<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 0-22474
-------
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 No.)
111 Presidential Boulevard, Bala Cynwyd, PA 19004
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(610) 668-2440
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the past 90
days.
Yes __X__ No ____
As of November 9, 1999, there were 3,405,279 shares of the registrant's Common
Stock issued and outstanding.
================================================================================
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Information
Consolidated Balance Sheets as of September 30, 1999
and June 30, 1999.............................................................................................. 2
Consolidated Statements of Income for the three months ended
September 30, 1999 and 1998.................................................................................... 3
Consolidated Statements of Stockholders' Equity for the three months ended
September 30, 1999 and 1998.................................................................................... 4
Consolidated Statements of Cash Flow for the three months ended
September 30, 1999 and 1998.................................................................................... 5
Notes to Consolidated Financial Statements......................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk.......................................................... 30
PART II OTHER INFORMATION.................................................................................................. 31
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1- Financial Information
American Business Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------ ----------
(Unaudited) (Note)
<S> <C> <C>
Assets
Cash and cash equivalents $ 24,378 $ 22,395
Loan and lease receivables, net
Available for sale 46,069 33,776
Other 8,046 6,863
Interest-only and residual strips 202,318 178,218
Receivable for sold loans and leases 55,039 66,086
Prepaid expenses 2,471 1,671
Property and equipment, net 12,538 10,671
Servicing rights 50,099 43,210
Other assets 28,981 33,411
---------- ----------
Total assets $ 429,939 $ 396,301
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Subordinated debt and notes payable $ 296,232 $ 270,343
Accounts payable and accrued expenses 30,436 26,826
Deferred income taxes 20,432 16,604
Other liabilities 20,963 24,282
---------- ----------
Total liabilities 368,063 338,055
---------- ----------
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: 3,579,504 and 3,703,514 shares (including treasury
shares of 38,200 and 116,550) 3 3
Additional paid-in capital 23,943 23,339
Accumulated other comprehensive income 4,035 3,354
Retained earnings 34,980 33,596
Treasury stock, 38,200 and 116,550 shares (485) (1,446)
---------- ----------
62,476 58,846
Note receivable (600) (600)
---------- ----------
Total stockholders' equity 61,876 58,246
---------- ----------
Total liabilities and stockholders' equity $ 429,939 $ 396,301
========== ==========
</TABLE>
Note: The balance sheet at June 30, 1999 has been derived from the audited
financial statements at that date.
See accompanying notes to consolidated financial statements.
2
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended
September 30,
-----------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues
Gain on sale of loans and leases $ 19,121 $ 13,781
Interest and fees 7,509 4,539
Servicing income 1,189 490
Other income 1 14
--------- ---------
Total revenues 27,820 18,824
--------- ---------
Expenses
Interest 7,646 4,803
Provision for credit losses 141 126
Employee related costs 1,995 1,213
Sales and marketing 7,612 5,358
General and administrative 4,109 2,142
--------- ---------
Total expenses 21,503 13,642
--------- ---------
Income before provision for income taxes 6,317 5,182
Provision for income taxes 2,527 1,762
--------- ---------
Net income $ 3,790 $ 3,420
========= =========
Earnings per common share
Basic $ 1.06 $ 0.92
========= =========
Diluted $ 1.03 $ 0.90
========= =========
Average Common Shares:
Basic 3,580 3,700
Diluted 3,685 3,824
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------------- Accumulated
Number Additional Other
Of Shares Paid-In Comprehensive Retained
Outstanding Amount Capital Income Earnings
--------------- ----------- ------------ ----------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1999 3,587 $ 3 $ 23,339 $ 3,354 $ 33,596
Comprehensive income:
Net income -- -- -- -- 3,790
Unrealized gains on investment securities -- -- -- 681 --
-------- ------- ----------- ---------- ----------
Total comprehensive income -- -- -- 681 3,790
-------- ------- ----------- ---------- ----------
Exercise of stock options 1 -- -- --
Repurchase of treasury shares (47) -- -- -- --
Cash dividends ($0.07 per share) -- -- -- -- (250)
Stock dividend (5% of outstanding shares):
Issuance of treasury shares -- -- -- -- --
Issuance of new shares -- -- 604 -- (2,156)
-------- ------- ----------- ---------- ----------
Balance, September 30, 1999 3,541 $ 3 $ 23,943 $ 4,035 $ 34,980
======== ======= =========== ========== ==========
Balance, June 30, 1998 3,699 $ 3 $ 23,256 $ -- $ 20,083
Comprehensive income:
Net income -- -- -- -- 3,420
-------- ------- ----------- ---------- ----------
Total comprehensive income -- -- -- -- 3,420
-------- ------- ----------- ---------- ----------
Cash dividends ($0.015 per share) -- -- -- -- (52)
-------- ------- ----------- ---------- ----------
Balance, September 30, 1998 3,699 $ 3 $ 23,256 $ -- $ 23,451
======== ======= =========== ========== ==========
</TABLE>
[RESTUB]
<TABLE>
<CAPTION>
Total
Treasury Note Stockholders'
Stock Receivable Equity
------------ -------------- ---------------
<S> <C> <C> <C>
Balance, June 30, 1999 $ (1,446) $ (600) $ 58,246
Comprehensive income:
Net income -- -- 3,790
Unrealized gains on investment securities -- -- 681
---------- --------- ----------
Total comprehensive income -- -- 4,471
---------- --------- ----------
Exercise of stock options -- -- --
Repurchase of treasury shares (591) -- (591)
Cash dividends ($0.07 per share) -- -- (250)
Stock dividend (5% of outstanding shares):
Issuance of treasury shares 1,552 -- 1,552
Issuance of new shares -- -- (1,552)
---------- --------- ----------
Balance, September 30, 1999 $ (485) $ (600) $ 61,876
========== ========= ==========
Balance, June 30, 1998 $ -- $ (600) $ 42,742
Comprehensive income:
Net income -- -- 3,420
---------- --------- ----------
Total comprehensive income -- -- 3,420
---------- --------- ----------
Cash dividends ($0.015 per share) -- -- (52)
---------- --------- ----------
Balance, September 30, 1998 $ -- $ (600) $ 46,110
========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended
September 30,
--------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,790 $ 3,420
Adjustments to reconcile net income to net
cash used in operating activities:
Gain on sale of loans and leases (19,121) (13,781)
Depreciation and amortization 4,428 2,066
Interest accretion on interest-only and residual strips (2,749) --
Provision for credit losses 141 126
Accounts written off, net (10) (153)
Loans and leases originated for sale (262,737) (204,356)
Proceeds from sale of loans and leases 235,048 170,971
Principal payments on loans and leases 1,290 2,297
Increase in accrued interest and fees on
loan and lease receivables (1,183) (845)
Increase in overcollateralization on securitized loans and leases (2,007) (2,000)
Decrease in interest-only and residual strips 4,278 2,124
Decrease (increase) in receivable for loans and leases sold 13,277 (7,816)
Increase in prepaid expenses (800) (580)
Increase in accounts payable and accrued expenses 3,610 762
Increase in deferred income taxes 3,389 7
(Decrease) increase in loans in process (3,319) 12,696
Increase (decrease) in other, net 3,477 (1,317)
---------- ----------
Net cash used in operating activities (19,198) (36,379)
---------- ----------
Cash Flows from Investing Activities:
Purchase of property and equipment, net (2,800) (1,624)
Purchase of investment -- (646)
Principal receipts on investments 6 239
---------- ----------
Net cash used in investing activities (2,794) (2,031)
---------- ----------
</TABLE>
5
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow (continued)
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended
September 30,
---------------------------------
1999 1998
----------- ---------
<S> <C> <C>
Cash Flows from Financing Activities:
Proceeds from issuance of subordinated debt $ 45,249 $ 25,843
Redemptions of subordinated debt (16,693) (9,653)
Net (repayments) borrowings on revolving lines of credit (1,722) 24,212
Principal payments on note payable, other (945) (563)
Financing costs incurred (1,073) (1,834)
Cash dividend paid (250) (52)
Repurchase of treasury stock (591) --
---------- ---------
Net cash provided by financing activities 23,975 37,953
---------- ---------
Net increase (decrease) in cash and cash equivalents 1,983 (457)
Cash and cash equivalents, beginning of period 22,395 4,486
---------- ---------
Cash and cash equivalents, end of period $ 24,378 $ 4,029
========== =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 7,646 $ 4,484
Income taxes $ -- $ 2,262
</TABLE>
6
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
1. Basis of Financial Statement Presentation
American Business Financial Services, Inc. ("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 businesses secured by real
estate and other business assets, mortgage and home equity loans,
including loans 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.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and the elimination of intercompany
balances) considered necessary for a fair presentation have been
included. Operating results for the three month period ended September
30, 1999 are not necessarily indicative of financial results that may
be expected for the full year ended June 30, 2000. These unaudited
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999.
Certain prior period financial statement balances have been
reclassified to conform to the current period presentation. All
outstanding share, average common share and earnings per common share
amounts have been retroactively adjusted to reflect the effect of a 5%
stock dividend declared August 18, 1999, and paid September 27, 1999.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
the Statement of Financial Accounting Standards 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 entities 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 in August 1999, the FASB issued the Statement of Financial
Accounting Standards No. 137, which deferred the effective date of the
standard 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.
7
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
In October 1998, the 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, 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, had been reclassified to available-for-sale on
January 1, 1999.
2. Loan and Lease Receivables - Available for Sale
Loan and lease receivables available for sale which are held in the
Company's portfolio were as follows (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------ ---------
<S> <C> <C>
Real estate secured loans $ 27,148 $ 21,027
Leases net of unearned income of $2,699
and $1,543 19,754 13,451
--------- --------
46,902 34,478
Less: Allowance for credit losses on loans and leases
available for sale 833 702
--------- --------
$ 46,069 $ 33,776
========= ========
</TABLE>
3. Interest-Only and Residual Strips
Activity for interest-only and residual strips during the three-month
period ended September 30, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period $ 178,218
Initial recognition of interest-only and residual strips 24,509
Interest accretion 2,749
Cash receipts (4,278)
Net adjustments to fair value 1,120
---------
Balance at end of period $ 202,318
=========
</TABLE>
8
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
September 30, 1999
4. Servicing Rights
Activity for servicing rights during the three-month period ended
September 30, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period $ 43,210
Initial recognition of servicing rights 9,344
Amortization (2,455)
---------
Balance at end of period $ 50,099
=========
</TABLE>
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, referred to as a stratum, for the predominant risk
characteristics of the underlying loans and leases, which consist of
loan type, credit quality and other factors. Impairments if they
occurred would be recognized in a valuation allowance for each impaired
stratum in the period of impairment. At September 30, 1999 no
valuation allowance for impairment is required.
5. Other Assets
Other assets were comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
----------- --------
<S> <C> <C>
Goodwill, net of accumulated amortization
of $2,197 and $1,913 $ 14,734 $ 15,018
Financing costs, debt offering costs, net of
accumulated amortization of $4,633 and $3,903 4,865 4,487
Due from securitization trusts 3,780 6,266
Investments held to maturity (mature October 1999
through April 2011) 1,008 1,014
Real estate owned 843 843
Other 3,751 5,783
--------- --------
$ 28,981 $ 33,411
========= ========
</TABLE>
9
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
September 30, 1999
6. Subordinated Debt and Notes Payable
Subordinated debt and notes payable were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------ ---------
<S> <C> <C>
Subordinated debentures (a) $ 235,887 $ 206,918
Subsidiary subordinated debentures (b) 4,321 4,735
Warehouse revolving line of credit (c) 33,780 42,626
Warehouse revolving line of credit (d) 7,732 3,764
Warehouse revolving line of credit (e) 5,259 102
Revolving line of credit (f) 3,000 5,000
Repurchase agreement (g) 4,677 4,677
Senior subordinated debt (h) 617 1,250
Other debt 959 1,271
---------- ---------
$ 296,232 $ 270,343
========== =========
</TABLE>
(a) Subordinated debentures due October 1999 through September 2009,
interest rates ranging from 6.15% to 12.00%; subordinated to all of
the Company's indebtedness.
(b) Subsidiary subordinated debentures due October 1999 through May
2003, interest rates ranging from 9.00% to 10.45%; subordinated to
all of the Company's senior indebtedness.
(c) $150 million warehouse revolving line of credit expiring October
2000, interest rates ranging from LIBOR plus 1.375% to LIBOR plus
2.0%, collateralized by certain loan receivables.
(d) $20 million warehouse revolving line of credit expiring September
2000, interest rates at prime less 1.0% or LIBOR at the Company's
option, collateralized by lease receivables.
(e) $150 million warehouse line of credit expiring August 2000,
interest rate of LIBOR plus 1.0%, collateralized by loan
receivables.
(f) $5 million revolving line of credit expiring December 1999,
interest rate of LIBOR plus 2.0%, collateralized by certain
residual interests in securitization trusts.
(g) Repurchase agreement due October 1999, interest rate of LIBOR plus
0.5%, collateralized by certain lease backed securities.
(h) Senior subordinated debt due through December 1999, interest rate
of 12.0%, subordinated to certain subsidiary's senior indebtedness.
10
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
September 30, 1999
7. Earnings Per Share
Following is a reconciliation of the Company's basic and diluted
earnings per share calculations (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months ended
September 30,
----------------------------------
1999 1998
--------- --------
<S> <C> <C> <C>
Earnings
(a) Net income $ 3,790 $ 3,420
Average Common Shares
(b) Average common shares outstanding 3,580 3,700
Average potentially dilutive shares 105 124
--------- ========
(c) Average common and potentially dilutive shares 3,685 3,824
========= ========
Earnings Per Common Share
Basic (a/b) $ 1.06 $ 0.92
Diluted (a/c) $ 1.03 $ 0.90
</TABLE>
8. Segment Information
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 including loans 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 securities 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 Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of
an Enterprise and Related Information" 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.
11
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
September 30, 1999
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>
Three months ended Loan and Investment
September 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 $19,121 $ - $ - $ - $ - $ 19,121
Interest income 1,409 226 - 3,050 - 4,685
Non-interest income 896 - 3,118 - - 4,014
Inter-segment revenues - 7,038 - 2,247 (9,285) -
Operating expenses:
Interest expense 4,729 5,478 20 4,457 (7,038) 7,646
Non-interest expense 10,460 1,610 1,356 431 - 13,857
Inter-segment expense 2,247 - - - (2,247) -
Income tax expense 1,596 70 697 164 - 2,527
------- ------- ------- -------- ------- --------
Net income $ 2,394 $ 106 $ 1,045 $ 245 $ - $ 3,790
======= ======= ======= ======== ======= ========
Segment assets $86,508 $20,232 $49,349 $273,850 $ - $429,939
======= ======= ======= ======== ======= ========
</TABLE>
12
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
PART 1. FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Our consolidated financial information set forth below should be read
in conjunction with the consolidated financial statements and the accompanying
notes to consolidated financial statements included in Item 1. of this Quarterly
Report, and the consolidated financial statements, notes to consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the year ended June 30, 1999.
Forward Looking Statements
When used in this Quarterly Report on Form 10-Q the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "projected," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including but not limited to general economic conditions, changes
in interest rates, changes in future residential real estate values, regulatory
changes (legislative or otherwise) affecting the real estate market and mortgage
lending activities, competition, demand for our services, availability of
funding, loan payment rates, delinquency and default rates, changes in factors
influencing the loan securitization market and other risks identified in our
Securities and Exchange Commission filings. Such factors, which are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, could affect our financial performance and could cause the actual
results for future periods to differ materially from any opinion or statements
expressed herein with respect to future periods. As a result, we wish to caution
readers not to place undue reliance on any such forward looking statements,
which speak only as of the date made.
General
American Business Financial Services, Inc. is a retail financial
services organization operating throughout the United States. We originate sell
and service business purpose loans, home equity loans, first mortgage loans and
equipment leases through our principal direct and indirect subsidiaries. We also
underwrite, process and purchase home equity loans through the Bank Alliance
Program whereby we purchase home equity loans from financial institutions that
do not meet the underlying guidelines of the selling institutions but meet our
underwriting criteria. Loans originated primarily consist of fixed rate loans
secured by first or second mortgages on single family residences. Our customers
include credit impaired borrowers and other borrowers who would qualify for
loans from traditional sources but who are attracted to our loan and lease
products due to our personalized service and timely response to loan or lease
applications. We originate loans and leases through a retail branch network of
26 offices. In addition we sell subordinated debt securities to the public, the
proceeds of which are used to fund loan and lease originations and our
operations.
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 additional loan and lease originations and
to provide additional sources of revenue through retained mortgage and lease
servicing rights. We rely primarily on securitizations to generate cash proceeds
for repayment of warehouse credit facilities and other borrowings. 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.
13
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 requires 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, operating
results for a given quarter can fluctuate significantly as a result of the
timing and level of securitizations.
The gain on sale of 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 to 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.
Our growth strategy is dependent upon our ability to increase our 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,
our ability to obtain adequate financing on favorable terms, profitably
securitize our 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.
Securitization Accounting Considerations
When we securitize our loans and leases by selling them to trusts we
receive 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 the pool of securitized loans and leases. These
securities which are senior to our residual interest in the trusts, are sold to
public investors. In addition, when we securitize our loans and leases we retain
the right, for a fee, to service the loans and leases. Servicing includes
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.
As the holder of 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 loan and lease 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.
14
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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, our retained residual interests in the securitization and retained
servicing rights, based upon their relative fair values.
The calculation of the fair value of residual interests and servicing
rights is based upon the present value of the future expected excess cash flows
from the securitized loans and leases 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 or leases. The rate of prepayment of loans
and leases 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 prepayment 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. To the extent that prepayments or defaults 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.
Interest-only and residual strips and servicing rights are periodically
revalued 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.
15
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following chart presents certain key assumptions used in the
initial valuation and periodic revaluation performed on our interest-only and
residual strips and servicing rights from securitizations during the first
quarter of fiscal 2000.
Initial Periodic
Valuation Revaluation
-----------------------------------------------------------------------------
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 - 10.0%(b) 3.0 - 13.0%(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 -- 0.26%
Business purpose loans -- 0.11%
Business equipment leases -- 0.60%
-----------------------------------------------------------------------------
(a) Ramped over 12 to 18 months
(b) Ramped over 24 months
(c) Residual values are continuously adjusted based on actual experience.
16
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
RESULTS OF OPERATIONS
Summary Financial Results
(dollars in thousands, except per share data)
Three Months ended
September 30,
-----------------------
Percentage
1999 1998 increase
--------- --------- ----------
Total revenues........................ $ 27,820 $ 18,824 47.8%
Total expenses........................ 21,503 13,642 57.6
Net income............................ 3,790 3,420 10.8
Return on average equity.............. 25.03% 30.21%
Return on average assets.............. 3.64 5.27
Earnings per share:
Basic............................... $ 1.06 $ 0.92 15.2%
Diluted............................. 1.03 0.90 14.4
Dividends declared per share.......... 0.07 0.015 366.7
Net Income. For the first quarter of fiscal 2000 net income increased
$0.4 million, or 10.8%, to $3.8 million from $3.4 million for the first quarter
of fiscal 1999. Basic earnings per common share increased to $1.06 on average
common shares of 3,579,966 compared to $0.92 per share on average common shares
of 3,699,576 for the first quarter of fiscal 1999. Diluted earnings per common
share increased to $1.03 on average common shares of 3,684,548 compared to $0.90
per share on average common shares of 3,824,119 for the first quarter of fiscal
1999. All fiscal 1999 average common share and per share amounts have been
retroactively adjusted to reflect the effect of a 5% stock dividend declared
August 18, 1999, and paid on September 27, 1999.
Increases in net income and earnings per share primarily resulted from
the impact of growth in the volume of loans and leases originated and
securitized during the period and increases in the collection of fee income due
to growth 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 first quarter of fiscal 2000, the quarterly dividend was
increased by 366.7% to $0.07 per share from $0.015 per share in the first
quarter of fiscal 1999. The common dividend payout ratio based on diluted
earnings per share was 6.8% for the first quarter of fiscal 2000, compared to
1.7% for the first quarter of fiscal 1999.
As previously announced on July 17, 1998 our Board of Directors
authorized the repurchase of up to 10% of the outstanding shares of our common
stock over a one-year period. In May 1999 the repurchase period was extended for
an additional year to July 2000 to repurchase an additional 10%. In the first
quarter of fiscal 2000, 46,400 shares were repurchased representing 1.3% of the
outstanding shares. Of the prior repurchases 38,200 shares remained in treasury
after the use of shares for the 5% stock dividend described above.
17
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Total Revenues. For the first quarter of fiscal 2000, total revenues
increased $9.0 million, or 47.8%, to $27.8 million from $18.8 million for the
first quarter of fiscal 1999. Growth in total revenue was the result of
increased gains on sales of loans and leases as a result of the increased volume
of loans and leases securitized, increases in interest and fees collected on
loans and leases originated and, to a lesser extent, increases in servicing
income due to the growth of the total managed portfolio.
Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $5.3 million, or 38.7%, to $19.1 million for the first quarter of
fiscal 2000 from $13.8 million in the first quarter of fiscal 1999. The increase
was the result of selling $210.2 million of loans and leases through
securitizations in fiscal 2000, including, $24.2 million of business purpose
loans, $176.7 million of home equity loans and $9.3 million of equipment leases
compared to $13.6 million of business purpose loans, $126.3 million of home
equity loans and $13.5 million of equipment leases in the first quarter of
fiscal 1999.
Gain on sale of loans and leases as a percentage of loans and leases
securitized were 9.1% in fiscal 2000, compared to 8.9% in fiscal 1999. Factors
impacting the year to year comparability of the gain percentage included
increases in the relative percentage of business purpose loans to home equity
loans securitized. Business purpose loans have a higher coupon rate which
results on an increased value of our residual interests in the pool of
securitized loans. This factor was offset by the impact of the January 1, 1999
adoption of the Statement of Financial Accounting Standards 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). 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. In
accordance with the provisions of SFAS No. 134, we have reclassified our
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. The adoption of SFAS No. 134 did not have a
material effect on our financial condition, but reduced gains on sale by $3.3
million pre-tax in the quarter ended September 30, 1999.
