<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1999
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0418807
- -------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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
Chairman, President, Chief Executive Officer,
Chief Operating Officer and Director
American Business Financial Services, Inc.
Balapointe Office Center
111 Presidential Boulevard
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 the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective registration statement filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If 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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434 please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
Title of each class Amount to be Proposed Propose maximum Amount of
of securities to be registered maximum offering aggregate offering registration fee
registered price per price
subordinated
debenture (1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinated $300,000,000 $1,000 $300,000,000 $83,400
Debentures
=================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the
registration fee.
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>
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR ANY APPLICABLE STATE SECURITIES COMMISSION
BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
Subject to Completion Dated September 17, 1999
[LOGO]
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
$300,000,000 of Subordinated Debt Securities
The following terms apply to the subordinated investment notes and the
adjustable-rate, subordinated money market notes we are offering. For a more
detailed description of these securities, see "Highlights of Terms of the Debt
Securities," "Prospectus Summary -- Description of Debt Securities Offered" and
"Description of the Debt Securities Offered and the Indenture."
Terms of Debt Securities Offered
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Investment Notes Money Market Notes
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Annual Interest Rate............ Fixed upon issuance based upon the Adjustable upon notice to holders, but
term length chosen. not less than 4.0% per year. No
interest on balances of less than
$1,000.
- ----------------------------------------------------------------------------------------------------------------------
Payment of Interest............. Periodic cash payments. Interest paid in the form of additional
securities.
- ----------------------------------------------------------------------------------------------------------------------
Redemption by Holder............ Upon death or total disability for Redemptions of $500 or greater permitted
securities with remaining maturities upon 10 business days written notice to
greater than one year. us. Redemption by draft also available.
- ----------------------------------------------------------------------------------------------------------------------
Redemption by Company........... Not redeemable. Redeemable upon 30 days written notice.
- ----------------------------------------------------------------------------------------------------------------------
Maturity........................ Three months to 120 months. No fixed maturity.
- ----------------------------------------------------------------------------------------------------------------------
Transferability................. Upon our prior written consent Upon our prior written consent.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
We will receive a total of approximately $292.5 million of the proceeds
from the sale of the debt securities and money market notes after paying
expenses. We estimate expenses to be $7.5 million. We do not presently intend to
use registered broker-dealers to assist with the sale of the debt securities. If
we elect to use broker-dealers on a best efforts basis in connection with future
sales of the investment notes or money market notes, we anticipate that we will
pay commissions of up to 10% of the sales price to those brokers and we may
reimburse those brokers for certain costs and expenses. If we use brokers,
expenses of the offering will increase and the proceeds we receive will be less
than currently estimated.
We will provide the interest rates currently being offered on the debt
securities in a supplement to this prospectus. You should read this prospectus
and the rate supplement carefully before you invest.
<PAGE>
We are 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 our assets
or other matters. These debt securities are not certificates of deposit. The
payment of principal and interest on these securities is not guaranteed by any
governmental or private insurance fund or any other entity. Our sources of funds
for the repayment of principal at maturity and the ongoing payment of interest
on these debt securities include revenues from operations, including the
securitization or sale of loans from our portfolio working capital, and cash
generated from additional debt financing. These debt securities are unsecured.
We do not contribute funds to a separate account such as a sinking fund to repay
the debt represented by these securities upon maturity.
There is no public trading market for these securities. Due to the
non-negotiable nature of these securities, it is unlikely that an active trading
market will develop.
An investment in these securities involves certain risks. These
securities are unsecured obligations, which are subordinated to our senior debt.
You should consider carefully the risk factors and the other information set
forth in this prospectus before you decide to purchase these securities. See
"Risk Factors" beginning on page 10 for information that should be considered by
prospective purchasers of these securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-----------------------------
The date of this prospectus is ________________ , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................................................................................3
Highlights of the Terms of the Debt Securities Offered............................................................9
Risk Factors ....................................................................................................10
Use of Proceeds..................................................................................................20
Description of the Debt Securities Offered and the Indenture.....................................................21
Selected Consolidated Financial Data.............................................................................34
Management's Discussion and Analysis of Financial Condition and Results of Operations............................36
Business.........................................................................................................60
Where You Can Find More Information..............................................................................78
Management.......................................................................................................79
Principal Stockholders...........................................................................................82
Market for Common Stock and Related Stockholder Matters..........................................................85
Plan of Distribution.............................................................................................86
Legal Matters....................................................................................................86
Experts..........................................................................................................86
Index to Consolidated Financial Statements......................................................................F-1
</TABLE>
-2-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may
not contain all of the information that is important to you. To fully understand
the offering, you should read the entire prospectus carefully, including the
"Risk Factors" and the Consolidated Financial Statements and the related notes
before you decide to purchase these securities. References in this prospectus to
"ABFS," "we," "us," and "our" refer to American Business Financial Services,
Inc. and its subsidiaries.
General Information Regarding Our Business
American Business Financial Services, Inc. is a diversified financial
services company operating throughout the United States. We originate loans and
leases through a retail branch network of offices. Through our principal direct
and indirect subsidiaries, we originate, service and sell:
o loans to businesses secured by real estate and other business
assets, which we refer to in this document as business purpose
loans;
o mortgage loans, typically to credit-impaired borrowers, which are
secured by first and second mortgages on single-family residences
and which do not satisfy the eligibility requirements of Fannie
Mae, Freddie Mac or similar buyers which we refer to in this
document as home equity loans;
o mortgage loans to borrowers with favorable credit histories which
are secured by first mortgages on one-to four-unit residential
properties, most of which satisfy the eligibility requirements of
Fannie Mae and Freddie Mac, which are referred to in this document
as first mortgage loans; and
o small ticket business equipment leases, which generally involve
amounts of $2,000 to $250,000.
In addition, we have entered into business arrangements with several
financial institutions pursuant to which we will purchase home equity loans that
do not meet the underwriting guidelines of the selling institution but that do
meet our underwriting criteria which is referred to in this document as the Bank
Alliance Program.
Our loan customers currently fall primarily in two categories. The
first category of customers includes credit-impaired borrowers who are generally
unable to obtain financing from banks or savings and loan associations that have
historically provided loans only to individuals with the most favorable credit
characteristics. These borrowers generally have impaired or unsubstantiated
-3-
<PAGE>
credit characteristics and/or unverifiable income. The second category of
customers includes borrowers who would qualify for loans from traditional
lending sources but who still elect to use our products and services. Our
experience has indicated that these borrowers are attracted to our loan products
as a result of our marketing efforts, the personalized service provided by our
staff of highly trained lending officers and our timely response to loan
requests. Historically, both categories of customers have been willing to pay
our origination fees and interest rates even though they are generally higher
than those charged by traditional lending sources. Our lease customers are
typically small businesses or proprietorships with less than 100 employees and
favorable credit histories.
We were incorporated in Delaware in 1985 and we began operations in
1988, initially offering business purpose loans secured by real estate through
our subsidiary, American Business Credit. References in this document to "ABFS,"
"we," "us," and "our" refer to American Business Financial Services, Inc. and
its subsidiaries. Certain financial information contained in this document has
been adjusted to reflect a 5% stock dividend declared on August 18, 1999 and
payable on September 27, 1999.
The ongoing securitization of our loans and leases is a central part of
our current business strategy. A securitization is a financing technique often
used by originators of financial assets to raise capital. A securitization
involves the transfer of a pool of financial assets, in our case loans or
leases, to a trust in exchange for certificates, notes or other securities
issued by the trust and representing an undivided interest in the trust assets.
The transfer to the trust could involve a sale or pledge of the financial assets
depending on the particular transaction. A portion of the certificates, notes or
other securities are then sold to investors for cash. Often the originator of
the loans or leases retains the right to service the assets for a fee and may
also retain an interest in the cash flows generated by the securitized assets
referred to as a residual interest which is subordinate to the regular interest
sold to investors. Through June 30, 1999, we had securitized an aggregate of
$1.3 billion of loans and leases, consisting of $201.3 million of business
purpose loans, $969.8 million of home equity loans, and $152.3 of equipment
leases. We retain the servicing rights on all securitized loans and leases. See
"Business--Securitizations."
In addition to securitizations, we fund our operations with
subordinated debt that we offer by means of this prospectus which was declared
effective by the SEC from our principal operating office located in Pennsylvania
and branch offices located in Florida and Arizona. We have offered this debt
without the assistance of an underwriter or dealer. At June 30, 1999, we had
$212.9 million in subordinated debt outstanding. This debt had a weighted
average interest rate of 9.35% and a weighted average maturity of 21 months as
of June 30, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
We intend to continue to use funds generated from the securitization of
loans and leases as well as the sale of subordinated debt to increase our loan
and lease originations and investments in operations required to position us for
expansion into new geographic markets, including the development of the Internet
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<PAGE>
as a distribution channel. We also continue to explore a variety of strategic
options to broaden our product offerings and reduce our cost of funds. To
achieve these goals, we may consider the acquisition of other finance companies
or related companies, the purchase of portfolios of loans, the establishment or
purchase of a state or federally chartered financial institution or industrial
loan company, the issuance of secured credit cards, the origination and
servicing of loans insured by the Small Business Administration and the
engagement of independent NASD registered brokers to assist in the sale of the
subordinated debt securities. We cannot assure you that we will engage in any of
the activities listed above or the impact of those activities on our financial
condition or results of operations.
Our principal executive office is located at 103 Springer Building,
3411 Silverside Road, Wilmington, Delaware 19810. The telephone number at that
address is (302) 478-6160. Our principal operating office and the executive
offices of our subsidiaries are located at Balapointe Office Centre, 111
Presidential Boulevard, Suite 215, Bala Cynwyd, PA 19004. The telephone number
at the Balapointe Office Centre is (610) 668-2440. We maintain a site on the
World Wide Web at www.abfsonline.com. The information on our web site is not and
should not be considered part of this document.
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<PAGE>
Summary Consolidated Financial Data
Your should consider our consolidated financial information set forth
below together with the more detailed Consolidated Financial Statements,
including the related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Gain on sale of loans and leases $65,640 $41,316 $20,043 $ 8,721 $ 1,350
Interest and fees ............... 17,424 17,386 5,584 3,245 4,058
Other ........................... 3,360 633 335 129 143
------- ------- ------- ------- -------
Total revenues ..................... 86,424 59,335 25,962 12,095 5,551
Total expenses ..................... 64,573 41,445 16,960 8,974 4,657
------- ------- ------- ------- -------
Operating income before income taxes 21,851 17,890 9,002 3,121 894
Income taxes ....................... 7,763 6,435 3,062 802 313
------- ------- ------- ------- -------
Net income ......................... $14,088 $11,455 $ 5,940 $ 2,319 $ 581
======= ======= ======= ======= =======
Per Common Share Data:
Net income (a) .................. $ 3.72 $ 2.98 $ 1.95 $ 0.96 $ 0.26
Cash dividends declared ......... .165 .06 .06 .03 --
</TABLE>
(a) Amounts have been retroactively adjusted to reflect the effect of
a 5% stock dividend declared August 18, 1999 as if the shares had
been outstanding for each period presented.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 22,395 $ 4,486 $ 5,014 $ 5,345 $ 4,734
Loan and lease receivables, net available for sale........ 33,776 62,382 35,712 18,003 8,669
Other..................................................... 6,863 4,096 1,144 534 328
Total assets.............................................. 396,301 226,551 103,989 46,894 22,175
Subordinated debt ........................................ 212,902 115,182 56,486 33,620 17,800
Total liabilities......................................... 338,055 183,809 73,077 42,503 20,031
Stockholders' equity...................................... 58,246 42,742 30,912 4,392 2,143
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1999 1998 1997 1996 1995
--------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
Originations:
Business Purpose Loans................................ $ 64,818 $ 52,335 $38,721 $28,872 $18,170
Home Equity Loans..................................... 634,820 328,089 91,819 36,479 16,963
First Mortgage Loans.................................. 66,519 33,671 - - -
Equipment Leases ..................................... 96,289 70,480 8,004 5,967 2,220
Loans and Leases sold:
Securitizations....................................... 777,598 384,700 115,000 36,506 9,777
Other................................................. 105,751 51,594 3,817 19,438 31,948
Total managed loan and lease portfolio................... 1,176,918 559,398 176,651 59,891 17,774
Average loan/lease size:
Business Purpose Loans................................ 80 83 78 78 71
Home Equity Loans..................................... 74 62 51 47 46
First Mortgage Loans.................................. 165 154 - - -
Equipment Leases...................................... 23 21 11 11 12
Weighted average interest rate on loans and leases
originated:
Business Purpose Loans .............................. 15.91% 15.96% 15.91% 15.83% 16.05%
Home Equity Loans..................................... 11.05 11.95 11.69 9.94 12.68
First Mortgage Loans.................................. 7.67 8.22 - - -
Equipment Leases...................................... 11.40 12.19 15.48 17.22 15.85
At or For the Year Ended June 30,
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
Financial Ratios:
Return on average assets ................................ 4.56% 6.93% 7.87% 6.71% 3.37%
Return on average equity ................................ 28.10 31.10 33.65 70.96 31.36
Total delinquencies as a percentage of total portfolio
serviced, at end of period ........................... 3.19 3.01 2.15 2.30 3.84
Real estate owned as a percentage of total portfolio
serviced, at end of period............................ .85 .16 .34 1.01 4.29
Loan and lease losses as a percentage of the average
total portfolio serviced during the period............ .12 .12 .07 .33 .66
Pre-tax income as a percentage of total revenues......... 25.28 30.15 33.99 25.81 16.11
Ratio of earnings to fixed charges....................... 1.92 2.23 2.56 1.97 1.54
</TABLE>
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<PAGE>
Overview of the Offering
The Offering. We are offering up to $300.0 million of subordinated
investment notes and adjustable rate subordinated money market debt securities
referred to herein as debt securities. The debt securities will be issued
pursuant to an indenture between us and First Trust National Association, a
national banking association as trustee. No minimum amount of debt securities
must be sold in the offering. We may withdraw or cancel the offering at any
time. In the event of such withdrawal or cancellation, the debt securities
previously sold will remain outstanding until maturity and pending orders will
be irrevocable. See "Plan of Distribution."
Unsecured Obligations. The debt securities are not insured, guaranteed or
secured by any lien on any of our assets. We do not intend to contribute funds
to a separate fund, such as a sinking fund, to provide funds to repay the debt
securities upon maturity. See "Risk Factors -- There are no funds set aside to
repay the debt securities offered."
Subordinated Obligations. The debt securities will be second in right of
repayment, or subordinated, to our senior debt. As of June 30, 1999, we had
$64.7 million of senior debt outstanding. There is no limitation on the amount
of senior debt we may incur. See "Description of the Debt Securities Offered and
the Indenture" for a description of what constitutes senior debt.
Parity Debt. Upon liquidation or dissolution, our indebtedness other than
the senior debt will have rights equal to those of the debt securities being
offered. As of June 30, 1999, we had $206.9 million of indebtedness which will
rank equally with the debt securities. See "Description of the Debt Securities
Offered and the Indenture."
Orders. Your order will be irrevocable upon acceptance by us. We may
reject your order in whole or in part, for any reason. If your order is not
accepted by us, we will promptly refund the funds you paid with your order to
you without deduction of any costs and without interest. See "Plan of
Distribution."
Upon acceptance of an order, we will issue a confirmation statement
reflecting ownership to each purchaser. This statement is not a negotiable
instrument, and no rights of ownership in the security may be transferred by the
endorsement and deliver of the statement to a purchaser.
Overview of Terms of Debt Securities. For an overview of the debt
securities see "Highlights of Terms of Debt Securities Offered" above and
"Description of the Debt Securities Offered" appearing in this prospectus.
Use of Proceeds. We intend to use the net proceeds resulting from the sale
of the notes for our general corporate purposes, including financing the growth
of our loan and lease portfolios, the repayment of our outstanding debt and
possible unspecified acquisitions of related businesses or assets. We are
reviewing our strategic options with respect to growth through acquisitions and
otherwise. This initiative may include consideration of, and discussion with,
various potential targets from time to time including mortgage companies,
leasing companies, banks and thrifts. No specific allocation of such proceeds
has been determined as of the date of this prospectus. See "Use of Proceeds."
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<PAGE>
HIGHLIGHTS OF TERMS OF THE DEBT SECURITIES OFFERED
<TABLE>
<CAPTION>
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Investment Notes Money Market Notes
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Types of Security Offered..... Unsecured, subordinated, fixed term debt Unsecured, adjustable rate, subordinated
security. debt security.
- --------------------------------------------------------------------------------------------------------------------
Denomination of Initial Minimum purchase: $1,000 per security Minimum purchase: $1,000 per security
Purchase and Additional or any amount in excess of $1,000. or any amount in excess of $1,000.
Purchases.....................
- --------------------------------------------------------------------------------------------------------------------
Annual Interest Rate.......... Fixed upon issuance. You may choose a We will adjust the interest rate paid
term length and the applicable interest from time to time in our sole
rate will be based upon the term chosen. discretion. The rate shall not be less
than 4.0% per year. We will notify
holders in writing at least 14 days
prior to any decrease in the interest
rate. No interest will be paid for any
day on which the principal balance is
below $1,000.
- --------------------------------------------------------------------------------------------------------------------
Payment of Interest........... Interest on investment notes with Interest will be compounded daily and
remaining maturities of less than one credited monthly at the end of each
year will be compounded daily and paid month. No checks will be issued in
at maturity. Interest on investment payment of interest. Accrued interest
notes with maturities of one year or will be added to principal in each
greater will be compounded daily and, at account in the form of additional
the election of the holder, paid at securities.
maturity, monthly, quarterly,
semi-annually or annually.
- --------------------------------------------------------------------------------------------------------------------
Redemption by Holder.......... Investment notes with remaining May be redeemed by the holder upon
maturities of less than one year are not written notice to us with payment to be
redeemable prior to maturity. made within 10 business days of our
Investment notes with maturities of one receipt of such notice from the holder.
year or greater may be redeemed by the Redemptions must be at least $500,
holder following his/her total permanent except for redemptions to close an
disability (as described under the account. Redemptions may be made by
heading "Description of the Debt drafts, which are similar to checks. We
Securities Offered and the Indenture-- will charge a service fee if you use
Provisions Relating to investment more thanthree (3) drafts per month.
notes"), or by his/her estate after
death, at the principal amount plus
accrued interest. Otherwise, the holder
will have no right to cause redemption
prior to maturity (for joint holders,
see "Description of the Debt Securities
Offered and the Indenture--Provisions
Related to Investment Notes").
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Investment Notes Money Market Notes
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Redemption by Company......... Not redeemable until maturity. Redeemable upon 30 days written notice
to the holder.
- --------------------------------------------------------------------------------------------------------------------
Form/Transferability.......... In book-entry form and non-negotiable. In book-entry form and non-negotiable.
(A confirmation statement will be (A confirmation statement will be
issued, not an individual promissory issued, not an individual promissory
note.) Not transferable without our note.) Not transferable without our
prior written consent. prior written consent.
- --------------------------------------------------------------------------------------------------------------------
Maturity...................... Investment notes are offered with terms No fixed maturity.
to maturity of three to 120 months, the
term of each note is established at the
time of purchase.
- --------------------------------------------------------------------------------------------------------------------
Automatic Extension........... The investment notes will be Not applicable.
automatically extended for a period
equal to the original term unless: (i)
we notify the holder at least seven days
prior to the maturity date that an
extension will not be provided; or (ii)
the holder elects to redeem his/her
notes within seven days after the
maturity date. Investment notes to be
extended will be extended at a fixed
rate equal to the rate then being
offered on newly issued investment notes
of like tenor, term and denomination at
their respective maturity dates.
- --------------------------------------------------------------------------------------------------------------------
Periodic Statements........... Quarterly statements detailing the Monthly statements detailing the current
current balance and interest rate paid balance and interest rate paid on each
on each note will be mailed to each account will be mailed to each holder no
holder no later than the tenth business later than the tenth business day
day following the end of each calendar following the end of each month.
quarter.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
RISK FACTORS
Before you invest in our debt securities, you should be aware that
there are various risks, including those described below. You should consider
carefully these risk factors together with all of the other information included
in this prospectus and the rate supplement provided to you with this prospectus
before you decide to purchase any debt securities we are offering.
Some of the information in this prospectus or the documents
incorporated by reference in this prospectus may contain forward-looking
statements. You can identify these statements by phrases such as "will likely
result," "may," "are expected to," "is anticipated," "estimate," "projected,"
"intends to" or other similar words. Forward-looking statements are subject to
certain risks and uncertainties, including but not limited to the following:
o market conditions and real estate values in our primary lending area;
o credit risk related to our borrowers;
o our dependence on securitizations;
o our ability to sustain our revenue and earnings growth;
o our ability to implement our growth strategy;
o competition;
o our dependence on debt financing to fund our operations;
o changes in interest rates;
o our ability to implement an effective hedging strategy;
o the geographic concentration of our loans;
o risks associated with leasing activities;
o state and federal regulation and licensing requirements applicable to our
lending activities;
o claims by borrowers or investors;
o dependence on key personnel;
o environmental regulation;
o risks associated with year 2000 computer problems; and
o the properties of the debt securities being offered.
All of the above risks could cause our actual results to differ materially from
historical earnings and those presently anticipated. When considering
forward-looking statements, you should keep these risk factors in mind as well
as the other cautionary statements in this prospectus. You should not place
undue reliance on any forward-looking statement.
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<PAGE>
Risks Related to the Offering
The debt securities offered by this prospectus are not insured against loss.
No governmental or private agency insures the debt securities offered
by this prospectus. The holder of the debt securities is dependent solely upon
sources such as our earnings, proceeds from the sale or securitization of loans
and leases from our portfolio, our working capital and other sources of funds,
including proceeds from the continuing sale of subordinated debt and lines of
credit for repayment of principal at maturity and the ongoing payment of
interest on the notes.
Our business operations are not subject to examination by federal banking
regulators.
Since we are not a commercial bank, savings bank or thrift institution,
we are not regulated or subject to examination in the same manner as commercial
banks, savings banks and thrift institutions. Thus, our operations are not
subject to the stringent regulatory requirements imposed upon the operations of
those entities and are not subject to periodic compliance examinations by
federal banking regulators designed to protect investors. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The debt securities are unsecured and second in right of repayment to our senior
debt borrowed from institutional lenders.
The debt securities offered by this prospectus will be subordinated, or
second in right of repayment, to our senior debt. As of June 30, 1999, there was
$58.7 million of senior debt outstanding. There is no limitation on the amount
of senior debt we can incur. Senior debt includes any indebtedness incurred in
connection with our (including our subsidiaries) borrowings from a bank, trust
company, insurance company, or from any other institutional lender. These
borrowings do not have to be specifically designated as "senior debt." If we
were to become insolvent, our senior debt would have to be paid in full prior to
payment of debt securities in our liquidation. In addition, any indebtedness of
our subsidiaries, 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 debt securities. There may not be adequate funds remaining to pay
the principal and interest on the debt securities. See "Description of the Debt
Securities Offered and the Indenture - Provisions Related to All Securities."
We are not required to set aside funds to repay the debt securities offered.
We do not contribute funds on a regular basis to a separate account,
commonly known as a sinking fund, to repay the debt securities upon maturity.
Since no funds are set aside periodically for the repayment of the debt
securities over their term, holders of the debt securities must rely on our
revenues from operations and other sources for repayment. See "Description of
the Debt Securities Offered and the Indenture - General."
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Your ability to liquidate your investment is limited because of transfer
restrictions and the lack of a trading market.
The debt securities sold under this prospectus are non-negotiable,
which means they may not be transferred without our prior written consent. There
is no established trading market for the debt securities. Due to the
non-negotiable nature of the debt securities and the lack of a market for the
sale of the debt securities, even if we permitted a transfer, investors may be
unable to liquidate their investment. See "Description of the Debt Securities
Offered and the Indenture."
Our management has broad discretion over how to use the proceeds from the
offering.
Since no specific allocation of the proceeds has been determined as of
the date of this Prospectus, our management will have broad discretion in
determining how the proceeds of the offering will be used. See "Use of
Proceeds."
Risks Related to Our Business
A decline in value of the collateral securing our loans may adversely affect our
business by reducing originations and increasing losses on foreclosure.
Our business may be adversely affected by declining real estate or
other collateral values. Any significant decline in real estate values reduces
the ability of borrowers to use home equity as collateral for borrowings. This
may reduce the number of loans we are able to make, which will reduce the gain
on sale of loans and servicing and origination fees we will collect. Declining
values will also increase the loan-to-value ratios of loans we previously made,
which in turn, increases the probability of a loss in the event the borrower
defaults and we have to sell the mortgaged property. In addition, delinquencies
and foreclosures generally increase during economic slowdowns or recessions. As
a result, the market value of the real estate or other collateral underlying our
loans may not, at any given time, be sufficient to satisfy the outstanding
principal amount of the loans. See "Business--Lending and Leasing Activities"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Lending to credit-impaired borrowers may result in higher delinquencies in our
managed portfolio which could adversely impact our financial condition and
results of operation.
We market a significant portion of our loans to borrowers who are
either unable or unwilling to obtain financing from traditional sources, such as
commercial banks. Loans made to these borrowers may entail a higher risk of
delinquency and loss than loans made to borrowers who use traditional financing
sources. Total delinquent loans as a percentage of our total managed portfolio
serviced were 3.19% at June 30, 1999, as compared to 3.01% at June 30, 1998.
While we use underwriting standards and collection procedures designed to
mitigate the higher credit risk associated with lending to these borrowers, our
standards and procedures may not offer adequate protection
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against risks of default. In the event loans sold and serviced by us experience
higher delinquencies, foreclosures or losses than anticipated, our results of
operations or financial condition would be adversely affected.
We maintain an allowance for credit losses on portfolio loans to
account for loans and leases that are delinquent and are expected to be
ineligible for sale into a securitization. The allowance is calculated based
upon our estimate of the expected collectibility of loans and leases outstanding
based upon a variety of factors, including but not limited to economic
conditions and credit and collateral considerations. See "Business-Lending and
Leasing Activities" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Our reliance upon the sale of our loans and leases through securitization may
result in fluctuating operating results.
In recent periods, a significant portion of our revenue and net income
represented gain on the sale of loans and leases in securitization transactions.
Gain on sale of loans and leases resulting from securitizations as a percentage
of total revenues was 69.6% for the fiscal year 1998 and 76.0% for fiscal year
1999. In addition, we rely primarily on securitizations to generate cash
proceeds for:
o repayment of our warehouse credit facilities,
o repayment of other borrowings; and
o origination of additional loans and leases.
Our ability to complete securitizations depends on several conditions,
including:
o conditions in the securities markets generally,
o conditions in the asset-backed securities markets specifically;
and
o the credit quality of our loans and lease portfolios.
Any substantial impairment of our securitization market for loans and leases
could have a material adverse effect on our results of operations and financial
condition. See "Business -- Securitizations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Our revenues and net income may fluctuate as a result of the timing and size of
our securitizations.
The strategy of selling loans and leases through securitizations
requires us to build an inventory of loans and leases over time. During this
time we accrue costs and expenses. We do not recognize gain on the sale of loans
and leases until we complete a securitization which may not occur until a
subsequent fiscal quarter. 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, we could experience a loss for a
period. In addition, due to the timing difference
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between the period when costs are incurred in connection with the origination of
loans and leases and their subsequent sale through the securitization, we may
operate on a negative cash flow basis, which could adversely impact our results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
We may not be able to sustain the levels of revenue growth and earnings growth
that we experienced in the past.
During fiscal 1999 and fiscal 1998, we experienced record levels of
total revenue and net income as a result of increases in loan and lease
originations and the securitization of loans and leases. Total revenue increased
approximately $27.1 million, or 45.7%, between fiscal 1998 and 1999 while net
income increased approximately $2.6 million, or 23.0%. Our ability to sustain
the level of growth in total revenue and net income experienced during fiscal
1999 and fiscal 1998 depends upon a variety of factors outside our control,
including:
o interest rates,
o conditions in the asset-backed securities markets,
o economic conditions in our primary market area,
o competition, and
o regulatory restrictions.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our inability to continue to successfully implement our growth strategy may have
an adverse effect on profits.
Our growth strategy seeks to increase our loan and lease volume through
geographic expansion and further development of existing markets while
maintaining our customary origination fees, the spread between interest rates
and the interest rates we pay for capital and underwriting criteria.
Implementation of this strategy will depend in large part on our ability to:
o open or expand offices in markets with a sufficient concentration of
borrowers who meet our underwriting criteria;
o obtain adequate financing on favorable terms;
o profitably securitize our loans and leases in the secondary market
on a regular basis;
o hire, train and retain skilled employees;
o successfully implement our marketing campaigns; and
o continue to expand in the face of increasing competition from other
lenders.
Our failure with respect to any or all of these factors could impair our ability
to grow and successfully leverage our fixed costs and could have a material
adverse effect on our results of operations and financial condition. See
"Business -- Lending and Leasing Activities."
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Competition from other lenders and lessors could adversely affect our profits.
The lending and leasing markets that we compete in are highly
competitive. Some competing lenders have substantially greater resources,
greater experience, lower cost of funds, and a more established market presence
than we have. If our competitors increase their marketing efforts to include our
market niche of borrowers, we may be forced to reduce the rates and fees we
currently charge in order to maintain and expand our market share. Any reduction
in our rates or fees could have an adverse impact on our results of operations.
Our profitability and the profitability of other similar lenders may attract
additional competitors into this market.
As we expand into new geographic markets, we will face competition from
companies with established positions in these areas. We may not be able to
continue to compete successfully in the markets we serve or expand into new
geographic markets. See "Business--Competition."
We are dependent upon the availability of financing to fund our continuing
operations.
For our ongoing operations, we are dependent upon frequent financings,
including:
o the sale of unsecured subordinated debt securities;
o warehouse credit facilities;
o lines of credit; and
o funds received from the securitization of loans and leases.
Any failure to renew or obtain adequate funding under a warehouse
credit facility, or other borrowings could hurt our profitability. To the extent
that we are not successful in maintaining or replacing existing subordinated
debt securities upon maturity, we would have to limit our loan and lease
originations or sell loans and leases earlier than intended. Limiting our
originations and our earlier sales of loans and leases could have a negative
effect on our results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Liquidity and Capital Resources."
A change in market interest rates may adversely affect our profits.
Our profits are likely to be adversely affected during any period of
rapid changes, either upward or downward, in interest rates. Any future rise in
interest rates may adversely affect the following:
o customer demand for our products;
o our cost of funds;
o the spread between the rate of interest we receive on loans and
interest rates we must pay under our outstanding credit facilities;
and
o the profit we will realize in securitizations or other sales of
loans and leases.
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Any future decrease in interest rates could also reduce the amounts
which we may earn on our newly originated loans and leases. This could reduce
the spread between the interest we earn on loans and the interest we pay under
our outstanding credit facilities and subordinated debt. A decline in interest
rates could also decrease the size of the loan portfolio we service by
increasing the level of prepayments, because borrowers tend to refinance as
interest rates fall. This would result in a reduction of the servicing fees we
earn. See "Business--Lending and Leasing Activities."
In addition, in connection with certain of our loan securitizations
undertaken, the securitization trusts have issued certificates with interest
rates which fluctuate based upon the LIBOR rate. The principal amount of these
certificates represents 10% to 15% of the amount of loans securitized. The
certificates are secured by fixed rate loans sold in the securitization. Our
profit on the sale of the certificates is in part the difference or spread
between the rate paid on the certificates and the rate paid on the loans
securing the certificates which are our residual interests. To the extent market
interest rates increase, causing the rate paid on the certificates to increase,
the value of our residual interests would be reduced or eliminated. This would
result in a reduction in our profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Decreasing interest rates could adversely effect our income due to the length of
maturities of our outstanding debt.
We are also subject to risks associated with changes in interest rates
to the extent that we have issued fixed rate subordinated debt securities with
scheduled maturities of one to ten years. At June 30, 1999, we had $93.6 million
of subordinated debt securities with scheduled maturities greater than one year.
If market interest rates decrease in the future, the rates paid on our long term
subordinated debt could exceed the current market rate paid for similar
instruments which could result in a reduction in our profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk Management."
Our failure to implement an effective hedging strategy could result in losses or
negatively impact earnings.
We have implemented a hedging strategy in an attempt to mitigate the
effect of changes in interest rates on our fixed-rate mortgage loan portfolio
prior to securitization that involves in part the short sale of U.S. Treasury
securities. An effective hedging strategy is complex and no strategy can
completely insulate us from interest rate risk. In fact, poorly designed
strategies or improperly executed transactions may increase rather than mitigate
interest rate risk. Hedging involves transaction and other costs, and these
costs could increase as the period covered by the hedging protection increases
or in periods of rising and fluctuating interest rates. In addition, the short
sale of U.S. Treasury securities is not an effective hedge against the risk that
the difference between the treasury rate and the rate needed to attract
potential buyers of asset backed securities may widen. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Interest Rate Risk Management."
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An economic downturn in the eastern region of the United States could affect our
financial performance more than other businesses which are more geographically
diversified.
Although we are licensed in numerous states, we currently originate
loans primarily in the eastern region of the United States. The concentration of
loans in a specific geographic region subjects us to the risk that a downturn in
the economy in the eastern region of the country would more greatly affect us
than if our lending business were more geographically diversified. See "Business
- -- Lending and Leasing Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our securitization agreements require us to retain risk on loans and leases that
do not meet the requirements in these agreements.
Although we sell substantially all of the loans and leases we originate
through securitizations, all of the securitization agreements require that we
replace or repurchase loans or leases which do not conform to the
representations and warranties made by us at the time of sale.
Additionally, when borrowers are delinquent in making monthly payments
on loans included in a securitization trust, we are required to advance interest
payments for the delinquent loans if we deem that the advances will be
ultimately recoverable. These advances require funding from our capital
resources but have priority of repayment from the succeeding month's
collections. See "Business -- Securitizations."
Our estimation of the value of residual interests we retain when we securitize
loans could be inaccurate and could result in reduced profits.
We generally retain residual interests in the securitization
transactions we complete. A residual interest is a retained interest in the cash
flow of securitized loans and leases. We estimate the residual interests to be
received in connection with our securitizations based upon certain prepayment
and default assumptions. Our actual prepayment and default experience may vary
materially from these estimates. As a result, the gain we recognize upon the
sale of loans and leases may be overstated because actual prepayments or losses
are greater than we originally estimated. Higher levels of future prepayments,
delinquencies and/or liquidations could result in the decreased value of
residual interests which would adversely affect our income in the period of
adjustment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Risks associated with leasing activities may reduce our future profitability.
There are risks associated with leasing which are different than those
associated with our mortgage lending operations. While our equipment leases are
secured by a lien on the leased equipment, the equipment is subject to the risk
of damage, destruction or obsolescence prior to the termination of the lease. In
the case of our fair market value leases, lessees may choose not
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to exercise their option to purchase the equipment for its fair market value at
the termination of the lease. When this happens, we may have to sell the
equipment to third party buyers at a discount. Our financial results may be
adversely affected by losses in the value of our leased equipment. See
"Business--Lending and Leasing Activities."
Our lending business is subject to government regulation and licensing
requirements which may hinder our ability to operate profitably.
Our 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 our home equity and first
mortgage lending activities. Our home equity and first mortgage lending
activities are subject to regulation under various federal laws including the
following:
o Truth-in-Lending Act and Regulation Z (including the Home Ownership
and Equity Protection Act of 1994);
o the Equal Credit Opportunity Act and Regulation B, as amended;
o the Real Estate Settlement Procedures Act and Regulation X;
o the Home Mortgage Disclosure Act; and
o the Fair Debt Collection Practices Act.
We are 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 impose
licensing obligations, 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.
Although we believe that we have implemented systems and procedures to
facilitate compliance with the foregoing requirements and believe that we are in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, more restrictive laws, rules and regulations may be
adopted in the future that could make compliance more difficult or expensive.
See "Business -- Regulation."
Claims by borrowers or investors could have an impact on our operations.
In the ordinary course of our business, we are subject to claims made
against us by borrowers and private investors arising from, among other things:
o losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentation, error and
omission by our employees, officers and agents (including our
appraisers);
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o incomplete documentation; and
o failure to comply with various laws and regulations applicable to
our business.
Although there are no material claims or legal actions currently
assessed against us, any claims asserted in the future may result in legal
expenses or liability which could have a material adverse effect on our results
of operations and financial condition. See "Business--Legal Proceedings."
We depend on the services of key people, and the loss of any of these people
could disrupt our operations and result in reduced revenues.
The success of our operations depends on the continued employment of
our senior level management, and most notably Anthony J. Santilli, our Chairman,
President and Chief Executive Officer. If key members of the senior level
management were for some reason unable to perform their duties or were to leave
us for any reason, we may not be able to find capable replacements. See
"Management."
Environmental laws and regulations may restrict our ability to foreclose on
loans secured by real estate.
In the course of our business, we have acquired, and may acquire in the
future, properties securing loans which are in default. Under various federal,
state and local environmental laws which pertain primarily to commercial
properties, a current or previous owner or operator of real property may be
required to investigate and clean up hazardous or toxic substances or chemical
releases on the property. In addition, the owner or operator may be held liable
to a governmental entity or to third parties for property damage, personal
injury, investigation and cleanup costs relating to the contaminated property.
Our ability to foreclose on the real estate collateralizing our loans,
may be limited by these environmental laws. While we would not knowingly make a
loan collateralized by real property that was contaminated, it is possible that
the environmental contamination would not be discovered until after we had made
the loan.
The costs of investigation, remediation or removal of hazardous
substances may be substantial and can easily exceed the value of the property.
The presence of hazardous substances, or the failure to properly eliminate the
substances from the property, can hurt the owner's ability to sell or rent the
property and prevent the owner from using the property as collateral for a loan.
Even people who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of the
substances at the disposal or treatment facility, whether or not the facility is
owned or operated by the person who arranged for the disposal or treatment.
In addition to federal or state regulations, 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
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from environmental contamination emanating from the property. See
"Business--Loan and Lease Servicing."
Problems related to the year 2000 could cause system failures that impair our
operations.
Many currently installed computer systems and software products in the
United States and worldwide use two digits rather than four to define the
applicable year. Software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, such as a temporary inability
to process loan or other transactions, send statements or late notices, or
engage in similar routine business activities. This problem has been referred to
as the "Year 2000" issue. We are in the process of ensuring our systems
recognize the year 2000 as the year 2000 and not as the year 1900 by obtaining
certifications from vendors regarding the Year 2000 compliance of their products
as well as testing our applications. We currently estimate that the costs
associated with this Year 2000 compliance program will be approximately
$500,000. Although we currently estimate that our information technology systems
will be Year 2000 compliant by the end of 1999, there can be no assurance that
unforeseen events would prevent us from meeting this deadline.
We have contacted vendors with which we do a significant amount of
business to determine whether they are Year 2000 compliant and to determine the
extent to which their computer systems are subject to Year 2000 issues. We
cannot predict the extent to which Year 2000 issues will affect these third
parties, or the extent to which we would be vulnerable to the failure of these
parties to remedy any Year 2000 issues on a timely basis. Since the failure of
our vendors to convert their systems on a timely basis may have a material
adverse effect on us, we are developing a contingency plan in the event these
vendors are not Year 2000 compliant on a timely basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources."
USE OF PROCEEDS
We intend to use the net proceeds resulting from the sale of the debt
securities (estimated to be approximately $292.5 million net of estimated
offering expenses if all of the securities we are offering through this
prospectus are sold) for general corporate purposes. General corporate purposes
may include:
o financing the future growth of our loan and lease portfolios;
o the repayment of warehouse credit facilities, lines of credit and
our maturing debt;
o possible future acquisitions of related businesses or assets; and
o general operating activities.
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 the proceeds are used, we
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may invest the proceeds, depending on our cash flow requirements, in short and
long-term investments, including, but not limited to:
o treasury bills,
o commercial paper,
o certificates of deposit,
o securities issued by U.S. government agencies,
o money market funds; and
o repurchase agreements.
Our investment policies permit significant flexibility as to the types of such
investments that we may make. We may also maintain daily unsettled balances with
certain broker-dealers. We are reviewing our strategic options with respect to
growth through acquisitions and otherwise. Our initiative may include
consideration of, and discussions with, potential target institutions from time
to time, which may include mortgage companies, leasing companies, banks and
thrifts. As of the date of this prospectus, we had no commitments or agreements
with respect to any material acquisitions.
DESCRIPTION OF THE DEBT SECURITIES OFFERED AND THE INDENTURE
General
The debt securities represent our unsecured debt obligations. The debt
securities will be issued under the indenture between U.S. Bank Trust National
Association a national banking association, as trustee and us. The terms of the
debt securities include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939, in effect on the date
the indenture is qualified under that act. The debt securities are subject to
all terms and conditions of the indenture and Trust Indenture Act. We refer you
to the indenture and the Trust Indenture Act for a complete understanding of the
debt securities. The following includes a summary of some provisions of the
indenture, and a copy of the indenture is available from us upon request. 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 debt securities will be subordinated in right of payment to, or
subordinate to, the prior payment in full of all senior debt further described
in our prospectus, whether outstanding on the date of the indenture or incurred
following the date of the indenture. There is no limit on the amount of senior
debt we may incur. See "-- Provisions Related to All Securities--Subordination."
