<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 DECEMBER 31, 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
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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 February 9, 2000, there were 3,364,979 shares of the registrant's Common
Stock issued and outstanding.
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<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 December 31, 1999
and June 30, 1999................................................................................ 2
Consolidated Statements of Income for the three and six months ended
December 31, 1999 and 1998....................................................................... 3
Consolidated Statements of Stockholders' Equity for the six months ended
December 31, 1999 and 1998....................................................................... 4
Consolidated Statements of Cash Flow for the six months ended
December 31, 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............................................ 31
PART II OTHER INFORMATION.................................................................................... 32
- -------
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>
December 31, June 30,
1999 1999
------------ ---------
(Unaudited) (Note)
<S> <C> <C>
Assets
Cash and cash equivalents $ 18,916 $ 22,395
Loan and lease receivables, net
Available for sale 34,339 33,776
Other 8,903 6,863
Interest-only and residual strips 232,237 178,218
Receivable for sold loans and leases 89,292 66,086
Prepaid expenses 3,469 1,671
Property and equipment, net 14,868 10,671
Servicing rights 57,795 43,210
Other assets 32,079 33,411
-------- --------
Total assets $491,898 $396,301
======== ========
Liabilities and Stockholders' Equity
Liabilities
Subordinated debt $266,136 $211,652
Warehouse lines and other notes payable 92,669 58,691
Accounts payable and accrued expenses 32,807 26,826
Deferred income taxes 22,856 16,604
Other liabilities 14,083 24,282
-------- --------
Total liabilities 428,551 338,055
-------- --------
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: 3,615,279 and 3,703,514 shares (including treasury
shares of 232,300 and 116,550) 4 3
Additional paid-in capital 24,222 23,339
Accumulated other comprehensive income 3,931 3,354
Retained earnings 38,491 33,596
Treasury stock, 232,300 and 116,550 shares (2,701) (1,446)
-------- --------
63,947 58,846
Note receivable (600) (600)
-------- --------
Total stockholders' equity 63,347 58,246
-------- --------
Total liabilities and stockholders' equity $491,898 $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 Six Months Ended
December 31, December 31,
------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Gain on sale of loans and leases $20,492 $14,775 $39,613 $28,372
Interest and fees 4,737 3,907 9,497 8,446
Interest accretion on
interest-only strips 4,316 208 7,065 392
Servicing income 1,050 525 2,239 1,015
Other income 2 1 3 15
------- ------- -------- --------
Total revenues 30,597 19,416 58,417 38,240
------- ------- -------- --------
Expenses
Interest 8,417 4,745 16,063 9,548
Provision for credit losses 568 77 709 203
Employee related costs 2,527 1,296 4,522 2,509
Sales and marketing 6,677 4,422 13,864 9,253
General and administrative 6,145 3,409 10,679 6,078
------- ------- -------- --------
Total expenses 24,334 13,949 45,837 27,591
------- ------- -------- --------
Income before provision for income taxes 6,263 5,467 12,580 10,649
Provision for income taxes 2,505 1,969 5,032 3,731
------- ------- -------- --------
Net Income $ 3,758 $ 3,498 $ 7,548 $ 6,918
======= ======= ======= =======
Earnings per common share:
Basic $ 1.10 $ 0.95 $ 2.16 $ 1.87
Diluted $ 1.08 $ 0.92 $ 2.11 $ 1.82
Average common shares:
Basic 3,397 3,699 3,489 3,699
Diluted 3,478 3,800 3,571 3,812
====================================================================================================
</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 -- -- -- -- 7,548
Unrealized gains on investment securities -- -- -- 577 --
----- --- ------- ------ -------
Total comprehensive income -- -- -- 577 7,548
----- --- ------- ------ -------
Exercise of stock options 37 1 149 -- --
Issuance of non-employee stock options -- -- 130 -- --
Repurchase of treasury shares (241) -- -- -- --
Cash dividends ($0.14 per share) -- -- -- -- (497)
Stock dividend (5% of outstanding shares):
Issuance of treasury shares -- -- -- -- --
Issuance of new shares -- -- 604 -- (2,156)
----- --- ------- ------ -------
Balance, December 31, 1999 3,383 $ 4 $24,222 $3,931 $38,491
===== === ======= ====== =======
Balance, June 30, 1998 3,699 $ 3 $23,256 $ -- $20,083
Comprehensive income:
Net income -- -- -- -- 6,918
----- --- ------- ------ -------
Total comprehensive income -- -- -- -- 6,918
----- --- ------- ------ -------
Issuance of non-employee stock options -- -- 73 -- --
Cash dividends ($0.065 per share) -- -- -- -- (228)
----- --- ------- ------ -------
Balance, December 31, 1998 3,699 $ 3 $23,329 $ -- $26,773
===== === ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
[RESTUBED FOR ABOVE]
<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 -- -- 7,548
Unrealized gains on investment securities -- -- 577
-------- ----- -------
Total comprehensive income -- -- 8,125
-------- ----- -------
Exercise of stock options -- -- 150
Issuance of non-employee stock options -- -- 130
Repurchase of treasury shares (2,807) -- (2,807)
Cash dividends ($0.14 per share) -- -- (497)
Stock dividend (5% of outstanding shares):
Issuance of treasury shares 1,552 -- 1,552
Issuance of new shares -- -- (1,552)
-------- ----- -------
Balance, December 31, 1999 $ (2,701) $(600) $63,347
======== ===== =======
Balance, June 30, 1998 $ -- $(600) $42,742
Comprehensive income:
Net income -- -- 6,918
-------- ----- -------
Total comprehensive income -- -- 6,918
-------- ----- -------
Issuance of non-employee stock options -- -- 73
Cash dividends ($0.065 per share) -- -- (228)
-------- ----- -------
Balance, December 31, 1998 $ -- $(600) $49,505
======== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 7,548 $ 6,917
Adjustments to reconcile net income to net
cash used in operating activities:
Gain on sale of loans and leases (39,613) (28,372)
Depreciation and amortization 8,733 4,565
Interest accretion on interest-only and residual strips (7,065) (392)
Provision for credit losses 709 203
Accounts written off, net (1,072) (262)
Loans and leases originated for sale (536,381) (431,747)
Proceeds from sale of loans and leases 500,636 384,594
Principal payments on loans and leases 2,383 6,029
Increase in accrued interest and fees on
loan and lease receivables (2,040) (789)
Purchase of initial overcollateralization on securitized loans
and leases (4,375) (2,800)
Required purchases of additional overcollateralization on
securtized loans and leases (12,411) (5,998)
Cash flow from interest-only and residual strips 19,981 9,168
Increase in receivable for loans and leases sold (19,313) (9,040)
Increase in prepaid expenses (1,798) (235)
Increase in accounts payable and accrued expenses 5,981 4,529
Increase (decrease) in deferred income taxes 5,881 (5,298)
(Decrease) increase in loans in process (10,199) 1,082
Increase in other, net 993 254
-------- ---------
Net cash used in operating activities (81,422) (67,592)
-------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment, net (6,122) (3,875)
Purchase of investment -- (646)
Principal receipts on investments 11 399
-------- ---------
Net cash used in investing activities (6,111) (4,122)
-------- ---------
</TABLE>
5
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow (continued)
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1999 1998
-------- ---------
<S> <C> <C>
Cash Flows from Financing Activities:
Proceeds from issuance of subordinated debt $ 89,806 $ 60,649
Redemptions of subordinated debt (35,322) (21,892)
Net borrowings on revolving lines of credit 35,692 39,390
Principal payments on note payable, other (1,714) (466)
Financing costs incurred (1,384) (2,407)
Cash dividend paid (497) (228)
Exercise of employee stock options 150 --
Issuance of non-employee stock options 130 73
Repurchase of treasury stock (2,807) --
-------- ---------
Net cash provided by financing activities 84,054 75,119
-------- ---------
Net (decrease) increase in cash and cash equivalents (3,479) 3,405
Cash and cash equivalents, beginning of period 22,395 4,486
-------- ---------
Cash and cash equivalents, end of period $ 18,916 $ 7,891
======== =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 11,606 $ 3,392
Income taxes $ -- $ 2,278
</TABLE>
6
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
1 Basis of Financial Statement Presentation
American Business Financial Services, Inc., 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 and conventional first mortgage and home equity loans, including
loans to credit impaired borrowers secured by first and second mortgages. In
addition, the Company continues to service its portfolio of business
equipment leases, and to originate a minimal amount of new leases. The
Company also sells subordinated debt securities to the public, the proceeds
of which are used to fund loan 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 six month period ended December 31,
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 prior
period 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 (continued)
December 31, 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>
December 31, June 30,
1999 1999
------------ ---------
<S> <C> <C>
Real estate secured loans $ 13,593 $ 21,027
Leases net of unearned income of $3,102
and $1,543 21,085 13,451
---------- --------
34,678 34,478
Less: Allowance for credit losses on loans and leases
available for sale 339 702
---------- --------
$ 34,339 $ 33,776
========== ========
</TABLE>
3. Interest-Only and Residual Strips
Activity for interest-only and residual strips during the six-month
period ended December 31, 1999 was as follows (in thousands):
Balance at beginning of period $ 178,218
Initial recognition of interest-only and residual strips,
including initial overcollateralization of $4,375 53,576
Required purchases of additional overcollateralization 12,411
Interest accretion 7,065
Cash flow from interest-only and residual strips (19,981)
Net adjustments to fair value 948
---------
Balance at end of period $ 232,237
=========
Interest-only and residual strips include overcollateralization
balances that represent excess principal balances of loans and leases
in securitization trusts over investor interests maintained to provide
credit enhancement to investors in securitization trusts. In order to
meet the required overcollateralization levels, the trust initially
retains residual cash flows until after overcollateralization
requirements, which are specific to each securitization, are met.
At December 31, 1999, the Company's investment in overcollateralization
was $60.5 million.
8
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
4. Servicing Rights
Activity for servicing rights during the six-month period ended
December 31, 1999 was as follows (in thousands):
Balance at beginning of period $ 43,210
Initial recognition of servicing rights 19,915
Amortization (5,330)
---------
Balance at end of period $ 57,795
=========
Servicing rights are periodically valued by the Company based on a
discounted cash flow analysis of loans and leases remaining in the
securitization trusts. A review for impairment is performed on a
disaggregated basis for the predominant risk characteristics, referred
to as a stratum, of the underlying loans and leases, which consist of
loan type and 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. As of December 31, 1999, no
valuation allowance for impairment was required.
5. Other Assets
Other assets were comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ ---------
<S> <C> <C>
Goodwill, net of accumulated amortization
of $2,505 and $1,913 $ 15,759 $ 15,018
Financing costs, debt offering costs, net of
accumulated amortization of $4,605 and $3,903 5,133 4,487
Due from securitization trusts for servicing related
activities 6,193 6,266
Investments held to maturity (mature January 2000
through April 2011) 1,003 1,014
Real estate owned 513 843
Other 3,478 5,783
--------- ---------
$ 32,079 $ 33,411
========= =========
</TABLE>
9
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
6. Subordinated Debt and Warehouse Lines and Other Notes Payable
Subordinated debt was comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- ---------
<S> <C> <C>
Subordinated debentures (a) $ 261,901 $ 206,918
Subsidiary subordinated debentures (b) 4,235 4,734
----------- ---------
Total subordinated debentures $ 266,136 $ 211,652
=========== =========
</TABLE>
Warehouse lines and other notes payable were comprised of the following
(in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
-------------- ----------
<S> <C> <C>
Warehouse revolving line of credit (c) $ 63,425 $ 42,627
Warehouse revolving line of credit (d) 4,662 3,764
Warehouse revolving line of credit (e) 14,097 102
Revolving line of credit (f) 5,000 5,000
Repurchase agreement (g) 4,677 4,677
Senior subordinated debt (h) -- 1,250
Other debt 808 1,271
----------- ----------
Total warehouse lines and other notes payable $ 92,669 $ 58,691
=========== ==========
</TABLE>
(a) Subordinated debentures due January 2000 through December 2009, interest
rates ranging from 6.15% to 12.45%; subordinated to all of the Company's
indebtedness.
(b) Subsidiary subordinated debentures due January 2000 through May 2003,
interest rates ranging from 9.00% to 11.99%; subordinated to all of the
Company's 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 January 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 2000, interest rate of
LIBOR plus 2.0%, collateralized by certain residual interests in
securitization trusts.
(g) Repurchase agreement due January 2000, interest rate of LIBOR plus 0.5%,
collateralized by certain lease backed securities.
(h) Senior subordinated debt due 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)
December 31, 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 Six Months Ended
December 31, December 31,
----------------------- ---------------------
1999 1998 1999 1998
---- ---- ------- -------
<S> <C> <C> <C> <C>
Earnings
(a) Net income $3,758 $3,498 $ 7,548 $ 6,918
Average Common Shares
(b) Average common shares outstanding 3,397 3,699 3,489 3,699
Average potentially dilutive shares 81 101 82 113
------ ------ ------ -------
(c) Average common and potentially
dilutive shares 3,478 3,800 3,571 3,812
====== ====== ====== =======
Earnings Per Common Share
Basic (a/b) $ 1.10 $ 0.95 $ 2.16 $ 1.87
Diluted (a/c) $ 1.08 $ 0.92 $ 2.11 $ 1.82
</TABLE>
8. Segment Information
The Company has three operating segments: Loan Origination, Servicing, and
Investment Note Services.
The Loan Origination segment originates business purpose loans secured
by real estate and other business assets and home equity loans
including loans to credit-impaired borrowers and conventional first
mortgage loans secured by one to four family residential real estate.
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. 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)
December 31, 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>
Six months ended
December 31, 1999 Loan Investment 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 $ 39,613 $ -- $ -- $ -- $ -- $ 39,613
Interest income 2,553 -- -- 8,114 -- 10,667
Non-interest income 1,357 -- 6,780 -- -- 8,137
Inter-segment revenues -- 16,090 -- 2,602 (18,692) --
Operating expenses:
Interest expense 11,320 11,746 100 8,987 (16,090) 16,063
Non-interest expense 20,456 3,601 3,988 1,729 -- 29,774
Inter-segment expense 2,602 -- -- -- (2,602) --
Income tax expense 3,658 297 1,077 -- -- 5,032
---------- ---------- ---------- ----------- ----------- ------------
Net income $ 5,487 $ 446 $ 1,615 $ -- $ -- $ 7,548
========== ========== ========== =========== =========== ===========
Segment assets $ 69,621 $ 18,841 $ 58,501 $ 344,935 $ -- $ 491,898
========== ========== ========== =========== =========== ===========
</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 and the risk factors contained in our Annual
Report on Form 10-K for the year ended June 30, 1999 incorporated by reference
in this Form 10-Q in their entirety.
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 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 and conventional first
mortgage loans 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 products due to
our personalized service, and timely response to loan applications. We originate
loans through a retail branch network of 21 offices. In addition we sell
subordinated debt securities to the public, the proceeds of which are used to
fund loan originations and our operations.
Prior to December 31, 1999 we also originated equipment leases. We have
since de-emphasized the leasing origination business in keeping with our
strategy of focusing on our most profitable lines of business. We are currently
originating a minimal volume of leases and are continuing to service the run off
of our managed portfolio of leases, which totaled $155.3 million in gross
receivables at December 31, 1999.
Securitizations
The ongoing securitization of loans is a central part of our current
business strategy. We sell loans and have in the past sold leases through
securitizations with servicing retained in order to fund additional loan
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 serviced. Any substantial reduction in the size or availability of the
securitization market for loans could have a material adverse effect on our
results of operations and financial condition.
13
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 through securitizations requires building an inventory of loans 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 may be unfavorably impacted to the extent we
hold fixed-rate mortgage loans in our available for sale portfolio prior to
securitization. A significant variable affecting the gain on sale of loans in a
securitization is the spread between the average coupon rate on fixed rate
loans, and the weighted average pass-through rate to investors for interests
issued in connection with a securitization. Although the loan coupon rate is
fixed at the time the loan 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. Therefore, if market rates required by investors increase
prior to securitization of the loans, the spread between the average coupon rate
on the loans and the pass-through rate to investors may be reduced or
eliminated.
Our business strategy is dependent upon our ability to identify and
emphasize lending related activities that will provide the most economic value
to the Company. 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 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 strategy, which would 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 prepayment rates and default
rates on the pool of loans or leases. The prepayment rate 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, defaults 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 of interest-only and residual strips and servicing rights from
securitizations during the second quarter of fiscal 2000, and periodic
revaluation performed on our interest-only and residual strips and servicing
rights from previous securitizations.