The following schedule details our loan and lease originations during the
three-month periods ended September 30, 1999 and 1998 (in thousands):
Three Months ended
September 30,
-------------------------------
1999 1998
---------- ----------
Business purpose loans $ 23,411 $ 12,688
Home equity loans 208,262 167,012
Equipment leases 15,509 24,656
---------- ----------
$ 247,182 $ 204,356
========== ==========
18
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Loan originations for our business loan subsidiary, American Business
Credit, Inc., which offers business purpose loans secured by real estate
increased $10.7 million, or 84.5%, to $23.4 million from $12.7 million in the
first quarter of fiscal 1999. This increase is attributable geographic to
expansion of American Business Credit's lending program including recent
expansion into the Chicago market place.
Home equity loans originated by our subsidiaries Upland Mortgage, New
Jersey Mortgage and Investment Corp. and Processing Service Center increased
$41.3 million, or 24.7%, to $208.3 million from $167.0 million for the first
quarter of fiscal 1999. The home equity business line continued to phase in
advanced Internet technology through our web site www. UplandMortgage.com. This
site now takes online loan applications and incorporates our proprietary Rapid
Credit Approval system and an advanced e-mail system. These capabilities are
part of an overall strategy to pursue a fully automated web site by the first
quarter of the year 2000.
Leases originated by our subsidiary American Business Leasing decreased
$9.1 million, or 37.1%, to $15.5 million from $24.6 million for the first
quarter of fiscal 1999. This decrease is a result of our reduced emphasis on the
leasing business and American Business Leasing's concentration on higher
yielding, more profitable leases by focusing on niche markets, so that it is
competing with other leasing companies of similar size.
Interest and Fees. Interest and fee income for the first quarter of
fiscal 2000 increased $3.0 million, or 65.4%, to $7.5 million from $4.5 million
in the first quarter of fiscal 1999. Interest and fee income consists primarily
of interest income earned on loans and leases while held in our portfolio,
premiums earned on loans sold with servicing released, other ancillary fees
collected in connection with loan and lease originations and interest accretion
on the value of interest-only and residual strips. Interest income accretion on
interest-only and residual strips increased due to both the increases in the
interest-only and residual strip balance and increases in cash flow from our
residual interests in the trusts. As a greater balance of the securitized
portfolio seasons increases in the fair value of interest-only and residual
strips are realized as accretion income, which represents increases in the
present value of future cash flows from the securitized loans and leases due to
the passage of time.
Interest income increased $2.4 million, or 100.1%, to $4.7 million from
$2.3 million for the first quarter of fiscal 1999. This increase was primarily
attributable to recording $2.7 million of interest accretion on the fair value
of interest-only and residual strips. This increase was partially offset by a
$0.6 million reduction in interest income on portfolio loans as a result of a
reduction in the duration of time portfolio loans accrued interest income prior
to securitization.
Fee income increased $0.6 million, or 28.1%, to $2.8 million from $2.2
million for the first quarter of fiscal 1999 as a result of an increase in the
volume of loans originated for the three-month period ended September 30, 1999.
Servicing Income. Servicing income is comprised of contractual and
ancillary fees collected on securitized loans and leases less amortization of
the servicing rights assets recorded at the time loans and leases are
securitized. For the first quarter of fiscal 2000, servicing income increased
$0.7 million, or 142.7%, to $1.2 million from $0.5 million for the first quarter
of fiscal 1999. The increase was the result of growth in the total managed
portfolio from $709.7 million at September 30, 1998 to $1.2 billion at June 30,
1999 to $1.3 billion at September 30, 1999.
19
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
As a percentage of the average managed portfolio, servicing income for
the quarter increased to 0.10% from 0.08% in the prior year. This increase was
the result of the increased origination of loans with prepayment fees and the
collection of other ancillary fees.
Total Expenses. For the first quarter of fiscal 2000, total expenses
increased $7.9 million, or 57.6%, to $21.5 million from $13.6 million for the
first quarter of fiscal 1999. As described in more detail below, this increase
was a result of increased interest expense attributable to the sale of
subordinated debt and borrowings used to fund loan and lease originations and
increases in sales and marketing, and general and administrative expenses
related to growth in loan and lease originations, the growth of the total
managed portfolio and the continued building of support area infrastructure to
support the increases in originated and managed portfolios.
Interest Expense. For the first quarter of fiscal 2000, interest
expense increased $2.8 million, or 59.2%, to $7.6 million from $4.8 million for
the first quarter of fiscal 1999. The increase was attributable to an increase
in the amount of subordinated debt outstanding during the first quarter of
fiscal 2000, 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 three months ended September 30, 1999 was $230.4 million compared to $117.7
million during the three months ended September 30, 1998. Average interest rates
paid on subordinated debt outstanding increased to 9.42% for during the three
months ended September 30, 1999 from 9.34% during the three months ended
September 30, 1998. Rates offered on subordinated debt increased to attract
additional funds as well as in response to general increases in market rates.
The average outstanding balances under warehouse and other credit lines were
$119.7 million during the three months ended September 30, 1999, compared to
$94.3 million during the three months ended September 1998.
Provision for Credit Losses. The provision for credit losses on
portfolio loans and leases for the first quarter of fiscal 2000 was $0.1
million, which was consistent with the first quarter of fiscal 1999. An
allowance for credit losses for portfolio loans and leases 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 $0.8 million
at September 30, 1999 compared to $0.7 million at June 30, 1999 and $1.1 million
at September 30, 1998. The changes in the allowance for credit losses are due
primarily to fluctuations in the balances of loan and lease receivables
available for sale to $46.9 million at September 30, 1999 from $34.5 million at
June 30, 1999 and $84.2 million at September 30, 1998.
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 "Securitization Accounting Considerations" for more
information regarding these credit loss assumptions.
20
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following table summarizes the changes in the allowance for credit
losses by loan and lease type for the three months ended September 30, 1999 (in
thousands).
Business Home
Purpose Equity Equipment
Loans Loans Leases Total
-------- -------- --------- -------
Balance at beginning of period $ 26 $243 $433 $702
Provision for credit losses 19 91 31 141
(Charge-offs) recoveries, net (21) 2 9 (10)
----- ------ ------- -------
Balance at end of period $ 24 $336 $473 $833
===== ====== ======= =======
Charge-offs related to securitized loans and leases were generally
absorbed by securitization trusts.
Sales and Marketing Expenses. For the first quarter of fiscal 2000,
sales and marketing expenses increased $2.3 million, or 42.1%, to $7.6 million
from $5.3 million for the first quarter of fiscal 1999. The increase was
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.
Subject to market conditions, we plan to continue to increase the amount of
funds spent on advertising throughout the United States to generate additional
increases in loan originations and sales of subordinated debt securities. As a
result, it is anticipated that sales and marketing expenses will continue to
increase in the future.
General and Administrative Expenses. For the first quarter of fiscal
2000, general and administrative expenses increased $2.0 million, or 91.8%, to
$4.1 million from $2.1 million for the first quarter of fiscal 1999. The
increases were primarily attributable to increases in rent, telephone, office
expense, professional fees and other expenses incurred as a result of the
previously discussed growth in loan and lease originations and in the volume of
total loans and leases managed during fiscal 2000 and the continued building of
support area infrastructure to support the increases in originations and the
managed portfolio.
21
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
BALANCE SHEET INFORMATION
(in thousands, except per share data)
Balance Sheet Data:
September 30, June 30,
1999 1999
-------------- ---------
Cash and cash equivalents $ 24,378 $ 22,395
Loan and lease receivables, net:
Available for sale 46,069 33,776
Other 8,046 6,863
Interest-only and residual strips 202,318 178,218
Servicing rights 50,099 43,210
Total assets 429,939 396,301
Subordinated debt and notes payable 296,232 270,343
Total liabilities 368,063 338,055
Total stockholders' equity 61,876 58,246
Book value per common share 17.47 16.24
Total assets increased $33.6 million, or 8.5%, to $429.9 million at
September 30, 1999 from $396.3 million at June 30, 1999 primarily due to
increases in interest-only and residual strips, loans and lease receivables
available for sale, and to a lesser extent, servicing rights.
Interest-only and residual strips, which are residual interests created
in connection with securitizations, increased $24.1 million, or 13.5%, to $202.3
million from $178.2 million at June 30, 1999. We completed $210.2 million in
loan and lease securitizations during the first quarter of fiscal 2000,
resulting in the recording of $24.5 million of interest-only and residual
strips. In addition, interest accretion and increases in the fair value of
interest-only and residual strips recorded in the quarter were $2.7 million and
$1.1 million, respectively. These increases were offset by cash receipts
received during the quarter from securitization trusts of $4.3 million. Loans
and leases available for sale increased $12.3 million or 36.4% to $46.1 million
from $33.8 million at June 30, 1999. The balances of loans and leases available
for sale tend to fluctuate based on the timing and size of securitizations of
portfolio loans and origination volume during the quarter. Servicing rights
increased $6.9 million, or 15.9% to $50.1 million from $43.2 million at June 30,
1999, due to the recording of $9.3 million of mortgage servicing rights obtained
in connection with loan securitizations, partially offset by amortization of
servicing rights.
Total liabilities increased $30.0 million, or 8.9%, to $368.1 million
from $338.0 million at June 30, 1999 due primarily to an increase in
subordinated debt and notes payable. The increase in subordinated debt and notes
payable of $25.9 million, or 9.6%, was principally attributable to net sales of
subordinated debt. Subordinated debt outstanding at September 30, 1999 was
$240.2 million. Borrowings net of repayments on lines of credit were stable at
$46.7 million compared to $46.5 million in the prior quarter. Other notes
payable and lines of credit decreased $2.9 million from the prior quarter due to
repayments. See "Liquidity and Capital Resources" for further detail.
22
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Managed Portfolio Quality
Total delinquencies (loans and leases with payments past due greater
than 30 days) in the total managed portfolio were $44.0 million at September 30,
1999 compared to $37.6 million at June 30, 1999 and $21.1 million at September
30, 1998. Total delinquencies as a percentage of the total managed portfolio
(the "delinquency rate") were 3.28% at September 30, 1999 compared to 3.19% at
June 30, 1999 and 2.97% at September 30, 1998. The increase in the delinquency
rate from prior periods was attributable to the maturation of the managed
portfolio, which was $1.3 billion at September 30, 1999, $1.2 billion at June
30, 1999 and $709.7 million at September 30, 1998. Delinquent loans and leases
in the available for sale portfolio at September 30, 1999 were $1.6 million, or
3.9%. (See "Provision for Credit Losses" for further discussion of risks
associated with potential increases in delinquencies.)
Total real estate owned ("REO"), comprising foreclosed properties and
deeds acquired in lieu of foreclosure, increased to $12.3 million, or 0.92% of
the total managed portfolio at September 30, 1999 compared to $9.9 million or
0.85% and $2.0 million or 0.30%, respectively, at June 30, 1999 and September
30, 1998. 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 a loan.
This process eliminates the need to initiate a formal foreclosure process, which
could take many months.
Published statistics gathered from a national sample of sub-prime
mortgage companies by the Mortgage Information Corporation, have shown that
delinquency rates averaged 13.2% as of June 30, 1999, as compared to our current
delinquency rate of 3.28% and our June 30, 1999 delinquency rate of 3.19%. We
believe that our delinquency rate is the result of our centralized credit
underwriting structure, adherence to written underwriting standards and emphasis
on collections. Our standards are based on early identification of loans and
leases that have become credit problems, followed by a thorough evaluation and
implementation of appropriate action to work out these loans and leases. In
addition, the business purpose and home equity loans we originate have an
average loan-to-value ratio of 61.5% and 78.0%, respectively, and the
predominate share of our home mortgage products are first liens as opposed to
junior lien loans. We believe these factors may mitigate certain potential
losses on our managed portfolio.
Included in total REO at September 30, 1999 was $0.8 million recorded
in our financial statements, and $11.5 million in loan securitization trusts.
Property acquired by foreclosure or in settlement of loan and lease receivables
is recorded in our financial statements at the lower of the cost basis in the
loan or fair value of the property less estimated costs to sell. The expected
impact of credit losses for delinquent loans, leases and REO property held by
securitization trusts are reflected through assumptions for credit losses used
in the estimation of the fair value of our interest-only and residual strips and
servicing rights. (See "Securitization Accounting Considerations" for further
information regarding these assumptions.)
23
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following table provides data concerning delinquency experience,
REO and loss experience for the managed loan and lease portfolio (dollars in
thousands):
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999 September 30, 1998
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
----------- ---- ----------- ---- ---------- ----
Delinquency by Type
Business Purpose Loans
<S> <C> <C> <C>
Total managed portfolio............. $ 165,827 $ 148,932 $ 111,877
Period of delinquency
31-60 days...................... $ 710 .43% $ 1,506 1.01% $ 1,388 1.24%
61-90 days...................... 1,165 .70 475 .32 1,181 1.06
Over 90 days.................... 8,732 5.27 8,612 5.78 4,457 1.06
----------- ---- ----------- ---- ---------- ----
Total delinquencies............. $ 10,607 6.40% $ 10,593 7.11% $ 7,026 6.28%
=========== ==== =========== ==== ========== ====
REO................................. $ 3,434 $ 2,881 $ 1,187
=========== =========== ==========
Home Equity Loans
Total managed portfolio............. $ 1,006,075 $ 858,806 $ 467,647
=========== =========== ==========
Period of delinquency
31-60 days...................... $ 5,614 .56% $ 4,836 .56% $ 4,918 1.05%
61-90 days...................... 4,807 .48 4,149 .48 1,658 .35
Over 90 days.................... 20,379 2.03 15,346 1.79 4,883 1.04
----------- ---- ----------- ---- ---------- ----
Total delinquencies............. $ 30,800 3.06% $ 24,331 2.83% $ 11,459 2.44%
=========== ==== =========== ==== ========== ====
REO................................. $ 8,873 $ 7,067 $ 853
=========== =========== ==========
Equipment Leases
Total managed portfolio............. $ 168,973 $ 169,180 $ 130,141
=========== =========== ==========
Period of delinquency
31-60 days...................... $ 300 .18% $ 389 .23% $ 659 .50%
61-90 days...................... 236 .14 425 .25 685 .53
Over 90 days.................... 2,011 1.19 1,826 1.08 1,269 .98
----------- ---- ----------- ---- ---------- ----
Total delinquencies............. $ 2,547 1.51% $ 2,640 1.56% $ 2,613 2.01%
=========== ==== =========== ==== ========== ====
Combined
Total managed portfolio............. $ 1,340,875 $ 1,176,918 $ 709,665
=========== =========== ==========
Period of delinquency
31-60 days...................... $ 6,624 .49% $ 6,731 .57% $ 6,965 .98%
61-90 days...................... 6,208 .46 5,049 .43 3,525 .50
Over 90 days.................... 31,122 2.32 25,784 2.19 10,608 1.49
----------- ---- ----------- ---- ---------- ----
Total delinquencies............. $ 43,954 3.28% $ 37,564 3.19% $ 21,098 2.97%
=========== ==== =========== ==== ========== ====
REO................................. $ 12,307 $ 9,948 $ 2,040
=========== =========== ==========
Losses experienced during the
period(a)(b) ................... $ 761 .25 % $ 1,137 .12% $ 153 .09%
=========== ==== =========== ==== ========== ====
</TABLE>
(a) Percentage based on annualized losses and average total managed portfolio.
(b) Losses recorded on our books were $10,000 and losses absorbed by
securitization trusts were $751,000 for the three months ended September 30,
1999. Losses recorded on our books were $1.1 million and losses absorbed by
securitization trusts were $30,000 for the year ended June 30, 1999. All losses
were recorded on our books for the three months ended September 30, 1998.
24
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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. 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 balances (primarily loans and leases available
for sale, interest-only strips, servicing rights and subordinated debt).
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 to 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.
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 the first quarter of fiscal 2000, gains of $0.2 million were
incurred on hedging transactions (futures contracts), which were recognized as a
component of the gain on sale recorded on securitizations during the period. At
September 30, 1999 a hedge contract was open for the short-sale of $20 million
of U.S. Treasury securities. Unrealized losses on this contract were $30,000 at
period end. In addition, At September 30, 1999, we were obligated to satisfy a
loan securitization prefund requirement of $20.9 million of mortgage loans. This
prefund requirement was satisfied in the second quarter.
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. 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
securitizations in that period or in future periods. As a result, we may be
25
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
Interest-only and Residual Strips and Servicing Rights - A portion of
the certificates issued to investors by securitization trusts are floating
interest rate certificates based on one-month LIBOR plus a spread. The fair
value of the excess cash flow we will receive from these trusts would be
effected by any changes in rates paid on the floating rate certificates. At
September 30, 1999, $95.4 million of debt issued by securitization trusts was
floating rate debt based on LIBOR representing 8.8% of total debt issued by
securitization trusts. Due to increases in LIBOR between June 30, 1999 and
September 30, 1999 the fair value of our interest-only and residual strips
decreased by $1.6 million. The decrease in fair value was recognized as part of
a net adjustment to other comprehensive income, which is a component of retained
earnings.
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 the
related interest-only and residual strips and servicing rights, adversely
impacting earnings during the period of adjustment. Revaluation of our
interest-only and residual strips and servicing rights are periodically
performed. As part of the revaluation process assumptions used for prepayment
rates are monitored against actual experience and adjusted if warranted. It is
estimated that a 100 basis point increase in prepayment rates would decrease the
fair value of interest-only and residual strips by approximately $5.2 million
and the fair value of servicing rights by approximately $1.2 million.
We attempt to minimize prepayment risk on interest-only strips and
servicing rights 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 we originate are subject to
prepayment fees. In addition, we have found that credit impaired borrowers are
less sensitive to interest rates than monthly payments further reducing
prepayment expectations.
Subordinated Debt - We also experience interest rate risk to the extent
that as of September 30, 1999 approximately $130.8 million of our liabilities
were comprised of fixed rate 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.
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 over-collaterization
requirements in connection with our securitizations, payment of operating
expenses and funding of capital expenditures. We rely on borrowings such as
subordinated debt and warehouse credit facilities to fund these business
activities. At September 30, 1999, a total of $240.2 million of subordinated
debt was outstanding, and credit facilities totaling $429.7 million were
available, of which $56.8 million was drawn upon.
26
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 our 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
act as the servicer of the loans and leases we securitize and in that capacity
are 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 majority of our 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
our business 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 transact 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
our 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.
Subordinated Debt Securities - During the first quarter of fiscal 2000,
we sold $28.5 million in principal amount of subordinated debt securities with
maturities ranging between one day and ten years. As of September 30, 1999,
$240.2 million of subordinated debt was outstanding. Under a shelf registration
statement declared effective by the Securities and Exchange Commission on
October 15, 1999, we registered $300.0 million of subordinated debt for future
issuance. 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.
27
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Credit Facilities - The following is a description of the warehouse and
other credit facilities utilized to fund the origination of loans and leases
prior to securitization and for other operating purposes as of September 30,
1999. All of these facilities are senior in right of payment to our subordinated
debt (in thousands).
<TABLE>
<CAPTION>
Amount Amount
Committed Utilized
----------- ---------
<S> <C> <C> <C>
Warehouse revolving line of credit, expiring August 2000 $ 150,000 $ 5,259
Warehouse revolving line of credit, expiring October 2000 150,000 33,780
Warehouse revolving line of credit, expiring September 2000 20,000 7,732
---------- ----------
Total warehouse facilities 320,000 46,771
---------- ----------
Revolving line of credit, expiring December 1999 5,000 3,000
Repurchase agreement 4,677 4,677
Commercial paper conduit for lease production, expiring
October 1999 100,000 2,334
Total credit facilities $ 429,677 $ 56,782
========== ==========
</TABLE>
The warehouse revolving lines of credit are secured by loan and lease
receivables. The other credit facilities are secured with certain residual
interests in securitization trusts. The warehouse credit agreements require that
we maintain specific covenants regarding net worth, leverage and other
standards. At September 30, 1999, we are in compliance with the terms of all
loan covenants.
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 our 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.
We lease our corporate headquarters in Bala Cynwyd, PA under an
operating lease expiring in January 2003 at a minimum annual rental of
approximately $2.2 million. We lease additional office space in Bala Cynwyd, PA
under an operating lease expiring September 2004, at a minimum annual rental of
approximately $0.6 million. We also lease a facility in Roseland, New Jersey
under an operating lease expiring July 2003 at an annual rental of $0.8 million.
The corporate headquarters and Roseland leases have a renewal provision at an
increased annual rental.
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.
28
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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: The awareness process included contacting all
business units to educate management regarding the Y2K program and to discern
any potential issues. Awareness efforts are continuing through the span of the
project.
Phase 2 - Assessment: An inventory was conducted of all core and
non-core 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". We are in the process of
replacing most core IT systems due to strategic and growth reasons unrelated to
the Y2K issue. All systems acquired as part of this enhancement project must be
certified by their vendors as Y2K compliant. Non-IT systems, including the
telecommunications systems, business machines, building and premises systems and
key suppliers, whose Y2K failures could have a material impact on our operation
were evaluated by obtaining specific responses from third parties. The
assessment phase also included the development of appropriate response plans,
such as repair, conversion, replacement or elimination of affected systems.
Phase 3 - Renovation: This phase involved the remediation of Y2K issues
identified as a result of the assessment. All required remediation efforts have
been completed.
Phase 4 - Validation: This phase involved establishing a test
environment, performing systems tests and validating the results on all IT
hardware, software and data processing infrastructure which includes mainframe,
network and server related equipment. All verification testing has been
completed. Validation of new "replacement" systems is being performed as part of
their implementation.
Phase 5 - Implementation: This phase involved 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 our IT hardware and infrastructure is less than 2 years
old, minimizing exposure to Y2K issues. This inventory was 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. Their responses were 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.
