-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Blw88umQVjWYfJb50SHLduOHqrfM2H6oU9otnE4FesCkfgXWdunkRht9uk597A35 hPBWBfsCHNvBFUJPJ25y3Q== 0000950116-97-001043.txt : 19970526 0000950116-97-001043.hdr.sgml : 19970526 ACCESSION NUMBER: 0000950116-97-001043 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19970523 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN BUSINESS FINANCIAL SERVICES INC /DE/ CENTRAL INDEX KEY: 0000772349 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 870418807 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-24115 FILM NUMBER: 97613824 BUSINESS ADDRESS: STREET 1: 111 PRESIDENTIAL BLVD STREET 2: STE 215 CITY: BALA CYNWYD STATE: PA ZIP: 19004 BUSINESS PHONE: 6106682440 MAIL ADDRESS: STREET 1: 111 PRESIDENTIAL BLVD STE 215 CITY: BALA CYNWYD STATE: PA ZIP: 19004 SB-2/A 1 AMENDMENT # 1 TO FORM SB-2 As filed with the Securities and Exchange Commission on May 23, 1997 Registration No. 333-24115 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- AMERICAN BUSINESS FINANCIAL SERVICES, INC. (Exact name of Registrant as specified in its charter)
Delaware 6162 87-0418807 - ------------------------------- --------------------------- ---------------------- (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
AMERICAN BUSINESS FINANCIAL SERVICES, INC. 103 Springer Building 3411 Silverside Road Wilmington, Delaware 19810 (302) 478-6160 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ANTHONY J. SANTILLI, JR. Chairman, President, Chief Executive Officer, Chief Operating Officer, Treasurer and Director American Business Financial Services, Inc. Balapointe Office Center 111 Presidential Boulevard Suite 215 Bala Cynwyd, PA 19004 (610) 668-2440 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: JANE K. STORERO, ESQUIRE Blank Rome Comisky & McCauley 1200 Four Penn Center Plaza Philadelphia, Pennsylvania 19103 (215) 569-5500 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective registration statement filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434 please check the following box. [ ] The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ [LOGO] AMERICAN BUSINESS FINANCIAL SERVICES INC. $125,000,000 Principal Amount Adjustable Rate Subordinated Money Market Notes Three, Six, Eighteen and Thirty Month Subordinated Investment Notes; One, Two, Three, Four, Five, Seven and Ten Year Subordinated Investment Notes This Prospectus relates to the offer and sale of up to $125,000,000 in principal amount (the "Offering") of unsecured, subordinated investment notes (the "Investment Notes") and unsecured, adjustable rate, subordinated money market notes (the "Money Market Notes" and when referred to, together with the Investment Notes, the "Notes") of American Business Financial Services, Inc., a Delaware corporation ("ABFS" or the "Company"). The Notes will be offered on an ongoing and continuous "best-efforts" basis by ABFS. The Notes will be subordinated to all "Senior Debt" (as hereinafter defined) of the Company (including its subsidiaries). See "Prospectus Summary -- Securities Offered." As of May 15, 1997, there was no Senior Debt outstanding. There is no limitation on the amount of Senior Debt the Company may incur. Any indebtedness of the subsidiaries of ABFS, other than the Senior Debt, will have rights upon liquidation or dissolution of the particular subsidiary, prior to payment being made to debtholders. Any indebtedness of ABFS, other than the Senior Debt, will have rights upon liquidation or dissolution of ABFS which ranks pari passu (i.e. equally) in right of payment to the Notes offered hereby. As of May 15, 1997, ABFS had an aggregate of approximately $52.0 million in principal amount of indebtedness, which ranks pari passu in right of payment with the Notes. The Notes have no sinking fund. See "Description of the Notes and the Indenture -- Provisions Related to All Notes." Investment Notes will be issued in minimum denominations of $1,000 and in fully registered form. Purchasers of the Investment Notes will elect a maturity when they subscribe for the Investment Notes. The Investment Notes may be extended by the Company, at its option, for an identical term unless the holder thereof requests payment within seven days after the original maturity. Interest rates paid will depend on the term of the Investment Note. The Money Market Notes will be issued in minimum denominations of $1,000. The Money Market Notes have no stated maturity and are redeemable in minimum amounts of $500 (in any amount to close an account) at the option of the holder upon written notice to the Company. The payment due upon redemption shall be made within 10 business days of the Company's receipt of such notice from the holder. The Money Market Notes may also be redeemed by the Company upon 30 days written notice to the holder. The interest rate paid on the Money Market Notes will be adjusted by the Company from time to time in its sole discretion provided that such rate shall not be less than 4.0% per year. (continued on next page) ABFS is not subject to state or federal statutes or regulations applicable to banks and/or savings and loan associations with regard to insurance, the maintenance of reserves, the quality or condition of its assets or other matters. THE NOTES OFFERED HEREUNDER ARE NOT CERTIFICATES OF DEPOSIT ("CDs"). THE PAYMENT OF PRINCIPAL AND INTEREST ON THE NOTES IS NOT GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR ANY OTHER ENTITY. THE COMPANY'S REVENUES FROM OPERATIONS, INCLUDING THE SECURITIZATION OR SALE OF LOANS FROM ITS PORTFOLIO, THE COMPANY'S WORKING CAPITAL, AND CASH GENERATED FROM ADDITIONAL DEBT FINANCING REPRESENT THE COMPANY'S SOURCES OF FUNDS FOR THE REPAYMENT OF PRINCIPAL AT MATURITY AND THE ONGOING PAYMENT OF INTEREST ON THE NOTES. THE NOTES ARE SPECULATIVE SECURITIES AND AN INVESTMENT HEREUNDER SHOULD BE UNDERTAKEN ONLY AFTER CAREFUL EVALUATION OF THE RISK FACTORS AND THE OTHER INFORMATION SET FORTH IN THE PROSPECTUS. SEE "RISK FACTORS" ON PAGE 12 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
======================================================================================== Underwriting Price to Commissions and Proceeds to Public(1) Discounts(2) the Company(2)(3) - ---------------------------------------------------------------------------------------- Per Note ...................... 100% -0- 100% - ---------------------------------------------------------------------------------------- Total ........................ $125,000,000 -0- $125,000,000 ========================================================================================
(footnotes on following page) ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------- The date of this Prospectus is May ___, 1997. (1) The Notes will be issued at their face principal value, without discount. (2) ABFS does not currently have any agreements concerning the use of the services of any National Association of Securities Dealers, Inc. ("NASD") member broker-dealer as an agent to assist in the sales of the Notes and, accordingly, is not presently obligated to pay any commissions in connection with the sale of the Notes. If an agreement concerning the use of any broker-dealer is reached, ABFS may pay NASD member broker-dealers, as agents, an estimated commission ranging from .5% to 10% of the sale price of any Notes sold through any such agent, depending on numerous factors. ABFS may agree to indemnify such broker-dealers against certain liabilities, including liabilities under the Securities Act of 1933, as amended. ABFS may also agree to reimburse such broker-dealers for costs and expenses, up to a maximum percentage to be determined, based upon a percentage of Notes sold. See "Plan of Distribution." (3) Before deducting other expenses incurred in connection with the Offering payable by ABFS estimated at approximately $3.1 million. The Company will provide written notice to all holders of the Money Market Notes at least 14 days prior to any decrease in the interest rate to be paid thereon, which notice shall set forth the new interest rate to be paid and the effective date of such change. The Company reserves the right to increase the interest rate paid on the Money Market Notes at any time without prior notice to the holders of the Money Market Notes. No interest will be paid on the Money Market Notes for any day during which the principal balance of any account is less than $1,000. Accrued interest will be paid monthly in the form of additional Money Market Notes. The Money Market Notes are non-negotiable and will be issued in book entry form. As a result, book-entry owners of the Money Market Notes will not be entitled to physical delivery of the Money Market Notes purchased in certificated form equal in amount to their respective book-entry accounts maintained by the Company except in the limited circumstances described herein. See "Prospectus Summary -- Securities Offered." The Company reserves the right to reject any subscription hereunder, in whole or in part, for any reason. Subscriptions will be irrevocable upon receipt by ABFS. In the event a subscription is not accepted by the Company, the proceeds of such subscription will be promptly refunded to the subscriber without deduction of any costs and without interest. The Company expects that such subscriptions will be refunded within 48 hours after the Company has received the subscription. No minimum amount of Notes must be sold in the Offering. ABFS reserves the right to withdraw or cancel the Offering at any time. In the event of such withdrawal or cancellation, the Notes previously sold will remain outstanding until maturity and pending subscriptions will be irrevocable. See "Plan of Distribution." It is presently anticipated that there will be no trading market for the Notes. The Notes will not be transferable without the prior written consent of the Company. Such consent will be withheld in such circumstances as determined by the Company in its reasonable discretion, including but not limited to the Company's determination that such transfer might result in a violation of any state or federal securities or other applicable law. The Notes will be issued pursuant to an Indenture of Trust between the Company and First Trust, N.A., as trustee. For a full description of the terms and provisions of the Notes offered hereby, see "Description of the Notes and the Indenture." No ABFS employee, broker-dealer, salesman or other person has been authorized to give any oral information or to make any oral representation other than those contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by ABFS. This Prospectus does not constitute an offer of any securities other than those to which it relates or to any person in any jurisdiction where such offer would be unlawful. The delivery of this Prospectus at any time does not imply that the information contained herein is correct as of any time subsequent to its date. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Commission. So long as the Company is subject to the reporting requirements of the Exchange Act, it will continue to furnish the reports and other information required thereby to the Commission. The Company will furnish to its debtholders annual reports containing audited financial statements and an opinion thereon expressed by the Company's independent auditors and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE NOTES OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT SETTING FORTH THE INTEREST RATES THEN BEING OFFERED ON THE NOTES. 2 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form SB-2 (together with all exhibits and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the registration of the Notes offered by this Prospectus. This Prospectus does not contain all of the information set forth in such Registration Statement and the exhibits thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information pertaining to the Company, the Notes offered by this Prospectus and related matters, reference is made to such Registration Statement, including the exhibits filed as a part thereof. Each statement in this Prospectus referring to a document filed as an exhibit to such Registration Statement is qualified by reference to the exhibit for a complete statement of its terms and conditions. The Registration Statement and any reports and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located as follows: Chicago Regional Office, Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, IL 60661-2511; and New York Regional Office, 7 World Trade Center, New York, NY 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such web site is http://www.sec.gov. The Company's common stock, par value $0.001 per share ("Common Stock"), is traded on the NASDAQ National Market System under the symbol "ABFI." Reports, proxy statements and other information concerning the Company are available for inspection at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006. 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements, including the notes thereto appearing elsewhere in this Prospectus. Prospective investors of the Notes offered hereby should carefully consider the factors set forth under "Risk Factors." General ABFS is a financial services company operating primarily in the mid-atlantic region of the United States. The Company, through its principal direct and indirect subsidiaries, originates, sells and services loans to businesses secured by real estate and other business assets ("Business Purpose Loans") and non-conforming mortgage loans typically to credit impaired borrowers, secured by mortgages on single-family residences ("Home Equity Loans"). The Company also originates small ticket leases (generally $10,000 to $150,000) for the acquisition of business equipment ("Equipment Leases"). In addition, the Company has recently entered into exclusive business arrangements with several financial institutions pursuant to which the Company will purchase Home Equity Loans that do not meet the underwriting guidelines of the selling institution but meet the Company's underwriting criteria (the "Bank Alliance Program"). The Company's customers currently consist primarily of two groups. The first category of customers includes credit impaired borrowers who are generally unable to obtain financing from banks, savings and loan associations or other finance companies that have historically provided loans only to individuals with favorable credit characteristics. These borrowers generally have impaired or unsubstantiated credit characteristics and/or unverifiable income and respond favorably to the Company's marketing efforts. The second category of customers includes borrowers who would qualify for loans from traditional lending sources but elect to utilize the Company's products and services. The Company's experience has indicated that these borrowers are attracted to the Company's loan products as a result of its marketing efforts, the personalized service provided by the Company's staff of highly trained lending officers and the timely response to loan requests. Historically, both categories of customers have been willing to pay the Company's origination fees and interest rates which are generally higher than those charged by traditional lending sources. Business Purpose Loans The Company began operations in 1988 and initially offered Business Purpose Loans. The Company currently originates Business Purpose Loans through a retail network of salespeople in Pennsylvania, Delaware, New Jersey, New York, Virginia, Maryland and Connecticut. The Company has taken the initial steps to expand its business purpose lending program into the southeastern region of the United States. The Company focuses its marketing efforts on small businesses who do not meet all of the credit criteria of commercial banks and small businesses that the Company's research indicates are predisposed to using the Company's products and services. The Business Purpose Loans originated by the Company are secured by real estate. In substantially all cases, the Company receives additional collateral in the form of, among other things, pledges of securities, assignments of contract rights, life insurance and lease payments and liens on business equipment and other business assets, as available. The Company's Business Purpose Loans are generally originated with fixed rates and typically have origination fees of 5.0% to 6.0%. The weighted average interest rate received on the Business Purpose Loans originated by the Company was 15.91% and 15.83% for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. Business Purpose Loans typically have significant prepayment penalties which the Company believes tend to extend the average life of such loans and make these loans more attractive products to securitize. The Business Purpose Loans securitized in the Company's last two securitizations had a weighted average loan-to-value ratio (based upon the real estate collateral securing the loans) of 59.9% at the time of securitization. 4 The Company's strategy for expanding its business purpose lending program focuses on motivating borrowers through the investment in retail marketing and sales efforts rather than on emphasizing discounted pricing or a reduction in underwriting standards. The Company utilizes a proprietary training program involving extensive and on-going training of its loan officers. The Company originated $27.6 million and $28.9 million of Business Purpose Loans for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. Home Equity Loans ABFS entered the Home Equity Loan market in 1991. The Company originates Home Equity Loans primarily to credit impaired borrowers through retail marketing which includes telemarketing operations, direct mail, radio and television advertisements. The Company currently originates Home Equity Loans primarily in Pennsylvania, New Jersey, Delaware, Maryland, Virginia and Georgia. The Company was recently granted licenses and expects to begin originating Home Equity Loans on a limited basis in North Carolina, South Carolina, Connecticut and Florida during calendar 1997. The Company originated $57.8 million and $36.5 million of Home Equity Loans for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. The weighted average interest rate on Home Equity Loans originated by the Company was 11.54% and 9.94% for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. The Company initiated the Bank Alliance Program in fiscal 1996. The Company believes that the Bank Alliance Program is a unique method of increasing the Company's production of Home Equity Loans to credit impaired borrowers. Currently, the Company has entered into agreements with eight financial institutions which provide the Company with the opportunity to underwrite, process and purchase Home Equity Loans generated by the branch networks of such institutions which consist of approximately 1,000 branches located in Pennsylvania, Delaware, New Jersey and Maryland. The Company is also negotiating with other financial institutions regarding their participation in the program. Equipment Leases ABFS began offering Equipment Leases in December 1994 to complement its business purpose lending program. The Company originates leases on a nationwide basis with a particular emphasis on the eastern portion of the United States. The Company believes that cross-selling opportunities exist for offering lease products to Business Purpose Loan customers and offering Business Purpose Loans to lease customers. The weighted average interest rate received on the Equipment Leases originated by the Company was 16.01% and 17.22% for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. The Company currently holds all Equipment Leases originated in its lease portfolio to generate interest income. The Company recently hired a leasing officer with over 25 years of experience in small ticket leasing to expand this area of the Company's business. See "Business -- Lending and Leasing Activities." The Company intends to continue to utilize funds generated from the securitization of loans and the sale of subordinated debt to increase its loan and lease originations and to expand into new geographic markets, with an initial focus on expansion in the southeastern region of the United States. The Company also intends to expand its Bank Alliance Program with financial institutions across the United States. From the inception of the Company's business in 1988 through March 31, 1997, the Company has experienced total net loan and lease losses of approximately $303,000. The Company's losses on its total loan and lease portfolio serviced totaled $50,000, $129,000, $88,000 and $10,000, respectively, for the nine months ended March 31, 1997 and the years ended June 30, 1996, 1995 and 1994. The Company's loans and leases delinquent over 30 days (excluding real estate owned) represented 2.46% and 2.30% of the total loan and lease portfolio at March 31, 1997 and June 30, 1996, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset Quality." 5 Securitization of Loans The ongoing securitization of loans is a central part of the Company's current business strategy. The Company's ability to fund and subsequently securitize Business Purpose Loans and Home Equity Loans has significantly improved its financial performance and enabled it to both expand its marketing efforts and increase the geographic scope of its products. Through March 31, 1997, the Company had securitized an aggregate of $66.5 million of Business Purpose Loans and $66.9 million of Home Equity Loans. The Company retains the servicing rights on its securitized loans. See "Business -- Securitizations." In addition to securitizations, the Company funds its operations with subordinated debt that the Company markets directly to individuals from the Company's principal operating office located in Pennsylvania and branch offices located in Florida and Arizona. At March 31, 1997, the Company had $49.3 million in subordinated debt outstanding with a weighted average coupon of 9.02% and a weighted average maturity of 25.6 months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Public Offering of Common Stock In February 1997, the Company completed an underwritten public offering of 1,150,000 shares (including 150,000 shares sold pursuant to the underwriters' overallotment option) of its Common Stock. The Common Stock was sold at a price of $20.00 per share. The offering of the Common Stock resulted in net proceeds of approximately $20.7 million. The net proceeds from the Common Stock offering had the effect of increasing the Company's stockholders' equity by approximately $20.7 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 6 Summary Consolidated Financial Data The consolidated financial information set forth below for ABFS should be read in conjunction with the more detailed consolidated financial statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
Nine Months Ended March 31, Year Ended June 30, -------------------- --------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- -------- -------- -------- --------- ------- --------- (Dollars in Thousands, except per share data) Statement of Income Data: Revenues: Gain on sale of loans ........................... $15,645 $3,974 $9,005 $1,443 $ 110 $ 119 $ 83 Interest and fees .............................. 4,086 2,362 3,351 4,058 2,367 1,619 1,534 Other .......................................... 316 94 23 143 156 306 103 Total revenues .................................... 20,047 6,430 12,379 5,644 2,633 2,044 1,720 Total expenses .................................... 13,200 5,406 9,258 4,750 2,299 1,977 1,928 Operating income (loss) before income taxes (recoverable), extraordinary item and cumulative effect of accounting change ..................... 6,847 1,024 3,121 894 334 67 (208) Income (loss) before extraordinary item and cumulative effect of accounting change ......... 4,451 665 2,319 581 137 41 (125) Extraordinary item (net of income taxes of $101) . -- -- -- -- -- -- 157 Cumulative effect of accounting change on prior years .......................................... -- -- -- -- (52) -- -- Net income ....................................... 4,451 665 2,319 581 85 41 32 Per Common Share Data(1): Income (loss) before extraordinary item and cumulative effect of accounting change ......... $ 1.67 $ .29 $ 1.01 $ .27 $ .04 $ .02 $ (.08) Extraordinary item .............................. -- -- -- -- -- -- .10 Net income ....................................... 1.67 .29 1.01 .27 .04 .02 .02 Cash dividends declared ........................ .045 -- 0.03 -- -- -- --
March 31, June 30, --------------------- ------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- -------- --------- --------- -------- ------- ------ (In Thousands) Balance Sheet Data: Cash and cash equivalents ........................... $ 25,778 $ 799 $ 5,345 $ 4,734 $ 83 $ 151 $ 270 Loan and lease receivables, net available for sale . 16,152 23,444 17,625 8,669 3,181 2,170 2,088 Other ............................................. 903 499 534 328 5,538 2,963 1,491 Total assets ....................................... 93,179 40,226 46,894 22,175 12,284 7,270 5,368 Subordinated debt ................................. 49,339 28,682 33,620 17,800 7,171 1,327 665 Total liabilities ................................. 63,704 37,417 42,503 20,031 10,721 5,801 4,322 Stockholders' equity .............................. 29,475 2,809 4,392 2,143 1,562 1,469 1,045
- ------------ (1) Per share information for fiscal years 1994, 1993 and 1992 has been restated to reflect the 3 for 2 stock split effected on November 1, 1995. 7
Nine Months Ended March 31, Year Ended June 30, -------------------------- ------------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ----------- ------------ --------- --------- --------- -------- ------- (Dollars in Thousands) Other Data: Originations: Business Purpose Loans .................. $ 27,581 $ 20,545 $28,872 $18,170 $11,793 $9,769 $5,773 Home Equity Loans ..................... 57,827 24,218 36,479 16,963 22,231 22,017 34,462 Equipment Leases ........................ 5,622 4,230 5,967 2,220 -- -- -- Loans sold: Securitizations ........................ 87,156 14,506 36,506 9,777 -- -- -- Other ................................. 1,757 18,956 19,438 31,948 30,562 29,036 40,310 Total loan and lease portfolio serviced . 138,030 44,260 59,891 17,774 8,407 5,134 3,578 Average loan/lease size: Business Purpose Loans .................. 75 78 78 71 57 63 48 Home Equity Loans ..................... 48 46 47 46 51 45 42 Equipment Leases ........................ 10 11 11 12 -- -- -- Weighted average interest rate on loans and leases originated: Business Purpose Loans .................. 15.91% 15.82% 15.83% 16.05% 16.03% 16.24% 16.45% Home Equity Loans ..................... 11.54 10.34 9.94 12.68 8.65 9.60 9.25 Equipment Leases ........................ 16.04 15.96 17.22 15.85 -- -- --
At or For The Nine Months Ended March 31, At or For the Year Ended June 30, --------------------- ------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- ------- --------- Financial Ratios: Return on average assets (1) ............ 8.47% 2.84% 6.71% 3.37% 0.87% 0.65% 0.56% Return on average equity (1) ............ 35.83 35.04 70.96 31.36 5.58 3.29 (3.27) Total delinquencies as a percentage of total portfolio serviced, at end of period (2) .............................. 2.47 3.08 2.30 3.84 6.85 5.97 5.39 Allowance for credit losses to total portfolio serviced, at end of period ... 1.00 1.05 1.18 .87 .93 .80 1.14 Real estate owned as a percentage of total portfolio serviced, at end of period ................................. .50 1.25 1.01 4.29 2.63 1.44 -- Loan and lease losses as a percentage of the average total portfolio serviced during the period ..................... .05 -- .33 .66 .15 .47 .13 Pre-tax income (loss) as a percentage of total revenues ........................... 34.15 15.92 25.21 15.84 12.69 3.26 (12.10)
- ------------ (1) Annualized. (2) Total delinquencies includes loans and leases delinquent over 30 days, exclusive of real estate owned. 8 Securities Offered General. The Offering relates to $125,000,000 in principal amount of Investment Notes and Money Market Notes issued by ABFS pursuant to an Indenture of Trust between the Company and First Trust National Association, a national banking association as trustee (the "Indenture"). The Notes are subordinated to the Senior Debt (as defined herein) of the Company and are not insured, guaranteed or secured by any lien on any assets of ABFS. There are no provisions for a sinking fund. The Investment Notes and the Money Market Notes will be subordinated to all Senior Debt of the Company. As of May 15, 1997, there was no Senior Debt outstanding. There is no limitation on the amount of Senior Debt the Company may incur. Senior Debt is defined for this purpose to include any indebtedness (whether outstanding on the date hereof or hereafter created) incurred in connection with borrowings by the Company (including its subsidiaries) from a bank, trust company, insurance company, other institutional lender or other entity which lends funds in connection with its primary business activities, whether such indebtedness is or is not specifically designated by the Company as being "Senior Debt" in its defining instruments. In addition, any indebtedness of the subsidiaries of ABFS, other than the Senior Debt, will have rights upon liquidation or dissolution of the particular subsidiary prior to payment being made to the debtholders. Such debt totaled $1.1 million as of May 15, 1997. Any indebtedness of ABFS, other than the Senior Debt, will have rights upon liquidation or dissolution of ABFS which ranks pari passu (i.e. equally) in right of payment to the Notes offered hereby. As of May 15, 1997, the Company had $52.0 million of indebtedness which ranks pari passu in right of payment with the Notes. See "Description of the Notes and the Indenture -- Provisions Related to All Notes." Investment Notes. The Investment Notes are offered with fixed maturities ranging from three months to ten years. Individual Investment Notes will be issued as subscriptions are accepted. The Investment Notes are offered in minimum denominations of $1,000. Purchasers thereof may choose any of the following maturities: three months, six months, one year, eighteen months, two years, thirty months, three years, four years, five years, seven years or ten years. The Investment Notes are non-negotiable instruments and will be issued in fully registered form. Transfers of record ownership of the Investment Notes may be made only with the prior written consent of ABFS. Such consent will be withheld in such circumstances as determined by the Company in its reasonable discretion, including but not limited to the Company's determination that such transfer might result in a violation of any state or federal securities or other applicable law. The Company may also require a signature guarantee in connection with such transfer. The term of the Investment Notes may, with the consent of the Company, be extended in accordance with the procedure set forth below. The Company provides notice to the holder of a note regarding the upcoming maturity date. The holder may request repayment for a period of up to seven days after the maturity date of the Investment Note. As a courtesy, the Company provides a request for repayment form with such notice. (Use of such form by a holder is not a condition of repayment.) Requests for repayment may also be made to the Company by letter. If the holder does not request repayment and the Company does not notify the holder of its intention to repay the Investment Note, such note will be extended for an identical term. If the Company intends to repay the Investment Note and to not permit the holder to extend the term it will notify the holder of its intention at least seven days prior to the expiration of the applicable term. Any Investment Notes which are so extended will be extended at the interest rate then being offered by the Company for newly issued Investment Notes of like term and denomination. See "Highlights of Terms of the Notes Offered" on page 11 hereof. Money Market Notes. The Money Market Notes are offered in minimum denominations of $1,000 and any amount in excess thereof. The Money Market Notes have no stated maturity and are redeemable in minimum amounts of $500 (in any amount to close an account) at the option of the holder upon written notice to the Company. The payment due upon redemption shall be made within 10 business days of the Company's receipt of such notice from the holder. The Money Market Notes may also be redeemed by the Company at any time upon thirty days written notice to the holder. The Money Market Notes are non-negotiable instruments and will be issued only in book-entry form with the Company maintaining a record of each holder's interest in the Money Market Notes through the 9 establishment and maintenance of an account for each purchaser of a Money Market Note. Except in certain limited circumstances described herein, the Money Market Notes will not be issuable in definitive certificated form to any holder. Upon subscription, a transaction statement reflecting ownership will be issued to each purchaser upon the Company's acceptance of the purchaser's subscription. Such statement is not a negotiable instrument, and no rights of ownership in a Money Market Note may be transferred by the endorsement and delivery of such statement to a purchaser. Transfers of record ownership of the Money Market Notes may be made only with the prior written consent of ABFS. Such consent will be withheld in such circumstances as determined by the Company in its reasonable discretion, including but not limited to the Company's determination that such transfer might result in a violation of any state or federal securities or other applicable law. The Company may require a signature guarantee in connection with such transfer. Upon transfer of a Money Market Note, the Company will provide the transferee of the Money Market Note with a transaction statement which will evidence the transfer of the ownership of the account on the Company's records. The Company shall provide the Trustee with information regarding the establishment of new accounts and transfers of existing accounts on a bi-weekly basis. The interest rate paid on the Money Market Notes will be adjusted by the Company from time to time in its sole discretion provided that such rate shall not be less than 4.0% per year. The Company will provide written notice to all holders of the Money Market Notes at least 14 days prior to any decrease in the interest rate to be paid thereon, which notice shall set forth the new interest rate to be paid and the effective date of such change. The Company reserves the right to increase the interest rate paid on the Money Market Notes at any time without prior notice to the holders of the Money Market Notes. Interest on the Money Market Notes will be compounded daily and credited monthly on the last day of each calendar month. In lieu of paying interest by check, accrued interest will be paid in the form of additional Money Market Notes. No interest will be paid on the Money Market Notes for any day during which the principal balance of an account is less than $1,000. The Company is required to provide the Trustee with quarterly reports which shall include such information as the Trustee shall reasonably request, including the outstanding balance, interest credited, withdrawals made and interest rate paid on the Money Market Note accounts during the preceding quarterly period. The Company will provide holders of the Money Market Notes with a monthly statement which will indicate, among other things, such holder's current balance (including interest credited and withdrawals made) and interest rate paid on the Money Market Notes during the preceding calendar month. Such statements will be mailed to such holders no later than the tenth business day following each month end. See "Highlights of Terms of the Notes Offered" on page 11 hereof. Use of Proceeds The net proceeds resulting from the sale of the Notes will be utilized by the Company for its general corporate purposes, including financing the future growth of the Company's Business Purpose Loan, Home Equity Loan and Equipment Lease Portfolios, the repayment of the Company's outstanding debt and the possible unspecified acquisitions of related businesses or assets (although none are currently contemplated). No specific allocation of such proceeds has been determined as of the date of this Prospectus. See "Use of Proceeds." 10 HIGHLIGHTS OF TERMS OF THE NOTES OFFERED
Investment Notes Types of Security Offered ...... Unsecured, subordinated, fixed term notes Denomination of Initial Purchase and Additional Purchases ............ Minimum purchase: $1,000 per note or any amount in excess thereof. Annual Interest Rate ............ Fixed upon issuance. Purchasers will elect a term length and the interest rate applicable to such note will be based upon the term length chosen. Payment of Interest ............ Interest on notes with maturities of less than one year will be compounded daily and paid at maturity. Interest on notes with maturities of one year or greater will be compounded daily and, at the election of the holder, paid at maturity, monthly, quarterly, semi-annually or annually. Redemption by Holder ............ Notes with maturities of less than one year are not redeemable by the holder prior to maturity. Notes with maturities of one year or greater may be redeemed by the holder following his/her Total Permanent Disability, or by his/her estate after death, at the principal amount plus accrued interest. Otherwise, the holder will have no right to cause redemption prior to maturity. (For joint holders, see "Description of the Notes and the Indenture -- Provisions Related to Investment Notes".) Redemption by Company ......... Not redeemable until maturity. Form ........................... In fully registered form and non- negotiable. Not transferable without the Company's prior written consent. Maturity ........................ Investment Notes are offered with terms to maturity of three, six, eighteen and thirty months and one, two, three, four, five, seven and ten years. Automatic Extension ............ If the Company does not notify the holder of its intention to repay the note at least seven days prior to maturity or if not redeemed by holder within seven days after its maturity date, the note will be extended automatically for a period equal to the original term. Notes to be extended will be extended at a fixed rate equal to the rate then being offered on newly issued notes of like tenor, term and denomination at their respective maturity dates. Monthly Statements ............ None.
