three months ended September 30, 1997
55
<PAGE>
and the year ended June 30, 1997, respectively. The Company currently holds all
Equipment Leases originated in its lease portfolio to generate interest income.
The Company intends to attempt to securitize its Equipment Lease portfolio in
the future subject to market and economic conditions. See "--Lending and Leasing
Activities."
From the inception of the Company's business in 1988 through September
30, 1997, the Company has experienced total net loan and lease losses of
approximately $450,000. The Company's losses on its total loan and lease
portfolio serviced totaled $100,000, $98,000 and $129,000 respectively, for the
three months ended September 30, 1997 and the years ended June 30, 1997 and
1996. The Company's loans and leases delinquent over 30 days (excluding real
estate owned) represented 2.86% and 2.15%of the total loan and lease portfolio
serviced at September 30, 1997 and June 30, 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset Quality."
The ongoing securitization of loans is a central part of the Company's
current business strategy. Through September 30, 1997, the Company had
securitized an aggregate of $87.4 million of Business Purpose Loans and $133.5
million of Home Equity Loans. The Company retains the servicing rights on its
securitized loans. See "--Securitizations."
In addition to securitizations, the Company funds its operations with
subordinated debt that the Company markets directly to individuals from the
Company's principal operating office located in Pennsylvania and branch offices
located in Florida and Arizona. At September 30, 1997, the Company had $70.1
million in subordinated debt outstanding with a weighted average coupon of 9.23%
and a weighted average maturity of 24.2 months. Of this amount, $17.3 million
represents Notes sold pursuant to this Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company intends to continue to utilize funds generated from the
securitization of loans and the sale of subordinated debt to increase its loan
and lease originations and to expand into new geographic markets, with an
initial focus on the continued expansion in the southeastern region of the
United States and initial entry into the midwestern region of the United States.
Subsidiaries
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 American Business Credit, Inc.
("ABC") and its primary subsidiaries, American Business Finance Corporation
("ABFC"), HomeAmerican Credit, Inc. (d/b/a Upland Mortgage and referred to
herein as "HAC" or "Upland"), Processing Service Center, Inc. ("PSC"),
HomeAmerican Consumer Discount Company ("HCDC"), American Business Leasing
("ABL"), ABC Holdings Corporation ("Holdings"); and NJMIC and its subsidiary,
Federal Leasing Corp. (The Company and its direct and indirect subsidiaries are
collectively referred to herein as the "Company").
ABC, a Pennsylvania corporation incorporated in 1988 and acquired by
the Company in 1993, originates, services and sells Business Purpose Loans. HAC,
a Pennsylvania corporation
56
<PAGE>
incorporated in 1991, originates and sells Home Equity Loans. HAC acquired
Upland Mortgage Corp. 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 June 30,
1997, HCDC maintained a portfolio of consumer loans of approximately $32,000.
The Company does not intend to emphasize this area of its business in the
future.
NJMIC, a New Jersey corporation organized in 1938 and acquired by the
Company in October 1997, is currently engaged in the origination and sale of
Home Equity Loans, as well as First Mortgage Loans. Historically, NJMIC sold
loans it originated in the secondary market with servicing released. The Company
intends to continue to sell First Mortgage Loans originated by NJMIC in the
secondary market with servicing released. The Company intends to securitize Home
Equity Loans originated by NJMIC pursuant to the Company's current
securitization program.
NJMIC's wholly-owned subsidiary, Federal Leasing Corp. ("Federal"), is
a Delaware corporation which was organized in 1974. ABFS intends to continue to
securitize leases originated by Federal in the future subject to economic and
market conditions. Federal generally sells such leases through securitizations
and maintains the servicing on such leases.
The Company's indirect subsidiaries, ABFS 1995-1, Inc., ABFS 1995-2,
Inc., ABFS 1996-1, Inc., ABFS 1996-2, Inc., ABFS 1997-1, Inc. and ABFS 1997-2,
Inc. are Delaware investment holding companies. Such companies were incorporated
to facilitate the Company's securitizations. The stock of such subsidiaries is
held by ABC and Upland Mortgage. In connection with the acquisition of NJMIC and
Federal, the Company acquired FLC Financial Corp. and FLC II Financial Corp.,
the Delaware investment holding companies incorporated to facilitate the
securitization of Federal's leases. The stock of such companies is held by
Federal. None of these corporations engage in any business activity other than
holding the subordinated certificate, if any, and the interest only and residual
strips created in connection with the Company's securitizations. See
"--Securitizations." ABFC was incorporated in 1990 in order to issue
subordinated debt in 1990 through 1993. Since December 1993, ABFC has been
inactive. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
57
<PAGE>
The following chart sets forth organizational structure of ABFS.(l)
<TABLE>
<CAPTION>
ABFS
(Holding Company)
(Issues subordinated debt)
|
|
AMERICAN BUSINESS CREDIT, INC.
(Originates and services Business Purpose Loans)
|
|
----------------------------------------------------------------------------------------------------
| | | | | | |
| | | | | | |
<S> <C> <C> <C> <C> <C> <C>
HOME
NEW JERSEY AMERICAN HOME
MORTGAGE CREDIT, INC. PROCESSING AMERICAN AMERICAN AMERICAN
AND d b a SERVICE BUSINESS CONSUMER ABC BUSINESS
INVESTMENT UPLAND CENTER, LEASING, DISCOUNT HOLDINGS FINANCE
CORP. MORTGAGE(2) INC. INC. COMPANY CORP. CORP.
(Originates, (Originates, (Process (Originates (Originates (Holds (Issued
and services purchases and Bank Alliance and services and sells foreclosed subordi-
First Mortgage and services Home Program Home Equipment small real nated
Home Equity Loans) Equity Loans) Equity Loans) Leases) consumer estate) debt
installment from 1990
loans) to 1993)
|
|
|
|
FEDERAL
LEASING
CORP.
(Originates
Equipment
Leases)
</TABLE>
(1) In addition to the corporations pictured above, the Company and its
subsidiaries have organized a special purpose corporation for each of its
securitizations. Such corporations are indirect subsidiaries of ABFS.
(2) Loans purchased by Upland represent loans acquired through the Bank Alliance
Program.
58
<PAGE>
Lending and Leasing Activities
General. The following table sets forth certain information concerning
the loan and lease origination, purchase and sale activities of the Company for
the three months ended September 30, 1997 and the years ending June 30, 1997,
1996 and 1995. The Company did not originate First Mortgage Loans prior to
October 1997.
<TABLE>
<CAPTION>
Three Months
Ended
September 30, Year Ended June 30,
------------- --------------------------------------------
1997 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loans/Leases Originated/Purchased
(Net of Refinances)
Business Purpose Loans ............................... $10,667 $38,721 $28,872 $18,170
Home Equity Loans .................................... $43,771 $91,819 $36,479 $16,963
Equipment Leases ..................................... $ 4,512 $ 8,004 $ 5,967 $ 2,220
Other Loans .......................................... $ -- $ 39 $ 240 $ 1,108
Number of Loans/Leases Originated/Purchased
Business Purpose Loans ............................... 131 498 371 257
Home Equity Loans .................................... 892 1,791 772 365
Equipment Leases ..................................... 467 743 530 193
Other Loans .......................................... -- 8 52 237
Average Loan/Lease Size
Business Purpose Loans ............................... $ 81 $ 78 $ 78 $ 71
Home Equity Loans .................................... $ 49 $ 51 $ 47 $ 46
Equipment Leases ..................................... $ 10 $ 11 $ 11 $ 12
Other Loans .......................................... $ -- $ 5 $ 5 $ 5
Weighted Average Interest Rate on Loans/Leases
Originated
Business Purpose Loans ............................... 15.97% 15.91% 15.83% 16.05%
Home Equity Loans .................................... 12.12% 11.69% 9.94% 12.68%
Equipment Leases ..................................... 13.47% 15.48% 17.22% 15.85%
Other Loans .......................................... % 20.83% 24.50% 24.51%
Weighted Average Term (in months)
Business Purpose Loans ............................... 173 184 169 173
Home Equity Loans .................................... 252 218 194 212
Equipment Leases ..................................... 43 40 42 40
Other Loans .......................................... -- 59 50 53
Loans/Leases Sold
Business Purpose Loans ............................... $12,087 $38,083 $28,252 $24,762
Home Equity Loans .................................... $54,144 $80,734 $24,325 $16,963
Equipment Leases ..................................... $ -- $ -- $ 2,259 $ --
Other Loans .......................................... $ -- $ 58 $ 1,108 $ --
Number of Loans/Leases Sold
Business Purpose Loans ............................... 123 497 378 384
Home Equity Loans .................................... 1,030 1,631 512 365
Equipment Leases ..................................... -- -- 193 --
Other Loans .......................................... -- 8 252 --
Weighted Average Rate on Loans/Leases
Originated ........................................... 12.92% 13.09% 12.97% 14.85%
</TABLE>
59
<PAGE>
The following table sets forth information regarding the average
loan-to-value ratios for loans originated by the Company during the periods
indicated. The Company did not originate any First Mortgage Loans during the
periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended September 30, Year Ended June 30,
------------------- -----------------------------
Loan Type 1997 1997 1996
- -------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Business Purpose Loans............................ 60.0% 60.0% 58.9%
Home Equity Loans................................. 71.8 72.0 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>
Three Months Ended
September 30, Year Ended June 30,
----------------- ---------------------------------------------------------
1997 % 1997 % 1996 % 1995 %
------- ----- -------- ----- ------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania.............. $18,439 31.28 $ 53,834 38.85% $33,324 46.57% $ 17,913 46.57%
New Jersey................ 15,539 26.35 40,725 29.39 20,986 29.33 16,300 42.38
New York.................. 2,617 4.44 8,343 6.02 7,417 10.36 1,534 3.99
Virginia.................. 2,688 4.56 5,469 3.95 104 0.15 111 0.29
Maryland.................. 2,127 3.61 5,010 3.61 4,408 6.16 1,191 3.10
North Carolina............ 1,871 3.17 4,245 3.06 78 0.11 6 0.02
Delaware.................. 1,615 2.74 3,117 2.25 2,724 3.81 481 1.25
Florida................... 2,392 4.06 3,670 2.65 674 0.94 149 0.39
Georgia................... 9,805 16.63 10,092 7.28 181 0.25 98 0.25
Connecticut............... 200 .34 2,005 1.45 87 0.12 5 0.01
Other..................... 1,662 2.82 2,073 1.49 1,575 2.20 673 1.75
------- ------ -------- ------ ------- ------ -------- ------
Total............ $58,950 100.00% $138,583 100.00% $71,558 100.00% $ 38,461 100.00%
======= ====== ======== ====== ======= ====== ======== ======
</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 loan size of approximately $81,000 for the loans originated during
the three months ended September 30, 1997. Generally, Business Purpose Loans are
made at fixed rates and for terms ranging from five
60
<PAGE>
to 15 years. Such loans generally have origination fees of 5.0% to 6.0% of the
aggregate loan amount. For the three months ended September 30, 1997, the
weighted average interest rate received on such loans was 15.97% and the average
loan-to-value ratio was 60.0% for the loans originated by the Company during
such period. During the three months ended September 30, 1997 and the year ended
June 30, 1997, the Company originated $10.4 million and $38.7 million of
Business Purpose Loans, respectively.
Generally, the Company computes interest due on its outstanding loans
using the simple interest method. Where permitted by applicable law, a
prepayment fee is imposed. Although prepayment fees imposed vary based upon
applicable state law, the prepayment fees 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 and NJMIC. Historically, Home Equity
Loans originated and funded by the Company were sold to one of several third
party lenders, at a premium and with servicing released. Currently, the Company
builds portfolios of Home Equity Loans for the purpose of securitizing such
loans.
Home Equity Loan applications are obtained from potential borrowers
over the phone and in person. The loan request is then processed and closed. The
loan processing staff generally provides its home equity borrowers with a loan
approval within 24 hours and closes its Home Equity Loans within approximately
seven to ten days of obtaining a loan approval.
Home Equity Loans generally range from $15,000 to $250,000 and had an
average loan size of approximately $49,000 for the loans originated during the
three months ended September 30, 1997. 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 approximately 2.0% of the aggregate loan
amount. For the three months ended September 30, 1997, the weighted average
interest rate received on such loans was 12.12% and the average loan-to-value
ratio was 71.8% for the loans originated by the Company during such period.
During the three months ended September 30, 1997 and the year ended June 30,
1997, the Company originated $43.8 million and $91.8 million of Home Equity
Loans, respectively. 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 fee may be
imposed and is 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 PSC, 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
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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 PSC 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 eight 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 1,000 branches
located in Pennsylvania, Delaware, New Jersey and Maryland. During the three
months ended September 30, 1997 and the year ended June 30, 1997, the Company
purchased $1.4 million and $7.6 million of loans, respectively, 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.
First Mortgage Loans. In October 1997 in connection with its
acquisition of NJMIC, the Company commenced originating First Mortgage Loans
secured by one-to four-unit residential properties located primarily in the
eastern region of the United States. Such properties are generally
owner-occupied single family residences but may also include second homes and
investment properties. Such loans are generally made to borrowers with favorable
credit histories and are underwritten pursuant to Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA")
standards to permit their sale in the secondary market. NJMIC typically sells
such loans to third parties with servicing released. NJMIC also originates
Federal Housing Authority ("FHA") and Veterans Administration ("VA") loans which
are subsequently sold to third parties with servicing released. The Company
intends that NJMIC will continue to originate such loans for sale in the
secondary market.
Leasing Activities. The Company through its indirect subsidiaries, ABL
and Federal, 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, commercial equipment, medical equipment and industrial 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.
Generally, the Company's Equipment Leases are of two types: (i) finance
leases which have a term of 12 to 60 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 $150,000, with an average lease size of approximately
$10,000 for the leases originated during the three months ended September 30,
1997. Leases in excess of $250,000 are generally sold on a non-recourse basis to
third parties. The Company's leases generally have maximum terms of five years.
The weighted average interest rates received on such leases for the three months
ended September
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30, 1997 was 13.47%. During the three months ended September 30, 1997 and the
year ended June 30, 1997, the Company originated $4.5 million and $8.0 million
of Equipment Leases, respectively. Generally, the interest rates and other terms
and conditions of the Company's Equipment. Leases are competitive with the
leasing terms of other leasing companies in its market area.
Currently, all leases originated by ABL and Federal are generally held
in the Company's lease portfolio. At September 30, 1997, principal value of the
Company's lease portfolio totaled $12.2 million. In addition, the Company
acquired $4.8 million of leases in connection with the acquisition of Federal in
October 1997. Such leases are serviced by ABL or Federal. Historically, Federal
sold all leases originated by it through securitizations with servicing
retained. The Company intends to attempt to securitize leases originated by ABL
or Federal in the future provided market and economic conditions warrant such
activity. ABL has developed relationships with third party purchasers of leases
and from time to time 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. See "Risk Factors --
Risks Associated with Leasing Activities."
Marketing Strategy
The Company concentrates its marketing efforts primarily 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 also markets First Mortgage Loans to
borrowers with favorable credit histories.
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 eastern 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
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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 also intends to utilize NJMIC's network of loan brokers.
The Company's marketing efforts for Home Equity Loans are concentrated
on the east coast of the United States. In connection with the acquisition of
NJMIC, the Company expanded its branch office network to include the states of
Illinois, Ohio and Delaware. The Company may open additional sales offices in
other states in the future. Loan processing, underwriting, servicing and
collection procedures are performed at the Company's main office. The Company
also utilizes the Bank Alliance Program as an additional source of loans. See
"-- Lending and Leasing Activities -- Home Equity Lending."
The Company markets First Mortgage Loans through its network of loan
brokers. The Company's marketing efforts for First Mortgage Loans are
concentrated in the mid-atlantic region of the United States.
The Company, through ABL and Federal, 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 and Federal primarily obtain their
equipment leasing customers through equipment manufacturers, brokers and vendors
with whom they have a relationship and through a direct sales force. 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 September 30,
1997, the Company's total servicing portfolio included 4,893 loans and leases
with an aggregate outstanding balance of $214.4 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. Notwithstanding the acquisition of
NJMIC and Federal, the Company's servicing and collections activities will
continue to be centralized at the Company's principal operating office located
in Bala Cynwyd, Pennsylvania.
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 immediately 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
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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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset Quality."
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. See
"--Securitizations."
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, Home
Equity Loans and First Mortgage Loans and the origination of Equipment Leases.
The Company does not anticipate any changes in its underwriting procedures and
practices in light of the acquisition of NJMIC and Federal. 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
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collateral. Initially, the borrower is required to fill out a detailed
application providing pertinent credit information. As part of the description
of the borrower's financial condition, the borrower is required to provide
information concerning assets, liabilities, income, credit, employment history
and other demographic and personal information. If the application demonstrates
the borrower's ability to repay the debt as well as sufficient income and
equity, loan processing personnel obtain and review an independent credit bureau
report on the credit history of the borrower and verification of the borrower's
income by obtaining and reviewing one or more of the borrower's pay stubs,
income tax returns, checking account statements, W-2 tax forms or verification
of business or employment forms. Once all applicable employment, credit and
property information is obtained, a determination is made as to whether
sufficient unencumbered equity in the property exists and whether the
prospective borrower has sufficient monthly income available to meet the
borrower's monthly obligations.
Generally, Business Purpose Loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the independent
appraised fair market value of the real estate collateral securing the loan) on
the properties collateralizing the loans of no greater than 75%. Business
Purpose Loans collateralized by commercial real estate must generally have an
overall loan-to-value ratio (based solely on the independent appraised fair
market value of the real estate collateral securing the loan) of no greater than
60% percent. In addition, in substantially all instances, the Company also
receives additional collateral in the form of, among other things, 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. The Business Purpose Loans originated by the Company had
an average loan-to-value ratio of 60% and 60% for the three months ended
September 30, 1997 and the year ended June 30, 1997, respectively.
The maximum acceptable loan-to-value ratio for Home Equity Loans held
in portfolio or securitized is generally 90%. The Home Equity Loans originated
by the Company had an average loan-to-value ratio of 71.8% and 72% for the three
months ended September 30, 1997 and the year ended June 30, 1997, 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.
The Company generally does not lend more than 95% of the appraised
value in the case of First Mortgage Loans, other than FHA and VA Loans. The
Company generally requires private mortgage insurance on all such First Mortgage
Loans with loan-to-value ratios in excess of 80% at the time of origination in
order to reduce its exposure. The Company obtains mortgage insurance
certificates from the FHA on all FHA loans and loan guaranty certificates from
the VA on all VA loans regardless of the loan-to-value ratio on the underlying
loan amount.
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, Home Equity Loans and First Mortgage Loans, the
appraisal is completed by a qualified appraiser on a FNMA form. See "Risk
Factors -- Decline in Collateral Value May Adversely Affect Loan-to-Value
Ratios."
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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 six pools of loans it securitized. The six pools of loans
securitized were comprised of $87.4 million of Business Purpose Loans and $133.5
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 interest only and
residual strips 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 interest only and residual
strips 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 interest only and residual strips) is subordinate to the
senior certificate, the Company retains a significant 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 interest only and residual strips will be entitled
to receive all of the remaining interest in the loans at the time of the
termination of the trust. See "Risk Factors -- Dependence Upon Securitizations
and Fluctuations in Operating Results."
The pooling and servicing agreements that govern the distribution of
cash flows from the loans included in the securitization trusts require the
over-collateralization 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 over-collateralization percentage may
be reduced over time according to the delinquency and loss experience of the
loans. The Company's interest
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in each over-collateralized amount is reflected in the Company's financial
statements as a portion of the interest only and residual strips. To the extent
that a loss is realized on the loans, losses will be paid first out of the
interest only and residual strips received and ultimately out of the
over-collateralization amount available to the interest only and residual
strips, 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 interest only and residual strips held by the Company. See "Risk
Factors -- Dependence Upon Securitizations and Fluctuations in Operating
Results."
The Company may be required either to repurchase or to replace loans
which do not conform to the representations and warranties made by the Company
in the pooling and servicing agreements entered into when the loans are pooled
and sold through securitizations. As of September 30, 1997, the Company had not
been required to repurchase or replace any such loans. 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
collection.
The Company generally retains the servicing rights with respect to all
loans securitized. 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 three months ended September 30,
1997 and the years ended June 30, 1997, 1996 and 1995 generated gain on sale of
loans of $8.5 million, $20.0 million, $8.7 million and $1.3 million,
respectively. Such gains contributed to 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" and "Risk Factors - Dependence
upon Securitizations and Fluctuations in Operating Results."
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 intends to consider
the securitization of Equipment Leases in the future subject to economic and
market conditions. The Company believes that a securitization program provides a
number of benefits by allowing the Company to diversify its funding base,
provide liquidity and lower its cost of funds.
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Competition
The Company competes for Business Purpose Loans against many other
finance companies and financial institutions. Although many other entities
originate Business Purpose Loans, the Company has focused its lending efforts on
its niche market of businesses which may qualify for loans from traditional
lending sources but who the Company believes are attracted to the Company's
products as a result of the Company's marketing efforts and responsive customer
service and rapid processing and closing periods.
The Company has significant competition for Home Equity Loans. Through
Upland and NJMIC, the Company competes with banks, thrift institutions, mortgage
bankers 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 and Federal, the Company competes with banks, leasing and finance companies
with greater resources, capitalization and name recognition throughout its
market area. It is the intention of the Company to capitalize on its vendor
relationships, cross-selling opportunities, and the efforts of its direct sales
force to combat these competitive factors. See "Risk Factors--Increased
Competition Could Adversely Affect Results of Operations."
Regulation
General. The home equity and first mortgage lending business is highly
regulated by both federal and state laws. All Home Equity and First Mortgage
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 certain of the
loans 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, certain 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 fines and penalties can also be
imposed under TILA and Regulation Z.
Other Lending Laws. The Company is also required to comply with the
ECOA, which prohibits creditors from discriminating against applicants on
certain prohibited bases, including race, color, religion, national origin, sex,
age or marital status. Regulation B promulgated under ECOA
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restricts creditors from obtaining certain types of information from loan
applicants. Among other things, it also requires certain disclosures by the
lender regarding consumer rights and requires lenders to advise applicants of
the reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for loans increases as a result of information
obtained from a consumer credit reporting agency, another statute, the Fair
Credit Reporting Act of 1970, as amended, requires lenders to supply the
applicant with the name and address of any credit reporting agency whose credit
report was used in determining to reject a loan application, and certain
additional information and disclosures. In addition, Upland and NJMIC are
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 and NJMIC are 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 and NJMIC are licensed and regulated by the departments of
banking or similar entities in the various states in which it is licensed. These
rules and regulations, among other things, 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. See "Risk Factors--Regulatory Restrictions and
Licensing Requirements."
Employees
At September 30, 1997, the Company employed 281 people on a full-time
basis and 12 people on a part-time basis. The Company added 161 additional
full-time employees in connection with its acquisition of NJMIC. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
Property
Except for real estate acquired in foreclosure as part of the Company's
normal course of business, neither ABFS nor its subsidiaries presently hold
title to any real estate for operating purposes. The interests which the Company
presently holds in real estate are in the form of mortgages against parcels of
real estate owned by Upland's or ABC's borrowers or affiliates of Upland's or
ABC's borrowers and real estate acquired through foreclosure.
The Company presently leases office space at 111 Presidential
Boulevard, Bala Cynwyd, Pennsylvania, just outside the city limits of
Philadelphia. The Company is currently leasing its office space under a five
year lease with a current year annual rental cost of approximately $700,000.
Such lease contains a five-year renewal option at an increased annual rental
amount. The Company
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also leases the Roseland, New Jersey office which functions as the headquarters
for NJMIC and its subsidiaries. The current lease term expires on July 31, 1998.
Such lease contains two renewal options for additional terms of five years. This
15,304 square foot office facility has a current annual rental cost of
approximately $248,690. In addition, the Company leases branch offices on a
short term basis in various cities throughout the United States. Management does
not believe that the leases for the branch offices are material to the Company's
operations.
Legal Proceedings
On October 23, 1997, a class action suit was filed in the Superior
Court of New Jersey at Docket No. L-12066-97 against NJMIC by Alfred G. Roscoe
on behalf of himself and others similarly situated. Mr. Roscoe is seeking
certification that the action may be maintained as a class action as well as
unspecified compensatory damages and injunctive relief. In his complaint, Mr.
Roscoe alleges that NJMIC violated New Jersey's Mortgage Financing on Real
Estate Law, N.J.S.A. 46:10A-1 et seq. by requiring him and other borrowers to
pay or reimburse NJMIC for attorneys' fees and costs in connection with loans
made to them by NJMIC. Mr. Roscoe further asserts that NJMIC's alleged actions
violated New Jersey's Consumer Fraud Act, N.J.S.A. 56:8-1, et seq. and
constitute common law fraud and deceit. NJMIC intends to vigorously defend this
suit.
Pursuant to the terms of the Agreement for Purchase and Sale of Stock
of NJMIC between the Company and the former shareholders of NJMIC, such former
shareholders are required to indemnify the Company up to $16.0 million in
connection with any losses related to, caused by or arising from NJMIC's failure
to comply with applicable law to the extent such losses exceed $100,000. Such
former shareholders have agreed to defend the Company in this suit.
Additionally, from time to time, the Company is involved as plaintiff
or defendant in various other legal proceedings arising in the normal course of
its business. While the ultimate outcome of these various legal proceedings
cannot be predicted with certainty, it is the opinion of management that the
resolution of these legal actions should not have a material effect on the
Company's financial position, results of operations or liquidity.
71
<PAGE>
MANAGEMENT
General
The present management structure of the Company is as follows: Anthony
J. Santilli, Jr. is Chairman, President, Chief Executive Officer, Chief
Operating Officer 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,
and Director
Leonard Becker 74 Director
Michael DeLuca 66 Director
Richard Kaufman 55 Director
Harold E. Sussman 72 Director
Beverly Santilli 38 Executive Vice President and Secretary of
ABFS and President of ABC
Jeffrey M. Ruben 34 Senior Vice President and General Counsel of
ABFS
David M. Levin 53 Senior Vice President - Finance and Chief
Financial Officer
</TABLE>
- -----------------------
(1) As of September 30, 1997.
Directors
The Company's Amended and Restated Certificate of Incorporation
currently provides that the Board shall consist of not less than one nor more
than fifteen directors and that within these limits the number of directors
shall be as established by the Board. The Board has set the number of directors
at five. The Company's Amended and Restated Certificate of Incorporation
provides that the Board shall be divided into three classes following the
closing of a public offering. In February 1997, the Company completed an
underwritten public offering of 1,150,000 shares (including 150,000 shares sold
pursuant to the underwriters' overallotment option) of its Common Stock (the
"Public Offering"). Following the completion of the Public Offering, the
Company's
72
<PAGE>
Board of Directors was divided into three classes as required by the
Amended and Restated Certificate of Incorporation. At the Annual Meeting of
Stockholders held on December 16, 1997, directors were elected to serve for
terms of one, two or three years depending upon the class in which each director
serves.
The initial directors of Class I, Michael DeLuca and Harold E. Sussman,
were elected to serve for terms of three years or until the fourth annual
meeting of stockholders following the Public Offering (i.e., the 2000 Annual
Meeting of Stockholders). At the fourth annual meeting of stockholders following
the Public Offering, the directors of Class I shall be elected for terms of
three years, and after expiration of such terms, shall thereafter be elected
every three years for three year terms. The initial directors of Class II,
Anthony J. Santilli, Jr. and Richard Kaufman, were elected to serve for terms of
one year or until the second annual meeting of stockholders following the Public
Offering (i.e., the 1998 Annual Meeting of Stockholders). At the second annual
meeting of stockholders following the Public Offering, the directors of Class II
shall be elected for terms of three years and, after the expiration of such
terms, shall thereafter be elected every three years for three year terms. The
initial director of Class III, Leonard Becker, was elected to serve for a term
of two years or until the third annual meeting of stockholders after the Public
Offering (i.e., the 1999 Annual Meeting of Stockholders). At the third annual
meeting of stockholders following the Public Offering, the director of Class III
shall be elected for a term of three years and after the expiration of such
term, shall thereafter be elected every three years for a three year term.
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 and Chief Operating Officer 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 American Business Credit, Inc.
("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.,
73
<PAGE>
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 following is a description of the committees of the Company's Board
of Directors.
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 once during the year ended June 30, 1997.
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 twice during the year ended June 30, 1997.
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, 1997.
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
once during the year ended June 30, 1997.
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.
74
<PAGE>
Beverly Santilli is Executive Vice President and Secretary of
ABFS and President of ABC. Mrs. Santilli is responsible for all sales, marketing
and human resources for ABC and for the day-to-day operation of ABC. Prior to
joining ABC and from September 1984 to November 1987, Mrs. Santilli was
affiliated with PSFS initially as an Account Executive and later as a Commercial
Lending Officer with such institution's Private Banking Group. Mrs. Santilli is
the wife of Anthony J. Santilli, Jr.
Jeffrey M. Ruben is Senior Vice President and General Counsel of ABFS
and its subsidiaries. Mr. Ruben is responsible for the Company's legal and
regulatory compliance matters. From June 1990 until he joined the Company in
April 1992, Mr. Ruben was an attorney with the law firm of Klehr, Harrison,
Harvey, Branzburg & Ellers in Philadelphia, Pennsylvania. From December 1987
until June 1990, Mr. Ruben was employed as a credit analyst with the CIT Group
Equipment Financing, Inc. From July 1985 until December 1987, Mr. Ruben was a
Portfolio Administrator with LFC Financial Corp. in Radnor, Pennsylvania. Mr.
Ruben is a member of the Pennsylvania and New Jersey Bar Associations. Mr. Ruben
holds both a New Jersey Mortgage Banker License and a New Jersey Secondary
Mortgage Banker License.
David M. Levin is Senior Vice President - Finance and Chief
Financial Officer of the Company. He has held these positions since May 1995 and
October 1995, respectively. Prior to joining the Company, Mr. Levin was
associated with Fishbein & Company, P.C., Certified Public Accountants (previous
auditors for the Company), as a staff member from 1983 to 1988 and as a
shareholder from 1989 to 1995. Mr. Levin is a Certified Public Accountant.
Compensation of Directors
General. 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.
1995 Non-Employee Director Plan. The Company adopted the 1995 Stock
Option Plan for 1995 Non-Employee Directors (the "1995 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 1995 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. As of June 30, 1997,
25,000 shares remain available for future issuances under this plan.
The 1995 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 1995 Non-Employee Director Plan are not
incentive stock options ("Incentive Stock Options") as defined in Section 422 of
the Internal Revenue Code of 1986, as
75
<PAGE>
amended (the "Code"). Such options are referred to as "Non-Qualified Stock
Options." The exercise price of the stock options granted under the 1995
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 1995 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 1995 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 1995
Non-Employee Director Plan, all unexercised options terminate three months
following the date on which an optionee ceases to be a director of the Company
but in no event shall an option be exercisable after ten years from the date of
grant thereof. In the event that a non-employee director dies or becomes
disabled during the option term, the director's executor or legal guardian, as
applicable, may exercise such option during the three month period following
such event to the same extent that the director was entitled to exercise such
option prior to his death or disability but in no event later than ten years
from the date of grant.
In connection with the adoption of such plan, each non-employee
director of the Company received an option to purchase 22,500 shares of Common
Stock at an exercise price of $5.00 per share (the "Formula Award"). Pursuant to
the terms of such Formula Awards, if a non-employee director ceases to be a
director of the Company within three years of the option grant, the Company has
the right to repurchase shares received pursuant to the exercise of options
granted under the 1995 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 1995 Non-Employee
Director Plan would also receive an option to purchase 22,500 shares of Common
Stock, subject to availability, at the market 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 an exercise price of $17.75 per share.
1997 Non-Employee Director Plan. In October 1997 the Board of Directors
of ABFS adopted the 1997 Non-Employee Director Plan, (the "Non-Employee Director
Plan"). Pursuant to the terms of such plan, 120,000 shares of the Company's
Common Stock are reserved for issuance thereunder. Only directors of the Company
who are not full-time employees of the Company or its subsidiaries may receive
awards under the Non-Employee Stock Option Plan.
Any option awarded pursuant to the Non-Employee Director Plan shall be
a Non-Qualified Stock Option. Pursuant to the terms of such plan, each
non-employee director of the Company shall be automatically granted an option to
purchase 5,000 shares of the Company's Common Stock on October 1st of each year
commencing in fiscal 1998 for a period of three years. Notwithstanding the
foregoing, no award of options may be made pursuant to the non-employee director
plan unless such award is approved by the Board of Directors prior to October 1
of each year.
The Non-Employee Director Plan is administered by the Board of
Directors of the Company, which shall adopt such rules for the conduct of its
business and the administration of the Non-Employee Director Plan as it
considers desirable.
76
<PAGE>
Options granted pursuant to the Non-Employee Director Plan shall be
immediately exercisable following their grant. Unless terminated earlier by the
option's terms, options granted under the Non-Employee Director Plan will expire
three years after the date they are granted. All unexercised options terminate
three months after the optionee ceases to be a director of the Company (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 not later than three years after the date of option
grant. No option granted under the Non-Employee Director Plan is assignable or
transferable, otherwise than by will or by the laws of descent and distribution.
Except in the event of death or disability, all options granted under the
Non-Employee Director Plan are exercisable only by such optionee.
Unless terminated earlier by the Company's Board of Directors, the
Non-Employee Director Plan will remain in effect until all awards granted
pursuant to such plan have been satisfied by the issuance of shares, provided
that no new awards shall be granted under the Non-Employee Director Plan more
than three years from the date of adoption of such plan by the Board of
Directors. The Non-Employee Director Plan provides for adjustments to the number
of shares subject to outstanding options and to the exercise price of such
outstanding options in the discretion of the Board of Directors in event of a
declaration of stock dividend, stock split, merger, consolidation, split up,
combination, recapitalization, conversion or similar circumstances.
The Board of Directors may amend or supplement the Non-Employee
Director Plan in any way, or suspend or terminate such plan at any time, as
determined by the Board of Directors; provided, however, that such action shall
not affect options granted under the Non-Employee Director Plan prior to the
actual date on which such action occurred.
Indemnification of Directors and Officers
The Company's Amended and Restated Certificate of Incorporation and
Bylaws provide that to the fullest extent permitted by Delaware law, directors
of the Company shall not be personally liable to the Company or stockholders of
the Company for monetary damages for breach of fiduciary duty as a director.
ABFS's Amended and Restated Certificate of Incorporation and also Bylaws provide
that, if Delaware law is hereafter amended to authorize the further elimination
or limitation of the liability of the directors of ABFS, then the liability of
such directors shall be eliminated or limited to the fullest extent permitted by
applicable law. The effect of these provisions of the Company's Amended and
Restated Certificate of Incorporation and Bylaws is to eliminate the rights of
the Company and its stockholders (through stockholders' derivative suits on
behalf of the Company) to recover monetary damages against a director for breach
of the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in certain situations described
in Delaware General Corporation Law. This provision does not limit or eliminate
the rights of the Company or any stockholder to seek nonmonetary relief, such as
an injunction or recission, 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
77
<PAGE>
advancement of expenses. The Bylaws of ABFS also provide that the Company may
obtain insurance on behalf of such persons, which the Company currently
maintains.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Executive Compensation
The Company has no direct salaried employees. Each of the executive
officers of the Company 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 the Company and its subsidiaries to the Chief Executive Officer and each
other executive officer who made in excess of $100,000 during fiscal 1997 (the
"Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
----------------------------------------- ----------------------------------------
Securities
Restricted Underlying
Name and Fiscal Other Annual Stock Options/ All Other
Principal Position Year Salary Bonus Compensation(1 Award(s) SARS (#) Compensation
------------------ ---- ------ ----- -------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 1997 $287,600 $484,200 -- -- 5,000(2) $--
Chairman, President, Chief 1996 237,500 300,000(3) -- -- 22,500(4) --
Executive Officer, Chief 1995 191,667 -- -- -- -- --
Operating Officer and
Director of ABFS
Beverly Santilli 1997 $182,750 $322,800 -- -- 12,500(5) $--
President, ABC and Executive 1996 120,000 65,000 -- -- -- --
Vice President and Secretary 1995 86,892 -- -- -- -- --
of ABFS
Jeffrey M. Ruben 1997 $ 118,750 $ 62,500 -- -- 12,500(6) $--
Senior Vice President and 1996 96,125 50,000 -- -- -- --
General Counsel of ABFS 1995 80,353 -- -- -- 7,500(7) --
David M. Levin 1997 $ 92,750 $47,500 -- -- 12,500(8) $--
Senior Vice President - 1996 85,000 20,000 -- -- -- --
Finance and 1995 (9) -- -- -- -- -- --
Chief Financial Officer of
ABFS
</TABLE>
- ------------------------------
(1) Excludes perquisites and other personal benefits that do not exceed
$50,000 or 10% of each officer's total salary and bonus.
(2) Represents an option to purchase 5,000 shares of Common Stock granted
to Mr. Santilli at an exercise price of $17.75 per share.
(3) Represents Mr. Santilli's yearly bonus of $250,000 plus a one-time
bonus of $50,000 paid in October 1995.
(4) Represents an option to purchase 22,500 shares of Common Stock granted
to Mr. Santilli at an exercise price of $5.00 per share.
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<PAGE>
(5) Represents an option to purchase 12,500 shares of Common Stock granted
to Mrs. Santilli at an exercise price of $20.00 per share. Such option
will vest at a rate of 20% per year over a five year period with the
first portion vesting on February 13, 1998, the first anniversary of
the date of grant.
(6) Represents an option to purchase 12,500 shares of Common Stock granted
to Mr. Ruben at an exercise price of $20.00 per share. Such option will
vest at a rate of 20% per year over a five year period with the first
portion vesting on February 13, 1998, the first anniversary of the date
of grant.
(7) Represents an option to purchase 7,500 shares of Common Stock granted
to Mr. Ruben at an exercise price of $2.67 per share.
(8) Represents an option to purchase 12,500 shares of Common Stock granted
to Mr. Levin at an exercise price of $20.00 per share. Such option will
vest at a rate of 20% per year over a five year period with the first
portion vesting on February 13, 1998, the first anniversary of the date
of grant.
(9) No disclosure of salary information is included for Mr. Levin for
fiscal 1995 as he was not an executive officer at such time.
Management Incentive Plan. During 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.
The maximum annual bonus awarded can range from 15% to 50% of an individual's
annual salary for all officers of the Company, other than the President and
Executive Vice President. The annual bonus payable to each of the President and
the Executive Vice President under such plan is equal to 2.5% of such
individual's base salary for each 1.0% the Company exceeds the Board established
net income target. For example, if 80% of an individual's goals are met, a bonus
of 50% of the individual's potential bonus is payable under the plan. If 100% of
the individual's goals are 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.
Stock Option Plan. 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, no options may be awarded to non-employee directors. Pursuant to
the terms of the Plan, 560,000 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. Options to purchase 82,988 shares of the Company's
Common Stock remained available for grant as of September 30, 1997.
The Plan is administered by the compensation committee (the
"Compensation Committee") which is comprised of three or more members of the
Board of Directors of the Company, each of whom must meet the definition of a
"non-employee" director within the meaning of Rule 16b-3 of the Exchange Act and
an "outside director" as defined under Section 162(m) of the Code. The
Compensation Committee has the discretion to interpret the provisions of the
Plan; to determine the
79
<PAGE>
persons 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 options granted pursuant to the Plan are exercisable in accordance
with a vesting schedule (if any) which is set by the Compensation Committee at
the time of grant. The Compensation Committee may in its sole discretion,
provide in an option agreement the circumstances under which the option shall
become immediately exercisable and may accelerate the date on which all or any
portion of an option may be exercised. 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). No option granted under
the Plan is assignable or transferable, otherwise than by will or by the laws of
descent and distribution. Except in the event of death or disability, all
options granted under the Plan are exercisable during the lifetime of an
optionee, and are exercisable only by such optionee.
The Plan provides for adjustments to the number of shares subject to
outstanding options and to the exercise price of such outstanding options in the
discretion of the Compensation Committee in the event of a declaration of a
stock dividend, distribution or other offering of shares, merger, consolidation,
split up, combination, exchange, or recapitalization.
The Compensation Committee may amend or terminate the Plan at any time
except that the Compensation Committee may not amend the Plan without
stockholder approval to (i) increase the number of shares which may be issued
under the Plan (other than pursuant to Section 14 of the Plan); (ii) change the
minimum option price (other than pursuant to Section 14 of the Plan); (iii)
extend the term of the Plan, or (iv) extend the period during which an option
may be exercised or changed. In addition, no amendment or modification to the
Plan shall impair the rights of any optionee under any previously granted award
without the consent of such optionee.
The following table sets forth information regarding options exercised
during fiscal 1997 and the value of options granted to the Named Officers at
fiscal year end.
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<PAGE>
AGGREGATED OPTIONS/SAR EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options/SARs at
Options/ SARs at Fiscal Year End
Name Shares Acquired Value Fiscal Year End Exercisable/
on Exercise(#) Realized($) Exercisable/ Unexercisable Unexercisable (1)
- ------------------------- --------------- ----------- -------------------------- -----------------
<S> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 0 0 27,500/0 $348,750/0 (2)
Chairman, President, Chief
Executive Officer, Chief
Operating Officer and
Director of ABFS
Beverly Santilli 0 0 0/12,500 0/0 (3)
President of ABC and Executive
Vice President and
Secretary of ABFS
Jeffrey M. Ruben 0 0 7,500/12,500 $129,975/0 (4)
Senior Vice President and
General Counsel of ABFS
David M. Levin 0 0 0/12,500 0/0 (5)
Senior Vice President -
Finance and Chief Financial
Officer of ABFS
</TABLE>
(1) 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 $20.00 on June 30, 1997.
(2) The exercise price of 22,500 of the options held by Mr. Santilli is
$5.00 per share and the exercise price of 5,000 of the options held by
Mr. Santilli is $17.75 per share.
(3) The exercise price of the options held by Mrs. Santilli is $20.00 per
share. Such shares subject to such option vest at a rate of 20% of the
initial award per year over a five year period commencing on February
13, 1998.
(4) The exercise price of 7,500 of the options held by Mr. Ruben is $2.67
per share and the exercise price of 12,500 of the options held by Mr.
Ruben is $20.00 per share. Such shares subject to such option vest at a
rate of 20% of the initial award per year over a five year period
commencing on February 13, 1998.
(5) The exercise price of the options held by Mr. Levin is $20.00 per
share. Such shares subject to such option vest at a rate of 20% of the
initial award per year over a five year period commencing on February
13, 1998.
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<PAGE>
The following table sets forth information regarding options to
purchase shares of Common Stock granted to the Named Officers during fiscal
1997. The Stock Option Plan does not provide for the grant of stock appreciation
rights ("SARs").
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/sh) Expiration Date
- ------------------------------------ ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 5,000 3.1% $17.75 October 22, 2006
Chairman, President, Chief Executive
Officer, Chief Operating Officer and
Director of ABFS
Beverly Santilli 12,500 7.7 20.00 February 13, 2008(1)
President of ABC and Executive Vice
President and Secretary of ABFS
Jeffrey M. Ruben 12,500 7.7 20.00 February 13, 2008(1)
Senior Vice President and General
Counsel of ABFS
David M. Levin 12,500 7.7 20.00 February 13, 2008(1)
Senior Vice President - Finance and
Chief Financial Officer of ABFS
</TABLE>
(1) Option vests at a rate of 20% of the initial award per year and each
vested portion of such option remains exercisable for a period of five
years from the date it becomes exercisable.
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
employment agreements with Mr. and Mrs. Santilli were subsequently amended in
October 1997. The salaries of Mr. and Mrs. Santilli are subject to increase but
not decrease, on an annual basis based upon the Consumer Price Index. Mr.
Ruben's salary is subject to increase on an annual basis based upon the Consumer
Price Index and may also be increased from time to time by Mr. Santilli. Once
increased, Mr. Ruben's salary may not be decreased following a "change in
control" of the Company. The employment agreements are designed to assist the
Company in maintaining a stable and competent management team. Certain of the
terms of such agreements, including the amendments thereto, 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
82
<PAGE>
voluntary resignation may occur within three years of February 20, 1997, the
closing date of the public offering of the Company's Common Stock absent a
change in control) or seventieth birthday or (b) the later of: (i) the fifth
year anniversary of the execution of the agreement (or three years in the case
of Mr. Ruben); or (ii) five years (or three years in the case of Mr. Ruben) from
the date of notice to the employee of the Company's intention to terminate the
agreement. To the extent the Company gives Mr. or Mrs. Santilli notice of its
intent to terminate their agreements, other than for cause, such individuals
would be entitled to receive their salaries and certain benefits for five years.
To the extent Mr. Ruben is terminated without cause during the term of his
agreement, he would be entitled to receive his salary for three years except
that if such termination occurs while Mr. Santilli is Chief Executive Officer of
the Company, he shall receive a termination payment equal to the current year's
base salary.
The employment agreements with each of Mr. and Mrs. Santilli also
provide for a cash payment to each employee equal to 299% of the last five
years' average annual compensation as calculated in accordance with Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code"), (in addition to
any other payments and benefits due under the agreements) in the event of a
"change in control" (as defined in such agreements), of the Company during the
term of the agreements to which such employee does not consent in such
individual's capacity as a director or stockholder of the Company. Mr. Ruben's
agreement provides for a similar cash payment only if his employment is
terminated in the event of a "change in control," which payment shall be in lieu
of any additional payment which may be due pursuant to the terms of his
agreement. The agreements with Mr. Ruben and Mrs. Santilli also provide that in
the event of a "change in control" of the Company each employee's stock options
shall vest in full (provided, that in the case of Mrs. Santilli, she does not
consent to such "change in control"). The vesting of options and the receipt of
other payments and benefits provided for under the agreements upon a "change in
control" of the Company may subject an employee to the payment of an excise tax
equal to 20% of all payments contingent upon a "change in control" made in
excess of the employee's base compensation. Under the terms of the agreements,
in such event the Company will pay the employees an additional amount such that
the net amount of payments retained by the employees after the payment of any
excise tax and any federal, state and local income and employment taxes and the
excise tax on the additional amount paid by the Company shall be equal to the
total payments or benefits to be received by the employees under their
respective agreements. The Company is not entitled to a deduction for any
payments subject to the excise tax made to employees pursuant to the terms of
the agreements. For purposes of all of the employment agreements, a "change in
control" of the Company shall include: (a) a change in the majority of the
members of the Board of Directors within a two-year period, excluding a change
due to the voluntary retirement or death of any board member (with respect to
Mr. Ruben's agreement, no "change in control" as a result of a change in the
majority of the directors will be deemed to occur under the terms of his
agreement if Mr. Santilli remains Chairman of the Board), or (b) a person or
group of persons acting in concert (as defined in Section 13(a) of the Exchange
Act) acquires beneficial ownership, within the meaning of Rule 13(d)(3) of the
Rules and Regulations of the Commission promulgated pursuant to the Exchange
Act, of a number of voting shares of the Company which constitutes (i) 50% or
more of the Company's shares voted in the election of directors, or (ii) more
than 25% of the Company's outstanding voting shares. Based upon their current
salaries, if Mr. and Mrs. Santilli and Mr. Ruben had been terminated as of June
30, 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
83
<PAGE>
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 $1.1 million, $562,000 and
$327,000, respectively. In addition, Mr. and Mrs. Santilli's agreements would
continue to be in force for the remainder of their term as described above.
Each employment agreement also prohibits the employee from divulging
confidential information regarding the Company's business to any other party and
prohibits the employee, during the term of the agreement, from engaging in a
business or being employed by a competitor of the Company without the prior
written consent of the Company. The Company may extend the non-compete
provisions of any of the agreements at its option (or in the case of Mr. Ruben,
with his consent) for up to one year following the termination of such agreement
upon payment to the employee of an amount equal to the highest annual salary and
bonus received by the employee during the term of the agreement; provided,
however, that the non-compete provisions of Mr. Ruben's contract shall be
automatically extended for one year in the event he is terminated without cause
and receives a severance payment pursuant to the terms of his agreement unless
he returns a pro rata portion of the severance payment received from the
Company.
The employment agreements with Mr. and Mrs. Santilli also provide for
the payment of an annual cash bonus equal to 2.5% of each individual's base
salary for each 1.0% the Company exceeds the Board established net income
target. 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.
84
<PAGE>
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 options to purchase 225,012
shares of Common Stock 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 the Company's
Common Stock owned by Mr. Santilli such that the value of the collateral is
equal to twice the outstanding loan amount.
85
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of January 9, 1998 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.
<TABLE>
<CAPTION>
Name, Position and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned(1) of Class
-------------------------- --------------------- --------
<S> <C> <C>
Anthony J. Santilli, Jr. 927,044 (2) (3) 25.9%
Chairman, President,
Chief Executive Officer, Chief Operating
Officer 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 136,230 (4) 3.8%
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Michael DeLuca, Director of ABFS 199,735 (4) 5.6%
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 175,561 (4) 4.9%
1126 Bryn Tyddyn Drive
Gladwyne, PA 19035
Harold E. Sussman, Director of ABFS 106,711 (4) 3.0%
Colliers, Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 25,500 (5) (6)
Senior Vice President and General
Counsel of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
David M. Levin 17,500 (7) (6)
Senior Vice President - Finance and Chief
Financial Officer of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Wellington Management Company, LLP 469,400 (8) 13.3%
75 State Street
Boston, MA 02109
Orin S. Kramer, Jay Spellman and 251,900(9) 7.1%
Kramer Spellman, L.P.
2050 Center Avenue
Suite 300
Fort Lee, New Jersey 07024
All executive officers and directors as a group 1,588,281(10) 42.4%
(eight persons)
</TABLE>
86
<PAGE>
- -------------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations of the Securities and Exchange Commission. Accordingly
they may include securities owned by or for, among others, the wife
and/or minor children or the individual and any other relative who has
the same home as such individual, as well as other securities as to
which the individual has or shares voting or investment power or has
the right to acquire under outstanding stock options within 60 days
after the date of this table. Beneficial ownership may be disclaimed as
to certain of the securities.
(2) Shares listed are held in joint tenancy by Mr. and Mrs. Santilli.
(3) Includes options to purchase 27,500 shares and 5,000 shares of Common
Stock awarded to Mr. Santilli pursuant to the Company's Stock Option
Plan, all of which are currently exercisable. Also includes options to
purchase 12,500 and 5,000 shares of the Company's Common Stock awarded
to Mrs. Santilli pursuant to the Company's Stock Option Plan which
options are not currently exercisable. Such options vest at a rate of
20% per year commencing on February 13, 1998 and September 30, 1998,
respectively.
(4) Includes options to purchase 27,500 shares and 5,000 shares of Common
Stock awarded to each non-employee director of the Company pursuant to
the Company's 1995 Stock Option Plan for Non-Employee Directors and the
1997 Non-Employee Director Stock Option Plan, respectively, all of
which are currently exercisable.
(5) Includes 500 shares held directly and an option to purchase 7,500
shares of the Company's Common Stock awarded to Mr. Ruben pursuant to
the Company's Stock Option Plan which option is currently exercisable.
Also includes options to purchase 12,500 and 5,000 shares of the
Company's Common Stock awarded to Mr. Ruben pursuant to the Company's
Stock Option Plan which options are not currently exercisable. Such
options vest at a rate of 20% per year commencing on February 13, 1998
and September 30, 1998, respectively.
(6) Less than one percent.
(7) Includes options to purchase 12,500 and 5,000 shares of the Company's
Common Stock awarded to Mr. Levin pursuant to the Company's Stock
Option Plan which options are not currently exercisable. Such options
vest at a rate of 20% per year commencing on February 13, 1998 and
September 30, 1998, respectively.
(8) As reported in a Schedule 13G dated April 7, 1997 filed by Wellington
Management Company, LLP ("WMC"). Of the 469,400 shares reported as
beneficially owned by WMC, shared voting was reported with respect to
441,000 shares and shared dispositive power was reported with respect
to 469,400 shares. All of the shares beneficially owned by WMC are
owned of record by clients of WMC, none of which hold more than 5.0% of
such shares except for Bay Pond Partners, L.P.
(9) As reported in a Schedule 13D dated November 7, 1997 filed by Kramer
Spellman, L.P. ("KS"), a limited partnership, and its general partners,
Orin S. Kramer and Jay Spellman. KS and Messrs. Kramer and Spellman
reported shared voting and dispositive power with respect to the shares
owned by them. All of the shares reported as beneficially owned in the
Schedule 13D are owned by investment partnerships with respect to which
KS acts as a general partner and managed accounts for which KS acts as
a discretionary investment manager. Messrs. Kramer and Spellman
reported beneficial ownership as a result of their position as general
partners of KS.
(10) Includes options to purchase 222,500 shares of the Company's Common
Stock awarded to directors and officers of the Company pursuant to the
Company's stock option plans of which options to purchase 52,500 shares
of the Company's Common Stock are not currently exercisable.
87
<PAGE>
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the NASDAQ National
Market System under the symbol "ABFI." The Common Stock began trading on the
NASDAQ National Market System on February 14, 1997. Prior to February 14, 1997,
the Common Stock had been traded on the PHLX under the symbol "AFX" since May
13, 1996. Prior to the commencement of trading on the PHLX, there was no active
trading market for the Common Stock. As a result, stock price information for
the Common Stock is not available for any period prior to May 13, 1996.
The following table sets forth the high and low sales prices of the
Common Stock from the date on which the Common Stock commenced trading on the
PHLX through January 12, 1998. On January 12, 1998, the closing price of the
Common Stock on the NASDAQ National Market System was $21.125.
Quarter Ended High Low
------------- ---- ---
June 30, 1996(1)....................... $17.00 $11.38
September 30, 1996..................... 19.50 11.13
December 31, 1996 ..................... 20.00 17.25
March 31, 1997......................... 24.50 19.00
June 30, 1997.......................... 22.50 18.50
September 30, 1997..................... 24.00 19.50
December 31, 1997...................... 28.00 20.625
March 31, 1998(2)...................... 24.00 21.125
(1) Represents the period May 13, 1996 through June 30, 1996.
(2) Represents the period January 1, 1998 through January 12, 1998.
As of January 9, 1998, there were 105 record holders and approximately
812 beneficial holders of the Common Stock.
During fiscal 1997, the Company paid dividends on its Common Stock then
outstanding of $.06 per share, for an aggregate dividend payment of $158,248.
Subsequent to fiscal year end, the Company paid dividends of $.015 per share
during the three months ended September 30, 1997. The continuing payment by the
Company of dividends in the future is in the sole discretion of its Board of
Directors and will depend, among other things, upon the Company's earnings, its
capital requirements and financial condition, as well as other relevant factors.
88
<PAGE>
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.
As of January 9, 1997, there were 407,000 shares of Common Stock
subject to options. In addition, there were an additional 182,988 shares
reserved for issuance under the Company's option plans. See "Management."
PLAN OF DISTRIBUTION
Presently ABFS does not employ the services of a broker-dealer or
dealers as an agent to assist in the sales of the Notes offered hereby. ABFS may
in the future employ the services of an NASD member broker-dealer for purposes
of offering the Notes on a "best-efforts" or agency basis. If an agreement
concerning the use of the services of any broker-dealer is reached, ABFS may pay
any such broker-dealers an estimated commission ranging from .5% to 10% of the
sale price of any Notes sold through any such agent, depending on numerous
factors. ABFS may also agree to indemnify such broker-dealer against certain
liabilities, including liabilities under the Securities Act and to reimburse
such broker-dealer for its costs and expenses, up to a maximum to be determined,
based upon the total dollar value of the Notes sold. ABFS will otherwise offer
the Notes through its employees in accordance with Rule 3a4-1 under the Exchange
Act.
The Company reserves the right to reject any subscription hereunder, in
whole or in part, for any reason. Subscriptions will be irrevocable upon receipt
by ABFS. In the event a subscription is not accepted by ABFS, the proceeds of
such subscription will be promptly refunded to the subscriber, without deduction
of any costs and without interest. ABFS expects that such subscriptions will be
refunded within 48 hours after ABFS has received the subscription. Once a
subscriber's subscription has been accepted by ABFS, the applicable subscription
funds will be promptly deposited for benefit of the Company. A receipt will be
sent to the subscriber as soon as practicable thereafter. No minimum number of
Notes must be sold in the Offering. A subscriber will not know at the time of
subscription whether ABFS will be successful in completing the sale of any or
all of the Notes offered hereby. ABFS reserves the right to withdraw or cancel
the Offering at anytime. In the event of such withdrawal or cancellation,
subscriptions previously received will be irrevocable and no subscription funds
will be refunded.
LEGAL MATTERS
An opinion has been delivered by Blank Rome Comisky & McCauley LLP,
Philadelphia, Pennsylvania to the effect that the Notes when issued as
contemplated by this Prospectus, will be binding obligations of the Company.
EXPERTS
The Consolidated Financial Statements of ABFS and subsidiaries as of
June 30, 1997 and 1996 and for the years ending June 30, 1997 and 1996 included
in this Prospectus, have been audited by BDO Seidman, LLP, independent certified
public accountants, as set forth in their report
89
<PAGE>
appearing herein and have been included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
INFORMATION REGARDING FORMER ACCOUNTANTS
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. Fishbein and Company, P.C. had served as the Company's independent
accountants and audited the Company's financial statements for the year ended
June 30, 1995.
Fishbein and Company, P.C.'s report on the financial statements for the
year ended June 30, 1995 contained no adverse opinion or disclaimers of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principals.
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 year 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 year ended June 30, 1995. Such report did not contain an
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. In addition, there has not
been any "reportable events" as defined by Item 304(a)(1)(iv)(B) of Regulation
S-B during the periods referred to above.
90
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants......................F-2
Consolidated Balance Sheets.............................................F-3
Consolidated Statements of Income.......................................F-4
Consolidated Statements of Stockholders' Equity.........................F-5
Consolidated Statements of Cash Flows...................................F-6
Notes to Consolidated Financial Statements..............................F-9
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 sheets of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity and
cash flows for the years 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 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 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 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 financial position of American Business
Financial Services, Inc. and subsidiaries as of June 30, 1997 and 1996, and the
consolidated results of their operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ BDO Seidman LLP
Philadelphia, Pennsylvania
August 29, 1997
F-2
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
=================================================================================================
September 30, June 30,
1997 1997 1996
- -------------------------------------------------------------------------------------------------
(unaudited)
Assets
<S> <C> <C> <C>
Cash and cash equivalents $ 3,932,032 $ 5,013,936 $ 5,345,269
Loan and lease receivables, net
Available for sale 25,369,744 35,711,821 18,002,595
Other 1,217,840 1,143,566 534,325
Other receivables 55,268,374 39,644,161 13,713,125
Prepaid expenses 2,243,385 1,181,654 1,341,160
Property and equipment, net of accumulated
depreciation and amortization 3,577,436 2,863,345 1,452,895
Other assets 32,734,969 18,430,049 6,504,794
- -------------------------------------------------------------------------------------------------
Total assets $124,343,747 $103,988,532 $ 46,894,163
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================
September 30, June 30,
1997 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholders' Equity
Liabilities
<S> <C> <C> <C>
Debt $70,125,180 $56,486,229 $35,987,401
Accounts payable and accrued expenses 7,824,113 6,081,630 3,132,170
Deferred income taxes 6,254,575 4,630,981 1,506,271
Other liabilities 6,128,863 5,877,664 1,876,806
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 90,332,731 73,076,504 42,502,648
- --------------------------------------------------------------------------------------------------------------------
Commitment and contingencies
Stockholders' equity
Preferred stock, no par value
Authorized 1,000,000 shares
Issued and outstanding none -- --
Common stock, par value $.001
Authorized 9,000,000 shares
Issued and outstanding 3,503,166 shares in
1997 and 2,353,166 shares in 1996 3,503 3,503 2,353
Additional paid-in capital 22,669,477 22,669,477 1,931,699
Retained earnings 11,938,068 8,839,080 3,057,495
- --------------------------------------------------------------------------------------------------------------------
34,611,048 31,512,060 4,991,547
Less note receivable 600,032 600,032 600,032
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 34,011,016 30,912,028 4,391,515
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $124,343,747 $103,988,532 $46,894,163
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
====================================================================================================================
Three months ended Year ended
September 30, June 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Revenues
<S> <C> <C> <C> <C>
Gain on sales of loans $8,521,389 $4,073,235 $20,042,579 $8,720,776
Interest and fees 2,304,367 1,135,228 5,895,606 3,350,716
Servicing income 380,313 74,669 490,669 --
Other income 205 978 52,899 22,824
- --------------------------------------------------------------------------------------------------------------------
Total revenues 11,206,274 5,284,110 26,481,753 12,094,316
- --------------------------------------------------------------------------------------------------------------------
Expenses
Interest 1,859,801 1,041,659 5,174,925 2,667,858
Provision for credit losses 30,888 -- 105,941 396,811
Payroll and related costs 850,698 198,611 1,618,479 1,203,260
Sales and marketing 2,324,503 1,369,253 6,964,074 2,685,173
General and administrative 1,365,331 896,678 3,616,647 2,020,551
- --------------------------------------------------------------------------------------------------------------------
Total expenses 6,431,221 3,506,201 17,480,066 8,973,653
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,775,053 1,777,909 9,001,687 3,120,663
Income taxes 1,623,518 622,268 3,061,854 801,967
- --------------------------------------------------------------------------------------------------------------------
Net income $3,151,535 $1,155,641 $5,939,833 $2,318,696
====================================================================================================================
Earnings per share $ .87 $ .47 $ 2.05 $ 1.01
====================================================================================================================
Weighted average number
of shares outstanding 3,642,972 2,448,031 2,903,754 2,296,913
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<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>
Balance, July 1, 1995 2,128,154 $ 2,128 $ 1,331,892 $ 809,394 $ -- $ 2,143,414
Options exercised 225,012 225 599,807 -- (600,032) --
Cash dividends ($.03 per share) -- -- -- (70,595) -- (70,595)
Net income -- -- -- 2,318,696 -- 2,318,696
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 2,353,166 2,353 1,931,699 3,057,495 (600,032) 4,391,515
Sale of common stock,
net of offering expenses of
$2,261,072 1,150,000 1,150 20,737,778 -- -- 20,738,928
Cash dividends ($.06 per share) -- -- -- (158,248) -- (158,248)
Net income -- -- -- 5,939,833 -- 5,939,833
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 3,503,166 3,503 22,669,477 8,839,080 (600,032) 30,912,028
Cash dividends
($.015 per share - unaudited) -- -- -- (52,547) -- (52,547)
Net income (unaudited) -- -- -- 3,151,535 -- 3,151,535
- ------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997
(unaudited) 3,503,166 $ 3,503 $ 22,669,477 $ 11,938,068 $ (600,032) $ 34,011,016
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
===============================================================================================================
Three months ended Year ended
September 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,151,535 $ 1,155,641 $ 5,939,833 $ 2,318,696
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities
Gain on sales of loans/leases (10,909,361) (4,373,235) (20,051,241) (8,685,463)
Amortization of origination fees
and costs 168,446 86,321 419,620 305,136
Amortization of servicing rights 211,487 51,643 520,670 69,489
Provision for credit losses 567,532 300,000 105,941 396,811
Accounts written off (100,217) (50,443) (96,639) (129,063)
Depreciation and amortization of
property and equipment 208,530 106,980 513,323 318,493
Amortization of financing and
organization costs 150,312 127,933 537,653 505,012
Loans originated for sale (50,411,255) (20,880,727) (136,357,451) (54,505,000)
Sale of loans originated for sale 59,721,676 26,676,311 115,000,000 40,627,246
Decrease (increase) in accrued
interest and fees on loan and
lease receivables (376,206) (44,809) (1,288,364) (268,010)
Decrease (increase) in other
receivables (1,809,685) (1,083,286) (1,232,443) 683,797
(Increase) in prepaid expenses (1,061,731) (1,134,877) (1,266,059) (747,114)
Decrease (increase) in other assets (191,046) 299,466 270,541 332,009
Increase in accounts payable and
accrued expenses 1,742,483 1,154,427 2,949,460 2,014,240
Increase in deferred income taxes 1,623,594 622,268 3,124,710 801,967
Increase in other liabilities 251,199 295,107 4,000,858 1,491,565
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 2,937,293 3,308,720 (26,909,587) (14,470,189)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Leases originated for portfolio (4,634,257) (2,091,191) (8,003,561) (5,967,812)
Loan and lease payments received 1,796,920 856,130 4,554,535 4,549,979
Purchase of property and equipment (935,691) (231,783) (1,737,695) (1,022,926)
Decrease in securitization gain
receivable 368,314 -- 106,752 58,693
Principal receipts on investments 120,962 16,245 81,383 33,307
Initial overcollateralization of loans (2,000,000) -- (3,450,000)
Purchase of investments (17,000,000) -- (5,000,000) --
Sale of investments 5,000,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in)
investing activities (17,283,752) (1,450,599) (13,448,586) (2,348,759)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
===========================================================================================================
Three months ended Year ended
September 30, June 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Financing costs incurred $ (321,849) $ (244,368) $ (1,052,667) $ (662,950)
Net proceeds of (principal payments on)
revolving line of credit -- (2,348,465) (2,348,465) 2,348,465
Dividends paid (52,547) (35,297) (158,248) (70,595)
Principal payments on note
payable, other -- (104) (18,457) (5,605)
Proceeds from issuance of
subordinated debentures 16,669,927 5,945,884 33,991,099 19,687,962
Principal payments on subordinated
debentures (3,030,976) (1,708,450) (11,125,350) (3,867,447)
Proceeds from public offering net
of related costs -- -- 20,738,928 --
- -----------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities 13,264,555 1,609,200 40,026,840 17,429,830
- -----------------------------------------------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents (1,081,904) 3,467,321 (331,333) 610,901
Cash and cash equivalents,
beginning of period 5,013,936 5,345,269 5,345,269 4,734,368
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 3,932,032 $ 8,812,590 $ 5,013,936 $ 5,345,269
===========================================================================================================
</TABLE>
F-7
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
===============================================================================================================
Three months ended Year ended
September 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 1,449,428 $ 888,622 $ 2,875,620 $ 1,183,745
===============================================================================================================
Income taxes $ -- $ -- $ -- $ 78,475
===============================================================================================================
Noncash transactions recorded in connection with
the sale of and foreclosure on loans receivable
Increase in other receivables,
securitization gains $ 12,737,954 $ 15,563,603 $ 22,404,070 $ 10,585,960
Increase in other assets
Investment, held to maturity -- -- -- 2,332,247
Foreclosed real estate held for sale -- -- 71,909 111,890
Other holdings held for sale -- -- 131,617 308,933
Transfer from loans and
leases, other -- -- (123,789) (62,085)
Mortgage servicing rights 2,297,135 574,210 7,216,167 1,165,000
- --------------------------------------------------------------------------------------------------------------
$ 15,035,089 $ 6,137,813 $ 29,699,974 $ 14,441,945
===============================================================================================================
Reclassification of other assets,
leased equipment to fixed assets $ -- $ -- $ 186,077 $ 60,784
Reclassification of prepaid expenses
to other assets $ -- $ -- $ 1,425,565 $ --
===============================================================================================================
</TABLE>
Supplemental schedule of noncash investing and financing activities
During the fiscal 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 September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
1. Summary of Principles of Consolidation and Nature of Business
Significant
Accounting The accompanying consolidated financial statements
Policies 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 originates secured loans primarily
in the Mid-Atlantic Region and is subject to the
risks of the real estate market in that area.