The debt securities are not secured by any collateral or lien. There
are no provisions for a sinking fund or similar fund providing for payments on
the debt securities. See "Risk Factors -- We are not required to set aside funds
to repay the debt securities offered."
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Debt securities may be purchased in the minimum amount of $1,000 or any
amount in excess of $1,000. You may not cumulate separate purchases to satisfy
the minimum denomination requirement.
Investment Notes
Maturity. We are offering investment notes with terms ranging from
three to 120 months. You will select the term of each investment note upon your
order.
Book Entry. Upon acceptance of an order, we will credit our book-entry
registration and transfer system to the account of the purchaser of the
investment note, the principal amount of such security owned of record by such
purchaser. Upon acceptance of your order, we will send each purchaser a
confirmation statement which will indicate our acceptance of the order. The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of these securities in definitive form. These legal
requirements may impair the ability to transfer the record ownership of the
investment notes.
The record owners of investment notes issued in a book-entry interest
form will not receive or be entitled to receive physical delivery of a note or
certificate evidencing such indebtedness. The registered owners of the accounts
we establish upon the purchase or transfer of investment notes shall be deemed
to be the owners of the investment notes under the indenture. The person holding
a book-entry interest in the investment notes must rely upon the procedures
established by the trustee to exercise any rights of a holder of investment
notes under the indenture. We will provide the trustee with information
regarding the establishment of new accounts and the transfer of existing
accounts on a bi-weekly basis.
We will provide the trustee with information, as requested, regarding
the total amount of any principal and/or interest (which shall be paid in the
form of additional securities) due to book-entry owners with regard to the
investment notes on any interest payment date or upon redemption. On each
interest payment date, we will credit interest due on each account. We shall
determine the interest payments to be made to the book-entry accounts and
maintain, supervise and review any records relating to book-entry beneficial
interests in the notes.
Book-entry interests in the accounts evidencing ownership of the
investment notes are exchangeable for actual notes in denominations of $1,000
and any amount in excess of $1,000 and fully registered in those names as we
direct only if: (i) we, at our option, advise the trustee in writing of its
election to terminate the book-entry system, or (ii) after the occurrence of an
event of default under the indenture, holders of the investment notes
aggregating more than 50% of the aggregate outstanding amount of the investment
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 investment notes and the
trustee notifies all registered holders of these securities, of the occurrence
of any such event and the availability of definitive notes to holders of these
securities requesting such notes. Subject to the exceptions described above, the
book-entry interests in these securities shall not otherwise be exchangeable for
fully registered notes.
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Interest. The interest rate payable on an investment note will be
determined based upon the maturity date and term established for such investment
note at the time of order. Prevailing rates will be set forth in a supplement to
this prospectus. We will establish the interest rates payable on the investment
notes from time to time based on market conditions and our financial
requirements. We constantly re-evaluate our interest rates based upon this
analysis. Once determined, the rate of interest payable on an investment note
will remain fixed for the original term of the investment note.
We will compute interest on investment notes on the basis of an actual
calendar year and interest 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 twelve months 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 investment notes. Request to change the election must be made in writing to
us. No specific form of change of election is required. Any interest not
otherwise paid on an interest payment date will be paid at maturity.
We reserve the right to vary from time to time, at our discretion, the
interest rates we offer on the investment notes based on numerous factors other
than length of term to maturity. These 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 Keogh accounts;
rollover investments; and investment notes beneficially owned by persons
residing in particular geographic localities. We may make a decision to vary
interest rates in the future based on our fundraising 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
we may incur in selling investment notes in a particular jurisdiction which may
at the time be relevant to our operations and other factors.
Automatic Extension. The investment note will be automatically extended
for a term identical to the term of the original investment note unless:
o We notify the holder at least seven days prior to the maturity date
of our intention not to extend the investment note; or
o The holder elects to redeem the investment note within seven days
after the maturity date.
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The investment notes will continue to renew in this manner until
termination or redemption under the indenture and the investment notes by either
the holder or us. Interest shall continue to accrue from the first day of such
renewed term. Each renewed investment note 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
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 us on or before the maturity date, or the investment
note's then current rate if no such rate is specified. If we notify you of our
intention to repay an investment note at maturity, no interest will accrue after
the date of maturity. Otherwise, if a holder requests repayment within seven
days after its maturity date, we 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 the investment notes being offered by us to the general
public; or (ii) the rate being paid on such investment note immediately prior to
its maturity. As a courtesy, we provide 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 us in writing.
Place and Method of Payment. Principal and interest on the investment
notes will be payable at our principal executive office, as it may be
established from time to time, or at such other place as we may designate for
that purpose; provided, however, that payments may be made at our option by
check or draft mailed to the person entitled thereto at his/her address
appearing in the register which we maintain for that purpose.
Redemption by Us. We will have no right to prepay an investment note.
The holder has no right to require us to prepay any such investment 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 remaining 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 our satisfaction, 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 by persons who are
not legally married, the election to redeem upon the death of one joint owner
will not apply.
We may modify the foregoing policy on redemption after death or
disability in the future. However, no modification will affect the right of
redemption applicable to any then outstanding investment note.
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<PAGE>
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 us 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.
Quarterly Statements. We will provide holders of the investment notes
with quarterly statements, which will indicate, among other things, the current
account balance (including interest paid). These statements will be mailed not
later than the tenth business day following the end of each calendar quarter.
Provisions Relating to Money Market Notes
Maturity. The money market notes have no stated maturity and are
redeemable at any time in minimum amounts of $500 (or a lesser amount available
to close an account) at the option of the holder. See "--Redemptions by the
Holders of Money Market Notes."
Book-Entry System. Upon acceptance of an order, we will credit our
book-entry registration and transfer system, the principal amount of the money
market notes owned of record by such purchaser to the account of the purchaser
of the money market note. Upon acceptance of your order, we will send each
purchaser a confirmation statement which will indicate our acceptance of the
order. The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of those securities in definitive form. These
legal requirements may impair your ability to transfer the record ownership of
the money market notes.
The record owners of money market notes issued in a book-entry only
form will not receive or be entitled to receive physical delivery of a note or
certificate. The registered owners of the accounts we establish upon the
purchase or transfer of money market notes shall be deemed to be the owners of
the money market notes under the indenture. Each 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. We shall provide the trustee with information regarding the
establishment of new accounts and the transfer of existing accounts on a
bi-weekly basis.
We will make the information regarding the total amount of any
principal and/or interest, upon which will be paid in the form of additional
securities, due to book-entry owners with regard to the money market notes on
any interest payment date or upon redemption will be made available to the
trustee upon the trustee's request. On each interest payment date, we will
credit each account interest due on such account. We shall determine the
interest payments to be made to the book-entry accounts and will maintain,
supervise and review any records relating to book-entry beneficial interests in
money market notes.
Book-entry interests in the accounts evidencing ownership of the money
market notes are exchangeable for actual notes in denominations of $1,000 and
any amount in excess of $1,000 and fully registered in such names as we direct
only if: (i) we, at our option, advise the trustee in writing of our election to
terminate the book-entry system, or (ii) after the occurrence of an event of
default under the Indenture, 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 registered holders of the money market notes, of the occurrence of
any such event and the availability of definitive notes to holders of these
securities requesting the notes. Subject to the foregoing, the book-entry
interests in the money market notes shall not otherwise be exchangeable for
fully registered notes.
Redemption by the Holder of Money Market Notes. The holder of the money
market notes may redeem the security 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 us.
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.
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<PAGE>
In addition, subject to any established minimum redemption amount, a
holder of money market notes may make redemptions by draft, which is similar to
a check, made payable to the order of any payee. At the request of a holder, we
will provide drafts drawn on us that will be payable through our designated
bank. All authorized signers on a money market note must submit specimen
signatures to us and must agree to abide by our rules and regulations pertaining
to money market notes. Certain banks may not provide cash at the time of deposit
of a draft, but will wait until they have received payment from our designated
bank. When a draft is presented to the bank for payment, the bank, as agent of
the holder, will cause us to redeem a sufficient amount from the holder's money
market note to cover the amount of the draft. If a holder of more than one money
market note wishes to redeem less than all of that holder's money market notes,
then the holder must direct as to which of the holder's money market notes to
redeem in whole or in part. Interest continues to accrue on the amount of a
money market note covered by a draft until the draft is presented to our bank
for payment. The bank will return a draft if the amount of collected funds in
the holder's money market notes is insufficient to cover the draft or if the
signature(s) on the draft is (are) not, in our judgment, the same as the
specimen signature(s) previously submitted to us. We reserve the right to charge
a fee for the dishonor of a draft or for a stop payment order.
Neither we nor our bank will return canceled drafts to the holders of
money market notes, although we will provide you with copies of drafts upon
request and payment of a service charge. Holders of money market notes will
receive statements as described under "Form: Non-negotiability and Statements",
above, which will reflect draft transactions.
We will charge holders a $20 service fee for each draft presented in
excess of three drafts during any statement period. We may increase our service
charge by providing 30 days' prior written notice to each holder of a money
market note.
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<PAGE>
Interest. We will adjust the interest rates payable on the money market
notes from time to time in our sole discretion provided that the rate shall not
be less than 4.0% per year. We 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. The notice shall set forth the new interest rate to be paid
and the effective date of the change. We reserve 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 us at
(800) 776-4001.
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 note holder's principal balance of the account in the form of additional
securities. Interest will continue to accrue on the principal balance of each
security through the date of redemption. If a holder redeems the security 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 in this prospectus, we may vary,
at our discretion, the interest rates we offer on the money market notes based
on numerous factors. These 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 Keogh accounts;
rollover investments; and money market notes beneficially owned by persons
residing in particular geographic localities. As of the date of this prospectus,
we are not offering money market notes at varying rates to different investors.
However, we may make a decision to vary interest rates in the future based on
our fundraising 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 us in selling money
market notes in a particular jurisdiction which may at the time be relevant to
our operations and other factors.
Redemption by Us. We will have the right to redeem a money market note
at any time upon thirty days written notice to the holder of the note.
Place and Method of Payment Upon Redemption. Payments upon the
redemption of the money market notes will be payable at our principal executive
office, as it may be established from time to time, or at such other place as we
may designate for that purpose. However, we may, at our option, make payments by
check or draft mailed to the person entitled thereto at his/her address
appearing in the register which we maintain for that purpose.
Monthly Statements. We will 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 those 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 the end of each month. We shall provide additional
statements as the holders of these securities may reasonably request from time
to time. Holders requesting such additional statements may be required to pay
all charges incurred by us in providing such additional statements.
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Provisions Related to All Securities
Form and Denominations/Transfers. The debt securities are not
negotiable debt instruments and, subject to certain exceptions, will be issued
only in book-entry form. Upon the submission of an order, we will issue a
confirmation statement reflecting the ownership of a debt security to each
purchaser upon our acceptance of the order. The confirmation statement is not a
negotiable instrument, and no rights of record ownership can be transferred
without our prior written consent. Each holder of a debt security will receive a
periodic statement indicating any transactions in the holder's account, as well
as interest credited. Ownership of debt securities may be transferred on our
register only by written notice to us signed by the owner(s) or such owner's
duly authorized representative on a form to be supplied by us and with our
written consent (which consent shall not be unreasonably withheld). We may also,
in our discretion, require an opinion from such holder'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 debt
security, we will provide the new owner of such security with a confirmation
statement which will evidence the transfer of the account on our records.
Interest Accrual Date. Interest on the debt securities will accrue from
the date of purchase. The date of purchase will be deemed to be, for accepted
orders, the date we receive funds, if the funds are received prior to 3:00 p.m.
on a business day, or the next business day if the funds are received on a
non-business day or after 3:00 p.m. on a business day. For this purpose, our
business days will be deemed to be Monday through Friday, except for legal
holidays in the State of Delaware.
Subordination. The indebtedness evidenced by the notes, and any
interest thereon, are subordinated to all of our senior debt. The term senior
debt is defined for this purpose to include any indebtedness (whether
outstanding on the date of this prospectus or thereafter created) incurred by us
in connection with borrowings by us (including our subsidiaries) from a bank,
trust company, insurance company, or from any other institutional lender,
whether such indebtedness is or is not specifically designated by us as being
"senior debt" in its defining instruments. As of June 30, 1999, there was $58.7
million of senior debt outstanding. There is no limitation under the indenture
on the amount of senior debt we can incur. The notes are not guaranteed by any
of our subsidiaries. Accordingly, in the event of a liquidation or dissolution
of one of our subsidiaries, 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 us as a shareholder of
that subsidiary. Therefore, in the event of liquidation or dissolution of a
subsidiary, creditors of that subsidiary will receive payment of their claims
prior to any payment to the holders of the notes. As of June 30, 1999, there was
$6.0 million of such debt outstanding, respectively. Any of our indebtedness,
other than that described as senior debt and the debt of the subsidiaries, will
have rights upon liquidation or dissolution of us which ranks equally in right
of payment to the notes being offered. As of June 30, 1999, we had $206.9
million of debt outstanding, which ranks equally in right of payment to the
notes offered.
For a discussion of our status as a holding company and the lack of
insurance or guarantees in support of the notes, see "Risk Factors -- Our
business operations are not subject to examination by federal banking
regulators."
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<PAGE>
In the event of any liquidation, dissolution or any other winding up of
us, or of any receivership, insolvency, bankruptcy, readjustment, reorganization
or similar proceeding under the U.S. 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. If any of the above
events occurs, 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 -- The debt securities are unsecured and second in right of repayment to
all of our senior debt borrowed from institutional lenders."
Events of Default. The indenture provides that each of the following
constitutes an event of default:
o 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);
o default in payment of principal when due on the notes (whether or
not prohibited by the subordination provisions of the indenture) and
continuation of the default for 30 days;
o our failure to observe or perform any covenant, condition or
agreement with respect to the liquidation, consolidation or merger
or other disposition of substantially all of our assets of (after
notice and provided such default is not cured within 60 days after
receipt of notice);
o our failure for 60 days after notice to comply with certain other
agreements in the indenture or the notes; and
o certain events of bankruptcy or insolvency with respect to us.
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. However, so long as any senior debt is outstanding,
a declaration of this kind will 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 us, 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 the trustee determines that
withholding notice is in the interest of the holders.
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<PAGE>
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.
We are required to deliver to the trustee annually a statement
regarding compliance with the indenture, and we are 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 in this
prospectus, 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):
o reduce the principal amount of any investment note whose holder must
consent to an amendment, supplement or waiver;
o reduce the principal of or change the fixed maturity of any security
or alter the redemption provisions or the price at which we shall
offer to repurchase the investment note;
o reduce the rate of or change the time for payment of interest,
including default interest, on any investment note;
o waive a default or event of default in the payment of principal or
premium, if any, or interest on or redemption payment with respect
to the investment notes (except a rescission of acceleration of the
investment notes by the holders of at least a majority in aggregate
principal amount of the investment notes and a waiver of the payment
default that resulted from such acceleration);
o make any investment note payable in money other than that stated in
the investment notes;
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<PAGE>
o 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;
o make any change to the subordination provisions of the indenture
that adversely affects holders of investment notes;
o modify or eliminate holders' redemption rights (provided that no
modification or elimination is permitted as to any securities issued
with such right); or
o 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):
o 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 of the note);
o reduce the principal of any money market note (other than as a
result of withdrawals made by the holder of the note) or alter the
redemption provisions of the money market note or the price at which
we shall offer to repurchase the money market note;
o 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;
o 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);
o make any money market note payable in money other than that stated
in the money market notes;
o 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;
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<PAGE>
o make any change to the subordination provisions of the indenture
that adversely affects holders of money market notes;
o modify or eliminate redemption right of holders of the money market
notes; or
o make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of the
notes, we 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 our
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 our 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 SEC in order to effect or maintain the qualification of the
indenture under the Trust Indenture Act.
The Trustee. The indenture contains certain limitations on the rights
of the trustee, should it become one of our creditors, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any claim as security or otherwise. The trustee will be permitted to engage
in other transactions with us.
Subject to certain exceptions, 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. The indenture provides that in case an event of
default specified in the indenture shall occur and not be cured, the trustee
will be required, in the exercise of its power, to use the degree of care of a
reasonable person 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 the holder
shall have offered to the trustee security and indemnity satisfactory to it
against any loss, liability or expense.
Reports to Trustee. We will provide the trustee with quarterly reports
which shall contain the information reasonably requested by the trustee. These
quarterly reports will include information regarding the outstanding balance,
interest credited, withdrawals made and interest rate paid on each account
related to each account we maintain during the preceding quarterly period.
No Personal Liability of Directors, Officers, Employees and
Stockholders. No director, officer, employee, incorporator or stockholder of
ours, shall have any liability for any obligations of ours under the notes, the
indenture or for any claim based on, in respect to, or by reason of, these
obligations or their creation. Each holder of the notes waives and releases
these persons from any liability. The waiver and release are part of the
consideration for issuance of the notes. We have been advised that the waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the SEC that such a waiver is against public policy.
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Service Charges. We reserve the right to assess service charges for
replacing lost or stolen investment notes (for which an affidavit from the
holder will be required), changing the registration of any security to reflect a
change in name of the holder, or a transfer (whether by operation of law or
otherwise) of a security by the holder to another person.
Interest Withholding. With respect to those investors who do not
provide us with a fully executed Form W-8 or Form W-9, we will withhold 31% of
any interest paid. Otherwise, no interest will be withheld, except on debt
securities held by foreign business entities. It is our policy that no sale will
be made to anyone refusing to provide a fully executed Form W-8 or Form W-9.
Additional Securities. We may offer from time to time additional
classes of securities with terms and conditions different from the debt
securities being offered. We will amend or supplement this prospectus if and
when we decide to offer to the public any additional class of security under
this prospectus.
Variations by State. We reserve 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.
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SELECTED CONSOLIDATED FINANCIAL DATA
You should consider our selected consolidated financial information set
forth below together 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 in this
prospectus.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Gain on sale of loans and leases....................... $65,640 $41,316 $20,043 $ 8,721 $1,350
Interest and fees...................................... 17,424 17,386 5,584 3,245 4,058
Other.................................................. 3,360 633 335 129 143
------- ------- ------- ------- ------
Total revenues............................................ 86,424 59,335 25,962 12,095 5,551
Total expenses............................................ 64,573 41,445 16,960 8,974 4,657
------- ------- ------- ------- ------
Operating income before income taxes...................... 21,851 17,890 9,002 3,121 894
Income taxes.............................................. 7,763 6,435 3,062 802 313
------- ------- ------- ------- ------
Net income................................................ $14,088 $11,455 $ 5,940 $ 2,319 $ 581
======= ======= ======= ======= ======
Per Common Share Data:
Net income (a)......................................... $ 3.72 $ 2.98 $ 1.95 $ 0.96 $ 0.26
Cash dividends declared................................ .165 .06 .06 .03 --
</TABLE>
(a) Amounts have been retroactively adjusted to reflect the effect of a 5% stock
dividend declared August 18, 1999 as if the shares had been outstanding for
each period presented.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $ 22,395 $ 4,486 $ 5,014 $ 5,345 $ 4,734
Loan and lease receivables, net available for sale........ 33,776 62,382 35,712 18,003 8,669
Other..................................................... 6,863 4,096 1,144 534 328
Total assets.............................................. 396,301 226,551 103,989 46,894 22,175
Subordinated debt ........................................ 212,902 115,182 56,486 33,620 17,800
Total liabilities......................................... 338,055 183,809 73,077 42,503 20,031
Stockholders' equity...................................... 58,246 42,742 30,912 4,392 2,143
</TABLE>
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<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
Other Data: ---------- -------- -------- ------- -------
Originations: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Business Purpose Loans....................................... $ 64,818 $ 52,335 $ 38,721 $28,872 $18,170
Home Equity Loans............................................ 634,820 328,089 91,819 36,479 16,963
First Mortgage Loans......................................... 66,519 33,671 -- -- --
Equipment Leases ............................................ 96,289 70,480 8,004 5,967 2,220
Loans and Leases sold:
Securitizations.............................................. 777,598 384,700 115,000 36,506 9,777
Other........................................................ 105,751 51,594 3,817 19,438 31,948
Total managed loan and lease portfolio.......................... 1,176,918 559,398 176,651 59,891 17,774
Average loan/lease size:
Business Purpose Loans....................................... 80 83 78 78 71
Home Equity Loans............................................ 74 62 51 47 46
First Mortgage Loans......................................... 165 154 -- -- --
Equipment Leases............................................. 23 21 11 11 12
Weighted average interest rate on loans and leases originated:
Business Purpose Loans ...................................... 15.91% 15.96% 15.91% 15.83% 16.05%
Home Equity Loans............................................ 11.05 11.95 11.69 9.94 12.68
First Mortgage Loans......................................... 7.67 8.22 -- -- --
Equipment Leases............................................. 11.40 12.19 15.48 17.22 15.85
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets ....................................... 4.56% 6.93% 7.87% 6.71% 3.37%
Return on average equity ....................................... 28.10 31.10 33.65 70.96 31.36
Total delinquencies as a percentage of total portfolio
serviced, at end of period .................................. 3.19 3.01 2.15 2.30 3.84
Real estate owned as a percentage of total portfolio
serviced, at end of period................................... .85 .16 .34 1.01 4.29
Loan and lease losses as a percentage of the average total
portfolio serviced during the period......................... .12 .12 .07 .33 .66
Pre-tax income as a percentage of total revenues................ 25.28 30.15 33.99 25.81 16.11
Ratio of earnings to fixed charges.............................. 1.92 2.23 2.56 1.97 1.54
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following financial review and analysis of the financial condition
and results of operations, for the years ended June 30, 1999, 1998 and 1997
should be read in conjunction with the consolidated financial statements and the
accompanying notes to the consolidated financial statements, and other detailed
information appearing in this document.
Securitizations
The ongoing securitization of loans and leases is a central part of our
current business strategy. We sell loans and leases through securitizations with
servicing retained in order to fund growing loan and lease originations and to
provide additional sources of revenue through retained mortgage and lease
servicing rights. In fiscal 1999, we completed securitizations aggregating
$777.6 million, consisting of $71.9 million in business purpose loans, $613.0
million in home equity loans and $92.6 million in equipment leases. Such
securitizations generated gains on the sale of loans and leases of $65.6
million, $41.3 million and $20.0 million, respectively, for fiscal years ended
June 30, 1999, 1998 and 1997. Gain on sale of loans and leases resulting from
securitizations as a percentage of total revenues was 76.0%, 69.6% and 75.5% for
the years ended June 30, 1999, 1998 and 1997, respectively. We rely primarily on
securitizations to generate cash proceeds for repayment of warehouse credit
facilities and other borrowings and to originate additional loans and leases.
Several factors affect our ability to complete securitizations,
including conditions in the securities markets generally, conditions in the
asset-backed securities markets specifically and credit quality of the portfolio
of loans and leases serviced. Any substantial reduction in the size or
availability of the securitization market for loans and leases could have a
material adverse effect on our results of operations and financial condition.
Our quarterly 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
securitizations and changes in market interest rates. The strategy of selling
loans and leases through securitizations require building an inventory of loans
and leases over time, during which time costs and expenses are incurred. Since a
gain on sale is not recognized until a securitization is completed, which may
not occur until a subsequent quarter, operating results for a given quarter can
fluctuate significantly as a result of the timing and level of securitizations.
If securitizations do not close when expected, we could experience a materially
adverse effect on our results of operations for a quarter. The gain on sale of
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<PAGE>
loans and leases may be unfavorably impacted to the extent we hold fixed-rate
mortgage loans or leases in our available for sale portfolio prior to
securitization. A significant variable affecting the gain on sale of loans and
leases in a securitization is the spread between the average coupon rate on
fixed rate loans and leases, and the weighted average pass-through rate to
investors for interests issued in connection with a securitization. Although the
loan and lease coupon rate is fixed at the time the loan or lease is originated,
the pass-through rate to investors is not fixed until the pricing of the
securitization which occurs just prior the sale of the loans and leases.
Therefore, if market rates required by investors increase prior to
securitization of the loans and leases, the spread between the average coupon
rate on the loans and leases and the pass-through rate to investors may be
reduced or eliminated. In addition, due to the timing difference between the
period when costs are incurred in connection with the origination of loans and
leases and their subsequent sale through the securitization process, we may
operate on a negative cash flow basis, which could adversely impact our results
of operations and financial condition.
We also rely upon funds generated by the sale of subordinated debt and
other borrowings to fund our operations. At June 30, 1999, $212.9 million of
subordinated debt was outstanding and credit facilities and lines of credit
totaling $275.0 million were available, of which $51.5 million was drawn upon on
such date. In addition, we had a $100.0 million commercial paper conduit to
finance equipment lease origination of which $3.2 million was utilized at June
30, 1999. We expect to continue to rely on such borrowings to fund loans and
leases prior to securitization.
Certain Accounting Considerations
As a fundamental part of our business and financing strategy, we
securitize the majority of our loans and leases by selling them to trusts for
cash and a retained interest in the securitized loans and leases which is called
a residual interest. The trust issues multi-class securities which derive their
cash flows from a pool of securitized loans and leases. These securities which
represent the remaining interest in the trust called the regular interests, are
sold to public investors. We also retain servicing on securitized loans and
leases.
As the holder of the residual interests in a securitization, we are
entitled to receive certain excess (or residual) cash flows. These cash flows
are the difference between the payments made by the borrowers and the sum of the
scheduled and prepaid principal and interest paid to the investors in the trust,
servicing fees, trustee fees and, if applicable, insurance fees.
Overcollateralization requirements, representing an excess of the aggregate
principal balances of loans and leases in a securitized pool over investor
interests, are established to provide credit enhancement for the trust
investors. In order to meet the required overcollateralization levels the trust
initially retains the excess cash flow until after the overcollateralization
requirements, which are specific to each securitization, are met.
Gain on sale of loans and leases through securitizations represent the
difference between our net proceeds and the allocated cost of loans and leases
securitized. The allocated cost of the loans and leases securitized is
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<PAGE>
determined by allocating their net carrying value between the loans and leases
securitized, the residual interests and the mortgage servicing rights retained,
based upon their relative fair values. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", which was effective for fiscal quarters
beginning after December 15, 1998, we classified our residual interests as
available-for-sale securities. Available-for-sale securities are carried at fair
value, with subsequent adjustments to fair value recorded in stockholders'
equity and reported as a component of comprehensive income. Prior to the
adoption of SFAS No. 134, the differences between the fair value of residual
interests and their allocated costs was recorded as gain on securitization and
included in gain on sale of loans and leases. The adoption of SFAS No. 134 did
not have a material effect on our financial condition, but reduced the recorded
gain on sale by approximately $5.7 million pre-tax in the third and fourth
quarters of fiscal year 1999.
The calculation of the fair value of the residual interest is based
upon the present value of the future expected excess cash flows and utilizes
certain assumptions made by management at the time loans and leases are sold.
These assumptions include the discount rate used to calculate present value, the
rates of prepayment and default rates on the pool of loans. The rate of
prepayment of loans may be affected by a variety of economic and other factors,
including prevailing interest rates and the availability of alternative
financing to borrowers. The effect of those factors on loan and lease prepayment
rates may vary depending on the type of loan or lease. Estimates of prepayment
rates are made based on management's expectation of future prepayment rates,
which are based, in part, on the historical rate of repayment of the loans and
leases and other considerations. Although we believe we have made reasonable
estimates of prepayment rates and default assumptions, the actual prepayment and
default experience may materially vary from our estimates. The gain recognized
upon the sale of loans and leases will have been overstated if prepayments or
losses are greater than estimated. Additionally, certain of our securitization
trusts have issued floating rate certificates supported by fixed rate mortgages.
The fair value of the excess cash flow we will receive would be affected by any
changes in the rates paid on the floating rate certificates.
To the extent that prepayments or delinquencies differ from the
estimates made, adjustments of the gain on sale of loans and leases may be
required. Higher levels of future prepayments, delinquencies and/or liquidations
could result in a reduction in the value of residual interests which would
adversely affect income in the period of adjustment.
We also sell loans with servicing released referred to as whole loan
sales. Gains on whole loan sales equal the difference between the net proceeds
from such sales and the loans' net carrying value. The net carrying value of
loans is equal to their principal balance plus unamortized origination costs and
fees. Gains from these sales are recorded as fee income.
The timing of sales of loans and leases and the amount of loans and
leases sold will impact earnings from quarter to quarter. Subsequent to the
initial recognition of the residual interests in a securitization, ongoing
assessments are made to determine the fair value of the expected future excess
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<PAGE>
cash flows based upon current market conditions. At June 30, 1999, investments
in residual interests in securitizations totaled $178.2 million including
investments in interest-only strips of $139.6 million and investments in
overcollateralization of $38.6 million.
When loans or leases are sold through a securitization, the servicing
on the loans or leases is retained and the fair value of contractual servicing
fees net of the allocated costs of servicing is recognized as a separate asset
for accounting purposes. Fair value of servicing rights is determined by
computing the present value of projected net cash flows expected to be received
over the life of the loans or leases securitized. Such projections incorporate
assumptions, including servicing costs, prepayment rates, default rates and
discount rates. These assumptions are similar to those used to value the
residual interests retained in a securitization. Periodically, capitalized
servicing rights are evaluated for impairment, which is measured as the excess
of unamortized cost over fair value. We have generally found that non-conforming
borrowers are less sensitive to interest rates than monthly payment balances.
Therefore, interest rates are not considered as a predominant risk
characteristic for purposes of evaluating impairment. At June 30, 1999,
servicing rights totaled $43.2 million, compared to $18.5 million at June 30,
1998.
Results of Operations
Summary Financial Results
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30, Percentage Change
--------------------------------------------- --------------------------
1999 1998 1997 '99/'98 '98/'97
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Total revenues.......................... $86,424 $59,335 $25,962 45.7% 128.5%
Total expenses.......................... $64,573 $41,445 $16,960 55.8% 144.4%
Net income.............................. $14,088 $11,455 $5,940 23.0% 92.8%
Return on average equity................ 28.10% 31.10% 33.65%
Return on average assets................ 4.56% 6.93% 7.87%
Earnings per share:
Basic................................ $3.83 $3.10 $2.03 23.5% 52.7%
Diluted.............................. $3.72 $2.98 $1.95 24.8% 52.8%
Dividends declared per share............ $0.165 $0.06 $0.06
</TABLE>
Overview
For fiscal 1999, net income increased $2.6 million, or 23.0%, to $14.1
million from $11.5 million for fiscal 1998. Basic earnings per common share
increased 23.5% to $3.83 on average common shares of 3,682,070, compared to
$3.10 per share on average common shares of 3,692,492 for fiscal 1998. Diluted
earnings per common share increased 24.8% to $3.72 on average common shares of
3,791,204, compared to $2.98 per share on average common shares of 3,847,428 for
fiscal 1998. All average common share and earnings per common share amounts have
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<PAGE>
been retroactively adjusted to reflect the effect of a 5% stock dividend
declared August 18, 1999. See note 10 in the Consolidated Financial Statements
for further description.
The increases in net income and earnings per share primarily resulted
from the impact of increases in the volume of loans and leases securitized
during the periods and increases in the collection of fee income due to the
increase in loans and leases available for sale and securitized loans and leases
for which servicing was retained, referred to as the total managed portfolio.
In the second quarter of fiscal 1999, we increased our quarterly
dividend by 233% to $0.05 per share. Dividends of $0.165 were paid in fiscal
1999 compared to dividends of $0.06 in fiscal 1998. The common dividend payout
ratio based on diluted earnings per share was 4.2% for fiscal 1999, compared to
1.9% for fiscal 1998.
Our growth strategy is dependent upon our ability to increase loan and
lease origination volume through both geographic expansion and growth in current
markets. The implementation of this strategy will depend in large part on a
variety of factors outside of our control, including, but not limited to, the
ability to obtain adequate financing on favorable terms and profitably
securitize loans and leases on a regular basis and continue to expand in the
face of increasing competition. Our failure with respect to any of these factors
could impair our ability to successfully implement our growth strategy, which
could adversely affect our results of operations and financial condition.
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Total Revenues. Total revenues increased $27.1 million, or 45.7%, to
$86.4 million for the year ended June 30, 1999 from $59.3 million for the year
ended June 30, 1998. The increase was primarily attributable to increases in
gains on sale of loans and leases through securitizations and servicing income.
Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $24.3 million, or 58.9%, to $65.6 million for the year ended June 30,
1999 from $41.3 million for the year ended June 30, 1998. The increase was the
result of selling $777.6 million of loans and leases through securitizations in
fiscal 1999, including $71.9 million of business purpose loans, $613.0 million
of home equity loans and $92.6 million of equipment leases, compared to $54.1
million of business purpose loans, $270.9 million of home equity loans and $59.7
million of equipment leases in fiscal 1998.
Gain on sale of loans and leases as a percentage of loans and leases
securitized was 8.44% in fiscal 1999, compared to 10.74% in fiscal 1998. Factors
impacting the year to year comparability of the gain percentage included: the
adoption of SFAS No. 134 on January 1, 1999 which reduced pre-tax gains by
approximately 0.75%; a decline in the average coupon on loans and leases
originated during fiscal 1999; and an increase in the rate required to be paid
to investors in fiscal 1999 securitizations.
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<PAGE>
Gain on sale of loans and leases securitized represents the difference
between the net proceeds received, and the allocated cost of loans and leases
securitized. The allocated cost of the loans and leases securitized is
determined by allocating their net carrying value between the loans and leases
securitized, the retained residual interests in the securitization and the
mortgage servicing rights retained, based upon their relative fair values. The
calculation of the fair value of the residual interest is based upon the present
value of the future expected excess cash flows and utilizes certain assumptions
made by management at the time loans and leases are sold. Assumptions used in
the estimation of the fair value of residual interests include the discount rate
used to calculate present value and the rates of prepayment and default on the
pool of loans. See "Interest-only Strips and Servicing Assets" for more
information regarding these assumptions.
The following schedule details loan and lease originations during the
fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Business Purpose Loans ................................. $ 64,818 $ 52,335 $ 38,721
Home Equity Loans ...................................... 701,339 361,760 91,819
Equipment Leases........................................ 96,289 70,480 8,004
-------- -------- --------
$862,446 $484,575 $138,544
======== ======== ========
</TABLE>
Interest and Fee Income. Interest and fee income was $17.4 million for
the year ended June 30, 1999, substantially unchanged from the year ended June
30, 1998. Interest and fee income consists primarily of income earned on loans
and leases while held in our portfolio, premiums earned on whole loan sales and
other ancillary fees collected in connection with loan and lease originations.
Interest income decreased $2.3 million, or 22.1%, to $8.2 million for
the year ended June 30, 1999 as compared to $10.5 million for the year ended
June 30, 1998. This decrease was primarily attributable to a reduction in the
duration of time portfolio loans accrued interest income prior to securitization
and a reduction in the average coupon earned on loans and leases originated,
from 11.63% in fiscal 1998 to 11.30% in fiscal 1999. The decline in the average
coupon in fiscal 1999 primarily resulted from competitive pricing in the home
equity lending market.
Fee income increased $2.3 million, or 34.2%, to $9.2 million for the
year ended June 30, 1999 from $6.9 million for the year ended June 30, 1998. The
increase in fee income was due to an increase in ancillary fees earned in
connection with increased originations and an increase in fees earned on whole
loan sales. During the year ended June 30, 1999, we completed approximately
$105.8 million of whole loan sales as compared to $51.6 million during the year
ended June 30, 1998.
Servicing Income. Servicing income is comprised of contractual and
ancillary fees collected on securitized loans and leases, less amortization of
the servicing assets recorded at the time the loans and leases are securitized.
Servicing income increased $2.8 million, or 597.7%, to $3.3 million for the year
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<PAGE>
ended June 30, 1999, from $0.5 million for the year ended June 30, 1998. This
increase resulted from the higher average total managed portfolio, which was
$915.8 million during the year ended June 30, 1999 compared to $368.0 million
during the year ended June 30, 1998. As a percentage of the average managed
portfolio, servicing income increased to 0.36% for the year ended June 30, 1999,
from 0.13% for the year ended June 30, 1998, as a result in the origination of
loans with prepayment fees and the collection of other ancillary fees.
Total Expenses. Total expenses increased $23.1 million, or 55.8%, to
$64.6 million for the year ended June 30, 1999, from $41.4 million for the year
ended June 30, 1998. As described in more detail below, this increase was
primarily a result of higher interest expense attributable to sales of
subordinated debt securities and borrowings used to fund loan and lease
originations and increases in sales and marketing, and general and
administrative expenses. These increases related to the growth in loan and lease
originations, the growth in the total managed portfolio and the continued
building of support area infrastructure to support the increases in originated
and managed portfolios.
Interest Expense. Interest expense increased $9.2 million, or 70.0%, to
$22.4 million for the year ended June 30, 1999 from $13.2 million for the year
ended June 30, 1998. The increase was attributable to an increase in the amount
of subordinated debt outstanding during fiscal 1999, the proceeds of which were
used to fund loan and lease originations and investments in operations required
to position us for future growth, and the costs related to greater utilization
of warehouse and credit line facilities to fund loan and lease originations.
Average subordinated debt outstanding during the year ended June 30, 1999 was
$156.6 million compared to $85.8 million during the year ended June 30, 1998.
Average interest rates paid on outstanding subordinated debt increased to 9.32%
for the year ended June 30, 1999 from 9.23% for the year ended June 30, 1998 due
to increases in the rates offered on subordinated debt in order to respond to
general increases in market rates and to attract additional funds. The average
outstanding balances under warehouse and other credit lines were $102.6 million
during the year ended June 30, 1999, compared to $57.6 million during the year
ended June 30, 1998.
Provision for Credit Losses. The provision for credit losses on
portfolio loans and leases for fiscal 1999 was $0.9 million, compared to $0.5
million for fiscal 1998. An allowance for credit losses for portfolio loans and
leases and other receivables is maintained primarily to account for loans and
leases that are delinquent and are expected to be ineligible for sale into a
future securitization. The allowance is calculated based upon management's
estimate of the expected collectibility of loans and leases outstanding based
upon a variety of factors, including but not limited to, periodic analysis of
the portfolio, economic conditions and trends, historical credit loss
experience, borrowers ability to repay, and collateral considerations. Although
we maintain an allowance for credit losses at the level we consider adequate to
provide for potential losses, there can be no assurances that actual losses will
not exceed the estimated amounts or that an additional provision will not be
required. The allowance for credit losses was $0.7 million at June 30, 1999 as
compared to $0.9 million at June 30, 1998.
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<PAGE>
In addition to the allowance for credit losses on portfolio loans and
leases, certain assumptions are made regarding the expected impact of credit
losses on the fair value of interest-only strips and residual interests created
in securitizations. See "Interest-Only Strips and Servicing Assets" for more
information regarding these credit loss assumptions.
The following table summarizes changes in the allowance for credit
losses for the year fiscal years ended June 30, 1999, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1999 1998 1997
------- ---- -----
<S> <C> <C> <C>
Balance at beginning of period............................... $ 881 $ 338 $330
Acquired through acquisition................................. -- 719 --
Provision for credit losses.................................. 928 491 106
Charge offs, net of recoveries............................... (1,107) (667) (98)
------- ----- ----
Balance at end of period..................................... $ 702 $ 881 $338
======= ===== ====
</TABLE>
The following table summarizes the changes in the allowance for credit
losses by loan and lease type for the fiscal year ended June 30, 1999 (in
thousands).
<TABLE>
<CAPTION>
Business Home
Purpose Loans Equity Equipment
Loans Loans Leases Total
-------------- ------ --------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period................ $ 49 $ 433 $ 399 $ 881
Provision for credit losses.................... 278 296 354 928
Charge offs, net of recoveries................. (301) (486) (320) (1,107)
----- ------ ----- -------
Balance at end of period....................... $ 26 $ 243 $ 433 $ 702
===== ===== ===== =======
</TABLE>
The increase in net charge offs in fiscal 1999 primarily relates to the
maturing of the total managed portfolio. Charge offs related to loan and lease
securitizations generally have been recorded in ABFS's books if an impaired loan
is repurchased from the securitization.
Employee Related Costs. Employee related costs increased $0.3 million,
or 5.7% to $5.3 million for the year ended June 30, 1999 from $5.0 million for
the year ended June 30, 1998. The increase was primarily the result of additions
to staff in support of the increased marketing efforts, loan and lease
originations and servicing activities. Management anticipates that these
expenses will continue to increase in the future as our expansion continues and
loan and lease originations continue to increase.
Sales and Marketing Expenses. Sales and marketing expenses increased
$9.4 million, or 65.7%, to $23.6 million for the year ended June 30, 1999 from
$14.2 million for the year-end June 30, 1998. The increases were primarily
attributable to targeted television and radio advertising related to home equity
loans and advertising costs resulting from increased newspaper and direct mail
advertising related to sales of subordinated debt and loan products. During
fiscal 1999, targeted television advertising was intensified in Chicago, Florida
and Georgia. Subject to market conditions, we plan to continue to expand our
service area throughout the United States. As a result, it is anticipated that
sales and marketing expenses will continue to increase in the future.
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<PAGE>
General and Administrative Expenses. General and administrative
expenses increased $3.8 million, or 44.8%, to $12.3 million for the year ended
June 30, 1999 from $8.5 million for the year ended June 30, 1998. The increase
was primarily attributable to increases in rent, telephone, office expenses,
professional fees and other expenses incurred as a result of previously
discussed increases in loan and lease originations and in the volume of total
loans and leases managed during fiscal 1999 and the continued building of
support area infrastructure to support the increases in originations and the
managed portfolio.