Money Market Notes Types of Security Offered ...... Unsecured, adjustable rate, subordinated notes Denomination of Initial Purchase and Additional Purchases ............ Minimum purchase: $1,000 per note or any amount in excess thereof. Annual Interest Rate ............ The interest rate paid will be adjusted by the Company from time to time in its sole discretion provided that such rate shall not be less than 4.0% per year. Holders will be notified in writing at least 14 days prior to any decrease in the interest rate to be paid. No interest will be paid for any day on which the principal balance in an account is below $1,000. Payment of Interest ............ Interest will be compounded daily and credited monthly at the end of each month. No checks will be issued in payment of interest. Accrued interest will be added to principal in each account in the form of additional notes. Redemption by Holder ............ May be redeemed by the holder upon writ- ten notice to the Company with payment to be made within 10 business days of the Company's receipt of such notice from the holder. Redemptions must be at least $500, except for redemptions to close an account. Redemption by Company ......... Redeemable upon 30 days written notice to the holder. Form ........................... In book-entry form and non-negotiable. (A monthly statement will be issued, not an individual promissory note.) Not transferable without the Company's prior written consent. Maturity ........................ No fixed maturity. Automatic Extension ............ Not applicable. Monthly Statements ............ Monthly statements detailing the current balance and interest rate paid on each account will be mailed to each holder no later than the tenth business day following each month end.
THE NOTES OFFERED HEREBY ARE UNSECURED OBLIGATIONS SUBORDINATED TO THE SENIOR DEBT OF THE COMPANY. THE COMPANY IS NOT SUBJECT TO STATE OR FEDERAL STATUTES OR REGULATIONS APPLICABLE TO COMMERCIAL BANKS AND/OR SAVINGS AND LOAN ASSOCIATIONS WITH REGARD TO INSURANCE, THE MAINTENANCE OF RESERVES, THE QUALITY OR CONDITION OF ITS ASSETS OR OTHER MATTERS. THE NOTES OFFERED HEREUNDER ARE NOT CERTIFICATES OF DEPOSIT. PAYMENT OF PRINCIPAL AND INTEREST ON THE NOTES IS NOT GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR OTHER ENTITY. THE COMPANY'S REVENUES FROM OPERATIONS, INCLUDING THE SECURITIZATION OR SALE OF LOANS FROM ITS PORTFOLIO, THE COMPANY'S WORKING CAPITAL AND CASH GENERATED FROM ADDITIONAL DEBT FINANCING REPRESENT THE COMPANY'S SOURCES OF FUNDS FOR THE REPAYMENT OF PRINCIPAL, AT MATURITY, AND THE ONGOING PAYMENT OF INTEREST ON THE NOTES. 11 RISK FACTORS In addition to the financial and other information contained in this Prospectus, prospective investors should consider, among other things, the following factors in connection with the purchase of the Notes. Absence of Insurance and Regulation The Notes are not insured by any governmental or private agency and they are not guaranteed by any public or private entity. Likewise, the Company is not regulated or subject to examination in the same manner as commercial banks and thrift institutions. The Company is not a commercial bank or savings/thrift institution. The Company is dependent upon proceeds from the continuing sale of Notes and its institutional lines of credit to conduct its ongoing operations. The Company's revenues from operations, including the sale or securitization of loans from its portfolio, the Company's working capital and cash generated from additional debt financing represent the sources of funds for repayment of principal at maturity and the ongoing payment of interest on the Notes. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Subordination of Debt Represented by the Notes The Notes will be subordinate in claim and right to all Senior Debt of the Company. As of May 15, 1997, there was no Senior Debt outstanding. There is no limitation on the amount of Senior Debt the Company can incur. Senior Debt is defined for this purpose to include any indebtedness (whether outstanding on the date hereof or thereafter created) incurred in connection with borrowings by the Company (including its subsidiaries) from a bank, trust company, insurance company, or from any other institutional lender, whether such indebtedness is or is not specifically designated by the Company as being "Senior Debt" in its defining instruments. If the Company were to become insolvent, such Senior Debt of the Company would have a priority of right to payment in connection with the liquidation of the Company and its assets. In addition, any indebtedness of the subsidiaries of ABFS, other than the Senior Debt, will have rights upon liquidation or dissolution of the particular subsidiary prior to payment being made to any debtholders. As of May 15, 1997, such debt totaled $1.1 million. There can be no assurance that any holder of the Company's Notes would be repaid upon a liquidation of the Company. See "Description of the Notes and the Indenture -- Provisions Related to All Notes." Absence of Sinking Fund The Notes are unsecured obligations of the Company and no sinking fund (i.e., funds contributed on a regular basis to a separate account to repay the Notes) exists for the benefit of debtholders. See "Description of the Notes and the Indenture -- General." Limited Liquidity -- Lack of Trading Market The Notes offered hereby are non-negotiable and are therefore not transferable without the prior written consent of the Company. Due to the non-negotiable nature of the Notes and the lack of a market for the sale of the Notes, even if the Company permitted a transfer, investors may be unable to liquidate their investment even if circumstances would otherwise warrant such a sale. See "Description of the Notes and the Indenture." Decline in Collateral Value May Adversely Affect Loan-to-Value Ratios The Company's business may be adversely affected by declining real estate values. Any material decline in real estate values reduces the ability of borrowers to use home equity to support borrowings and increases the loan-to-value ratios of loans previously made by the Company, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a borrower default. Further, delinquencies, foreclosures and 12 losses generally increase during economic slowdowns or recessions. As a result, there can be no assurance that the market value of the real estate underlying such loans will at any time be equal to or in excess of the outstanding principal amount of such loans. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Credit Impaired Borrowers May Result in Increased Delinquency Rates The Company markets loans, in part, to borrowers who, for one reason or another, are not able, or do not wish, to obtain financing from traditional sources such as commercial banks. Loans made to such borrowers may entail a higher risk of delinquency and loss than loans made to borrowers who utilize traditional financing sources. As a result, the Company may experience higher delinquency rates and losses in the event of adverse economic conditions than those experienced by other lenders. At March 31, 1997 and June 30, 1996, total delinquent loans as a percentage of the Company's total portfolio serviced were 2.46% and 2.3%, respectively. While the Company utilizes underwriting standards and collection procedures designed to mitigate the higher credit risk associated with lending to such borrowers, no assurance can be given that such standards or procedures will offer adequate protection against this risk. In the event loans sold and serviced by the Company experience higher delinquencies, foreclosures or losses than anticipated, the Company's results of operations or financial condition could be adversely affected. See "Business." Dependence Upon Securitizations and Fluctuations in Operating Results In recent periods, gain on sale of loans generated by the Company's securitizations has represented a substantial majority of the Company's revenues and net income. Gain on sale of loans resulting from securitizations as a percentage of total revenues was 78.0% and 72.7% for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. In addition, the Company relies primarily on securitizations to generate cash proceeds for repayment of its warehouse credit facilities and other borrowings and to enable the Company to originate additional loans. Several factors affect the Company's ability to complete securitizations, including conditions in the securities markets generally, conditions in the asset-backed securities markets specifically and the credit quality of the portfolio of loans serviced by the Company. Any substantial reduction in the size or availability of the securitization market for the Company's loans could have a material adverse effect on the Company's results of operations and financial condition. The Company's revenues and net income have fluctuated in the past and are likely to fluctuate in the future principally as a result of the timing and size of its securitizations. The strategy of selling loans through securitizations requires the Company to build an inventory of loans over time, during which time the Company incurs costs and expenses. Since the Company does not recognize gains on the sale of such loans until it consummates a securitization thereof, which may not occur until a subsequent fiscal period, the Company's operating results for a given period can fluctuate significantly as a result of the timing and level of securitizations. If securitizations do not close when expected, the Company could experience a loss for the period which could have a materially adverse effect on the Company's results of operations. In addition, due to the timing difference between the period when costs are incurred in connection with the origination of loans and their subsequent sale through the securitization process, the Company may operate on a negative cash flow basis, which could adversely impact the Company's results of operations and financial condition. The Company has made estimates of the excess spread receivable to be received in connection with its securitizations based upon certain prepayment and default assumptions; however, its actual prepayment and default experience may vary materially from such estimates. As a result, the gain recognized by the Company upon the sale of loans may be overstated to the extent that actual prepayments or losses are greater than estimated. Higher levels of future prepayments, delinquencies and/or liquidations could result in decreased excess spreads and the write down of the receivable, which would adversely affect the Company's income in the period of adjustment. Conversely, if the estimated average lives of the loans assumed for this purpose are shorter than the actual life, the amount of cash actually received over the lives of the loans would reduce the gain previously recognized at the time the loans were sold and the Company would record a charge against earnings. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 13 Ability of the Company to Sustain Recent Levels of Growth and Operating Results During the nine months ended March 31, 1997 and fiscal 1996, the Company experienced record levels of total revenues and net income as a result of increases in loan originations and the securitization of loans. Total revenues and net income were $20.0 million and $4.5 million respectively, for the nine months ended March 31, 1997 as compared to $6.4 million and $700,000 for the nine months ended March 31, 1996. Total revenues increased approximately $6.8 million, or 121.4%, between fiscal 1995 and 1996 while net income increased approximately $1.7 million, or 292.6%. The Company's ability to sustain the level of growth in total revenues and net income experienced during the nine months ended March 31, 1997 and fiscal 1996 is dependent upon a variety of factors outside the control of the Company, including interest rates, conditions in the asset-backed securities markets, economic conditions in the Company's primary market area, competition and regulatory restrictions. As a result, the rate of growth experienced in the nine months ended March 31, 1997 and fiscal 1996 may not be sustained in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Ability of the Company to Implement its Growth Strategy The Company's growth strategy is dependent upon its ability to increase its loan volume through geographic expansion while maintaining its customary origination fees, interest rate spreads and underwriting criteria with respect to such increased loan volume. Implementation of this strategy will depend in large part on the Company's ability to: (i) expand its offices in markets with a sufficient concentration of borrowers meeting the Company's underwriting criteria; (ii) obtain adequate financing on favorable terms to fund its growth strategy; (iii) profitably securitize its loans in the secondary market on a regular basis; (iv) hire, train and retain skilled employees; (v) successfully implement its marketing campaigns; and (vi) continue to expand in the face of increasing competition from other lenders. The Company's failure with respect to any or all of these factors could impair its ability to successfully implement its growth strategy which could have a material adverse effect on the Company's results of operations and financial condition. See "Business." Increased Competition Could Adversely Affect Results of Operations The various segments of the Company's lending businesses are highly competitive. Certain lenders against which the Company competes have substantially greater resources, greater experience and lower cost of funds, as well as a more established market presence than the Company. To the extent the Company's competitors increase their marketing efforts to include the Company's market niche of borrowers, the Company may be forced to reduce the rates and fees it currently charges for such loans in order to maintain and expand its market share. Any reduction in such rates or fees could have an adverse impact on the Company's results of operations. In addition, even after the Company has made a loan to a borrower, the borrower may refinance the loan with another lender at more favorable rates and terms. Furthermore, the profitability of the Company and other similar lenders is attracting additional competitors into this market, with the possible effect of reducing the Company's ability to charge its customary origination fees and interest rates. In addition, as the Company expands into new geographic markets, it will face competition from lenders with established positions in these areas. There can be no assurance that the Company will be able to continue to compete successfully in the markets it serves or expand into new geographic markets. Such an event could have a material adverse effect on the Company's results of operations and financial condition. See "Business -- Competition." Dependence Upon Debt Financing For its ongoing operations, the Company is dependent upon borrowings such as that represented by the Company's unsecured subordinated debt and the Company's warehouse credit facilities and lines of credit as well as funds received from the securitization of loans. The Company had $49.3 million of subordinated debt outstanding at March 31, 1997 and had lines of credit and credit facilities of $72.5 million, none of which was being utilized on such date. At March 31, 1997, subordinated debt scheduled to mature during the twelve months ended March 31, 1998 totaled $26.8 million. Any failure to renew or obtain adequate funding under a warehouse credit facility, or other borrowings, or any substantial reduction in the size of or pricing in the 14 markets for the Company's loans, could have a material adverse effect on the Company's results of operations and financial condition. To the extent that the Company is not successful in maintaining or replacing existing financing, it would have to curtail its loan production activities or sell loans rather than securitizing them, thereby having a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Changes in Interest Rates May Adversely Affect Profitability The profitability of the Company is likely to be adversely affected during any period of rapid changes in interest rates. Any future rise in interest rates may adversely affect demand for the Company's products. In addition, such increase in rates may increase the Company's cost of funds and could adversely affect the spread between the rate of interest received on loans and rates payable under the Company's outstanding credit facilities or the pass-through rate for interests issued in connection with loans securitized. In addition, any future decrease in interest rates will reduce the amounts which the Company may earn on its newly originated loans and leases. A significant decline in interest rates could also decrease the size of the loan portfolio serviced by the Company by increasing the level of loan prepayments. In an attempt to mitigate the effect of changes in interest rates on its fixed-rate mortgage loan portfolio prior to securitization, the Company implemented a hedging strategy in August 1995. An effective hedging strategy is complex and no hedging strategy can completely insulate the Company from interest rate risks. The nature and timing of hedging transactions may impact the effectiveness of hedging strategies. Poorly designed strategies or improperly executed transactions may increase rather than mitigate risk. In addition, hedging involves transaction and other costs, and such costs could increase as the period covered by the hedging protection increases or in periods of rising and fluctuating interest rates. As a result, the Company may be prevented from effectively hedging its interest rate risks without reducing income in current periods. The Company also experiences interest rate risk to the extent that a portion of its liabilities are comprised of subordinated debt with scheduled maturities of one to ten years. At March 31, 1997, the Company had $22.5 million of subordinated debt with scheduled maturities greater than one year. To the extent that interest rates decrease in the future, the rates paid on such liabilities could exceed the rates received on the Company's newly originated loans resulting in a decrease in the Company's spread. Consequently, fluctuations in interest rates may adversely affect the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Interest Rate Risk Management." Geographic Concentration of Loans The Company currently originates loans in a circumscribed geographic area which primarily includes the states located in the mid-atlantic region of the United States. This practice may subject the Company to the risk that a downturn in the economy in such region of the country would more greatly affect the Company than if its lending business were more geographically diversified. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Contingent Risks Although the Company sells substantially all loans which it originates on a nonrecourse basis through securitizations, the Company retains risk on substantially all loans sold. During the period of time that loans are held pending sale, the Company is subject to the various business risks associated with the lending business including the risk of borrower default, the risk of foreclosure and the risk that a rapid increase in interest rates would result in a decline in the value of loans to potential purchasers. In addition, documents governing the Company's securitizations require the Company to commit to repurchase or replace loans which do not conform to the representations and warranties made by the Company at the time of sale. When borrowers are delinquent in making monthly payments on loans included in a 15 securitization trust, the Company is required to advance interest payments with respect to such delinquent loans to the extent that the Company deems such advances will be ultimately recoverable. These advances require funding from the Company's capital resources but have priority of repayment from the succeeding month's collections. In the ordinary course of its business, the Company is subject to claims made against it by borrowers and private investors arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions by employees, officers and agents of the Company (including its appraisers), incomplete documentation and failures by the Company to comply with various laws and regulations applicable to its business. Although there are no currently asserted material claims or legal actions asserted against the Company, any claims asserted in the future may result in legal expenses or liabilities which could have a material adverse effect on the Company's results of operations and financial condition. See "Business -- Legal Proceedings." Diversification of the Company's Business The Company's involvement in equipment leasing is relatively new. Therefore, the Company is not able to predict with any certainty whether it will be able to engage in this area of its business profitability either in the short or long term. There are also risks inherent in this type of activity which differ in certain respects from those which exist in the Company's lending activities. While the Equipment Leases made by the Company are secured by a lien on the equipment leased, such equipment is subject to the risk of damage, destruction or technological obsolescence prior to the termination of the lease. In the case of the Company's fair market value leases, lessees may choose not to exercise their option to purchase the equipment for its fair market value at the termination of the lease, with the result that the Company may be required to sell such equipment to third party buyers at a discount or otherwise dispose of such equipment. See "Business -- Lending and Leasing Activities." Regulatory Restrictions and Licensing Requirements The Company's home equity lending business is subject to extensive regulation, supervision and licensing by federal, state and local governmental authorities and is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on all or part of its home equity lending activities. The Company's home equity lending activities are subject to the Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act and Regulation B, as amended, the Federal Real Estate Settlement Procedures Act and Regulation X, the Home Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as well as other federal and state statutes and regulations affecting the Company's activities. The Company is also subject to examinations by state regulatory authorities with respect to originating, processing, underwriting, selling and servicing Home Equity Loans. These rules and regulations, among other things, impose licensing obligations on the Company, prohibit discrimination, regulate assessment, collection, foreclosure and claims handling, payment features, mandate certain disclosures and notices to borrowers and, in some cases, fix maximum interest rates, and fees. Failure to comply with these requirements can lead to termination or suspension of licenses, certain rights of rescission for mortgage loans, class action lawsuits and administrative enforcement actions. The previously described laws and regulations are subject to legislative, administrative and judicial interpretation, and certain of these laws and regulations have been infrequently interpreted or only recently enacted. Infrequent interpretations of these laws and regulations or an insignificant number of interpretations of recently enacted regulations can result in ambiguity with respect to permitted conduct under these laws and regulations. Any ambiguity under the regulations to which the Company is subject may lead to regulatory investigations or enforcement actions and private causes of action, such as class action lawsuits, with respect to the Company's compliance with the applicable laws and regulations. Although the Company believes that it has implemented systems and procedures to facilitate compliance with the foregoing requirements and believes that it is in compliance in all material respects with applicable local, state and federal laws, rules and regulations, there can be no assurance that more restrictive laws, rules and regulations will not be adopted in the future that could make compliance more difficult or expensive. See "Business -- Regulation." 16 Dependence on Key Personnel The success of the Company's operations depend, to a large extent, upon the management, lending, credit analysis and business skills of the senior level management of the Company. If members of senior level management were for some reason unable to perform their duties or were, for any reason, to leave the Company, there can be no assurance that the Company would be able to find capable replacements. The Company has entered into employment agreements with its Chairman, President and Chief Executive Officer, Anthony J. Santilli, Jr., its Executive Vice President, Beverly Santilli, and its Senior Vice President and General Counsel, Jeffrey M. Ruben. The Company also holds "key-man" insurance for Anthony J. Santilli, Jr. and Beverly Santilli. See "Management." Environmental Concerns In the course of its business, the Company has acquired, and may acquire in the future, properties securing loans which are in default. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or chemical releases at such property, and may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and cleanup costs incurred by such parties in connection with the contamination. The liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such property, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not the facility is owned or operated by such person. In addition, the owner or former owners of a contaminated site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from such property. The ability of the Company to foreclose on the real estate collateralizing its loans, if at any time such a foreclosure would be otherwise appropriate, may be limited by the above-referenced environmental laws. While the Company would not make a loan collateralized by real property as to which it had knowledge of an environmental risk or problem, it is possible that such a risk or problem could become known after the subject loan has been made. See "Business -- Loan and Lease Servicing." Management Discretion Over Substantial Amount of the Proceeds of the Offering and Possible Use for Future Unspecified Acquisitions The net proceeds from the sale of the Notes will be utilized for general corporate purposes, including financing the future growth of the Company's Business Purpose Loan, Home Equity Loan and Equipment Lease Portfolios, the repayment of the Company's outstanding debt and the possible unspecified acquisitions of related businesses or assets (although none are currently contemplated). No specific allocation of such proceeds has been determined as of the date of this Prospectus. Management will have broad discretion in allocating the proceeds of the Offering. See "Use of Proceeds." Forward Looking Statements When used in this Prospectus, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "projected", "intends to" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including but not limited to absence of insurance of the Notes, subordination of debt represented by the Notes, absence of a sinking fund for the repayment of the Notes, credit risk related to ABFS's borrowers, market conditions and real estate values in ABFS's primary lending area, lack of a public market for the Notes, competition, factors affecting the Company's ability to implement its growth strategy, ABFS's dependence on debt financing to fund its operations, dependence on securitizations and fluctuations in operating results, the Company's ability to sustain levels of growth, 17 geographic concentration of the Company's loans, diversification of the Company's business, contingent risks, state and federal regulation and licensing requirements applicable to ABFS's lending activities and environmental concerns that could cause the Company's actual results to differ materially from historical earnings and those presently anticipated or projected. Such factors, which are discussed in "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the notes to consolidated financial statements, could affect ABFS's financial performance and could cause ABFS's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in this Prospectus. As a result, potential investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 18 THE COMPANY The Company is a financial services company operating primarily throughout the mid-atlantic region of the United States. ABFS, through its principal direct and indirect subsidiaries, American Business Credit, Inc. ("ABC"), HomeAmerican Credit, Inc. (d/b/a Upland Mortgage and referred to herein as "HAC" or "Upland") and American Business Leasing, Inc. ("ABL"), originates, services and sells Business Purpose Loans, Home Equity Loans and Equipment Leases. The Company also underwrites, processes and purchases Home Equity Loans through the Bank Alliance Program and originates a limited number of secured and unsecured consumer loans. See "Business." ABFS was incorporated in Delaware in 1985 and began operations as a finance company in 1988, initially offering Business Purpose Loans to customers whose borrowing needs the Company believed were not being adequately serviced by commercial banks. Since its inception, ABFS has significantly expanded its product line and geographic scope and currently offers its loan and lease products in more than ten states. The Company's principal executive office is located at 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810. The telephone number at such address is (302) 478-6160. The Company's principal operating office and the executive offices of its subsidiaries are located at Balapointe Office Centre, 111 Presidential Boulevard, Suite 215, Bala Cynwyd, PA 19004. The telephone number at such address is (610) 668-2440. See "Business." USE OF PROCEEDS The net proceeds resulting from the sale of the Notes (estimated to be approximately $121.9 million net of estimated offering expenses if all of the Notes offered hereby are sold) will be utilized by the Company for its general corporate purposes. General corporate purposes may include: (i) financing the future growth of the Company's Business Purpose Loan, Home Equity Loan or Equipment Lease portfolios; (ii) the repayment of warehouse credit facilities, lines of credit and the Company's maturing debt; and (iii) possible future acquisitions of related businesses or assets. The precise amounts and timing of the application of such proceeds depends upon many factors, including, but not limited to, the amount of any such proceeds, actual funding requirements and the availability of other sources of funding. Until such time as the proceeds are utilized, they will be invested in short and long-term investments, including treasury bills, commercial paper, certificates of deposit, securities issued by U.S. government agencies, money market funds and repurchase agreements, depending on the Company's cash flow requirements. The Company's investment policies permit significant flexibility as to the types of such investments that may be made by the Company. The Company may also maintain daily unsettled balances with certain broker-dealers. While the Company may from time to time consider potential acquisitions, the Company as of the date of this Prospectus had no commitments or agreements with respect to any material acquisitions. DESCRIPTION OF THE NOTES AND THE INDENTURE General The Notes will be issued pursuant to an Indenture (the "Indenture") between the Company and First Trust National Association, a national banking association, as trustee (the "Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"), in effect on the date the Indenture is qualified thereunder. The Notes are subject to all such terms, and holders of the Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following includes a summary of certain provisions of the Indenture, a copy of which is available from the Company. This summary does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. The Notes will be subordinated in right of payment to the prior payment in full of all Senior Debt (as herein defined) of the Company, whether outstanding on the date of the Indenture or thereafter incurred. There is no limit on the amount of Senior Debt the Company may incur. See "--Provisions Related to All Notes." 19 The Notes are not secured by any collateral or lien. There are no provisions for a sinking fund applicable to such debt. See "Risk Factors -- Absence of Sinking Fund." The Investment Notes are offered by the Company at maturities ranging from three months to ten years. The term of each Investment Note will be chosen by the purchaser of such note upon subscription. The Money Market Notes have no stated maturity and are redeemable at any time in minimum amounts of $500 (except to close an account) at the option of the holder upon not less than ten business days written notice to the Company. Provisions Relating to Investment Notes Form and Denominations. The Investment Notes will be issued in fully registered form. The Investment Notes are not negotiable instruments, and no rights of record ownership therein can be transferred without the prior written consent of the Company. Ownership of an Investment Note may be transferred on the Company register only by written notice to the Company signed by the owner(s) or such owner's duly authorized representative on a form to be supplied by the Company and with the prior written consent of the Company (which consent shall not be unreasonably withheld). The Company may also, in its discretion, require an opinion from such noteholder's counsel that the proposed transfer will not violate any applicable securities laws and/or a signature guarantee in connection with such transfer. See "Prospectus Summary -- Securities Offered." An Investment Note may be purchased in the minimum amount of $1,000 or any amount in excess thereof. Separate purchases may not be accumulated to satisfy the minimum denomination requirement. Interest. The interest rates payable on the Investment Notes offered hereby will be established by the Company from time to time based on market conditions and the Company's financial requirements. The Company constantly re-evaluates its interest rates based on such analysis. Once determined, the rate of interest payable on an Investment Note will remain fixed for the original term of the Investment Note. The interest rate payable on an Investment Note will be determined based upon the maturity date and term established for such Investment Note upon subscription. Interest on Investment Notes will be computed on the basis of an actual calendar year and will compound daily. Interest on Investment Notes with terms of less than twelve months will be paid at maturity. Purchasers of Investment Notes with terms of one year or greater may elect to have interest paid monthly, quarterly, semiannually, annually or at maturity. This election may be changed one time by the holder during the term of these longer term notes. Requests to change such election are required to be made to the Company in writing. No specific form of change of election is required to be submitted to the Company. Any interest not otherwise paid on an interest payment date will be paid at maturity. The Company reserves the right to vary from time to time, in its discretion, the interest rates it offers on the Investment Notes based on numerous factors other than length of term to maturity. Such factors may include, but are not limited to: the desire to attract new investors; Investment Notes in excess of certain principal amounts; Investment Notes purchased for IRA and/or Keough accounts; rollover investments; and Investment Notes beneficially owned by persons residing in particular geographic localities. As of the date of this Prospectus, the Company is not offering varying interest rates to investors on the Investment Notes of identical maturity. However, the Company may make a decision to vary interest rates in the future based on its fund raising objectives including, but not limited to, the attraction of new investors in particular regions, the encouragement of the rollover of Investment Notes by current holders, circumstances in the financial markets and the economy, additional costs which may be incurred by the Company in selling Investment Notes in a particular jurisdiction which may at the time be relevant to the Company's operations and other factors. Interest Accrual Date. Interest on the Investment Notes will accrue from the date of purchase, which is deemed to be, for accepted subscriptions, the date the Company receives funds, if received prior to 3:00 p.m. on a business day, or the next business day if the Company receives such funds on a non-business day or after 3:00 p.m. on a business day. For this purpose, the Company's business days will be deemed to be Monday through Friday, except for Delaware legal holidays. 