We estimated that the costs directly associated with the Y2K compliance
program would be approximately $0.8 million. This budgeted amount did 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
29
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
budget. Approximately $0.6 million of the amount budgeted for costs directly
associated with the Y2K compliance program have been expended as of September
30, 1999 which include salaries for certain time spent by our internal Y2K
project team.
Contingency plans have been developed that will be used, if necessary,
in the event that any hardware, software or other computer systems, or those of
our vendors are not compliant, based on risks identified as a result of the
assessment and testing phases of our Year 2000 compliance program. Contingency
plans were prepared for all business units. These plans detail what each
business unit will do if any or all components of their business process falters
due to Y2K complications. We believe that the key to minimizing the impact of
any Y2K problem is early recognition, effective communications and timely
response. Towards this end, our contingency plans also include the establishment
of a Y2K command center, as well as an Advisory Team, Management Team and an
Implementation Team, each with their defined responsibilities, to mitigate any
issues that may arise.
While we fully expect that the precautions being taken will prepare us
for entering Year 2000, there is always the potential for risk due to unforeseen
events. 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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Risk Management". Additional
quantitative and qualitative disclosures regarding market risk are contained in
the Company's Form 10-K for the fiscal year ended June 30, 1999.
30
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 23, 1997, a class action suit was filed in the Superior
Court of New Jersey - Law Division, Essex County (the "Superior Court") at
Docket No. L-12066-97 against New Jersey Mortgage and Investment and Corp.
("NJMIC") by Alfred G. Roscoe, on behalf of himself and others similarly
situated. Mr. Roscoe sought certification that the action may be maintained as a
class action as well as unspecified compensatory damages and injunctive relief.
In his complaint, Mr. Roscoe alleged that NJMIC violated New Jersey's Mortgage
Financing on Real Estate Law, N.J.S.A. 46:10A-1 et seq., by requiring him and
other borrowers to pay or reimburse NJMIC for attorneys' fees and costs in
connection with loans made to them by NJMIC. Mr. Roscoe further asserted that
NJMIC's alleged actions violated New Jersey's Consumer Fraud Act, N.J.S.A.
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's Motion for Summary
Judgement. Mr. Roscoe appealed to the Superior Court of New Jersey - Appellate
Division (the "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
judgement of the Superior Court was filed with the Supreme Court of New Jersey
(the "Supreme Court"). NJMIC filed its Brief on Opposition for Certification on
March 16, 1999, which pleading was followed by the Petitioner's filing of a
Reply Brief. No decision has been rendered by the Supreme Court at this time.
Pursuant to the terms of the Agreement for Purchase and Sale of Stock
of NJMIC between the Company and the former stockholders of NJMIC, such former
stockholders are required to indemnify the Company up to $16.0 million in
connection with any losses related to, caused by or arising from NJMIC's failure
to comply with applicable law to the extent such losses exceed $100,000.
Such former stockholders have agreed to defend the Company in this suit.
Additionally from time to time, we are involved as plaintiff or
defendant in various legal proceedings arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these legal actions should not have a material effect on our financial
position, results of operations or liquidity.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
31
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
PART II. OTHER INFORMATION - continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 Lease Agreement dated August 30, 1999 related to One
Presidential Boulevard
10.2 Employment Agreement between American Business Financial
Services, Inc. and Albert Mandia
10.3 Change in Control Agreement between American Business
Financial Services, Inc. and Albert Mandia
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1999.
32
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
DATE: November 15, 1999 BY: /s/ Albert W. Mandia
----------------- -------------------------------------
Albert W. Mandia
Executive Vice President and Chief
Financial Officer
33
<PAGE>
American Business Financial Service, Inc. and Subsidiaries
Exhibit Index
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Lease Agreement dated August 30, 1999 related to
One Presidential Boulevard
10.2 Employment Agreement between American Business Financial
Services, Inc. and Albert Mandia
10.3 Change in Control Agreement between American Business
Financial Services, Inc. and Albert Mandia
27 Financial Data Schedule
34
<PAGE>
LEASE
LANDLORD: ONE PRESIDENTIAL BOULEVARD ASSOCIATES
TENANT: AMERICAN BUSINESS FINANCIAL SERVICES, INC.
PREMISES: One Presidential Boulevard
Bala Cynwyd, Pennsylvania
DATED: August 30, 1999
<PAGE>
INDEX
ARTICLE ONE. REFERENCE DATA 1
1.01 Subjects Referred To 1
1.02 Exhibits 2
ARTICLE TWO. GRANT AND TERM 2
2.01 Leased Premises 2
2.02 Use of Additional Areas 3
2.03 Term 3
ARTICLE THREE. RENT 4
3.01 Base Rent 4
3.02 Expense Adjustments 4
ARTICLE FOUR. CONDUCT OF BUSINESS BY TENANT 9
4.01 Use of Premises 9
4.02 Suitability 9
4.03 Uses Prohibited 9
4.04 Governmental Regulations 9
4.05 Advertising, Signs 10
ARTICLE FIVE. INSURANCE 10
5.01 Landlord's Insurance 10
5.02 Tenant's Insurance 10
5.03 Fire Insurance and Fire Insurance
Premiums 11
5.04 Exemption of Landlord and Management
Company from Liability 11
5.05 Insurance of Improvements 12
5.06 Waiver of Subrogation 12
5.07 Covenant to Hold Harmless 13
5.08 Property for Satisfaction 13
ARTICLE SIX. CHANGES AND ADDITIONS TO BUILDING 14
ARTICLE SEVEN. UTILITIES 14
7.01 Services 14
7.02 Electrical Usage 16
ARTICLE EIGHT. PARKING AND COMMON AREAS AND
FACILITIES 16
8.01 Control of Common Areas by Landlord 16
8.02 Use of Parking Areas 17
i
<PAGE>
INDEX (cont'd)
ARTICLE NINE. FIXTURES, ALTERATIONS AND IMPROVEMENTS 17
9.01 Tenant's Right to Make Alterations 17
9.02 Tenant's Performance of Work 18
9.03 Removal 18
9.04 Insurance and Taxes 19
9.05 Mechanics' Lien 19
9.06 Windows 20
ARTICLE TEN. MAINTENANCE OF LEASED PREMISES 21
10.01 Maintenance 21
10.02 Rules and Regulations 21
ARTICLE ELEVEN. DAMAGE AND DESTRUCTION 22
11.01 Notice by Tenant 22
11.02 Destruction of the Leased Premises 22
11.03 Destruction of the Office Building 22
11.04 Abatement of Rent 23
ARTICLE TWELVE. EMINENT DOMAIN 23
12.01 Complete Taking 23
12.02 Partial Taking 23
12.03 Compensation and Rent 24
12.04 Voluntary Conveyance 24
ARTICLE THIRTEEN. DEFAULT 24
13.01 Default of Tenant 24
13.02 Remedies of Landlord 25
13.03 Cumulative Rights 26
13.04 Surrender of Possession 27
13.05 Possessory Confession of Judgment 27
13.06 Monetary Confession of Judgment 28
13.07 Waiver of Defenses 28
13.08 Late Charges 29
13.09 Bankruptcy or Insolvency of Tenant 29
13.10 Default by Landlord 32
13.11 Excuse of Performance 32
13.12 Mitigation of Damage Through Re-Letting 32
ARTICLE FOURTEEN. ASSIGNMENT AND SUBLETTING 34
14.01 Transfer, Assignment and Subletting 34
14.02 Consent to Assignment 34
14.03 Merger or Assignment of Subleases 36
ii
<PAGE>
INDEX (cont'd)
ARTICLE FIFTEEN. ESTOPPEL CERTIFICATE, ATTORNMENT,
AND SUBORDINATION 36
15.01 Estoppel Certificate 36
15.02 Transfer by Landlord 36
15.03 Subordination 37
ARTICLE SIXTEEN. ACCESS BY LANDLORD 37
ARTICLE SEVENTEEN. QUIET ENJOYMENT 38
ARTICLE EIGHTEEN. HOLDING OVER, SUCCESSORS 38
18.01 Holding Over 38
18.02 Successors 39
ARTICLE NINETEEN. HAZARDOUS WASTE 39
19.01 Hazardous Material 39
19.02 Representations 39
19.03 Notice 39
19.04 Indemnification 40
ARTICLE TWENTY. OPTION FOR ADDITIONAL SPACE 40
20.01 Limitation and Conditions of
Exercise 40
20.02 Option for Additional Space 40
ARTICLE TWENTY-ONE. MISCELLANEOUS PROVISIONS 42
21.01 Subordination of Landlord's Lien 42
21.02 Brokerage Commission 43
21.03 Entire Agreement 43
21.04 Waiver 43
21.05 No Partnership 43
21.06 Accord and Satisfaction 44
21.07 Security Deposit 44
21.08 Captions 44
21.09 Tenant Defined 45
21.10 Corporate Authority 45
21.11 Partnership Tenant 45
21.12 Notices 45
21.13 Applicable Law 45
21.14 Waiver of Trial by Jury 46
21.15 Partial Invalidity 46
21.16 Time 46
21.17 Recording 46
21.18 Cumulative Remedies 46
21.19 Attorneys' Fees 46
21.20 Necessary Acts 46
21.21 Effectiveness of Lease 47
21.22 Representations 47
21.23 Interpretation of Language 47
iii
<PAGE>
LEASE
This Lease is entered into as of this 30th day of August, 1999, by and
between JEFFREY MORGAN, KEITH MORGAN and KEVIN MORGAN, Trustees under an
Irrevocable Trust Agreement of Robert Morgan and Suzanne Morgan, Settlors to
Jeffrey Morgan, Keith Morgan and Kevin Morgan, Trustees dated October 18, 1991,
d/b/a One Presidential Boulevard Associates (hereinafter referred to as
"Landlord") and American Business Financial Services, Inc. (hereinafter referred
to as "Tenant").
WHEREAS, Landlord is the owner of those certain premises more fully
described in Paragraph 2.01 hereof; and
WHEREAS, Tenant desires to lease such premises from Landlord and
Landlord desires to lease such premises to Tenant;
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter contained, Landlord and Tenant agree as follows:
ARTICLE ONE
REFERENCE DATA
Section l.0l: Subjects Referred To
Each reference in this lease to any of the following subjects shall be
construed to incorporate the data stated for that subject in this Section l.0l:
LANDLORD'S ADDRESS: One Presidential Boulevard Associates
Attn: Mr. Keith Morgan, Trustee
One Presidential Boulevard
Bala Cynwyd, PA l9004
Phone: (610) 668-3480
Fax: (610) 664-5897
With a copy to: Cornerstone Realty, Inc.
Attn: Mr. Jonathan Albert
225 E. Aurora Street
Waterbury, CT 06721
Phone: (203) 597-0400
Fax: (203) 753-9617
TENANT'S ADDRESS: American Business Financial Services, Inc.
Attn: Jeffrey M. Ruben, EVP
111 Presidential Boulevard
Suite 128
Bala Cynwyd, PA 19004
Phone: (610) 668-2440
Fax: (610) 949-7001
<PAGE>
OFFICE BUILDING: That certain building known as One Presidential
Boulevard, Bala Cynwyd, Pennsylvania, having a total rentable
area of 120,569 square feet, together with the parcel of real
property upon which such building is situated
RENTABLE AREA OF TENANT'S SPACE: 24,766 square feet in
accordance with BOMA standard and measured and agreed
to by Tenant
TERM COMMENCEMENT DATE: September 15, 1999 unless otherwise
adjusted as defined in Section 2.03
LEASE TERM: 5 years from the Commencement Date
ANNUAL BASE RENT: $631,533.00 calculated at $25.50 per
rentable square foot
MONTHLY BASE RENT: $52,627.75
PRO-RATA SHARE: 20.54%
PUBLIC LIABILITY INSURANCE LIMITS: $3,000,000
SECURITY DEPOSIT: $105,255.50
Section l.02: Exhibits
The exhibits listed below in this Section are incorporated in this
Lease by reference and are to be construed as part of this lease:
EXHIBIT A: Plan Showing Location of Tenant's Space
EXHIBIT B: Landlord's Initial Alterations and Improvements
EXHIBIT C: Rules and Regulations
EXHIBIT D: Additional Space
EXHIBIT E: Subordination, Non-Disturbance and Attornment
Agreement
ARTICLE TWO
GRANT AND TERM
Section 2.01: Leased Premises
In consideration of the rents, covenants, and agreements on the part of
Tenant to be paid and performed, Landlord leases to Tenant, and Tenant leases
from Landlord, those certain premises in the Office Building (herein called the
"Premises" or "Leased Premises") located as outlined on the floor plan of the
Office Building, which is marked Exhibit "A" attached hereto and made a part
hereof, consisting of 24,766 rentable square feet on the second and fourth
floors. Tenant acknowledges that it has inspected the Leased Premises and agrees
to accept delivery of the Premises as is, subject to Landlord's completion at
its sole expense (except as otherwise agreed to by Tenant as reflected in
2
<PAGE>
Exhibit B-1 attached) of the alterations and improvements reflected in Exhibit
"B" ("Initial Improvements"), attached hereto and made a part hereof.
Notwithstanding anything to the contrary in Exhibit "B", Landlord shall not be
responsible for installing telephone, equipment and data wiring or any security
system or providing any workstations, furniture or furnishings that may be
indicated in Exhibit "B" or in any other place or drawings.
Section 2.02: Use of Additional Areas
The use and occupation by Tenant of the Leased Premises shall include
the use in common with others entitled thereto of the common areas, parking
areas, service areas, service roads, loading facilities, sidewalks and other
facilities as may be designated from time to time by Landlord, subject however
to the terms and conditions of this Lease and to reasonable rules and
regulations for the use thereof as prescribed from time to time by Landlord.
Section 2.03: Term
(a) The Term of this Lease shall be five (5) years, unless sooner
terminated in accordance with the provisions of this Lease, commencing on the
date fifteen (15) days after Landlord delivers the Leased Premises substantially
completed to Tenant ("Commencement Date"). Landlord agrees to provide Tenant
with exclusive use of the Office Building's loading docks during the weekend
hours during the two weekends that are within such fifteen day period, with the
exception of any deliveries that might be made to the Office Building during
such use by Tenant. Provided that Landlord has received and approved
construction plans from Tenant in time for this Lease to be executed by August
31, 1999, the Leased Premises shall be substantially completed by November 1,
1999, but in the event the execution of this Lease is delayed, the time of
Landlord's obligation to deliver the Leased Premises to Tenant substantially
completed shall be adjusted accordingly but shall in no event be later than the
date Tenant shall occupy the Leased Premises or any part thereof for the purpose
of conducting its business. As used herein "substantially completed" shall mean
completion of the Initial Improvements to the Leased Premises in accordance with
Exhibit "B", except for "punch list" or finishing items the resolution of which
will not substantially interrupt Tenant's business operations. The list of
"punch list" items referred to above shall be prepared by Tenant and Landlord
and submitted to Landlord prior to Tenant's occupancy of the Premises for the
conduct of business. After the Commencement Date is established pursuant to this
paragraph, Landlord shall deliver to Tenant, and Tenant shall execute and
deliver back to Landlord, a memorandum setting forth the Commencement Date.
Landlord shall complete the punch list items within sixty (60) days of the
Commencement Date and shall effectuate such completion before 8:30 a.m. or after
3
<PAGE>
5:30 p.m. to the extent such completion requires painting other than touch-up
work or shall result in substantial quantities of noise.
(b) Provided all amounts owed by Tenant to Landlord under this Lease
have been paid in full, including but not limited to all late charges, Tenant
may elect to terminate this Lease, effective on the first day after completion
of the forty-eighth month after the Commencement Date, by delivering written
notice to Landlord of such election to terminate not later than February 1,
2004, together with payment to Landlord in the amount of $18.00 per rentable
square foot of space included in the Leased Premises at the time of Tenant's
election. If Tenant fails to timely deliver notice of its election with the
required payment, Tenant shall be deemed to have elected not to terminate the
Lease early, the Term of this Lease shall remain as defined in Paragraph (a)
above, and any right by Tenant to elect any earlier termination of this Lease
shall be void and of no further effect.
ARTICLE THREE
RENT
Section 3.01: Base Rent
The annual base rent ("Base Rent") during the term of this Lease shall
be payable by Tenant in equal monthly installments on or before the first day of
each month in advance, at the office of Landlord or its designated agent, or at
such other place designated by Landlord, without any prior demand therefor, and
without any deduction or set-off whatsoever, and shall be Six Hundred Thirty-One
Thousand Five Hundred Thirty-Three and 00/100 Dollars ($631,533.00) annually
($52,627.75 per month). For any rent attributable to less than a full calendar
month, Tenant shall pay to Landlord a sum equal to the monthly base rent
multiplied by a fraction, the numerator of which is the number of calendar days
in such partial calendar month period, and the denominator of which is the total
number of calendar days in such calendar month.
Section 3.02: Expense Adjustments
(a) If the Direct Expenses as defined in paragraph (b) below, as
adjusted in accordance with Section 3.02(d), if applicable, paid or incurred by
Landlord exceed the greater of the amounts paid or incurred by Landlord in
calendar years 1998 ($1,075,632) or 1999, then Tenant shall pay the amount of
such increase multiplied by Tenant's Pro Rata Share.
(b) For purposes of this Section 3.02, "Direct Expenses" are defined as
follows:
(i) Taxes. Landlord shall pay when due all Real Estate Taxes
(as hereinafter defined) imposed against the Office Building. Tenant shall pay
to Landlord, as Additional Rent, Tenant's Pro Rata Share, as set forth in
paragraph (a) above, of all Real Estate Taxes imposed against the Office
4
<PAGE>
Building. Real Estate Taxes shall include and be defined as all real estate
taxes, assessments, special or general, water and sewer rents and charges,
liens, levies, taxes and other governmental impositions and charges of every
kind and nature, ordinary and extraordinary, foreseen and unforeseen, assessed
or imposed against the Office Building and any personal property taxes imposed
upon the fixtures, machinery, equipment, apparatus, systems and appurtenances
in, upon or used in connection with the Office Building for the operation
thereof. Real Estate Taxes shall not include any tax which may be levied by any
governmental authority upon the income, profits or business of Landlord, or any
franchise, inheritance or estate taxes, unless due to a change in the method of
taxation. If any franchise, income, profit or other tax is imposed in
substitution or in lieu of Real Estate Taxes, such substituted tax shall be
deemed Real Estate Taxes for purposes of this Lease.
Any personal property taxes or any increase in the Real Estate Taxes by
reason of capital improvements, nonstandard or special installations,
alterations or fixtures made by or for the benefit of the Tenant to the Leased
Premises shall be paid for by the Tenant.
(ii) Insurance Premiums. Tenant shall pay Landlord, as Additional Rent,
Tenant's Pro Rata Share, as set forth in paragraph (a) above, of all premiums
for any insurance maintained by Landlord pursuant to Article Five of this Lease,
whether such premium increase shall be the direct result of the nature of
Tenant's occupancy, or any act or omission of Tenant or the reasonable
requirements of the holder of a mortgage or deed of trust covering the Premises,
any increased valuation of the Premises, general rate increases, or any other
cause whatsoever. Landlord has advised Tenant that premiums for 12 months rent
loss insurance have been included in the Direct Expenses for calendar years 1998
and 1999.
(iii) Utilities. Tenant shall pay Landlord as Additional Rent, Tenant's
Pro Rata Share, as set forth in paragraph (a) above, of all costs and expenses
incurred by Landlord for furnishing heat, air conditioning, electricity, water
and sewer utilities.
(iv) Operating Expenses. Tenant shall pay to the Landlord as Additional
Rent, Tenant's Pro Rata Share, as set forth in paragraph (a) above, of all costs
and expenses incurred by Landlord in the operation and maintenance of the
Building, including, without limiting the generality of the foregoing, all such
costs and expenses in connection with (1) license fees, janitorial service,
landscaping, and snow removal, (2) reasonable wages, salaries, security,
management and fees, employee benefits, payroll taxes, on-site office expenses,
administrative and auditing expenses, and equipment, materials and supplies for
the operation, management, maintenance and repair of said Office Building and
5
<PAGE>
all parking and common areas, (3) any capital expenditure (amortized, with
interest at the prime rate then in effect at PNC Bank N.A. of Philadelphia plus
two percent (2%) per annum, over the useful life of the improvement not to
exceed ten (10) years) made by Landlord for the purpose of reducing other
operating expenses or complying with any governmental requirement imposed after
the date of this Lease, (4) the operation and servicing of any computer system
installed to regulate Office Building equipment, (5) directory signs in the
lobby and hallways of the Office Building, other than those referenced in
Section 4.05 in excess of the cost to maintain standard signs, (6) elevator
maintenance and service, and (7) any charges or depreciation for machinery or
equipment used or useful in the maintenance or operation of the Building and
purchased to reduce or replace other operating expenses or to improve or enhance
the operation and maintenance of the Office Building (the foregoing being
hereinafter referred to as "Operating Expenses".
(c) "Operating Expenses" shall not include:
(i) any charge for depreciation (except as stated in clause 7
above), interest or leasehold rents paid or incurred by Landlord;
(ii) any charge for Landlord's income tax, excess profit
taxes, franchise taxes or similar taxes on Landlord's business;
(iii) leasing commissions;
(iv) real estate taxes;
(v) the cost of any special service rendered to a tenant of
the Office Building which is not rendered generally to other tenants;
(vi) costs of initial improvements to, or initial alterations
of, space leased or to be leased to any tenant of the Office Building for the
sole benefit of such tenant;
(vii) costs of performing any clean-up of "hazardous
materials" as such term is defined in Section 19.01, if such cleaning is
necessitated as a result of Landlord's failure to comply with any statutes,
regulations or ordinances;
(viii) all items and services for which Tenant is charged
directly, and not through its Pro Rata Share, pursuant to other provisions of
this Lease;
(ix) any costs or expenses legally required to be incurred by
Landlord to bring the common areas of the Office Building into compliance with
the Americans With Disabilities Act
6
<PAGE>
of 1990 as regulated and required as of the date of execution of this Lease;
(x) costs incurred in advertising and promotional activities
relating to procuring tenants for the Building; or
(xi) any cost or expenditure for which Landlord receives a
reimbursement, reduction or rebate, but not including reimbursements by tenants
of the Office Building pursuant to Direct Expense reimbursement provisions of
their leases.