The Company also originates business equipment
leases. 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 quality of credit risk, types of
loans originated, current interest rates and
economic conditions among other things.
Allowance for Credit Losses
The allowance for credit losses is based upon
the Company's estimate of expected
collectibility of loans and leases serviced. The
allowance is increased by periodic charges to
operations as necessary.
F-9
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
Interest Only and Residual Certificates
The Company securitizes its loan receivables
primarily into the form of a REMIC. A REMIC is a
multi-class security structure with certain tax
advantages which derives its monthly principal
paydowns from a pool of underlying mortgages.
The senior classes of the REMIC's are sold, with
the subordinated classes retained by the
Company. The subordinated classes are in the
form of interest only and residual certificates.
These subordinated classes of REMIC's represent
an interest in the REMIC as compared to the
right to receive funds under the form of
retained or capitalized excess servicing assets.
In accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity
Securities," the Company classifies
interest-only and residual certificates as
"trading securities" and, as such they are
recorded at fair value with resultant unrealized
gain or loss recorded in the results of
operations in the period of the change in fair
value. The Company determines fair value based
on a discounted cash flow analysis. The cash
flows are estimated as the excess of the
weighted average coupon on each pool of
receivables sold over the sum of the
pass-through interest rate plus a normal
servicing fee, a trustee fee and an insurance
fee, over the life of the receivables using
prepayment, default and interest rate
assumptions that market participants would use
for similar financial instruments subject to
prepayment, credit and interest rate risk and
are discounted using an interest rate that a
purchaser unrelated to the seller of such a
financial instrument would demand. The fair
valuation includes consideration of the
following characteristics: loan type, size,
interest rate, date of origination, term and
geographic location. The Company also uses other
available information such as externally
prepared reports on prepayment rates, interest
rates, collateral value, economic forecasts and
historical default and prepayment rates of the
portfolio under review.
On January 1, 1997, the Company adopted SFAS No.
125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of
Liabilities" (SFAS 125), which addresses the
accounting for transfers of financial assets in
which the transferor has some continuing
involvement either with the assets transferred
or with the transferee. A transfer of financial
assets in which the
F-10
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
transferor surrenders control over those assets is
accounted for as a sale to the extent that
consideration other than beneficial interests in
the transferred assets is received in exchange.
SFAS 125 requires that liabilities or derivatives
incurred or obtained by transferors as part of a
transfer of financial assets be initially measured
at fair value, if practicable. In addition, SFAS
125 requires that servicing assets and liabilities
be subsequently measured by the amortization over
their estimated life and assessment of asset
impairment be based on such assets' fair value.
SFAS 125 is effective for transfers and servicing
of financial assets and extinguishment of
liabilities occurring after December 31, 1996 and
is to be applied prospectively. The adoption of
this standard did not have a material impact on
the Company's results of operations.
Mortgage Servicing Rights
Effective July 1, 1995, the Company adopted SFAS
No. 122, "Accounting for Mortgage Servicing
Rights" (SFAS 122), which requires that upon
sale or securitization of servicing retained
mortgages, companies capitalize the cost
associated with the right to service mortgage
loans based upon their relative fair values.
Effective January 1, 1997, SFAS 122 was amended
by SFAS 125, as discussed above. The Company
determines fair value based on the present value
of estimated net future cash flows relating to
servicing income. The cost allocated to the
servicing rights is amortized in proportion to
and over the period of estimated net future
servicing fee income.
Prior to the adoption of SFAS 122, income
related to servicing rights acquired through
loan origination activities was recorded in the
period the loans were serviced. Under SFAS 122
and SFAS 125, the Company capitalized at fair
value $7,216,167, $1,457,000, $2,297,135 and
$545,000 of such costs during the years ended
June 30, 1997 and 1996 and the three months
ended September 30, 1997 and 1996, respectively.
During the same periods, amortization of
capitalized servicing rights were $520,670,
$69,489, $211,487 and $51,643, respectively. At
June 30, 1997 and 1996, the capitalized
servicing rights approximated fair value. The
Company periodically reviews capitalized
servicing rights for valuation impairment.
F-11
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
This review is performed on a disaggregated
basis for the predominant risk characteristics
of the underlying loans which are loan type,
loan-to-value ratio and credit quality. The
Company generally makes loans to credit impaired
borrowers whose borrowing needs may not be met
by traditional financial institutions due to
credit exceptions. The Company has found that
credit impaired borrowers are payment sensitive
rather than interest rate sensitive. As such,
the Company does not consider interest rates a
predominant risk characteristic for purposes of
valuation impairment. Impairment is recognized
in a valuation allowance for each disaggregated
stratum in the period of impairment.
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 debt are amortized using the
interest method over the term of the related
debt.
F-12
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
Investments, Held to Maturity
The investments classified as held to maturity
consist of mortgage-backed securities that the
Company has the positive intent and ability to
hold to maturity. These investments are stated
at amortized cost, which approximates market.
Foreclosed property held for sale is stated at
the lower of cost or fair market value.
Income Recognition
Gain on sale of loans and leases receivables is
recognized upon the securitization of the
receivables in the form of REMIC's. Gain on
sales of receivables from securitizations
represents the present value of the differential
between the interest rate earned on the
receivables sold and the pass-through rate paid
to the securitization investors after
considering the effects of estimated
prepayments, bad debts and other costs,
including normal servicing fees, less the costs
of originating such receivables, and the gain or
loss on certain transactions structured as an
economic hedge that are designed to minimize the
risk of interest rate fluctuations.
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.
F-13
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
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 interest only and
residual strip 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 interest only and
residual strips and the write down of the
receivables, 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.
Earnings Per Share
Earnings per share are based on the weighted
average number of shares outstanding. Earnings
per share amounts for the year ended June 30,
1997 and the three months ended September 30,
1997 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 and the three months ended September 30,
1996.
Reclassifications
Certain amounts in the 1996 financial statements
have been reclassified to conform to the 1997
presentation.
Unaudited Interim Financial Information
The unaudited interim consolidated financial
statements as of September 30, 1997 and for the
three month periods ended September 30, 1997 and
1996 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.
F-14
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
2. Loan and
Lease
Receivables
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate secured loans $11,737,861 $24,581,475 $12,960,229
Leases (net of unearned
income of $2,670,954,
$1,986,487 and $1,136,621) 12,155,621 8,970,238 4,393,713
Other loans 32,075 32,075 109,726
Unamortized origination
costs/fees 1,713,167 2,466,342 868,934
-----------------------------------------------------------------------------------
Less allowance for 25,638,724 36,050,130 18,332,602
credit losses 268,980 338,309 330,007
-----------------------------------------------------------------------------------
Loan and lease
receivables, net $25,369,744 $35,711,821 $18,002,595
===================================================================================
</TABLE>
Substantially, all of the leases are direct
finance 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
($2,730,207 at September 30, 1997 and $2,753,400
at June 30, 1997) should certain amounts of the
loans prove to be uncollectible. However, the
Company believes that allowances established for
these off-balance sheet instruments are adequate
to provide for any amounts found to be
uncollectible. At September 30, 1997, the
uncollected balance of receivables securitized
was approximately $188,800,000. At June 30,
1997, the uncollected balance of receivables
securitized was approximately $142,600,000.
At September 30, 1997, the accrual of interest
income was suspended unreal estate secured loans
of $456,045. At June 30, 1997, the accrual of
interest income was suspended on real estate
secured loans of $187,760. Based on its
evaluation of the collateral related to these
loans, the Company expects to collect all
contractual interest and principal.
F-15
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
3. Allowance
for Credit
Losses
<TABLE>
<CAPTION>
Portfolio Securitizations Total
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, July 1, 1995 $ 62,258 $ 93,000 $ 155,258
Provision for credit losses 396,811 284,417 681,228
Accounts written off (129,062) -- (129,062)
--------------------------------------------------------------------------------
Balance, June 30, 1996 330,007 377,417 707,424
Provision for credit losses 105,941 1,048,725 1,154,666
Accounts written off (97,639) -- (97,639)
--------------------------------------------------------------------------------
Balance, June 30, 1997 338,309 1,426,142 1,764,451
Provision for credit losses 30,888 536,644 567,532
Accounts written off (100,217) -- (100,217)
--------------------------------------------------------------------------------
Balance,
September 30, 1997 $ 268,980 $ 1,962,786 $ 2,231,766
================================================================================
</TABLE>
4. Other
Receivables
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales of loans $ 2,675,730 $ 960,136 $ 86,090
Loan fees 172,059 246,294 121,874
Interest only and residual
strips (net of allowance
for credit losses of
$1,962,786, $1,426,142
and $377,417) 51,712,386 37,507,191 13,070,257
Other 708,199 930,540 434,904
--------------------------------------------------------------------------------
$55,268,374 $39,644,161 $13,713,125
================================================================================
</TABLE>
F-16
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
5. Property
and
Equipment
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Warehouse premises $ 146,205 $ -- $ --
Computer equipment and
software 2,733,265 2,247,786 1,296,769
Office furniture and
equipment 1,797,522 1,641,572 803,445
Leasehold improvements 385,156 293,098 171,542
Transportation equipment 47,601 32,745 --
--------------------------------------------------------------------------------
5,109,749 4,215,201 2,271,756
Less accumulated depreciation
and amortization 1,532,313 1,351,856 818,861
--------------------------------------------------------------------------------
$3,577,436 $2,863,345 $1,452,895
================================================================================
</TABLE>
6. Other
Assets
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deposits $ 169,740 $ 263,165 $ 296,582
Financing costs, debt
offerings, net of accumulated
amortization of $1,871,446,
$1,721,764 and $1,074,212 1,826,346 1,653,471 1,138,455
Investments, at cost, which approximate
fair market value (mature in June
2002 through April 2011) 2,730,206 2,753,400 2,834,783
Investment, held for sale, at cost,
which approximates fair market value
(U.S. Treasury notes due
September 30, 1999 and
June 30, 1999) 17,000,000 5,000,000 --
Foreclosed property
held for sale 780,372 605,177 607,905
Servicing rights 10,168,656 8,083,008 1,387,511
Other 59,649 71,828 239,558
--------------------------------------------------------------------------------------
$32,734,969 $18,430,049 $ 6,504,794
======================================================================================
</TABLE>
F-17
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
7. Debt
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Subordinated debt, due October 1997 through
October 1998; interest at rates ranging from 8%
to 12% payable quarterly; subordinated to all of
the Company's senior indebtedness $ 915,721 $ 1,077,721 $ 1,345,421
Subordinated debt, due October 1997 through
September 2007; interest at rates ranging from
7% to 10.50%; subordinated to all of the
Company's senior indebtedness 69,209,459 55,408,508 32,275,058
Note payable, $50,000,000 revolving line of
credit expiring September 1997; interest at
LIBOR plus 1 1/4% payable monthly;
collateralized by loans receivable -- -- 2,348,465
Note payable in monthly installments of $655
including interest at 11.8%; final payment due
in March 1999; collateralized by related equipment -- -- 18,457
------------------------------------------------------------------------------------------------------
$70,125,180 $56,486,229 $35,987,401
======================================================================================================
</TABLE>
F-18
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
Principal payments on debt for the next five years
are due as follows: year ending June 30, 1998 -
$29,581,709; 1999 - $7,762,807; 2000 - $5,351,198;
2001 - $2,959,431 and 2002 - $5,542,984.
At June 30, 1997, the Company has available
unused revolving lines of credit of $50,000,000,
$7,500,000 and $15,000,000. The lines expire in
September 1997, May 1998 and December 1999,
respectively. At September 30, 1997, the Company
has available unused revolving lines of credit
of $50,000,000 and $100,000,000. The lines
expire in December 1997 and July 1999. Advances
under the lines, if any, are collateralized by
certain loans receivable.
Subsequent to June 30, 1997, the Company
obtained a $100 million line of credit from a
syndicate of banks. Under this warehouse
facility, the Company may take advances, subject
to certain conditions including sublimits to
warehouse loans and leases.
8. Common and In May, 1996, the stockholders approved an amended
Preferred and restated Certificate of Incorporation which
Stock 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.
In September, 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.
In February, 1997, the Company sold 1,150,000
shares of common stock through a public offering
resulting in net proceeds of $20,738,928.
F-19
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
9. Stock In May, 1996, the stockholders approved a
Options 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
June 30, 1997, 25,000 shares were available for
future grants under this plan. Transactions under
this plan were as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C>
Options granted and
outstanding, June 30, 1996 90,000 $ 5.00
--------------------------------------------------------------------------------
Options granted 20,000 17.75
Options exercised -- --
--------------------------------------------------------------------------------
Options outstanding,
June 30, 1997 110,000 $ 7.32
================================================================================
</TABLE>
The Company has an employee stock option plan
which authorizes the grant to employees of
options to purchase 460,000 shares of common
stock (subsequently increased to 560,000 shares)
at a price equal to the market price of the
stock at the date of grant. Options are either
fully vested when granted or vest over a
five-year period and expire five to ten years
after grant. At June 30, 1997, 7,488 shares were
available for future grants under this plan.
Transactions under the plan were as follows:
F-20
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
<TABLE>
<CAPTION>
Number Weighted/Average
Shares Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding,
June 30, 1996 66,000 3.46
--------------------------------------------------------------------------------
Options granted, (weighted average
fair value of $11.51 per share) 161,500 19.93
Options exercised -- --
--------------------------------------------------------------------------------
Options outstanding,
June 30, 1997 227,500 $ 15.15
================================================================================
</TABLE>
The following tables summarize information about
stock options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------------------------
Weighted
Remaining
Range of Number Contractual Life Weighted-average
Exercise Prices of Options in Years Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C> <C>
$2.67 - $5.00 66,000 3.0 $ 3.46
$17.75 - $20.00 161,500 9.1 19.93
--------------------------------------------------------------------------------
Total 227,500 7.4 $ 15.15
================================================================================
</TABLE>
F-21
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------------------------------------------------------
Weighted
Remaining
Range of Number Contractual Life Weighted-average
Exercise Prices of Options in Years Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C> <C>
$2.67 - $5.00 66,000 3.0 $ 3.46
$17.75 5,000 4.1 17.75
--------------------------------------------------------------------------------
Total 71,000 3.1 $ 4.47
================================================================================
</TABLE>
In September, 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. The
loan is due in September, 2005 (earlier if the
stock is disposed) with interest only at 6.46%,
payable annually. The loan was secured by
450,012 shares of the Company's stock (at the
date of exercise, market value of collateral was
approximately $1,200,000), subsequently reduced
to 225,012 shares and is shown as a reduction of
stockholders' equity on the accompanying balance
sheet.
On July 1, 1996, the Company adopted Financial
Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation," which
requires either the fair value of employee
stock-based compensation plans be recorded as a
component of compensation expense in the
statement of income as of the date of grant of
awards related to such plans, or the impact of
such fair value on net income and earnings per
share be disclosed on a pro forma basis in a
footnote to financial statements for awards
granted after December 15, 1994, if the
accounting for such awards continues to be in
accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25"). The Company will
continue such accounting under the provisions of
APB 25.
F-22
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
Had compensation cost for the plan been
determined based on fair value at the grant
dates for awards under the plan consistent with
the method prescribed by SFAS 123, the Company's
net income and earnings per share would have
been reduced to the pro forma amounts indicated
as follows:
June 30, 1997 1996
--------------------------------------------------
Net income
--------------------------------------------------
As reported $5,939,833 $ 2,318,686
Pro forma 5,722,702 2,239,793
Earnings per share
--------------------------------------------------
As reported $2.05 $ 1.01
Pro forma 1.97 0.98
==================================================
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes
option pricing model using the following
assumptions:
June 30, 1997 1996
--------------------------------------------------
Expected volatility 30.0% 25.0%
Expected life 5-10 yrs. 5 yrs.
Risk free interest rate 6.31%-6.90% 5.77%-6.01%
==================================================
10. Income Taxes The provision for income taxes consists of the
following:
Year Ended June 30, 1997 1996
--------------------------------------------------
Current
Federal $ -- $ --
State -- --
--------------------------------------------------
Deferred
Federal 3,061,854 858,617
State -- (56,650)
--------------------------------------------------
3,061,854 801,967
--------------------------------------------------
$3,061,854 $ 801,967
==================================================
F-23
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
The current provision for federal income taxes
for the years ended June 30, 1997 is net of the
tax benefit of approximately $533,000 from the
utilization of net operating loss carryforwards.
The cumulative temporary differences resulted in
net deferred income tax assets or liabilities
consisting primarily of:
<TABLE>
<CAPTION>
Three months
ended Year ended
September 30, June 30,
1997 1997 1996
--------------------------------------------------------------------------------------
Deferred income tax assets
<S> <C> <C> <C>
Allowance for credit losses $ 758,801 $ 599,914 $ 287,214
Net operating loss carryforwards 1,888,688 1,888,688 461,954
Loan and lease receivable 347,209 291,379 68,058
Accrued expenses -- -- 246,500
--------------------------------------------------------------------------------------
2,994,698 2,779,981 1,063,726
Less valuation allowance 1,888,688 1,888,688 148,500
--------------------------------------------------------------------------------------
1,106,010 891,293 915,226
--------------------------------------------------------------------------------------
Deferred income tax liabilities
Loan and lease origination
costs/fees, net 124,840 784,156 368,849
Book over tax basis of property
and equipment 432,922 372,688 131,751
Other receivables 1,922,140 1,706,642 1,548,423
Servicing rights 4,880,683 2,658,788 372,474
--------------------------------------------------------------------------------------
7,360,585 5,522,274 2,421,497
--------------------------------------------------------------------------------------
Net deferred income tax
liabilities $6,254,575 $4,630,981 $1,506,271
=======================================================================================
</TABLE>
F-24
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
The valuation allowance represents the income
tax effect of State net operating loss
carryforwards of the Company which are not
presently expected to be utilized.
A reconciliation of income taxes at federal
statutory rates to the Company's tax provision
is as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1997 1996
--------------------------------------------------------------
<S> <C> <C>
Federal income tax at
statutory rates $ 3,061,854 $ 1,061,005
State income tax, net
of federal tax benefit -- --
Nondeductible expenses -- 13,545
Increase in state tax
valuation allowance -- --
Other, net -- (272,583)
--------------------------------------------------------------
$ 3,061,854 $ 801,967
==============================================================
</TABLE>
For income tax reporting, the Company has net
operating loss carryforwards aggregating
approximately $18,400,000 available to reduce
future state income taxes for various states as
of June 30, 1997. If not used, substantially all
of the carryforwards will expire at various
dates from June 30, 1998 to June 30, 2000.
11. Commitment Commitment
and
Contingencies The Company leases certain of its facilities under
a five-year operating lease expiring in January
2003, at a minimum annual rental of $699,216. 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 $668,364 and $373,694 for the years
ended June 30, 1997 and 1996. Rent expense under
all operating leases for such facilities was
$243,165 and $1,132,619 for the three months ended
September 30, 1997 and 1996, respectively.
F-25
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
Contingencies
A subsidiary of the Company makes home equity
loans on behalf of unaffiliated lenders for a
fee equal to a percentage of the loan amount.
Certain agreements require that all or a portion
of the fee be refunded if the loan is paid off
during the first six to twelve months after
origination.
At September 30, 1997, approximately $20,000 of
income is subject to this provision. The actual
amount of the fee refunded during the three
months ended September 30, 1997 which was
recorded as income prior to July 1, 1997 was not
material.
At June 30, 1997 and 1996, approximately $79,000
and $292,000, respectively, of income is subject
to this provision. The actual amount of the fee
refunded during the years ended June 30, 1997
and 1996, which was recorded as income prior to
July 1, 1996 and 1995 was $25,637 and $138,187,
respectively.
Employment Agreements
The Company entered into employment agreements
with three executives under which they are
entitled to annual base compensation of
$625,000, collectively, adjusted for increases
in the Consumer Price Index and for one
executive, merit increases. The agreements
terminate upon (a) the earlier of the
executive's death, permanent disability,
termination of employment for cause, voluntary
resignation (except that no voluntary
resignation may occur prior to February 2000) or
seventieth birthday, or (b) the later of the
fifth anniversary of the agreement or from three
to five years from the date of notice to the
executive of the Company's intention to
terminate the agreement.
In addition, the executives are entitled to a
cash payment equal to 299% of the last five
years average annual compensation in the event
of a "change in control", as defined in the
agreement and two of the executives are entitled
to all of the compensation discussed above.
F-26
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
12. Fair Value of No market exists for certain of the Company's
Financial assets and liabilities, therefore, fair value
Instruments 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, 1997:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------------------------
Carrying Fair
Value Value
--------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,013,936 $ 5,013,936
Loans and leases available
for sale 36,050,130 37,543,286
Interest only and residual strips 38,933,333 38,933,333
Servicing rights 8,083,008 8,083,008
Liabilities
Subordinated debt $56,486,229 $56,486,229
</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.
F-27
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
Loans and Leases Available for Sale - The Company
has estimated the fair values reported based upon
recent sales and securitizations.
Interest Only and Residual Strips - 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.
Subordinated Debt - The fair value of fixed
maturity subordinated debt is estimated using the
rates currently offered for debentures of similar
maturities.
13. Hedging The Company regularly securitizes and sells fixed
Transactions rate mortgage loans. To offset the effects of
interest rate fluctuations on the value of its
fixed rate loans held for sale, the Company may
hedge its interest rate risk related to the loans
held for sale by selling forward contracts for
U.S. Treasury securities. 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, 1997, there were no hedging
transactions outstanding.
14. Recent In February, 1997, the FASB issued SFAS 128,
Accounting "Earnings Per Share" (EPS) (SFAS 128), which is
Pronouncements effective in fiscal 1998, earlier application is
not permitted. SFAS 128 simplifies the standards
for computing earnings per share. It replaces the
presentation of primary EPS with a presentation of
basic EPS. Basic EPS excludes dilution and is
computed by dividing income available to common
shareholders by the weighted average number of
common shares outstanding for the period. If SFAS
128 had been applied to fiscal 1997 results of
operations, the Company's basic EPS would have
been $2.13 (pro forma) of earnings per common
share based on net income of $5,939,833 and
weighted average number of common shares of
2,784,416 (pro forma). Fully diluted EPS remains
the same under SFAS 128, but will be referred to
as diluted EPS.
F-28
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the Three
Months Ended September 30, 1997 and 1996 is unaudited)
================================================================================
In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement establishes
standards for the reporting and display of
comprehensive income in a full set of general
purpose financial statements. The provisions of
the statement are effective for fiscal years
beginning after December 15, 1997.
In June 1997, FASB issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and
Related Information." This statements requires
that public business enterprises report certain
information about operating segments in complete
sets of financial statements of the enterprise
and in condensed financial statements of interim
periods issued to stockholders. This statement
also requires that public business enterprises
report certain information about their products
and services, the geographical areas in which
they operate and their major customers. The
provisions of the statement are effective for
fiscal years beginning after December 15, 1997.
Due to the recent issuance of these
pronouncements, the Company has not completed
its analysis of the impact of SFAS No. 130 and
SFAS 131.
15. Subsequent Effective October 1, 1997, the Company acquired
Event all of the outstanding stock of New Jersey
Mortgage and Investment Corp. (NJMIC), a mortgage
and leasing company based in Roseland, New Jersey.
The purchase price for the stock consists of an
initial payment of cash and shares of common stock
of the Company and a note payable to the owners of
NJMIC and includes a contingent payment in the
future if NJMIC achieves certain performance
targets. The acquisition of NJMIC will be
accounted for using the purchase method of
accounting and accordingly, the purchase price
will be allocated to assets acquired and
liabilities assumed based on the fair values at
the date of acquisition. The fair value of NJMIC's
assets approximated the liabilities assumed and
accordingly, the majority of the purchase price is
anticipated to be recorded as goodwill. Any
contingent payments will result in an increase in
the amount of recorded goodwill.
F-29
<PAGE>
==============================================================
No person is authorized to give any information or to make any
representation not contained or incorporated by reference in
this Prospectus, and if given or made, such information or
representation must not be relied upon as having been
authorized by the Company. Neither the delivery of this
Prospectus nor any sale made in connection herewith shall,
under any circumstances, create any implication that there has
been no change in the facts set forth in this Prospectus or in
the affairs of the Company since the date hereof. This
Prospectus, even when accompanied by an appropriate Prospectus
Supplement, does not constitute an offer to sell or
solicitation of any offer to buy the Notes 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 Notes is not qualified to
do so, or to any person to whom it is unlawful to make such an
offer or solicitation.
-------------------
TABLE OF CONTENTS
Page
Available Information........................................3
Prospectus Summary...........................................4
Highlights of Terms of the Notes Offered....................13
Risk Factors................................................15
The Company.................................................23
Use of Proceeds ............................................23
Description of the Notes and the Indenture .................25
Selected Consolidated Financial Data........................35
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............37
Business....................................................54
Management..................................................72
Certain Relationships and Related
Transactions..............................................85
Principal Stockholders......................................86
Market for Common Stock and Related
Stockholder Matters.......................................88
Plan of Distribution........................................89
Legal Matters...............................................89
Experts.....................................................89
Information Regarding Former Accountants ...................90
Index to Consolidated Financial Statements.................F-1
Consolidated Financial Statements..........................F-4
==============================================================
<PAGE>
==============================================================
$125,000,000
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
[LOGO]
Subordinated Investment Notes
and Adjustable Rate Subordinated
Money Market Notes
PROSPECTUS
_______________, 1998
============================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Amended and Restated Certificate of Incorporation (the "Certificate
of Incorporation") and the Bylaws (the "Bylaws") of ABFS provide for
indemnification of its directors and officers to the full extent permitted by
Delaware law. In the event that the Delaware General Corporation Law (the
"Corporation Law") is amended to authorize corporate action further eliminating
or limiting the personal liability of directors and officers, the Certificate of
Incorporation and Bylaws provide the personal liability of the directors and
officers of ABFS shall be so eliminated or limited.
Section 145 of the Corporation Law provides, in substance, that
Delaware corporations shall have the power, under specified circumstances, to
indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding.
Section 145 of the Corporation Law provides that a company may pay the
expenses incurred by an officer or director in defending any civil, criminal,
administrative, or investigative action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding upon an undertaking by or
on behalf of such director or officer to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by the corporation.
The Certificate of Incorporation and Bylaws of ABFS provide that ABFS shall pay
such expenses.
The Company has obtained insurance to cover the Company's directors and
executive officers for liabilities which may be incurred in connection with the
offer, sale and registration of the Common Stock.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Investment Notes and the Money Market
Investment Accounts, other than underwriting discounts and commissions, which
ABFS does not anticipate paying:
II-1
<PAGE>
SEC Registration Fee*.................................. $ 37,879
NASD Filing Fee........................................ 0
Printing, Engraving and Mailing ....................... 60,000
Legal Fees and Expenses................................ 60,000
Accounting Fees and Expenses........................... 25,000
Blue Sky Fees and Expenses............................. 10,000
Miscellaneous.......................................... 2,907,121
----------
TOTAL................................ $3,100,000
==========
* Exact; all other fees and expenses are estimates
Item 26. Recent Sales of Unregistered Securities.
On September 29, 1995, ABFS issued 225,012 shares of common stock to
Anthony J. Santilli, President of ABFS, upon the exercise of stock options at a
price of $2.67 per share.
On October 27, 1997, ABFS issued 20,240 shares of common stock to
Stanley L. Furst and Joel E. Furst as partial consideration for their 100%
interest in New Jersey Mortgage and Investments, Corp., a New Jersey
corporation.
Exemptions from registration for the issuances described above were
claimed pursuant to Section 4(2) of the Securities Act, in reliance upon the
fact that such sales did not involve a public offering. Therefore, such
securities are subject to certain transfer restrictions.
Item 27. Financial Statements and Exhibits
The following documents were filed as part of this Registration
Statement.
(a) Financial Statements:
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Reports of Independent Certified Public Accountants
Consolidated balance sheets as of June 30, 1997 and 1996
and September 30, 1997 (unaudited)
II-2
<PAGE>
Consolidated statements of income for the years ended June
30, 1997 and 1996 and the three months ended
September 30, 1997 and 1996 (unaudited)
Consolidated statements of stockholders' equity for the years
ended June 30, 1997 and 1996 and the three months
ended September 30, 1997 (unaudited)
Consolidated statements of cash flows for the years ended June
30, 1997 and 1996 and the three months ended
September 30, 1997 and 1996 (unaudited)
Notes to Consolidated Financial Statements
(b) Exhibits:
Regulation S-B
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference from Exhibit 3.1 of ABFS'
Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1996 filed on September 27, 1996, File No.
0-22472 (the "1996 Form 10-KSB")).
3.2 Bylaws of ABFS (Incorporated by reference from Exhibit
3.2 of the Registration Statement on Form SB-2 filed
December 27, 1996, Registration Number 333-18919 (the
"1996 Form SB-2")).
4.1 Form of unsecured Investment Note (Incorporated by
reference from Exhibit 4.1 of Amendment No. 1 to the
Registration Statement on Form SB-2 filed April 29,
1994, Registration Number 33-76390 (the "Form SB-2")).
4.2 Form of unsecured Investment Note issued pursuant to
Indenture with First Trust, National Association, a
national banking association. (Incorporated by
reference from Exhibit 4.5 of Amendment No. One to the
Registration Statement on Form SB-2 filed on December
14, 1995, Registration Number 33-98636 (the "1995 Form
SB-2")).
4.3 Form of Indenture by and between ABFS and First Trust,
National Association, a national banking association
(Incorporated by reference from Exhibit 4.6 of the
Registration Statement on Form SB-2 filed on October
26, 1995, Registration Number 33-98636).
II-3
<PAGE>
Regulation S-B
Exhibit Number Description
- -------------- -----------
4.4 Form of Indenture by and between ABFS and First Trust,
National Association, a national banking association.*
4.5 Form of unsecured Investment Note.*
5 Opinion of Blank Rome Comisky & McCauley LLP.*
10.1 Loan and Security Agreement between Upland Mortgage and
BankAmerica Business Credit, Inc. dated May 23, 1996
(Incorporated by reference from the 1996 Form 10-KSB).
10.2 Amended and Restated Stock Option Plan (Incorporated by
reference from Exhibit 10.2 of ABFS' Quarterly Report
on Form 10-QSB for the quarter ended September 30,
1997, File No. 0-22474 (the "September 30, 1997 Form
10-QSB")).
10.3 Stock Option Award Agreement (Incorporated by reference
from Exhibit 10.1 of the Registration Statement on Form
S-11 filed on February 26, 1993, Registration No.
33-59042 (the "Form S-11")).
10.4 Line of Credit Agreement by and between American
Business Credit, Inc. and Eagle National Bank
(Incorporated by reference from Exhibit 10.4 of
Amendment No. 1 to the Registration Statement on Form
SB-2 filed on April 29, 1993, Registration No. 33-59042
(the "1993 Form SB-2")).
10.5 Agreement dated April 12, 1993 between American
Business Credit, Inc. and Eagle National Bank
(Incorporated by reference from Exhibit 10.5 of the
1993 Form SB-2).
10.6 1995 Stock Option Plan for Non-Employee Directors
(Incorporated by reference from Exhibit 10.6 of the
Amendment No. 1 to the 1996 Form SB-2 filed on February
4, 1997 Registration No. 333-18919 (the "Amendment No.
1 to the 1996 Form SB-2")).
10.7 Form of Option Award Agreement for Non-Employee
Directors Plan for Formula Awards (Incorporated by
reference from Exhibit 10.13 of the 1996 Form 10-KSB).
10.8 1997 Non-Employee Director Stock Option Plan (including
form of Option Agreement) (Incorporated by reference
from Exhibit 10.1 of the September 30, 1997 Form
10-QSB).
10.9 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).
II-4
<PAGE>
Regulation S-B
Exhibit Number Description
- -------------- -----------
10.10 Lease dated January 7, 1994 by and between TCW 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).
10.11 First Amendment to Agreement of Lease by and between
TCW Realty Fund IV Pennsylvania Trust and ABFS dated
October 24, 1994. (Incorporated by reference from
Exhibit 10.9 of ABFS' Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1995 (the "1995 Form
10-KSB")).
10.12 Second Amendment to Agreement of Lease by and between
TCW Realty Fund IV Pennsylvania Trust and ABFS dated
December 23, 1994 (Incorporated by reference from
Exhibit 10.10 of the 1995 Form 10-KSB).
10.13 Third Amendment to Lease between TCW Realty Fund IV
Pennsylvania Trust and ABFS dated July 25, 1995
(Incorporated by reference from Exhibit 10.11 of the
1995 Form 10-KSB).
10.14 Promissory Note of Anthony J. Santilli, Jr. and Stock
Pledge Agreement dated September 29, 1995 (Incorporated
by reference from Exhibit 10.14 of the 1995 Form SB-2).
10.15 Form of Employment Agreement with Anthony J. Santilli,
Jr., Beverly Santilli and Jeffrey M. Ruben
(Incorporated by reference from Exhibit 10.15 of the
Amendment No. 1 to the 1996 Form SB-2).
10.16 Amendment One to Anthony J. Santilli, Jr.'s Employment
Agreement (Incorporated by reference from Exhibit 10.3
of the September 30, 1997 Form 10-QSB).
10.17 Amendment One to Beverly Santilli's Employment
Agreement (Incorporated by reference from Exhibit 10.4
of the September 30, 1997 Form 10-QSB).
10.18 Management Incentive Plan (Incorporated by reference
from Exhibit 10.16 of the 1996 Form SB-2).
10.19 Loan and Security Agreement dated December 12, 1996
between American Business Credit, Inc. and Finova
Capital Corporation (Incorporated by reference from
Exhibit 10.17 of the 1996 Form SB-2).
II-5
<PAGE>
Regulation S-B
Exhibit Number Description
- -------------- -----------
10.20 Form of Option Award Agreement for Non-Employee
Directors Plan for Non-Formula Awards (Incorporated by
reference from Exhibit 10.18 of the Amendment No. 1 to
the 1996 Form SB-2).
10.21 Form of Pooling and Servicing Agreement related to the
Company's loan securitizations dated March 31, 1995,
October 1, 1995, May 1, 1996, August 31, 1996, February
28, 1997 and September 1, 1997 (Incorporated by
reference from Exhibit 4.1 of ABFS' Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1995 (the
"March 31, 1995 Form 10-QSB")).
10.22 Form of Sales and Contribution Agreement related to the
Company's loan securitizations dated March 31, 1995,
October 1, 1995, May 1, 1996, September 27, 1998, March
27, 1997 and September 29, 1997 (Incorporated by
reference from Exhibit 4.1 of the March 31, 1995 Form
10-QSB).
10.23 Amendments to the Interim Warehouse and Security
Agreement between Upland Mortgage and Prudential
Securities Realty Funding Corporation.*
10.24 Fourth Amendment to Lease between TCW Realty Fund IV
Pennsylvania Trust and ABFS dated April 9, 1996.*
10.25 Fifth Amendment to Lease between TCW Realty Fund IV
Pennsylvania Trust and ABFS dated October 8, 1996.*
10.26 Sixth Amendment to Lease between TCW Realty Fund IV
Pennsylvania Trust and ABFS dated March 31, 1997.*
10.27 Agreement for Purchase and Sale of Stock between
Stanley L. Furst, Joel E. Furst and ABFS dated October
27, 1997 (Incorporated by reference from ABFS' Current
Report on Form 8-K dated October 27, 1997, File No.
0-22474).
10.28 Credit Agreement between American Business Credit,
Inc., HomeAmerican Credit, Inc., and American Business
Leasing, Inc., as co-borrowers, American Business
Financial Services, Inc., as parent, Texas Commerce
Bank National Association, as administrative agent and
certain lenders (Incorporated by reference from Exhibit
10.24 of ABFS' Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1997 filed on September 29,
1997, File No. 0-22474).
II-6
<PAGE>
Regulation S-B
Exhibit Number Description
- -------------- -----------
10.29 Standard Form of Office Lease and Rider to Lease dated
April 2, 1993 by and between 5 Becker Associates and
NJMIC.
10.30 First Amendment of Lease by and between 5 Becker
Associates and NJMIC dated July 27, 1994.
10.31 Form of Debenture Note related to NJMIC's subordinated
debt.
10.32 Note Agreement and Promissory Note dated July 15, 1997
issued by NJMIC to N.M. Rothschild & Sons.
10.33 Form of Standard Terms and Conditions of Servicing
Agreement related to NJMIC's lease securitizations
dated May 1, 1995 and March 1, 1996.
10.34 Form of Standard Terms and Conditions of Lease
Acquisition Agreement related to NJMIC's lease
securitizations dated May 1, 1995 and
March 1, 1996.
10.35 Amended and Restated Specific Terms and Conditions of
Servicing Agreement related to NJMIC's lease
securitization dated May 1, 1995.
10.36 Amended and Restated Specific Terms and Conditions of
Lease Acquisition Agreement related to NJMIC's lease
securitization dated May 1, 1995.
10.37 Specific Terms and Conditions of Servicing Agreement
related to NJMIC's lease securitization dated March 1,
1996.
10.38 Specific Terms and Conditions of Lease Acquisition
Agreement related to NJMIC's lease securitization dated
March 1, 1996.
II-7
<PAGE>
Regulation S-B
Exhibit Number Description
- -------------- -----------
11 Statement of computation of Per Share Earnings
(Included in Note 1 of the Notes to Consolidated
Financial Statements).
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 Blank Rome Comisky & McCauley LLP (See
Exhibit 5).*
23.2 Consent of BDO Seidman LLP.
24 Power of attorney (included on signature page).
25 Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 on Form T-1.*
27 Financial Data Schedule (Incorporated by reference from
Exhibit 27 of the September 30, 1997 Form 10-QSB).
99.1 Form of Prospectus Supplement.*
99.2 Advertising Materials and Order Forms.*
- --------------------------------------
* Previously filed.
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-B for a Registration Statement on Form SB-2.
II-8
<PAGE>
Item 28. Undertakings.
(a) As to Rule 415.
The small business issuer will:
(1) File, during any period in which offers or sells
securities, a post-effective amendment to this
registration statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together,
represent a fundamental change in the
information in the registration statement;
and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new
registration statement of the securities offered, and
the offering of the securities at that time to be the
initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold
at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The small business issuer will:
(1) For determining any liability under the Securities
Act, treat the information omitted from the form of
prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in
II-9
<PAGE>
a form of prospectus filed by the small business
issuer under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act as part of this registration
statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities
Act, treat each post-effective amendment that
contains a form of prospectus as a new registration
statement for the securities offered in the
registration statement, and that offering of the
securities at that time as the initial bona fide
offering of those securities.
II-10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Philadelphia, Commonwealth of Pennsylvania on January 20, 1998.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: January 20, 1998 By: /S/ ANTHONY J. SANTILLI, JR.
------------------------------------------------
Anthony J. Santilli, Jr., Chairman, President,
Chief Executive Officer, Chief Operating Officer,
and Director (Duly Authorized Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Anthony J. Santilli, his true and lawful
attorney-in-fact and agent with full power of substitution or resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documentation in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/S/ ANTHONY J. SANTILLI, JR. Chairman, President, Chief Executive Officer, January 20, 1998
------------------------------------- Chief Operating Officer and Director
Anthony J. Santilli, Jr. (Principal Executive and Operating Officer)
/S/ DAVID M. LEVIN Senior Vice President-Finance and Chief January 20, 1998
------------------------------------- Financial Officer (Principal Financial and
David M. Levin Accounting Officer)
/S/ LEONARD BECKER Director January 20, 1998
-------------------------------------
Leonard Becker
/S/ RICHARD KAUFMAN Director January 20, 1998
-------------------------------------
Richard Kaufman
/s/ MICHAEL DELUCA Director January 20, 1998
-------------------------------------
Michael DeLuca
/S/ HAROLD SUSSMAN Director January 20, 1998
-------------------------------------
Harold Sussman
</TABLE>
<PAGE>
EXHIBIT INDEX
S-B Exhibit Numbers Description
- ------------------- -----------
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference from Exhibit 3.1 of ABFS'
Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1996 filed on September 27, 1996, File No.
0-22472 (the "1996 Form 10-KSB")).
3.2 Bylaws of ABFS (Incorporated by reference from Exhibit
3.2 of the Registration Statement on Form SB-2 filed
December 27, 1996, Registration Number 333-18919 (the
"1996 Form SB-2")).
4.1 Form of unsecured Investment Note (Incorporated by
reference from Exhibit 4.1 of Amendment No. 1 to the
Registration Statement on Form SB-2 filed April 29,
1994, Registration Number 33-76390 (the "Form SB-2")).
4.2 Form of unsecured Investment Note issued pursuant to
Indenture with First Trust, National Association, a
national banking association. (Incorporated by
reference from Exhibit 4.5 of Amendment No. One to the
Registration Statement on Form SB-2 filed on December
14, 1995, Registration Number 33-98636 (the "1995 Form
SB-2")).
4.3 Form of Indenture by and between ABFS and First Trust,
National Association, a national banking association
(Incorporated by reference from Exhibit 4.6 of the
Registration Statement on Form SB-2 filed on October
26, 1995, Registration Number 33-98636).
4.4 Form of Indenture by and between ABFS and First Trust,
National Association, a national banking association.*
4.5 Form of unsecured Investment Note.*
5 Opinion of Blank Rome Comisky & McCauley LLP.*
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).
<PAGE>
S-B Exhibit Numbers Description
- ------------------- -----------
10.2 Amended and Restated Stock Option Plan (Incorporated by
reference from Exhibit 10.2 of ABFS' Quarterly Report
on Form 10-QSB for the quarter ended September 30,
1997, File No. 0-22474 (the "September 30, 1997 Form
10-QSB")).
10.3 Stock Option Award Agreement (Incorporated by reference
from Exhibit 10.1 of the Registration Statement on Form
S-11 filed on February 26, 1993, Registration No.
33-59042 (the "Form S-11")).
10.4 Line of Credit Agreement by and between American
Business Credit, Inc. and Eagle National Bank
(Incorporated by reference from Exhibit 10.4 of
Amendment No. 1 to the Registration Statement on Form
SB-2 filed on April 29, 1993, Registration No. 33-59042
(the "1993 Form SB-2")).
10.5 Agreement dated April 12, 1993 between American
Business Credit, Inc. and Eagle National Bank
(Incorporated by reference from Exhibit 10.5 of the
1993 Form SB-2).
10.6 1995 Stock Option Plan for Non-Employee Directors
(Incorporated by reference from Exhibit 10.6 of the
Amendment No. 1 to the 1996 Form SB-2 filed on February
4, 1997 Registration No. 333-18919 (the "Amendment No.
1 to the 1996 Form SB-2")).
10.7 Form of Option Award Agreement for Non-Employee
Directors Plan for Formula Awards (Incorporated by
reference from Exhibit 10.13 of the 1996 Form 10-KSB).
10.8 1997 Non-Employee Director Stock Option Plan (including
form of Option Agreement) (Incorporated by reference
from Exhibit 10.1 of the September 30, 1997 Form
10-QSB).
10.9 Interim Warehouse and Security Agreement between Upland
Mortgage and Prudential Securities Realty Funding
Corporation dated April 25, 1996 (Incorporated by
reference from Exhibit 10.14 of the 1996 Form 10-KSB).
10.10 Lease dated January 7, 1994 by and between TCW 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).
10.11 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
<PAGE>
S-B Exhibit Numbers Description
- ------------------- -----------
Exhibit 10.9 of ABFS= Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1995 (the "1995 Form
10-KSB")).
10.12 Second Amendment to Agreement of Lease by and between
TCW Realty Fund IV Pennsylvania Trust and ABFS dated
December 23, 1994 (Incorporated by reference from
Exhibit 10.10 of the 1995 Form 10-KSB).
10.13 Third Amendment to Lease between TCW Realty Fund IV
Pennsylvania Trust and ABFS dated July 25, 1995
(Incorporated by reference from Exhibit 10.11 of the
1995 Form 10-KSB).
10.14 Promissory Note of Anthony J. Santilli, Jr. and Stock
Pledge Agreement dated September 29, 1995 (Incorporated
by reference from Exhibit 10.14 of the 1995 Form SB-2).
10.15 Form of Employment Agreement with Anthony J. Santilli,
Jr., Beverly Santilli and Jeffrey M. Ruben
(Incorporated by reference from Exhibit 10.15 of the
Amendment No. 1 to the 1996 Form SB-2).
10.16 Amendment One to Anthony J. Santilli, Jr.'s Employment
Agreement (Incorporated by reference from Exhibit 10.3
of the September 30, 1997 Form 10-QSB).
10.17 Amendment One to Beverly Santilli's Employment
Agreement (Incorporated by reference from Exhibit 10.4
of the September 30, 1997 Form 10-QSB).
10.18 Management Incentive Plan (Incorporated by reference
from Exhibit 10.16 of the 1996 Form SB-2).
10.19 Loan and Security Agreement dated December 12, 1996
between American Business Credit, Inc. and Finova
Capital Corporation (Incorporated by reference from
Exhibit 10.17 of the 1996 Form SB-2).
10.20 Form of Option Award Agreement for Non-Employee
Directors Plan for Non-Formula Awards (Incorporated by
reference from Exhibit 10.18 of the Amendment No. 1 to
the 1996 Form SB-2).
10.21 Form of Pooling and Servicing Agreement related to the
Company's loan securitizations dated March 31, 1995,
October 1, 1995, May 1, 1996, August 31, 1996, February
28, 1997 and September 1, 1997 (Incorporated by
reference from Exhibit 4.1 of ABFS' Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1995 (the
"March 31, 1995 Form 10-QSB")).
<PAGE>
S-B Exhibit Numbers Description
- ------------------- -----------
10.22 Form of Sales and Contribution Agreement related to the
Company's loan securitizations dated March 31, 1995,
October 1, 1995, May 1, 1996, September 27, 1996, March
27, 1997 and September 29, 1997 (Incorporated by
reference from Exhibit 4.1 of the March 31, 1995 Form
10-QSB).
10.23 Amendments to the Interim Warehouse and Security
Agreement between Upland Mortgage and Prudential
Securities Realty Funding Corporation.*
10.24 Fourth Amendment to Lease between TCW Realty Fund IV
Pennsylvania Trust and ABFS dated April 9, 1996.*
10.25 Fifth Amendment to Lease between TCW Realty Fund IV
Pennsylvania Trust and ABFS dated October 8, 1996.*
10.26 Sixth Amendment to Lease between TCW Realty Fund IV
Pennsylvania Trust and ABFS dated March 31, 1997.*
10.27 Agreement for Purchase and Sale of Stock between
Stanley L. Furst, Joel E. Furst and ABFS dated October
27, 1997 (Incorporated by reference from ABFS' Current
Report on Form 8-K dated October 27, 1997, File No.
0-22474).
10.28 Credit Agreement between American Business Credit,
Inc., HomeAmerican Credit, Inc., and American Business
Leasing, Inc., as co-borrowers, American Business
Financial Services, Inc., as parent, Texas Commerce
Bank National Association, as administrative agent and
certain lenders (Incorporated by reference from Exhibit
10.24 of ABFS' Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1997 filed on September 29,
1997, File No. 0-22474).
10.29 Standard Form of Office Lease and Rider to Lease dated
April 2, 1993 by and between 5 Becker Associates and
NJMIC.
10.30 First Amendment of Lease by and between 5 Becker
Associates and NJMIC dated July 27, 1994.
10.31 Form of Debenture Note related to NJMIC's subordinated
debt.
10.32 Note Agreement and Promissory Note dated July 15, 1997
issued by NJMIC to N.M. Rothschild & Sons.
<PAGE>
S-B Exhibit Numbers Description
- ------------------- -----------
10.33 Form of Standard Terms and Conditions of Servicing
Agreement related to NJMIC's lease securitizations
dated May 1, 1995 and March 1, 1996.
10.34 Form of Standard Terms and Conditions of Lease
Acquisition Agreement related to NJMIC's lease
securitizations dated May 1, 1995 and March 1, 1996.
10.35 Amended and Restated Specific Terms and Conditions of
Servicing Agreement related to NJMIC's lease
securitization dated May 1, 1995.
10.36 Amended and Restated Specific Terms and Conditions of
Lease Acquisition Agreement related to NJMIC's lease
securitization dated May 1, 1995.
10.37 Specific Terms and Conditions of Servicing Agreement
related to NJMIC's lease securitization dated March 1,
1996.
10.38 Specific Terms and Conditions of Lease Acquisition
Agreement related to NJMIC's lease securitization dated
March 1, 1996.
11 Statement of computation of Per Share Earnings
(Included in Note 1 of the Notes to Consolidated
Financial Statements).
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.
<PAGE>
S-B Exhibit Numbers Description
- ------------------- -----------
23.1 Consent of Blank Rome Comisky & McCauley LLP (See
Exhibit 5).*
23.2 Consent of BDO Seidman LLP.
24 Power of attorney (included on signature page).
25 Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 on Form T-1.*
27 Financial Data Schedule (Incorporated by reference from
Exhibit 27 of the September 30, 1997 Form 10-QSB).
99.1 Form of Prospectus Supplement.*
99.2 Advertising Materials and Order Forms.*
- --------------------------------------
* Previously filed.
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-B for a Registration Statement on Form SB-2.
<PAGE>
STANDARD FORM OF OFFICE LEASE
AGREEMENT OF LEASE, made as of this 2nd day of April 1993, between 5 BECKER
ASSOCIATES, a New Jersey limited partnership, having an office c/o Bellemead
Management Co., Inc., 280 Corporate Center, 4 Becker Farm Road, Third Floor,
Roseland, New Jersey 07068 (the "Owner" or "Landlord"), and NEW JERSEY MORTGAGE
AND INVESTMENT CORP., a New Jersey corporation, having an address at 66 West
Mount Pleasant Avenue, Livingston, New Jersey (the "Tenant").
WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord a portion of the first (1st) floor of a certain office building located
at 5 Becker Farm Road, Roseland, New Jersey (the "Premises" or "Demised
Premises" or "demised premises"), more particularly shown upon the Rental Plan
annexed hereto and made a part hereof as Exhibit "A", for a term commencing and
terminating as set forth in Article 37 of the Rider to Lease.
The annual rental rate ("Minimum Rent") for the Premises shall be ONE
HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED FIFTY ONE AND 25/100. DOLLARS
($175,451.25), payable in advance on the first day of each calendar month in
equal monthly installments of FOURTEEN THOUSAND SIX HUNDRED TWENTY AND 94/100
DOLLARS ($14,620.94) during the term of this Lease.
Installments of Minimum Rent payable hereunder shall be paid at the office
of Landlord or at such other place as Landlord may designate from time to time
by written notice to Tenant hereunder, without setoff or deduction whatsoever
except that Tenant shall pay security upon the execution hereof.
<PAGE>
In the event that, at the commencement of the term of this lease, or
thereafter. Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby convenant
as follows:
Rent 1. Tenant shall pay the rent as above and as
hereinafter provided.
Occupany 2. Tenant shall use and occupy demised premises for
general excutive and administrative offices only and for
no other purpose.
Tenant 3. Tenant shall make no changes in or to the
Alterations demised premises of any nature without Owner's prior
written consent. Subject to the prior written consent of
Owner, and to the provisions of this article, Tenant at Tenant's expense, may
make alterations, installations, additions or improvements which are
non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before making
any alterations, additions, installations or improvements, at its expense,
obtain all permits, approvals and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicates of all such permits, approvals
and certificates to Owner and Tenant agrees to carry and will cause Tenant's
contractors and sub-contractors to carry such workman's compensation, general
liability, personal and property damage insurance as Owner may require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have been done for, or materials
furnished to, Tenant, whether or not done pursuant to this article, the same
shall be discharged by Tenant within thirty days thereafter, at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
cables, telephones wires, partitions, railings and like installations, installed
in the premises at any time, either by Tenant or by Owner in Tenant's behalf,
shall, upon installation, become the property of Owner and shall remain upon and
be surrendered with the demised premises unless Owner, by notice to Tenant no
later than twenty days prior to the date fixed as the termination of this lease,
elects to relinquish Owner's right thereto and to have them removed by Tenant,
in which event the same shall be removed from the premises by Tenant prior to
the expiration of the lease, at Tenant's expense. Nothing in this Article shall
be construed to give Owner title to or to prevent Tenant's removal of trade
fixtures, moveable office furniture and equipment, but upon removal of any such
from the premises or upon removal of other installations as may be required by
Owner, Tenant shall immediately and at its expense, repair and restore the
premises to the condition existing prior to installation and repair any damage
to the demised premises or the building due to such removal. All property
permitted or required to be removed, by Tenant at the end of the term remaining
in the premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or may be removed from
the premises by Owner, at Tenant's expense.
Maintenance 4. Tenant shall, throughout the term of this lease,
and take good care of the demised premises and the
Repairs fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised
premises or any other part of the building and the systems and equipment
thereof, whether requiring structural or nonstructural repairs caused by or
resulting from carelessness, omission, neglect or improper conduct of Tenant,
Tenant's subtenants, agents, employees, invitees or licensees, or which arise
out of any work, labor, service or equipment done for or supplied to Tenant or
any subtenant or arising out of the installation, use or operation of the
property or equipment of Tenant or any subtenant. In connection with the
immediately preceding sentence, Tenant shall not be responsible for damages or
injury adjudged to have been caused solely by the negligence or willful
misconduct of Landlord, its agents or employees. Tenant shall also repair all
damage to the building and the demised premises caused by the moving of
Tenant's fixtures, furniture and equipment. Tenant shall promptly make, at
Tenant's expense, all repairs in and to the demised premises for which Tenant is
responsible, using only the contractor for the trade or trades in question,
selected from a list of at least two contractors per trade submitted by Owner.
Any other repairs in or to the building or the facilities and systems thereof
for which Tenant is responsible shall be performed by Owner at the Tenant's
expense. Owner shall maintain in good working order and repair the exterior and
the structural portions of the building, including the structural portions of
its demised premises, and the public portions of the building interior and the
building plumbing, electrical, heating and ventilating systems (to the extent
such systems presently exist) serving the demised premises. Tenant agrees to
give prompt notice of any defective condition in the premises for which Owner
may be responsible hereunder. There shall be no allowance to Tenant for
diminution of rental value and no liability on the part of Owner by reason of
inconvenience, annoyance or injury to busineas arising from
<PAGE>
Owner or others making repairs, alterations, additions or improvements in or to
any portion of the building or the demised premises or in and to the fixtures,
appurtenances or equipment thereof. It is specifically agreed that Tenant shall
not be entitled to any setoff or reduction of rent by reason of any failure of
Owner to comply with the covenants of this or any other article of this Lease.
Tenant agrees that Tenant's sole remedy at law in such instance will be by way
of an action for damages for breach of contract. The provisions of this Article
4 shall not apply in the case of fire or other casualty which are dealt with in
Article 9 hereof.
Window 5. Tenant will not clean nor require, permit,
Cleaning suffer or allow any window in the demised premises to
be cleaned from the outside.
Requirements 6. Prior to the commencement of the lease term,
of Law, if Tenant is then in possession, and at all times
Fire Insurance, thereafter, Tenant, at Tenant's sole cost and expense,
Floor Loads shall promptly comply with all present and future laws,
orders and regulations of all state, federal, municipal
and local governments, departments, commissions and boards and any direction of
any public officer pursuant to law, and all orders, rules and regulations of any
body which shall impose any violation, order or duty upon Owner or Tenant with
respect to the demised premises, whether or not arising out of Tenant's use or
manner of use thereof, (including Tenant's permitted use) or, with respect to
the building if arising out of Tenant's use or manner of use of the premises or
the building (including the use permitted under the lease). Nothing herein shall
require Tenant to make structural repairs or alterations unless Tenant has, by
its manner of use of the demised premises or method of operation therein,
violated any such laws, ordinances, orders, rules, regulations or requirements
with respect thereto. Tenant may, after securing Owner to Owner's satisfaction
against all damages, interest, penalties and expenses, including, but not
limited to, reasonable attorney's fees, by cash deposit or by surely bond in an
amount and in a company satisfactory to Owner, contest and appeal any such
1aws ordinances, orders, rules, regulations or requirements provided same is
done with all reasonable promptness and provided such appeal shall not subject
Owner to prosecution for a criminal offense or constitute a default under any
lease or mortgage under which Owner may be obligated, or cause the demised
premises or any part thereof to be condemned or vacated. Tenant shall not do or
permit any act or thing to be done in or to the demised premises which is
contrary to law, or which will invalidate or be in conflict with public
liability, fire or other policies of insurance at any time carried by or for the
benefit of Owner with respect to the demised premises or the building of which
the demised premises form a part, or which shall or might subject Owner to any
liability or responsibility to any person or for property damage. Tenant shall
not keep anything in the demised premises except as now or hereafter permitted
by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating
Organization or other authority having jurisdiction, and then only in such
manner and such quantity so as not to increase the rate for fire insurance
applicable to the building, nor use the premises in a manner which will increase
the insurance rate for the building or any property located therein over that in
effect prior to the commencement of Tenant's occupancy. Tenant shall pay all
costs, expenses, fines, penalties, or damages, which may be imposed upon Owner
by reason of Tenant's failure to comply with the provisions of this article and
if by reason of such failure the fire insurance rate shall, at the beginning of
this lease or at any time thereafter, be higher than it otherwise would be, then
Tenant shall reimburse Owner, as additional rent hereunder, for that portion of
all fire insurance premiums thereafter paid by Owner which shall have been
charged because of such failure by Tenant. In any action or proceeding wherein
Owner and Tenant are parties, a schedule or "make-up" of rate for the building
or demised premises issued by any body making fire insurance rates applicable to
said premises shall be conclusive evidence of the facts therein stated and of
the several items and charges in the fire insurance rates then applicable to
said premises. Tenant shall not place a load upon any floor of the demised
premises exceeding the floor load per square foot area which it was designed to
carry and which is allowed by law. Owner reserves the right to prescribe the
weight and position of all safes, business machines and mechanical equipment.
Such installations shall be placed and maintained by Tenant, at Tenant's
expense, in settings sufficient, in Owner's judgement, to absorb and prevent
vibration, noise and annoyance.
<PAGE>
Subordination 7.(a) This lease is subject and subordinate to all
ground or underlying leases and to all mortages which
may now or hereafter affect such leases or the real property of which demised
premises are a part and to all renewals, modifications, consolidatons,
replacements and extensions of any such underlying leases and mortgages. This
clause shall be self-operative and no further instrument of subdination shall be
required by any ground or underlying lessor or by any mortgagee, affecting any
lease or the real property of which the demised premises are a part. In
confirmation of such subordination, Tenant shall execute promptly any
certificate that Owner may request.
(b) With respect to all mortgages which may as of the
date hereof affect this Lease or the building of which the demised premises form
a part, Owner agrees that upon Tenant's written request received by Owner with
ten (10) days after the date hereof (time being of the essence), Owner shall
endeavor to use reasonable efforts (at no cost or expense to Owner) to obtain a
non-disturbance and attornment agreement in recordable form from the holder of
any such mortgage, providing in substance that so long an Tenant shall have
entered into possession and occupancy of the demised premises and commenced
payment of Minimum Rent and additional rent due hereunder, and so long as Tenant
has not breached its obligations for the timely payment of Minimum Rent and
additional rent and in the performance of the other terms, covenants and
conditions to be performed or observed on Tenant's part under the Lease,
Tenant's possession of the demised premises will not be disturbed during the
term hereof, notwithstanding the foreclosure of any such mortgage, and Tenant
will be named as a party defendant in any foreclosure proceedings brought for
the recovery of possession, it being hereby covenanted and agreed by Tenant that
the holder of any such mortgage, or anyone claiming by, through or under said
holder shall not be (i) liable for any act or omission for any prior landlord
(including Owner), or (ii) subject to any offsets or defenses which Tenant might
have against any prior landlord (including Owner) or (iii) bound by any Minimum
Rent, Adjusted Minimum Rent or additional rent or other charges which Tenant
might have paid for more than the current month to a prior landlord (including
Owner), or (iv) bound by any modifications of this Lease made without the
written consent of such mortgages.
Property- 8. Owner or its agents shall not be liable for any
Loss, Damage, damage to property of Tenant or of others entrusted
Reimbursement, to employees of the building, nor for lose of or
Indemnity damage to any property of Tenant by theft or
otherwise, nor for any injury or damage to persons or
property resulting from any cause of whatsoever nature, unless caused by or due
to the negligence of Owner, its agents, servants or employeees. Owner or its
agents will not be liable for any such damage caused by other tenants or persons
in, upon or about said building or caused by operations in construction of any
private, public or quasi public work. If at any time any windows of the demised
premises are temporarily closed, darkened or bricked up (or permanently closed,
darkened or bricked up, if required by law) for any reason whatsoever including,
but not limited to Owner's own acts, Owner shall not be liable for any damage
Tenant may sustain thereby and Tenant shall not be entitled to any compensation
therefor nor abatement or diminution of rent nor shall the same release Tenant
from its obligations hereunder nor constitute an eviction. Tenant shall
indemnify and save harmless Owner against and from all liabilities, obligations,
damages, penalties, claims, costs and expenses for which Owner shall not be
reimbursed by insurance, including reasonable attorneys fees, paid, suffered or
incurred as a result of any breach by Tenant, Tenant's agents, contractors,
employees, invitees, or licensees, of any covenant or condition of this lease,
or the carelessness, negligence or improper conduct of the Tenant, Tenant's
agents, contractors, employees, invitees or licensees. Tenant's liability under
this lease extends to the acts and omissions of any sub-tenant, and any agent,
contractor, employee, invitee or licensee of any sub-tenant. In case any action
or proceeding is brought against Owner by reason of any such claim, Tenant, upon
written notice from Owner, will, at Tenant's expense, resist or defend such
action or proceeding by counsel approved by Owner in writing, such approval not
to be unreasonably withheld.
Destrucion, 9. (a) If the demised premises or any part thereof
Fire and Other shall be damaged by fire or other casualty, Tenant
Casualty shall give immediate notice thereof to Owner and this
lease shall continue in full force and effect except as
hereinafter set forth. (b) If the demised premises are partially damaged or
rendered partially unusable by fire or other casualty, the damages thereto shall
be repaired by and at the expense of Owner and the rent, until such repair shall
be substantially completed, shall be apportioned from the day following the
casualty according to the part of the premises which is usable. (c) If the
demised premises are totally damaged or rendered wholly unusable by fire or
other casualty, then the rent shall be proportionately paid up to the time of
the casualty and thenceforth shall cease until the date when the premises shall
have been repaired and restored by Owner, subject to Owner's right to elect not
to restore the same as hereinafter provided. (d) If the demised premises are
rendered wholly unusable or (whether or not the demised premises are damaged in
whole or in part) if the building shall be so damaged that Owner shall decide to
demolish it or to rebuild it, then, in any of such events, Owner may elect to
terminate this lease by
<PAGE>
written notice to Tenant, given within 90 days after such fire or casualty,
specifying a date for the expiration of the lease, which date shall not be more
than 60 days after the giving of such notice, and upon the date specified in
such notice the term of this lease shall expire as fully and completely as if
such date were the date set forth above for the termination of this lease and
Tenant shall forthwith quit, surrender and vacate the premises without prejudice
however, to Landlord's rights and remedies against Tenant under the lease
provisions in effect prior to such termination, and any rent owing shall be paid
up to such date and any payments of rent made by Tenant which were on account of
any period subsequent to such date shall be returned to Tenant. Unless Owner
shall serve a termination notice as provided for herein, Owner shall make the
repairs and restorations under the conditions of (b) and (c) hereof, with all
resonable expedition, subject to delays due to adjustment of insurance claims,
labor troubles and causes beyond Owner's resonable control. In the event (i)
Landlord reasonably determines that 40% or more of the demised premises shall be
damaged by fire or other casualty during the term and Tenant shall be unable to
use 40% or more of the demised premises as a result of such damage, and (ii)
Owner shall not exercise the right to terminate this Lease and shall,
accordingly, be obligated to repair any such damage pursuant to the provisions
hereof, and (iii) Owner shall have failed to repair such damage within nine (9)
months after the date of such fire or other casualty, as such nine (9) month
period shall be extended by the number of days that Owner is delayed in
completing such restoration by any cause or factor beyond Owner's reasonable
control, including, but no limited to, Tenant's failure to cooperate with Owner,
strikes or other labor disputes, accidents, orders or regulations of any
Federal, State, County or Municipal Authority, delays due to adjustment of
insurance claims, lack of availability of materials, parts or utility services,
acts of God, fire, earthquake, floods, explosion, action of the elements, war,
hostilities, invasion, insurrection, riot, mob violence, sabotage, or by reason
of any other cause, whether similar or not to the foregoing, that is beyond the
reasonable control of Owner, (such nine (9) month period as so extended is
referred to as the "Restoration Period"), then, in such event, Tenant shall have
a one time option to give the Owner, within ten (10) days next following the
expiration of the Restoration Period, time being of the essence, a thirty (30)
day notice of termination of this Lease; if by the expiration of said thirty
(30) day period Owner shall have failed to repair such damage, then, upon the
expiration of said thirty (30) days, this Lease and the term thereunder shall
end and expire as fully and completely as if the expiration of such thirty (30)
day period were the day herein definitely fixed for the end and expiration of
this Lesse and the term thereof and Tenant shall then quit and surrender the
demised premises to Owner but Tenant shall remain liable as provided in this
Lease. Failure of Tenant to timely deliver a thirty (30) day notice of
termination shall be conclusively deemed to be an express election by Tenant to
waive Tenant's right to terminate the Lease as provided in this Article. After
any such casualty, Tenant shall cooperate with Owner's restoration by removing
from the premises as promptly as reasonably possible, all of Tenant's
salvageable inventory and movable equipment, furniture, and other property.