<TABLE>
<CAPTION>
Initial Periodic
Valuation Revaluation
--------------------------------------------------------------------------------
<S> <C> <C>
Discount rates
Home equity loans ........................ 11.0% 11.0%
Business purpose loans ................... 11.0% 11.0%
Business equipment leases ................ --(d) 11.0%
Annual prepayment rate assumptions
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 .......... --(d) --(c)
Actual prepayment rate experience (see table on page 17)
Annual credit loss rate (default rate) assumptions
Home equity loans ....................... 0.30% 0.25%
Business purpose loans .................. 0.30% 0.25%
Business equipment leases ............... --(d) 0.50%
Actual cumulative credit losses (default rate)
Home equity loans ....................... -- 0.14%(e)
Business purpose loans .................. -- 0.22%(e)
Business equipment leases ............... -- 1.13%
--------------------------------------------------------------------------------
</TABLE>
(a) Ramped over 12 to 18 months
(b) Ramped over 24 months
(c) Residual values are continuously adjusted based on actual
experience.
(d) There were no business equipment lease securitizations during
the second quarter.
(e) See "Managed Portfolio Quality - Loss Experience" for a
summary of cumulative credit losses by loan securitization for
further detail.
16
<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 actual prepayment experience by loan
securitization trust.
<TABLE>
<CAPTION>
Assumption Utilized for Second Quarter
Valuation Actual Annualized CPR
--------------------------------------------- --------------------------------------------
Business Home Business Home
Purpose Equity Blended Rate Purpose Equity Blended Rate
Trust Loans Loans Loans Loans
----------- ------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1996-1 ............... 13.00% 24.00% 17.96% 19.10% 18.01% 18.63%
1996-2 ............... 13.00 24.00 18.60 18.91 27.45 23.75
1997-1 ............... 13.00 24.00 19.90 13.34 24.76 21.13
1997-2 ............... 13.00 24.00 20.88 14.19 23.84 21.47
1998-1 ............... 13.00 24.00 22.18 14.60 21.41 20.39
1998-2 ............... 10.83(a) 24.00 22.15 10.21 18.08 17.08
1998-3 ............... 8.67(a) 24.00 22.70 8.32 11.02 10.80
1998-4 ............... 6.50(a) 24.00 22.05 10.84 9.73 9.83
----- ----- ----- ----- ----- -----
Weighted
average-seasoned
trusts (d) ........... 11.41% 24.00% 21.84% 12.97% 15.81% 15.45%
====== ====== ====== ====== ====== ======
1999-1 ............... 3.75%(b) 12.00%(c) 11.24% 3.48% 8.90% 8.42%
1999-2 ............... 2.50 (b) 8.00 (c) 7.25 9.66 4.60 5.14
1999-3 ............... 1.25 (b) 4.00 (c) 3.67 3.43 1.78 1.98
</TABLE>
(a) Ramping to 13% over 24 months
(b) Ramping to 10% over 24 months
(c) Ramping to 24% over 18 months
(d) Seasoned trusts have been established for one year or more
17
<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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ Percentage ------------------------ Percentage
1999 1998 Increase 1999 1998 Increase
--------- --------- ------------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues........................ $ 30,597 $ 19,416 57.6% $ 58,417 $ 38,240 52.8%
Total expenses........................ $ 24,334 $ 13,949 74.5% $ 45,837 $ 27,591 66.1%
Net income............................ $ 3,758 $ 3,498 7.4% $ 7,548 $ 6,918 9.1%
Return on average equity.............. 23.81% 29.03% 24.41% 29.76%
Return on average assets.............. 3.23% 4.67% 3.43% 5.01%
Earnings per share:
Basic.............................. $ 1.10 $ 0.95 15.8% $ 2.16 $ 1.87 15.5%
Diluted............................ $ 1.08 $ 0.92 17.4% $ 2.11 $ 1.82 15.9%
Dividends declared per share.......... $ 0.07 $ 0.05 40.0% $ 0.14 $ 0.065 115.4%
</TABLE>
Net Income. For the second quarter of fiscal 2000 net income increased
$0.3 million, or 7.4%, to $3.8 million from $3.5 million for the second quarter
of fiscal 1999. Basic earnings per common share increased to $1.10 on average
common shares of 3,397,000 compared to $0.95 per share on average common shares
of 3,699,000 for the second quarter of fiscal 1999. Diluted earnings per common
share increased to $1.08 on average common shares of 3,478,000 compared to $0.92
per share on average common shares of 3,800,000 for the second quarter of fiscal
1999.
For the six months ended December 31, 1999, net income increased $0.6
million, or 9.1%, to $7.5 million from $6.9 million for the six months ended
December 31, 1998. Basic earnings per common share increased to $2.16 on average
common shares outstanding of 3,489,000 compared to $1.87 per share on average
common shares outstanding of 3,699,000 for the six months ended December 31,
1998. Diluted earnings per common share increased to $2.11 on average common
shares outstanding of 3,571,000 compared to $1.82 per share on average common
shares outstanding of 3,812,000 for the six months ended December 31, 1998.
Increases in net income and earnings per share primarily resulted from
the growth in the volume of loans originated and securitized during the period,
interest accretion earned on interest-only strips and increases in the
collection of fee income due to growth in loans available for sale and
securitized loans and leases for which servicing was retained, referred to as
the total managed portfolio.
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.
In the first quarter of fiscal 2000, the quarterly dividend was
increased by 40.0% to $0.07 per share from $0.05 per share. In January, 2000 the
quarterly dividend was increased an additional 14.3% to $0.08 per share. The
common dividend payout ratio based on diluted earnings per share was 6.5% for
the second quarter of fiscal 2000, compared to 5.2% for the second quarter of
fiscal 1999.
18
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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 second
quarter of fiscal 2000, 194,100 shares were repurchased representing 5.5% of the
outstanding shares. For the first six months of fiscal 2000, 240,910 shares were
repurchased representing 6.7% of the outstanding shares at the beginning of the
period. The impact of the share repurchase program was an increase of diluted
earnings per share by $0.03 and $0.04 for the three and six-month periods ended
December 31, 1999, respectively. On January 24, 2000, the Board of Directors
authorized the repurchase of an additional 338,000 shares, representing 10.0% of
the outstanding shares.
Total Revenues. For the second quarter of fiscal 2000, total revenues
increased $11.2 million, or 57.6%, to $30.6 million from $19.4 million for the
second quarter of fiscal 1999. For the first six months of fiscal 2000, total
revenues increased $20.2 million, or 52.9%, to $58.4 million from $38.2 million
for the first six months of fiscal 1999. Growth in total revenue was the result
of increased gains on sales of loans and leases in the first six months of
fiscal 2000, as a result of the increased volume of loans and leases
securitized, increases in interest accretion earned on our interest-only strips,
increases in interest and fees collected on loans and leases originated and
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 $5.7 million, or 38.7%, to $20.5 million for the second quarter of
fiscal 2000 from $14.8 million in the second quarter of fiscal 1999. The
increase was the result of selling $236.7 million of loans through
securitizations in the second quarter of fiscal 2000, including, $27.4 million
of business purpose loans and $209.3 million of home equity loans compared to
$11.7 million of business purpose loans, $128.4 million of home equity loans and
$35.1 million of equipment leases in the second quarter of fiscal 1999.
For the six months ended December 31, 1999, gain on sale of loans and
leases increased $11.2 million, or 39.6%, to $39.6 million from $28.4 million
for the six months ended December 31, 1998. The increase was the result of
securitization of $51.7 million of business purpose loans, $386.0 million of
home equity loans and $9.3 million of equipment leases. Securitizations in the
first six months of fiscal 1999 included $25.3 million of business purpose
loans, $254.7 million of home equity loans and $48.6 million of equipment
leases.
Gain on sale of loans and leases as a percentage of loans and leases
securitized was 8.9% in fiscal 2000, compared to 8.6% in fiscal 1999. Factors
impacting 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 in an increased value of our residual
interests in the pool of securitized loans. In addition, due to increases in the
volume of loans originated with prepayment fees, we have reduced the annual
prepayment rate assumption on business loans and lengthened the ramping rate for
prepayments on home equity loans for fiscal 2000 securitizations. These factors
which increased the gain on sale as a percentage of loans and leases securitized
were 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, as of January 1, 1999 we 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 $5.9
million pre-tax in the six months ended December 31, 1999.
19
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following schedule details our loan and lease originations (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Business purpose loans .. $ 28,830 $ 13,262 $ 52,241 $ 25,950
Home equity loans ....... 226,066 163,384 434,328 330,396
Equipment leases ........ 4,100 27,648 19,609 52,304
---------- ---------- ---------- ---------
$ 258,996 $ 204,294 $ 506,178 $ 408,650
========== ========== ========== =========
</TABLE>
Loan originations for our subsidiary, American Business Credit, Inc.,
which offers business purpose loans secured by real estate, increased $15.6
million, or 117.4%, to $28.8 million for the second quarter of fiscal 2000 from
$13.3 million in the second quarter of fiscal 1999. For the six months ended
December 31, 1999, loan originations increased $26.3 million, or 101.3%, to
$52.2 million from $25.9 million for the six months ended December 31, 1998.
This increase was attributable to geographic expansion of American Business
Credit's lending program including recent expansion into the Chicago market
place as well as refocused marketing efforts. American Business Credit recently
launched a web site, www.abceasyloan.com in order to increase its distribution
channels for business purpose loans.
Home equity loans originated by our subsidiaries Upland Mortgage, New
Jersey Mortgage and Investment Corp. and Processing Service Center increased
$62.7 million, or 38.4%, to $226.1 million for the second quarter of fiscal 2000
from $163.4 million for the second quarter of fiscal 1999. For the six months
ended December 31, 1999, loan originations increased $103.9 million, or 31.5%,
to $434.3 million from $330.4 million for the six months ended December 31,
1998. The home equity business line has changed its marketing mix to focus on
direct mail, which delivers leads at a lower cost. 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 both of which utilize technology to reduce time and manual effort
required for loan approval.
Interest and Fees. Interest and fee income for the second quarter of
fiscal 2000 increased $0.8 million, or 21.2%, to $4.7 million from $3.9 million
in the second quarter of fiscal 1999. For the six months ended December 31,
1999, interest and fee income increased $1.1 million, or 12.4%, to $9.5 million
from $8.4 million for the six months ended December 31, 1998. 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.
Interest income remained level at $1.6 million for the second quarter
of fiscal 2000 and fiscal 1999. During the six months ended December 31, 1999
interest income decreased $0.3 million, or 7.7%, to $3.6 million from $3.9
million for the six months ended December 31, 1998. The decrease was due to the
reduced length of time loans were held in our available for sale portfolio prior
to securitization. Fee income increased $0.8 million, or 32.5%, to $3.1 million
from $2.3 million for the second quarter of fiscal 1999. For the six months
ended December 31, 1999, fee income increased $1.3 million, or 30.4%, to $5.9
million from $4.5 million for the six months ended December 31, 1998. The
increases for the three and six-month periods were the result of increases in
the volume of loans originated during the periods.
20
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Interest Accretion on Interest-Only Strips. Interest accretion
represents the interest component of cash flows received on interest-only
strips. Interest accretion of $4.7 million and $9.5 million was earned in the
three-month and six-month periods ended December 31, 1999, respectively,
compared to $0.2 million and $0.4 million in the three-month and six-month
periods ended December 31, 1998, respectively. The increases in interest
accretion reflect the growth in interest-only strips and the maturing of the
interest-only strips portfolio in terms of generating cash flow.
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 second quarter of fiscal 2000, servicing income increased
$0.5 million, or 100.0%, to $1.0 million from $0.5 million for the second
quarter of fiscal 1999. For the six months ended December 31, 1999, servicing
income increased $1.2 million, or 120.6%, to $2.2 million from $1.0 million for
the six months ended December 31, 1998.
As an annualized percentage of the average managed portfolio, servicing
income for the quarter increased to 0.32%, from 0.28% in the prior year. The
servicing income annualized percentage for the first six months of fiscal 2000
was 0.36%, compared to 0.28% for the first six months of fiscal 1999. These
increases were the result of the increased origination of loans with prepayment
fees and the collection of other ancillary fees.
Total Expenses. For the second quarter of fiscal 2000, total expenses
increased $10.4 million, or 74.4%, to $24.3 million from $13.9 million for the
second quarter of fiscal 1999. Total expenses increased $18.2 million, or 66.1%,
to $45.8 million for the six months ended December 31, 1999 as compared to $27.6
million for the six months ended December 31, 1998. 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 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 second quarter of fiscal 2000, interest
expense increased $3.7 million, or 77.4%, to $8.4 million from $4.7 million for
the second quarter of fiscal 1999. The increase was attributable to an increase
in the amount of subordinated debt outstanding during the second quarter of
fiscal 2000, the proceeds of which were used to fund loan 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 originations. Average subordinated debt outstanding during the three
months ended December 31, 1999 was $254.1 million compared to $146.0 million
during the three months ended December 31, 1998. Average interest rates paid on
subordinated debt outstanding increased to 9.55% during the three months ended
December 31, 1999 from 9.22% during the three months ended December 31, 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 $100.1 million during the
three months ended December 31, 1999, compared to $72.9 million during the three
months ended December 31, 1998.
During the first six months of fiscal 2000 interest expense increased
$6.5 million, or 68.2%, to $16.0 million from $9.5 million for the six months
ended December 31, 1998. Average subordinated debt outstanding during the six
months ended December 31, 1999 was $239.9 compared to $131.9 during the six
months ended December 31, 1998. The average outstanding balances under warehouse
and other credit lines were $109.9 during the six months ended December 31, 1999
compared to $83.6 during the six months ended December 31, 1998. Average
interest rates paid on subordinated debt increased to 9.49% from 9.28% during
the comparable six-month period.
Provision for Credit Losses. The provision for credit losses on
portfolio loans and leases for the second quarter of fiscal 2000 increased $0.5
million, or 637.7%, to $0.6 million from $77 thousand for the quarter ended
December 31, 1998. The provision for credit losses on portfolio loans and leases
for the six months ended December 31, 1999 increased $0.5 million, or 249.3%, to
$0.7 million as compared to $0.2 million for the six months ended December 31,
1998. The increase in the provision for both periods was due to the recording of
$0.6 million of additional reserves for delinquent leases. See "Managed
Portfolio Quality - loss experience" for further detail.
21
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 $0.3 million
at December 31, 1999 compared to $0.7 million at June 30, 1999. The changes in
the allowance for credit losses are due primarily to the write off of $0.9
million of lease receivables.
The following table summarizes the changes in the allowance for credit losses by
loan and lease type (in thousands).
<TABLE>
<CAPTION>
Business Home
Purpose Equity Equipment
Three Months Ended December 31, 1999 Loans Loans Leases Total
- ------------------------------------ ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 24 $ 336 $ 473 $ 833
Provision for credit losses 65 (80) 583 568
(Charge-offs) recoveries, net (66) (96) (900) (1,062)
------ ------ ------ -------
Balance at end of period $ 23 $ 160 $ 156 $ 339
====== ====== ====== ========
<CAPTION>
Business Home
Purpose Equity Equipment
Six Months Ended December 31, 1999 Loans Loans Leases Total
- ---------------------------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 26 $ 243 $ 433 $ 702
Provision for credit losses 84 11 614 709
(Charge-offs) recoveries, net (87) (94) (891) (1,072)
------ ------ ------ -------
Balance at end of period $ 23 $ 160 $ 156 $ 339
====== ====== ====== ========
</TABLE>
Charge-offs related to securitized loans and leases are generally
absorbed by securitization trusts. Therefore, 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 and "Managed Portfolio Quality - Loss Experience" for
information regarding actual losses.
Sales and Marketing Expenses. For the second quarter of fiscal 2000,
sales and marketing expenses increased $2.3 million, or 51.0%, to $6.7 million
from $4.4 million for the second quarter of fiscal 1999. For the six months
ended December 31, 1999, sales and marketing expenses increased $4.6 million, or
49.8%, to $13.9 million from $9.3 million for the six months ended December 31,
1998. The increases were primarily attributable to increases in marketing
efforts through the use of targeted direct mail programs for our loan products.
These targeted programs are considered to be more cost effective than the
television and radio advertising campaigns used previously. In addition we
increased the use of newspaper and periodical advertising to generate additional
sales of our subordinated debt securities. Subject to market conditions, we plan
to increase the funding for advertising throughout the United States to generate
additional increases in loan originations and sales of subordinated debt
securities.
General and Administrative Expenses. For the second quarter of fiscal
2000, general and administrative expenses increased $2.7 million, or 80.3%, to
$6.1 million from $3.4 million for the second quarter of fiscal 1999. For the
six months ended December 31, 1999, general and administrative expenses
increased $4.6 million, or 75.7%, to $10.7 million from $6.1 million for
22
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
the six months ended December 31, 1998. The increases were primarily
attributable to increases in rent, telephone, office expense, professional fees,
systems and technology and other expenses incurred as a result of the previously
discussed growth in loan originations, 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.