20 Interest Withholding. With respect to those investors who do not provide the Company with a fully executed Form W-8 or Form W-9, the Company will withhold 31% of any interest paid. Otherwise, no interest will be withheld, except on the Investment Notes held by foreign business entities. It is the Company's policy that no sale will be made to anyone refusing to provide a fully executed Form W-8 or Form W-9. Automatic Extension. At least seven days prior to an Investment Note's stated maturity date, the Company will notify the registered holder in writing of such maturity date and of its intention to repay, or if the Company does not intend to repay, reminding the holder of the automatic extension. If at such time, the Company does not notify the holder of its intention to repay, subject to the holder's demand for repayment, the term of such note will be automatically extended. If, within seven days after an Investment Note's maturity date, the holder thereof has not demanded repayment of such note, and the Company has not notified the holder of its intention to repay such note, such note shall be extended for a term identical to the term of the original Investment Note. The Investment Notes will continue to renew as described herein absent some action permitted under the Indenture and the Investment Notes by either the holder or the Company. Interest shall continue to accrue from the first day of such renewed term. Such note, as renewed, will continue in all its provisions, including provisions relating to payment, except that the interest rate payable during any renewed term shall be the interest rate which is then being offered by the Company on similar Investment Notes being offered as of the renewal date. If similar Investment Notes are not then being offered, the interest rate upon renewal will be the rate specified by the Company on or before the maturity date, or the note's current rate if no such rate is specified. If the Company gives notice to a noteholder of the Company's intention to repay an Investment Note at maturity, no interest will accrue after the date of maturity. Otherwise, if a noteholder requests repayment within seven days after its maturity date, the Company will pay interest during the period after its maturity date and prior to repayment at the lower of (i) the lowest interest rate then being paid on debt securities being offered by the Company to the general public or (ii) the rate being paid on such note immediately prior to its maturity. As a courtesy, the Company provides a request for repayment form with such notice. Use of such form by a holder is not a condition of repayment. Requests for repayment may also be made to the Company by letter. Place and Method of Payment. Principal and interest on the Investment Notes will be payable at the principal executive office of the Company, as it may be established from time to time, or at such other place as the Company may designate for that purpose; provided, however, that payments may be made at the option of the Company by check or draft mailed to the person entitled thereto at his/her address appearing in the register which the Company maintains for that purpose. Redemption by the Company. The Company will have no right to prepay an Investment Note. The holder has no right to require the Company to prepay any such note prior to its maturity date as originally stated or as it may be extended, except as indicated below. Redemption by the Holder upon Death or Total Permanent Disability. Except for Investment Notes with maturities of less than 12 months, an Investment Note may be redeemed at the election of the holder following his/her Total Permanent Disability, as established to the satisfaction of the Company, or by his/her estate following his/her death. The redemption price, in the event of such a death or disability, will be the principal amount of the Investment Note, plus interest accrued and not previously paid, to the date of redemption. If spouses are joint record owners of an Investment Note, the election to redeem will apply when either record owner dies or becomes subject to a Total Permanent Disability. In other cases of Investment Notes jointly held, the election will not apply. The Company may modify the foregoing policy on redemption after death or disability. However, no such modification will affect the right of redemption applicable to any then outstanding Investment Note. Should the Company modify such policy at a future date, written notice of such modification will be sent to all owners of those outstanding Investment Notes which were purchased while the policy was in effect (but such notice will not affect the right to redeem such outstanding Investment Notes after the owner's death or disability.) For the purpose of determining the right of a holder to demand early repayment of an Investment Note, Total Permanent Disability shall mean a determination by a physician chosen by the Company that the holder, who was gainfully employed on a full time basis at the time of purchase, is unable to work on a full time basis, defined as working at least forty hours per week, during the succeeding twenty-four months. 21 Provisions Relating to Money Market Notes Form and Denominations. The Money Market Notes are not negotiable instruments and will be issued only in book-entry form. See "--Book Entry System." Upon subscription, a transaction statement reflecting the ownership of a Money Market Note will be issued to each purchaser upon the Company's acceptance of the subscription. Such statement is not a negotiable instrument, and no rights of record ownership therein can be transferred without the prior written consent of the Company. Each holder of a Money Market Note will receive a monthly statement indicating any transactions in the holder's account, as well as, interest credited. Ownership of a Money Market Note may be transferred on the Company's register only by written notice to the Company signed by the owner(s) or such owner's duly authorized representative on a form to be supplied by the Company and with the prior written consent by the Company (which consent shall not be unreasonably withheld). The Company may also, in its discretion, require an opinion from such noteholder's counsel that the proposed transfer will not violate any applicable securities laws and/or a signature guarantee in connection with such transfer. Upon transfer of a Money Market Note, the Company will provide the new owner of the Money Market Note with a transaction statement which will evidence the transfer of the account on the Company's records. Money Market Notes have no stated maturity and may be purchased in the minimum amount of $1,000 or any amount in excess thereof. Separate purchases may not be accumulated to satisfy the minimum denomination requirement. Book-Entry System. Upon acceptance of a purchaser's order, the Company will credit its book-entry registration and transfer system to the account of the purchaser of the Money Market Note, the principal amount of such Money Market Note owned of record by such purchaser. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such legal requirements may impair the ability to transfer the record ownership of the Money Market Notes. The record owners of the Money Market Notes issued in a book-entry interest form will not receive or be entitled to receive physical delivery of the Money Market Notes owned. The registered owners of the accounts established by the Company in connection with the purchase or transfer of Money Market Notes shall be deemed to be the owners of the Money Market Notes under the Indenture. Such person holding a book-entry interest in the Money Market Notes must rely upon the procedures established by the Trustee to exercise any rights of a holder of the Money Market Notes under the Indenture. The Company shall provide the Trustee with information regarding the establishment of new accounts and the transfer of existing accounts on a bi-weekly basis. The information regarding the total amount of any principal and/or interest (which shall be paid in the form of additional Money Market Notes) due to book-entry owners with regard to the Money Market Notes on any interest payment date or upon redemption will be made available by the Company to the Trustee upon the Trustee's request. On each interest payment date, the Company will credit each account on the applicable interest payment date based upon the applicable interest rate due on such note and the amount of Money Market Notes held of record in the account. The Company shall have the responsibility for determining the interest payments to be made to the book-entry accounts and for maintaining, supervising and reviewing any records relating to book-entry beneficial interests in the Money Market Notes. Book-entry interests in the accounts evidencing ownership of the Money Market Notes are exchangeable for Money Market Notes in denominations of $1,000 and any amount in excess thereof and fully registered in such names as the Company directs if: (i) the Company at its option advises the Trustee in writing of its election to terminate the book-entry system, or (ii) after the occurrence of an Event of Default, holders of the Money Market Notes aggregating more than 50% of the aggregate outstanding amount of the Money Market Notes advise the Trustee in writing that the continuation of a book-entry system is no longer in the best interests of the holders of Money Market Notes and the Trustee notifies all holders of the Money Market Notes, of the occurrence of any such event and the availability of definitive notes to holders of the Money Market Notes requesting such notes. Subject to the foregoing, the book-entry interests in the Money Market Notes shall not otherwise be exchangeable for fully registered Money Market Notes. 22 Reports to Trustee. The Company shall provide the Trustee with quarterly reports which shall contain such information as the Trustee shall reasonably request including information regarding the outstanding balance, interest credited, withdrawals made and interest rate paid on each Money Market Note account maintained by the Company during the preceding quarterly period. Monthly Statements. The Company shall provide holders of the Money Market Notes with monthly statements which will indicate, among other things, the current account balance (including interest credited and withdrawals made, if any) and the interest rate paid on the Money Market Notes as of the month end preceding the issuance of the statement. Such statements will be mailed not later than the tenth business day following each month end. The Company shall provide additional statements as the holders of the Money Market Notes may reasonably request from time to time. Holders requesting such additional statements may be required to pay all charges incurred by the Company in providing such additional statements. Interest. The interest rate payable on the Money Market Notes offered hereby will be adjusted by the Company from time to time in its sole discretion provided that such rate shall not be less than 4.0% per year. The Company will provide written notice to all holders of the Money Market Notes at least 14 days prior to any decrease in the interest rate to be paid thereon, which notice shall set forth the new interest rate to be paid and the effective date of such change. The Company reserves the right to increase the interest rate paid on the Money Market Notes at any time without prior notice to the holders of the Money Market Notes. Investors may inquire about the interest rate then being paid on the outstanding Money Market Notes by calling the Company at (610) 668-2440. Interest on each account with a balance of at least $1,000 accrues daily and is credited monthly on the last day of each calendar month. Interest accrued during each monthly period will not be paid by check but will be added to the noteholder's principal balance of the account in the form of additional Money Market Notes. Interest will continue to accrue on the principal balance of each Money Market Note through the date of redemption. If a holder redeems the Money Market Note in full, the principal balance of the account (including accrued interest) will be paid by check as soon as practicable. No interest shall be paid for any day the principal amount in any account is less than $1,000. Subject to the limitations set forth herein, the Company may vary, in its discretion, the interest rates it offers on the Money Market Notes based on numerous factors. Such factors may include, but are not limited to: the desire to attract new investors; Money Market Notes in excess of certain principal amounts; Money Market Notes purchased for IRA and/or Keough accounts; rollover investments; and Money Market Notes beneficially owned by persons residing in particular geographic localities. As of the date hereof, the Company is not offering Money Market Notes at varying rates to different investors. However, the Company may make a decision to vary interest rates in the future based on its fund raising objectives including, but not limited to, the attraction of new investors in particular regions, circumstances in the financial markets and the economy, any additional costs which may be incurred by the Company in selling Money Market Notes in a particular jurisdiction which may at the time be relevant to the Company's operations and other factors. Interest Accrual Date. Interest on the Money Market Notes will accrue from the date of purchase, which is deemed to be, for accepted subscriptions, the date the Company receives funds, if received prior to 3:00 p.m. on a business day, or the next business day if the Company receives such funds on a non-business day or after 3:00 p.m. on a business day. For this purpose, the Company's business days will be deemed to be Monday through Friday, except for Delaware legal holidays. Interest Withholding. With respect to those investors who do not provide the Company with a fully executed Form W-8 or Form W-9, the Company will withhold 31% of any interest paid. Otherwise, no interest will be withheld, except on Money Market Notes held by foreign business entities. It is the Company's policy that no sale will be made to anyone refusing to provide a fully executed Form W-8 or Form W-9. Redemption by the Holder of Money Market Note. The holder of each Money Market Note may redeem the Money Market Note at any time in minimum amounts of $500 (or any amount to close an account) upon not less than 10 business days written notice to the Company. To the extent a holder of the Money Market Notes redeems the Money Market Notes and purchase new ones, the redemptions are treated as being made on a first-in, first-out basis. 23 Redemption by the Company. The Company will have the right to redeem a Money Market Note at any time upon thirty days written notice to the holder thereof. Place and Method of Payment upon Redemption. Payments upon the redemption of the Money Market Notes will be payable at the principal executive office of the Company, as it may be established from time to time, or at such other place as the Company may designate for that purpose; provided however, that payments may be made at the option of the Company by check or draft mailed to the person entitled thereto at his/her address appearing in the register which the Company maintains for that purpose. Provisions Related to All Notes Subordination. The indebtedness evidenced by the Notes, and any interest thereon, are subordinated to all Senior Debt of the Company. The term Senior Debt is defined for this purpose to include any indebtedness (whether outstanding on the date hereof or thereafter created) incurred by the Company in connection with borrowings by the Company (including its subsidiaries) from a bank, trust company, insurance company, or from any other institutional lender, whether such indebtedness is or is not specifically designated by the Company as being "Senior Debt" in its defining instruments. As of May 15, 1997 there was no Senior Debt outstanding. There is no limitation under the Indenture on the amount of Senior Debt the Company can incur. The Notes are not guaranteed by any subsidiaries of ABFS. Accordingly, in the event of a liquidation or dissolution of a subsidiary of ABFS, the law requires that creditors of that subsidiary be paid, or provision for such payment be made, from the assets of that subsidiary prior to distributing any remaining assets to ABFS as a shareholder of that subsidiary. Therefore, in the event of liquidation or dissolution of a subsidiary, creditors of such subsidiary will receive payment of their claims prior to any payment to the debtholders. As of May 15, 1997, there was $1.1 million of such debt outstanding. Any indebtedness of ABFS, other than that described as Senior Debt and the debt of the subsidiaries, will have rights upon liquidation or dissolution of ABFS which ranks pari passu (i.e. equally) in right of payment to the Notes offered hereby. As of May 15, 1997, the Company had $52.0 million of debt outstanding which ranks pari passu in right of payment to the Notes offered. For a discussion of the Company's status as a holding company and the lack of insurance or guarantees in support of the Notes, see "Risk Factors -- Absence of Insurance and Regulation." In the event of any liquidation, dissolution or any other winding up of the Company, or of any receivership, insolvency, bankruptcy, readjustment, reorganization or similar proceeding under the Federal Bankruptcy Code or any other applicable federal or state law relating to bankruptcy or insolvency, or during the continuation of any Event of Default (as described below), no payment may be made on the Notes until all Senior Debt has been paid. In any such event, holders of Senior Debt may also submit claims on behalf of debtholders and retain the proceeds for their own benefit until they have been fully paid, and any excess will be turned over to the debtholders. If any distribution is nonetheless made to debtholders, the money or property distributed to them must be paid over to the holders of the Senior Debt to the extent necessary to pay Senior Debt in full. See "Risk Factors -- Subordination of Debt Represented by the Notes." Events of Default. The Indenture provides that each of the following constitutes an Event of Default: (i) default for 30 days in the payment of interest when due on the Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment of principal when due on the Notes (whether or not prohibited by the subordination provisions of the Indenture) and continuation thereof for 30 days; (iii) failure by the Company to observe or perform any covenant, condition or agreement with respect to the liquidation, consolidation or merger or other disposition of substantially all of the assets of the Company (after notice and provided such default is not cured within 60 days after receipt of notice); (iv) failure by the Company for 60 days after notice to comply with certain other agreements in the Indenture or the Notes; and (v) certain events of bankruptcy or insolvency with respect to the Company. If any Event of Default occurs and is continuing, the Trustee or the holders of at least a majority in principal amount of the then outstanding Notes may declare the unpaid principal of and any accrued interest on the Notes to be due and payable immediately; provided, however, that so long as any Senior Debt is outstanding, such declaration shall not become effective until the earlier of (x) the day which is five Business 24 Days after the receipt by representatives of Senior Debt of such written notice of acceleration or (y) the date of acceleration of any Senior Debt. In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. Amendment, Supplement and Waiver. Except as provided herein, the Indenture or the Notes may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the Notes then outstanding, and any existing Default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the holders of a majority in principal amount of the then outstanding Notes. Without the consent of each holder of the Investment Notes affected, an amendment or waiver may not (with respect to any Investment Notes held by a nonconsenting holder of Investment Notes) (i) reduce the principal amount of the Investment Note whose holder must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any note or alter the redemption provisions thereof or the price at which the Company shall offer to repurchase the Investment Note, (iii) reduce the rate of or change the time for payment of interest, including default interest, on any Investment Note, (iv) waive a Default or Event of Default in the payment of principal or premium, if any, or interest on or redemption payment with respect to the Investment Notes (except a rescission of acceleration of the Investment Notes by the holders of at least a majority in aggregate principal amount of the Investment Notes and a waiver of the payment default that resulted from such acceleration), (v) make any Investment Note payable in money other than that stated in the Investment Notes, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of holders of Investment Notes to receive payments of principal of or interest on the Investment Notes, (vii) make any change to the subordination provisions of the Indenture that adversely affects holders of Investment Notes, (viii) modify or eliminate holders' redemption rights (provided that no modification or elimination is permitted as to any securities issued with such right), or (ix) make any change in the foregoing amendment and waiver provisions. Without the consent of each holder of the Money Market Notes affected, an amendment or waiver may not (with respect to any Money Market Notes held by a nonconsenting holder of Money Market Notes) (i) reduce the principal amount of Money Market Notes whose holders must consent to an amendment, supplement or waiver (other than as a result of withdrawals made by the holder thereof), (ii) reduce the principal of any Money Market Note (other than as a result of withdrawals made by the holder thereof) or alter the redemption provisions thereof or the price at which the Company shall offer to repurchase the Money Market Note, (iii) reduce the rate of interest on the Money Market Notes, other than the rate adjustments provided for pursuant to the terms of the Money Market Notes or change the time for payment of interest, including default interest, on any Money Market Note, (iv) waive a Default or Event of Default in the payment of principal or premium, if any, or interest on or redemption payment with respect to the Money Market Notes (except a rescission of acceleration of the Money Market Notes by the holders of at least a majority in aggregate principal amount of the Money Market Notes and a waiver of the payment default that resulted from such acceleration), (v) make any Money Market Note payable in money other than that stated in the Money Market Notes, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of holders of Money Market Notes to receive payments of principal of or interest on the 25 Money Market Notes, (vii) make any change to the subordination provisions of the Indenture that adversely affects holders of Money Market Notes, (viii) modify or eliminate redemption right of holders of the Money Market Notes, or (ix) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any holder of the Notes, the Company and/or the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency; to provide for assumption of the Company's obligations to holders of the Notes in the case of a merger or consolidation to provide for additional certificates or certificated securities; to make any change that would provide any additional rights or benefits to the holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such holder, including an increase in the aggregate dollar amount of Notes which may be outstanding under the Indenture; to modify the Company's policy to permit redemptions of the Investment Notes upon the death or Total Permanent Disability of any holder of the Investment Notes (but such modification shall not adversely affect any then outstanding security); or to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. The Trustee. The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions with the Company. The holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of Notes, unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. No Personal Liability of Directors, Officers, Employees and Stockholders. No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes, the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. Service Charges. The Company reserves the right to assess service charges for replacing any lost or stolen Investment Note (for which an affidavit from the holder will be required), changing the registration of any Note when such change is occasioned by a change in name of the holder, or a transfer (whether by operation of law or otherwise) of any Note by the holder to another person. Additional Securities. The Company may offer from time to time additional classes of securities with terms and conditions different from the Notes offered hereby. The Company will amend this Prospectus if and when it decides to offer to the public any additional class of security hereunder. Variations by State. The Company reserves the right to offer different securities and to vary the terms and conditions of the offer (including, but not limited to, additional interest payments and service charges for all Notes) depending upon the state where the purchaser resides. 26 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated financial information set forth below for ABFS should be read in conjunction with the more detailed consolidated financial statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
Nine Months Ended March 31, Year Ended June 30, --------------------- ------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- --------- --------- --------- --------- ------- ------- (Dollars in Thousands except per share data) Statement of Income Data: Revenues: Gain on sale of loans .............................. $ 15,645 $ 3,974 $ 9,005 $ 1,443 $ 110 $ 119 $ 83 Interest and fees .................................... 4,086 2,362 3,351 4,058 2,367 1,619 1,534 Other ................................................ 316 94 23 143 156 306 103 Total revenues ....................................... 20,047 6,430 12,379 5,644 2,633 2,044 1,720 Total expenses ....................................... 13,200 5,406 9,258 4,750 2,299 1,977 1,928 Operating income (loss) before income taxes (recoverable), extraordinary item and cumulative effect of accounting change ........................ 6,847 1,024 3,121 894 334 67 (208) Income (loss) before extraordinary item and cumulative effect of accounting change ............... 4,451 665 2,319 581 137 41 (125) Extraordinary item (net of income taxes of $101) ...... -- -- -- -- -- -- 157 Cumulative effect of accounting change on prior years -- -- -- -- (52) -- -- Net income .......................................... 4,451 665 2,319 581 85 41 32 Per Common Share Data(1): Income (loss) before extraordinary item and cumulative effect of accounting change ............ $ 1.67 $ .29 $ 1.01 $ .27 $ .04 $ .02 $ (.08) Extraordinary item ................................. -- -- -- -- -- -- .10 Net income .......................................... 1.67 .29 1.01 .27 .04 .02 .02 Cash dividends declared .............................. .045 -- 0.03 -- -- -- --
March 31, June 30, --------------------- ------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- -------- --------- --------- -------- ------- ------ (In Thousands) Balance Sheet Data: Cash and cash equivalents ........................... $ 25,778 $ 799 $ 5,345 $ 4,734 $ 83 $ 151 $ 270 Loan and lease receivables, net available for sale ... 16,152 23,444 17,625 8,669 3,181 2,170 2,088 Other ................................................ 903 499 534 328 5,538 2,963 1,491 Total assets .......................................... 93,179 40,226 46,894 22,175 12,284 7,270 5,368 Subordinated debt .................................... 49,339 28,682 33,620 17,800 7,171 1,327 665 Total liabilities .................................... 63,704 37,417 42,503 20,031 10,721 5,801 4,322 Stockholders' equity ................................. 29,475 2,809 4,392 2,143 1,562 1,469 1,045
- ------------ (1) Per share information for fiscal years 1994, 1993 and 1992 has been restated to reflect the 3 for 2 stock split effected on November 1, 1995. 27
Nine Months Ended March 31, Year Ended June 30, -------------------------- ----------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ------------ ------------ ---------- ---------- ---------- --------- ------- (Dollars in Thousands) Other Data: Originations: Business Purpose Loans .................... $ 27,581 $ 20,545 $ 28,872 $ 18,170 $ 11,793 $ 9,769 $ 5,773 Home Equity Loans .......................... 57,827 24,218 36,479 16,963 22,231 22,017 34,462 Equipment Leases .......................... 5,622 4,230 5,967 2,220 -- -- -- Loans sold: Securitizations ............................. 87,156 14,506 36,506 9,777 -- -- -- Other ...................................... 1,757 18,956 19,438 31,948 30,562 29,036 40,310 Total loan and lease portfolio serviced ..... 138,030 44,260 59,891 17,774 8,407 5,134 3,578 Average loan/lease size: Business Purpose Loans .................... 75 78 78 71 57 63 48 Home Equity Loans .......................... 48 46 47 46 51 45 42 Equipment Leases .......................... 10 11 11 12 -- -- -- Weighted average interest rate on loans and leases originated: Business Purpose Loans .................... 15.91% 15.82% 15.83% 16.05% 16.03% 16.24% 16.45% Home Equity Loans .......................... 11.54 10.34 9.94 12.68 8.65 9.60 9.25 Equipment Leases .......................... 16.04 15.96 17.22 15.85 -- -- --
At or For The Nine Months Ended March 31, At or for the Year Ended June 30, ------------------- ------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ------ --------- --------- --------- --------- ------- ------ Financial Ratios: Return on average assets (1) ........................... 8.47% 2.84% 6.71% 3.37% 0.87% 0.65% 0.56% Return on average equity (1) ........................... 35.83 35.04 70.96 31.36 5.58 3.29 (3.27) Total delinquencies as a percentage of total portfolio serviced, at end of period (2) ........................ 2.47 3.08 2.30 3.84 6.85 5.97 5.39 Allowance for credit losses to total portfolio serviced, at end of period .................................... 1.00 1.05 1.18 .87 .93 .80 1.14 Real estate owned as a percentage of total portfolio serviced, at end of period ........................... .50 1.25 1.01 4.29 2.63 1.44 -- Loan and lease losses as a percentage of the average total portfolio serviced during the period ............ .05 -- .33 .66 .15 .47 .13 Pre-tax income (loss) as a percentage of total revenues 34.15 15.92 25.21 15.84 12.69 3.26 (12.10)