Tenant's liability for rent shall resume five (5) days after written notice from
Owner that the premises are substantially ready for Tenant's occupancy. (e)
Nothing contained hereinabove shall relieve Tenant from liability that may exist
as a result of damage from fire or other casualty. Notwithstanding the
foregoing, each party shall look first to any insurance in its favor before
making any claim against the other party for recovery for loss or damage
resulting from fire or other casualty, and to the extent that such insurance is
in force and collectible and to the extent permitted by law, Owner and Tenant
each hereby releases and waives all right of recovery against the other or any
one claiming through or under each of them by way of subrogation or otherwise.
The foregoing release and waiver shall be in force only if both releasors'
insurance policies contain a clause providing that such a release or waiver
shall not invalidate the insurance. If, and to the extent, that such waiver can
be obtained only by the payment of additional premiums, then the party
benefiting from the waiver shall pay such premium within ten days after written
demand or shall be deemed to have agreed that the party obtaining insurance
coverage shall be free of any further obligation under the provisions hereof
with respect to waiver of subrogation. Tenant acknowledges that Owner will not
carry insurance on Tenant's furniture and/or furnishings or any fixtures or
equipment, improvements, or appurtenances removable by Tenant and agrees that
Owner will not be obligated to repair any damage thereto or replace the same.
Eminent 10. If the whole or any part of the demised
Domain premises shall be acquired or condemned by Eminent
Domain for any public or quasi public use or purpose,
then and in that event, the term of this lease shall cause and terminate from
the date of title vesting in such proceeding and Tenant shall have no claim for
the value of any unexpired term or said lease and assigns to Owner, Tenant's
entire interest in any such award.
Assignment, 11. Tenant, for itself, its heirs, distributes,
Mortgage, Etc. executors, administrators, legal representatives,
successors and assigns, expressly covenants that it
shall not assign, mortgage or encumber this agreement, nor underlet, or suffer
or permit the demised premises or any part thereof to be used by others, without
the prior written consent of Owner in each instance. Transfer of the majority of
the stock of a corporate Tenant shall be deemed an assigiment.
<PAGE>
If this lease be assigned, of if the demised premises or any part thereof be
underlet or occupied by anybody other than Tenant, Owner may, after default by
Tenant, collect rent from the assignee, under-tenant or occupant, and apply the
net amount collected to the rent herein reserved, but no such assignment,
underletting, occupancy or collection shall be deemed a waiver of this
convenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Owner to an
assignment or underletting shall not in any wise be construed to relieve Tenant
from obtaining the express consent in writing of Owner to any further assignment
or underletting.
Electric 12. Tenant covenants and agrees that at all times
Current its use of electric current shall not exceed the
capacity of existing feeders to the building or the
risers or wiring installation and Tenant may not use any electrical equipment
which, in Owner's opinion, reasonably exercised, will overload such
installations or interfere with the use thereof by other tenants of the
building. The change at any time of the character of electric service shall in
no wise make owner liable or responsible to Tenant, for any loss, damages or
expenses which Tenant may sustain.
Access to 13. Owner or Owner's agents shall have the
Premises right (but shall not be obligated) to enter the demised
premises in any emergency at any thime, and, at other
reasonable times, to examine the same and to make such repairs, replacements and
improvements as Owner may deem necessary and reasonably desirable to the
demised premises or to any other portion of the building or which Owner may
elect to perform. Tenant shall permit Owner to use and maintain and replace
pipes and conduits in and through the demised premises and to erect new pipes
and conduits therein provided they are concealed within the walls, floor, or
ceiling. Owner may, during the progress of any work in the demised premises,
take all necessary materials and equipment into said premises without the same
constituting an eviction nor shall the Tenant be entitled to any abatement of
rent while such work is in progress nor to any damages by reason of loss or
interruption of business or otherwise. Throughout the term hereof Owner shall
have the right to enter the demised premises at reasonable hours for the
purpose of showing the same to prospective purchasers or mortgagees of the
building, and during the last six months of the term for the purpose of showing
the same to prospective tenants. If Tenant is not present to open and permit an
entry into the premises, Owner or Owner's agents may enter the same whenever
such entry may be necessary or permissible by master key or forcibly and
provided reasonable care is exercised to safeguard Tenant's property, such entry
shall not render Owner or its agents liable therefor, nor in any event shall the
obligations of Tenant hereunder be affected. If during the last month of the
term Tenant shall have removed all or substantially all of Tenant's property
therefrom, Owner may immediately enter, alter, renovate or redecorate the
demised premises without limitation or abatement of rent, or incurring liability
to Tenant for any compensation and such act shall have no effect on this lease
or Tenant's obligations hereunder.
Smoking 14. Landlord reserves the right to establish a no
Policy smoking policy in some or all common areas of the
building including but not limited to elevators.
lobbies, atriums, stairwells, corridors and restrooms.
Occupancy 15. Tenant will not at any time use or occupy the
demised premises in violation of the certificate of
occupancy issued for the budding of which the demised premises are a part.
Tenant has inspected the premises and accepts them as is, subject to the rider
annexed hereto with respect to Owner's work, if any. In any event, Owner makes
no representation as to the condition of the premises and Tenant agrees to
accept the same subject to violations, whether or not of record.
Bankruptcy 16. (a) Anything elsewhere in this lease to the
contrary notwithstanding, this lease may be cancelled
by Owner by the sending of a written notice to Tenant within a reasonable time
after the happening of any one or more of the following events: (1) the
commencement of a case in bankruptcy or under the laws of any state naming
Tenant as the debtor, or (2) the making by Tenant of an assignment or any other
arrangement for the benefit of creditors under any state statute. Neither Tenant
nor any person claiming through or under Tenant, or by reason of any statute or
order of court, shall thereafter be entitled to possession of the premises
demised but shall forthwith quit and surrender the premises. If this lease shall
be assigned in accordance with its terms, the provisions of this Article 16
shall be applicable only to the party then owning Tenant's interest in this
lease.
(b) it is stipulated and agreed that in the event of the
termination of this lease pursuant to (a) hereof, Owner shall forthwith,
notwithstanding any other provisions of this lease to the contrary, be entitled
to recover from Tenant as and for liquidated damages an amount equal to the
difference between the rent reserved hereunder for the unexpired portion of the
term demised and the fair and reasonable rental value of the demised premises
for the same period. In the computation of such damages the difference between
any installment of rent becoming due
<PAGE>
hereunder after the date of termination and the fair and reasonable rental value
of the demised premises for the period for which such installment was payable
shall be discounted to the date of termination at the rate of four percent (4%)
per annum. If such premises or any part thereof be relet by the Owner for the
unexpired term of said lease, or any part thereof, before presentation of proof
of such liquidated damages to any court, commission or tribunal, the amount of
rent reserved upon such reletting shall be deemed to be the fair and reasonable
rental value for the part or this whole of the premises so re-let during the
term of the re-letting. Nothing herein contained shall limit or prejudice the
right of the Owner to prove for and obtain as liquidated damages by reason of
such termination, an amount equal to the maximum allowed by any statute or rule
of law in effect at the time when, and governing the proceedings in which, such
damages are to be proved, whether or not such amount be greater, equal to, or
less than the amount of the difference referred to above.
Default 17. (1) If Tenant defaults in fulfilling any of the
covenants of this lease other than the covenants for
the payment of rent or additional rent; or if the demised premises becomes
vacant or deserted; or if any execution or attachment shall be issued against
Tenant or any of Tenant's property whereupon the demised premises shall be taken
or occupied by someone other than Tenant; or if this lease be rejected under
Section 235 of Title 11 of the U.S. Code (bankruptcy code); or if Tenant shall
fail to move into or take possession of the premises within fifteen (15) days
after the commencement of the term of this lease, then, in any one or more of
such events, upon Owner serving a written five (5) days notice upon Tenant
specifying the nature of said default and upon the expiration of said five (5)
days, if Tenant shall have failed to comply with or remedy such default, or if
the said default or omission complained of shall be of a nature that the same
cannot be completely cured or remedied within said five (5) day period, and if
Tenant shall not have diligently commenced curing such default within such five
(5) day period, and shall not thereafter with reasonable diligence and in good
faith, proceed to remedy or cure such default, then Owner may serve a written
three (3) days' notice of cancellation of this lease upon Tenant, and upon the
expiration of said three (3) days this lease and the term thereunder shall end
and expire as fully and completely as if the expiration of such three (3) day
period were the day herein definitely fixed for the end and expiration of this
lease and the term thereof and Tenant shall then quit and surrender the demised
premises to Owner but Tenant shall remain liable as hereinafter provided.
(2) If the notice provided for in (1) hereof shall
have been given, and the term shall expire as aforesaid; or if Tenant shall make
default in the payment of the rent reserved herein or any item of additional
rent herein mentioned or any part of either or in making any other payment
herein required, after giving Tenant a five (5) day written notice of monetary
default and if Tenant shall have failed to cure said monetary default within the
aforementioned five (5) day period, then, and in any of such events Owner may
without notice, re-enter the demised premises either by force or otherwise, and
dispossess Tenant by summary proceedings or otherwise, and the legal
representative of Tenant or other occupant of demised premises and remove their
effects and hold the premises as if this lease had not been made, and Tenant
hereby waives the service of notice of intention to re-enter or to institute
legal proccedings to that end. Tenant expressly agrees that in no event shall
Landlord be required to give Tenant written notice of monetary default more than
two (2) times in any calendar year. If Tenant shall make default hereunder prior
to the date fixed as the commencement of any renewal or extension of this lease,
Owner may cancel and terminate such renewal or extension agreement by written
notice.
Remedies of 18. In case of any such default, re-entry, expiration
Owner and Waiver and/or dispossess by summary of proceedings or
of Redemption otherwise, (a) the rent shall become due thereupon and
be paid up to the time of such re-entry, dispossess
and/or expiration, (b) Owner may re-let the premises or any part or parts
thereof, either in the name of Owner of otherwise, for a term or terms, which
may at Owner's option be less than or exceed the period which would otherwise
have constituted the balance of the term of this lease and may grant concessions
or free rent or charge a higher rental than that in this lease, and/or (c)
Tenant or the legal representatives of Tenant shall also pay Owner an liquidated
damages for the failure of Tenant to observe and perform said Tenant's covenants
herein contained, any deficiency between the rent hereby reserved and/or
covenanted to be paid and the net amount, if any, of the rents collected on
account of the lease or leases of the demised premises for each month of the
period which would otherwise have constituted the balance of the term of this
lease. The failure of Owner to re-let the premises or any part or parts thereof
shall not release or affect Tenant's liability for damages. In computing such
liquidated damages there shall be added to the said deficiency such expenses as
Owner may incur in connection with re-letting, such as legal expenses,
attorneys' fees, brokerage, advertising and for keeping the demised premises in
good order or for preparing the same for re-letting. Any such liquidated damages
shall be paid in monthly installments by Tenant on the rent day specified in
this lease and any suit brought to collect the amount of the deficiency for any
month shall not prejudice in any way the rights of Owner to collect the
deficiency for any subsequent month by a similar proceeding. Owner, in putting
the demised premises in good order or preparing die same for re-rental may, at
Owner's option, make such alterations, repairs, replacements, and/or
<PAGE>
decorations in the demised premises as Owner, in Owner's sole judgment,
considers advisable and necessary for the purpose of re-letting the demised
premises, and the making of such alterations, repairs, replacements, and/or
decorations shall not operate or be construed to release Tenant from liability
hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever
for failure to re-let the demised premises, or in the event that the demised
premises are re-let, for failure to collect the rent thereof under such
re-letting, and in no event shall Tenant be entitled to receive any excess, if
any, of such net rents collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant of any of the
covents or provisions hereof, Owner shall have the right of injunction and the
right to invoke any remedy allowed at law or in equity as if re-entry, summary
proceedings and other remedies were not herein provided for. Mention in this
lease of any particular remedy, shall not preclude Owner from any other remedy,
in law or in equity. Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws in the event of Tenant
being evicted or dispossessed for any cause, or in the event of Owner obtaining
possession of demised premises, by reason of the violation by Tenant of any of
the covenants and conditions of this lease, or otherwise.
Fees and 19. If Tenant shall default in the observance or
Expenses performance of any term or covenant on Tenant's part
to be observed or performed under or by virtue of any
of the terms or provisions in any article of this lease, then, unless otherwise
provided elsewhere in this lease, Owner may immediately or at any time
thereafter and without notice in an emergency or, in a non-emergency, no sooner
than ten (10) days after Owner Gives Tenant written notice, perform the
obligation of Tenant thereunder. If Owner, in connection with the foregoing or
in connection with any default by Tenant in the covenant to pay rent hereunder,
makes any expenditures or incurs any obligations for the payment of money,
including but not limited to attorney's fees, in instituting, prosecuting or
defending any action or proceedings, then Tenant will reimburse Owner for such
sums so paid or obligations incurred with interest and costs. The foregoing
expenses incurred by reason of Tenant's default shall be deemed to be additional
rent hereunder and shall be paid by Tenant to Owner within five (5) days of
rendition of any bill or statement to Tenant therefor. If Tenant's lease term
shall have expired at the time of making of such expenditures or incurring of
such obligations, such sums shall be recoverable by Owner as damages.
Building 20. Owner shall have the right at any time without
Alterations the same constituting an eviction and without
and incurring liability to Tenant therefor to change the
Management arrangement and/or location of public entrances,
passageways, doors, doorways, corridors, elevators,
stairs, toilets or other public parts of the building and to change the name,
number or designation by which the building may be known. In so changing the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the building,
Landlord shall exercise reasonable efforts to minimize any material
interruption with Tenant's business. There shall be no allowance to Tenant for
diminution of rental value and no liability on the part of Owner by reason of
inconvenience, annoyance or injury to business arising from Owner or other
Tenants making any repairs in the building or any such alterations, additions
and improvements. Furthermore, Tenant shall not have any claim against Owner by
reason of Owner's imposition of such controls of the manner of access to the
building by Tenant's social or business visitors as the Owner may deem necessary
for the security of the building and its occupants.
No Repre- 21. Neither Owner nor Owners's agents have made
sentations by any representations or promises with respect to the
Owner physical condition of the building, the land upon which
it is erected or the demised premises, the rents, leases,
expenses of operation or any other matter or thing affecting or related to the
premises except as herein expressly set forth and no rights, easements or
licenses are acquired by Tenant by implication or otherwise except as expressly
set forth in the provisions of this lease. Tenant has inspected the building and
the demised premises and is thoroughly acquainted with their condition and
agrees to take the same "as is" and acknowledges that the taking of possession
of the demised premises by Tenant shall be conclusive evidence that the said
premises and the building of which the same form a part were in good and
satisfactory condition at the time such possession was so taken, except as to
latent defects. All understandings and agreements heretofore made between the
parties hereto are merged in this contract, which alone fully and completely
expresses the agreement between Owner and Tenant and any executory agreement
hereafter made shall be in ineffective to change, modify, discharge or effect an
abandonment of it in whole or in part, unless such executory agreement is in
writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
End of 22. Upon the expiration or other termination of
Term the term of this lease, Tenant shall quit and surrender
to Owner the demised premises, broom clean, in good
order and condition, ordinary wear and damages which Tenant is not required to
repair as provided elsewhere in this lease excepted, and Tenant
<PAGE>
shall remove all its property. Tenant's obligation to observe or perform this
covenant shall survive the expiration or other termination of this lease. If
the last day of the term of this Lease or any renewal thereof, falls on Sunday,
this lease shall expire at noon on the preceeding Saturday unless it be a legal
holiday in which case it shall expire at noon on the preceding business day.
Quiet 23. Owner covenants and agrees with Tenant that upon
Enjoyment Tenant paying the rent and additional rent and
observing and performing all the terms, covenants and
conditions, on Tenant's part to be observed and performed, Tenant may peaceably
and quietly enjoy the premises hereby demised, subject, nevertheless, to the
terms and conditions of this lease including, but not limited to, Article 31
hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
Failure 24. If Owner is unable to give possession of the
To Give demised premises on the date of the commencement
Possession of the term hereof, because such building has not been
sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in
any wise to extend the term of this lease, but the rent payable hereunder shall
be abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until after Owner shall have given Tenant written notice that the
premises are substantially ready for Tenant's occupancy. If permission is given
to Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. Notwithstanding
anything to the contrary contained in this Article 24, in the event the
Commencement Date (as hereinafter defined) does not occur on the Estimated
Commencement Date (as hereinafter defined) ("Outside Date") as a result of
Landlord's negligent acts or omissions, Landlord shall be obligated to
reimburse Tenant for any out of pocket holdover penalties imposed and collected
by Tenant's current landlord for premises located at 66 West Mt. Pleasant
Avenue, Livingston, New Jersey; provided, however, that in no event shall
Landlord's obligation to reimburse Tenant exceed $17,000 per holdover month.
Landlord shall have the right to extend the Outside Date by a period equal to
the aggregate number of days of delay in Substantial Completion (as hereinafter
defined) or in the issuance of a temporary or permanent Certificate of Occupancy
covering the demised premises occasioned by reason of Tenant's failure to
cooperate with Landlord, Tenant's delays in submitting any drawings or
specifications, or in supplying information, or in approving drawings,
specifications or estimates, or in giving authorizations, or by reason of any
"Extra" or "Change Order" designated by Tenant, or by reason of any changes by
Tenant in any designations previously made by Tenant, or by reason of any
similar acts or emissions of Tenant or by reason of any cause or factor beyond
Landlord's reasonable control, including but not limited to, strikes or other
labor disputes, accidents, orders or regulations of any Federal, State, County
or Municipal authority, lack of availability of materials, parts or utility
services, delays due to adjustment of insurance claims, acts of God, fire,
earthquake, floods, explosion, action of the elements, war, hostilities,
invasion, insurrection, riot, mob violence, sabotage or by reason of any other
cause, whether similar or not to the foregoing that is beyond the reasonable
control of Owner. If Tenant shall use or occupy all or any part of the demised
premises, Landlord's obligation to reimburse Tenant for out of pocket holdover
expenses shall no longer be of any force and effect.
No Waiver 25. The failure of Owner to seek redress for
violation of, or to insist upon the strict performance
of any covenant or condition of this lease or of any of the Rules or
Regulations, set forth or hereafter adopted by Owner pursuant to Article 33
hereof, shall not prevent a subsequent act which would have originally
constituted a violation from having all the force and effect of an original
violation. The receipt by Owner of rent with knowledge of the breach of any
covenant of this lease shall not be deemed a waiver of such breach and no
provision of this lease shall be deemed to have been waived by Owner unless such
waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner
of a leaser amount than the monthly rent herein stipulated shall be deemed to be
other than on account of the earliest stipulated rent, nor shall any endorsement
or statement of any check or any letter accompanying any check or payment as
rent be deemed an accord and satisfaction, and Owner may accept such check or
payment without prejudice to Owner's right to recover the balance of such rent
or pursue any other remedy in this lease provided. No act or thing done by Owner
or Owner's agents during the term hereby demised shall be deemed an acceptance
of a surrender of said premises, and no agreement to accept such surrender shall
be valid unless in writing signed by Owner. No employee of Owner or Owner's
agent shall have any power to accept the keys of said premises prior to the
termination of the lease and the delivery of keys to any such agent or employee
shall not operate as a termination of the lease or a surrender of the premises.
<PAGE>
Waiver 26. It is mutually agreed by and between Owner and
Trial by Jury Tenant that the respective parties hereto shall and they
hereby do waive trial by jury in any action, proceeding
or counterclaimn brought by either of the parties hereto against the other
(except for personal injury or property damage) on any matters whatsoever
arising out of or in any way connected with this lease, the relationship of
Owner and Tenant, Tenant's use of or occupancy of said premises and any
emergency statutory or any other statutory remedy. It is further mutually agreed
that in the event Owner commences any summary proceeding for possession of the
premises, Tenant will not interpose any counterclaim of whatever nature or
description in any such proceeding including a counterclaim under Article 4.
Inability to 27. This lease and the obligation of Tenant to pay
Perform rent hereunder and perform all of the other covenants
and agreements hereunder on part of Tenant to be
performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever including, but not limited to, government
preemption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions of supply and demand which have been or
are affected by war or other emergency.
Bills and 28. Intentionally Deleted Prior to Execution.
Notices
Services 29. As long as Tenant is not in default under any
Provided by of the covenants of this lease, Owner shall provide:
Owner (a) necessary elevator facilities on business days from
8 a.m. to 6 p.m. and have one elevator subject to call
at all other times; (b) heat to the demised premises when and as required by
law, on business days from 8 a.m. to 7 p.m. and on Saturdays from 9 a.m. to 12
noon; (c) water for ordinary lavatory purposes, but if Tenant uses or consumes
water for any other purposes or in unusual quantities (of which fact Owner shall
be the sole judge), Owner may install a water meter at Tenant's expense which
Tenant shall thereafter maintain at Tenant's expense in good working order and
repair to register such water consumption and Tenant shall pay for water
consumed as shown on said meter as additional rent as and when bills are
rendered; (d) cleaning service for the demised premises on business days at
Owner's expense provided that the same are kept in order by Tenant. If, however,
said premises are to be kept clean by Tenant, it shall be done at Tenant's sole
expense, in a manner satisfactory to Owner and no one other than persons
approved by Owner shall be permitted to enter said premises or the building of
which they are a part for such purpose. Tenant shall pay Owner the cost of
removal of any of Tenant's refuse and rubbish from the building; (e) If the
demised premises are serviced by Owner's air conditioning/cooling and
ventilating system, air conditioning/cooling will be furnished to tenant from
May 15th through September 30th on business days (Mondays through Fridays,
holidays excepted) from 8:00 a.m. to 7:00 p.m. and on Saturdays from 9 a.m. to
12 noon, and ventilation will be furnished on business days during the aforesaid
hours except when air conditioning/cooling is being furnished as aforesaid. If
Tenant requires air conditioning/cooling or ventilation for more extended hours
or on Saturdays, Sundays or on holidays, Owner will furnish the same at Tenant's
expense; (f) Owner reserves the right to stop services of the heating,
elevators, plumbing, air-conditioning, power systems or cleaning or other
services, if any, when necessary by reason of accident or for repairs,
alterations, replacements or improvements necessary or desirable in the judgment
of Owner for as long as may be reasonably required by reason thereof. If the
building of which the demised premises are a part supplies manually operated
elevator service, Owner at any time may substitute automatic control elevator
service and upon ten days' written notice to Tenant, proceed with alterations
necessary therefor without in any wise affecting this Least or the obligation of
Tenant hereunder. The same shall be done with minimum of inconvenience to
Tennant and Owner shall pursue the alteration with due diligence.
Captions 30. The Captions am inserted only as a matter of
convenience and for reference and in no way define,
limit or describe the scope of this lease nor the intent of any provisions
thereof.
Definitions 31. The term "office", or "offices", wherever used in
this lease, shall not be construed to mean premises used
as a store or stores, for the sale or display, at any time, of goods, wares or
merchandise, of any kind, or an a restaurant, shop, booth, bootblack or other
stand, barber shop, or for other similar purposes or for manufacturing. The term
"Owner" meant a landlord or lessor, and as used in this lease means only the
owner, or the mortgagee in possession, for the time being of the land and
building (or the owner of a lease of the building or of the land and building)
of which the demised promises form a part, so that in the event of any sale or
sales of said land and building or of said lease, or in the event of a lease of
said building, or of the land and building,
<PAGE>
the said Owner shall be and hereby is entirely freed and relieved of all
convenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors
in interest, or between the parties and the purchaser, at any such sale, or the
said lessee of the building, or of the land and building, that the purchaser
or the lessee of the building has assumed and agreed to carry out any and all
covenants and obligations of Owner, hereunder. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays
(except such portion thereof as is covered by specific hours in Article 29
hereof), Sundays and all days set forth on Exhibit E.
Adjacent 32. If an excavation shall be made upon land
Excavation- adjacent to the demised premises, or shall be
Shoring authorized to be made, Tenant shall afford to the
person causing or authorized to cause such excavation.
license to enter upon the demised premises for the purpose of doing such work
as said person shall deem necessary to preserve the wall or the building of
which demised premises form a part from injury or damage and to support the
same by proper foundations without any claim for damages or indemnity against
Owner, or diminution or abatement of rent.
Rules and 33. Tenant and Tenant's servants, employees,
Regulations agents, visitors, and licensees shall observe faithfully,
and comply strictly with, the Rules and Regulations and
such other and further reasonable Rules and Regulations as Owner or Owner's
agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision to the
Newark office of the American Arbitration Association, whose determination shall
be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon Owner within ten (10) days after the giving of notice thereof.
Nothing in this lease contained shall be construed to impose upon Owner any duty
or obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, as against any other tenant and Owner shall not
be liable to Tenant for violation of the same by any other tenant, its servants,
employees, agents, visitors or licensees.
Security 34. Tenant shall deposit with Owner on the date
hereof the sum of $14,620.94 as security for the
faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limiited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the Lease and
after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendee or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security; and Tenant agrees to look to
the new Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.
Estoppel 35. Tenant, at any time, and from time to time,
Certificate upon at least 10 days' prior notice by Owner, shall
execute, acknowledge and deliver to Owner, and/or to
any other person, firm or corporation specified by Owner, a statement certifying
that this Lease is unmodified and in full force and effect (or, if there have
been modifications, that the same is in full force and effect as modified and
stating the modifications), stating the dates to which the rent and additional
rent have been paid, and stating whether or not there exists any default by
Owner under this Lease, and, if so, specifying each such default.
Successors and 35A. The covenants, conditions and agreements
Assigns contained in this lease shall bind and inure to the
benefit of Owner and Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns.
<PAGE>
Exhibits 35B. This lease consists of this Printed Portion
containing Articles 1-35C, and each of the following
attached hereto and made a part hereof; (a) Rider to Lease and (b) the following
exhibits: Exhibit A (Rental Plan), Exhibit B (Work Letter), Exhibit C (Legal
Description), Exhibit D (Cleaning Service Rider), Exhibit E (Legal Holidays)
and Exhibit F (Option Space).
Rider 35C. In the event of any inconsistency between the
provisions of the Rider to Lease and those contained
in this Printed Portion to which the Rider to Lease is annexed, the provisions
of the Rider to Lease shall govern and be binding.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed this Lease
on the day and year first written above.
ATTESTED BY: LANDLORD:
5 BECKER ASSOCIATES
By: 5 Becker Farm Corp.,
General Partner
/s/ Robert T. Lapidus By: /s/ James S. Servidea
- --------------------------- ---------------------------
Robert T. Lapidus James S. Servidea
Assistant Secretary Vice President
APPLY CORPORATE SEAL HERE
ATTESTED BY: AGENT FOR LANDLORD:
BELLEMEAD MANAGEMENT CO., INC.
/s/ Robert T. Lapidus By: /s/ James S. Servidea
- --------------------------- ---------------------------
Robert T. Lapidus James S. Servidea
Assistant Secretary Vice President
APPLY CORPORATE SEAL HERE
ATTESTED BY: TENANT:
NEW JERSEY MORTGAGE AND INVESTMENT
CORP.
/s/ Joel Furst By: /s/ Stan Furst
- --------------------------- ---------------------------
Name: Joel Furst Name: Stan Furst
- --------------------------- ---------------------------
(Please Print) (Please Print)
Title: Corporate (Assistant) Title: President
Secretary --------------------
(Please Print)
APPLY CORPORATE SEAL HERE
<PAGE>
IMPORTANT- PLEASE READ
RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE
IN ACCORDANCE WITH ARTICLE 33.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery
by Owner. There shall not be used in any space, or in the public hall of the
building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and sideguards.
2. The water and wash closets and plumbing mixtures shall not be used for
any purposes other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein.
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose c1erks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any
window of the building; and no Tenant shall sweep or throw or permit to be swept
or thrown from the demised premises any dirt or other substances into any of
the corridors or halls, elevators, or out of the doors or windows or stairways
of the building and Tenant shall not use, keep or permit to be used or kept any
foul or noxious gas or substance in the demised premises, or permit or suffer
the demised premises to be occupied or used in a manner offensive or
objectionable to Owner or other occupants of the building by reason of noise,
odors, and/or vibrations, or interfere in any way with other Tenants or those
having business therein, nor shall any animals or birds be kept in or about the
building. Smoking or carrying lighted cigars or cigarettes in the elevators of
the building is prohibited.
4. No awnings or other projections shall be attached to the outside walls
of the building without the prior written consent of Owner.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premises if
the same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of Tenant may appear on the entrance door
of the premises. In the event of the violation of the foregoing by any Tenant,
Owner may remove same without any liability, and may charge the expense incurred
by such removal to Tenant or Tenants violating this rule. Interior signs on
doors and directory tablet shall be inscribed, painted or affixed for each
Tenant by Owner at the expense of such Tenant, and shall be of a size, color and
style acceptable to Owner.
6. No Tenant shall mark, paint, drill into, or in any way deface any part of
the demised premises or the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or
other similar floor covering, so that the same shall come in direct contact
with the floor of the demised premises, and, if linoleum or other similar floor
covering is desired to be used an interlining of builder's deadening felt shall
be first affixed to the floor, by a paste or other material, soluble in water,
the use of cement or other similar adhesive material being expressly prohibited.
<PAGE>
7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or mechanism thereof. Each Tenant must, upon the termination of his
Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such Tenant, and in the event of the
loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of
any description shall be delivered to and removed from the premises only on the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Owner. Owner reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules and Regulations of the
lease or which these Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the building is prohibited and
each Tenant shall cooperate to prevent the same.
10. Owner reserves the right to exclude from the building between the hours
of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all persons
who do not present a pass to the building signed by Owner. Owner will furnish
passes to persons for whom any Tenant requests same in writing. Each Tenant
shall be responsible for all persons for whom he requests such pass and shall be
liable to Owner for all acts of such persons.
11. Owner shall have the right to prohibit any advertising by any Tenant
which in Owner's opinion, tends to impair the reputation of the building or its
desirability as a building for offices, and upon written notice from Owner,
Tenant shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any inflammable, combustible or explosive fluid, material,
chemical or substance, or cause or permit any odors of cooking or other
processes, or any unusual or other objectionable odors to permeate in or
emanate from the demised premises.
13. If the building contains central air conditioning and ventilation,
Tenant agrees to keep all windows closed at all times and to abide by all rules
and regulations issued by the Owner with respect to such services. If Tenant
requires air conditioning or ventilation after the usual hours, Tenant shall
give notice in writing to the building superintendent prior to 3:00 P.M. in the
case of services required on week days, and prior to 3:00 P.M. on the day prior
in the case of after hours service required on weekends or on holidays.
14. Tenant shall not move any safe, heavy machinery. heavy equipment, bulky
matter, or fixtures into or out of the building without Landlord's prior written
consent. If such safe, machinery, equipment, bulky matter or fixtures requires
special handling, all work in connection therewith shall comply with all laws
and regulations applicable thereto and shall be done during such hours as Owner
may designate.
15. Tenant shall report all peddlers, solicitors and beggars to the office
of the Building or as Landlord otherwise requests. Landlord shall exercise
reasonable steps to keep such persons outside of the Building.
16. Tenant shall take reasonable action to assure that its employees,
invitees and guests do not (a) utilize any parking spaces designated for the use
of others, nor (b) park in any driveways, fire lanes or other areas not striped
for vehicular parking.
<PAGE>
TABLE OF CONTENTS FOR
RIDER TO LEASE
ARTICLE PAGE
- ------- ----
36. DEFINITIONS; DEMISED PREMISES;
ADJUSTED MINIMUM RENT ................................................. 1
37. COMMENCEMENT OF TERM; COMMENCEMENT DATE;
ESTIMATED COMMENCEMENT DATE AND TERMINATION DATE ....................... 4
38. TENANT'S POSSESSION .................................................... 5
39. HEATING, AIR-CONDITIONING AND VENTILATION;
LEGAL HOLIDAYS; "AFTER HOURS" .......................................... 5
40. ELECTRIC CURRENT ....................................................... 6
41. LIABILITY INSURANCE .................................................... 6
42. ALL RISK INSURANCE ..................................................... 6
43. PARKING FACILITIES ..................................................... 7
44. ACCESS AND COMMON AREAS ................................................ 7
45. INTENTIONALLY DELETED PRIOR TO EXECUTION ............................... 8
46. BROKER ................................................................. 8
47. CLEANING SERVICES ...................................................... 8
48. ASSIGNMENT AND SUBLETTING .............................................. 8
49. TENANT'S COOPERATION; REASONABLE
MODIFICATIONS; ESTOPPEL CERTIFICATE .................................... 13
50. LIMITATION OF LIABILITY;
DEFINITION OF "LANDLORD" ................................................ 13
51. STATUTORY WAIVER; NOTICE BY TENANT .................................... 14
52. CORPORATE AUTHORITY .................................................... 14
53. PERSONAL TAXES ......................................................... 14
54. BUILDING CHANGES ....................................................... 14
55. HOLDING OVER ........................................................... 14
56. RESTRICTIVE COVENANT - FOOD SERVICE .................................... 15
57. NOTICES ................................................................ 15
58. INTERPRETATION ......................................................... 16
59. NO OFFER OR AGREEMENT .................................................. 16
60. DAMAGES ................................................................ 17
61. BANKRUPTCY ............................................................. 17
62. SECURITY ............................................................... 18
63. PARTNERSHIP TENANT ..................................................... 18
64. LANDLORD'S WORK; LANDLORD'S WORK LETTER ................................ 19
65. ECRA COMPLIANCE ........................................................ 20
66. RENEWAL OPTIONS ........................................................ 20
67. RIGHT OF FIRST OFFER ................................................... 22
68. EAGLE ROCK MEMBERSHIP .................................................. 24
SIGNATURE PAGE ......................................................... 24
<PAGE>
RIDER TO LEASE
DATED: April 2, 1993
LANDLORD: 5 Becker Associates
TENANT: New Jersey Mortgage and Investment Corp.
PREMISES: Portion of the first (1st) floor
5 Becker Farm Road
Roseland, New Jersey
36. DEFINITIONS; DEMISED PREMISES;
ADJUSTED MINIMUM RENT
------------------------------
36.1 Definitions. For purposes of this Article, the following terms
shall have the meanings set forth below:
(1) Assessed Valuation shall mean the assessed valuation of the Real
Estate for the First Tax Year, as such assessed valuation is or may be
ultimately determined by final administrative or judicial proceeding, or by
abatement by an appropriate taxing authority;
(2) Base Tax Rate shall mean the real estate tax rate in effect on
the date of this Lease;
(3) First Operating Year shall mean the calendar year ending December
31, 1993. Operating Year shall mean any calendar year thereafter;
(4) First Tax Year shall mean the calendar year ending December 31,
1993. Tax Year shall mean any calendar year thereafter;
(5) Land shall mean the land described in Exhibit C to this Lease;
(6) Occupancy Percentage shall be as defined in Section 36.2;
(7) Real Estate Tax Base shall mean the amount determined by
multiplying the Assessed Valuation by the Base Tax Rate;
(8) Taxes shall mean all real estate taxes, charges and assessments
imposed upon the Land, Building and other improvements thereon or the occupancy
or leasing thereof (collectively, the "Real Estate"). If any franchise, capital
stock, capital gains, rent, income, profit or any other tax or charge shall be
imposed upon all or any part of the Real Estate, such franchise, capital stock,
capital gains, rent, income, profit or other tax or charge shall be deemed
included in the term "Taxes" for the purposes of this Article. Landlord shall
have the exclusive right, but not the obligation, to contest or appeal any Tax
assessment levied on the Real Estate by any governmental or quasi-governmental
authority;
36.2 The Demised Premises shall be deemed to contain a floor area of
10,797 square feet and the building of which the Demised Premises form a part
("Building" or "building") shall be deemed to contain a total floor area of
118,339 square feet. Tenant's occupancy Percentage shall be deemed to be 9.12
percent.
36.3 Adjusted Minimum Rent shall mean the Minimum Rent as increased
in accordance with this Article to reflect any increase in Taxes and Building
Operating Costs. Tenant shall pay such increases as additional rent as
hereinafter provided.
36.4 Taxes. (1) If the Taxes for any Tax Year during the term of this
Lease shall be greater than the Real Estate Tax Base, then Tenant shall pay to
Landlord, as additional rent, an amount equal to the Occupancy Percentage of
such excess.
<PAGE>
(2) Upon the issuance by the respective taxing authorities having
jurisdiction over the Real Estate of a bill or bills for the Taxes imposed upon
the Real Estate for the First Tax year, Landlord shall submit a copy of such
bill or bills to Tenant. Thereafter, on or about each anniversary of said date,
Landlord shall submit to Tenant a copy of the latest tax bill or bills for the
Taxes for each subsequent Tax Year indicating each change in the Taxes and the
effective date of such change together with a statement (the "Tax Statement")
which shall indicate the amount, if any, required to be paid by Tenant as
additional rent. Within 30 days after the issuance of the Tax Statement, Tenant
shall pay the additional rent as set forth therein. Any payments due pursuant
to this Article for a period of less than a full Tax Year, either at the
commencement or at the end of the term of this Lease, shall be ratably
apportioned.
(3) If at any time the taxing jurisdiction in which the Real Estate is
located should change its method of valuating the Real Estate for the First Tax
Year as part of a general revaluation program ("Revaluation"), then, the
provisions of Sections 36.1(2) and 36.1(1) above notwithstanding, for purposes
of computing the Real Estate Base pursuant to Section 36.1(7) Landlord may, at
its option, use one of the following methods:
(a) The Assessed Valuation shall be the amount for which the Real
Estate would have been assessed for the First Tax Year if there had
been no Revaluation, and the Base Tax Rate shall be as defined in
Section 36.1(2) above, or
(b) The Assessed Valuation shall be the actual amount assessed,
and the Base Tax Rate shall be the real estate tax rate as subsequently
reduced by the taxing jurisdiction in connection with the Revaluation.
Landlord shall inform the Tenant as to which of the above two methods
Landlord has elected at such time as Landlord submits the Tax Statement to
Tenant.
36.5 Building Operating costs. (1) Tenant hereby agrees that for each
Operating Year during the term of this Lease for which the total Building
Operating Costs (as hereinafter defined) shall exceed the Building Operating
Costs for the First Operating Year, Tenant shall pay to Landlord, as additional
rent, an amount equal to the Occupancy Percentage of such excess within 30 days
after presentation of Landlord's statement (the "Operating Statement") therefor.
The Operating Statement shall indicate (i) the initial additional amount
required to be paid by Tenant as additional rent as in this Article provided;
(ii) the Tenant's new Adjusted Minimum Rent; and (iii) the manner in which such
adjustment is computed. Landlord shall present its Operating Statement within 90
days after the commencement of each such operating Year ("Billing Date").
Tenant shall thereafter, for the balance of that operating Year and for that
portion of the next operating Year until the Billing Date during such year, make
monthly payments of 1/12th of such increase to reflect the change as of the
Billing Date, which amounts shall be credited for the account of Tenant against
the annual payment due on the succeeding Billing Date.
(2) The "Building Operating Costs" shall include each and
every expense incurred in connection with the ownership, administration,
management, operation, repair, replacement and maintenance of the Real Estate,
including but not limited to, wages, salaries and fees paid to persons either
employed by Landlord or engaged as independent contractors in the operation of
the Real Estate, and such other typical items of expense as indicated below. All
such costs and the values allocated to services rendered and supplies delivered
shall be reflected on the comparative statement which shall be exhibited to the
Tenant upon request.
<PAGE>
(3) The expenses referred to in this Article shall be determined in
accordance with sound accounting principles. So long as Tenant is not in default
under any provisions of this Lease, Tenant or its representatives shall have the
right, at its own expense, upon reasonable notice and during reasonable hours,
to inspect the books of Landlord for the purpose of verifying the information
contained in any Operating Statement, provided prior written request for such
inspection shall be made by Tenant and further provided that such request is
made within sixty (60) days of receipt of the Operating Statement to be
verified. Any Operating Statement not verified within said sixty (60) day period
shall be deemed to be correct.
(4) Some of the typical items of expense which comprise or may
comprise the Building Operating Costs and to be included in the Statement are or
may be: (a) general repairs and maintenance; (b) utility costs, including but
not limited to, cost of electricity to power HVAC units serving the entire
Building (both tenant and common areas), cost of oil or other fuel required to
heat the entire Building, cost of electricity to light the common areas; (c)
cleaning costs, including but not limited to, window cleaning, general interior
office cleaning, cleaning of common areas; (d) service contracts, including but
not limited to, contracts for elevator service, HVAC service, rubbish removal,
carting, janitorial and watchman services and snow removal; (e) costs of
landscaping; (f) costs of insurance; (g) fees and/or salaries of
superintendents, engineers, mechanics, custodians; (h) towel service for common
lavatories; and (i) sales and use taxes.
(5) Anything to the contrary contained in this Article 36
notwithstanding, if the average occupancy of the Building is less than
ninety-five (95%) percent during the First Operating Year, then Landlord shall
make a determination ("Landlord's Determination") of what the Building Operating
Costs for such year would have been if during the entire year the average tenant
occupancy of the Building were ninety-five (95%) percent. Landlord's
Determination shall be binding and conclusive upon Tenant and shall for all
purposes of this Lease be deemed to be the Building operating Costs for the
First Operating Year. Landlord shall notify Tenant of Landlord's Determination
within ninety (90) days following the last day of the First Operating Year.
Thereafter, if for any subsequent Lease year the average tenant occupancy of the
Building is below ninety-five (95%), the Building Operating Costs for any such
year shall be adjusted by Landlord to the amount that such Building Operating
Costs would have been if the average tenant occupancy during that year had been
ninety-five (95%) percent.
36.6 If, pursuant to any Tax Statement or Operating Statement showing
Taxes or Building Operating Costs for any year subsequent to the First Tax Year
or First Operating Year, respectively, there shall be an additional amount
payable or a refund due with respect to Taxes and/or Building Operating Costs
for the period covered by such statements), such amount shall be calculated, and
any amount payable by the Tenant to the Landlord as additional rent shall be
promptly paid, or the amount due to the Tenant shall be credited against amounts
owing Landlord. However, it is agreed by the parties that any refund shall not
in any way operate to reduce the Minimum Rent. If such calculation takes place
and/or any payment in connection herewith becomes payable after the expiration
of the term of this Lease, this provision shall be deemed to have survived such
expiration.
36.7 Any increase in additional rent under this Article shall be
prorated for the final Operating Year if such Operating Year covers a period of
less than twelve (12) full months. Tenant's obligation to pay additional rent
under this Article for the final Operating Year shall survive the expiration of
the term of this Lease.
36.8 In the event that the payment of any sum required to be paid by
Tenant to Landlord under this Lease (including, without limiting the generality
of the foregoing, Minimum Rent, Adjusted Minimum Rent, or payment made by
Landlord under any
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provision of this Lease for which Landlord is entitled to reimbursement by
Tenant) shall become overdue for 10 days beyond the date on which they are due
and payable as provided in this Lease, then a delinquency service charge equal
to four percent of the amount overdue shall become immediately due and payable
to Landlord as liquidated damages for Tenant's failure to make prompt payment.
Further, such delinquency service charge shall be payable on the first day of
the month next succeeding the month during which such late charges become
payable as additional rent, together with interest at a rate equal to two
percent (2%) above the prime lending rate as announced from time to time by
Citibank, N.A. (or any successor thereto), but in no event at a rate greater
than the maximum rate permitted by law, on the amounts overdue from the date on
which they became due and payable. In the event of nonpayment of any delinquency
service charges and interest provided for above, Landlord shall have, in
addition to all other rights and remedies, all the rights and remedies provided
for herein and by law in the case of nonpayment of rent. No failure by Landlord
to insist upon the strict performance by Tenant of Tenant's obligations to pay
late charges shall constitute a waiver by Landlord of its rights to enforce the
provisions of this Section 36.8 in any instance thereafter occurring. The
provisions of this Section 36.8 shall not be construed in any way to extend any
time period provided for in this Lease.
36.9 If Tenant fails to remit when due any sum required to be paid by
Tenant to Landlord under this Lease (including, without limiting the generality
of the foregoing, Minimum Rent, Adjusted Minimum Rent, or payment made by
Landlord under any provision of this Lease for which Landlord is entitled to
reimbursement by Tenant), Landlord may (subject to Article 17 (2) hereof], in
addition to all other rights and remedies provided herein and by law, serve a
written notice of cancellation of this Lease upon Tenant and upon the giving of
said notice of cancellation, this Lease and the term thereof shall terminate and
expire as fully and completely as if the day on which said notice of
cancellation was given were the day herein definitely fixed for the end and
expiration of this Lease and the term thereof and Tenant shall then quit and
surrender the Demised Premises to Landlord but Tenant shall remain liable as
herein provided. Following each second consecutive monthly installment of
Adjusted Minimum Rent that remains unpaid for longer than ten (10) days beyond
the date on which same is due and payable, Landlord may, in addition to all
other rights and remedies provided herein and by law, require that Tenant
increase the amount of the security deposited with Landlord by an amount equal
to two (2) months' Minimum Rent. If Tenant shall deliver to Landlord a check
that is returned unpaid for any reason, Tenant shall pay Landlord TWENTY FIVE
AND 00/100 DOLLARS ($25.00) for Landlord's expense in connection therewith and
said charge shall be payable to Landlord on the first day of the next succeeding
month as additional rent.
37. COMMENCEMENT OF TERM; COMMENCEMENT DATE;
ESTIMATED COMMENCEMENT DATE AND TERMINATION DATE
37.1 The parties intend that the Lease shall commence on or about
August 1, 1993 (the "Estimated Commencement Date"). Notwithstanding the above,
the commencement date ("Commencement Date") as defined, fixed and ascertained in
this Article shall be the date upon which the work required to be performed by
the Landlord pursuant to the Work Letter attached hereto as Exhibit "B" (the
"Work"), shall be substantially completed. The Work shall be deemed to be
substantially completed ("Substantial Completion") for all purposes hereunder,
on the earlier of the date upon which:
A. (i) Landlord has procured a temporary or permanent Certificate of
Occupancy, permitting occupancy of the Demised Premises by the Tenant; and (ii)
the Landlord's architects shall have certified that Landlord has substantially
performed the Work. Substantial Completion shall be deemed to have occurred even
though minor details of work remain to be done, provided such details do not
materially interfere with the Tenant's use of the Demised Premises,
<PAGE>
or
B. Tenant shall have taken possession of all or any part of the
Demised Premises.
37.2 On or about the Commencement Date, Landlord shall deliver to
Tenant a notice ("Commencement Date Notice") fixing the Commencement Date and
termination date which shall be a date five (5) years after the Commencement
Date ("Termination Date"). Tenant shall acknowledge receipt of the Commencement
Date Notice by signing a copy of same and returning it to Landlord within five
(5) days of the receipt thereof.
37.3 The date upon which Tenant's obligation to pay Minimum Rent due
hereunder commences ("Rent Commencement Date") shall be deemed to be the
Commencement Date. Notwithstanding the foregoing, Tenant shall pay Landlord
upon the execution of this Lease the security referred to in Articles 34 and 62
hereof.
37.4 If, prior to the Commencement Date, Tenant shall enter the
Demised Premises to make any installations of its equipment, fixtures and
furnishings, Landlord shall have no liability for any personal injury or
property damage suffered by Tenant.
37.5 Subject to Article 24 hereof, if for any reason the Premises are
not ready for occupancy on the Estimated Commencement Date, this Lease shall
nevertheless continue in full force and effect; the Commencement Date shall be
postponed until Substantial Completion has occurred and the Rent Commencement
Date shall be postponed for a like number of days, subject to Article 64. The
Termination Date shall be adjusted to provide the full term set forth above.
38. TENANT'S POSSESSION
38.1 When Tenant takes possession of the Demised Premises, Tenant
shall be deemed to have accepted the Demised Premises as substantially completed
as of the date of such possession.
38.2 During the term of this Lease, Tenant shall have the right at its
sole cost and expense to plant additional trees outside of the Building and
adjacent to the Demised Premises, subject to Landlord's right of approval as to
location and selection of trees.
39. HEATING, AIR-CONDITIONING AND VENTILATION;
LEGAL HOLIDAYS; "AFTER HOURS"
39.1 Notwithstanding the provisions of subsections (b) and (e) of
Article 29 of this Lease, but subject to all of the other terms, covenants and
conditions of said Article 29, Landlord shall provide and furnish appropriate
heat, air-conditioning or ventilation to the Demised Premises between the hours
of 8:00 a.m. to 7:00 p.m., Monday through Friday, other than Legal Holidays
(which are listed on Exhibit "El" attached to this Lease) and on Saturdays
between the hours of 9:00 a.m. and 12 noon.
39.2 At all other times not otherwise provided for in Section 39.1
above, Landlord agrees that it shall, upon prior written request from Tenant,
provide after-hours air-conditioning, ventilation or heating, as the case may
be, for which Tenant shall pay to Landlord as additional rent hereunder, a sum
equal to $35.00 per hour for providing heat, air-conditioning or ventilation
(irrespective of whether any other tenants in the Building are furnished with
heat, air-conditioning or ventilation at the same time) that being intended to
cover Landlord's cost for the power or fuel required to provide the same. In the
event that during the term of this Lease, or any renewal hereof, the Landlord's
cost for providing after-hours heating, air-conditioning or ventilation shall
increase by virtue of utility rate increases or unit fuel cost increases, the
above-specified hourly charges shall be adjusted from time to time to
prospectively reflect said increases. In addition to the foregoing, should
<PAGE>
there be any charges incurred by Landlord for additional attendant engineers or
similar additional requirements as may be imposed from time to time by the
State Labor Department, local authorities, union requirements, or the like,
Tenant agrees to reimburse Landlord for its out-of-pocket expenses incurred in
connection therewith, related to the after-hours use by Tenant.
40. ELECTRIC CURRENT
40.1 Landlord's obligation to supply current shall be limited to the
current required to power the Building standard heating and air-conditioning
systems and the lighting of common areas.
40.2 Tenant shall arrange to purchase and pay for all of the electric
current requirements for light and power used in connection with Tenant's
operations within the Demised Premises. Landlord shall furnish and install an
electric meter for the measurement of the consumption of Tenant's electric
current as herein provided.
40.3 At the request of Landlord, prior to the occupancy of the Demised
Premises, Tenant shall execute any and all applications for service, or forms
required by the local utility company supplying electric current to the Building
for the metering of all electric current and power required for the operation of
the electrical equipment of any nature whatsoever and lights within or serving
the Demised Premises.
41. LIABILITY INSURANCE
41.1 Tenant, at its sole cost and expense, shall procure, provide and
maintain in force during the term of this Lease the following policies to be
written by good and solvent insurance companies satisfactory to Landlord: (1)
comprehensive general liability insurance, which shall include coverage for
personal liability, contractual liability, Tenant's legal liability, bodily
injury, death and property damage, all on an occurrence basis with respect to
the business carried on, in or from the Demised Premises and Tenant's use and
occupancy of the Demised Premises, with coverage for any one occurrence or claim
of not less than $1,000,000 or such other amount as Landlord may reasonably
require upon not less than six (6) months' prior written notice. Such insurance
shall include Landlord and the managing agent of the Building as additional
insureds and shall protect Landlord in respect of claims by Tenant as if
Landlord were separately insured; and (2) insurance against such other perils
and in such amounts as Landlord may from time to time reasonably require upon
not less than thirty (30) days' prior written notice.
41.2 Each of the aforesaid policies shall contain an undertaking by
the insurer that no material change adverse to Landlord or Tenant will be made
and such policy will not lapse or be cancelled, except after not less than
ninety (90) days' prior written notice to Landlord of the intended change, lapse
or cancellation. On or before the Commencement Date and thereafter, at least
thirty (30) days prior to the effective date of any policy, Tenant agrees to
deliver to Landlord a duplicate original of the aforesaid policies.
42. ALL RISK INSURANCE
42.1 Tenant, at its sole cost and expense, shall procure, provide and
maintain in force during the term of this Lease the following policy to be
written by a good and solvent insurance company satisfactory to Landlord: "All
Risk" insurance, which shall cover the Demised Premises, Tenant's personal
property, equipment and improvements against loss or damage by fire and any
other hazards or casualties in an amount to provide for the actual replacement
cost of the Demised Premises, Tenant's personal property, equipment and
improvements. Such insurance shall include Landlord and the managing agent of
the Building as additional insureds and shall protect Landlord in respect of
claims by Tenant
<PAGE>
as if Landlord were separately insured. The aforesaid "All Risk" policy shall
contain an undertaking by the insurer that no material change adverse to
Landlord or Tenant will be made and such policy will not lapse or be cancelled,
except after not less than ninety (90) days' prior written notice to Landlord of
the intended change, lapse, or cancellation. On or before the Commencement Date
and thereafter, at least thirty (30) days prior to the effective date of the
"All Risk" policy, Tenant agrees to deliver to Landlord a duplicate original of
said policy.
43. PARKING FACILITIES
43.1 So long as Tenant is not in default under this Lease, Landlord
hereby grants to Tenant the revocable license (the "License") to park up to
forty four (44) cars ("Allotted Parking"), for use solely by Tenant and
Tenant's employees, licensees, guests and invitees in the parking area or areas
serving the Building (the "Parking Area"). Landlord agrees to mark once, at
Tenant's expense, as the designated parking spaces of Tenant ten (10) parking
spaces within the Parking Area. said designations shall not increase the
Allotted Parking defined in the first sentence of this Section. The use of any
more than the Allotted Parking by Tenant, its employees, licensees, guests or
invitees, after notice from Landlord, shall be deemed a material event of
default under this Lease, and Landlord may immediately suspend or revoke the
License and/or exercise such remedies as are provided in this Lease. Landlord
shall not be responsible to Tenant for enforcing the License or for violation of
the License by other tenants of the Building, by third parties, or guests or
visitors to the Building.
43.2 In the event the number of parking spaces in the Parking Area is
reduced by circumstances beyond the control of Landlord, the Allotted Parking
shall be reduced proportionately.
43.3 Nothing contained in this Lease shall be deemed to create
liability upon Landlord for any damage to motor vehicles of visitors or
employees, for any loss of property from within those motor vehicles, or for any
injury to Tenant, its employees, licensees, guests and invitees unless
ultimately determined to be caused by the sole negligence or willful misconduct
of Landlord, its agents, servants and employees. Tenant agrees to acquaint its
employees with any parking rules and regulations promulgated by Landlord and
assumes responsibility for compliance by its employees with such parking
provisions, and Tenant shall be liable to Landlord for all unpaid parking
charges, if any, incurred by its employees. Any amount due from Tenant pursuant
to this Article 43 shall be deemed additional rent and failure to pay same shall
constitute a default under the Lease. Tenant authorizes Landlord to (i) tow away
from the Parking Area, at Tenant's sole cost and expense, any motor vehicle
belonging to Tenant or Tenant's employees, licensees, guests and invitees
parked illegally or in violation of this Article 43 or any parking rules and
regulations promulgated by Landlord and (ii) attach violation stickers or
notices to any motor vehicles belonging to Tenant or Tenant's employees,
licensees, guests and invitees parked illegally or in violation of this Article
43 or any parking rules and regulations promulgated by Landlord.
44. ACCESS AND COMMON AREAS
44.1 Tenant shall have the right of nonexclusive use, in common with
others, of (a) automobile parking areas not designated for use by others and
driveways (subject to Article 43 hereof) ; (b) footways, and (c) such elevator
and other facilities as may be constructed and designated from time to time by
Landlord in the Building, all to be subject to the terms and conditions of the
Lease and to reasonable rules and regulations for the use thereof as prescribed
from time to time by Landlord.
<PAGE>
45. INTENTIONALLY DELETED PRIOR TO EXECUTION
46. BROKER
46.1 Tenant represents that no real estate broker other than Furst,
Furst & Gelfond, P.A. is responsible for bringing about, or negotiating, this
Lease and Tenant has not dealt with any other broker in connection with the
Demised Premises.
46.2 In accordance with the foregoing representation, Tenant agrees
to defend, indemnify and hold harmless the Landlord, its affiliates and/or
subsidiaries, partners and officers from any expense or liability (including
attorney's fees) arising out of any claim for commission by any broker other
than Furst, Furst & Gelfond, P.A. claiming or alleging to have acted on behalf
of or to have dealt with Tenant.
46.3 Tenant represents that Furst, Furst & Gelfond, P.A. is duly
licensed and lawfully permitted to act as the broker in connection with this
Lease.
46.4 Landlord shall pay a one time commission to Furst, Furst &
Gelfond, P.A. in the amount of $138,862.81 within thirty (30) days after the
term of this Lease has commenced, provided Tenant is not in default under this
Lease at such time.
47. CLEANING SERVICES
47.1 So long as Tenant is not in default under this Lease, Landlord
shall provide services for maintenance of the grounds, common areas and parking
areas and such other cleaning services within the Demised Premises as are set
forth on "Cleaning Service Rider" annexed hereto and made a part hereof as
Exhibit "D", as same may be reasonably amended from time to time by Landlord.
Landlord's cleaning services shall include the cleaning of the kitchen floor and
wiping the kitchen counters located within the Demised Premises.
47.2 Tenant shall pay to Landlord the cost of removal from the
Demised Premises of any of Tenant's refuse or rubbish other than ordinary office
waste, and Tenant, at Tenant's expense, shall cause all portions of the Demised
Premises not used as office areas to be cleaned daily in a manner satisfactory
to Landlord. Tenant also shall cause all portions of the Demised Premises used
for the storage, preparation, service or consumption of food or beverages to be
exterminated against infestation by vermin, roaches or rodents regularly and, in
addition, whenever there shall be evidence of any infestation. Tenant shall
contract directly with Landlord or, at Landlord's option, directly with
Landlord's contractors, for the removal of such other refuse and rubbish and for
cleaning services in addition to those furnished by Landlord and for
extermination services required hereunder.
48. ASSIGNMENT AND SUBLETTING
48.1 For purposes of this Article and Article 11, any occupancy
arrangement (including without limitation management agreements, concessions and
licenses) affecting all or any part of the Demised Premises, other than a direct
lease with Landlord, not deemed an assignment shall be referred to as a sublease
and any occupant of all or part of the Demised Premises, other than a tenant
under a direct lease with Landlord, not deemed an assignee shall be referred to
as a sublessee. Supplementing the provisions of Article 11, and except as
provided in Section 48.8 if the Tenant shall desire to assign this Lease, sublet
or underlet all or any portion of the Demised Premises, it shall first submit in
writing to the Landlord a notice setting forth in reasonable detail:
(a) the identity and address of the proposed assignee or sublessee;
(b) in the case of a subletting, the terms and conditions thereof;
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<PAGE>
(c) the nature and character of the business of the proposed assignee
and sublessee and its proposed use for the Demised Premises;
(d) evidence that the proposed assignee or sublessee is a United States
citizen or citizens or a corporation qualified to do business in the State of
New Jersey and organized and existing under the laws of one of the States of the
United States;
(e) banking, financial and other credit information relating to the
proposed assignee or sublessee reasonably sufficient to enable Landlord to
determine the proposed assignee's or sublessee's financial responsibility; and
(f) in the case of a subletting of only a portion of the Demised
Premises, plans and specifications for Tenant's layout, partitioning, and
electrical installations for the portion of the Demised Premises to be sublet.
48.2 If the nature and character of the business of the proposed
assignee or sublessee, and the proposed use and occupancy of the Demised
Premises, or any portion thereof, by the proposed assignee or sublessee, is in
keeping and compatible with the dignity and character of the Building, then,
subject to compliance with the requirements of Article 11 and this Article 48,
anything to the contrary in Article 11 notwithstanding, Landlord agrees not
unreasonably to withhold or delay its consent to any such proposed assignment or
subletting; provided, however, that Tenant shall, by notice in writing as
described in Section 48.1, advise Landlord of its intention to assign this Lease
or to sublease all or any part of the Demised Premises, from, on and after a
stated date (which shall not be less than 60 days after the date of Tenant's
notice), in which event Landlord shall have the right, to be exercised by giving
written notice, to recapture the space described in Tenant's notice. Such
recapture notice shall, if given, cancel and terminate this Lease with respect
to the space therein described as of a date which shall be the later of 30 days
following the date set forth in Tenant's notice, or 30 days after Tenant shall
have surrendered possession of the Demised Premises. In the event less than all
of the Demised Premises are recaptured, Landlord shall construct and erect such
partitioning and modify building systems as may be required to separate the
space retained by Tenant from the space recaptured. The cost of such alterations
shall be borne fully and exclusively by Tenant, shall constitute additional rent
hereunder and shall be payable to Landlord within 20 days following a statement
from Landlord for the amount thereof.
48.3 If this Lease be cancelled pursuant to the foregoing with
respect to less than the entire Demised Premises, the Minimum Rent and/or the
Adjusted Minimum Rent and Tenant's Occupancy Percentage shall be adjusted on the
basis of the number of square feet retained by Tenant in proportion to the
number of square feet originally demised under this Lease, and this Lease, as so
amended, shall continue thereafter in full force and effect. If the Lease shall
be cancelled pursuant to Section 48.2 hereof with respect to all or any part of
the Demised Premises, then, Tenant shall be released from paying all Adjusted
Minimum Rent, Minimum Rent and additional rent (i) that relate solely to the
space required to be surrendered pursuant to Section 48.2 hereof and (ii) which
accrues after the date on which Tenant quits, surrenders and delivers to
Landlord actual and exclusive possession of the space required to be surrendered
pursuant to Section 48.2 hereof in an empty, vacant, broom clean condition, in
good order and free of all (a) occupants, (b) tenants, (c) liens and (d)
property required to be removed under the Lease by the Termination Date.
48.4 In addition to the foregoing requirements: (a) no sublease shall
violate any law or result in an occupancy of the Demised Premises by more than
three (3) tenants, including the Tenant hereunder, (b) no sublease shall be for
a term of less than two years, unless the unexpired term of this Lease shall be
less than two years at the commencement of the sublease, (c) no assignee
9
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or sublessee shall be an existing tenant of or any party then negotiating for
space in the Building, or any other building in the office park of which the
Building is a part (i) owned by Landlord, Bellemead Development Corporation
("Bellemead") or any partnership in which Bellemead or an affiliate of Bellemead
is a partner or (ii) managed by Bellemead or an affiliate of Bellemead
("Affiliated Building"), (d) no sublease shall result in the occupancy of less
than 1000 square feet of space, (e) Tenant shall not be in default under any of
the terms and conditions of this Lease at the time of any notice or request for
consent under the terms of this Article or at the effective date of such
assignment or subletting, (f) no subletting or assignment shall be for a face
rental rate less than that currently being charged by Landlord for comparable
space in the Building or any Affiliated Building. Furthermore, anything to the
contrary in Section 48.2 notwithstanding, Landlord shall not consent to any
sublease or assignment unless Tenant agrees at the time of the proposed sublease
or assignment and in the Tenant's notice required in Section 48.2 to pay over to
Landlord fifty (50%) percent of all consideration (of whatever nature) that
would be payable by the prospective sublessee or assignee to Tenant over the
term of the sublease or assignment pursuant to such sublease or assignment which
exceeds the prorata share of the Minimum Rent allocable to the Demised Premises,
or any part thereof, as the case may be, payable by Tenant hereunder and (g)
Tenant shall pay when due all brokerage or similar commissions arising from any
assignment or sublease.