BALANCE SHEET INFORMATION
Balance Sheet Data:
(in thousands, except per share data)
December 31, June 30,
1999 1999
------------ ---------
Cash and cash equivalents $ 18,916 $ 22,395
Loan and lease receivables, net:
Available for sale 34,339 33,776
Other 8,903 6,863
Interest-only and residual strips 232,237 178,218
Receivable for sold loans and leases 89,292 66,086
Servicing rights 57,795 43,210
Total assets 491,898 396,301
Subordinated debt 266,136 211,652
Warehouse lines and other notes payable 92,669 58,691
Total liabilities 428,551 338,055
Total stockholders' equity 63,347 58,246
Book value per common share 18.73 16.24
Interest-only and residual strips to adjusted
stockholder's equity (a) 1.6x 2.5x
Subordinated debt to tangible stockholders' equity 5.5x 4.9x
(a) Amount is interest-only and residual strips less overcollateralization
interests to tangible equity plus subordinated debt with an original
maturity greater than 5 years.
Total assets increased $95.6 million, or 24.1%, to $491.9 million at
December 31, 1999 from $396.3 million at June 30, 1999 primarily due to
increases in interest-only and residual strips, receivable for sold loans and
leases and servicing rights.
Interest-only and residual strips, which are residual interests created
in connection with securitizations, increased $54.0 million, or 30.3%, to $232.2
million from $178.2 million at June 30, 1999. We completed $236.7 million in
loan securitizations during the second quarter and $202.3 million in the first
quarter of fiscal 2000, resulting in the recording of $53.6 million of
interest-only and residual strips. In addition, for the first six months of
fiscal 2000, interest accretion and increases in the fair value of interest-only
and residual strips recorded in the quarter were $7.1 million and $1.0 million,
respectively. These increases were offset by cash flow received during the
six-month period from securitization trusts of $20.0 million. Cash receipts on
interest-only and residual strips include required purchases of additional
overcollateralization of $12.4 million for the six months ended December 31,
1999. Total overcollateralization balances included in interest-only and
residual strips were $60.5 million at December 31, 1999. Receivable for sold
loans and leases increased $23.2 million, or 35.1%, to $89.3 million at December
31, 1999 from $66.1 million at June 30, 1999, due to the funding of a
securitization for which cash was received subsequent to the end of the period.
23
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Servicing rights increased $14.6 million, or 33.8% to $57.8 million from $43.2
million at June 30, 1999, due to the recording of $19.9 million of mortgage
servicing rights obtained in connection with loan securitizations, partially
offset by amortization of servicing rights. Total liabilities increased $90.5
million, or 26.8%, to $428.6 million from $338.1 million at June 30, 1999 due
primarily to an increase in subordinated debt and warehouse lines and other
notes payable. Subordinated debt increased $54.4 million, or 25.7%, to $266.1
million for the first six months of fiscal 2000 due to net sales of subordinated
debt used to fund loan originations and investments in operations. Subordinated
debt was 5.5 times tangible equity at December 31, 1999, compared to 4.9 times
as of June 30, 1999. Borrowings net of repayments on warehouse lines of credit
increased $35.7, or 76.8%, to $82.2 million compared to $46.5 million at June
30, 1999. The increase was due to the funding of a securitization for which cash
was received subsequent to the end of the period. Other lines of credit and
notes payable decreased $1.7 million from June 30, 1999 due to repayments. See
"Liquidity and Capital Resources" for further detail.
24
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Managed Portfolio Quality
The following table provides data concerning delinquency experience,
REO and loss experience for the managed loan and lease portfolio (dollars in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 September 30, 1999 June 30, 1999
------------------ -------------------- -------------------
Delinquency by Type Amount % Amount % Amount %
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Business Purpose Loans
Total managed portfolio............... $ 185,820 $ 165,827 $ 148,932
=========== =========== ===========
Period of delinquency
31-60 days ....................... $ 605 .33% $ 710 .43% $ 1,506 1.01%
61-90 days ....................... 1,328 .71 1,165 .70 475 .32
Over 90 days...................... 8,729 4.70 8,732 5.27 8,612 5.78
----------- ----- ----------- ----- ----------- -----
Total delinquencies............... $ 10,662 5.74% $ 10,607 6.40% $ 10,593 7.11%
=========== ===== =========== ===== =========== =====
REO................................... $ 3,211 $ 3,434 $ 2,881
=========== =========== ===========
Home Equity Loans
Total managed portfolio............... $ 1,155,438 $ 1,006,075 $ 858,806
=========== =========== ===========
Period of delinquency
31-60 days ....................... $ 8,272 .72% $ 5,614 .56% $ 4,836 .56%
61-90 days ....................... 5,371 .46 4,807 .48 4,149 .48
Over 90 days ..................... 27,505 2.38 20,379 2.02 15,346 1.79
----------- ----- ----------- ----- ----------- -----
Total delinquencies............... $ 41,148 3.56% $ 30,800 3.06% $ 24,331 2.83%
=========== ===== =========== ===== =========== =====
REO................................... $ 10,221 $ 8,873 $ 7,067
=========== =========== ===========
Equipment Leases
Total managed portfolio............... $ 155,282 $ 168,973 $ 169,180
=========== =========== ===========
Period of delinquency
31-60 days ....................... $ 612 .39% $ 300 .18% $ 389 .23%
61-90 days ....................... 379 .24 236 .14 425 .25
Over 90 days ..................... 817 .53 2,011 1.19 1,826 1.08
----------- ----- ----------- ----- ----------- -----
Total delinquencies............... $ 1,808 1.16% $ 2,547 1.51% $ 2,640 1.56%
=========== ===== =========== ===== =========== =====
Combined
Total managed portfolio............... $ 1,496,540 $ 1,340,875 $ 1,176,918
=========== =========== ===========
Period of delinquency
31-60 days ....................... $ 9,489 .63% $ 6,624 .50% $ 6,731 .57%
61-90 days ....................... 7,078 .47 6,208 .46 5,049 .43
Over 90 days ..................... 37,051 2.48 31,122 2.32 25,784 2.19
----------- ----- ----------- ----- ----------- -----
Total delinquencies............... $ 53,618 3.58% $ 43,954 3.28% $ 37,564 3.19%
=========== ===== =========== ===== =========== =====
REO................................... $ 13,432 .90% $ 12,307 .92% $ 9,948 .85%
=========== ===== =========== ===== =========== =====
Losses (recoveries) experienced
during the 3 month period(a)(b)
Loans............................. $ 686 .22% $ 770 .28% $ 162 .07%
===== ===== =====
Leases............................ 893 2.62% (9) (.03)% 163 .48%
----------- ===== ----------- ====== ----------- =====
Total managed portfolio........... $ 1,579 .46% $ 761 .25% $ 325 .12%
=========== ===== =========== ====== =========== =====
</TABLE>
(a) Percentage based on annualized losses and average managed portfolio.
(b) Losses recorded on our books were $1.1 million and losses absorbed by loan
securitization trusts were $517,000 for the three months ended December 31,
1999. 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. All losses were recorded on our books for the three months ended June 30,
1999.
25
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Delinquent loans and leases- Total delinquencies (loans and leases with
payments past due greater than 30 days) in the total managed portfolio were
$53.6 million at December 31, 1999 compared to $44.0 million at September 30,
1999 and $37.6 million at June 30, 1999. Total delinquencies as a percentage of
the total managed portfolio (the "delinquency rate") were 3.58% at December 31,
1999 compared to 3.28% at September 30, 1999 and 3.19% at June 30, 1999. The
increase in the delinquency rate from prior periods was attributable to a
December seasonal trend and the maturation of the managed portfolio, which was
$1.5 billion at December 31, 1999, $1.3 billion at September 30, 1999 and $1.2
billion at June 30, 1999. Delinquent loans and leases in the available for sale
portfolio (which are included in total delinquencies) at December 31, 1999 were
$1.0 million, or 2.8%. In addition, at December 31, 1999, $1.2 million, or 3.4%
of portfolio loans were on non-accrual status. See "Risk Factors" in our Form
10-K for further discussion of risks associated with potential increases in
delinquencies.
Published statistics gathered from a national sample of sub-prime
mortgage companies by the Mortgage Information Corporation, have shown that
delinquency rates averaged 14.39% as of September 1999, as compared to our
current mortgage delinquency rate of 3.47% and September 30, 1999 delinquency
rate of 3.53%. Even when calculating our delinquency rates on a twelve-month
trailing basis, our delinquency rates were 6.1% at December 31, 1999, 6.2% at
September 30, 1999, and 6.7% at June 30, 1999. We believe that our delinquency
rate is in part the result of our centralized credit underwriting structure,
adherence to written underwriting standards and emphasis on collections. Our
collections processes are based on early identification of loans and leases that
have become credit problems, followed by an evaluation and implementation of
appropriate action to work out these loans and leases.
Real estate owned- Total real estate owned ("REO"), comprising
foreclosed properties and deeds acquired in lieu of foreclosure, increased to
$13.4 million, or 0.90% of the total managed portfolio at December 31, 1999
compared to $12.3 million or 0.92% and $9.9 million or 0.85%, respectively, at
September 30, 1999 and June 30, 1999. The increase in the volume of 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 utilized 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. The
decrease in REO as a percentage of the managed portfolio reflects the
effectiveness of these initiatives.
Included in total REO at December 31, 1999 was $0.5 million recorded in
our financial statements, and $12.9 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.
Loss experience- During the second quarter of fiscal 2000, we
experienced net loan and lease charge-offs in our total managed portfolio of
$1.6 million, including net lease charge-offs of $893 thousand. The second
quarter lease charge-offs reflected the deterioration in the performance of the
on-balance sheet lease portfolio during the quarter. The $0.6 million provision
for credit losses recorded in the second quarter of fiscal 2000 included $583
thousand for these lease charge-offs. Specific reserves for the remaining lease
charge-offs were established in previous periods.
On an annualized basis, net loan charge-offs for the second quarter of
fiscal 2000 represent 0.22% of the total managed portfolio. Loss severity
experience on delinquent loans generally has ranged from 5% to 10% of principal
and loss severity experience on REO generally has ranged from 20% to 25% of
principal. The business purpose and home equity loans we originate have an
average loan-to-value ratio of 61.0% 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.
26
<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 cumulative net loss experience by loan
securitization trust. Net losses (net recoveries)
<TABLE>
<CAPTION>
Cumulative Losses Original Pool Balance
(in thousands) (in millions)
----------------------------------------- ---------------------------------------
Business Home Business Home
Trust Purpose Equity Combined Purpose Equity Combined
- ---------- ------------- --------- -------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1996-1 $ 40 $ - $ 40 $ 13 $ 9 $ 22
1996-2 219 88 307 16 24 40
1997-1 48 298 346 22 53 75
1997-2 (8) 274 266 23 77 100
1998-1 139 348 487 16 89 105
1998-2 - 317 317 15 105 120
1998-3 - 49 49 17 183 200
1998-4 (34) 218 184 9 71 80
1999-1 41 - 41 16 169 185
1999-2 - (7) (7) 30 190 220
1999-3 - 1 1 28 194 222
------- ---------- ------------ -------- --------- ---------
$ 445 $ 1,586 $ 2,031 $ 205 $ 1,164 $ 1,369
========================================================================================================
<CAPTION>
Cumulative Loss Percentage
--------------------------------------------------
Business Home Combined
Trust Purpose Equity Combined Annualized
- ---------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C>
1996-1 0.31% -% 0.18% 0.05%
1996-2 1.36 0.37 0.77 0.26
1997-1 0.22 0.56 0.46 0.17
1997-2 (0.04) 0.36 0.27 0.11
1998-1 0.90 0.39 0.46 0.25
1998-2 - 0.30 0.26 0.17
1998-3 - 0.03 0.02 0.02
1998-4 (0.39) 0.31 0.23 0.20
1999-1 0.25 - 0.02 0.03
1999-2 - - - (0.01)
1999-3 - - - -
=================================================================
</TABLE>
Weighted average cumulative loss percentages for all securitization trusts:
Business Purpose 0.22%
Home Equity 0.14%
Combined 0.15%
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.)
27
<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. 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 may be 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 three month and six month periods ended December 31,
1999, respectively, cash gains of $0.2 million and $0.4 million were incurred on
hedging transactions (futures contracts), and were recognized as a component of
the gain on sale recorded on securitizations during the period. As of the end of
the period, there were no open hedge contracts, however, we were obligated to
satisfy a loan securitization prefund requirement of $5.7 million of mortgage
loans. This prefund requirement is expected to be satisfied in the third
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 may use hedging 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 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
affected by any changes in rates paid on the floating rate certificates. At
December 31, 1999, $103.9 million of debt issued by loan securitization trusts
was floating rate debt based on LIBOR, representing 8.3% of total debt issued by
loan securitization trusts. From September 30, 1999 to December 31, 1999
increases in one-month LIBOR resulted in a decrease in the fair value of our
interest-only and residual strips of $1.2 million. Decreases for the six months
ended December 31, 1999 were $2.8 million.
28
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In accordance with generally accepted accounting principles, the decreases in
fair value were recognized as part of net adjustments 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 $6.0 million
and the fair value of servicing rights by approximately $1.4 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 95% 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 December 31, 1999 approximately $116.3 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 December 31, 1999, a total of $266.1 million of subordinated debt
was outstanding, and credit facilities totaling $345.7 million were available,
of which $101.4 million was drawn upon.
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 significant portion 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 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 and business loan markets
and the ability to raise capital through sales of subordinated debt securities
pursuant to a registered public offering.
29
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 second quarter of fiscal
2000, we sold $25.9 million in principal amount of subordinated debt securities,
net of redemptions, with maturities ranging between one day and ten years. As of
December 31, 1999, $266.1 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, of which $267.2 million was available for future issuance at December 31,
1999. The proceeds from sales of subordinated debt securities will be used to
fund general operating and lending activities. We intend to meet our obligation
to repay such debt as it matures with income from operations, including
securitization or sale of loans or leases, working capital and cash generated
from additional debt financing. The utilization of funds for the repayment of
such obligations should not adversely affect operations.
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 December 31,
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>
Warehouse revolving line of credit, expiring August 2000 $ 150,000 $ 14,097
Warehouse revolving line of credit, expiring October 2000 150,000 63,425
Warehouse revolving line of credit, expiring January 2000 20,000 4,662
---------- ---------
Total warehouse facilities 320,000 82,184
--------- ---------
Revolving line of credit, expiring December 2000 5,000 5,000
Repurchase agreement 4,677 4,677
Commercial paper conduit for lease production,
expiring March 31, 2000 (off-balance sheet) 16,000 9,491
--------- ---------
Total credit facilities $ 345,677 $ 101,352
========= =========
</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 December 31, 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 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 production activities or sell loans rather than securitize
them, which would have a material adverse effect on our results of operations
and financial condition.
30
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 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
Prior to December 31, 1999 the Company had performed certain activities
to ensure our information technology systems and those of our significant
vendors were Y2K compliant. Since January 1, 2000 there have been no disruptions
to our operations due to Y2K related events.
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.
31
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Meeting") was held
on November 30, 1999. The following is a description of the matters submitted to
stockholders for their approval at the Meeting and the votes cast with respect
thereto:
Votes Cast
Broker
Proposal For Withheld Non-Votes
-------- --- -------- ---------
Election of Director:
Leonard Becker (three year term) 3,476,579 16,577 -0-
Approval of the 1999 Stock Option Plan 2,076,236 197,821 1,219,099
Item 5. Other Information - None
32
<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 12/99 Amendment dated effective as of December 30, 1999, to $5,000,000
Loan Agreement dated as of December 30, 1998, between American
Business Credit, Inc., HomeAmerican Credit, Inc., and New Jersey
Mortgage and Investment Corp., as co-borrowers, and Chase Bank of
Texas, National Association as lender.
10.2 American Business Financial Services Inc. 1999 Stock Option Plan
10.3 Amendment No. 3 to Receivables Purchase Agreement, dated as of October
13, 1999 among American Business Lease Funding Corporation, American
Business Leasing, Inc. and a syndicate of financial institutions led
by First Union Securities, Inc. as Deal Agent.