- ------------ (1) Annualized. (2) Total delinquencies includes loans and leases delinquent over 30 days, exclusive of real estate owned. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following financial review and analysis is intended to assist prospective investors in understanding and evaluating the financial condition and results of operations of the Company, for the years ended June 30, 1996, 1995 and 1994 and the nine months ended March 31, 1997 and March 31, 1996. This information should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes thereto, "Selected Consolidated Financial Data" and other detailed information regarding the Company appearing elsewhere in this Prospectus. All operations of the Company are conducted through ABC and its subsidiaries. Overview The Company is a financial services company operating primarily in the mid-atlantic region of the United States. ABFS, through its direct and indirect subsidiaries, originates, sells and services Business Purpose Loans, Home Equity Loans and Equipment Leases. The Company also underwrites, processes and purchases Home Equity Loans through the Bank Alliance Program and originates a limited number of secured and unsecured consumer loans. The Company's customers include credit impaired borrowers and other borrowers who would qualify for loans from traditional sources but who the Company believes are attracted to the Company's loan and lease products due to the Company's personalized service and timely response to loan applications. Since its inception, the Company has significantly expanded its product line and geographic scope and currently offers its loan and lease products in more than ten states. See "Business." The ongoing securitization of loans is a central part of the Company's current business strategy. Prior to 1995, the Company sold substantially all of the loans it originated in the secondary market with servicing released. Since such time, the Company has sold loans through securitizations in order to fund growing loan and lease originations. The Company has completed five securitizations aggregating $66.5 million in Business Purposes Loans and $66.9 million in Home Equity Loans. Such securitizations generated gain on the sale of loans of $15.6 million, $8.9 million and $1.4 million, respectively, for the nine months ended March 31, 1997 and for fiscal years ended June 30, 1996 and 1995. See "--Results of Operations." The Company also relies upon funds generated by the sale of subordinated debt and other borrowings to fund its operations. At March 31, 1997, the Company had $49.3 million of subordinated debt outstanding and credit facilities and lines of credit totaling $72.5 million, none of which was drawn upon on such date. The Company expects to continue to rely on such borrowings to fund loans prior to securitization. See "-- Liquidity and Capital Resources." Accounting Considerations Related to the Securitizations As a fundamental part of its current business strategy, the Company sells substantially all of the loans it originates in securitizations to trusts in exchange for certificates representing the senior interest in the securitized loans held by the trust and the excess spread and, if applicable, a subordinated interest in the securitized loans held by the trust. The senior certificates are subsequently sold to investors for cash. As a result of securitizations, the Company's net income is increasingly dependent upon realizing gains on the sale of loans due to the excess spread associated with such loans at the time of sale. The excess spread is calculated as the difference between (a) principal and interest paid by borrowers and (b) the sum of (i) pass-through interest and principal to be paid to the holders of the senior certificates and (ii) servicing, trustee and insurance fees and other costs. The Company's right to receive this excess spread begins after a pre-determined over-collateralization amount or reserve is established. Such over-collateralization amount is specific to each securitization and is used as a means of credit enhancement. When loans are sold in securitizations, the Company recognizes both revenue and an associated receivable equal to the present value of the excess spread expected to be realized over the anticipated average life of the loans sold less future estimated credit losses relating to the loans sold, net of origination costs and 29 hedging results. These excess spreads and the associated receivable are computed using prepayment, loss and discount rate assumptions that the Company believes are reasonable. The Company periodically reviews these assumptions in relation to actual experience and, if necessary, adjusts the receivable. The Company carries the excess spread on the pool of securitized loans at fair value. As such, the carrying value of the excess spread is impacted by changes in prepayment and loss experience of the underlying loans. The Company determines the fair value of the excess spread utilizing prepayment and credit loss assumptions appropriate for each particular securitization. The range of values attributable to the factors used in determining fair value is broad. Accordingly, the Company's estimate of fair value is subjective. The prepayment assumptions used by the Company with respect to its Business Purpose Loans are based upon the Company's historical experience due to the lack of any industry wide historical prepayment rates for such loans. The prepayment assumptions with respect to the Company's Home Equity Loans are based on historical experience in the industry. Although the Company believes it has made reasonable estimates of prepayment rates and default assumptions, the actual prepayment and default experience may materially vary from its estimates. The gain recognized by the Company upon the sale of loans will have been overstated if prepayments or losses are greater than estimated. To the extent that prepayments, delinquencies and/or liquidations differ from the Company's estimates, adjustments of the Company's gain on sale of loans during the period of adjustment may be required. When loans are sold through a securitization, the Company retains the servicing on the loans sold which is recognized as a separate asset for accounting purposes. To determine the fair value of the mortgage servicing rights, the Company projects net cash flows expected to be received from servicing related income over the life of the loans. Such projections assume certain servicing costs, prepayment rates and credit losses. These assumptions are similar to those used by the Company to value the excess spread. There can be no assurance that the Company's estimates and assumptions used to determine the fair value of mortgage servicing rights will remain appropriate for the life of each securitization. To the extent that prepayments, delinquencies and/or liquidations differ from the Company's estimates, adjustments of the Company's mortgage servicing rights during the period of adjustment may be required. Mortgage servicing rights will be accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 125. See "--Recent Accounting Pronouncements," "Risk Factors--Dependence Upon Securitizations and Fluctuations in Operating Results" and "Business--Securitizations." Balance Sheet Information March 31, 1997 compared to June 30, 1996. Total assets increased $46.3 million, or 98.7%, to $93.2 million at March 31, 1997 from $46.9 million at June 30, 1996 due primarily to increases in cash, other receivables and other assets. Cash increased $20.4 million as a result of the net proceeds from the sale of 1,150,000 shares (including 150,000 shares sold pursuant to the underwriters' overallotment option) of the Company's Common Stock in an underwritten public offering. Other receivables, consisting primarily of the excess spread related to the Company's securitizations, increased $19.0 million, or 134.8%, to $33.1 million at March 31, 1997, from $14.1 million at June 30, 1996 due to the Company's retention of the excess spread in connection with its loan securitizations. Other assets increased $5.3 million, or 81.5%, to $11.8 million at March 31, 1997 from $6.5 million at June 30, 1996 due primarily to an increase in mortgage servicing rights obtained in connection with the Company's loan securitizations. See "--Results of Operations--Nine Months Ended March 31, 1997 Compared with the Nine Months Ended March 31, 1996." Total liabilities increased $21.2 million, or 49.9%, to $63.7 million at March 31, 1997 from $42.5 million at June 30, 1996 primarily due to a net increase in debt, accounts payable and accrued expenses and deferred income taxes. The net increase in debt was due to net sales of subordinated debt of $15.7 million during the nine months ended March 31, 1997 and a net decrease in institutional debt of $2.3 million as the Company repaid its institutional debt with proceeds from its securitizations. At March 31, 1997, the Company had $49.3 million of subordinated debt outstanding. The Company's ratio of total debt to equity at March 31, 1997 was 1.7:1 as compared to 8.2:1 at June 30, 1996. Accounts payable and accrued expenses increased $3.2 million, 30 or 103.2%, to $6.3 million at March 31, 1997 from $3.1 million at June 30, 1996 due to growth in the Company's operations resulting in larger accruals for advertising and interest. Deferred income taxes increased $2.4 million, or 160.0%, to $3.9 million at March 31, 1997 from $1.5 million at June 30, 1996 due to additional tax accruals on the Company's income for the nine months ended March 31, 1997. Stockholders' equity increased $25.1 million to $29.5 million at March 31, 1997 from $4.4 million at June 30, 1996 due to proceeds from the Company's Common Stock offering and net income (net of dividends) of $4.4 million. June 30, 1996 compared to June 30, 1995. Total assets increased $24.7 million, or 111.3%, to $46.9 million at June 30, 1996 from $22.2 million at June 30, 1995. The primary reasons for the increase were increases in loan and lease receivables, other receivables and other assets. Loan and lease receivables available for sale increased $8.9 million, or 102.3%, to $17.6 million at June 30, 1996 from $8.7 million at June 30, 1995 as a result of the Company's strategy of holding loans in its portfolio pending securitization. Other receivables increased $9.9 million, or 235.7%, to $14.1 million at June 30, 1996 from $4.2 million at June 30, 1995 due to the Company's retention of the excess spread in connection with its two loan securitizations. Other assets, consisting primarily of subordinated interests resulting from the securitizations, increased $3.6 million, or 124.1%, to $6.5 million at June 30, 1996 from $2.9 million at June 30, 1995 due primarily to an increase in subordinated interests obtained as a result of the Company's securitizations. Total liabilities increased $22.5 million, or 112.5%, to $42.5 million at June 30, 1996 from $20.0 million at June 30, 1995 primarily due to an increase in debt. The increase in debt was due to sales of subordinated debt of $19.7 million during the year ended June 30, 1996 combined with a net increase in bank debt of $2.3 million. At June 30, 1996, the Company had approximately $33.6 million of subordinated debt outstanding. The Company's ratio of total debt (subordinated debt plus credit facilities) to equity at June 30, 1996 was 8.2:1. June 30, 1995 compared to June 30, 1994. Total assets increased $9.9 million, or 80.5%, to $22.2 million at June 30, 1995 from $12.3 million at June 30, 1994. The primary reasons for the increase were an increase in cash and cash equivalents, other receivables and other assets. Cash and cash equivalents increased $4.6 million to $4.7 million at June 30, 1995 from $83,000 at June 30, 1994 as a result of increased sales of the Company's subordinated debt. Other receivables increased $3.3 million, or 351.4%, to $4.2 million at June 30, 1995 from $939,000 at June 30, 1994 due to the Company's retention of the excess spread in connection with a securitization of $9.7 million of Business Purpose Loans. Other assets increased $1.6 million, or 123.1%, to $2.9 million at June 30, 1995 from $1.3 million, at June 30, 1994, due primarily to the addition of a subordinated certificate obtained as a result of a securitization and an increase in foreclosed real estate held for sale. Total liabilities increased $9.3 million, or 86.9%, to $20.0 million at June 30, 1995, from $10.7 million at June 30, 1994 primarily due to an increase in debt outstanding. The increase in debt was due to net sales of subordinated debt of $10.6 million during the year ended June 30, 1995 which more than offset the net decrease in institutional debt of $2.2 million. At June 30, 1995, the Company had approximately $17.8 million of subordinated debt outstanding. The Company's ratio of total debt to equity at June 30, 1995 was 8.3:1. Results of Operations During the nine months ended March 31, 1997 and fiscal 1996, the Company experienced record levels of total revenues and net income as a result of increases in originations and securitizations. The Company's total revenues increased $13.6 million and net income increased $3.8 million for the nine months ended March 31, 1997 as compared to nine months ended March 31, 1996. Total revenues increased $6.8 million, or 121.4%, between fiscal 1995 and 1996 while net income increased $1.7 million, or 292.6%, during the same fiscal period. Since the Company's securitization strategy requires the Company to build an inventory of loans over time, the Company may experience fluctuations in operating results as a consequence of incurring costs and expenses in a fiscal period prior to the fiscal period in which the securitization is consummated. As such, the results of operations for a given period may not be indicative of results for subsequent comparable periods. See "Risk Factors--Dependence Upon Securitizations and Fluctuations in Operating Results" and "--Ability of the Company to Sustain Recent Levels of Growth and Operating Results." 31 Nine Months Ended March 31, 1997 Compared with the Nine Months Ended March 31, 1996 Total Revenues. Total revenues increased $13.6 million, or 212.5%, to $20.0 million for the nine months ended March 31, 1997 from $6.4 million for the nine months ended March 31, 1996. The increase in total revenues was primarily the result of gains on sales of loans through securitizations. Gain on Sale of Loans. Gain on sale of loans increased $11.6 million to $15.6 million for the nine months ended March 31, 1997 from $4.0 million for the nine months ended March 31, 1996. The increase was the result of sales of $29.3 million of Business Purpose Loans and $57.9 million of Home Equity Loans through securitizations in September 1996 and March 1997 as compared to the sale of $14.5 million of Business Purpose Loans through securitization in October 1995. The Company recognized net gains of $14.4 million (representing the fair value of the excess spread of $16.1 million less $1.7 million of costs associated with these transactions) on the Company's participation in the $87.2 million of loans sold through securitizations. The Company recognized $1.2 million of gain on sale of loans through excess mortgage servicing rights received in connection with prior securitizations. Given the unseasoned nature of the loans securitized and the lack of supporting financial information thereon, the Company was previously unable to reasonably estimate the value of such excess mortgage servicing rights. Interest and Fee Income. Interest and fee income consists of interest income, fee income and amortization of origination costs. Interest and fee income increased $1.7 million, or 70.8%, to $4.1 million for the nine months ended March 31, 1997 from $2.4 million for the nine months ended March 31, 1996 due to an increase in interest income as a result of an increased amount of loans retained in portfolio prior to securitization. Interest income consists of interest income the Company earns on the loans and leases it holds in its portfolio. Interest income from loans and leases held in portfolio increased $1.8 million to $3.3 million for the nine months ended March 31, 1997 or a 120.0% increase over the $1.5 million reported for the nine months ended March 31, 1996. The increase was attributable to increased originations of Business Purpose Loans, Home Equity Loans and Equipment Leases, as well as management's decision to retain Home Equity Loans in portfolio in contemplation of future securitizations. During the nine months ended March 31, 1997, the Company originated approximately $57.8 million of Home Equity Loans, $27.6 million of Business Purpose Loans and $5.6 million of Equipment Leases. During the nine months ended March 31, 1996, the Company originated $24.2 million of Home Equity Loans, $20.5 million of Business Purpose Loans and $4.2 million of Equipment Leases. The majority of the Home Equity Loans originated during the nine months ended March 31, 1996 were sold to third parties (with servicing released). Beginning in October 1995, as part of the Company's securitization strategy, the Company placed Home Equity Loans into its held for sale portfolio until sold as part of a securitization. Prior to the implementation of the securitization strategy, the Company originated and immediately sold such loans. As a result of the Company's securitization strategy, the Company holds a greater amount of Home Equity Loans in its portfolio thereby generating an increase in interest income and a decrease in fee income, as described below. Fee income includes primarily premium and points earned when loans are closed, funded and immediately sold to unrelated third party purchasers. Fee income decreased $31,000 from $1,090,000 for the nine months ended March 31, 1996 to $1,059,000 for the nine months ended March 31, 1997. The reduction in fee income was due to the Company's current strategy of building a portfolio of loans and securitizing them. As a result of this strategy, the Company is generally not selling loans upon origination, which has resulted in a reduction in fee income. The third component of interest and fee income is amortization of origination costs. During the nine months ended March 31, 1997, amortization of origination costs was $268,000 compared to $245,000 recognized during the nine months ended March 31, 1996. The increase was attributable to an increase in the amortization of lease origination costs of $81,000 resulting from an increase in the Equipment Lease portfolio. This increase was partially offset by the amortization of loan origination costs which decreased by $58,000. The decrease in amortization of loan origination costs resulted from the Company's change in its amortization policy, effective October 1, 1996, to exclude loans originated or purchased which were designated to be sold within the following twelve months. 32 Total Expenses. Total expenses increased $7.8 million, or 144.4%, to $13.2 million for the nine months ended March 31, 1997 from $5.4 million for the nine months ended March 31, 1996. As described in more detail below, this increase was primarily a result of increased interest and sales expense attributable to the Company's continued sale of subordinated debt. Also contributing to the increase in total expenses was increases in provision for credit losses, payroll, sales and marketing and general and administrative expenses related to increased loan and lease originations. Interest Expense. Interest expense increased $1.9 million, or 111.8%, to $3.6 million for the nine months ended March 31, 1997 from $1.7 million for the nine months ended March 31, 1996. The increase was primarily attributable to an increase in the amount of the Company's subordinated debt outstanding, the proceeds of which were utilized to fund the Company's loan growth. Average subordinated debt outstanding was $41.5 million during the nine months ended March 31, 1997 compared to $23.0 million during the nine months ended March 31, 1996. Average interest rates paid on the subordinated debt increased to 9.04% for the nine months ended March 31, 1997 from 8.96% for the nine months ended March 31, 1996 due to an increase in the volume of debt with maturities of greater than one year which bear higher interest rates than shorter term debt. Interest expense on lines of credit utilized by the Company for the nine months ended March 31, 1997 was $504,000, as compared to $205,000 for the nine months ended March 31, 1996. The increase was due to the Company's partial utilization of its warehouse lines of credit to fund Home Equity Loans and Business Purpose Loans. Allowance for Credit Losses. The Company maintains an allowance for credit losses based upon management's estimate of the expected collectibility of loans and leases outstanding. The allowance is determined based upon management's estimate of potential losses in the portfolio in light of economic conditions, the credit history of the borrowers, and the nature and characteristics of the underlying collateral as well as the Company's historical loss experience. Although the Company's historical loss experience has been minimal, the increase in the allowance reflects the increase in originations. Although the Company maintains its allowance for credit losses at the level it considers adequate to provide for potential losses, there can be no assurances that actual losses will not exceed the estimated amounts or that additional provisions will not be required. The Company had an allowance for credit losses of $1.4 million at March 31, 1997. The allowance is increased through a provision for credit losses. The provision for credit losses increased by $417,000 to $723,000 for the nine months ended March 31, 1997 from $306,00 for the nine months ended March 31, 1996. The ratio of the allowance for credit losses to total net loan and lease receivables serviced was 1.0% at March 31, 1997 and at March 31, 1996. From the inception of the Company's business in 1988 through March 31, 1997, the Company has experienced a total of approximately $303,000 in net loan and lease losses. The Company's delinquency rate as a percentage of the total portfolio serviced was 2.46% at March 31, 1997 and 3.08% at March 31, 1996. Payroll and Related Costs. Payroll and related costs increased $624,000, or 137.4%, to $1.1 million for the nine months ended March 31, 1997 from $454,000 for the nine months ended March 31, 1996. The increase was due to both an increase in the number of administrative employees as a result of the Company's growth in loan and lease originations and an increase in loans serviced. Management anticipates that these expenses will continue to increase in the future as the Company's expansion and increasing originations continue. Sales and Marketing Expenses. Sales and marketing expenses increased $3.4 million, or 188.9%, to $5.2 million for the nine months ended March 31, 1997 from $1.8 million for the nine months ended March 31, 1996. The increase was attributable to increases in advertising costs as a result of increased newspaper, direct mail and radio advertising related to the Company's sales of subordinated debt and loan products. In addition, the Company initiated a television advertising program for the sale of its home equity product. Subject to market conditions, the Company plans to expand its service area throughout the eastern United States. As a result, it is anticipated that sales and marketing expenses will continue to increase in the future. General and Administrative Expenses. General and administrative expenses increased $1.4 million or 127.3%, to $2.5 million for the nine months ended March 31, 1997 from $1.1 million for the nine months ended March 31, 1996. The increase was primarily attributable to increases in rent, telephone, office expense, professional fees and other expenses incurred as a result of previously discussed increases in loan and lease originations and loan servicing experienced during the nine months ended March 31, 1997. 33 Income Taxes. Income taxes increased $2.0 million to $2.4 million for the nine months ended March 31, 1997 from $358,000 for the nine months ended March 31, 1996 due to an increase in income before taxes. Net Income. Net income increased $3.8 million to $4.5 million for the nine months ended March 31, 1997 as compared to $665,000 for the nine months ended March 31, 1996. As a result of the increase, earnings per share increased to $1.67 on weighted average common shares outstanding of 2,667,996 compared to $0.29 on weighted average common shares outstanding of 2,278,160. Year Ended June 30, 1996 Compared with the Year Ended June 30, 1995 Total Revenues. Total revenues increased $6.8 million, or 121.4%, to $12.4 million in the year ended June 30, 1996 from $5.6 million in the year ended June 30, 1995. The increase in total revenues was primarily the result of increased gains on sales of loans through securitizations. Gain on Sale of Loans. Gain on sale of loans increased $7.6 million, or 542.9%, to $9.0 million for the year ended June 30, 1996 from $1.4 million for the year ended June 30, 1995. This increase was the result of increased loan sales through securitizations in the year ended June 30, 1996. The Company consummated loan securitizations in October 1995 and May 1996 generating gain in the aggregate on securitizations of $8.9 million (representing the fair value of the excess spread of $10.4 million less $1.5 million of costs associated with the transactions) on the Company's participation in $36.5 million of loans sold through securitizations. Of the loans sold through securitizations during the year ended June 30, 1996, $27.5 million were Business Purpose Loans and $9.0 million were Home Equity Loans. Interest and Fee Income. Interest and fee income decreased $707,000, or 17.2%, to $3.4 million in the year ended June 30, 1996 from $4.1 million in the year ended June 30, 1995 due to a decline in fee income as a result of the implementation of the Company's securitization program discussed below. Interest income from loans and leases held in portfolio increased $777,000 to $2.2 million in the year ended June 30, 1996 or a 55.5% increase over the $1.4 million reported for the year ended June 30, 1995. ABL, the Company's leasing subsidiary, contributed $593,000 of the increase. The remaining increase was attributable to increased originations of Business Purpose Loans and Home Equity Loans as well as management's decision to retain Home Equity Loans in portfolio in contemplation of the securitization thereof in the future. During the year ended June 30, 1996, the Company originated approximately $37.0 million of Home Equity Loans and $29.0 million of Business Purpose Loans. During the year ended June 30, 1995, the Company originated approximately $18.0 million of Home Equity Loans, the majority of which were sold to third parties (with servicing released) and $18.2 million of Business Purpose Loans. Beginning in October 1995, as part of the Company's securitization strategy, the Company placed loans into its held for sale portfolio until sold as part of a securitization. As a result of this strategy, the Company holds a greater amount of Home Equity Loans in its portfolio thereby generating an increase in interest income and a decrease in fee income. Fee income decreased $1.7 million to $1.5 million for the year ended June 30, 1996 from $3.2 million for the year ended June 30, 1995. The reduction in fee income was due to the Company's current strategy of building a portfolio of loans and securitizing them. As a result of this strategy, the Company is not selling as many loans upon origination thereby reducing fee income in the form of premiums received on the sale of loans. Amortization of origination costs, the third component of interest and fee income, decreased $223,000 to $305,000 for the year ended June 30, 1996 from $528,000 for the year ended June 30, 1995. Amortization of origination costs attributable to leasing activities increased $166,000 as ABL was only in operation for approximately six months of the year ended June 30, 1995. However, amortization of origination costs attributable to mortgage loans decreased $374,000 in the year ended June 30, 1996. The amount of origination cost recognized is in part determined by the length of time a loan is held in portfolio. In the year ended June 30, 1995, the Company securitized its loan portfolio in March 1995 resulting in the average loan being held in portfolio for approximately 5.5 months. In the year ended June 30, 1996, loans were securitized in October 1995 and May 1996, reducing the average holding period to approximately three months. 34 Total Expenses. Total expenses increased $4.5 million, or 93.8%, to $9.3 million in the year ended June 30, 1996 from $4.8 million in the year ended June 30, 1995. As described in more detail below, this increase was primarily a result of increases in interest and sales expenses attributable to the Company's continued sale of subordinated debt, and increased payroll, sales and marketing and general and administrative expenses related to increased loan originations during the year ended June 30, 1996. Interest Expense. Interest expense increased $1.5 million, or 125.0%, to $2.7 million in the year ended June 30, 1996 from $1.2 million in the year ended June 30, 1995. The increase was primarily attributable to an increase in the amount of the Company's subordinated debt outstanding. Management utilized the proceeds from the sale of such subordinated debt to fund the increase in loan originations experienced during the year ended June 30, 1996. Outstanding subordinated debt which were issued for terms ranging from three months to ten years and with rates ranging from 7% to 10.5%, increased to an average of $25.0 million during the year ended June 30, 1996 from an average of $12.0 million during the year ended June 30, 1995. The average interest rate paid on the subordinated debt increased to 9.02% for fiscal 1996 from 8.75% for fiscal 1995 due to an increase in market rates of interest. Provision for Credit Losses. The provision for credit losses increased to $681,000 in fiscal 1996 from $165,000 in fiscal 1995. The provision for credit losses was increased due to the increase in the Company's loan and lease portfolio. The Company's allowance for credit losses totaled $707,000 at June 30, 1996. The ratio of the allowance for credit losses to total net loan and lease receivables serviced was 1.18% at June 30, 1996 as compared to 0.87% at June 30, 1995. Payroll and Related Costs. Payroll and related costs increased $208,000, or 20.8%, to $1.2 million in the year ended June 30, 1996 from $1.0 million in the year ended June 30, 1995. This increase was primarily due to an increase in the number of administrative employees as a result of the Company's growth in loan originations, geographic expansion and increase in loans serviced for others. Sales and Marketing Expenses. Sales and marketing expenses increased $1.2 million, or 80.0%, to $2.7 million in the year ended June 30, 1996 from $1.5 million in the year ended June 30, 1995. The increase was attributable to an increase in advertising costs as a result of increased newspaper and direct mail advertising related to the Company's sale of subordinated debt and loan products and the initiation of a radio advertising program for the home equity loan product. The increase in sales and marketing expenses was also due to the expansion of the Company's service area during fiscal 1996 into Maryland, New York City and Florida. During such period, the Company began offering its subordinated debt in Florida and Business Purpose Loans in Maryland and New York City. General and Administrative Expenses. General and administrative expenses increased $1.1 million, or 127.0%, to $2.0 million in the year ended June 30, 1996 from $866,000 in the year ended June 30, 1995. The increase was primarily attributable to increases in rent, telephone, office expense, professional fees and other expenses incurred as a result of the previously discussed increase in loan originations and loan servicing experienced during fiscal 1996. Income Taxes. Income taxes increased from $313,000 for the year ended June 30, 1995 to $802,000 for the year ended June 30, 1996 as a result of increased earnings. At June 30, 1996, the Company had approximately $900,000 of net operating loss carryforwards ("NOLs") available for federal income tax purposes (which the Company intends to utilize) and $1.6 million of NOLs available for state income tax purposes. If not utilized, substantially all of the state NOLs will expire at various dates between June 30, 1997 and June 30, 1999. Based upon the relatively short carryforward periods allowed by the states in which the Company operates and the Company's current strategy of utilizing securitizations to manage portfolio size, it is not likely that the Company will utilize all of the NOLs for state tax purposes. As a result, the Company established a valuation reserve equal to 100% of the value of this asset. Net Income. Net income increased $1.7 million, or 292.6%, to $2.3 million for the year ended June 30, 1996 from $581,000 for the year ended June 30, 1995. As a result of the increase in income, earnings per share increased to $1.01 on weighted average common shares outstanding of 2,296,913 in the year ended June 30, 1996 compared to $0.27 on weighted average common shares outstanding of 2,128,154 for the year ended June 30, 1995 representing a 274.1% increase for the year ended June 30, 1996 from the year ended June 30, 1995. 35 Year Ended June 30, 1995 Compared with the Year Ended June 30, 1994 Total Revenues. Total revenues increased $3.0 million, or 115.4%, to $5.6 million in the year ended June 30, 1995 from $2.6 million in the year ended June 30, 1994. The increase in total revenues was the result of increased interest and fee income combined with the recognition of gain on sale of loans through a securitization. Gain on Sale of Loans. Gain on sale of loans increased $1.3 million, or 1181.8%, to $1.4 million for the year ended June 30, 1995 from $110,000 for the year ended June 30, 1994 as a result of increased loan sales through a securitization in the year ended June 30, 1995. The Company consummated its first securitization of $9.7 million in Business Purpose Loans in March 1995 generating gain on sale of loans of $1.4 million (representing the fair value of the excess spread of $3.1 million less $1.7 million of costs associated with the transaction). Interest and Fee Income. Interest and fee income increased $1.7 million, or 70.8%, to $4.1 million in the year ended June 30, 1995 from $2.4 million in the year ended June 30, 1994 due primarily to an increase in fee income earned in connection with the origination of Business Purpose Loans for sale to unaffiliated lenders. Interest income from loans and leases increased $390,000 to $1.4 million in the year ended June 30, 1995, or 39.0%, from $1.0 million for the year ended June 30, 1994. ABL, the Company's leasing subsidiary which commenced operations in December 1994, contributed $99,000 of the increase. The remaining increase was attributable to higher average outstanding loan and lease receivables caused by increased originations during fiscal 1995. During the year ended June 30, 1995, the Company originated $18.2 million of Business Purpose Loans and $17.0 million of Home Equity Loans. During the same period, $2.2 million of leases were originated. Average outstanding loan and lease receivables increased to $9.9 million during the year ended June 30, 1995 to $6.6 million during the year ended June 30, 1994. Fee income increased $1.3 million, or 68.4%, to $3.2 million for the year ended June 30, 1995 from $1.9 million for the year ended June 30, 1994. The increase in fee income was due to higher originations of Business Purpose Loans on which the Company received higher fees than those received on Home Equity Loans. Business Purpose Loans originated on behalf of unaffiliated lenders increased to $15.0 million during the year ended June 30, 1995 from $8.3 million for the year ended June 30, 1994. Amortization of origination costs remained fairly constant during the years ended June 30, 1995 and 1994 at approximately $500,000. Total Expenses. Total expenses increased $2.5 million, or 108.7%, to $4.8 million in the year ended June 30, 1995 from $2.3 million in the year ended June 30, 1994. This increase was primarily the result of increased interest and sales expenses attributable to the Company's sale of subordinated debt, and increased payroll, sales and marketing and general administrative expenses related to increased loan originations during the year ended June 30, 1995. Interest Expense. Interest expense increased $585,000, or 93.2%, to $1.2 million in the year ended June 30, 1995 from $628,000 in the year ended June 30, 1994 primarily due to an increase in the amount of the Company's subordinated debt outstanding as management utilized the proceeds from the sale of such subordinated debt to fund the increase in loan originations during the year ended June 30, 1995. Outstanding subordinated debt which were issued for terms ranging from three months to ten years and with rates ranging from 7.0% to 10.25% increased to an average of $12.0 million during the year ended June 30, 1995 from an average $3.8 million during the year ended June 30, 1994. The average interest rate paid on the subordinated debt remained fairly constant during the two years at approximately 8.75%. Provision for Credit Losses. The provision for credit losses increased $117,000 to $165,000 for the year ended June 30, 1995 from $48,000 for the year ended June 30, 1994. The provision for credit losses was increased due to the increase in the Company's loan and lease portfolio. The allowance for credit losses was $155,000 at June 30, 1995. The ratio of the allowance for credit losses to total net loan and lease receivables serviced was 0.87% at June 30, 1995 as compared to 0.93% at June 30, 1994. 36 Payroll and Related Costs. Payroll and related costs increased $584,000, or 142.1%, to $995,000 in the year ended June 30, 1995 from $411,000 in the year ended June 30, 1994. The increase was due to the hiring of additional personnel in connection with the commencement of operations of ABL and an increase in the number of administrative employees resulting from the Company's growth in loan originations. Sales and Marketing Expenses. Sales and marketing expenses increased $849,000, or 128.4%, to $1.5 million in the year ended June 30, 1995 from $661,000 in the year ended June 30, 1994. The increase was attributable to an increase in advertising costs as a result of increased newspaper and direct mail advertising related to the Company's sale of subordinated debt and loan products. General and Administrative Expenses. General and administrative expenses increased $315,000, or 57.2%, to $866,000 in the year ended June 30, 1995 from $551,000 in the year ended June 30, 1994. The increase was primarily attributable to increases in rent, telephone, office expense, professional fees and other expenses incurred as a result of the commencement of operations of ABL and the previously discussed increase in loan originations. Income Taxes and Change in Accounting for Income Taxes. Income taxes increased $115,000, or 58.1%, to $313,000 for the year ended June 30, 1995 from $198,000 for the year ended June 30, 1994 due to increased income before taxes. The Company adopted SFAS No. 109 in the fourth quarter of fiscal 1994 retroactive to July 1, 1993. The provisions of SFAS No. 109 require the liability method of accounting for income taxes and among other things, recognition of future tax benefits, measured by enacted tax rates, attributable to deductible temporary differences between financial statement and income tax bases of assets and liabilities and to NOLs, to the extent that realization of such benefits is more likely than not. The adoption of SFAS No. 109 resulted in a $52,000 reduction in net income for the year ended June 30, 1994. At June 30, 1995, the Company had NOLs for state tax purposes of approximately $1.4 million. Based upon the relatively short carryforward periods allowed by the states in which the Company operates and the Company's current strategy of utilizing securitizations to manage portfolio size, it is not likely that the Company will utilize all of the NOLs for state tax purposes. As a result, the Company established a valuation reserve equal to 100% of the value of this asset. Net Income. Net income increased $496,000, or 583.5% to $581,000 for the year ended June 30, 1995 from $85,000 for year ended June 30, 1994 primarily due to the increase in the gain on sale of loans due to the Company's securitizations. As a result of the increase, earnings per share increased to $.27 on weighted average common shares outstanding of 2,128,154 for the year ended June 30, 1995 compared to $0.04 on weighted average common shares outstanding of 2,127,263 for the year ended June 30, 1994 representing a 575.0% increase in earnings per share for the year ended June 30, 1995 from the year ended June 30, 1994. 37 Asset Quality The following table provides data concerning delinquency experience, real estate owned ("REO") and loss experience for the Company's loan and lease portfolio serviced. There were no home equity or other loans included in REO during the periods presented.