(d) Notwithstanding any language in this Lease seemingly to the
contrary, if the Office Building is not fully occupied during any calendar year
of the Lease Term, actual variable cost components (as determined in the
reasonable judgment of Landlord) of Direct Expenses and Additional Rent for
purposes of this section 3.02 shall be determined as if the Office Building had
been fully occupied during such year. For the purposes of this Lease "fully
occupied" shall mean occupancy of 95% of the total rentable area in the Office
Building. Furthermore, to the extent that the occupancy level of the Office
Building is 95% or greater in any lease year, Landlord can pass through to the
existing tenants all Direct Expenses as Additional Rent.
(e) Tenant's payment of its share of Direct Expenses (also referred to
herein from time to time as "Additional Rent") shall be administered and paid as
follows:
(i) Tenant's share of Direct Expenses shall be paid to
Landlord in advance on the first day of each month in equal monthly
installments, in amounts reasonably estimated from time to time by Landlord in
writing with an explanation of the calculation of Landlord's estimate. If the
aggregate amount of such monthly payments paid by Tenant exceeds the actual
amount thereafter due, the overpayment shall be credited on Tenant's next
succeeding charge or charges for each expense or, if such excess occurs during
the last lease year, Landlord will refund such excess to Tenant within thirty
(30) days following the expiration of the lease term, provided Tenant is not
then in default of any of its obligations under this Lease. If the aggregate
amount of such monthly payments paid by Tenant shall be less than the actual
amount due, Tenant shall pay to Landlord the difference between the amount paid
by Tenant and the actual amount due, within twenty (20) days after written
demand from Landlord.
(ii) Annually, Landlord or its agent shall provide Tenant with
a written statement from Landlord setting forth the amount of Direct Expenses
and showing in reasonable detail the manner in which it has been computed. For a
period of ninety (90) days after receipt of an annual statement, Tenant shall
have the right upon prior written notice to Landlord, to examine Landlord's
books and records at any reasonable time during ordinary business hours to
7
<PAGE>
verify Landlord's statement of such expenses. Within such ninety (90) day
period, Tenant may request approval from Landlord to copy records regarding
specific expenses, and Landlord shall not unreasonably withhold its approval so
long as Tenant pays the full expense of such copying, provides a confidentiality
agreement providing for non-disclosure and the return of such copies and
arranges a means for the copying to be performed that is not disruptive of
Landlord's business.
(iii) If Tenant does not notify Landlord in writing of a dispute
regarding the Direct Expenses, and the specific charges in dispute, within
twenty (20) days after the books and records are made available to Tenant
pursuant to paragraph d(ii) above, then such amounts shall be deemed approved by
Tenant. In the event that the final inspection reveals that the Direct Expenses
for the period in question were overstated by an amount greater than five (5%)
percent, then Landlord shall promptly reimburse Tenant for the amount of its
reasonable out-of-pocket costs and expense of the inspection conducted under
this section with respect to such period but not to exceed the amount by which
Tenant's Pro Rata Share of the Direct Expenses was overstated, unless such
overstatement was the result of Landlord's intentional acts or bad faith, in
which case Tenant shall be entitled to the full amount of its reasonable
out-of-pocket costs and expenses of such inspection. Such reimbursement shall be
made within thirty (30) days after presentation to Landlord of bills and
invoices incurred by Tenant for such review in form and detail reasonably
acceptable to Landlord.
(iv) Notwithstanding that the Lease Term has expired and
Tenant has vacated the Leased Premises, when the final determination is made of
Tenant's share of Direct Expenses for the year in which this Lease terminates,
Tenant shall immediately pay any increase due over the estimated expenses paid
and conversely any overpayment made in the event said expenses decrease shall be
immediately rebated by Landlord to Tenant.
(v) If Tenant shall fail to pay, within thirty (30) days from
the date when due (except when collected monthly, in which event payment is due
within ten (10) days), any Base Rent, Additional Rent or any other charges
payable hereunder, such unpaid amounts shall bear interest from the date due to
the date of payment at the "Prime Rate" then in effect at the PNC Bank N.A. of
Philadelphia, Pennsylvania plus three (3%) percent per annum. Notwithstanding
the preceding, Landlord agrees to give Tenant three (3) business days' advance
written notice, not more than once in any one year, before charging interest in
accordance with this Section 3.02(d)(v), and if Tenant pays such past-due sum
within such three business day period, interest under this paragraph shall not
be imposed.
8
<PAGE>
ARTICLE FOUR
CONDUCT OF BUSINESS BY TENANT
Section 4.01: Use of Premises
The Leased Premises shall be used and occupied by Tenant for general
office use only, and for no other purposes whatsoever without obtaining the
prior written consent of Landlord.
Section 4.02: Suitability
Tenant shall not violate and this Lease shall be subject to any
applicable zoning ordinances and any municipal, county and state laws and
regulations governing and regulating the use of the Premises and the Office
Building. Landlord expressly makes no representation or warranty that the use of
the Leased Premises contemplated by Tenant does not conflict with or violate any
applicable zoning ordinances or municipal, county or state laws and regulations
regarding the use of the Premises. To the best of its knowledge, Landlord knows
of no zoning ordinance or laws which would prohibit Tenant's use of the Leased
Premises for general office use.
Section 4.03: Uses Prohibited
(a) Tenant shall not do or permit anything to be done in or about the
Premises which will in any way obstruct or interfere with the rights of any
other tenants or occupants of the Office Building or injure or annoy them, or
use or allow the Premises to be used for any illegal purposes, nor shall Tenant
cause, maintain or permit any nuisance in, on or about the Premises. Tenant
shall not commit or allow to be committed any waste in or upon the Premises. No
portion of the Premises may be used for any of the purposes prohibited by or in
contravention of the rules and regulations reasonably promulgated by Landlord
from time to time and delivered to Tenant pursuant to Section 10.02 hereof.
Tenant shall not interfere with the quiet enjoyment of any other tenant in the
Office Building. Without limiting the generality of the foregoing, Tenant shall
not allow the Leased Premises to be used for any kind of eating and/or sleeping
establishment, and nothing shall be done in the Leased Premises which will emit
noxious odors, noises or vibrations at unacceptable levels in the Office
Building as determined by Landlord in the reasonable exercise of its judgment.
Tenant further agrees not to connect any apparatus, machinery or device to the
electric wires or water or other pipes in the Leased Premises except as set
forth in Article Seven hereof, except that Tenant may install the usual office
machines and equipment, such as personal computers and similar equipment.
Section 4.04: Governmental Regulations
Tenant shall, at Tenant's sole cost and expense, comply with all of the
requirements, statutes, and ordinances of all county, municipal, state, federal
9
<PAGE>
and other governmental authorities having jurisdiction, now in force or which
may hereafter be in force, pertaining to Tenant's occupancy of the Leased
Premises and use of the Leased Premises for general office purposes.
Section 4.05: Advertising, Signs
Tenant shall not affix or maintain upon the glass panes and supports of
the windows, (or within 24 inches of any window), doors and the exterior walls
of the Premises, any signs, advertising, placards, names, insignia, trademarks,
descriptive material or any other such like items except such as shall have
first received the written approval of Landlord as to size, type, color,
location, copy, nature and display qualities, which approval may be withheld at
Landlord's sole discretion. Advertising by way of handbills, leaflets, pamphlets
or other written materials distributed to the premises of other tenants in the
Office Building shall not be permitted, nor shall Tenant distribute such
materials to members of the general public in or on any of the common areas of
the Office Building. Anything to the contrary in this Lease notwithstanding,
Tenant shall not affix any sign to the roof of the Office Building. Any signs in
the hallways of the Office Building specific as to Tenant's space and other than
the directory signs referred to in Section 3.02(b)(iv)(5), shall be supplied and
controlled by Landlord, in Landlord's sole discretion, and Tenant shall
reimburse Landlord for the expense thereof in excess of the standard cost.
ARTICLE FIVE
INSURANCE
Section 5.01: Landlord's Insurance
Landlord will maintain comprehensive general liability and property
insurance in such amounts and coverage as Landlord deems sufficient for the
proper operation of the Office Building, including commercially reasonable
percentages of replacement cost coverage in the event of a casualty. Landlord
may purchase rent loss insurance with coverage of up to 18 months and may carry
any other insurance coverage reasonably requested by any person holding a
mortgage or deed of trust upon the Office Building.
Section 5.02: Tenant's Insurance
Tenant shall, during the entire term hereof, keep in full force and
effect a policy of comprehensive general liability and property damage insurance
with respect to the Leased Premises and the business operated by Tenant in the
Leased Premises, in which the limit of comprehensive general liability shall not
be less than three million ($3,000,000) dollars per single occurrence. Landlord
shall have the right to require Tenant to increase such insurance limits to such
amounts as Landlord shall reasonably require from time to time during the Lease
term, so long as similarly applied to all tenants of the Office Building who
10
<PAGE>
lease more than 5,000 square feet. The policy shall name Landlord as an
additional insured and shall contain a clause that the insurer will not cancel
or change the insurance without first giving Landlord thirty (30) days prior
written notice. The insurance carrier shall be approved by Landlord, which
approval shall not be unreasonably withheld, and a copy of the policy or a
certificate of insurance showing Landlord as named additional insured shall be
delivered to Landlord upon the Commencement Date. Such insurance policy shall
contain a provision that it and the coverage evidenced thereby shall be primary
and non-contributing with respect to any policies carried by Landlord, and that
any coverage carried by Landlord shall be excess insurance.
Section 5.03: Fire Insurance and Fire Insurance Premiums
Tenant agrees that it will not keep, use, sell, or offer for sale in or
about the Leased Premises, any article which may be prohibited by Landlord's or
Tenant's fire insurance policy then in effect covering the Leased Premises
and/or the Office Building or any of its contents. Notwithstanding any language
in this Lease seemingly to the contrary, in the event the specific business
conducted by Tenant in the Leased Premises (and not use of the Leased Premises
for general office purposes) causes any increases of premium of the fire and/or
any other insurance policy covering the Office Building or any part thereof
above the rate for an office building, Tenant shall pay the additional premium
on the fire and/or casualty policy by reason thereof and Tenant shall also pay
any increase in any rent loss insurance policy caused by the specific business
conducted by Tenant. Bills for such additional insurance premiums shall be
rendered by Landlord to Tenant at such times as Landlord may elect, and shall be
due and payable by Tenant when rendered.
Section 5.04: Exemption of Landlord and Management Company from Liability
Neither Landlord, its agents nor its designated management company
shall be liable for injury to Tenant's business for loss of income therefrom or
for injury or damage which may be sustained by the property of Tenant, its
employees, invitees, customers, agents or contractors, or any other person in
the Leased Premises, caused by or resulting from fire, explosion, falling wall
and/or ceiling materials, steam, electricity, gas, dampness, water or rain which
may leak or flow from or into any part of the Leased Premises from the roof,
street or subsurface condition or from any other place, or from the breakage,
leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or by any latent
defect in the Leased Premises or other cause of whatsoever nature, whether said
damage or injury results from conditions arising upon the Leased Premises or
from other sources or places, and regardless of whether the cause of such damage
or injury or the means of repairing same is inaccessible to Tenant. Neither
11
<PAGE>
Landlord, its agents nor its designated management company shall be liable for
any damage caused by other tenants or persons in the Leased Premises, occupants
of adjacent property of the Office Building, or the public, or caused by
operations in construction of any private, public or quasi-public work or by
other tenants of the Office Building so long as Landlord shall have used its
good faith efforts to enforce the terms of its leases with other tenants of the
Office Building. The provisions of this paragraph are intended to apply to
claims brought by Tenant and any party or entity subject to its control.
Landlord acknowledges that Tenant's waiver is limited to these claims.
Notwithstanding the above, the exemption stated in this section shall apply to
latent defects in the Initial Improvements only so long as Landlord, its agents
and its designated management company had no actual knowledge of the existence
of the defect.
Section 5.05: Insurance of Improvements
Tenant shall at all times maintain "All Risk" insurance in the name of
both Landlord, its agent, and Tenant, in an amount adequate to cover the full
replacement cost in the event of fire or extended coverage loss to any and all
trade fixtures, alterations, decorations, additions, or improvements made to the
Leased Premises by Tenant or by Landlord on Tenant's behalf with loss proceeds
payable to Landlord and/or Tenant as their interests may appear, it being
expressly understood and agreed that none of such property shall be insured by
Landlord under such insurance as it may carry upon the Office Building. Such
insurance policy shall be maintained with an insurance company approved by
Landlord, which approval shall not be unreasonably withheld. Tenant shall
deliver to Landlord certificates of such fire insurance policy or policies which
show Landlord and its designated agent as named additional insurers and shall
each contain a clause requiring insurer to give Landlord thirty (30) days
written notice of modification or cancellation of such policies.
Section 5.06: Waiver of Subrogation
The parties release each other, and their respective authorized
representatives, from any claims for damage to any person or to the Premises and
the Office Building and other improvements in which the Premises are located,
and to the fixtures, personal property, Tenant's improvements, and alterations
of either Landlord or Tenant in or on the Premises and the Office Building and
other improvements in which the Premises are located that are caused by or
result from risks insured against under any insurance policies carried by the
parties and in force at the time of any such damage. Each party shall cause each
insurance policy obtained by it to provide that the insurance company waives all
right to recovery by way of subrogation against either party in connection with
any damage covered by any policy. Neither party shall be liable to the
12
<PAGE>
other for any damage caused by fire or any other risks insured against under any
insurance policy required by this Lease.
Section 5.07: Covenant to Hold Harmless
(a) Tenant covenants, to the extent permitted by applicable law, to
indemnify Landlord, its partners, representatives, agents and employees, and
save them harmless from and against any and all claims, actions, damages,
liability and expense including the attorney's fees of counsel designated by
Tenant and approved by Landlord whose approval will not be unreasonably
withheld, in connection with all losses, including loss of life, personal injury
and/or damage to property (except for loss or damage to the extent caused by the
negligence, willful misconduct or bad faith of Landlord or its agents, officers,
employees, or persons acting on Landlord's behalf) to the extent arising from or
out of any occurrence in, upon or at the Leased Premises or the occupancy or use
by Tenant of the Leased Premises or any part thereof, or arising from or out of
Tenant's failure to comply with any provision of this Lease or occasioned wholly
or in part by any act or omission, including negligent acts or omissions, by
Tenant, its agents, contractors, suppliers, employees, servants, customers or
licensees. In case Landlord or any other party so indemnified shall be made a
party to any litigation commenced by or against Tenant, other than an action by
Tenant against Landlord to enforce Landlord's obligations under this Lease and
which does not include claims subject to the indemnification obligations of
Tenant stated herein, then Tenant shall protect and hold Landlord or any other
party indemnified under this Section harmless and shall pay all costs, expenses
and reasonable attorney's fees incurred or paid by them in connection with such
litigation.
(b) Notwithstanding any other provisions of this Lease, the obligations
of the Tenant pursuant to this Section 5.07 shall remain in full force and
effect after the termination of this Lease until the expiration of the period
stated in the applicable statute of limitations during which a claim, cause of
action or prosecution relating to the matters herein described may be brought
and the payment in full or the satisfaction of such claim, cause of action or
prosecution and the payment of all expenses and charges incurred by the
Landlord, or its officers, partners, employees, servants or agents, relating to
the enforcement of the provisions herein specified.
Section 5.08: Property for Satisfaction
Tenant shall look only to Landlord's estate and interest in the Office
Building for the satisfaction of Tenant's remedies for the collection of any
judgment (or other judicial process) requiring the payment of money by Landlord
in the event of any default by Landlord under this Lease, and no other property
or other assets of Landlord shall be subject to levy, execution or other
enforcement procedure for the satisfaction of Tenant's remedies under or with
13
<PAGE>
respect to this Lease, the relationship of Landlord and Tenant hereunder or
Tenant's use and occupancy of the Leased Premises. Neither the trustees,
beneficiaries partners, shareholders, directors nor officers of Landlord (the
"Parties") shall be liable for the performance of Landlord's obligations
hereunder. Tenant shall not make any claims against nor seek damages from any of
the Parties, nor shall Tenant look to the property or assets of any of the
Parties in seeking either to enforce Landlord's obligations under this Lease or
to satisfy a judgment for Landlord's failure to perform such obligations.
ARTICLE SIX
CHANGES AND ADDITIONS TO BUILDING
Landlord hereby reserves the right at any time to remodel, refurbish,
make alterations or additions to the Office Building, so long as such work does
not unreasonably interfere with Tenant's right to quiet enjoyment of the Leased
Premises or otherwise unreasonably interfere with the conduct of business in the
Leased Premises during normal business hours. Tenant agrees that Tenant will
not, through any act or omission on the part of Tenant, in any way hinder,
impede, or frustrate the efforts of the Landlord in commencing and/or completing
such alterations, additions, remodeling or refurbishing in a timely fashion.
Landlord further reserves the exclusive right to the roof.
ARTICLE SEVEN
UTILITIES
Section 7.01: Services
(a) Landlord shall furnish the Premises, during the hours of 8:00 a.m.
to 6:00 p.m. on a five (5) day week basis, excluding Saturdays, Sundays and
holidays, with heating and air conditioning in amounts provided in similar
office buildings in the Bala Cynwyd area, in accordance with the following:
Summer: 78 degrees Fahrenheit dry bulb at fifty percent (50%)
relative humidity when the outside temperature is below 91 degrees Fahrenheit
dry bulb and 78 degrees Fahrenheit wet bulb.
Winter: 68 degrees Fahrenheit dry bulb at thirty percent (30%)
relative humidity when the outside temperature is above 15 degrees Fahrenheit
dry bulb.
(b) Notwithstanding the foregoing, the temperatures and conditions for
heating and air conditioning stated in Section 7.01(a) above shall not apply and
Landlord shall not be responsible if the normal operation of the air
conditioning or heating system shall fail to provide conditioned air in
accordance with the requirements of Section 7.01(a): (i) in any portions of the
Premises where the internal heat load exceeds 2.5 watts per square foot of
lighting or where the connected load exceeds 3.5 watts per square foot for any
14
<PAGE>
computer, machine or appliance installed by Tenant or where the human occupancy
density exceeds one (1) person for every 125 square feet of usable area or (ii)
because of any partitioning or other Tenant improvements or furnishings (other
than Landlord's Initial Improvements reflected in Exhibit "B") made, performed
by or installed on behalf of Tenant or any person claiming through or under
Tenant. Tenant shall cooperate fully with Landlord at all times and abide by all
regulations and requirements which Landlord may reasonably prescribe for the
proper functioning and protection of the heating and air conditioning systems.
(c) Landlord reserves the right to interrupt the service of the air
conditioning, elevator, plumbing, electrical, sanitary, mechanical or other
service or utility systems of the Office Building when necessary by reason of
emergency, requirement of law or any cause beyond Landlord's reasonable control
or for repair and maintenance including necessary repairs or replacements and
routine inspection and servicing which in the reasonable judgment of Landlord
exercised in good faith are necessary to maintain the proper functioning of such
systems, so long as Landlord diligently pursues all reasonable actions available
to it to resume furnishing such services. If Landlord's performance of routine
repairs or maintenance would result in a material disruption of Tenant's
business operations, Landlord shall use reasonable efforts to perform routine
repairs and maintenance before 8:30 a.m. and after 5:30 p.m.
(d) Landlord shall not be liable for failure to furnish any of the
foregoing services when such failure is caused by accident or conditions beyond
the reasonable control of Landlord, including but not limited to labor
disturbances or disputes of any character; nor shall Landlord be liable for loss
of or injury to property however occurring through or in connection with or
incidental to the furnishing of any of the foregoing. Such failure shall not
relieve Tenant from its duty to pay the full amount of rent herein reserved, or
constitute or be construed as a constructive or other eviction of Tenant, unless
the Leased Premises as a whole are untenantable and Landlord has failed to make
a good faith, diligent effort to commence a remedy within two (2) business days
after receipt of written notice from Tenant advising Landlord of the failure and
providing Landlord with full information from Tenant of the nature of the
failure. In this regard, if Tenant's complaint is that Landlord is not meeting
the temperatures stated above and if Landlord cannot immediately confirm such
claim from its own observation, Tenant shall provide the report and measurements
of a licensed professional engineer experienced in heating, refrigeration and
air conditioning confirming Landlord's failure to meet the temperatures provided
above and Landlord shall have a reasonable time to commence a remedy in response
to such information. If after receiving such notice and, if required, the report
and measurements from Tenant's engineer, the Leased Premises remain untenantable
15
<PAGE>
for more than ten (10) business days, Tenant shall be entitled to an abatement
of rent.
(e) Lamping and relamping will be performed by the Landlord at Tenant's
expense for Landlord's actual costs.
Section 7.02: Electrical Usage
(a) Tenant will not, without prior written consent of Landlord, connect
any apparatus or device for the purpose of using electric current except through
existing electrical outlets in the Premises as constructed for the space as part
of Landlord's Initial Improvements reflected in Exhibit "B". Landlord may
reserve the right to review Tenant's electrical usage and to cause an electric
current meter(s) to be installed in the Premises so as to measure the amount of
electricity consumed by Tenant, with the cost of any such meter(s) and of
installation, maintenance and repair thereof to be paid for by Landlord. Tenant
agrees to pay to Landlord promptly upon demand therefor all charges actually
incurred, net of any reimbursement, reduction or rebate from the utility
company, for such electrical service in the amount shown by said meter(s).