Income Taxes. Income taxes increased $1.4 million, or 20.6%, to $7.8
million for the year ended June 30, 1999 from $6.4 million for the year ended
June 30, 1998 due to an increase in income before income taxes. The effective
tax rate for the year ended June 30, 1999 was 35.5%, compared to 36% for the
year ended June 30, 1998.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Total Revenues. Total revenues increased $33.4 million, or 128.5%, to
$59.3 million for the year ended June 30, 1998 from $26.0 million for the year
ended June 30, 1997. The increase was attributable to increases in gain on sale
of loans and leases through securitizations and interest and fee income and
servicing income.
Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $21.3 million, or 106.5%, to $41.3 million for the year ended June 30,
1998 from $20.0 million for the year ended June 30, 1997. The increase was the
result of selling $384.7 million of loans and leases through securitizations,
including sales of $54.1 million of business purpose loans, $270.9 million of
home equity loans and $59.7 million of equipment leases in fiscal 1998, compared
to the sale of $38.1 million of business purpose loans and $76.9 million of home
equity loans in fiscal 1997. There were no sales of leases through
securitization during the year ended June 30, 1997.
Interest and Fee Income. Interest and fee income increased $11.8
million, or 210.7%, to $17.4 million for the year ended June 30, 1998, from $5.6
million for the year ended June 30, 1997. The increase was primarily due to
increases in the volume of loans and leases originated and retained in our
portfolio prior to securitization and an increase in fee income as a result of
an increase in whole loan sales and other ancillary fees earned in connection
with loan and lease originations.
Servicing Income. Servicing income increased $0.2 million, or 68.2%, to
$0.5 million for the year ended June 30, 1998 from $0.3 million for the year
ended June 30, 1997 as a result of an increase in the average managed portfolio
to $368.0 million during the year ended June 30, 1998 from $118.3 million during
the year ended June 30, 1997.
Total Expenses. Total expenses increased $24.5 million, or 144.4%, to
$41.4 million for the year ended June 30, 1998 from $17.0 million for the year
ended June 30, 1997. This increase was related to the increase in loan and lease
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<PAGE>
originations, costs associated with a larger managed portfolio of loans and
leases, geographic expansion of our market and the October 1, 1997 acquisition
and operation of New Jersey Mortgage and Investment Corp. and subsidiaries.
Interest Expense. Interest expense increased $8.0 million, or 153.8%,
to $13.2 million for the year ended June 30, 1998 from $5.2 million for the year
ended June 30, 1997. The increase was attributable to increases in the amount of
subordinated debt outstanding, greater utilization of warehouse lines of credit
to fund loans and leases and debt assumed and incurred in connection with the
acquisition of New Jersey Mortgage. Average subordinated debt outstanding was
$85.8 million during the year ended June 30, 1998 compared to $44.4 million
during the year ended June 30, 1997.
Average interest rates paid on the subordinated debt increased to 9.23%
for the year ended June 30, 1998 from 8.99% for the year ended June 30, 1997 due
to increases in the rates offered on subordinated debt in order to attract
additional funds and higher rates paid on subordinated debt assumed in the
acquisition of New Jersey Mortgage. Interest expense on lines of credit was $4.2
million for the year ended June 30, 1998 compared to $0.5 million for the year
ended June 30, 1997 due to the increase in warehouse lines to fund loan and
lease originations. In addition, approximately $14.5 million of debt was assumed
in the acquisition of New Jersey Mortgage resulting in approximately $1.1
million of additional interest expense for the year ended June 30, 1998.
Provision for Credit Losses. The allowance for credit losses was $0.9
million at June 30, 1998 as compared to $0.3 million at June 30, 1997. The
provision for credit losses increased by $0.4 million to $0.5 million for the
year ended June 30, 1998 from $0.1 million for the year ended June 30, 1997.
Employee Related Costs. Employee related costs increased $3.4 million,
or 212.5% to $5.0 million for the year ended June 30, 1998 from $1.6 million for
the year ended June 30, 1997. The increase was primarily the result of
additional staff needed to support the increased marketing efforts, loan and
lease originations and servicing activities and the addition of personnel added
upon the acquisition of New Jersey Mortgage.
Sales and Marketing Expenses. Sales and marketing expenses increased
$7.2 million, or 102.9%, to $14.2 million for the year ended June 30, 1998 from
$7.0 million for the year-end June 30, 1997. The increase was attributable to
greater usage of newspaper, direct mail and television advertising relating to
originations of home equity loans and sales of subordinated debt securities.
General and Administrative Expenses. General and administrative
expenses increased $5.4 million, or 174.4%, to $8.5 million for the year ended
June 30, 1998 from $3.1 million for the year ended June 30, 1997. The increase
was attributable to increases in rent, telephone, office expenses, professional
fees and other expenses incurred as a result of previously discussed increases
in loan and lease originations, servicing and branch operations experienced
during the year ended June 30, 1998. In addition, goodwill recorded from the
acquisition of New Jersey Mortgage was amortized on the straight-line method
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<PAGE>
over fifteen years resulting in a charge of $0.8 million for the year ended June
30, 1998.
Income Taxes. Income taxes increased $3.3 million, or 106.5%, to $6.4
million for the year ended June 30, 1998 from $3.1 million for the year ended
June 30, 1997 due to an increase in income before income taxes and an increase
in the effective tax rate from 34% for the year ended June 30, 1997 to 36% for
the year ended June 30, 1998.
Financial Condition
Balance Sheet Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 22,395 $ 4,486 $ 5,014
Loan and lease receivables, net:
Available for sale..................................... 33,776 62,382 35,712
Other.................................................. 6,863 4,096 1,144
Interest-only strips and other receivables................ 253,936 100,737 39,644
Servicing rights.......................................... 43,210 18,472 8,083
Total assets.............................................. 396,301 226,551 103,989
Subordinated debt and notes payable....................... 270,343 144,585 56,486
Total liabilities......................................... 338,055 183,809 73,077
Total stockholders' equity................................ 58,246 42,742 30,912
Book value per common share............................... $ 16.24 $ 11.55 $ 8.40
</TABLE>
June 30, 1999 Compared to June 30, 1998
Total assets increased $169.7 million, or 74.9%, to $396.3 million at
June 30, 1999 from $226.6 million at June 30, 1998 due primarily to increases in
interest-only strips and other receivables, cash and cash equivalents and
servicing rights.
Cash and cash equivalents increased $17.9 million, or 399.2% to $22.4
at June 30, 1999 from $4.5 million at June 30, 1998 primarily due to receipts
from sales of subordinated debt securities.
Interest-only strips and other receivables (comprised mainly of
interest-only and residual strips created in connection with securitizations)
increased $153.2 million, or 152.1%, to $253.9 million at June 30, 1999 from
$100.7 million at June 30, 1998. During fiscal 1999 $777.6 million in loan and
lease securitizations were completed resulting in the recognition of $90.5
million of interest-only strips. At June 30, 1999, other receivables included
$66.1 million due on sold loans compared to $2.4 million at June 30, 1998.
Servicing rights increased $24.7 million, or 133.9%, to $43.2 million
at June 30, 1999 from $18.5 million at June 30, 1998 due primarily to the
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<PAGE>
recording of $30.3 million of servicing rights obtained in connection with loan
and lease securitizations, partially offset by amortization of servicing rights.
Loan and lease receivables - available for sale decreased $28.6
million, or 45.9%, at June 30, 1999, primarily due to the timing and size of
fourth quarter fiscal 1999 securitizations. Mortgage loans securitized in the
fourth quarter of fiscal 1999 were $220.0 million compared to $120.0 million in
the fourth quarter of fiscal 1998.
Total liabilities increased $154.3 million, or 83.9%, to $338.1 million
at June 30, 1999 from $183.8 million at June 30, 1998 due primarily to increases
in subordinated debt and notes payable. The increase in subordinated debt and
notes payable of $125.7 million, or 87.0%, was primarily attributable to $101.2
million of net sales of subordinated debt securities. Subordinated debt in the
amount of $212.9 million was outstanding at June 30, 1999. Additional borrowings
of $51.5 million, net of repayments, were obtained under warehouse and line of
credit facilities to fund lending and leasing activities. See "Liquidity and
Capital Resources" for further detail.
Accounts payable and accrued expenses increased $11.3 million, or
72.4%, to $26.8 million at June 30, 1999 from $15.6 million at June 30, 1998 due
to growth in lending and leasing activities resulting in larger accruals for
interest expense and other operating expenses. Deferred income taxes increased
$5.7 million, or 52.8%, to $16.6 million at June 30, 1999 from $10.9 million at
June 30, 1998 due to timing differences in recognition of income from
securitizations.
June 30, 1998 Compared to June 30, 1997
Total assets increased $122.6 million, or 117.9%, to $226.6 million at
June 30, 1998 from $104.0 million at June 30, 1997 due primarily to increases in
loans and leases available for sale, other receivables and other assets.
Loans and leases available for sale increased $26.7 million, or 74.7%,
to $62.4 million at June 30, 1998, from $35.7 million at June 30, 1998. The
increase was the result of increases in originations, net of sales, of $44.2
million during year ended June 30, 1998 as compared to $19.7 million for the
year ended June 30, 1997. Interest-only strips and other receivables increased
$61.1 million, or 154.1%, to $100.7 million at June 30, 1998, from $39.6 million
at June 30, 1997 and servicing rights increased $10.4 million, or 128.5%, to
$18.5 million at June 30, 1998 from $8.1 million at June 30, 1997, both due to
loan and lease securitizations during fiscal 1998. Other assets increased $15.7
million, or 152.4%, to $26.0 million at June 30, 1998 from $10.3 million at June
30, 1997 due to the recognition of $16.2 million of goodwill, net of
amortization, resulting from the acquisition of New Jersey Mortgage.
Total liabilities increased $110.7 million, or 151.4%, to $183.8
million at June 30, 1998 from $73.1 million at June 30, 1997 due primarily to a
net increase in subordinated debt and notes payable and to a lesser extent
increases in other liabilities. The increase in subordinated debt and notes
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<PAGE>
payable of $88.1 million was due to net sales of subordinated debt of $49.2
million during the year ended June 30, 1998, an increase in warehouse lines of
credit of $26.5 million due to growth in lending and leasing activities, and a
net increase of $12.4 million of debt assumed and incurred in the acquisition of
New Jersey Mortgage. At June 30, 1998, $115.2 million of subordinated debt was
outstanding. Accounts payable and accrued expenses increased $9.5 million, or
155.7%, to $15.6 million at June 30, 1998 due to growth in lending and leasing
activities resulting in larger accruals for interest expense and other operating
expenses. Deferred income taxes increased $6.3 million, or 137.0%, to $10.9
million at June 30, 1998 from $4.6 million at June 30, 1997 due mainly to tax
accruals on income for the year ended June 30, 1998.
Managed Portfolio Quality
Total delinquencies (loans and leases with payments past due more than
30 days) in the total managed portfolio were $37.6 million at June 30, 1999 as
compared to $16.8 million and $3.8 million, respectively, at June 30, 1998 and
1997. Total delinquent loans and leases as a percentage of the total portfolio
serviced (the "delinquency rate") was 3.19% at June 30, 1999 as compared to
3.01% and 2.15%, respectively, at June 30, 1998 and 1997. Increases in the
delinquency rates were attributable to the maturation of the total managed
portfolio, which was $1,176.9 million at June 30, 1999, compared to $559.4
million and $176.7 million, respectively, at June 30, 1998 and 1997. Delinquent
loans and leases in the available for sale portfolio were $1.8 million at June
30, 1999.
Total real estate owned ("REO"), comprising foreclosed properties and
deeds acquired in lieu of foreclosure, increased to $9.9 million, or 0.85% of
the total managed portfolio at June 30, 1999 compared to $0.9 million and $0.6
million, respectively, at June 30, 1998 and 1997. The increase in REO reflects
the seasoning of the portfolio and the results of loss mitigation initiatives of
quick repossession of collateral through accelerated foreclosure processes and
"Cash For Keys" programs. Cash for Keys is a program whereby in certain select
situations, when collateral values of loans support the action, a delinquent
borrower may be offered a monetary payment in exchange for the deed to a
property held as collateral for the loan. This process eliminates the need to
initiate a formal foreclosure process which could take many months. Included in
total REO at June 30, 1999 was $0.7 million carried on our books, and $9.2
million in loan securitization trusts.
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<PAGE>
The following table provides data concerning delinquency experience,
REO and loss experience for the loan and lease portfolio serviced (dollars in
thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1999 1998 1997
Delinquency by Type Amount % Amount % Amount %
- ------------------------------------------ ---------- ----- --------- ----- ---------- ----
<S> <C> <C> <C>
Business Purpose Loans
Total managed portfolio................... $ 148,932 $101,250 $ 68,979
========== ======== ========
Period of delinquency
31-60 days............................ 1,506 1.01% $ 1,236 1.22% $ 1,879 2.72%
61-90 days............................ 475 .32 928 .92 462 .67
Over 90 days.......................... 8,612 5.78 3,562 3.52 718 1.04
---------- ---- -------- ---- -------- ----
Total delinquencies................... $ 10,593 7.11% $ 5,726 5.66% $ 3,059 4.43%
========== ==== ======== ==== ======== ====
REO....................................... $ 2,881 $ 611 $ 605
========== ======== ========
Home Equity Loans
Total managed portfolio................... $ 858,806 $349,685 $ 98,211
========== ======== ========
Period of delinquency
31-60 days............................ $ 4,836 .56% $ 3,726 1.08% $ 262 .27%
61-90 days............................ 4,149 .48 1,022 .30 341 .35
Over 90 days.......................... 15,346 1.79 3,541 1.02 115 .12
---------- ---- -------- ---- -------- ----
Total delinquencies................... $ 24,331 2.83% $ 8,289 2.40% $ 718 .73%
========== ==== ======== ==== ======== ====
REO....................................... $ 7,067 $ 311 $ -
========== ======== ========
Equipment Leases
Total managed portfolio................... $ 169,180 $108,463 $ 9,461
========== ======== ========
Period of delinquency
31-60 days............................ $ 389 .23% $ 1,000 .92% $ 29 .31%
61-90 days............................ 425 .25 320 .30 - -
Over 90 days.......................... 1,826 1.08 1,478 1.36 4 .04
---------- ---- -------- ---- -------- ----
Total delinquencies................... $ 2,640 1.56% $ 2,798 2.58% $ 33 .35%
========== ==== ======== ==== ======== ====
Combined
- ------------------------------------------
Total managed portfolio................... $1,176,918 $559,398 $176,651
========== ======== ========
Period of delinquency
31-60 days............................ $ 6,731 .57% $ 5,962 1.07% $ 2,170 1.23%
61-90 days............................ 5,049 .43 2,270 .41 803 .45
Over 90 days.......................... 25,784 2.19 8,581 1.53 837 .47
---------- ---- -------- ---- -------- ----
Total delinquencies................... $ 37,564 3.19% $ 16,813 3.01% $ 3,810 2.15%
========== ==== ======== ==== ======== ====
REO....................................... $ 9,948 $ 922 $ 605
========== ======== ========
Losses experienced during the period(a)(b) $ 1,137 .12% $ 667 .12% $ 98 .07%
========== ==== ======== ==== ======== ====
</TABLE>
- --------------------------
(a) Percentage based on average total managed portfolio.
(b) Losses recorded on our books were $1.1 million, losses absorbed by
securitization trusts were $30,000 for the year ended June 30, 1999. We
recorded all losses on our books for the years ended June 30, 1998 and
1997.
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<PAGE>
The following table summarizes net charge off experience by loan type
for the fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
June 30,
-----------------------
1999 1998 1997
------ ---- ----
Business purpose loans...................... $ 301 $138 $34
Home equity loans........................... 486 -- --
Equipment Leases............................ 320 529 64
-------- ----- ----
Total....................................... $1,107 $667 $98
======== ===== ====
Interest Rate Risk Management
A primary market risk exposure that we face is interest rate risk.
Profitability and financial performance is sensitive to changes in U.S. Treasury
yields, LIBOR yields and the spread between the effective rate of interest
received on loans and leases available for sale or securitized (generally fixed
interest rates) and the interest rates paid pursuant to credit facilities or the
pass-through rate to investors for interests issued in connection with
securitizations. Also, a substantial and sustained increase in market interest
rates could adversely affect our ability to originate and purchase loans and
leases. The overall objective of our interest rate risk management strategy is
to mitigate the effects of changing interest rates on profitability and the fair
value of interest rate sensitive assets (primarily interest-only strips,
servicing rights and loans and leases available for sale).
Interest Rate Sensitivity - The following table provides information
about financial instruments that are sensitive to changes in interest rates. For
interest-only strips and servicing rights, the table presents projected
principal cash flows utilizing certain assumptions including prepayment and
default rates. For debt obligations, the table presents principal cash flows and
related average interest rates by expected maturity dates (dollars in
thousands):
<TABLE>
<CAPTION>
Amount Maturing in Years Ending June 30,
----------------------------------------------------------------------------
There- Fair
2000 2001 2002 2003 2004 after Total Value
--------- -------- --------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Loans and leases available for
sale (a)........................ $32,512 $ 14 $ 16 $ 18 $ 20 $ 1,196 $ 33,776 $ 35,152
Interest-only strips.............. 29,611 38,091 37,921 34,987 27,900 106,082 274,592 178,217
Servicing rights.................. 15,208 11,829 8,968 6,771 5,101 13,777 61,654 43,210
Investments held to maturity...... 126 128 133 143 145 763 1,438 911
Rate Sensitive Liabilities:
Fixed interest rate borrowings.... 119,683 34,923 25,055 9,049 12,315 13,148 214,173 214,745
Average interest rate............. 8.71% 9.46% 10.22% 10.56% 10.64% 11.36% 9.36%
Variable interest rate borrowings. $56,170 $ -- $ -- $ -- $ -- $ -- $ 56,170 $ 56,170
Average interest rate............. 6.45% 6.45%
</TABLE>
- ------------------------
(a) Loans and leases available for sale are generally held for less than three
months prior to securitization therefore all loans and leases which qualify
for securitization are reflected as maturing in the year ended June 30,
2000.
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<PAGE>
Loans and Leases Available for Sale - Gain on sale of loans and leases
may be unfavorably impacted to the extent fixed-rate mortgage loans or leases in
the available for sale portfolio are held prior to securitization. A significant
variable affecting the gain on sale of loans and leases in a securitization is
the spread between the average coupon rate on fixed rate loans and leases, and
the weighted average pass-through rate to investors for interests issued in
connection with the securitization. Although the average loan and lease coupon
rate is fixed at the time the loan or lease is originated, the pass-through rate
to investors is not fixed until the pricing of the securitization which occurs
just prior the sale of the loans and leases. In addition, a portion of the
certificates are based on a floating interest rate. Therefore, if market rates
required by investors increase prior to securitization of the loans and leases,
the spread between the average coupon rate on the loans and leases and the
pass-through rate to investors may be reduced or eliminated.
Hedging strategies are utilized in an attempt to mitigate the effect of
changes in interest rates on fixed-rate loan and lease portfolios between the
date of origination and the date of securitization. These strategies include the
utilization of derivative financial instruments such as futures and forward
pricing on securitizations. The nature and quality of hedging transactions are
determined based on various factors, including market conditions and the
expected volume of mortgage loan and lease originations and purchases. The gain
or loss derived from these hedging transactions is deferred and recognized as an
adjustment to the gain on sale of loans and leases when the loans and leases are
securitized. During fiscal 1999, net losses of approximately $2.0 million were
incurred on hedging transactions (futures contracts), which were recognized as
an offset to the gains on sale recorded on securitizations during the year. At
June 30, 1999 no such contracts were outstanding. At June 30, 1999, we were
obligated to satisfy a lease securitization prefund requirement of $9.0 million
of business equipment leases.
In the future we may expand the types of derivative financial
instruments we use to hedge interest rate risk. Such instruments could include
interest rate swaps and interest rate options or other derivative instruments.
We have implemented a hedging strategy in an attempt to mitigate the
effect of changes in market value of fixed-rate mortgage loans held for sale.
However, an effective interest rate risk management strategy is complex and no
such strategy can completely insulate us 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. Such costs could increase as the period covered by the hedging
protection increases. It is expected that such loss would be offset by income
realized from the securitizations in that period or in future periods. As a
result, we may be prevented from effectively hedging fixed-rate loans held for
sale, without reducing income in current or future periods due to the costs
associated with hedging activities. See "Risk Factors - Our failure to implement
an effective hedging strategy could result in losses or negatively impact
earnings."
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<PAGE>
Interest-only Strips and Servicing Assets - A significant decline in
market interest rates could increase the level of loan prepayments, thereby
decreasing the size of the total managed loan and lease portfolio and the
related projected cash flows. Higher than anticipated rates of loan prepayments
could require a write down of the fair value of related interest-only strips and
servicing rights, adversely impacting earnings during the period of adjustment.
The following chart presents certain key assumptions used in the initial
valuations and June 30, 1999 revaluation of residual interests from
securitizations (interest-only strips and mortgage servicing assets):
<TABLE>
<CAPTION>
Initial Periodic
Valuation Revaluation
----------------- ----------------
<S> <C> <C>
Discount rates
Home equity loans........................................ 11.0% 11.0%
Business purpose loans................................... 11.0% 11.0%
Business equipment leases................................ 11.0% 11.0%
Annual prepayment rates
Home equity loans ....................................... 2.0% - 24.0%(a) 2.0% -24.0%(a)
Business purpose loans .................................. 3.0% - 13.0%(b) 3.0% -15.0%(b)
Business equipment leases................................ --(c) --(c)
Annual credit loss rates
Home equity loans........................................ 0.25% 0.25%
Business purpose loans................................... 0.25% 0.25%
Business equipment leases................................ 0.50% 0.50%
Actual cumulative credit losses
Home equity loans........................................ -- 0.05%
Business purpose loans................................... -- 0.19%
Business equipment leases................................ -- 0.71%
</TABLE>
- ----------------------
(a) Ramped over 12 to 18 months
(b) Ramped over 24 months
(c) Residual values are continuously adjusted based on actual experience.
It is estimated that a 100 basis point (1.0%) increase in prepayment
rates would decrease the fair value of interest-only strips by approximately
$4.3 million and the fair value of servicing assets by approximately $1.0
million.
We attempt to minimize prepayment risk on interest-only strips and
servicing assets by requiring prepayment fees on business purpose loans and home
equity loans, where permitted by law. Currently, approximately 94% of business
purpose loans and 80% of home equity loans in the managed portfolio are subject
to prepayment fees. In addition, we have found that credit impaired borrowers
are less sensitive to interest rates than monthly payment balances further
reducing prepayment expectations.
Subordinated Debt - We also experience interest rate risk to the extent
that as of June 30, 1999 approximately $93.6 million of our liabilities were
comprised of subordinated debt with scheduled maturities of greater than one
year. To the extent that market interest rates demanded for subordinated debt
increase in the future, the rates paid on replacement debt could exceed rates
currently paid thereby increasing interest expense and reducing net income.
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<PAGE>
Liquidity and Capital Resources
Our business requires continual access to short and long-term sources
of debt financing. Our cash requirements include the funding of loan and lease
originations, payment of interest expense, funding of overcollaterization
requirements in connection with securitizations, payment of operating expenses
and funding of capital expenditures.
We continue to significantly rely on access to the asset-backed
securities market through securitizations to generate cash proceeds for the
repayment of debt and to fund ongoing operations. As a result of the terms of
the securitizations, we will receive less cash flow from the portfolios of loans
and leases securitized than we would otherwise receive absent securitizations.
Additionally, pursuant to the terms of the securitizations, we will act as the
servicer of the loans and leases and in that capacity will be obligated to
advance funds in certain circumstances which may create greater demands on our
cash flow than either selling loans with servicing released or maintaining a
portfolio of loans and leases.
A significant portion of loan originations are non-conforming mortgages
to subprime borrowers. Certain participants in the non-conforming mortgage
industry have experienced greater than anticipated losses on their
securitization residual interests due to the effects of increased credit losses
and increased prepayment rates, resulting in some competitors exiting the
business or recording valuation allowances or write downs for these conditions
in fiscal 1999. In addition, unusual movements in the capital markets in fiscal
1999 resulted in increased demand for U.S. Treasury securities which had an
adverse impact on the demand for asset-backed securities including those backed
by non-conforming mortgage loans. As a result, some participants experienced
restricted access to capital required to fund loan originations, and have been
precluded from participation in the asset-backed securitization market. However,
we have maintained our ability to obtain funding and to securitize loans and
leases. Factors that have minimized the effect of adverse market conditions on
ABFS include our ability to originate loans and leases through established
retail channels, focus on credit underwriting, assessment of prepayment fees on
loans, diversification of lending in the home equity, business loan and
equipment lease markets and the ability to raise capital through sales of
subordinated debt securities pursuant to a registered public offering.
Subject to economic, market and interest rate conditions, we intend to
continue to implement additional securitizations of our loan and lease
portfolios. Any delay or impairment in our ability to securitize loans and
leases, as a result of market conditions or otherwise, could adversely affect
the results of operations.
To a limited extent, we intend to continue to augment the interest and
fee income earned on loan and lease portfolios by selling loans and leases
either at the time of origination or from our portfolio to unrelated third
parties. These transactions also create additional liquid funds available for
lending activities.
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<PAGE>
We also rely on borrowings such as subordinated debt and warehouse
credit facilities to fund operations. At June 30, 1999, a total of $212.9
million of subordinated debt was outstanding, and credit facilities totaling
$375.0 million were available, of which $54.7 million was drawn upon at such
date.
During fiscal 1999, we sold $101.3 million in principal amount of
subordinated debt securities with maturities ranging between one day and ten
years. As of June 30, 1999, approximately $206.9 million of subordinated debt
was outstanding. Under a shelf registration statement declared effective by the
Securities and Exchange Commission on October 20, 1998, we registered $250.0
million of subordinated debt of which $122.0 million was available for issuance
at June 30, 1999. The proceeds from sales of subordinated debt securities will
be used to fund general operating and lending activities. We intend to meet our
obligation to repay such debt as it matures with income from operations,
including securitization or sale of loans or leases, working capital and cash
generated from additional debt financing. The utilization of funds for the
repayment of such obligations should not adversely affect operations.
The following is a description of the warehouse and line of credit
facilities that are utilized to fund origination of loans and leases prior to
securitization. All of these facilities are senior in right of payment to the
subordinated debt.
Our subsidiaries had an aggregate $100.0 million Interim Warehouse and
Security Agreements with Prudential Securities Credit Corporation expiring
August 31, 1999 to fund loan originations. The agreement was subsequently
increased to $150.0 million and extended to August 31, 2000. The obligations
under these agreements are guaranteed by ABFS. Under these agreements, the
subsidiaries may obtain advances subject to certain conditions, which extensions
of credit bear interest at a specified margin over the LIBOR rate. The
obligations under these agreements are collateralized by pledged loans. At June
30, 1999, $0.1 million of this facility was drawn upon.
We along with certain of our subsidiaries, obtained a $150.0 million
warehouse credit facility from a syndicate of banks led by Chase Bank of Texas
N.A. expiring October 1, 2000. Under this warehouse facility, advances may be
obtained, subject to certain conditions, including sublimits based upon the type
of collateral securing the advance. Interest rates on the advances are based
upon 30-day LIBOR plus a margin. Obligations under the facility are
collateralized by certain pledged loans and other collateral related thereto.
The facility also requires the obligation to meet certain financial ratios and
contains restrictive covenants, including covenants limiting loans to and
transaction with affiliates, the issuance of additional debt, and the types of
investments that can be purchased. At June 30, 1999, $42.6 million of this
facility was drawn upon.
In September 1998 our subsidiaries, American Business Leasing, Inc. and
Federal Leasing Corp, entered into a credit agreement with First Union National
Bank pursuant to which First Union committed to extend $20.0 million of credit
in the form of a warehouse line of credit to such entities to enable them to
fund eligible lease receivables. The agreement terminates in September 2000.
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<PAGE>
Under the First Union line of credit, American Business Leasing and Federal
Leasing may obtain advances in increments of $500,000 or greater, subject to
certain conditions, which extensions of credit shall bear interest at either the
LIBOR rate plus a margin or the prime rate set by First Union less a margin at
the borrower's option. This agreement has a term of two years unless accelerated
upon an event of default as described in the agreement. The obligation under the
First Union line of credit is collateralized by pledged leases and other
collateral related thereto. This obligation is guaranteed by us and certain of
our subsidiaries. At June 30, 1999, $3.8 million of this line of credit was
being utilized.
In October 1998, American Business Leasing and American Business Lease
Funding Corporation, a wholly-owned subsidiary of American Business Leasing,
entered into a $100.0 million commercial paper conduit underwritten by First
Union Capital Markets to finance equipment lease production. The agreement
allows for up to two sales of equipment leases per month into the conduit. The
agreement terminates on October 14, 1999 unless terminated earlier in the event
of default described therein. The cost of financing is the average interest rate
on commercial paper plus a margin. At June 30, 1999, $3.2 million of this
facility was being utilized. If we do not extend the term of this agreement, we
will utilize other lines of credit currently available to us to fund lease
production or may explore other financing arrangements.
In December 1998, we and our subsidiaries, American Business Credit,
Home American Credit and New Jersey Mortgage entered into an agreement with
Chase Bank pursuant to which Chase Bank committed to extend $5.0 million of
credit in the form of a Security Agreement against the Class R Certificate of
the ABFS Mortgage Loan Trust 1998-2. Under the Chase Bank line of credit
American Business Credit, Home American Credit and New Jersey Mortgage may
borrow up to $5.0 million, subject to certain conditions, which extensions of
credit shall bear interest at the LIBOR rate plus a margin. Such agreement has a
term of one year unless accelerated upon an event of default as described in
such agreement. At June 30, 1999, $5.0 million of this line of credit was being
utilized.
As of June 30, 1999, $175.9 million of debt was scheduled to mature
during the twelve months ending June 30, 2000 which was mainly comprised of
maturing subordinated debt, warehouse lines of credit and other debt incurred in
connection with the acquisition of New Jersey Mortgage. We currently expect 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 current use of
securitizations to fund loan growth, we are also dependent upon other borrowings
to fund a portion of our operations. We intend to continue to utilize debt
financing to fund operations in the future.
Any failure to renew or obtain adequate funding under a warehouse
credit facility, or other borrowings, or any substantial reduction in the size
or pricing in the markets for loans and leases, could have a material adverse
effect on our results of operations and financial condition. To the extent we
are not successful in maintaining or replacing existing financing, we may have
to curtail loan and lease production activities or sell loans and leases rather
than securitize them, thereby having a material adverse effect on our results of
operations and financial condition.
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<PAGE>
We lease our corporate headquarters facilities under a five-year
operating lease expiring in January 2003 at a minimum annual rental of
approximately $2.2 million. The lease contains a renewal option for an
additional period at increased annual rental. We also leases a facility in
Roseland, New Jersey which functions as the loan production headquarters for New
Jersey Mortgage and its subsidiaries at an annual rental cost of approximately
$0.8 million. The current lease term expires on July 31, 2003 and contains a
renewal option for an additional term of five years at an increased annual
rental. In addition, branch offices are leased on a short-term basis in various
cities throughout the United States. The leases for the branch offices are not
material to operations. See Note 14 of the Notes to Consolidated Financial
Statements for information regarding lease payments.
Year 2000 Update
A Year 2000 ("Y2K") Task Force was established to assess Y2K issues and
to implement a Y2K compliance program. The Task Force, which meets weekly,
includes members of the Information Technology Department, Finance Department,
Legal Department, representatives from all business units, and an independent
consultant with Y2K expertise. The Task Force reports monthly to executive
management. The Task Force has completed an assessment of the core information
technology (IT) systems and is continuing the process of evaluating the
remainder of the non-core IT systems as well as non-IT systems. The non-IT
systems include the telecommunications systems, business machines and building
and premises systems.
The Task Force has adopted a five-phase approach to assess Y2K issues
and to address those issues that are reasonably within its control:
Phase 1 - Awareness: One of the first tasks performed by the Task Force
was to generate greater awareness of Y2K issues. The awareness process included
contacting all business units to educate management regarding the Y2K program
and to discern any potential issues. Each business unit has assigned a point of
contact to assist the Task Force in the assessment and compliance process.
Awareness efforts will continue throughout the span of the project.
Phase 2 - Assessment: An inventory has been conducted of all IT
hardware and software, including business applications, operating systems,
third-party products, and internal and external interfaces that may be at risk.
Each critical system was reviewed, rated for importance to business operations
and identified as "retain" or "retire." This process has been completed for all
core and non-core IT systems. We are in the process of replacing most core IT
systems due to strategic and growth reasons unrelated to the Y2K issue. The
process began in 1996 and completion is anticipated by September 30, 1999. All
systems acquired as part of this enhancement project must be certified by their
vendors as Y2K compliant. Non-IT systems have been evaluated, which include the
telecommunications systems, business machines, building and premises systems and
key suppliers, whose Y2K failures could have a material impact on our operation.
This part of the assessment, which was dependent on obtaining specific responses
from third parties, was completed as of June 30, 1999. The assessment phase also
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includes the development of appropriate response plans, which may include
repair, conversion, replacement or elimination of affected systems.
Phase 3 - Renovation: This phase involves the remediation of Y2K issues
identified as a result of the assessment. With the exception of a single,
vendor-provided application, all core IT system remediation efforts were
completed on schedule (June 30, 1999). The vendor of the non-compliant
application has committed to remediate and successfully test the system,
achieving Y2K compliance by September 30, 1999 (See Phase 4 - Validation).
Phase 4 - Validation: This phase involves establishing a test
environment, performing systems tests and validating the results. The systems to
be used for testing have been acquired, and the validation process has begun.
Y2K testing and verification of all new "replacement" systems will be done as
part of their implementation process. Test plans have been written, with
verification testing projected to be completed by September 30, 1999. We have
successfully completed Y2K testing of a suite of applications currently
providing service to many of the key business units. In addition, the data
processing infrastructure which includes mainframe, network and server related
equipment, has been tested and validated as compliant.
Phase 5 - Implementation: This phase involves the deployment of the
appropriate Y2K compliant strategy based on the results of the Assessment,
Renovation and Validation phases.
Year 2000 Risks and Contingency Plans
The majority of the IT hardware and infrastructure is less than 2 years
old, minimizing exposure to Y2K issues. This inventory is being checked against
vendor provided Y2K information for validation. Also, we intend that all new
hardware and software acquisitions are represented and warranted by the vendors
as Y2K compliant and that any systems developed by in-house programmers will
continue to be created using Y2K compliant tools, platforms, and procedures.
We have contacted suppliers who provide necessary goods and services,
including banking institutions who provide financial services, to evaluate their
Y2K compliance plans. As responses are received, their responses are reviewed
and evaluated to ensure that no Y2K related event will materially impede the
ability of our suppliers to continue to provide needed goods and services as the
Year 2000 is approached and reached. We believe all responses received indicate
that these goods and services are, or will be, Year 2000 compliant. The failure
of our suppliers to address their Y2K issues on a timely basis may have a
material adverse effect on our operations.
Based upon the current status, we have targeted the end of September
1999 for completion of our Y2K compliance program. However, no assurance can be
given that we will meet this time frame. We currently estimate that the costs
directly associated with the Y2K compliance program will be approximately $0.5
million. This budgeted amount does not include the costs associated with the
"replacement" systems as referenced in Phase 2. The funds necessary to complete
the systems replacement project and the Y2K compliance program are included in
the Information Technology operating budget. Approximately $0.1 million of the
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amount budgeted for costs directly associated with the Y2K compliance program
have been expended as of June 30, 1999.
We are in the process of developing a contingency plan that will be
used in the event that any hardware, software or other computer systems, or
those of our vendors are not Y2K compliant, based on risks identified as a
result of the assessment and testing phase of our Year 2000 compliance program.
While we fully expect that the precautions being taken will prepare us
for entering Year 2000, there is always the potential for risk. Our failure or
any of our material suppliers failure to bring their systems into Year 2000
compliance on a timely basis may have a material adverse effect on our
operations.
Fourth Quarter Results
For the fourth quarter of fiscal 1999, net income increased $0.3
million, or 6.5%, to $3.7 million from $3.4 million for the comparable period of
fiscal 1998. Basic earnings per common share increased 8.6% to $1.01 on average
common shares of 3,626,072, compared to $0.93 per share on average common shares
of 3,699,576 for the comparable period of fiscal 1998. Diluted earnings per
common share increased 11.2% to $0.99 on average common shares of 3,730,236,
compared to $0.89 per share on average common shares of 3,905,831 for the
comparable period of fiscal 1998.
The increases in net income and earnings per share primarily resulted
from the impact of increases in the volume of loans and leases securitized
during the periods and increases in the collection of fee income due to the
increase in the total managed portfolio.
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on operations. These pronouncements should be read in conjunction
with the significant accounting policies, which have been adopted, that are set
forth in Note 1 of the Notes to the Consolidated Financial Statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities."
("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment
(fair value hedge), (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (cash flow hedge), or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. At the time of issuance SFAS No. 133 was to be effective
on a prospective basis for all fiscal quarters of fiscal years beginning after
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June 15, 1999. Subsequently, the effective date of the standard was delayed
until years beginning after June 15, 2000. The adoption of this standard is not
expected to have a material effect on our financial condition or results of
operations.
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<PAGE>
BUSINESS
General
We are a diversified financial services company operating throughout
the United States. Through our principal direct and indirect subsidiaries,
American Business Credit, Inc., HomeAmerican Credit, Inc. (doing business as
Upland Mortgage), American Business Leasing, Inc., New Jersey Mortgage and
Investment Corp. and Federal Leasing Corp., we originate, service and sell
business purpose loans, home equity loans, first mortgage loans and equipment
leases. We also underwrite, process and purchase home equity loans through our
Bank Alliance Program.
We were incorporated in Delaware in 1985 and began operations as a
finance company in 1988, initially offering business purpose loans to customers
whose borrowing needs we believed were not being adequately serviced by
commercial banks. Since our inception, we have significantly expanded our
product line and geographic scope and currently offer our loan products in 44
states and our lease products throughout the United States.
Subsidiaries
As a holding company, our activities have been limited to: (i) holding
the shares of our operating subsidiaries, and (ii) raising capital for use in
the subsidiaries' lending operations. ABFS is the parent holding company of
American Business Credit, Inc. and its primary subsidiaries, HomeAmerican
Credit, Inc. (doing business as Upland Mortgage), Processing Service Center,
Inc., American Business Leasing, Inc., ABC Holdings Corporation and New Jersey
Mortgage and Investment Corp. and its subsidiary, Federal Leasing Corp.
American Business Credit, a Pennsylvania corporation incorporated in
1988 and acquired by us in 1993, originates, services and sells business purpose
loans. Home American Credit, a Pennsylvania corporation incorporated in 1991,
originates and sells home equity loans. Home American Credit acquired Upland
Mortgage Corp. in 1996 and since that time has conducted business as "Upland
Mortgage." Upland Mortgage also purchases home equity loans through the Bank
Alliance Program. Processing Service Center processes home equity loan
applications for financial institutions as part of the Bank Alliance Program.
Incorporated in 1994, American Business Leasing commenced operations in 1995 and
originates and services equipment leases.
New Jersey Mortgage and Investment Corp., a New Jersey corporation
organized in 1938 and acquired by us in October 1997, is currently engaged in
the origination and sale of home equity loans, as well as first mortgage loans.
New Jersey Mortgage originates loans secured by real estate. These loans are
originated through New Jersey Mortgage's network of branch sales offices and
three satellite offices. New Jersey Mortgage has been offering mortgage loans
since 1939. We currently sell first mortgage loans originated by American
Household Mortgage, a division of New Jersey Mortgage, in the secondary market
with servicing released. We also
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securitize home equity loans originated by New Jersey Mortgage pursuant to our
existing current securitization program.
New Jersey Mortgage's wholly-owned subsidiary, Federal Leasing Corp.,
is a Delaware corporation which was organized in 1974. Federal Leasing Corp.
generally originates equipment leases throughout the United States and has in
the past sold such leases through securitizations and retains the servicing
rights with respect to the leases. We intend to evaluate the continued
securitization of equipment leases based upon market and economic conditions in
the future.
ABC Holdings Corporation, a Pennsylvania corporation, was incorporated
in 1992 to hold properties acquired through foreclosure.
We also have numerous special purpose subsidiaries that were
incorporated solely to facilitate our securitizations. Some of those companies
are Delaware investment holding companies. The stock of these subsidiaries is
held by various subsidiaries of ours. As part of the acquisition of New Jersey
Mortgage and Federal Leasing Corp., we also acquired FLC Financial Corp. and FLC
II Financial Corp., the Delaware investment holding companies incorporated to
facilitate the securitization of Federal Leasing Corp.'s leases. The stock of
these companies is held by Federal Leasing Corp. 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
securitizations completed through Federal Leasing Corp. prior to its acquisition
by us. See "--Securitizations."
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The following chart sets forth our basic organizational structure(1).
<TABLE>
<CAPTION>
-------------------------------------------------------------
ABFS
-------------------------------------------------------------
(Holding Company)
(Issues subordinated debt securities)
-------------------------------------------------------------
-------------------------------------------------------------
AMERICAN BUSINESS CREDIT, INC.