10.4 Amendment No. 4, dated as of November 12, 1999, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
10.5 Amendment No. 5, dated as of November 29, 1999, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
10.6 Amendment No. 6, dated as of December 14, 1999, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
10.7 Seventh Amendment, dated as of December 31, 1999, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
10.8 Eighth Amendment, dated as of January 10, 2000, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
33
<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: February 14, 2000 BY: /s/ Albert W. Mandia
----------------- --------------------------------------
Albert W. Mandia
Executive Vice President and
Chief Financial Officer
34
<PAGE>
American Business Financial Service, Inc. and Subsidiaries
Exhibit Index
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 12/99 Amendment dated effective as of December 30, 1999, to $5,000,000
Loan Agreement dated as of December 30, 1998, between American
Business Credit, Inc., HomeAmerican Credit, Inc., and New Jersey
Mortgage and Investment Corp., as co-borrower and Chase Bank of Texas,
National Association as lender.
10.2 American Business Financial Services Inc. 1999 Stock Option Plan
10.3 Amendment No. 3 to Receivables Purchase Agreement, dated as of October
13, 1999 among American Business Lease Funding Corporation, American
Business Leasing, Inc. and a syndicate of financial institutions led
by First Union Securities, Inc. as Deal Agent.
10.4 Amendment No. 4, dated as of November 12, 1999, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
10.5 Amendment No. 5, dated as of November 29, 1999, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
10.6 Amendment No. 6, dated as of December 14, 1999, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
10.7 Seventh Amendment, dated as of December 31, 1999, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
10.8 Eighth Amendment, dated as of January 10, 2000, to the Receivables
Purchase Agreement, dated as of September 30, 1998, among American
Business Lease Funding Corporation, American Business Leasing, Inc.
and a syndicate of financial institutions led by First Union
Securities, Inc. as Deal Agent.
27 Financial Data Schedule
<PAGE>
12/99 AMENDMENT
THIS 12/99 AMENDMENT (this "12/99 Amendment") is dated effective as of
December 30, 1999 (the "12/99 Amendment Date"). The parties hereto are AMERICAN
BUSINESS CREDIT, INC., a Pennsylvania corporation, HOMEAMERICAN CREDIT, INC., a
Pennsylvania corporation d/b/a Upland Mortgage, and NEW JERSEY MORTGAGE &
INVESTMENT CORP., a New Jersey corporation (collectively, the "Borrowers"), and
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association
("Lender").
RECITALS:
Borrowers executed and delivered to Lender a promissory note dated
December 30, 1998 (which, as it may have been renewed, extended or rearranged,
is herein called the "Note"), in the original principal sum of $5,000,000
bearing interest on the unpaid balance thereof at the rate or rates therein
stated, with a final stated maturity thereof of December 30, 1999.
The Note was issued pursuant to that certain Loan Agreement dated
December 30, 1998 (which, as it may have been amended, supplemented or restated,
is herein called the "Loan Agreement") between Borrowers and Lender. Lender is
entitled to the benefits of the Loan Agreement and the security provided for in
it including, among other security, a Security Agreement -- Class R Certificate
(the "Security Agreement") dated December 30, 1998 from ABFS 1998-2, Inc. ("ABFS
1998-2") in favor of Lender, to which instrument reference is here made for
description of the collateral for the Note and for all other purposes. The
liens, security interests and assignments of the Security Agreement, and of all
other documents and instruments now or hereafter governing, evidencing,
guaranteeing or securing or otherwise relating to payment of all or any part of
the indebtedness evidenced by the Note (collectively, the "Credit Papers") are
hereinafter collectively called the "Liens".
Borrowers and Lender now agree to renew and extend the final stated
maturity of the Note, to amend the Loan Agreement and to ratify the Liens and
confirm that they continue to secure the Note, as modified hereby, all as set
forth in the succeeding provisions of this 12/99 Amendment (which shall control
over any conflicting or inconsistent recitals above).
AGREEMENTS:
In consideration of the premises and the mutual agreements herein set
forth, Borrowers and Lender hereby agree as follows:
1. Loan Agreement Amended. The following definitions are amended in their
entirety to henceforth read as follows:
(a) "Maturity Date" means the maturity date of the Note, December 28,
2000, as such date may be accelerated pursuant to any of the Credit Papers.
<PAGE>
(b) "Maximum Loan Available Amount" means, on any day, an amount equal
to the lesser of (i) the Commitment for that day or (ii) (A) from the period
beginning on the 12/99 Amendment Effective Date through January 30, 2000, fifty
percent (50%) of the Class R Certificate's Value on that day and (B) beginning
on January 31, 2000, twenty-five percent (25%) of the Class R Certificate's
Value.
2. Payment Schedule. Principal of and accrued interest on the Note shall be due
and payable as provided in Sections 2.2 and 2.3 of the Loan Agreement.
3. Guarantor Consents. Guarantor hereby joins in this 12/99 Amendment to
evidence Guarantor's consent to execution by Borrowers of this 12/99 Amendment,
to confirm that the Guaranty applies and shall continue to apply to the Note, as
modified by this 12/99 Amendment and to acknowledge that without such consent
and confirmation, Lender would not execute this 12/99 Amendment or otherwise
consent to such modification.
4. ABFS 1998-2 Consents. ABFS 1998-2 hereby joins in this 12/99 Amendment to
evidence ABFS 1998-2's consent to execution by Borrowers of this 12/99
Amendment, to ratify and confirm that the Liens created by the Security
Agreement secure and shall continue to secure the Note, as modified by this
12/99 Amendment and to acknowledge that without such consent and confirmation,
Lender would not execute this 12/99 Amendment or otherwise consent to such
extension.
5. Lien Continuation; Miscellaneous. The Liens are hereby ratified and confirmed
as continuing to secure the payment of the Note, as modified hereby. Nothing
herein shall in any manner diminish, impair or extinguish the Note, any of the
other Credit Papers or the Liens. The Liens are not waived. To the extent of any
conflict between the Note or any of the other Credit Papers (or any earlier
modification of any of them) and this 12/99 Amendment, this 12/99 Amendment
shall control. Except as hereby expressly modified, all terms of the Note and
the other Credit Papers (as any of them may have been previously modified by any
written agreement) remain in full force and effect. If more than one person or
entity execute this 12/99 Amendment as "Borrowers", each shall be jointly and
severally liable for the obligations of Borrowers hereunder. This 12/99
Amendment (a) shall bind and benefit Borrowers, Guarantor and, except as herein
expressly limited, Lender and their respective heirs, beneficiaries,
administrators, executors, receivers, trustees, successors and assigns
(provided, that Borrowers shall not assign their rights hereunder without the
prior written consent of Lender); (b) may be modified or amended only by a
writing signed by each party; (c) SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES
OF AMERICA FROM TIME TO TIME IN EFFECT; (d) may be executed in several
counterparts, and by the parties hereto in separate counterparts, and each
counterpart, when executed and delivered, shall constitute an original agreement
enforceable against all who signed it without production of or accounting for
any other counterpart, and all separate counterparts shall constitute the same
agreement and (e) embodies the entire agreement and understanding between the
parties with respect to modifications of instruments provided for herein and
supersedes all prior conflicting or inconsistent agreements, consents and
2
<PAGE>
understandings relating to such subject matter. Borrowers acknowledge and agree
that there are no oral agreements between Borrowers and Lender which have not
been incorporated in this 12/99 Amendment. If any provision of this 12/99
Amendment should be determined by any court of competent jurisdiction to be
illegal, invalid or unenforceable under present or future laws, the legality,
validity and enforceability of the remaining provisions of this 12/99 Amendment
shall not be affected thereby. Each waiver in this 12/99 Amendment is subject to
the overriding and controlling rule that it shall be effective only if and to
the extent that (a) it is not prohibited by applicable law and (b) applicable
law neither provides for nor allows any material sanctions to be imposed against
Lender for having bargained for and obtained it. Wherever the term "including"
or a similar term is used in this 12/99 Amendment, it shall be read as if it
were "including by way of example only and without in any way limiting the
generality of the clause or concept referred to." Any exhibits, appendices and
annexes described in this 12/99 Amendment as being attached to it are hereby
incorporated into it. The headings in this 12/99 Amendment shall be accorded no
significance in interpreting it. To the maximum extent permitted by applicable
law, Borrowers, ABFS 1998-2 and Guarantor each hereby releases, discharges and
acquits forever Lender and its officers, directors, trustees, agents, employees
and counsel (in each case, past, present and future) from any and all Claims
existing as of the date hereof (or the date of actual execution hereof by the
applicable person or entity, if later). As used herein, the term "Claim" shall
mean any and all liabilities, claims, defenses, demands, actions, causes of
action, judgments, deficiencies, interest, liens, costs or expenses (including
but not limited to court costs, penalties, attorneys' fees and disbursements,
and amounts paid in settlement) of any kind and character whatsoever, including
but not limited to claims for usury, breach of contract, breach of commitment,
negligent misrepresentation or failure to act in good faith, in each case
whether now known or unknown, suspected or unsuspected, asserted or unasserted
or primary or contingent, and whether arising out of written documents,
unwritten undertakings, course of conduct, tort, violations of laws or
regulations or otherwise.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE ss. 26.02
THIS 12/99 AMENDMENT AND ALL OTHER CREDIT PAPERS EXECUTED BY ANY OF THE
PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION
HEREOF, INCLUDING THE GUARANTY AND SUBORDINATION AGREEMENT, TOGETHER
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
3
<PAGE>
EXECUTED effective as of the 12/99 Amendment Date.
BORROWERS: AMERICAN BUSINESS CREDIT, INC.
By: ____________________________________
Name:___________________________________
Title:__________________________________
HOMEAMERICAN CREDIT, INC.
d/b/a Upland Mortgage
By: ____________________________________
Name:___________________________________
Title:__________________________________
NEW JERSEY MORTGAGE & INVESTMENT CORP.
By: ____________________________________
Name:___________________________________
Title:__________________________________
GUARANTOR: AMERICAN BUSINESS FINANCIAL SERVICES, INC.
By: ____________________________________
Name:___________________________________
Title:__________________________________
ABFS 1998-2: ABFS 1998-2, INC.
By: ____________________________________
Name:___________________________________
Title:__________________________________
4
<PAGE>
LENDER: CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
By: ____________________________________
Name:___________________________________
Title:__________________________________
5
<PAGE>
APPENDIX A
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
1999 STOCK OPTION PLAN
1. Purpose of Plan
The purpose of this 1999 Stock Option Plan (the "Plan") is to
provide additional incentive to officers, other key employees, and directors of,
and important consultants to, American Business Financial Services, Inc., a
Delaware corporation (the "Company"), and each present or future parent or
subsidiary corporation of the Company, by encouraging them to invest in shares
of the Company's common stock, $0.001 par value per share ("Common Stock"), and
thereby acquire a proprietary interest in the Company and an increased personal
interest in the Company's continued success and progress.
2. Aggregate Number of Shares
500,000 shares of the Company's Common Stock shall be the
aggregate number of shares which may be issued under this Plan. Notwithstanding
the foregoing, in the event of any change in the outstanding shares of the
Common Stock of the Company by reason of a stock dividend, stock split,
combination of shares, recapitalization, merger, consolidation, transfer of
assets, reorganization, conversion or what the Committee (defined in Section
4(a)), deems in its sole discretion to be similar circumstances, the aggregate
number and kind of shares which may be issued under this Plan shall be
appropriately adjusted in a manner determined in the sole discretion of the
Committee. Reacquired shares of the Company's Common Stock, as well as unissued
shares, may be used for the purpose of this Plan. Common Stock of the Company
subject to options which have terminated unexercised, either in whole or in
part, shall be available for future options granted under this Plan.
3. Class of Persons Eligible to Receive Options
All officers and key employees of the Company and of any
present or future Company parent or subsidiary corporation are eligible to
receive an option or options under this Plan. All directors of, and important
consultants to, the Company and of any present or future Company parent or
subsidiary corporation are also eligible to receive an option or options under
this Plan. The individuals who shall, in fact, receive an option or options
shall be selected by the Committee, in its sole discretion, except as otherwise
specified in Section 4 hereof. No individual may receive options under this Plan
for more than 90% of the total number of shares of the Company's Common Stock
authorized for issuance under this Plan.
A-1
<PAGE>
4. Administration of Plan
1. This Plan shall be administered either by the Company's
Board of Directors or a Compensation Committee appointed by the Company's Board
of Directors. The Compensation Committee shall consist of a minimum of two and a
maximum of five members of the Board of Directors, each of whom shall be a
"Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the
Securities Exchange Act of 1934, as amended, or any future corresponding rule,
except that the failure of the Compensation Committee for any reason to be
composed solely of Non-Employee Directors shall not prevent an option from being
considered granted under this Plan. The term "Committee," as used herein, shall
refer to either the Company's Board of Directors or such Compensation Committee,
depending upon who is administering the Plan. The Committee shall, in addition
to its other authority and subject to the provisions of this Plan, determine
which individuals shall in fact be granted an option or options, whether the
option shall be an Incentive Stock Option or a Non-Qualified Stock Option (as
such terms are defined in Section 5(a)), the number of shares to be subject to
each of the options, the time or times at which the options shall be granted,
the rate of option exercisability, and, subject to Section 5 hereof, the price
at which each of the options is exercisable and the duration of the option.
2. The Committee shall adopt such rules for the conduct of its
business and administration of this Plan as it considers desirable. A majority
of the members of the Committee shall constitute a quorum for all purposes. The
vote or written consent of a majority of the members of the Committee on a
particular matter shall constitute the act of the Committee on such matter. The
Committee shall have the right to construe the Plan and the options issued
pursuant to it, to correct defects and omissions and to reconcile
inconsistencies to the extent necessary to effectuate the Plan and the options
issued pursuant to it, and such action shall be final, binding and conclusive
upon all parties concerned. No member of the Committee or the Board of Directors
shall be liable for any act or omission (whether or not negligent) taken or
omitted in good faith, or for the exercise of an authority or discretion granted
in connection with the Plan to a Committee or the Board of Directors, or for the
acts or omissions of any other members of a Committee or the Board of Directors.
Subject to the numerical limitations on Committee membership set forth in
Section 4(a) hereof, the Board of Directors may at any time appoint additional
members of the Committee and may at any time remove any member of the Committee
with or without cause. Vacancies in the Committee, however caused, may be filled
by the Board of Directors, if it so desires.
5. Incentive Stock Options and Non-Qualified Stock Options
1. Options issued pursuant to this Plan may be either
Incentive Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified
Stock Options granted pursuant to Section 5(c) hereof, as determined by the
Committee. An "Incentive Stock Option" is an option which satisfies all of the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") and the regulations thereunder, and a "Non-Qualified Stock Option"
is an option which either does not satisfy all of those requirements or the
terms of the option provide that it
A-2
<PAGE>
will not be treated as an Incentive Stock Option. The Committee may grant both
an Incentive Stock Option and a Non-Qualified Stock Option to the same person,
or more than one of each type of option to the same person. The option price for
options issued under this Plan shall be equal at least to the fair market value
(as defined below) of the Company's Common Stock on the date of the grant of the
option. The fair market value of the Company's Common Stock on any particular
date shall mean the last reported sale price of a share of the Company's Common
Stock on any stock exchange on which such stock is then listed or admitted to
trading, or on the NASDAQ Stock Market, on such date, or if no sale took place
on such day, the last such date on which a sale took place, or if the Common
Stock is not then quoted on the NASDAQ Stock Market, or listed or admitted to
trading on any stock exchange, the average of the bid and asked prices in the
over-the-counter market on such date, or if none of the foregoing, a price
determined in good faith by the Committee to equal the fair market value per
share of the Common Stock.
2. Subject to the authority of the Committee set forth in
Section 4(a) hereof, Incentive Stock Options issued pursuant to this Plan shall
be issued substantially in the form set forth in Appendix I hereof, which form
is hereby incorporated by reference and made a part hereof, and shall contain
substantially the terms and conditions set forth therein. Incentive Stock
Options shall not be exercisable after the expiration of ten years from the date
such options are granted, unless terminated earlier under the terms of the
option, except that options granted to individuals described in Section
422(b)(6) of the Code shall conform to the provisions of Section 422(c)(5) of
the Code. At the time of the grant of an Incentive Stock Option hereunder, the
Committee may, in its discretion, amend or supplement any of the option terms
contained in Appendix I for any particular optionee, provided that the option as
amended or supplemented satisfies the requirements of Section 422 of the Code
and the regulations thereunder. Each of the options granted pursuant to this
Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that
term is defined in Section 422 of the Code and the regulations thereunder. In
the event this Plan or any option granted pursuant to this Section 5(b) is in
any way inconsistent with the applicable legal requirements of the Code or the
regulations thereunder for an Incentive Stock Option, this Plan and such option
shall be deemed automatically amended as of the date hereof to conform to such
legal requirements, if such conformity may be achieved by amendment. If such
conformity may not be achieved by amendment, such option shall be deemed to be a
Non-Qualified Stock Option.