(b) If heat generating machines or equipment (other than personal
computers, copiers and other general office equipment, all in such types and
amounts as customarily used in general office use) are used in the Leased
Premises by Tenant and affect Landlord's ability to maintain the temperatures
otherwise maintained by the air conditioning system, Landlord reserves the
right, after thirty (30) days written notice to Tenant, to install supplementary
air conditioning units in the Premises and the reasonable cost thereof,
including the cost of installation and the cost of operation and maintenance
thereof, shall be paid by Tenant to Landlord upon demand.
ARTICLE EIGHT
PARKING AND COMMON AREAS AND FACILITIES
Section 8.01: Control of Common Areas by Landlord
All automobile parking areas, driveways, entrances and exits thereto,
and other facilities furnished by Landlord in or near the Office Building,
including employee parking areas, loading docks, if any, sidewalks and ramps,
landscaped areas, exterior stairways, rest rooms and other areas and
improvements provided by Landlord for the general use, in common, of tenants,
their officers, agents, employees, clients and customers shall at all times be
subject to the exclusive control and management of Landlord. Landlord shall have
the right to construct, maintain and operate lighting facilities on all said
areas and improvements, to police same, from time to time to change the area,
level, location and arrangement of parking areas and other facilities
hereinabove referred to, to restrict parking by tenants, their officers, agents,
employees and invitees to employee parking areas in numbers permitted in this
Lease, to close all or any portion of said areas to facilities to such extent as
may, in the opinion of Landlord's counsel, be legally sufficient to prevent a
dedication thereof or the accrual of any right to any person or the public
therein, to close temporarily all or any portion of the parking areas or
16
<PAGE>
facilities, to discourage non-employee parking, to designate reserve parking
areas, and to do and perform such other acts in and to said areas and
improvements as in the use of good business judgment Landlord shall determine to
be advisable with a view to the improvement of the convenience and use thereof
by Tenant, its officers, agents, employees, clients and customers. Landlord will
operate and maintain the common facilities referred to above in such manner as
Landlord, in its sole discretion, shall determine from time to time, provided
that Tenant's use of the same shall not be materially affected. Without limiting
the scope of such discretion, Landlord shall have the full right and authority
to employ all personnel pertaining to and necessary for the proper operation and
maintenance of the common areas and facilities, the cost of which shall be a
Direct Expense under Section 3.02.
Section 8.02: Use of Parking Areas
Tenant shall have the right to the use, for itself, its employees,
agents, invitees and visitors, of three (3) reserved parking spaces at the front
of the Building to be designated by Landlord and a maximum of ninety-seven (97)
unassigned parking spaces in the parking areas surrounding the Office Building.
ARTICLE NINE
FIXTURES, ALTERATIONS AND IMPROVEMENTS
Section 9.01: Tenant's Right to Make Alterations
Landlord agrees that Tenant may, at its own expense and after giving
Landlord or its designated agent at least thirty (30) days notice in writing of
its intention to do so, from time to time during the Term hereof make
alterations, additions and changes in and to the interior of the Premises
(except those of a structural nature) as Tenant may find necessary or convenient
for its purposes, provided that the value of the Leased Premises is not hereby
diminished. However, no alterations, additions or changes costing in excess of
Ten Thousand Dollars ($10,000.00) may be made without first procuring the
approval in writing of Landlord, which approval shall not be unreasonably
withheld. In addition, no alterations, additions or changes shall be made to the
exterior walls or roof of the Premises, nor shall Tenant erect any mezzanine
without the prior written approval of Landlord. In no event shall Tenant make or
cause to be made any penetration through the roof of the Leased Premises. Tenant
shall be directly responsible for any and all damages resulting from any
violation of the provisions of this Article.
17
<PAGE>
Section 9.02: Tenant's Performance of Work
All alterations, additions, improvements or changes to be made to the
Leased Premises that require the approval of Landlord shall be under the
supervision of a competent architect or competent licensed structural engineer
and made in accordance with plans and specifications with respect thereto,
approved in writing by Landlord before the commencement of the work, which
approval shall not be unreasonably withheld. In addition to the approval of the
plans and specifications as herein described, Tenant shall further submit the
names of all contractors and other entities utilized to make alterations to the
Leased Premises for Landlord's approval prior to commencement of work. All work
done with respect to alterations, additions and changes must be done in a good
and workmanlike manner and diligently prosecuted to completion to the end that
the Premises shall at all times be a complete unit except during the period of
work. Any such changes, alterations and improvements shall be performed and done
strictly in accordance with the laws and ordinances relating thereto, and Tenant
shall be responsible for obtaining all necessary building permits or any other
licenses or permits required by any laws, ordinances and regulations of all
governmental agencies or entities having jurisdiction over the Office Building.
In performing the work of any such alterations, additions or changes, Tenant
shall have the work performed in a manner which will not obstruct the access to
the Office Building or the premises of any other tenant in the Office Building,
and which will not interfere, in any manner, with the operation of the Office
Building or the appearance of the common areas.
Section 9.03: Removal
(a) Unless the approval for such improvement is otherwise conditioned,
upon the termination of this Lease, Tenant shall remove any alterations,
improvements and changes made by Tenant to the Leased Premises pursuant to this
Section, provided that Tenant repairs all damage caused by such removal, and
returns the Premises to the condition that existed at the Lease Commencement
Date, normal wear and tear and casualty excepted. All improvements not removed
by Tenant shall become a part of the Premises. Notwithstanding the foregoing
provision, Landlord may not require Tenant to remove any alterations or
additions constructed by Landlord or Tenant in connection with Landlord's
Initial Improvements shown in Exhibit B attached to this Lease. In addition, if
Tenant has constructed improvements or alterations in accordance with the terms
of this Lease after receipt of Landlord's approval in writing, Tenant shall be
obligated to remove such alterations and improvements only if Landlord
conditions its approval upon removal.
(b) Any trade fixtures, signs and other personal property of Tenant not
permanently affixed to the Premises shall remain the property of Tenant, and
Landlord agrees that Tenant shall have the right, at any time, and from time to
time, provided Tenant not be in default hereunder, to remove its trade fixtures
18
<PAGE>
and other personal property which it may have stored or installed in the
Premises. Nothing contained in this Article shall be deemed or construed to
permit or allow Tenant to remove so much of such personal property, without the
immediate replacement thereof with similar personal property of comparable or
better quality, as to render the Premises unsuitable for general office use.
Tenant at its expense shall immediately repair any damage occasioned to the
Premises by reason of the removal of any such trade fixtures and other personal
property, and upon the last day of the Lease Term or a date of earlier
termination of this Lease, shall leave the Premises in a neat and broom clean
condition, free of debris.
(c) All improvements to the Premises by Tenant, including but not
limited to light fixtures, floor coverings and partitions, but excluding trade
fixtures, shall become the property of Landlord upon expiration or earlier
termination of this Lease.
Section 9.04: Insurance and Taxes
(a) In the event that Tenant shall make any permitted alterations,
additions or improvements to the Premises under the terms and provisions of
Article Nine or Article Six, Tenant agrees to carry such insurance as required
by Article Five covering any such alteration, addition or improvement, it being
expressly understood and agreed that none of such alterations, additions or
improvements shall be insured by Landlord under such insurance as it may carry
upon the Office Building, nor shall Landlord be required under any provisions
for reconstruction of the Premises to reinstall any such alterations,
improvements or additions.
(b) Tenant shall be responsible for and pay before delinquency all
taxes, assessments, license fees and public charges levied, assessed or imposed
upon its business operations, as well as upon its trade fixtures, leasehold
improvements and leasehold interest, merchandise and other personal property in,
on or upon the Premises. In the event, any such items of property are assessed
with property of Landlord, then and in such event, such assessment shall be
equitably divided between Landlord and Tenant to the end that Tenant shall pay
its equitable proportion of such assessment. Landlord shall determine the basis
of prorating any such assessments and such determination shall be binding upon
both Landlord and Tenant.
Section 9.05: Mechanics' Lien
(a) Tenant agrees that it will pay or cause to be paid all costs for
work done by it or caused to be done by it on the Premises, and Tenant will keep
the Premises free and clear of all mechanics' liens and other liens on account
of work done for Tenant or persons claiming under it. Tenant agrees to and shall
19
<PAGE>
indemnify, defend and save Landlord free and harmless against liability, loss,
damage costs, attorneys' fees and all other expenses on account of claims of
lien of laborers or materialmen or others for work performed or materials or
supplies furnished for Tenant or persons claiming under it.
(b) If any lien or notice of lien on account of an alleged debt of
Tenant or any notice of contract by a party engaged by Tenant or Tenant's
contractor to work in the Premises shall be filed against the Premises or the
Office Building of which the Premises is a part, Tenant shall, within thirty
(30) days after notice of the filing thereof, cause the same to be discharged of
record by payment, deposit, bond, order of a court of competent jurisdiction or
otherwise. If Tenant shall fail to cause such lien or notice of lien to be
discharged within the period provided, then Landlord, in addition to any other
rights or remedies, may, but shall not be obligated to, discharge the same by
either paying the amounts claimed to be due or by procuring the discharge of
such lien by deposit or by bonding proceedings; and in any such event, Landlord
shall be entitled, if Landlord so elects, to defend any prosecution of an action
for foreclosure of such lien by the lienor or to compel the prosecution of an
action for foreclosure of such lien by the lienor and to pay the amount of the
judgment in favor of the lienor with interest, costs and allowances. Any amount
paid by Landlord and all costs and expenses, including attorney fees, incurred
by Landlord in connection therewith, together with interest thereon at prime
plus three percent (3%) the maximum legal rate from the respective dates of
Landlord's making of the payment or incurring of the cost and expenses shall be
paid by Tenant to Landlord on demand and without inquiry into the validity of
the lien. Nothing in this Lease shall be construed as in any way constituting a
consent or request by Landlord, expressed or implied, by inference or otherwise,
to any contractor, subcontractor, laborer or materialman for the performance of
any labor or the furnishing of any materials for any specific or general
improvement, alteration or repair of or to the Premises or to any improvements
thereon, or to any part thereof.
(c) Should any claims of lien be filed against the Leased Premises or
any action affecting the title to such property be commenced, the party
receiving notice of such lien or action shall forthwith give the other party
written notice thereof.
(d) In connection with pursuit of its rights under this Section,
Landlord or its representatives shall have the right to go upon and inspect the
Premises at all reasonable times after one (1) business days' notice to Tenant.
Section 9.06: Windows
Notwithstanding anything in this Lease to the contrary, Tenant shall
not place or cause to be placed any item in the windows of the Leased Premises,
including but not limited to signs and/or window treatment, without the prior
approval of Landlord. Tenant shall provide window treatments for the Leased
Premises acceptable to Landlord at Landlord's sole discretion.
20
<PAGE>
ARTICLE TEN
MAINTENANCE OF LEASED PREMISES
Section 10.01: Maintenance
(a) Landlord will keep and maintain the Office Building and common
areas in good order and repair, including but not limited to cleaning and
janitorial service, in accordance with the standards of comparable office
buildings in the vicinity of the Office Building. Tenant will at its own expense
keep and maintain in good order and repair during the full term of the Lease all
parts of the Leased Premises, except that Tenant shall not be required to make
any structural alterations or repairs or system alterations or repairs (except
as otherwise provided in this Lease or caused by Tenant's misuse or abuse
thereof) and Landlord shall provide janitorial services to the Premises.
(b) At the expiration of the Lease, Tenant shall surrender the Leased
Premises in good condition, reasonable wear and tear and damage by casualty
excepted, and shall surrender all keys for the Leased Premises to Landlord or
its designated agent at the place then fixed for the payment of rent and shall
inform Landlord or its designated agent of all combinations on locks, safes and
vaults, if any, in the Leased Premises. Before surrendering the Leased Premises,
Tenant shall repair any damage caused by removal of trade fixtures, alterations
and improvements, such repairs to be performed in a good and workmanlike manner,
and shall broom clean the Premises thoroughly. Tenant's obligation to observe or
perform this covenant shall survive the expiration or other termination of this
Lease.
Section 10.02: Rules and Regulations
Tenant shall faithfully observe and comply with the rules and
regulations presented in Exhibit "C" hereto. Landlord shall use its good faith
efforts to enforce such rules and regulations, but Landlord shall not be
responsible to Tenant for the noncompliance with any of said rules and
regulations by other tenants or occupants of the Office Building, except that
nothing in this Section shall relieve Landlord of its obligation to provide
Tenant with quiet enjoyment of the Leased Premises as provided in Article
Seventeen. Such rules and regulations shall apply and be enforced as to all
tenants in the Office Building on a uniform basis.
21
<PAGE>
ARTICLE ELEVEN
DAMAGE AND DESTRUCTION
Section 11.01: Notice by Tenant
Tenant shall give prompt notice to Landlord in case of fire or
accidents in the Leased Premises or of defects therein or in any fixtures or
equipment. However, such notices, or any occurrence giving rise thereto, shall
not impose any duty on Landlord except as otherwise expressly provided herein.
Section 11.02: Destruction of the Leased Premises
Landlord shall maintain fire and extended coverage insurance on the
Office Building in an amount sufficient to avoid application of any coinsurance
provisions. In the event that the Leased Premises are damaged by fire or other
perils covered by fire and extended coverage insurance, for which damage the
cost of repair is less than thirty-three and one-third percent (33-1/3%) of the
cost of replacement of the Leased Premises and is less than the amount of Base
Rent reasonably estimated by Landlord as remaining due hereunder for the balance
of the term hereof, the damage shall be promptly repaired by Landlord at
Landlord's expense, provided Landlord shall not be obligated to expend for such
repair an amount in excess of the insurance proceeds recovered as a result of
such damage, and in no event shall Landlord be required to repair or replace
Tenant's stock in trade, files, documents, fixtures, improvements, furnishings,
and/or equipment. In the event of any damage to the Leased Premises, and if
Landlord is not required to repair as hereinabove provided, Landlord may elect
whether to repair or rebuild the Leased Premises, or to terminate this Lease
effective as of the date of damage, upon giving notice of such election in
writing to Tenant within forty-five (45) days after the occurrence of the event
causing damage. Nothing in this Section 11.02 shall be construed as a limitation
of Tenant's liability for such occurrence should such liability otherwise exist.
Section 11.03: Destruction of the Office Building
In the event that the Leased Premises or other premises forming a
portion of the Office Building, as it may exist from time to time, are damaged
by fire, explosion or any other cause to the extent that the cost of repair of
such damage is equal to or greater than thirty-three and one-third percent
(33-1/3%) of the replacement cost of said Office Building, Landlord may elect to
repair or rebuild such damage, or to terminate this Lease effective the date of
damage upon giving notice of such election in writing to Tenant within
forty-five (45) days after the occurrence causing the damage, whether the Leased
Premises be damaged or not. Nothing in this Section 11.03 shall be construed as
a limitation of Tenant's liability for such occurrence should such liability
otherwise exist.
22
<PAGE>
Section 11.04: Abatement of Rent
If damage to the Leased Premises or repairing or rebuilding of the
Leased Premises after such damage shall render the Leased Premises untenantable
in whole or in part, and Landlord shall repair such damage pursuant to the
provisions of this Article Eleven, then a proportionate abatement of the monthly
Base Rent and Additional Rent shall be allowed only for such period as is
covered by Landlord's rent loss insurance, which insurance shall be maintained
by Landlord to cover a minimum of twelve (12) months, so long as such insurance
is reasonably commercially available to Landlord. The proportionate abatement
shall be computed on the basis of the relation which the area of space rendered
untenantable bears to the total area of the Leased Premises prior to such
damage. If Landlord is required or elects to repair the Leased Premises as
herein provided, Tenant shall, promptly upon substantial completion of
Landlord's repairs, repair or replace its improvements, fixtures, furniture,
furnishings and equipment, and if Tenant has closed, Tenant shall promptly
reopen for business.
ARTICLE TWELVE
EMINENT DOMAIN
Section 12.01: Complete Taking
In the event the entire Premises shall be appropriated or taken under
the power of eminent domain by any public or quasi-public authority, this Lease
shall terminate and expire as of the date of such taking, and the Tenant shall
thereupon be released from any liability thereafter accruing hereunder.
Section 12.02: Partial Taking
(a) In the event more than twenty-five (25%) percent of the total
square footage of floor area of the Premises is taken under the power of eminent
domain by any public or quasi-public authority, or if by reason of any
appropriation or taking, regardless of the amount so taken, the remainder of the
Premises is not one undivided parcel of property, either Landlord or Tenant
shall have the right to terminate this Lease as of the date Tenant is required
to vacate a portion of the Premises upon giving notice in writing of such
election within thirty (30) days after receipt by Tenant from Landlord of
written notice that said Premises have been so appropriated or taken. In the
event of such termination, both Landlord and Tenant shall thereupon be released
from any liability thereafter accruing hereunder. Landlord agrees immediately
after learning of any appropriation or taking to give to Tenant notice in
writing thereof. If both Landlord and Tenant elect not to so terminate this
Lease, Tenant shall remain in possession of the portion of the Premises which
shall not have been appropriated or taken as herein provided.
23
<PAGE>
(b) In the event that this Lease is not terminated after any partial
taking as described above, then Landlord agrees at Landlord's cost and expense
as soon as reasonably possible to restore the Leased Premises to a complete unit
of as like quality and character as possible, in view of the taking, as existed
prior to such appropriation or taking; and thereafter the Base Rent and
Additional Rent and other expenses paid by Tenant shall be reduced on the basis
of the relation which the area of space remaining bears to the total area of the
Leased Premises prior to such taking. Landlord shall be entitled to receive the
total award or compensation in such proceedings.
Section 12.03: Compensation and Rent
If this Lease is terminated pursuant to Sections 12.01 or 12.02,
Landlord shall be entitled to the entire award or compensation in such
proceedings, but the rent and other charges for the last month of Tenant's
occupancy shall be prorated and Landlord agrees to refund to Tenant any rent or
other charges paid in advance. Tenant's right to receive compensation or damages
for its personal property, fixtures and improvements paid for directly by Tenant
without reimbursement by Landlord and relocation expenses shall not be affected
in any manner hereby.
Section 12.04: Voluntary Conveyance
For the purposes of this Article Twelve, a voluntary sale or conveyance
in lieu of condemnation, but under threat of condemnation, shall be deemed an
appropriation or taking under the power of eminent domain so long as Tenant's
rights pursuant to Sections 12.02 and 12.03 are not diminished.
ARTICLE THIRTEEN
DEFAULT
Section 13.01: Default of Tenant
The occurrence of any of the following shall constitute a material
default and breach of this Lease by Tenant:
(1) Any failure by Tenant to pay the Rent, which for purposes of this
Article Thirteen shall be defined to mean Base Rent and Additional Rent required
to be paid by Tenant pursuant to the terms of this Lease, within ten (10) days
after the due date thereof without any further notice being required from
Landlord to Tenant (except that Landlord agrees to give Tenant written notice of
default under this Section 13.01 but shall not be required to provide such
notice more than once in any one Lease year), or to pay any other monetary sums
required to be paid hereunder within ten (10) days after written notice from
Landlord to Tenant therefor;
(2) The abandonment or vacation of the Premises by Tenant for more than
ten (10) consecutive business days unless Tenant shall have provided prior
notice to Landlord and given Landlord reasonable assurance of its continued
performance under the Lease;
24
<PAGE>
(3) A failure by Tenant to observe and perform any other provisions of
this Lease to be observed or performed by Tenant, where such failure continues
for thirty (30) days after notice thereof by Landlord to Tenant; provided,
however, that Tenant shall not be deemed to be in default if the nature of such
failure is such that the same cannot reasonably be cured within such thirty (30)
day period and Tenant shall within such period commence such cure and thereafter
diligently prosecute such cure and complete the cure within no more than ninety
(90) days, which time shall be extended only upon Landlord's written consent to
a longer period. Landlord's consent to extend the period of cure shall not be
unreasonably withheld so long as Tenant demonstrates that the cure could not
have been timely completed by expenditure of additional funds and Tenant has
specifically designated reserves on its books to cover the full expense of such
cure. In no event shall Landlord's consent to a period of cure of more than
ninety (90) days be required if Tenant's failure to cure places Landlord in
breach of any agreements it may have with other parties, including any lender or
other tenant in the Office Building. Any consent to a longer period by Landlord
shall be conditioned upon Tenant's continued use of its best efforts to
diligently complete the cure.
Section 13.02: Remedies of Landlord
In the event of any such material default and breach by Tenant beyond
any applicable grace and/or cure period as stated in this Lease, Landlord may at
any time thereafter, with or without notice and demand and without limiting
Landlord in the exercise of any right or remedy at law or in equity which
Landlord may have by reason of such default or breach:
(1) Maintain this Lease in full force and effect and recover the Rent
as it becomes due, without termination Tenant's right of possession,
irrespective of whether Tenant shall have abandoned the Premises. In the event
Landlord elects not to terminate the Lease, Landlord shall have the right to
attempt to re-let the Premises at such rent and upon such conditions and for
such a term, and to do all acts necessary to maintain or preserve the Premises,
as Landlord deems reasonable and necessary without being deemed to have elected
to terminate the Lease including removal of all persons and property from the
Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of, and for the account of, Tenant. In the event such
re-letting occurs, this Lease shall terminate automatically upon the new
tenant's taking possession of the Premises, and Landlord shall be entitled to
recover from Tenant all damages incurred by reason of Tenant's default, as more
fully set forth below. Notwithstanding that Landlord at any time
25
<PAGE>
during the term of this Lease may elect to terminate this Lease by virtue of
such previous default by Tenant.
(2) Terminate Tenant's right to possession, in which case this Lease
shall terminate and Tenant shall immediately surrender possession of the
Premises to Landlord. In such event Landlord shall be entitled to recover from
Tenant all damages incurred by Landlord by reason of Tenant's default including
without limitation thereof, the following: (i) any unpaid Rent which has been
earned at the time of such termination; plus (ii) the amount by which the unpaid
Rent for the balance of the term after termination exceeds the amount of such
rental loss that is proved could be reasonably avoided; plus (iii) any
unamortized Tenant improvements and leasing commissions; plus (iv) reasonable
attorneys' fees plus such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable state law. Upon
any such re-entry, Landlord shall have the right to make any reasonable repairs,
alterations or modifications to the Premises, which Landlord in its sole
discretion deems reasonable and necessary.