-------------------------------------------------------------
(Originates and services business purpose loans)
-------------------------------------------------------------
---------------------------------------------------------------------------------------------
HOME AMERICAN
NEW JERSEY CREDIT, INC. PROCESSING AMERICAN ABC
MORTGAGE AND d/b/a SERVICE BUSINESS HOLDINGS
INVESTMENT CORP. UPLAND CENTER, INC. LEASING, INC. CORP.
MORTGAGE
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Originates and (Originates, (Processes bank (Originates (Holds
services first purchases and alliance and foreclosed
mortgage and services home program services real estate)
home equity equity loans)(2) home equity equipment
loans) loans) leases)
---------------------------------------------------------------------------------------------
--------------------
FEDERAL
LEASING CORP.
--------------------
(Originates
equipment
leases)
--------------------
</TABLE>
- --------
(1)In addition to the corporations pictured above, we organized at
least one special purpose corporation for each of these securitizations.
(2)Loans purchased by Upland Mortgage represent loans acquired through
the Bank Alliance Program.
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Lending and Leasing Activities
General. The following table sets forth certain information concerning
our loan and lease origination, purchase and sale activities for the years
indicated. We did not originate first mortgage loans prior to October 1997.
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1999 1998 1997
----------- ------------ --------------
(dollars in thousands)
<S> <C> <C> <C>
Loans/Leases Originated/Purchased
(Net of refinances)
Business purpose loans....................................... $ 64,818 $ 52,335 $38,721
Home equity loans............................................ $634,820 $328,089 $91,819
First mortgage loans......................................... $ 66,519 $ 33,671 --
Equipment leases............................................. $ 96,289 $ 70,480 $ 8,004
Other loans.................................................. -- -- $ 39
Number of Loans/Leases Originated/Purchased
Business purpose loans....................................... 806 632 498
Home equity loans............................................ 8,251 5,292 1,791
First mortgage loans......................................... 781 218 --
Equipment leases............................................. 4,138 3,350 743
Other loans.................................................. -- -- 8
Average Loan/Lease Size
Business purpose loans....................................... $ 80 $ 83 $ 78
Home equity loans............................................ $ 74 $ 62 $ 51
First mortgage loans......................................... $ 165 $ 154 --
Equipment leases............................................. $ 23 $ 21 $ 11
Other loans.................................................. -- -- $ 5
Weighted Average Interest Rate on Loans/Leases
Originated/Purchased
Business purpose loans....................................... 15.91% 15.96% 15.91%
Home equity loans............................................ 11.05% 11.95% 11.69%
First mortgage loans......................................... 7.67% 8.22% --
Equipment leases............................................. 11.40% 12.19% 15.48%
Other loans.................................................. -- -- 20.83%
Weighted Average Term (in months)
Business purpose loans....................................... 169 172 184
Home equity loans............................................ 261 244 218
First mortgage loans......................................... 322 340 --
Equipment leases............................................. 50 49 40
Other loans.................................................. -- -- 59
Loans/Leases Sold
Business purpose loans....................................... $ 71,931 $ 54,135 $38,083
Home equity and First mortgage loans......................... $613,069 $322,459 $80,734
Equipment leases............................................. $ 92,597 $ 59,700 --
Other loans.................................................. -- -- $ 58
Number of Loans/Leases Sold
Business purpose loans....................................... 911 629 497
Home equity and First mortgage loans......................... 8,074 4,753 1,631
Equipment leases............................................. 4,363 3,707 --
Other loans.................................................. -- -- 8
Weighted Average Rate on Loans/Leases Originated............. 11.30% 11.63% 13.09%
</TABLE>
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The following table sets forth information regarding the average
loan-to-value ratios for loans we originated during the periods indicated. We
did not originate any first mortgage loans prior to October 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
Loan Type 1999 1998 1997
----------------------------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
Business purpose loans .................................... 61.5% 60.5% 60.0%
Home equity loans ......................................... 78.0 76.6 72.0
First mortgage loans ...................................... 78.0 79.9 --
</TABLE>
The following table shows the geographic distribution of our loan and
lease originations and purchases during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------
1999 % 1998 % 1997 % 1996 %
---------- --------- ------------------- --------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New Jersey........................ $236,976 27.48% $128,025 26.38% $ 40,725 29.39% $20,986 29.33%
New York ......................... 163,580 18.97 54,907 11.31 8,343 6.02 7,417 10.36
Pennsylvania...................... 139,992 16.23 150,048 31.06 53,834 38.85 33,324 46.57
Florida .......................... 61,312 7.11 23,905 4.93 3,670 2.65 674 0.94
Georgia........................... 59,395 6.89 23,084 4.76 10,092 7.28 181 0.25
Illinois.......................... 27,663 3.21
California........................ 20,487 2.38 12,709 2.62 -- -- -- --
Maryland.......................... 19,625 2.28 11,748 2.42 5,010 3.61 4,408 6.16
Ohio.............................. 17,155 1.99
Virginia ......................... 17,126 1.99 13,138 2.71 5,469 3.95 104 0.15
Delaware.......................... 14,254 1.65 10,823 2.23 3,117 2.25 2,724 3.81
Connecticut....................... 14,052 1.63 5,964 1.23 2,005 1.45 87 0.12
North Carolina ................... 13,648 1.58 5,144 1.06 4,245 3.06 78 0.11
Texas ............................ 6,631 .77 6,430 1.33 -- -- -- --
Other............................. 50,550 5.84 38,650 7.98 2,073 1.49 1,575 2.20
-------- ------ -------- ------ -------- ------ ------- ------
Total ....................... $862,446 100.00% $484,575 100.00% $138,583 100.00% $71,558 100.00%
======== ====== ======== ====== ======== ====== ======= ======
</TABLE>
Business Purpose Loans. Through our subsidiary, American Business
Credit, we currently originate business purpose loans through a retail network
of salespeople in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey,
New York, Ohio, Pennsylvania and Virginia. We focus our marketing efforts on
small businesses who do not meet all of the credit criteria of commercial banks
and small businesses that our research indicates may be predisposed to using our
products and services.
We originate 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. We do not target any particular industries or trade
groups and, in fact, take precautions against concentration 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
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apartment buildings and mixed use buildings, owned by the borrower, a principal
of the borrower, or a guarantor of the borrower. In addition, in most cases,
these loans are 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.
Our business purpose loans generally ranged from $15,000 to $500,000
and had an average loan size of approximately $80,000 for the loans originated
during the year ended June 30, 1999. Generally, our business purpose loans are
made at fixed rates and for terms ranging from five to 15 years. We generally
charge origination fees for these loans of 5.0% to 6.0% of the original
principal balance. The weighted average interest rate charged on the business
purpose loans originated by us was 15.91% for the year ended June 30, 1999 . The
business purpose loans we securitized during the past fiscal year had a weighted
average loan-to-value ratio, based solely upon the real estate collateral
securing the loans, of 61.5% at the time of securitization. See
"--Securitizations." We originated $64.8 million of business purpose loans for
the year ended June 30, 1999.
Generally, we compute interest due on its outstanding loans using the
simple interest method. Where permitted by applicable law, we impose a
prepayment fee. Although prepayment fees imposed vary based upon applicable
state law, the prepayment fees on our business purpose loan documents generally
amount to a significant portion of the outstanding loan balance. We believe that
such prepayment terms tend to extend the average life of our loans by
discouraging prepayment which makes these loans more attractive for
securitization. Whether a prepayment fee is imposed and the amount of such fee,
if any, is negotiated between the individual borrower and American Business
Credit prior to closing of the loan.
Home Equity Loans. We originate home equity loans through Upland
Mortgage and New Jersey Mortgage primarily to credit-impaired borrowers through
retail marketing which includes telemarketing operations, direct mail, radio and
television advertisements as well as through our interactive web site. We
entered the home equity loan market in 1991. Currently, we are licensed to
originate home equity loans in 44 states across the United States.
Home equity loans originated and funded by our subsidiaries are
generally securitized. In addition, we sell home equity loans to one of several
third party lenders, at a premium and with servicing released. Currently, we
build portfolios of home equity loans for the purpose of securitizing such
loans.
Home equity loan applications are obtained from potential borrowers
over the phone, in person or over the Internet through our interactive web site.
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 $10,000 to $250,000 and had an
average loan size of approximately $74,000 for the loans originated during the
year ended June 30, 1999.
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During the year ended June 30, 1999, we originated $634.8 million of home equity
loans. Generally, home equity loans are made at fixed rates of interest and for
terms ranging from five to 30 years. Such loans generally have origination fees
of approximately 2.0% of the aggregate loan amount. For the year ended June 30,
1999, the weighted average interest rate received on such loans was 11.05% and
the average loan-to-value ratio was 78.0% for the loans originated by us during
such period. We attempt to maintain our 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 us.
In fiscal 1996, through Upland Mortgage and in conjunction with
Processing Service Center, Inc., we entered into exclusive business arrangements
with several financial institutions which provide for Upland Mortgage's purchase
of home equity loans that do not meet the underlying guidelines of the selling
institutions but meet our underwriting criteria. This program is called the Bank
Alliance Program. The Bank Alliance Program is designed to provide an additional
source of home equity loans, 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.
This program allows these financial institutions to originate loans to
credit-impaired borrowers in order to achieve certain community reinvestment
goals and to generate fee income and subsequently sell such loans to Upland
Mortgage. We believe that the Bank Alliance Program is a unique method of
increasing our production of home equity loans.
Under this program, a borrower who fails to meet a financial
institution's underwriting guidelines will be referred to Processing Service
Center, Inc. which will process the loan application and underwrite the loan
pursuant to Upland Mortgage's underwriting guidelines. If the borrower qualifies
under Upland Mortgage's underwriting standards, the loan will be originated by
the financial institution and subsequently sold to Upland Mortgage.
Since the introduction of this program, we have entered into agreements
with twenty-two financial institutions which provide us with the opportunity to
underwrite, process and purchase loans generated by the branch networks of such
institutions which consist of in excess of 1,500 branches located in Colorado,
Delaware, Florida, Georgia, Indiana, Maryland, Michigan, Nebraska, New
Hampshire, New Jersey, Ohio, Pennsylvania and Tennessee. During fiscal 1999,
Upland Mortgage purchased in excess of $35.0 million of loans pursuant to this
program. We intend to continue to expand the Bank Alliance Program with
financial institutions across the United States.
During fiscal 1999, we launched an Internet loan distribution channel
under the name www.UplandMortgage.com. Through this interactive web site,
borrowers can calculate interest payments and submit and an application via the
Internet. The Upland Mortgage Internet platform provides borrowers with
convenient access to the mortgage loan application process, 7 days a week, 24
hours a day. We believe that the addition of this distribution channel maximizes
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the efficiency of the application process and could reduce our transaction costs
in the future to the extent the volume of loan applications received via the web
page increases. Throughout the loan processing period, borrowers who submit
applications on line are supported by our staff of highly trained loan officers.
We intend to continue to enhance our web site in order to permit online
underwriting, approval and processing of a loan application.
First Mortgage Loans. We began offering first mortgage loans in October
1997 in connection with our acquisition of New Jersey Mortgage. New Jersey
Mortgage has been originating mortgage loans since 1939. We originate first
mortgage loans and sell them in the secondary market with servicing released.
Our first mortgage lending market area is primarily the eastern region of the
United States. We originated $66.5 million of first mortgage loans during the
year ended June 30, 1999.
The first mortgage loans are secured by one-to four-unit residential
properties located primarily in the eastern region of the United States. These
properties are generally owner-occupied single family residences but may also
include second homes and investment properties. These loans are generally made
through American Household Mortgage, a division of New Jersey Mortgage, to
borrowers with favorable credit histories and are underwritten pursuant to
Freddie Mac or Fannie Mae standards to permit their sale in the secondary
market, however, we also originate first mortgage loans which do not meet the
Freddie Mac or Fannie Mae standards for sale in the secondary market. Certain of
these first mortgage loans have balances of $240,000 or greater and are commonly
referred to as jumbo loans.
New Jersey Mortgage typically sells such loans to third parties with
servicing released. New Jersey Mortgage also originates Federal Housing
Authority ("FHA") and Veterans Administration ("VA") loans which are
subsequently sold to third parties with servicing released. This means that we
do not generally retain the right to collect and service these loans after they
are sold. New Jersey Mortgage originates such loans for sale in the secondary
market.
Equipment Leases. Through our indirect subsidiaries American Business
Leasing and Federal Leasing Corp., we began offering equipment leases in
December 1994 to complement our business purpose lending program. We currently
originate equipment leases throughout the United States. We originate equipment
leases to corporations, partnerships, other entities and sole proprietors on
various types of business equipment including, but not limited to, computer
equipment, automotive equipment, construction equipment, commercial equipment,
medical equipment and industrial equipment. We generally do not target
credit-impaired lessees. All such lessees must meet certain specified financial
and credit criteria.
Generally, our 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 or 10% of the original equipment cost 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. Our equipment leases
generally range in size from $2,000 to $250,000, with an average lease size of
approximately $23,000 for
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the leases originated during the year ended June 30, 1999. Leases in excess of
$250,000 are generally sold on a non-recourse basis to third parties. Our leases
generally have maximum terms of seven years. The weighted average interest rates
received on leases for the year ended June 30, 1999 was 11.40%. During the year
ended June 30, 1999, we originated $96.3 million of equipment leases. Generally,
the interest rates and other terms and conditions of our equipment leases are
competitive with the leasing terms of other leasing companies in our market
area.
Prior to fiscal 1998, all leases originated by American Business
Leasing were generally held in our lease portfolio. Historically, Federal
Leasing Corp. sold all leases it originated through securitizations with
servicing retained. Presently, American Business Leasing and Federal Leasing
Corp. periodically sell the equipment leases, with servicing retained, through
securitizations or to Variable Funding Capital Corporation, a commercial paper
conduit underwritten by First Union Capital Market. These leases are serviced by
American Business Leasing or Federal Leasing Corp. During fiscal 1999, we sold
or securitized $92.6 million of equipment leases. During fiscal 1999, we
streamlined our leasing activities to focus solely on the origination of small
ticket business equipment leases which generally involve equipment valued at
$2,000 to $250,000, which market we believe is not adequately serviced by larger
leasing companies. In the future, we intend to evaluate the continued
securitization of our lease portfolio subject to market and economic conditions.
There are risks inherent in our leasing activities which are different
than those risks inherent in our mortgage lending activities. See "Risk
Factors--Risks associated with leasing activities may reduce our future
profitability."
Marketing Strategy
We concentrate our marketing efforts primarily on two potential
customer groups. One group, based on historical profiles, has a tendency to
select our loan and lease products because of our personalized service and
timely response to loan requests. The other group is comprised of
credit-impaired borrowers who satisfy our underwriting guidelines. We also
market first mortgage loans and leases to borrowers with favorable credit
histories. See "--Risk Factors - Lending to credit-impaired borrowers may result
in higher delinquencies in our managed portfolio which could adversely impact
our financial condition and results of operations."
Our marketing efforts for business purpose loans focus on our niche
market of selected small businesses located in our market area which generally
includes the eastern half of the United States. We target businesses which we
believe would qualify for loans from traditional lending sources but would elect
to use our products and services. Our experience has indicated that these
borrowers are attracted to us as a result of our marketing efforts, the
personalized service provided by our staff of highly trained lending officers
and our timely response to loan applications. Historically, such customers have
been willing to pay our origination fees and interest rates which are generally
higher than those charged by traditional lending sources.
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We market business purpose loans through various forms of advertising,
and a direct sales force. Advertising media used includes large direct mail
campaigns and newspaper and radio advertising. Our commissioned sales staff,
which consists of full-time highly trained salespersons, is responsible for
converting advertising leads into loan applications. We use a proprietary
training program involving extensive and on-going training of our lending
officers. Our sales staff uses significant person-to-person contact to convert
direct mail advertising into loan applications and maintains contact with the
borrower throughout the application process. See "--Lending and Leasing
Activities - Business Purpose Loans."
We market home equity loans through telemarketing, direct mail
campaigns as well as television, Internet, radio and newspaper advertisements.
Our television advertising campaign is designed to complement the other forms of
advertising we used. Our integrated approach to media advertising is intended to
maximize the effect of our advertising campaigns. We also use a network of loan
brokers.
Our marketing efforts for home equity loans are concentrated in the
eastern region of the United States. In connection with the acquisition of New
Jersey Mortgage, we expanded our branch office network to include Illinois,
Ohio, Delaware, Pennsylvania and Virginia in its existing network of offices in
Georgia, Maryland, South Carolina and Florida. We intend to open additional
sales offices in other states in the future. Loan processing, underwriting,
servicing and collection procedures are performed at our main office located in
Pennsylvania. We also use the Bank Alliance Program as an additional source of
loans as well as our Internet web site. See "--Lending and Leasing
Activities-Home Equity Loans."
We market first mortgage loans through our network of loan brokers. Our
marketing efforts for first mortgage loans are concentrated in the mid-Atlantic
region of the United States. In addition, we market first mortgage loans under
the name American Household Mortgage. See "--Lending and Leasing Activities -
First Mortgage Loans."
Through our subsidiaries, American Business Leasing and Federal Leasing
Corp., we market equipment leases throughout the United States. During 1999, we
streamlined our leasing operations to focus our marketing efforts on the
origination of small ticket business equipment leases which we believe is not
adequately serviced by large leasing companies. Our marketing efforts in the
leasing area are focused on our niche market of distributors of small to
medium-sized office, industrial and medical equipment. American Business Leasing
and Federal Leasing Corp. primarily obtain their equipment leasing customers
through equipment manufacturers, brokers and vendors with whom they have a
relationship and through a direct sales force. See "--Lending and Leasing
Activities - Equipment Leases."
Loan and Lease Servicing
Generally, we service the loans and leases we maintain in our portfolio
or which we securitize in accordance with our established servicing procedures.
Servicing includes collecting and transmitting payments to investors, accounting
for principal and interest, collections and
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foreclosure activities, and selling the real estate or other collateral that is
acquired. At June 30, 1999, our total managed portfolio included approximately
23,000 loans and leases with an aggregate outstanding balance of $1.2 billion.
We generally receive contractual servicing fees of 0.50% per annum based upon
the outstanding balance of securitized loans and leases serviced and the scope
of our servicing responsibilities. In addition, we receive other ancillary fees
related to the loans and leases serviced. Our servicing and collections
activities are centralized at our principal operating office located in Bala
Cynwyd, Pennsylvania.
In servicing loans and leases, we typically send an invoice to obligors
on a monthly basis advising them of the required payment and its due date. We
begin 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 our work-out department. The work-out department tries to
reinstate a delinquent loan or lease, seek a payoff, or occasionally enter into
a modification agreement with the borrower to avoid foreclosure. All proposed
work-out arrangements are evaluated on a case-by-case basis, based upon the
borrower's past credit history, current financial status, cooperativeness,
future prospects and the reasons for the delinquency. If the loan or lease
becomes delinquent 61 days or more and a satisfactory work-out arrangement with
the borrower is not achieved or the borrower declares bankruptcy, the matter is
immediately referred to our attorneys 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.
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, we record it at the lower of cost or estimated fair value, less
estimated cost of disposition. After acquisition, all costs incurred in
maintaining the property are accounted for as expenses.
Our ability to foreclose on certain properties may be affected by state
and federal environmental laws. See "Risk Factors - Environmental laws and
regulations may restrict our ability to foreclose on loans secured by real
estate."
As the servicer of securitized loans and leases, we are obligated to
advance funds for scheduled payments that have not been received from the
borrower unless we determine that our advances will not be recoverable from
subsequent collections in respect to the related loans or leases. 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, first mortgage loans and equipment leases. These policies and
practices may be altered, amended and supplemented as conditions warrant. We
reserve the right to make changes in our day-to-day practices and policies.
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Our loan and lease underwriting standards are applied to evaluate
prospective borrowers' credit standing and repayment ability as well as the
value and adequacy of the mortgaged property or equipment as collateral.
Initially, the prospective borrower is required to fill out a detailed
application providing pertinent credit information. As part of the description
of the prospective 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 prospective 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. 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
prospective 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, we also receive
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 we originated had an average loan-to-value
ratio of 61.5% for the year ended June 30, 1999.
The maximum acceptable loan-to-value ratio for home equity loans held
in portfolio or securitized is generally 90%. The home equity loans we
originated had an average loan-to-value ratio of 78.0% for the year ended June
30, 1999. Occasionally, exceptions to these maximum loan-to-value ratios are
made if other collateral is available or if there are other compensating
factors. From time to time, we make loans with loan-to-value ratios in excess of
90% which are sold with servicing released. Title insurance is generally
obtained in connection with all real estate secured loans.
We generally do not lend more than 95% of the appraised value in the
case of first mortgage loans, other than Federal Housing Authority and Veterans
Administration Loans. We generally require private mortgage insurance on all
first mortgage loans with loan-to-value ratios in excess of 80% at the time of
origination in order to reduce our exposure. We obtain 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 whether the mortgaged property is adequate as
collateral, we have each property considered for financing appraised. The
appraisal is completed by an independent
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qualified appraiser and generally includes pictures of comparable properties and
pictures of the interior of the building. With respect to business purpose
loans, home equity loans and first mortgage loans, the appraisal is completed by
an independent qualified appraiser on a Fannie Mae form.
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 us, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. As a result, we cannot assure
that the market value of the real estate underlying the loans will at any time
be equal to or in excess of the outstanding principal amount of those loans.
Although we have expanded the geographic area in which we originate loans, a
downturn in the economy generally or in a specific region of the country may
have an effect on our originations. See "Risk Factors - A decline in value of
collateral securing our loans may adversely affect our business by reducing
originations and increasing losses on foreclosure."
In leasing, 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 their credit history. Our lease underwriting
criteria include a review of the borrower'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. In certain
situations, we may also obtain a personal guarantee on the lease.
Securitizations
Our sale of our business purpose loans, home equity loans and equipment
leases through securitization is an important financing technique. Since 1995,
we have completed approximately 14 securitization transactions. The 14 pools of
loans and leases securitized were comprised of approximately $201.3 million of
business purpose loans, approximately $969.8 million of home equity loans and
approximately $152.3 million of equipment leases. During fiscal 1999, the
Company securitized $71.9 million, $613.0 million and $92.6 million of business
purpose loans, home equity loans and equipment leases, respectively.
Securitization is a financing technique often used by originators of
financial assets to raise capital. A securitization involves the transfer of a
pool of financial assets, in our case loans or leases, to a trust in exchange
for cash and a retained interest in the securitized loans and leases which is
called a residual interest. The trust issues various classes of securities which
derive their cash flows from a pool of securitized loans and leases. These
securities which represent the remaining interest in the trust called the
regular interests, are sold to public investors. We also retain servicing on
securitized loans and leases. See "--Loan and Lease Servicing."
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As the holder of the residual interests in a securitization, we are
entitled to receive certain excess (or residual) cash flows. These cash flows
are the difference between the payments made by the borrowers and the sum of the
scheduled and prepaid principal and interest paid to the investors in the trust,
servicing fees, trustee fees and, if applicable, insurance fees.
Overcollateralization requirements, representing an excess of the aggregate
principal balances of loans and leases in a securitized pool over investor
interests, are established to provide credit enhancement for the trust
investors. In order to meet the required overcollateralization levels the trust
initially retains the excess cash flow until after the overcollateralization
requirements, which are specific to each securitization, are met.
We may be required either to repurchase or to replace loans or leases
which do not conform to the representations and warranties we made in the
pooling and servicing agreements entered into when the loans or leases are
pooled and sold through securitizations. As of June 30, 1999, we had not been
required to repurchase or replace any such loans or leases. When borrowers are
delinquent in making scheduled payments on loans or leases included in a
securitization trust, we are required to advance interest payments with respect
to such delinquent loans or leases to the extent that we determine that such
advances will be ultimately recoverable. These advances require funding from our
capital resources but have priority of repayment from the succeeding month's
collection.
Our securitizations often include a prefunding option where a portion
of the cash received from investors is withheld until additional loans or leases
are transferred to the trust. The loans or leases to be transferred to the trust
to satisfy the preferred option must be substantially similar in terms of
collateral, size, term, interest rate, geographic distribution and loan-to-value
ratio as the loans or leases initially transferred to the trust. To the extent
we fail to originate a sufficient number of qualifying loans or leases for the
prefunded account within the specified time period, our earnings during the
quarter in which the funding was to occur would be reduced.
The securitization of loans and leases during the years ended June 30,
1999, 1998 and 1997 generated gain on sale of loans and leases of $65.6 million,
$41.3 million and $20.0 million, respectively. These gains contributed to our
record levels of revenue and net income during these fiscal years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Certain Accounting Considerations."
Subject to market conditions, we anticipate that we will continue to
securitize business purpose loans, home equity loans and possibly equipment
leases. We believe that a securitization program provides a number of benefits
by allowing us to diversify our funding base, provide liquidity and lower our
cost of funds.
Competition
We compete for business purpose loans against many other finance
companies and financial institutions. Although many other entities originate
business purpose loans, we have focused our lending efforts on our niche market
of businesses which may qualify for loans from
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traditional lending sources but who we believe are attracted to our products as
a result of our marketing efforts, responsive customer service and rapid
processing and closing periods.
We have significant competition for home equity loans. Through Upland
Mortgage and New Jersey Mortgage, we compete with banks, thrift institutions,
mortgage bankers and other finance companies, which may have greater resources
and name recognition. We attempt to mitigate these factors through a highly
trained staff of professionals, rapid response to prospective borrowers'
requests and by maintaining a relatively short average loan processing time. In
addition, we implemented our Bank Alliance Program in order to generate
additional loan volume.
We also face significant competition for equipment leases. Through
American Business Leasing and Federal Leasing Corp., we compete with banks,
leasing and finance companies with greater resources, capitalization and name
recognition throughout their market areas. It is our intention to capitalize on
our vendor relationships and the efforts of our direct sales force to compete
with these businesses.
The various segments of our lending businesses are highly competitive.
See "Risk Factors - Competition from other lending and lessors could adversely
affect our profits."
General. Our 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 Truth in Lending Act, the 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 Truth in Lending Act and Regulation Z issued
under the Truth in Lending Act contain disclosure requirements designed to
provide consumers with uniform, understandable information about the terms and
conditions of loans and credit transactions so that consumers may compare credit
terms. The Truth in Lending Act also guarantees consumers a three-day right to
cancel certain transactions and imposes specific loan feature restrictions on
certain loans of the type originated by us. We believe that we are in compliance
with the Truth in Lending Act in all material respects. If we were found not to
be in compliance with the Truth in Lending Act, some 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 us. Other fines and penalties can
also be imposed under the Truth in Lending Act and Regulation Z.
Equal Credit Opportunity and Other Laws. We are also required to comply
with the Equal Credit Opportunity Act, which prohibits creditors from
discriminating against applicants on the basis of race, color, religion,
national origin, sex, age or marital status. Regulation B issued under the
Equity Credit Opportunity Act 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.
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In instances where the applicant is denied credit or the rate of
interest for a loan increases as a result of information obtained from a
consumer credit reporting agency, the Fair Credit Reporting Act of 1970, as
amended, requires lenders to supply the applicant with the name and address of
the reporting agency whose credit report was used in determining to reject a
loan application. It also requires that lenders provide other information and
disclosures about the loan application rejection. In addition, we are subject to
the Fair Housing Act and regulations under the Fair Housing Act, which broadly
prohibit specific discriminatory practices in connection with our home equity
lending business.
We are also subject to the Real Estate Settlement Procedures Act. The
Real Estate Settlement Procedures Act imposes, limits on the amount of funds a
borrower can be required to deposit with us in any escrow account for the
payment of taxes, insurance premiums or other charges; limits on fees paid to
third parties; and various disclosure requirements.
We are subject to various other federal and state laws, rules and
regulations governing, the licensing of mortgage lenders and servicers,
procedures that must be followed by mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
these laws, as well as with the laws described above, may result in civil and
criminal liability.
Several of our subsidiaries are licensed and regulated by the
departments of banking or similar entities in the various states in which they
are licensed. The rules and regulations contain licensing and licensed entities
activities, among other things, prohibit discrimination, collection, foreclosure
and claims handling, payment features, mandate certain disclosures and notices
to borrowers and, in some cases, fix maximum interest rates, and fees. Failure
to comply with these requirements can lead to termination or suspension of
licenses, certain rights of rescission for mortgage loans, individual and class
action lawsuits and administrative enforcement actions. Upland Mortgage and New
Jersey Mortgage maintain compliance with the various federal and state laws
through its in-house counsel and outside counsel which continually review Upland
Mortgage and New Jersey Mortgage documentation and procedures and monitor and
inform Upland Mortgage on various changes in the laws.
The previously described laws and regulations are subject to
legislative, administrative and judicial interpretation. Some of these laws and
regulations have recently been enacted. Some of these laws and regulations are
rarely challenged in or interpreted by the courts. Infrequent interpretations of
these laws and regulations or an insignificant number of interpretations of
recently enacted regulations can make it difficult for us to know what is
permitted conduct under these laws and regulations. Any ambiguity under the
regulations to which we are subject may lead to regulatory investigations or
enforcement actions and private causes of action, such as class action lawsuits,
with respect to our compliance with the applicable laws and regulations.
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Although we believe that we have implemented systems and procedures to
make sure that we comply with regulatory requirements and that we are in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, if more restrictive laws, rules and regulations are
enacted or more restrictive judicial and administrative interpretations of those
laws are issued, compliance with the laws could become more expensive or
difficult.
Employees
At June 30, 1999, we employed 858 people on a full-time basis and 36
people on a part-time basis. None of our employees are covered by a collective
bargaining agreement. We consider our employee relations to be good.
Property
Except for real estate acquired in foreclosure in the normal course of
our business, we do not presently hold title to any real estate for operating
purposes. The interests which we presently hold in real estate are in the form
of mortgages against parcels of real estate owned by our borrowers or their
affiliates and real estate acquired through foreclosure.
We presently lease office space at 111 Presidential Boulevard, Bala
Cynwyd, Pennsylvania, just outside the city limits of Philadelphia. We are
currently leasing this office space under lease with an annual rental cost of
approximately $2.2 million. The current lease term expires in July 31, 2003. We
also lease the Roseland, New Jersey office which functions as the headquarters
for New Jersey Mortgage and its subsidiaries. The Roseland office lease contains
a renewal option for an additional term of five years. The Roseland office
facility has a current annual rental cost of approximately $766,000. In
addition, we lease branch offices on a short term basis in various cities
throughout the United States. We do not believe that the leases for the branch
offices are material to our 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 New Jersey Mortgage by
Alfred G. Roscoe on behalf of himself and others similarly situated. Mr. Roscoe
sought certification that the action could be maintained as a class action. He
also sought unspecified compensatory damages and injunctive relief. In his
complaint, Mr. Roscoe alleged that New Jersey Mortgage violated New Jersey's
Mortgage Financing on Real Estate Law, N.J. Stat. Ann. 46:10A-1 et seq., by
requiring him and other borrowers to pay or reimburse New Jersey Mortgage for
attorneys' fees and costs in connection with loans made to them by New Jersey
Mortgage. Mr. Roscoe further asserted that New Jersey Mortgage's alleged actions
violated New Jersey's Consumer Fraud Act, N.J. Stat. Ann. 56:8-1, et seq. and
constituted common law fraud and deceit.
On February 24,1998, after oral argument before the Superior Court, an
order was entered in favor of New Jersey Mortgage and against Mr. Roscoe
granting New Jersey Mortgage Motion
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for Summary Judgment. Mr. Roscoe appealed to the Superior Court of New Jersey -
Appellate Division. Oral argument on the appeal was heard on January 20, 1999
before a two-judge panel of the Appellate Division. On February 3, 1999, the
panel filed a per curiam opinion affirming the Superior Court's ruling in favor
of New Jersey Mortgage.
On March 4, 1999, a Petition for Certification for review of the final
judgment of the Superior Court was filed with the Supreme Court of New Jersey.
New Jersey Mortgage filed its Brief in Opposition to the Petition for
Certification on March 16, 1999, and Mr. Roscoe filed a reply brief. To date, no
decision has been rendered by the New Jersey Supreme Court on this matter.
Pursuant to the terms of the Agreement for Purchase and Sale of Stock
of New Jersey Mortgage between us and the former shareholders of New Jersey
Mortgage, the former shareholders are required to indemnify us up to $16.0
million to the extent of any losses over $100,000 related to, caused by or
arising from New Jersey Mortgage's failure to comply with applicable law. The
former New Jersey Mortgage shareholders have agreed to defend us in this suit.
Additionally, from time to time, we are involved as plaintiff or
defendant in various other legal proceedings arising in the normal course of our
business. While we cannot predict the ultimate outcome of these various legal
proceedings, it is management's opinion that the resolution of these legal
actions should not have a material effect on our financial position, results of
operations or liquidity.
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WHERE YOU CAN FIND MORE INFORMATION
We filed a Registration Statement on Form S-2 (which, together with all
exhibits and schedules thereto, is referred to as the "registration statement")
with the SEC, with respect to the registration of the notes offered by this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and the attached exhibits. For further information
pertaining to our business, the debt securities offered by this prospectus and
related matters, you should review the registration statement, including the
exhibits filed as a part of the registration statement. Each statement in this
prospectus referring to a document filed as an exhibit to the registration
statement is qualified by reference to the exhibit for a complete statement of
its terms and conditions.
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. So long as we are subject to the SEC's reporting
requirements, we will continue to furnish the reports and other required
information to the SEC. We will furnish all holders of the notes with copies of
our annual reports containing audited financial statements and an opinion
thereon expressed by our independent auditors and will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
You may read and copy any reports, statements and other information we
file at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operations of the Public Reference Room. Our SEC filings are also available on
the SEC's Internet site (http://www.sec.gov).
Our common stock is traded on the NASDAQ National Market System under
the symbol "ABFI." You may also read reports, proxy statements and other
information we file at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.
We will provide, at no cost, to each person to whom this prospectus is
delivered, upon written or oral request, copies of any of the information
included in the registration statement, which is not included in this
prospectus. Requests should be directed to:
Jeffrey M. Ruben, Esquire
American Business Financial Services, Inc.
Bala Pointe Office Centre
111 Presidential Boulevard
Bala Cynwyd, PA 19004
(610) 668-2440
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MANAGEMENT
General
All of our directors and executive officers 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 our Board of
Directors and executive officers:
<TABLE>
<CAPTION>
Name Age(1) Position
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Anthony J. Santilli........................ 56 Chairman, President, Chief Executive Officer,
Chief Operating Officer and Director
Leonard Becker............................. 76 Director
Michael DeLuca............................. 68 Director
Richard Kaufman............................ 67 Director
Harold E. Sussman.......................... 73 Director
Beverly Santilli........................... 40 First Executive Vice President and Secretary of
ABFS and President of American Business Credit
Jeffrey M. Ruben........................... 36 Executive Vice President and General Counsel
Albert W. Mandia .......................... 51 Executive Vice President and Chief Financial
Officer(2)
</TABLE>
- -----------------------
(1) As of June 30, 1999.
(2) Mr. Mandia became our Chief Financial Officer on October 1, 1998.
Directors
Our 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 or
until their successors are elected and qualified. Our Amended and Restated
Certificate of Incorporation provides that the Board of Directors shall be
divided into three classes which, have staggered terms of office, and which are
as equal in number as possible. The members of each class of directors are to be
elected for a term of three years. Our Amended and Restated Articles of
Incorporation does not permit stockholders to cumulate their votes for the
election of directors.
The principal occupation of each of our directors is set forth below.
All directors have held their present position for at least five years unless
otherwise indicated.
Anthony J. Santilli is our Chairman, President, Chief Executive Officer
and Chief Operating Officer and is an executive officer of its subsidiaries. He
has held the positions since early 1993 when we became the parent company of
American Business Credit and the positions with the subsidiaries since the
formation of American Business Credit in June 1988.
Prior to the founding of America Business Credit 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
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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.
Leonard Becker is a former 50% owner and officer of the SBIC of the
Eastern States, Inc., a federally licensed small business corporation which made
medium term loans to small business concerns. For the last 30 years, Mr. Becker
has been heavily involved in the investment in and management of real estate;
and, has been involved in the ownership of numerous shopping centers, office
buildings and apartments. Mr. Becker formerly served as a director of Eagle
National Bank and Cabot Medical Corp.
Michael DeLuca was President, Chairman of the Board, Chief Executive
Officer and a former owner of Bradford-White Corporation, a manufacturer of
plumbing products, for a period of approximately thirty years. Presently, Mr.
DeLuca serves as a Director of BWC-West, Inc., Bradford-White International and
is Chief Executive Officer and a Director of Lux Products Corporation.
Richard Kaufman is Chairman and Chief Executive Officer of Academy
Industries, Inc., a paper converting company, a position he has held since
December 1996. From 1982 to 1996, he was self employed and involved in making
and managing investments for his own benefit. From 1976 to 1982, Mr. Kaufman was
President and Chief Operating Officer of Morlan International, Inc., a cemetery
and financial services conglomerate. From 1970 to 1976, Mr. Kaufman served as a
Director and Vice President-Real Estate and Human Services Division of Texas
International, Inc., an oil and gas conglomerate.
Harold E. Sussman is currently a principal in and Chairman of the Board
of the real estate firm of Colliers, Lanard & Axilbund, a major commercial and
industrial real estate brokerage and management firm in the Philadelphia area,
with which he has been associated since 1972.
Executive Officers who are not also Directors
The following is a description of the business experience of each
executive officer who is not also a director.
Beverly Santilli, age 40, is First Executive Vice President and
Secretary, positions she has held since September 1998 and our inception,
respectively. Mrs. Santilli has held a variety of positions including Executive
Vice President and Vice President. Mrs. Santilli is also the President of
American Business Credit. Mrs. Santilli is responsible for all sales, marketing
and day-to-day operation of American Business Credit. Mrs. Santilli is also
responsible for human resources of ABFS. Prior to joining American Business
Credit 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 that bank's Private Banking Group. Mrs. Santilli is the wife of
Anthony J. Santilli.
Jeffrey M. Ruben, age 36, is Executive Vice President and General
Counsel as well as Executive Vice President and General Counsel of certain of
our subsidiaries, positions he has held since September 1998 and April 1992,
respectively. Mr. Ruben is responsible for the loan and the lease collections
departments, the asset allocation unit and the legal department. Mr.
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Ruben served as Senior Vice President from April 1992 to September 1999. From
June 1990 until he joined us 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. 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.
Albert W. Mandia, age 51, is the Executive Vice President and Chief
Financial Officer of ABFS, positions he has held since June 1998 and October
1998, respectively. Mr. Mandia is responsible for all financial, information
systems and investor relations functions. From 1974 to 1998, Mr. Mandia was
associated with CoreStates Financial Corp. where he last held the position of
Chief Financial Officer from February 1997 to April 1998.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of September 15, 1999 by our
directors and executive officers and each person known to be the beneficial
owners of five percent or more of our common stock, and all directors and
executive officers as a group. The business address of our officers is our
address.
<TABLE>
<CAPTION>
Name, Position and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned(1) of Class
- --------------------------------------------------------------- ----------------------- --------------------------
<S> <C> <C>
Anthony J. Santilli, Chairman, President, 932,044(2)(3) 26.0%
Chief Executive Officer, Chief Operating
Officer and Director of ABFS
and Beverly Santilli, President of ABC
and First Executive Vice President and Secretary of ABFS
Michael DeLuca, Director of ABFS 204,735(4) 5.7
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 180,561(4) 5.1
1126 Bryn Tyddyn Drive
Gladwyne, PA 19035
Leonard Becker, Director of ABFS 121,230(4) 3.4
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Harold E. Sussman, Director of ABFS 111,711(4) 3.1
Colliers, Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 25,500(5) (6)
Executive Vice President and General
Counsel of ABFS
Albert W. Mandia 12,500(7) [(6)]
Executive Vice President and Chief
Financial Officer of ABFS
</TABLE>
-82-
<PAGE>
<TABLE>
<CAPTION>
Name, Position and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned(1) of Class
- --------------------------------------------------------------- ----------------------- --------------------------
<S> <C> <C>
All executive officers and directors as a group (7 persons) 1,588,281(8) 42.5
</TABLE>
- -----------------------------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations of the SEC. 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 37,500 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, of which options
to purchase 10,500 shares are not currently exercisable within 60
days.
(4) Includes options to purchase 27,500 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 options to
purchase 10,000 shares of Common Stock awarded to each non-employee
director pursuant to the Company's 1997 Stock Option Plan for
Non-Employee Directors, 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, of which options to purchase 10,500 shares are not
exercisable within 60 days of the Record Date.
(6) Less than one percent.
-83-
<PAGE>
(7) Represents options to purchase 12,500 shares of the Company's Common
Stock awarded to Mr. Mandia pursuant to the Company's Stock Option
Plan, 2,500 of which are currently exercisable.
(8) Includes options to purchase 260,000 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 43,200
shares of the Company's Common Stock are not currently exercisable.
-84-
<PAGE>
MARKET FOR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Our common stock is currently traded on the NASDAQ National Market
System under the symbol "ABFI." Our common stock began trading on the NASDAQ
National Market System on February 14, 1997. Prior to February 14, 1997, our
common stock had been traded on the Philadelphia Stock Exchange under the symbol
"AFX" since May 13, 1996. Prior to the commencement of trading on the PHLX,
there was no active trading market for our common stock.