3. Subject to the authority of the Committee set forth in
Section 4(a) hereof, Non-Qualified Stock Options issued to officers and other
key employees pursuant to this Plan shall be issued substantially in the form
set forth in Appendix II hereof, which form is hereby incorporated by reference
and made a part hereof, and shall contain substantially the terms and conditions
set forth therein. Subject to the authority of the Committee set forth in
Section 4(a) hereof, Non-Qualified Stock Options issued to directors and
important consultants pursuant to this Plan shall be issued substantially in the
form set forth in Appendix III hereof, which form is hereby incorporated by
reference and made a part hereof, and shall contain substantially the terms and
conditions set forth therein. Non-Qualified Stock Options shall expire ten years
after the date they are granted, unless terminated earlier under the option
terms. At the time of granting a Non-Qualified Stock Option hereunder, the
Committee may, in its discretion, amend or supplement any of the option terms
contained in Appendix II or Appendix III for any particular optionee.
A-3
<PAGE>
4. Neither the Company nor any of its current or future
parent, subsidiaries or affiliates, nor their officers, directors, shareholders,
stock option plan committees, employees or agents shall have any liability to
any optionee in the event (i) an option granted pursuant to Section 5(b) hereof
does not qualify as an "Incentive Stock Option" as that term is used in Section
422 of the Code and the regulations thereunder; (ii) any optionee does not
obtain the tax treatment pertaining to an Incentive Stock Option; or (iii) any
option granted pursuant to Section 5(c) hereof is an "Incentive Stock Option."
5. Except as otherwise provided in Section 422 of the Code and
regulations thereunder or any successor provision, no Incentive Stock Option
granted pursuant to this Plan shall be transferable other than by will or the
laws of descent and distribution. Except as otherwise provided by the Rules and
Regulations of the Securities and Exchange Commission, the Committee at the time
of grant of a Non-Qualified Stock Option may provide that such stock option is
transferrable to any "family member" of the optionee by gift or qualified
domestic relations order. For purposes of this section, a family member includes
any child, stepchild, grandchild, parent, step-parent, grandparent, spouse,
former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including adoptive
relationships, any person sharing the grantee's household (other than a tenant
or employee), a trust in which these persons have more than 50% of the
beneficial interest, a foundation in which these persons (or the grantee)
controls the management of assets, and any other entity in which these persons
or the grantee own more than 50% of the voting interests.
6. Amendment, Supplement, Suspension and Termination
Options shall not be granted pursuant to this Plan after the
expiration of ten years from the date the Plan is adopted by the Board of
Directors of the Company. The Board of Directors reserves the right at any time,
and from time to time, to amend or supplement this Plan, including the forms of
option agreement attached hereto, in any way, or to suspend or terminate it,
effective as of such date, which date may be either before or after the taking
of such action, as may be specified by the Board of Directors; provided,
however, that such action shall not affect options granted under the Plan prior
to the actual date on which such action occurred. If an amendment or supplement
of this Plan is required by the Code or the regulations thereunder to be
approved by the shareholders of the Company in order to permit the granting of
"Incentive Stock Options" (as that term is defined in Section 422 of the Code
and regulations thereunder) pursuant to the amended or supplemented Plan, such
amendment or supplement shall also be approved by the shareholders of the
Company in such manner as is prescribed by the Code and the regulations
thereunder. If the Board of Directors voluntarily submits a proposed amendment,
supplement, suspension or termination for shareholder approval, such submission
shall not require any future amendments, supplements, suspensions or
terminations (whether or not relating to the same provision or subject matter)
to be similarly submitted for shareholder approval.
A-4
<PAGE>
7. Effectiveness of Plan
This Plan shall become effective on the date of its adoption
by the Company's Board of Directors, subject however to approval by the holders
of the Company's Common Stock in the manner as prescribed in the Code and the
regulations thereunder. Options may be granted under this Plan prior to
obtaining shareholder approval, provided such options shall not be exercisable
until shareholder approval is obtained.
8. General Conditions
1. Nothing contained in this Plan or any option granted
pursuant to this Plan shall confer upon any employee the right to continue in
the employ of the Company or any affiliated or subsidiary corporation or
interfere in any way with the rights of the Company or any affiliated or
subsidiary corporation to terminate his employment in any way.
2. Nothing contained in this Plan or any option granted
pursuant to this Plan shall confer upon any director or consultant the right to
continue as a director of, or consultant to, the Company or any affiliated or
subsidiary corporation or interfere in any way with the rights of the Company or
any affiliated or subsidiary corporation, or their respective shareholders, to
terminate the directorship of any such director or the consultancy relationship
of any such consultant.
3. Corporate action constituting an offer of stock for sale to
any person under the terms of the options to be granted hereunder shall be
deemed complete as of the date when the Committee authorizes the grant of the
option to the such person, regardless of when the option is actually delivered
to such person or acknowledged or agreed to by him.
4. The terms "parent corporation" and "subsidiary corporation"
as used throughout this Plan, and the options granted pursuant to this Plan,
shall (except as otherwise provided in the option form) have the meaning that is
ascribed to that term when contained in Section 422(b) of the Code and the
regulations thereunder, and the Company shall be deemed to be the grantor
corporation for purposes of applying such meaning.
5. References in this Plan to the Code shall be deemed to also
refer to the corresponding provisions of any future United States revenue law.
6. The use of the masculine pronoun shall include the feminine
gender whenever appropriate.
A-5
<PAGE>
APPENDIX I
INCENTIVE STOCK OPTION
To: _____________________________________________________________________
Name
_____________________________________________________________________
Address
Date of Grant: _______________________________________________________________
You are hereby granted an option, effective as of the date hereof, to
purchase __________ shares of common stock, $0.001 par value per share ("Common
Stock"), of American Business Financial Services, Inc., a Delaware corporation
(the "Company"), at a price of $____________ per share pursuant to the Company's
1999 Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date
of grant, but not before that time. On and after one year and prior to
__________ years from the date of grant, your option may be exercised for up to
_____% of the total number of shares subject to the option minus the number of
shares previously purchased by exercise of the option (as adjusted as the
Committee in its sole discretion determines for any change in the outstanding
shares of the Common Stock of the Company by reason of a stock dividend, stock
split, combination of shares, recapitalization, merger, consolidation, transfer
of assets, reorganization, conversion or what the Committee deems in its sole
discretion to be similar circumstances). Each succeeding year thereafter, your
option may be exercised for up to an additional _____% of the total number of
shares subject to the option minus the number of shares previously purchased by
exercise of the option (as adjusted for any change in the outstanding shares of
the Common Stock of the Company by reason of a stock dividend, stock split,
combination of shares, recapitalization, merger, consolidation, transfer of
assets, reorganization, conversion or what the Committee deems in its sole
discretion to be similar circumstances). Thus, this option is fully exercisable
on and after _____ years after the date of grant, except if terminated earlier
as provided herein. This option shall terminate and is not exercisable after ten
years from the date of its grant (the "Scheduled Termination Date"), except if
terminated earlier as hereafter provided.
I-1
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In the event of a "Change of Control" (as defined below) of the
Company, your option may, from and after the date of the Change of Control, and
notwithstanding the immediately preceding paragraph, be exercised for up to 100%
of the total number of shares then subject to the option minus the number of
shares previously purchased upon exercise of the option (as adjusted for stock
dividends, stock splits, combinations of shares and what the Committee deems in
its sole discretion) and your vesting date may accelerate accordingly. A "Change
of Control" shall be deemed to have occurred upon the happening of any of the
following events:
1. A change within a twelve-month period in the holders of more than
50% of the outstanding voting stock of the Company; or
2. Any other event deemed to constitute a "Change of Control" by the
Committee.
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check and includes cash
received from a stock brokerage firm in a so-called "cashless exercise"; (b)
(unless prohibited by the Committee) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Committee) any combination of cash and Common Stock of
the Company valued as provided in clause (b). The use of the so-called
"attestation procedure" to exercise a stock option may be permitted by the
Committee. Any assignment of stock shall be in a form and substance satisfactory
to the Secretary of the Company, including guarantees of signature(s) and
payment of all transfer taxes if the Secretary deems such guarantees necessary
or desirable.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which your employment by the Company or
a Company subsidiary corporation is terminated (whether such termination be
voluntary or involuntary) other than by reason of disability as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the regulations thereunder, or death (but in no event later than the
Scheduled Termination Date). After the date your employment is terminated, as
aforesaid, you may exercise this option only for the number of shares which you
had a right to purchase and did not purchase on the date your employment
terminated. If you are employed by a Company subsidiary corporation, your
employment shall be deemed to have terminated on the date your employer ceases
to be a Company subsidiary corporation, unless you are on that date transferred
to the Company or another Company subsidiary corporation. Your employment shall
not be deemed to have terminated if you are transferred from the Company to a
Company subsidiary corporation, or vice versa, or from one Company subsidiary
corporation to another Company subsidiary corporation.
I-2
<PAGE>
If you die while employed by the Company or a Company subsidiary
corporation, your executor or administrator, as the case may be, may, at any
time within one year after the date of your death (but in no event later than
the Scheduled Termination Date), exercise the option as to any shares which you
had a right to purchase and did not purchase during your lifetime. If your
employment with the Company or a Company parent or subsidiary corporation is
terminated by reason of your becoming disabled (within the meaning of Section
22(e)(3) of the Code and the regulations thereunder), you or your legal guardian
or custodian may at any time within one year after the date of such termination
(but in no event later than the Scheduled Termination Date), exercise the option
as to any shares which you had a right to purchase and did not purchase prior to
such termination. Your executor, administrator, guardian or custodian must
present proof of his authority satisfactory to the Company prior to being
allowed to exercise this option.
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee deems in its sole discretion to
be similar circumstances, the number and kind of shares subject to this option
and the option price of such shares shall be appropriately adjusted in a manner
to be determined in the sole discretion of the Committee.
Notwithstanding anything to the contrary contained in this option, in
the event of a sale or a proposed sale of the majority of the stock or assets of
the Company or a proposed Change of Control, the Committee shall have the right
to terminate this option upon thirty (30) days prior written notice to you,
subject to your right to exercise such option to the extent vested prior to such
termination.
This option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of the Company. The Company reserves the
right not to deliver to you the shares purchased by virtue of the exercise of
this option during any period of time in which the Company deems, in its sole
discretion, that such delivery would violate a federal, state, local or
securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this option
is not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is approved
by the shareholders of the Company in the manner prescribed by the Code and the
regulations thereunder;
(b) Until this option and the optioned shares are approved and/or
registered with such federal, state and local regulatory bodies or agencies and
securities exchanges as the Company may deem necessary or desirable; or
(c) During any period of time in which the Company deems that the
exercisability of this option, the offer to sell the shares optioned hereunder,
or the sale thereof, may violate a federal, state, local or securities exchange
rule, regulation or law, or may cause the Company to be legally obligated to
issue or sell more shares than the Company is legally entitled to issue or sell.
I-3
<PAGE>
(d) Until you have paid or made suitable arrangements to pay (which may
include payment through the surrender of Common Stock, unless prohibited by the
Committee) (i) all federal, state and local income tax withholding required to
be withheld by the Company in connection with the option exercise, and (ii) your
portion of other federal, state and local payroll and other taxes due in
connection with the option exercise.
The following two paragraphs shall be applicable if, on the date of
exercise of this option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that he will
acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgments and agreements as the
Company may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the optionee
hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
I-4
<PAGE>
It is the intention of the Company and you that this option shall, if
possible, be an "Incentive Stock Option" as that term is used in Section 422 of
the Code and the regulations thereunder. In the event this option is in any way
inconsistent with the legal requirements of the Code or the regulations
thereunder for an "Incentive Stock Option," this option shall be deemed
automatically amended as of the date hereof to conform to such legal
requirements, if such conformity may be achieved by amendment. If such
conformity may not be achieved by amendment, such option shall be deemed to be a
Non-Qualified Stock Option.
Nothing herein shall modify your status as an at-will employee of the
Company. Further, nothing herein guarantees you employment for any specified
period of time. This means that either you or the Company may terminate your
employment at any time for any reason, or no reason. You recognize that, for
instance, you may terminate your employment or the Company may terminate your
employment prior to the date on which your option becomes vested.
Any dispute or disagreement between you and the Company with respect to
any portion of this option or its validity, construction, meaning, performance
or your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with the
Company over this option amicably and informally, in good faith, for a period
not to exceed two weeks. Thereafter, the dispute or disagreement will be
submitted to arbitration. At any time prior to a decision from the arbitrator(s)
being rendered, you and the Company may resolve the dispute by settlement. You
and the Company shall equally share the costs charged by the American
Arbitration Association or its successor, but you and the Company shall
otherwise be solely responsible for your own respective counsel fees and
expenses. The decision of the arbitrator(s) shall be made in writing, setting
forth the award, the reasons for the decision and award and shall be binding and
conclusive on you and the Company. Further, neither you nor the Company shall
appeal any such award. Judgment of a court of competent jurisdiction may be
entered upon the award and may be enforced as such in accordance with the
provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of Delaware.
In consideration of the grant to you of this option, you hereby agree
to the confidentiality and non-interference provisions set forth in Attachment A
hereto.
I-5
<PAGE>
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions, including Attachment A hereto.
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
By:__________________________________
I hereby acknowledge receipt of a copy of the foregoing stock option
and the 1999 Stock Option Plan and, having read them hereby signify my
understanding of, and my agreement with, its terms and conditions including
Attachment A hereto. I accept this option in full satisfaction of any previous
written or verbal promises made to me by the Company with respect to option
grants [except for options granted to me pursuant to agreements dated
___________].
______________________________________
(Date) (Signature)
I-6
<PAGE>
Attachment A to Stock Option
Confidentiality and Non-Interference.
(a) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, during your employment with the Company or
at any time thereafter, except with the express prior written consent of the
Company or pursuant to the lawful order of any judicial or administrative agency
of government, directly or indirectly, disclose, communicate or divulge to any
individual or entity, or use for the benefit of any individual or entity, any
knowledge or information with respect to the conduct or details of the Company's
business which you, acting reasonably, believe or should believe to be of a
confidential nature and the disclosure of which not to be in the Company's
interest.
(b) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, during your employment with the Company and
for a period of two years thereafter, except with the express prior written
consent of the Company, directly or indirectly, whether as employee, owner,
partner, consultant, agent, director, officer, shareholder or in any other
capacity, engage in or assist any individual or entity to engage in any act or
action which you, acting reasonably, believe or should believe would be harmful
or inimical to the interests of the Company.
(c) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, for a period of two years after your
employment with the Company ceases for any reason whatsoever (whether voluntary
or not), except with the express prior written consent of the Company, directly
or indirectly, whether as employee, owner, partner, consultant, agent, director,
officer, shareholder or in any other capacity, for your own account or for the
benefit of any individual or entity, (i) solicit any customer of the Company for
business which would result in such customer terminating their relationship with
the Company; or (ii) solicit or induce any individual or entity which is an
employee of the Company to leave the Company or to otherwise terminate their
relationship with the Company.
I-7
<PAGE>
(d) The parties agree that any breach by you of any of the covenants or
agreements contained in this Attachment A will result in irreparable injury to
the Company for which money damages could not adequately compensate the Company
and therefore, in the event of any such breach, the Company shall be entitled
(in addition to any other rights and remedies which it may have at law or in
equity) to have an injunction issued by any competent court enjoining and
restraining you and/or any other individual or entity involved therein from
continuing such breach. The existence of any claim or cause of action which you
may have against the Company or any other individual or entity shall not
constitute a defense or bar to the enforcement of such covenants. If the Company
is obliged to resort to the courts for the enforcement of any of the covenants
or agreements contained in this Attachment A, or if such covenants or agreements
are otherwise the subject of litigation between the parties, and the Company
prevails in such enforcement or litigation, then the term of such covenants and
agreements shall be extended for a period of time equal to the period of such
breach, which extension shall commence on the later of (a) the date on which the
original (unextended) term of such covenants and agreements is scheduled to
terminate or (b) the date of the final court order (without further right of
appeal) enforcing such covenant or agreement.
(e) If any portion of the covenants or agreements contained in this
Attachment A, or the application hereof, is construed to be invalid or
unenforceable, the other portions of such covenant(s) or agreement(s) or the
application thereof shall not be affected and shall be given full force and
effect without regard to the invalid or enforceable portions to the fullest
extent possible. If any covenant or agreement in this Attachment A is held
unenforceable because of the area covered, the duration thereof, or the scope
thereof, then the court making such determination shall have the power to reduce
the area and/or duration and/or limit the scope thereof, and the covenant or
agreement shall then be enforceable in its reduced form.