(3) Upon two days notice to Tenant, declare to be immediately due and
payable, on account of rent and other charges herein reserved for the balance of
the term of this Lease, all Rent due from Tenant to Landlord and in arrears at
the time of the declaration made herein as well as Landlord's good faith
estimate of all future Rent to be paid by Tenant up to the end of the term, even
if such amounts shall not be capable of precise determination.
(4) Collect as an additional item of damages the cost of repairs,
alterations, redecorating, lease commissions, legal expenses and Landlord's
other expenses incurred in reletting the Premises to a new tenant.
(5) Enter the Premises and remove therefrom all persons and property.
Such property may be stored in a public warehouse or elsewhere at the cost of
and for the account of Tenant, and may be sold by Landlord by public or private
sale, without notice to or demand upon Tenant, if said property is stored for
thirty (30) days or more and Tenant has not paid the entire cost of storage.
Section 13.03: Cumulative Rights
All rights and remedies of Landlord enumerated in this Article Thirteen
shall be cumulative and none shall exclude any other right or remedy allowed by
law. In addition to the other remedies provided herein, Landlord shall be
entitled to seek an injunction restraining a violation or attempted violation of
any of the covenants, agreements or conditions of this Lease.
26
<PAGE>
Section 13.04: Surrender of Possession
Upon termination of this Lease, Tenant shall surrender possession and
vacate the Premises immediately and deliver possession to Landlord. Tenant
hereby grants to Landlord full and free license to enter upon the Premises in
such event with or without process of law and to repossess the Premises and to
expel or remove Tenant and any other who may be occupying or within the Premises
and to remove any and all property from it, using such force as may be
necessary, without being deemed in any manner guilty of trespass, eviction or
forcible entry or detainer and without relinquishing Landlord's right to Rent or
any other right given to Landlord under this Lease or by operation of law.
Section 13.05: Possessory Confession of Judgment
When this Lease and its term shall have been terminated on account of
any default by Tenant in the payment of Base Rent or its equal monthly
installment of its Pro Rata Share of Direct Expenses or when the term hereby
created shall have expired, and only after ten (10) business days' advance
notice from Landlord to Tenant of Landlord's intent to obtain such confession
stating the grounds of default, it shall be lawful for any attorney of any court
of record to appear as attorney for Tenant as well as for all persons claiming
by, through or under Tenant and to sign an agreement for entering in any
competent court an amicable action in ejectment against Tenant and all persons
claiming by, through or under Tenant and to confess judgment for the recovery by
Landlord of possession of the Premises, for which this Lease shall be sufficient
warrant; thereupon, if Landlord so desires, an appropriate writ of possession
may issue promptly, without any prior writ or proceeding whatsoever, provided
that if for any reason after such action shall have been commenced it shall be
determined that possession of the Premises should remain or be restored to
Tenant, Landlord shall have the right for the same default and upon any
subsequent default or defaults, or upon the termination of this Lease or of
Tenant's right of possession to bring one or more further amicable action or
actions to recover possession of the Premises and to confess judgment for the
recovery of possession of the Premises as provided. Notwithstanding anything
contained in this Lease to the contrary, the right of Landlord to initiate an
amicable action in ejectment as specified above shall not preclude or limit
Landlord's right to initiate an amicable action for Rent (including but not
limited to, all unpaid Rent for the balance of the term of this Lease). Further,
notwithstanding anything contained in this authorization for confession of
judgment to the contrary, Landlord shall not confess judgment solely on the
basis of Tenant's failure to timely pay Landlord the difference between the
aggregate amount of the monthly payments made by Tenant and the actual amount
due as stated in Section 3.02(e)(i) unless Tenant's time to review records
pursuant to Section 3.02(e)(ii) has expired and Tenant has not notified Landlord
of any dispute under Section 3.02(e)(iii).
27
<PAGE>
Section 13.06: Monetary Confession of Judgment
If Tenant shall default in the payment of Base Rent or its equal
monthly installment of its Pro Rata Share of Direct Expenses or in the payment
of any other sums due by Tenant, and only after ten (10) business days' advance
notice from Landlord to Tenant of Landlord's intent to obtain such confession,
Tenant hereby authorizes and empowers any Prothonotary or attorney of any court
of record to appear for Tenant in any and all actions which may be brought for
Rent and other sums; and to sign for Tenant an agreement for entering in any
competent court an amicable action or actions for the recovery of Rent and other
sums, and in suits or in amicable action or actions to confess judgment against
Lessee for all or any part of the Rent and other sums, including, but not
limited to, interest and costs, together with a commission for collection of
fifteen percent (15%) of any defaulted Rent or other sums being confessed but in
no event less than three thousand dollars ($3,000). Such authority shall not be
exhausted by one exercise, but judgment may be confessed from time to time as
often as any of the Rent and other sums shall fall due or be in arrears and such
powers may be exercised as well after the expiration of the term of this Lease.
Notwithstanding anything contained in this authorization for confession of
judgment to the contrary, Landlord shall not confess judgment solely on the
basis of Tenant's failure to timely pay Landlord the difference between the
aggregate amount of the monthly payments made by Tenant and the actual amount
due as stated in Section 3.02(e)(i) unless Tenant's time to review records
pursuant to Section 3.02(e)(ii) has expired and Tenant has not notified Landlord
of any dispute under Section 3.02(e)(iii).
Section 13.07: Waiver of Defenses
Tenant expressly waives:
(1) the benefit of all laws, now or hereafter in force, exempting any
goods in the Premises or elsewhere from distraint, levy or sale in any legal
proceedings taken by Landlord to enforce any rights under this Lease.
(2) The right to issue a writ of replevin for the recovery of any goods
seized under a levy upon an execution for rent, damages or otherwise.
(3) The right to delay execution on any real estate that may be levied
upon to collect any amount which may become due under the terms and conditions
of this Lease and any right to have the same appraised. Tenant authorizes the
Prothonotary or Clerk to enter a writ of execution or other process upon
Tenant's voluntary waiver and further agrees that said real estate may be sold
on a writ of execution or other process.
28
<PAGE>
(4) All rights under the Pennsylvania Landlord and Tenant Act of 1951
and all supplements and amendments to it;
(5) The right to three months and fifteen or thirty days notice
required under certain circumstances by the Pennsylvania Landlord and Tenant Act
of 1951, Tenant hereby agreeing that the respective notice periods provided for
in this Lease shall be sufficient in either or any such case.
Section 13.08: Late Charges
Tenant hereby acknowledges that the late payment by Tenant to Landlord
of Rent and any and all other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of Rent or any other sum due from Tenant shall
not be received by Landlord or Landlord's designee within ten (10) days after
such amount shall be due, Tenant shall pay to Landlord a late charge equal to
three percent (3%) of such overdue amount or $100.00, whichever is greater.
Notwithstanding the preceding, Landlord agrees to give Tenant three (3) business
days' advance written notice, which notice may be included as part of and need
not be in addition to the notice referred to in Section 13.01(1) above, not more
than once during any one Lease year, before charging such late charges, and if
Tenant pays such past-due sum within such three (3) business day period, late
charges under this section shall not be imposed. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Landlord
will incur by reason of late payment by Tenant. Acceptance of such late charge
by Landlord shall in no event constitute a waiver of Tenant's obligation to make
timely payments, nor prevent Landlord from exercising any of the other rights
and remedies granted hereunder.
Section 13.09: Bankruptcy or Insolvency of Tenant
(a) Except as specifically provided in this Section 13.10, the
occurrence of any of the following shall constitute a material default and
breach of this Lease by Tenant: the making by Tenant of any general assignment
or general arrangement for the benefit of creditors; the filing by or against
Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy (unless, in
the case of a petition filed against Tenant, the same is dismissed within sixty
(60) days); the appointment of a trustee or receiver to take possession is not
restored to Tenant within thirty (30) days; or the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest
29
<PAGE>
in this Lease, where such seizure is not discharged within (30) days.
(b) Neither Tenant's interest in this Lease, nor any estate hereby
created in Tenant nor any interest herein or therein, shall pass to any trustee
or receiver or assignee for the benefit of creditors or otherwise by operation
of law except as may specifically be provided pursuant to the Federal Bankruptcy
Code.
(c) In the event the interest or estate created in Tenant hereby shall
be taken in execution or by other process of law, or if Tenant's executors,
administrators, or assigns, if any, shall be adjudicated insolvent or bankrupt
pursuant to the provisions of any State Act or the Federal Bankruptcy Code or if
Tenant is adjudicated insolvent by a Court of competent jurisdiction other than
the United States Bankruptcy Court, if a receiver or trustee of the property of
Tenant shall be appointed by reason of the insolvency or inability of Tenant to
pay its debts, or if any assignment shall be made of the property of Tenant for
the benefit of creditors, then and in any such events, this Lease and all
rights, but not the duties or obligations, of Tenant hereunder, at the option of
Landlord, shall automatically cease and terminate with the same force and effect
as though the date of such event were the date originally set forth herein and
fixed for the expiration of the term, and Tenant shall vacate and surrender the
Leased Premises but shall remain liable as herein provided.
(d) Tenant shall not cause or give cause for the appointment of a
trustee or receiver of the assets of Tenant and shall not make any assignment
for the benefit of creditors, or become or be adjudicated insolvent. The
allowance of any petition under insolvency law except under the Federal
Bankruptcy Code or the appointment of a trustee or receiver of Tenant or its
assets shall be conclusive evidence that Tenant caused, or gave cause therefor,
unless such allowance of the petition, or the appointment of a trustee or
receiver, is vacated within sixty (60) days after such allowance or appointment.
Any act described in this Section shall be deemed a material breach of Tenant's
obligations hereunder, and this Lease shall thereupon automatically terminate.
Landlord does, in addition, reserve any and all other remedies provided in this
Lease or in law.
(e) Upon the filing of a petition by or against Tenant under the
Federal Bankruptcy Code, Tenant, as debtor and as debtor in possession, and any
trustee who may be appointed agree as follows: (i) to perform each and every
obligation of Tenant under this Lease including, but not limited to, conforming
to the manner of operations of the business as provided in Section 4.01 of this
Lease until such time as this Lease is either rejected or assumed by order of
the United States Bankruptcy Court; (ii) to pay monthly in advance on the first
day of each month as reasonable compensation for use and occupancy of the Leased
Premises an amount equal to all Rent and other charges otherwise due pursuant to
30
<PAGE>
this Lease; (iii) to reject or assume this Lease within sixty (60) days of the
filing of such petition under Chapter 7 of the Federal Bankruptcy Code or within
one hundred twenty (120) days (or such shorter term as Landlord, in its sole
discretion, may deem reasonable so long as notice of such period is given) of
the filing of a petition under any other Chapter; for purposes of this Section,
it shall be conclusively presumed that the time periods set forth herein
constitute a reasonable period of time within which to determine whether to
reject or assume this Lease, and it shall be the burden of Tenant or the
trustees to overcome this presumption; (iv) to give Landlord at least forty-five
(45) days prior written notice of any proceedings relating to any assumption of
this Lease; (v) to give at least thirty (30) days prior written notice of any
abandonment of the Leased Premises; (vi) to do all such other things of benefit
to Landlord or otherwise required under the Federal Bankruptcy Code; (vii) to be
deemed to have rejected this Lease in the event of the failure to comply with
any of the above; (viii) to have consented to the entry of an order by an
appropriate United States Bankruptcy Court providing all of the above waiving
notice, and hearing of the entry of same.
(f) No default under this Lease by Tenant, either prior to or
subsequent to the filing of such a petition, shall be deemed to have been waived
unless expressly done so in writing by Landlord.
(g) Included within and in addition to any other conditions or
obligations imposed upon Tenant or its successor in the event of assumption
and/or assignment are the following: (i) the cure of any monetary defaults and
the reimbursement of pecuniary loss within not more than thirty (30) days of
assumption and/or assignment; and (ii) the deposit of any additional sum equal
to three (3) month's rental to be held as security deposit concurrently with
assumption and/or assignment; and (iii) the use of the Leased Premises as set
forth in Section 4.01 of this Lease, and (iv) demonstration in writing by the
reorganized debtor or assignee of such debtor or assignee of such debtor in
possession or of Tenant's trustee that it has sufficient background, including
but not limited to financial ability, to operate a business out of the Leased
Premises in the manner contemplated in this Lease and to meet all other
reasonable criteria of Landlord as did Tenant upon execution of this Lease; and
(v) the prior written consent of any mortgagee to which this Lease has been
assigned as collateral security; and (vi) the Premises, at all times, shall
remain an office or office suite and no physical changes of any kind shall be
made to the Premises unless in compliance with the applicable provisions of this
Lease.
(h) The invalidity of any term or provision, or any part thereof, of
this Section 13.10, as determined by a court of competent jurisdiction, shall in
no way affect the validity
31
<PAGE>
and/or enforceability of any other term of provision, or any part thereof, of
this Section 13.10.
Section 13.10: Default by Landlord
Landlord shall not be in default unless Landlord fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord and to
Landlord's designated agent stated in Section 1.01 above, or to the holder of
any first deed of trust covering the Premises whose name and address shall have
theretofore been furnished to Tenant in writing if the name of such holder is
given in substitution for notice to Landlord or Landlord's designated agent,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligation is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within said thirty (30) day period and
thereafter diligently prosecutes the same to completion.
Section 13.11: Excuse of Performance
Anything in this Lease to the contrary notwithstanding, providing such
cause is not due to the willful act or gross negligence of the party invoking
this excuse of performance, a party shall not be deemed in default with respect
to the performance of any of the terms, covenants and conditions of this Lease
if same shall be due to any strike, lockout, civil commotion, war-like
operation, invasion, rebellion, hostilities, military or usurped power,
sabotage, governmental regulations or controls, inability to obtain any material
or service, through Act of God or other cause beyond the control of that party,
except that in no event shall any such causes excuse Tenant from performance of
any monetary obligations under this Lease, including but not limited to any
obligation to pay Base Rent or Additional Rent.
Section 13.12: Mitigation of Damage Through Re-Letting
(a) In the event Tenant has vacated the Leased Premises and given
Landlord written notice that the Leased Premises have been permanently vacated
by it and that Tenant has waived any claim to prevent Landlord from terminating
this Lease as to all or any part of the Leased Premises, and so long as Tenant
is not defending against claims by Landlord or asserting claims against Landlord
arising out of or based upon any provision in this Lease, Landlord shall use
commercially reasonable efforts to re-let the Leased Premises as stated in this
Section to mitigate Landlord's damages from Tenant's default under this Lease.
(b) Notwithstanding the obligation stated in paragraph (a) above,
Landlord shall not be required to:
32
<PAGE>
(i) take any action to offer or advertise the availability of
the Leased Premises for lease other than listing such Premises with a real
estate broker pursuant to the standard commission and terms previously and
customarily given by the Landlord to such a broker, and Landlord shall have such
obligation to list the Premises with a broker only on the condition that Tenant
bear all costs associated with such listing and reach satisfactory agreement
with Landlord's broker to pay all commissions arising out of such listing and
release Landlord from all liability with regard to such commissions;
(ii) improve the Leased Premises, which may be re-let "as is";
(iii) subdivide the portion of the Leased Premises on either
floor;
(iv) provide any other form of lease concession requiring an
out-of-pocket expenditure by Landlord or which would otherwise affect the amount
of rent due from a new tenant;
(v) re-let the Leased Premises for any rent other than the
fair market rent (which shall not be less than the Rent reserved in this Lease),
as of the date of the proposed reletting, for general office use of the Leased
Premises.
(c) Landlord may take into account all relevant facts concerning the
qualifications of any proposed tenant, including but not limited to those stated
in Section 14.02(b), and shall only be obligated to re-let the Leased Premises
upon substantially the same terms and conditions, in all respects material to
Landlord, as found in Landlord's standard form of lease agreement and for a term
not less than two years.
(d) Notwithstanding anything in this Section to the contrary, Landlord
shall have no obligations under this Section if there is other comparably sized
space within the Office Building available for lease, and Landlord's lease of
any other vacant space within the Office Building as a priority over re-letting
the Leased Premises shall not act as a breach of any duty by Landlord to
mitigate damages by reletting the Leased Premises.
(e) Any reletting of the Leased Premises by Landlord shall not release
Tenant of its liability for damages but shall only act in mitigation of such
damages, and Tenant shall have no rights or entitlement to any surplus created
through reletting the Leased Premises. Any failure by Landlord to mitigate
damages as required by this Section shall not bar Landlord from recovery from
Tenant.
33
<PAGE>
ARTICLE FOURTEEN
ASSIGNMENT AND SUBLETTING
Section 14.01: Transfer, Assignment and Subletting
Tenant shall not voluntarily, involuntarily, or by operation of law,
transfer, assign, sublet, change of control, mortgage or hypothecate or
otherwise encumber this Lease or Tenant's interest in and to the Leased Premises
without first procuring the written consent of Landlord. If at any time during
the term of this Lease any part or all of the corporate shares of Tenant, or of
a parent corporation of which the Tenant is a direct or indirect subsidiary,
shall be transferred by sale, assignment, bequest, inheritance, operation of law
or other disposition which results in a change in the present effective voting
control of Tenant or of such parent corporation by the person or persons owning
or controlling a majority of the shares of Tenant or of such parent corporation
on the date of this Lease, Tenant shall promptly notify Landlord in writing of
such change, and such change in voting control shall constitute an assignment of
this Lease for all purposes of this Section. Any such attempt to transfer,
assign, sublet, change ownership, mortgage or hypothecate this Lease without
Landlord's prior written consent shall be void and confer no rights upon any
third person.
Section 14.02: Consent to Assignment
(a) Landlord shall not unreasonably withhold or delay consent to an
assignment of this Lease or to subletting of the Leased Premises, provided that
any such assignment or subletting shall be made solely upon the following terms
and conditions:
(i) Tenant shall provide Landlord for Landlord's approval at
least thirty (30) days prior to any proposed sublease or assignment, written
notice of such proposed assignment, containing the name and address of the
proposed sublessee or assignee, adequate information as to its reputation and
financial condition and the intended use of the Premises, which shall be limited
to office use, and a copy of the proposed sublease or assignment. No assignment
or sublease shall become effective unless and until Landlord shall have reviewed
and approved the information set forth in such notice, which approval shall not
be unreasonably withheld or delayed.
(ii) Landlord shall have the option, exercisable by written
notice within thirty (30) days after receipt of the notice from Tenant, to
terminate this Lease effective as of the date specified by Landlord in such
notice, which date shall be not later than thirty (30) days after the date of
Landlord's notice.
(iii) In the event Landlord shall elect not to terminate this
Lease, Landlord shall have the right, upon five (5) days prior written notice to
Tenant, to require Tenant thereafter to pay to Landlord a sum equal to (i) any
34
<PAGE>
rent or other consideration paid to Tenant by any sublessee which is in excess
of the Rent, and any other charges then being paid by Tenant to Landlord for the
subleased space pursuant to the terms hereof, and (ii) any other profit or gain
realized by Tenant from any subletting or assignment. Nothing contained herein
shall reduce the amount payable to Landlord to a sum less than that which
Landlord would otherwise have received if the Premises had not been subleased.
All sums payable hereunder by Tenant shall be paid to Landlord as excess rent
immediately upon receipt thereof by Tenant.
(iv) The proposed sublessee or assignee shall not be a tenant
or prior tenant within the past eighteen (18) months (or prior tenant who
defaulted under their lease) of any space in the Office Building or a related
entity of any other tenant.
(v) The proposed sublessee or assignee shall not be a person
or entity that has negotiated within the past eighteen (18) months or is
negotiating with Landlord for the rental of any space in the Office Building.
(vi) The proposed sublessee or assignee shall not be entitled,
directly or indirectly, to diplomatic or sovereign immunity and shall be subject
to the service of process in, and the jurisdiction of the courts of, the
Commonwealth of Pennsylvania.
(vii) Tenant will not advertise any rental rates for any such
subletting or assignment.
(viii) The proposed sublessee or assignee shall use the Leased
Premises exclusively for an office use.
(ix) The proposed sublessee or assignee and its principals
have demonstrated to Landlord's reasonable satisfaction financial stability and
good business reputation.
(x) Each transfer, assignment, subletting, mortgage or
hypothecation shall be by an instrument in writing in a form reasonably
satisfactory to Landlord and shall be executed by the transferor, assignor,
sublessee, hypothecator or mortgagor and the transferee, assignee, sublessee or
mortgagee in each instance as the case may be. Each transferee, assignee,
sublessee or mortgagee shall agree in writing to assume and be bound by and to
perform the terms, covenants and conditions of this Lease to be performed by
Tenant including the payment of all amounts due or to become due under this
Lease directly to Landlord. No such assignment, or sublet shall relieve Tenant
of any obligations under this Lease. In the event Landlord shall consent to an
assignment, transfer, subletting, mortgage or hypothecation, Tenant shall pay to
Landlord a sum no less than $250.00 for the time and expense incurred by
Landlord or its agent in connection with the transaction. In addition, Tenant
shall reimburse Landlord for Landlord's reasonable attorneys' fees incurred in
conjunction with processing and the documentation of any such transaction.
35
<PAGE>
(b) For purposes of this Article Fourteen, in determining
reasonableness, Landlord may take into account all relevant facts surrounding
the proposed assignment or sublease, including, without limitation:
(i) the business reputation of the proposed assignee or
subtenant, and its officers, directors and shareholders;
(ii) the nature of the business and proposed use of the
demised premises by the proposed assignee or subtenant;
(iii) the source of the rent due from the proposed assignee
or subtenant, including the financial condition and operating performance of the
proposed assignee or subtenant, and its guarantors, if any; and
(iv) the extent to which the Tenant and the proposed
assignee or subtenant provide Landlord with assurance of future performance
hereunder.