The following table sets forth the high and low sales prices of our
common stock for the periods indicated. The stock price information appearing
below has been retroactively adjusted to reflect the effect of a 5% stock
dividend declared subsequent to June 30, 1999. On September 9, 1999, the closing
price of the common stock on the NASDAQ National Market System was $12.875.
Quarter Ended High Low
----------------------------------------- -------- --------
June 30, 1997 $21.42 $17.62
September 30, 1997 22.86 18.57
December 31, 1997 26.67 19.64
March 31, 1998 26.19 19.52
June 30, 1998 24.29 20.95
September 30, 1998 20.71 11.19
December 31, 1998 13.70 5.48
March 31, 1999 14.29 11.67
June 30, 1999 18.93 10.23
As of September 9, 1999, there were 115 record holders and
approximately 1,000 beneficial holders of our common stock.
During fiscal 1999, we paid $0.165 per share in dividends on common
stock, for an aggregate dividend payment of $575,000. During fiscal 1998, we
paid dividends of $211,000. The payment of dividends in the future is in the
sole discretion of our Board of Directors and will depend, among other things,
upon earnings, capital requirements and financial condition, as well as other
relevant factors.
On August 18, 1999, our Board of Directors declared a 5% stock dividend
payable on September 27, 1999, to stockholders of record as of September 3,
1999.
As a Delaware corporation, we may not declare and pay dividends on
capital stock if the amount paid exceeds an amount equal to the excess of our
net assets over paid-in-capital or, if there is no excess, our net profits for
the current and/or immediately preceding fiscal year.
On October 27, 1997, we 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.
-85-
<PAGE>
PLAN OF DISTRIBUTION
We do not currently use a broker-dealer or the agent to assist in the
sales of the debt securities. We may employ the services of a National
Association of Securities Dealers, Inc. member broker-dealer in the future 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, we
may pay any the broker-dealer a commission which we estimate will range from .5%
to 10% of the sale price of any notes sold through the broker-dealer, depending
on numerous factors. We may also agree to indemnify the broker-dealer against
certain liabilities, including liabilities under the Securities Act and to
reimburse the broker-dealer for its costs and expenses, up to a maximum to be
determined, based upon the total dollar value of the securities sold. We will
otherwise offer the debt securities through our employees in accordance with
Rule 3a4-1 under the Exchange Act.
We reserve the right to reject any order, in whole or in part, for any
reason. Your order will be irrevocable upon receipt by us. In the event your
order is not accepted, we will promptly refund your funds, without deduction of
any costs and without interest. We expect that orders will be refunded within 48
hours after receipt. Once your order has been accepted, the applicable order
funds will be promptly deposited in our account. We will send a receipt to you
as soon as practicable after acceptance of your order. No minimum number of debt
securities must be sold in the offering. You will not know at the time of order
whether we will be successful in completing the sale of any or all of the debt
securities being offered. We reserve the right to withdraw or cancel the
offering at any time. In the event of such withdrawal or cancellation, orders
previously received will be irrevocable and no funds will be refunded.
We may from time to time offer investment incentives to investors.
These incentives could take the form of merchandise travel, accommodations, or
other goods or services which would be awarded to investors who satisfy total
investment, length of investment or other criteria. There are no specific
incentive programs in place on the date of this prospectus. Any specific
incentive program would be disclosed in a prospectus supplement. Investors must
consider that they will recognize income for income tax purposes based upon the
value of any incentive received.
LEGAL MATTERS
Blank Rome Comisky & McCauley LLP, a Pennsylvania limited liability
partnership, Philadelphia, Pennsylvania, will deliver an opinion stating that
the debt securities when issued as contemplated by this prospectus will be
binding obligations.
EXPERTS
Our Consolidated Financial Statements as of June 30, 1999 and 1998 and
for the years ending June 30, 1999, 1998 and 1997 included in this prospectus,
have been audited by BDO Seidman, LLP, independent certified public accountants,
as set forth in their report appearing in this prospectus and have been included
in reliance upon that report given upon the authority of BDO Seidman, LLP as
experts in accounting and auditing.
-86-
<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 Flow....................................... F-6
Notes to Consolidated Financial Statements................................. F-8
F-1
<PAGE>
Report of Independent Certified Public Accountants
American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1999 and 1998,
and the related consolidated statements of income and stockholders' equity, and
cash flow for each of the years in the three-year period ended June 30, 1999.
These 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Business
Financial Services, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flow for each of the
years in the three-year period ended June 30, 1999 in conformity with generally
accepted accounting principles.
In January 1999, the Company adopted Financial Accounting Standards Board
Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". This change is discussed in note 1 of the Notes to Consolidated
Financial Statements.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
September 9, 1999
F-2
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Balance Sheets
===============================================================================
June 30, 1999 1998
- -------------------------------------------------------------------------------
(dollar amounts in thousands)
Assets
Cash and cash equivalents $ 22,395 $ 4,486
Loan and lease receivables, net
Available for sale 33,776 62,382
Other 6,863 4,096
Interest-only strips and other receivables 253,936 100,737
Prepaid expenses 1,671 2,572
Property and equipment, net 10,671 7,785
Servicing rights 43,210 18,472
Other assets 23,779 26,021
- -------------------------------------------------------------------------------
Total assets $ 396,301 $ 226,551
===============================================================================
Liabilities and Stockholders' Equity
Liabilities
Subordinated debt and notes payable $ 270,343 $ 144,585
Accounts payable and accrued expenses 26,826 15,563
Deferred income taxes 16,604 10,864
Other liabilities 24,282 12,797
- -------------------------------------------------------------------------------
Total liabilities 338,055 183,809
- -------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, par value $.001
Authorized, 1,000,000 shares
Issued and outstanding, none -- --
Common stock, par value $.001
Authorized, 9,000,000 shares
Issued: 3,703,514 shares in 1999
(including treasury shares of 116,550
in 1999), and 3,699,576 shares in 1998 3 3
Additional paid-in capital 23,339 23,256
Accumulated other comprehensive income 3,354 --
Retained earnings 33,596 20,083
Treasury stock, 116,500 shares at cost (1,446) --
- -------------------------------------------------------------------------------
58,846 43,342
Note receivable (600) (600)
- -------------------------------------------------------------------------------
Total stockholders' equity 58,246 42,742
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 396,301 $ 226,551
===============================================================================
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Income
===============================================================================
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
(dollar amounts in thousands, except per share data)
<S> <C> <C> <C>
Revenues
Gain on sale of loans and leases $65,640 $41,316 $20,043
Interest and fees 17,424 17,386 5,584
Servicing income 3,321 476 283
Other income 39 157 52
- ----------------------------------------------------------------------------------------------------
Total revenues 86,424 59,335 25,962
- ----------------------------------------------------------------------------------------------------
Expenses
Interest 22,427 13,190 5,175
Provision for credit losses 928 491 106
Employee-related costs 5,318 5,030 1,618
Sales and marketing 23,595 14,237 6,964
General and administrative 12,305 8,497 3,097
- ----------------------------------------------------------------------------------------------------
Total expenses 64,573 41,445 16,960
- ----------------------------------------------------------------------------------------------------
Income before provision for income taxes 21,851 17,890 9,002
Provision for income taxes 7,763 6,435 3,062
- ----------------------------------------------------------------------------------------------------
Net income $14,088 $11,455 $ 5,940
====================================================================================================
Earnings per common share
Basic $ 3.83 $ 3.10 $ 2.03
Diluted $ 3.72 $ 2.98 $ 1.95
====================================================================================================
Average common shares (in thousands)
Basic 3,682 3,692 2,921
Diluted 3,791 3,847 3,049
====================================================================================================
</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>
Year ended June 30, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------- Accumulated
Number Additional Other Total
Of Shares Paid-In Comprehensive Retained Treasury Note Stockholders'
Outstanding Amount Capital Income Earnings Stock Receivable Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 2,353 $ 2 $ 1,932 $ -- $ 3,057 $ -- $ (600) $ 4,391
Sale of common stock,
net of offering expenses of $2,261 1,150 1 20,737 -- -- -- -- 20,738
Cash dividends ($.06 per share) -- -- -- -- (158) -- -- (158)
Net income -- -- -- -- 5,940 -- -- 5,940
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 3,503 3 22,669 -- 8,839 -- (600) 30,911
Common stock issued for acquisition 20 -- 500 -- -- -- -- 500
Issuance of non-employee stock options -- -- 87 -- -- -- -- 87
Cash dividends ($.06 per share) -- -- -- -- (211) -- -- (211)
Net income -- -- -- -- 11,455 -- -- 11,455
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 3,523 3 23,256 -- 20,083 -- (600) 42,742
Comprehensive income:
Net income -- -- -- -- 14,088 -- -- 14,088
Unrealized gains on investment securities -- -- -- 3,354 -- -- -- 3,354
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 3,354 14,088 -- -- 17,442
Issuance of non-employee stock options -- -- 73 -- -- -- -- 73
Exercise of stock options 4 -- 10 -- -- -- -- 10
Cash dividends ($0.165 per share) -- -- -- -- (575) -- -- (575)
Repurchase of treasury shares (111) -- -- -- -- (1,446) -- (1,446)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 3,416 $ 3 $ 23,339 $ 3,354 $ 33,596 $(1,446) $ (600) $ 58,246
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
===============================================================================
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 14,088 $ 11,454 $ 5,940
Adjustments to reconcile net income to
net cash used in operating activities
Gain on sales of loans and leases (65,640) (41,316) (20,051)
Depreciation and amortization 10,826 5,340 1,992
Provision for credit losses 928 491 106
Provision for credit losses from acquired
subsidiary -- 694 --
Accounts written off, net (1,107) (667) (98)
Loans and leases originated for sale (909,372) (486,196) (136,358)
Proceeds from sale of loans and leases 819,814 418,609 117,823
(Increase) decrease in accrued interest
and fees on loan and lease receivables (2,767) 6,164 (1,288)
Decrease in interest-only strips and other
receivables 7,046 7,177 3,162
Decrease (increase) in prepaid expenses 901 (1,391) (1,266)
Increase in accounts payable and
accrued expenses 11,465 9,199 2,949
Increase in deferred income taxes 5,539 5,333 3,125
Increase in loans in process 11,484 6,455 4,001
Other, net (9,113) (12,808) (6,946)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (105,908) (71,462) (26,909)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Loan and lease payments received 9,200 19,003 4,555
Leases originated for portfolio -- -- (8,004)
Purchase of property and equipment (5,819) (4,085) (1,738)
Proceeds from sale of property and equipment 684 -- --
Decrease in securitization gain receivable -- 2,884 107
Initial overcollateralization of loans (4,825) (5,378) (3,450)
Purchase of investments -- (2,986) (5,000)
Principal receipts and maturity of investments 3,428 5,101 81
Purchase of subsidiary, net -- (9,585) --
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,668 4,954 (13,449)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
===============================================================================
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Cash flows from financing activities
Financing costs incurred $ (2,986) $ (2,041) $ (1,053)
Proceeds from issuance of subordinated
debentures 168,357 73,884 33,991
Principal payments on subordinated
debentures (70,636) (25,044) (11,125)
Net borrowings on
revolving lines of credit 25,241 19,750 (2,348)
Proceeds from repurchase agreement 4,677 -- --
Principal payments on debt, other (1,566) (445) (18)
Dividends paid (575) (211) (158)
Recorded fair value of options granted 73 87 --
Exercise of employee stock options 10 -- --
Repurchase of treasury stock (1,446) -- --
Proceeds from public offering, net of related
costs -- -- 20,738
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 121,149 65,980 40,027
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents $ 17,909 $ (528) $ (331)
Cash and cash equivalents at beginning of year 4,486 5,014 5,345
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,395 $ 4,486 $ 5,014
==============================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 18,900 $ 10,647 $ 2,877
==============================================================================================================
Income taxes $ 3,750 $ 50 $ --
==============================================================================================================
Supplemental disclosure of noncash financing activity
Noncash transaction recorded in connection with
acquisition of subsidiary
Decrease in acquisition debt $ (1,001) $ (3,418) $ --
Decrease in loan and lease receivables 1,001 3,418 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
1. Summary of Business
Significant
Accounting American Business Financial Services, Inc.
Policies ("ABFS"), together with its subsidiaries (the
"Company"), is a diversified retail financial
service organization operating throughout the
United States. The Company originates, sells and
services loans to business secured by real estate
and other business assets, mortgage and home
equity loans, typically to credit impaired
borrowers secured by first and second mortgages
and business equipment leases. In addition the
Company sells subordinated debt securities to the
public, the proceeds of which are used to fund
loan and lease originations and the Company's
operations.
Basis of Financial Statement Presentation
The consolidated financial statements include the
accounts of ABFS and its subsidiaries (all of
which are wholly owned.) The consolidated
financial statements have been prepared in
accordance with generally accepted accounting
principles. All significant intercompany balances
and transactions have been eliminated. In
preparing the consolidated financial statements,
management is required to make estimates and
assumptions which affect the reported amounts of
assets and liabilities as of the date of the
consolidated financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates. These estimates include, among
other things, estimated prepayment, credit loss
and discount rates on loans and leases sold with
servicing retained, estimated servicing revenues
and costs, valuation of collateral owned and
determination of the allowance for credit losses.
Certain prior period financial statement balances
have been reclassified to conform to current
period presentation. All outstanding share,
average common share, earnings per common share
and stock option amounts have been retroactively
adjusted to reflect the effect of a 5% stock
dividend declared August 18, 1999. See note 10 for
further description.
F-8
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Cash and Cash Equivalents
Cash equivalents consist of short-term investments
with an initial maturity of three months or less.
Loan and Lease Receivables
Loan and lease receivables -available for sale are
loans and leases the Company plans to sell or
securitize and are carried at the lower of
aggregate cost (principal balance, including
unamortized origination costs and fees) or market
value. Market value is determined by quality of
credit risk, types of loans originated, current
interest rates, economic conditions, and other
relevant factors.
Loan and lease receivables -other is comprised
mainly of accrued interest and fees on loans and
leases and lease equipment residuals receivable
from a third party.
Allowance for Credit Losses
The Company's allowance for credit losses on
portfolio loans and leases is maintained to
account for loans and leases that are delinquent
and are expected to be ineligible for sale into a
securitization. The allowance is calculated based
upon management's estimate of the expected
collectibility of loans and leases outstanding
based upon a variety of factors, including but not
limited to, periodic analysis of the portfolio,
economic conditions and trends, historical credit
loss experience, borrowers ability to repay, and
collateral considerations.
Additions to the allowance arise from the
provision for credit losses charged to operations
or from the recovery of amounts previously charged
off. Loan and lease charge offs reduce the
allowance.
F-9
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
In addition to the allowance for credit losses on
portfolio loans and leases, the Company makes
certain assumptions regarding the expected impact
of credit losses on the fair value of
interest-only strips and residual interests. See
note 4 for more information regarding these credit
loss assumptions.
Loan and Lease Origination Costs and Fees
Direct loan and lease origination costs and loan
fees such as points and other closing fees are
recorded as an adjustment to the cost basis of the
related loan and lease receivable and are
recognized in the Statement of Income as an
adjustment to the gain on sale recorded at the
time the loans and leases are securitized.
Interest-only Strips and Residual Interests
The Company sells a majority of its originated
loans and leases through securitizations. In
connection with these securitizations, the Company
retains certain residual interests in the trusts
to which the loans or leases are transferred. The
residual interests entitle the Company to receive
certain excess (or residual) cash flows which are
derived from payments made to the trust from the
securitized loans and leases after deducting
payments to investors in the securitization trust
and other miscellaneous fees. These cash flows are
projected over the life of the loans and leases
using certain prepayment and default assumptions.
Excess cash flows are retained by the trust until
certain overcollateralization levels are
established. The overcollateralization causes the
aggregate principal amount of the related
securitization pool to exceed the aggregate
balance of the investor notes. The
overcollateralization serves as credit enhancement
for the investors. The securitization trusts and
its investors have no recourse to other assets of
the Company for failure of the securitized loans
and leases to pay when due.
F-10
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The fair values of the excess cash flows are
estimated based on a discounted cash flow
analysis, and are recorded by the Company at the
time loans and leases are securitized. Cash flows
are discounted from the date the cash is expected
to be available to the Company (the "cash-out
method"). Cash flows are discounted using an
interest rate management believes an unrelated
purchaser would require.
Interest-only strips and residual interests are
periodically revalued by the Company based on a
discounted cash flow analysis of loans and leases
remaining in the trusts. The assumptions for
prepayment and default rates are monitored against
actual experience and adjusted if warranted.
In October 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 134,
"Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 requires that after the
securitization of a mortgage loan held for sale,
an entity classify the resulting mortgage-backed
security or other retained interests based on its
ability and intent to hold or sell those
investments. SFAS No. 134 became effective for
fiscal quarters beginning after December 15, 1998.
In accordance with the provisions of SFAS No. 134,
the Company has reclassified its retained
interests from trading securities to
available-for-sale securities. As
available-for-sale securities, subsequent
adjustments to the fair value of retained
interests are recorded in stockholders' equity and
reported as a component of comprehensive income.
Servicing Rights
Upon the securitization of loans and leases, the
Company retains servicing rights. The Company
capitalizes the costs associated with the rights
to service securitized loans and leases based on
the servicing rights' relative fair value to other
consideration received in a securitization. The
fair value of servicing rights is estimated based
on a discounted cash flow analysis which considers
F-11
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
contractual fees for servicing (generally 0.5% of
outstanding loans and leases serviced) and the
rights to collect ancillary servicing related fees
from the loans and leases, net of costs to service
the loans and leases. Assumptions used to value
servicing rights are consistent with assumptions
used to value residual interests in
securitizations. Servicing rights are amortized in
proportion to, and over the period of, estimated
future servicing income.
Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation and amortization.
Depreciation and amortization is computed using
the straight-line method over the estimated useful
life of the assets ranging from 3 to 15 years.
Financing Costs and Amortization
Financing costs incurred in obtaining revolving
lines of credit are recorded in other assets and
are amortized using the straight-line method over
the terms of the agreements. Financing costs
incurred in connection with public offerings of
subordinated debt securities are also recorded in
other assets and are amortized over the term of
the related debt.
Investments Held to Maturity
Investments classified as held to maturity
recorded in other assets consist of asset-backed
securities that the Company has the positive
intent and ability to hold to maturity. These
investments are stated at amortized cost.
Real Estate Owned
Property acquired by foreclosure or in settlement
of loan and lease receivables is recorded in other
assets, and is carried at the lower of the cost
basis in the loan or fair value of the property
less estimated costs to sell.
F-12
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Revenue Recognition
The Company derives its revenue principally from
gain on sale of loans and leases, interest and
fees on loans and leases, and servicing income.
Gains on sales of loans and leases through
securitizations represent the difference between
the net proceeds to the Company, including
retained interests in the securitization, and the
allocated cost of loans and leases securitized.
The allocated cost of loans and leases securitized
is determined by allocating their net carrying
value between the loans and leases, the residual
interests and the servicing rights retained by the
Company based upon their relative fair values.
Interest and fee income consists of interest
earned on loans and leases while held in the
Company's portfolio, premiums earned on loans sold
with servicing released and other ancillary fees
collected in connection with loan and lease
origination. Interest income is recognized based
on the interest method. Accrual of interest income
is suspended when the receivable is contractually
delinquent for 90 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 will cause earlier suspension if collection
is doubtful.
Servicing income is recognized as contractual fees
and other fees for servicing loans and leases are
collected, net of amortization of servicing rights
assets.
Derivative Financial Instruments
The primary market risk exposure that the Company
faces is interest rate risk. The Company utilizes
hedging strategies to mitigate the effect of
changes in interest rates on its fixed-rate loan
and lease portfolios between the date of
origination and the date of securitization. These
strategies include the utilization of derivative
F-13
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
financial instruments such as futures and forward
pricing on securitizations. The nature and quality
of hedging transactions are determined by the
Company's management based on various factors,
including market conditions and the expected
volume of mortgage loan and lease originations and
purchases. The gain or loss derived from these
hedging transactions is deferred and recognized as
an adjustment to the gain on sale of loans and
leases when the loans and leases are securitized.
The Company had no contracts open at June 30, 1999
or 1998, other than an obligation to satisfy a
lease securitization prefund requirement of $9.0
million and $14.0 million, respectively, at June
30, 1999 and 1998.
Income Taxes
The Company and its subsidiaries file a
consolidated federal income tax return.
Under the asset and liability method used by the
Company to provide for income taxes, deferred tax
assets and liabilities are recognized for the
expected future tax consequences of temporary
differences between the financial statement and
tax basis carrying amounts of existing assets and
liabilities.
Acquisition
Effective October 1, 1997, the Company acquired
all of the issued and 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
consisted of $11.0 million in cash, a note payable
of $5.0 million and the issuance of 20,240 shares
of the Company's common stock. The purchase
agreement included a provision for a series of
contingent payments to the former stockholders of
NJMIC totaling $4.0 million based on NJMIC's
attainment of certain performance targets over a
three year period. To date the Company has paid
$1.3 million of the total amount of potential
contingent payments.
F-14
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The transaction was accounted for under the
purchase method and accordingly the results of
NJMIC have been included with the Company's since
the date of acquisition. As a result of the
transaction the Company recorded approximately
$16.9 million of goodwill, which is being
amortized using the straight-line method over 15
years. Any contingent payments made will be
recorded as additional goodwill.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging
Activities." ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for
derivative instruments, including certain
derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for
hedging activities. It requires that an entity
recognize all derivatives as either assets or
liabilities in the statement of financial position
and measure those instruments at fair value. If
certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the
exposure to changes in the fair value of a
recognized asset or liability or an unrecognized
firm commitment (fair value hedge), (b) a hedge of
the exposure to variable cash flows of a
forecasted transaction (cash flow hedge), or (c) a
hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted
transaction. At the time of issuance SFAS No. 133
was to be effective on a prospective basis for all
fiscal quarters of fiscal years beginning after
June 15, 1999. Subsequently the effective date of
the standard was delayed until years beginning
after June 15, 2000. The adoption of this standard
is not expected to have a material effect on the
Company's financial condition or results of
operations.
F-15
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
2. Loan and Lease
Receivables
<TABLE>
<CAPTION>
June 30, 1999 1998
--------------------------------------------------------------
(in thousands)
<S> <C> <C>
Real estate secured loans $ 21,027 $ 51,196
Leases (net of unearned income
of $1,543 and $1,845) 13,451 12,067
--------------------------------------------------------------
34,478 63,263
Less allowance for credit
losses on loan and
lease receivables available for
sale 702 881
--------------------------------------------------------------
$ 33,776 $ 62,382
==============================================================
</TABLE>
Real estate secured loans have contractual
maturities of up to 30 years.
At June 30, 1999 and 1998, the accrual of interest
income was suspended on real estate secured loans
of $85 thousand and $718 thousand respectively.
Based on its evaluation of the collateral related
to these loans, the Company expects to collect all
contractual interest and principal.
Substantially all leases originated by the Company
are direct finance-type leases whereby the lessee
has the right to purchase the leased equipment at
the lease expiration for a nominal amount.
F-16
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
3. Allowance for
Credit Losses Year ended June 30, 1999 1998 1997
-------------------------------------------------
(in thousands)
Balance at beginning
of year $ 881 $ 338 $330
Acquired through
acquisition -- 719 --
Provision for credit
losses 928 491 106
Charge offs, net of
recoveries (1,107) (667) (98)
-------------------------------------------------
Balance at end of
year $ 702 $ 881 $338
=================================================
4. Securitizations During fiscal 1999, the Company sold $71.9 million
of business purpose loans and $613.0 million of
home equity loans in four securitizations and
$92.6 million of equipment leases in numerous
sales to a commercial paper conduit and two
securitizations. During fiscal 1998 the Company
sold $54.1 million of business purpose loans and
$270.9 million of home equity loans in three
securitizations and $59.7 million of equipment
leases in one securitization.
In fiscal 1999, cash proceeds from the
securitizations of business purpose loans and home
equity loans were $685.0 million, with pretax
gains of $62.5 million. Cash proceeds from the
securitization of equipment leases were $91.1
million with pretax gains of $2.6 million. In
fiscal 1998, cash proceeds from the securitization
of business purpose loans and home equity loans
were $325.0 million, with pretax gains of $41.2
million. Cash proceeds from the securitization of
equipment leases were $13.7 million with pretax
gains of $0.3 million.
F-17
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The following chart presents certain key
assumptions used in the valuation of residual
interests from securitizations (interest-only
strips and mortgage servicing assets).
<TABLE>
<CAPTION>
Initial Periodic
Valuation Revaluation
---------------------------------------------------------------------------------
<S> <C> <C>
Discount rates
Home equity loans 11.0% 11.0%
Business purpose loans 11.0% 11.0%
Business equipment leases 11.0% 11.0%
Annual prepayment rates
Home equity loans 2.0% - 24.0% (1) 2.0% - 24.0% (1)
Business purpose loans 3.0% - 13.0% (2) 3.0% - 15.0% (2)
Business equipment leases -- (3) -- (3)
Annual credit loss rates
Home equity loans 0.25% 0.25%
Business purpose loans 0.25% 0.25%
Business equipment leases 0.50% 0.50%
===================================================================================
</TABLE>
(1) Ramped over 12 to 18 months
(2) Ramped over 24 months
(3) Residual values are continuously adjusted
based on actual experience.
5. Interest-Only Strips
and Other
Receivables
<TABLE>
<CAPTION>
June 30, 1999 1998
------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Interest-only and residual strips-
Available for sale $ 172,411 $ --
Trading assets 5,806 95,913
Receivable for sold loans 66,086 2,377
Advances to securitization trusts 6,266 738
Other 3,367 1,709
------------------------------------------------------------------------
$ 253,936 $100,737
========================================================================
</TABLE>
F-18
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
SFAS No. 134, which became effective January 1,
1999, requires that after the securitization of a
mortgage loan held for sale, the resulting
mortgage-backed security or other retained
interests be classified based on the Company's
ability and intent to hold or sell the
investments. As a result, retained interests
previously classified as trading assets, as
required by prior accounting principles, have been
reclassified to available-for-sale. The effect of
SFAS No. 134 on net income and net income per
share was $3.3 million and $0.88, respectively.
Interest-only strips include overcollateralized
balances that represent undivided interests in the
securitizations maintained to provide credit
enhancements to the investors. At June 30, 1999
and 1998, overcollateralized principal balances
were $38.6 million and $25.3 million,
respectively.
The activity for interest-only strip receivables
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998
---------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 95,913 $37,507
Initial recognition of
interest-only strips 90,480 64,379
Interest accretion and other 2,370 740
Cash receipts (13,900) (6,713)
Net adjustments to fair value 3,354 --
---------------------------------------------------------------
Balance at end of year $178,217 $95,913
===============================================================
</TABLE>
F-19
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
6. Servicing Rights The serviced loan and lease portfolio, which
includes loans and leases sold to investors and
those retained by the Company, is as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, 1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Home equity loans $ 858,806 $349,685
Business purpose loans 148,932 101,250
Equipment leases 169,180 108,463
-----------------------------------------------------------------------
$1,176,918 $559,398
=======================================================================
</TABLE>
The activity for the loan and lease servicing
rights asset is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 18,472 $ 8,083
Initial recognition of
Servicing rights 30,289 12,041
Amortization (5,551) (1,652)
-----------------------------------------------------------------------
Balance at end of year $ 43,210 $ 18,472
=======================================================================
</TABLE>
F-20
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Servicing rights are periodically valued by the
Company based on a discounted cash flow analysis
of loans and leases remaining in the
securitization trusts. A review for impairment is
performed on a disaggregated basis for the
predominant risk characteristics, herein referred
to as a stratum, of the underlying loans and
leases, which consist of loan type and credit
quality. Key assumptions used in the periodic
valuation of the servicing assets are described in
note 4. 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 for impairments.
Impairments if they occurred would be recognized
in a valuation allowance for each impaired stratum
in the period of impairment. At June 30, 1999 and
1998, the carrying value of servicing rights
approximated fair value.
7. Property and
Equipment
<TABLE>
<CAPTION>
June 30, 1999 1998
--------------------------------------------------------------
(in thousands)
<S> <C> <C>
Computer equipment and software $ 7,548 $ 5,383
Office furniture and equipment 8,271 5,527
Leasehold improvements 1,756 1,102
Transportation equipment 260 217
--------------------------------------------------------------
17,835 12,229
Less accumulated depreciation
and amortization 7,164 4,444
--------------------------------------------------------------
$10,671 $ 7,785
==============================================================
</TABLE>
Depreciation and amortization expense for
property and equipment was $2.9 million, $1.7
million and $0.5 million for the years ended
June 30, 1999, 1998 and 1997, respectively.
F-21
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
8. Other Assets
<TABLE>
<CAPTION>
June 30, 1999 1998
----------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deposits $ 198 $ 146
Financing costs, debt offerings, net
of accumulated amortization of $3,903
and $2,891 4,487 2,525
Investments held to maturity
(mature July 1999 through April 2011) 1,014 5,639
Real estate owned 843 716
Goodwill, net of accumulated
amortization of $1,913 and $780 15,018 16,151
Other 2,219 844
----------------------------------------------------------------------------
$23,779 $26,021
============================================================================
</TABLE>
F-22
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
9. Subordinated Debt
and Notes Payable
<TABLE>
<CAPTION>
June 30, 1999 1998
----------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Subordinated debt, due July 1999 through June
2009, interest at rates ranging from 6.15% to
11.5%; subordinated to all of the Company's
senior indebtedness. $ 206,918 $ 105,652
Subordinated debt, due July 1999 through May
2003; interest rates ranging from 9.0% to
11.99%; subordinated to all of the Company's
senior indebtedness. 4,735 6,530
Note payable, $150,000 revolving line of
credit expiring October 2000; interest
rates ranging from LIBOR plus 1.375% to LIBOR
plus 2.0%; collateralized by loan and other
receivables in the amount of $42,626. 42,626 25,720
Note payable, $20,000 revolving line of credit
expiring September 2000; interest at prime
less 1.0% or LIBOR at the Company's option;
collateralized by lease receivables in the
amount of $3,764. 3,764 --
Note payable, $5,000 revolving line of credit
expiring December 1999; interest at LIBOR plus
2.0% payable monthly; collateralized by
certain residual interests in securitized
loans with a value of $17,949. 5,000 --
</TABLE>
F-23
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
<TABLE>
<CAPTION>
June 30, 1999 1998
----------------------------------------------------------------------------
(in thousands)
----------------------------------------------------------------------------
<S> <C> <C>
Note payable, $100,000 revolving line of
credit expiring August 2000; interest at LIBOR
plus 1.25%, payable monthly; collateralized by
loan and lease receivables in the amount of
$102. $ 102 $ 531
Repurchase agreement, due July 1999,
interest at LIBOR plus 0.5%;
collateralized by certain lease -backed
securities in the amount of $5,806. 4,677 --
Senior subordinated debt, due July 1999
through December 1999; interest at 12.0%,
payable monthly; subordinated to certain
subsidiary's senior indebtedness. 1,250 3,000
Note payable, acquisition, July 1999
through October 2000; interest at 8.0%,
payable monthly. 581 2,915
Capitalized lease, due July 1999 through
December 2001; interest at 7.7% payable
monthly; collateralized by certain office
equipment with a value of $527. 527 --
Other notes payable 163 237
----------------------------------------------------------------------------
$270,343 $144,585
============================================================================
</TABLE>
F-24
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Principal payments on debt for the next five years
are as follows: year ending June 30, 2000 - $176.0
million; 2001 - $35.0 million; 2002 - $25.0
million; 2003 - $9.0 million; and 2004 - $12.0
million.
The loan agreements provide for certain covenants
regarding net worth and financial matters. At June
30, 1999, the Company is in compliance with the
terms of the loan covenants.
10. Stockholders' On August 18, 1999, the Company's Board of
Equity Directors declared a 5% stock dividend to be paid
on September 27, 1999 to shareholders of record on
September 3, 1999. In addition the Board resolved
that all outstanding stock options would be
adjusted for the dividend. Accordingly, all
outstanding shares, earnings per common share,
average common share and stock option amounts have
been retroactively adjusted to reflect the effect
of the stock dividend.
In July 1998, the Company's Board of Directors
authorized the repurchase of up to 10% of the
outstanding shares of its common stock over a
one-year period. In May 1999, the repurchase
period was extended for an additional one year to
July 2000. As of June 30, 1999, 111,000 shares or
3% of the Company's outstanding shares were
repurchased under the July 1998 authorization at a
cost of $1.4 million.
In the second quarter of fiscal 1999, the Company
increased its quarterly dividend by 233% to $0.05
per share. Dividends of $0.165 were paid in the
year ended June 30, 1999 compared to $0.06 in each
of the years ended June 30, 1998 and 1997.
The Company has a loan receivable from an officer
of the Company for $600 thousand, which was an
advance for the exercise of stock options to
purchase 225,012 shares of the Company's common
stock. The loan is due in September 2005 (earlier
if the stock is disposed of). Interest at 6.46% is
payable annually. The loan is secured by 225,012
shares of the Company's stock, and is shown as a
reduction of stockholders' equity on the
accompanying balance sheet.
In February 1997, the Company sold 1,150,000
shares of common stock through a public offering,
resulting in net proceeds of $20.7 million.
F-25
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
11. Employee The Company has a 401(k) defined contribution
Benefit Plan plan, which was established in 1995, available to
all employees who have been with the Company for
six months and have reached the age of 21.
Employees may generally contribute up to 15% of
their salary each year, subject to IRS imposed
limitations. The Company, effective October 1,
1997, at its discretion, may match up to 25% of
the first 5% of salary contributed by the
employee. The Company's contribution expense was
$263 thousand and $108 thousand for the years
ended June 30, 1999 and 1998 respectively.
12. Stock Option Plans The Company has a stock option plan that provides
for the periodic granting of options to key
employees ("the Employee Plan"). The options are
generally granted at the market price of the
Company's stock on the date of grant and expire
five to ten years from date of grant. Options
either fully vest when granted or over periods of
up to five years. At June 30, 1999, substantially
no shares were available for future grant under
this plan.
F-26
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
A summary of stock option activity under the
Employee Plan for the years ended June 30, 1999,
1998 and 1997, retroactively adjusted for the
effect of the 5% stock dividend described in
note 10, follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
-----------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, June 30, 1996 69,300 $ 3.30
Options granted 169,575 18.98
--------------------------------------------------------------------------
Options outstanding, June 30, 1997 238,875 14.43
Options granted 106,575 22.95
Options canceled (9,450) 19.51
--------------------------------------------------------------------------
Options outstanding, June 30, 1998 336,000 18.10
Options granted 14,175 17.86
Options exercised (3,937) 2.54
Options canceled (41,475) 20.48
--------------------------------------------------------------------------
Options outstanding, June 30, 1999 304,763 $ 16.74
==========================================================================
</TABLE>
The following tables summarize information
about stock options outstanding under the
Employee Plan at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------------------------------------
Weighted
Remaining
Range of Exercise Number Contractual Weighted-Average
Prices of Options of Shares Life in Years Exercise Price
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2.54-$4.76 65,363 1.0 $ 3.34
14.29-16.90 10,500 3.3 15.75
19.05 131,250 7.2 19.05
19.52-24.76 97,650 8.5 22.72
----------------------------------------------------------------------------------
304,763 6.1 $16.74
==================================================================================
</TABLE>
F-27
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
<TABLE>
<CAPTION>
Options Exercisable
----------------------------------------------------------------------------------
Weighted
Remaining
Range of Exercise Number Contractual Weighted-Average
Prices of Options of Shares Life in Years Exercise Price
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2.54-$4.76 65,625 1.0 $ 3.34
14.29-16.90 10,500 3.3 15.75
19.05 59,325 6.5 19.05
19.52-24.76 23,730 8.4 22.72
----------------------------------------------------------------------------------
159,180 4.3 $12.92
==================================================================================
</TABLE>
The Company accounts for stock options issued
under the Employee Plan using the intrinsic value
method, and, accordingly, no expense is recognized
where the exercise price equals or exceeds the
fair value of the shares at the date of grant. Had
the Company accounted for stock options granted
under the Employee Plan using the fair value
method, pro forma net income and earnings per
share would have been as follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
June 30, 1999 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $ 14,088 $ 11,455 $ 5,940
Pro forma 13,811 10,956 5,361
Earnings per share -basic
As reported $ 3.83 $ 3.10 $ 2.03
Pro forma 3.75 2.97 1.84
Earnings per share -diluted
As reported $ 3.72 $ 2.98 $ 1.95
Pro forma 3.64 2.85 1.76
===============================================================================
</TABLE>
F-28
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The fair value of options granted was estimated on
the date of grant using the Black-Scholes
option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
June 30, 1999 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility 30% 30% 25%
Expected life 5-10 yrs. 5-10 yrs. 5 yrs.
Risk-free interest rate 4.50%-5.68% 5.39%-6.17% 6.31%-6.90%
rate
</TABLE>
The Company also has a non-employee director stock
option plan ("the Director Plan") that provides
for the granting of options to non-employee
directors. Options are generally granted at the
market price of the stock on the date of grant,
fully vest when granted and expire three to ten
years after the date of grant.
A summary of activity under the Director Plan for
the three years ended June 30, 1999, 1998 and
1997, retroactively adjusted for the effect of the
5% stock dividend described in note 10, follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, June 30, 1996 94,500 $ 4.76
Options granted 21,000 16.90
------------------------------------------------------------------------------
Options outstanding, June 30, 1997 115,500 6.97
Options granted 21,000 22.14
------------------------------------------------------------------------------
Options outstanding, June 30, 1998 136,500 9.30
Options granted 21,000 14.29
------------------------------------------------------------------------------
Options outstanding, June 30, 1999 157,500 $ 9.97
==============================================================================
</TABLE>
The fair value of options granted under the
Director Plan is expensed on the date of grant.
The Company recognized expense of $73 thousand and
$87 thousand for the years ended June 30, 1999 and
1998, respectively.
F-29
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
13. Income Taxes The provision for income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
-------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 1,268 $ 1,087 $ --
-------------------------------------------------------------------------
Deferred
Federal 6,495 5,348 3,062
State -- -- --
-------------------------------------------------------------------------
6,495 5,348 3,062
-------------------------------------------------------------------------
Total Provision for
income taxes $ 7,763 $ 6,435 $ 3,062
=========================================================================
</TABLE>
The current provision for federal income taxes for
the year ended June 30, 1997 is net of the tax
benefit of approximately $0.5 million from the
utilization of net operating loss carryforwards.
There were no tax benefits from the utilization of
net operating loss carryforwards in the years
ended June 30, 1999 or 1998.
F-30
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The cumulative temporary differences resulted in
net deferred income tax assets or liabilities
consisting primarily of the following (in
thousands):
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998
----------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets
Allowance for credit losses $ 4,039 $ 1,212
Net operating loss carryforwards 11,262 5,777
Loan and lease receivables -- 659
----------------------------------------------------------------------
15,301 7,648
Less valuation allowance 6,845 5,777
----------------------------------------------------------------------
8,456 1,871
----------------------------------------------------------------------
Deferred income tax liabilities
Loan and lease origination
costs/fees, net 1,123 1,253
Book over tax basis of property
and equipment 47 741
Interest-only strips and other
receivables 19,886 8,396
Servicing rights 4,004 2,345
----------------------------------------------------------------------
25,060 12,735
----------------------------------------------------------------------
Net deferred income taxes $ 16,604 $ 10,864
======================================================================
</TABLE>
The valuation allowance represents the income tax
effect of state net operating loss carryforwards
of the Company, which are not presently expected
to be utilized.
F-31
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
A reconciliation of income taxes at federal
statutory rates to the Company's tax provision is
as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at
statutory rates $ 7,429 $ 6,083 $ 3,062
Nondeductible items 528 349 --
Other, net (194) 3 --
------------------------------------------------------------------------------
$ 7,763 $ 6,435 $ 3,062
==============================================================================
</TABLE>
For income tax reporting, the Company has net
operating loss carryforwards aggregating
approximately $85.5 million available to reduce
future state income taxes for various states as of
June 30, 1999. If not used, substantially all of
the carryforwards will expire at various dates
from June 30, 2000 to June 30, 2002.
14. Commitments As of June 30, 1999, the Company leases property
and under noncancelable operating leases requiring
Contingencies minimum annual rentals as follows (in thousands):
Year ending June 30, Amount
-----------------------------------------------
2000 $ 3,598
2001 3,347
2002 3,024
2003 2,041
2004 48
Thereafter --
-----------------------------------------------
$12,058
===============================================
Rent expense for leased property was $2.9 million,
$1.7 million and $0.5 million respectively, for
the years ended June 30, 1999, 1998 and 1997.
F-32
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
Employment Agreements
The Company entered into employment agreements, as
amended, with three executives under which they
are entitled to annual base compensation of
$800,000, collectively, adjusted for increases in
the Consumer Price Index and merit increases for
one executive. 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
70th 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.
The Company has entered into employment agreements
with two other officers under which they are
entitled to minimum annual base compensation of
$350,000, collectively. These agreements terminate
upon the earlier of the executive's death,
permanent disability, termination for cause,
voluntary resignation or three years.
15. 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 sought certification that the action
could be maintained as a class action. He also
sought unspecified compensatory damages and
injunctive relief. In his complaint, Mr. Roscoe
alleged that NJMIC violated New Jersey's Mortgage
Financing on Real Estate Law, N.J. Stat. Ann.