(f) For purposes of this Attachment A, the term "the Company" shall
include the Company, any successor to the Company and all present and future
direct and indirect subsidiaries and affiliates of the Company.
I-8
<PAGE>
APPENDIX II
NON-QUALIFIED STOCK OPTION FOR OFFICERS
AND OTHER KEY EMPLOYEES
To: ___________________________________________________________________________
Name
___________________________________________________________________________
Address
Date of Grant:__________________________________________________________________
You are hereby granted an option, effective as of the date hereof, to
purchase __________ shares of common stock, $0.001 par value per share ("Common
Stock"), of American Business Financial Services, Inc., a Delaware corporation
(the "Company"), at a price of $_______ per share pursuant to the Company's 1999
Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date
of grant, but not before that time. On and after one year and prior to _____
years from the date of grant, your option may be exercised for up to _______ of
the total number of shares subject to the option minus the number of shares
previously purchased by exercise of the option (as adjusted as the Committee in
its sole discretion determines for any change in the outstanding shares of the
Common Stock of the Company by reason of a stock dividend, stock split,
combination of shares, recapitalization, merger, consolidation, transfer of
assets, reorganization, conversion or what the Committee deems in its sole
discretion to be similar circumstances). Each succeeding year thereafter, your
option may be exercised for up to an additional ____% of the total number of
shares subject to the option minus the number of shares previously purchased by
exercise of the option (as adjusted for any change in the outstanding shares of
the Common Stock of the Company by reason of a stock dividend, stock split,
combination of shares, recapitalization, merger, consolidation, transfer of
assets, reorganization, conversion or what the Committee deems in its sole
discretion to be similar circumstances). Thus, this option is fully exercisable
on and after_____ years after the date of grant, except if terminated earlier as
provided herein. This option shall terminate and is not exercisable after ten
years from the date of its grant (the "Scheduled Termination Date"), except if
terminated earlier as hereafter provided.
II-1
<PAGE>
In the event of a "Change of Control" (as defined below) of the
Company, your option may, from and after the date of the Change of Control, and
notwithstanding the immediately preceding paragraph, be exercised for up to 100%
of the total number of shares then subject to the option minus the number of
shares previously purchased upon exercise of the option (as adjusted for stock
dividends, stock splits, combinations of shares and what the Committee deems in
its sole discretion) and your vesting date may accelerate accordingly. A "Change
of Control" shall be deemed to have occurred upon the happening of any of the
following events:
1. A change within a twelve-month period in the holders of more
than 50% of the outstanding voting stock of the Company; or
2. Any other event deemed to constitute a "Change of Control" by the
Committee.
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check and includes cash
received from a stock brokerage firm in a so-called "cashless exercise"; (b)
(unless prohibited by the Committee) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Committee) any combination of cash and Common Stock of
the Company valued as provided in clause (b). The use of the so-called
"attestation procedure" to exercise a stock option may be permitted by the
Committee. Any assignment of stock shall be in a form and substance satisfactory
to the Secretary of the Company, including guarantees of signature(s) and
payment of all transfer taxes if the Secretary deems such guarantees necessary
or desirable.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which your employment by the Company or
a Company subsidiary corporation is terminated (whether such termination be
voluntary or involuntary) other than by reason of disability as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the regulations thereunder, or death (but in no event later than the
Scheduled Termination Date). After the date your employment is terminated, as
aforesaid, you may exercise this option only for the number of shares which you
had a right to purchase and did not purchase on the date your employment
terminated. If you are employed by a Company subsidiary corporation, your
employment shall be deemed to have terminated on the date your employer ceases
to be a Company subsidiary corporation, unless you are on that date transferred
to the Company or another Company subsidiary corporation. Your employment shall
not be deemed to have terminated if you are transferred from the Company to a
Company subsidiary corporation, or vice versa, or from one Company subsidiary
corporation to another Company subsidiary corporation.
II-2
<PAGE>
If you die while employed by the Company or a Company subsidiary
corporation, your executor or administrator, as the case may be, may, at any
time within one year after the date of your death (but in no event later than
the Scheduled Termination Date), exercise the option as to any shares which you
had a right to purchase and did not purchase during your lifetime. If your
employment with the Company or a Company parent or subsidiary corporation is
terminated by reason of your becoming disabled (within the meaning of Section
22(e)(3) of the Code and the regulations thereunder), you or your legal guardian
or custodian may at any time within one year after the date of such termination
(but in no event later than the Scheduled Termination Date), exercise the option
as to any shares which you had a right to purchase and did not purchase prior to
such termination. Your executor, administrator, guardian or custodian must
present proof of his authority satisfactory to the Company prior to being
allowed to exercise this option.
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee deems in its sole discretion to
be similar circumstances, the number and kind of shares subject to this option
and the option price of such shares shall be appropriately adjusted in a manner
to be determined in the sole discretion of the Committee.
Notwithstanding anything to the contrary contained in this option, in
the event of a sale or a proposed sale of the majority of the stock or assets of
the Company or a proposed Change of Control, the Committee shall have the right
to terminate this option upon thirty (30) days prior written notice to you,
subject to your right to exercise such option to the extent vested prior to such
termination.
Except for transfers to ___________ under the terms set forth in the
Plan, this option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of the Company. The Company reserves the
right not to deliver to you the shares purchased by virtue of the exercise of
this option during any period of time in which the Company deems, in its sole
discretion, that such delivery would violate a federal, state, local or
securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this option
is not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is
approved by the shareholders of the Company in the manner prescribed by the Code
and the regulations thereunder;
(b) Until this option and the optioned shares are approved
and/or registered with such federal, state and local regulatory bodies or
agencies and securities exchanges as the Company may deem necessary or
desirable; or
II-3
<PAGE>
(c) During any period of time in which the Company deems that
the exercisability of this option, the offer to sell the shares optioned
hereunder, or the sale thereof, may violate a federal, state, local or
securities exchange rule, regulation or law, or may cause the Company to be
legally obligated to issue or sell more shares than the Company is legally
entitled to issue or sell.
(d) Until you have paid or made suitable arrangements to pay
(which may include payment through the surrender of Common Stock, unless
prohibited by the Committee) (i) all federal, state and local income tax
withholding required to be withheld by the Company in connection with the option
exercise and (ii) your portion of other federal, state and local payroll and
other taxes due in connection with the option exercise.
The following two paragraphs shall be applicable if, on the
date of exercise of this option, the Common Stock to be purchased pursuant to
such exercise has not been registered under the Securities Act of 1933, as
amended, and under applicable state securities laws, and shall continue to be
applicable for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that
he will acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgments and agreements as the
Company may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
II-4
<PAGE>
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
It is the intention of the Company and you that this option shall not
be an "Incentive Stock Option" as that term is used in Section 422 of the Code
and the regulations thereunder.
Nothing herein shall modify your status as an at-will employee of the
Company. Further, nothing herein guarantees you employment for any specified
period of time. This means that either you or the Company may terminate your
employment at any time for any reason, or no reason. You recognize that, for
instance, you may terminate your employment or the Company may terminate your
employment prior to the date on which your option becomes vested.
Any dispute or disagreement between you and the Company with respect to
any portion of this option or its validity, construction, meaning, performance
or your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with the
Company over this option amicably and informally, in good faith, for a period
not to exceed two weeks. Thereafter, the dispute or disagreement will be
submitted to arbitration. At any time prior to a decision from the arbitrator(s)
being rendered, you and the Company may resolve the dispute by settlement. You
and the Company shall equally share the costs charged by the American
Arbitration Association or its successor, but you and the Company shall
otherwise be solely responsible for your own respective counsel fees and
expenses. The decision of the arbitrator(s) shall be made in writing, setting
forth the award, the reasons for the decision and award and shall be binding and
conclusive on you and the Company. Further, neither you nor the Company shall
appeal any such award. Judgment of a court of competent jurisdiction may be
entered upon the award and may be enforced as such in accordance with the
provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of Delaware.
In consideration of the grant to you of this option, you hereby agree
to the confidentiality and non-interference provisions set forth in Attachment A
hereto.
II-5
<PAGE>
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions, including Attachment A hereto.
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
By:________________________
I hereby acknowledge receipt of a copy of the foregoing stock option
and the 1999 Stock Option Plan and, having read them hereby signify my
understanding of, and my agreement with, its terms and conditions including
Attachment A hereto. I accept this option in full satisfaction of any previously
written or verbal promises made to me by the Company with respect to option
grants [except for options granted to me pursuant to agreements dated
_______________].
___________________________
(Date) (Signature)
II-6
<PAGE>
Attachment A to Stock Option
Confidentiality and Non-Interference.
(a) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, during your employment with the Company or
at any time thereafter, except with the express prior written consent of the
Company or pursuant to the lawful order of any judicial or administrative agency
of government, directly or indirectly, disclose, communicate or divulge to any
individual or entity, or use for the benefit of any individual or entity, any
knowledge or information with respect to the conduct or details of the Company's
business which you, acting reasonably, believe or should believe to be of a
confidential nature and the disclosure of which not to be in the Company's
interest.
(b) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, during your employment with the Company and
for a period of two years thereafter, except with the express prior written
consent of the Company, directly or indirectly, whether as employee, owner,
partner, consultant, agent, director, officer, shareholder or in any other
capacity, engage in or assist any individual or entity to engage in any act or
action which you, acting reasonably, believe or should believe would be harmful
or inimical to the interests of the Company.
(c) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, for a period of two years after your
employment with the Company ceases for any reason whatsoever (whether voluntary
or not), except with the express prior written consent of the Company, directly
or indirectly, whether as employee, owner, partner, consultant, agent, director,
officer, shareholder or in any other capacity, for your own account or for the
benefit of any individual or entity, (i) solicit any customer of the Company for
business which would result in such customer terminating their relationship with
the Company; or (ii) solicit or induce any individual or entity which is an
employee of the Company to leave the Company or to otherwise terminate their
relationship with the Company.
II-7
<PAGE>
(d) The parties agree that any breach by you of any of the covenants or
agreements contained in this Attachment A will result in irreparable injury to
the Company for which money damages could not adequately compensate the Company
and therefore, in the event of any such breach, the Company shall be entitled
(in addition to any other rights and remedies which it may have at law or in
equity) to have an injunction issued by any competent court enjoining and
restraining you and/or any other individual or entity involved therein from
continuing such breach. The existence of any claim or cause of action which you
may have against the Company or any other individual or entity shall not
constitute a defense or bar to the enforcement of such covenants. If the Company
is obliged to resort to the courts for the enforcement of any of the covenants
or agreements contained in this Attachment A, or if such covenants or agreements
are otherwise the subject of litigation between the parties, and the Company
prevails in such enforcement or litigation, then the term of such covenants and
agreements shall be extended for a period of time equal to the period of such
breach, which extension shall commence on the later of (a) the date on which the
original (unextended) term of such covenants and agreements is scheduled to
terminate or (b) the date of the final court order (without further right of
appeal) enforcing such covenant or agreement.
(e) If any portion of the covenants or agreements contained in this
Attachment A, or the application hereof, is construed to be invalid or
unenforceable, the other portions of such covenant(s) or agreement(s) or the
application thereof shall not be affected and shall be given full force and
effect without regard to the invalid or enforceable portions to the fullest
extent possible. If any covenant or agreement in this Attachment A is held
unenforceable because of the area covered, the duration thereof, or the scope
thereof, then the court making such determination shall have the power to reduce
the area and/or duration and/or limit the scope thereof, and the covenant or
agreement shall then be enforceable in its reduced form.
(f) For purposes of this Attachment A, the term "the Company" shall
include the Company, any successor to the Company and all present and future
direct and indirect subsidiaries and affiliates of the Company.
II-8
<PAGE>
APPENDIX III
NON-QUALIFIED STOCK OPTION FOR DIRECTORS
AND IMPORTANT CONSULTANTS
To: _______________________________________________________________________
Name
_______________________________________________________________________
Address
Date of Grant:__________________________________________________________________
You are hereby granted an option, effective as of the date hereof, to
purchase __________ shares of common stock, $0.001 par value per share ("Common
Stock"), of American Business Financial Services, Inc., a Delaware corporation
(the "Company"), at a price of $_______ per share pursuant to the Company's 1999
Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date
of grant, but not before that time. On and after one year and prior to
______years from the date of grant, your option may be exercised for up to
______% of the total number of shares subject to the option minus the number of
shares previously purchased by exercise of the option (as adjusted as the
Committee in its sole discretion determines for any change in the outstanding
shares of the Common Stock of the Company by reason of a stock dividend, stock
split, combination of shares, recapitalization, merger, consolidation, transfer
of assets, reorganization, conversion or what the Committee deems in its sole
discretion to be similar circumstances). Each succeeding year thereafter, your
option may be exercised for up to an additional ______% of the total number of
shares subject to the option minus the number of shares previously purchased by
exercise of the option (as adjusted for any change in the outstanding shares of
the Common Stock of the Company by reason of a stock dividend, stock split,
combination of shares, recapitalization, merger, consolidation, transfer of
assets, reorganization, conversion or what the Committee deems in its sole
discretion to be similar circumstances). Thus, this option is fully exercisable
on and after _____ years after the date of grant, except if terminated earlier
as provided herein. This option shall terminate and is not exercisable after ten
years from the date of its grant (the "Scheduled Termination Date"), except if
terminated earlier as hereafter provided.
III-1
<PAGE>
In the event of a "Change of Control" (as defined below) of the
Company, your option may, from and after the date of the Change of Control, and
notwithstanding the immediately preceding paragraph, be exercised for up to 100%
of the total number of shares then subject to the option minus the number of
shares previously purchased upon exercise of the option (as adjusted for stock
dividends, stock splits, combinations of shares and what the Committee deems in
its sole discretion) and your vesting date may accelerate accordingly. A "Change
of Control" shall be deemed to have occurred upon the happening of any of the
following events:
1. A change within a twelve-month period in the holders of more than
50% of the outstanding voting stock of the Company; or
2. Any other event deemed to constitute a "Change of Control" by the
Committee.
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check and includes cash
received from a stock brokerage firm in a so-called "cashless exercise"; (b)
(unless prohibited by the Committee) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Committee) any combination of cash and Common Stock of
the Company valued as provided in clause (b). The use of the so-called
"attestation procedure" to exercise a stock option may be permitted by the
Committee. Any assignment of stock shall be in a form and substance satisfactory
to the Secretary of the Company, including guarantees of signature(s) and
payment of all transfer taxes if the Secretary deems such guarantees necessary
or desirable.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which you cease for any reason to be a
director of, or consultant to, the Company or a subsidiary corporation (whether
by death, disability, resignation, removal, failure to be reappointed, reelected
or otherwise, or the expiration of any consulting arrangement, and regardless of
whether the failure to continue as a director or consultant was for cause or
without cause or otherwise), but in no event later than ten years from the date
this option is granted. After the date you cease to be a director or consultant,
you may exercise this option only for the number of shares which you had a right
to purchase and did not purchase on the date you ceased to be a director or
consultant. If you are a director of a subsidiary corporation, your directorship
shall be deemed to have terminated on the date such company ceases to be a
subsidiary corporation, unless you are also a director of the Company or another
subsidiary corporation, or on that date became a director of the Company or
another subsidiary corporation. Your directorship or consultancy shall not be
deemed to have terminated if you cease being a director of, or consultant to,
the Company or a subsidiary corporation but are or concurrently therewith become
(a) a director of, or consultant to, the Company or another subsidiary
corporation or (b) an employee of the Company or a subsidiary corporation.
III-2
<PAGE>
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee deems in its sole discretion to
be similar circumstances, the number and kind of shares subject to this option
and the option price of such shares shall be appropriately adjusted in a manner
to be determined in the sole discretion of the Committee.
Notwithstanding anything to the contrary contained in this option, in
the event of a sale or a proposed sale of the majority of the stock or assets of
the Company or a proposed Change of Control, the Committee shall have the right
to terminate this option upon thirty (30) days prior written notice to you,
subject to your right to exercise such option to the extent vested prior to such
termination.
Except for transfers to __________ under the terms set forth in the
Plan, this option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of the Company. The Company reserves the
right not to deliver to you the shares purchased by virtue of the exercise of
this option during any period of time in which the Company deems, in its sole
discretion, that such delivery would violate a federal, state, local or
securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this option
is not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is
approved by the shareholders of the Company in the manner prescribed by the Code
and the regulations thereunder;
(b) Until this option and the optioned shares are approved
and/or registered with such federal, state and local regulatory bodies or
agencies and securities exchanges as the Company may deem necessary or
desirable; or
(c) During any period of time in which the Company deems that
the exercisability of this option, the offer to sell the shares optioned
hereunder, or the sale thereof, may violate a federal, state, local or
securities exchange rule, regulation or law, or may cause the Company to be
legally obligated to issue or sell more shares than the Company is legally
entitled to issue or sell.