Section 14.03: Merger or Assignment of Subleases
The voluntary or other surrender of this Lease by Tenant, or mutual
cancellation thereof, shall not work a merger but shall, at the option of the
Landlord, terminate any or all existing subleases or subtenancies or operate as
an assignment to Landlord of any or all such subleases or subtenancies.
ARTICLE FIFTEEN
ESTOPPEL CERTIFICATE, ATTORNMENT, AND SUBORDINATION
Section 15.01: Estoppel Certificate
Tenant and Landlord shall at any time and from time to time upon not
less than fifteen (15) days prior written request, execute, acknowledge and
deliver to the other party or to any mortgagee a statement in writing, in such
form as may reasonably be requested, certifying the date of commencement of this
Lease, that the Lease is unmodified and in full force and effect (or if there
have been modifications to this Lease, that it is in full force and effect as
modified and stating the date of modifications), the dates to which the rent and
other charges have been paid and there are no defenses or offsets to this Lease
(or stating those claimed).
Section 15.02: Transfer by Landlord
In the event of any transfers of interest hereunder by Landlord
whether by sale, foreclosure, exercise of a power of sale under a mortgage or
otherwise, Tenant shall attorn to such transferee of Landlord and recognize such
36
<PAGE>
transferee as Landlord under this Lease. In the event of such a transfer of
Landlord's interest hereunder, then from and after the effective date of such
transfer, Landlord shall be released and discharged from any and all obligations
under this Lease except those already accrued.
Section 15.03: Subordination
Upon the request of the Landlord, Tenant will subordinate its rights
hereunder to the lien of any mortgages, deed(s) of trust or the lien resulting
from any other method of financing or refinancing, now or hereafter in force
against the land and buildings of which the Leased Premises are a part or upon
any buildings hereafter placed upon the land of which the Leased Premises are a
part, and to all advances made or hereafter to be made upon the security
thereof. This section shall be self-operative and no further instrument or
subordination shall be required to be delivered to any lender. Landlord shall
request and use reasonable efforts to obtain a standard form of non-disturbance
agreement from Landlord's existing mortgagee, which agreement shall be
substantially in the form attached hereto, marked as Exhibit "E". With regard to
any future mortgagees, so long as Tenant is not in default hereunder and has not
been in default beyond applicable notice and grace periods as set forth in this
Lease, Landlord shall request and use good faith efforts to obtain a standard
form of non-disturbance agreement providing that so long as Tenant is not in
default beyond applicable notice and grace periods as set forth in this Lease,
such mortgagee shall not disturb Tenant's possession of the Leased Premises.
ARTICLE SIXTEEN
ACCESS BY LANDLORD
Landlord and any of its agents shall have the right to enter the
Leased Premises at all reasonable times upon reasonable notice to Tenant, to
examine the same, and to show them to prospective purchasers of the Office
Building, and to make such repairs, alterations, improvements or additions as
Landlord may deem necessary or desirable, and Landlord shall be allowed to take
all material into and upon said Premises that may be required therefore without
the same constituting an eviction of Tenant in whole or in part, and the rent
shall in no way abate while said repairs, alterations, improvements, or
additions are being made, by reason of loss or interruption of business of
Tenant or otherwise, provided such repairs, alterations, improvements or
additions are promptly made and Landlord makes a reasonable effort to schedule
non-emergency repairs in a manner to minimize disruption to Tenant's business
during standard business hours. During the twelve (12) months prior to the
expiration of the terms of this Lease or any renewal terms, Landlord may exhibit
the Premises to prospective tenants or purchasers, and place upon the Premises
the usual notice "For Lease" or "For Sale" which notices Tenant shall permit to
37
<PAGE>
remain thereon without molestation. Nothing herein contained, however, shall be
deemed or construed to impose upon Landlord any obligation, responsibility or
liability whatsoever, for the care, maintenance or repair of the Office Building
or any part thereof, except as otherwise herein specifically provided.
ARTICLE SEVENTEEN
QUIET ENJOYMENT
Upon payment by the Tenant of the rents herein provided, and upon the
observance and performance of all the covenants, terms, and conditions on
Tenant's part to be observed and performed, Tenant shall peaceably and quietly
hold and enjoy the Leased Premises for the term hereby demised without hindrance
or interruption by Landlord or Landlord's agents or representatives, subject to
the terms and conditions of this Lease.
ARTICLE EIGHTEEN
HOLDING OVER, SUCCESSORS
Section 18.01: Holding Over
Tenant hereby waives, for Tenant and all those claiming under it, all
rights now or hereafter existing to redeem the Leased Premises after termination
of Tenant's right of occupancy, by order or judgment of any court or any legal
process or writ. If Tenant should continue in possession of the Leased Premises
after the expiration or any sooner termination of the term hereof, said holding
over shall, at Landlord's option, be construed to be a tenancy from month to
month. During the first three (3) months of any such holdover, Tenant agrees to
pay Landlord for each day Tenant holds over, rent equal to one hundred fifty
percent (150%) of the total rent and all other charges which Tenant was
obligated to pay to Landlord during the twelve (12) months immediately preceding
such termination or expiration, plus all damages sustained by Landlord by reason
of such retention, except that with regard to damages that are foreseeable by
Landlord that could be avoided by Tenant vacating the space upon notice of those
upcoming damages from Landlord, Landlord shall be entitled to collect only the
damages that Landlord incurs after providing Tenant with five (5) days advance
written notice. If Tenant's holdover shall continue for more than three months,
Tenant agrees to pay Landlord, for each day over three (3) months that Tenant
holds over, the same rent as stated above except that the rent and charges shall
be increased by two hundred percent (200%) rather than one hundred fifty percent
(150%) and Landlord shall be entitled to all additional damages suffered by
Landlord during the continuing period of Tenant's holdover. Such tenancy shall
be on the terms and conditions herein specified, so far as applicable. Nothing
contained herein shall constitute a consent by Landlord to Tenant's continued
possession following the expiration or other termination of this Lease, and
nothing contained in this
38
<PAGE>
paragraph shall limit Landlord's rights and remedies as provided by law or
elsewhere in this Lease.
Section 18.02: Successors
All rights and liabilities herein given to, or imposed upon, the
respective parties hereto shall extend to and bind the several respective heirs,
executors, administrators, successors, and assigns of the parties. No rights,
however, shall inure to the benefit of any assignee of Tenant unless the
assignment to such assignee has been approved by Landlord in writing as provided
in Article Fourteen hereof.
ARTICLE NINETEEN
HAZARDOUS WASTE
Section 19.01: Hazardous Material
The term "hazardous material" is used in this Lease in its broadest
sense and includes but is not limited to petroleum base products, paint and
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonium
compounds, asbestos, PCB's and other chemical products, but excludes any
cleaning compound or other solvents typically used to clean and maintain office
equipment and office furnishings so long as such cleaning compounds and solvents
are stored only in reasonable amounts for those purposes and are stored and used
in compliance with all applicable laws and regulations.
Section 19.02: Representations
(a) To Landlord's knowledge, no release, discharge, leak, spill or
disposal of hazardous materials in violation of applicable federal, state, and
local laws and regulations has occurred in the Office Building and Landlord has
not been notified by any regulatory authority or agency of any violation of
federal, state or local laws, regulations or ordinances.
(b) Tenant represents and warrants that it will, not store, use,
release, produce, install or dispose of any hazardous material or oil on the
Leased Premises.
Section 19.03: Notice
(a) Tenant will provide Landlord with written notice: (i) upon Tenant
obtaining knowledge of any potential or known release, or threat of release, of
any hazardous material or oil at or from the Leased Premises; (ii) upon Tenant's
receipt of any notice to such effect from any federal, state, or other
governmental authority; and (iii) upon the Tenant obtaining knowledge of any
incurrence of any expense or loss by such governmental authority in connection
with the assessment, containment, or removal of any hazardous material or oil
39
<PAGE>
for which such expense or loss Tenant may be liable or for which such expense or
loss a lien may be imposed on the Leased Premises.
(b) Landlord shall have the right to enter the Leased Premises at any
time to inspect the same and ascertain whether they are clean and free of
hazardous materials.
Section 19.04: Indemnification
Tenant shall indemnify, defend, and hold Landlord harmless of and
from any claim brought or threatened against Landlord on account of the
introduction by Tenant of hazardous material or oil onto the Leased Premises, or
the release of such hazardous material or oil by Tenant or its employees, agents
or invitees on or from the Leased Premises, or the failure by Tenant to comply
with the terms and provisions hereof (each of which may be defended,
compromised, settled, or pursued by Landlord with counsel of Landlord's
selection, but at the expense of Tenant). The within indemnification shall
survive payment of the liabilities and/or any termination of this Lease.
ARTICLE TWENTY
OPTION FOR ADDITIONAL SPACE
Section 20.01: Limitation and Conditions of Exercise
(a) The submission of this Lease by Landlord to Tenant does not
constitute a reservation of or option for the Leased Premises. Tenant shall have
no option rights other than as specified below. Any option granted to Tenant
shall be personal to Tenant or any corporate affiliate of Tenant and may not be
exercised or assigned to any other person. If this Lease is assigned or the
Leased Premises or any portion thereof are sublet, other than with the prior
written consent of Landlord, the option set forth below will be void and of no
effect.
(b) Tenant shall have no right to exercise the option below
notwithstanding anything in the grant of option or right to the contrary, (i) if
at the time of exercise Tenant has received notice of any non-monetary default
pursuant to any provision of this Lease which remains uncured or waived, or (ii)
if at the time of exercise Tenant owes any monetary obligation to Landlord, or
(iii) in the event Landlord has given Tenant more than one (1) notice of a
material default under this Lease during the twelve (12) month period prior to
the time Tenant intends to exercise the option or right, or (iv) in the event
there shall have been any material adverse change in Tenant's financial
condition during the initial term of this Lease.
Section 20.02: Option for Additional Space
(a) Provided Tenant has not lost the right to exercise this option as
set forth above, Tenant shall have a right of first offer on the terms set forth
herein to lease one or both areas of additional contiguous space on the fourth
40
<PAGE>
floor of the Office Building as shown in Exhibit "D" attached hereto and made a
part hereof ("Additional Space"), for the remainder of the term of this Lease.
If either of the tenants occupying the Additional Space vacates the space or
such tenant's lease expires or if either portion of the Additional Space
otherwise becomes available during the initial term of this Lease or any
extension thereof, and if there is a minimum of three years remaining on
Tenant's term under this Lease, Landlord will give Tenant notice stating the
portion of the Additional Space that will be available, the Fair Market Rent and
the date of availability. Upon receipt of Landlord's notice, Tenant may, within
ten (10) business days thereafter, elect to send written notice to Landlord of
Tenant's intent to accept and lease the entire space described in Landlord's
notice as of the date stated in Landlord's notice. Tenant's acceptance of and
agreement to lease the Additional Space shall be upon the same terms and
conditions as provided herein for the Leased Premises, except that an
appropriate adjustment shall be made to Tenant's Pro-Rata Share and the base
rent for the Additional Space shall equal Fair Market Rent, as defined below,
with Tenant's obligation to pay Rent for the Additional Space commencing
forty-five (45) days after the date Landlord delivers the Additional Space to
Tenant in its "as is" condition.
(b) In the event Tenant accepts such Additional Space, Landlord agrees
to reimburse Tenant for payments made by Tenant to third party contractors for
constructing leasehold improvements to such space in an amount not to exceed the
product of the per square foot expense by Landlord for the Initial Improvements
in Exhibit "B", which amount is agreed to be $13.00 per square foot, multiplied
by a fraction, the numerator of which shall be the amount of time remaining
under this Lease and the denominator of which shall be the amount of time in the
original Lease Term. Landlord's reimbursement shall be made at the completion of
Tenant's construction of the leasehold improvements to the Additional Space and
only if Tenant is not in default under this Lease and shall not include
reimbursement for any personal property, trade fixtures or equipment installed
by Tenant.
(c) Upon receipt of Tenant's notice of intent to accept the space and
provided all the terms of this option has been met, Landlord shall prepare and
submit to Tenant for its signature an amendment to this Lease adding the
appropriate portion of the Additional Space to, and making this Additional Space
part of, the Leased Premises. If Tenant does not advise Landlord in writing of
its election to make an offer upon such space within the time specified, this
right of first offer shall cease to exist entirely as to the relevant space and
this Article 20 shall be void and of no further effect.
(d) Fair Market Rent shall mean the prevailing fair market rent as of
the date of Landlord's notice to Tenant of the availability of the Additional
41
<PAGE>
Space, for the highest and best use of the Premises, taking into account market
rent for comparable office space in Bala Cynwyd, Pennsylvania and such other
factors as reasonable lessors would consider relevant, but shall in no event be
less than $25.50 per square foot, including utilities.
(e) The Fair Market Rent shall be determined as set forth herein.
Landlord shall give Tenant notice of Landlord's determination of the Fair Market
Rent ("Landlord's Determination") in Landlord's notice to Tenant of the
availability of the Additional Space offered to Tenant. Landlord's Determination
shall be conclusive unless Landlord and Tenant mutually agree in writing as to
Fair Market Rent or Tenant, within ten (10) days after Tenant's receipt of
Landlord's Determination, submits to Landlord an appraisal by a real property
MAI appraiser, experienced in the leasing of office space in the Bala Cynwyd
area, employed and paid for by Tenant, stating an opinion as to the Fair Market
Rent and including a summary of the bases and assumptions supporting that
opinion ("Tenant's Appraisal"). If within ten (10) days after Landlord's receipt
of Tenant's Appraisal, Landlord and Tenant do not establish the Fair Market Rent
by agreement in writing, Landlord shall employ and pay a real property MAI
appraiser, experienced in the leasing of office space in the Bala Cynwyd area,
to determine the Fair Market Rent and shall submit such appraisal ("Landlord's
Appraisal") in writing to Tenant within twenty (20) days after Landlord's
receipt of Tenant's Appraisal. If Landlord's Appraisal and Tenant's Appraisal
differ by less than ten percent (10%), average of the two appraisals shall be
the Fair Market Rent. If Landlord's Appraisal and Tenant's Appraisal differ by
more than ten percent (10%), the two appraisers shall be instructed within
twenty (20) days of Tenant's receipt of Landlord's Appraisal to appoint a third
MAI appraiser to determine the Fair Market Rent ("Third Appraisal"). Landlord
and Tenant shall each pay one-half (1/2) the cost of the Third Appraisal. The
appraisal which varies most from the median of the three appraisals shall be
disregarded and the average of the remaining two appraisals shall be the Fair
Market Rent and shall be binding upon Landlord and Tenant.
ARTICLE TWENTY-ONE
MISCELLANEOUS PROVISIONS
Section 21.01: Subordination of Landlord's Lien
Tenant shall have the right to finance and to secure under the
Uniform Commercial Code, inventory, furnishings, furniture, equipment,
machinery, signs, and other personal property located at the Leased Premises,
with the exception of Landlord's Initial Improvements as shown in Exhibit B and,
so long as Tenant is not in default under this Lease, Tenant's right to finance
as herein provided shall be paramount and superior to any common law Landlord's
lien. Provided that Tenant is not in default hereunder, upon not less than
fifteen (15) days' notice, to effectuate Tenant's rights as provided herein,
Landlord agrees to execute a written subordination of its common law or
42
<PAGE>
statutory, non-judicial Landlord's lien, provided that such form of
subordination is satisfactory to Landlord and provides Tenant's lender with no
additional rights other than those Tenant enjoys under the terms of this Lease.
Section 21.02: Brokerage Commission
Landlord has agreed to pay a brokerage commission to Geis Realty
Group, Inc. and Colliers, Lanard & Axilbund pursuant to the terms of separate
agreements with each of them. Tenant represents and warrants that it has dealt
with no other brokers except for Geis Realty and Colliers, Lanard & Axilbund.
Each party represents and warrants that it has caused or incurred no other
claims for brokerage commissions or finder's fees in connection with this Lease,
and each party shall indemnify and hold the other harmless against and from any
liabilities arising from any such claim caused or incurred by it including,
without limitation, the cost of attorney's fees in connection therewith.
Section 21.03: Entire Agreement
This Lease and the exhibits, and riders, if any, attached hereto and
forming a part hereof, set forth all the covenants, promises, agreements,
conditions and understandings between Landlord and Tenant concerning the Leased
Premises and there are no covenants, promises, agreements, conditions or
understandings between them other than are herein set forth. No subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless reduced to writing and signed by the party to be
charged with their performance.
Section 21.04: Waiver
The waiver by Landlord of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of any subsequent
breach of same of any other terms, covenant or condition herein contained. The
subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a
waiver of any preceding breach by Tenant of any term, covenant or condition of
this Lease, other than the failure of Tenant to pay the particular rental so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent. No covenant, term or condition of this Lease
shall be deemed to have been waived by Landlord or Tenant, unless such waiver be
in writing signed by said party.
Section 21.05: No Partnership
Landlord shall not by virtue of this Lease, in any way or for any
purpose, be deemed to have become a partner of Tenant in the conduct of its
business, or otherwise, or joint venturer or a member of a joint enterprise with
Tenant, nor is Tenant an agent of Landlord for any reason whatsoever.
43
<PAGE>
Section 21.06: Accord and Satisfaction
No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly rent herein stipulated shall be deemed to be other than on account
of the earliest stipulated rent, nor shall any enforcement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check as payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy in this Lease provided.
Section 21.07: Security Deposit
Tenant has deposited with Landlord the Security Deposit in the amount
stated in Section 1.01 as security for the full and faithful performance of
every provision of this Lease to be performed by Tenant. If Tenant defaults with
respect to any provision of this Lease, including payment of the Base Rent,
Additional Rent or any other payment due pursuant to this Lease, Landlord may
use, apply or retain all or any part of the Security Deposit for the payment of
any Rent, or to compensate Landlord for any other loss, cost or damage which
Landlord may suffer by reason of Tenant's default. If any portion of the
Security Deposit is so used or applied, Tenant shall, within five (5) business
days after notice thereof, deposit cash with Landlord in an amount sufficient to
restore the Security Deposit to its original amount, and Tenant's failure to do
so shall be a breach of this Lease. Landlord may, in the event the Security
Deposit is depleted and not replenished, at Landlord's election, apply any Base
Rent or Additional Rent prepaid by Tenant to restore the Security Deposit.
Landlord shall not, unless otherwise required by law, be required to keep the
Security Deposit separate from its general funds, nor pay interest to Tenant. If
Landlord is required to maintain the Security Deposit in an interest bearing
account, Landlord shall retain the maximum amount permitted under applicable law
as a bookkeeping and administrative charge. The Security Deposit or any balance
thereof shall be returned to Tenant (or, at Landlord's option, to the last
transferee of Tenant's interest hereunder) within thirty (30) days of expiration
of the Term so long as Landlord has not issued a written notice of default to
Tenant, which default remains uncured. If the Building is sold, the Security
Deposit may be transferred to the new owner, and Landlord shall be discharged
from further liability with respect thereto so long as the full amount of the
security deposit is transferred to the new owner.
Section 21.08: Captions
The captions, section numbers, article numbers and index appearing in
this Lease are inserted only as a matter of
44
<PAGE>
convenience and no way define, limit or construe the scope or intent of such
sections or articles in this Lease.
Section 21.09: Tenant Defined
The word "Tenant" shall be deemed and taken to mean each and every
person or party mentioned as a Tenant herein, be the same one or more; and if
there shall be more than one Tenant, any notice required or permitted by the
terms of this Lease may be given by or to any one thereof, and shall have the
same force and effect as if given by or to all thereof. The use of the neuter
singular pronoun to refer to Landlord and Tenant shall be deemed a proper
reference even though Landlord or Tenant may be an individual, a partnership, a
corporation, or a group of two or more individuals or corporations. The
necessary grammatical changes required to make the provisions of this Lease
apply in the plural sense where there is more than one Landlord or Tenant and to
either corporations, associations, partnerships, or individuals, males or
females, shall in all instances be assumed as though in each case fully
expressed. If there shall be more than one Tenant occupying the Leased Premises,
all liabilities hereunder shall be joint and several.
Section 21.10: Corporate Authority
If Tenant is a corporation, each individual executing this Lease on
behalf of said corporation represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of said corporation in accordance with
a duly adopted resolution of the Board of Directors of said corporation or in
accordance with the By-laws of said corporation, and that this Lease is binding
upon said corporation in accordance with its terms.
Section 21.11: Partnership Tenant
[Left Blank Intentionally]
Section 21.12: Notices
All notices or other communications hereunder shall be in writing and
shall be deemed to have been duly given if personally delivered, or if mailed by
United States certified mail, postage prepaid, return receipt requested, to
Landlord and Tenant at the addresses set forth in Article 1, or at such other
address as Landlord, or Tenant, shall from time to time designate to the other
in writing. The date of service of any notice hereunder shall be the date of
personal delivery, or five (5) business days after the postmark on the certified
mail, as the case may be.
Section 21.13: Applicable Law
The laws of the Commonwealth of Pennsylvania shall govern the
validity, performance and enforcement of this Lease.
45
<PAGE>
Section 21.14: Waiver of Trial by Jury
It is mutually agreed by and between Landlord and Tenant that the
respective parties shall and do waive trial by jury in any action, proceeding or
counterclaim brought by either of the parties against the other as to any
matters whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises
or any statutory remedy.
Section 21.15: Partial Invalidity
If any terms, covenant or condition of this Lease or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such term,
covenant or condition to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each
term, covenant or condition of this Lease shall be valid and be enforced to the
fullest extent permitted by law.
Section 21.16: Time
Time is of the essence of this Lease and each and all provisions
hereof in which performance is a factor.
Section 21.17: Recording
Tenant shall not record this Lease or any memoranda thereof without
the prior written consent of Landlord.
Section 21.18: Cumulative Remedies
No remedy or election hereunder shall be deemed exclusive but shall,
wherever possible, be cumulative with all other remedies at law or in equity.