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 asserted that
NJMIC's alleged actions violated New Jersey's
Consumer Fraud Act, N.J. Stat. Ann. 56:8-1,
et seq. and constituted common law fraud and
deceit.
On February 24, 1998, after oral argument before
the Superior Court, an order was entered in favor
of NJMIC and against Mr. Roscoe granting NJMIC
Motion for Summary Judgment. Mr. Roscoe appealed
to the Superior Court of New Jersey - Appellate
Division. Oral argument on the appeal was heard on
January 20, 1999 before a two-judge panel of the
Appellate Division. On February 3, 1999, the panel
filed a per curiam opinion affirming the Superior
Court's ruling in favor of NJMIC.
On March 4, 1999, a Petition for Certification for
review of the final judgment of the Superior Court
was filed with the Supreme Court of New Jersey.
New Jersey Mortgage filed its Brief in Opposition
to the Petition for Certification on March 16,
1999, and Mr. Roscoe filed a reply brief. To date,
no decision has been rendered by the New Jersey
Supreme Court on this matter.
F-33
<PAGE>
Pursuant to the terms of the Agreement for
Purchase and Sale of Stock of NJMIC between the
Company and the former shareholders of NJMIC, the
former shareholders are required to indemnify the
Company up to $16.0 million to the extent of any
losses over $100,000 related to, caused by or
arising from NJMIC's failure to comply with
applicable law. The former NJMIC 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 business. While the Company cannot
predict the ultimate outcome of these various
legal proceedings, it is management's opinion that
the resolution of these legal actions should not
have a material effect on the Company's financial
position, results of operations or liquidity.
16. 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.
F-34
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The following table summarizes the carrying
amounts and fair value estimates of financial
instruments recorded on the Company's financial
statements at June 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------------------------------------
Carrying Fair
Value Value
----------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 22,395 $ 22,395
Loan and leases available
for sale 33,776 35,152
Interest-only strips and
other residual assets 178,217 178,217
Servicing rights 43,210 43,210
Investments held to maturity 1,014 911
Liabilities
Subordinated debt and
notes payable $270,343 $270,915
======================================================================
<CAPTION>
June 30, 1998
----------------------------------------------------------------------
Carrying Fair
Value Value
----------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 4,486 $ 4,486
Loan and leases available
for sale 62,382 63,685
Interest-only strips and
other residual assets 95,913 95,913
Servicing rights 18,472 19,310
Investments held to
maturity 5,639 5,639
Liabilities
Subordinated debt and
notes payable $144,585 $144,585
======================================================================
</TABLE>
F-35
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The methodology and assumptions utilized to
estimate the fair value of the Company's financial
instruments are as follows:
Cash and cash equivalents - For these
short-term instruments, the carrying amount
approximates fair value.
Loans and leases available for sale - Fair
value is determined by recent sales and
securitizations.
Interest-only strips - Fair value is
determined using estimated discounted future
cash flows taking into consideration
anticipated prepayment rates and credit loss
rates of the underlying loans and leases.
Servicing rights - Fair value is determined
using estimated discounted future cash flows
taking into consideration anticipated
prepayment rates and credit loss rates of the
underlying loans and leases.
Investments held to maturity - Represent
mortgage loan backed securities retained in
securitizations. Fair value is determined
using estimated discounted future cash flows
taking into consideration anticipated
prepayment rates and credit loss rates of the
underlying loans and leases.
Subordinated debt and notes payable - The
fair value of fixed debt is estimated using
the rates currently available to the Company
for debt of similar terms.
F-36
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The carrying value of investment securities at
June 30, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-Maturity:
Mortgage backed securities
retained in
securitizations $1,014 $-- $(103) $ 911
Available for sale:
Lease backed securities
retained in
securitizations. 4,818 253 -- 5,071
--------------------------------------------------------------------------------
Total $5,832 $253 $(103) $5,982
================================================================================
</TABLE>
17. Reconciliation of
Basic and Diluted
Earnings Per
Common Share
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
--------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C>
(Numerator)
Net income $ 14,088 $ 11,455 $ 5,940
--------------------------------------------------------------------------------
(Denominator)
Average Common Shares
Average common 3,682 3,692 2,921
shares outstanding
Average potentially
dilutive shares 109 155 128
Average common and potentially
dilutive shares 3,791 3,847 3,049
--------------------------------------------------------------------------------
Earnings per common
share
Basic $ 3.83 $ 3.10 $ 2.03
Diluted 3.72 2.98 1.95
================================================================================
</TABLE>
F-37
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
18. Segment The Company adopted the Statement of Financial
Information Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information"
as of July 1, 1998 ("SFAS No. 131"). SFAS No. 131
establishes standards for the way companies report
information about operating segments in annual
financial statements and in interim financial
reports. The adoption of SFAS No. 131 did not
affect the Company's results of operations or
financial position.
The Company has three operating segments: Loan and
Lease Origination, Servicing, and Investment Note
Services.
The Loan and Lease Origination segment originates
business purpose loans secured by real estate and
other business assets, home equity loans typically
to credit-impaired borrowers, conventional first
mortgage loans secured by one to four family
residential real estate and small ticket and
middle market business equipment leases.
The Servicing segment services the loans and
leases the Company originates both while held in
the Company's portfolio and subsequent to
securitization. Servicing activities include
billing and collecting payments from borrowers,
transmitting payments to investors, accounting for
principal and interest, collections and
foreclosure activities and disposing of real
estate owned.
The Investment Note Services segment markets the
Company's subordinated debt pursuant to a
registered public offering. The proceeds from the
sale of subordinated debt are used to fund the
Company's general operating and lending
activities.
All Other mainly represents segments that do not
meet the SFAS No. 131 quantitative or defined
thresholds for determining reportable segments,
financial assets not related to operating
segments, unallocated overhead and other expenses
of the Company unrelated to the reportable
segments identified.
F-38
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
The accounting policies of the reportable segments
are the same as those described in the summary of
significant accounting policies.
Reconciling items represent elimination of
inter-segment income and expense items.
<TABLE>
<CAPTION>
Loan and Investment
Year ended June 30, 1999 Lease Note Reconciling
(in thousands) Origination Services Servicing All Other Items Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
External revenues:
Gain on sale of loans and
leases $65,640 $ -- $ -- $ -- $ -- $ 65,640
Interest income 5,733 321 -- 2,120 -- 8,174
Non-interest income 5,225 88 7,265 4 -- 12,582
Inter-segment revenues -- 23,630 -- 25,080 (48,710) --
Operating expenses:
Interest expense 14,313 14,995 415 16,333 (23,630) 22,426
Non-interest expense 23,270 6,344 2,574 9,931 -- 42,119
Inter-segment expense 24,490 590 -- -- (25,080) --
Income tax expense 5,161 750 1,519 333 -- 7,763
- ------------------------------------------------------------------------------------------------------------------------------
Net income 9,364 1,360 2,757 607 -- 14,088
==============================================================================================================================
Segment assets $66,969 $28,131 $44,921 $256,280 $ -- $396,301
==============================================================================================================================
</TABLE>
F-39
<PAGE>
================================================================================
You should rely only on the information contained or incorporated by reference
in this prospectus. We have authorized no one to provide you with different
information. You should not assume that the information in this prospectus,
including information incorporated by reference, is accurate as of any date
other than the date on the front of the prospectus. This prospectus is not an
offer to sell nor is it seeking an offer to buy the securities in any
jurisdiction where that offer or sale is not permitted. The information in this
prospectus is correct only as of the date of this prospectus, regardless of the
time of the delivery of this prospectus or any sale of securities.
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
[LOGO]
$300,000,000
of
Subordinated Investment Notes
and Adjustable Rate Subordinated
Money Market Notes
------------------
PROSPECTUS
------------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Debt Securities, other than underwriting
discounts and commissions, which ABFS does not anticipate paying:
SEC Registration Fee* $ 83,400
Printing, Engraving and Mailing 80,000
Legal Fees and Expenses 100,000
Accounting Fees and Expenses 50,000
Blue Sky Fees and Expenses 20,000
Miscellaneous 7,166,600
----------
TOTAL $7,500,000
==========
- -------------------
* Exact; all other fees and expenses are estimates
Item 15. 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
II-1
<PAGE>
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 maintains insurance to cover the Company's directors and
executive officers for liabilities which may be incurred by the Company's
directors and executive officers in the performance of their duties.
Item 16. Exhibits
Exhibit
Number Description
- --------- --------------------------------------------------------------------
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).
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 (Incorporated by
reference from Exhibit 4.4 of the Registration Statement on Form
SB-2 filed March 28, 1997, Registration Number 333-24115 (the "1997
Form SB-2")).
4.5 Form of unsecured Investment Note (Incorporated by reference from
Exhibit 4.5 of the 1997 Form SB-2).
4.6 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by
reference from Exhibit 4.4 of the Registration Statement on Form
SB-2 filed May 23, 1997, Registration Number 333-24115).
II-2
<PAGE>
Exhibit
Number Description
- --------- --------------------------------------------------------------------
4.7 Form of Unsecured Investment Note (Incorporated by reference from
Exhibit 4.5 of the Registration Statement on Form SB-2 filed May 23,
1997, Registration Number 333-24115).
4.8 Form of Indenture by and between ABFS and U.S. Bank Trust National
Association, a national banking association (Incorporated by
reference from Exhibit 4.8 of Registrant's Registration Statement on
Form S-2, No. 333- 63859, filed September 21, 1998).
4.9 Form of Unsecured Investment Note (Incorporated by reference from
Exhibit 4.9 of Registrant's Registration Statement on Form S-2, No.
333-63859, filed September 21, 1998).
4.10 Form of Indenture by and between ABFS and U.S. Bank Trust National
Association.
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 from the
quarter ended September 30, 1997, File No. 0-22474).
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, 1996 Registration No. 333-18919 (the
"Amendment No. 1 to the 1997 Form SB-2")).
II-3
<PAGE>
Exhibit
Number Description
- --------- --------------------------------------------------------------------
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 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 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, 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'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).
II-4
<PAGE>
Exhibit
Number Description
- --------- --------------------------------------------------------------------
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, September 1, 1997,
February 1, 1998, and June 1, 1998 (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 and September 27, 1996 (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. (Incorporated by reference from Exhibit 10.21 of the
Amendment No. 1 to the 1997 Form SB-2 filed on May 23, 1997
Registration No. 333-24115(the "Amendment No. 1 to the 1997 SB-2")).
10.24 Fourth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated April 9, 1996 (Incorporated by reference from
Exhibit 10.22 to the Amendment No. 1 to the 1997 SB-2).
10.25 Fifth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated October 8, 1996 (Incorporated by reference from
Exhibit 10.23 to the Amendment No. 1 to the 1997 SB-2).
10.26 Sixth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated March 31, 1997 (Incorporated by reference from
Exhibit 10.24 to the Amendment No. 1 to the 1997 SB-2).
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. 0-22747).
II-5
<PAGE>
Exhibit
Number Description
- --------- --------------------------------------------------------------------
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,
Chase Bank of Texas, NA, 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 (Incorporated by
reference from Exhibit 10.29 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.30 First Amendment of Lease by and between 5 Becker Associates and
NJMIC dated July 27, 1994 (Incorporated by reference from Exhibit
10.30 of Post-Effective Amendment No. 1 to the Registration
Statement on Form SB-2 filed on January 22, 1998, Registration No.
333-2445).
10.31 Form of Debenture Note related to NJMIC's subordinated debt
(Incorporated by reference from Exhibit 10.31 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on
January 22, 1998, Registration No. 333-2445).
10.32 Note Agreement and Promissory Note dated July 15, 1997 issued by
NJMIC to N.M. Rothschild & Sons (Incorporated by reference from
Exhibit 10.32 of Post-Effective Amendment No. 1 to the Registration
Statement on Form SB-2 filed on January 22, 1998, Registration No.
333-2445).
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. (Incorporated by reference from Exhibit 10.33 of
Post-Effective Amendment No. 1 to the Registration Statement on Form
SB-2 filed on January 22, 1998, Registration No. 333-2445).
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 (Incorporated by reference from Exhibit 10.34 of
Post-Effective Amendment No. 1 to the Registration Statement on Form
SB-2 filed on January 22, 1998, Registration No. 333-2445).
10.35 Amended and Restated Specific Terms and Conditions of Servicing
Agreement related to NJMIC's lease securitization dated May 1, 1995
(Incorporated by
II-6
<PAGE>
Exhibit
Number Description
- --------- --------------------------------------------------------------------
reference from Exhibit 10.35 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.36 Amended and Restated Specific Terms and Conditions of Lease
Acquisition Agreement related to NJMIC's lease securitization dated
May 1, 1995 (Incorporated by reference from Exhibit 10.36 of
Post-Effective Amendment No. 1 to the Registration Statement on Form
SB-2 filed on January 22, 1998, Registration No. 333-2445).
10.37 Specific Terms and Conditions of Servicing Agreement related to
NJMIC's lease securitization dated March 1, 1996 (Incorporated by
reference from Exhibit 10.37 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.38 Specific Terms and Conditions of Lease Acquisition Agreement related
to NJMIC's lease securitization dated March 1, 1996 (Incorporated by
reference from Exhibit 10.38 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.39 Indenture by and among ABFS Equipment Contract Trust 1998-A,
American Business Leasing, Inc. and The Chase Manhattan Bank dated
June 1, 1998 (Incorporated by reference from Exhibit 10.39 of
Registrant's Registration Statement on Form S-2, No. 333-63859,
filed September 21, 1998).
10.40 Form of Unaffiliated Seller's Agreement related to the Company's
home equity loan securitizations dated March 27, 1997, September 29,
1997, February 1, 1998 and June 1, 1998 (Incorporated by reference
from Exhibit 10.40 of Registrant's Registration Statement on Form
S-2, No. 333-63859, filed September 21, 1998).
10.41 First Amended and Restated Interim Warehouse and Security Agreement
among Prudential Securities Credit Corporation, as lender, and
HomeAmerican Credit Inc. and American Business Credit, Inc., as
borrowers (Incorporated by reference from Exhibit 10.41 of
Registrant's Registration Statement on Form S-2, No. 333-63859,
filed September 21, 1998).
10.42 Amendments to the First Amended and Restated Interim Warehouse and
Security Agreement among Prudential Securities Credit Corporation,
as lender, and HomeAmerican Credit Inc. and American Business
Credit, Inc., as borrowers (Incorporated by reference from Exhibit
10.42 of Registrant's
II-7
<PAGE>
Exhibit
Number Description
- --------- --------------------------------------------------------------------
Registration Statement on Form S-2, No. 333-63859, filed
September 21, 1998).
10.43 Amendments to the Credit Agreement between American Business Credit,
Inc., HomeAmerican Credit, Inc., American Business Leasing, Inc.,
New Jersey Mortgage & Investment Corp., and Federal Leasing Corp. as
co-borrowers, American Business Financial Services, Inc., as parent,
Chase Bank of Texas, NA, as administrative agent for lenders
(Incorporated by reference from Exhibit 10.43 of Registrant's
Registration Statement on Form S-2, No. 333-63859, filed September
21, 1998).
10.44 $100.0 Million Receivables Purchase Agreement, dated September 30,
1998 among American Business Lease Funding Corporation, American
Business Leasing, Inc. and a syndicate of financial institutions led
by First Union Capital Markets and First Union National Bank, as
liquidity agent. (Incorporated by reference from Exhibit 10.1 of the
Registrant's September 30, 1998 Form 10-Q).
10.45 $20.0 Million Credit Agreement, dated September 28, 1998 between
American Business Leasing, Inc., Federal Leasing Corp. and First
Union National Bank. (Incorporated by reference from Exhibit 10.2 of
the Registrant's September 30, 1998 Form 10-Q).
10.46 Interim Warehouse and Security Agreement, dated August 3, 1998,
among Prudential Securities Credit Corporation, as lender, and
Federal Leasing, Inc. and American Business Leasing, Inc., as
borrowers, and Amendments One and Two thereto. (Incorporated by
reference from Exhibit 10.3 of the Registrant's September 30, 1998
Form 10-Q).
10.47 Amended and Restated Credit Agreement, dated October 1, 1998,
between American Business Credit, Inc., HomeAmerican Credit, Inc.,
American Business Leasing, Inc., New Jersey Mortgage and Investment
Corp., as co-borrowers, American Business Financial Services, Inc.,
as parent and Chase Bank of Texas. (Incorporated by reference from
Exhibit 10.4 of the Registrant's September 30, 1998 Form 10-Q)
10.48 $5,000,000 Loan Agreement dated as of December 30, 1998, between
American Business Credit, Inc., HomeAmerican Credit, Inc., New
Jersey Mortgage and Investment Corp. as co-borrowers, and Chase Bank
of Texas as lender. (Incorporated by reference from Exhibit 10.1 of
the Registrant's
10.49 Amendment to First Amended and Restated Interim Warehouse and
Security Agreement dated June 7, 1997 among Prudential Securities
Credit Corporation and Home American Credit, Inc., New Jersey
Mortgage and American Business Credit, Inc. and ABFS as guarantor
(Incorporated by reference to Exhibit 10.44 of the Form 10-K for
the year ended June 30, 1999)
II-8
<PAGE>
Exhibit Description
- ------- --------------------------------------------------------------------
December 31, 1998 Form 10-Q).
11 Statement of Computation of Per Share Earnings (Included in Note 16
of the Notes to Consolidated Financial Statements).
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of the Company (Incorporated by reference from Exhibit
21 of the Registrant's Form 10-K for the year ended June 30, 1999
filed on September 16, 1999.)
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 Registrant's Form 10-K for the year ended June 30, 1999).
99.1 Form of Prospectus Supplement.
99.2 Advertising Materials and Order Forms.
- --------------------------------
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-K for a Registration Statement on Form S-2.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sells securities,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
II-9
<PAGE>
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would
not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate
offering price set forth in the "calculation of
Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be the initial bona fide offering thereof;
(3) To remove form registration by means of a post-effective
amendment any of the securities that remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to
and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are
not set forth in the prospectus, to deliver, or cause to be delivered
to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling
II-10
<PAGE>
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant under Rule 424(b)(1), or (4) or 497(h)
under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-11
<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 S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of
Philadelphia, Commonwealth of Pennsylvania on September 17, 1999.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: September 17, 1999 By:/s/ Anthony J. Santilli
---------------------------------------
Anthony J. Santilli, Chairman, President,
Chief Executive Officer, Chief Operating Officer
and Director (Duly Authorized Officer)
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 Chairman, President, Chief Executive September 17, 1999
- ---------------------------- Officer, Chief Operating Officer and ------------------
Anthony J. Santilli Director (Principal Executive and
Operating Officer)
/s/ Albert W. Mandia Executive Vice President and Chief September 17, 1999
- ---------------------------- Financial Officer (Principal Financial ------------------
Albert W. Mandia and Accounting Officer)
/s/ Leonard Becker Director September 17, 1999
- ---------------------------- ------------------
Leonard Becker
/s/ Richard Kaufman Director September 17, 1999
- ---------------------------- ------------------
Richard Kaufman
/s/ Michael DeLuca Director September 17, 1999
- ---------------------------- ------------------
Michael DeLuca
/s/ Harold Sussman Director September 17, 1999
- ---------------------------- ------------------
Harold Sussman
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Numbers Description
- --------------- -----------------------------------------------------
4.10 Form of Indenture by and between ABFS and U.S. Bank
Trust, National Association, a national banking
association.
5 Opinion of Blank Rome Comisky & McCauley LLP.
11 Statement of Computation of Per Share Earnings.
(Included in Note 16 of the Notes to Consolidated
Financial Statements).
12 Statement of Computation of Ratios.
21 Subsidiaries of the Company (Incorporated by
reference from Exhibit 21 of the Registrant's Form
10-K for the year ended June 30, 1999).
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.
99.1 Form of Prospectus Supplement.
99.2 Advertising Materials and Order Forms.
<PAGE>
INDENTURE
AMERICAN BUSINESS FINANCIAL SERVICES, INC., as obligor
Unsecured, Subordinated Investment Debt Securities
and
Unsecured, Adjustable Rate Subordinated Money Market Securities
------------------------------
$300,000,000.00
------------------------------
U.S. BANK TRUST NATIONAL ASSOCIATION, a national banking association
as trustee
Dated as of September __, 1999
------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE........................................................1
Section 1.1 Definitions............................................................................1
Section 1.2 Other Definitions......................................................................5
Section 1.3 Incorporation by Reference of Trust Indenture Act......................................5
Section 1.4 Rules of Construction..................................................................5
ARTICLE II. THE SECURITIES...................................................................................6
Section 2.1 Unlimited Amount; Accounts; Interest; Maturity.........................................6
Section 2.2 Transaction Statement..................................................................8
Section 2.3 Registrar and Paying Agent.............................................................8
Section 2.4 Paying Agent to Hold Money in Trust....................................................9
Section 2.5 Securityholder Lists...................................................................9
Section 2.6 Transfer and Exchange..................................................................9
Section 2.7 Payment of Principal and Interest; Principal and
Interest Rights Preserved.............................................................10
Section 2.8 Reserved..............................................................................11
Section 2.9 Outstanding Securities................................................................12
Section 2.10 Treasury Securities...................................................................12
Section 2.11 Reserved..............................................................................12
Section 2.12 Reserved..............................................................................12
Section 2.13 Defaulted Interest....................................................................12
Section 2.14 Book Entry Registration...............................................................13
Section 2.15 Initial and Periodic Statements.......................................................13
ARTICLE III. REDEMPTION.....................................................................................14
Section 3.1 Redemption of Investment Debt Securities..............................................14
Section 3.2 Redemption of Money Market Securities.................................................14
ARTICLE IV. COVENANTS.......................................................................................15
Section 4.1 Payment of Securities.................................................................15
Section 4.2 Maintenance of Office or Agency.......................................................16
Section 4.3 SEC Reports and Other Reports.........................................................16
Section 4.4 Compliance Certificate................................................................17
Section 4.5 Stay, Extension and Usury Laws........................................................18
Section 4.6 Liquidation...........................................................................18
ARTICLE V. SUCCESSORS.......................................................................................18
Section 5.1 When the Company May Merge, etc.......................................................18
Section 5.2 Successor Corporation Substituted.....................................................19
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI. DEFAULTS AND REMEDIES...............................................................................19
Section 6.1 Events of Default.....................................................................19
Section 6.2 Acceleration..........................................................................20
Section 6.3 Other Remedies........................................................................20
Section 6.4 Waiver of Past Defaults...............................................................21
Section 6.5 Control by Majority...................................................................21
Section 6.6 Limitation on Suits...................................................................21
Section 6.7 Rights of Holders to Receive Payment..................................................22
Section 6.8 Collection Suit by Trustee............................................................22
Section 6.9 Trustee May File Proofs of Claim......................................................22
Section 6.10 Priorities............................................................................23
Section 6.11 Undertaking for Costs.................................................................23
ARTICLE VII. TRUSTEE............................................................................................23
Section 7.1 Duties of Trustee.....................................................................23
Section 7.2 Rights of Trustee.....................................................................24
Section 7.3 Individual Rights of Trustee..........................................................25
Section 7.4 Trustee's Disclaimer..................................................................25
Section 7.5 Notice of Defaults....................................................................26
Section 7.6 Reports by Trustee to Holders.........................................................26
Section 7.7 Compensation and Indemnity............................................................26
Section 7.8 Replacement of Trustee................................................................27
Section 7.9 Successor Trustee by Merger, etc......................................................28
Section 7.10 Eligibility; Disqualification.........................................................28
Section 7.11 Preferential Collection of Claims Against Company.....................................28
ARTICLE VIII. DISCHARGE OF INDENTURE............................................................................29
Section 8.1 Termination of Company's Obligations..................................................29
Section 8.2 Application of Trust Money............................................................30
Section 8.3 Repayment to Company..................................................................30
Section 8.4 Reinstatement.........................................................................30
ARTICLE IX. AMENDMENTS..........................................................................................31
Section 9.1 Without Consent of Holders............................................................31
Section 9.2 With Consent of Holders...............................................................31
Section 9.3 Compliance with Trust Indenture Act...................................................33
Section 9.4 Revocation and Effect of Consents.....................................................33
Section 9.5 Notation on or Exchange of Investment Debt Securities.................................34
Section 9.6 Trustee to Sign Amendments, etc.......................................................34
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE X. SUBORDINATION........................................................................................34
Section 10.1 Agreement to Subordinate..............................................................34
Section 10.2 Liquidation; Dissolution; Bankruptcy..................................................34
Section 10.3 Default of Senior Debt................................................................35
Section 10.4 When Distribution Must Be Paid Over...................................................36
Section 10.5 Notice by Company.....................................................................37
Section 10.6 Subrogation...........................................................................37
Section 10.7 Relative Rights.......................................................................37
Section 10.8 Subordination May Not Be Impaired by the Company
or Holders of Senior Debt.............................................................37
Section 10.9 Distribution or Notice to Representative..............................................38
Section 10.10 Rights of Trustee and Paying Agent....................................................39
Section 10.11 Authorization to Effect Subordination.................................................39
Section 10.12 Article Applicable to Paying Agent....................................................39
Section 10.13 Miscellaneous.........................................................................40
ARTICLE XI. MISCELLANEOUS.......................................................................................40
Section 11.1 Trust Indenture Act Controls..........................................................40
Section 11.2 Notices...............................................................................40
Section 11.3 Communication by Holders with Other Holders...........................................41
Section 11.4 Certificate and Opinion as to Conditions Precedent....................................42
Section 11.5 Statements Required in Certificate or Opinion.........................................42
Section 11.6 Rules by Trustee and Agents...........................................................42
Section 11.7 Legal Holidays........................................................................42
Section 11.8 No Recourse Against Others............................................................43
Section 11.9 Duplicate Originals...................................................................43
Section 11.10 Governing Law.........................................................................43
Section 11.11 No Adverse Interpretation of Other Agreements.........................................43
Section 11.12 Successors............................................................................43
Section 11.13 Severability..........................................................................43
Section 11.14 Counterpart Originals.................................................................43
Section 11.15 Table of Contents, Headings, etc......................................................44
</TABLE>
iii
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
----------- -----------------
310(a)(1)...................................................................7.10
(a)(2)......................................................................7.10
(a)(3)......................................................................N.A.
(a)(4)......................................................................N.A.
(a)(5)......................................................................N.A.
(b)....................................................................7.8; 7.10
(c).........................................................................N.A.
311(a)......................................................................7.11
(b).........................................................................7.11
(c).........................................................................N.A.
312(a).......................................................................2.5
(b).........................................................................11.3
(c).........................................................................11.3
313(a).......................................................................7.6
(b)(1)......................................................................N.A.
(b)(2).......................................................................7.6
(c)....................................................................7.6; 11.2
(d)..........................................................................7.6
314(a)............................................................4.3; 4.4; 11.2
(b).........................................................................N.A.
(c)(1)......................................................................11.4
(c)(2)......................................................................11.4
(c)(3)......................................................................N.A.
(d).........................................................................N.A.
(e).........................................................................11.5
(f).........................................................................N.A.
315(a)....................................................................7.1(b)
(b)....................................................................7.5; 11.2
(c).......................................................................7.1(a)
(d).......................................................................7.1(c)
(e).........................................................................6.11
316(a)(last sentence).......................................................2.10
(a)(1)(A)....................................................................6.5
(a)(1)(B)....................................................................6.4
(a)(2)......................................................................N.A.
(b)..........................................................................6.7
(c).........................................................................N.A.
317(a)(1)....................................................................6.8
(a)(2).......................................................................6.9
(b)..........................................................................2.4
318(a)......................................................................11.1
N.A. means not applicable
* This Cross Reference Table is not part of the Indenture
iv
<PAGE>
INDENTURE dated as of September ___, 1999, by American Business
Financial Services, Inc., a Delaware corporation (the "Company"), and U.S. Bank
Trust National Association, a national banking association, as trustee (the
"Trustee").
The Company and the Trustee agree as follows for the benefit of each
other and for the equal and ratable benefit of the Holders of the unsecured,
subordinated Investment Debt Securities and the unsecured adjustable rate
subordinated Money Market Securities of the Company issued pursuant to the
Company's registration statement on Form S-2 declared effective by the
Securities and Exchange Commission on or about September ___, 1999
(collectively, the "Securities"):
ARTICLE I.
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.1 Definitions.
"Account" means the record of beneficial ownership of a Money Market
Debt Security or Investment Debt Security maintained by the Company.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise.
"Agent" means any Registrar, Paying Agent or co-registrar of the
Securities.
"Board of Directors" means the Board of Directors of the Company or any
authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Company" means American Business Financial Services, Inc., unless and
until replaced by a successor in accordance with Article V hereof and thereafter
means such successor.
"Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date as of which this
Indenture is originally dated, located at 180 East 5th Street, Saint Paul,
Minnesota 55101, Attention: Mr. Richard Prokosch, Corporate Finance.
<PAGE>
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fiscal Year" means initially a June 30 year end.
"GAAP" means, as of any date, generally accepted accounting principles
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Holder" or "Securityholder" means a Person in whose name a Security is
registered.
"Indebtedness" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or representing the
balance deferred and unpaid of the purchase price of any property (including
capital Lease obligations) or representing any hedging obligations, except any
such balance that constitutes an accrued expense or a trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
hedging obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, and also includes, to the extent not
otherwise included, (a) the Guarantee of items that would be included within
this definition, and (b) liability for items that would arise by operation of a
Person's status as a general partner of a partnership.
"Indenture" means, this Indenture as amended or supplemented from time
to time.
"Interest Accrual Date" means with respect to any Security, the date
the Company accepts funds for the purchase of the Security if such funds are
received by 3:00 p.m. (EDT) on a Business Day, or if such funds are not so
received, on the next Business Day.
"Interest Accrual Period" means, as to each Security, the period from
the later of the Interest Accrual Date of such Security or the day after the
last Payment Date upon which an interest payment was made until the following
Payment Date during which interest accrues on each Security with respect to any
Payment Date.
"Investment Debt Securities" or "Investment Debt Security" means the
Company's Unsecured Subordinated Investment Debt Security(s) issued under this
Indenture.
2
<PAGE>
"Issue Date" means, with respect to any Security, the date on which
such Money Market Security is initially registered on the books and records of
the Registrar.
"Legal Holiday" means a legal holiday in the State of Delaware.
"Maturity Date" means, with respect to any Security, the date on which
the principal of such Security becomes due and payable as therein provided.
"Maturity Record Date" means, with respect to any Security, as of 11:59
p.m. of the date fifteen days prior to the Maturity Date or Redemption Date
applicable to such Security.
"Money Market Security" means the Company's unsecured adjustable rate,
subordinated money market securities issued pursuant to this Indenture.
"Obligations" means any principal, interest (including Post-Petition
Interest), penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Officer" means the Chairman of the Board or principal executive
officer of the Company, the President or operating officer of the Company, the
Chief Financial Officer or principal financial officer of the Company, the
Treasurer, any Assistant Treasurer, Controller or principal officer of the
Company, Secretary or any Vice-President of the Company.
"Officers' Certificate" means a certificate signed by two Officers, one
of whom must be the principal executive officer, principal operating officer,
principal financial officer or principal accounting officer of the Company.
"Opinion of Counsel" means an opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Payment Date" means the last day of each calendar month or such other
date as determined by the Holder and the Company or if such day is not a
Business Day, the Business Day immediately following such day and, with respect
to a specific Security, the Maturity Date or Redemption Date of such Security.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Post-Petition Interest" means interest accruing after the commencement
of any bankruptcy or insolvency case or proceeding with respect to the Company
or any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, at the rate applicable to such Indebtedness,
whether or not such interest is an allowable claim in any such proceeding.
3
<PAGE>
"Redemption Date" has the meaning given in Article III hereof.
"Redemption Price" means, with respect to any Security to be redeemed,
the principal amount of such Security plus the interest accrued but unpaid
during the Interest Accrual Period up to the Redemption Date for such security.
"Regular Record Date" means, with respect to each Payment Date, as of
11:59 p.m. of the date fifteen days prior to such Payment Date.
"Responsible Officer" when used with respect to the Trustee, means any
officer in its Corporate Trust Office, or any other assistant officer of the
Trustee in its Corporate Trust Office customarily performing functions similar
to those performed by the Persons who at the time shall be such officers,
respectively, or to whom any corporate trust matter is referred because of his
or her knowledge of and familiarity with the particular subject.
"SEC" means the U.S. Securities and Exchange Commission.
"Security" or "Securities" means, the Company's unsecured, subordinated
Investment Debt Securities and the unsecured, adjustable rate, subordinated
Money Market Securities issued under this Indenture.
"Senior Debt" means any Indebtedness (whether outstanding on the date
hereof or thereafter created) incurred by the Company in connection with
borrowings by the Company (including its subsidiaries) from a bank, trust
company, insurance company, any other institutional lender or other entity which
lends funds in connection with its primary business activities whether such
Indebtedness is or is not specifically designated by the Company as being
"Senior Debt" in its defining instruments.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA.
"Total Permanent Disability" means a determination by a physician
chosen by the Company that the Holder of a Security, who was gainfully employed
on a full time basis at the Issue Date of such security is unable to work on a
full time basis during the succeeding twenty-four months. For purposes of this
definition, "working on a full time basis" shall mean working at least forty
hours per week.
"Trustee" means First Trust National Association, a national banking
association, until a successor replaces it in accordance with the applicable
provisions of this Indenture and thereafter means the successor serving
hereunder.
"U.S. Government Obligations" means direct obligations of the United
States of America, or any agency or instrumentality thereof for the payment of
which the full faith and credit of the United States of America is pledged.
4
<PAGE>
Section 1.2 Other Definitions.
Defined in
Term Section
---- -------
"Bankruptcy Law"................................................6.1
"Custodian".....................................................6.1
"Event of Default"..............................................6.1
"Legal Holiday"................................................11.7
"Paying Agent"..................................................2.3
"Payment Blockage Period"......................................10.3
"Payment Notice"...............................................10.3
"Registrar".....................................................2.3
Section 1.3 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee;
"obligor" on the Securities means the Company or any successor
obligor upon the Securities.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
Section 1.4 Rules of Construction.
Unless the context otherwise requires:
1. a term has the meaning assigned to it;
2. an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
5
<PAGE>
3. references to GAAP, as of any date, shall mean GAAP in
effect in the United States as of such date;
4. "or" is not exclusive,
5. words in the singular include the plural, and in the plural
include the singular; and
6. provisions apply to successive events and transactions.
ARTICLE II.
THE SECURITIES
Section 2.1 Unlimited Amount; Accounts; Interest; Maturity.
The outstanding aggregate principal amount of Securities outstanding at
any time is limited to $300 million, provided, however, that the Company and the
Trustee may, without the consent of any Holder, increase such aggregate
principal amount of Securities which may be outstanding at any time. The
Securities may be subject to notations, legends or endorsements required by law,
stock exchange rule, agreements to which the Company is subject or usage.
Except as provided in Section 2.14 hereof, each Security shall not be
evidenced by a promissory note. The record of beneficial ownership of the
Securities shall be maintained and updated by the Company through the
establishment and maintenance of Accounts. Each Security shall be in such
denominations as may be designated from time to time by the Company but in no
event in an original denomination less than $1,000. Separate purchases may not
be cumulated to satisfy the minimum denomination requirements. Each Investment
Debt Security shall have a term of not less than three months and not greater
than 120 months as shall be designated by the Company from time to time. Each
Money Market Security shall have no stated term to maturity and shall be
redeemable in increments of $500 (except in the case of the redemption of the
entire account) at the option of the Holder upon written notice to the Company
as provided in Article III of this Indenture. The payment due upon redemption
shall be made within 10 Business Days of the Company's receipt of such notice
from the Holder. Each Money Market Security shall also be redeemable by the
Company upon 30 days written notice to the Holder thereof.
Each Security shall bear interest from and commencing on its Interest
Accrual Date at such rate of interest as the Company shall determine from time
to time; provided, however, that the interest rate will be fixed for the term of
the Investment Debt Securities upon issuance, subject to change upon extension
and the interest rate on the Money Market Securities shall 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 shall provide written notice to all
Holders of the Money Market Securities 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
shall have the right to increase
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the interest rate paid on the Money Market Securities at any time without prior
notice to the Holders of the Money Market Securities.
Interest on an Investment Debt Security with a term of six (6) months
or less will compound daily and be payable at maturity. Interest on an
Investment Debt Security of duration longer than six (6) months will compound
daily and the Holder thereof may elect to have interest paid monthly, on the
fifteenth day of each calendar month, quarterly, on January 15, April 15, July
15 and October 15, semi-annually, on January 15 and July 15, annually, on
January 15, or upon maturity. A Holder may change this election once during the
term of the Investment Debt Security. To the extent any applicable interest
payment date is not a Business Day, then interest shall be paid instead on the
next succeeding Business Day.
Interest on a Money Market Security shall compound daily and will be
payable in the form of additional notes. Interest shall be payable on a monthly
basis at the end of each calendar month on any Account with a balance of $1,000
or more. No interest will be paid on any Account for any day during which the
principal balance of such account is less than $1,000.
The Company will give each Holder of an Investment Debt Security
(existing as of the applicable Maturity Record Date) a written notice at least
seven days prior to the Maturity Date of the Investment Debt Security held by
such Holder reminding such Holder of the pending maturity of the Investment Debt
Security and noticing the Holder of the Company's intention to repay, or if the
Company does not intend to repay the Investment Debt Security, reminding the
Holder that the automatic extension provision described in the next paragraph
will take effect unless the Holder requests payment. Such notice shall also
state that payment of principal of an Investment Debt Security be made upon
presentation and surrender of such Investment Debt Security and shall specify
the place where such Investment Debt Security may be presented and surrendered
for the making of such payment. If the Company gives notice to a Holder of the
Company's intention to repay an Investment Debt Security at maturity, no
interest will accrue after the Maturity Date for such Investment Debt Security.
Otherwise, if a Holder requests repayment within seven days after the Maturity
Date, the Company will pay interest on the Investment Debt Security during the
period after the Investment Debt Security's Maturity Date and prior to
redemption at the lower of (i) the lowest interest rate then being paid on
Investment Debt Securities being offered by the Company to the general public or
(ii) the rate being paid on such Investment Debt Security immediately prior to
its maturity.
If, within seven days after the Maturity Date of an Investment Debt
Security, a Holder of such Investment Debt Security has not demanded repayment
of the Investment Debt Security, and the Company has not noticed its intention
to repay such Security at least seven days prior to maturity, such Investment
Debt Security shall be extended automatically for the same term, and shall be
deemed to have been renewed by the Holder thereof as of the Maturity Date. An
Investment Debt Security will continue to renew as described herein absent some
permitted action be either the Holder or the Company. Interest shall continue to
accrue from the first day of such renewed term. Such Investment Debt Security,
as renewed, will continue in all its provisions, including provisions relating
to payment, except that the interest rate payable during any renewed term shall
be the interest rate which is being
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offered by the Company on similar Investment Debt Securities as of the renewal
date. If similar Investment Debt Securities are not then being issued, the
interest rate upon renewal will be the rate specified by the Company on or
before the Maturity Date of such Investment Debt Security, or the Investment
Debt Security's current rate if no such rate is specified.
Investment Debt Securities with a remaining duration of greater than
one (1) year are subject to early repayment at the election (a) of the Holder
only upon the occurrence cf a Total Permanent Disability of such Holder (or if
such Investment Debt Security is held jointly by a husband and wife, upon the
Total Permanent Disability of one of such spouses), (b) of a Holder's estate
after a Holder's death or (c) if such Investment Debt Security is held jointly
by a husband and wife, of a Holder upon the death of such Holder's spouse.
Otherwise, Holders will have no right to demand early repayment.
The Company may modify its policy on redemptions after death or Total
Permanent Disability provided that any change in such policy shall not effect
any outstanding security.
The terms and provisions contained in the Investment Debt Securities
shall constitute, and are hereby expressly made, a part of this Indenture and to
the extent applicable, the Company and the Trustee, by their execution and
delivery of this Indenture, and the Holders by accepting the Investment Debt
Securities, expressly agree to such terms and provisions and to be bound
thereby. In case of a conflict, the provisions of this Indenture shall control.
Section 2.2 Transaction Statement.
A Security shall not be validly issued until a transaction statement
executed by a duly authorized officer of the Company is sent to the purchaser or
transferee thereof and an Account is established by the Company in the name of
such purchaser or transferee.
Section 2.3 Registrar and Paying Agent.
The Company shall maintain (i) an office or agency where Securities may
be presented for registration of transfer or for exchange ("Registrar") and (ii)
an office or agency where Securities may be presented for payment ("Paying
Agent"). The Registrar shall keep a register of the Securities and of their
transfer and exchange. The Company may appoint one or more co-registrars and one
or more additional paying agents. The term "Registrar" includes any
co-registrar, and the term "Paying Agent" includes any additional paying agent.
The Company may change any Paying Agent or Registrar without prior notice to any
Securityholder; provided that the Company shall promptly notify the
Securityholders of the name and address of any Agent not a party to this
Indenture. The Company may act as Paying Agent and/or Registrar. In the event
the Company uses any Agent other than the Company or the Trustee, the Company
shall enter into an appropriate agency agreement with such Agent, which
agreement shall incorporate the provisions of the TIA. The agreement shall
implement the provisions of this Indenture that relate to such Agent. The
Company shall notify the Trustee of the name and address of any such Agent. If
the Company fails to maintain a Registrar or Paying
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Agent, or fails to give the foregoing notice, the Trustee shall act as such, and
shall be entitled to appropriate compensation in accordance with Section 7.7
hereof.