48.5 Any sublease must provide (a) that it shall be subject and
subordinate to all of the terms and conditions of this Lease, (b) that
notwithstanding Article 2 hereof, the use of the Demised Premises thereunder
shall be restricted exclusively to executive and administrative office use, (c)
that the term thereof shall not extend beyond a date which is one day prior to
the expiration date of the Term hereof, (d) no sublessee or its heirs,
distributees, executors, administrators, legal representatives, successors or
assigns, without the prior consent of Landlord in each instance, which consent
Landlord may withhold for any reason or no reason, shall (i) assign, whether by
merger, consolidation or otherwise, mortgage or encumber its interest in any
sublease, in whole or in part, or (ii) sublet, or permit the subletting of, that
part of the Demised Premises affected by such subletting or any part thereof, or
(iii) permit such part of the Demised Premises affected by such subletting or
any part thereof to be occupied or used for desk space, mailing privileges or
otherwise, by any person other than such sublessee. The sale, pledge, transfer
or other alienation of (y) any of the issued and outstanding capital stock of
any corporate sublessee (unless such stock is publicly traded on any recognized
security exchange or over-the-counter market) or (z) any transfer of interest in
any partnership or joint venture sublessee, however accomplished, and whether in
a single transaction or in a series of related or unrelated transactions, shall
be deemed, for the purposes of this Section, an assignment of such sublease
which shall require the prior consent of Landlord in each instance, and (e) in
the event of cancellation or termination of this Lease for any reason whatsoever
or of the surrender of this Lease whether voluntary, involuntary or by operation
of law, prior to the expiration date of such sublease, including extensions and
renewals granted thereunder, that, at Landlord's option, the subtenant shall
vacate the Demised Premises or shall make full and complete attornment to
Landlord for the balance of the term of the sublease, which attornment shall be
evidenced by an agreement in form and substance satisfactory to Landlord which
the subtenant shall execute and deliver at any time within five days after
request by Landlord, its successors and assigns. The subtenant shall waive the
provisions of any law now or hereafter in effect which may give the subtenant
any right of election to terminate the sublease or to surrender possession of
the Demised Premises in the event any proceeding is brought by Landlord to
terminate this Lease. No assignee or sublessee shall receive any credit from
Landlord whatsoever for security deposits, rent or any other monies paid to
Tenant unless same shall have been actually received by Landlord.
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48.6 Each of the following events shall be deemed to constitute an
assignment of this Lease and shall require the prior written consent of
Landlord in each instance:
(a) Any assignment or transfer of this Lease by operation of law;
(b) Any hypothecation, pledge or collateral assignment of this Lease;
and
(c) Any involuntary assignment or transfer of this Lease in connection
with bankruptcy, insolvency, receivership or otherwise.
48.7 Tenant, its sublessees, and their respective successors and
assigns acknowledge and agree that the restriction that Landlord's consent under
certain circumstances to a proposed assignment of this Lease or to a subletting
shall not be unreasonably withheld and shall not be intended or construed as an
agreement or covenant on the part of Landlord, but rather as a qualification on
Tenant's covenant not to assign this Lease or sublet, and they further agree
that Landlord shall not be liable in damages or subject to liability of any
other kind or nature whatever by reason of Landlord's failure or refusal to
grant its consent to any proposed assignment of this Lease or subletting of the
Demised Premises, the sole and exclusive recourse being a declaratory judgment
on the question of Landlord's reasonableness.
48.8 It is a condition to the effectiveness of any permitted
assignment or sublease otherwise complying with Article 11 and this Article 48
that the assignee execute, acknowledge and deliver to Landlord an agreement in
form and substance satisfactory to Landlord whereby the assignee assumes all
obligations of Tenant under this Lease, and agrees that the provisions of
Article 11 and this Article 48 shall continue to be binding upon it in respect
of all future assignments of this Lease. No assignment of this Lease shall
release the assignor from its continuing obligations to Landlord under this
Lease or any renewals or extensions thereof, except as expressly herein
provided, and Tenant and any subsequent assignor shall continue to remain
jointly and severally liable (as primary obligor) for all of Tenant's
obligations hereunder.
48.9 Tenant covenants to obtain all permits and approvals required by
any governmental or quasi-governmental agency for any work or otherwise required
in connection with any assignment of this Lease or any sublease, and Tenant
shall deliver copies of the same to Landlord prior to the commencement of work
if work is to be done. Tenant is furthermore responsible for and is required to
reimburse Landlord for all costs including, but not limited to, architectural,
engineering and legal fees which Landlord incurs in reviewing any proposed
assignment of this Lease or any sublease and any permits, approvals and
applications for the construction within the Demised Premises. Tenant's failure
to obtain any of the above-mentioned permits and approvals or to submit same and
a duplicate original counterpart of the assignment or sublease to Landlord
within five days of the date of issuance or execution of such item(s) shall
constitute a default under this Lease.
48.10 If Landlord reasonably withholds its consent of any proposed
assignment or sublease, or if Landlord exercises its recapture option under
Section 48.2, Tenant shall indemnify, defend and hold harmless Landlord against
and from all loss, liability, damage, cost and expense (including reasonable
attorneys' fees and disbursements) resulting from any claims that may be made
against Landlord by the proposed assignee or sublessee or by any brokers or
other persons claiming a commission or similar compensation in connection with
the proposed assignment or sublease.
48.11 If Landlord consents to any proposed assignment or sublease and
Tenant fails to consummate the assignment or sublease to which Landlord
consented within 45 days after the giving of such consent, Tenant shall be
required again to comply with all of the
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provisions and conditions of this Article 48 before assigning this Lease or
subletting all or part of the Demised Premises.
48.12 The joint and several liability of the named Tenant and any
immediate or remote successor in interest of the named Tenant for the due
performance and observance of all covenants and conditions to be performed and
observed by Tenant shall not be impaired by any agreement of Landlord extending
the time for such performance or observance or by Landlord's waiving or failing
to enforce any provisions of this Lease.
48.13 The listing of any name other than that of Tenant on any door of
the Demised Premises or on any directory or in any elevator in the Building or
otherwise, shall not operate to vest in the person so named any right or
interest in this Lease or in the Demised Premises or the Building, or be deemed
to constitute, or serve as a substitute for any prior consent required under
this Article, and it is understood that any such listing shall constitute a
privilege extended by Landlord which shall be revocable at Landlord's will by
notice to Tenant.
48.14 Any provisions of Article 11 and Article 48 to the contrary
notwithstanding, but subject to the other terms, conditions and provisions
contained in said Articles:
(a) Any corporate Tenant shall have the right, without the
consent of Landlord, to assign this Lease or sublet all or any part of
the Demised Premises to any corporation controlling, controlled by or
under common control with Tenant (through a public offering, private
placement or otherwise) provided that no such assignee shall further
assign this Lease and no such sublessee shall assign or encumber its
sublease or further sublet all or any part of the Demised Premises, and
provided, further, that any event resulting in such assignee or
sublessee ceasing to be a corporation controlling, controlled by or
under common control with Tenant shall be deemed to be an assignment or
sublease requiring the prior consent of Landlord and Tenant shall
thereupon be required to comply with all provisions of Article 11 and
this Article 48 applicable thereto. For purposes of this Section,
"control" means ownership of at least fifty-one percent (51%) of the
issued and outstanding voting stock of such corporation.
(b) Any corporate Tenant shall also have the right, without
the consent of Landlord, to assign this Lease to any corporation
succeeding to Tenant by merger or consolidation in accordance with
applicable statutory provisions for merger or consolidation of
corporations or by purchase of all or substantially all of Tenant's
assets, provided that immediately after such merger, consolidation or
purchase, the shareholders' equity (capital stock, additional paid-in
capital and retained earnings) of the successor corporation or the
purchasing corporation, as the case may be, shall be at least equal to
the shareholders' equity of Tenant immediately prior to such merger,
consolidation or purchase and the foregoing shall be so certified by
the chief financial officer of the assignee.
It is Landlord's intent to permit assignment of the Lease and
subletting pursuant to this Section 48.14 exclusively as an accommodation to the
bona fide and legitimate business needs of Tenant, and notwithstanding the
provisions hereof, no assignment of this Lease or sublease of the Demised
Premises without Landlord's consent hereunder shall be permitted where the sole
or primary purpose of such assignment or subletting is to permit occupancy of
the Demised Premises by a third party in avoidance of Landlord's consent, or in
the case of a corporation's purchasing all or substantially all of Tenant's
assets where this Lease constitutes all or a substantial portion of such assets.
Tenant shall promptly give Landlord prior written notice of any assignment of
this Lease or subletting permitted under this Section 48.14 accompanied by all
documentation required by Landlord to establish compliance with the requirements
of subsections (a) and (b) above and Tenant shall also promptly provide Landlord
with a copy of any executed instrument of
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merger, consolidation or assignment or the executed sublease, as
the case may be.
49. TENANT'S COOPERATION; REASONABLE
MODIFICATIONS; ESTOPPEL CERTIFICATE
49.1 If, in connection with obtaining financing for the Building
and/or the Real Estate, or otherwise upon the interest of the Landlord, as
lessee, under any ground or underlying lease, any lending institution shall
request reasonable modifications of this Lease as a condition of such
financing, Tenant covenants not unreasonably to withhold or delay its agreement
to such modification, upon Landlord's request, provided that such modification
does not materially or adversely affect the rights of Tenant under this Lease.
49.2 Tenant agrees at any time and from time to time, upon not less
than ten days' prior written request, that Tenant shall execute, acknowledge and
deliver to Landlord, or its designee, a statement in writing certifying: that
this Lease is unmodified and is in full force and effect (or if there have been
modifications, the specifics thereof and that the Lease is in full force and
effect as modified); the dates to which the Minimum Rent (or Adjusted Minimum
Rent) and additional rent have been paid; the amount of all rents paid in
advance, if any; and any other information that Landlord shall reasonably
request. Tenant further agrees to furnish Landlord upon demand at any time such
information and assurances as Landlord may request that Tenant has not breached
the provisions of this Lease. It is intended hereby that any such statement
delivered pursuant to this Article may be relied upon by a prospective purchaser
of the Landlord's interest or a mortgagee of Landlord's interest, or any
assignee of any mortgage upon Landlord's interests in the Real Estate. The
foregoing obligation shall be deemed a substantial obligation of the tenancy,
the breach of which shall give Landlord those remedies herein provided for an
event of default. Tenant's failure to timely deliver such statement shall be
conclusive upon Tenant: (a) that this Lease is in full force and effect, without
modification except as may be represented by Landlord; (b) that there are no
uncured defaults in Landlord's performance and Tenant has no right of offset,
counterclaim, defenses or deduction against the Minimum Rent, Adjusted Minimum
Rent, additional rent or against Landlord; and (c) that no more than one month's
installment of Minimum Rent has been paid in advance.
49.3 Tenant agrees that in connection with any financing or
refinancing of the Building and/or the Real Estate, upon not less than ten (10)
days' prior written request, that Tenant shall demonstrate to Landlord Tenant's
financial status and that of any occupant of the Demised Premises by submitting
to Landlord all reasonable information as Landlord may request, including but
not limited to a balance sheet as of a date within ninety (90) days of
Landlord's request therefor and statements of income or profit and loss. The
foregoing obligation shall be deemed a substantial obligation of the tenancy,
the breach of which shall give Landlord those remedies herein provided for an
event of default.
50. LIMITATION OF LIABILITY;
DEFINITION OF "LANDLORD"
50.1 Notwithstanding anything to the contrary herein provided, each
and every term, covenant, condition and provision of this Lease, is hereby made
specifically subject to the provisions of this Article 50. The term "Owner" or
"Landlord" as used in this Lease means only the owners or lessors for the time
being of the Real Estate, so that in the event of any conveyance of such
interest and the transfer to the transferee of any funds then being held under
this Lease by such owner, Landlord shall be and hereby is entirely freed and
relieved of any and all obligations of Landlord hereunder thereafter accruing,
and it shall be deemed without further agreement between the parties and such
grantee(s) that the grantee has assumed and agreed to observe and perform all
obligations of Landlord hereunder. It is specifically understood and agreed that
notwithstanding anything to the contrary herein
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provided or otherwise provided at law or in equity, there shall be absolutely no
personal liability in excess of its interest in the Real Estate to the Landlord
or any successor in interest thereto (whether the same be an individual, joint
venture, tenancy in common, firm or partnership, general, limited or otherwise)
or on the part of the members of any firm, partnership or joint venture or other
unincorporated Landlord with respect to any of the terms, covenants and/or
conditions of this Lease; in the event of a breach or default by Landlord, or
any successor in interest thereof, of any of its obligations under this Lease,
Tenant shall look solely to the then Landlord for the satisfaction of each and
every remedy of Tenant, such exculpation of personal and additional liability
which is in excess of such interest in the Real Estate to be absolute and
without any exception whatsoever.
51. STATUTORY WAIVER; NOTICE BY TENANT
51.1 Tenant waives the benefit of N.J.S.A. 46:8-6 and 46:8-7, as same
may be amended. Tenant further waives its right under N.J.S.A. 2A:18-60, as same
may be amended. Tenant agrees that it will not be relieved of the obligations to
pay the Minimum Rent; Adjusted Minimum Rent or any additional rent in case of
damage to or destruction of the Building, except as provided in Article 9 of the
Printed Portion of this Lease.
51.2 Tenant shall give Landlord immediate notice in case of fire or
accident within the Demised Premises, or, upon the Real Estate if involving
Tenant, its servants, agents, guests, employees, invitees or licensees.
52. CORPORATE AUTHORITY
52.1 Tenant represents that the officer executing and delivering this
Lease has been duly authorized to enter into this Lease and that the execution
and delivery of this Lease by Tenant do not and shall not violate any provision
of any by-law, agreement, order, judgment, governmental regulation or any other
obligation to which Tenant is a party or is subject.
52.2 Upon execution hereof, Tenant shall deliver an appropriate
certification by its secretary or assistant secretary to the above effect.
53. PERSONAL TAXES
53.1 Tenant agrees to pay all taxes imposed upon Tenant or on the
personal property of Tenant in connection with its use and occupancy of the
Demised Premises including, but not limited to, personal property, income,
withholding and unemployment compensation, and to hold Landlord harmless from
collection thereof out of monies due and owing Landlord.
54. BUILDING CHANGES
54.1 This Lease shall not be affected or impaired by any change to
any lawns, sidewalk, driveways, parking areas or streets adjacent to or around
the Building, except as provided in the provisions of this Lease dealing with
condemnation.
55. HOLDING OVER
55.1 Tenant shall pay Landlord one and one half (1 1/2) times the
fair market rental value of the Demised Premises, as determined by Landlord (but
in no event less than one and one half (1 1/2) times the total of Adjusted
Minimum Rent plus additional rent then applicable under the Lease) for each
month or partial month during which Tenant retains possession of the Demised
Premises, or any part thereof, after the expiration or termination of the Lease.
Notwithstanding the preceding sentence, the parties hereto agree that Tenant
shall only be responsible for paying the Adjusted Minimum Rent stated in the
Lease for the initial sixty (60) day period following the expiration or
termination of the Lease and the holdover rent penalty of one and one-half
(1 1/2) times the fair market rental value of the Demised Premises shall
commence on the
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sixty first (61st) day following the termination of the Lease. Tenant
understands that on the last day of the term of this Lease, all or a part of the
Demised Premises may be subject to certain rights of occupancy held by other
parties and that any retention of possession by Tenant after the last day of the
term of this Lease may cause significant hardship on Landlord and on parties to
whom certain rights of occupancy for all or any part of the Demised Premises
have been granted. In connection with the foregoing, Tenant shall defend,
indemnify and hold Landlord harmless against all liabilities and damages
sustained by reason of any such retention of possession. If Tenant retains
possession of the Demised Premises, or any part thereof, for thirty (30) days or
longer after the expiration or termination of this Lease, then Landlord, at
Landlord's election expressed in a written notice to Tenant but not otherwise,
may, in addition to all other rights and remedies available to Landlord under
this Lease and by law, constitute such holding over as a renewal of this Lease
for a period of one (1) year on the same terms as are set forth in this Lease,
except that the Minimum Rent shall be equal to the then fair rental value of the
Demised Premises, as determined by Landlord (but in no event less than the
Minimum Rent then payable by Tenant under this Lease). Nothing contained in this
Lease shall be construed as a consent by Landlord to the occupancy or possession
by Tenant of the Demised Premises beyond the Termination Date or prior
expiration of the term hereof, and Landlord, upon the Termination Date or prior
expiration of the term hereof, shall also be entitled to consequential damages
and to the benefit of all legal remedies that now may be in force or may be
hereafter enacted for summary possession of the Demised Premises.
56. RESTRICTIVE COVENANT - FOOD SERVICE
56.1 Tenant hereby covenants and agrees (anything to the contrary
contained in this Lease, notwithstanding) that it shall not use the Demised
Premises or any portion thereof, for the service of food to anyone other than
Tenant's employees, nor shall it maintain any facilities for the sale or
consumption of food to and by anyone other than Tenant's employees without, in
each case, obtaining the prior written consent of the Landlord. The consent of
the Landlord required hereunder may be withheld for any reason or no reason.
56.2 Landlord represents to Tenant, and Tenant acknowledges, that
pursuant to agreements made or to be made by and between the Landlord and third
parties for the operation of a restaurant, cafeteria, coffee-cart and similar
food services for this Building and/or other buildings in the office park in
which this Building is located, no tenant of this Building, including Tenant,
shall prepare, contract for, serve or otherwise make available a food service
facility in competition with such third parties. Any breach of this restriction
by the Tenant shall be deemed a material event of default under the terms of
this Lease, and Landlord may, in its discretion, exercise such remedies as it
may deem appropriate to terminate this Lease, prevent a violation of this
covenant, and recover any damages to which it may be exposed by virtue of a
breach by the Tenant.
56.3 Tenant shall not permit the consumption of food or drink in the
common areas of the Building.
57. NOTICES
57.1 All notices, demands and requests which may or are required to be
given by either party hereunder to the other, shall be in writing. All notices,
demands and requests by Landlord to Tenant shall be deemed to have been properly
given if sent by Landlord or its managing agent and mailed by registered or
certified mail, return receipt requested, postage prepaid, addressed to Tenant
at the Demised Premises Attention: Stanley L. Furst, President or to such other
address as Tenant may from time to time designate by written notice to Landlord.
All notices, demands and requests by Tenant to Landlord shall be
deemed duly given or served if, and shall not be deemed
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duly given or served unless, sent by registered or certified mail, return
receipt requested, postage prepaid, addressed to Landlord at:
LANDLORD: 5 BECKER ASSOCIATES
c/o Bellemead Management Co., Inc.
280 Corporate Center
4 Becker Farm Road
Third Floor
Roseland, New Jersey 07068
Attention: Legal Department
or to such other address as Landlord may from time to time designate by written
notice to Tenant.
All notices referred to hereunder shall be deemed given and received
two days after the date said notice is mailed by United States registered or
certified mail as aforesaid, in any post office or branch post office regularly
maintained by the United State Government, unless said notice was personally
served upon, an officer of Landlord or Tenant, in which case such notice shall
be deemed given when delivered.
58. INTERPRETATION
58.1 If any term or provisions of this Lease or the application
thereof to any party or circumstance shall to any extent be invalid or
unenforceable, the remainder of this Lease or the application of such term or
provision to parties or circumstances other than to those with respect to which
it is held invalid or enforceable, shall not be affected thereby, and each term
and provision of this Lease shall be valid and enforced to the fullest extent
permitted by law.
58.2 In any and all cases where Landlord's consent or approval is
required under this Lease, Tenant shall upon Landlord's demand reimburse
Landlord, as additional rent, for all costs and expenses, including but not
limited to architectural, engineering and legal fees, which Landlord incurs in
determining whether to grant its consent or approval.
58.3 This Lease shall be governed by and construed in accordance with
the laws of and enforced only in the courts of New Jersey. Tenant hereby
irrevocably submits itself to the jurisdiction of the courts of the State of New
Jersey and to the jurisdiction of the United States District Court for the
District of New Jersey for the purposes of any suit, action or other proceeding
brought by Landlord arising out of or based upon this Lease. Tenant hereby
waives and agrees not to assert, by way of motion, as a defense, or otherwise,
in any such suit, action or proceeding, any claim that it is not subject
personally to the jurisdiction of the above-named courts, that its property is
exempt or immune from attachment or execution, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that this Lease may not be enforced in or by
such court.
58.4 This Lease shall be construed without regard to any presumption
or other rule requiring construction against the party causing this Lease to be
drafted. Text deleted from a prior draft of this Lease shall not be admissible
in an action or proceeding relating to the Lease for the purpose of altering or
limiting the meaning or effect of the Lease.
58.5 Tenant acknowledges and agrees that it has had the assistance of
counsel in the review, negotiation and execution of this Lease or has waived its
right to counsel.
59. NO OFFER OR AGREEMENT
59.1 No broker or agent of any broker has authority to make or agree
to make a lease or any other agreement or undertaking in connection herewith,
including, but not limited to the modification, amendment of or cancellation of
a lease. The mailing
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or delivery of this document or any draft hereof by the Landlord or its agent
to Tenant, its agent or attorney shall not be deemed an offer by the Landlord to
lease the Demised Premises on the terms herein. This Lease shall not be
effective, nor shall Tenant have any rights with respect thereto unless and
until Landlord shall accept this Lease and execute and deliver the same to
Tenant.
60. DAMAGES
60.1 Notwithstanding anything to the contrary contained in Article
18 hereof, if Landlord shall re-enter the Demised Premises under the provisions
of Article 18, or in the event of the termination of this Lease, or of
re-entry, by or under any summary dispossess or other proceeding or action of
any provision of law by reason of default hereunder on the part of Tenant,
Tenant shall pay to Landlord as damages, (i) a sum which at the time of such
termination of this Lease or at the time of any such re-entry by Landlord, as
the case may be, equals the aggregate Adjusted Minimum Rent payable hereunder
which would have been payable by Tenant (conclusively presuming that additional
rent on account of increases in Taxes and Building Operating Costs shall
increase at the average of the rates of increase thereof previously experienced
by Landlord during the period not to exceed 3 years prior to such termination)
for the period commencing with such earlier termination of this Lease or the
date of such re-entry, as the case may be, and ending with the Termination
Date, had this Lease not so terminated or had Landlord not so re-entered the
Demised Premises plus (ii) the expenses of re-letting, including altering and
preparing the Demised Premises for new tenants, brokers, commissions,
attorney's fees and all other expenses properly chargeable against the Demised
Premises and the rental thereof. Any such re-letting may be for a period
shorter or longer than the remaining term of this Lease; but in no event shall
Tenant be entitled to receive any excess of such net rents over the sums
payable by Tenant to Landlord hereunder, or shall Tenant be entitled in any
suit for the collection of damages pursuant to this subsection to a credit in
respect of any net rents from a reletting. If the Demised Premises or any part
thereof should be re-let in combination with the other space, then proper
apportionment on a square foot basis shall be made of the rent received from
such re-letting and of the expenses of re-letting.
60.2 Suit or suits for the recovery of such damages, or any
installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall be deemed to require Landlord to
postpone suit until the date when the term of this Lease would have expired if
it had not been so terminated or had Landlord not re-entered the Demised
Premises. Nothing herein contained shall be construed to limit or preclude
recovery by Landlord against Tenant of any sums or damages to which, in
addition to the damages particularly provided above, Landlord may lawfully be
entitled by reason of any default hereunder on the part of Tenant. Any
indemnity of Tenant shall survive the expiration or earlier termination of this
Lease. Nothing herein contained shall be construed to limit or prejudice the
right of Landlord to prove for and obtain as liquidated damages by reason of
the termination of this Lease or re-entry of the Demised Premises for the
default of Tenant under this Lease, an amount equal to the maximum allowed by
any statute or rule of law governing the proceedings in which such damages are
to be proved whether or not such amount be greater, equal to, or less than any
of the sums referred to in Section 60.1.
61. BANKRUPTCY
61.1 If, as a matter of law, Landlord has no right on the bankruptcy
of Tenant to terminate this Lease, then, if Tenant, as debtor, or its trustee
wishes to assume or assign this Lease, in addition to curing or adequately
assuring the cure of all defaults existing under this Lease on Tenant's part on
the date of filing of the proceeding (such assurances being defined below),
Tenant, as debtor, or the trustee or assignee, must also furnish adequate
assurances of future performance under this Lease (as defined below). Adequate
assurance of curing defaults means the posting
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with Landlord of a sum in cash sufficient to defray the cost of such a cure.
Adequate assurance of future performance under this Lease means posting a
deposit equal to three (3) months' rent, including all other charges payable by
Tenant hereunder, such as the amounts payable pursuant to Article 36 hereof,
and, in the case of an assignee, assuring Landlord that the assignee is
financially capable of assuming this Lease, and that its use of the Demised
Premises will not be detrimental to the other tenants in the Building or
Landlord. In a reorganization under Chapter 11 of the Bankruptcy Code, the
debtor or trustee must assume this Lease or assign it within one hundred twenty
(120) days from the filing of the proceeding, or he shall be deemed to have
rejected and terminated this Lease.
61.2 If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the
"Bankruptcy Code"), any and all monies or other considerations to be delivered
in connection with the assignment shall be delivered to Landlord, shall be and
remain the exclusive property of Landlord and shall not constitute property of
Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any
person or entity to which this Lease is assigned pursuant to the provisions of
the Bankruptcy Code shall be deemed to have assumed all of the obligations
arising under this Lease on and after the date of the assignment, and shall upon
demand execute and deliver to Landlord an instrument confirming that assumption.
62. SECURITY
62.1 In the event Landlord applies or retains any portion or all of
the security deposited, Tenant shall forthwith restore the amount so applied or
retained so that at all times the amount deposited with Landlord shall be not
less than $14,620.94.
62.2 Tenant, in lieu of cash, may deliver to Landlord, as security, an
irrevocable negotiable letter of credit ("Letter of Credit") by and drawn on a
bank or trust company approved by Landlord, in form and content acceptable to
Landlord for its account in the amount of $14,620.94. The Letter of Credit shall
have an expiration date of not less than one (1) year from the date hereof and
shall be renewed by Tenant each and every year during the term of this Lease so
that the Letter of Credit may be drawn down through and including the sixtieth
(60th) day after the Termination Date. Each renewal shall be delivered to
Landlord not less than sixty (60) days before the expiration date of the then
current Letter of Credit. Failure to deliver such renewal on or before said date
shall be a material breach of this Lease and Landlord shall have the right,
among other remedies provided hereunder, to present the existing Letter of
Credit for payment, draw thereon and apply or retain the proceeds thereof in
accordance with Articles 34 and 62. Upon Landlord's demand, Tenant shall revise
the Letter of Credit by changing the beneficiary thereunder to whomever Landlord
may designate from time to time. Tenant shall deliver the revised Letter of
Credit naming the new beneficiary within thirty (30) days after Landlord
requests delivery of same. Failure to deliver such revised Letter of Credit
within the aforementioned thirty (30) day period shall be a material breach of
this Lease and Landlord shall have the right, among other remedies provided
hereunder, to present the existing Letter of Credit for payment, draw thereon
and apply or retain the proceeds thereof in accordance with Articles 34 and 62.
63. PARTNERSHIP TENANT
63.1 If Tenant is a partnership, joint venture or unincorporated
association (or is comprised of two (2) or more persons, individually and as
co-partners of a partnership) or if Tenant's interest in this Lease shall be
assigned to a partnership, joint venture or unincorporated association (or to
two (2) or more persons, individually and as co-partners of a partnership)
pursuant to Articles 11 and 48 (any such partnership and such persons are
referred to in this Section as "Partnership Tenant"), the following
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provisions of this Section shall apply to such Partnership Tenant; (i) the
liability of each of the persons comprising Partnership Tenant shall be joint
and several, individually and as a partner, and (ii) each of the persons
comprising Partnership Tenant, whether or not such person shall be one of the
persons comprising Tenant at the time in question, hereby consents in advance
to, and agrees to be bound by, any written instrument which may hereafter be
executed, changing, modifying or discharging this Lease, in whole or in part, or
surrendering all or any part of the Demised Premises to Landlord, and by any
notices, demands, requests or other communications which may hereafter be given,
by Partnership Tenant or by any of the persons comprising Partnership Tenant and
(iii) any bills, statements, notices, demands, requests or other communications
given or rendered to Partnership Tenant or to any of the persons comprising
Partnership Tenant shall be deemed given or rendered to Partnership Tenant and
to all such persons and shall be binding upon Partnership Tenant and all such
persons, and (iv) if Partnership Tenant shall admit new partners, all of such
new partners shall, by their admission to Partnership Tenant, be deemed to have
assumed performance of all of the terms, covenants and conditions of this Lease
on Tenant's part to be observed and performed, and shall be liable for such
performance, together with all other partners, jointly or severally,
individually and as a partner, and (v) Partnership Tenant shall give prompt
notice to Landlord of the admission of any such new partners, and upon demand of
Landlord, shall cause each such new partner to execute and deliver to Landlord
an agreement in form satisfactory to Landlord, wherein each such new partner
shall so assume performance of all of the terms, covenants and conditions of
this Lease on Tenant's part to be observed and performed (but neither Landlord's
failure to request any such agreement nor the failure of any such new partner to
execute or deliver any such agreement to Landlord shall vitiate the provisions
of subdivision (iv) of this Section).
64. LANDLORD'S WORK: LANDLORD'S WORK LETTER
64.1 Annexed hereto as Exhibit "B" and made a part hereof is
Landlord's work letter (the "Work Letter") . Tenant agrees that it shall either
approve Landlord's drawings or provide to Landlord on or before February 1,
1993, such drawings and specifications required by Landlord for Tenant's layout,
partitioning, electrical, reflecting ceiling and other installations for the
approval and acceptance of Landlord. At a cost to Tenant of $73,750.00
("Construction Charge"), Landlord shall furnish and install the Work Letter
items described in Exhibit B. To the extent Tenant's drawings require work, the
cost of which is not contemplated by the Work Letter, such work shall be reduced
to an "Extra" or "Change Order" to be executed by both Landlord and Tenant,
which shall indicate the work required, the cost thereof to be paid by Tenant
upon demand, and the additional time required, if any, for completion. The
Construction Charge shall be payable by Tenant to Landlord within thirty (30)
days after the term of the Lease has commenced. Tenant shall be responsible for
any delays in completing the Demised Premises by reason of Tenant's failure to
cooperate with Landlord, Tenant's delays in submitting any drawings or
specifications, or in supplying information, or in approving drawings,
specifications or estimates, or in giving authorizations, or by reason of any
"Extra" or "Change Order" designated by Tenant, or by reason of any changes by
Tenant in any designations previously made by Tenant, or by reason of any
similar acts or omissions of Tenant or by reason of any cause or factor beyond
Landlord's reasonable control, including but not limited to strikes or other
labor disputes, accidents, orders or regulations of any federal, state, county
or municipal authority, delays due to adjustment of insurance claims, lack of
availability of materials, parts or services, acts of God, fire, earthquake,
floods, explosion, action of the elements, war, hostilities, invasion,
insurrection, riot, mob violence, sabotage or by reason of any other cause,
whether similar or not to the foregoing, that is beyond the reasonable control
of Landlord. If the Commencement Date does not occur on or before the Estimated
Commencement Date by virtue of any of the reasons set forth in the immediately
preceding sentence, then the Commencement Date shall be
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deemed, notwithstanding anything contained to the contrary in Article 37, to
have occurred on the Estimated Commencement Date.
65., ECRA COMPLIANCE
65.1 Tenant shall, at Tenant's own expense, comply with the
Environmental Cleanup Responsibility Act, (N.J.S.A. 13:1K-6 et seq.), the
Comprehensive Environmental Response, Compensation & Liability Act (42 U.S.C.
9601 et seq.) and the Spill Compensation and Control Act (N.J.S.A. 58:10-23.11
et seq.) and any and all amendments thereto and the regulations and orders
promulgated thereunder. Tenant shall, at Tenant's own expense, make all
submissions to, provide all information to, and comply with all requirements of,
the Bureau of Industrial Site Evaluation ("the Bureau") of the New Jersey
Department of Environmental Protection and Energy ("NJDEPE"). Should the
Bureau or any other division of NJDEPE determine that a cleanup plan be prepared
and that a cleanup be undertaken because of any spills or discharges of
hazardous substances or wastes in or about the Real Estate caused by Tenant
which occur during the term of this Lease, then Tenant shall, at Tenant's own
expense, prepare and submit the required plans and financial assurances, and
carry out the approved plans. Tenant's obligations under this Article shall
arise if there is any closing, terminating or transferring of operations of an
industrial establishment utilizing the Demised Premises or a transfer of the
Real Estate or any portion thereof which falls under the purview of the statutes
hereinbefore referred.
65.2 At no expense to Landlord, Tenant shall promptly provide all
information requested by Landlord for preparation of non-applicability
affidavits and shall promptly sign such affidavits when requested by Landlord.
Tenant shall indemnify, defend and save harmless Landlord from all fines, suits,
procedures, claims and actions of any kind arising out of or in any way
connected with any spills or discharges of hazardous substances or wastes in or
about the Real Estate caused by Tenant which occur during the term of this
Lease; and from all fines, suits, procedures, claims and actions of any kind
arising out of Tenant's failure to provide all information, make all submissions
and take all actions required by the Bureau or any other division of NJDEPE.
Tenant's obligations and liabilities under this Article shall continue so long
as Landlord remains responsible for any spills or discharges of hazardous
substances or wastes in or about the Real Estate caused by Tenant which occur
during the term of this Lease. Tenant's failure to abide by the terms of this
Article shall be restrainable by injunction.
66. RENEWAL OPTIONS
66.1 Subject to the provisions of section 65.2 below, Tenant shall
have the option to renew this Lease for two (2) additional terms of five (5)
years each (individually, a "Renewal Term", and collectively, the "Renewal
Terms"), which initial Renewal Term shall commence upon the expiration of the
term described in Article 37 of this Lease (the "Initial Term"). The terms,
covenants and conditions during the Initial Term, including but not limited to
the definitions of the First Tax Year and First Operating Year as set forth in
Article 36 hereof, shall be projected and carried over into each Renewal Term,
except as specifically set forth hereinafter.
(a) The Minimum Rent during the initial Renewal Term shall be the
greater of (i) Market Rent (as defined in clause (b) below) or (ii) the Adjusted
Minimum Rent as of the last day of the Initial Term. The Minimum Rent during the
second Renewal Term shall be the greater of (i) Market Rent (as defined in
clause (b) below) or (ii) the Adjusted Minimum Rent as of the last day of the
initial Renewal Term.
(b) "Market Rent" shall mean the fair market rent for the Demised
Premises, as of the commencement date of the applicable Renewal Term (the
"Determination Date"), based upon the rents generally in effect for comparable
office space in the area in which the Real Estate is located. Market Rent (for
the purposes of
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<PAGE>
determining the Minimum Rent only during each Renewal Term) shall be determined
on what is commonly known as "gross" basis; that is, in computing Market Rent,
it shall be assumed that all real estate taxes and expenses for customary
services are included in such Market Rent and are not passed through to the
Tenant as separate additional charges. Notwithstanding the foregoing, the
minimum Rent for each Renewal Term shall be thereafter increased from time to
time as provided in this Lease and the First Tax Year and First Operating Year
for each Renewal Term shall be defined as provided in Article 36 hereof.
(c) Landlord shall notify Tenant ("Landlord's Determination Notice")
of Landlord's determination of the Market Rent within sixty (60) days of the
Determination Date. If Tenant disagrees with Landlord's determination, Tenant
shall notify Landlord ("Tenant's Notice of Disagreement") within fifteen (15)
days of receipt of Landlord's Determination Notice. Time shall be of the essence
with respect to Tenant's Notice of Disagreement, and the failure of Tenant to
give such notice within the time period set forth above shall conclusively be
deemed an acceptance by Tenant of the Market Rent as determined by Landlord and
a waiver by Tenant of any right to dispute such Market Rent. If Tenant timely
gives its Tenant's Notice of Disagreement, then the Market Rent shall be
determined as follows: Landlord and Tenant shall, within thirty (30) days of the
date on which Tenant's Notice of Disagreement was given, each appoint an
Appraiser (hereinafter defined) for the purpose of determining the Market Rent.
An Appraiser shall mean a duly qualified impartial real estate appraiser having
at least ten (10) years' experience in the area in which the Demised Premises
are located. In the event that the two (2) Appraisers so appointed fail to agree
as to the Market Rent within a period of thirty (30) days after the appointment
of the second Appraiser, such two (2) Appraisers shall forthwith appoint a third
Appraiser who shall make a determination within thirty (30) days thereafter. If
such two Appraisers fail to agree upon such third Appraiser within ten (10) days
following the last thirty (30) day period, such third Appraiser shall be
appointed by a presiding Judge of the Superior Court of the State of New Jersey
for the County in which the Real Estate is located. Such two (2) Appraisers or
three (3) Appraisers, as the case may be, shall proceed with all reasonable
dispatch to determine the Market Rent. The decision of such Appraisers shall be
final; such decision shall be in writing and a copy shall be delivered
simultaneously to Landlord and to Tenant. If such Appraisers fail to deliver
their decision as set forth above prior to the commencement of the applicable
Renewal Term, Tenant shall pay Landlord the Adjusted Minimum Rent at the rate as
of the last day of the Initial Term or the initial Renewal Term, as applicable,
until such decision is so delivered. If the Market Rent as determined above is
in excess of the actual rent paid, then Tenant, upon demand, shall pay to
Landlord the difference between the actual rent paid and the Market Rent from
the commencement of the applicable Renewal Term. Landlord and Tenant shall each
be responsible for and shall pay the fee of the Appraiser appointed by them
respectively, and Landlord and Tenant shall share equally the fee of the third
Appraiser. Promptly upon determination of the Market Rent, Tenant shall execute
and deliver a Lease amendment prepared by Landlord setting forth the terms of
the applicable Renewal Term.
66.2 Tenant's option to renew, as provided in Section 65.1 above,
shall be strictly conditioned upon and subject to each of the following:
(a) Tenant shall notify Landlord in writing of Tenant's exercise of
its initial option to renew at least six (6) months, but not more than twelve
(12) months, prior to the expiration of the Initial Term and Tenant shall notify
Landlord in writing of Tenant's exercise of its second option to renew at least
six (6) months, but not more than twelve (12) months prior to the expiration of
the initial Renewal Term;
(b) At the time Landlord receives Tenant's notice as provided in (a)
above, and at the expiration of the Initial Term
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and the initial Renewal Term, Tenant shall not have been in default under the
terms or provisions of this Lease and the Tenant named on the first and last
page of this Lease shall be in occupancy of the entire Demised Premises;
(c) Tenant shall have no further renewal option other than the
option to extend for the two Renewal Terms as set forth in Section 65.1 above;
(d) This option to renew shall be deemed personal to the Tenant named
on the first and last page of this Lease and may not be assigned;
(e) Landlord shall have no obligation to do any work or perform any
services for the Renewal Terms with respect to the Demised Premises or the
Building which Tenant agrees to accept in their then "as is" condition; and
(f) No later than ten (10) days prior to the commencement of the
applicable Renewal Term, Tenant shall deposit with Landlord such additional sums
as may be required to increase any security deposit then held by Landlord
proportionate to the increase in the Minimum Rent.
67. RIGHT OF FIRST OFFER
67.1 There currently exists 4,507 square feet of space adjacent to
the Demised Premises which is described on Exhibit F attached hereto and made a
part hereof (the "Option Space"). Landlord agrees that if all or any portion of
the Option Space shall become available during the term of this Lease, subject
to the rights of existing tenants, then in such case, before offering the
available Option Space to any other party, Landlord will first offer to Tenant
the right to include the Option Space within the Demised Premises on the
Inclusion Date (hereinafter defined) upon all of the terms and conditions of
this Lease, as if the Option Space had been part of the Demised Premises on the
Commencement Date, except as specifically set forth hereinafter. The Inclusion
Date shall be the date on which Tenant exercises its option pursuant to the
terms of this Article.
(a) The Minimum Rent payable with respect to the Option Space shall
commence on the Inclusion Date and shall be (i) the Market Rent (as defined in
clause (b) below) which shall in no event be less than (ii) the product of (1)
the Adjusted Minimum Rent per square foot with respect to the Demised Premises
on the date Landlord's offer is made and (2) the rentable square foot area of
the Option Space.
(b) "Market Rent" shall mean the fair market rent for the Option
Space as of the Inclusion Date based upon the rents generally in effect for
comparable office space in the area in which the Building is located. Market
Rent (for the purposes of determining the Minimum Rent for the Option Space
only) shall be determined on what is commonly known as "gross" basis; that is,
in computing Market Rent it shall be assumed that all real estate taxes and
customary services are included in such additional charges. Notwithstanding the
foregoing, the Minimum Rent for the Option Space shall be thereafter increased
from time to time as provided in this Lease.
(C) Landlord shall notify Tenant ("Landlord's Determination Notice")
of Landlord's determination of the Market Rent on or before the Inclusion Date.
If Tenant disagrees with Landlord's determination, Tenant shall notify Landlord
("Tenant's Notice of Disagreement") within fifteen (15) days after receipt of
Landlord's Determination Notice. Time shall be of the essence with respect to
Tenant's Notice of Disagreement, and the failure of Tenant to give such notice
within the time period set forth above shall conclusively be deemed an
acceptance by Tenant of the Market Rent as determined by Landlord and a waiver
by Tenant of any right to dispute such Market Rent. If Tenant timely gives its
Tenant's Notice of Disagreement, then the Market Rent shall be determined as
follows: Landlord and Tenant shall, within thirty (30) days after
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the date on which Tenant's Notice of Disagreement was given, each appoint an
Appraiser (hereinafter defined) for the purpose of determining the Market Rent.
An Appraiser shall mean a duly qualified impartial real estate appraiser having
at least ten (10) years experience in the area in which the Building is located.
In the event that the two (2) Appraisers so appointed fail to agree as to the
Market Rent within a period of thirty (30) days after the appointment of the
second Appraiser, such two (2) Appraisers shall forthwith appoint a third
Appraiser who shall make a determination within thirty (30) days thereafter. If
such two (2) Appraisers so appointed fail to agree upon such third Appraiser
within ten (10) days following the last thirty (30) day period, such third
Appraiser shall be appointed by a presiding Judge of the Superior Court of the
State of New Jersey for the County in which the Building is located. Such two
(2) Appraisers or three (3) Appraisers, as the case may be, shall proceed with
all reasonable dispatch to determine the Market Rent. The decision of such
Appraisers shall be final; such decision shall be in writing and a copy shall be
delivered simultaneously to Landlord and to Tenant. Tenant shall pay Landlord
Adjusted Minimum Rent on the Option Space at the rate set forth in Section
66.1(a) (ii) hereof until such decision is so delivered. If the Market Rent as
determined above is in excess of actual rent paid, then Tenant, upon demand,
shall pay to Landlord the difference between the actual rent paid and the Market
Rent from the Inclusion Date. Landlord and Tenant shall each be responsible for
and shall pay the fee of the Appraiser appointed by them respectively, and
Landlord and Tenant shall share equally the fee of the third Appraiser. Promptly
upon determination of the Market Rent, Tenant shall execute and deliver a Lease
amendment in a form satisfactory to Landlord reflecting the inclusion of the
Option Space within the Demised Premises on the Inclusion Date.
67.2 Landlord shall make the foregoing offer in writing, and Tenant
shall have the right to exercise such option with respect to the Option Space if
Tenant shall not have breached any term or provision of the Lease and the Tenant
named on the first and last page of the Lease is in occupancy of the entire
Demised Premises. Tenant may only exercise such option by written notice
received by Landlord within ten (10) days after Landlord makes such offer to
Tenant. Tenant shall accept the Option Space in its "as is" physical condition
as of the Inclusion Date and agrees that Landlord will not be required to do
any work or perform any services therein. If Tenant does not accept the offer
made by Landlord pursuant to the provisions of this Article 66 with respect to
the Option Space, Landlord shall be under no further obligation to Tenant with
respect to the Option Space or any part thereof and Tenant shall have forever
waived and relinquished its right to the Option Space and any part thereof and
Landlord shall at any and all times thereafter be entitled to lease such space
in whole or in part, or in whole or in parts in conjunction with any other
space, to others at such rental and upon such terms and conditions as Landlord,
in its sole discretion may desire whether such rental terms, provisions and
conditions are the same as those offered to Tenant or more or less favorable.
Tenant agrees not to acquire the Option Space pursuant to this Article 66 for
the primary purpose of subletting or otherwise disposing of the same or any part
thereof to others.
67.3 If the Option space shall not be available for Tenant's
occupancy on the Inclusion Date for any reason including the holding over of the
prior tenant, then Landlord and Tenant agree that the failure to have such
Option Space available for occupancy by Tenant shall in no way affect the
validity of this Lease or the inclusion of the Option Space within the Demised
Premises as of the Inclusion Date or the obligations of Landlord and Tenant
hereunder, nor shall the same be construed in any way to extend the term of this
Lease. Within ten (10) days after Tenant's exercise of this option for the
Option Space, Tenant shall deposit with Landlord such additional sums as may be
required by Landlord to increase the security deposit, if any, then held by
Landlord proportionate to the increase in Minimum Rent. Tenant's rights under
this Article shall be deemed personal to the Tenant named on the first and last
page of this Lease and may not be assigned.
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68. EAGLE ROCK MEMBERSHIP
68.1 Provided Tenant has not (a) breached any term of this Lease, (b)
assigned the Lease or (c) sublet all or any part of the Demised Premises,
Landlord shall reimburse Tenant for the documented and out-of-pocket costs
Tenant incurs for any initial membership dues to the Eagle Rock Club located at
4 Becker Farm Road, Roseland, New Jersey for four (4) people covering a period
not exceeding the Initial Term. If the Lease expires or is terminated prior to
the expiration of the Initial Term, Landlord, not Tenant, shall be entitled to
any prorated refund of membership dues paid for any period beyond the early
expiration or termination of the Lease.
IN WITNESS WHEREOF, Landlord has signed this Lease and this Rider, and
Tenant by its proper corporate officers has signed this Lease and this Rider
this 2nd day of April, 1993.
LANDLORD:
ATTESTED BY: 5 BECKER ASSOCIATES
By: 5 Becker Farm Corp.,
General Partner
/s/ Robert T. Lapidus /s/ James S. Servidea
- --------------------- ---------------------------
Robert T. Lapidus James S. Servidea
Assistant Secretary Vice President
APPLY CORPORATE SEAL HERE
AGENT FOR LANDLORD
ATTESTED BY: BELLEMEAD MANAGEMENT CO., INC.
/s/ Robert T. Lapidus /s/ James S. Servidea
- --------------------- ---------------------------
Robert T. Lapidus James S. Servidea
Assistant Secretary Vice President
APPLY CORPORATE SEAL HERE
TENANT:
ATTESTED BY: NEW JERSEY MORTGAGE AND INVESTMENT
CORP.
/s/ Joel Furst By: /s/ Stan Furst
- ---------------------------- ------------------------------------
Name: Joel Furst
-----------------------
(Please Print) Name: Stan Furst
--------------------------
Title: Corporate (Assistant) (Please Print)
Secretary
Title: President
-------------------------
(Please Print)
APPLY CORPORATE SEAL HERE
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FIRST AMENDMENT OF LEASE
FIRST AMENDMENT OF LEASE dated as of July 27, 1994 between 5 BECKER
ASSOCIATES, a New Jersey limited partnership, having an address c/o Bellemead
Management Co., Inc., 4 Becker Farm Road, Roseland, New Jersey 07068
(hereinafter called "Landloard") and NEW JERSEY MORTGAGE AND INVESTMENT CORP., a
New Jersey Corporation having an address at 5 Becker Farm Road, Roseland, New
Jersey 07068 (hereinafter called "Tenant").
WITNESSETH:
WHERAS:
A. Landlord and Tenant heretofore entered into a certain lease dated April
2, 1993 (said lease, as the same may be amended from time to time, is
hereinafter called the "Lease") with respect to premises on the first (1st)
floor of that certain office building ("Building") known as and located at 5
Becker Farm Road, Roseland, New Jersey
B. Tenant is desirous of increasing the size of the Demised Premises by the
addition of some 4,507 rentable square feet ("Additional Space") on the first
(1st) floor of the Building; and
C. The parties hereto desire to further modify the Lease in certain
respects.
NOW THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto modify said Lease as follows:
1. All terms contained in this First Amendment of Lease that are defined in
the Lease, shall, for the purposes hereof, have the same meaning ascribed to
them in the Lease.
2. The Demised Premises shall be expanded to incorporate the Additional
Space on or about August 1, 1994 (the "Estimated Additional Space Commencement
Date"). Notwithstanding the above, the Additional Space commencement date (the
"Additional Space Commencement Date") shall be the date upon which the work
required to be performed by the Landload pursuant Paragraph 6 hereof (the
"Additional Space Work") shall be substantially completed. The
<PAGE>
Additional Space Work shall be deemed to be substantially completed for all
purposes hereunder, on the date upon which:
(i) Landlord has procured a temporary or permanent Certificate of
Occupancy, permitting occupancy of the Additional Space by the
Tenant; and (ii) The Landlord's architects shall have certified
that Landlord has substantially performed the Additional Space
Work. Substantial completion shall be deemed to have occurred even
though minor details of work remain to be done, provided such
details do not materially interfere with the Tenant's use of the
Additional Space.
As of the Additional Space Commencement Date, Exhibit A (Rental Plan) to
the Lease shall be modified by incorporating the attached Schedule A so that for
all times after the Additional Space Commencement Date, the original Exhibit A
to the Lease and Schedule A attached hereto shall collectively be deemed to be
the new Exhibit A (Rental Plan) to the Lease.
3. The Lease is hereby amended to provide that Tenant shall pay an annual
Minimum Rent as follows:.
TWO HUNDRED FORTY EIGHT THOUSAND SIX HUNDRED NINETY AND 00/100 DOLLARS
($248,690.00) for the period commencing on the Additional Space
Commencement Date and ending on the Termination Date (July 31, 1998),
payable in advance, on the first day of each calendar month in equal
monthly installments of TWENTY THOUSAND SEVEN HUNDRED TWENTY FOUR AND
17/100 DOLLARS ($20,724.17).
At all times prior to the Additional Space Commencement Date, Tenant shall
continue to pay the Minimum Rent and Adjusted Minimum Rent stated in the Lease.
4. At all times after the Additional Space Commencement Date, Section 36.2
of the Lease shall be modified to provide that the Demised Premises shall
contain 15,304 square feet and that the Occupany Percentage shall be 12.93%.
5. At all times after the Additional Space Commencement Date, Section 43.1
of the Lease shall be modified so that Tenant's License for Allotted Parking
shall be for forty nine (49) cars, of which fourteen (14) spaces shall be
designated for Tenant's sole use.
6. Tenant agrees that it shall either approve Landlord's drawings for the
Additional Space or provide to Landlord on or before the date hereof, such
drawings and spcifications required by Landlord for Tenant's layout,
partitioning, electrical,
2
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reflecting ceiling and other installations for the approval and acceptance of
Landlord. Landlord shall furnish and install in accordance with such drawings,
the Additional Space Work described below at a cost to Tenant of $5,400.15. The
Additional Space Work shall consist of those items enumerated on Schedule B
attached hereto and made a part hereof. To the extent Tenant's drawings require
work in addition to the Additional Space Work, such work shall be reduced to an
"Extra" or "Change Order" to be excuted by both Landlord and Tenant, which shall
indicate the work required, the cost thereof to be paid by Tenant, and the
additional time required, if any, for completion. Tenant shall be responsible
for any delays in completing the Additional Space or Demised Premises by reason
of Tenant's failure to cooperate with Landlord, Tenant's delays in submitting
any drawings or specifications, or in supplying information, or in approving
drawings, specifications or estimates, or in giving autorizations, or by reason
of any changes by Tenant in any designations previously made by Tenant, or by
reason of any similar acts or omissions of Tenant or by reason of any cause or
factor beyond Landlord's reasonable control, including but not limited to
strikes or other labor disputes, accidents, orders or regulations of any
federal, state, county or municipal authority, delays due to adjustment of
insurance claims, lack of availability of materials, parts or services, acts of
God, fire, earthquake, floods, explosion, action of the elements, war,
hostilities, invasion, insurrection, riot, mob violence, sabotage or by reason
of any other cause, whether similar or not to the foregoing, that is beyond the
reasonable control of Landlord.
7. If for any reason Tenant does not renew the Lease for an additional term
of five (5) years or more, Tenant shall pay to Landlord the sum of TWO THOUSAND
TWO HUNDRED EIGHTY AND 00/10O DOLLARS ($2,280.00) as a penalty (the "Penalty").
The Penalty shal1 be payable six (6) months prior to the termination date of the
Lease.
8. As of the Additional Space Commencement Date, Articles, 34 and 62 of the
Lease shall be modified so that Tenant's security
3
<PAGE>
deposit shall be $20,724.17, in the form of cash or a letter of credit in
accordance with Section 62.2 of the Lease.
9. Tenant covenants, represents and warrants that no real estate broker
other than Furst, Gelford & Tolstoi, P.A. is responsible for bringing about or
negotiating this First Amendment of Lease and Tenant has not dealt with any
other broker in connection with the consummation of this First Amendment of
Lease. In accordance with the foregoing representation, Tenant covenants and
agrees to pay, defend, hold harmless and indemnify Landlord and its directors,
officers, partners, and their affiliates and/or subsidiaries from and against
any and all cost, expenses, including attorney's fees (in settlement, at trial
or on appeal), court costs and disbursements or liability for any commission
or other compensation claimed by any broker or agent other than Furst, Gelford &
Tolstoi, P.A. acting through or on behalf of Tenant with respect to this First
Amendment of Lease. Landlord shall pay Furst, Gelford & Tolstoi, P.A. a one time
commission in the amount of $25,104 within thirty (30) days after the
Additional Space Commencement Date. There shall be no additional commissions
payable and no additional protection granted to Furst, Gelford Tolstoi, P.A.
whatsoever.
10. Subject to the rights of existing tenants, Article 67 of the Lease is
hereby modified so that the Option Space described therein shall include the
balance of the space located on the first (1st) floor of the Building.
11. Except as modified by this First Amendment of Lease, the Lease and all
covenants, agreements, terms and conditions therof shall remain in full force
and effect and are hereby in al1 respects ratified and confirmed. The terms and
provisions of the Lease, as modified hereby, shall govern the Tenant's occupancy
and use of the Demised Premises as increased by the Additional Space.
12. Tenant represents that the undersigned officer of Tenant has been duly
authorized on behalf of Tenant to enter into this First Amendment of Lease in
accordance with the terms, covenats and conditions set forth herein, and, upon
Landlord's request,
4
<PAGE>
Tenant shall deliver appropriate evidence of the accuracy of the foregoing
representation.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
of Lease as of the day and year first above written.
Signed, sealed and delivered LANDLORD:
IN THE PRESENCE OF OR 5 BECK ASSOCIATES
ATTESTED BY: By: 5 Becker Farm Corp.
General Partner
/s/ Robert T. Lapidus By: /s/ James Servidea
- ------------------------------- ---------------------------------
Robert T. Lapidus James Servidea
Assistant Secretary Vice President
TENANT:
NEW JERSEY MORTGAGE AND
INVESTMENT CORP.
/s/ Joel Furst By: /s/ Stan Furst
- -------------------------------- ---------------------------------
Joel Furst Stan Furst
Secretary President
The undersigned is executing this First Amendment of Lease for the sole
purpose of consenting to the terms of Paragraph 9 hereof.
FURST, GELFORD TOLSTOI, P.A.
By: /s/ Furst, Gelford Tolstoi
-----------------------------
Name: __________________
(Please Print)
Title: _________________
(Please Print)
5
<PAGE>
Exhibit A
FORM OF NOTES
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES OR "BLUE SKY" LAWS (COLLECTIVELY, THE "SECURITIES LAWS") AND MAY NOT
BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE
SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION APPLIES TO SUCH TRANSFER OR
DISPOSITION.
NEW JERSEY MORTGAGE AND INVESTMENT CORP.
12.00% Senior Subordinated Note
Due July 1, 2002
No. 1 July __, 1997
$3,000,000.00
NEW JERSEY MORTGAGE AND INVESTMENT CORP., a New Jersey corporation (the
"Company"), for value received, hereby promises to pay to N M ROTHSCHILD & SONS
LIMITED or registered assigns on July 1, 2002 the principal amount of THREE
MILLION DOLLARS AND NO CENTS ($3,000,000.00), or the balance of such principal
amount as shall not have been prepaid by the Company prior to such date as
provided herein, and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the principal amount from time to time remaining unpaid
hereon at the rate of 12.00% per annum from the date hereof until maturity,
payable monthly on the 1st day of each month (commencing on the first of such
dates after the date hereof) and at maturity. The Company agrees to pay interest
on overdue principal (including any overdue required or optional prepayment of
principal) and premium, if any, and (to the extent legally enforceable) on any
overdue installment of interest, at lesser of the highest rate allowed by
applicable law or 16% per annum, after the date due, whether by acceleration or
otherwise, until paid. Both the principal hereof and interest hereon are payable
at the principal office of the Company in Roseland, New Jersey, in coin or
currency of the United States of America which at the time of payment shall be
legal tender for the payment of public and private debts.
This Note is one of the 12.00% Senior Subordinated Notes due July 1,
2002 (the "Notes") of the Company in the aggregate principal amount of
$3,000,000 issued or to be issued under and pursuant to the terms and provisions
of the Note Agreement, dated as of July _, 1997
<PAGE>
(the "Note Agreement"), entered into by the Company with the original Purchaser
therein referred to, and this Note and the holder hereof are entitled equally
and ratably with the holders of all other Notes outstanding under the Note
Agreement to all the benefits provided for thereby or referred to therein.
Reference is hereby made to the Note Agreement for a statement of such rights
and benefits.
This Note and the other Notes outstanding under the Note Agreement may
be declared due prior to their expressed maturity dates and certain prepayments
are required to be made thereon, all in the events, on the terms and in the
manner and amounts as provided in the Note Agreement.
The Notes are not subject to prepayment or redemption at the option of
the Company prior to their expressed maturity dates except on the terms and
conditions and in the amounts and with the premium, if any, set forth in the
Note Agreement
This Note and the indebtedness evidenced hereby, including the
principal and interest, shall at all times remain junior and subordinate to
any and all Senior Debt, as such term is defined in the Note Agreement, all on
the terms and to the extent more fully set forth in the Note Agreement.
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the principal office of the Company duly endorsed
or accompanied by a written instrument of transfer duly executed by the
registered holder of this Note or its attorney duly authorized in writing.
Payment of or on account of principal, premium, if any, and interest on this
Note shall be made only to or upon the order in writing of the registered
holder.
This Note shall be governed by and construed in accordance with the
laws of the State of New York, without reference to the laws thereof regarding
conflicts of laws. This Note is executed as an instrument under seal.
NEW JERSEY MORTGAGE AND
INVESTMENT CORP.
By: ____________________
Name:
Title:
2
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES OR "BLUE SKY" LAWS (COLLECTIVELY, THE "SECURITIES LAWS") AND MAY NOT
BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE
SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION APPLIES TO SUCH TRANSFER OR
DISPOSITION.
NEW JERSEY MORTGAGE AND INVESTMENT CORP.
12.00% Senior Subordinated Note
Due July 1, 2002
No. 1 July 22, 1997
$3,000,000.00
NEW JERSEY MORTGAGE AND INVESTMENT CORP., a New Jersey corporation
(the "Company"), for value received, hereby promises to pay to N M ROTHSCHILD &
SONS LIMITED or registered assigns on July 1, 2002 the principal amount of THREE
MILLION DOLLARS AND NO CENTS ($3,000,000.00), or the balance of such principal
amount as shall not have been prepaid by the Company prior to such date as
provided herein, and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the principal amount from time to time remaining unpaid
hereon at the rate of 12.00% per annum from the date hereof until maturity,
payable monthly on the 1st day of each month (commencing on the first of such
dates after the date hereof) and at maturity. The Company agrees to pay interest
on overdue principal (including any overdue required or optional prepayment of
principal) and if any, and (to the extent legally enforceable) on any overdue
installment of interest, at lesser of the highest rate allowed by applicable law
or 16% per annum, after the date due, whether by acceleration or otherwise,
until paid. Both the principal hereof and interest hereon are payable at the
principal office of the Company in Roseland, New Jersey, in coin or currency of
the United States of America which at the time of payment shall be legal tender
for the payment of public and private debts.
This Note is one of the 12.00% Senior Subordinated Notes due July
1, 2002 (the "Notes") of the Company in the aggregate principal amount of
$3,000,000 issued or to be issued under and pursuant to the terms and provisions
of the Note Agreement, dated as of July 15, 1997 (the "Note Agreement"), entered
into by the Company with the original Purchaser therein referred to, and this
Note and the holder hereof are entitled equally and ratably with the holders of
all other Notes outstanding under the Note Agreement to all the benefits
provided for thereby or referred to therein. Reference is hereby made to the
Note Agreement for a statement of such rights and benefits.
<PAGE>
This Note and the other Notes outstanding under the Note
Agreement may be declared due prior to their expressed maturity dates and
certain prepayments are required to be made thereon, all in the events, on the
terms and in the manner and amounts as provided in the Note Agreement.
The Notes are not subject to prepayment or redemption at the
option of the Company prior to their expressed maturity dates except on the
terms and conditions and in the amounts and with the premium, if any, set forth
in the Note Agreement.
This Note and the indebtedness evidenced hereby, including the
principal and interest, shall at all times remain junior and subordinate to any
and all Senior Debt, as such term is defined in the Note Agreement, all on the
terms and to the extent more fully set forth in the Note Agreement.
This Note is registered on the books of the Company and is
transferable only by surrender thereof at the principal office of the Company
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Note or its attorney duly authorized in
writing. Payment of or on account of principal, premium, if any, and interest on
this Note shall be made only to or upon the order in writing of the registered
holder.
This Note shall be governed by and construed in accordance with
the laws of the State of New York, without reference to the laws thereof
regarding conflicts of laws. This Note is executed as an instrument under seal.
NEW JERSEY MORTGAGE AND
INVESTMENT CORP.
By: Joel Furst
------------------------
Name: Joel Furst
Title: Sr. Vice President
-2-
<PAGE>
Sheetl
Date* Ending Principal Fixed Interest
Principal ($) Amortisation @12% **
XX/07/1997
01-Aug-97 3,000,000.00 0 TBD***
01-Sep-97 3,000,000.00 0.00 30,000.00
01-Oct-97 3,000,000.00 0.00 30,000.00
01-Nov-97 3,000,000.00 0.00 30,000.00
01-Dec-97 3,000,000.00 0.00 30,000.00
01-Jan-98 3,000,000.00 0.00 30,000.00
01-Feb-98 3,000,000.00 0.00 30,000.00
01-Mar-98 3,000,000.00 0.00 30,000.00
01-Apr-98 3,000,000.00 0.00 30,000.00
01-May-98 3,000,000.00 0.00 30,000.00
01-Jun-98 3,000,000.00 0.00 30,000.00
01-Jul-98 3,000,000.00 0.00 30,000.00
01-Aug-98 3,000,000.00 0.00 30,000.00
01-Sep-98 3,000,000.00 0.00 30,000.00
01-Oct-98 3,000,000.00 0.00 30,000.00
01-Nov-98 3,000,000.00 0.00 30,000.00
01-Dec-98 3,000,000.00 0.00 30,000.00
01-Jan-99 3,000,000.00 0.00 30,000.00
01-Feb-99 3,000,000.00 0.00 30,000.00
01-Mar-99 3,000,000.00 0.00 30,000.00
01-Apr-99 3,000,000.00 0.00 30,000.00
01-May-99 3,000,000.00 0.00 30,000.00
01-Jun-99 3,000,000.00 0.00 30,000.00
01-Jul-99 3,000,000.00 0.00 30,000.00
01-Aug-99 2,925,000.00 75,000.00 30,000.00
01-Sep-99 2,850,000.00 75,000.00 29,250.00
01-Oct-99 2,775,000.00 75,000.00 28,500.00
01-Nov-99 2,700,000.00 75,000.00 27,750.00
01-Dec-99 2,625,000.00 75,000.00 27,000.00
01-Jan-00 2,550,000.00 75,000.00 26,250.00
01-Feb-00 2,475,000.00 75,000.00 25,500.00
01-Mar-00 2,400,000.00 75,000.00 24,750.00
01-Apr-00 2,325,000.00 75,000.00 24,000.00
01-May-00 2,250,000.00 75,000.00 23,250.00
01-Jun-00 2,175,000.00 75,000.00 22,500.00
01-Jul-00 2,100,000.00 75,000.00 21,750.00
01-Aug-00 2,025,000.00 75,000.00 21,000.00
01-Sep-00 1,950,000.00 75,000.00 20,250.00
01-Oct-00 1,875,000.00 75,000.00 19,500.00
01-Nov-00 1,800,000.00 75,000.00 18,750.00
01-Dec-00 1,725,000.00 75,000.00 18,000.00
01-Jan-01 1,650,000.00 75,000.00 17,250.00
01-Feb-01 1,575,000.00 75,000.00 16,500.00
01-Mar-01 1,500,000.00 75,000.00 15,750.00
01-Apr-Ol 1,425,000.00 75,000.00 15,000.00
01-May-01 1,350,000.00 75,000.00 14,250.00
01-Jun-01 1,275,000.00 75,000.00 13,500.00
01-Jul-01 1,200,000.00 75,000.00 12,750.00
01-Aug-01 1,100,000.00 100,000.00 12,000.00
01-Sep-01 1,000,000.00 100,000.00 11,000.00
01-Oct-01 900,000.00 100,000.00 10,000.00
01-Nov-01 800,000.00 100,000.00 9,000.00
01-Dec-01 700,000.00 100,000.00 8,000.00
01-Jan-02 600,000.00 100,000.00 7,000.00
01-Feb-02 500,000.00 100,000.00 6,000.00
01-Mar-02 400,000.00 100,000.00 5,000.00
01-Apr-02 300,000.00 100,000.00 4,000.00
01-May-02 200,000.00 100,000.00 3,000.00
01-Jun-02 100,000.00 100,000.00 2,000.00
01-Jul-02 0.00 100,000.00 1,000.00
*Principal and interest payments flow on the first day
of the month subject to a US business day convention
**Interest Calculated on the basis of 12 months of 30 days out of a 360 day year
***To be determined depending on the start date to be during the week
commencing 14th July.