(d) Until you have paid or made suitable arrangements to pay
(which may include payment through the surrender of Common Stock, unless
prohibited by the Committee) (i) all federal, state and local income tax
withholding required to be withheld by the Company in connection with the option
exercise and (ii) your portion of other federal, state and local payroll and
other taxes due in connection with the option exercise.
III-3
<PAGE>
The following two paragraphs shall be applicable if, on the date of
exercise of this option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that
he will acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgements and agreements as
the Company may, in its sole discretion, deem advisable to avoid any violation
of federal, state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
It is the intention of the Company and you that this option shall not
be an "Incentive Stock Option" as that term is used in Section 422 of the Code
and the regulations thereunder.
III-4
<PAGE>
Any dispute or disagreement between you and the Company with respect to
any portion of this option or its validity, construction, meaning, performance
or your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with the
Company over this option amicably and informally, in good faith, for a period
not to exceed two weeks. Thereafter, the dispute or disagreement will be
submitted to arbitration. At any time prior to a decision from the arbitrator(s)
being rendered, you and the Company may resolve the dispute by settlement. You
and the Company shall equally share the costs charged by the American
Arbitration Association or its successor, but you and the Company shall
otherwise be solely responsible for your own respective counsel fees and
expenses. The decision of the arbitrator(s) shall be made in writing, setting
forth the award, the reasons for the decision and award and shall be binding and
conclusive on you and the Company. Further, neither you nor the Company shall
appeal any such award. Judgment of a court of competent jurisdiction may be
entered upon the award and may be enforced as such in accordance with the
provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of Delaware.
In consideration of the grant to you of this option, you hereby agree
to the confidentiality and non-interference provisions set forth in Attachment A
hereto.
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions, including Attachment A hereto.
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
By:________________________
I hereby acknowledge receipt of a copy of the foregoing stock option
and the 1999 Stock Option Plan and, having read them hereby signify my
understanding of, and my agreement with, its terms and conditions, including
Attachment A hereto. I accept this option in full satisfaction of any previous
written or verbal promises made to me by the Company with respect to option
grants [except for options granted to me pursuant to agreements dated ________].
___________________________
(Date) (Signature)
III-5
<PAGE>
Attachment A to Stock Option
Confidentiality and Non-Interference.
------------------------------------
(a) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, during your term as a director of, or a
consultant to, the Company or at any time thereafter, except with the express
prior written consent of the Company or pursuant to the lawful order of any
judicial or administrative agency of government, directly or indirectly,
disclose, communicate or divulge to any individual or entity, or use for the
benefit of any individual or entity, any knowledge or information with respect
to the conduct or details of the Company's business which you, acting
reasonably, believe or should believe to be of a confidential nature and the
disclosure of which not to be in the Company's interest.
(b) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, during your term as a director of, or a
consultant to, the Company and for a period of two years thereafter, except with
the express prior written consent of the Company, directly or indirectly,
whether as employee, owner, partner, consultant, agent, director, officer,
shareholder or in any other capacity, engage in or assist any individual or
entity to engage in any act or action which you, acting reasonably, believe or
should believe would be harmful or inimical to the interests of the Company.
(c) You covenant and agree that, in consideration of the grant to you
of this stock option, you will not, for a period of two years after your term as
a director of, or a consultant to, the Company ceases for any reason whatsoever
(whether voluntary or not), except with the express prior written consent of the
Company, directly or indirectly, whether as employee, owner, partner,
consultant, agent, director, officer, shareholder or in any other capacity, for
your own account or for the benefit of any individual or entity, (i) solicit any
customer of the Company for business which would result in such customer
terminating their relationship with the Company; or (ii) solicit or induce any
individual or entity which is an employee of the Company to leave the Company or
to otherwise terminate their relationship with the Company.
III-6
<PAGE>
(d) The parties agree that any breach by you of any of the covenants or
agreements contained in this Attachment A will result in irreparable injury to
the Company for which money damages could not adequately compensate the Company
and therefore, in the event of any such breach, the Company shall be entitled
(in addition to any other rights and remedies which it may have at law or in
equity) to have an injunction issued by any competent court enjoining and
restraining you and/or any other individual or entity involved therein from
continuing such breach. The existence of any claim or cause of action which you
may have against the Company or any other individual or entity shall not
constitute a defense or bar to the enforcement of such covenants. If the Company
is obliged to resort to the courts for the enforcement of any of the covenants
or agreements contained in this Attachment A, or if such covenants or agreements
are otherwise the subject of litigation between the parties, and the Company
prevails in such enforcement or litigation, then the term of such covenants and
agreements shall be extended for a period of time equal to the period of such
breach, which extension shall commence on the later of (a) the date on which the
original (unextended) term of such covenants and agreements is scheduled to
terminate or (b) the date of the final court order (without further right of
appeal) enforcing such covenant or agreement.
(e) If any portion of the covenants or agreements contained in this
Attachment A, or the application hereof, is construed to be invalid or
unenforceable, the other portions of such covenant(s) or agreement(s) or the
application thereof shall not be affected and shall be given full force and
effect without regard to the invalid or enforceable portions to the fullest
extent possible. If any covenant or agreement in this Attachment A is held
unenforceable because of the area covered, the duration thereof, or the scope
thereof, then the court making such determination shall have the power to reduce
the area and/or duration and/or limit the scope thereof, and the covenant or
agreement shall then be enforceable in its reduced form.
(f) For purposes of this Attachment A, the term "the Company" shall
include the Company, any successor to the Company and all present and future
direct and indirect subsidiaries and affiliates of the Company.
III-7
<PAGE>
KILPATRICK STOCKTON LLP
DRAFT
10/13/99
AMENDMENT NO. 3 TO
RECEIVABLES PURCHASE AGREEMENT
THIS AMENDMENT NO. 3 TO RECEIVABLES PURCHASE AGREEMENT, dated as of
October 13, 1999 (this "Amendment"), is entered into by and among AMERICAN
BUSINESS LEASE FUNDING CORPORATION, as Seller, AMERICAN BUSINESS LEASING, INC.,
as Servicer, certain Investors, VARIABLE FUNDING CAPITAL CORPORATION, as a
Purchaser, FIRST UNION SECURITIES, INC., (formerly known as First Union Capital
Markets Corp.) as Deal Agent, FIRST UNION NATIONAL BANK, as Liquidity Agent, and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as the Collateral Custodian and
Backup Servicer. Capitalized terms used and not otherwise defined herein are
used as defined in the Agreement (as defined below).
WHEREAS, the parties hereto entered into that certain Receivables
Purchase Agreement, dated as of September 30, 1998, as amended by that First
Amendment to Receivables Purchase Agreement, dated as of November 13, 1998 and
as further amended by that Second Amendment to Receivables Purchase Agreement,
dated as of December 31, 1998 (as amended, the "Agreement"); and
WHEREAS, the parties hereto desire to further amend the Agreement in
certain respects as provided herein;
NOW, THEREFORE, in consideration of the premises and the other mutual
covenants contained herein, the parties hereto agree as follows:
Section 1. Amendments.
(a) The definition of "Commitment Termination Date" in Section 1.1 is
hereby deleted and replaced in its entirety as follows:
Commitment Termination Date: November 12, 1999 or such later date to
which the Commitment Termination Date may be extended (if extended) in
the sole discretion of VFCC and each Investor in accordance with the
terms of Section 2.1(b).
Section 2. Agreement in Full Force and Effect as Amended. Except as
specifically amended hereby, the Agreement shall remain in full force and
effect. All references to the Agreement shall be deemed to mean the Agreement as
modified hereby. This Amendment shall not constitute a novation of the
Agreement, but shall constitute an amendment thereof. The parties hereto agree
to be bound by the terms and conditions of the Agreement, as amended by this
Amendment, as though such terms and conditions were set forth herein.
<PAGE>
Section 3. Miscellaneous.
(a) This Amendment may be executed in any number of counterparts, and
by the different parties hereto on the same or separate counterparts, each of
which shall be deemed to be an original instrument but all of which together
shall constitute one and the same agreement.
(b) The descriptive headings of the various sections of this Amendment
are inserted for convenience of reference only and shall not be deemed to affect
the meaning or construction of any of the provisions hereof.
(c) This Amendment may not be amended or otherwise modified except as
provided in the Agreement.
(d) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CONFLICT OF LAWS
PROVISIONS.
[Remainder of Page Intentionally Left Blank.]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
THE SELLER: AMERICAN BUSINESS LEASE FUNDING
CORPORATION
By:
----------------------------------
Title:
-------------------------------
THE SERVICER: AMERICAN BUSINESS LEASING, INC.
By:
----------------------------------
Title:
-------------------------------
THE INVESTORS: FIRST UNION NATIONAL BANK
By:
----------------------------------
Title:
-------------------------------
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attn: Mr. Bill A. Shirley
Facsimile: (704) 374-3254
Telephone: (704) 374-4001
<PAGE>
VFCC: VARIABLE FUNDING CAPITAL CORPORATION
By First Union Securities, Inc.
as attorney-in-fact
By:
----------------------------------
Title:
-------------------------------
Variable Funding Capital Corporation
c/o First Union Securities, Inc.
One First Union Center, TW-9
Charlotte, North Carolina 28288-0610
Attn: Conduit Administration
Facsimile: (704) 383-6036
Telephone: (704) 383-9343
With a copy to: Lord Securities Corp.
Attention: Vice President
Facsimile: (212) 346-9012
Telephone: (212) 346-9006
<PAGE>
THE DEAL AGENT: FIRST UNION SECURITIES, INC.
By:
----------------------------------
Title:
-------------------------------
First Union Securities, Inc.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attn: Conduit Administration
Facsimile : (704) 383-6036
Telephone: (704) 383-9343
THE LIQUIDITY AGENT: FIRST UNION NATIONAL BANK
By:
----------------------------------
Title:
-------------------------------
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attn: Bill A. Shirley, Jr.
Facsimile: (704) 374-4001
Telephone: (704) 374-4001
<PAGE>
THE COLLATERAL CUSTODIAN NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By:
----------------------------------
Title:
-------------------------------
Norwest Bank Minnesota, National Association
Sixth and Marquette Avenue
Minneapolis, MN 55479-0067
Attention: Custody Vault
Facsimile: (612) 667-1080
Confirmation No.: (612) 667-4960
THE BACKUP SERVICER: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By:
----------------------------------
Title:
-------------------------------
Norwest Bank Minnesota, National Association
Sixth and Marquette Avenue
Minneapolis, MN 55479-0067
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3539
Confirmation No.: (612) 667-8058
<PAGE>
FOURTH AMENDMENT TO THE
RECEIVABLES PURCHASE AGREEMENT
AMENDMENT NO. 4 (the "Amendment"), dated as of November 12, 1999, to the
Receivables Purchase Agreement, dated as of September 30, 1998, and as amended,
among AMERICAN BUSINESS LEASE FUNDING CORPORATION, as the seller, AMERICAN
BUSINESS LEASING, INC., as the Servicer, the INVESTORS named therein, VARIABLE
FUNDING CAPITAL CORPORATION, as a Purchaser, FIRST UNION SECURITIES, INC. (f/k/a
First Union Securities, Inc.), as deal agent, FIRST UNION NATIONAL BANK, as
liquidity agent and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as the
Collateral Custodian and Backup Servicer (as amended, modified or supplemented
from time to time, the "Receivables Purchase Agreement"). Capitalized terms used
and not defined herein shall have the same meanings as defined in the
Receivables Purchase Agreement.
RECITALS
The parties listed on the signature pages hereto desire to amend the
Receivables Purchase Agreement to the extent set forth herein, and are willing
to do so subject to the terms and conditions set forth herein.
Accordingly, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable
considerations, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree to amend the Receivables Purchase Agreement as follows:
1. The definition of "Commitment Termination Date" in Section 1.1 of
the Receivables Purchase Agreement is hereby amended in its entirety to read as
follows:
Commitment Termination Date: November 29, 1999.
2. The definition of "Purchase Limit" in Section 1.1 of the Receivables
Purchase Agreement is hereby amended in its entirety to read as follows:
Purchase Limit: At any time, $25,000,000, on or after the Termination
Date, the "Purchase Limit" shall mean the then aggregate outstanding
Capital.
3. The Seller hereby certifies that each of the representations and
warranties set forth in Article IV of the Receivables Purchase Agreement are
true and correct on the date hereof, as if each such representation and warranty
was made on the date hereof.
4. This Amendment may be executed in any number of counterparts, each
of which shall be an original and all of which shall constitute one document. It
shall not be necessary in making proof of this Amendment to produce or account
for more than one counterpart signed by the party to be charged. Delivery of an
executed counterpart of a signature page to this letter agreement by facsimile
shall be effective as delivery of a manually executed counterpart of this letter
agreement.
<PAGE>
5. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
6. Except as amended hereby, the Receivables Purchase Agreement shall
in all other respects remain in full force and effect.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE SELLER: AMERICAN BUSINESS LEASE FUNDING CORPORATION
By /s/
-----------------------------------------
Title: EVP
THE SERVICER: AMERICAN BUSINESS LEASING, INC.
By /s/
-----------------------------------------
Title: EVP
THE INVESTORS: FIRST UNION NATIONAL BANK
By
-----------------------------------------
Title:
Commitment: $25,000,000
First Union National Bank
1345 Chestnut Street
Philadelphia, PA 19107
Attention: Harry Ellis
Facsimile No.: (215) 973-2727
Confirmation No: (215) 973-1887
VFCC: VARIABLE FUNDING CAPITAL
CORPORATION
By First Union Securities, Inc.,
as attorney-in-fact
By
-----------------------------------------
Title:
Variable Funding Capital Corporation
c/o First Union Securities, Inc.
One First Union Center, TW-6
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
3
<PAGE>
THE DEAL AGENT: FIRST UNION SECURITIES, INC.
By
-----------------------------------------
Title:
First Union Securities, Inc.
One First Union Center, TW-6
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
THE LIQUIDITY AGENT: FIRST UNION NATIONAL BANK
By
-----------------------------------------
Title:
First Union National Bank
1345 Chestnut Street
Philadelphia, PA 19107
Attention: Harry Ellis
Facsimile No.: (215) 973-2727
Confirmation No.: (215) 973-1887
4
<PAGE>
THE COLLATERAL CUSTODIAN: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Collateral Custodian
By
-----------------------------------------
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0067
Attention: Custody Vault
Facsimile No.: (612) 667-1080
Confirmation No.: (612) 667-4960
THE BACKUP SERVICER: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Backup Servicer
By
-----------------------------------------
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3539
Confirmation No.: (612) 667-8058
5
<PAGE>
AMERICAN BUSINESS LEASING: AMERICAN BUSINESS LEASING
By
-----------------------------------------
Title:
FEDERAL LEASING CORP.: FEDERAL LEASING CORP.
By
-----------------------------------------
Title:
<PAGE>
FIFTH AMENDMENT TO THE
RECEIVABLES PURCHASE AGREEMENT
AMENDMENT NO. 5 (the "Amendment"), dated as of November 29, 1999, to the
Receivables Purchase Agreement, dated as of September 30, 1998, and as amended,
among AMERICAN BUSINESS LEASE FUNDING CORPORATION, as the seller, AMERICAN
BUSINESS LEASING, INC., as the Servicer, the INVESTORS named therein, VARIABLE
FUNDING CAPITAL CORPORATION, as a Purchaser, FIRST UNION SECURITIES, INC. (f/k/a
First Union Capital Markets, a division of Wheat First Securities, Inc.), as
deal agent, FIRST UNION NATIONAL BANK, as liquidity agent and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, as the Collateral Custodian and Backup Servicer
(as amended, modified or supplemented from time to time, the "Receivables
Purchase Agreement"). Capitalized terms used and not defined herein shall have
the same meanings as defined in the Receivables Purchase Agreement.
RECITALS
The parties listed on the signature pages hereto desire to amend the
Receivables Purchase Agreement to the extent set forth herein, and are willing
to do so subject to the terms and conditions set forth herein.
Accordingly, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable
considerations, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree to amend the Receivables Purchase Agreement as follows:
1. The definition of "Commitment Termination Date" in Section 1.1 of
the Receivables Purchase Agreement is hereby amended in its entirety to read as
follows:
Commitment Termination Date: December 14, 1999.
2. The Seller hereby certifies that each of the representations and
warranties set forth in Article IV of the Receivables Purchase Agreement are
true and correct on the date hereof, as if each such representation and warranty
was made on the date hereof.