March 31, 1997 June 30, 1996 June 30, 1995 June 30, 1994 --------------------- -------------------- --------------------- --------------------- Delinquency by Type Amount % Amount % Amount % Amount % - ----------------------------------- ---------- -------- --------- -------- ---------- -------- --------- -------- (Dollars in Thousands) Business Purpose Loans Total portfolio serviced ......... $ 60,319 $37,950 $ 14,678 $ 8,170 ========= ======== ========= ======== Period of delinquency 31-60 days ..................... $ 1,743 2.89% $ 86 .23% $ 141 .96% $ 71 .87% 61-90 days ..................... 204 .34 118 .31 75 .51 -- -- Over 90 days .................. 816 1.35 1,033 2.72 310 2.11 504 6.17 --------- ------- -------- ------- --------- ------ -------- ------ Total delinquencies. ............ $ 2,763 4.58% $ 1,237 3.26% $ 526 3.59% $ 575 7.04% ========= ======= ======== ======= ========= ====== ======== ====== REO .............................. $ 690 $ 608 $ 762 $ 220 ========= ======== ========= ======== Home Equity Loans Total portfolio serviced ......... $ 69,554 $17,224 -- -- ========= ======== ========= ======== Period of delinquency 31-60 days ..................... $ 258 .37% -- -- -- -- -- -- 61-90 days ..................... 83 .12 -- -- -- -- -- -- Over 90 days .................. -- -- -- -- -- -- -- -- --------- ------- -------- ------- --------- ------ -------- ------ Total delinquencies ............ $ 341 .49% -- -- -- -- -- -- ========= ======= ======== ======= ========= ====== ======== ====== Equipment Leases Total portfolio serviced ......... $ 8,046 $ 4,607 $ 2,031 -- ========= ======== ========= ======== Period of delinquency ............ 31-60 days ..................... $ 108 1.34% $ 23 .50% $ 49 2.40% -- -- 61-90 days ..................... 18 .23 14 .30 40 1.97 -- -- Over 90 days .................. 88 1.09 41 .89 -- -- -- -- --------- ------- -------- ------- --------- ------ -------- ------ Total delinquencies ............ $ 214 2.66% $ 78 1.69% $ 89 4.37% -- -- ========= ======= ======== ======= ========= ====== ======== ====== Other Loans (1) Total portfolio serviced ......... $ 111 $ 110 $ 1,065 $ 237 ========= ======== ========= ======== Period of delinquency 31-60 days ..................... $ 18 16.2% $ -- --% $ 16 1.51% -- -- 61-90 days ..................... -- -- 18 16.36 30 2.82 -- -- Over 90 days .................. 66 59.5 50 45.45 21 1.97 -- -- --------- ------- -------- ------- --------- ------ -------- ------ Total delinquencies ............ $ 84 75.7% $ 68 61.81% $ 67 6.30% -- -- ========= ======= ======== ======= ========= ====== ======== ====== Company Combined --------------------------- Total portfolio serviced ......... $138,030 $59,891 $ 17,774 $ 8,407 ========= ======== ========= ======== Period of delinquency 31-60 days ..................... $ 2,127 1.54% $ 109 .18% $ 206 1.16% 72 .85% 61-90 days ..................... 305 .22 150 .25 145 .82 -- -- Over 90 days .................. 970 .70 1,124 1.87 331 1.86 504 6.00 --------- ------- -------- ------- --------- ------ -------- ------ Total delinquencies ............ $ 3,402 2.46% $ 1,383 2.30% $ 682 3.84% $ 576 6.85% ========= ======= ======== ======= ========= ====== ======== ====== REO .............................. $ 690 $ 608 $ 762 $ 220 ========= ======== ========= ======== Losses experienced during the period ........................ $ 50 .04% $ 129 .22% $ 88 .49% $ 10 .12% ========= ======= ======== ======= ========= ====== ======== ====== Allowance for credit losses at end of period ........................ $ 1,380 1.00% $ 707 1.18% $ 155 .87% $ 78 .93% ========= ======= ======== ======= ========= ====== ======== ======
- ------------ (1) Includes secured and unsecured consumer loans originated by HCDC. 38 The following table sets forth the Company's loss experience for the periods indicated. For the Nine Months Ended March 31, For the Year Ended ------------- June 30, ------------------------ 1997 1996 1995 1994 ------------- ------- ------ ----- (In Thousands) Business Purpose Loans ...... $ 31 $ 92 $ 86 $ 10 Home Equity Loans ............ -- -- -- -- Other Loans .................. 10 37 2 -- Leases ..................... 9 -- -- -- ----- ------ ----- ----- Total losses ............... $ 50 $ 129 $ 88 $ 10 ===== ====== ===== ===== The Company's total delinquencies as a percentage of the total loan and lease portfolio serviced decreased from June 30, 1995 to June 30, 1996 while the dollar amount of loans and leases delinquent increased, which increase is reflective of the increase in the Company's total loan and lease portfolio serviced. Similarly, the increase in the dollar amount of the Company's loans and leases delinquent at March 31, 1997 as compared to June 30, 1996 reflects the continued growth of the Company's loan and lease portfolio. Total delinquencies, as a percentage of the total loan and lease portfolio serviced, were 2.46% at March 31, 1997 as compared to 2.30% at June 30, 1996. Interest Rate Risk Management The Company's profitability is largely dependent upon the spread between the effective rate of interest received on the loans originated or purchased by the Company and interest rates payable pursuant to the Company's credit facilities or the pass-through rate for interests issued in connection with the securitization of loans. The Company's spread may be negatively impacted to the extent it holds fixed-rate mortgage loans in its held for sale portfolio prior to securitization. The adverse effect on the Company's spread may be the result of increases in interest rates during the period the loans are held prior to securitization or as a result of an increase in the rate required to be paid to investors in connection with the securitization. In August 1995, the Company implemented a hedging strategy in an attempt to mitigate the effect of changes in interest rates on its fixed-rate mortgage loan portfolio between the date of origination and securitization. This strategy involves short sales of a combination of U.S. Treasury securities with an average life which closely match the average life of the loans to be securitized. The settlement date of the short sale, as well as the buy back of the Treasury securities coincides with the anticipated settlement date of the underlying securitization. At June 30, 1996, the Company had sold short $15.0 million of U.S. Treasury securities. The deferred loss related to these activities was approximately $27,000 at June 30, 1996. During the nine months ended March 31, 1997, the Company incurred a loss of approximately $31,000 on short sales of securities. The Company also prefunds loan originations in connection with its loan securitizations which enables the Company to determine in the current period the rate to be received by the investors on loans to be originated and securitized in a future period. See "Business--Securitizations." The nature and quantity of hedging transactions are determined by the Company's management based on various factors, including market conditions and the expected volume of mortgage loan originations and purchases. The Company believes that it has implemented a cost-effective hedging program to provide a level of protection against changes in market value of its fixed-rate mortgage loans held for sale. However, an effective interest rate risk management strategy is complex and no such strategy can completely insulate the Company from interest rate changes. In addition, hedging involves transaction and other costs, and such costs could increase as the period covered by the hedging protection increases. In the event of a decrease in market interest rates, the Company would experience a loss on the purchase of Treasury securities involved in the interest rate lock transaction which would be reflected on the Company's financial statements during the period in which the buy back of the Treasury securities occurred. Such loss would be offset by the income realized from the securitization in future periods. As a result, the Company may be prevented from effectively hedging its fixed-rate loans held for sale, without reducing the Company's income in current periods. 39 In the future, the Company intends to continue to engage in short sales of Treasury securities as part of its interest rate risk management strategy. The Company also experiences interest rate risk to the extent that as of March 31, 1997 approximately $22.5 million of its liabilities were comprised of subordinated debt with scheduled maturities of greater than one year. To the extent that interest rates decrease in the future, the rates paid on such liabilities could exceed the rates received on new loan originations resulting in a decrease in the Company's spread. See "Risk Factors--Changes in Interest Rates May Adversely Affect Profitability." Liquidity and Capital Resources The Company continues to fund its loans principally through (i) the securitization and sales of loans which it originates, (ii) the sale of the Company's registered subordinated debt, (iii) institutional debt financing, and (iv) retained earnings. In addition, during the nine months ended March 31, 1997, the Company utilized the capital market to sell additional shares of its Common Stock. The Company's cash requirements include the funding of loan originations, payment of interest expense, funding over-collateralization requirements, operating expenses and capital expenditures. To a limited extent, the Company presently intends to continue to augment the interest and fee income it earns on its loan and lease portfolio, from time to time, by selling loans either at the time of origination or from its portfolio to unrelated third parties. These transactions also create additional liquid funds available for lending activities. In recent periods, the Company has significantly increased its reliance on securitizations to generate cash proceeds for the repayment of debt and to fund its ongoing operations. During fiscal 1995, the Company completed a securitization of $9.7 million of Business Purpose Loans resulting in proceeds of approximately $9.0 million. During fiscal 1996, the Company completed two loan securitizations. These securitizations, which were consummated in October 1995 and May 1996, involved $14.5 million of Business Purpose Loans and $22.0 million of Business Purpose and Home Equity Loans, respectively. The securitizations occurring during fiscal 1996 resulted in proceeds of approximately $34.3 million. During the nine months ended March 31, 1997, the Company completed two securitizations involving $87.2 million of Business Purpose Loans and Home Equity Loans. These securitizations resulted in net proceeds of approximately $83.7 million. The Company has utilized the proceeds of the securitizations to fund the origination of new loans and leases and to repay funds borrowed pursuant to the Company's warehouse financing facilities. As a result of the terms of the securitizations, the Company will receive less cash flow from the portfolios of loans securitized than it would otherwise receive absent securitizations. The Company's sale of loans through securitizations has resulted in gains on sale of loans recognized by the Company. For the fiscal years 1996 and 1995 and the nine months ended March 31, 1997, the Company had net gain on sale of loans through securitizations of $8.9 million, $1.4 million and $14.4 million, respectively. The Company uses a portion of the proceeds of a securitization, net of fees and costs of the securitization, are used to repay its warehouse credit facilities. Additionally, in a securitization, the Company obtains the right to receive excess cash flows generated by the securitized loans held in the trust referred to herein as the excess spread and capitalizes mortgage servicing rights, each of which creates non-cash taxable income. Consequently, the income tax payable and the expenses related to the securitizations negatively impact the Company's cash flow. As a result, the Company may operate on a negative operating cash flow basis which could negatively impact the Company's results of operations during such periods. See "Risk Factors-- Dependence Upon Securitizations and Fluctuations in Operating Results." Additionally, pursuant to the terms of the securitizations, the Company will act as the servicer of the loans and in that capacity will be obligated to advance funds in certain circumstances in respect of each monthly loan interest payment that accrued during the collection period for the loans but was not received, unless the Company determines that such advances will not be recoverable from subsequent collections in respect of the related loan. The Company's obligation to advance funds in its capacity as servicer of the loans may create greater demands on the Company's cash flow than either selling loans or maintaining a portfolio of loans. 40 Subject to economic, market and interest rate conditions, the Company intends to continue to implement additional securitizations of its loan portfolios and may in the future securitize its Equipment Lease portfolio. Adverse conditions in the securitization market could impair the Company's ability to sell loans through securitizations on a favorable or timely basis. Since the sale of loans through securitizations is an important source of revenues, any such delay or impairment could have a material adverse impact on the Company's results of operations. See "Risk Factors--Changes in Interest Rates May Adversely Affect Profitability." Despite its use of a portion of the proceeds of the securitizations to fund loan originations, the Company continues to rely on borrowings such as its subordinated debt and warehouse credit facilities or lines of credit to fund its operations. At March 31, 1997, the Company had a total of $49.3 million of subordinated debt outstanding. The Company also had available credit facilities and lines of credit totaling $72.5 million, none of which was drawn upon on such date. In February 1997, the Company completed an underwritten public offering of 1,150,000 shares of its Common Stock. The stock was sold at a price of $20.00 per share. The offering of the Common Stock resulted in net proceeds of approximately $20.7 million. Between 1990 and 1993, American Business Finance Corporation ("ABFC"), an indirect subsidiary of ABFS, sold approximately $1.7 million in principal amount of subordinated debt at rates ranging from 10.8% to 14.0%. In December 1993, the Company ceased selling subordinated debt through ABFC. As of March 31, 1997, ABFC had approximately $1.2 million of the subordinated debt outstanding. This debt is currently maturing and will be fully extinguished by October 1998. In addition, between July 1, 1993 and March 31, 1997, ABFS sold $75.2 million in principal amount of subordinated debt (including redemptions and repurchases by investors), pursuant to registered public offerings with maturities ranging between three months and ten years. As of March 31, 1997, ABFS had approximately $48.1 million of subordinated debt outstanding (excluding the debt of ABFC). The proceeds of such sales of debt have been used to fund general operating and lending activities. The Company intends to meet its obligations to repay such debt as it matures with income generated through its lending activities and funds generated through repayment of its outstanding loans. The repayment of such obligations should not effect the Company's operations. Upland has a $50.0 million Interim Warehouse and Security Agreement with Prudential Securities Realty Funding Corporation. Upland also has a $7.5 million Revolving Loan and Security Agreement with BankAmerica Business Credit, Inc. In addition, ABC has a Loan and Security Agreement with Finova Capital Corporation. This line of credit is in the amount of $15.0 million and is guaranteed by the Company. At March 31, 1997, none of these credit facilities were being utilized. The Company is currently discussing the possibility of obtaining additional lines of credit with other lenders and providers of credit. As of March 31, 1997, the Company had $26.8 million of debt scheduled to mature during the twelve months ending March 31, 1998 which was comprised of maturing subordinated debt. The Company currently expects to refinance the maturing debt through cash flow from operations and loan sales or securitizations and, if necessary, may retire the debt through extensions of maturing debt or new debt financing. Despite the Company's current use of securitizations to fund loan growth, the Company is also dependent upon borrowings to fund a portion of its operations. As a result, the Company intends to continue to utilize debt financing to fund its operations in the future. See "Risk Factors--Dependence Upon Debt Financing." From time to time, the Company considers potential acquisitions of related businesses or assets which could have a material impact upon the Company's results of operations and liquidity position. The Company leases certain of its facilities under a five-year operating lease expiring in January 2003 at a minimum annual rental of $636,495. The lease contains a renewal option for an additional period at increased annual rental. See "Business--Property." 41 Recent Accounting Pronouncements Set forth below are recent accounting pronouncements which may have a future effect on the Company's operations. These pronouncements should be read in conjunction with the significant accounting policies which the Company has adopted that are set forth in the Company's notes to consolidated financial statements. In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") establishing financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation plans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, which generally does not result in compensation expense recognition for most plans. Companies that elect to remain with the existing accounting are required to disclose in a footnote to the financial statements pro forma net income, and if presented, earnings per share, as if SFAS No. 123 had been adopted. The accounting requirements of this Statement are effective for transactions entered into during fiscal years that begin after December 15, 1995; however, companies are required to disclose information for awards granted in their first fiscal year beginning after December 15, 1994. The Company intends to continue to utilize the intrinsic value method of accounting for stock based compensation as permitted by SFAS No. 123. Subject to the approval of stockholders, the Company amended its existing option plan to increase the number of options available for issuance thereunder from 78,988 to 163,988 shares, of which the Company made awards of options to purchase 150,000 shares of Common Stock in conjunction with the public offering of the Company's Common Stock to various officers of the Company. See "Management" and Note 9 of the Notes to Consolidated Financial Statements. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). Pursuant to SFAS No. 125, after a transfer of financial assets, an entity would be required to recognize all financial assets and servicing it controls and liabilities it has incurred and, conversely, would not be required to recognize financial assets when control has been surrendered and liabilities when extinguished. SFAS No. 125 provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 will be effective with respect to the transfer and servicing of financial assets and the extinguishment of liabilities occurring after December 31, 1996, with earlier application prohibited. The Company has not completed an analysis of the potential effects of SFAS No. 125 on the Company's financial condition or results of operations. See Note 1 of the Notes to Consolidated Financial Statements. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. SFAS No. 128 simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 will be effective for financial statements for both interim and annual periods ending after December 15, 1997. Based upon the Company's analysis of SFAS No. 128, the Company does not believe that the implementation of SFAS No. 128 will have a material effect on the computation of its earnings per share. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"). SFAS No. 129 establishes standards for disclosing information about an entity's capital structure. SFAS No. 129 will be effective for financial statements for periods ending after December 15, 1997. Based upon the Company's current capital structure, the Company does not believe that the implementation of SFAS No. 129 will be a material effect on the Company's disclosure of information regarding its capital structure. 42 Impact of Inflation and Changing Prices The Consolidated Financial Statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars (except with respect to securities which are carried at market value), without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. 43 BUSINESS General ABFS is a financial services company operating primarily in the mid-atlantic region of the United States. The Company, through its principal direct and indirect subsidiaries, originates, sells and services Business Purpose Loans and Home Equity Loans. The Company also originates Equipment Leases. In addition, the Company recently commenced implementation of the Bank Alliance Program pursuant to which it has entered into exclusive business arrangements with several financial institutions pursuant to which the Company will purchase Home Equity Loans that do not meet the underwriting guidelines of the selling institution but that do meet the Company's underwriting criteria. The Company's customers currently consist primarily of two groups. The first category of customers includes credit impaired borrowers who are generally unable to obtain financing from banks, savings and loan associations or other finance companies that have historically provided loans only to individuals with favorable credit characteristics. These borrowers generally have impaired or unsubstantiated credit characteristics and/or unverifiable income and respond favorably to the Company's marketing efforts. The second category of customers includes borrowers who would qualify for loans from traditional lending sources but elect to utilize the Company's products and services. The Company's experience has indicated that these borrowers are attracted to the Company's loan products as a result of its marketing efforts, the personalized service provided by the Company's staff of highly trained lending officers and the timely response to loan requests. Historically, both categories of customers have been willing to pay the Company's origination fees and interest rates which are generally higher than those charged by traditional lending sources. The Company began operations in 1988 and initially offered Business Purpose Loans. The Company currently originates Business Purpose Loans through a retail network of salespeople in Pennsylvania, Delaware, New Jersey, New York, Virginia, Maryland and Connecticut. The Company has taken the initial steps to expand its business purpose lending program into the southeastern region of the United States. The Company focuses its marketing efforts on small businesses which generally do not meet all of the credit criteria of commercial banks and small businesses that the Company's research indicates are predisposed to using the Company's products and services. The Business Purpose Loans originated by the Company are secured by real estate. In substantially all cases, the Company receives additional collateral in the form of, among other things, pledges of securities, assignments of contract rights, life insurance and lease payments and liens on business equipment and other business assets, as available. The Company's Business Purpose Loans are typically originated with fixed rates and typically have origination fees of 5.0% to 6.0%. The weighted average interest rate on the Business Purpose Loans originated by the Company were 15.91% and 15.83% for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. The Business Purpose Loans typically have significant prepayment penalties which the Company believes tend to extend the average life of such loans and make these loans more attractive products to securitize. The Business Purpose Loans securitized in the last two securitizations had a weighted average loan-to-value ratio (based solely upon the real estate collateral securing the loans) of 59.9% at the time of securitization. The Company's strategy for expanding its business purpose lending program focuses on motivating borrowers through the investment in retail marketing and sales efforts rather than on emphasizing discounted pricing or a reduction in underwriting standards. The Company utilizes a proprietary training program involving extensive and on-going training of its loan officers. The Company originated $27.6 million and $28.9 million of Business Purpose Loans for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. ABFS entered the Home Equity Loan market in 1991. The Company originates Home Equity Loans primarily to credit impaired borrowers through retail marketing which includes telemarketing operations, direct mail and television advertisements. The Company currently originates Home Equity Loans primarily in Pennsylvania, New Jersey, Delaware, Maryland, Virginia and Georgia. The Company was recently granted licenses and expects to begin originating Home Equity Loans on a limited basis in North Carolina, South 44 Carolina, Connecticut and Florida during calendar 1997. The Company originated $57.8 million and $36.5 million of Home Equity Loans for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. The weighted average interest rate on Home Equity Loans originated by the Company was 11.54% and 9.94% for the nine months ended on March 31, 1997 and the year ended June 30, 1996, respectively. The Company initiated its Bank Alliance Program in fiscal 1996. The Company believes that the Bank Alliance Program is a unique method of increasing the Company's production of Home Equity Loans to credit impaired borrowers. Currently, the Company has entered into agreements with eight financial institutions which provide the Company with the opportunity to underwrite, process and purchase Home Equity Loans generated by the branch networks of such institutions which consist of approximately 1,000 branches located in Pennsylvania, Delaware, New Jersey and Maryland. The Company is also negotiating with other financial institutions regarding their participation in the program. ABFS began offering Equipment Leases in December 1994 to complement its business purpose lending program. The Company originates leases on a nationwide basis with a particular emphasis on the eastern portion of the United States. The Company believes that cross-selling opportunities may exist for offering lease products to Business Purpose Loan customers and offering Business Purpose Loans to lease customers. The weighted average interest rate received on the Equipment Leases originated by the Company was 16.0% and 17.22% for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. The Company currently holds all Equipment Leases originated in its lease portfolio to generate interest income. The Company recently hired a leasing officer with over 25 years of experience in small ticket leasing to expand this area of the Company's business. The Company intends to continue to utilize funds generated from the securitization of loans and the sale of subordinated debt to increase its loan and lease originations and to expand into new geographic markets with an initial focus on expansion in the southeastern region of the United States. The Company also intends to expand its Bank Alliance Program with financial institutions across the United States. From the inception of the Company's business in 1988 through March 31, 1997, the Company has experienced total net loan and lease losses of approximately $303,000. The Company's losses on its loan and lease portfolio serviced totaled $50,000, $129,000, $88,000 and $10,000, respectively, for the nine months ended March 31, 1997 and the years ended June 30, 1996, 1995 and 1994. The Company's loans and leases delinquent over 30 days represented 2.46% and 2.30% of the total loan and lease portfolio (excluding real estate owned) serviced at March 31, 1997 and June 30, 1996, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset Quality." The Company's ability to fund and subsequently securitize Business Purpose Loans and Home Equity Loans has significantly improved its financial performance and enabled it to both expand its marketing efforts and increase the geographic scope of its products. Through March 31, 1997, the Company had securitized an aggregate of $66.5 million of Business Purpose Loans and $66.9 million of Home Equity Loans. The Company retains the servicing rights on its securitized loans. In addition to securitizations, the Company funds its operations with subordinated debt that the Company markets directly to individuals from the Company's operating office located in Pennsylvania and branch offices located in Florida and Arizona. At March 31, 1997, the Company had $49.3 million in subordinated debt outstanding with a weighted average coupon of 9.02% and a weighted average maturity of 25.6 months. American Business Financial Services Inc.'s only activity as of the date hereof has been: (i) acting as the holding company for its operating subsidiaries and (ii) raising capital for use in the Company's lending operations. ABFS is the parent holding company of ABC and its primary subsidiaries, American Business Finance Corporation, Upland, Processing Service Center, Inc., HomeAmerican Consumer Discount Company ("HCDC"), ABL and ABC Holdings Corporation (collectively, the "Company"). ABC, a Pennsylvania corporation incorporated in 1988 and acquired by the Company in 1993, originates, services and sells Business Purpose Loans. HAC, a Pennsylvania corporation incorporated in 1991, originates 45 and sells Home Equity Loans. HAC acquired Upland in 1996 and since such time has conducted business as "Upland Mortgage." Upland also purchases Home Equity Loans through the Bank Alliance Program. Processing Service Center, Inc. processes Home Equity Loan applications for financial institutions as part of the Bank Alliance Program. Incorporated in 1994, ABL commenced operations in 1995 and originates and services Equipment Leases. ABC Holdings Corporation was incorporated to hold properties acquired through foreclosure. HCDC was incorporated in 1993 for the purpose of offering secured and unsecured small consumer loans (i.e., loans up to $15,000) for sale to third party investors. Collateral securing such loans includes residential real estate, automobiles, boats and other personal property. As of March 31, 1997, HCDC maintained a portfolio of consumer loans of approximately $111,000. The Company does not intend to emphasize this area of its business in the future. The Company's indirect subsidiaries, ABFS 1995-1, Inc., ABFS 1995-2, Inc., ABFS 1996-1, Inc., ABFS 1996-2, Inc. and ABFS 1997-1, Inc. are Delaware investment holding companies. Such companies were incorporated to facilitate the Company's securitizations. The stock of such subsidiaries is held by ABC and Upland Mortgage. Such corporations do not engage in any business activity other than holding the subordinated certificate, if any, and the excess spread. See "--Securitizations." American Business Finance Corporation was incorporated in 1990 in order to issue subordinated debt in 1990 through 1993. Since December 1993, American Business Finance Corporation has been inactive. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 46 The following chart sets forth organizational structure of ABFS.(1) ABFS (Holding Company) (Issues subordinated debt) | | AMERICAN BUSINESS CREDIT, INC. (Originates and services Business Purpose Loans) | | --------------------------------------------------------------------- | | | | | | | | | | | | HOME HOME AMERICAN PROCESSING AMERICAN AMERICAN AMERICAN CREDIT, INC. SERVICE BUSINESS CONSUMER ABC BUSINESS d b a CENTER, LEASING, DISCOUNT HOLDINGS FINANCE UPLAND INC. INC. COMPANY CORP. CORP. MORTGAGE(2) (Originates, (Process (Originates (Originates (Holds (Issued purchases and Bank Alliance and services and sells foreclosed subordi- services Home Program Home Equipment small real nated Equity Loans) Equity Loans) Leases) consumer estate) debt installment from 1990 loans) to 1993) (1) In addition to the corporations pictured above, the Company organized a special purpose corporation for each of its securitizations. Such corporations are indirect subsidiaries of ABFS. (2) Loans purchased by Upland represent loans acquired through the Bank Alliance Program. 47 Lending and Leasing Activities General. The following table sets forth certain information concerning the loan and lease origination, purchase and sale activities of the Company for the nine months ended March 31, 1997 and the years ending June 30, 1996, 1995 and 1994.
Nine Months Ended March 31, Year Ended June 30, ------------ ---------------------------------------- 1997 1996 1995 1994 ------------ ----------- ----------- ------------ (Dollars in Thousands) Loans/Leases Originated/Purchased (Net of Refinances) Business Purpose Loans ........................... $27,581 $28,872 $18,170 $11,793 Home Equity Loans .............................. $57,827 $36,479 $16,963 $22,231 Equipment Leases ................................. $ 5,622 $ 5,967 $ 2,220 $ -- Other Loans .................................... $ 27 $ 240 $ 1,108 $ 242 Number of Loans/Leases Originated/Purchased Business Purpose Loans ........................... 366 371 257 206 Home Equity Loans .............................. 1,196 772 365 438 Equipment Leases ................................. 585 530 193 -- Other Loans .................................... 8 52 237 51 Average Loan/Lease Size Business Purpose Loans ........................... $ 75 $ 78 $ 71 $ 57 Home Equity Loans .............................. $ 48 $ 47 $ 46 $ 55 Equipment Leases ................................. $ 10 $ 11 $ 12 $ -- Other Loans .................................... $ 3 $ 5 $ 5 $ 4 Weighted Average Interest Rate on Loans/Leases Originated Business Purpose Loans ........................... 15.91% 15.83% 16.05% 16.03% Home Equity Loans .............................. 11.54% 9.94% 12.68% 8.65% Equipment Leases ................................. 16.04% 17.22% 15.85% --% Other Loans .................................... 21.36% 24.50% 24.51% 24.92% Weighted Average Term (in months) Business Purpose Loans ........................... 186 169 173 168 Home Equity Loans .............................. 205 194 212 171 Equipment Leases ................................. 39 42 40 -- Other Loans .................................... 40 50 53 25 Loans/Leases Sold Business Purpose Loans ........................... $29,239 $28,252 $24,762 $ 8,331 Home Equity Loans .............................. $59,674 $24,325 $16,963 $22,231 Equipment Leases ................................. $ -- $ 2,259 $ -- $ -- Other Loans .................................... $ -- $ 1,108 $ -- $ -- Number of Loans/Leases Sold Business Purpose Loans ........................... 380 378 384 98 Home Equity Loans .............................. 1,248 512 365 438 Equipment Leases ................................. -- 193 -- -- Other Loans .................................... -- 252 -- -- Weighted Average Rate on Loans/Leases Originated . 13.22% 12.97% 14.85% 11.30%
48 The following table sets forth information regarding the average loan-to-value ratios for loans originated by the Company during the periods indicated. Nine Months Ended March 31, Year Ended June 30, ------------------ -------------------- Loan Type 1997 1996 - ------------------------------ ------------------ -------------------- Business Purpose Loans ...... 59.6% 58.9% Home Equity Loans ............ 69.2 68.8 The following table shows the geographic distribution of the Company's loan and lease originations and purchases during the periods indicated.