Section 21.19: Attorneys' Fees
If suit is brought by either party against the other arising out of
or based upon any provision of this Lease and/or the tenancy created hereby, the
losing party shall pay to the prevailing party all reasonable costs and expenses
of such suit including, but not limited to, appraiser's and other expert witness
fees and all attorneys' fees incurred.
Section 21.20: Necessary Acts
All parties hereto shall do all acts and execute all documents
necessary, convenient or desirable to effect all provisions of this Lease.
46
<PAGE>
Section 21.21: Effectiveness of Lease
This Lease shall not become effective until a copy executed by
Landlord is delivered to Tenant. The submission of this form of Lease to Tenant
by Landlord, or Landlord's agent, does not constitute an offer to Lease. No
employee or agent of Landlord or any person with whom Tenant may have negotiated
this Lease has any authority to modify the terms hereof or to make any
agreements, representations, or promises unless the same are contained herein or
added hereto in writing.
Section 21.22: Representations
Tenant does not rely on the fact, nor does Landlord represent, that
any specific tenant or number of tenants shall during the term of this Lease
occupy any space in the Office Building.
Tenant and its principal executing this Lease represent and warrant
that the financial statements for Tenant provided to Landlord prior to the
execution of this Lease are accurate and in accordance with the books and
records of Tenant and meet the requirements stated above for Tenant's financial
statement. Tenant agrees to submit to Landlord within ninety (90) days after the
end of each calendar year a profit and loss statement for the previous year and
a balance sheet as of the last day of the year, which will present fairly the
financial position of Tenant for the periods set forth and will not fail to
state any material fact.
There are no representations or warranties whatsoever between the
parties other than as set forth herein or in the exhibits, rider or other
amendment hereto, any reliance with respect to representations is solely upon
the representations and agreements contained herein.
Section 21.23: Interpretation of Language
This Lease and any amendments, exhibits or rider thereto shall not be
construed either for or against Landlord or Tenant by reason of the same having
been drafted by one or the other party.
IN WITNESS WHEREOF, and intending to be legally bound, the parties
hereto have executed this Lease as of the day and year first above written.
WITNESS: LANDLORD:
ONE PRESIDENTIAL BOULEVARD
ASSOCIATES
_______________________ By: ___________________________
Keith Morgan, Trustee
47
<PAGE>
ATTEST: TENANT:
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
_______________________ By: ____________________________
Jeffrey M. Ruben,
Executive Vice-President
48
<PAGE>
EXHIBIT A
PLAN SHOWING LOCATION OF TENANT'S SPACE
A-1
<PAGE>
EXHIBIT B
LANDLORD'S INITIAL ALTERATIONS AND IMPROVEMENTS
B-1
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
1. The public sidewalks, paved areas, landscaped areas, entrances,
passages, courts, elevators, vestibules, stairways, corridors or halls shall not
be obstructed or encumbered by Tenant or used for any purpose other than ingress
and egress to and from the Lease Premises.
2. No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted or affixed by Tenant on any part of the Leased
Premises or Office Building so as to be visible from outside the Leased Premises
without the prior written consent of Landlord. In the event of the violation of
this paragraph, Landlord may remove same without any liability, and may charge
the expense incurred in such removal to Tenant as additional rent.
3. No awnings, curtains, blinds, shades, screens or other projections
shall be attached to or hung in, or used in connection with, any window of the
Leased Premises or any outside wall of the Office Building without the prior
written consent of Landlord.
4. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were designed and
constructed, and no sweepings, rubbish, rags, acids, chemicals, process water,
cooling water or like substances shall be deposited therein. Said plumbing
fixtures and the plumbing system of the Office Building shall be used only for
the discharge of so-called sanitary waste. All damage resulting from any misuse
of said fixtures and/or plumbing system by Tenant or anyone claiming under
Tenant shall be borne by Tenant.
5. Tenant must, upon the termination of its tenancy, return to Landlord
all locks, cylinders and keys to the Leased Premises and any offices therein.
6. Landlord reserves the right to exclude from the Office Building
between the hours of 6 P.M. and 8 A.M. on business days and at all hours on
Saturdays, Sundays and legal holidays all persons connected with or calling upon
Tenant who do not present a pass to the Office Building signed by Tenant. Tenant
shall be responsible for all persons for whom it issues any such pass and shall
be liable to Landlord for all wrongful acts of such persons.
7. There shall not be used in any space, or in the public halls of the
Office Building, either by Tenant or by others, in the delivery or receipt of
supplies, furniture or equipment any hand trucks, except those equipped with
rubber tires and side guards.
C-1
<PAGE>
8. No bicycles, vehicles or animals of any kind shall be brought into
or kept in or about the Leased Premises.
9. Tenant shall not make, or permit to be made, any unseemly or
disturbing odors or noises or disturb or interfere with occupants of the Office
Building or those having business with them, whether by use of any musical
instrument, radio, machine, or in any other way.
10. At its election, Landlord may designate certain parking areas from
time to time for use by visitors or others, and Tenant and its employees shall
refrain from parking their motor vehicles in said designated parking areas.
11. The moving in or out of all safes, freight, furniture, or bulky
matter of any description must take place during the hours which Landlord may
determine from time to time. Landlord reserves the right to inspect all freight
and bulky matter to be brought into the Office Building and to exclude from the
Office Building all freight and bulky matter which violates any of these Rules
and Regulations or the Lease of which these Rules and Regulations are a part.
12. Canvassing, soliciting, and peddling in the Office Building are
prohibited and Tenant shall cooperate to prevent the same.
13. No additional locks or bolts of any kind shall be placed upon any
of the doors or windows by Tenant, nor shall any changes be made in existing
locks or the mechanism thereof without the prior written consent of Landlord.
14. Landlord reserves the right to rescind, alter, waive and/or
establish any rules and regulations which, in its judgment, are necessary,
desirable or proper for its best interests and the best interests of the
occupants of the Office Building.
15. Landlord reserves the right at any time, and from time to time, to
change the name and/or address of the Office Building.
16. No vending machines of any type shall be operated in the Leased
Premises without Landlord's prior written consent, which consent shall not be
unreasonably withheld.
17. Tenant shall keep the Leased Premises free at all times of pests,
rodents and other vermin.
C-2
<PAGE>
May 15, 1998
Mr. Albert Mandia
4 Sprucefield Court
New Hope, PA 18976
Dear Al:
We are pleased to offer you employment as Chief Financial Officer for American
Business Financial Services, Inc., ("ABFS" or "Company") reporting directly to
me, at a base salary of $275,000 if annualized. In addition, you will be
eligible for a Management Incentive Target Bonus of 40% of your salary,
beginning fiscal year 1999 (July 1, 1998 through June 30, 1999). Payment of this
bonus will be contingent upon you and the Company achieving specific goals and
objectives, and will be paid upon completion of the Company's audited financial
statements for its fiscal year end. These goals and objectives will be
established and agreed upon by me and you. This offer of employment is
contingent upon your formal acceptance by the end of the day on Friday, May 22,
1998, and upon your reporting to work on or before Monday, June 1, 1998.
You will also receive a monthly car allowance in the amount of $600 per month
during your employment with the Company.
In addition, we are pleased to offer you options to purchase 12,500 shares of
American Business Financial Services Common Stock. The price of these shares
will be set at the closing market price on your first day of employment. The
options will vest over a five year period with twenty percent (20%) vesting each
year. You will be able to exercise your first twenty percent one year from your
date of employment and forty percent two years from that date, and so forth
through the five years. Upon vesting, you will have five years in which to
exercise that portion of your option which vested. A more detailed explanation
of the vesting provisions as well as all other terms and conditions of your
stock option grant are specified in the Company's Employee Stock Option Plan.
You will also be eligible to participate in the annual executive stock option
award program each year.
<PAGE>
Mr. Albert Mandia
May 15, 1998
Page 2.
You will be eligible for health, dental, vision and prescription insurance
coverage effective July 1, 1998. There is a small premium for employee coverage;
additional coverage may be purchased for your spouse and dependent family
members. More detailed information on these plans are enclosed for your review.
You may elect to have your contribution towards the cost of the coverage paid on
a pre-tax basis. ABFS also provides life insurance equal to one year's base
salary, up to a maximum of $50,000 and a long-term disability plan, both at no
cost to the employee.
Our Company currently offers a qualified 401(k) plan. After completion of six
(6) months of employment, you may elect to invest up to fifteen (15%) percent of
your gross salary, up to an annual maximum of $10,000, using pre-tax dollars.
The Company makes a discretionary contribution equal to 25% of the first 5 % of
compensation which you have contributed.
In addition, during the course of our fiscal year, July 1 - June 30, you will be
credited up to a maximum of six (6) weeks vacation. Vacation is accrued at the
rate of 2 1/2 days per month with the exception of May and June. You will also
be credited with two personal and five sick days each year. Any vacation,
personal or sick time that is not used prior to June 30 of each year will be
forfeited.
Should ABFS terminate your employment for any reason, except for cause, you will
be paid severance equal to one year's base salary. For the purposes of this
offer of employment, the Company shall have "cause" to terminate your employment
if you, in the reasonable judgment of the Company (1) materially breach any of
the agreements, duties or obligations under this agreement, (2) embezzle or
convert to your own use any funds of the Company of any client or customer of
the Company, (3) convert to your own use or unreasonably destroy any property of
the Company, without the Company's consent, (4) are convicted of a felony, (5)
neglect the duties of your position or demonstrate willful dishonesty or
malfeasance in the performance of your duties, (6) refuse to carry out the
reasonable directions of the Chief Executive Officer, (7) are adjudicated an
incompetent, (8) are habitually intoxicated or are diagnosed by an independent
medical doctor to be addicted to a controlled substance or any drug whatsoever,
or (9) commit any act which is materially detrimental to the Company or any of
its affiliates.
<PAGE>
Mr. Albert Mandia
May 15, 1998
Page 3.
In compliance with the Immigration Reform and Control Act, it is necessary for
you to supply the Company with verification of employment eligibility. On your
first day of employment you must bring with you appropriate documentation to
verify your eligibility to work in the United States. Documents which are
acceptable as verification include a U.S. Passport or a valid photo driver's
license and social security card. If these documents are not available please
contact Human Resources for a more detailed listing of acceptable documents.
Please report to Suite 211 on your first day of work, between 8:30 and 9:00
a.m., and ask for Joan Mueller. She will provide you will all documents you will
need to complete to be put on payroll and select your benefit coverage. Al, if
you have any questions concerning this offer, please feel free to contact me
directly at (610) 617-7400 or Joan at (610) 617-4900.
Please confirm your decision to accept our offer of employment by signing below
and returning one original of this letter to my attention. I am looking forward
to working with you.
Sincerely,
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Anthony J. Santilli, Jr.
Chairman and CEO
cc: Joan Mueller -- HR/ABFS
I have carefully read and reviewed this letter and accept this offer of
employment and all the terms and conditions contained herein.
- ---------------------- -----------------------------------
Date Albert Mandia
<PAGE>
As of October 1, 1998
Albert W. Mandia
Executive Vice President
Dear Al:
American Business Financial Services, Inc. (the "Company")
considers it essential to the best interests of its stockholders to attract top
executives and to foster the continuous employment of key management personnel.
The Board of Directors of the Company (the "Board") recognizes that the
possibility of a future change of control may exist and that such possibility,
and the uncertainty and questions which it may raise among management, may
result in the departure or distraction of management personnel to the detriment
of the Company and its stockholders.
The Board has determined that appropriate steps should be
taken to ensure the continuity of management and to foster objectivity in the
face of potentially disturbing circumstances arising from the possibility of a
change of control of the Company, although no such change is now contemplated.
In order to induce you to remain in the employ of the Company
and in consideration of your further services to the Company, the Company agrees
that you shall receive the severance benefits set forth in this letter agreement
("Agreement") in the event your employment with the Company terminates within
the twenty-four (24) month period immediately subsequent to a "Change of
Control" of the Company (as defined in subparagraph 2(c) hereof) under the
circumstances described below.
1. Term of Agreement. This Agreement shall commence on the
date hereof and shall continue in effect until your employment with the Company
is terminated other than after a Change of Control unless sooner terminated by
written agreement of the Company and you.
2. Definitions. As used in this Agreement:
(a) "Annual Compensation" means the total of (i) one year of
base salary, at the highest base salary rate that you were paid by the Company
in the 12-month period prior to the date of your termination of employment, and
(ii) 100% of the greatest annual bonus which you were paid within the past three
fiscal years.
<PAGE>
(b) "Beneficial Owner" shall have the meaning ascribed to such
term in Rule 13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") .
(c) "Change of Control" of the Company means and includes each
and all of the following occurrences:
(i) The stockholders of the Company approve a merger
or consolidation of the Company with any other corporation and such
transaction is consummated, other than (A) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity) at least seventy-five percent (75%) of the total
voting power represented by the voting securities of the Company (or
such surviving entity outstanding immediately after such merger or
consolidation) or (B) a merger or consolidation which would result in
at least twenty percent (20%) of the voting securities of the Company
(or such surviving entity outstanding immediately after such merger or
consolidation) being held by an Employee Group.
(ii) The stockholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's
assets, other than a transaction which result in an Employee Group
holding, directly or indirectly, at least twenty percent (20%) of the
assets upon completion of such transaction.
(iii) The acquisition by any Person as Beneficial
owner, directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting power
represented by the Company's then outstanding voting securities except
(A) if such Person constitutes an Employee Group, or (B) pursuant to a
negotiated agreement with the Company pursuant to which such securities
are purchased for the Company.
(iv) A majority of the Board of Directors of the
Company in office at the beginning of any twenty-four (24) month period
is replaced during the course of such twenty-four (24) month period
(other than by voluntary resignation of individual directors in the
ordinary course of business) and such placement was not initiated by
the Board of Directors of the Company as constituted at the beginning
of such twenty-four (24) month period or an Employee Group.
(d) "Change of Control Date" means the date upon which a
Change of Control transaction is consummated.
(e) "COBRA" means Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended.
2
<PAGE>
(f) "Code" means the Internal Revenue Code of 1986, as
amended.
(g) "Company" means American Business Financial Services,
Inc., and any successor as provided in Section 9 hereof.
(h) "Employee Group" means one or more members of the then
existing management and/or employee groups of the Company acting alone or in a
concerted effort.
(i) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Sections 13(d) of the Exchange Act
but excluding the Company and any subsidiary and any employee benefit plan
sponsored or maintained by the Company or any subsidiary (including any trustee
of such plan acting as Trustee).
(j) "Severance Payment" means the payment of severance
compensation as provided in Section 3 of this Agreement.
3. Compensation Upon Termination of Employment Following a
Change of Control. If your employment with the Company is terminated within
twenty-four (24) months after a Change in Control, subject to the limitations
set forth in paragraph 3(d) below, (a "Covered Termination"),
(a) You will be entitled to a Severance Payment in an amount
computed as follows:
(i) an amount equal to two (2) times Annual
Compensation multiplied by a fraction, the numerator of which is the
result of 730 less the number of days elapsing since the Change of
Control Date and the denominator of which is 730 ("Termination
Payment"); plus
(ii) continued coverage under the Company's health
and group-term life insurance benefits on the same basis as such
benefits were provided to you and your family under plans of the
Company as of the Change of Control for a total of days which equals
the result of 730 less the number of days elapsing since the Change of
Control Date.
(b) Any cash payment to you under subparagraph 3(a) shall be
made within 30 calendar days of your termination of employment.
(c) Upon the occurrence of a Covered Termination, you shall be
provided, at the Company's sole expense, with professional outplacement services
consistent with your duties or profession and of a type and level customary for
persons in your position, as selected by the Company, subject to reasonable
limitations established by the Company on a uniform basis for similarly situated
employees as to duration and dollar amounts.
(d) Notwithstanding anything contained in subsection (a)
above, the Company shall have no obligation to make any payment or offer any
benefits to you under this Section 3 if your employment is terminated (i) prior
to a Change in Control, (ii) or if your employment is terminated by the Company
after a Change in Control for Cause (as defined in Section 4), (iii) by reason
of death or Disability (as defined in Section 5), or (iv) due to retirement or
resignation other than for Good Reason (as defined in Section 6).
3
<PAGE>
(e) For purposes of COBRA, the date of a "qualifying event"
for you and your covered dependents shall be the date upon which the coverage
provided under Section 3(a)(ii) above terminates.
4. Cause. For purposes of this Agreement, "Cause" means your:
(i) willful gross neglect of your duties with the Company, (ii) fraud or
dishonesty in connection with performance of your duties to the Company (iii)
conviction by a court of competent jurisdiction of any crime (or upon entering a
plea of guilty or nolo contendere to a charge of any crime) constituting a
felony or (iv) failure to enter into any written employment agreement, with a
minimum term of three years, offered to you in good faith by the Company which
would entitle you to a position, responsibilities, compensation, benefits
package, Severance Payment and other terms and conditions of employment at least
as favorable to you as those to which you are entitled on the date hereof.
5. Disability. For purposes of this Agreement, "Disability"
means that, at the time your employment is terminated, you have been unable to
perform the duties of your position for a period of three (3) consecutive months
or for a period in excess of six months within any twelve month period (whether
or not consecutive) as the result of your incapability due to physical or mental
illness.
6. Good Reason. The Company will be obligated to make payments
and provide benefits under Section 3 if you terminate your employment for Good
Reason within twenty-four months after a Change in Control. For purposes of this
Agreement, "Good Reason" means
(i) a material reduction in salary or benefits,
(ii) a material change in job responsibilities,
(iii) a request to relocate, except for office
relocations that would not increase your one-way commute by more than
50 miles, or
(iv) the failure of the Company to obtain the
assumption of the Agreement as stipulated in Section 9 hereof.
In no event shall you be considered to have terminated your employment for "Good
Reason" unless and until (i) the Company receives written notice from you
identifying in reasonable detail the acts or omissions constituting such "Good
Reason" and the provision of this Agreement you relied upon for such
termination, and (ii) such acts or omissions are not cured by the Company within
five (5) business days of the Company's receipt of such notice.
7. Disputes. If you disagree with your allotment of benefits
under this Agreement, you may file a written appeal with the designated human
resources representative. Any claim relating to this Agreement shall be subject
to this appeal process. The written appeal must be filed within sixty (60) days
of your termination date.
4
<PAGE>
The appeal must state the reasons that you believe you are
entitled to different benefits under the Agreement. A designated human resources
representative shall review the claim. If the claim is wholly or partially
denied, the designated human resources representative shall provide you with a
written notice of the denial, specifying the reasons the claim was denied. Such
notice shall be provided within ninety (90) days of receiving your written
appeal.
If your appeal is denied, you shall have the right and option
to elect review of such denial by either a court of competent jurisdiction or by
arbitration.
8. No Mitigation.
(a) You shall not be required to mitigate the amount of any
payment provided for in Section 3 hereof by seeking other employment or
otherwise, nor shall the amount of such payment be reduced by reason of
compensation or other income you receive for services rendered after your
termination of employment with the Company.
(b) In addition to the Termination Payment payable pursuant to
Section 3 hereof, you shall be entitled to receive all benefits payable to you
under any benefit plan of the Company in which you participate.
9. Company's Successors. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, to expressly assume and agree to perform the obligations under this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. As used in this
Section 9, "Company" includes any successor to its business or assets as
aforesaid which executes and delivers this Agreement or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation of law.
10. Notice. Notices and all other communications provided for
in this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or five (5) days after deposit with postal
authorities transmitted by United States registered or certified mail, return
receipt requested, postage prepaid, addressed to the respective addresses set
forth on the first or last page of this Agreement, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notices of change address shall be effective only upon receipt.
11. Amendment or Waiver. No provisions of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing by you and the Company. No waiver of either party at any
time of the breach of, or lack of compliance with, any conditions or provisions
of this Agreement shall be deemed a waiver of the provisions or conditions
hereof.
5
<PAGE>
12. Sole Agreement. This Agreement represents the entire
agreement between you and the Company with respect to the matters set forth
herein and supersedes and replaces any prior agreements in their entirety. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter of this Agreement will be made by either party
which are not set forth expressly herein.
13. Employee's Successors. This Agreement shall inure to the
benefit of and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amounts are still payable to you
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of the Agreement to your devisee, legatee, or other
designee or, if there be no such designees, to your estate.
14. Funding. This Agreement shall be funded from the Company's
general assets.
15. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
16. Applicable Law. This Agreement shall be interpreted and
enforced in accordance with the laws of the Commonwealth of Pennsylvania.
17. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
If the foregoing conforms with your understanding, please
indicate your agreement to the terms hereof by signing where indicated below and
returning one copy of this Agreement to the undersigned.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed effective as of
the date set forth above.
Very truly yours,
AMERICAN BUSINESS FINANCIAL SERVICES,
INC.
By:
-----------------------------------
Anthony J. Santilli, Jr.
Chairman
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST SET FORTH ABOVE:
- ---------------------------------------
[Name]
- ---------------------------------------
(Address)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of American Business Financial Services, Inc.
and Subsidiaries as of September 30, 1999 and the three months then ended and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,378,000
<SECURITIES> 0
<RECEIVABLES> 54,115,000
<ALLOWANCES> 833,000
<INVENTORY> 0
<CURRENT-ASSETS> 171,685,000
<PP&E> 20,693,000
<DEPRECIATION> 8,155,000
<TOTAL-ASSETS> 429,939,000
<CURRENT-LIABILITIES> 216,560,000
<BONDS> 0
0
0
<COMMON> 3,000
<OTHER-SE> 61,873,000
<TOTAL-LIABILITY-AND-EQUITY> 429,939,000
<SALES> 0
<TOTAL-REVENUES> 27,820,000
<CGS> 0
<TOTAL-COSTS> 21,503,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 141,000
<INTEREST-EXPENSE> 7,646,000
<INCOME-PRETAX> 6,317,000
<INCOME-TAX> 2,527,000
<INCOME-CONTINUING> 3,790,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,790,000
<EPS-BASIC> 1.06
<EPS-DILUTED> 1.03
</TABLE>