The Company shall be the initial Registrar and Paying Agent. The
Company initially appoints Trustee as agent for service of notices and demands
in connection with the Securities. The Company shall act as Registrar and Paying
Agent until such time as the Company gives the Trustee written notice to the
contrary.
Section 2.4 Paying Agent to Hold Money in Trust.
Prior to each due date of the principal or interest on any Security,
the Company shall deposit with the Paying Agent sufficient funds to pay
principal, premium, if any, and interest then so becoming due and payable in
cash. The Company shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent will hold in trust for the benefit of
Securityholders or the Trustee all money held by the Paying Agent for the
payment of principal or interest on the Securities, and will notify the Trustee
promptly in writing of any default by the Company in making any such payment.
While any such default continues, the Trustee shall require a Paying Agent (if
other than the Company) to pay all money held by it to the Trustee. The Company
at any time may require a Paying Agent to pay all money held by it to the
Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the
Company) shall have no further liability for the money delivered to the Trustee.
If the Company acts as Paying Agent, it shall segregate and hold in a separate
trust fund for the benefit of the Securityholders all money held by it as Paying
Agent. The Company shall notify the Trustee in writing at least 5 days before
the Payment Date of the name and address of the Paying Agent if a person other
than the Company is named Paying Agent at any time or from time to time.
Section 2.5 Securityholder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders and shall otherwise comply with TIA ss.312(a). If the Trustee is
not the Registrar, the Company shall furnish to the Trustee each quarter during
the term of this Indenture and at such other times as the Trustee may request in
writing, a list in such form and as of such date as the Trustee may reasonably
require of the names and addresses of Securityholders, and the aggregate
principal amount outstanding and the Company shall otherwise comply with TIA
ss.312(a).
Section 2.6 Transfer and Exchange.
(a) The Securities are not negotiable instruments and cannot be
transferred without the prior written consent of the Company (which consent
shall not be unreasonably withheld). Requests to Registrar for the transfer of
the Accounts maintained for the benefit of the Holders of the Securities shall
be:
(i) made to the Registrar in writing on a form supplied
by the Company;
(ii) duly executed by the current holder of the Account,
as reflected on the Company's records as of the date
of receipt of such transfer request, or his attorney
duly authorized in writing;
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(iii) accompanied by the written consent of the Company to
the transfer; and
(iv) if requested by the Company, an opinion of Holder's
counsel (which counsel shall be reasonably acceptable
to the Company) that the transfer does not violate
any applicable securities laws and/or a signature
guarantee.
Upon transfer of a Security, the Company will provide the new registered owner
of the Security with an initial transaction statement which will evidence the
transfer of the account on the Company's records. Such initial transaction
statement shall meet the applicable requirements of Section 8-408 of the
Delaware Uniform Commercial Code or any successor provision.
(b) Obligations with respect to Transfers and Exchanges of Securities.
(i) The Company may assess service charges to a
Holder for any registration or transfer or
exchange, and the Company may require
payment of a sum sufficient to cover any
transfer tax or similar governmental charge
payable in connection therewith (other than
any such transfer taxes or similar
governmental charge payable upon exchange
pursuant to Section 9.5 hereof).
(ii) The Company shall treat the individual or
entity listed on each Account maintained by
the Company as the absolute owner of the
Security represented thereby for purposes of
receiving payments thereon and for all other
purposes whatsoever.
Section 2.7 Payment of Principal and Interest; Principal and Interest
Rights Preserved.
(a) Each Security shall accrue interest at the rate specified for such
Security and such interest shall be payable on each Payment Date following the
Issue Date for such Security, until the principal thereof becomes due and
payable. Any installment of interest payable on a Security that is caused to be
punctually paid or duly provided for by the Company on the applicable Payment
Date shall be paid to the Holder in whose name such Security is registered in
the Security Register on the applicable Regular Record Date: (i) with respect to
the Investment Debt Securities outstanding, by check mailed to such Holder's
address as it appears in the Security Register on such Regular Record Date, and
(ii) with respect to the Money Market Securities outstanding, by crediting the
Account of each Holder of a Money Market Security as of the last day of each
calendar date month following the Issue Date with additional Money Market
Securities in an amount equal to the interest due on the balance maintained in
the Account during the preceding calendar month provided that no interest shall
accrue for any day in which the balance in an Account is less than $1,000. The
payment of any interest payable in connection with the payment of any principal
payable with respect to such Security
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on a Maturity Date or Redemption Date shall be payable as provided below. Any
funds with respect to which such checks were issued which remain uncollected
shall be held in accordance with Section 8.3 hereof. Any installment of interest
not punctually paid or duly provided for shall be payable in the manner and to
the Holders specified in Section 2.13 hereof.
(b) Each of the Investment Debt Securities shall have stated maturities
of principal as shall be indicated in each such Security. The principal of each
Investment Debt Security shall be paid in full no later than the Maturity Date
thereof unless the term of such Security is extended pursuant to Section 2.1
hereof or such Investment Debt Security becomes due and payable at an earlier
date by acceleration, redemption or otherwise. The interest rate paid on the
Money Market Securities shall 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 shall provide written notice to all Holders of the Money
Market Securities 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 shall have the right to
increase the interest rate paid on the Money Market Securities at any time
without prior notice to the Holders of the Money Market Securities.
Interest on each Security shall be due and payable on each Payment Date
at the interest rate applicable to such Security for the Interest Accrual Period
related to such Security and such Payment Date.
Notwithstanding any of the foregoing provisions with respect to
payments of principal of and interest on the Securities, if the Securities have
become or been declared due and payable following an Event of Default, then
payments of principal of and interest on the Securities shall be made in
accordance with Article 6 hereof.
The principal payment made on any Investment Debt Security on any
Maturity Date (or the Redemption Price of any Security required to be redeemed),
and any accrued interest thereon, shall be payable on or after the Maturity Date
or Redemption Date therefor at the office or agency of the Company maintained by
it for such purpose pursuant to Section 2.3 hereof or at the office of any
Paying Agent for such Investment Debt Security.
The principal payment made on any Money Market Security on any
Redemption Date and any accrued interest thereon, shall be payable within 10
Business Days of the Company's receipt of written notice executed by the Holder
or his duly authorized representative on a form acceptable to the Company at the
office or agency of the Company maintained by it for such purpose pursuant to
Section 2.3 hereof or at the office of any Paying Agent for such Money Market
Securities. All such payments made upon redemption of the Money Market
Securities shall be made in U.S. dollars.
(c) All computations of interest due with respect to any Security shall
be made, unless otherwise specified in the Security, based upon the actual
number of days (e.g., 365 or 366) in the applicable year.
Section 2.8 Reserved.
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Section 2.9 Outstanding Securities.
The Securities outstanding at any time are (i) the outstanding balances
of all Accounts representing the Investment Debt Securities maintained by the
Company or such other entity as the Company designated as Registrar, and (ii)
the outstanding balances of all of the Accounts representing the Money Market
Securities maintained by the Company or such other entity as the Company
designates as Registrar.
If the principal amount of any Security is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
Subject to Section 2.10 hereof, a Security does not cease to be
outstanding because the Company or an Affiliate of the Company holds the
Security.
Section 2.10 Treasury Securities.
In determining whether the holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company or any Affiliate of the Company shall be considered as though not
outstanding, except that for purposes of determining whether the Trustee shall
be protected in relying on any such direction, waiver or consent, only
Securities that a Responsible Officer of the Trustee actually knows to be so
owned shall be so disregarded.
Section 2.11 Reserved.
Section 2.12 Reserved.
Section 2.13 Defaulted Interest.
If the Company defaults in a payment of interest on any Security, it
shall pay the defaulted interest plus, to the extent lawful, any interest
payable on the defaulted interest, to the Holder of such Security on a
subsequent special record date, which date shall be at the earliest practicable
date but in all events at least 5 Business Days prior to the payment date, in
each case at the rate provided in the Security. The Company shall, with written
notification to the Trustee, fix or cause to be fixed each such special record
date and payment date. At least 15 days before any such special record date, the
Company (or the Trustee, in the name of and at the expense of the Company) shall
mail to
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Securityholder(s) a notice that states the special record date, the related
payment date and the amount of such interest to be paid.
Section 2.14 Book Entry Registration.
The Registrar shall maintain a book entry registration and transfer
system through the establishment of Accounts for the benefit of Holders of
Securities as the sole method of recording the ownership and transfer of
ownership interests in such Securities. The registered owners of the Accounts
established by the Company in connection with the purchase or transfer of the
Securities shall be deemed to be the Holders of the Securities outstanding for
all purposes under this Indenture. The Company shall promptly notify the
Registrar of the acceptance of a subscriber's order to purchase a Security and
the Registrar shall credit its book-entry registration and transfer system to
the Account of each Security purchaser, the principal amount of such Security
owned of record by the purchaser. The total amount of any principal and/or
interest (which shall be paid in the form of additional notes) due and payable
to book entry owners of the Accounts maintained by the Company as provided in
this Indenture shall be credited to such Accounts by the Company within the time
frames provided in this Indenture.
The Company shall notify the Trustee no less frequently than bi-weekly
of the establishment of new accounts and the transfer of existing accounts.
Book-entry accounts representing interests in the Securities shall not
be exchangeable for Securities in denominations of $1,000 and any amount in
excess thereof and fully registered in the names as the Company directs unless
(a) the Company at its option advises the Trustee in writing of its election to
terminate the book-entry system, or (b) after the occurrence of any Event of
Default, Holders of a majority of the Money Market Securities or Investment Debt
Securities then outstanding (as determined based upon the latest quarterly
statement provided to the Trustee pursuant to Section 4.3(d) hereof) advise the
Trustee in writing that the continuation of the book-entry system is no longer
in the best interests of such Holders and the Trustee notifies all Holders of
the Money Market Securities or Investment Debt Securities, as the case may be,
of such event and the availability of definitive notes to the Holders of Money
Market Securities or Investment Debt Securities, as the case may be, requesting
such notes in definitive form.
Section 2.15 Initial and Periodic Statements.
(1) The Company shall provide initial transaction statements which meet
the applicable requirements of Section 8-408 of Article 8 of the Delaware
Uniform Commercial Code or any successor section to initial purchasers,
registered owners, registered pledgees, former registered owners and former
pledgees, as required by Section 8-408, within two business days of the
occurrence of the events specified in such section.
(2) The Company shall send each Holder of a Security (and each
registered pledgee) via U.S. mail not later than ten business days after each
month end in the case of money market securities and after each quarter end in
the case of Investment Debt Securities in which such Holder had an outstanding
balance in such holder's Account, a statement which indicates as of the calendar
month end preceding the mailing: (a) the balance of such Account; (b) interest
credited; (c) withdrawals
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made, if any; and (d) the interest rate paid on such Account during the
preceding calendar month. Such monthly statements shall also include, among
other things, the information required by the applicable provisions of Section
8-408 of Article 8 of the Delaware Uniform Commercial Code or any successor
section. The Company shall provide additional statements as the holders or
registered pledgees of the Securities may reasonably request from time to time.
The Company may charge such holders or pledgees requesting such statements a fee
to cover the charges incurred by the Company in providing such additional
statements.
ARTICLE III.
REDEMPTION
Section 3.1 Redemption of Investment Debt Securities.
The Company may not redeem, in whole or in part, any Investment Debt
Security prior to the scheduled Maturity Date of the Security. In addition,
except as provided in this Article III, the Company shall have no mandatory
redemption or sinking fund obligations with respect to any of the Investment
Debt Securities.
Upon the death or Total Permanent Disability of a Holder of an
Investment Debt Security, the estate of such Holder (in the event of death) or
such Holder (in the event of Total Permanent Disability) may require the Company
to redeem, in whole and not in part, the Investment Debt Security held by such
Holder provided that such Investment Debt Security has a remaining maturity of
greater than one (1) year at the time of such death or disability by delivering
to the Company an irrevocable election (a "Redemption Election") requiring the
Company to make such redemption. In the event an Investment Debt Security is
held jointly by two or more Persons (including without limitation joint owners
that are not legally married), the Company shall not be required to redeem such
Investment Debt Security until each joint holder of such Investment Debt
Security has either died or suffered a Total Permanent Disability.
Notwithstanding the foregoing sentence, if an Investment Debt Security is held
jointly by a husband and wife, such Investment Debt Security shall be subject to
the elective redemption provisions of this Article III upon the death or Total
Permanent Disability of either spouse. Upon receipt of a Redemption Election,
the Company shall designate the Redemption Date for such Investment Debt
Security, which Redemption Date shall be no more than fifteen days after the
Company's receipt of the Redemption Election, and shall pay the Redemption Price
to the estate of the Holder or the Holder, as the case may be, in accordance
with the provisions set forth in Section 2.7 hereof. No interest shall accrue on
an Investment Debt Security to be redeemed under this Article III for any period
of time after the Redemption Date for such Investment Debt Security and after
the Company has tendered the Redemption Price to the Estate of the Holder or to
the Holder, as the case may be.
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Section 3.2 Redemption of Money Market Securities.
The Company may not redeem, in whole or in part, any Money Market
Security except upon 30 days prior written notice to the Holder thereof listed
on the records maintained by the Company. In addition, except as provided in
this Article III, the Company shall have no mandatory redemption or sinking fund
obligations with respect to any of the Money Market Securities.
Any Holder of a Money Market Security may require the Company to
redeem, in whole and or in part, in increments of $500 (except in the case of
redemption of an entire account), the Money Market Security held by such Holder
by delivering to the Company an irrevocable election (a "Redemption Election")
requiring the Company to make such redemption or by executing a draft in a form
provided by or approved by the Company. Upon receipt of a Redemption Election,
the Company shall designate the Redemption Date for such Money Market Security,
which Redemption Date shall be within ten (10) Business Days after the Company's
receipt of the Redemption Election, and shall pay the Redemption Price to (i)
the Holder or his duly authorized attorney in fact, as the case may be, in
accordance with the provisions set forth in Section 2.7 hereof, or (ii) in the
case of a draft, to the intermediary which presented the draft to the Company's
designated bank for collection on behalf of a payee. No interest shall accrue on
a Money Market Security to be redeemed under this Section 3.2 of Article III for
any period of time after the Redemption Date for such Money Market Security and
after the Company has tendered the Redemption Price to the Holder of the Money
Market Security or his duly authorized attorney in fact.
ARTICLE IV.
COVENANTS
Section 4.1 Payment of Securities.
The Company shall duly pay the principal of and interest on each
Security on the dates and in the manner provided in the Prospectus related to
such Securities. Principal and interest (to the extent such interest is paid in
cash) shall be considered paid on the date due if the Paying Agent, if other
than the Company, holds at least one Business Day before that date money
deposited by the Company in immediately available funds and designated for and
sufficient to pay all principal and interest then due; provided, however, that
principal and interest shall not be considered paid within the meaning of this
Section 4.1 if money is held by the Paying Agent for the benefit of holders of
Senior Debt pursuant to the provisions of Article 10 hereof. The payment of
interest on the Money Market Securities shall be paid in the form of additional
notes as provided for in Section 2.1 hereof. Such Paying Agent shall return to
the Company, no later than 5 days following the date of payment, any money
(including accrued interest) that exceeds such amount of principal and interest
paid on the Securities in accordance with this Section 4. 1.
To the extent lawful, the Company shall pay interest (including
Post-Petition Interest in any proceeding under any Bankruptcy Law) on overdue
principal at the rate borne by the Securities, compounded semi-annually; it
shall pay interest (including Post-Petition Interest in any proceeding
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under any Bankruptcy Law) on overdue installments of interest (without regard to
any applicable grace period) at the same rate, compounded semi-annually.
Section 4.2 Maintenance of Office or Agency.
The Company will maintain an office or agency (which may be an office
of the Trustee, Registrar or coregistrar) where Securities may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Company will give prompt written notice to the Trustee of the location, and
any change in the location, of such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other office or
agency.
The Company hereby designates its office at Balapointe Office Centre,
111 Presidential Boulevard, Bala Cynwyd, Pennsylvania as one such office or
agency of the Company in accordance with Section 2.3.
Section 4.3 SEC Reports and Other Reports.
(a) The Company shall file with the Trustee, within 15 days after
filing with the SEC, copies of the annual reports and of the information,
documents, and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) that the Company is required
to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If the
Company is not subject to the requirements of such Section 13 or 15(d) of the
Exchange Act, the Company shall continue to file with the SEC and the Trustee on
the same timely basis such reports, information and other documents as it would
file if it were subject to the requirements of Section 13 or 15(d) of the
Exchange Act. The Company shall also comply with the provisions of TIA
ss.314(a). Notwithstanding anything contrary herein the Trustee shall have no
duty to review such documents for purposes of determining compliance with any
provisions of the Indenture.
(b) So long as any of the Securities remain outstanding, the Company
shall cause an annual report to stockholders and each quarterly or other
financial report furnished by it generally to stockholders to be filed with the
Trustee at the time of such mailing or furnishing to stockholders. If the
Company is not required to furnish annual or quarterly reports to its
stockholders pursuant to the Exchange Act, the Company shall cause its financial
statements, including any notes thereto (and, with respect to annual reports, an
auditors' report by the Company's certified independent accountants) and a
"Management's Discussion and Analysis of Financial Condition or Plan of
Operations," comparable to that which would have been required to appear in
annual or quarterly reports filed under Section
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13 or 15(d) of the Exchange Act to be so filed with the Trustee within 120 days
after the end of each of the Company's fiscal years and within 60 days after the
end of each of the first three quarters of each such fiscal year.
(c) Whether or not required by the rules and regulations of the SEC,
the Company shall file a copy of all such information with the SEC for public
availability and make such information available to investors who request it in
writing.
(d) The Company, or such other entity as the Company shall designate as
Registrar for the Money Market Securities as provided in Section 7.3 hereof,
shall provide the Trustee with quarterly management reports which provide the
Trustee with such information regarding the Accounts maintained by the Company
for the benefit of the Holders of the Money Market Securities as the Trustee may
reasonably request which information shall include at least the following: (1)
the outstanding balance of each Account; (2) interest credited or withdrawals
made for the period; (3) the amount of interest paid in the form of additional
notes at each month end and (3) the interest rate paid on each Account
maintained by the Company during the preceding quarterly period.
Section 4.4 Compliance Certificate.
(a) The Company shall deliver to the Trustee, within 120 days after the
end of each Fiscal Year, an Officers' Certificate stating that a review of the
activities of the Company during the preceding fiscal year has been made under
the supervision of the signing Officers with a view to determining whether each
has kept, observed, performed and fulfilled its obligations under this
Indenture, and further stating, as to each such Officer signing such
certificate, that to the best of his knowledge each has kept, observed,
performed and fulfilled each and every covenant contained in this Indenture and
is not in default in the performance or observance of any of the terms,
provisions and conditions hereof (or, if a Default or Event of Default shall
have occurred, describing all such Defaults or Events of Default of which he may
have knowledge and what action each is taking or proposes to take with respect
thereto) and that to the best of his knowledge no event has occurred and remains
in existence by reason of which payments on account of the principal of or
interest, if any, on the Securities are prohibited or if such event has
occurred, a description of the event and what action each is taking or proposes
to take with respect thereto.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the annual financial
statements delivered pursuant to Section 4.3 above shall be accompanied by a
written statement of the Company's independent public accountants that in making
the examination necessary for certification of such financial statements nothing
has come to their attention which would lead them to believe that the Company
has violated the provisions of Section 4. 1 of this Indenture or, if any such
violation has occurred, specifying the nature and period of existence thereof,
it being understood that such accountants shall not be liable directly or
indirectly to any Person for any failure to obtain knowledge of any such
violation.
(c) The Company will, so long as any of the Securities are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of any Default
or Event of Default, an Officers'
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Certificate specifying such Default or Event of Default and what action the
Company is taking or proposes to take with respect thereto.
Section 4.5 Stay, Extension and Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all beneficial advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or
impede the execution of any power herein granted to the Trustee, but will suffer
and permit the execution of every such power as though no such law has been
enacted.
Section 4.6 Liquidation.
The Board of Directors or the stockholders of the Company may not adopt
a plan of liquidation that provides for, contemplates or the effectuation of
which is preceded by (a) the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company otherwise than substantially
as an entirety (Section 5.1 of this Indenture being the Section hereof which
governs any such sale, lease, conveyance or other disposition substantially as
an entirety) and (b) the distribution of all or substantially all of the
proceeds of such sale, lease, conveyance or other disposition and of the
remaining assets of the Company to the holders of capital stock of the Company,
unless the Company, prior to making any liquidating distribution pursuant to
such plan, makes provision for the satisfaction of the Company's Obligations
hereunder and under the Securities as to the payment of principal and interest.
ARTICLE V.
SUCCESSORS
Section 5.1 When the Company May Merge, etc.
The Company may not consolidate or merge with or into (whether or not
the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to another corporation, Person or
entity unless (a) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (b) the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company) or the entity or Person to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made assumes all the obligations of the Company pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the Securities
and this Indenture; and (c) immediately after such transaction no Default or
Event of Default exists.
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The Company shall deliver to the Trustee prior to the consummation of
the proposed transaction an Officers' Certificate to the foregoing effect and an
Opinion of Counsel stating that the proposed transaction and such supplemental
indenture comply with this Indenture. The Trustee shall be entitled to
conclusively rely upon such Officers' Certificate and Opinion of Counsel.
Section 5.2 Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 5.1, the successor corporation formed by such
consolidation or into or with which the Company, is merged or to which such
sale, lease, conveyance or other disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person has been named
as the Company herein; provided, however, that the Company shall not be released
or discharged from the obligation to pay the principal of or interest on the
Securities.
ARTICLE VI.
DEFAULTS AND REMEDIES
Section 6.1 Events of Default.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest
on a Security when the same becomes due and payable and the
Default continues for a period of 30 days, whether or not such
payment is prohibited by the provisions of Article 10 hereof;
(2) the Company defaults in the payment of the
principal of any Security when the same becomes due and
payable at maturity, upon a required redemption or otherwise,
and the Default continues for a period of 30 days, whether or
not prohibited by the provisions of Article 10 hereof;
(3) the Company fails to observe or perform any
covenant, condition or agreement on the part of the Company to
be observed or performed pursuant to Section 4.6 or 5.1
hereof;
(4) the Company fails to comply with any of its other
agreements or covenants in, or provisions of, the Securities
or this Indenture and the Default continues for the period and
after the notice specified below;
(5) the Company pursuant to or within the meaning of
any Bankruptcy Law (a) commences a voluntary case; (b)
consents to the entry of an order for relief against it in an
involuntary case; (c) consents to the appointment of a
Custodian of it or for all or substantially all of its
property; (d) makes a general assignment for the benefit of
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its creditors; or (e) admits in writing its inability to pay
debts as the same become due; or
(6) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that (a) is for relief
against the Company in an involuntary case; (b) appoints a
Custodian of the Company or for all or substantially all of
its property; (c) orders the liquidation of the Company, and
the order or decree remains unstayed and in effect for 120
consecutive days; and
The term "Bankruptcy Law" means title II, U.S. Code or any similar
Federal or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.
A Default under clause (3) or (4) of Section 6.1 is not an Event of
Default until the Trustee or the Holders of at least a majority in principal
amount of the then outstanding Securities notify the Company of the Default and
the Company does not cure the Default or such Default is not waived within 60
days after receipt of the notice. The notice must specify the Default, demand
that it be remedied and state that the notice is a "Notice of Default."
Section 6.2 Acceleration.
If an Event of Default (other than an Event of Default specified in
clauses (5) or (6) of Section 6.1) occurs and is continuing, the Trustee by
notice to the Company or the Holders of at least a majority in principal amount
of the then outstanding Securities by written notice to the Company and the
Trustee may declare the unpaid principal of and any accrued interest on all the
Securities to be due and payable. Upon such declaration the principal and
interest shall be due and payable immediately; provided, however, that if any
Indebtedness or Obligation is outstanding pursuant to the Senior Debt, upon a
declaration of acceleration by the Holders, all principal and interest under
this Indenture shall be due and payable upon the earlier of (x) the day which is
5 Business Days after the receipt by each of the Company and the holders of
Senior Debt of such written notice of acceleration or (y) the date of
acceleration of any Indebtedness under any Senior Debt. If an Event of Default
specified in clause (5) or (6) of Section 6.1 occurs, such an amount shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder. The Holders of a majority in
principal amount of the then outstanding Securities by written notice to the
Trustee may rescind an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
(except nonpayment of principal or interest that has become due solely because
of the acceleration) have been cured or waived.
Section 6.3 Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal or interest on
the Securities or to enforce the performance of any provision of the Securities
or this Indenture.
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The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
Section 6.4 Waiver of Past Defaults.
Holders of a majority in principal amount of the then outstanding
Securities by notice to the Trustee may waive an existing Default or Event of
Default and its consequences except a continuing Default or Event of Default in
the payment of the principal of or interest on any Security held by a
non-consenting Holder. Upon actual receipt of any such notice of waiver by a
Responsible Officer of the Trustee, such Default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
Section 6.5 Control by Majority.
The Holders of a majority in principal amount of the then outstanding
Securities may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on it, provided, that indemnification for the Trustee's fees and
expenses, in a form reasonably satisfactory to the Trustee, shall have been
provided. However, the Trustee may refuse to follow any direction that conflicts
with law or this Indenture, that the Trustee determines may be unduly
prejudicial to the rights of other Securityholders, or that may involve the
Trustee in personal liability.
Section 6.6 Limitation on Suits.
A Holder may pursue a remedy with respect to this Indenture or the
Securities only if:
(1) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(2) the Holders of at least a majority in principal amount of
the then outstanding Securities make a written request to the Trustee
to pursue the remedy;
(3) such Holder or Holders offer and, if requested, provide to
the Trustee indemnity satisfactory to the Trustee against any loss,
liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer and, if requested, the
provision of indemnity; and
(5) during such 60 day period the Holders of a majority in
principal amount of the then outstanding Securities do not give the
Trustee a direction inconsistent with the request.
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A Holder may not use this Indenture to prejudice the rights of another Holder or
to obtain a preference or priority over another Holder.
Section 6.7 Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, but subject to
Article 10 hereof, the right of any Holder of a Security to receive payment of
principal and interest on the Security, on or after the respective due dates
expressed in the Security, or to bring suit for the enforcement of any such
payment on or after such respective dates, shall not be impaired or affected
without the consent of the Holder.
Section 6.8 Collection Suit by Trustee.
If an Event of Default specified in Section 6.1 (1) or (2) occurs and
is continuing, the Trustee is authorized to recover judgment in its own name and
as trustee of an express trust against the Company for the whole amount of
principal and interest remaining unpaid on the Securities and interest on
overdue principal and, to the extent lawful, interest and such further amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
Section 6.9 Trustee May File Proofs of Claim.
The Trustee is authorized to file such proofs of claim and other papers
or documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders allowed in any judicial proceedings relative to the Company (or any
other obligor upon the Securities), its creditors or its property and shall be
entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.7 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.7 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties which the Holders of the
Securities may be entitled to receive in such proceeding whether in liquidation
or under any plan of reorganization or arrangement or otherwise. Nothing herein
contained shall be deemed to authorize the Trustee to authorize or consent to or
accept or adopt on behalf of any Holder any plan of reorganization, arrangement,
adjustment or composition affecting the Securities or the rights of any Holder
thereof, or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding.
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If the Trustee does not file a proper claim or proof of debt in the
form required in any such proceeding prior to 30 days before the expiration of
the time to file such claims or proofs, then any holder of Senior Debt shall
have the right to demand, sue for, collect and receive the payments and
distributions in respect of the Securities which are required to be paid or
delivered to the holders of Senior Debt as provided in Article 10 hereof and to
file and prove all claims therefor and to take all such other action in the name
of the Holders or otherwise, as such holder of Senior Debt may determine to be
necessary or appropriate for the enforcement of the provisions of Article 10.
Section 6.10 Priorities.
If the Trustee collects any money pursuant to this Article, it shall,
subject to the provisions of Article 10 hereof, pay out the money in the
following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.7, including payment of all compensation, expenses and liabilities
incurred, and all advances made, if any, by the Trustee and the costs and
expenses of collection;
Second: to Holders of Senior Debt to the extent required by Article 10
hereof;
Third: to Holders for amounts due and unpaid on the Securities for
principal and interest, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Securities for principal and
interest, respectively; and
Fourth: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders.
Section 6.11 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.7, or a suit by Holders of more than 10% in principal
amount of the then outstanding Securities.
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ARTICLE VII.
TRUSTEE
Section 7.1 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) The duties of the Trustee shall be determined solely by
the express provisions of this Indenture and the Trustee need perform
only those duties that are specifically set forth in this Indenture and
no others, and no implied covenants or obligations shall be read into
this Indenture against the Trustee.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon resolutions,
statements, reports, documents, orders, certificates, opinions or other
instruments furnished to the Trustee and conforming to the requirements
of this Indenture. However, in the case of any of the above that are
specifically required to be furnished to the Trustee pursuant to this
Indenture, the Trustee shall examine them to determine whether they
substantially conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liabilities for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (2)
of this Section.
(2) The Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.5.
(d) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to paragraphs
(a), (b) and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or incur any liability. The Trustee may refuse to perform
any duty or exercise any right or power unless it receives indemnity
satisfactory to it against any loss, liability or expense.
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(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
Section 7.2 Rights of Trustee.
(a) The Trustee may conclusively rely upon any document believed by it
to be genuine and to have been signed or presented to it by the proper Person.
The Trustee need not investigate any fact or matter stated in the document. The
Trustee shall have no duty to inquire as to the performance of the Issuers'
covenants in Article 4. In addition, the Trustee shall not be deemed to have
knowledge of any Default or any Event of Default except any Default or Event of
Default of which the Trustee shall have received written notification or
obtained actual knowledge.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel and the written advice of such counsel or any Opinion of Counsel shall
be full and complete authorization and protection from liability in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon.
(c) The Trustee may act through agents, attorneys, custodians or
nominees and shall not be responsible for the misconduct or negligence or the
supervision of any agents, attorneys, custodians or nominees appointed by it
with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(f) The Trustee shall not be deemed to have notice of an Event of
Default for any purpose under this Indenture unless notified of such Event of
Default by the Company, the Paying Agent (if other than the Company) or a Holder
of the Securities.
Section 7.3 Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or an
Affiliate of the Company with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However, the Trustee is
subject to Sections 7.10 and 7.11.
Section 7.4 Trustee's Disclaimer.
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The Trustee shall not be responsible for and makes no representation as
to the validity or adequacy of this Indenture or the Securities, it shall not be
accountable for the Company's use of the proceeds from the Securities or any
money paid to the Company or upon the Company's direction under any provision
hereof, it shall not be responsible for the use or application of any money
received by any Paying Agent other than the Trustee and it shall not be
responsible for any statement or recital herein or any statement in the
Securities or any other document in connection with the sale of the Securities
or pursuant to this Indenture other than its certificate of authentication.
Section 7.5 Notice of Defaults.
If a Default or Event of Default occurs and is continuing and if it is
known to a Responsible Officer of the Trustee, the Trustee shall mail to Holders
a notice of the Default or Event of Default within 90 days after it occurs. At
least 5 Business Days prior to the mailing of any notice to Holders under this
Section 7.5, the Company shall provide the Company with notice of its intent to
mail such notice. Except in the case of a Default or Event of Default in payment
on any Security, the Trustee may withhold the notice if and so long as the
Responsible Officers of the Trustee in good faith determines that withholding
the notice would have no material adverse effect on the Holders.
Section 7.6 Reports by Trustee to Holders.
Within 60 days after the end of each May 15, commencing May 15, 2000,
the Trustee shall mail to Holders a brief report dated as of such reporting date
that complies with TIA ss. 313(a) (but if no event described in TIA ss. 313(a)
has occurred within the 12 months preceding the reporting date, no report need
be prepared or transmitted). The Trustee also shall comply with TIA ss. 313(b).
The Trustee shall also transmit by mail all reports as required by TIA ss.
313(c).
Commencing at the time this Indenture is qualified under the TIA, a
copy of each report mailed to Holders under this Section 7.6 (at the time of its
mailing to Holders) shall be filed with the SEC and each stock exchange, if any,
on which the Securities are listed. The Company shall promptly notify the
Trustee when the Securities are listed on any stock exchange.
Section 7.7 Compensation and Indemnity.
The Company shall pay to the Trustee from time to time reasonable
compensation for its acceptance of this Indenture and its performance of the
duties and services required hereunder. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee against any and all losses,
liabilities or expenses incurred by it arising out of or in connection with the
acceptance or administration of its duties under this Indenture, except as set
forth in the second next paragraph. The Trustee shall notify the Company
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promptly of any claim for which it may seek indemnity. Failure by the Trustee to
so notify the Company shall not relieve the Company of its obligations
hereunder, except to the extent the Company is prejudiced thereby. The Company
shall defend the claim and the Trustee shall reasonably cooperate in such
defense. The Trustee may have separate counsel and the Company shall pay the
reasonable fees and expenses of such one counsel. The Company need not pay for
any settlement made without its consent, which consent shall not be unreasonably
withheld.
The obligations of the Company under this Section 7.7 shall survive the
satisfaction and discharge of this Indenture.
The Company need not reimburse any expense or indemnify against any
loss or liability incurred by the Trustee through its own negligence or bad
faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on the Securities. Such lien shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(5) or (6) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
Section 7.8 Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.8.
The Trustee may resign at any time and be discharged from the trust
hereby created by so notifying the Company. The Holders of a majority in
principal amount of the then outstanding Securities may remove the Trustee by so
notifying the Trustee and the Company in writing. The Company may remove the
Trustee if.
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(3) a Custodian or public officer takes charge of the Trustee
or its property;
(4) the Trustee becomes incapable of acting as Trustee under
this Indenture, or
(5) the Company so elects, provided such replacement Trustee
is qualified and reasonably acceptable.
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If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Securities may appoint
a different successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 30 days after notice
that the Trustee has resigned or has been removed, the Company or the Trustee or
the Holders of at least a majority in principal amount of the then outstanding
Securities may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
If the Trustee after written request by any Holder who has been a
Holder for at least 6 months fails to comply with Section 7.10, such Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to all Holders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, provided all sums owing
to the Trustee hereunder have been paid and subject to the lien provided for in
Section 7.7. Notwithstanding replacement of the Trustee pursuant to this Section
7.8, the Company's obligations under Section 7.7 hereof shall continue for the
benefit of the retiring Trustee.
Section 7.9 Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another corporation,
the successor corporation without any further act shall be the successor
Trustee.
Section 7.10 Eligibility; Disqualification.
There shall at all times be a Trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America or of any state or territory thereof or of the District of Columbia
authorized under such laws to exercise corporate trustee power, shall be subject
to supervision or examination by Federal, state, territorial or District of
Columbia authority and shall have a combined capital and surplus of at least
$500,000 as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1). The Trustee is subject to TIA ss. 310(b).
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Section 7.11 Preferential Collection of Claims Against Company.
The Trustee is subject to TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
ARTICLE VIII.
DISCHARGE OF INDENTURE
Section 8.1 Termination of Company's Obligations.
This Indenture shall cease to be of further effect (except that the
Company's obligations under Section 7.7 and 8.4, and the Company's, Trustee's
and Paying Agent's obligations under Section 8.3 shall survive) when all
outstanding Investment Debt Securities have been paid in full and all
outstanding Money Market Securities redeemed and the Company has paid all sums
payable by the Company hereunder. In addition, the Company may terminate all of
its obligations under this Indenture if:
(1) the Company irrevocably deposits in trust with the Trustee
or at the option of the Trustee, with a trustee reasonably satisfactory
to the Trustee and the Company under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee, money or
U.S. Government Obligations sufficient (as certified by an independent
public accountant designated by the Company) to pay principal and
interest on the Securities to maturity or redemption, as the case may
be, and to pay all other sums payable by it hereunder, provided that
(i) the trustee of the irrevocable trust shall have been irrevocably
instructed to pay such money or the proceeds of such U.S. Government
Obligations to the Trustee and (ii) the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to the payment of said principal and interest
with respect to the Securities;
(2) the Company delivers to the Trustee an Officers'
Certificate stating that all conditions precedent to satisfaction and
discharge of this Indenture have been complied with; and
(3) no Event of Default or event (including such deposit)
which, with notice or lapse of time, or both, would become an Event of
Default with respect to the Securities shall have occurred and be
continuing on the date of such deposit.
Then, this Indenture shall cease to be of further effect (except as provided in
this paragraph), and the Trustee, on demand of the Company, shall execute proper
instruments acknowledging confirmation of and discharge under this Indenture.
The Company may make the deposit only if Article X hereof does not prohibit such
payment. However, the Company's obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7,
2.8, 4.1, 4.2, 4.3, 7.7, 7.8, 8.3 and 8.4 and the Trustee's and Paying Agent's
obligations in Section 8.3 shall survive until the Securities are no longer
outstanding. Thereafter, only the Company's
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obligations in Section 7.7 and 8.4 and the Company's, Trustee's and Paying
Agent's obligations in Section 8.3 shall survive.
After such irrevocable deposit made pursuant to this Section 8.1 and
satisfaction of the other conditions set forth herein, the Trustee upon written
request shall acknowledge in writing the discharge of the Company's obligations
under this Indenture except for those surviving obligations specified above.
In order to have money available on a payment date to pay principal or
interest on the Securities, the U.S. Government Obligations shall be payable as
to principal or interest at least one Business Day before such payment date in
such amounts as will provide the necessary money. U.S.
Government Obligations shall not be callable at the issuer's option.
Section 8.2 Application of Trust Money.
The Trustee or a trustee satisfactory to the Trustee and the Company
shall hold in trust money or U.S. Government Obligations deposited with it
pursuant to Section 8.1. It shall apply the deposited money and the money from
U.S. Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of principal and interest on the Securities.
Section 8.3 Repayment to Company.
The Trustee and the Paying Agent shall promptly pay to the Company upon
written request any excess money or securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of principal or interest that
remains unclaimed for two years after the date upon which such payment shall
have become due; provided, however, that the Company shall have either caused
notice of such payment to be mailed to each Holder entitled thereto no less than
30 days prior to such repayment or within such period shall have published such
notice in a newspaper of widespread circulation published in the City of
Philadelphia. After payment to the Company, Holders entitled to the money must
look to the Company for payment as general creditors unless an applicable
abandoned property law designates another Person, and all liability of the
Trustee and such Paying Agent with respect to such money shall cease.
Section 8.4 Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with Section 8.2 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 8.1 until
such time as the Trustee or Paying Agent is permitted to apply all such money or
U.S. Government Obligations in accordance with Section 8.2; provided, however,
that if the Company has made any payment of interest on or
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principal of any Securities because of the reinstatement of its obligations, the
Company shall be subrogated to the rights of the Holders of such Securities to
receive such payment, as long as no money is owed to the Trustee by the Company,
from the money or U.S. Government Obligations held by the Trustee or Paying
Agent.
ARTICLE IX.
AMENDMENTS
Section 9.1 Without Consent of Holders.
The Company and the Trustee may amend this Indenture or the Securities
without the consent of any Holder:
(1) to cure any ambiguity, defect or inconsistency;
(2) to comply with Section 5.1;
(3) to provide for additional uncertificated Securities or
certificated Securities;
(4) to make any change that does not adversely affect the
legal rights hereunder of any Holder, including but not limited to an
increase in the aggregate dollar amount of Securities which may be
outstanding under this Indenture;
(5) make any change in the second paragraph of Article 3;
provided, however, that no such change shall adversely affect the
rights of any outstanding Security; or
(6) to comply with any requirements of the SEC in connection
with the qualification of this Indenture under the TIA.
Section 9.2 With Consent of Holders.
The Company and the Trustee may amend this Indenture or the Securities
with the written consent of the Holders of at least a majority in principal
amount of the then outstanding Securities. The Holders of a majority in
principal of the then outstanding Securities may also waive any existing default
or compliance with any provision of this Indenture or the Securities. However,
without the consent of the Holder of each Investment Debt Security affected, an
amendment or waiver under this Section may not (with respect to any Investment
Debt Security held by a nonconsenting Holder):
(1) reduce the principal amount of Investment Debt Securities
whose Holders must consent to an amendment, supplement or waiver;
(2) reduce the rate of or change the time for payment of
interest, including default interest, on any Investment Debt Security;
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(3) reduce the principal of or change the fixed maturity of
any Investment Debt Security or alter the redemption provisions or the
price at which the Company shall offer to purchase such Investment Debt
Security pursuant to Section 3.1 of Article III hereof;
(4) make any Investment Debt Security payable in money other
than that stated in the Prospectus (or related supplement) with respect
to such Investment Debt Security;
(5) Modify or eliminate the right of the estate of a Holder or
a Holder to cause the Company to redeem an Investment Debt Security
upon the death or Total Permanent Disability of a Holder pursuant to
Article III; provided, however, that the Company may not modify or
eliminate such right, as it may be in effect on the Issue Date, of any
Investment Debt Security which was issued with such right. After an
amendment under this subsection 9.1(5) becomes effective, the Company
shall mail to the Holders of each Investment Debt Security then
outstanding a notice briefly describing the amendment.