Nine Months Ended March 31, ---------------------------------------------- State 1997 % 1996 % - ---------------------- ---------- ---------- --------- ----------- (Dollars in Thousands) Pennsylvania ......... $ 37,608 41.30% $23,234 47.22% New Jersey ......... 27,203 29.87 14,064 28.59 New York ............ 6,790 7.46 5,286 10.74 Virginia ............ 4,052 4.45 86 .17 Maryland ............ 2,564 2.82 2,839 5.77 North Carolina ...... 3,095 3.40 50 .10 Delaware ............ 2,790 3.06 2,027 4.12 Florida ............ 1,365 1.50 347 .71 Georgia ............ 3,690 4.05 159 .32 Connecticut ......... 636 .70 54 .11 Other ............... 1,264 1.39 1,056 2.15 --------- -------- -------- -------- Total ............... $ 91,057 100.00% $49,202 100.00% ========= ======== ======== ======== Year Ended June 30, -------------------------------------------------------------------- State 1996 % 1995 % 1994 % - ---------------------- ---------- ---------- --------- ---------- --------- --------- Pennsylvania ......... $ 33,324 46.57% $17,913 46.57% $18,246 53.25% New Jersey ......... 20,986 29.33 16,300 42.38 15,540 45.35 New York ............ 7,417 10.36 1,534 3.99 -- -- Virginia ............ 104 0.15 111 0.29 -- -- Maryland ............ 4,408 6.16 1,191 3.10 -- -- North Carolina ...... 78 0.11 6 0.02 -- -- Delaware ............ 2,724 3.81 481 1.25 480 1.40 Florida ............ 674 0.94 149 0.39 -- -- Georgia ............ 181 0.25 98 0.25 -- -- Connecticut ......... 87 0.12 5 0.01 -- -- Other ............... 1,575 2.20 673 1.75 -- -- --------- -------- -------- -------- -------- -------- Total ............... $ 71,558 100.00% $38,461 100.00% $34,266 100.00% ========= ======== ======== ======== ======== ========
Business Purpose Lending. Through its subsidiary, ABC, the Company originates Business Purpose Loans to corporations, partnerships, sole proprietors and other business entities for various business purposes including, but not limited to, working capital, business expansion, equipment acquisition and debt-consolidation. The Company does not target any particular industries or trade groups and, in fact, takes precautions against concentrations of loans in any one industry group. All Business Purpose Loans are collateralized by a first or second mortgage lien on a principal residence or some other parcel of real property, such as office and apartment buildings and mixed use buildings, owned by the borrower, a principal of the borrower, or a guarantor of the borrower. In addition, such loans are generally further collateralized by personal guarantees, pledges of securities, assignments of contract rights, life insurance and lease payments and liens on business equipment and other business assets, as available. Business Purpose Loans generally range from $15,000 to $350,000 and had an average loan size of approximately $75,000 for the loans originated during the nine months ended at March 31, 1997. Generally, Business Purpose Loans are made at fixed rates and for terms ranging from five to 15 years. Such loans generally have origination fees of 5.0% to 6.0% of the aggregate loan amount. For the nine months ended March 31, 1997, the weighted average interest rate received on such loans was 15.91% and the average loan-to-value ratio was 59.6% for the loans originated by the Company during such period. From July 1, 1993 through March 31, 1997, the Company originated $86.4 million of Business Purpose Loans. Generally, the Company computes interest due on its outstanding loans using the simple interest method. Where permitted by applicable law, a prepayment penalty is imposed. Although prepayment penalties imposed vary based upon applicable state law, the prepayment penalties provided for in the Company's Business Purpose Loan documents generally an amount to a significant portion of the outstanding loan balance. The Company believes that such prepayment terms tend to extend the average life of such loans and make such loans more attractive products to securitize. Whether a prepayment fee is imposed and the amount of such fee, if any, is negotiated between the Company and the individual borrower prior to consummation of the loan. See "-- Securitizations." Home Equity Lending. The Company originates Home Equity Loans primarily to credit impaired borrowers through Upland. Historically, Home Equity Loans originated and funded by the Company were sold to one of several third party lenders, at a premium and with servicing released. Currently, the Company builds portfolios of Home Equity Loans for the purpose of securitizing such loans. 49 Home Equity Loan applications are obtained from potential borrowers over the phone and in person. The loan request is then processed and closed. The loan processing staff generally provides its home equity borrowers with a loan approval within 24 hours and closes its Home Equity Loans within approximately seven days of obtaining a loan approval. Home Equity Loans generally range from $15,000 to $250,000 and had an average loan size of approximately $48,000 for the loans originated during the nine months ended March 31, 1997. Generally, Home Equity Loans are made at fixed rates of interest and for terms ranging from 15 to 30 years. Such loans generally have origination fees of up 2.0% of the aggregate loan amount. For the nine months ended March 31, 1997, the weighted average interest rate received on such loans was 11.54% and the average loan-to-value ratio was 69.2% for the loans originated by the Company during such period. The Company attempts to maintain its interest and other charges on Home Equity Loans competitive with the lending rates of other finance companies and banks. Where permitted by applicable law, a prepayment penalty may be imposed and are generally charged to the borrower on the prepayment of a Home Equity Loan except in the event the borrower refinances a Home Equity Loan with the Company. In fiscal 1996, Upland, in conjunction with the Processing Center, Inc., implemented the Bank Alliance Program which is designed to provide an additional source of Home Equity Loans. The Bank Alliance Program targets traditional financial institutions, such as banks, which because of their strict underwriting and credit guidelines have generally provided mortgage financing only to the most credit-worthy borrowers. The program enables such financial institutions to originate loans to credit impaired borrowers in order to achieve certain community reinvestment objectives and subsequently sell such loans to Upland. Under the program, a borrower who fails to meet a financial institution's underwriting guidelines will be referred to the Processing Service Center, Inc. which will process the loan application and underwrite the loan pursuant to Upland's underwriting guidelines. If the borrower qualifies under Upland's underwriting standards, the loan will be originated by the financial institution and subsequently sold to Upland. Since the introduction of this program, agreements have been entered into with six financial institutions which provide the Company with the opportunity to underwrite, process and purchase loans generated by the branch networks of such institutions which consist of approximately 800 branches located in Pennsylvania, Delaware, New Jersey and Maryland. During fiscal 1996 and the nine months ended March 31, 1997, $6.2 million and $4.5 million, respectively, of loans were purchased pursuant to this program. The Company continues to market this program to other regional and national banking institutions. The Company is also negotiating with other financial institutions regarding their participation in the program. Leasing Activities. The Company through its subsidiary, ABL, originates Equipment Leases to corporations, partnerships, other entities and sole proprietors on various types of business equipment including, but not limited to, computer equipment, phone systems, copiers, construction equipment and medical equipment. The Company generally does not target credit impaired borrowers. All such lessees must meet certain specified financial and credit criteria. The Company originates leases throughout the United States with primary emphasis on the eastern portion of the United States. In addition, the Company recently hired a leasing officer with over 25 years of experience in small ticket leasing to expand this area of the Company's leasing business. Generally, the Company's Equipment Leases are of two types: (i) finance leases which have a term of twelve to sixty months and provide a purchase option exercisable by the lessee at $1.00 at the termination of the lease and (ii) fair market value or true leases which have a similar term but provide a purchase option exercisable by the lessee at the fair market value of the equipment at the termination of the lease. The Company's Equipment Leases generally range in size from $3,000 to $100,000, with an average lease size of approximately $10,000 for the leases originated during the nine months ended March 31, 1997. The Company's leases generally have maximum terms of five years. The weighted average interest rate received on such leases for the nine months ended March 31, 1997 was 16.04%. Generally, the interest rates and other terms and conditions of the Company's Equipment Leases are competitive with the leasing terms of other leasing companies in its market area. Currently, all leases originated are generally held in the Company's lease portfolio. At March 31, 1997, principal value of the Company's lease portfolio totaled $8.0 million. All leases are serviced by ABL. It is 50 anticipated that in the future, ABL may develop relationships with third party purchasers of leases and will sell a portion of the leases it originates to such third parties. The sale of leases to third party purchasers may or may not require ABL to retain the servicing rights to such leases. The Company may, in the future, attempt to securitize its lease portfolio provided financial and economic conditions warrant such activity. Marketing Strategy The Company concentrates its marketing efforts on two potential customer groups, one of which, based on historical profiles, displays a pre-disposition for being customers of the Company's loan and lease products and the other being credit impaired borrowers that satisfy the Company's underwriting guidelines. The Company's marketing efforts for Business Purpose Loans focus on the Company's niche market of selected small businesses located in the Company's market area which generally includes the mid-atlantic region of the United States. The Company targets businesses which it believes would qualify for loans from traditional lending sources but would elect to utilize the Company's products and services. The Company's experience has indicated that these borrowers are attracted to the Company as a result of its marketing efforts, the personalized service provided by the Company's staff of highly trained lending officers and the timely response to loan applications. Historically, such customers have been willing to pay the Company's origination fees and interest rates which are generally higher than those charged by traditional lending sources. The Company markets Business Purpose Loans through various forms of advertising, and a direct sales force. Advertising media utilized includes large direct mail campaigns and newspaper and radio advertising. The Company's commissioned sales staff, which consists of full-time highly trained sales persons, are responsible for converting advertising leads into loan applications. The Company utilizes a proprietary training program involving extensive and on-going training of its lending officers. The Company's sales staff utilizes significant person-to-person contact to convert direct mail advertising into loan applications and maintains contact with the borrower throughout the application process. The Company markets Home Equity Loans through telemarketing, direct mail campaigns as well as television, radio and newspaper advertisements. The Company's television advertising campaign initiated in September 1996 was designed to complement the other forms of advertising utilized by the Company. The Company's integrated approach to media advertising is intended to maximize the effect of the Company's advertising campaigns. The Company's marketing efforts for Home Equity Loans are currently concentrated in the mid-atlantic region of the United States. The Company recently began originating loans in Georgia, North Carolina, Florida and Connecticut and recently opened branch sales offices in Georgia and Florida. The Company may open additional sales offices in other states in the future. Loan processing, underwriting, servicing and collection procedures are performed at the Company's main office. The Company also utilizes the Bank Alliance Program as an additional source of loans. See "-- Lending and Leasing Activities -- Home Equity Lending." The Company, through ABL, markets its Equipment Leases throughout the United States with particular emphasis on the eastern portion of the United States. The Company's marketing efforts in the leasing area are focused on the Company's niche market of distributors of small to medium-sized office, industrial and medical equipment. ABL primarily obtains its equipment leasing customers through equipment manufacturers, brokers and vendors with whom it has a relationship and through a direct sales force. The Company does not target any particular industry or trade group and avoids the concentration of leases in one particular industry group. The Company believes that its leasing activities will enhance its cross-selling opportunities with its existing Business Purpose Loan customers. Loan and Lease Servicing Generally, the Company services the loans and leases it maintains in its portfolio or which are securitized by the Company in accordance with its established servicing procedures. Servicing includes collecting and transmitting payments to investors, accounting for principal and interest, collections and foreclosure activities, and disposing of real estate owned. At March 31, 1997, the Company's total servicing portfolio included 3,391 51 loans and leases with an aggregate outstanding balance of $138.0 million. The Company generally receives servicing fees of 0.50% to 0.75% per annum based upon the outstanding balance of securitized loans serviced and the Company's responsibilities related to collections and accounting for such loans. In servicing its loans and leases, the Company typically sends an invoice to borrowers on a monthly basis advising them of the required payment and its due date. The Company initiates the collection process one day after a borrower fails to make a monthly payment. When a loan or lease becomes 45 to 60 days delinquent, it is transferred to the Company's work-out department. The work-out department attempts to reinstate a delinquent loan or lease, seek a payoff, or occasionally enter into a modification agreement with the borrower to avoid foreclosure. All proposed work-out arrangements are evaluated on a case-by-case basis, based upon the borrower's past credit history, current financial status, cooperativeness, future prospects and the reasons for the delinquency. If the loan or lease becomes delinquent 61 days or more and a satisfactory work-out arrangement with the borrower is not achieved or the borrower declares bankruptcy, the matter is immediately referred to counsel for collection. Legal action may be initiated prior to a loan or lease becoming delinquent over 60 days if management determines that the circumstances warrant such action. The Company believes that the low level of delinquencies experienced by the Company during prior periods is due, in large part, to the Company's maintenance of a high level of borrower contact and a servicing relationship appropriate to the Company's borrowing base. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired or expected to be acquired by foreclosure or deed in lieu of foreclosure, it is recorded at the lower of cost or estimated fair value, less estimated cost of disposition. After acquisition, all costs incurred in maintaining the property are expensed. The Company's ability to foreclose on certain properties may be affected by state and federal environmental laws which impose liability on the property owner for the costs related to the investigation and clean up of hazardous or toxic substances or chemicals released on the property. Although the Company's loans are primarily secured by residential real estate, there is a risk that the Company could be required to investigate or clean up an environmentally damaged property which is discovered after acquisition by the Company. To date, the Company has not been required to perform any investigation or clean up activities nor has it been subject to any environmental claims. See "Risk Factors -- Environmental Concerns." The Company in its capacity as the servicer of securitized loans is obligated to advance funds (an "Advance") in respect of each monthly loan interest payment that accrued during the collection period for the loans but was not received, unless the Company determines that such Advances will not be recoverable from subsequent collections in respect to the related loans. Underwriting Procedures and Practices Summarized below are certain of the policies and practices which are followed in connection with the origination of Business Purpose Loans and Home Equity Loans and the origination of Equipment Leases. It should be noted that such policies and practices will be altered, amended and supplemented as conditions warrant. The Company reserves the right to make changes in its day-to-day practices and policies in its sole discretion. The Company's loan underwriting standards are applied to evaluate prospective borrowers' credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. Initially, the borrower is required to fill out a detailed application providing pertinent credit information. As part of the description of the borrower's financial condition, the borrower is required to provide information concerning assets, liabilities, income, credit, employment history and other demographic and personal information. If the application demonstrates the borrower's ability to repay the debt as well as sufficient income and equity, loan processing personnel obtain and review an independent credit bureau report on the credit history of the borrower and verification of the borrower's income by obtaining and reviewing one or more of the borrower's pay stubs, income tax returns, checking account statements, W-2 tax forms or verification of business or employment forms. Once all applicable employment, credit and property information is obtained, a determination is made as to whether sufficient unencumbered equity in the property exists and whether the prospective borrower has sufficient monthly income available to meet the borrower's monthly obligations. 52 Generally, Business Purpose Loans collateralized by residential real estate must have an overall loan-to-value ratio (based solely on the independent appraised fair market value of the real estate collateral securing the loan) on the properties collateralizing the loans of no greater than 75%. Business Purpose Loans collateralized by commercial real estate must generally have an overall loan-to-value ratio (based solely on the independent appraised fair market value of the real estate collateral securing the loan) of no greater than 60% percent. In addition, in substantially all instances, the Company also receives additional collateral in the form of, among other things, pledges of securities, assignments of contract rights, life insurance and lease payments and liens on business equipment and other business assets, as available. The Business Purpose Loans originated by the Company had an average loan-to-value ratio of 59.6% and 58.9% for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. The maximum acceptable loan-to-value ratio for Home Equity Loans is 90%. The Home Equity Loans originated by the Company had an average loan-to-value ratio of 69.2% and 68.8% for the nine months ended March 31, 1997 and the year ended June 30, 1996, respectively. Occasionally, exceptions to these maximum loan-to-value ratios are made if other collateral is available or if there are other compensating factors. Title insurance is generally obtained in connection with all real estate secured loans. In determining the adequacy of the mortgaged property as collateral, an appraisal is made of each property considered for financing. The appraisal is completed by an independent qualified appraiser and generally includes pictures of comparable properties and pictures of the subject property's interior. With respect to Business Purpose and Home Equity Loans, the appraisal is completed by a qualified appraiser on a Federal National Mortgage Association ("FNMA") form. In the leasing area, while a security interest in the equipment is retained in connection with the origination of the lease, the lease is not dependent on the value of the equipment as the principal means of securing the lease. The underwriting standards applicable to leases place primary emphasis on the borrower's financial strength and its credit history. The Company's lease underwriting criteria includes a review of the subject company's credit reports, financial statements, bank references and trade references, as well as the credit history and financial statements of the principals of the borrower. The Company typically obtains personal guarantees on its Equipment Leases. Securitizations The sale of the Company's Business Purpose Loans and Home Equity Loans through securitizations is an important objective of the Company. In furtherance of this objective, since 1995 the Company has sold in the secondary market senior interests in five pools of loans it securitized. The five pools of loans securitized were comprised of $66.5 million of Business Purpose Loans and $66.9 million of Home Equity Loans. Generally, a securitization involves the transfer by the Company of receivables representing a series of loans to a single purpose trust in exchange for certificates or securities issued by the trust. The certificates represent an undivided ownership interest in the loans transferred to the trust. The certificates consist of a class of senior certificates and the excess spread and may also include a class of subordinated certificates. In connection with securitizations, the senior certificates are sold to investors and the subordinate certificates, if any, and the excess spread are typically retained by the Company. As a result of the sale of the senior certificates, the Company receives a cash payment representing a substantial portion of the principal balance of the loans held by the trust. The senior certificates entitle the holder to be repaid the principal of its purchase price and the certificates bear interest at a stated rate of interest. The stated rate of interest is typically substantially less than the interest rate required to be paid by the borrowers with respect to the underlying loans. As a consequence, the Company is able to receive cash for a portion of its portfolio and to pay the principal and interest required by the senior certificates with the cash flows from the underlying loans owned by the trust. However, since the interest in the loans held by the Company (the subordinate certificate and the excess spread) is subordinate to the senior certificate, the Company retains a portion of the risk that the full value of the underlying loans will not be realized. Additionally, the holder of the senior certificates will receive certain additional payments on account of principal in order to reduce the balance of the senior certificates in proportion to the subordinated amount held by the Company. The additional payments of 53 principal are designed to increase the senior certificate holder's protection against loan losses. In the typical subordination structure, the Company, as the holder of the excess spread will be entitled to receive all of the remaining interest in the loans at the time of the termination of the trust. The pooling and servicing agreements that govern the distribution of cash flows from the loans included in the securitization trusts require the overcollateralization of the senior certificates by using interest receipts on the loans to reduce the outstanding principal balance of the senior certificates to a pre-set percentage of the loans. The overcollateralization percentage may be reduced over time according to the delinquency and loss experience of the loans. The Company's interest in each overcollateralized amount is reflected in the Company's financial statements as a portion of the excess spread. To the extent that a loss is realized on the loans, losses will be paid first out of the excess spread received and ultimately out of the overcollateralization amount available to the excess spread, and the subordinated certificates, if available. If losses exceed the Company's projected amount, the excess losses will result in a reduction in the value of the excess spread held by the Company. See "Risk Factors -- Dependence upon Securitizations and Fluctuations in Operating Results." The Company may be required either to repurchase or to replace loans which do not conform to the representations and warranties made by the Company in the pooling and servicing agreements entered into when the loans are pooled and sold through securitizations. As of March 31, 1997, the Company had not been required to repurchase or replace any such loans. The Company generally retains the servicing rights with respect to all loans securitized. See "-- Loan and Lease Servicing." The Company's securitizations are often structured to provide for a portion of the loans included in the trust to be funded with loans originated by the Company during a period subsequent to the securitization. The amount of the aggregate trust value to be funded in the future is referred to as the "prefunded account." The loans to be included in such account must be substantially similar in terms of collateral, size, term, interest rate, geographic distribution and loan-to-value ratio as the loans initially transferred to the trust. To the extent the Company fails to originate a sufficient number of qualifying loans for the prefunded account within the specified time period, the Company's earnings during the quarter in which the funding was to occur would be reduced. The securitization of loans during the nine months ended March 31, 1997 and the years ended June 30, 1996 and 1995 generated gain on sale of loans of $15.6 million, $8.9 million and $1.4 million, respectively. Such gains contributed to the Company's record levels of revenue and net income during such periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Subject to market conditions, the Company anticipates that it will continue to build portfolios of Business Purpose Loans and Home Equity Loans and enter into securitizations of these portfolios. The Company may also consider the securitization of Equipment Leases in the future. The Company believes that a securitization program provides a number of benefits by allowing the Company to diversify its funding base, provide liquidity and lower its cost of funds. Competition The Company competes for Business Purpose Loans against many other finance companies and financial institutions. Although many other entities originate Business Purpose Loans, the Company has focused its lending efforts on its niche market of businesses which may qualify for loans from traditional lending sources but who the Company believes are attracted to the Company's products as a result of the Company's marketing efforts and responsive customer service and rapid processing and closing periods. The Company has significant competition for Home Equity Loans. Through Upland, the Company competes with banks, thrift institutions, mortgage bankers and other financial companies, which may have greater resources and name recognition. The Company attempts to mitigate these factors through a highly trained staff of professionals, rapid response to prospective borrowers' requests and maintaining a short average loan processing time. In addition, the Company recently implemented the Bank Alliance Program in order to generate additional loan volume. See "-- Lending and Leasing Activities -- Home Equity Lending." 54 The Company has significant competition for Equipment Leases. Through ABL, the Company competes with banks, leasing and finance companies with greater resources, capitalization and name recognition throughout its market area. It is the intention of the Company to capitalize on its vendor relationships, cross-selling opportunities, and the efforts of its direct sales force to combat these competitive factors. See "Risk Factors -- Increased Competition Could Adversely Affect Results of Operations." Regulation General. The home equity lending business is highly regulated by both federal and state laws. All Home Equity Loans must meet the requirements of, among other statutes, the Federal Truth in Lending Act ("TILA"), the Federal Real Estate Settlement Procedures Act ("RESPA"), the Equal Credit Opportunity Act of 1974, as amended ("ECOA") and their accompanying Regulations Z, X and B, respectively. Truth in Lending. The TILA and Regulation Z promulgated thereunder contain certain disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. TILA also guarantees consumers a three day right to cancel certain transactions and imposes specific loan feature restrictions on loans of the type originated by Upland. Management of the Company believes that it is in compliance with TILA in all material respects. If the Company were found not to be in compliance with TILA, aggrieved borrowers could have the right to rescind their loans and to demand, among other things, the return of finance charges and fees paid to the Company. Other Lending Laws. The Company is also required to comply with the ECOA, which prohibits creditors from discriminating against applicants on certain prohibited bases, including race, color, religion, national origin, sex, age or marital status. Regulation B promulgated under ECOA restricts creditors from obtaining certain types of information from loan applicants. Among other things, it also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for loans increases as a result of information obtained from a consumer credit reporting agency, another statute, the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply the applicant with the name and address of the reporting agency. In addition, Upland is subject to the Fair Housing Act and regulations thereunder, which broadly prohibit certain discriminatory practices in connection with the Company's home equity lending business. Upland is also subject to RESPA. RESPA imposes, among other things, limits on the amount of funds a borrower can be required to deposit with the Company in any escrow account for the payment of taxes, insurance premiums or other charges. In addition, the Company is subject to various other federal and state laws, rules and regulations governing, among other things, the licensing of, and procedures that must be followed by, mortgage lenders and servicers, and disclosures that must be made to consumer borrowers. Failure to comply with such laws, as well as with the laws described above, may result in civil and criminal liability. Upland is licensed and regulated by the departments of banking or similar entities in the various states in which it is licensed. Upland maintains compliance with the various federal and state laws through its in-house and outside counsel which continually review Upland's documentation and procedures and monitor and apprise Upland on various changes in the laws. See "Risk Factors - -- Regulatory Restrictions and Licensing Requirements." Employees At March 31, 1997, the Company employed 194 people on a full-time basis and 24 people on a part-time basis. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. Property Except for real estate acquired in foreclosure as part of the Company's normal course of business, neither ABFS nor its subsidiaries presently hold title to any real estate for operating purposes. The interests which the Company presently holds in real estate are in the form of mortgages against parcels of real estate owned by Upland's or ABC's borrowers or affiliates of Upland's or ABC's borrowers and real estate acquired through foreclosure. 55 The Company presently leases office space at 111 Presidential Boulevard, Bala Cynwyd, Pennsylvania, just outside the city limits of Philadelphia. The Company is currently leasing its office space under a five year lease with a current year annual rental of approximately $636,000. Such lease contains a five-year renewal option at an increased annual rental amount. The Company is currently negotiating with its landlord to lease additional office space in the building where its executive offices are located. In addition, the Company leases an executive suite in Boca Raton, Florida, expiring in August 1997, and Phoenix, Arizona, expiring in October 1997. The Company leases its New Jersey office located in Cherry Hill, New Jersey. Legal Proceedings From time to time, the Company is involved as plaintiff or defendant in various legal proceedings arising in the normal course of its business. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on the Company's financial position, results of operations or liquidity. 56 MANAGEMENT General The present management structure of the Company is as follows: Anthony J. Santilli, Jr. is Chairman, President, Chief Executive Officer, Chief Operating Officer, Treasurer and a Director of the Company. Beverly Santilli is President of ABC and an Executive Vice President and Secretary of ABFS. Jeffrey M. Ruben is Senior Vice President and General Counsel of the Company. David M. Levin, CPA is the Senior Vice President - Finance and Chief Financial Officer. Harold Sussman, Michael DeLuca, Richard Kaufman and Leonard Becker are non-employee directors of the Company and take no part in the day-to-day operating activities of the Company. All directors and executive officers of the Company hold office during the term for which they are elected and until their successors are elected and qualified. The following table sets forth information regarding the Company's Board of Directors and executive officers:
Name Age(1) Position - -------------------------- -------- ----------------------------------------------------- Anthony J. Santilli, Jr. 54 Chairman, President, Chief Executive Officer, Chief Operating Officer, Treasurer and Director Leonard Becker 73 Director Michael DeLuca 65 Director Richard Kaufman 55 Director Harold E. Sussman 71 Director Beverly Santilli 37 Executive Vice President and Secretary of ABFS and President of ABC Jeffrey M. Ruben 34 Senior Vice President and General Counsel of ABFS David M. Levin 52 Senior Vice President - Finance and Chief Financial Officer