<PAGE>
NEW JERSEY MORTGAGE AND INVESTMENT CORP.
5 Becker Farm Road, P.O. Box M
Roseland, New Jersey 07068
NOTE AGREEMENT
$3,000,000 12.00% Senior Subordinated Notes
Due July 1, 2002
Dated as of
July 15, 1997
N M Rothschild & Sons Limited
New Court
St. Swithin's Lane
London EC4P 4DU
Gentlemen:
The undersigned, NEW JERSEY MORTGAGE AND INVESTMENT CORP., a New
Jersey corporation (the "Company"), agrees with you (the "Purchaser") as
follows:
SECTION 1. PURCHASE AND SALE OF NOTES.
Section 1.1. Description of Notes. The Company will authorize the
issue and sale of $3,000,000 aggregate principal amount of its 12.00% Senior
Subordinated Notes (the "Notes") to be dated the date of issue, to bear interest
from such date at the rate of 12.00% per annum, payable monthly in arrears on
the 1st day of each month (commencing August 1, 1997) and at maturity and to
bear interest on overdue principal (including any overdue required or optional
prepayment of principal) and overdue premium, if any, and (to the extent legally
enforceable) on any overdue installment of interest at the lesser of the highest
rate allowed by applicable law or 16% per annum, after the date due, whether by
acceleration or otherwise, until paid, to be expressed to mature on July 1, 2002
(the "Maturity Date"), and to be in the form attached hereto as Exhibit A.
Interest on the Notes shall be computed on the basis of a 360-day year of twelve
30-day months. In case the due date of any payment falls on a day that is not a
Business Day, such payment shall instead be due on the next succeeding Business
Day, and interest shall continue to accrue. The Notes are not subject to
prepayment or redemption at the option of the Company prior to their expressed
maturity dates except on the terms and conditions and in the amounts and with
the premium, if any, set forth in Section 2 of this Agreement. The term "Notes"
as used herein shall include each Note delivered pursuant to this Agreement and
<PAGE>
any Note delivered in exchange therefor.
Section 1.2. Commitment, Closing Date. Subject to the terms and
conditions hereof and on the basis of the representations and warranties
hereinafter set forth, the Company agrees to issue and sell to the Purchaser,
and the Purchaser agrees to purchase from the Company, Notes in the aggregate
principal amount of $3,000,000 at a price of 100% of the principal amount
thereof on the Closing Date hereafter mentioned.
Delivery of the Notes on the Closing Date will be made at the
offices of Lane & Mittendorf LLP, 320 Park Avenue, 10th floor, New York, New
York 10022, against payment therefor, in the amount of the purchase price, in
Federal Reserve or other funds current and immediately available at New York,
New York, by electronic funds transfer to the account of the Company specified
on the signature page hereof (the completion of such delivery and payment, the
"Closing"). Delivery of the Notes will be made at 10:00 a.m. Eastern Daylight
Savings Time, on July 21, 1997 (the "Closing Date"), or such later date as the
parties may agree. The Notes delivered to the Purchaser on the Closing Date will
be delivered to the Purchaser in the form of a single registered Note in the
form attached hereto as Exhibit A for the full amount of the Purchaser's
purchase on the Closing Date (unless different denominations are specified by
the Purchaser), registered in the Purchaser's name or in the name of the
Purchaser's nominee, all as the Purchaser may specify at any time prior to the
date fixed for delivery.
The commitment of the Purchaser to purchase the Notes on the
Closing Date is subject to satisfaction or waiver of the conditions set forth
herein and to receipt by the Purchaser, concurrently with the execution and
delivery hereof by the Purchaser, of a nonrefundable facility fee in the amount
of $30,000, to be paid by electronic funds transfer to the account of the
Purchaser identified on the signature page hereof.
SECTION 2. PREPAYMENT OF NOTES.
Section 2. 1. Required Prepayments. The Company agrees that on
the 1st day of each calendar month, commencing August 1, 1999 and ending on
July 1, 2002 or such earlier date on which the Notes shall be paid in full, it
will prepay and apply pro rata and there shall become due and payable on the
principal indebtedness evidenced by the Notes the aggregate amount of (i)
$75,000 per month for the period August 1, 1999 through July 1, 2001,
inclusive, and (ii) $100,000 per month for the period August 1, 2001 through
July 1, 2002, inclusive. The entire outstanding principal amount of the Notes
shall become due and payable on the Maturity Date. No premium shall be payable
in connection with any required prepayment made pursuant to this Section 2.1.
In the event of any purchase or other acquisition by the
Company of less than all of the Notes, the amount of the payment required at
the Maturity Date and each prepayment required to be made pursuant to this
Section 2.1 shall be reduced in the proportion that the principal amount of
such purchase or other acquisition bears to the unpaid principal amount of
2
<PAGE>
the Notes immediately prior to such purchase or other acquisition (after giving
effect to any prepayment made pursuant to this Section 2.1 on the date of such
purchase or other acquisition).
Section 2.2. Optional Prepayment with Make-Whole Premium. In
addition to the payments required by Section 2.1, upon compliance with Section
2.4 the Company shall have the privilege, at any time and from time to time, on
or after the date of issuance of the Notes, of prepaying the outstanding Notes,
in whole (and not in part), by payment of the entire aggregate principal amount
of the Notes, and accrued interest thereon to the date of such prepayment,
together with a premium equal to the Make-Whole Amount, determined as of the
date of such prepayment pursuant to this Section 2.2. The Company also will pay
all costs and expenses, including but not limited to breakage fees, incurred by
any Holder as a result of such optional prepayment of the Notes, in prepaying
an interest rate swap or similar hedging arrangement with a weighted average
life comparable to the weighted average life of the Notes (collectively,
"Break-Up Expenses").
Section 2.3. Prepayment upon Change of Control or Sale. In the
event that the Company has knowledge of a Change of Control or Sale or an
impending Change of Control or Sale relating to either the Company or Federal,
the Company will give written notice (a "Control Change or Sale Notice" of such
fact to all Holders at least 60 days prior to any proposed Change of Control or
Sale Date; provided, however, that if the Company shall not then have knowledge
of such fact, such Control Change or Sale Notice shall be delivered promptly
upon receipt of such knowledge, but in no event later than 3 business days after
the Change of Control or Sale Date. The Control Change or Sale Notice shall (i)
describe the facts and circumstances of such Change of Control (including the
Change of Control or Sale Date or proposed Change of Control or Sale Date) in
reasonable detail, (ii) make reference to this Section 2.3 and the right of the
Company voluntarily to prepay and, in the event the Company does not so elect,
the right of the Holders of a majority in aggregate principal amount of the then
outstanding Notes to require the Company to prepay the Notes, in each case on
the terms and conditions provided for herein, together with the Prepayment
Premium, if the prepayment occurs on or prior to July 1, 2000, and to pay all
Break-Up Expenses, (iii) state either that the Company has elected voluntarily
to prepay or, in the absence of such and election, that the Holders of a
majority in aggregate principal amount of the Notes then outstanding may declare
all of the then outstanding Notes immediately due and payable.
Upon the receipt of such Change of Control or Sale or, if no
Change of Control or Sale Notice is given, upon receipt of actual knowledge of a
Change of Control or Sale relating to either the Company or Federal, the Holders
of a majority in aggregate principal amount then outstanding Notes may declare,
by written notice (the "Note Acceleration Notice") to the Company, the entire
outstanding principal amount and all interest due through the date of payment
upon all then outstanding Notes to be due and payable, and thereupon such Notes
shall become due and payable, without any presentment, demand, protest or other
notice of any kind, all of which are expressly hereby waived, on the date (the
"Control Change or Sale Payment Date") occurring 30 days after the Change of
Control or Sale Date, in the event that such Note Acceleration Notice is served
on or prior to the Change of Control or Sale Date, or 20 days after
3
<PAGE>
the date such Note Acceleration Notice is served, if such Note Acceleration
Notice is not served on or prior to the Change of Control or Sale Date. The
Company covenants and agrees to prepay in full on the Control Change or Sale
Payment Date the aggregate principal amount unpaid of then outstanding Notes and
all interest accrued but unpaid to the date of prepayment, together with the
Prepayment Premium, if the prepayment occurs on or prior to July 1, 2000, and
all Break-Up Expenses due in respect of such Notes.
Section 2.4. Notice of Optional Prepayments pursuant to Section
2.2. The Company will give notice of any prepayment of the Notes pursuant to
Section 2.2 to each Holder thereof not less than 30 days nor more than 60 days
before the date fixed for such optional prepayment specifying (i) such date,
(ii) the principal amount of the Holder's Notes to be prepaid on such date,
(iii) that a premium may be payable, (iv) the date when such premium will be
calculated, (v) the estimated premium, and (vi) the accrued interest applicable
to the prepayment. Notice of prepayment having been so given, the aggregate
principal amount of the Notes specified in such notice, together with accrued
interest thereon and the premium, if any, payable with respect thereto shall
become due and payable on the prepayment date specified in said notice. Not
later than two Business Days prior to the prepayment date specified in such
notice, the Company shall provide each Holder written notice of the Make-Whole
Amount, if any, payable in connection with such prepayment and, whether or not
any premium is payable, a reasonably detailed computation of the Make-Whole
Amount; provided, that the failure of the Company to provide such Holder with
the notice contemplated herein shall not diminish or delay the obligation of the
Company to make such payment.
Section 2.5. Application of Prepayments. All prepayments pursuant
to Section 2.1 shall be applied on all outstanding Notes ratably,in accordance
with the unpaid principal amounts thereof.
Section 2.6 Direct Payment. Notwithstanding anything to the
contrary contained in this Agreement or the Notes, in the case of any Note owned
by the Purchaser or any other Institutional Holder which has given written
notice to the Company requesting that the provisions of this Section 2.6 shall
apply, the Company will punctually pay when due the principal thereof, interest
thereon and premium, if any, due with respect to said principal, without any
presentment thereof, directly to such Holder at its address set forth herein or
such other address as such Holder may from time to time designate in writing to
the Company or, if a bank account with a United States bank is so designated for
such Holder, the Company will make such payments in immediately available funds
to such bank account, marked for attention as indicated, or in such other manner
or to such other account in any United States bank as such Holder may from time
to time direct in writing.
4
<PAGE>
SECTION 3. REPRESENTATIONS OF THE COMPANY.
The Company represents and warrants to the
holders of the Notes as follows:
3.1. Subsidiaries. The Company has no Subsidiaries except as set
forth on Schedule 3.1 attached hereto. Schedule 3.1 correctly states the name of
each such Subsidiary, its jurisdiction of incorporation and the percentage of
its Voting Stock owned by the Company and/or other Subsidiaries. The Company and
each Subsidiary has good and marketable title to all of the shares it purports
to own of the stock of each Subsidiary, free and clear in each case of any lien.
All such shares have been duly issued and are fully paid and non-assessable.
3.2. Corporate Organization and Authority.
The Company and each of the Subsidiaries:
(a) is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation;
(b) has all requisite power and authority and all
necessary licenses and permits to own and operate its Properties and to carry
on its business as now conducted and as presently proposed to be conducted; and
(c) is duly licensed or qualified and is in good
standing as a foreign corporation in each jurisdiction wherein the nature of the
business transacted by it or the nature of the Property owned or leased by it
makes such licensing or qualification necessary.
3.3. Financial Statements. The consolidated balance sheets of
the Company and its consolidated Subsidiaries as of February 28 in each of the
years 1995, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows and changes therein for the
fiscal years ended on said dates, each accompanied by a report thereon
containing an opinion unqualified as to scope limitations imposed by the Company
and otherwise without qualification, by a firm of certified public accountants
acceptable to the Purchaser, have been prepared in accordance with GAAP
consistently applied except as therein noted, are correct and complete and
present fairly the financial position of the Company and its Subsidiaries as of
such dates and the results of their operations, stockholders' equity and cash
flows and changes therein for such periods.
There has been no change in the condition, financial or
otherwise, of the Company and its consolidated Subsidiaries as shown on the
audited consolidated financial statements dated February 28, 1997, except
changes in the ordinary course of business, none of which individually or in the
aggregate has been materially adverse.
3.4. Full Disclosure. The financial statements referred to in
Section 3.3 do not, nor does this Agreement or any other written statement
furnished by the Company to the
5
<PAGE>
Purchaser in connection with the negotiation of the sale of the Notes, contain
any untrue statement of a material fact or omit a material fact necessary to
make the statements contained therein or herein not misleading. There is no fact
peculiar to the Company or its Subsidiaries which the Company has not disclosed
to the Purchaser in writing which materially affects adversely, nor, so far as
the Company can now foresee, will materially affect adversely, the Properties,
business, prospects, profits or condition (financial or otherwise) of the
Company and its Subsidiaries, taken as a whole.
3.5. Pending Litigation. Except as identified on Schedule 3.5
hereto, there are no proceedings pending or, to the knowledge of the Company
threatened, against or affecting the Company or any Subsidiary in any court or
before any governmental authority or arbitration board or tribunal which involve
the possibility of materially and adversely affecting the Properties, business,
prospects, profits or condition (financial or otherwise) of the Company and its
Subsidiaries.
3.6 Title to Properties. The Company and each Subsidiary has
good and marketable title in fee simple (or its equivalent under applicable law)
to all material parcels of real Property and has good title to all the other
material items of Property it purports to own and good leasehold title to those
parcels of real Property it purports to lease, including that reflected in the
most recent financial statement referred to in Section 3.3 hereof, except as
sold or otherwise disposed of in the ordinary course of business since February
28, 1997 and except for Liens permitted by the Agreement.
3.7. Patents and Trademarks. The Company and each Subsidiary
owns or possesses all the patents, trademarks, trade names, service marks,
copyright, licenses and rights with respect to the foregoing necessary for the
present and planned future conduct of its business, without any known conflict
with the rights of others.
3.8. Sale is Legal and Authorized. The sale of the Notes and
compliance by the Company with all of the provisions of the Agreement and the
Notes:
(a) are within the corporate powers of the Company;
(b) will not violate any provisions of any law or any
order of any court or governmental authority or agency and will not conflict
with or result in any breach, of any of the terms, conditions or provisions of,
or constitute a default under the Restated Articles of Organization or By-laws
of the Company or any indenture or other agreement or instrument to which the
Company is a party or by which it or its Property may be bound or result in the
imposition of any Liens or encumbrances on any Property of the Company; and
(c) have been duly authorized by proper corporate action
on the part of the Company (no action by the stockholders of the Company being
required by law, by the Restated Articles of Organization or By-laws of the
Company or otherwise) and duly executed and delivered by the Company, and the
Agreement and the Notes constitute the legal, valid and
6
<PAGE>
binding obligations, contracts and agreements of the Company enforceable
against it in accordance with their respective terms.
3.9. No Defaults. No Default or Event of Default has occurred and
is continuing. Neither the Company nor any Subsidiary is in default in the
payment of principal or interest on any outstanding Debt and is not in default
under any instrument or instruments or agreements under and subject to which any
Debt has been issued, and no event has occurred and is continuing under the
provisions of any such instrument or agreement which with the lapse of time or
the giving of notice, or both, would constitute an event of default thereunder.
3.10. Governmental Consent. No approval, consent or withholding
of objection on the part of any regulatory body, state, Federal or local, is
necessary in connection with the execution and delivery by the Company of the
Agreement or the Notes or the compliance by the Company with any of the
provisions of the Agreement or the Notes.
3.11. Taxes. All tax returns required to be filed by the Company
or any Subsidiary in any jurisdiction have, in fact, been filed, and all taxes,
assessments, fees and other governmental charges upon the Company or any
Subsidiary or upon any of their respective Properties, income or franchises,
which are shown to be due and payable in such returns have been paid. For all
taxable years ending on or before February 28, 1997, the Federal income tax
liability of the Company and its Subsidiaries has been satisfied and either the
period of limitations on assessment of additional Federal income tax has expired
or the Company and its Subsidiaries have entered into an agreement with the
Internal Revenue Service closing conclusively the total tax liability for the
taxable year. The Company does not know of any proposed additional tax
assessment against it or any Subsidiary for which adequate provision has not
been made on their accounts, and no material controversy in respect of
additional Federal or state income taxes due since said date is pending or to
the knowledge of the Company threatened. The provisions for taxes on the books
of the Company and each Subsidiary are adequate for all open years, and for its
current fiscal period.
3.12. Employee Retirement Income Security Act of 1974. Assuming
the representation set forth in Section 4 is true and correct, the consummation
of the transactions provided for in this Agreement and compliance by the Company
with the provision hereof and the Notes issued hereunder will not involve any
nonexempt prohibited transaction within the meaning of ERISA or Section 4975 of
the Internal Revenue Code. Each Plan complies in all material respects with all
applicable statutes and governmental rules and regulations, and (a) no
Reportable Event has occurred and is continuing with respect to any Plan, (b)
neither the Company nor any ERISA Affiliate has withdrawn from any Plan or
Multiemployer Plan or instituted steps to do so, and (c) no steps have been
instituted to terminate any Plan. No condition exists or event or transaction
has occurred in connection with any Plan which could result in the incurrence by
the Company or any ERISA Affiliate of any material liability, fine or penalty.
No Plan maintained by the Company or any ERISA Affiliate, nor any trusts created
thereunder, have incurred any "accumulated funding deficiency" as defined in
Section 302 of ERISA nor does the present value of all benefits vested under all
Plans exceed, as of the last
7
<PAGE>
annual valuation date, the value of the assets of the Plans allocable to such
vested benefits. Neither the Company nor any ERISA Affiliate is a member of or
contributes to any multiple employer plan as defined in ERISA. Neither the
Company nor any ERISA Affiliate is a participant in or is obligated to make any
payment to a Multiemployer Plan. Neither the Company nor any ERISA Affiliate
has any contingent liability with respect to any post-retirement "welfare
benefit plan" (as such term is defined in ERISA) except as has been disclosed to
the Purchaser.
3.13. Compliance with Law. Neither the Company nor any Subsidiary
(a) is in violation of any law, ordinance, franchise, governmental rule or
regulation to which it is subject; or (b) has failed to obtain any license,
permit, franchise or other governmental authorization necessary to the
ownership of its Property or to the conduct of its business, which violation or
failure to obtain would materially adversely affect the Properties, business,
prospects, profits or condition (financial or otherwise) of the Company and its
Subsidiaries, taken as a whole, or impair the ability of the Company to perform
its obligations contained in the Agreement or the Notes. Neither the Company nor
any Subsidiary is in default with respect to any order of any court or
governmental authority or arbitration board or tribunal.
3.14. Compliance with Environmental Laws. Neither the Company
nor any Subsidiary is in violation of any applicable Federal, state, or local
laws, statutes, rules, regulations or ordinances relating to public health,
safety or the environment, including, without limitation, relating to releases,
discharges, emissions or disposal to air, water, land or ground water, to the
withdrawal or use of ground water, to the use, handling or disposal of
polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde, to the
treatment, storage, disposal or management of hazardous substances (including,
without limitation, petroleum, crude oil or any fraction thereof, or other
hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous or
other controlled, prohibited or regulated substances which violation could have
a material adverse effect on the Properties, business, prospects, profits or
condition (financial or otherwise) of the Company and its Subsidiaries, taken as
a whole. The Company does not know of any liability or class of liability of it
or any of its Subsidiaries under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et
seq.), or the Resource Conservation and Recovery Act of 1976, as amended (42
U.S.C. Section 6901 et seq.).
3.15. No Registration. Assuming the representations and
warranties set forth in Section 4 hereof are true, no registration under the
Securities Act or any state securities laws of any of the Notes is required for
the sale thereof as contemplated hereby, except as has already been obtained. No
form of general solicitation or general advertising was used by the Company or
any person authorized to act on its behalf in connection with the offer and sale
of any of the Notes, including, but not limited to, articles, notices, or other
communications published in any newspaper, magazine or similar medium or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising. No
securities of the same class as the Notes have been issued or sold by the
Company within the six-month period immediately prior to the date of issuance of
the Notes.
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3.16. Investment Company Act of 1940. Neither the Company nor any
Subsidiary is an "investment company" or a company "controlled by" an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
3.17. Indebtedness. Schedule 3.17 attached hereto correctly
describes all Senior Debt, Senior Subordinated Debt, and Investor Subordinated
Debt of the Company and its Subsidiaries outstanding on June 30, 1997. There
has been no increase in the respective outstanding principal amounts thereof
since June 30, 1997. All of the Investor Subordinated Debt is or will on the
Closing Date be fully subordinated to the Notes.
3.18. Use of Proceeds. The net proceeds from the sale of the Notes
will be used to provide funds for general corporate purposes of the Company.
None of the transactions contemplated in the Agreement (including, without
limitation thereof, the use of proceeds from the issuance of the Notes) will
violate or result in a violation of Section 7 of the Securities Exchange Act of
1934, as amended, or any regulation issued pursuant thereto, including, without
limitations, Regulations G, T, U and X of the Board of Governors of the Federal
Reserve System, 12 CFR, ch. II. Neither the Company nor any Subsidiary owns or
intends to carry or purchase any "margin stock" within the meaning of said
Regulation G. None of the proceeds from the sale of the Notes will be used to
purchase, or refinance any borrowing the proceeds of which were used to
purchase, any "security" within the meaning of the Securities Exchange Act of
1934, as amended.
3.19. Representations as to Mortgages and Leases. With respect to
the Company and each Subsidiary:
(a) Each Mortgage sold or otherwise transferred by the
Company or any Subsidiary was sold or transferred on a non-recourse basis by the
Company or such Subsidiary except as to the amount of any premium on sale that
may be refundable by the Company in the ordinary course of business with respect
to any prepaid Mortgage during the 12-month period immediately following any
such sale;
(b) Each Mortgage originated by the Company or any
Subsidiary is reasonably expected to be sold or transferred within 90 days of
the date of origination; and
(c) Neither the Company nor any Subsidiary has
repurchased any Lease except in the ordinary course of business and in
compliance with the terms of the transaction documents entered into between the
Company or any such Subsidiary and an SPV in connection with an lease-backed
securitization transaction.
SECTION 4. REPRESENTATIONS OF THE PURCHASER.
Section 4.1. Representations of the Purchaser. The Purchaser
represents, and in entering into this Agreement the Company understands, that
the Purchaser is acquiring the Notes
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for the purpose of investment and with no present intention of distributing the
same; it being understood, however, that the disposition of the Purchaser's
Property shall at all times be and remain within its control and that the
foregoing is without prejudice to the Purchaser's right at all times to sell or
otherwise dispose of all or any part of the Notes in any transaction exempt from
the registration requirements of the Securities Act and applicable state
securities laws and which, if taken together with the original offer and sale of
the Notes by the Company to the Purchaser (assuming the representations and
warranties set forth in Section 3.15 hereof are true), will not cause the
original issue of the Notes to no longer be exempt from the registration
requirements of the Securities Act and applicable state securities laws. The
Purchaser further represents that it is an "accredited investor" as that term is
defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act, with such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of its purchase of the Notes.
The Purchaser represents that it understands that there will be no market for
the Notes, that the Notes have not been registered under the 1933 Act, and that
the Notes cannot be resold unless they are registered under the Securities Act
or unless an exemption from registration is available. The Purchaser represents
that it has been provided with the opportunity to obtain financial and other
information about the Company and has obtained such information from the Company
as it may have requested. The Purchaser further represents that it is acquiring
the Notes for its own account and with its general corporate assets and not with
any "plan assets" or funds of a "benefit plan investor", as those terms are
defined in Section 2510.3-101 of the Department of Labor Regulations under
ERISA.
SECTION 5. CONDITIONS TO CLOSING.
Section 5. 1. Conditions. The obligation of the Purchaser to
purchase the Notes on the Closing Date shall be subject to the performance by
the Company of its agreements hereunder which by the terms hereof are to be
performed at or prior to the time of delivery of the Notes and to the following
further conditions precedent:
(a) Closing Certificates. On the Closing Date the
Purchaser shall have received (i) an Officer's Certificate dated the Closing
Date, signed by the President or a Vice President of the Company, the truth and
accuracy of which shall be a condition to the Purchaser's obligation to purchase
the Notes proposed to be sold to the Purchaser on the Closing Date and to the
effect that, among other things, (x) the representations and warranties of the
Company set forth herein are true and correct on and with respect to the Closing
Date, (y) the Company has performed all of its obligations hereunder which are
to be performed on or prior to the Closing Date, and (z) no Default or Event of
Default has occurred and is continuing and (ii) a Secretary's Certificate dated
the Closing Date, signed by the Secretary of the Company, as to the full force
and effect of corporate resolutions of the Company authorizing the execution,
delivery and performance of this Agreement and the incumbency of officers of the
Company.
(b) Legal Opinions. On the Closing Date the
Purchaser shall have received from Furst, Gelfond & Tolstoi, counsel for the
Company, its opinion, dated the Closing Date, in form and substance satisfactory
to the Purchaser, and covering the matters set forth in
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Exhibit B hereto.
(c) Financial Statements. On or prior to the Closing
Date, the Purchaser shall have received copies of the audited financial
statements of the Company and the unqualified reports of the Company's certified
public accountant listed in Section 3.3.
(d) Consent of Holders of Other Debt. On or prior to
the Closing Date, all consents and approvals required to be obtained from any
holder or holders of any outstanding Debt of the Company or any Subsidiary which
shall be necessary to permit the consummation of the transactions contemplated
hereby shall have been obtained, all such consents or approvals shall be
satisfactory in form and substance to the Purchaser and its special counsel and
shall be in full force and effect on the Closing Date.
(e) Letter Agreement. Stan Furst and Joel Furst shall
have executed and delivered to the Purchaser a letter agreement, in form and
substance satisfactory to the Purchaser, setting forth limitations on the
payment of compensation to each of them by the Company upon the occurrence of
specified events.
(f) Legal Fees. The Company shall pay, as set forth in
an invoice rendered by Lane & Mittendorf LLP on the Closing Date, special
counsel to the Purchaser, the fees and disbursements of such counsel.
(g) Satisfactory Proceedings. All proceedings taken in
connection with the transactions contemplated by this Agreement, and all
documents necessary to the consummation thereof, shall be satisfactory in form
and substance to the Purchaser and the Purchaser's special counsel, and the
Purchaser shall have received a copy (executed or certified as may be
appropriate) of all legal documents or proceedings taken in connection with the
consummation of said transactions.
Section 5.2. Failure to Deliver; Waiver of Conditions. If on the
Closing Date the Company fails to tender to the Purchaser the Notes to be issued
to any Purchaser on such date or if the conditions specified in Section 5.1 have
not been fulfilled, the Purchaser may thereupon elect to be relieved of all
further obligations under this Agreement. Without limiting the foregoing, if
the conditions specified in Section 5.1 have not been fulfilled, the Purchaser
may waive compliance by the Company with any such condition to such extent as
the Purchaser may in its sole discretion determine. Nothing in this Section 5
shall operate to relieve the Company of any of its obligations hereunder or to
waive the Purchaser's rights against the Company.
SECTION 6. COMPANY COVENANTS.
From and after the Closing Date and continuing so long as any
amount remains unpaid on any Note, the Company covenants and agrees that it will
comply and, if applicable, cause each of its Subsidiaries to comply with the
following provisions:
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Section 6.1. Corporate Existence, Etc. The Company will preserve
and keep in full force and effect, and will cause each Subsidiary to preserve
and keep in full force and effect, its corporate existence and all licenses and
permits necessary to the proper conduct of its business; provided, however,
that the foregoing shall not prevent any transaction permitted by Section 6.14;
and provided, further, that the foregoing shall not prevent the dissolution of
any special purpose vehicle Subsidiary at any time after such Subsidiary shall
have paid in full all of the principal of and interest on those term,
warehouse and/or other notes which such Subsidiary shall have issued and sold as
contemplated in the clause of such Subsidiary's Articles of Organization or
other charter document which describes the limited business and other purposes
of such Subsidiary.
Section 6.2. Insurance. The Company will maintain, and will cause
each Subsidiary to maintain, insurance coverage by financially sound and
reputable insurers in such forms and amounts and against such risks as are
customary for corporations of established reputation engaged in the same or a
similar business and owning and operating similar Properties.
Section 6.3. Chief Executive Officer; Key Man Life Insurance.
At all times while any amount is outstanding under the Notes:
(a) Stan Furst shall (i) be the Chief Executive
Officer of the Company, which position shall entail the customary managerial
duties and authority of such office, and (ii) own beneficially and of record not
less than 50% of the Voting Stock of the Company, on a fully diluted basis; and
(b) the Company will purchase, or cause to be
purchased (and will deliver to the Purchaser a certificate of insurance or other
satisfactory evidence with respect to), within 90 days of the date of this
Agreement and will keep in full force and effect, or cause to be kept in full
force and effect, a life insurance policy or policies issued by reputable and
sound insurers, and acceptable in form and substance to the Purchaser insuring
the life of Stan Furst in the full face amount of not less than $1,000,000,
naming the Purchaser as beneficiary (the "Key Man Insurance").
The Company further covenants and agrees that it will not assign,
encumber, pledge or hypothecate the Key Man Insurance or the cash surrender
value thereof, will at all times cause any premium due thereon to be paid timely
and in full, will cause the Key Man Insurance to contain an undertaking by the
insurers to give not less than 30 days (or such other period as is customary for
such insurers) prior written notice to the Purchaser in the event of
cancellation or expiration of the Key Man Insurance for any reason and will
forward to the Purchaser copies of any notices from the insurers received by the
Company.
Section 6.4. Investor Subordinated Debt. At all times while any
amount is outstanding under the Notes, the Company will take all necessary
action to ensure that the Investor Subordinated Debt, and any renewal, extension
or replacement of such Debt, remains fully and effectively subordinated to the
Notes.
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Section 6.5. Executive and Director Compensation. At all times
while any amount is outstanding under the Notes:
(a) the Company will at all times require the
compensation of each member of the Control Group who receives a salary from the
Company or any Subsidiary to be determined by a committee of its Board of
Directors; and
(b) the Company will not, and will not permit any
Subsidiary to, at any time pay compensation to any non-employee member of its
Board of Directors except reasonable director's fees consisting of an annual
retainer, a fixed fee for attendance at meetings of the Board of Directors or
any committee thereof and meetings of the Company's shareholders and reasonable
travel expenses in connection with attendance at any such meeting (collectively,
Director's Fees"); provided that any member of such Board of Directors who is
also an employee of the Company or any Subsidiary shall not receive any
Director's Fees.
Section 6.6. Taxes; Claims for Labor and Materials; Compliance
with Laws. The Company will promptly pay and discharge, and will cause each
Subsidiary promptly to pay and discharge, all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or such Subsidiary,
respectively, or upon or in respect of all or any part of the Property or
business of the Company or such Subsidiary, all trade accounts payable in
accordance with usual and customary business terms, and all claims for work,
labor or materials, which if unpaid might become a Lien upon any Property of the
Company or such Subsidiary; provided, however, that the Company or such
Subsidiary shall not be required to pay any such tax, assessment, charge, levy,
account payable or claim if (i) the validity, applicability or amount thereof is
being contested in good faith by appropriate actions or proceedings which will
prevent the forfeiture or sale of any Property of the Company or such Subsidiary
or any material interference with the use thereof by the Company or such
Subsidiary, and (ii) the Company or such Subsidiary shall set aside on its
books, reserves deemed by it to be adequate with respect thereto. The Company
will promptly comply and will cause each Subsidiary to comply with all laws,
ordinances or governmental rules and regulations to which it is subject
including, without limitation, the Occupational Safety and Health Act of 1970,
as amend ERISA and all laws, ordinances, governmental rules and regulations
relating to environmental protection in all applicable jurisdictions, the
violation of which could materially and adversely affect the Properties,
business, prospects, profits or condition (financial or otherwise) of the
Company and its Subsidiaries or would result in any Lien not permitted under
Section 6.12.
Section 6.7. Maintenance, Etc. The Company will maintain,
preserve and keep, and will cause each Subsidiary to maintain, preserve and
keep, its Properties which are used or useful in the conduct of its business
(whether owned in fee or a leasehold interest) in good repair and working order
and from time to time will make all necessary repairs, replacements, renewals
and additions so that at all times the efficiency thereof shall be maintained.
Section 6.8. Nature of Business. Neither the Company nor any
Subsidiary will engage in any business if, as a result, the general nature of
the business, taken on a consolidated
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basis, which would then be engaged in by the Company and/or any of its
Subsidiaries would be substantially changed from the general nature of the
business engaged in by the Company and its Subsidiaries on the date of this
Agreement.
Section 6.9. Certain Financial Covenants. The Company will
maintain the following financial covenants, to be tested on a quarterly basis in
conjunction with its financial statements, at all times while any of the Notes
are outstanding:
(a) Adjusted Consolidated Debt shall not exceed 650% of
Adjusted Consolidated Net Worth;
(b) Consolidated Tangible Net Worth shall not be less than
an amount equal to $1,600,000 plus 80% of Consolidated Net Income;
(c) Adjusted Consolidated Liabilities shall not exceed 90%
of Adjusted Consolidated Assets;
(d) Consolidated Net Worth shall not be less than
$7,500,000; and
(e) Stockholders' Equity shall not be less
than $2,000,000.
The Company shall submit to the Purchaser, not later than 60
days after the end of each fiscal quarter, commencing with and including the
fiscal quarter ending November 30, 1997, a written statement in reasonable
detail and conforming to applicable requirements of GAAP, certified as true and
correct to the best of his knowledge by the chief financial officer of the
Company, demonstrating to the satisfaction of the Purchaser compliance with this
Section 6.9 and Section 6.15 and stating that such Person is not aware of any
reason that the Company will not continue to be in compliance with this Section
6.9 and Section 6.15 during the succeeding two fiscal quarters. Such statement
shall also set forth a summary of the terms and conditions of any Debt permitted
by Sections 6.10(a)(iii), (iv) or (v) issued during the fiscal quarter then
ended and certifying that, after giving effect thereto, the Company is in
compliance with Section 6.10(a).
Section 6.10. Limitations on Debt.
(a) The Company will not, and will not permit any
Subsidiary to, create, assume or incur or in any manner become liable in respect
of any Debt, except:
(i) Debt evidenced by the Notes;
(ii) Funded Debt of the Company and its
Subsidiaries outstanding as of the date of this Agreement and reflected on the
consolidated balance sheet of the Company and its Subsidiaries as at
June 30, 1997;
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(iii) Bank Debt, provided that the principal amount thereof
outstanding under the provisions of this Section 6.10(a)(iii) shall not at any
time exceed $50,000,000;
(iv) additional secured and unsecured Senior Debt
of the Company and its Subsidiaries (including without limitation Bank Debt),
provided that at the time of issuance thereof and after giving effect thereto
and to the application of the proceeds thereof the Company remains in
compliance with Section 6.9 hereof; and
(v) the Investor Subordinated Debt; provided that
all new, renewed or extended Investor Subordinated Debt shall have a term (ie.,
time to maturity) at least as long as the existing Investor Subordinated Debt.
(b) Subsidiary Debt. Any corporation which becomes a
Subsidiary after the date hereof shall for all purposes of this Section 6.10 be
deemed to have created, assumed or incurred at the time it becomes a Subsidiary
all Debt of such corporation existing immediately after it becomes a Subsidiary.
Section 6.11. Accounting Policies. Except in order to comply with
GAAP, the Company shall not materially change any of its accounting policies or
its fiscal year or the fiscal year of any of its Subsidiaries, including
without limitation, policies relating to accounting for the residual value of
Leased Assets.
Section 6.12. Limitation on Liens. The Company will not, and will
not permit any Subsidiary to, create or incur, or suffer to be incurred or to
exist, any Lien on its or their Property or assets, whether now owned or
hereafter acquired, or upon any income or profits therefrom, or transfer any
Property for the purpose of subjecting the same to the payment of obligations in
priority to the payment of its or their general creditors, or acquire or agree
to acquire, or permit any Subsidiary to acquire, any Property or assets upon
conditional sales agreements or other title retention devices, except:
(a) Liens for Property taxes and assessments or
governmental charges or levies and Liens securing claims or demands of mechanics
and materialmen, provided payment thereof is not at the time required by Section
6.6;
(b) Liens of or resulting from any judgment or award, the
time for the appeal or petition for rehearing of which shall not have expired,
or in respect of which the Company or a Subsidiary shall at any time in good
faith be prosecuting an appeal or proceeding for a review and in respect of
which a stay of execution pending such appeal or proceeding for review shall
have been secured;
(c) Liens incidental to the conduct of business or the
ownership of Properties and assets (including Liens in connection with worker's
compensation, unemployment insurance and other like laws, warehousemen's and
attorneys' liens and statutory landlords' liens)
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and Liens to secure the performance of bids, tenders or trade contracts, or to
secure statutory obligations, surety or appeal bonds or other Liens of like
general nature, in each case incurred in the ordinary course of business and
not in connection with the borrowing of money, provided in each case, the
obligation secured is not overdue or, if overdue, is being contested in good
faith by appropriate actions or proceedings;
(d) minor survey exceptions or minor
encumbrances, easements or reservations, or rights of others for rights-of-way,
utilities and other similar purposes, or zoning or other restrictions as to the
use of real Properties, which are necessary for the conduct of the activities of
the Company and its Subsidiaries or which customarily exist on Properties of
corporations engaged in similar activities and similarly situated and which do
not in any event materially impair their use in the operation of the business of
the Company and its Subsidiaries;
(e) Liens existing as of the Closing Date
and reflected in Schedule 6.12 hereto, but only if (i) the principal amount of
the Debt or other Property secured thereby is not increased and (ii) such Lien
does not hereafter extend to any Property or asset not previously subject
thereto, except to the extent that such encumbered Property or asset is a
replacement or substitution for a previously encumbered Property or asset in an
asset securitization or leasing or mortgage transaction to which a Subsidiary is
a party; and
(f) Liens incurred after the Closing Date
given to secure the payment of Senior Debt incurred within the limitations of
Sections 6.09 and 6.10.
Section 6.13. Restricted Payments. The Company will not make any
Restricted Payment except
(a) dividends upon any capital stock of the Company for
the period from July 15, 1997 to and including the date of making of the
dividend payment in question in an aggregate amount not exceeding 35% of
Consolidated Net Income for such period, computed on a cumulative basis for said
entire period (or if such Consolidated Net Income is a deficit figure, then
minus 100% of such deficit); provided, however, that at the time of any
Restricted Payment made prior to August 1, 1999, and after giving effect
thereto:
(i) Adjusted Consolidated Debt shall not
exceed an amount equal to 500% of Adjusted Consolidated Net Worth; and
(ii) the aggregate amount of all such dividends
upon the Company's common stock paid during the period from and after July 15,
1997 to and including the date of making the dividend payment in question would
exceed the sum of (A) 35% of Consolidated Net Income for such period, computed
on a cumulative basis for said entire period (or if such Consolidated Net Income
is a deficit figure, then minus 100% of such deficit) plus (B) the net cash
proceeds derived by the Company from the issuance and sale after July 15, 1997
of capital stock of the Company plus (C) the aggregate principal amount of any
Debt which has been converted after July 15, 1997 into capital stock of the
Company minus (D) the aggregate
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amount of Restricted Payments made under the provisions of Sections 6.13(a),
(b), (c) and (d); and
provided, further, that from and after July 15, 1997, and after giving effect
thereto, the Company shall be in compliance with the provisions of Section
6.13(a)(ii);
(b) scheduled repayments at stated maturity of Senior
Subordinated Debt ranking equally with the Notes or of Investor Subordinated
Debt,
(c) at the option of the Company, prepayments of Senior
Subordinated Debt ranking equally with the Notes, provided in each case that
such Debt is replaced immediately with indebtedness similar in form and
substance to the Debt so prepaid, but with a longer maturity than the Notes, and
(d) at the option of the Company, prepayments of Investor
Subordinated Debt;
provided that, notwithstanding anything to the contrary contained in the
foregoing provisions of this Section 6.13, the Company shall not make any
Restricted Payment if at the date of making such Restricted Payment, whether
before or after giving effect thereto, the Company shall not be in compliance
with any provision of Section 6.9 or any Default or Event of Default shall have
occurred and be continuing.
The Company will not declare any dividend which constitutes a
Restricted Payment payable more than 60 days after the date of declaration
thereof, other than dividends on capital stock of the Company payable not more
than 180 days after the date of declaration thereof, the declaration of which is
duly noted in the intervening quarterly financial statements of the Company and
the payment of which is stated, in the corporate action evidencing the
declaration for dividends declared from and after the date hereof, to be (i)
payable from funds legally available therefor and (ii) subject to compliance, at
the time of and giving effect to such payment, by the Company with the terms
hereof.
For the purposes of this Section 6.13, the amount of any
Restricted Payment declared, paid or distributed in Property shall be deemed to
be the greater of the book value or fair market value (as determined in good
faith by the Board of Directors of the Company) of such Property at the time of
the making of the Restricted Payment in question.
Section 6.14. Mergers, Consolidations and Sales of Assets.
(a) Subject at all times to the limitations set forth in
Section 2.3 with respect to required prepayments upon a Change of Control or a
Sale of the Company or Federal, the Company or any Subsidiary may sell, lease or
otherwise dispose of its assets in the ordinary course of its business;
provided, however, that if any such sale, lease or other disposition involves
more than 10% of Tangible Assets in any one transaction or series of related
transactions, the
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Company and such Subsidiary shall be limited as to the use of the proceeds
therefrom as follows:
(i) As to net proceeds equal to a sum not to
exceed 10% of Tangible Assets, such proceeds may be used at their sole and
absolute discretion; and
(ii) As to net proceeds which exceed 10% of the
Company's Tangible Assets, such excess shall be either (x) reinvested in assets
in related businesses of the Company or such Subsidiary, as determined by its
Board of Directors; or (y) to the extent not so reinvested or committed to be
reinvested, applied to repay the Notes forthwith.
(b) Whether or not a Change of Control or a Sale of the
Company or of Federal shall occur, if there is a sale or other disposition of
more than 1O% of Tangible Assets as herein provided and there is received, as
all or a substantial portion of consideration of such transaction, promissory
notes or other forms of debt obligation from the purchaser, then the Company
shall notify the Holders in writing, in the manner set forth in Section 11.6, of
the intent to enter into such transaction (a "Deferred Purchase Price Sale
Notice"). Within 30 days after the Company has given a Deferred Purchase Price
Sale Notice, the Holders of a majority in aggregate principal amount of the then
outstanding Notes may issue a Note Acceleration Notice, whereupon the
outstanding principal amount of the Notes shall thereupon become forthwith due
and payable. In the event the transaction described in such Deferred Purchase
Price Sale Notice does not close, then such Note Acceleration Notice shall be
null and void and of no force and effect whatsoever. In the event the Holders do
not issue a Note Acceleration Notice within 20 Business Days after they receive
a Deferred Purchase Price Sale Notice from the Company, then the right of the
Holders to accelerate the Notes in connection with the transaction referred to
in such Deferred Purchase Price Sale Notice shall automatically terminate.
(c) In connection with any acceleration or payment of
the Notes pursuant to Section 6.14(b), the Company shall pay the Prepayment
Premium, if the acceleration or payment occurs on or prior to July 1, 2000, and
all Break-Up Expenses due in respect of the Notes.
Section 6.15. Operating Covenants. At all times while any amount
is outstanding under the Notes, the Company will not, and will not permit any
Subsidiary to:
(a) (i) enter into any Lease requiring aggregate payments
in excess of the amount of $300,000 unless the Company or such Subsidiary has
received a firm commitment to acquire such Lease from the investor to whom such
Lease is to be sold or otherwise transferred, or (ii) enter into any Lease with
a term in excess of 72 months, or (iii) permit more than 50% of Lease
originations of the Company or any such Subsidiary to be from any one State, or
(iv) permit more than 70% of the Company's or any such Subsidiary's Lease
originations to be in medical equipment or more than 30% of the Company's or any
Subsidiary's Lease originations to be of any other single type of equipment, or
(v) permit more than 30% of the Company's or any such Subsidiary's Lease
originations to be or to be produced by any single equipment vendor, or (vi)
repurchase any Lease except in the ordinary course of business and in
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compliance with the terms of the transaction documents entered into between the
Company or any such Subsidiary and an SPV in connection with an lease-backed
securitization transaction;
(b) (i) enter into any Mortgage with an
original principal amount greater than $300,000 unless the Company or such
Subsidiary has received a firm commitment to acquire such Mortgage from the
investor to whom such Mortgage is to be sold or otherwise transferred, or enter
into any Mortgage with an original principal amount in excess of $1,500,000, or
(ii) permit more than 60% of Mortgage originations of the Company or any such
Subsidiary to be from any one State, or (iii) permit more than 10% of Mortgage
originations of the Company or any such Subsidiary to be rated "C" or lower, or
(iv) enter into any Mortgage with a term in excess of 30 years, or (v) sell or
transfer any Mortgage on any basis other than a non-recourse basis except as to
the amount of any premium that may be refundable by the Company in the ordinary
course of business with respect to any prepaid Mortgage; or (vi) originate any
Mortgage which is not reasonably expected to be sold or transferred within 90
days of the date of origination, or (vii) sell or otherwise transfer more than
50% of Mortgage originations, determined on the basis of the aggregate principal
amount thereof, of the Company and its Subsidiaries to any one investor, or
(viii) enter into any Mortgage rated "D" or lower or any Mortgage secured by
mixed-use property unless the Company or such Subsidiary has received a firm
commitment to acquire such Mortgage from the investor to whom such Mortgage is
to be sold or otherwise transferred;
(c) include on its balance sheet Mortgages having an
aggregate principal amount in excess of $2,500,000 which are more than 180 days
old;
(d) except upon the prior written consent of the Holders,
which consent shall not unreasonably be withheld, consolidate with, combine or
merge into any other Person or permit any other Person to consolidate with or
merge into it; or sell, lease, abandon or otherwise transfer or dispose of any
of its assets or property of any nature except for assets it sells in the
ordinary course of its business; or
(e) except upon the prior written consent of
the Holders, which consent shall not unreasonably be withheld, transfer any of
its capital stock, or become a party to any agreement, where such transfer or
agreement would result in the Company owning, or having the right to vote with
respect to, less than 50.001% of the capital stock of any Subsidiary, or where
such transfer would result in the Control Group, as a group owning, or having
the right to vote with respect to, less than 50.001% of the Company.
Section 6.16. Issuance, Sale of Stock.
(a) The Company will not permit any Subsidiary to issue or
sell any shares of stock of any class (including as "stock" for the purposes of
this Section 6.16, any warrants, rights or options to purchase or otherwise
acquire stock or other Securities exchangeable for or convertible into stock) of
such Subsidiary to any Person other than the Company or a Wholly-owned
Subsidiary, except for the purpose of qualifying directors, or except in
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satisfaction of the validly pre-existing preemptive rights of minority
shareholders in connection with the simultaneous issuance of stock to the
Company and/or a Subsidiary whereby the Company and/or such Subsidiary maintain
their same proportionate interest in such Subsidiary.
(b) The Company will not sell, transfer or otherwise
dispose of any shares of stock of any Subsidiary (except to qualify directors)
or any Debt of any Subsidiary, and will not permit any Subsidiary to sell,
transfer or otherwise dispose of (except to the Company or a Wholly-owned
Subsidiary) any shares of stock or any Debt of any other Subsidiary, unless:
(i) simultaneously with such sale, transfer,
or disposition, all shares of stock and all Debt of such Subsidiary at the time
owned by the Company and by every other Subsidiary shall be sold, transferred or
disposed, of as an entirety;
(ii) the Board of Directors of the Company
shall have determined, as evidenced by a resolution thereof, that the proposed
sale, transfer or disposition of said shares of stock and Debt is in the best
interests of the Company;
(iii) said shares of stock and Debt are sold,
transferred or otherwise disposed of to a Person, for a cash consideration and
on terms reasonably deemed by the Board of Directors to be adequate and
satisfactory;
(iv) the Subsidiary being disposed of shall
not have any continuing investment in the Company or any other Subsidiary not
being simultaneously disposed of; and
(v) such sale or other disposition does not
involve a substantial part (as hereinafter defined) of the assets of the Company
and its Subsidiaries
As used in Sections 6.14 and 6.16, a sale, lease or other
disposition of assets shall be deemed to be a "substantial part" of the assets
of the Company and its Subsidiaries if the book value of such assets, when added
to the book value of all other assets sold, leased or otherwise disposed of by
the Company and its Subsidiaries during the period commencing on the Closing
Date and ending with the date of such sale, lease or other disposition, exceeds
10% of Consolidated Net Worth, determined as of the end of the immediately
preceding fiscal year; provided that there shall be excluded from any
calculation of a "substantial part" (i) sales, leases and other dispositions of
assets in the ordinary course of business and (ii) the sale of Leases and
receivables in accordance with industry practice.
Section 6.17. Investments. The Company will not, and will not
permit any Subsidiary to, make any Investments, other than:
(a) Investments by the Company and its
Subsidiaries in and to Subsidiaries, including any Investment in a corporation
which, after giving effect to such Investment, will become a Subsidiary;
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(b) Investments in commercial paper maturing in 270
days or less from the date of issuance which, at the time of acquisition by the
Company or any Subsidiary, is accorded the highest rating by Standard & Poor's
Corporation, Moody's Investors Service, Inc. or other nationally recognized
credit rating agency of similar standing;
(c) Investments in direct obligations of the United
States of America or any agency or instrumentality of the United States of
America, the payment or guarantee of which constitutes a full faith and credit
obligation of the United States of America, in either case, maturing in twelve
months or less from the date of acquisition thereof;
(d) Investments in certificates of deposit maturing
within one year from the date of issuance thereof, issued by a bank or trust
company organized under the laws of the United States or any state thereof,
having capital, surplus and undivided profits aggregating at least $100,000,000
and whose long-term certificates of deposit are, at the time of acquisition
thereof by the Company or a Subsidiary, rated AA or better by Standard & Poor's
Corporation or Aa or better by Moody's Investors Service, Inc.;
(e) loans or advances in the usual and ordinary
course of business to officers, directors and employees for expenses (including
moving expenses related to a transfer) incidental to carrying on the business of
the Company or any Subsidiary; and
(f) receivables arising from the sale of goods and
services in the ordinary course of business of the Company and its Subsidiaries.
In valuing any Investments for the purpose of applying the
limitations set forth in this Section 6.17, such Investments shall be taken at
the original cost thereof, without allowance for any subsequent write-offs or
appreciation or depreciation therein, but less any amount repaid or recovered on
account of capital or principal.
For purposes of this Section 6.17, at any time when a corporation
becomes a Subsidiary, all Investments of such corporation at such time shall be
deemed to have been made by such corporation, as a Subsidiary, at such time.
Section 6.18. Guaranties. The Company will not, and will not
permit any Subsidiary to, become or be liable in respect of any guaranty except
guaranties by the Company which are limited in amount to a stated maximum dollar
exposure or which constitute guaranties of obligations incurred by a Subsidiary
in compliance with the provisions of this Agreement.
Section 6 19. Repurchase of Notes. Neither the Company nor any
Subsidiary or Affiliate, directly or indirectly, may repurchase or make any
offer to repurchase any Notes unless an offer has been made to repurchase Notes,
pro rata, from all Holders at the same time and on the same terms. In case the
Company repurchases or otherwise acquires any Notes, such Notes shall
immediately thereafter be canceled and no Notes shall be issued in substitution
therefor. Without limiting the foregoing, upon the repurchase or other
acquisition of any Notes by the
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Company, any Subsidiary or any Affiliate (or upon the agreement of Company, any
Subsidiary or any Affiliate to purchase or otherwise acquire any Notes), such
Notes shall no longer be outstanding for purposes of any section of this
Agreement relating to the taking by the Holders of any actions with respect
hereto, including, without limitation, Sections 7.3, 7.4 and 8.1.
Section 620. Transactions with Affiliates. The Company will not,
and will not permit any Subsidiary to, enter into or be a party to any
transaction or arrangement with any Affiliate (including, without limitation,
the purchase from, sale to or exchange of Property with, or the rendering of any
service by or for, any Affiliate), except in the ordinary course of and pursuant
to the reasonable requirements of the Company's or such Subsidiary's business
and upon fair and reasonable terms no less favorable to the Company or such
Subsidiary than would obtain in a comparable arm's-length transaction with a
Person other than an Affiliate.
Section 6.21. Termination of Pension Plans.
(a) The Company will not and will not permit any
Subsidiary to withdraw from any Multieniployer Plan or permit any employee
benefit plan maintained by it to be terminated if such withdrawal or
termination could result in withdrawal liability (as described in Part 1 of
Subtitle E of Title IV of ERISA) or the imposition of a Lien on any Property of
the Company or any Subsidiary pursuant to Section 4068 of ERISA.
(b) The Company will not, and will not permit any
Subsidiary to, permit any Plans at any time maintained by the Company or any
Subsidiary to have any Unfunded Vested Pension Liabilities. As used herein
"Unfunded Vested Pension Liability" shall mean an excess of the actuarial
present value of accumulated vested Plan benefits as at the end of the
immediately preceding Plan year of such Plans (or as of any more recent
valuation date) over the net assets allocated to such Plans which are available
for benefits, all as determined and disclosed in the most recent actuarial
valuation report for such Plans.
(c) All assumptions and methods used to determine the
actuarial valuation of vested employee benefits under all Plans at any time
maintained by the Company or any Subsidiary and the present value of assets of
such Plans shall be reasonable in the good faith judgment of the Company and
shall comply with all requirements of law.
(d) The Company will not, and will not permit any
Subsidiary to, cause any Plan which it maintains or in which it participates at
any time to:
(i) engage in any "prohibited transaction"
(as such term is defined in ERISA);
(ii) incur any "accumulated funding
deficiency" (as such term is defined in ERISA), whether or not waived; or
(iii) terminate any such Plan in a manner
which could result in
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the imposition of a lien on any Property of the Company or any of its
Subsidiaries pursuant to ERISA.
(e) The Company will not, and will not permit any
Subsidiary to, permit any condition to exist in connection with any Plan which
might constitute grounds for the Pension Benefit Guaranty Corporation to
institute proceedings to have such Plan terminated or a trustee appointed to
administer such Plan.
Section 6.22. Reports and Rights of Inspection. The Company will
keep, and will cause each Subsidiary to keep, proper books of record and account
in which full and correct entries will be made of all dealings or transactions
of, or in relation to, the business and affairs of the Company or such
Subsidiary, in accordance with GAAP consistently applied (except for changes
disclosed in the financial statements furnished to the Holders pursuant to this
Section 6.22 and concurred in by the independent public accountants referred to
in Section 6.22(b) hereof), and will furnish to each Institutional Holder (in
duplicate if so specified below or otherwise requested):
(a) Quarterly Statements. As soon as available and in
any event within 60 days (or such earlier date as furnished to the holders of
the Senior Debt) after the end of each quarterly fiscal period (except the last)
of each fiscal year, commencing with and including the quarter ended November
30, 1997, copies of:
(i) consolidated balance sheets of the
Company and its Subsidiaries as of the close of such quarterly fiscal period,
setting forth in comparative form the consolidated figures for the fiscal year
then most recently ended;
(ii) consolidated statements of operations
of the Company and its Subsidiaries for such quarterly fiscal period and for the
portion of the fiscal year ending with such quarterly fiscal period, in each
case setting forth in comparative form the consolidated figures for the
corresponding periods of the preceding fiscal year, and
(iii) consolidated statements of cash flows
of the Company and its Subsidiaries for the portion of the fiscal year ending
with such quarterly fiscal period, setting forth in comparative form the
consolidated figures for the corresponding period of the preceding fiscal year,
all in reasonable detail and certified as complete, correct and fairly
representative of the financial condition of the Company and its Subsidiaries by
an authorized financial officer of the Company;
(b) Annual Statements. As soon as available and in
any event within 120 days after the close of each fiscal year of the Company,
copies of.
(i) consolidated and consolidating balance
sheets of the Company and its Subsidiaries as of the close of such fiscal year;
and
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(ii) consolidated and consolidating
statements of operations and changes in stockholders' equity and cash flows of
the Company and its Subsidiaries for such fiscal year,
in each case setting forth in comparative form the consolidated figures for the
preceding fiscal year, all in reasonable detail and accompanied by a report
thereon of a firm of independent public accountants of recognized national
standing selected by the Company to the effect that the consolidated financial
statements present fairly, in all material respects, the consolidated financial
position of the Company and its Subsidiaries as of the end of the fiscal year
being reported on and the consolidated results of the operations and cash flows
for said year in conformity with GAAP and that the examination of such
accountants in connection with such financial statements has been conducted in
accordance with generally-accepted auditing standards and included such tests of
the accounting records and such other auditing procedures as said accountants
deemed necessary in the circumstances;
(c) Audit Reports. Promptly upon receipt thereof, one
copy of each interim or special audit made by independent accountants of the
books of the Company or any Subsidiary and any management letter received from
such accountants;
(a) SEC and Other Reports. Promptly upon their
becoming available, one copy of each financial statement, report, notice or
proxy statement sent by the Company to stockholders generally and of each
regular or periodic report, and any registration statement or prospectus filed
by the Company or any Subsidiary with any securities exchange or the Securities
and Exchange Commission or any successor agency, and copies of any orders in any
proceedings to which the Company or any of its Subsidiaries is a party, issued
by any governmental agency, Federal or state, having jurisdiction over the
Company or any of its Subsidiaries;
(e) ERISA Reports. Promptly upon the occurrence
thereof, written notice of (i) a Reportable Event with respect to any Plan;
(ii) the institution of any steps by the Company, any ERISA Affiliate, the PBGC
or any other person to terminate any Plan; (iii) the institution of any steps by
the Company or any ERISA Affiliate to withdraw from any Plan; (iv) a "prohibited
transaction" within the meaning of Section 406 of ERISA in connection with any
Plan; (v) any material increase in the contingent liability of the Company or
any Subsidiary with respect to any post-retirement welfare liability; or (vi)
the taking of any action by, or the threatening of the taking of any action by,
the Internal Revenue Service, the Department of Labor or the PBGC with respect
to any of the foregoing;
(f) Compliance Certificates. Within the periods
provided in paragraphs (a) and (b) above, a certificate of the Chief Financial
Officer of the Company stating that such Person has reviewed the provisions of
this Agreement and setting forth: (A) the information and computations (in
sufficient detail) required in order to establish whether the Company was in
compliance with the requirements of Sections 6.3, 6.5 and 6.9 through 6.19 at
the end of the period covered by the financial statements then being funished,
(B) whether there existed as of the date of such financial statements and
whether, to the best of such Person's knowledge, there
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exists on the date of the certificate or existed at any time during the period
covered by such financial statements any Default or Event of Default and, if any
such condition or event exists on the date of the certificate, specifying the
nature and period of existence thereof and the action the Company is taking and
proposes to take with respect thereto, and (C) unless the Company elects to
provide separately the written statements required to be provided pursuant to
Section 6.9, the information required to be contained in such statements,
including without limitation the statement of such Person that such Person is
not aware of any reason that the Company will not continue to be in compliance
with Sections 6.9 and 6.10; and
(g) Requested Information. With reasonable promptness,
such other data and information as a Holder may reasonably request.
Without limiting the foregoing, the Company will permit the
Purchaser and each Institutional Holder which is the Holder of at least
$1,000,000 in aggregate principal amount of the Notes outstanding (or such
Persons as such Institutional Holder may designate), individually, to visit and
inspect, under the Company's guidance, any of the Properties of the Company or
any Subsidiary, to examine all of their books of account, records, reports and
other papers, to make copies and extracts therefrom and to discuss their
respective affairs, finances and accounts with their respective officers,
employees, and independent public accountants (and by this provision the Company
authorizes said accountants to discuss with the Purchaser and any Institutional
Holder individually, the finances and affairs of the Company and its
Subsidiaries) all at such reasonable times and as often as may be reasonably
requested. The Company shall not be required to pay or reimburse any Holder for
expenses which such Holder may incur in connection with any such visitation or
inspection, except that if such visitation or inspection is made during any
period when a Default or an Event of Default shall have occurred and be
continuing, the Company agrees to reimburse such Holder for all such expenses
promptly upon demand.
Section 623. Change of Name. The Company shall promptly provide
notice to all Holders of any change in its name.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES.
Section 7.I. Events of Default. Any one or more of the following
shall constitute an "Event of Default" as such term is used herein:
(a) Default shall occur in the payment of interest on any
Note when the same shall have become due and such default shall continue for
more than 5 days; or
(b) Default shall occur in the making of any required
prepayment on any of the Notes as provided in Section 2.1; or
(C) Default shall occur in the making of any other
payment of the principal of any Note or premium, if any, thereon at the
expressed or any accelerated maturity
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date or at any date fixed for prepayment; or
(d) Default shall be made in the payment when due
(whether by lapse of time, by declaration, by call for redemption or otherwise)
of the principal of or interest on any Debt (other than the Notes) of the
Company or any Subsidiary and such default shall continue beyond the period of
grace, if any, allowed with respect thereto; or
(e) Default or the happening of any event shall occur
under any indenture, agreement or other instrument under which any Debt of the
Company or any Subsidiary may be issued and such default or event shall continue
for a period of time sufficient to permit the acceleration of the maturity of
any Debt of the Company or any Subsidiary outstanding thereunder; or any event
shall occur or any condition shall exist which shall have caused any Debt of
the Company or any Subsidiary to become due prior to its or their stated
maturity or its (or their) regularly scheduled dates of payment; or
(f) Default shall occur in the observance or performance
of any covenant or agreement contained in Section 6.3 through Section 6.6 and
Section 6.9 through Section 6.14; or
(g) Default shall occur in the observance or performance
of any other covenant or any other provision of this Agreement which is not
remedied within 30 days after the earlier of (i) the day on which the Company
first obtains knowledge of such default, or (ii) the day on which written notice
thereof is given to the Company by any Holder; or
(h) any representation or Warranty made by the Company
herein, or made by the Company in any statement or certificate furnished by the
Company in connection with the consummation of the issuance and delivery of the
Notes or furnished by the Company pursuant hereto, is untrue in any material
respect as of the date of the issuance or making or renewal thereof; or
(i) final judgment or judgments for the payment of money
aggregating in excess of $250,000 is or are outstanding against the Company or
any Subsidiary or against any Property or assets of either and any one of such
judgments has remained unpaid,unvacated, unbonded or unstayed by appeal or
otherwise for a period of 30 days from the date of its entry; or
(j) a custodian, liquidator, trustee, administrator or
receiver is appointed for the Company or any Subsidiary or for the major part of
the Property of either and is not discharged within 30 days after such
appointment; or
(k) the Company or any Subsidiary becomes insolvent or
bankrupt, is generally not paying its debts as they become due or makes an
assignment for the benefit of creditors, or the Company or any Subsidiary
applies for or consents to the appointment of a custodian, liquidator, trustee
or receiver for the Company or such Subsidiary or for the major part
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of the Property of any thereof; or
(1) bankruptcy, reorganization, arrangement or insolvency
proceedings, or other proceedings for relief under any bankruptcy or similar law
or laws for the relief of debtors, are instituted by or against the Company or
any Subsidiary and, if instituted against the Company or any Subsidiary, are
consented to or are not dismissed within 60 days after such institution.
Section 7.2. Notice to Holders. When any Event of Default
described in the foregoing Section 7.1 has occurred, or if any Holder or the
holder of any other evidence of Debt of the Company gives any notice or takes
any other action with respect to a claimed default, the Company agrees to give
notice within three business days of such event to all Holders, in the manner
set forth in Section 11.6.
Section 7.3. Acceleration of Maturity. When any Event of Default
described in paragraph (a) through (i) of Section 7.1 has occurred and is
continuing, the Holders of at least a majority in aggregate principal amount of
the Notes may, by notice to the Company, declare the entire principal and all
interest accrued on all Notes to be, and all Notes shall thereupon become,
forthwith due and payable, without any presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived. When any Event of
Default described in paragraph (j), (k) or (l) of Section 7.1 has occurred,
then all outstanding Notes shall immediately become due and payable without
presentment, demand or notice of any kind. Upon the Notes becoming due and
payable as a result of any Event of Default as aforesaid, the Company will
forthwith pay to the Holders, the entire principal and interest accrued on the
Notes. No course of dealing on the part of the Holder or Holders nor any delay
or failure on the part of any Holder to exercise any right shall operate as a
waiver of such right or otherwise prejudice such Holder's rights, powers and
remedies. The Company further agrees, to the extent permitted by law, to pay to
the Holder or Holders all costs and expenses incurred by them in the collection
of any Notes upon any default hereunder or thereon, including costs and expenses
(including breakage) of prepaying any interest rate swap or other hedging
arrangement entered into by any such Holder relating to the Notes and reasonable
compensation to such Holder's or Holders' attorneys for all services rendered in
connection therewith.
Section 7.4. Rescission of Acceleration. The provisions of Section
7.3 are subject to the condition that if the principal of and accrued interest
on all or any outstanding Notes have been declared immediately due and payable
by reason of the occurrence of any Event of Default described in paragraphs (a)
through (i), inclusive, of Section 7. 1, the Holders holding 66-2/3% in
aggregate principal amount of the Notes then outstanding may, by written
instrument filed with the Compdny, rescind and annul such declaration and the
consequences thereof, provided that at the time such declaration is annulled and
rescinded:
(a) no judgment or decree has been entered for the
payment of any monies due pursuant to the Notes or this Agreement;
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(b) all arrears of interest upon all the Notes and all
other sums payable under the Notes and under this Agreement (except any
principal, interest or premium on the Notes which has become due and payable
solely by reason of such declaration under Section 7.3) shall have been duly
paid; and
(c) each and every other Default and Event of Default
shall have been made good, cured or waived pursuant to Section 7;
and provided further, that no such rescission and annulment shall extend to or
affect any subsequent Default or Event of Default or impair any right consequent
thereto.