(6) make any change in Section 6.4 or 6.7 hereof or in this
sentence of this Section 9.2;
(7) make any change in Article X that adversely affects the
rights of any Holders; or
(8) waive a Default or Event of Default in the payment of
principal of, or premium, if any, or interest on, or redemption payment
with respect to, any Security (except a rescission of acceleration of
the Investment Debt Securities by the Holders of at least a majority in
aggregate principal amount of the Investment Debt Securities and a
waiver of the payment default that resulted from such acceleration).
Without the consent of each Holder of Money Market Securities affected, an
amendment or waiver under this Section may not (with respect to any Money Market
Security held by a nonconsenting Holder):
(1) reduce the principal amount (other than as a result of
withdrawals made by the Holder) of a Money Market Security whose Holder
must consent to an amendment, supplement or waiver;
(2) reduce the rate of interest paid on the Money Market
Securities, other than interest rate adjustments as provided for in
Article II hereof, or change the time for payment of interest,
including default interest, on any Security;
(3) reduce the principal of (other than as a result of
withdrawals made by the Holder) or alter the redemption provisions or
the price at which the Company shall offer to purchase such Money
Market Security pursuant to Section 3.2 of Article III hereof;
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(4) make any Money Market Security payable in money other than
that stated in this Indenture;
(5) make any change in Section 6.4 or 6.7 hereof or in this
sentence of this Section 9.2;
(6) make any change in Article 10 that adversely affects the
rights of any Holders; or
(7) waive a Default or Event of Default in the payment of
principal of, or premium, if any, or interest on, or redemption payment
with respect to, any Money Market Security (except a rescission of
acceleration of the Money Market Securities by the Holders of at least
a majority in aggregate principal amount of the Money Market Securities
and a waiver of the payment default that resulted from such
acceleration).
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment or waiver, but
it shall be sufficient if such consent approves the substance thereof.
After an amendment or waiver under this Section becomes effective, the
Company shall mail to the Holders of each Security affected thereby a notice
briefly describing the amendment or waiver. Any failure of the Company to mail
such notice, or any defect therein, shall not, however, in any way impair or
affect the validity of any such supplemental indenture or waiver. Subject to
Sections 6.4 and 6.7 hereof, the Holders of a majority in principal amount of
the Securities then outstanding may waive compliance in a particular instance by
the Company with any provision of this Indenture or the Securities.
Section 9.3 Compliance with Trust Indenture Act.
If at the time this Indenture shall be qualified under the TIA, every
amendment to this Indenture or the Securities shall be set forth in a
supplemental indenture that complies with the TIA as then in effect.
Section 9.4 Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to it by a
Holder of a Security is a continuing consent by the Holder and every subsequent
Holder of a Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if notation of the consent is not made on
any Security. An amendment or waiver becomes effective in accordance with its
terms and thereafter binds every Holder.
The Company may fix a record date for determining which Holders must
consent to such amendment or waivers. If the Company fixes a record date, the
record date shall be fixed at (i) the later of 30 days prior to the first
solicitation of such consent or the date of the most recent list of
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Holders furnished to the Trustee prior to such solicitation pursuant to Section
2.5, or (iii) such other date as the Company shall designate.
Section 9.5 Notation on or Exchange of Investment Debt Securities.
The Trustee may place an appropriate notation about an amendment or
waiver on any Security, if certificated, or any Account statement.
Failure to make the any notation or issue a new note shall not affect
the validity and effect of such amendment or waiver.
Section 9.6 Trustee to Sign Amendments, etc.
The Trustee shall sign any amendment or supplemental indenture
authorized pursuant to this Article 9 if, in the Trustee's reasonable
discretion, the amendment does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but need
not, sign it. In signing or refusing to sign such amendment or supplemental
indenture, the Trustee shall be entitled to receive, if requested, an indemnity
reasonably satisfactory to it and to receive and, subject to Section 7.1, shall
be fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel (or written advice of counsel) as conclusive evidence that such
amendment or supplemental indenture is authorized or permitted by this
Indenture, that it is not inconsistent herewith, and that it will be valid and
binding upon the Company in accordance with its terms. The Company may not sign
an amendment or supplemental indenture until its Board of Directors approves it.
ARTICLE X.
SUBORDINATION
Section 10.1 Agreement to Subordinate.
The Company agrees, and each Holder by accepting a Security consents
and agrees, that the Indebtedness evidenced by the Securities and the payment of
the principal of and interest on the Securities is subordinated in right of
payment, to the extent and in the manner provided in this Article, to the prior
payment in full, in cash, cash equivalents or otherwise in a manner satisfactory
to the holders of Senior Debt, of all Obligations due in respect of Senior Debt
of the Company whether outstanding on the date hereof or hereafter incurred, and
that the subordination is for the benefit of the holders of Senior Debt.
For purposes of the Article 10, a payment or distribution on account of
the Securities may consist of cash, property or securities, by set-off or
otherwise, and a payment or distribution on account of any of the Securities
shall include, without limitation, any redemption, purchase or other acquisition
of the Securities.
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Section 10.2 Liquidation; Dissolution; Bankruptcy.
(a) Upon any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to creditors upon
(i) any dissolution or winding-up or total or partial liquidation or
reorganization of the Company whether voluntary or involuntary and whether or
not involving insolvency or bankruptcy or (ii) any bankruptcy or insolvency case
or proceeding or any receivership, liquidation, reorganization or other similar
case or proceeding in connection therewith, relative to the Company or to its
assets, (iii) any assignment for the benefit of creditors or any other
marshaling of assets of the Company, all obligations due, or to become due, in
respect of Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt) shall first
interfeasibly be paid in full, or provision shall have been made for such
payment, in cash, cash equivalents or otherwise in a manner satisfactory to the
holders of Senior Debt, before any payment is made on account of the principal
of, premium, if any, or interest on the Securities, except that Holders may
receive securities that are subordinated to at least the same extent as the
Securities are to (x) Senior Debt and (y) any securities issued in exchange for
Senior Debt. Upon any such dissolution winding-up, liquidation or
reorganization, any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to which the Holders of
the Securities or the Trustee under this Indenture would be entitled, except for
the provisions hereof, shall be paid by the Company or by any receiver, trustee
in bankruptcy, liquidating trustee, agent or other Person making such payment or
distribution, or by the Holders of the Securities or by the Trustee under this
Indenture if received by them, directly to the holders of Senior Debt (pro rata
to such holders on the basis of the amounts of Senior Debt held by such holders)
or their Representative or Representatives, or to the trustee or trustees under
any indenture pursuant to which any of such Senior Debt may have been issued, as
their interests may appear, for application to the payment of Senior Debt
remaining unpaid until all such Senior Debt has been indefeasibly paid in full,
or provisions shall have been made for such payment, in cash, cash equivalents
or otherwise in a manner satisfactory to the holders of Senior Debt, after
giving effect to any concurrent payment, distribution or provision therefor to
or for the holders of Senior Debt.
(b) For purposes of this Article X, the words "cash, property or
securities" shall not be deemed to include securities of the Company or any
other corporation provided for by a plan of reorganization or readjustment which
are subordinated, to at least the same extent as the Securities, to the payment
of all Senior Debt then outstanding or to the payment of all securities issued
in exchange therefor to the holders of Senior Debt at the time outstanding. The
consolidation of the Company with, or the merger of the Company with or into,
another corporation or the liquidation or dissolution of the Company following
the conveyance or transfer of its property as an entirety, or substantially as
an entirety, to another corporation upon the terms and conditions provided in
Article 5 shall not be deemed a dissolution, winding-up, liquidation or
reorganization for the purposes of this Section if such other corporation shall,
as part of such consolidation, merger, conveyance or transfer, comply with the
conditions stated in Article V.
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Section 10.3 Default of Senior Debt.
(a) In the event and during the continuation of any default in the
payment of principal of (or premium, if any) or interest on any Senior Debt, or
any amount owing from time to time under or in respect of Senior Debt or in the
event that any nonpayment event of default with respect to any Senior Debt shall
have occurred and be continuing and shall have resulted in such Senior Debt
becoming or being declared due and payable prior to the date on which it would
otherwise have become due and payable, or (b) in the event that any other
nonpayment event of default with respect to any Senior Debt shall have occurred
and be continuing permitting the holders of such Senior Debt (or a trustee on
behalf of the holders thereof) to declare such Senior Debt due and payable prior
to the date on which it would otherwise have become due and payable, then the
Company shall make no payment, direct or indirect (including any payment which
may be payable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Securities) (other than securities that
are subordinated to at least the same extent as the Securities are to (x) Senior
Debt and (y) any securities issued in exchange for Senior Debt) unless and until
(i) such event of default shall have been cured or waived or shall have ceased
to exist or such acceleration shall have been rescinded or annulled, or (ii) in
case of any nonpayment event of default specified in (b), during the period (a
"Payment Blockage Period") commencing on the date the Company and the Trustee
receive written notice (a "Payment Notice") of such event of default (which
notice shall be binding on the Trustee and the Holders as to the occurrence of
such an event of default) from a holder of the Senior Debt to which such default
relates and ending on the earliest of (A) 179 days after such date, (B) the
date, if any, on which such Senior Debt to which such default relates is
discharged or such default is waived by the holders of such Senior Debt or
otherwise cured and (C) the date on which the Trustee receives written notice
from the holder of such Senior Debt to which such default relates terminating
the Payment Blockage Period. No new Payment Blockage Period may be commenced
within 360 days after the receipt by the Trustee of any prior Payment Blockage
Notice. For all purposes of this Section 10.3, no Event of Default which existed
or was commencing with respect to the Senior Debt to which a Payment Blockage
Period relates on the date such Payment Blockage Period commenced shall be or be
made the basis for the commencement or any subsequent Payment Blockage Period
unless such event of default is cured or waived for a period of not less than
180 consecutive days.
Section 10.4 When Distribution Must Be Paid Over.
If the Trustee or any Holder receives any payment with respect to the
Securities, whether in cash property or securities (other than securities that
are subordinated to at least the same extent of the Securities are to (x) Senior
Debt and (y) any securities issued in exchange for Senior Debt at a time when
such payment is prohibited by Article X hereof), such payment shall be held by
the Trustee or such Holder, in trust for the benefit of, and shall be paid
forthwith over and delivered to, the holders of Senior Debt (pro rata to such
holders on the basis of the amount of Senior Debt held by such holders) for
application to the payment of all Obligations with respect to Senior Debt
remaining unpaid to the extent necessary to pay such Obligations in full, in
cash, cash equivalents or otherwise in a manner satisfactory to the holders of
Senior Debt, in accordance with the terms of such Senior Debt, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.
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With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically set
forth in this Article 10, and no implied covenants or obligations with respect
to the holders of Senior Debt shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of Holders or the Company
or any other Person money or assets to which any holders of Senior Debt shall be
entitled by virtue of this Article X, except if such payment is made as a result
of the willful misconduct or gross negligence of the Trustee.
Section 10.5 Notice by Company.
The Company shall promptly notify the Trustee and the Paying Agent in
writing of any facts known to the Company that would cause a payment of any
Obligations with respect to the Company to violate this Article, but failure to
give such notice shall not affect the subordination of the Securities to the
Senior Debt provided in this Article.
Section 10.6 Subrogation.
After all Senior Debt is paid in full, in cash, cash equivalents or
otherwise in a manner satisfactory to the holders of such Senior Debt, and until
the Securities are paid in full, Holders shall be subrogated (equally and
ratably with all other Indebtedness pari passu with the Securities) to the
rights of holders of Senior Debt to receive distributions applicable to Senior
Debt to the extent that distributions otherwise payable to the Holders have been
applied to the payment of Senior Debt. A distribution made under this Article to
holders of Senior Debt which otherwise would have been made to Holders is not,
as between the Company and Holders, a payment by the Company on the Senior Debt.
Section 10.7 Relative Rights.
This Article defines the relative rights of Holders and holders of
Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders, the
obligations of the Company, which are absolute and unconditional, to
pay principal of and interest on the Securities in accordance with
their terms;
(2) affect the relative rights of Holders and creditors of the
Company other than their rights in relation to holders of Senior Debt;
or
(3) prevent the Trustee or any Holder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Debt to receive distributions
and payments otherwise payable to Holders.
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If the Company fails because of this Article to pay principal of or
interest on a Security on the due date, the failure is still a Default or Event
of Default.
Section 10.8 Subordination May Not Be Impaired by the Company or Holders
of Senior Debt.
No right of any present or future holder of Senior Debt to enforce the
subordination of the Indebtedness evidenced by the Securities and the
Obligations related thereto shall be prejudiced or impaired by any act or
failure to act by any such holder or by the Company, the Trustee or any Agent
or by the failure of the Company to comply with this Indenture, regardless of
any knowledge thereof which any such holder may have or otherwise be charged
with.
Without limiting the effect of the preceding paragraph, any holder of
Senior Debt may at any time and from time to time without the consent of or
notice to any other holder or to the Trustee, without impairing or releasing any
of the rights of any holder of Senior Debt under this Indenture, upon or without
any terms or conditions and in whole or in part:
(a) change the manner, place or term of payment, or change or extend
the time of payment of, renew or alter any Senior Debt or any other liability of
the Company to such holder, any security therefor, or any liability incurred
directly or indirectly in respect thereof, and the provisions of this Article X
shall apply to the Securities as so changed, extended, renewed or altered;
(b) notwithstanding the provisions of Section 5.1 hereof, sell,
exchange, release, surrender, realize upon or otherwise deal with in any manner
and in any order any property by whomsoever at any time pledged or mortgaged to
secure, or howsoever securing, any Senior Debt or any other liability of the
Company to such holder or any other liabilities incurred directly or indirectly
in respect thereof or hereof or any offset thereagainst;
(c) exercise or refrain from exercising any rights or remedies against
the Company or others or otherwise act or refrain from acting or, for any
reason, fail to file, record or otherwise perfect any security interest in or
lien on any property of the Company or any other Person; and
(d) settle or compromise any Senior Debt or any other liability of the
Company to such holder, or any security therefor, or any liability incurred
directly or indirectly in respect thereof.
All rights and interests under this Indenture of any holder of Senior
Debt and all agreements and obligations of the Trustee, the Holders, and the
Company under Article 6 and under this Article 10 shall remain in full force and
effect irrespective of (i) any lack of validity or enforceability of any
agreement or instrument relating to any Senior Debt or (ii) any other
circumstance that might otherwise constitute a defense available to, or a
discharge of, the Trustee, any Holder, or the Company.
Any holder of Senior Debt hereby authorized to demand specific
performance of the provisions of this Article 10, whether or not the Company
shall have complied with any of the provisions of this Article 10 applicable to
it, at any time when the Trustee or any Holder shall have failed to comply
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with any of these provisions. The Trustee and the Holders irrevocably waive any
defense based on the adequacy of a remedy at law that might be asserted as a bar
to such remedy of specific performance.
Section 10.9 Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
representative.
Upon any payment or distribution of assets of the Company referred to
in this Article X, the Trustee and the Holders shall be entitled to rely upon
any order or decree made by any court of competent jurisdiction in which
bankruptcy, dissolution, winding-up, liquidation or reorganization proceedings
are pending or upon any certificate of any representative of any holder of
Senior Debt or of the liquidating trustee or agent or other Person making any
distribution, delivered to the Trustee or to the Holders, for the purpose of
ascertaining the Persons entitled to participate in such distribution, the
holders of the Senior Debt and other indebtedness of the Company, the amount
thereof or payable thereon, the amount or amounts paid or distributed thereon
and all other facts pertinent thereto or to this Article X.
Section 10.10 Rights of Trustee and Paying Agent.
Notwithstanding the provisions of this Article X or any other provision
of this Indenture, the Trustee shall not be charged with knowledge of the
existence of any facts which would prohibit the making of any payment or
distribution by the Trustee, or the taking of any action by the Trustee, and the
Trustee or Paying Agent may continue to make payments on the Securities unless
it shall have received at its Corporate Trust Division at least 5 Business Days
prior to the date of such payment written notice of facts that would cause the
payment of any Obligations with respect to the Securities to violate this
Article, which notice, unless specified by a holder of Senior Debt as such,
shall not be deemed to be a Payment Notice. The Trustee may conclusively rely on
such notice. Only the Company or a holder of Senior Debt may give the notice.
Nothing in this Article X shall apply to amounts due to, or impair the claims
of, or payments to, the Trustee under or pursuant to Section 7.7 hereof.
The Trustee in its individual or any other capacity may hold Senior
Debt with the same rights it would have if it were not Trustee. Any Agent may do
the same with like rights.
Section 10.11 Authorization to Effect Subordination.
Each Holder of a Security by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate, as between the holders of Senior Debt and the
Holders, the subordination as provided in this Article X, and appoints the
Trustee his attorney-in-fact for any and all such purposes.
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Section 10.12 Article Applicable to Paying Agent.
In case at any time any Paying Agent (other than the Trustee or the
Company) shall have been appointed by the Company and be then acting hereunder,
the term "Trustee" as used in this Article X shall in such case (unless the
context otherwise requires) be construed as extending to and including such
Paying Agent within its meaning as fully for all intents and purposes as if such
Paying Agent were named in this Article X in addition to or in place of the
Trustee.
Section 10.13 Miscellaneous.
(a) The agreements contained in this Article 10 shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any of the Senior Debt is rescinded or must otherwise be returned by any holder
of Senior Debt upon the insolvency, bankruptcy or reorganization of the Company
or otherwise, all as though such payment had not been made.
(b) The Trustee shall notify all holders of Senior Debt (of whose
identity the Trustee has received reasonable advance written notice) of the
existence of any Default or Event of Default under Section 6.1 promptly after a
Responsible Officer of the Trustee actually becomes aware thereof; provided,
however, that at least 5 Business Days prior to the notification of any holder
of Senior Debt under this Section 7.5, the Company shall provide the Company
with notice of its intent to provide such notification.
ARTICLE XI.
MISCELLANEOUS
Section 11.1 Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by TIA ss. 318(c), the imposed duties shall control.
Section 11.2 Notices.
Any notice, instruction, direction, request or other communication by
the Company, the Trustee or any other holder of Senior Debt to the others is
duly given if in writing and delivered in person or mailed by first-class mail
(registered or certified, return receipt requested), telex, telecopier or
overnight air courier guaranteeing next day delivery, to the other's address:
If to the Company:
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Balapointe Office Centre
111 Presidential Boulevard
Bala Cynwyd, PA 19004
Attention: Anthony J. Santilli
Chairman, President and Chief Executive Officer
Telecopier: (215) 668-1468
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With a copy to:
BLANK ROME COMISKY & McCAULEY LLP
One Logan Square
Philadelphia, Pennsylvania 19103-2599
Attention: Jane K. Storero, Esquire
Telecopier: (215) 569-5555
If to the Trustee:
U.S. BANK TRUST NATIONAL ASSOCIATION
180 East 5th Street
Saint Paul, Minnesota 55101
Attention: Mr. Richard Prokosch, Corporate Finance
Telecopier: (612) 244-0711
If to a holder of Senior Debt, such address as such holder of Senior
Debt shall have provided in writing to the Company and the Trustee.
The Company, the Trustee or a holder of Senior Debt by notice to the
Company and the Trustee may designate additional or different addresses for
subsequent notices or communications.
All notices and communications (other than those sent to Holders) shall
be deemed to have been duly given: at the time delivered by hand, if personally
delivered; 5 Business Days after being deposited in the mail, postage prepaid,
if mailed; when answered back, if telexed; when receipt acknowledged, if
telecopied; and the next Business Day after timely delivery to the courier, if
sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first-class
mail, certified or registered, return receipt requested, to his address shown on
the register kept by the Registrar. Failure to mail a notice or communication to
a Holder or any defect in it shall not affect its sufficiency with respect to
other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
Section 11.3 Communication by Holders with Other Holders.
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Holders may communicate pursuant to TIA ss. 312(b) with other Holders
with respect to their rights under this Indenture or the Securities. The Trustee
is subject to ss. 312(b). The Company, the Trustee, the Registrar and anyone
else shall have the protection of TIA ss. 312(c).
Section 11.4 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 11.5) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 11.5) stating that, in the opinion of such counsel,
all such conditions precedent and covenants have been complied with.
Section 11.5 Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA ss. 314(a)(4)) shall include:
(1) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion whether such covenant or condition has been
complied with; and
(4) a statement whether, in the opinion of such Person, such
condition or covenant has been complied with.
Section 11.6 Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
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<PAGE>
Section 11.7 Legal Holidays.
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions in the Commonwealth of Pennsylvania or the City of Wilmington or at
a place of payment are authorized or obligated by law, regulation or executive
order to remain closed. If a payment date is a Legal Holiday at a place of
payment, payment may be made at that place on the next succeeding day that is
not a Legal Holiday, and no interest shall accrue for the intervening period.
Section 11.8 No Recourse Against Others.
No director, officer, employee, agent, manager or stockholder of the
Company as such, shall have any liability for any obligations of the Company
under the Securities or this Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. Each Holder by accepting a
Security waives and releases all such liability.
Section 11.9 Duplicate Originals.
The parties may sign any number of copies of this Indenture. One signed
copy is enough to prove this Indenture.
Section 11.10 Governing Law.
THE INTERNAL LAW OF THE STATE OF DELAWARE SHALL GOVERN THIS
INDENTURE AND THE SECURITIES, WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS THEREOF.
Section 11.11 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company. Any such indenture, loan or debt agreement may
not be used to interpret this Indenture.
Section 11.12 Successors.
All agreements of the Company in this Indenture and the Securities
shall bind its successors. All agreements of the Trustee in this Indenture shall
bind its successor.
Section 11.13 Severability.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
43
<PAGE>
Section 11.14 Counterpart Originals.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
Section 11.15 Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions thereof.
44
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, as of the day and year first written above.
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
(SEAL) By: ______________________________
Name: ______________________
Title: ______________________
Attest:
U.S. BANK TRUST NATIONAL
ASSOCIATION, as Trustee
By: ______________________________
Name: ______________________
Title: ______________________
{SIGNATURE PAGE TO INDENTURE}
45
<PAGE>
BLANK ROME COMISKY & MCCAULEY LLP ______________________________________________
September 17, 1999
American Business Financial Services, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, DE 19810
Re: American Business Financial Services, Inc.
Debt Securities
Registration Statement on Form S-2
------------------------------------------
Gentlemen:
We have acted as counsel to American Business Financial Services, Inc.
(the "Company") in connection with the Registration Statement on Form S-2 (the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the offer
and sale by the Company of up to $300,000,000 in principal amount of unsecured,
subordinated investment notes and unsecured, adjustable rate, subordinate money
market securities (the "Debt Securities"). The Debt Securities will be issued
pursuant to an Indenture to be entered into between the Company and U.S. Bank
Trust National Association, a national banking association, as trustee (the
"Indenture"). This opinion is being furnished pursuant to the requirements of
Item 601(b)(5) of Regulation S-K.
In rendering this opinion, we have examined only the documents listed
on Exhibit "A" attached hereto. We have not performed any independent
investigation other than the document examination described. Our opinion is
therefore qualified in all respects by the scope of that document examination.
We have assumed and relied, as to questions of fact and mixed questions of law
and fact, on the truth, completeness, authenticity and due authorization of all
certificates, documents and records examined and the genuineness of all
signatures. We have also assumed that the Indenture will be in the form filed as
an exhibit to the Registration Statement and will have been duly executed and
delivered by the Company and U.S. Bank Trust National Association, a national
banking association, as trustee.
<PAGE>
American Business Financial Services, Inc.
September 17, 1999
Page 2
This opinion is limited to the laws of the State of Delaware and no
opinion is expressed as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that the
Debt Securities that are being offered and sold by the Company pursuant to the
Registration Statement, when issued by the Company as contemplated by the
Registration Statement and in accordance with the Indenture, will be binding
obligations of the Company.
The opinions expressed herein are qualified in all respects by the
following: (a) no opinion is rendered as to the availability of equitable
remedies including, but not limited to, specific performance and injunctive
relief; (b) the effect of bankruptcy, reorganization, insolvency, fraudulent
conveyance, moratorium and other similar laws or equitable principles affecting
creditors' rights or remedies; and (c) the effect of applicable law and court
decisions which may now or hereafter limit or render unenforceable certain
rights and remedies.
This opinion is given as of the date hereof. We assume no obligation to
update or supplement this opinion to reflect any facts or circumstances which
may hereafter come to our attention or any changes in laws which may hereafter
occur.
This opinion is strictly limited to the matters stated herein and no
other or more extensive opinion is intended, implied or to be inferred beyond
the matters expressly stated herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus, which is part of the Registration Statement.
Sincerely,
/s/ Blank Rome Comisky & McCauley LLP
BLANK, ROME, COMISKY & McCAULEY LLP
<PAGE>
EXHIBIT "A"
1. The Company's Amended and Restated Certificate of Incorporation.
2. The Company's Amended and Restated Bylaws.
3. Resolutions of the Board of Directors approving the Offering.
4. Form of Indenture filed as an exhibit to the Registration Statement.
5. The Registration Statement.
6. Good Standing Certificate from the Secretary of State of the State
of Delaware.
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
EXHIBIT 12 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of the
Company for the five fiscal years ended June 30, 1999 computed by dividing net
fixed charges (interest expense on all debt plus the interest element of
operating leases) into earnings (income before income taxes and fixed charges).
<TABLE>
<CAPTION>
For Fiscal Years Ended
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earnings $ 14,088 $ 11,455 $ 5,940 $ 2,319 $ 581
Income tax expense 7,763 6,435 3,062 802 313
Interest charges 22,427 13,190 5,175 2,668 1,213
Amortization of debt issuance costs 1,012 1,171 535 505 436
Interest portion of rental expense 232 136 40 32 16
----------- ------------ ----------- ----------- ------------
Earnings available to cover
fixed charges $ 45,522 $ 32,387 $ 14,752 $ 6,326 $ 2,559
=========== ============ =========== =========== ============
Fixed charges
Interest charges 22,427 13,190 5,175 2,668 1,213
Amortization of debt issuance costs 1,012 1,171 535 505 436
Interest portion of rental expense 232 136 40 32 16
----------- ------------ ----------- ----------- ------------
Total fixed charges $ 23,671 $ 14,497 $ 5,750 $ 3,205 $ 1,665
=========== ============ =========== =========== ============
Ratio of earnings to fixed charges 1.92 2.23 2.56 1.97 1.54
=========== ============ =========== =========== ============
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
Bala Cynwyd, PA
We hereby consent to the use in this Registration Statement on Form S-2 of
our report dated September 9, 1999, 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
September 17, 1999
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM T-1
Statement of Eligibility Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
U.S. BANK TRUST NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0257700
- ------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
U.S. Bank Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 87-0418807
- ------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Subordinated Debentures
-----------------------------------
(Title of the Indenture Securities)
<PAGE>
GENERAL
-------
1. General Information Furnish the following information as to the Trustee.
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation. None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement
of eligibility and qualification.
1. Copy of Articles of Association.*
2. Copy of Certificate of Authority to Commence Business.*
3. Authorization of the Trustee to exercise corporate trust powers
(included in Exhibits 1 and 2; no separate instrument).*
4. Copy of existing By-Laws.*
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the act.
7. Copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority is incorporated by reference to Registration Number
333-70709.
* Incorporated by reference to Registration Number 22-27000.
<PAGE>
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, U.S. Bank Trust National Association, an Association organized and
existing under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Saint Paul and State of Minnesota on the 16th day of September,
1999.
U.S. BANK TRUST NATIONAL ASSOCIATION
/s/ Laurie Howard
-------------------------
Laurie Howard
Vice President
/s/ Gloria Kessler
- ------------------
Gloria Kessler
Assistant Secretary
<PAGE>
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, U.S. BANK TRUST NATIONAL ASSOCIATION hereby consents that
reports of examination of the undersigned by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon its request therefor.
Dated: September 16, 1999
U.S. BANK TRUST NATIONAL ASSOCIATION
/s/ Laurie Howard
-----------------
Laurie Howard
Vice President
<PAGE>
1.800.776.4001
ABFS
PLUG INTO THE FUTURE
Sample A. Sample
Apt. 1-A
123 Any Street
Anytown, US 12345-6789 [GRAPHIC OMITTED] [GRAPHIC OMITTED]
AT YOUR REQUEST,
ABFS IS PLEASED TO PROVIDE YOU WITH THE ENCLOSED INFORMATION FOR YOUR REVIEW.
Dear Investor:
American Business Financial Services, Inc. (ABFS) is pleased to present its
newest prospectus dated ____________. The new prospectus details an offering
worth $300.0 million of American Business Financial Services, Inc. Investment
Notes and Money Market Securities. This prospectus replaces the prospectus
dated October 20, 1998.
ABFS experienced healthy increases during Fiscal 1999 in revenues, net income,
and loan originations. The Company embarked on several strategic initiatives to
take ABFS into the new millennium and beyond. The following information provides
a detailed look at our year-end results:
> > Revenue grew 45.7 percent to $86.4 million for the year ended June 30,
1999.
> > Net income was $14.1 million, representing a 23 percent increase over
net income in fiscal 1998.
> > Total loan and lease originations grew 78 percent to $862.4 million for
fiscal 1999.
In its eleven year history, the ABFS Investment Note program has grown to
include thousands of satisfied customers. ABFS Investment Notes offer many
benefits to investors like yourself--such as fixed rates, interest compounded
daily until maturity, flexible terms you choose, and interest payments paid
monthly, quarterly, semiannually, annually, or at maturity.
ABFS invites you to consider its Investment Notes as part of your investment
strategy. Please read the attached Prospectus carefully, including the "Risk
Factors," before investing. To invest with ABFS, complete, sign, and mail the
Investor Order Form, along with your check made payable to ABFS, in the enclosed
postage-paid envelope.
American Business Financial Services thanks you for your interest in its
Investment Notes. Please feel free to call one of our Investment Officers at
1-800-776-4001 with any questions you may have.
Sincerely,
/s/ Anthony J. Santilli what's inside
- -----------------------
Anthony J. Santilli >> Investor Order Forms
Chairman & CEO >> Reply Envelope
American Business Financial Services, Inc. >> Questions & Answers
>> Prospectus
>> Rate Supplement
[GRAPHIC OMITTED]
BalaPointe Office Centre o 111 Presidential Boulevard,
Suite 215 o Bala Cynwyd, PA 19004
www.ABFSonline.com
<PAGE>
[GRAPHIC OMITTED]
short trim
<PAGE>
ABFS Investment Notes
Begin Earning These High Rates
Prospectus Supplement dated October x, xxxx.
Term Rate Annual Yield*
Minimum for Investment Notes and Money Market Notes $1,000
For more information, call
1-800-776-4001
[GRAPHIC OMITTED]
2255 Glades Road BalaPointe Office Centre 2425 East Camelback Road
Suite 311E 111 Presidential Boulevard Suite 1065
Boca Raton, FL 33431 Bala Cynwyd, PA 19004 Phoenix, AZ 85016
- --------------------------------------------------------------------------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC. IS A NASDAQ LISTED COMPANY (ABFI).
- --------------------------------------------------------------------------------
An offer can only be made by the Prospectus dated October XX, XXXX, delivered in
conjunction with this Rate Supplement dated October XX, XXXX. See "Risk Factors"
in the Prospectus for a discussion of certain factors which should be considered
in connection with an Investment in the Notes.
* Interest is compounded daily based on a 365-day year. The effective annual
yield assumes all interest remains invested for 365 days. Subordinated
Investment Notes represent obligation of the Company and are not
certificates of deposit or insured by the FDIC or any governmental or
private entity. This announcement is neither an offer to sell nor a
solicitation of an offer to buy Subordinated Investment Notes. This offer is
made by prospectus only. The rates for the Investment Notes are available
through November XX, XXXX.
** The interest rate paid on the Money Market Notes is subject to change from
time to time at the Company's sole discretion provided that such rate shall
not be reduced below 4.0% per year. Written notice of any decrease in rate
will be provided to holders of such notes at least 14 days prior to the
effective date of the change. No notice will be provided in connection with
an increase in the interest rate paid on such notes.
<PAGE>
If you require assistance in
completing the order form, [GRAPHIC OMITTED]
just call 1-800-776-4001.
investor order form
(Place in the prepaid envelope)
- --------------------------------------------------------------------------------
INVESTOR: Please indicate your investment order below. Fill in all terms and
amounts.
- --------------------------------------------------------------------------------
Investment Notes
Enclosed is my check for the purchase of an American Business Financial
Services, Inc., Investment Note(s). ($1,000 minimum per note.)
Please check one of the following interest payment options:
[ ] Compound interest daily and pay at maturity.
If no interest option is checked, interest will be compounded daily and
paid at maturity.
[ ] Compound interest daily and pay interest by check. (on maturities of 12
months or longer)
[ ] Monthly [ ] Quarterly [ ] Semi-Annually [ ] Annually
I have indicated below the amount I wish to invest for each term selected:
(Notes purchased at 18 months or longer are entitled to Bonus basis-points)
+ BONUS .25%
Term _____________________________ Amount $_______________ [ ]
Term _____________________________ Amount $_______________ [ ]
Term _____________________________ Amount $_______________ [ ]
Term _____________________________ Amount $_______________ [ ]
The TOTAL Amount of my INVESTMENT NOTE Purchase is: $_____________
Rates established at the date of purchase and set forth in the current
Prospectus and Rate Supplement and fixed until maturity.
Money Market Notes
Enclosed is my check for the purchase of American Business Financial Service,
Inc. Investment Money Market Note(s). Initial Rate is established at the date of
purchase and is calculated as set forth in the current prospectus.
The TOTAL Amount of my MONEY MARKET NOTE Purchase is $____________
(minimum $1,000)
- --------------------------------------------------------------------------------
INVESTOR: Please print all information below to complete your order.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Registration Information
<S> <C> <C>
Registered Owner _______________________________________ SSN/EIN _____________________________
Telephone Number (___)__________________________________ Date of Birth _______________________
Street Address_________________________________________________________________________________
City ____________________________________________________ State _______________ Zip ___________
Second Joint Owner (if applicable)_______________________ SSN _________________________________
Beneficiary Name ________________________________________ Beneficiary SSN _____________________
Custodian's Name (Only one allowed by Law) ____________________________________________________
Minor's Name ____________________________________________ Minor's SSN _________________________
Under the Uniform Gifts to Minors Act
</TABLE>
Signature Verification
Under penalties of perjury, I certify that:
1. The social security number show on this form is correct.
2. I have received the prospectus and understand that American Business
Financial Services, Inc., Investment Note(s) and Money Market Note(s) are not
bank savings or deposit accounts and are not insured by the U.S. Government
or any instrumentality thereof.
3. I am not subject to backup withholding, either because I have not been
notified by the Internal Revenue Service (IRS) that I am subject to backup
withholding as a result of a failure to report all interest or dividends, or
the IRS has notified me that I am no longer subject to backup withholding.
Only cross out subpart (3) if you are subject to backup withholding.
Signature of Registered Owner_______________________________ Date _____________
Joint Signature (if applicable)_____________________________ Date _____________
Payment Instructions
Make your checks payable to: American Business Financial Services, Inc.
BalaPointe Office Centre o 111 Presidential Boulevard o Bala Cynwyd, PA 19004
<PAGE>
Frequently asked questions about
ABFS Investment Notes and
Money Market Notes . . .
Question
What are American Business Financial Services, Inc. (ABFS) Investment Notes and
Money Market Notes ("Notes")?
Answer
ABFS Investment Notes and Money Market Notes ("Notes") are unsecured
subordinated promissory notes issued by American Business Financial Services,
Inc., a financial services holding company. ABFS Notes represent debt
obligations of American Business Financial Services, Inc.
Question
Are these Notes insured or guaranteed?
Answer
The Notes are not certificates of deposit or insured by the FDIC or any other
governmental or private entity. ABFS relies on revenues from loan sales, working
capital, additional debt financing, and securitization transactions to repay
principal and interest on ABFS Notes.
Question
Why should I consider including ABFS Notes in my investment portfolio?
Answer
ABFS Notes pay competitive rates when compared to other investments of
similar risks and maturities. The Notes also offer flexibility to choose from a
selection of terms and interest payment options. With Investment Notes, you have
the opportunity to earn high fixed rates and eliminate the risk of market
fluctuations that may affect your principal or interest rate. Our Money Market
Notes provide a higher degree of liquidity in a variable rate investment.
ABFS Notes are subject to the risks associated with any uninsured subordinated
investment.
Question
What are the investment requirements?
Answer
ABFS Notes are offered at a minimum of $1,000. However, you can invest $3,000,
$5,000, $10,000, or any amount you wish. You may select terms from 3 months to
10 years. Our Money Market Notes have no stated maturity. You have the
flexibility to choose the amount and the term that best meet your investment
needs.
The enclosed Prospectus and Rate Supplement describe our Investment Notes, Money
Market Notes, and Company in considerable detail. Please read the material in
order to make any informed decisions.
Question
Can I invest in ABFS Investment Notes through my IRA, KEOGH, or SEP?
Answer
You can invest in ABFS Investment Notes through IRAs, Keoghs, Seps, and other
qualified plans. You may use your current trustee or custodian if they permit.
Money Market Notes are not eligible for IRAs or Keoghs. You may wish to consult
a financial advisor and should review the risk factors before making such an
investment.
<PAGE>
Frequently asked questions about
ABFS Investment Notes and
Money Market Notes. . .
Question
Can my interest be used to supplement my income?
Answer
Yes. You may select to have your interest sent to you monthly, quarterly,
semi-annually, or annually on Investment Notes with maturities of 12 months or
longer...or you may want to take advantage of the power of compound interest and
leave your interest until maturity.
Question
May I redeem my ABFS investment note before maturity?
Answer
Redemptions will be permitted prior to maturity only in the event of death or,
in certain cases, total permanent disability of a registered owner. Money Market
Notes may be redeemed at any time.
Question
What fees or commissions will I pay?
Answer
Absolutely none. There are no fees and no commissions. You pay nothing extra and
nothing is deducted. This means every dollar of your investment is earning
interest for you. An annual maintenance fee may be charged by the custodian for
IRA/KEOGH/SEP accounts.
Question
How do I invest?
Answer
It's easy. After reading the Prospectus and Rate Supplement, simply complete and
sign the appropriate Investor Order Form. Please be certain to indicate how long
you wish to invest and how often you want to receive your interest. Finally,
return the Investor Order Form along with your check, payable to American
Business Financial Services, Inc., in the self-addressed stamped envelope
provided. You also have the option of making an investment online. Visit our
website at ABFSonline.com to learn more about our investment notes.
This brochure is neither an offer to sell nor a solicitation of an offer to buy
securities. Such an offer can only be made by Prospectus accompanied by a
current Rate Supplement. Investments should be considered only after a careful
review of all risk factors contained in the Prospectus.
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. (ABFS)
PROVIDES FINANCIAL PRODUCTS AND SERVICES TO INDIVIDUALS AND
BUSINESSES THROUGH OUR SPECIALIZED COMPANIES.
ABFS operates through our financial organizations:
[GRAPHIC OMITTED]
Our business loan company has helped many small businesses realize their full
potential with loans ranging from $15,000 to $350,000. With our network of
highly trained sales professionals, ABC does business in the Northeast,
Mid-Atlantic, and Southeast regions. Real estate collateral is required.
[GRAPHIC OMITTED]
NJMIC has built its reputation in the direct-to-broker lending business by
delivering first and second mortgages quickly and easily. As a recognized
industry leader in lending to people with past or even present credit problems,
we offer a loan program for every type of borrower. NJMIC has retail branches in
Delaware, Florida, Maryland, New Jersey, New York, Ohio, and Pennsylvania.
[GRAPHIC OMITTED]
Upland Mortgage offers first and second mortgages personalized to suit the needs
of our customers. We make loans to customers with perfect and less-than-perfect
credit for debt consolidation, home improvement, and a variety of other consumer
needs. Upland conducts business in the Northeast, Mid-Atlantic, and Southeast
regions with retail branches in Florida, Georgia, Maryland, Mississippi, New
Jersey, Pennsylvania, Tennessee, and Virginia. Upland Mortgage offers an easy
application process and some of the most competitive rates around.
[GRAPHIC OMITTED]
The Processing Service Center, Inc. and the Bank Alliance Program(R) brings
success to client banks by increasing loan volume, thus generating fee income
and gaining additional CRA credit. PSC does this simply by adding a sub-prime
home equity loan product alternative to the banks existing product mix. The
transaction is transparent to bank customers.
For more information, call
1-800-776-4001
[GRAPHIC OMITTED]
BalaPointe Office Centre o 111 Presidential Boulevard,
Suite 215 o Bala Cynwyd, PA 19004
- --------------------------------------------------------------------------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC. IS A NASDAQ LISTED COMPANY (ABFI).
- --------------------------------------------------------------------------------
An offer can only be made by the Prospectus delivered in conjunction with a Rate
Supplement. See "Risk Factors" for a discussion of certain factors which should
be considered in connection with an Investment in the Notes. *The Effective
Annual Yield assumes all interest reinvested daily at the stated rate. The
interest rate paid on the Money Market Notes is subject to change from time to
time at the Company's sole discretion provided that such rate shall not be
reduced below 4.0% per year. Written notice of any decrease in rate will be
provided to holders of such notes at least 14 days prior to the effective date
of the change. No notice will be provided in connection with an increase in the
interest rate paid on such notes.
GO6285 PW