- ------------ (1) As of May 1, 1997. Directors The Company's Amended and Restated Certificate of Incorporation fixes the number of Directors to between one and fifteen as determined by resolution of the Board of Directors. The Board of Directors of the Company is currently comprised of five persons. Prior to February 20, 1997, the closing of the public offering of the Company's Common Stock, all directors were elected each year for a one-year term and until their successors were elected and qualified. The Company's Amended and Restated Certificate of Incorporation provides that the Board of Directors shall be divided into three classes following the closing of the public offering of the Company's Common Stock. Accordingly, prior to the next annual meeting of stockholders (the first annual meeting of stockholders following the closing of the public offering of the Company's Common Stock) the Board shall determine the composition of each class. The initial directors of Class One will serve until the next annual meeting of stockholders; at such annual meeting of stockholders, the directors of Class One shall be elected for a term of three years, and after expiration of such term, shall thereafter be elected every three years for three-year terms. The initial directors of Class Two shall serve until the second annual meeting of stockholders following the public offering of the Company's Common Stock. At the second annual meeting of stockholders following the public offering of the Company's Common Stock, the directors of Class Two shall be elected for a term of three years and, after the expiration of such term, shall thereafter be elected every three years for three-year terms. The initial directors of Class Three shall serve until the third annual meeting of stockholders after the public offering of the Company's Common Stock. At the third annual meeting of stockholders following the public offering of the Company's Common Stock, the directors of Class Three shall be elected for a term of three years and after the expiration of such term, shall thereafter be elected every three years for three-year terms. 57 The following is a description of the business experience of the Company's Board of Directors. Anthony J. Santilli, Jr. is the Chairman, President, Chief Executive Officer, Chief Operating Officer and Treasurer of the Company and is an executive officer of its subsidiaries. He has held the positions with the Company since early 1993 when the Company became the parent company of ABC and the positions with the subsidiaries since the formation of ABC in June 1988. Prior to the founding of ABC in 1988, Mr. Santilli was Vice President and Department Head of the Philadelphia Savings Fund Society ("PSFS"). As such, Mr. Santilli was responsible for PSFS' commercial relationships with small and middle market business customers. Mr. Santilli also served as the secretary of PSFS' Asset/Liability Committee and Policy Committee from May 1983 to June 1985 and June 1986 to June 1987, respectively. Leonard Becker is a former 50% owner and officer of the SBIC of the Eastern States, Inc., a federally licensed small business corporation which made medium term loans to small business concerns. For the last 30 years, Mr. Becker has been heavily involved in the investment in and management of real estate; and has been involved in the ownership of numerous shopping centers, office buildings and apartments. Mr. Becker formerly served as a director of Eagle National Bank and Cabot Medical Corp. Michael DeLuca was President, Chairman of the Board, Chief Executive Officer and a former owner of Bradford-White Corporation, a manufacturer of plumbing products, for a period of approximately thirty years. Presently, Mr. DeLuca serves as a Director of BWC-West, Inc., Bradford-White International and is Chief Executive Officer and a director of Lux Products Corporation. Richard Kaufman is Chairman and Chief Executive Officer of Academy Industries, Inc., a paper converting company, a position he has held since December 1996. From 1982 to 1996, he was self employed and involved in making and managing investments for his own benefit. From 1976 to 1982, Mr. Kaufman was President and Chief Operating Officer of Morlan International, Inc., a cemetery and financial services conglomerate. From 1970 to 1976, Mr. Kaufman served as a Director and Vice President-Real Estate and Human Services Division of Texas International, Inc., an oil and gas conglomerate. Harold E. Sussman is currently a principal in and Chairman of the Board of the real estate firm of Colliers, Lanard & Axilbund, a major commercial and industrial real estate brokerage and management firm in the Philadelphia area, with which he has been associated since 1972. Committees of the Board of Directors The Board of Directors of the Company held four meetings during the year ended June 30, 1996. During fiscal 1996, no director attended fewer than 75% of the aggregate of the total number of Board meetings and the total number of meetings held by committees of the Board of Directors on which he served. The following is a description of each of the committees of the Board of Directors of the Company. Audit Committee. The members of the Audit Committee are Messrs. DeLuca, Sussman and Becker. The Audit Committee reviews the Company's audited financial statements and makes recommendations to the Board concerning the Company's accounting practices and policies and the selection of independent accountants. The Audit Committee met twice during the year ended June 30, 1996. Compensation Committee. The members of the Compensation Committee are Messrs. DeLuca, Sussman and Kaufman. The Compensation Committee is responsible for establishing salaries, bonuses and other compensation for the executive officers and administers the Company's stock option plans. The Compensation Committee met once during the year ended June 30, 1996. Finance Committee. The members of the Finance Committee are Messrs. Santilli, Becker, Kaufman and DeLuca. The Finance Committee monitors and makes suggestions as to the interest rates paid by the Company on its debt instruments, develops guidelines and sets policy relating to the amount and maturities of investments to be accepted by the Company and performs cash management functions. The Finance Committee met four times during the year ended June 30, 1996. 58 Executive Committee. The members of the Executive Committee are Messrs. Santilli, Kaufman and Becker. The Executive Committee is empowered by the Board to act in its stead between meetings of the Board. The Executive Committee met four times during the year ended June 30, 1996. Executive Officers who are not also Directors The following is a description of the business experience of each executive officer who is not also a director. Beverly Santilli is Executive Vice President and Secretary of ABFS and President of ABC. Mrs. Santilli is responsible for all sales, marketing and human resources for ABC and for the day-to-day operation of ABC. Prior to joining ABC and from September 1984 to November 1987, Mrs. Santilli was affiliated with PSFS initially as an Account Executive and later as a Commercial Lending Officer with such institution's Private Banking Group. Mrs. Santilli is the wife of Anthony J. Santilli, Jr. Jeffrey M. Ruben is Senior Vice President and General Counsel of ABFS and its subsidiaries. Mr. Ruben is responsible for the Company's legal and regulatory compliance matters. From June 1990 until he joined the Company in April 1992, Mr. Ruben was an attorney with the law firm of Klehr, Harrison, Harvey, Branzburg & Ellers in Philadelphia, Pennsylvania. From December 1987 until June 1990, Mr. Ruben was employed as a credit analyst with the CIT Group Equipment Financing, Inc. From July 1985 until December 1987, Mr. Ruben was a Portfolio Administrator with LFC Financial Corp. in Radnor, Pennsylvania. Mr. Ruben is a member of the Pennsylvania and New Jersey Bar Associations. Mr. Ruben holds both a New Jersey Mortgage Banker License and a New Jersey Secondary Mortgage Banker License. David M. Levin is Senior Vice President - Finance and Chief Financial Officer of the Company. He has held these positions since May 1995 and October 1995, respectively. Prior to joining the Company, Mr. Levin was associated with Fishbein & Company, P.C., Certified Public Accountants (previous auditors for the Company), as a staff member from 1983 to 1988 and as a shareholder from 1989 to 1995. Mr. Levin is a Certified Public Accountant. Compensation of Directors Non-employee directors of the Company receive an annual stipend of $5,000 and a monthly stipend of $1,000. No director may receive more than $17,000 per year. Mr. Santilli, the only director who is also an officer of the Company, does not receive any separate fee for acting in his capacity as a director. The Company adopted a Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan") in order to attract, retain and motivate non-employee directors and to encourage such individuals to increase their ownership interest in the Company. The Non-Employee Director Plan was adopted by the Board of Directors on September 12, 1995 and became effective upon its ratification by the stockholders at the Annual Meeting held on May 31, 1996. Such plan provides for the award of options to purchase up to 135,000 shares of the Company's Common Stock from the Company's authorized but unissued shares. The Non-Employee Director Plan is administered by the Board of Directors of the Company who shall have the exclusive right to determine the amount and conditions applicable to the options issued pursuant to such plan. Any non-employee director of the Company or its subsidiaries is eligible to participate in such plan. Options granted under the Non-Employee Director Plan are not incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The exercise price of the stock options granted under the Non-Employee Director Plan shall be equal to the fair market value of the Company's Common Stock on the date of grant. Payment of the exercise price for options granted under the Non-Employee Director Plan may be made (i) in cash, or (ii) unless prohibited by the Board of Directors, in shares of Common Stock, or a combination of cash and shares. Except in the event of death or disability of the director as described below, all options granted pursuant to the Non-Employee Director Plan are exercisable during the lifetime of the director only by the director and may not be exercised more than ten years from the date of the grant. Unless terminated earlier as provided in the Non-Employer Director Plan, all 59 unexercised options terminate three months following the date on which an optionee ceases to be a director of the Company but in no event shall an option be exercisable after ten years from the date of grant thereof. In the event that a non-employee director dies or becomes disabled during the option term, the director's executor or legal guardian, as applicable, may exercise such option during the three month period following such event to the same extent that the director was entitled to exercise such option prior to his death or disability but in no event later than ten years from the date of grant. In connection with the adoption of such plan, each non-employee director of the Company received an option to purchase 22,500 shares of Common Stock at an exercise price of $5.00 per share (the "Formula Award"). Pursuant to the terms of such Formula Awards, if a non-employee director ceases to be a director of the Company within three years of the option grant, the Company has the right to repurchase shares received pursuant to the exercise of options granted under the Non-Employee Director Plan for a period of six months from the date the optionee ceases to be a director of the Company. Each new outside director elected subsequent to the adoption of the Non-Employee Director Plan would also receive an option to purchase 22,500 shares of Common Stock, subject to availability, at the market price on the date of grant. In addition, on October 22, 1996, the Board of Directors awarded each non-employee director an option to purchase 5,000 shares of the Company's Common Stock. Such options had a weighted average exercise price of $7.32 per share. As of March 31, 1997, 25,000 shares remain available for future issuances under this plan. Indemnification of Directors and Officers The Company's Amended and Restated Certificate of Incorporation and Bylaws provide that to the fullest extent permitted by Delaware law, directors of the Company shall not be personally liable to the Company or stockholders of the Company for monetary damages for breach of fiduciary duty as a director. ABFS's Amended and Restated Certificate of Incorporation and also Bylaws provide that, if Delaware law is hereafter amended to authorize the further elimination or limitation of the liability of the directors of ABFS, then the liability of such directors shall be eliminated or limited to the fullest extent permitted by applicable law. The effect of these provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior), except in certain situations described in Delaware General Corporation Law. This provision does not limit or eliminate the rights of the Company or any stockholder to seek nonmonetary relief, such as an injunction or recission, in the event of a breach of a director's duty of care. The Amended and Restated Certificate of Incorporation and the Bylaws of ABFS provide that the Company shall, to the full extent permitted by the laws of the State of Delaware, as amended from time to time, indemnify all persons whom they may indemnify pursuant thereto, including advancement of expenses. The Bylaws of ABFS also provide that the Company may obtain insurance on behalf of such persons, which the Company currently maintains. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Executive Compensation ABFS has no direct salaried employees. Each of the executive officers of ABFS is an executive officer of the Company's principal operating subsidiary, ABC, and is a salaried employee of such entity. 60 The following table sets forth information regarding compensation paid by ABFS and its subsidiaries to the Chief Executive Officer and each other executive officer who made in excess of $100,000 during fiscal 1996 (the "Named Officers"). SUMMARY COMPENSATION TABLE
Annual Compensation --------------------------------------------------------- Name and Fiscal Other Annual Principal Position Year Salary Bonus Compensation(2) - -------------------------------------- --------- ---------- ------------- ----------------- Anthony J. Santilli, Jr. 1996 $237,500 $300,000(1) -- Chairman, President, Chief Executive 1995 191,667 -- -- Officer, Chief Operating Officer, 1994 175,000 -- -- Treasurer and Director of ABFS Beverly Santilli 1996 $120,000 $ 65,000 -- President of ABC and Executive Vice 1995 86,892 -- -- President and Secretary of ABFS 1994 80,163 -- -- Jeffrey M. Ruben 1996 $ 96,125 $ 50,000 -- Senior Vice President and 1995 80,353 -- -- General Counsel of ABFS 1994 75,228 -- -- David M. Levin 1996 $ 85,000 $ 20,000 -- Senior Vice President - Finance and 1995(5) -- -- -- Chief Financial Officer of ABFS 1994(5) -- -- -- Long Term Compensation Awards Restricted Underlying Name and Stock Options/ All Other Principal Position Award(s) SARs (#) Compensation - -------------------------------------- ------------ ------------ ---------- Anthony J. Santilli, Jr. -- 22,500(3) -- Chairman, President, Chief Executive -- -- -- Officer, Chief Operating Officer, -- -- -- Treasurer and Director of ABFS Beverly Santilli -- -- -- President of ABC and Executive Vice -- -- -- President and Secretary of ABFS -- -- -- Jeffrey M. Ruben -- -- -- Senior Vice President and -- 7,500(4) -- General Counsel of ABFS -- -- -- David M. Levin -- -- -- Senior Vice President - Finance and -- -- -- Chief Financial Officer of ABFS -- -- --
- ------------ (1) This represents Mr. Santilli's yearly bonus of $250,000 plus a one-time bonus of $50,000 paid in October 1995. (2) Excludes perquisites and other personal benefits that do not exceed $50,000 or 10% of each officer's total salary and bonus. (3) Represents an option to purchase 22,500 shares of Common Stock granted to Mr. Santilli at an exercise price of $5.00 per share. (4) Represents an option to purchase 7,500 shares of Common Stock granted to Mr. Ruben at an exercise price of $2.67 per share. (5) No disclosure of salary information is included for Mr. Levin for fiscal 1995 and 1994 as he was not an executive officer at such time. During fiscal 1996, the Company paid cash bonuses to certain officers and employees based upon the Company's achievement of certain established performance targets. Bonuses paid for fiscal 1996 to the Named Officers are included in the Summary Compensation Table above. During the first quarter of fiscal 1997, the Board of Directors adopted a Management Incentive Plan for the benefit of certain officers of the Company and its subsidiaries, including certain of the Company's executive officers. The plan is intended to motivate management toward the achievement of the Company's business goals and objectives by rewarding management in the form of an annual cash bonus if certain established Company and individual goals are attained. Officers eligible to participate in the plan include selected officers at the level of Vice President and above. Bonuses are determined based upon the achievement of qualitative and quantitative individual, departmental and Company goals pursuant to an established formula under which the various factors are weighted based upon each individual's position, years of service and contribution to the overall performance of the Company or a subsidiary thereof. Based upon these criteria, a maximum potential bonus is established for each individual eligible to participate in such plan. The maximum annual bonus awarded can range from 15% to 225% of an individual's annual salary. For example, if 80% of an individual's goals are met, a bonus of 50% of the individual's potential bonus is payable under the plan. If 100% of the individual's goal is reached, a bonus equal to 100% of the individual's potential bonus is payable under the plan. No bonuses will be paid in any year where the Company fails to meet at least 80% of its performance goals. Bonuses may be prorated to the extent an eligible participant has not been employed by the Company for a full 12-month period. 61 In 1993, the Company adopted, and the stockholders approved, the Company's Stock Option Plan (the "Plan"). The purpose of the Plan is to attract and retain qualified management officials. Pursuant to the terms of the Plan, 375,000 shares (as adjusted for the Company's stock split) of Common Stock were reserved for issuance upon the exercise of options granted under the Plan. Subject to the approval of the Company's stockholders, during fiscal 1997 the Company amended the Plan to increase the amount of authorized but unissued shares of Common Stock available for issuance thereunder by 85,000 shares. In connection with the public offering of the Company's Common Stock, the Company granted incentive stock options to purchase approximately 150,000 shares of Common Stock to certain of its officers. Of this amount, options to purchase 12,500 shares of Common Stock were awarded to each of Messrs. Ruben and Levin and Mrs. Santilli. Such options will vest at a rate of 20% per year over a five-year period with the first portion vesting on the first anniversary of the date of grant. Options to purchase 13,988 shares of the Company's Common Stock remained available for grant as of March 31, 1997. The Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee has the discretion to interpret the provisions of the Plan; to determine the officers to receive options under the Plan; to determine the type of awards to be made and the amount, size and terms of each such award; to determine the time when awards shall be granted; and to make all other determinations necessary or advisable for the administration of the Plan. Options granted under the Plan may be incentive stock options intended to qualify under Section 422 of the Code, or options not intended to so qualify. The Plan requires the exercise price of all stock options to be at least equal to the fair market value of the Common Stock on the date of the grant. Except as set forth below, all options granted pursuant to the Plan are exercisable in accordance with a vesting schedule which is established at the time of grant and may not be exercised more than ten years from the date of the grant. No individual may receive more than 75% of the shares reserved for issuance under the Plan. In the case of incentive stock options granted to a stockholder owning, directly or indirectly, in excess of 10% of the Common Stock, the option exercise price must be at least equal to 110% of the fair market value of the Common Stock on the date of grant and such options may not be exercised more than five years from the date of grant. Payment of the exercise price for options granted under the Plan may be made in cash, shares of Common Stock, or a combination of both as determined by the Compensation Committee. All unexercised incentive stock options terminate three months following the date on which an optionee's employment by the Company terminates, other than by reason of disability or death. An exercisable option held by an optionee who dies or who ceases to be employed by the Company because of disability may be exercised by the employee or his representative within one year after the employee dies or becomes disabled (but not later than the scheduled option termination date). Options granted pursuant to the Plan are not transferable except to the decedent's estate in the event of death of the optionee. 62 The following table sets forth information regarding options exercised by the Named Officers during fiscal 1996 and option values of options held by such individuals at fiscal year end. AGGREGATED OPTIONS/SAR EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
Value of Unexercised Number of Unexercised In-the-Money Options/SARs at Options/SARs at Fiscal Year End Fiscal Year End Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise(#) Realized($) Unexercisable (#) Unexercisable ($) - --------------------------------- ----------------- ------------- ----------------------- --------------------- Anthony J. Santilli, Jr. 225,012 0 22,500/0 $143,438/0(1) Chairman, President, Chief Executive Officer, Chief Operating Officer, Treasurer and Director of ABFS Beverly Santilli 0 0 N/A N/A President of ABC and Executive Vice President Secretary of ABFS Jeffrey M. Ruben 0 0 7,500/0 $ 65,288/0(2) Senior Vice President and General Counsel of ABFS David M. Levin 0 0 N/A N/A Senior Vice President - Finance and Chief Financial Officer of ABFS
- ------------ (1) This represents the aggregate market value (market price of the Common Stock less the exercise price) of the options granted based upon the closing sales price per share of $11.375 on June 30, 1996. The exercise price of the options held by Mr. Santilli is $5.00 per share. (2) This represents the aggregate market value (market price of the Common Stock less the exercise price) of the options granted based upon the closing sales price per share of $11.375 on June 30, 1996. The exercise price of the options held by Mr. Ruben is $2.67 per share. 63 The following table sets forth information regarding options to purchase shares of Common Stock granted to the Named Officers during fiscal 1996. No stock appreciation rights ("SARs") were granted in fiscal 1996. OPTIONS/SAR GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
Number of % of Total Securities Options/SARs Underlying granted to Options/SARs Employees in Name granted (#) Fiscal Year - -------------------------------------- -------------- -------------- Anthony J. Santilli, Jr. 22,500(1) 100% Chairman, President, Chief Executive Officer, Chief Operating Officer, Treasurer and Director of ABFS Beverly Santilli --(2) -- President of ABC and Executive Vice President and Secretary of ABFS Jeffrey M. Ruben --(3) -- Senior Vice President and General Counsel of ABFS David M. Levin --(4) -- Senior Vice President - Finance and Chief Financial Officer of ABFS Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation Exercise or Base for Option Term Name Price ($/sh) Expiration Date 5% ($) 10% ($) - -------------------------------------- ------------------ ----------------- --------------------- Anthony J. Santilli, Jr. $5.00 October 1, $ 70,751 $ 179,296 Chairman, President, Chief Executive 2005 Officer, Chief Operating Officer, Treasurer and Director of ABFS Beverly Santilli -- -- -- -- President of ABC and Executive Vice President and Secretary of ABFS Jeffrey M. Ruben -- -- -- -- Senior Vice President and General Counsel of ABFS David M. Levin -- -- -- -- Senior Vice President - Finance and Chief Financial Officer of ABFS
- ------------ (1) Represents an option to purchase 22,500 shares of Common Stock. Subsequent to the end of fiscal 1996, Mr. Santilli received an option to purchase 5,000 shares of Common Stock. (2) Subsequent to the end of fiscal 1996, Mrs. Santilli received an option to purchase 12,500 shares of Common Stock. (3) Subsequent to the end of fiscal 1996, Mr. Ruben received an option to purchase 12,500 shares of Common Stock. (4) Subsequent to the end of fiscal 1996, Mr. Levin received an option to purchase 12,500 shares of Common Stock. Employment Agreements On January 29, 1997, the Company entered into employment agreements with each of Anthony J. Santilli, Jr., Beverly Santilli and Jeffrey M. Ruben pursuant to which they are entitled to receive annual salaries of $300,000, $200,000 and $125,000, respectively, during the term of the agreements. The salaries of Mr. and Mrs. Santilli are subject to increase but not decrease, on an annual basis based upon the Consumer Price Index. Mr. Ruben's salary is subject to increase on an annual basis based upon the Consumer Price Index and may also be increased from time to time by Mr. Santilli. Once increased, Mr. Ruben's salary may not be decreased following a "change in control" of the Company. The employment agreements are designed to assist the Company in maintaining a stable and competent management team. Certain of the terms of such agreements are described below. The term of each agreement terminates upon the earlier of: (a) the employee's death, permanent disability, termination of employment for cause, voluntary resignation (provided that no voluntary resignation may occur within three years of February 20, 1997, the closing date of the public offering of the Company's Common Stock absent a change in control) or seventieth birthday or (b) the later of: (i) the fifth year anniversary of the execution of the agreement (or three years in the case of Mr. Ruben); or (ii) five years (or three years in the case of Mr. Ruben) from the date of notice to the employee of the Company's intention to terminate the agreement. To the extent the Company gives Mr. or Mrs. Santilli notice of its intent to terminate their agreements, other than for cause, such individuals would be entitled to receive their salaries and certain 64 benefits for five years. To the extent Mr. Ruben is terminated without cause during the term of his agreement, he would be entitled to receive his salary for three years except that if such termination occurs while Mr. Santilli is Chief Executive Officer of the Company, he shall receive a termination payment equal to the current year's base salary. The employment agreements with each of Mr. and Mrs. Santilli also provide for a cash payment to each employee equal to 299% of the last five years' average annual compensation as calculated in accordance with Section 280G of the Code (in addition to any other payments and benefits due under the agreements) in the event of a "change in control" (as defined in such agreements), of the Company during the term of the agreements to which such employee does not consent in such individual's capacity as a director or stockholder of the Company. Mr. Ruben's agreement provides for a similar cash payment only if his employment is terminated in the event of a "change in control," which payment shall be in lieu of any additional payment which may be due pursuant to the terms of his agreement. The agreements with Mr. Ruben and Mrs. Santilli also provide that in the event of a "change in control" of the Company each employee's stock options shall vest in full (provided, that in the case of Mrs. Santilli, she does not consent to such "change in control"). The vesting of options and the receipt of other payments and benefits provided for under the agreements upon a "change in control" of the Company may subject an employee to the payment of an excise tax equal to 20% of all payments contingent upon a "change in control" made in excess of the employee's base compensation. Under the terms of the agreements, in such event the Company will pay the employees an additional amount such that the net amount of payments retained by the employees after the payment of any excise tax and any federal, state and local income and employment taxes and the excise tax on the additional amount paid by the Company shall be equal to the total payments or benefits to be received by the employees under their respective agreements. The Company is not entitled to a deduction for any payments subject to the excise tax made to employees pursuant to the terms of the agreements. For purposes of all of the employment agreements, a "change in control" of the Company shall include: (a) a change in the majority of the members of the Board of Directors within a two-year period, excluding a change due to the voluntary retirement or death of any board member (with respect to Mr. Ruben's agreement, no "change in control" as a result of a change in the majority of the directors will be deemed to occur under the terms of his agreement if Mr. Santilli remains Chairman of the Board), or (b) a person or group of persons acting in concert (as defined in Section 13(a) of the Exchange Act) acquires beneficial ownership, within the meaning of Rule 13(d)(3) of the Rules and Regulations of the Commission promulgated pursuant to the Exchange Act, of a number of voting shares of the Company which constitutes (i) 50% or more of the Company's shares voted in the election of directors, or (ii) more than 25% of the Company's outstanding voting shares. Based upon their current salaries, if Mr. and Mrs. Santilli and Mr. Ruben had been terminated as of January 1, 1997 under circumstances entitling them to change in control payments (excluding the value realized upon the exercise of options or any excise tax and other payments described above, which amounts may vary based upon a variety of factors, including but not limited to, the acquisition price and the timing of the change in control), Mr. Santilli, Mrs. Santilli and Mr. Ruben would have been entitled to receive a lump sum payment of $780,000, $319,000 and $279,000, respectively. In addition, Mr. and Mrs. Santilli's agreements would continue to be in force for the remainder of their term as described above. Each employment agreement also prohibits the employee from divulging confidential information regarding the Company's business to any other party and prohibits the employee, during the term of the agreement, from engaging in a business or being employed by a competitor of the Company without the prior written consent of the Company. The Company may extend the non-compete provisions of any of the agreements at its option (or in the case of Mr. Ruben, with his consent) for up to one year following the termination of such agreement upon payment to the employee of an amount equal to the highest annual salary and bonus received by the employee during the term of the agreement; provided, however, that the non-compete provisions of Mr. Ruben's contract shall be automatically extended for one year in the event he is terminated without cause and receives a severance payment pursuant to the terms of his agreement unless he returns a pro rata portion of the severance payment received from the Company. The employment agreements with Mr. and Mrs. Santilli also provide for the payment of an annual cash bonus of up to 225% of the employee's base salary to the extent certain Board established targets are met. Mr. Ruben's agreement provides for his participation in the Company's bonus plan established by the Board of 65 Directors. Each employment agreement also provides the employees with certain other benefits including a company car for each of Mr. and Mrs. Santilli, payment of certain life, health (including the payment of health insurance benefits for the family of Mr. and Mrs. Santilli) and disability insurance payments and reimbursement for all reasonable expenses incurred by the employee in the performance of his or her duties. In the event Mr. Santilli becomes disabled (as defined in the agreement) during the term of his agreement, such employment agreement also provides for the payment of monthly disability payments to him in an amount equal to his monthly salary prior to the disability less any disability benefits received by Mr. Santilli pursuant to any disability insurance paid for, in whole or in part, by the Company for the period of his disability, but in no event beyond the date Mr. Santilli reaches 65 years of age. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company does not have any formal policy concerning the direct or indirect pecuniary interest of any of its officers, directors, security holders or affiliates in any investment to be acquired or disposed of by the Company or in any transaction to which the Company is a party or has an interest. The Company will not enter into any such transactions unless approved by a majority of the entire Board of Directors, not including any interested director. On September 29, 1995, the Company made a loan in the amount of $600,032 to Anthony J. Santilli, Jr., its President and Chief Executive Officer. The proceeds of the loan were used to exercise options to purchase 225,012 shares of Common Stock of the Company at a price of $2.67 per share. The loan bears interest at the rate of 6.46% with interest due annually or at maturity and the principal due September 2005. The loan is secured by the stock purchased with the proceeds of the loan as well as additional shares of Common Stock owned by Mr. Santilli such that the value of the collateral is equal to twice the outstanding loan amount. 66 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of May 1, 1997 by (i) the directors of the Company, (ii) the Named Officers, (iii) each person known by the Company to be the beneficial owners of five percent or more of the Common Stock of the Company, and all directors and executive officers of the Company as a group.