SECTION 8. AMENDMENTS, WAIVERS AND CONSENTS.
Section 8.1. Consent Required. Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended or
compliance therewith may be waived (either generally or in a particular instance
and either retroactively or prospectively), if the Company shall have obtained
the consent in writing of the Holders holding at least 66-2/3% in aggregate
principal amount of outstanding Notes; providet4 however, that without the
written consent of all of the Holders, no such amendment or waiver shall be
effective which will change (i) the time of payment (including any prepayment
required by Section 2) of the principal of or the interest on any Note or change
the principal amount thereof or change the rate of interest thereon, or (ii) any
of the provisions with respect to optional prepayments, or (iii) any of the
provisions of Sections 6.14, Section 6.16, or Section 10 or any related
definition or (iv) the percentage of Holders required to consent to any
amendment or waiver of any of the provisions of this-Agreement.
Section 8. Solicitation of Holders; Notice to Holders. So long as
there are any Notes outstanding, the Company will not solicit, request or
negotiate for or with respect to any proposed waiver or amendment of any of the
provisions of this Agreement or the Notes unless each Holder (irrespective of
the amount of Notes then owned by it) shall be informed thereof by the Company
and shall be afforded the opportunity of considering the same and shall be
supplied by the Company with sufficient information to enable it to make an
informed decision with respect thereto. The Company will not, directly or
indirectly, pay or cause to be paid any remuneration, whether by way of
supplemental or additional interest, fee or otherwise, to any Holder as
consideration for or as an inducement to entering into by any Holder of any
waiver or amendment of any of the terms and provisions of this Agreement or the
Notes unless such remuneration is concurrently offered, on the same terms,
ratably to all Holders. After an amendment, supplement or waiver becomes
effective pursuant to this Section 8, the Company shall send a notice to each
Holder of the Notes describing such amendment, supplement or waiver.
Section 8.3. Effect of Amendment or Waiver. Any such amendment
or waiver shall apply equally to all of the Holders and shall be binding upon
them, upon each future Holder
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and upon the Company, whether or not any Note shall have been marked to indicate
such amendment or waiver. No such amendment or waiver shall extend to or affect
any obligation not expressly amended or waived or impair any right consequent
thereon.
SECTION 9. INTERPRETATION OF AGREEMENT; DEFINITIONS.
Section 9. 1. Definitions. Unless the context otherwise requires
or such term is otherwise defined herein, the terms hereinafter set forth when
used herein shall have the following meanings and the following definitions
shall be equally applicable to both the singular and plural forms of any of the
terms herein defined:
"Adjusted Consolidated Assets" shall mean, as at the date of
determination, the total assets of the Company and its Subsidiaries (net of Cash
Equivalents) less an amount equal to the sum of (i) an amount equal to 20% of
Investments in SPVs, net of Federal's recorded allowance for credit losses (or,
in the case of any SPV with respect to which a Trigger Event (as defined in any
securitization documents to which such SPV is a party) has occurred, 100% of
Investments in such SPV), (ii) an amount equal to 20% of the residual value of
Leased Assets, (iii) an amount equal to the outstanding principal amount of all
Mortgages more than 180 days old), (iv) an amount equal to the outstanding
principal amount of all Mortgages and the aggregate rent due under all Leases
with respect to which any payment is more than 90 days past due.
"Adjusted Consolidated Debt" shall mean, as of the date of any
determination thereof, the sum of total outstanding liabilities of the Company
and its Subsidiaries plus, without duplication, the unused portion of any credit
or lending commitment, less the aggregate principal amount of Investor
Subordinated Debt outstanding up to a maximum of $6,000,000.
"Adjusted Consolidated Net Worth" shall mean an amount equal to
the sum of Consolidated Tangible Net Worth plus the aggregate principal amount
of Investor Subordinated Debt outstanding up to a maximum of $6,000,000.
"Adjusted Consolidated Liabilities" shall mean, as of the date of
determination thereof, the total liabilities of the Company and its Subsidiaries
(net of Cash Equivalents) excluding Investor Subordinated Debt but including the
Notes.
"Affiliate" shall mean any Person (other than a Subsidiary) (i)
which directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Company, (ii) which
beneficially owns or holds 5% or more of any class of the Voting Stock of the
Company, or (iii) 5% or more of the Voting Stock (or in the case of a Person
which is not a corporation, 5% or more of the equity interest) of which is
beneficially owned or held by the Company or a Subsidiary. The term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of Voting Stock, by contract or otherwise.
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"Agreement" shall mean this Note Agreement.
"Bank Debt" shall mean the Debt from time to time outstanding
under the existing bank loan agreements identified on Schedule 6.12 and any
amendment, renewal, extension, replacement or refinancing of any of such
agreements.
"Bankruptcy Event" shall mean any liquidation, dissolution or
winding up of the Company, or any execution, sale, receivership, insolvency,
bankruptcy, liquidation, readjustment, reorganization, or other similar
proceeding relative to the Company or its Property.
"Business Day" or "business day" shall mean any day on which
commercial banks are generally open for business in New York, New York.
"Cash Equivalents" shall mean (i) obligations issued or
unconditionally guaranteed by the United States of America or any agency
thereof, or obligations issued by any agency or instrumentality thereof and
backed by the full faith and credit of the United States of America, and
maturing not more than one year from the date of purchase thereof, (ii)
commercial paper rated the highest grade by Moody's Investors Service, Inc.
"Moody's" and Standard & Poors Corporation (S&P) and maturing not more than
270 days from the date of creation thereof, (iii) time deposits with, and
certificates of deposit and banker's acceptances issued by, and bank having
capital, surplus and undivided profits aggregating at least $500,000,000 and
maturing not more than one year from the date of creation thereof, (iv)
repurchase agreements that are secured by a perfected interest in an obligation
described in clause (i) and are with any bank described in clause (iii), (v)
readily marketable direct obligations issued by any state of the United States
of America or any political subdivision thereof having one of the two highest
ratings categories obtainable from either Moody's or S&P and maturing not more
than one year from the date of purchase thereof, and (vi) receivables from
financial institutions for Mortgages sold or otherwise transferred.
"Change of Control" shall mean each and every issue, sale or other
disposition of shares of stock of the Company or Federal, which results in any
Person, or group of Persons acting in concert, other than the Control Group,
beneficially owning or controlling, directly or indirectly, more than 50% (by
number of votes) of the Voting Stock of the Company or of Federal.
"Change of Control Date" shall mean any date upon which a Change
of Control shall occur.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Collection Action" shall mean with respect to a default upon
Senior Debt (i) a general notification to account debtors of the Company that
payments in respect of accounts payable to the Company are to be made to or for
the account of any holders of Senior Debt, (ii) the commencement by any holder
of Senior Debt of a judicial or nonjudicial foreclosure or other
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enforcement action to realize on collateral security for such Senior Debt, or
(iii) the commencement of judicial proceedings with respect to such default.
"Company" shall mean New Jersey Mortgage and Investment Corp., a
New Jersey corporation, and any Person who succeeds to all, or substantially
all, of the assets and business of New Jersey Mortgage and Investment Company.
"Consolidated" when used as a modifier with respect to Debt,
Senior Debt or Senior Subordinated Debt, shall mean all Debt, Senior Debt or
Senior Subordinated Debt of the Company and its Subsidiaries, determined on a
consolidated basis eliminating intercompany items.
"Consolidated Net Income" shall mean, for any period, the
consolidated net income of the Company and its Subsidiaries, determined in
accordance with GAAP.
"Consolidated Net Worth" shall mean, as of the date of any
determination thereof, the sum of (a) Stockholders' Equity plus (b) the
aggregate principal amount of Investor Subordinated Debt outstanding.
"Consolidated Tangible Net Worth" shall mean, as of the date of
any determination thereof, Stockholders' Equity less loans to and receivables
from shareholder, employees and affiliates and less intangible assets, including
goodwill, all as determined on a consolidated basis in accordance with GAAP.
"Control Group" shall mean (i) Stan Furst and Joel Furst; (ii) the
spouses, lineal descendants and spouses of the lineal descendants of the persons
named in clause (i); and (iii) the estates or legal representatives of the
persons named in clause (i) and (ii).
"Debt" of any Person shall mean (i) all obligations of such
Person for borrowed money (including but not limited to the Notes) or which has
been incurred in connection with the acquisition of assets and (ii) all
Guarantees by such Person of Debt of others; provided that there shall be
excluded from Debt all obligations created or arising under any conditional sale
or title retention agreement with respect to Property acquired by such Person if
the rights and remedies of the seller, lender or lessor under such agreement in
the event of default are limited to repossession or sale of such Property.
"Default" shall mean any event or condition, the occurrence of
which would, with the lapse of time or the giving of notice, or both, constitute
an Event of Default.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
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"ERISA Affiliate" shall mean any corporation, trade or business
that is a member of a controlled group of corporations or a controlled group of
trades or businesses, as described in Section 414(b) and 414(c), respectively,
of the Code and Section 4001 of ERISA.
"Event of Default" shall have the meaning set forth in Section 7.1.
"Federal" shall mean Federal Leasing Corp., a New Jersey
corporation and a wholly-owned Subsidiary of the Company.
"GAAP" shall mean generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity operating in the United States as may be
approved by a significant segment of the accounting profession that are
applicable to the circumstances as of the date of determination, applied on a
consistent basis.
"Guaranties" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing, or in effect guaranteeing,
any Debt, dividend or other obligation, of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Debt or obligation or any
Property or assets constituting security therefor, (ii) to advance or supply
funds (x) for the purchase or payment of such Debt or obligation or (y) to
maintain working capital or other balance sheet condition or otherwise to
advance or make available fimds for the purchase or payment of such Debt or
obligation, (iii) to lease Property or to purchase Securities or other Property
or services primarily for the purpose of assuring the owner of such Debt or
obligation of the ability of the primary obligor to make payment of the Debt or
obligation, or (iv) otherwise to assure the owner of the Debt or obligation of
the primary obligor against loss in respect thereof. For the purposes of all
computations made under this Agreement, a Guaranty in respect of any Debt for
borrowed money shall be deemed to be Debt equal to the principal amount of such
Debt for borrowed money which has been guaranteed, with interest and other
charges accrued and unpaid to the date of payment thereof, and a Guaranty
in respect of any other obligation or liability or any dividend shall be deemed
to be Debt equal to the maximum aggregate amount of such obligation, liability
or dividend.
"Holder" shall mean any Person which is, at the time of
reference, the registered holder of any Note, and "Holders" shall mean all such
Persons.
"Indebtedness" of any Person shall mean and include all
obligations of such Person which in accordance with GAAP shall be classified
upon a balance sheet of such Person as liabilities of such Person, and in any
event shall include all (i) obligations of such Person for borrowed money or
which has been incurred in connection with the acquisition of Property or
assets, (ii) obligations secured by any Lien upon Property or assets owned by
such Person, even though such Person has not assumed or become liable for the
payment of such obligations, (iii)
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obligations created or arising under any conditional sale or other title
retention agreement with respect to Property acquired by such Person,
notwithstanding the fact that the rights and remedies of the seller, lender or
lessor under such agreement in the event of default are limited to repossession
or sale of Property and (iv) Guaranties of Indebtedness of others.
"Institutional Holder" shall mean any Holder which is the
Purchaser or which is a bank, trust company, insurance company, fraternal
benefit society, pension fund, mutual fund or other similar institutional
investor that meets the definition of "accredited investor" under Rule 501
(a)(1),(2), (3) or (7) of Regulation D promulgated under the Securities Act and
that shall hold any Note.
"Interest Charges" shall mean, for any period, all interest and
all amortization of debt discount and expense on any particular Indebtedness for
which such calculations are being made. Computations of Interest Charges on a
pro forma basis for Indebtedness having a variable interest rate shall be
calculated at the rate in effect on the date of any determination.
"Interest Rate" shall mean a fixed rate per annum of 12.00.
percent.
"Investments" shall mean all investments, in cash or by delivery
of Property made, directly or indirectly in any Person, whether by acquisition
of shares of capital stock, indebtedness or other obligations or Securities or
by loan, advance, capital contribution or otherwise; provided, however, that
"Investments" shall not mean or include routine investments in Property to be
used or consumed in the ordinary course of business.
"Investor Subordinated Debt" shall mean the Debt listed in
Schedule 3.17 under the heading "Investor Subordinated Debt" and any renewal,
extension or replacement of such Debt.
"Leased Assets" shall mean assets of the Company or any Subsidiary
subject to Leases.
"Leases" shall mean equipment leases, including medical equipment
leases, held by the Company or any of its Subsidiaries.
"Lien" shall mean any interest in Property securing an obligation
owed to, or a claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute or contract, and including but
not limited to the security interest lien arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall include reservations, exceptions
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting Property. For the purposes of this
Agreement, the Company or a Subsidiary shall be deemed to be the owner of any
Property which it has acquired or holds subject to a conditional sale agreement,
capitalized
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lease or other arrangement pursuant to which title to the Property has been
retained by or vested in some other Person for security purposes and such
retention or vesting shall constitute a Lien.
"Make-Whole Amount" shall mean the excess, if any, of (i) the
aggregate present value as of the date of any prepayment of each dollar of
principal of the Notes being prepaid and the amount of interest (exclusive of
interest accrued to the date of prepayment), at the Interest Rate, that would
have been payable in respect of such dollar if such prepayment had not been
made, determined by discounting such amounts on a monthly basis at the
Reinvestment Rate from the respective dates on which they would have been
payable, over (ii) 1 00% of the principal amount of the outstanding Notes being
prepaid. For purposes of any determination of the Make-Whole Amount:
"Reinvestment Rate" shall mean 2.00% plus the arithmetic
mean of the yields under the respective headings "This Week"
and "Last Week" published in the Statistical Release under the
caption "Treasury Constant Maturities" for the maturity
(rounded to the nearest month) corresponding to the Weighted
Average Life to Maturity of the principal being prepaid. If no
maturity exactly corresponds to such Weighted Average Life to
Maturity, yields for the two published maturities most closely
corresponding to such Weighted Average Life to Maturity shall
be calculated pursuant to the immediately preceding sentence
and the Reinvestment Rate shall be interpolated or extrapolated
from such yields on a straight-line basis, rounding in each of
such relevant periods to the nearest month. For the purposes of
calculating the Reinvestment Rate, the most recent Statistical
Release published prior to the date of determination of the
Make-Whole Amount shall be used.
"Statistical Release" shall mean the statistical
release designated "H.15(519)" or any successor publication
which is published weekly by the Federal Reserve System
and, which establishes yields on actively traded U.S.
Government Securities adjusted to constant maturities or, if
such statistical release is not published at the time of
any determination hereunder, then such other reasonably
comparable index which shall be designated by the Holders of
66-2/3% in aggregate principal amount of the outstanding Notes.
"Weighted Average Life to Maturity" of the principal
amount of the Notes being prepaid shall mean, as of the time of
any determination thereof, the number of years obtained by
dividing the then Remaining Dollar-Years of such principal by
the aggregate amount of such principal. The term "Remaining
Dollar-Years" of such principal shall mean the amount obtained
by
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(i) multiplying (x) the remainder of (1) the amount of principal
that would have become due on each scheduled payment date under
the Notes if such prepayment had not been made, less (2) the
amount of principal on the Notes scheduled to become due on such
date after giving effect to such prepayment and the application
thereof in accordance with the provisions of this Agreement, by
(y) the number of years (calculated to the nearest one-twelfth)
which will elapse between the date of determination and such
scheduled payment date, and (ii) totalling the products obtained
in (i).
"Material Covenant Default" shall mean with respect to any
Senior Debt, the occurrence of any event of default or breach of any incurrence
or maintenance covenant or any other provision contained therein or in any
agreement under which Senior Debt may be issued restricting or relating to:
maintenance of working capital, liquidity, current ratio, fixed or interest
charges coverage, net worth, allowance for bad debt reserves or
debt-to-capitalization ratio; the amount or classes of Debt (including without
limitation, Guaranties) which may at any time be incurred or outstanding;
permitted Liens; mergers or acquisitions; sale of significant assets; change of
control, limitation on prepayment of Debt, default under other Debt,
representations and warranties, permitted investments, impairment of collateral;
maintenance of borrowing base; or the making of Restricted Payments.
"Mortgage" shall mean any mortgage on real property granted or
held by the Company or any of its Subsidiaries.
"Multiemployer Plan" shall have the same meaning as in ERISA.
"PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean an individual, partnership, corporation,
trust, limited liability company, joint venture, association, joint stock
company or unincorporated organization, and a government or agency or political
subdivision thereof (including any subdivision or ongoing business of any such
entity or substantially all of the assets of any such entity, subdivision or
business).
"Plan" shall mean a "pension plan" as such term is defined in
ERISA, established or maintained by the Company or any ERISA Affiliate or as to
which the Company or any ERISA Affiliate contributed or is a member or
otherwise may have any liability.
"Prepayment Premium" shall mean the prepayment premium in the
amount of $120,000 payable upon the occurrence of a Change of Control or a Sale
of the Company or Federal occurring on or prior to July 1, 2000.
"Property" shall mean any interest in any kind of property or
asset, whether real,
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personal or mixed, and whether tangible or intangible, and "Properties" shall
mean all such interests.
"Reportable Event" shall have the same meaning as in ERISA.
"Restricted Payment" shall mean with respect to the Company:
(a) the declaration or payment of any dividends, either in
cash or Property, on any shares of its capital stock of any class (except
dividends or other distributions payable solely in shares of common stock of the
Company); or
(b) directly or indirectly, or through any Subsidiary, the
purchase, redemption or retirement of any shares of its capital stock of any
class or any warrants, rights or options to purchase or acquire any shares of
its capital stock (other than in exchange for or out of the net cash proceeds
to the Company from the substantially concurrent issue or sale of other shares
of capital stock of the Company or warrants, rights or options to purchase or
acquire any shares of its capital stock); or
(c) any other payment or distribution, either directly or
indirectly or through any Subsidiary, in respect of its capital stock; or
(d) any prepayment of principal at the option of the
Company in respect of Investor Subordinated Debt.
"Sale" means (i) any consolidation or merger of the Company or
any Subsidiary with another entity, other than (x) in the case of the Company,
a consolidation or merger that does not result in a Change of Control,
provided that the Company is the surviving entity in such transaction, or (y) a
consolidation or merger between Subsidiaries, or of a Subsidiary into the
Company; or (ii) any sale, lease or other disposition of all or a substantial
part of the Property of the Company or any of its Subsidiaries, other than any
sale, lease or other disposition of all or a substantial part of the Property of
the Company or any Subsidiary to another Subsidiary or to the Company; as used
in this Agreement, the term "all or a substantial part" means with respect to
the Company or Federal, fifty (50) percent or more of the assets of either such
company.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Security" shall have the same meaning as in Section 2(l) of the
Securities Act.
"Senior Debt" shall mean the principal, interest (including,
without limitation, any interest accruing subsequent to the filing of a petition
or other action concerning bankruptcy, whether or not such interest is an
allowed claim in such proceeding), premiums, penalties, fees, expenses and other
amounts due under or in connection with the following, whether presently
outstanding or hereafter incurred: (i) all Indebtedness of the Company and its
Subsidiaries on a consolidated basis which by its terms is not expressly
subordinated to any other Indebtedness of the Company (including without
limitation the Bank Debt, as the same may be amended,
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supplemented or modified from time to time)(a) for money borrowed or (b) which
is evidenced by a note, debenture or similar instrument (including a purchase
money mortgage) given in connection with the acquisition of any Property or
assets (other than inventory or other similar Property acquired in the ordinary
course of business); (ii) any liabilities of others described in the preceding
clause (i) which the Company has guaranteed; and (iii) all renewals, extensions,
refundings, restructurings, amendments and modifications of any such
Indebtedness or Guaranty.
"Senior Subordinated Debt" shall mean the Notes.
"SPVs" shall mean any special purpose corporation, trust or other
entity created by the Company or any of its Subsidiaries in connection with
the securitization of assets of the Company or any such Subsidiary.
"Stockholders' Equity" shall mean the sum of preferred and common
stock, additional paid-in capital and retained earnings less treasury stock,
determined in accordance with GAAP.
"Subordinated Indebtedness" shall mean the principal, interest
(including, without limitation, any interest accruing subsequent to the filing
of a petition or other action concerning bankruptcy, whether or not such
interest is an allowed claim in such proceeding), premiums, penalties, fees,
expenses and other amounts due under or in connection with all Indebtedness of
the Company, whether presently outstanding or hereafter incurred, which by its
terms is subordinated to Senior Debt.
"Subsidiary" or "subsidiary" shall mean with respect to any
Person any corporation (or other legal entity) of which more than 50% (by number
of votes) of the Voting Stock shall be beneficially owned, directly or
indirectly, by such parent corporation and/or one or more corporations which are
themselves subsidiaries of such Person.
"Tangible Assets" shall mean the tangible assets of the Company
and its Subsidiaries as shown on the consolidated balance sheets of the Company
as of a given date.
"Voting Stock" shall mean securities of any class or classes, the
holders of which are ordinarily, in the absence of contingencies, entitled to
vote in the elections of corporate directors, managers or trustees (or Persons
performing similar functions).
"Wholly-owned" when used in connection with any Subsidiary shall
mean a Subsidiary of which all of the issued and Outstanding shares of stock
(except shares required as directors' qualifying shares) shall be owned by the
Company.
Section 9.2. Accounting Principles. Where the character or amount
of any asset or liability or item of income or expense is required to be
determined or any consolidation or other accounting computation is required to
be made for the purposes of this Agreement, the same shall be done in accordance
with GAAP, to the extent applicable, except where such
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principles are inconsistent with the requirements of this Agreement.
Section 9.3. Directly or Indirectly. Where any provision in this
Agreement refers to action to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether the action in
question is taken directly or indirectly by such Person.
SECTION 10. SUBORDINATION.
Section 10.1. Notes Subordinated to Senior Debt. The Debt
evidenced by the Notes and any renewals or extensions thereof, shall at all
times be unsecured and wholly subordinate and junior in right of payment to all
Senior Debt (including as Senior Debt for all purposes of this Section 10,
principal, premium, if any, and interest accruing both before and after the
commencement of a bankruptcy proceeding of the Company, and all fees,
indemnities and other obligations of the Company payable in respect of any
Senior Debt which are not expressly made subordinate and junior to other
obligations whether now or hereafter outstanding) all in the manner and with the
force and effect hereinafter set forth:
(a) In the event of any Bankruptcy Event, all amounts
owing on all Senior Debt shall first be indefeasibly paid in full before any
payment or distribution of any kind or character is made upon the Debt
evidenced by, or any payment is made to purchase, redeem or otherwise acquire
the Notes; and in any such event any payment or distribution of any kind or
character, whether in cash, Property or Securities (other than in Securities,
including equity securities, or other evidences of Debt (i) which are unsecured,
(ii) which have an average life to stated maturity and final maturity which are
no shorter than the average life to stated maturity and final maturity of the
Notes, (iii) the payment of which is subordinated at least to the extent
provided herein to the payment of all Senior Debt, and (iv) which do not have
the effect of causing the Notes to be treated in any case or proceeding as part
of the same class of claims as the Senior Debt or any class on a parity with or
senior to the Senior Debt, or otherwise altering the rights of the holders of
Senior Debt in any case or proceeding ("New Subordinated Securities")) which
shall be made upon or in respect of any Note shall be paid over to the holders
of such Senior Debt, pro rata, for application in payment thereof unless and
until such Senior Debt shall have been indefeasibly paid or satisfied in full in
cash or Cash Equivalents or otherwise in a manner satisfactory to the holders
of Senior Debt.
(b) In the event the holders of any Senior Debt
accelerate the maturity of the payments of principal and interest on any Senior
Debt, the Holders shall not receive or take any action to collect or enforce
their rights with respect to any payments of principal or interest or other
payments or distributions of any kind or character (other than New Subordinated
Securities) on the Notes, unless and until the earliest to occur of (i) payment
in full of all amounts owing on all Senior Debt outstanding or until payment on
such Senior Debt shall have been indefeasibly paid in full, in cash or Cash
Equivalents or otherwise in a manner satisfactory to the holders of Senior Debt,
(ii) such declaration of acceleration shall have been rescinded or (iii) the
default or defaults which gave rise to such declaration of acceleration shall
have been
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cured or waived in writing.
(C) In the event of a default in the payment of either
principal or interest on any Senior Debt (under circumstances when neither
Section 10.1(a) nor Section 10.1(b) is applicable) and the giving by any holder
or holders of such Senior Debt to the Company of written notice of such default
(a "Senior Debt Default Notice") the Holder's shall not receive or take any
action to collect or enforce their rights with respect to, payments of principal
or interest or other distributions of any kind or character on the Notes (other
than New Subordinated Securities) (a "Blockage Period"), unless and until the
earlier of the date (i) such default shall have been cured or waived in writing
by the holders of such Senior Debt or (ii) there shall first have been
indefeasibly paid in full in cash or Cash Equivalents all Senior Debt
outstanding or until payment of such Senior Debt shall have been provided for in
a manner satisfactory to the holders of Senior Debt; provided that such holder
or holders of Senior Debt shall either have commenced a Collection Action in
respect of such default or shall commence a Collection Action with respect to
such default within 360 days after the giving of such Senior Debt Default
Notice.
(d) In the event of a Material Covenant Default with
respect to any Senior Debt (under circumstances when neither Section 10.1(a)
nor Section 10.1(b) nor Section 10.1(c) is applicable) and the giving by any
holder or holders of Senior Debt to the Company of a Senior Debt Default Notice
stating that a Blockage Period is in effect as of the date of such Notice, the
Holders shall not receive or take any action to collect or enforce their rights
with respect to payments of principal or interest or other distributions of any
kind or character on the Notes (other than New Subordinated Securities) unless
and until the earliest to occur of (i) indefeasible payment in full in cash or
Cash Equivalents of all amounts owing on all Senior Debt outstanding or until
payment of such Senior Debt shall have been provided for in a manner
satisfactory to the holders of Senior Debt, (ii) such Material Covenant Default
shall have been rescinded in writing by the holder or holders of such Senior
Debt or (iii) the default or defaults which gave rise to such Material Covenant
Default shall have been cured to the satisfaction of the holders of such Senior
Debt or waived in writing by the holders of such Senior Debt; provided that such
holder or holders of Senior Debt shall either have commenced a Collection Action
in respect of such Material Covenant Default or shall commence a Collection
Action with respect to such Material Covenant Default within 180 days after the
giving of such Senior Debt Default Notice.
(e) In the event that any Note is declared or becomes due
and payable because of the occurrence of any Event of Default described in
Section 7.1 hereof (under circumstances when neither Section 10.1(a) nor Section
10.1(b) nor Section 10.1(c) nor Section 10.1(d) is applicable), the Holders
shall not be entitled to payments of the Notes unless and until there shall
first have been indefeasibly paid in full in cash or Cash Equivalents all Senior
Debt outstanding at the time such Notes so become due and payable because of any
such event, or until payment on such Senior Debt shall have been provided for in
a manner satisfactory to the holders of Senior Debt.
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(f) Notwithstanding the foregoing, (i) a Senior Debt
Default Notice shall be effective only if it is given by a holder or holders of
Bank Debt, (ii) not more than one Senior Debt Default Notice pursuant to Section
10.1(b) or Section 10.1(c) or Section 10.1(d) shall be permitted in any
period of twelve consecutive months nor more than three times in the aggregate;
and (iii) a holder of Senior Debt shall not be entitled to give a Senior Debt
Default Notice pursuant to Section 10.1(d) more than once with respect to any
default which was specified in such a Notice and which has continued uncured or
unwaived without interruption since the date such Notice was given, nor shall
such holder be entitled to give a separate notice with respect to any default
not so specified which (to the actual knowledge of any holder giving such
notice) was existing on the date a Senior Debt Default Notice was given pursuant
to Section 10.1(d) and which has continued uncured or unwaived without
interruption from the date such Notice was given. Upon receipt of any Senior
Debt Default Notice, the Company shall forthwith send a copy thereof to each
Holder.
For purposes of this Section 10, payment "otherwise in a manner
satisfactory to the holders of Senior Debt" shall be deemed to have occurred
with respect to Property (other than cash or Cash Equivalents or promissory
notes or other deferred payment obligations) received by the holders of such
Senior Debt pursuant to a plan of reorganization of the Company approved under
Chapter 11 of the Federal Bankruptcy Code, if such holders voted in favor of
such plan, or pursuant to an agreement, contract or other arrangement in writing
executed by such holders, to the extent in any such case that pursuant to such
plan, agreement, contract or other arrangement such Property is intended to
satisfy the obligations of the Company to such holders.
Upon the expiration of any 360-day period described in Section
10.1(c) or any 180-day period described in Section 10.1(d), provided that no
Senior Debt holder shall have commenced a Collection Action prior to such
expiration, the Holders shall be entitled to receive immediate payment of all
accrued but unpaid payments of interest and required prepayments of principal
pursuant to Section 2 or Section 6.14 of this Agreement and payment of principal
at maturity of the Notes, but shall not be entitled to receive other payments of
principal or interest or other distributions of any kind or character on the
Notes, unless the Senior Debt has been paid in full or provision reasonably
satisfactory to the holders of Senior Debt has been made.
Each and every Holder by its acceptance of Notes agrees that
each, holder of Senior Debt shall be a third party beneficiary hereof and
entitled to rely hereon as though it was a party hereto and further undertakes
and agrees for the benefit of each holder of Senior Debt to execute, verify,
deliver and file any proofs of claim which any holder of Senior Debt may by
written notice to such Holder at any time require in order to prove and realize
upon any rights or claims pertaining to the Notes and to effectuate the full
benefit of the subordination contained herein; and upon failure of any Holder so
to do within 30 days following such written notice by such holder of Senior
Debt, any such holder of Senior Debt shall be deemed to be irrevocably appointed
the agent and attorney-in-fact of such Holder to execute, verify, deliver and
file any such proofs of claim.
The Company agrees, for the benefit of the holders of Senior
Debt, that (a) it shall
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give prompt notice in writing to the holders of Senior Debt of the occurrence of
a Default and (b) in the event that any Note is declared or becomes due and
payable before its stated maturity because of the occurrence of an Event of
Default hereunder, (i) the Company will give prompt notice in writing of such
happening to the holders of Senior Debt and (ii) all Senior Debt shall forthwith
become immediately due and payable upon demand of the holder thereof, regardless
of the expressed maturity thereof.
The Company shall give prompt written notice to each Holder of any
default or event of default with respect to any Senior Debt, of any acceleration
of the maturity of any Senior Debt, and of the commencement of any action to
enforce or collect upon the Senior Debt.
No right of any holder of any Senior Debt to enforce subordination
as herein provided shall at any time or in any way be affected or impaired by
any failure to act on the part of the Company or the holders of Senior Debt, or
by any noncompliance by the Company with any of the terms, provisions and
covenants of the Notes or this Note Agreement, regardless of any knowledge
thereof that any such holder of Senior Debt may have or be otherwise charged
with. In addition, the holders of Senior Debt may, at any time and from time to
time, without the consent of or notice to the Holders, without incurring
responsibility to such Holders and without impairing or releasing the
subordination provided in this Section 10, do any one or more of the following:
(i) change the manner, place or terms of payment or extend the time of payment
of, or renew or alter Senior Debt or any instrument evidencing the same or any
agreement under which Senior Debt is outstanding or any guaranty of or
collateral for Senior Debt; (ii) sell, exchange, release or otherwise deal with
any Property pledged, mortgaged or otherwise securing Senior Debt; (iii) release
any Person liable in any manner for the collection or payment of Senior Debt;
and (iv) exercise or refrain from exercising any rights against the Company and
any other Person.
If any payment or distribution of any character, whether in cash,
Property or securities shall be received by any Holder in contravention of any
of the terms of this Agreement and before all the Senior Debt shall have been
paid in full or provision having been made for such payment, such payment or
distribution or security shall be received in trust for the benefit of, and
shall be promptly paid over or delivered and transferred to the holders of the
Senior Debt at the time outstanding in accordance with the priorities then
existing among such holders for application to the payment of all Senior Debt
remaining unpaid, to the extent necessary to pay all such Senior Debt in full.
The provisions of this Section 10 shall continue to be effective
or be reinstated, as the case may be, if at any time any payment of Senior Debt
is rescinded or must otherwise be returned by any holder of Senior Debt for any
reason whatsoever, all as though such payment had not been made.
The terms and provisions of this Section 10 (including the
definitions relating hereto or used herein) are made for the benefit of the
holders of Senior Debt, who are entitled to rely thereon and compel enforcement
thereof and shall not be amended or modified in any
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respect without the prior written consent thereto of the holders of Senior Debt.
The foregoing provisions are solely for the purpose of defining
the relative rights of the holders of Senior Debt on the one hand, and the
Holders on the other hand, and nothing herein shall impair, as between the
Company and the Holders, the obligation of the Company which is unconditional
and absolute, to pay the principal, premium, if any, and interest on the Notes
in accordance with their terms, nor shall anything herein prevent the Holders
from exercising all remedies otherwise permitted by applicable law or hereunder
upon default hereunder, subject to the rights of the holders of Senior Debt as
herein provided for.
SECTION - 11. MISCELLANEOUS.
Section 11.1. Registered Notes. The Company shall cause to be
kept at its principal office a register for the registration and transfer of the
Notes (hereinafter called the "Note Register") and the Company will register or
transfer or cause to be registered or transferred as hereinafter provided any
Note issued pursuant to this Agreement.
At any time and from time to time any Holder which has been duly
registered as hereinabove provided may transfer such Note upon surrender
thereof at the principal office of the Company duly endorsed or accompanied by a
written instrument of transfer duly executed by the Holder or its attorney duly
authorized in writing.
The Person in whose name any registered Note shall be registered
shall be deemed and treated as the owner and holder thereof and a Holder for all
purposes of this Agreement. Payment of or on account of the principal, premium,
if any, and interest on any registered Note shall be made to or upon the written
order of such Holder.
Each registered Note shall contain a legend stating that such Note
has not been registered under the Securities Act or under any applicable state
securities laws and may be reoffered or sold only if so registered or if an
exemption from registration is available.
Section 11.2. Exchange of Notes. At any time and from time to
time, upon not less than ten days' notice to that effect given by the Holder of
any Note initially delivered or of any Note exchanged or substituted therefor
pursuant to Section 11.1, this Section 11.2 or Section 11.3, and, upon
surrender of such Note at its office, the Company will deliver in exchange
therefor, without expense to such Holder, except as set forth below, a Note, or
Notes in denominations of $100,000 or any amount in excess thereof as such
Holder shall specify, for the same aggregate principal amount as the then unpaid
principal amount of the Note so surrendered, dated as of the date to which
interest has been paid on the Note so surrendered or, if such surrender is prior
to the payment of any interest thereon, then dated as of the date of issue,
registered in the name of such Person or Persons as may be designated by such
Holder, and otherwise of the same form and tenor as the Notes so surrendered for
exchange. The Company may require the payment of a sum sufficient to cover any
stamp tax or governmental charge imposed upon such exchange or transfer.
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Section 11.3. Loss, Theft, Etc. of Notes. Upon receipt of
evidence satisfactory to the Company of the loss, theft, mutilation or
destruction of any Note, and in the case of any such loss, theft or destruction
upon delivery of a bond of indemnity in such form and amount as shall be
reasonably satisfactory to the Company, or in the event of such mutilation upon
surrender and cancellation of the Note, the Company will make and deliver
without expense to the Holder thereof, a new Note, of like tenor, in lieu of
such lost, stolen, destroyed or mutilated Note. If an Institutional Holder is
the owner of any such lost, stolen or destroyed Note, then the affidavit of an
authorized officer of such owner, setting forth the fact of such loss, theft of
destruction shall be accepted as satisfactory evidence thereof and no indemnity
shall be required as a condition to the execution and delivery of a new Note
other than the written agreement of such owner to indemnify the Company.
Section 11.4. Expenses, Stamp Tax Indemnity.
(a) If the Closing shall not occur, the Company will
promptly pay all of the Purchaser's reasonable fees and other expenses
(including reasonable out-of-pocket costs and travel expenses) in connection
with the consideration, preparation, negotiation, execution or delivery of this
Agreement or of any amendments, waivers or consents pursuant to the provisions
hereof, including but not limited to the reasonable fees and disbursements of
Lane & Mittendorf LLP, special counsel to the Purchaser.
(b) If the Closing shall occur, the Company will promptly
pay all of the Purchaser's reasonable fees and other expenses (including
reasonable out-of-pocket costs and reasonable travel expenses) in connection
with the consideration, preparation, negotiation, execution or delivery of this
Agreement and the transactions contemplated hereby, including but not limited
to the reasonable fees and disbursements of Lane & Mittendorf LLP, special
counsel to the Purchaser, duplicating and printing costs and charges for
shipping the Notes, adequately insured to the Purchaser's home office or at such
other place as the Purchaser may designate, and all such reasonable expenses of
the Holders relating to any amendment, waivers or consents pursuant to the
provisions hereof, including, without limitation, any amendments, waivers, or
consents resulting from any work-out, renegotiation or restructuring relating to
the performance by the Company of its obligations under this Agreement and the
Notes.
(c) The Company also agrees that it will pay and hold the
Holders harmless against any and all liability with respect to stamp and other
taxes, if any, which may be payable or which may be determined to be payable in
connection with the execution and delivery of this Agreement or the Notes,
whether or not any Notes are then outstanding.
(d) The Company agrees to protect and indemnify the
Holders against any liability for any and all brokerage fees and commissions
payable or claimed to be payable to any Person in connection with the
transactions contemplated by this Agreement.
(e) Without limiting the generality of the foregoing, it
is agreed and understood that the Company will pay at the Closing (if it shall
occur) and upon receipt of any
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statement therefor, all of the foregoing expenses arising in connection with or
relating to this Agreement. The obligations of the Company under this Section
11.4 shall survive the termination of this Agreement.
Section 11.5. Powers and Rights Not Waived, Remedies Cumulative.
No delay or failure on the part of any Holder in the exercise of any power or
right shall operate as a waiver thereof; nor shall any single or partial
exercise of the same preclude any other or further exercise thereof, or the
exercise of any other power or right, and the rights and remedies of each Holder
are cumulative to, and are not exclusive of, any rights or remedies any such
Holder would otherwise have.
Section 11.6 Notices. All communications provided for hereunder
shall be in writing and, if to a Holder, delivered or mailed prepaid by
registered or certified mail (registered or certified airmail if such Holder's
address is outside the United States) or overnight air courier (provided that
any Sale Notice or Deferred Purchase Price Sale Notice shall always be sent by
overnight air courier), or by facsimile communication, in each case addressed to
such Holder at its address appearing beneath its signature at the foot of this
Agreement or such other address as any Holder may designate to the Company in
writing, and if to the Company, delivered or mailed by registered or certified
mail or overnight air courier, or by facsimile communication, to the Company at
the address beneath its signature at the foot of this Agreement or to such other
address as the Company may in writing designate to the Holders; provided,
however, that a notice to a Holder by overnight air courier shall only be
effective if delivered to such Holder at a street address designated for such
purpose in accordance with this Section 11.6, and a notice to such Holder by
facsimile communication shall only be effective if made by confirmed
transmission to such Holder at a telephone number designated for such purpose in
accordance with this Section 11.6 and promptly followed by the delivery of such
notice by registered or certified mail or overnight air courier, as set forth
above.
Section 11. 7. Successors and Assigns. This Agreement shall be
binding upon the Company and its successors and assigns and shall inure to the
benefit of the Purchaser and its successor and assigns, including each
successive Holder.
Section 11.8. Survival of Covenants and Representations.
All covenants, representations and warranties made by the Company herein and
in any certificates delivered pursuant hereto, whether or not in connection with
the Closing Date, shall survive the closing and the delivery of this Agreement
and the Notes.
Section 11.9. Severability. Should any part of this Agreement for
any reason be declared invalid or unenforceable, such decision shall not affect
the validity or enforceability of any remaining portion, which remaining portion
shall remain in force and effect as if this Agreement had been executed with the
invalid or unenforceable portion thereof eliminated and it is hereby declared
the intention of the parties hereto that they would have executed the remaining
portion of this Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid or
unenforceable.
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Section 11.10. Governing Law. This Agreement and the Notes
issued and sold hereunder shall be governed by and construed in accordance with
the laws of the State of New York, without reference to the laws thereof
regarding conflicts of laws.
Section 11.11. Captions. The descriptive headings of the various
Sections or parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions hereof.
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The execution hereof by the Purchaser shall constitute a contract
between the Company and the Purchaser for the uses and purposes hereinabove set
forth. This Agreement may be executed in any number of counterparts, each
executed counterpart constituting an original but all together only one
agreement.
NEW JERSEY MORTGAGE AND
INVESTMENT CORP.
By: /s/ Joel Furst
----------------------------------
Name: Joel Furst
Title: Sr. Vice Pres.
Notices to the Company:
NEW JERSEY MORTGAGE AND
INVESTMENT CORP.
5 Becker Farm Road
Roseland, New Jersey 07068
Attention: President
Telefacsimile:
Confirmation:
Account information for electronic
funds transfers to the Company:
New Jersey Mortgage and Investment Corp.
Borrow Account
Corestates Bank
Account # 1151033
ABA routing # 031000011
Ref.- $3 Million 12.00% Senior
Subordinated Notes due
July 1, 2002
46
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Accepted July 22, 1997
N M ROTHSCHILD & SONS LIMITED
By: /s/ C.R. Keay
-----------------------------------
Name: C.R. Keay
Title: Director
By: /s/ Peter Westby
-----------------------------------
Name: Peter Westby
Title: ASSISTANT DIRECTOR
Notices to the Purchaser:
N M ROTHSCHILD & SONS LIMITED
New Court
St Swithin's Lane
London EC4P 4DU
Attention: Andrew Jackson
Telefacsimile: 011 44 17 1 280-5400
Confirmation: 011 44 17 1 280-5676
Account information for electronic
funds transfers to the Purchaser:
Chase Manhatten Bank N.A.
New York, New York
For the account of N M Rothschild & Sons Limited London
Account # 001-1-948262
SWIFT Code CHAUS33
Reference: NJMIC
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________________________________________________________________________________
APPENDIX I
STANDARD TERMS AND CONDITIONS OF SERVICING
Dated as of __________
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - DEFINITIONS
Section 1.01 Defined Terms ....................................... 1
ARTICLE 2 - SERVICER REPRESENTATIONS AND WARRANTIES
Section 2.01 Representations and Warranties ...................... 2
ARTICLE 3 - ADMINISTRATION AND SERVICING OF LEASE CONTRACTS
Section 3.01 Responsibilities of Servicer ........................ 4
Section 3.02 Servicer Standard of Care ........................... 6
Section 3.03 Servicer Remittances ................................ 7
Section 3.04 Servicer Advances ................................... 8
Section 3.05 Financing Statements, Title Filings ................. 8
Section 3.06 Maintenance of Insurance Policy; Insurance Proceeds.. 8
Section 3.07 Personal Property and Sales Taxes ................... 8
Section 3.08 No Offset ........................................... 9
Section 3.09 Servicing Compensation .............................. 9
Section 3.10 Substitution or Purchase of Lease Contracts ......... 9
ARTICLE 4 - ACCOUNTINGS, STATEMENTS AND REPORTS
Section 4.01 Monthly Servicer's Reports .......................... 11
Section 4.02 Financial Statements; Certification as to Compliance;
Notice of Default .................................. 11
Section 4.03 Annual Independent Accountants' Reports; Annual
Federal Tax Lien Search ............................ 13
Section 4.04 Access to Certain Documentation and Information ..... 14
Section 4.05 Other Necessary Data ................................ 15
Section 4.06 Indenture Trustee to Cooperate ...................... 15
ARTICLE 5 - THE SERVICER AND THE ISSUER
Section 5.01 Servicer Indemnification ............................ 16
Section 5.02 Corporate Existence; Reorganizations ................ 16
Section 5.03 Limitation on Liability of the Servicer and Others .. 17
Section 5.04 The Servicer Not to Resign ......................... 17
Section 5.05 Issuer Indemnification .............................. 17
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ARTICLE 6 - SERVICING TERMINATION
Section 6.01 Servicer Events of Default .......................... 18
Section 6.02 Back-up Servicer to Act; Taking of Bids; Appointment
of Successor Servicer .............................. 20
Section 6.03 Notification to Noteholders ......................... 22
Section 6.04 Waiver of Past Defaults ............................. 22
Section 6.05 Effects of Termination of Servicer .................. 22
Section 6.06 No Effect on Other Parties .......................... 23
ARTICLE 7 - THE BACK-UP SERVICER
Section 7.01 Representations of Back-up Servicer ................. 24
Section 7.02 Merger or Consolidation of, or Assumption of the
Obligations of, Back-up Servicer ................... 25
Section 7.03 Back-up Servicer Resignation ........................ 25
Section 7.04 Oversight of Servicing .............................. 25
Section 7.05 Back-up Servicer Compensation ....................... 26
Section 7.06 Duties and Responsibilities ......................... 27
ARTICLE 8 - MISCELLANEOUS PROVISIONS
Section 8.01 Termination of Servicing Agreement .................. 28
Section 8.02 Amendments .......................................... 28
Section 8.03 Governing Law ....................................... 29
Section 8.04 Notices ............................................. 29
Section 8.05 Severability of Provisions .......................... 29
Section 8.06 Binding Effect ...................................... 29
Section 8.07 Article Headings and Captions ....................... 29
Section 8.08 Legal Holidays ...................................... 29
Section 8.09 Assignment for Security for the Notes ............... 30
Section 8.10 No Servicing Assignment ............................. 30
Section 8.11 MBIA Default ........................................ 30
Section 8.12 Third Party Beneficiary ............................. 30
Appendix X - Definitions
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These STANDARD TERMS AND CONDITIONS OF SERVICING (the "Standard
Servicing Terms"), dated as of March 1, 1996, are incorporated by reference and
are intended to form a part of the SPECIFIC TERMS OF SERVICING dated as of March
1, 1996 (the "Specific Servicing Terms"), to which these Standard Servicing
Terms are appended (together, the "Servicing Agreement").
ARTICLE 1
DEFINITIONS
1.01 Defined Terms. Except as otherwise specified or as the context may
otherwise require, capitalized terms used but not otherwise defined herein shall
have the respective meanings set forth on Appendix X attached to the Specific
Servicing Terms which is incorporated by reference for all purposes of the
Servicing Agreement, and the definitions of such terms are equally applicable
both to the singular and plural forms of such terms and to the masculine,
feminine and neuter genders of such terms.
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ARTICLE 2
SERVICER REPRESENTATIONS AND WARRANTIES
2.01 Representations and Warranties.
The Servicer makes the following representations and warranties as of
each Delivery Date, which shall survive such Delivery Date:
(a) Organization and Good Standing. The Servicer has been duly
incorporated and is validly existing and in good standing as a corporation under
the laws of the Servicer State of Incorporation, with requisite corporate power
and authority to own its properties, perform its obligations under the Servicing
Agreement and to transact the business in which it is now engaged or in which it
proposes to engage.
(b) Authorization and Binding Obligation. Each of the Servicing
Agreement and the applicable Insurance Agreement has been duly authorized,
executed and delivered by the Servicer and constitutes the valid and legally
binding obligation of the Servicer enforceable against the Servicer in
accordance with its terms, subject as to enforcement to any bankruptcy,
insolvency, reorganization and other similar laws of general applicability
relating to or affecting creditors' rights generally and to general principles
of equity regardless of whether enforcement is sought in a court of equity or
law.
(c) No Violation. The entering into of the Servicing Agreement and the
applicable Insurance Agreement and the performance by the Servicer of its
obligations under the Servicing Agreement and the applicable Insurance
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the property or assets
of such Servicer pursuant to the terms of any material indenture, mortgage, deed
of trust or other agreement or instrument to which it is a party or by which it
is bound or to which any of its property or assets is subject, nor will such
action result in any violation of the provisions of its Certificate of
Incorporation or Articles of Incorporation, as applicable, or By-laws, or any
statute or any order, rule or regulation of any court or any regulatory
authority or other governmental agency or body having jurisdiction over it or
any of its properties; and no consent, approval, authorization, order,
registration or qualification of or with any court, or any such regulatory
authority or other governmental agency or body is required for the Servicer to
enter into the Servicing Agreement and the applicable Insurance Agreement.
(d) No Proceedings. There are no proceedings or investigations pending,
or to the knowledge of the Servicer, threatened against or affecting the
Servicer or any subsidiary in or before any court, governmental authority or
agency or arbitration board or tribunal, including but not limited to any such
proceeding or investigation with respect to any environmental or other liability
resulting from the ownership or use of any of the Equipment, which, individually
or in the aggregate, involve the possibility of materially and adversely
affecting the properties, business, prospects, profits or condition (financial
or otherwise) of the Servicer and its subsidiaries, or the ability of the
Servicer to perform its obligations under the Servicing Agreement or the
Insurance Agreement. The
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Servicer is not in default with respect to any order of any court, governmental
authority or agency or arbitration board or tribunal.
(e) Approvals. The Servicer (i) is not in violation of any laws,
ordinances, governmental rules or regulations to which it is subject, (ii) has
not failed to obtain any licenses, permits, franchises or other governmental
authorizations necessary to the ownership of its property or to the conduct of
its business, and (iii) is not in violation in any material respect of any term
of any agreement, charter instrument, bylaw or instrument to which it is a party
or by which it may be bound, which violation or failure to obtain materially
adversely affect the business or condition (financial or otherwise) of the
Servicer and its subsidiaries.
(f) Investment Company. The Servicer is not an investment company which
is required to register under the Investment Company Act of 1940, as amended.
(g) Net Worth. As of the Initial Delivery Date, the Initial Net Worth
Standard is met.
(h) Standard of Care. The Servicer has serviced the Lease Contracts and
Equipment in a manner consistent with industry standards for lease contracts and
equipment similar to the Lease Contracts and Equipment, and in any event in a
prudent and commercially reasonable manner, and has conducted its servicing
operations in a manner consistent with industry standards for servicing of
financial portfolios.
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ARTICLE 3
ADMINISTRATION AND SERVICING OF LEASE CONTRACTS
3.01 Responsibilities of Servicer.
(a) The Servicer, for the benefit of MBIA and the Noteholders, shall be
responsible for, and shall, in accordance with its customary servicing
procedures, pursue the managing, servicing, administering, enforcing and making
of collections on the Lease Contracts, the Equipment and any Insurance Policies,
the enforcement of the Indenture Trustee's security interest in the Lease
Contracts, Lease Receivables and Equipment granted pursuant to the Indenture,
and the sale or the releasing of the Equipment upon the expiration or other
termination of the related Lease Contract (or repossession thereof without
termination), each in accordance with the standards and procedures set forth in
the Servicing Agreement and any related provisions of the Indenture and Lease
Acquisition Agreement. The Servicer's responsibilities shall include collecting
and posting of all payments, responding to inquiries of Customers, investigating
delinquencies, accounting for collections and furnishing monthly and annual
statements to the Back-up Servicer, the Indenture Trustee, MBIA, the Rating
Agencies and the Noteholders with respect to payments, making Servicer Advances,
providing appropriate federal income tax information to the Indenture Trustee
for use in providing information to the Noteholders or MBIA, collecting and
remitting sales and property taxes to taxing authorities, and using its best
efforts to maintain the perfected security interest of the Indenture Trustee in
the Trust Estate. The Servicer (at its expense), acting alone or through a
subservicer, shall have full power and authority, acting at its sole discretion,
to do any and all things in connection with such managing, servicing,
administration, enforcement, collection and such sale of the Equipment that it
may deem necessary or desirable, including the prudent delegation of such
responsibilities. Without limiting the generality of the foregoing, the
Servicer, in its own name or in the name of a subservicer, shall, and is hereby
authorized and empowered by the Indenture Trustee, subject to Section 3.02
hereof to execute and deliver (on behalf of itself, the Noteholders, the
Indenture Trustee or any of them) any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge, and all other
comparable instruments, with respect to the Lease Contracts and any files or
documentation pertaining to the Lease Assets. With the prior written consent of
MBIA (which consent shall not be unreasonably withheld), the Servicer may
subcontract with another firm to act as subservicer that is not acting as a
subservicer on the Initial Delivery Date so long as the Servicer remains
fully responsible and accountable for performance of all obligations of the
Servicer. The Servicer, acting alone or through a subservicer, also may, in its
sole discretion, waive any late payment charge or penalty, or any other fees
that may be collected in the ordinary course of servicing any Lease Contract.
Notwithstanding the foregoing, neither the Servicer, nor any subservicer, shall,
except pursuant to a fudicial order from a court of competent jurisdiction, or
as otherwise expressly provided in the Servicing Agreement, release or waive
the right to collect the Scheduled Payments or any unpaid balance on any
Lease Contract. The Indenture Trustee shall, at the expense of the Servicer,
furnish the Servicer, or at the request of the Servicer, any subservicer, with
any powers of attorney and other documents necessary or appropriate to enable
the Servicer or subservicer to carry out its servicing, and administrative
duties hereunder, and the Indenture Trustee shall net be responsible for the
Servicer's or subservicer's application thereof. Notwithstanding the appointment
by the Servicer of a subservicer hereunder, the Servicer shall
remain primarily liable for the full performance of its obligations hereunder.
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(b) The Servicer (or a subservicer) shall conduct any Lease Contract
management, servicing, administration, collection or enforcement actions in the
following manner:
(i) The Servicer, as agent for and on behalf of the Issuer,
with respect to any Defaulted Lease Contract shall follow such
practices and procedures as are normal and consistent with the
Servicer's standards and procedures relating to its own lease
contracts, lease receivables and equipment that are similar to the
Lease Contracts, Lease Receivables and the Equipment, including without
limitation, the taking of appropriate actions to foreclose or otherwise
liquidate any such Defaulted Lease Contract, together with the related
Equipment, to collect any Guaranty Amounts, and to enforce the Issuer's
rights under the Lease Acquisition Agreement. All Recoveries, Insurance
Proceeds or Residual Proceeds in respect of any such Lease Receivable
and the related Equipment received by the Servicer shall be remitted to
the Indenture Trustee for deposit in the Collection Account pursuant to
Section 3.03(a) hereof;
(ii) The Servicer may sue to enforce or collect upon Lease
Contracts as agent for the Issuer and the Indenture Trustee, on behalf
of the Noteholders and MBIA. If the Servicer elects to commence a legal
proceeding to enforce a Lease Contract, the act of commencement shall
be deemed to be an automatic assignment of the Lease Contract to the
Servicer for purposes of collection only. If, however, in any
enforcement suit or legal proceeding it is held that the Servicer may
not enforce a Lease Contract on the ground that it is not a real party
in interest or a holder entitled to enforce the Lease Contract, then
the Indenture Trustee on behalf of the Noteholders and MBIA shall, at
the Servicer's request and expense, take such steps as the Servicer
deems necessary and instructs the Indenture Trustee in writing to take
to enforce the Lease Contract, including bringing suit in its name or
the name of the Issuer, as beneficial owner of the Lease Contract, or
the names of the Noteholders or MBIA, as third party beneficiaries
thereunder, and the Indenture Trustee shall be indemnified by the
Servicer for any such action taken;
(iii) The Servicer shall exercise any rights of recourse
against third parties that exist with respect to any Lease Contract in
accordance with the Servicer's usual practice. In exercising recourse
rights, the Servicer is authorized on the Indenture Trustee's behalf to
reassign the Lease Contract to the person against whom recourse exists
to the extent necessary, and at the price set forth in the document
creating the recourse. The Servicer will not reduce or diminish such
recourse rights, except to the extent that it exercises such right;
(iv) The Servicer may not allow substitutions of Substitute
Lease Contracts that do not comply with Section 3.10 hereof, Sections
2.04, 3.03 and 3.04 of the Standard Lease Acquisition Terms and Section
4.04 of the Standard Indenture Terms;
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(v) The Servicer may waive, modify or vary any terms of any
Lease Contract or consent to the postponement of strict compliance with
any such term if in the Servicer's reasonable and prudent determination
such waiver, modification or postponement is not materially adverse to
the Noteholders or MBIA; provided, however, that (A) the Servicer shall
not forgive any payment of rent, and (B) the Servicer shall not permit
any modification with respect to any Lease Contract that would decrease
the Scheduled Payment, defer the payment of any principal or interest
or any Scheduled Payment, reduce the Implicit Principal Balance (except
in connection with actual payments attributable to such Implicit
Principal Balance), or prevent the complete amortization of the
Implicit Principal Balance from occurring by the Calculation Date
preceding the Stated Maturity of the related Notes. The Servicer shall
provide the Back-up Servicer, MBIA and the Indenture Trustee with an
Amended Lease Schedule to the related Series Lease Schedule reflecting
any modification of any Scheduled Payment;
(vi) The Servicer shall not consent to the termination of any
Lease Contract in connection with loss of or damage to the related
Equipment unless the Customer has paid an amount not less than the
Purchase Price for such Lease Contract, or if less, the maximum amount
legally collectible under the related Lease Contract:
(vii) Upon termination of a Lease Contract after payment
of the last Scheduled Payment due thereunder or in the event that the
Servicer or any subservicer in the enforcement of any Lease Contract
otherwise (A) acquires title to any item of Equipment with respect to
which title was held by the Customer or (B) reclaims possession of
Equipment from the Customer, the Servicer shall use its best efforts to
sell or re-lease such item of Equipment promptly and consistent with
the standard of care set forth in Section 3.02 hereof. Any Insurance
Proceeds, Recoveries or Residual Proceeds related thereto shall be
deposited in accordance with Section 3.03(a) hereof: and
(viii) Notwithstanding any provision to the contrary
contained in the Servicing Agreement, the Servicer or any subservicer
shall exercise any right under a Lease Contract to accelerate the
unpaid Scheduled Payments, due or to become due thereunder in such a
manner as to maximize the net proceeds available to the Trust Estate:
provided, however, that the Servicer will not accelerate any Scheduled
Payment unless permitted to do so by the terms of the Lease Contract
or under applicable law.
3.02 Servicer Standard of Care.
In managing, administering, servicing, enforcing and making collections
on the Lease Contracts and Equipment pursuant to the Servicing Agreement, the
Servicer will exercise that degree of skill and care consistent with industry
standards for servicing of financial portfolios, and that which the Servicer
customarily exercises with respect to similar lease contracts and equipment
6
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owned or originated by it, and in any event, in a prudent and commercially
reasonable manner. The Servicer shall punctually perform all of its obligations
and agreements under the Servicing Agreement and shall comply with all
applicable federal and state laws and regulations, shall maintain all state and
federal licenses and franchises necessary for it to perform its servicing
responsibilities hereunder, and shall not materially impair the rights of MBIA
or the Noteholders in any Lease Contracts or payments thereunder.
3.03 Servicer Remittances.
(a) Except as provided in the Specific Servicing Terms, the Servicer,
as agent of the Issuer, shall remit to the Indenture Trustee for deposit in the
Collection Account by 12:00 noon Minneapolis time on each Tuesday and Thursday
that is a Business Day, or if such day is not a Business Day, on the next
Business Day thereafter, the amounts described below that have been collected
throuah 4:00 p.m. Minneapolis time on the preceding Business Day (or 4:00 p.m.
Minneapolis time on the second preceding Business Day with respect to amounts
collected by the Servicer in a lockbox) so long as the total of such amounts
exceed $1,000:
(i) all payments made under the Lease Contracts, including
prepayments but excluding taxes, received directly by the Servicer;
(ii) all Residual Proceeds and Recoveries;
(iii) the Purchase Price of any Lease Contract purchased by
the Company or the Issuer, to the extent received by the Servicer;
(iv) all Guaranty Amounts;
(v) all Servicing Charges, unless otherwise provided in the
Specific Servicing Terms; and
(vi) all Insurance Proceeds.
The Servicer shall hold in trust for the benefit of the Holders of the
Notes and MBIA any payment it receives relating to items (i) through (vi) above
until such time as the Servicer transfers any such payment to the Indenture
Trustee for deposit in the Collection Account.
(b) If ACH debits are utilized with respect to a Lease Contract, either
the Servicer shall remit such payments to the Collection Account in accordance
with Section 3.03(a) hereof, or the Servicer will notify the National Automated
Clearing House System to debit the Customer for all payments relating to Lease
Receivables under such Lease Contract and to credit an account (the "ACH
Account") maintained at the ACH Bank, in the name of and in the sole control of
the Indenture Trustee for the benefit of the Noteholders and MBIA, and the
Servicer shall not revoke or modify such notifications. In the event (i) a
Customer provides the Servicer or the applicable ACH Bank with written notice of
its termination of such Customer's authorization agreement for ACH debits, (ii)
there are Lease Contracts that do not provide for ACH debits, or (iii) the
Servicer
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otherwise receives directly moneys with respect to Lease Receivables that would
otherwise involve ACH debits, the Servicer shall deposit all payments from all
such Customers into the Collection Account in accordance with subsection (a)
above. Payments received in the ACH Account representing any payment listed in
Section 3.03(a)(i) through (vi) above, will be transferred by the Indenture
Trustee to the Collection Account on the related Determination Date.
3.04 Servicer Advances.
Not later than 10:00 a.m., Minneapolis time, on the Determination Date
prior to each Payment Date, the Servicer shall make an advance (a "Servicer
Advance") for each Lease Contract which is a Delinquent Lease Contract on such
date by remitting to the Indenture Trustee for deposit in the Collection Account
an amount equal to the Scheduled Payments, or portion thereof, which were due in
the prior Due Period but not received and deposited in the Collection Account on
or prior to such Determination Date; provided, however, that the Servicer shall
not be obligated to make any Servicer Advance pursuant to this Section 3.04 that
the Servicer determines in good faith, and in accordance with its customary
servicing practices, is unlikely to be eventually repaid from Scheduled Payments
made by or on behalf of the related Customer; further provided, that the
Servicer may not make a Servicer Advance with respect to a Lease Contract once
it has become a Defaulted Lease Contract. On each Determination Date, the
Servicer shall deliver to the Back-up Servicer, the Indenture Trustee, MBIA and
the Placement Agent the Monthly Servicer's Report, which shall include a
listing of the aggregate amount of Scheduled Payments not received for the
immediately prior Due Period, the amount of Servicer Advances, and the amounts
which it has determined in its sole discretion, and in accordance with its
customary servicing practices, are unlikely to be recoverable from or on behalf
of the related Customers.
3.05 Financing Statements; Title Filings. The Servicer will make all
Uniform Commercial Code filings as may be required pursuant to the terms of the
Indenture. The Servicer shall, in accordance with its customary servicing
procedures and at its own expense, be responsible for taking such steps as are
necessary to maintain perfection of such security interests. The Indenture
Trustee hereby authorizes the Servicer to re-perfect or to cause the
re-perfection of such security interest on its behalf as Indenture Trustee, as
necessary.
3.06 Maintenance of Insurance Policy; Insurance Proceeds. The Servicer
shall have the obligation to verify, monitor and enforce the acquisition and
maintenance of a Customer's Insurance Policies. Any Insurance Proceeds shall be
remitted to the Indenture Trustee for deposit in the Collection Account pursuant
to Section 3.03(a) hereof.
3.07 Personal Property and Sales Taxes. The Servicer shall, on behalf
of the Issuer, pay or cause to be paid all personal property, sales and use
taxes on or with respect to the Equipment, or the acquisition or leasing
thereof, as and when such taxes become due, to the extent a Customer has paid
amounts to the Servicer or into the ACH Account for such taxes. The Servicer
shall also cause to be filed in a timely manner any and all returns and reports
required in connection with the payment of such taxes.
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3.08 No Offset. Prior to the termination of the Servicing Agreement,
the obligations of the Servicer under the Servicing Agreement shall not be
subject to any defense, counterclaim or right of offset that the Servicer
has or may have against the Issuer or any other person, whether in respect of
the Servicing Agreement, any Lease Contract, Lease Receivable, Equipment or
otherwise.
3.09 Servicing Compensation.
(a) As compensation for the performance of its obligations under the
Servicing Agreement the Servicer shall be entitled to receive the Servicer Fee
and the Additional Servicer Fee, if applicable. The Servicer Fee with respect to
any Lease Contract shall be paid monthly, commencing on the related Initial
Payment Date and terminating on the first to occur of (i) the receipt of the
last Scheduled Payment and related Residual Proceeds with respect to the last
remaining Lease Contract, (ii) the receipt of Recoveries and Insurance Proceeds
with respect to the last remaining Lease Contract, or (iii) the date on which
the Issuer or MBIA purchases the last remaining Lease Contract. The Servicer Fee
shall be paid by the Issuer to the Servicer at the times and in the priority as
set forth in the Indenture. The Servicer shall pay all expenses incurred by it
in connection with its servicing activities hereunder, including, without
limitation, payment of the fees and disbursements of the Independent
Accountants and payment of expenses incurred in connection with distributions
and reports to the Indenture Trustee, the Back-up Servicer, MBIA, the Rating
Agencies and Noteholders and shall not be entitled to reimbursement for such
expenses; provided, however, that the Servicer will be entitled to prompt
reimbursement from the Issuer for reasonable costs and expenses incurred by the
Servicer (including reasonable attorney's fees and out-of-pocket expenses) in
connection with the realization, attempted realization or enforcement of rights
and remedies upon Defaulted Lease Contracts, from amounts received as Recoveries
from any Defaulted Lease Contracts, such amounts to be paid pursuant to the
terms of the Indenture.
(b) In connection with any transfer of the servicing obligations to a
successor Servicer in accordance with Secfion 6.02 hereof, the Back-up
Servicer shall be entitled to reimbursement of Transition Costs as provided
therein and in the Indenture.