3. This Amendment may be executed in any number of counterparts, each
of which shall be an original and all of which shall constitute one document. It
shall not be necessary in making proof of this Amendment to produce or account
for more than one counterpart signed by the party to be charged. Delivery of an
executed counterpart of a signature page to this letter agreement by facsimile
shall be effective as delivery of a manually executed counterpart of this letter
agreement.
4. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
<PAGE>
5. Except as amended hereby, the Receivables Purchase Agreement shall
in all other respects remain in full force and effect.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE SELLER: AMERICAN BUSINESS LEASE FUNDING CORPORATION
By _________________________________________
Title:
THE SERVICER: AMERICAN BUSINESS LEASING, INC.
By _________________________________________
Title:
THE INVESTORS: FIRST UNION NATIONAL BANK
By _________________________________________
Title:
Commitment: $25,000,000
First Union National Bank
1345 Chestnut Street
Philadelphia, PA 19107
Attention: Harry Ellis
Facsimile No.: (215) 973-2727
Confirmation No: (215) 973-1887
3
<PAGE>
VFCC: VARIABLE FUNDING CAPITAL
CORPORATION
By First Union Securities, Inc.,
as attorney-in-fact
By _________________________________________
Title:
Variable Funding Capital Corporation
c/o First Union Securities, Inc.
One First Union Center, TW-6
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
THE DEAL AGENT: FIRST UNION SECURITIES, INC.
By _________________________________________
Title:
First Union Securities, Inc.
One First Union Center, TW-6
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
4
<PAGE>
THE LIQUIDITY AGENT: FIRST UNION NATIONAL BANK
By _________________________________________
Title:
First Union National Bank
1345 Chestnut Street
Philadelphia, PA 19107
Attention: Harry Ellis
Facsimile No.: (215) 973-2727
Confirmation No: (215) 973-1887
THE COLLATERAL CUSTODIAN: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Collateral Custodian
By _________________________________________
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0067
Attention: Custody Vault
Facsimile No.: (612) 667-1080
Confirmation No.: (612) 667-4960
THE BACKUP SERVICER: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Backup Servicer
By _________________________________________
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3539
Confirmation No.: (612) 667-8058
5
<PAGE>
AMERICAN BUSINESS LEASING: AMERICAN BUSINESS LEASING
By _________________________________________
Title:
FEDERAL LEASING CORP.: FEDERAL LEASING CORP.
By _________________________________________
Title:
6
<PAGE>
SIXTH AMENDMENT TO THE
RECEIVABLES PURCHASE AGREEMENT
AMENDMENT NO. 6 (the "Amendment"), dated as of December 14, 1999, to the
Receivables Purchase Agreement, dated as of September 30, 1998, and as amended,
among AMERICAN BUSINESS LEASE FUNDING CORPORATION, as the seller, AMERICAN
BUSINESS LEASING, INC., as the Servicer, the INVESTORS named therein, VARIABLE
FUNDING CAPITAL CORPORATION, as a Purchaser, FIRST UNION SECURITIES, INC. (f/k/a
First Union Capital Markets, a division of Wheat First Securities, Inc.), as
deal agent, FIRST UNION NATIONAL BANK, as liquidity agent and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, as the Collateral Custodian and Backup Servicer
(as amended, modified or supplemented from time to time, the "Receivables
Purchase Agreement"). Capitalized terms used and not defined herein shall have
the same meanings as defined in the Receivables Purchase Agreement.
RECITALS
The parties listed on the signature pages hereto desire to amend the
Receivables Purchase Agreement to the extent set forth herein, and are willing
to do so subject to the terms and conditions set forth herein.
Accordingly, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable
considerations, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree to amend the Receivables Purchase Agreement as follows:
1. The definition of "Commitment Termination Date" in Section 1.1 of
the Receivables Purchase Agreement is hereby amended in its entirety to read as
follows:
Commitment Termination Date: December 31, 1999.
2. The Seller hereby certifies that each of the representations and
warranties set forth in Article IV of the Receivables Purchase Agreement are
true and correct on the date hereof, as if each such representation and warranty
was made on the date hereof.
3. This Amendment may be executed in any number of counterparts, each
of which shall be an original and all of which shall constitute one document. It
shall not be necessary in making proof of this Amendment to produce or account
for more than one counterpart signed by the party to be charged. Delivery of an
executed counterpart of a signature page to this letter agreement by facsimile
shall be effective as delivery of a manually executed counterpart of this letter
agreement.
4. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
<PAGE>
5. Except as amended hereby, the Receivables Purchase Agreement shall
in all other respects remain in full force and effect.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE SELLER: AMERICAN BUSINESS LEASE FUNDING CORPORATION
By _________________________________________
Title:
THE SERVICER: AMERICAN BUSINESS LEASING, INC.
By _________________________________________
Title:
THE INVESTORS: FIRST UNION NATIONAL BANK
By _________________________________________
Title:
Commitment: $25,000,000
First Union National Bank
1345 Chestnut Street
Philadelphia, PA 19107
Attention: Harry Ellis
Facsimile No.: (215) 973-2727
Confirmation No: (215) 973-1887
3
<PAGE>
VFCC: VARIABLE FUNDING CAPITAL
CORPORATION
By First Union Securities, Inc.,
as attorney-in-fact
By _________________________________________
Title:
Variable Funding Capital Corporation
c/o First Union Securities, Inc.
One First Union Center, TW-6
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
THE DEAL AGENT: FIRST UNION SECURITIES, INC.
By _________________________________________
Title:
First Union Securities, Inc.
One First Union Center, TW-6
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
4
<PAGE>
THE LIQUIDITY AGENT: FIRST UNION NATIONAL BANK
By _________________________________________
Title:
First Union National Bank
1345 Chestnut Street
Philadelphia, PA 19107
Attention: Harry Ellis
Facsimile No.: (215) 973-2727
Confirmation No: (215) 973-1887
THE COLLATERAL CUSTODIAN: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Collateral Custodian
By _________________________________________
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0067
Attention: Custody Vault
Facsimile No.: (612) 667-1080
Confirmation No.: (612) 667-4960
THE BACKUP SERVICER: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Backup Servicer
By _________________________________________
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3539
Confirmation No.: (612) 667-8058
5
<PAGE>
SEVENTH AMENDMENT TO THE
RECEIVABLES PURCHASE AGREEMENT
SEVENTH AMENDMENT (the "Amendment"), dated as of December 31, 1999, to the
Receivables Purchase Agreement, dated as of September 30, 1998, and as amended,
among AMERICAN BUSINESS LEASE FUNDING CORPORATION, as the seller, AMERICAN
BUSINESS LEASING, INC., as the Servicer, the INVESTORS named therein, VARIABLE
FUNDING CAPITAL CORPORATION, as a Purchaser, FIRST UNION SECURITIES, INC. (f/k/a
First Union Capital Markets, a division of Wheat First Securities, Inc.), as
deal agent, FIRST UNION NATIONAL BANK, as liquidity agent and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, as the Collateral Custodian and Backup Servicer
(as amended, modified or supplemented from time to time, the "Receivables
Purchase Agreement"). Capitalized terms used and not defined herein shall have
the same meanings as defined in the Receivables Purchase Agreement.
RECITALS
The parties listed on the signature pages hereto desire to amend the
Receivables Purchase Agreement to the extent set forth herein, and are willing
to do so subject to the terms and conditions set forth herein.
Accordingly, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable
considerations, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree to amend the Receivables Purchase Agreement as follows:
1. The definition of "Commitment Termination Date" in Section 1.1 of
the Receivables Purchase Agreement is hereby amended in its entirety to read as
follows:
"Commitment Termination Date: January 11, 2000."
2. Section 7.2 of the Receivables Purchase Agreement is hereby amended
as follows:
(a) by replacing the period at the end of subsection (r) with the
following "; and"; and
(b) adding a new subsection (s) as follows:
"(s) January 11, 2000;"
3. The Seller hereby certifies that each of the representations and
warranties set forth in Article IV of the Receivables Purchase Agreement are
true and correct on the date hereof, as if each such representation and warranty
was made on the date hereof.
<PAGE>
4. This Amendment may be executed in any number of counterparts, each
of which shall be an original and all of which shall constitute one document. It
shall not be necessary in making proof of this Amendment to produce or account
for more than one counterpart signed by the party to be charged. Delivery of an
executed counterpart of a signature page to this letter agreement by facsimile
shall be effective as delivery of a manually executed counterpart of this letter
agreement.
5. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
6. Except as amended hereby, the Receivables Purchase Agreement shall
in all other respects remain in full force and effect.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE SELLER: AMERICAN BUSINESS LEASE FUNDING CORPORATION
By _________________________________________
Title:
THE SERVICER: AMERICAN BUSINESS LEASING, INC.
By _________________________________________
Title:
THE INVESTORS: FIRST UNION NATIONAL BANK
By _________________________________________
Title:
Commitment: $25,000,000
First Union National Bank
1345 Chestnut Street
Philadelphia, PA 19107
Attention: Harry Ellis
Facsimile No.: (215) 973-2727
Confirmation No: (215) 973-1887
VFCC: VARIABLE FUNDING CAPITAL
CORPORATION
By First Union Securities, Inc.,
as attorney-in-fact
By _________________________________________
Title:
Variable Funding Capital Corporation
c/o First Union Securities, Inc.
One First Union Center, TW-6
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
3
<PAGE>
THE DEAL AGENT: FIRST UNION SECURITIES, INC.
By _________________________________________
Title:
First Union Securities, Inc.
One First Union Center, TW-6
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
THE LIQUIDITY AGENT: FIRST UNION NATIONAL BANK
By _________________________________________
Title:
First Union National Bank
1345 Chestnut Street
Philadelphia, PA 19107
Attention: Harry Ellis
Facsimile No.: (215) 973-2727
Confirmation No: (215) 973-1887
4
<PAGE>
THE COLLATERAL CUSTODIAN: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Collateral Custodian
By _________________________________________
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0067
Attention: Custody Vault
Facsimile No.: (612) 667-1080
Confirmation No.: (612) 667-4960
THE BACKUP SERVICER: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Backup Servicer
By _________________________________________
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3539
Confirmation No.: (612) 667-8058
5
<PAGE>
EIGHTH AMENDMENT TO THE
RECEIVABLES PURCHASE AGREEMENT
EIGHTH AMENDMENT (the "Amendment"), dated as of January 10, 1999, to the
Receivables Purchase Agreement, dated as of September 30, 1998, and as amended,
among AMERICAN BUSINESS LEASE FUNDING CORPORATION, as the seller, AMERICAN
BUSINESS LEASING, INC., as the Servicer, the INVESTORS named therein, VARIABLE
FUNDING CAPITAL CORPORATION, as a Purchaser, FIRST UNION SECURITIES, INC. (f/k/a
First Union Capital Markets, a division of Wheat First Securities, Inc.), as
deal agent, FIRST UNION NATIONAL BANK, as liquidity agent and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, as the Collateral Custodian and Backup Servicer
(as amended, modified or supplemented from time to time, the "Receivables
Purchase Agreement"). Capitalized terms used and not defined herein shall have
the same meanings as defined in the Receivables Purchase Agreement.
RECITALS
The parties listed on the signature pages hereto desire to amend the
Receivables Purchase Agreement to the extent set forth herein, and are willing
to do so subject to the terms and conditions set forth herein.
Accordingly, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable
considerations, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree to amend the Receivables Purchase Agreement as follows:
1. Pursuant to the provisions of Section 2.1(b) of the Receivables
Purchase Agreement, the Seller is required to provide no more than 60 days, but
not less than 45 days, prior written notice to the Deal Agent to extend the
Commitment Termination Date. Each of the parties hereto waives the requirement
that an extension request be made within the time required by Section 2.1(b).
2. The definition of "Commitment Termination Date" in Section 1.1 of
the Receivables Purchase Agreement is hereby amended in its entirety to read as
follows:
"Commitment Termination Date: March 31, 2000."
3. Clause (b) of the definition of "Portfolio Concentration Criteria"
in Section 1.1 of the Receivables Purchase Agreement is hereby amended in its
entirety to read as follows:
"(b) the Contract has a remaining term to maturity of not greater than
60 months, provided, however, that up to 7.25% (by ADCB) may have a
remaining term to maturity of not greater than 84 months;"
<PAGE>
4. Clause (g) of the definition of "Portfolio Concentration Criteria"
in Section 1.1 of the Receivables Purchase Agreement is hereby amended in its
entirety to read as follows:
"(g) (i) no more than one Source (including its Affiliates) has
originated more than 5% of the ADCB (this one Source not to exceed
12.2%), except as consented to by the Deal Agent and (ii) no more than
44% of the ADCB will be originated by Sources;"
5. The definition of "Purchase Limit" in Section 1.1 of the Receivables
Purchase Agreement is hereby amended in its entirety to read as follows:
"Purchase Limit: At any time, $16,000,000, on or after the Termination
Date, the "Purchase Limit" shall mean the then aggregate outstanding
Capital."
6. Section 2.8 of the Receivables Purchase Agreement is hereby amended
in its entirety to read as follows:
"Section 2.8. [Reserved]."
7. The introductory paragraph of Section 2.9 of the Receivables
Purchase Agreement is hereby amended in its entirety to read as follows:
"The provisions of this Section 2.9 shall apply (i) after April 1, 2000
and (ii) during the term of this Agreement after the occurrence of the
Termination Date:"
8. The Seller hereby certifies that each of the representations and
warranties set forth in Article IV of the Receivables Purchase Agreement are
true and correct on the date hereof, as if each such representation and warranty
was made on the date hereof.
9. This Amendment may be executed in any number of counterparts, each
of which shall be an original and all of which shall constitute one document. It
shall not be necessary in making proof of this Amendment to produce or account
for more than one counterpart signed by the party to be charged. Delivery of an
executed counterpart of a signature page to this letter agreement by facsimile
shall be effective as delivery of a manually executed counterpart of this letter
agreement.
10. This Amendment shall be governed by and construed in accordance
with the laws of the State of New York.
11. Except as amended hereby, the Receivables Purchase Agreement shall
in all other respects remain in full force and effect.
[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE SELLER: AMERICAN BUSINESS LEASE FUNDING CORPORATION
By /s/
-----------------------------------------
Title: E.V.P
THE SERVICER: AMERICAN BUSINESS LEASING, INC.
By /s/
-----------------------------------------
Title: E.V.P
THE INVESTORS: FIRST UNION NATIONAL BANK
By
-----------------------------------------
Title:
Commitment: $16,000,000
First Union National Bank
One First Union Center TW-9
Charlotte, NC 28288
Attention: Jane Workman
Facsimile No.: (704) 374-6249
Confirmation No: (704) 374-4382
VFCC: VARIABLE FUNDING CAPITAL
CORPORATION
By First Union Securities, Inc.,
as attorney-in-fact
By
-----------------------------------------
Title:
Variable Funding Capital Corporation
c/o First Union Securities, Inc.
One First Union Center, TW-9
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
3
<PAGE>
THE DEAL AGENT: FIRST UNION SECURITIES, INC.
By
-----------------------------------------
Title:
First Union Securities, Inc.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
THE LIQUIDITY AGENT: FIRST UNION NATIONAL BANK
By
-----------------------------------------
Title:
First Union National Bank
One First Union Center TW-9
Charlotte, NC 28288
Attention: Jane Workman
Facsimile No.: (704) 374-6249
Confirmation No: (704) 374-4382
THE COLLATERAL CUSTODIAN: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Collateral Custodian
By
-----------------------------------------
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0067
Attention: Custody Vault
Facsimile No.: (612) 667-1080
Confirmation No.: (612) 667-4960
THE BACKUP SERVICER: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
as Backup Servicer
By
-----------------------------------------
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3539
Confirmation No.: (612) 667-8058
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of American Business Financial Services, Inc.
and Subsidiaries as of December 31, 1999 and the six months then ended and is
qualified in its entirety to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-2000
<CASH> 18,916
<SECURITIES> 0
<RECEIVABLES> 43,242
<ALLOWANCES> 339
<INVENTORY> 0
<CURRENT-ASSETS> 203,478
<PP&E> 24,016
<DEPRECIATION> 9,148
<TOTAL-ASSETS> 491,898
<CURRENT-LIABILITIES> 259,516
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 63,343
<TOTAL-LIABILITY-AND-EQUITY> 491,898
<SALES> 0
<TOTAL-REVENUES> 58,417
<CGS> 0
<TOTAL-COSTS> 45,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 709
<INTEREST-EXPENSE> 16,063
<INCOME-PRETAX> 12,580
<INCOME-TAX> 5,032
<INCOME-CONTINUING> 7,548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,548
<EPS-BASIC> 2.16
<EPS-DILUTED> 2.11
</TABLE>