3.10 Substitution or Purchase of Lease Contracts.
(a) The Servicer shall not allow termination of a Lease Contract prior
to the scheduled expiration date or prepayment of any Lease Contract (except as
may be specifically required under such Lease Contract in connection with a
casualty to the related Equipment), unless the Issuer has (i) pledged to the
Indenture Trustee, a Substitute Lease Contract and the related Equipment and
Lease Receivables under such Substitute Lease Contract, and delivered to the
Indenture Trustee the ornginal executed counterpart of the Substitute Lease
Contract and all other items contained in the related Lease Contract File or
(ii) purchased such prepaid Lease Contract and the related Equipment from the
Indenture Trustee by remittance of the Purchase Price to the Servicer for
deposit in the Collection Account in accordance with Section 3.03(a) hereof;
provided, further, that purchases and substitutions of Lease Contracts
pursuant to this subsection (a) shall comply with the requirements of Section
4.04 of the Standard Indenture Terms and the criteria set forth in Section 3.04
of the Lease Acquisition Agreement, such amounts to be paid pursuant to the
terms of the Indenture.
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(b) The Servicer shall permit the Issuer to (i) purchase any Defaulted
Lease Contract or Delinquent Lease Contract by remittance by the Issuer to the
Servicer, for deposit in the Collection Account in accordance with Section
3.03(a) hereof, of the Purchase Price for such Lease Contract or (ii) substitute
for any Defaulted Lease Contract or Delinquent Lease Contract, a Substitute
Lease Contract and the related Equipment and Lease Receivables under such
Substitute Lease Contract, upon the delivery to the Indenture Trustee of the
original executed counterpart of the Substitute Lease Contract and the related
Lease Contract File; provided that, purchases and substitutions of Lease
Contracts pursuant to this subparagraph (b) shall comply with the requirements
of Section 4.04 of the Standard Indenture Terms and the criteria set forth in
Section 3.04 of the Lease Acquisition Agreement.
(c) Notwithstanding any other provision contained in the Servicing
Agreement, the Servicer shall not, with respect to a Defaulted Lease Contract
(i) negotiate or enter into a new lease with the Customer relating to the
Equipment or the Customer's obligations under such Defaulted Lease Contract or
(ii) allow the Customer thereunder to resume its rights under such Defaulted
Lease Contract, unless the Issuer has repurchased or made a substitution for
such Defaulted Lease Contract in the manner set forth in subsection (b) hereof.
(d) In the event that the Company is required to repurchase or
substitute a Lease Contract pursuant to Sections 2.04 or 3.03 of the Lease
Acquisition Agreement, the Servicer shall permit such repurchase or substitution
only in accordance with the terms of Sections 3.03 and 3.04 thereof.
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ARTICLE 4
ACCOUNTINGS, STATEMENTS AND REPORTS
4.01 Monthly Servicer's Reports. Prior to the end of the first week of
each month, the Servicer will provide to the Indenture Trustee and the Note
Administrator a Computer Tape containing the information from which the Servicer
will prepare the Monthly Servicer's Report. No later than 10:00 a.m.,
Minneapolis time, on each Determination Date, the Servicer shall deliver the
Monthly Servicer's Report to the Issuer, the Back-up Servicer, the Indenture
Trustee, MBIA, and the Placement Agent, and the Indenture Trustee will deliver
the Monthly Servicer's Report to each Noteholder and the Rating Agencies in the
form attached as Exhibit A to the Specific Servicing Terms with respect to the
activity in the immediately preceding Due Period. In the course of preparing the
Monthly Servicer's Report, the Servicer shall seek direction from the Issuer as
to remittance of any funds to be paid pursuant to Section 12.02(d)(xv) of the
Standard Indenture Terms. Lease Contracts which have been substituted for or
purchased by the Company or the Issuer shall be identified by Customer lease
number on the Monthly Servicer's Report. On each Payment Date, the Servicer
shall deliver to the Back-up Servicer and MBIA a Computer Tape in a format
acceptable to the Back-up Servicer containing the information from which the
Servicer prepared the Monthly Servicer's Report, as well as any additional
information reasonably requested by the Back-up Servicer prior to such Payment
Date.
4.02 Financial Statements; Certification as to Compliance; Notice of
Default.
(a) The Servicer will deliver to the Indenture Trustee, the Placement
Agent, MBIA, the Back-up Servicer, the Rating Agencies and to each Noteholder of
Outstanding Notes (and, upon the request of any Noteholder, to any prospective
transferee of any Note), provided, however, that if the initial Servicer is no
longer the Servicer, the Company shall provide the items listed in subsections
(a)(i) and (a)(vii) instead of the Servicer:
(i) within 120 days after the end of each fiscal year of
the Reported Companies, four copies of the Reported Companies'
Financial Statements, all in reasonable detail and accompanied by an
opinion of the Independent Accountants or a firm of independent
certified public accountants of recogized national standing stating
that such financial statements present fairly the financial condition
of the Reported Companies (or, in the case of a successor Servicer,
such successor Servicer's financial condition) and have been prepared
in accordance with generally accepted accounting principles
consistently applied (except for changes in application in which such
accountants concur), and that the examination of such accountants in
connection such financial statements has been made in accordance
with generally accepted auditing standards, and accordingly included
such tests of the accounting records and such other auditing procedures
as were considered necessary in the circumstances;
(ii) with each set of Reported Companies' Financial Statements
delivered pursuant to subsection (a)(i) above, the Servicer will
deliver an Officer's Certificate stating that such officer has reviewed
the relevant terms of the Indenture, the Lease Acquisition Agreement,
the related Insurance Agreement and the Servicing Agreement and has
made, or
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APPENDIX 1
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STANDARD TERMS AND CONDITIONS OF LEASE ACQUISITION
Dated as of ______________
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TABLE OF CONTENTS
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ARTICLE I - DEFINITIONS
1.01 Defined Terms.................................................................... 1
ARTICLE 2 - ACQUISITION OF LEASE ASSETS
2.01 Lease Asset Acquisitions......................................................... 2
2.02 Delivery of Lease Contracts; Filing of Financing Statements ..................... 2
2.03 Servicing of Lease Contracts and Equipment....................................... 3
2.04 Review of Lease Contracts........................................................ 3
2.05 Nature of Transfer............................................................... 3
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
3.01 Representations and Warranties of the Company ................................... 4
3.02 Representations and Warranties of the Issuer..................................... 13
3.03 Purchase or Substitution Required Upon Breach of Certain
Representations and Warranties.................................................. 14
3.04 Requirements for Purchasd or Substitution of Lease Contracts and
Acquisition of Funded Lease Contracts........................................... 15
ARTICLE 4 - COVENANTS OF THE ISSUER AND COMPANY
4.01 Company Covenants................................................................ 17
4.02 Issuer Covenants................................................................. 20
4.03 Assignment of Lease Assets....................................................... 21
ARTICLE 5 - CONDITIONS PRECEDENT
5.01 Conditions to the Issuer's Obligations........................................... 22
5.02 Conditions to the Company's Obligations.......................................... 22
ARTICLE 6 - TERM AND TERMINATION
6.01 Term............................................................................. 24
6.02 Default by the Company........................................................... 24
ARTICLE 7 - MISCELLANEOUS
7.01 Amendments....................................................................... 25
7.02 Governing Law.................................................................... 25
7.03 Notices.......................................................................... 25
7.04 Separability Clause.............................................................. 25
7.05 Assignment....................................................................... 25
7.06 Further Assurances............................................................... 25
7.07 No Waivers; Cumulative Remedies.................................................. 25
7.08 Binding Effect; Third Party Beneficiaries........................................ 26
7.09 Set-Off.......................................................................... 26
7.10 MBIA Default..................................................................... 26
APPENDIX X Definitions
EXHIBIT A Form of Company Certificate
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These STANDARD TERMS & CONDITIONS OF LEASE ACQUISITION (the "Standard
Lease Acquisition Terms"), dated as of March 1, 1996 are incorporated by
reference and are intended to form a part of the SPECIFIC TERMS AND CONDITIONS
OF LEASE ACQUISITION dated as of March 1, 1996 (the "Specific Lease
Acquisition Terms")to which these Standard Lease Acquisition Terms are appended
(together, the "Lease Acquisition Agreement").
ARTICLE I - DEFINITIONS
1.01 Defined Terms. Except as otherwise defined herein or in the
Specific Lease Acquisition Terms, or unless the context otherwise requires,
capitalized terms used herein but not otherwise defined herein, shall have the
respective meanings set forth in Appendix X attached to the Specific Lease
Acquisition Terms which is incorporated by reference for all purposes of the
Lease Acquisition Agreement, and the definitions of such terms are equally
applicable both to the singular and plural forms of such terms.
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ARTICLE 2 - ACQUISITION OF LEASE ASSETS
2.01 Lease Asset Acquisitions. Subject to all the terms and conditions
of the Lease Acquisition Agreement and in reliance upon the representations,
warranties and covenants set forth in the Lease Acquisition Agreement, as of the
Initial Acquisition Date the Issuer is acquiring the Lease Assets listed on the
Initial Series Lease Schedule attached to the Company Certificate, dated the
Initial Acquisition Date. The Company, from time to time thereafter on each
Funding Date with respect to each Series of Notes until the Funding Termination
Date with respect to such Series, shall transfer to the Issuer or originate on
behalf of the Issuer, in accordance with the terms of the Lease Acquisition
Agreement, and the Issuer shall acquire from the Company in accordance with the
terms of the Lease Acquisition Agreement on each Funding Date with respect to
each Series of Notes until the Funding Termination Date with respect to such
Series, additional Lease Assets pursuant to a Company Certificate (a) in the
case of Lease Assets being acquired by the Issuer in connection with the
issuance of a new Series of Notes, with the applicable Initial Series Lease
Schedule attached thereto, or (b) in the case of Substitute Lease Contracts and,
with respect to any Funding Date. Funded Lease Contracts, with the applicable
Amended Lease Schedule attached thereto. The Company agrees that all Lease
Assets sold, transferred, conveyed and assigned hereunder shall be Eligible
Lease Contracts as of such date of assignment and shall conform with all of the
requirements of the Lease Acquisition Agreement. The Company hereby acknowledges
that its transfer of Lease Assets to the Issuer is absolute and irrevocable,
without reservation, retention of any interest, or recourse to the Company,
except as provided in Sections 2.04 and 3.03 hereof. All Lease Assets shall
be acquired by the Issuer for the consideration referred to in the applicable
Specific Lease Acquisition Terms.
To the extent that the Company shall retain any files or documentation
pertaining to the Lease Assets, it shall hold such documents in trust for the
benefit of the Issuer as the owner thereof. The possession of any documents or
files pertaining to the Lease Assets by the Company is at the will of the Issuer
for the sole purpose of servicing such Lease Assets, and such retention and
possession by the Company is in a custodial capacity only. The documents and
files retained by the Company relating to the Lease Assets shall be segregated
from the books and records of the Company and shall be marked appropriately to
reflect clearly the sale of the related Lease Assets to the Issuer.
2.02 Delivery of Lease Contracts; Filing of Financing Statements.
(a) In connection with the Issuer's acquisition of the Lease Assets,
the Company, on behalf of the Issuer, shall deliver the original Lease
Contracts to the Indenture Trustee so that the Indenture Trustee may retain
possession thereof as provided in the Transaction Documents. In addition, the
Company agrees to record and file prior to the Closing Date, the related
Delivery Date or Funding Date, as applicable, or within the time period set
forth in the Indenture, at its own expense, financing statements (and thereafter
timely continuation statements with respect to such financing statements)
with respect to the Lease Assets, meeting the requirements of the Transaction
Documents.
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(b) In connection with such acquisition, the Company shall promptly, at
its own expense, cause any Electronic Ledger maintained by it to be marked to
show that the Lease Assets have been acquired by the Issuer in accordance with
the Lease Acquisition Agreement and transferred by the Issuer to the Indenture
Trustee in accordance with the Transaction Documents.
2.03 Servicing of Lease Contracts and Equipment. The Servicer shall
service the Lease Assets for the benefit of the Issuer (and its successors and
assigns) in accordance with the terms and conditions of the Transaction
Documents. Notwithstanding the foregoing, the Company acknowledges and agrees
that its obligations under the Lease Acquisition Agreement are independent of
any obligations it may have as Servicer and that its obligations under the Lease
Acquisition Agreement will continue in full force and effect, whether or not it
is acting as Servicer, until termination of the Lease Acquisition Agreement in
accordance with Section 6.01 hereof.
2.04 Review of Lease Contracts. If the Company or the Indenture Trustee
(who shall thereupon notify the Company) discovers that any Lease Contracts are
missing or defective (that is, mutilated, damaged, defaced, incomplete,
improperly dated, clearly forged or otherwise physically altered) in any
material respect, the Company shall correct or cure such omission, defect or
other irregularity within 30 days from the date the Company discovered, or is
notified by the Indenture Trustee of, such omission or defect. Otherwise, the
Company shall purchase such Lease Contract from the Issuer or replace such Lease
Contract with a Substitute Lease Contract in accordance with Section 3.04(c)
hereof.
2.05 Nature of Transfer. In the event that the transfer of the Lease
Assets from the Company to the Issuer is deemed to be a secured financing, the
Company shall be deemed hereunder to have Granted to the Issuer, and the Company
does hereby Grant to the Issuer, a security interest in all of the Company's
right, title and interest in, to and under the Lease Assets, whether now owned
or hereafter acquired. For purposes of such Grant, the Lease Acquisition
Agreement shall constitute a security agreement under applicable law.
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ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
3.01 Representations and Warranties of the Company.
(a) Except as otherwise provided in the Specific Lease Acquisition
Terms, the Company hereby makes the following representations and warranties as
to each Lease Contract to the Issuer and for the benefit of MBIA, the Indenture
Trustee and Holders of the Notes, on which the Issuer relies in acquiring the
Lease Assets. Such representations and warranties are as of the related Cut-off
Date with respect to Lease Contracts on the related Initial Series Lease
Schedule, as of the related Funding Date with respect to Pools to be acquired on
such Funding Date, or the date of substitution with respect to Substitute Lease
Contracts, unless otherwise indicated, but shall survive any subsequent
transfer, assignment, contribution or conveyance of the Lease Contracts and
related Lease Receivables and Equipment:
(i) The information set forth in the Initial Series Lease
Schedule or Amended Lease Schedule, as applicable, is true and correct
as of the related Cut-off Date.
(ii) The Lease Contract is by its terms an absolute and
unconditional obligation of the Customer, non-cancelable and except
in certain instances involving loss or damage to the Equipment,
non-prepayable prior to the expiration of the initial term of such
Lease Contract (unless otherwise specified in the Specific Lease
Acquisition Terms); no Lease Contract provides for the substitution,
exchange or addition of any other items of Equipment pursuant to such
Lease Contract; and the rights with respect to such Lease Contract are
assignable by the lessor thereunder without the consent of any Person.
Each Lease Contract is net to the lessor of any maintenance, taxes,
insurance or other expenses and contains provisions requiring the
Customer to assume all risk of loss or malfunction of the related
Equipment.
(iii) The Company has heretofore provided to the Indenture
Trustee the sole original counterpart of each of the Lease Contracts
previously in the possession of the Company, as amended, and the terms
of such Lease Contracts have not been amended, waived or modified
subsequent to the above being provided to the Indenture Trustee and if
another original counterpart of such Lease Contracts should
subsequently come into the possession of the Company, it will also be
so provided to the Indenture Trustee.
(iv) There is only one original executed counterpart of the
Lease Contract that constitutes "chattel paper" for purposes of section
9-105(l)(b) and 9-308 of the UCC and the Electronic Ledgers have been
marked as provided in Section 2.02(b) hereof. Such Lease Contract
constitutes the entire agreement between the Company and the related
Customer.
(v) The Lease Contract was not originated in, nor is it
subject to the laws of, any jurisdiction, the laws of which would make
unlawful the sale, transfer or assigrunent of such document under any
of the Transaction Documents, including any repurchase in accordance
with the Transaction Documents.
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(vi) The Lease Contract is, and on the related Acquisition
Date will be, in full force and effect in accordance with its
respective terms and neither the Company nor any Customer has or will
have suspended or reduced any payments or obligations due or to become
due thereunder by reason of a default by the other party to such Lease
Contract; as of the Cut-off Date and there are no proceedings pending,
or to the best of the Company's knowledge, threatened asserting
insolvency of a Customer; there has been no other default, breach or
violation and no event permitting acceleration under the Lease
Contract; there are no proceedings pending, or to the best of the
Company's knowledge, threatened, wherein the Customer or any
governmental agency has alleged that any such Lease Contract is illegal
or unenforceable; and none of the Scheduled Payments are subject to any
set-off or credit of any kind.
(vii) The Lease Contract is the valid, binding and legally
enforceable full recourse obligation of the parties thereto enforceable
in accordance with its terms, subject, as to enforcement, to applicable
bankruptcy, insolvency, reorganization and other similar laws of
general applicability relating to or affecting creditors' rights
generally and to general principles of equity regardless of whether
enforcement is sought in a court of law or equity.
(viii) All filings (including Uniform Commercial Code
filings), notices and recordings as required under the Indenture to
perfect the first priority security interest of the Issuer and the
Indenture Trustee in the Lease Contracts, the related Lease Receivables
and the Equipment being acquired hereunder have been accomplished and
are in full force and effect or will be accomplished within the time
period specified in the Transaction Documents.
(ix) Each Lease Contract being acquired by the Issuer is in a
form of a lease contract attached as Exhibit A to the Specific Lease
Acquisition Terms, except for such immaterial modifications or
deviations from the form lease contracts which appear in certain Lease
Contracts or which may appear in the future form Lease Contracts of
the Company; any such modifications or deviations from the form lease
contracts will not have a material adverse effect on the Holders of the
Notes or MBIA and will not reduce the Scheduled Payments or other
payments due under the Lease Contracts.
(x) The Lease Contract was either (A) originated by the
Company on behalf of itself or the Issuer in the ordinary course of
business and meets the Company's origination and underwriting criteria
used in originating the Lease Contracts delivered to the Issuer on
the Initial Delivery Date or (B) purchased from a broker or leasing
company that originated such leases pursuant to agreed upon and
well-articulated underwriting and documentation standards and with whom
the Company has regularly dealt in the past. The origination and
collection practices used by the Company with respect to each Lease
Contract have been in all respects legal, proper, prudent and customary
in the equipment financing and servicing business. None of the Lease
Contracts is a consumer lease.
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(xi) Any payment required to be made by a Customer subject to
a PUT clause does not exceed five times the largest regular rental
payment due under the Lease Contract. In determining whether to lease
Equipment to any particular Customer, the Company considered each
Customer's ability to pay any PUT payments included in the terms of the
Lease Contract.
(xii) The Lease Contract has regular rental payments
(excluding payments required pursuant to a PUT) that do not increase by
more than 200% during the remaining term of the Lease Contract (unless
otherwise specified in the Specific Terms of Lease Acquisition). In
determining whether to lease Equipment to any particular Customer, the
Company considered each Customer's ability to pay any increases in the
rental payments due under the terms of the Lease Contract.
(xiii) The Equipment related to the Lease Contract was
properly delivered to the Customer in good repair, without defects and
in satisfactory order and, to the best knowledge of the Company, is
currently in proper working order. Each Customer has accepted the
Equipment leased to it and, after reasonable opportunity to inspect and
test such Equipment, has not notified the Company of any defects
therein.
(xiv) With the exception of the Loan Contracts the Lease
Contract constitutes a "true lease" for federal income tax purposes.
The Lease Contracts and Loan Contracts satisfy such ratios and other
tax related criteria as maybe set forth in the Specific Lease
Acquisition Terms.
(xv) Each Lease Receivable derives from a Lease Contract that
has an original stated term of at least 12 months and not more than 72
months. Each such Lease Contract is within its original term and has
not had any extensions.
(xvi) Except with respect to any Funded Lease Contract, each
Customer under each Lease Contract will have made at least, two lease
payments with respect to such Lease Contract, including any security
deposit or advance payment made by the lessee upon the execution of the
Lease Contract or the delivery of the Equipment. Each Lease Contract
obligates the related Customer to make all Scheduled Payments
thereunder in full notwithstanding the collection by the lessor of a
security deposit with respect thereto. The calculation of the Implicit
Principal Balance of each Lease Receivable does not include any
security deposits or advance payments collected by or on behalf of the
lessor which are applied to Scheduled Payments.
(xvii) None of the Customers is a lessee that is a merchant
with respect to the Equipment leased under any Lease Contract, and none
of the Customers is the United States of America or any state, or
agency, department or instrumentality or political subdivision of the
United States of America or anv state. Each Lease Contract is payable
in U.S. dollars and the obligor thereon is a United States resident.
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(xviii) All requirements of applicable federal, state and
local laws, and regulations thereunder in respect of the Lease
Contract have been complied with in all material respects, including,
without limitation, usury laws, the Federal Truth-in-Lending Act, the
Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and
any other applicable consumer credit, equal opportunity and disclosure
laws if any, and each Lease Contract complied in all material respects
at the time it was originated or made and now complies in all material
respects with all legal requirements of the jurisdiction in which it
was originated.
(xix) With the sole exception of the Customer's right to quiet
enjoyment, the Lease Contract is not and will not be subject to any
right of rescission, set-off, counterclaim or defense, including the
defense of usury, whether arising out of transactions concerning the
Lease Contract or otherwise, and the operation of any of the terms of
the Lease Contract or the exercise by the Company or the Customer of
any right under the Lease Contract will not render the Lease Contract
unenforceable in whole or in part, and no such right of rescission,
set-off, counterclaim or defense, including a defense arising out of a
breach of the Customer's right of quiet enjoyment of the Equipment, has
been asserted with respect thereto, except that certain rights or
defenses may exist under applicable law which, individually or in the
aggregate, do not make the remedies available to the Company with
respect to such Lease Contract inadequate for the practical realization
of the benefits provided thereby.
(xx) The Company has duly fulfilled all obligations on the
lessor's part to be fulfilled under or in connection with the Lease
Contract, including, without limitation, giving any notices or
consents necessary to effect the acquisition of the Lease Assets by the
Issuer and has done nothing to impair the rights of the Trust Estate
and the Holders of the Notes in the Lease Contract or payments with
respect thereto.
(xxi) The Lease Contract and the Equipment have not been sold,
transferred, assigned or pledged by the Company to any Person other
than the Issuer (except for security interests in the Lease Assets
which shall be terminated on or prior to the related Acquisition Date),
and upon execution and delivery of the Lease Acquisition Agreement by
the Company and the repayment by the Issuer of the Existing
Indebtedness, the Issuer will have all of the right, title and interest
in and to the Lease Contract, the Lease Receivables and the related
Equipment, free and clear of all liens and encumbrances, except for the
interests of the Customer pursuant to the Lease Contract.
(xxii) Each Lease Contract requires that the Customer maintain
the Equipment in good and workable order and that the Customer obtain
and maintain physical damage insurance, or provide self-insurance or
purchase insurance from the Company (which may be self-insured)
covering the Equipment. Insurance coverage required to be maintained by
the Customer under each Lease Contract is of a type customary for the
equipment covered thereby and consistent with industry practice for
monitoring compliance thereof; such insurance coverage is in full force
and effect.
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(xxiii) The Company purchased each item of Equipment from
either (i) the manufacturer or other supplier following receipt of an
invoice from such manufacturer or supplier or (ii) a lessee following
confirmation that such item of Equipment was on such lessee's premises.
The sale to the Issuer of the Lease Contracts and all of the Company's
right, title and interest in each item of Equipment does not violate
the terms or provisions of any lease or any other agreement to which
the Company is a party or by which it is bound.
(xxiv) The sale, transfer, assignment and conveyance of the
Lease Contracts (including all payments due or to become due
thereunder) and the Equipment by the Company pursuant to the Lease
Acquisition Agreement is not subject to and will not result in any tax,
fee or governmental charge payable by the Company to any federal, state
or local government ("Transfer Taxes") other than Transfer Taxes which
have or will be paid by the Company as due. In the event that the
Issuer receives actual notice of any Transfer Taxes arising out of the
transfer, assignment and conveyance of the Lease Contracts and/or the
Equipment, on written demand by the Issuer, or upon the Company
otherwise being given notice thereof, the Company shall pay, and
otherwise indemnify and hold the Issuer, the Indenture Trustee and MBIA
harmless, on an after-tax basis, from and against any and all such
Transfer Taxes (it being understood that the Holders of the Notes, the
Indenture Trustee and MBIA shall have no obligation to pay such
Transfer Taxes).
(b) The Company hereby makes, as of each Cut-off Date and each date of
substitution of a Substitute Lease Contract, the following representations and
warranties to the Issuer, and for the benefit of MBIA, the Indenture Trustee and
the Holders of the Notes, on which the Issuer relies in acquiring the Lease
Assets and issuing a Series of Notes. Such representations and warranties speak
as of the related Cut-off Date with respect to Lease Contracts on the related
Initial Series Lease Schedule, as of the related Funding Date with respect to
Pools to be acquired on such Funding Date, or the date of substitution with
respect to Substitute Lease Contracts, unless otherwise indicated, but shall
survive any subsequent transfer, assignment, contribution or conveyance of the
Lease Contracts, related Equipment and Lease Receivables.
(i) Each of the Concentration Limits set forth in the Specific
Lease Acquisition Terms are true and correct as to the entire pool of
Lease Assets acquired by the Issuer, after giving effect to the
acquisition by the Issuer of Lease Contracts on the related Acquisition
Date.
(ii) The Company used no selection procedures that identified
the Lease Contracts being acquired on such Acquisition Date as being
less desirable or valuable than other comparable equipment leases owned
by the Company.
(iii) The Computer Tape from which the selection of the Lease
Contracts being acquired on such Acquisition Date was made, was made
available to the Issuer's accountants that are providing any comfort
letter to MBIA, any Noteholders, or the Placement Agent in connection
with any information contained in any Private Placement Memorandum
applicable to such Notes, and such information was complete and
accurate as
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of its date and includes a description of the same Lease Contracts that
are described in the related Series Lease Schedule and the payments due
thereunder as of the related Cut-off Date.
(c) Except as otherwise provided in the Specific Lease Acquisition
Terms, the Company hereby makes the following representations and warranties to
the Issuer and for the benefit of MBIA, the Indenture Trustee and the Holders of
the Notes on which the Issuer relies in acquiring the Lease Assets and issuing a
Series of Notes. Such representations and warranties speak as of the Cut-off
Date relating to each Acquisition Date unless otherwise indicated, but shall
survive any subsequent transfer, assignment, contribution or conveyance of the
Lease Contracts, related Equipment and Lease Receivables:
(i) The Company has been duly organized and is validly
existing and in good standing as a corporation under the laws of its
jurisdiction of incorporation with corporate power and authority to own
its properties and to transact the business in which it is now engaged,
and the Company is duly qualified to do business in and is in good
standing under the laws of each State in which any Equipment or any
Customer is located or is not required under applicable law to effect
such qualification, except where failure to so qualify, would not have
a material adverse effect on the ability of the Company to perform its
obligations under the Transaction Documents or on any of the Lease
Contracts, the Lease Receivables or the Equipment.
(ii) The performance of the obligations of the Company under
the Lease Acquisition Agreement and the other Transaction Documents and
the consummation of the transactions herein and therein contemplated
will not conflict with or result in any breach of any of the terms or
provisions of, or constitute with or without notice, lapse of time or
both, a default under the Certificate of Incorporation or Articles of
Incorporation, as applicable, or By-laws of the Company, or any
material indenture, agreement, mortgage, deed of trust or other
instrument to which the Company is a party or by which it is bound, or
result in the creation or imposition of any lien, charge or encumbrance
(except the lien created by the Transaction Documents) upon any of the
property or assets of the Company pursuant to the terms of such
indenture, mortgage, deed of trust, or other agreement or instrument to
which the Company is a party or by which the Company is bound or to
which any of the Company's property or assets is subject, nor will such
action result in any violation of the provisions of the Company's
Certificate of Incorporation or Articles of Incorporation, as
applicable, or By-laws or any statute or any order, rule or regulation
of any court or any regulatory authority or other govemmental agency or
body having jurisdiction over the Company or any of its properties; and
no consent, approval, authorization order, registration or
qualification of or with or other action of any court, or any such
regulatory authority or other governmental agency or body is required
for consummation of the transactions contemplated by the Lease
Acquisition Agreement and the other Transaction Documents except such
consents, approvals and authorizations which have been obtained or such
registrations or qualifications which have been made.
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<PAGE>
(iii) The Lease Acquisition Agreement, the related Insurance
Agreement and any other Transaction Document to which the Company is a
party have been duly authorized, executed and delivered by the Company
by all necessary corporate action and such agreements are the valid and
legally binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, subject as to
enforcement to applicable bankruptcy, insolvency, reorganization and
other similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity
regardless of whether enforcement is sought in a court of law or
equity.
(iv) The Company Address is the chief executive office, chief
place of business and the office where the Company keeps its records
concerning the Lease Contracts, Lease Receivables and the Equipment.
(v) The Company does not believe, nor does it have any
reasonable cause to believe, that it cannot perform each and every
covenant contained in the Lease Acquisition Agreement.
(vi) The transactions contemplated by the Transaction
Documents are being consummated by the Company in furtherance of its
ordinary business purposes, with no contemplation of insolvency and
with no intent to hinder, delay or defraud any of its present or future
creditors.
(vii) The consideration received by the Company as set forth
in the Specific Lease Acquisition Terms is fair consideration having
value reasonably equivalent to or in excess of the value of the
performance of the Company's obligations hereunder.
(viii) Neither on the date of the transactions contemplated by
the Transaction Documents or immediately before or after such
transactions, nor as a result of the transactions, will the Company:
(A) be insolvent such that the sum of its debts is greater
than all of its respective property, at a fair valuation;
(B) be engaged in or about to engage in, business or a
transaction for which any property remaining with the Company will be
an unreasonably, small capital or the remaining assets of the Company
will be unreasonably small in relation to its respective business or
the transaction; or
(C) have intended to incur or believed it would incur, debts
that would be beyond its respective ability to pay as such debts mature
or become due. The Company's assets and cash flow enable it to meet its
present obligations in the ordinary course of business as they become
due.
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(ix) Both immediately before and after the transactions
contemplated by the Transaction Documents (a) the present fair salable
value of the Company's assets was or will be in excess of the amount
that will be required to pay its probable liabilities as they then
exist and as they become absolute and matured; and (b) the sum of the
Company's assets was or will be greater than the sum of its debts,
valuing its assets at a fair salable value.
(x) The acquisition of the Lease Contracts, Lease Receivables
and the related Equipment by the Issuer pursuant to the Lease
Acquisition Agreement is not subject to the bulk transfer or any
similar statutory provisions in effect in any applicable jurisdiction.
(xi) There are no proceedings or investigations pending, or to
the knowledge of the Company, threatened, against or affecting the
Company in or before any court governmental authority or agency or
arbitration board or tribunal (including, but not limited to any such
proceeding or investigation with respect to any environmental or other
liability resulting from the ownership or use of any of the Equipment)
which, individually or in the aggregate, involve the possibility of
materially and adversely affecting the properties, business, prospects,
profits or condition (financial or otherwise) of the Company, or the
ability of the Company to perform its obligations under the Lease
Acquisition Agreement. The Company is not in default with respect to
any order of any court, governmental authority or agency or
arbitration board or tribunal.
(xii) All tax returns or extensions required to be filed by
the Company in any jurisdiction have in fact been filed, and all taxes,
assessments, fees and other governmental charges upon the Company, or
upon any of the respective properties, income or franchises of the
Company, shown to be due and payable on such returns have been, or will
be, paid when due. To the best of the Company's knowledge, all such tax
returns are true and correct and the Company has no knowledge of any
proposed additional tax assessment against it in any material amount
nor of any basis therefor. The provisions for taxes on the books of the
Company are in accordance with generally accepted accounting
principles.
(xiii) The Company (i) is not in violation of any laws,
ordinances governmental rules or regulations to which it is subject,
(ii) has not failed to obtain any licenses, permits, franchises or
other governmental authorizations necessary to the ownership of its
property or to the conduct of its business, and (iii) is not in
violation in any material respect of any term of any agreement, charter
instrument, bylaw or instrument to which it is a party or by which it
may be bound which violation or failure to obtain might materially
adversely affect the business or condition (financial or otherwise) of
the Company.
(xiv) The Private Placement Memorandum does not contain any
untrue statement of fact that would have a material effect on such
Lease Contracts or on the ability of the Trust Estate to realize the
benefits thereof.
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(xv) The Company and the Issuer are members of an affiliated
group within the meaning of section 1504 of the Internal Revenue Code,
which will file a consolidated federal income tax return at all times
until termination of the Transaction Documents.
(xvi) It is the intention of the Company that the Lease Assets
be acquired by the Issuer and that the beneficial interest in and title
to the Lease Assets not be part of the Company's estate in the event of
the filing of a bankruptcy petition by or against the Company under any
bankruptcy law.
(xvii) Immediately prior to the acquisition of the Lease
Contracts by the Issuer pursuant to the Lease Acquisition Agreement,
the Company was the sole owner of the Lease Contracts and the related
Equipment (with the exception of Equipment which is the subject of a
Loan Contract, as to which the Company has a valid first perfected
security interest in the related Equipment) and had good and marketable
title thereto, free and clear of all liens, claims and encumbrance
(except for the Existing Indebtedness and security interests in the
Lease Assets which shall be terminated on or prior to the Delivery
Date); and the acquisition of the Lease Assets by the Issuer does not
violate the terms or provisions of any Lease Contract.
(xviii) The Company is the registered owner of all of the
issued and outstanding common stock of the Issuer, all of which
Common Stock is validly issued, fully paid and nonassessable.
(xix) The Company will treat the transfer of the Lease
Contracts and the related Lease Receivables and Equipment on the
Initial Delivery Date as a contribution to the Issuer for Federal,
state and local income tax, reporting and accounting purposes. The
affiliated group of which the Company and the Issuer are a member
within the meaning of section 1504 of the Code shall treat the Lease
Contracts as owned by the Issuer for Federal, state and local income
tax purposes, shall include in the computation of the Issuer's gross
income for such purposes the rental and other income from the Lease
Contracts, shall treat the Notes as debt of the Issuer for such
purposes, and shall cause the Issuer to deduct the interest paid or
accrued with respect to the Notes in accordance with such group's
applicable method of accounting for such purposes.
(xx) The present value of all benefits vested under all
"employee pension benefit plans," as such term is defined in Section 3
of ERISA, maintained by the Company, or in which employees of the
Company are entitled to participate, as from time to time in effect
(herein called the "Pension Plans"), does not exceed the value of the
assets of the Pension Plans allocable to such vested benefits (based on
the value of such assets as of December 31, 1995, the last annual
valuation date). No prohibited transactions, accumulated funding
deficiencies, withdrawals or reportable events have occurred with
respect to any Pension Plans that, in the aggregate, could subject the
Company to any material tax, penalty or other liability. No notice of
intent to terminate a Pension Plan has been filed, nor has any Pension
Plan been terminated under Section 4041 (f) of ERISA, nor has the
Pension Benefit
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Guaranty Corporation instituted proceedings to terminate, or appoint a
trustee to administer, a Pension Plan and no event has occurred or
condition exists which might constitute grounds under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to
administer, and Pension Plan.
3.02 Representations and Warranties of the Issuer. The Issuer hereby
represents and warrants to, and agrees with the Company for the benefit of,
MBIA, the Indenture Trustee and Holders of the Notes, which representations and
warranties the Company relies in entering into the Lease Acquisiton Agreement
with the Issuer. Such representations and warranties speak as of each
Acquisition Date unless otherwise indicated, but shall survive any subsequent
transfer, assignment, contribution or conveyance of the Lease Contracts and
related Lease Receivables and Equipment:
(a) The Issuer has been duly organized and is validly existing in good
standing as a corporation under the laws of the Issuer State of Incorporation,
with corporate power and authority to own its properties, perform its
obligations under the Transaction Documents and to transact the business in
which it is now engaged or in which it proposes to engage; the Issuer is duly
qualified to do business and is in good standing in each State in which the
nature of its business requires it to be so qualified, except where failure to
so qualify, would not have a material adverse effect on the ability of the
Issuer to perform its obligations under the Transaction Documents.
(b) The transfer to and receipt by the Issuer of the Lease Contracts
and the related Lease Receivables and the Equipment pursuant to the Lease
Acquisition Agreement and the consummation of the transactions contemplated
herein and in the Transaction Documents will not conflict with or result in
breach of any of the terms or provisions of, or constitute (with or without
notice, lapse of time or both) a default under the Certificate of Incorporation
or By-laws of the Issuer or any material indenture, agreement, mortgage, deed of
trust or other instrument to which the Issuer is a party or by which it is
bound, or result in the creation or imposition of any lien, charge or
encumbrance (except for the lien created by the Indenture) upon any of the
property or assets of the Issuer pursuant to the terms of, such indenture,
mortgage, deed of trust, or other agreement or instrument to which the Issuer is
a party or by which it is bound or to which any of the property or assets of the
Issuer is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-1aws of the Issuer or any
statute or any order, rule or regulation of any court or regulatory authority or
other governmental agency or body having jurisdiction over the Issuer or any of
its properties; and no consent, approval, authorization, order, registration or
qualification of or with or other action of any court or any such regulatory
authority or other governmental agency or body is required for the acquisition
of the Lease Contracts and the related Lease Receivables and the Equipment
hereunder.
(c) The Transaction Documents have been duly authorized, executed and
delivered by the Issuer by all necessary corporate action and constitute valid
and legal1y binding obligations of the Issuer enforceable against the Issuer in
accordance with their terms, subject as to enforcement to bankruptcy,
insolvency, reorganization and other similar laws of general applicabilty,
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relating to or affecting creditors' rights generally and to general
principles of equity regardless of whether enforcement is sought in a
court of equity or law.
(d) There are no proceedings or investigations to which the Issuer is a
party pending or, to the knowledge of the Issuer, threatened, before any court,
regulatory body, administrative agency or other tribunal or governmental
instrumentality (a) asserting the invalidity of the Lease Acquisition Agreement,
(b) seeking to prevent the issuance of the Notes or the consummation of any of
the transactions contemplated by the Lease Acquisition Agreement, or (c) seeking
any determination or ruling that would materially and adversely affect the
performance by the Issuer of its obligations under, or the validity or
enforceability of, the Lease Acquisition Agreement.
(e) All approvals, authorizations, consents, orders or other actions of
any Person or of any court, governmental agency or body or official, required
in connection with the execution and delivery of the Lease Acquisition
Agreement, have been or will be taken or obtained on or prior to the Initial
Delivery Date.
(f) The Issuer Address is the principal place of business and chief
executive office of the Issuer.
3.03 Purchase or Substitution Required Upon Breach of Certain
Representations and Warranties.
If (i) the Company, the Issuer, the Indenture Trustee or MBIA discovers
the breach of any representations or warranties set forth in Sections 3.01 and
3.02 hereof which materially and adversely affects the value of a Lease
Contract, the related Equipment, or the interests of the Holders of the Notes or
MBIA, or a breach of any representations and warranties set forth in Sections
3.01(a)(ii), 3.01(a)(v), 3.01(a)(vii), or 3.01(a)(xxi) or (ii) the Indenture
Trustee shall fail to receive evidence acceptable to MBIA that each application
for re-titling certificates of title has been filed within the time required
pursuant to Section 4.03 (a) of the Standard Indenture Terms, then the party
discovering such breach or condition shall give prompt written notice to the
other party and in the case of clause (1) above, the Company shall, within 30
days from the date the Company was notified of, or otherwise discovers, such
breach, cure such breach. In the case of clause (ii) above, the Company shall
deliver all original certificates of title still in its possession to the
Back-up Servicer, who shall file applications for re-titling the related
certificates of title at the expense of the Company. If in the case of clause
(i) the Company fails to cure such breach in the applicable time period or the
Company or the Back-up Servicer is unable to cure such circumstance or
condition, or in the case of clause (ii), the Indenture Trustee shall fail to
receive evidence acceptable to MBIA within the time period required pursuant to
Section 4.04(b) of the Standard Indenture Terms, the Company shall either (a)
purchase such Lease Contract and the related Equipment from the Issuer at the
Purchase Price or (b) provide a Substitute Lease Contract or if the breach
relates to a representation or warranty regarding the selection criteria of the
Lease Contracts as a whole and is not cured (as the liquidated damages remedy
therefor) by the Company, either (a) purchase such non-conforming Lease
Contracts and the related Equipment from the Issuer or (b) provide Substitute
Lease Contracts
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as set forth above, so that the representations and warranties with respect to
the selection criteria are correct, as evidenced by a certificate of an officer
of the Company to the Indenture Trustee. The Purchase Price for a purchased
Lease Contract and the related Equipment shall be paid, and any Substitute Lease
Contract shall be delivered, by the Company to the Issuer in accordance with
Section 3.04(c) hereof. It is understood and agreed that the obligation of the
Company to cure or purchase or replace any Lease Contract as to which such a
breach has occurred shall constitute the sole remedy respecting such breach
available to the Issuer, the Holders of Notes or the Indenture Trustee on behalf
of such Holders (except for any indemnities provided under Section 4.01(j)
hereof or under the Indenture) for any losses, claims, damages and liabilities
arising from the Issuer's ownership of such Lease Contract or the inclusion of
such Lease Contract in the Trust Estate.
Section 3.04 Requirements for Purchase or Substitution of Lease
Contracts and Acquisition of Funded Lease Contracts.
(a) If the Company is required to purchase any Lease Contract under
Sections 2.04 or 3.03 hereof, or if the Issuer is required to purchase any
Lease Contract under Sections 3.04 or 4.04(d) of the Standard Indenture Terms,
or is required or elects to purchase any Lease Contract under Section 3.10 of
the Standard Servicing Terms, such Lease Contract shall be purchased by the
Company or the Issuer, as applicable at the Purchase Price. All purchases shall
be accomplished at the times specified in subsection (c) below.
(b) If the Company (1) is required to substitute any Lease Contract
under Section 2.04 or 3.03 hereof, or if the Issuer is required to purchase any
Lease Contract under Sections 3.04 or 4.04(d) of the Standard Indenture Terms or
is required or elects to substitute any Lease Contract under Section 3.10 of the
Standard Servicing Terms, (a "Substitute Lease Contract"), or (2) conveys to the
Issuer or originates on behalf of the Issuer any Funded Lease Contract, each
such Substitute Lease Contract and Funded Lease Contract shall (i) be an
Eligible Lease Contract, (ii) be with respect to types of Equipment represented
in the pool of Lease Contracts delivered on the Initial Acquisition Date, and
types of Customers in the industries represented in the pool of Lease Contracts
delivered on the Initial Acquisition Date; (iii) be with a Customer whose credit
is equal to or better than that of the Customer under any other Lease Contract;
(iv) be written on one of the standard lease forms attached as Exhibit A to the
applicable Specific Lease Acquisition Terms; (v) be accompanied by (A) a Company
Certificate substantially in the form of Exhibit A hereto subjecting such Lease
Contract to the provisions hereof and providing with respect to such Substitute
Lease Contract or Funded Lease Contract, an Amended Lease Schedule and (B)
evidence of the UCC filings required and the filing of the certificates of
title, if applicable, as set forth in the Indenture; and (vi) not have been
selected using procedures that identified the Lease Contracts as being less
desirable or valuable than other comparable equipment leases owned by the
Company.
In addition to the above criteria, the following shall apply in
connection with any Substitute Lease Contract: (1) any Substitute Lease
Contracts assigned by the Company on any date in substitution for Lease
Contracts on any Series Lease Schedule shall have an aggregate Implicit
Principal Balance at least equal to the aggregate Implicit Principal Balance of
the Lease Contracts on such Series Lease Schedule being withdrawn, computed as
to both the Substitute Lease Contracts
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and the withdrawn Lease Contracts using the Discount Rate applicable to the
Series of Notes and the related tranche to which such withdrawn Lease Contracts
relate; (2) a Substitute Lease Contract may have Scheduled Payments that are due
after the last day of the month preceding the Stated Maturity of the related
Notes, but such payments shall not be counted in any Implicit Principal Balance
computation; and (3) the weighted average remaining term of Substitute Lease
Contracts substituted by the Company on any date (such average being determined
based upon the Implicit Principal Balance of the Lease Contracts being
substituted) may not be more than 30% longer than the weighted average
remaining term of the Lease Contracts being withdrawn in connection with such
substitution (such average being determined based upon the Implicit Principal
Balance of the Lease Contracts being withdrawn).
Upon the substitution of any Substitute Lease Contract pursuant to the
provisions of this Section 3.04(b), the Company hereby agrees that such
Substitute Lease Contract will be subject to all the terms and provisions of the
Lease Acquisition Agreement, any Servicing Agreement and the Indenture as if
such Substitute Lease Contract had been one of the original Lease Contracts
acquired on the related Delivery Date. Upon the substitution of a Substitute
Lease Contract pursuant to this Section 3.04(b), the Issuer and the Company
shall also comply with the provisions and limitations set forth in the
Indenture. All substitutions shall be accomplished at the time specified in
subsection (c) below.
(c) Any purchase or substitution of a Lease Contract by the Company in
accordance with Sections 2.04 or 3.03 hereof or this Section 3.04 shall be
made either by remittance of the Purchase Price to the Servicer for deposit
into the Collection Account in accordance with Section 3.O3(a) of the
Servicing Agreement or by substitution of a Substitute Lease Contract, as
applicable, on or prior to the Determination Date next following the expiration
of the cure period set forth in Sections 2.04 or 3.03 hereof, as applicable.
(d) Any voluntany purchase or substitution of a Lease Contract by the
Company pursuant to the terms of the Servicing Agreement or the Indenture in
the event of a default, delinquency or modification with respect to such Lease
Contract shall satisfy the same requirements for a purchase or substitution, as
the case may be, as are set forth in this Section 3.04.
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ARTICLE 4 -- COVENANTS OF THE ISSUER AND COMPANY
4.01 Company Covenants. The Company hereby covenants and agrees with
the Issuer as follows:
(a) Except as hereinafter provided, the Company will keep in full
effect its existence, rights and franchises as a corporation, and will obtain
and preserve its qualification to do business as a foreign corporation in each
jurisdiction in which such qualification is or shall be necessary to protect the
validity and enforceability of the Lease Acquisition Agreement or any of the
Lease Contracts and to perform its duties hereunder. Any person into which the
Company may be merged or consolidated, or to whom the Company has sold
substantially all of its assets, or any corporation resulting from any merger,
conversion or consolidation to which the Company shall be a party, or any
Person succeeding to the business of the Company shall be the successor of the
Company hereunder, without the execution or filing of any paper or any further
act on the part of any of the parties hereto, anything herein to the contrary
notwithstanding; provided, however, that (v) immediately after giving effect to
such transaction, no representation or warranty made pursuant to Section 3.01(c)
shall have been breached, (w) such successor executes an agreement or
assumption, in form reasonably satisfactory the Indenture Trustee and MBIA, to
perform every obligation under the Lease Acquisition Agreement, (x) such
successor has a net worth that is sufficient to perform in accordance with the
Transaction Documents, (y) the Company shall have delivered to the Issuer a
certificate of an officer of the Company and an Opinion of Counsel each stating
that such consolidation, merger, or succession and such agreement of assumption
complies with this Section 4.01 and that all conditions precedent, if any,
provided for in the Lease Acquisition Agreement relating to such transaction
have been complied with, and (z) the Company shall have delivered to the Issuer,
MBIA and the Indenture Trustee an Opinion of Counsel either (1) stating that, in
the opinion of such counsel, all financing statements, continuation statements
and amendments thereto have been executed and filed that are necessary fully to
preserve and protect the interest of the Issuer in the Lease Contracts and
reciting the details of such filings, or (2) stating that, in the opinion of
such counsel, no such action shall be necessary to preserve and protect such
interest.
(b) Neither the Company nor any of the directors, officers, employees
or agents of the Company shall be under any liability to the Issuer, the
Indenture Trustee or the Holders of Notes for any action taken or for refraining
from the taking of any action in good faith pursuant to the Lease Acquisition
Agreement, or for errors in judgement not involving recklessness or gross
negligence; provided, however, that this provision shall not protect the Company
against any breach of warranties or representations made herein, or failure to
perform its obligations in strict compliance with the Lease Acquisition
Agreement, or any liability which would otherwise be imposed by reason of any
breach of the terms and conditions of the Lease Acquisition Agreement. The
Company. and any director, officer, employee or agent of the Company, may rely
in good faith on any document of any kind prima facie properly executed and
submitted by any Person respecting any matters arising hereunder. The Company
shall not be under any obligation to appear in, prosecute, or defend any legal
action that is not incidental to its obligations as the contributor of the Lease
Assets under the Lease Acquisition Agreement and that in its opinion may involve
it in any expense or liability.
17
<PAGE>
(c) At the close of each calendar quarter, the Company shall file such
financing statements as set forth in Section 4.04(e) of the Standard Indenture
Terms. The Company, from time to time, at its own expense, shall execute and
file such additional financing statements (including continuation statements) as
may be necessary to preserve the security interests and liens described in
Section 3.01 (a)(viii) hereof as may be reasonably requested by the Issuer. MBIA
or the Indenture Trustee and are reasonably satisfactory in form and substance
to the Issuer and MBIA; provided, however, that financing statements with
respect to the Equipment shall be filed only with respect to the Equipment
initially located in the Enumerated States and the Company will not be required
to file any financing statements with any Customer as debtor.
(d) The Company will not change its name, identity or corporate
structure in any manner that would, could, or might make any financing statement
or continuation statement misleading within the meaning of section 9-402 (7) of
the UCC, unless it shall have given the Issuer, MBIA and the Indenture Trustee
at least 10 days' prior written notice thereof.
(e) The Company will give the Issuer, MBIA and the Indenture Trustee at
least 30 days prior written notice of any relocation of its principal executive
office if, as a result of such relocation, the applicable provisions of the UCC
would require the filing of any amendment of any previously filed financing or
continuation statement or of any new financing statement.
(f) The Company will duly fulfill all obligations on its part to be
fulfilled under or in connection with each Lease Contract, will not change or
modify the terms of the Lease Contracts except as expressly permitted by the
terms of the Transaction Documents and will do nothing to impair the rights of
the Issuer, MBIA or the Indenture Trustee in the Lease Contract or the
Equipment. In the event that the rights of the Company under any Lease Contract,
any guaranty of the related Customer's obligations under any Lease Contract, or
any Insurance Policy are not assignable to the Issuer or to the Indenture
Trustee, the Company will enforce such rights on behalf of the Indenture
Trustee.
(g) The Company will comply, in all material respects, with all acts,
rules, regulations, orders, decrees and directions of any Governmental authority
applicable to the Lease Assets or any part thereof, provided, however, that the
Company may contest any act, regulation, order, decree or direction in any
reasonable manner which shall not materially and adversely affect the rights of
the Issuer, MBIA or the Indenture Trustee in the Lease Assets.
(h) The Company will advise the Issuer, MBIA and the Indenture Trustee
promptly, in reasonable detail, of the occurrence of any breach by the Company
following discovery by the Company of such breach of any of its representations,
warranties and covenants contained herein.
(i) The Company will execute or endorse, acknowledge, and deliver to
the Issuer and the Indenture Trustee from time to time such schedules,
confirmatory assignments, conveyances, and other reassurances or instruments and
take such further similar actions relating to the Lease Contracts, the related
Lease Receivables and Equipment, and the rights covered by the Transaction
18
<PAGE>
Documents, as the Issuer or the Indenture Trustee may reasonably request to
preserve and maintain title to the Lease Assets and the rights of the Indenture
Trustee, MBIA and the Holders of Notes therein against the claims of all persons
and parties.
(j) The Company agrees to indemnify, defend and hold the Issuer
harmless from and against any and all loss, liability, damage, judgment, claim,
deficiency or expense (including interest, penalties, reasonable attorney's fees
and amounts paid in settlement) that is caused by (i) a breach at any time by
the Company of its representations, warranties and covenants contained in
Section 3.01 hereof or this Section 4.01 or (ii) any material information
furnished by the Company which is set forth in any schedule delivered hereunder,
being untrue in any respect when any such representation was made or schedule
delivered, provided that the Company shall not have any liability with respect
to a representation or warranty as to any specific Lease Contract, Lease
Receivable or Equipment other than to purchase such Lease Contract or substitute
for such Lease Contract in accordance with Section 3.03 hereof unless such
breach of representation or warranty is the result of the Company's fraud, gross
negligence, bad faith or willful misconduct. The Company shall also indemnify
the Indenture Trustee, the Servicer and MBIA for any cost or expenses incurred
by them in the enforcement of the Lease Acquisition Agreement. The obligations
of the Company under this Section 4.01 (j) shall be considered to have been
relied upon by the Issuer and shall survive the execution, delivery and
performance of the Lease Acquisition Agreement, regardless of any investigation
made by or on behalf of the Issuer, until termination of the Indenture. If the
Company has made any indemnity payments pursuant to this Section 4.01(j) and
thereafter the recipient collects any of such amounts from others, such party
will promptly repay the amount collected to the Company, without interest.
(k) The Company will do nothing to disturb or impair the acquisition
hereunder by the Issuer of the Lease Contracts and the related Lease Receivables
and Equipment.
(1) The Company (i) will (A) maintain its books and records separate
from the books and records of the Issuer and (B) maintain bank accounts separate
from those of the Issuer and (C) do its best to maintain two Independent
directors on the Issuer's board of directors, so long as the Company is a
shareholder of the Issuer and (ii) will not (X) take any action that would cause
the dissolution or liquidation of the Issuer, (Y) guarantee (directly or
indirectly), endorse or otherwise become contingently liable (directly or
indirectly) for the obligations of the Issuer, or (Z) institute against the
Issuer, or join any other person in instituting against the Issuer, any case,
proceeding or other action under any existing or future bankruptcy, insolvency
or similar laws. This subsection (1) shall survive termination of the Lease
Acquisition Agreement.
(m) The Company shall notify the Issuer and the Indenture Trustee
promptly after becoming aware of any Lien on any Lease Asset.
(n) On each date as of which the Company substitutes a Substitute Lease
Contract in accordance with Sections 2.04 or 3.04(b) hereof, or otherwise
assigns Lease Contracts to the Issuer, the Company shall provide to the Issuer a
Company Certificate substantially the form of
19
<PAGE>
Exhibit A hereto subjecting such Lease Contract to the provisions hereof and
providing with respect to such Lease Contracts the information required in the
Amended Lease Schedule.
(o) The annual financial statements of the Company will disclose the
effects of the transactions contemplated by the Transaction Documents in
accordance with generally accepted accounting principles. The financial
statements of the Company and the Issuer will also disclose that the assets of
the Issuer are not available to pay creditors of the Company. The resolutions,
agreements and other instruments underlying the Transaction Documents will be
continuously maintained by the Company as official records.
(p) The affiliated group of which the Company and the Issuer are
members within the meaning of section 1504 of the Code shall treat the Lease
Contracts and the related Equipment as owned by the Issuer for Federal, state
and local income tax purposes, shall include in the computation of the Issuer's
gross income for such purposes the rental and other income from the Lease
Contracts and the related Equipment, shall treat the Notes as debt of the Issuer
for such purposes, and shall cause the Issuer to deduct the interest paid or
accrued with respect to the Notes in accordance with such group's applicable
method of accounting for such purposes.
(q) The Company will, at its own cost and expense, (i) retain the
Electronic Ledger as a master record of the Lease Contracts and Equipment and
copies of all documents relating to each Lease Contract (other than the original
executed Lease Contracts) as custodian for the Issuer, the Indenture Trustee and
other Persons, if any, with interests in the Lease Contracts and Equipment and
(ii) mark the Lease Contracts and the Electronic Ledger to the effect that the
Lease Contracts and Equipment have been acquired by the Issuer and that they
have been transferred and assigned to the Indenture Trustee pursuant to the
Indenture.
(r) The Company will not pledge the stock of the Issuer without the
prior written consent of MBIA.
4.02 Issuer Covenants. The Issuer hereby covenants and agrees with the
Company as follows:
(a) The Issuer hereby acknowledges and agrees that its rights in the
Equipment are expressly subject to the rights of the related Customers in such
Equipment pursuant to the applicable Lease Contract. The Issuer covenants and
agrees that, so long as a Customer shall not be in default of any of the
provisions of the applicable Lease Contract, neither the Issuer nor any assignee
of the Issuer will disturb the Customer's quiet and peaceful possession of the
related Equipment and the Customer's unrestricted use thereof for its intended
purpose.
(b) If in any enforcement suit or legal proceeding it is held that the
Company may not enforce a Lease Contract on the ground that it is not a real
party in interest or holder entitled to enforce the Lease Contract, the Issuer
shall, at the Issuer's expense, take such steps as the Issuer deems necessary to
enforce the Contract, including bringing suit in the Issuer's name.
20
<PAGE>
(c) The Issuer warrants that it will own and possess the Equipment
subsequent to its acquisition thereof and that it will warrant and defend its
title to such Equipment against all Persons, claims and demands whatsoever. The
Issuer shall not assign, sell, pledge, or exchange, or in any way encumber or
otherwise dispose of the Equipment, except as permitted under the Indenture.
(d) The Issuer shall treat the Lease Contracts as owned by it for
Federal, state and local income tax purposes, shall include in the computation
of its gross income for such purposes the rental and other income from the Lease
Contracts, shall treat the Notes as its debt for such purposes and shall deduct
the interest paid or accrued with respect to the Notes in accordance with its
applicable method of accounting for such purposes.
4.03 Assi-nment of Lease Assets. The Company understands that the
Issuer will assign to and grant to the Indenture Trustee a security interest in
all its right, title and interest to the Lease Acquisition Agreement and the
Lease Assets. The Company consents to such assigment and grants and further
agrees that all representations, warranties, covenants and agreements the
Company made herein shall also be for the benefit of and inure to the Indenture
Trustee, the Trustee, MIBIA and all Holders from time to time of the Notes.
21
<PAGE>
ARTICLE 5 -- CONDITIONS PRECEDENT
5.01 Conditions to the Issuer's Obligations. The obligations of the
Issuer to provide the Company with the consideration provided for in the
Specific Lease Acquisition Terms shall be subject to the satisfaction of the
following conditions:
(a) All representations and warranties of the Company contained in
Section 3.01 (a) and (b) of the Lease Acquisition Agreement and all
information provided in any Series Lease Schedule or Amended Lease Schedule, as
applicable, shall be true and correct on the related Acquisition Date, all
representations and warranties in Section 3.01 (c) hereof, shall be true and
correct as of the Cut-off Date relating to any applicable Acquisition Date, and
the Company shall have delivered to the Issuer, the Indenture Trustee, MBIA and
each original purchaser of the Notes an officer's certificate to such effect;
(b) The Company shall have delivered all other information theretofore
required or reasonably requested by the Issuer to be delivered by the Company
hereunder, duly certified by an officer of the Company, and the Company shall
have substantially performed all other obligations required to be performed by
the provisions of the Lease Acquisition Agreement;
(c) On or prior to the applicable Acquisition Date, the Company shall
have delivered the Lease Contracts to the Indenture Trustee and there shall have
been made all filings, recordings and/or registrations, and there shall have
been given, or taken, any notice or any other similar action, as may be
necessary in the opinion of the Issuer, in order to establish and preserve the
right, title and interest of the Issuer in the Lease Assets;
(d) On or before the Initial Delivery Date, the Issuer, the Servicer,
the Back-Up Servicer and the Indenture Trustee shall have entered into the
Servicing Agreement;
(e) All of the Notes shall be issued and sold on the applicable
Delivery Date and the Issuer shall receive the full consideration due it upon
the issuance of such Notes and the Issuer shall have applied such consideration,
to the extent necessary, to pay the Existing Indebtedness.
5.02 Conditions to the Company's Obligations. The obligations of the
Company to enter into the Lease Acquisition Agreement on the Initial
Delivery Date and to deliver any Company Certificate on a subsequent Acquisition
Date shall be subject to the satisfaction of the following conditions:
(a) All representations and warranties of the Issuer contained in the
Lease Acquisition Agreement shall be true and correct with the same effect as
though such representations and warranties had been made on such Acquisition
Date;
(b) The consideration set forth in the Specific Lease Acquisition Terms
shall have been paid or delivered to the Company simultaneously with the
execution of the Lease Acquisition Agreement or delivery of a Company
Certificate, as applicable, and
22
<PAGE>
(c) All corporate and legal proceedings and all instruments in
connection with the transactions contemplated by the Lease Acquisition Agreement
shall be satisfactory in form and substance to the Company, and the Company
shall have received from the Issuer copies of all documents (including, without
limitation, records of corporate proceedings) relevant to the transactions
herein contemplated as the Company may reasonably have requested.
23
<PAGE>
ARTICLE 6 - TERM AND TERMINATION
6.01 Term. The Lease Acquisition Agreement shall commence as of the
date of execution and delivery hereof and, shall continue in full force and
effect until final the later of (i) payment with respect to the last Lease Asset
or (ii) termination of the Indenture.
6.02 Default by the Company. If the Company shall be in default under
the Lease Acquisition Agreement and such default shall not have been cured for a
period of 60 days, or if the Company shall become insolvent or make an
assignment for the benefit of its creditors or have a receiver appointed for all
or substantially all of its properties, or if any proceedings are commenced, or
consented to, by the Company are not stayed or dismissed within 90 days after
being commenced against the Company under any bankruptcy, insolvency or other
law for the relief of debtors, the Issuer shall have the right, in addition to
any other rights it may have under any applicable law, to terminate the Lease
Acquisition Agreement upon 30 days prior written notice to the Company; provided
that any termination of the Lease Acquisition Agreement shall not release the
Company from any obligation under the Lease Acquisition Agreement.
24
<PAGE>
ARTICLE 7 - MISCELLANEOUS
7.01 Amendments. The Lease Acquisition Agreement and the rights and
obligations of the parties hereunder may not be changed orally but only by an
instrument in writing signed by the party against which enforcement is sought.
The Lease Acquisition Agreement may be amended by the Issuer and the Company
only with the prior written consent of the Indenture Trustee and MBIA.
7.02 Governing Law. The Lease Acquisition Agreement shall be construed
in accordance with the internal laws of the State of New York, without regard to
choice of law principles.
7.03 Notices. All demands, notices and communications hereunder shall
be in writing and shall be delivered or mailed by registered or certified United
States mail, postage prepaid, and addressed, in the case of the Company, to the
Company Address, and in the case of the Issuer, to the Issuer Address. All
notices and demands shall be deemed to have been given either at the time of the
delivery thereof to any officer of the Person entitled to receive such notices
and demands at the address of such Person for notices hereunder, or on the third
day after the malling thereof to such address, as the case may be. Any Person
may change the address for notices hereunder by giving notice of such chance to
the other Person.
7.04 Separability Clause. Any provisions of the Lease Acquisition
Agreement which are prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceabilitv in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
7.05 Assignment. Except as provided in Section 4.01(a), the Lease
Acquisition Agreement may not be assigned or delegated by the Company without
the prior written consent of the Issuer, MBIA and the Indenture Trustee and may
not be assigned or delegated by the Issuer without the prior written consent of
the Company, MBIA and Indenture Trustee.
7.06 Further Assurances. Each of the Company and the Issuer agrees to
do such further acts and things and to execute and deliver to the Indenture
Trustee and MBIA such additional assignments, agreements, powers and
instruments as are required by the Indenture Trustee to carry into effect the
purposes of the Lease Acquisition Agreement or to better assure and confirm unto
the Indenture Trustee, MBIA or the Holders of the Notes their rights, powers or
remedies hereunder. If any Customer shall be in default under any Lease
Contract, upon reasonable request from the Servicer, the Company will take all
reasonable steps to assist in enforcing such Lease Contract and preserving and
maintaining title to the Lease Assets and the rights of the Indenture Trustee,
MBIA and the Holders of the Notes therein against the claims of all persons and
parties to the extent the Company is capable of performing such requested steps
and the Servicer reasonably determines that the assistance of the Company is
necessary to effect the intent and purposes hereof.
25
<PAGE>
7.07 No Waivers; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of the Issuer or the Company, any right,
remedy, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise of any right, remedy, or privilege hereunder
preclude any other or further exercise hereof or the exercise of any other
right, remedy, power or privilege. The rights, remedies, powers and privileges
herein provided are cumulative and not exhaustive of any rights, remedies,
powers and privilege provided by law.
7.08 Binding Effect; Third Party Beneficiaries. This Lease Acquisition
Agreement will inure to the benefit of and be binding upon the parties hereto,
the Indenture Trustee, MBIA, the Holders of Notes, and their respective
successors and permitted assigns.
7.09 Set-Off.
(a) The Company hereby irrevocably and unconditionally waives all right
of set-off that it may have under contract (including the Lease Acquisition
Agreement), applicable law or otherwise with respect to any funds or monies of
the Issuer at any time held by or in the possession of the Company.
(b) The Issuer shall have the right to set-off against the Company any
amounts to which the Company may be entitled and to apply such amounts to any
claims the Issuer may have against the Company from time to time under the
Lease Acquisition Agreement. Upon any such set-off the Issuer shall give notice
of the amount thereof and the reasons therefor.
7.10 MBIA Default. If an MBIA Default occurs, MBIA's right to consent
hereunder and to direct the Indenture Trustee shall be void and, in such event,
in all provisions of the Lease Acquisition Agreement wherein MBIA's consent or
direction is required or permitted, the consent or direction of the Holders of
not less than a majority in Outstanding Principal Amount of all Notes shall be
required or permitted.
26
<PAGE>
Definitions: Appendix X
Please see Appendix X attached to Standard Terms and Conditions
of Indenture
<PAGE>
EXHIBIT A
FORM OF COMPANY CERTIFICATE
_______________________, 19 ___
Pursuant to Section 3-04(b) of the Standard Terms and Conditions of Lease
Acquisition dated as of March 1, 1996 (the "Standard Lease Acquisition Terms,"
which together with the Specific Terms and Conditions of Lease Acquisition dated
as of March 1, 1996 (the "Specific Lease Acquisition Terms") constitute the
Lease Acquisition Agreement), between [Name of Company] (the "Company") and
[Name of Issuer] (the "Issuer"), attached hereto is an amendment to Schedule II
of Exhibit B of the Specific Lease Acquisition Terms, which includes information
regarding Lease Assets that are hereby sold, assigned, transferred and delivered
by the Company to the Issuer in accordance with the Lease Acquisition Agreement.
[NAME OF COMPANY].
By:_________________________________
Name:
Title:
[NAME OF ISSUER]
By:_________________________________
Name:
Title:
A-1
<PAGE>
AMENDED AND RESTATED SPECIFIC TERMS AND CONDITIONS OF SERVICING, dated
as of March 1, 1995, by and among FLC Financial Corp., a Delaware corporation
(the "Depositor"), Federal Leasing Corp., a New Jersey corporation, as the
Servicer hereunder (the "Servicer"), Norwest Bank Minnesota, National
Association, a national banking association (the "Back-up Servicer") and Norwest
Bank Minnesota, National Association, a national banking association, as trustee
(the "Indenture Trustee") under the Indenture (defined below).
PRELIMINARY STATEMENT
This Amended and Restated Specific Terms and Conditions of Servicing
(the "Specific Servicing Terms") is intended to incorporate by reference all of
the provisions of the Standard Terms and Conditions of Servicing attached hereto
as Appendix 1 (the "Standard Servicing Terms"). Together the Specific Servicing
Terms and the Standard Servicing Terms are intended to form the Servicing
Agreement entered into in connection with the financing described below.
The Depositor has entered into an Indenture dated as of March 1, 1995,
(the "Indenture"), with the Indenture Trustee, the Back-up Servicer and the
Servicer, pursuant to which the Depositor intends to issue one or more Series of
Warehouse Notes and Term Notes (the "Notes").
The Depositor and Federal Leasing Corp. (the "Company") have entered
into a Lease Acquisition Agreement dated as of March 1, 1995 (the "Lease
Acquisition Agreement"), providing for, among other things, the contribution and
sale, from time to time, by the Company to the Depositor of all of its right,
title and interest in and to certain Lease Assets which the Depositor is and
will be pledging with the Indenture Trustee, and in which the Depositor will be
granting to the Indenture Trustee a security interest, as security for the
Notes. As a precondition to the effectiveness of such Lease Acquisition
Agreement, the Lease Acquisition Agreement requires that the Servicer, the
Depositor, the Indenture Trustee and the Back-up Servicer enter into this
Agreement to provide for the servicing of the Lease Assets.
In order to further secure the Notes, the Depositor is granting to the
Indenture Trustee a security interest in, among other things, the Depositor's
rights derived under this Servicing Agreement and the Lease Acquisition
Agreement, and the Servicer agrees that all covenants and agreements made by the
Servicer herein with respect to the Lease Assets shall also be for the benefit
and security of the Indenture Trustee and all holders from time to time of the
Notes. For its services under the Servicing Agreement, the Servicer will receive
a Servicer Fee as provided herein and in the Indenture. For its services
hereunder the Back-up Servicer will receive a Back-up Servicer Fee as provided
herein and in the Indenture.
<PAGE>
Section 1. Specific Definitions and Designations
"ACH Bank": None.
"Back-up Servicer": shall initially mean Norwest Bank Minnesota,
National Association.
"Company": shall mean Federal Leasing Corp.
"Depositor": shall mean FLC Financial Corp.
"Indenture Trustee": shall initially mean Norwest Bank Minnesota,
National Association.
"Initial Net Worth Standard": shall mean that the Reported Companies'
total net worth, consisting of preferred stock and warrants and shareholders'
equity, as reflected in the most recent Reported Companies' Financial
Statements, is equal to at least $900,000.
"Reported Companies": shall mean Federal Leasing Corp., New Jersey
Mortgage Investment Corp. ("NJMIC"), and any other wholly-owned
subsidiary of the Company, on a consolidated basis, and in addition, any
successor Servicer appointed pursuant to the Servicing Agreement.
"Servicer": shall initially mean Federal Leasing Corp.
"Servicer State of Incorporation": is New Jersey.
Section 2. The Servicer Fee
The Servicer Fee shall be equal to $5.00 per Lease Contract, per
Scheduled Payment; provided, however, that if the Servicer is anyone other than
Federal Leasing Corp. or one of its affiliates, (i) the Servicer Fee shall be
equal to the lesser of (a) $5.00 per Lease Contract, per Scheduled Payment or
(b) the fee provided for in Section 6.02 of the Standard Servicing Terms and
(ii) such successor Servicer shall be entitled to any Additional Servicer Fee as
provided in the Standard Servicing Terms.
Section 3. Commencement of Independent Accounting Reports
The annual independent accountants' reports referred to in Section 4.03
of the Standard Servicing Terms shall commence with the fiscal year ended
February 28, 1995.
Section 4. Addresses for Notices
All demands, notices and communications referred to in Section 8.04 of
the Standard Servicing Terms shall be addressed as follows:
2
<PAGE>
(a) if to the Depositor, at 5 Becker Farm Road, Suite A, Roseland, New
Jersey 07068, Attention: President;
(b) if to the Servicer, at 5 Becker Farm Road, Roseland, New Jersey
07068, Attention: President;
(c) if to the Back-up Servicer, at 6th & Marquette Avenue, Minneapolis,
Minnesota, 55479-0069, Attention: Corporate Trust Department;
(d) if to the Indenture Trustee, at 6th Street & Marquette Avenue,
Minneapolis, Minnesota 55479-0069, Attention: Corporate Trust Department;
(e) if to any Noteholder, at its address for notices specified in the
Note Register;
(f) if to the Rating Agencies, at Standard & Poor's, 26 Broadway, New
York, NY 10004 and Moody's Investor Service, Inc., 99 Church Street, New York,
NY 10007.
Any of the Persons in subclauses (a) through (f) above may change the
address for notices hereunder by giving notice of such change to the other
Persons. Any change of address shown on the Note Register shall, after the date
of such change, be effective to change the address for such Noteholder
hereunder.
Section 5. Servicing Agreement Comprised of Specific Servicing Terms
and Standard Servicing Terms
This Specific Servicing Terms incorporates by reference all of the
provisions of the Standard Servicing Terms attached hereto as Appendix 1, which
together form the Servicing Agreement. Notwithstanding the foregoing, if any
provision of the Standard Servicing Terms conflicts with the provisions of the
Specific Servicing Terms, the provisions of the Specific Servicing Terms shall
control.
Section 6. Counterparts
This Servicing Agreement may be executed in one or more counterparts
all of which together shall constitute one original document.
3
<PAGE>
IN WITNESS WHEREOF, the Depositor, the Servicer, the Back-up Servicer
and the Indenture Trustee have caused this Servicing Agreement to be duly
executed by their respective officers thereunto duly authorized as of the date
and year first above written.
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, Indenture Trustee
By: /s/ Thomas S. Maple
-------------------------------------
Name: Thomas S. Maple
Title: VP
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, Back-up Servicer
By: /s/ Thomas S. Maple
-------------------------------------
Name: Thomas S. Maple
Title: VP
FLC FINANCIAL CORP.
Depositor
By: /s/ Stan Furst
-------------------------------------
Name: Stan Furst
Title: President
FEDERAL LEASING CORP.,
Servicer
By: /s/ Stan Furst
--------------------------------------
Name: Stan Furst
Title: Chairman
<PAGE>
EXHIBIT A
- --------------------------------------------------------------------------------
FEDERAL LEASING CORP. SPC Name: FLC Financial Corp.
MONTHLY SERVICER REPORT Month:_________, 1995
- --------------------------------------------------------------------------------
To Norwest Bank Minnesota, National Association,
as Trustee and Backup Servicer Determination Date:__________
MBIA as the Financial Guarantor
Rothschild Inc. as Placement Agent Calculation Date:____________
Dear Sirs:
In accordance with Section 4.01 of the Standard Terms and Conditions of
Servicing, dated March 1, 1995, by and among Federal Leasing Corp. as Servicer,
Norwest Bank Minnesota, N.A., as Indenture Trustee and Backup Servicer and FLC
Financial Corp., as Depositor ("SV"), this letter constitutes the Monthly
Servicer's Report for the Payment Date occurring on __________ 20, 1995. Unless
otherwise expressly noted, all data contained herein has been calculated as of
the related Calculation Date and with respect to the related Due Period.
Reference is also made to the Standard Terms and Conditions of Indenture, dated
as of March 1, 1995 ("IN") and the Specific Terms & Conditions of Indenture,
dated March 1, 1995 by and among the Depositor and the Servicer and the
Indenture Trustee and Back-Up Servicer ("IN-SUP").
<TABLE>
<CAPTION>
<S> <C>
Deposits into Collection Account for prior Due Period
Deposits by or on behalf of the Servicer:
Scheduled and Overdue Payments Received under the Lease Contracts directly by the Service $___________
Prepayments received $___________
Residual Proceeds $___________
Recoveries $___________
Purchase Price received $___________
Guaranty Amounts $___________
Insurance Proceeds $___________
Servicer Advances $___________
Prepayments received above $_________
PV of Prepayments (incl. residuals) $_________
Net Prepayments Due to Servicer (if negative, will be 0) $___________
Taxes received by Servicer $___________
Other amounts received by Servicer $___________
Total $
===========
Transfers made by Trustee to the Collection Account
Transfer from Advance Payment Account (per 3.03(c)(ii) of SV) $___________
Advance Payment Account Investment Earnings (per 3.03(c)(i) of SV) $___________
Transfer from Cash Collateral Account (per 12.03(d)(i) and (d) (iii) of IN) $___________
Collection Account Investment Earnings $___________
___________
Total $___________
Amounts from other sources (e.g. Depositor reimbursement of losses on eligible investments) $___________
Total deposited into the Collection Account $
(other than payments from MBIA) ===========
Disbursements from Collection Account:
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL LEASING CORP. SPC Name: FLC Financial Corp.
MONTHLY SERVICER REPORT Month:_________, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Prior to Payment of Principal and Interest Due
- ---------------------------------------------
Servicer Fee $___________
Reinvestment Income (Collection Account and Advance
Payment Account) to Servicer) $___________
Reimburse Servicer and Back-up Servicer pursuant to Section
3.09 of SV (for costs associated with Defaulted Leases) $___________
Pay Servicer any tax amounts deposited in Collection
Account pursuant to Section 3.07 of SV $___________
Transfer to Advance Payment Account payments in excess of scheduled amounts due $___________
Reimburse prepaid amounts greater than IPB and residual $___________
Unreimbursed Servicer Advances now collected $___________
Nonrecoverable Servicer Advances
Trustee Fee $___________
Backup Servicer Fee $___________
MBIA Premium (starting on March 20, 1996) $___________
Total $___________
Total Balance Available for Noteholder Payments $___________
Disbursements to Noteholder
- ---------------------------
Total Interest Due (current and overdue) $___________
Warehouse Note Int $___________@___________
Term Notes 1994-A Int $___________@___________
Term Notes 1995-A Int $___________@___________
Principal Distribution Amount $___________
Warehouse Note Prin $___________
Term Notes 1994-A Prin $___________
Term Notes 1995-A Prin $___________
Portion covered by MBIA Policy, (for every Payment Date
before stated Maturity Date, only Interest Due; for Stated
Maturity Date, Interest due plus outstanding Note Amount) $___________
Amounts received under the MBIA Policy (Article 8 of IN) $___________
Total Balance Available for Other Payments $___________
Other Disbursements
- -------------------
Deposit to the Cash Collateral Account to its Cash
Collateral Account Required Balance (see below) $___________
Any Insurance Premiums pursuant to 12.02(d)(viii) of IN $___________
Unpaid MBIA amounts, if any $___________
Additional Servicer Fee, if any $___________
Successor Servicer, MBIA and Trustee Transition Costs specified in 12.02(d)(x) of IN $___________
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL LEASING CORP. SPC Name: FLC Financial Corp.
MONTHLY SERVICER REPORT Month:_________, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Note Principal, if a Trigger Event has occurred (per 12.02(d)(xi) of IN) $___________
Warehouse Note Prin $___________
Term Notes 1994-A Prin $___________
Term Notes 1995-A Prin $___________
To the Servicer amounts specified in 12.02(d)(xii) of IN $___________
To the Servicer any unreimbursed Servicer Advances $___________
To MBIA, amounts specified in the Insurance Agreement $___________
To Trustee and Back-Up Servicer, amounts specified in 12.02(d)(xiv) of IN $___________
To the Warehouse Lender, excess costs pursuant to 12.02(d)(xv) $___________
To Rating Agencies $___________
To the Depositor, any excess amount remaining in the Collection Account $___________
Total deposited into the Collection Account, including payments from MBIA $___________
Total disbursed from Collection Account $___________
Servicer Advances
Amount of Scheduled Payments not received (includes both Scheduled
Payments on Delinquent Leases as well as leases which have
become Defaulted Leases in the current Monthly Period) $___________
Cumulative unreimbursed Servicer Advances as of
the previous Servicer Remittance Date $___________
Plus Servicer Advances for the current Monthly Period $___________
Less Aggregate amount of Servicer Advance reimbursements
for the current Monthly Period $___________
Cumulative unreimbursed Servicer Advances $___________
Cash CoHateral Account
Beginning Balance $___________
Plus Deposit made to the Cash Collateral Account due to rate adjustment $___________
Plus Amount transferred from Collection Account $___________
Investment Earnings on Cash Collateral Account $___________
Less Amount transferred to Collection Account $___________
Less amounts in excess of Cash Collateral Account Required Balance
transferred to Depositor pursuant to Section 12.03(d)(ii) of IN $___________
Ending Balance $___________
Cash Collateral Account Factor
Cash Collateral Account Required Balance:
Product of (a) Required Collateralization Amount (see below)- (Implicit
Principal Balance -ending Note balance)) and (b) Cash Collateral
Account Factor or zero if a Trigger Event has occurred 1.0067
___________
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL LEASING CORP. SPC Name: FLC Financial Corp.
MONTHLY SERVICER REPORT Month:_________, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Advance Payment Account
Beginning Balance $___________
Plus amount received during the Monthly Period and Remitted by Servicer $___________
Plus Investment Earnings on Advance Payment Account $___________
Less amount transferred by Trustee to Collection Account $___________
Ending Balance $___________
Implicit Principal Balance Decrease
(As of Calculation Date, for all leases acquired through Implicit
Determination Date) Principal Balance # of Contracts
----------------- --------------
Beginning Aggregate Implicit Principal Balance $________________ ______________
Less Amortization of Scheduled Payments $________________ ______________
Less Unamortized Implicit Principal balance of:
Defaulted Contracts $________________ ______________
Matured Contracts $________________ ______________
Casualty Contracts (to extent of Insurance Proceeds) $________________ ______________
Plus IPB of Substitute Contracts transferred into the Trust $________________ ______________
Less IPB of Substitute Contracts transferred out of the Trust $________________ ______________
Less IPB of Contracts repurchased by the Seller or Transferor
or purchased by the Servicer during the current Due Period $________________ ______________
Other $________________ ______________
Aggregate Implicit Principal Balance Decrease $________________ ______________
Ending IPB before current period Warehouse Fundings ________________ ______________
Plus IPB of Lease Contracts acquired through Warehouse Fundings $________________ ______________
Ending Aggregate Implicit Principal Balance $________________ ______________
</TABLE>
<TABLE>
<CAPTION>
Series Initial Implicit Principal Balance
-----------------------------------------
<S> <C> <C> <C> <C> <C>
1994-A Series Initial IPB $___________
1995-A Series Initial IPB $___________
Warehouse Initial IPB $___________
Total Initial Series IPB $___________
Note Information Beginning Note Less Principal Plus Warehouse Ending Note
Balance Payment Fundings Balance
------- -------------- -------------- ------------
Series 1994-A $______________ $______________ $_____________ $____________
Series 1995-A $______________ $______________ $_____________ $____________
Warehouse Note $______________ $______________ $_____________ $____________
Total $______________ $______________ $_____________ $____________
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL LEASING CORP. SPC Name: FLC Financial Corp.
MONTHLY SERVICER REPORT Month:_________, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Required Collateralization Amount, as last calculated plus
Warehouse Funding IPB times Holdback Rate, if any, on Payment
Date $____________
Required Collateralization Amount
Floor Percentage 3.50%
-----------
Collateralization Percentage 10.00%
-----------
a) Minimum Required Collateralization Amount $____________
b) the greatest of A, B, or C $____________
A) Collateralization Percentage multiplied by the
Aggregate Implicit Principal Balance $____________
B) Implicit Principal Balance of the 3 largest Customers $____________
C) Floor Percentage multiplied by the Initial Aggregate
Implicit Principal Balance $____________
Required Collateralization Amount equals the lesser of a) or b) $____________
Actual overcollateralization amount:
(Implicit Principal Balance plus Cash Collateral Account balance)
minus the Outstanding Note Amount $____________
Trigger Event Calculations:
Calculate Annualized Default Rate:
- ---------------------------------
# of months after Servicer Advance made to declare Defaulted Lease:
Implicit Principal Balance of Defaulted Lease Contracts during
current Due Period (including repurchased and Substitute Contracts) $____________
Less Recoveries received during the current Due Period $____________
Less Residuals $____________
Total $____________
Current Month Annualized Default Rate ___________________
</TABLE>
<TABLE>
<CAPTION>
Detail on Defaulted Contracts (excluding Repurchased or Substituted Contracts):
- -------------------------------------------------------------------------------
Implicit Principal
Balance # of Contracts
------------------- ---------------
<S> <C> <C>
Servicer did not make Advance $___________________ _______________
Prior Advance Deemed Unrecoverable $___________________ _______________
Prior Advance not Reimbursed by Deadline $___________________ _______________
Total Defaulted Contracts $___________________ _______________
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL LEASING CORP. SPC Name: FLC Financial Corp.
MONTHLY SERVICER REPORT Month:_________, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Calculate Delinquency Rate:
- ---------------------------
% of Aggregate
Delinquencies Implicit Implicit Number of
Principal Balance Principal Balance Contracts
---------------- ----------------- ---------
<S> <C> <C> <C> <C>
31-60 days delinquent $________________ _________________ __________
61-90 days delinquent $________________ _________________ __________
91-120 days delinquent $________________ _________________ __________
121-150 days delinquent $________________ _________________ __________
151-180 days delinquent $________________ _________________ __________
181 + days $________________ _________________ __________
Delinquency Rate $________________ _________________ __________
</TABLE>
<TABLE>
<CAPTION>
Check Default and Delinquency Triggers:
- --------------------------------------
Monthly Period
Sum of Current & Prior to
Average Immediately Immediately Immediately
Past 3 Months Preceding Month Current Month Preceding Month Preceding Month
------------- ----------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Annualized
Default Rate _____________ _______________ _____________ _______________ ________________
Delinquency Rate _____________ _______________ _____________ _______________ ________________
</TABLE>
<TABLE>
<CAPTION>
Curr Mo + Current
3 Mo Avg. Last Mo Month
------------- ------------ ---------
<S> <C> <C> <C>
Max. Default Rates: 2.10% 6.30% 6.30%
------------- ------------ ----------
Applicable Maximum Delinquency Rate 5.75%
-----------
Net Worth:
- ----------
Net Worth Minimum $ 900,000.00
------------
Federal Leasing Corp.'s Net Worth $ (as of _________, 1995 audited)
------------
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL LEASING CORP. SPC Name: FLC Financial Corp.
MONTHLY SERVICER REPORT Month:_________, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Detail on Substitutions and Purchases: Cumulative Implicit
Cumulative Principal Balance
Implicit Implicit Divided by Initial
Principal Balance Principal Balance Implicit Principal Balance
----------------- ----------------- --------------------------
<S> <C> <C> <C>
Leases Terminated or Prepaid and
Substituted per 4.04(d) of IN $________________ $________________ ________________ (< 10%)
Delinquent Lease Contracts
Repurchased or Substituted
per 4.04(d) of IN $________________ $________________ ________________ (<6%)
Defaulted Lease Contracts,
Repurchased or Substituted
per 4.04(d) of IN $________________ $________________ ________________ (< 3.5 %)
Substitution Limit on Aggregate IPB:
Defaulted and Delinquent Lease Contracts
Repurchased or Substituted
per 4.04(d) of IN $________________ $________________ ________________ (<20%)
Transition Costs:
Cumulative Transition Costs Paid to Date
pursuant to 12.02(d)(x) of IN $ 0.00
________________
</TABLE>
Explanatory Notes:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Contact: _____________________
Phone: _____________________
The undersigned officer of the Servicer hereby certifies that
the information contained in this Monthly Servicer Report is true and
accurate in all respects.
Federal Leasing Corp.
Servicer
By:__________________________
Name:
Title:
7
<PAGE>
APPENDIX I
STANDARD TERMS AND CONDITIONS OF SERVICING
Appendix I to this document, the Standard Terms and Conditions of Servicing, is
Document Number 5.
<PAGE>
AMENDED AND RESTATED SPECIFIC TERMS AND CONDITIONS OF LEASE
ACQUISITION, dated as of March 1, 1995, by and between Federal Leasing Corp., a
New Jersey corporation (the "Company") and its wholly owned subsidiary, FLC
Financial Corp., a Delaware corporation (the "Depositor").
PRELIMINARY STATEMENT
This Specific Terms and Conditions of Lease Acquisition (the "Specific
Lease Acquisition Terms") is intended to incorporate by reference all of the
provisions of the Standard Terms and Conditions of Lease Acquisition attached
hereto as Appendix 1 (the "Standard Lease Acquisition Terms"). Together the
Specific Lease Acquisition Terms and the Standard Lease Acquisition Terms are
intended to form the Lease Acquisition Agreement entered into in connection with
the financing described below.
The Depositor has entered into an Amended and Restated Indenture dated
as of March 1, 1995, (the "Indenture"), with Norwest Bank Minnesota, National
Association (the "Indenture Trustee"), Norwest Bank Minnesota, National
Association (the "Back-up Servicer") and Federal Leasing Corp., as servicer (the
"Servicer"), pursuant to which the Depositor intends to issue one or more series
of Warehouse Notes and Term Notes (the "Notes").
In furtherance thereof, the Depositor and Company have entered into the
Lease Acquisition Agreement to provide for, among other things, the acquisition
by the Depositor of all of the right, title and interest in and to certain Lease
Assets which the Depositor is and will be pledging with the Indenture Trustee
from time to time, and in which the Depositor is and will be from time to time
granting to the Indenture Trustee a security interest, as security for the
Notes. As a precondition to the effectiveness of the Lease Acquisition
Agreement, the Depositor, the Indenture Trustee, the Servicer and the Back-up
Servicer will enter into the Servicing Agreement to provide for the servicing of
the Lease Assets. The acquisition of the Lease Assets by the Depositor is
initially accomplished hereunder by the issuance by the Depositor to the Company
of its common stock in exchange for the contribution by the Company to the
Depositor of the Lease Assets.
In order to further secure the Notes, the Depositor is granting to the
Indenture Trustee a security interest in, among other things, the Depositor's
rights derived under the Lease Acquisition Agreement and the Servicing
Agreement, and the Company agrees that all covenants and agreements made by it
in the Lease Acquisition Agreement with respect to the Lease Assets shall also
be for the benefit and security of the Indenture Trustee, MBIA and all Holders
from time to time of the Notes. In consideration for its contribution and its
representations, warranties, covenants and other agreements under the Lease
Acquisition Agreement, the Company has received all of the Common Stock of the
Depositor and such other consideration as may from time to time be paid
hereunder.
1
<PAGE>
Section 1. Specific Definitions
"Assignment and Assumption Agreement": shall mean an Assignment and
Assumption Agreement substantially in the form attached hereto as Exhibit B.
"Common Stock": shall mean all of the issued and outstanding shares of
Common Stock of the Depositor, which consists of 1,000 shares having a par value
of $.01 per share.
"Company Address": shall mean 5 Becker Farm Road, Post Office Box M,
Roseland, New Jersey 07068.
"Concentration Limits": shall have the meaning specified in Section
3(c) hereof.
"Demand Note": shall mean the promissory note of the Company, dated May
17, 1994, made payable to the Depositor upon demand, in the principal amount of
$100,000.
"Depositor Address": shall mean 5 Becker Farm Road, Suite A, Roseland,
New Jersey 07068.
"Depositor State of Incorporation": shall mean Delaware.
"Existing Indebtedness": shall mean any indebtedness of the Company
which relates to preexisting financings of any Lease Contracts that are covered
by an Assignment and Assumption Agreement, as set forth in Schedule I thereto.
"Initial Acquisition Date": shall mean May 17, 1994.
"Lease Assets": shall also include the Demand Note.
"Obligation Agreement": shall mean the Indenture.
Section 2. Issuance of Common Stock and Contribution and Sale of Lease
Assets
2.01 Authorization and Issuance of Common Stock by the Depositor.
Subject to all the terms and conditions of the Lease Acquisition Agreement and
in reliance upon the representations, warranties and covenants set forth in the
Lease Acquisition Agreement, as of the Initial Acquisition Date the Depositor
hereby issues to the Company the Common Stock. Such Common Stock shall be issued
in the name of, and delivered directly to, the Company and the Company hereby
agrees to obtain directly from the Depositor such Common Stock, all in
accordance with the terms of the Lease Acquisition Agreement.
2.02 Lease Acquisition. On the Initial Acquisition Date, in return for
the Common Stock, and on each subsequent Acquisition Date, in return for the
payment of purchase price in the amount of the net proceeds from the related
Warehouse Funding or the issuance of a new Series of Notes, the Company hereby
transfers, assigns, sells, grants and contributes to the Depositor, without
recourse except as provided in Section 3.03 of the Standard Lease Acquisition
Terms, all of the
2
<PAGE>
Company's right, title and interest in and to all of the Lease Assets related to
the Lease Contracts now or hereafter listed on each Series Lease Schedule,
whether now existing or hereafter arising, and the Demand Note. The Company
hereby acknowledges that its transfer of the Lease Assets and the Demand Note to
the Depositor is absolute and irrevocable, without reservation or retention of
any interest whatsoever by the Company.
2.03 Assumption of Indebtedness by the Depositor. By the execution of
an Assignment and Assumption Agreement, subject to all the terms and conditions
of the Lease Acquisition Agreement and in reliance upon the representations,
warranties and covenants set forth in the Lease Acquisition Agreement, on the
Initial Acquisition Date and on any related subsequent Acquisition Date the
Depositor hereby agrees to assume the related Existing Indebtedness and the
Depositor agrees to repay the Existing Indebtedness with the proceeds of the
sale of any Obligations on the related Delivery Date simultaneously with the
issuance of such Obligations.
Section 3. Representations and Warranties of the Company.
(a) The following shall modify the indicated representations and
warranties set forth in Section 3.01(a) of the Standard Lease Acquisition Terms:
(xii) Except as indicated in the Concentration Limits set forth in
Section 3(c) hereof, the Lease Contract has regular rental payments
(excluding payments required pursuant to a PUT or a terminal rental
adjustment clause ("TRAC")) that do not increase by more than 200%
during the remaining term of the Lease Contract.
(xvi) Except with respect to any Warehouse Funded Lease Contract, each
Customer under each Lease Contract will have made at least two lease
payments with respect to such Lease Contract, including any security
deposit or advance payment made by the Customer upon the execution of
the Lease Contract or the delivery of the Equipment; except that up to
10% of the Aggregate Initial IPB may account for Lease Contracts
pursuant to which the related Customers have made less than two
payments.
(b) The Company represents and warrants that none of the Equipment is
titled equipment.
(c) The following items shall constitute the "Concentration Limits"
with respect to all Lease Assets acquired by the Depositor:
3
<PAGE>
Type of Limit Description of Limit
- ------------- --------------------
State No more than 22% of the Aggregate IPB consists of
Lease Contracts to Customers located in
California.
State No more than 15% of the Aggregate IPB consists of
Lease Contracts to Customers located in Florida.
State No more than 30% of the Aggregate IPB consists of
Lease Contracts to Customers located in New
Jersey.
State No more than 20% of the Aggregate IPB consists of
Lease Contracts to Customers located in New York.
State No more than 8% of the Aggregate IPB consists of
Lease Contracts to Customers located in each of
Georgia and Pennsylvania.
State No more than 15% of the Aggregate IPB consists of
Lease Contracts to Customers located in
Connecticut.
State No more than 5% of the Aggregate IPB consists of
Lease Contracts to Customers located in any other
single state.
Equipment No more than 45% of the Aggregate IPB relates to
Lease Contracts on medical equipment.
Equipment No more than 30% of the Aggregate IPB relates to
Lease Contracts on office equipment.
Equipment No more than 6% of the Aggregate IPB relates to
Lease Contracts on automotive equipment.
Equipment No more than 13% of the Aggregate IPB relates to
Lease Contracts on industrial tools and equipment.
Equipment No more than 6% of the Aggregate IPB relates to
Lease Contracts on printing and related equipment.
Equipment No more than 25% of the Aggregate IPB relates to
Lease Contracts on food processing equipment.
Equipment No more than 2.5% of the Aggregate IPB relates to
Lease Contracts on any other single type of
equipment.
Zip Code No more than 2% of the Aggregate IPB relates to
Lease Contracts of Customers located in any one
zip code, and the
4
<PAGE>
aggregate IPB of Lease Contracts having Customers
in the 25 most represented zip codes do not total
more than 40% of the Aggregate IPB.
Lessee No more than 1.5% of the Aggregate IPB consists of
Lease Contracts to any one Customer, and the
aggregate IPB of Lease Contracts with the 25 most
represented Customers do not total more than 40%
of the Aggregate IPB.
Term No more than 2% of the Aggregate IPB relates to
Lease Contracts with original terms exceeding 60
months.
Payment Frequency No more than 15% of the Aggregate IPB relates to
Lease Contracts that contain Scheduled Payments
less frequently than monthly.
Step Payments No more than 10% of the Aggregate IPB relates to
Lease Contracts that contain Scheduled Payments
that vary in amount.
Step Payments No more than 5% of the Aggregate IPB relates to
Lease Contracts that have unlimited increases in
rental payments, provided that the increases occur
no later than the 25th rental payment (such rental
payments do not include PUT and TRAC payments),
and then remains constant for the remainder of the
term of the Lease Contract; and no more than an
additional 5% of the Aggregate IPB relates to
Lease Contracts that have rental payments
(excluding PUT and TRAC payments) that do not
increase by more than 300% during the remaining
term of the Lease Contract.
PUT Payments No more than 10% of the Aggregate IPB relates to
Lease Contracts that contain PUT Payments.
TRAC Payments No Lease Contract contains TRAC Payments and at
least 90% of the Aggregate IPB relates to Lease
Contracts that are expected to generate residual
cash flows.
Loss & Damage Waivers No more than 2% of the Aggregate IPB relates to
Lease Contracts that contain loss and damage
waiver provisions or any other performance
obligation by the Depositor or the Company.
5
<PAGE>
(d) Exceptions to the Concentration Limits above are set forth on
Exhibit C hereto.
(e) Notwithstanding anything herein to the contrary, the inclusion of
Substitute Lease Contracts or Warehouse Funded Lease Contracts in the Trust
Estate shall not cause any Lease Contract to violate the restrictions enumerated
in (a) through (c) above, or cause the Aggregate IPB of the Lease Contracts to
exceed the applicable percentages enumerated in (a) through (c) above.
Section 4. Lease Acquisition Agreement Comprised of Specific Lease
Acquisition Terms and Standard Lease Acquisition Terms.
This Specific Lease Acquisition Terms incorporates by reference all of
the provisions of the Standard Lease Acquisition Terms attached hereto as
Appendix 1, which together form the Lease Acquisition Agreement. Notwithstanding
the foregoing, if any provision of the Standard Lease Acquisition Terms
conflicts with the provisions of the Specific Lease Acquisition Terms, the
provisions of the Specific Lease Acquisition Terms shall control.
Section 5. Counterparts
The Lease Acquisition Agreement may be executed in one or more
counterparts all of which together shall constitute one original document.
6
<PAGE>
IN WITNESS WHEREOF, the Company and the Depositor have caused the Lease
Acquisition Agreement to be duly executed by their respective officers thereunto
duly authorized as of the date and year first above written.
FEDERAL LEASING CORP.,
Company
By: /s/ Stan Furst, Chairman
-------------------------
Name: Stan Furst
Title: Chairman
FLC FINANCIAL CORP.
Depositor
By: /s/ Stan Furst, Pres.ident
---------------------------
Narne:Stan Furst
Title: President
<PAGE>
- -------------------------------------------------------------------------------
SPECIFIC TERMS AND CONDITIONS OF SERVICING
among
FLC FINANCIAL CORP. II
("Issuer")
and
FEDERAL LEASING CORP.
("Servicer")
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
("Back-up Servicer")
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
("Indenture Trustee")
------------------------
Dated as of March 1, 1996
- -------------------------------------------------------------------------------
<PAGE>
SPECIFIC TERMS AND CONDITIONS OF SERVICING, dated as of March 1, 1996,
by and among FLC Financial Corp. II, a Delaware corporation (the "Issuer"),
Federal Leasing Corp., a New Jersey corporation, as the Servicer hereunder (the
"Servicer"), Norwest Bank Minnesota, National Association, a national banking
association (the "Back-up Servicer") and Norwest Bank Minnesota, National
Association, a national banking association, as trustee (the "Indenture
Trustee") under the Indenture (defined below).
PRELIMINARY STATEMENT
This Specific Terms and Conditions of Servicing (the "Specific
Servicing Terms") is intended to incorporate by reference all of the provisions
of the Standard Terms and Conditions of Servicing attached hereto as Appendix 1
(the "Standard Servicing Terms") and the definitions in Appendix X. Together the
Specific Servicing Terms and the Standard Servicing Terms are intended to form
the Servicing Agreement entered into in connection with the financing described
below.
The Issuer has entered into an Indenture dated as of March 1, 1996,
(the "Indenture"), with the Indenture Trustee, the Back-up Servicer and the
Servicer, pursuant to which the Issuer intends to issue one or more Series of
Notes (the "Notes").
The Issuer and Federal Leasing Corp. (the "Company") have entered into
a Lease Acquisition Agreement dated as of March 1, 1996 (the "Lease Acquisition
Agreement"), providing for, among other things, the contribution and sale, from
time to time, by the Company to the Issuer of all of its right, title and
interest in and to certain Lease Assets which the Issuer is and will be pledging
with the Indenture Trustee, and in which the Issuer will be granting to the
Indenture Trustee a security interest, as security for the Notes. As a
precondition to the effectiveness of such Lease Acquisition Agreement, the Lease
Acquisition Agreement requires that the Servicer, the Issuer, the Indenture
Trustee and the Back-up Servicer enter into the Servicing Agreement to provide
for the servicing of the Lease Assets.
In order to further secure the Notes, the Issuer is granting to the
Indenture Trustee a security interest in, among other things, the Issuer's
rights derived under the Servicing Agreement and the Lease Acquisition
Agreement, and the Servicer agrees that all covenants and agreements made by the
Servicer herein with respect to the Lease Assets shall also be for the benefit
and security of the Indenture Trustee, MBIA and all Holders from time to time of
the Notes. For its services under the Servicing Agreement, the Servicer will
receive a Servicer Fee as provided herein and in the Indenture. For its services
hereunder the Back-up Servicer will receive a Back-up Servicer Fee as provided
herein and in the Indenture.
1
<PAGE>
Section 1. Specific Definitions and Designations
"ACH Bank": None.
"Back-up Servicer": shall initially mean Norwest Bank Minnesota,
National Association.
"Company": shall mean Federal Leasing Corp.
"Indenture Trustee": shall initially mean Norwest Bank Minnesota,
National Association.
"Initial Net Worth Standard": shall mean that the Reported Companies'
total net worth, consisting of preferred stock and warrants and shareholders'
equity, as reflected in the most recent Reported Companies' Financial
Statements, is equal to at least $1,300,000.
"Issuer": shall mean FLC Financial Corp. II.
"Reported Companies": shall mean Federal Leasing Corp., New Jersey
Mortgage Investment Corp. ("NJMIC"), and any other wholly-owned subsidiary of
the Company, on a consolidated basis, and in addition, any successor Servicer
appointed pursuant to the Servicing Agreement.
"Servicer": shall initially mean Federal Leasing Corp.
"Servicer State of Incorporation": is New Jersey.
Section 2. The Servicer Fee
The Servicer Fee shall be equal to $5.00 per Lease Contract, per
Scheduled Payment; provided, however, that if the Servicer is anyone other than
Federal Leasing Corp. or one of its affiliates, (i) the Servicer Fee shall be
equal to the lesser of (a) $5.00 per Lease Contract, per Scheduled Payment or
(b) the fee provided for in Section 6.02 of the Standard Servicing Terms and
(ii) such successor Servicer shall be entitled to any Additional Servicer Fee as
provided in the Standard Servicing Terms.
Section 3. Commencement of Independent Accounting Reports
The annual independent accountants' reports referred to in Section 4.03
of the Standard Servicing Terms shall commence with the fiscal year ended
February 28, 1997.
2
<PAGE>
Section 4. Addresses for Notices
All demands, notices and communications referred to in Section 8.04 of
the Standard Servicing Terms shall be addressed as follows:
(a) if to the Issuer, at 5 Becker Farm Road, Suite B, Roseland, New
Jersey 07068, Attention: President;
(b) if to the Servicer, at 5 Becker Farm Road, Roseland, New Jersey
07068, Attention: President;
(c) if to the Back-up Servicer, at 6th Street & Marquette Avenue,
Minneapolis, Minnesota, 55479-0069, Attention: Corporate Trust Department;
(d) if to the Indenture Trustee, at 6th Street & Marquette Avenue,
Minneapolis, Minnesota 55479-0069, Attention: Corporate Trust Department;
(e) if to any Noteholder, at its address for notices specified in the
Note Register;
(f) if to the Rating Agencies, at Standard & Poor's. 26 Broadway, New
York, NY 10004 and Moody's, 99 Church Street, New York, NY 10007.
(g) if to MBIA, at MBIA Insurance Corporation, 113 King Street,
Armonk, NY 10504, Attention: Insurance Portfolio Management--Structured Finance
(IPM-SF).
Any of the Persons in subclauses (a) through (g) above may change the
address for notices hereunder by giving notice of such change to the other
Persons. Any change of address shown on the Note Register shall, after the date
of such change, be effective to change the address for such Noteholder
hereunder.
Section 5. Servicing Agreement Comprised of Specific Servicing Terms
and Standard Servicing Terms
This Specific Servicing Terms incorporates by reference all of the
provisions of the Standard Servicing Terms attached hereto as Appendix 1 and the
definitions set forth in Appendix X, which together form the Servicing
Agreement. Notwithstanding the foregoing, if any provision of the Standard
Servicing Terms conflicts with the provisions of the Specific Servicing Terms,
the provisions of the Specific Servicing Terms shall control.
Section 6. Counterparts
This Specific Servicing Terms which together with the Standard
Servicing Terms form the Servicing Agreement (the "Servicing Agreement") which
may be executed in one or more counterparts all of which together shall
constitute one original document.
3
<PAGE>
IN WITNESS WHEREOF, the Issuer, the Servicer, the Back-up Servicer and
the Indenture Trustee have caused this Servicing Agreement to be duly executed
by their respective officers thereunto duly authorized as of the date and year
first above written.
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, Indenture Trustee
By: /s/ Bonnie Seideman
-------------------------------------
Name: Bonnie Seideman
Title: Assistant Vice President
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, Back-up Servicer
By: /s/ Bonnie Seideman
-------------------------------------
Name: Bonnie Seideman
Title: Assistant Vice President
FLC FINANCIAL CORP. II
Issuer
By: /s/ Stan Furst
-------------------------------------
Name: Stan Furst
Title: President
FEDERAL LEASING CORP.,
Servicer
By: /s/ Stan Furst
-------------------------------------
Name: Stan Furst
Title: Chairman
<PAGE>
================================================================================
SPECIFIC TERMS AND CONDITIONS OF LEASE ACQUISITION
between
FEDERAL LEASING CORP.
("Company")
and
FLC FINANCIAL CORP. II
("Issuer")
-------------------------------
Dated as of March 1, 1996
================================================================================
<PAGE>
SPECIFIC TERMS AND CONDITIONS OF LEASE ACQUISITION, dated as of March
1, 1996, by and between Federal Leasing Corp., a New Jersey corporation (the
"Company") and its wholly owned subsidiary, FLC Financial Corp. II, a Delaware
corporation (the "Issuer").
PRELIMINARY STATEMENT
This Specific Terms and Conditions of Lease Acquisition (the "Specific
Lease Acquisition Terms") is intended to incorporate by reference all of the
provisions of the Standard Terms and Conditions of Lease Acquisition attached
hereto as Appendix 1 (the "Standard Lease Acquisition Terms") and the
definitions in Appendix X attached thereto. Together the Specific Lease
Acquisition Terms and the Standard Lease Acquisition Terms are intended to form
the Lease Acquisition Agreement entered into in connection with the financing
described below.
The Issuer has entered into an Indenture dated as of March 1, 1996,
(the "Indenture"), with NorwestBank Minnesota, National Association (the
"Indenture Trustee"), Norwest Bank Minnesota, National Association (the "Back-up
Servicer") and Federal Leasing Corp., as servicer (the "Servicer"), pursuant to
which the Issuer intends to issue one or more series of Notes (the "Notes").
In furtherance thereof, the Issuer and Company have entered into the
Lease Acquisition Agreement to provide for, among other things, the acquisition
by the Issuer of all of the right, title and interest in and to certain Lease
Assets which the Issuer is and will be pledging with the Indenture Trustee from
time to time, and in which the Issuer is and will be from time to time granting
to the Indenture Trustee a security interest, as security for the Notes. As a
precondition to the effectiveness of the Lease Acquisition Agreement, the
Issuer, the Indenture Trustee, the Servicer and the Back-up Servicer will enter
into the Servicing Agreement to provide for the servicing of the Lease Assets.
The acquisition of the Lease Assets by the Issuer is initially accomplished
hereunder by the issuance by the Issuer to the Company of the Common Stock in
exchange for the contribution by the Company to the Issuer of the Lease Assets.
In order to further secure the Notes, the Issuer is granting to the
Indenture Trustee a security interest in, among other things, the Issuer's
rights derived under the Lease Acquisition Agreement and the Servicing
Agreement, and the Company agrees that all covenants and agreements made by it
in the Lease Acquisition Agreement with respect to the Lease Assets shall also
be for the benefit and security of the Indenture Trustee, MBIA and all Holders
from time to time of the Notes. In consideration for its contribution and its
representations, warranties, covenants and other agreements under the Lease
Acquisition Agreement, the Company has received all of the Common Stock of the
Issuer and such other consideration as may from time to time be paid hereunder.
<PAGE>
Section 1. Specific Definitions
"Common Stock": shall mean all of the issued and outstanding shares of
common stock of the Issuer, which consists of 1,000 shares having a par value of
$.01 per share.
"Company Address": shall mean 5 Becker Farm Road, Post Office Box M,
Roseland, New Jersey 07068.
"Concentration Limits": shall have the meaning specified in Section
3(c) hereof.
"Depositor": shall mean FLC Financial Corp.
"Existing Indebtedness": shall mean any indebtedness of the Company
which relates to preexisting financings of any Lease Contracts that are covered
by a Company Certificate, as set forth in Schedule I thereto.
"Initial Acquisition Date": shall mean March 20, 1996.
"Issuer Address": shall mean 5 Becker Farm Road, Suite B, Roseland, New
Jersey 07068.
"Issuer State of Incorporation": shall mean Delaware.
"1995-B Indenture": shall mean the Amended and Restated Standard Terms
and Conditions of Indenture, dated as of March 1, 1995, the Specific Terms and
Conditions of Indenture, dated as of March 1, 1995, and the Supplement to the
Indenture, Warehouse Notes, Series 1995-B, each among the Depositor, the
Company, as Servicer, and Norwest Bank Minnesota, National Association, as
Indenture Trustee and Back-up Servicer.
"1995-B Warehouse Note": shall mean the Depositor's Warehouse Note,
Series 1995-B issued pursuant to the 1995-B Indenture.
Section 2. Issuance of Common Stock and Contribution and Sale of Lease
Assets
2.01 Authorization and Issuance of Common Stock by the Issuer. Subject
to all the terms and conditions of the Lease Acquisition Agreement and in
reliance upon the representations, warranties and covenants set forth in the
Lease Acquisition Agreement, as of the Initial Acquisition Date the Issuer
hereby issues to the Company the Common Stock. Such Common Stock shall be issued
in the name of, and delivered directly to, the Company and the Company hereby
agrees to obtain directly from the Issuer such Common Stock, all in accordance
with the terms of the Lease Acquisition Agreement.
2.02 Lease Acquisition. On the Initial Acquisition Date, in return for
the Common Stock, and on each subsequent Acquisition Date, in return for the
payment of purchase price in the amount of the net proceeds from the related
Funding or the issuance of a new Series of Notes, the Company hereby transfers,
assigns, sells, grants and contributes to the Issuer, without recourse except as
provided in Section 3.03 of the Standard Lease Acquisition Terms, all of the
Company's right, title
<PAGE>
and interest in and to all of the Lease Assets related to the Lease Contracts
now or hereafter listed on each Series Lease Schedule, whether now existing or
hereafter arising. The Company hereby acknowledges that its transfer of the
Lease Assets to the Issuer is absolute and irrevocable, without reservation or
retention of any interest whatsoever by the Company.
2.03 Assumption of Indebtedness by the Issuer. By the execution of an
Issuer Certificate, subject to all the terms and conditions of the Lease
Acquisition Agreement and in reliance upon the representations, warranties and
covenants set forth in the Lease Acquisition Agreement, on the Initial
Acquisition Date and on any related subsequent Acquisition Date the Issuer
hereby agrees to assume the related Existing Indebtedness and the Issuer agrees
to repay the Existing Indebtedness with the proceeds of the sale of any Notes on
the related Acquisition Date simultaneously with the issuance of such Notes.
2.04 Contribution to the Depositor. On the Closing Date, the Company
agrees to use the net proceeds that it receives from the Issuer in connection
with the Issuer's issuance of its Lease Backed Notes, Series 1996-A, to purchase
the Depositor's Lease Contracts which, prior to the Closing Date, are pledged by
the Depositor to secure the 1995-B Warehouse Note pursuant to the provisions
of the 1995 B Indenture, at the "Purchase Price", as such term is defined in the
1995 B Indenture for purposes of this Section 2.04, for each such Lease
Contract.
Section 3. Representations and Warranties of the Company.
(a) The following shall modify the indicated representations and
warranties set forth in Section 3.01 (a) of the Standard Lease Acquisition
Terms:
(xii) Except as indicated in the Concentration Limits set forth in
Section 3 )(c) hereof, the Lease Contract has regular rental payments (excluding
payments required pursuant to a PUT) that do not increase by more than 200%
during the remaining term of the Lease Contract.
(b) The Company makes the additional representation and warranty which
shall be added to Section 3.01 (a):
(xxv) The Company represents and warrants that none of the Equipment is
titled equipment.
(c) The following items shall constitute the "Concentration Limits"
with respect to all Lease Assets acquired by the Issuer:
<PAGE>
Type of Limit Description of Limit
- ------------- --------------------
State No more than 40% of the Aggregate IPB consists of
Lease Contracts to Customers located in New Jersey.
State No more than 20% of the Aggregate IPB consists of
Lease Contracts to Customers located in California.
State No more than 20% of the Aggregate IPB consists of
Lease Contracts to Customers located in Florida.
State No more than 20% of the Aggregate IPB consists of
Lease Contracts to Customers located in New York.
State No more than 10% of the Aggregate IPB consists of
Lease Contracts to Customers located in any state
other than California, Florida, New Jersey or New
York.
Zip Code No more than 2.5% of the Aggregate IPB relates to
Lease Contracts of Customers located in any one zip
code.
Lessee No more than 2.5% of the Aggregate IPB consists of
Lease Contracts to any one Customer for the period
ending June 30, 1996, 2.25% for the period
ending September 20, 1996, and 2.0% thereafter.
Lessee No more than 10% of the Initial Pool Balance
consists of Lease Contracts to any Customer that
has made less than two Scheduled Payments.
Lessee No more than 8.0% of the Aggregate IPB consists of
Lease Contracts to the top five Customers (measured
by IPB of related Lease Contracts).
Term No more than 6.0% of the Aggregate IPB relates to
Lease Contracts with original terms exceeding 60
months.
Step Payments No more than 10% of the Aggregate IPB relates to
Lease Contracts that contain Scheduled Payments
that vary in amount.
Step Payments No more than 5.0% of the Aggregate IPB relates to
Lease Contracts that have unlimited increases in
rental payments. provided that such increases occur
no later than the 25th rental payment (such rental
payments do not include PUT
4
<PAGE>
payments), and then remains constant for the
remainder of the term of the Lease Contract; and no
more than an additional 5.0% of the Aggregate IPB
relates to Lease Contracts that have rental
payments (excluding PUT payments) that do not
increase by more than 300% during the remaining
term of the Lease Contract.
Payment Frequency No more than 15% of the Aggregate IPB relates to
Lease Contracts that contain Scheduled Payments
less frequently than monthly.
Equipment No more than 60% of the Aggregate IPB relates to
Lease Contracts on medical equipment.
Equipment No more than 25% of the Aggregate IPB relates to
Lease Contracts on food processing equipment.
Equipment No more than 10% of the Aggregate IPB relates to
Lease Contracts on automotive equipment.
PUT Payments
No more than 10% of the Aggregate IPB relates to
Lease Contracts that contain PUT Payments.
Loss & Damage Waivers No more than 2.0% of the Aggregate IPB relates to
Lease Contracts that contain loss and damage waiver
provisions or other performance obligations by the
Issuer or the Company.
Modifications No Lease Contract will be modified and, except for
less than 5% of Lease Contract comprising the
Initial Pool Balance, no Lease Contract will have
had their original term to maturity extended.
(d) Exceptions to the Concentration Limits above are set forth on
Exhibit C hereto.
(e) Notwithstanding anything herein to the contrary, the inclusion of
Substitute Lease Contracts or Funded Lease Contracts in the Trust Estate shall
not cause any Lease Contract to violate the restrictions enumerated in (a)
through (c) above, or cause the Aggregate IPB of the Lease Contracts to exceed
the applicable percentages enumerated in (a) through (c) above.
Section 4. Lease Acquisition Agreement Comprised of Specific Lease
Acquisition Terms and Standard Lease Acquisition Terms.
This Specific Lease Acquisition Terms incorporates by reference all of
the provisions of the Standard Lease Acquisition Terms attached hereto as
Appendix 1 and Appendix X, which together form the Lease Acquisition Agreement.
Notwithstanding the foregoing, if any provision
5
<PAGE>
of the Standard Lease Acquisition Terms conflicts with the provisions of this
Specific Lease Acquisition Terms, the provisions of this Specific Lease
Acquisition Terms shall control.
Section 5. Counterparts
The Lease Acquisition Agreement may be executed in one or more
counterparts all of which together shall constitute one original document.
6
<PAGE>
IN WITNESS WHEREOF, the Company and the Issuer have caused the Lease
Acquisition Agreement to be duly executed by their respective officers thereunto
duly authorized as of the date and year first above written.
FEDERAL LEASING CORP.,
Company
By: /s/ Stan Furst
-------------------------------
Name: Stan Furst
Title: Chairman
FLC FINANCIAL CORP. II
Issuer
By: /s/ Stan Furst
-------------------------------
Name: Stan Furst
Title: President
<PAGE>
EXHIBIT A
---------
FORM OF LEASE CONTRACT
------------------------
The following Lease Contracts are samples of the form lease contracts
used by Federal Leasing Corp. Some Lease Contracts may vary from the following
form lease contracts; any variations in such nonconforming lease contracts are,
in the opinion of the Issuer, immaterial variations.
<PAGE>
================================================================================
SPECIFIC TERMS AND CONDITIONS OF LEASE ACQUISITION
between
FEDERAL LEASING CORP.
("Company")
and
FLC FINANCIAL CORP. II
("Issuer")
-------------------------------
Dated as of March 1, 1996
================================================================================
<PAGE>
SPECIFIC TERMS AND CONDITIONS OF LEASE ACQUISITION, dated as of March
1, 1996, by and between Federal Leasing Corp., a New Jersey corporation (the
"Company") and its wholly owned subsidiary, FLC Financial Corp. II, a Delaware
corporation (the "Issuer").
PRELIMINARY STATEMENT
This Specific Terms and Conditions of Lease Acquisition (the "Specific
Lease Acquisition Terms") is intended to incorporate by reference all of the
provisions of the Standard Terms and Conditions of Lease Acquisition attached
hereto as Appendix 1 (the "Standard Lease Acquisition Terms") and the
definitions in Appendix X attached thereto. Together the Specific Lease
Acquisition Terms and the Standard Lease Acquisition Terms are intended to form
the Lease Acquisition Agreement entered into in connection with the financing
described below.
The Issuer has entered into an Indenture dated as of March 1, 1996,
(the "Indenture"), with NorwestBank Minnesota, National Association (the
"Indenture Trustee"), Norwest Bank Minnesota, National Association (the "Back-up
Servicer") and Federal Leasing Corp., as servicer (the "Servicer"), pursuant to
which the Issuer intends to issue one or more series of Notes (the "Notes").
In furtherance thereof, the Issuer and Company have entered into the
Lease Acquisition Agreement to provide for, among other things, the acquisition
by the Issuer of all of the right, title and interest in and to certain Lease
Assets which the Issuer is and will be pledging with the Indenture Trustee from
time to time, and in which the Issuer is and will be from time to time granting
to the Indenture Trustee a security interest, as security for the Notes. As a
precondition to the effectiveness of the Lease Acquisition Agreement, the
Issuer, the Indenture Trustee, the Servicer and the Back-up Servicer will enter
into the Servicing Agreement to provide for the servicing of the Lease Assets.
The acquisition of the Lease Assets by the Issuer is initially accomplished
hereunder by the issuance by the Issuer to the Company of the Common Stock in
exchange for the contribution by the Company to the Issuer of the Lease Assets.
In order to further secure the Notes, the Issuer is granting to the
Indenture Trustee a security interest in, among other things, the Issuer's
rights derived under the Lease Acquisition Agreement and the Servicing
Agreement, and the Company agrees that all covenants and agreements made by it
in the Lease Acquisition Agreement with respect to the Lease Assets shall also
be for the benefit and security of the Indenture Trustee, MBIA and all Holders
from time to time of the Notes. In consideration for its contribution and its
representations, warranties, covenants and other agreements under the Lease
Acquisition Agreement, the Company has received all of the Common Stock of the
Issuer and such other consideration as may from time to time be paid hereunder.
<PAGE>
Section 1. Specific Definitions
"Common Stock": shall mean all of the issued and outstanding shares of
common stock of the Issuer, which consists of 1,000 shares having a par value of
$.01 per share.
"Company Address": shall mean 5 Becker Farm Road, Post Office Box M,
Roseland, New Jersey 07068.
"Concentration Limits": shall have the meaning specified in Section
3(c) hereof.
"Depositor": shall mean FLC Financial Corp.
"Existing Indebtedness": shall mean any indebtedness of the Company
which relates to preexisting financings of any Lease Contracts that are covered
by a Company Certificate, as set forth in Schedule I thereto.
"Initial Acquisition Date": shall mean March 20, 1996.
"Issuer Address": shall mean 5 Becker Farm Road, Suite B, Roseland, New
Jersey 07068.
"Issuer State of Incorporation": shall mean Delaware.
"1995-B Indenture": shall mean the Amended and Restated Standard Terms
and Conditions of Indenture, dated as of March 1, 1995, the Specific Terms and
Conditions of Indenture, dated as of March 1, 1995, and the Supplement to the
Indenture, Warehouse Notes, Series 1995-B, each among the Depositor, the
Company, as Servicer, and Norwest Bank Minnesota, National Association, as
Indenture Trustee and Back-up Servicer.
"1995-B Warehouse Note": shall mean the Depositor's Warehouse Note,
Series 1995-B issued pursuant to the 1995-B Indenture.
Section 2. Issuance of Common Stock and Contribution and Sale of Lease
Assets
2.01 Authorization and Issuance of Common Stock by the Issuer. Subject
to all the terms and conditions of the Lease Acquisition Agreement and in
reliance upon the representations, warranties and covenants set forth in the
Lease Acquisition Agreement, as of the Initial Acquisition Date the Issuer
hereby issues to the Company the Common Stock. Such Common Stock shall be issued
in the name of, and delivered directly to, the Company and the Company hereby
agrees to obtain directly from the Issuer such Common Stock, all in accordance
with the terms of the Lease Acquisition Agreement.
2.02 Lease Acquisition. On the Initial Acquisition Date, in return for
the Common Stock, and on each subsequent Acquisition Date, in return for the
payment of purchase price in the amount of the net proceeds from the related
Funding or the issuance of a new Series of Notes, the Company hereby transfers,
assigns, sells, grants and contributes to the Issuer, without recourse except as
provided in Section 3.03 of the Standard Lease Acquisition Terms, all of the
Company's right, title
<PAGE>
and interest in and to all of the Lease Assets related to the Lease Contracts
now or hereafter listed on each Series Lease Schedule, whether now existing or
hereafter arising. The Company hereby acknowledges that its transfer of the
Lease Assets to the Issuer is absolute and irrevocable, without reservation or
retention of any interest whatsoever by the Company.
2.03 Assumption of Indebtedness by the Issuer. By the execution of an
Issuer Certificate, subject to all the terms and conditions of the Lease
Acquisition Agreement and in reliance upon the representations, warranties and
covenants set forth in the Lease Acquisition Agreement, on the Initial
Acquisition Date and on any related subsequent Acquisition Date the Issuer
hereby agrees to assume the related Existing Indebtedness and the Issuer agrees
to repay the Existing Indebtedness with the proceeds of the sale of any Notes on
the related Acquisition Date simultaneously with the issuance of such Notes.
2.04 Contribution to the Depositor. On the Closing Date, the Company
agrees to use the net proceeds that it receives from the Issuer in connection
with the Issuer's issuance of its Lease Backed Notes, Series 1996-A, to purchase
the Depositor's Lease Contracts which, prior to the Closing Date, are pledged by
the Depositor to secure the 1995-B Warehouse Note pursuant to the provisions
of the 1995 B Indenture, at the "Purchase Price", as such term is defined in the
1995 B Indenture for purposes of this Section 2.04, for each such Lease
Contract.
Section 3. Representations and Warranties of the Company.
(a) The following shall modify the indicated representations and
warranties set forth in Section 3.01 (a) of the Standard Lease Acquisition
Terms:
(xii) Except as indicated in the Concentration Limits set forth in
Section 3 )(c) hereof, the Lease Contract has regular rental payments (excluding
payments required pursuant to a PUT) that do not increase by more than 200%
during the remaining term of the Lease Contract.
(b) The Company makes the additional representation and warranty which
shall be added to Section 3.01 (a):
(xxv) The Company represents and warrants that none of the Equipment is
titled equipment.
(c) The following items shall constitute the "Concentration Limits"
with respect to all Lease Assets acquired by the Issuer:
<PAGE>
Type of Limit Description of Limit
- ------------- --------------------
State No more than 40% of the Aggregate IPB consists of
Lease Contracts to Customers located in New Jersey.
State No more than 20% of the Aggregate IPB consists of
Lease Contracts to Customers located in California.
State No more than 20% of the Aggregate IPB consists of
Lease Contracts to Customers located in Florida.
State No more than 20% of the Aggregate IPB consists of
Lease Contracts to Customers located in New York.
State No more than 10% of the Aggregate IPB consists of
Lease Contracts to Customers located in any state
other than California, Florida, New Jersey or New
York.
Zip Code No more than 2.5% of the Aggregate IPB relates to
Lease Contracts of Customers located in any one zip
code.
Lessee No more than 2.5% of the Aggregate IPB consists of
Lease Contracts to any one Customer for the period
ending June 30, 1996, 2.25% for the period
ending September 20, 1996, and 2.0% thereafter.
Lessee No more than 10% of the Initial Pool Balance
consists of Lease Contracts to any Customer that
has made less than two Scheduled Payments.
Lessee No more than 8.0% of the Aggregate IPB consists of
Lease Contracts to the top five Customers (measured
by IPB of related Lease Contracts).
Term No more than 6.0% of the Aggregate IPB relates to
Lease Contracts with original terms exceeding 60
months.
Step Payments No more than 10% of the Aggregate IPB relates to
Lease Contracts that contain Scheduled Payments
that vary in amount.
Step Payments No more than 5.0% of the Aggregate IPB relates to
Lease Contracts that have unlimited increases in
rental payments. provided that such increases occur
no later than the 25th rental payment (such rental
payments do not include PUT
4
<PAGE>
payments), and then remains constant for the
remainder of the term of the Lease Contract; and no
more than an additional 5.0% of the Aggregate IPB
relates to Lease Contracts that have rental
payments (excluding PUT payments) that do not
increase by more than 300% during the remaining
term of the Lease Contract.
Payment Frequency No more than 15% of the Aggregate IPB relates to
Lease Contracts that contain Scheduled Payments
less frequently than monthly.
Equipment No more than 60% of the Aggregate IPB relates to
Lease Contracts on medical equipment.
Equipment No more than 25% of the Aggregate IPB relates to
Lease Contracts on food processing equipment.
Equipment No more than 10% of the Aggregate IPB relates to
Lease Contracts on automotive equipment.
PUT Payments
No more than 10% of the Aggregate IPB relates to
Lease Contracts that contain PUT Payments.
Loss & Damage Waivers No more than 2.0% of the Aggregate IPB relates to
Lease Contracts that contain loss and damage waiver
provisions or other performance obligations by the
Issuer or the Company.
Modifications No Lease Contract will be modified and, except for
less than 5% of Lease Contract comprising the
Initial Pool Balance, no Lease Contract will have
had their original term to maturity extended.
(d) Exceptions to the Concentration Limits above are set forth on
Exhibit C hereto.
(e) Notwithstanding anything herein to the contrary, the inclusion of
Substitute Lease Contracts or Funded Lease Contracts in the Trust Estate shall
not cause any Lease Contract to violate the restrictions enumerated in (a)
through (c) above, or cause the Aggregate IPB of the Lease Contracts to exceed
the applicable percentages enumerated in (a) through (c) above.
Section 4. Lease Acquisition Agreement Comprised of Specific Lease
Acquisition Terms and Standard Lease Acquisition Terms.
This Specific Lease Acquisition Terms incorporates by reference all of
the provisions of the Standard Lease Acquisition Terms attached hereto as
Appendix 1 and Appendix X, which together form the Lease Acquisition Agreement.
Notwithstanding the foregoing, if any provision
5
<PAGE>
of the Standard Lease Acquisition Terms conflicts with the provisions of this
Specific Lease Acquisition Terms, the provisions of this Specific Lease
Acquisition Terms shall control.
Section 5. Counterparts
The Lease Acquisition Agreement may be executed in one or more
counterparts all of which together shall constitute one original document.
6
<PAGE>
IN WITNESS WHEREOF, the Company and the Issuer have caused the Lease
Acquisition Agreement to be duly executed by their respective officers thereunto
duly authorized as of the date and year first above written.
FEDERAL LEASING CORP.,
Company
By: /s/ Stan Furst
-------------------------------
Name: Stan Furst
Title: Chairman
FLC FINANCIAL CORP. II
Issuer
By: /s/ Stan Furst
-------------------------------
Name: Stan Furst
Title: President
<PAGE>
EXHIBIT A
---------
FORM OF LEASE CONTRACT
------------------------
The following Lease Contracts are samples of the form lease contracts
used by Federal Leasing Corp. Some Lease Contracts may vary from the following
form lease contracts; any variations in such nonconforming lease contracts are,
in the opinion of the Issuer, immaterial variations.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
JURISDICTION
PARENT SUBSIDIARY OF INCORPORATION
- -------------------------------- -------------------------------------- ----------------
<S> <C> <C>
American Business Financial American Business Credit, Inc. ("ABC") Pennsylvania
Services, Inc. ("ABFS")
ABC Processing Service Center, Inc. Pennsylvania
ABC HomeAmerican Credit, Inc. ("HAC")(1) Pennsylvania
ABC HomeAmerican Consumer Discount, Inc. Pennsylvania
ABC American Business Leasing, Inc. Pennsylvania
ABC ABC Holdings Corporation Pennsylvania
ABC American Business Finance Corporation Delaware
ABC August Advertising Agency Inc. Pennsylvania
ABC & HAC ABFS 1995-1, Inc. Delaware
ABC & HAC ABFS 1995-2, Inc. Delaware
ABC & HAC ABFS 1996-1, Inc. Delaware
ABC & HAC ABFS 1996-2, Inc. Delaware
ABC & HAC ABFS 1997-1, Inc. Delaware
ABC & HAC ABFS 1997-2, Inc. Delaware
ABC New Jersey Mortgage and Investment Corp. New Jersey
("NJMIC")
NJMIC Federal Leasing Corp. ("FLC") New Jersey
FLC FLC Financial Corp. Delaware
FLC FLC Financial Corp. II Delaware
</TABLE>
- ------------------------------------
(1) HomeAmerican Credit, Inc. is doing business as Upland Mortgage.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
Bala Cynwyd, PA
We hereby consent to the use in this post-effective Amendment No. 1 to
the Registration Statement on Form SB-2 of our report dated August 29, 1997,
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/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
January 20, 1998