Number of Shares Name and Position Beneficially Owned(1) Percentage of Class - ------------------------------------------------- ----------------------- -------------------- Anthony J. Santilli, Jr. 917,044(2)(3) 25.9% Chairman, President, Chief Executive Officer, Chief Operating Officer, Treasurer and Director of ABFS and Beverly Santilli, President of ABC and Executive Vice President and Secretary of ABFS 111 Presidential Blvd., Suite 215 Bala Cynwyd, PA 19004 Leonard Becker, Director of ABFS 131,230(4) 3.7 Becker Associates 111 Presidential Blvd., Suite 140 Bala Cynwyd, PA 19004 Michael DeLuca, Director of ABFS 194,735(4) 5.5 Lux Products 6001 Commerce Park Mt. Laurel, NJ 08054 Richard Kaufman, Director of ABFS 170,561(4) 4.8 1126 Bryn Tyddyn Drive Gladwyne, PA 19035 Harold Sussman, Director of ABFS 101,711(4) 2.9 Colliers, Lanard & Axilbund 399 Market Street, 3rd Floor Philadelphia, PA 19106 Jeffrey M. Ruben 20,500(5) (6) Senior Vice President and General Counsel of ABFS 111 Presidential Blvd., Suite 215 Bala Cynwyd, PA 19004 David M. Levin 12,500(7) (6) Senior Vice President - Finance and Chief Financial Officer of ABFS 111 Presidential Blvd., Suite 215 Bala Cynwyd, PA 19004 All executive officers and directors as a group (eight persons) 1,548,281(8) 42.3%
- ------------ (1) The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Commission. Accordingly they may include securities owned by or for, among others, the spouse and/or minor children or the individual and any 67 other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options within 60 days after the date of this table. Beneficial ownership may be disclaimed as to certain of the securities. (2) Shares listed are held in joint tenancy by Mr. and Mrs. Santilli. (3) Includes options to purchase 27,500 shares of the Company's Common Stock awarded to Mr. Santilli pursuant to the Company's Plan. Includes an option to purchase 12,500 shares of the Company's Common Stock awarded to Mrs. Santilli. (4) Includes options to purchase 27,500 shares of the Company's Common Stock awarded to each non-employee director of the Company pursuant to the Company's Non-Employee Director Plan. (5) Includes 500 shares held directly, as well as an option to purchase 20,000 shares of the Company's Common Stock awarded to Mr. Ruben pursuant to the Company's Plan. (6) Less than one percent. (7) Includes an option to purchase 12,500 shares of the Company's Common Stock awarded to Mr. Levin. (8) Includes options to purchase 182,500 shares of the Company's Common Stock. 68 MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is currently traded on the NASDAQ National Market System under the symbol "ABFI." The Common Stock began trading on the NASDAQ National Market System on February 14, 1997. Prior to February 14, 1997, the Common Stock had been traded on the PHLX under the symbol "AFX" since May 13, 1996. Prior to the commencement of trading on the PHLX, there was no active trading market for the Common Stock. As a result, stock price information for the Common Stock is not available for any period prior to May 13, 1996. The following table sets forth the high and low sales prices of the Common Stock from the date on which the Common Stock commenced trading on the PHLX through May 19, 1997. On May 19, 1997, the closing price of the Common Stock on the NASDAQ National Market System was $19.25. Quarter Ended High Low - -------------------------------- -------- ------- June 30, 1996(1) ......... $17.00 $11.38 September 30, 1996 ...... 19.50 11.13 December 31, 1996 ...... 20.00 17.25 March 31, 1997 ......... 24.50 19.00 June 30, 1997(2) ......... 22.50 18.50 - ------------ (1) Represents the period May 13, 1996 through June 30, 1996. (2) Represents the period April 1, 1997 through May 19, 1997. As of May 1, 1997, there were 104 record holders and approximately 530 beneficial holders of the Common Stock. During fiscal 1996, the Company paid dividends on its Common Stock then outstanding of $0.03 per share, for an aggregate dividend payment of $71,000. Subsequent to fiscal year end, the Company paid dividends of $0.045 per share during the nine months ended March 31, 1997. The continuing payment by the Company of dividends in the future is in the sole discretion of its Board of Directors and will depend, among other things, upon the Company's earnings, its capital requirements and financial condition, as well as other relevant factors. As a Delaware corporation, the Company may not declare and pay dividends on its capital stock if the amount paid exceeds an amount equal to the excess of the Company's net assets over paid-in-capital or, if there is no excess, its net profits for the current and/or immediately preceding fiscal year. As of March 31, 1997, there were 331,500 shares of Common Stock subject to options. In addition, there were an additional 38,488 shares reserved for issuance under the Company's option plans. See "Management." PLAN OF DISTRIBUTION It is presently anticipated that ABFS will not employ the services of a broker-dealer or dealers as an agent to assist in the sales of the Notes offered hereby. ABFS may in the future employ the services of an NASD member broker-dealer for purposes of offering the Notes on a "best-efforts" or agency basis. If an agreement concerning the use of the services of any broker-dealer is reached, ABFS may pay any such broker-dealers an estimated commission ranging from .5% to 10% of the sale price of any Notes sold through any such agent, depending on numerous factors. ABFS may also agree to indemnify such broker-dealer against certain liabilities, including liabilities under the Securities Act and to reimburse such broker-dealer for its costs and expenses, up to a maximum to be determined, based upon the total dollar value of the Notes sold. ABFS will otherwise offer the Notes through its employees in accordance with Rule 3a4-1 under the Exchange Act. 69 The Company reserves the right to reject any subscription hereunder, in whole or in part, for any reason. Subscriptions will be irrevocable upon receipt by ABFS. In the event a subscription is not accepted by ABFS, the proceeds of such subscription will be promptly refunded to the subscriber, without deduction of any costs and without interest. ABFS expects that such subscriptions will be refunded within 48 hours after ABFS has received the subscription. Once a subscriber's subscription has been accepted by ABFS, the applicable subscription funds will be promptly deposited for benefit of the Company. A receipt will be sent to the subscriber as soon as practicable thereafter. No minimum number of Notes must be sold in the Offering. A subscriber will not know at the time of subscription whether ABFS will be successful in completing the sale of any or all of the Notes offered hereby. ABFS reserves the right to withdraw or cancel the Offering at anytime. In the event of such withdrawal or cancellation, subscriptions previously received will be irrevocable and no subscription funds will be refunded. LEGAL MATTERS An opinion has been delivered by Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania to the effect that the Notes when issued as contemplated by this Prospectus, will be binding obligations of the Company. EXPERTS The Consolidated Financial Statements of ABFS and subsidiaries as of June 30, 1996 and for the year ending June 30, 1996 included in this Prospectus, have been audited by BDO Seidman, LLP, independent certified public accountants, as set forth in their report appearing herein and have been included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The Consolidated Financial Statements of ABFS and subsidiaries as of June 30, 1995 and for the years ended June 30, 1995 and 1994 included in this Prospectus, have been audited by Fishbein & Company, P.C., independent certified public accountants, as set forth in their report appearing herein and have been included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. On March 11, 1996, the Company engaged the firm of BDO Seidman, LLP as independent certified public accountants replacing the firm of Fishbein & Company, P.C. This change in independent certified public accountants was recommended by the Audit Committee and subsequently approved by the Board of Directors. There were no disagreements between the Company or its subsidiaries and Fishbein & Company, P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure in connection with the audit of the consolidated financial statements for the two years ended June 30, 1995 and subsequent period through March 11, 1996 which, if not resolved to the satisfaction of Fishbein & Company, P.C., would have caused them to make reference to the subject matter of the disagreement(s) in connection with the reports of Fishbein & Company, P.C. on the consolidated financial statements of the Company for the two years ended June 30, 1995. Such reports did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. In addition, there have not been any "reportable events" as defined by Item 304(a)(1)(iv)(B) of Regulation S-B during the periods referred to above. 70 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES Report of Independent Certified Public Accountants...........................F-2 Independent Auditor's Report ................................................F-3 Consolidated Balance Sheets ................................................F-4 Consolidated Statements of Operations .......................................F-5 Consolidated Statements of Stockholders' Equity..............................F-6 Consolidated Statements of Cash Flows .......................................F-7 Notes to Consolidated Financial Statements .................................F-9 F-1 [LETTERHEAD OF BDO SEIDMAN LLP] Report of Independent Certified Public Accountants American Business Financial Services, Inc. and Subsidiaries Bala Cynwyd, Pennsylvania We have audited the accompanying consolidated balance sheet of American Business Financial Services, Inc. and subsidiaries as of June 30, 1996, and the related consolidated statements of income and stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Business Financial Services, Inc. and subsidiaries as of June 30, 1996, and the consolidated results of their income, stockholders' equity and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP Philadelphia, Pennsylvania August 23, 1996 F-2 [LETTERHEAD OF FISHBEIN & COMPANY P.C] Stockholders and Directors American Business Financial Services, Inc. Bala Cynwyd, Pennsylvania INDEPENDENT AUDITOR'S REPORT We have audited the accompanying consolidated balance sheet of AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES as of June 30, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended June 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Business Financial Services, Inc. and Subsidiaries as of June 30, 1995, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. The Company changed it method of accounting for income taxes as of July 1, 1993. /s/ FISHBEIN & COMPANY, P.C. ---------------------------- Fishbein & Company, P.C. Elkins Park, Pennsylvania September 20, 1995 F-3 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES BALANCE SHEETS
March 31, June 30, June 30, 1997 1996 1995 -------------- -------------- ------------- (unaudited) ASSETS Cash and cash equivalents ........................... $ 25,778,328 $ 5,345,269 $ 4,734,368 Loan and lease receivables, net Available for sale ................................. 16,151,612 17,625,178 8,668,956 Other ............................................. 902,548 534,325 328,401 Other receivables ................................. 33,101,699 14,090,542 4,237,072 Prepaid expenses .................................... 3,284,255 1,341,160 594,046 Property and equipment, net of accumulated depreciation and amortization ..................... 2,113,799 1,452,895 687,678 Other assets ....................................... 11,846,309 6,504,794 2,924,375 ------------- ------------- ------------- Total assets .................................... $ 93,178,550 $ 46,894,163 $ 22,174,896 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Debt ................................................ $ 49,338,981 $ 35,987,401 $ 17,824,007 Accounts payable and accrued expenses ............ 6,338,383 3,132,170 1,117,930 Deferred income taxes .............................. 3,902,291 1,506,271 704,304 Other liabilities ................................. 4,123,767 1,876,806 385,241 ------------- ------------- ------------- Total liabilities .............................. 63,703,422 42,502,648 20,031,482 ------------- ------------- ------------- Commitment and contingencies Stockholders' equity Preferred stock, par value $.001 Authorized 1,000,000 shares Issued and outstanding none ........................ -- -- -- Common stock, par value $.001 Authorized 9,000,000 shares Issued and outstanding 3,503,166 shares in 1997; 2,353,166 shares in 1996 and 2,128,154 shares in 1995 ........................ 3,503 2,353 2,128 Additional paid-in capital ........................ 22,669,477 1,931,699 1,331,892 Retained earnings ................................. 7,402,180 3,057,495 809,394 ------------- ------------- ------------- 30,075,160 4,991,547 2,143,414 Less note receivable .............................. 600,032 600,032 -- ------------- ------------- ------------- Total stockholders' equity ........................ 29,475,128 4,391,515 2,143,414 ------------- ------------- ------------- Total liabilities and stockholders' equity ...... $ 93,178,550 $ 46,894,163 $ 22,174,896 ============= ============= =============
See accompanying notes to consolidated financial statements. F-4 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31, Year Ended June 30, ----------------------------- ------------------------------------------- 1997 1996 1996 1995 1994 -------------- ------------- ------------- ------------- ------------- (unaudited) (unaudited) Revenues Gain on sales of loans and leases ......... $ 15,644,904 $ 3,973,968 $ 9,005,193 $ 1,442,961 $ 110,378 Interest and fees ........................... 4,085,510 2,362,079 3,350,716 4,057,643 2,366,366 Other income .............................. 316,587 93,485 22,824 143,473 155,923 ------------- ------------ ------------ ------------ ---------- Total revenues ........................... 20,047,001 6,429,532 12,378,733 5,644,077 2,632,667 ------------- ------------ ------------ ------------ ---------- Expenses Interest .................................... 3,601,969 1,748,526 2,667,858 1,213,111 628,240 Provision for credit losses ............... 723,000 305,634 681,228 165,143 47,692 Payroll and related costs .................. 1,077,845 454,115 1,203,260 995,215 411,048 Sales and marketing ........................ 5,249,393 1,776,122 2,685,173 1,510,227 660,755 General and administrative .................. 2,547,753 1,121,509 2,020,551 866,478 550,792 ------------- ------------ ------------ ------------ ---------- Total expenses ........................... 13,199,960 5,405,906 9,258,070 4,750,174 2,298,527 ------------- ------------ ------------ ------------ ---------- Income before income taxes and cumulative effect of accounting changes ............... 6,847,041 1,023,626 3,120,663 893,903 334,140 Income taxes ................................. 2,396,464 358,269 801,967 312,866 197,563 ------------- ------------ ------------ ------------ ---------- Income before cumulative effect of accounting change .................................... 4,450,577 665,357 2,318,696 581,037 136,577 Cumulative effect of accounting change on prior years ................................. -- -- -- -- (51,933) ------------- ------------ ------------ ------------ ---------- Net income ................................. $ 4,450,577 $ 665,357 $ 2,318,696 $ 581,037 $ 84,644 ============= ============ ============ ============ ========== Earnings per share Income before cumulative effect of accounting change ........................ $ 1.67 $ .29 $ 1.01 $ .27 $ .06 Cumulative effect of accounting change on prior years .............................. -- -- -- -- (.02) ------------- ------------ ------------ ------------ ---------- Net income ................................. $ 1.67 $ .29 $ 1.01 $ .27 $ .04 ============= ============ ============ ============ ========== Weighted average number of shares outstanding ................................. 2,667,996 2,278,160 2,296,913 2,128,154 2,127,263 ============= ============ ============ ============ ==========
See accompanying notes to consolidated financial statements. F-5 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Total ---------------------- -------------- -------------- Number of Paid-In Retained Note Stockholders' Shares Amount Capital Earnings Receivable Equity ----------- --------- -------------- ------------- --------------- -------------- BALANCE, July 1, 1993 ......... 2,115,018 $ 2,115 $ 1,323,350 $ 143,713 $ -- $ 1,469,178 Public offering ............... 12,525 12 7,241 -- -- 7,253 Conversion of subordinated debt ........................... 611 1 1,301 -- -- 1,302 Net income ..................... -- -- -- 84,644 -- 84,644 ---------- -------- ------------- ------------ ------------ ------------- BALANCE, June 30, 1994 ......... 2,128,154 2,128 1,331,892 228,357 -- 1,562,377 Net income ..................... -- -- -- 581,037 -- 581,037 ---------- -------- ------------- ------------ ------------ ------------- BALANCE, June 30, 1995 ......... 2,128,154 2,128 1,331,892 809,394 -- 2,143,414 Options exercised ............... 225,012 225 599,807 -- -- 600,032 Note receivable on options exercised ..................... -- -- -- -- (600,032) (600,032) Cash dividends ($.03 per share) -- -- -- (70,595) -- (70,595) Net income ..................... -- -- -- 2,318,696 -- 2,318,696 ---------- -------- ------------- ------------ ------------ ------------- BALANCE, June 30, 1996 ......... 2,353,166 2,353 1,931,699 3,057,495 (600,032) 4,391,515 Public offering (unaudited) ... 1,500,000 1,150 20,737,778 -- -- 20,738,928 Cash dividend ($.045 per share) (unaudited) .................. -- -- -- (105,892) -- (105,892) Net income (unaudited) ......... -- -- -- 4,450,577 -- 4,450,577 ---------- -------- ------------- ------------ ------------ ------------- BALANCE, March 31, 1997 (unaudited) .................. 3,853,166 $ 3,503 $ 22,669,477 $ 7,402,180 $ (600,032) $ 29,475,128 ========== ======== ============= ============ ============ =============
See accompanying notes to consolidated financial statements. F-6 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, Year Ended June 30, --------------------------------- ----------------------------------------------- 1997 1996 1996 1995 1994 ---------------- --------------- --------------- --------------- ------------- (unaudited) (unaudited) Cash flows from operating activities Net income ........................ $ 4,450,577 $ 665,357 $ 2,318,696 $ 581,037 $ 84,644 Adjustments to reconcile net income to net cash (used in) provided by operating activities Gain on sales of loans/leases ... (15,666,664) (3,973,968) (8,969,880) (1,442,961) (110,378) Amortization of origination fees and costs ..................... 267,576 244,231 305,136 528,554 529,573 Amortization of deferred servicing rights ............... 295,101 13,780 69,489 -- -- Provision for credit losses ... 723,000 305,634 681,228 165,143 47,692 Accounts written off ............ (50,064) 3,000 (129,063) (87,885) (10,838) Depreciation and amortization of property and equipment ......... 356,647 217,356 318,493 177,632 116,007 Amortization of financing and organization costs ............ 441,329 378,034 505,012 436,260 190,012 (Increase) decrease in accrued interest and fees on loan and lease receivables ............ (932,781) (170,944) (268,010) 119,407 (129,751) Decrease (increase) in other receivables .................. 316,211 5,914,610 683,797 (328,081) (444,321) (Increase) in prepaid expenses (1,768,660) (514,962) (747,114) (241,164) (133,721) Decrease (increase) in other assets ........................ 256,072 (73,317) 332,009 (117,992) (253,668) Increase in accounts payable and accrued expenses ............... 3,206,214 1,357,780 2,014,240 328,022 488,350 Increase (decrease) in deferred income taxes .................. 2,396,020 (128,435) 801,967 285,791 247,636 Increase in other liabilities ... 2,246,961 934,798 1,491,565 316,868 39,262 ------------- ------------ ------------ ------------ ---------- Net cash (used in) provided by operating activities ............... (3,462,461) 5,172,954 (592,435) 720,631 660,499 ============= ============ ============ ============ ==========
F-7 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, ------------------------------------ 1997 1996 ---------------- ---------------- (unaudited) (unaudited) Cash flows from investing activities Loans and leases originated/purchased .................. $ (95,382,351) $ (39,431,191) Loans repurchased .................................... -- -- Loan and lease payments received ..................... 3,297,512 1,705,977 Proceeds of loans and leases sold ..................... 87,167,675 14,287,075 Purchase of property and equipment ..................... (1,017,551) (547,488) Decrease in securitization gain receivable ............ -- 44,183 Principal receipts on investments ..................... 56,868 20,820 Initial overcollateralization of loans ............... (3,450,000) -- --------------- --------------- Net cash (used in) investing activities ............... (9,327,847) (23,920,624) --------------- --------------- Cash flows from financing activities Financing costs incurred .............................. (761,249) (409,097) Net proceeds of (principal payments on) revolving line of credit ....................................... (2,348,465) 4,095,000 Proceeds of term note payable, bank .................. -- 250,000 Principal payments on term notes payable, bank ......... -- -- Dividends paid ....................................... (105,892) -- Principal payments on note payable, other ............ (18,459) (5,504) Proceeds of notes payable, related parties ............ -- -- Principal payments on notes payable, related parties . -- -- Proceeds from public offering, net of related costs ... 20,738,928 -- Proceeds from issuance of subordinated debt ............ 22,731,381 13,322,965 Principal payments on subordinated debt ............... (7,012,877) (2,441,263) --------------- --------------- Net cash provided by financing activities ............ 33,223,367 14,812,101 --------------- --------------- Net increase (decrease) in cash and cash equivalents .......................................... $ 20,433,059 $ (3,935,569) Cash and cash equivalents, beginning of period ...... 5,345,269 4,734,368 --------------- --------------- Cash and cash equivalents, end of period ............ $ 25,778,328 $ 798,799 --------------- --------------- Supplemental disclosures of cash flow information Cash paid during the period for Interest ............ $ 2,193,098 $ 780,990 --------------- --------------- Income taxes ....................................... $ -- $ 78,475 --------------- --------------- Noncash transactions recorded in connection with the sale of and foreclosure on loans receivable Increase in other receivables, securitization gains ... $ 15,877,367 $ 10,603,519 Increase in other assets Investment, held to maturity ........................ -- 1,087,277 Foreclosed real estate held for sale .................. 134,280 59,405 Other holdings held for sale ........................ 131,617 -- Transfer from loans and leases, other ............... 479,019 -- Mortgage servicing rights ........................... 4,814,850 250,000 Increase in fixed assets .............................. -- 83,859 --------------- --------------- $ 21,437,133 $ 12,084,060 =============== ===============
Year Ended June 30, -------------------------------------------------- 1996 1995 1994 ---------------- ---------------- -------------- Cash flows from investing activities Loans and leases originated/purchased .................. $ (60,472,812) $ (15,408,775) $ (6,674,527) Loans repurchased .................................... -- -- (21,393) Loan and lease payments received ..................... 4,549,979 3,065,676 1,084,159 Proceeds of loans and leases sold ..................... 40,627,246 8,747,265 1,607,233 Purchase of property and equipment ..................... (1,022,926) (382,154) (274,837) Decrease in securitization gain receivable ............ 58,693 9,958 -- Principal receipts on investments ..................... 33,307 3,567 -- Initial overcollateralization of loans ............... -- -- -- --------------- --------------- -------------- Net cash (used in) investing activities ............... (16,226,513) (3,964,463) (4,279,365) --------------- --------------- -------------- Cash flows from financing activities Financing costs incurred .............................. (662,950) (483,732) (597,167) Net proceeds of (principal payments on) revolving line of credit ....................................... 2,348,465 (1,999,431) (965,103) Proceeds of term note payable, bank .................. -- -- 64,000 Principal payments on term notes payable, bank ......... -- (245,555) (21,183) Dividends paid ....................................... (70,595) -- -- Principal payments on note payable, other ............ (5,606) (4,814) (1,652) Proceeds of notes payable, related parties ............ -- -- 807,444 Principal payments on notes payable, related parties . -- -- (1,589,011) Proceeds from public offering, net of related costs ... -- -- 7,253 Proceeds from issuance of subordinated debt ............ 19,687,982 12,049,581 6,107,478 Principal payments on subordinated debt ............... (3,867,447) (1,420,432) (262,102) --------------- --------------- -------------- Net cash provided by financing activities ............ 17,429,849 7,895,617 3,549,957 --------------- --------------- -------------- Net increase (decrease) in cash and cash equivalents .......................................... $ 610,901 $ 4,651,785 $ (68,909) Cash and cash equivalents, beginning of period ...... 4,734,368 82,583 151,492 --------------- --------------- -------------- Cash and cash equivalents, end of period ............ $ 5,345,269 $ 4,734,368 $ 82,583 --------------- --------------- -------------- Supplemental disclosures of cash flow information Cash paid during the period for Interest ............ $ 1,183,745 $ 706,506 $ 510,916 --------------- --------------- -------------- Income taxes ....................................... $ 78,475 $ 8,250 $ 12,364 --------------- --------------- -------------- Noncash transactions recorded in connection with the sale of and foreclosure on loans receivable Increase in other receivables, securitization gains ... $ 10,595,960 $ 3,271,770 $ -- Increase in other assets Investment, held to maturity ........................ 2,332,247 684,380 -- Foreclosed real estate held for sale .................. 111,890 448,801 -- Other holdings held for sale ........................ 308,933 -- -- Transfer from loans and leases, other ............... (62,085) -- -- Mortgage servicing rights ........................... 1,165,000 -- -- Increase in fixed assets .............................. -- -- -- --------------- --------------- -------------- $ 14,451,945 $ 4,404,951 $ -- =============== =============== ==============
- ------------ Supplemental schedule of noncash investing and financing activities During the year ended June 30, 1994, subordinated debt of $1,302 were converted to 611 shares of common stock. During the year ended June 30, 1994, a note payable of $30,529 was incurred for the acquisition of property and equipment. During the year ended June 30, 1996, stock options for 225,012 shares of common stock were exercised. Shares with a total price of $600,032 were issued in exchange for a note receivable of the same amount. See accompanying notes to consolidated financial statements. F-8 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Nature of Business The accompanying consolidated financial statements include the accounts of American Business Financial Services, Inc. ("ABFS") and its wholly-owned subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated. The Company makes secured loans primarily in the Mid-Atlantic Region and is subject to the risks of the real estate market in that area. The Company also makes business equipment leases and unsecured consumer loans. The Company securitizes its secured loans. Cash Equivalents Cash equivalents consist of short-term investments purchased with an initial maturity of three months or less. Loan and Lease Receivables Available for Sale Loan and lease receivables available for sale represent receivables that the Company generally intends to sell or securitize within the next twelve months. These assets are stated at the lower of cost (principal balance including unamortized origination costs/fees) or estimated market value in the aggregate. Market value is determined by most recent sale or securitization transactions. The Company sells loans through securitizations and is subject to certain limited recourse provisions. Income is recorded at the time of sale approximately equal to the present value of the anticipated future cash flows ("residuals"), offset by unamortized loan origination costs/fees, related transaction expenses and estimated credit losses ("excess spread receivables"). Subsequent to the initial sale, securitization income is recorded in proportion to the actual cash flow received. To the extent that the anticipated cash flows differ from actual cash flows, adjustments are recognized through the use of an allowance account, as needed. Effective January 1, 1997, the Company adopted Financial Accounting Standards Board Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". Under FAS 125, the Company recognized an unrealized gain of $1,808,945 related to loans sold in the quarter ended March 31, 1997. Allowance for Credit Losses The allowance for credit losses is based upon the Company's estimate of expected collectibility of loans and leases outstanding. The allowance is increased by periodic charges to operations as necessary. Mortgage Servicing Rights Effective July 1, 1995, the Company adopted Financial Accounting Standards Board Statement No. 122, "Accounting for Mortgage Servicing Rights". The Statement amends Statement No. 65 to require recognition as a separate asset the rights to service mortgage loans for others, however those servicing rights are acquired. The Statement requires the assessment of capitalized mortgage servicing rights for impairment to be based on the current fair value of those rights. Mortgage servicing rights are amortized in proportion to and over the period of the estimated net servicing income. At March 31, 1997, servicing rights include $1,287,434 on prior securitizations. These additional servicing rights were recognized as the securitizations seasoned and the supporting information was available to estimate such servicing rights. F-9 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Origination Costs and Fees and Amortization Direct origination costs, net of origination fees, are deferred and amortized over the contractual life of the receivable using the interest method. Unamortized amounts are recognized as (expense) income when the receivable is sold or paid in full. Property and Equipment and Depreciation and Amortization Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line and declining balance methods over the estimated useful lives of the assets (ranging from 5 to 10 years). Expenditures for additions, renewals and betterments are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Financing Costs and Amortization Costs incurred in obtaining revolving lines of credit are amortized using the straight-line method over the terms of the agreements. Financing costs incurred in connection with public offerings of debentures are amortized using the interest method over the term of the related debentures. Investments, Held to Maturity The investments classified as held to maturity consist of mortgage-backed securities that the Company has the positive intent and ability to hold to maturity. These investments are stated at amortized cost, which approximates market. Foreclosed property held for sale is stated at the lower of cost or fair market value. Interest Income Interest income from loan and lease receivables is recognized using the interest method. Accrual of interest income is suspended when the receivable is contractually delinquent for ninety days or more. The accrual is resumed when the receivable becomes contractually current, and past due interest income is recognized at that time. In addition, a detailed review of receivables will cause earlier suspension if collection is doubtful. Income Taxes The Company files a consolidated federal income tax return. The Company uses the liability method in accounting for income taxes. Principal differences between the Company's financial and income tax reporting include amortization of loan and lease origination costs/fees, the allowance for credit losses, depreciation and amortization of property and equipment, securitization gains, servicing rights and net operating losses. Earnings Per Share Earnings per share are based on the weighted average number of shares outstanding. Earnings per share amounts for the nine months ending March 31, 1997 assume the exercise of all stock options having an exercise price less than the average market price of the common stock using the treasury method. The effect of outstanding stock options is not dilutive for years ended June 30, 1996, 1995 and 1994 and for the nine months ended March 31, 1996. F-10 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Reclassifications Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation. Unaudited Interim Financial Information The unaudited interim consolidated financial statements as of March 31, 1997 and for the nine month periods ended March 31, 1997 and 1996 reflect, in the opinion of management, all adjustments (which include cash flows as of and for the periods presented). The results for the interim periods presented are not necessarily indicative of results to be expected for the full year. 2. LOAN AND LEASE RECEIVABLES
March 31, June 30, June 30, 1997 1996 1995 -------------- -------------- ------------ Real estate secured loans .............................. $ 8,878,292 $ 12,960,229 $ 4,761,778 Leases (net of unearned income of $1,736,031, $1,136,621 and $557,880) .......................................... 7,601,644 4,393,713 2,034,981 Other loans .......................................... 92,036 109,726 1,134,742 Unamortized origination costs/fees ..................... 960,000 868,934 892,713 ------------- ------------- ------------ 17,531,972 18,332,602 8,824,214 Less allowance for credit losses ..................... 1,380,360 707,424 155,258 ------------- ------------- ------------ Loan and lease receivables, net ........................ $ 16,151,612 $ 17,625,178 $ 8,668,956 ============= ============= ============
Substantially, all of the leases are sales-type leases whereby the lessee has the right to purchase the leased equipment at the lease expiration for a nominal amount. The Company sells real estate secured loans through securitizations and retains collection and administrative responsibilities as servicer for the trusts holding the loans. Under terms of the sales, the purchasers have limited recourse ($2,777,915 at March 31, 1997 and $2,834,783 at June 30, 1996) should certain amounts of the loans prove to be uncollectible. However, the Company believes that allowances established for these off-balance sheet instruments are adequate to provide for any amounts found to be uncollectible. At March 31, 1997, the uncollected balance of receivables securitized was approximately $121,100,000. At June 30, 1996, the uncollected balance of receivables securitized was approximately $42,100,000. At March 31, 1997, the accrual of interest income was suspended on real estate secured loans of $245,396. At June 30, 1996, the accrual of interest income was suspended on real estate secured loans of $599,564. Based on its evaluation of the collateral related to these loans, the Company expects to collect all contractual interest and principal. At June 30, 1996, the contractual maturities of loan and lease receivables are as follows:
1997 1998 1999 2000 2001 Thereafter Total ------------ ------------ ------------ ---------- ---------- ------------- ------------ Real estate secured loans $1,175,085 $ 369,635 $ 422,257 $422,529 $477,495 $10,093,228 $12,960,229 Leases .................. 1,785,696 1,280,863 767,481 415,126 144,547 -- 4,393,713 Other loans ............ 23,921 28,184 32,847 19,660 5,114 -- 109,726 Unamortized organiza- tion costs/fees ......... 614,865 132,547 70,126 34,644 13,712 3,040 868,934 ----------- ----------- ----------- --------- --------- ------------ ------------ Total loans receivable ... $3,599,567 $1,811,229 $1,292,711 $891,959 $640,868 $10,096,268 $18,332,602 =========== =========== =========== ========= ========= ============ ============
F-11 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 3. ALLOWANCE FOR CREDIT LOSSES Balance, July 1, 1993 ............ $ 41,146 Provision for credit losses ...... 47,692 Accounts written off ............ (10,838) ------------ Balance June 30, 1994 ............ 78,000 Provision for credit losses ...... 165,143 Accounts written off ............ (87,885) ------------ Balance, June 30, 1995 ............ 155,258 Provision for credit losses ...... 681,228 Accounts written off ............ (129,062) ------------ Balance, June 30, 1996 ............ 707,424 Provision for credit losses ...... 723,000 Accounts written off ............ (50,064) ------------ Balance, March 31, 1997 ......... $ 1,380,360 ============ 4. OTHER RECEIVABLES
March 31, June 30, June 30, 1997 1996 1995 -------------- -------------- ------------ Sales of loans ............ $ 25,699 $ 86,090 $ 415,521 Home equity loan fees ...... 59,714 121,874 506,236 Excess spread ............... 30,831,096 13,447,674 2,969,812 Interest only strip ......... 1,808,945 -- -- Other ..................... 376,245 434,904 345,503 ------------- ------------- ------------ $ 33,101,699 $ 14,090,542 $ 4,237,072 ============= ============= ============
5. PROPERTY AND EQUIPMENT
March 31, June 30, June 30, 1997 1996 1995 ------------- ------------- ---------- Computer equipment and software ..................... $ 1,961,476 $ 1,296,769 $ 754,732 Office furniture and equipment ..................... 1,105,789 803,445 393,423 Leasehold improvements .............................. 222,039 171,542 49,999 ------------ ------------ ---------- 3,289,304 2,271,756 1,198,154 ------------ ------------ ---------- Less accumulated depreciation and amortization ...... 1,175,505 818,861 510,476 ------------ ------------ ---------- $ 2,113,799 $ 1,452,895 $ 687,678 ============ ============ ==========
F-12 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 6. OTHER ASSETS
March 31, June 30, June 30, 1997 1996 1995 -------------- ------------- ------------ Deposits ............................................. $ 261,582 $ 296,582 $ 113,483 Financing costs, debt offerings, net of accumulated amortization of $1,511,471, $1,074,212 and $581,324 . 1,462,445 1,138,455 968,393 Investments, held to maturity (mature in September 2004 through April 2011) ................................. 2,777,915 2,834,783 680,813 Foreclosed property held for sale ..................... 690,364 607,905 761,523 Servicing rights .................................... 5,907,260 1,387,511 -- Other ................................................ 746,743 239,558 400,163 ------------- ------------ ------------ $ 11,846,309 $ 6,504,794 $ 2,924,375 ============= ============ ============
7. DEBT
March 31, June 30, June 30, 1997 1996 1995 -------------- -------------- ------------- Subordinated debt, due September 1996 through June 1998; interest at rates ranging from 8% to 12% payable quarterly; subordinated to all of the Company's senior indebtedness ............................................. $ 1,196,721 $ 1,345,421 $ 1,422,421 Subordinated debt, due July 1996 through September 2006; interest at rates ranging from 7% to 10.50%; subordi- nated to all of the Company's senior indebtedness ......... 48,142,260 32,275,058 16,377,523 Note payable, $25,000,000 revolving line of credit expiring September 1996; interest at LIBOR plus 11/4% (an effec- tive rate of 63/4% at June 30, 1996) payable monthly; collateralized by loans receivable ........................ -- 2,348,465 -- Note payable in monthly installments of $655 including interest at 11.8%; final payment due in March 1999; col- lateralized by related equipment ........................ -- 18,457 24,063 ------------- ------------- ------------- $ 49,338,981 $ 35,987,401 $ 17,824,007 ============= ============= =============
Principal payments on debt for the next five years are due as follows: year ending June 30, 1997 -- $21,206,784; 1998 -- $4,329,462; 1999 -- $2,884,971; 2000 -- $1,995,153 and 2001 -- $2,557,366. Effective December 18, 1995, the Company authorized the issuance through a public offering of up to $50,000,000 of unsecured, subordinated debt to be offered on an ongoing and continuous basis. During the year ended June 30, 1996, subordinated debt of $16,810,707 were issued through this offering. At June 30, 1996, the Company has available unused revolving lines of credit of $3,500,000 and $7,500,000, respectively. The lines expire in December 1996 and May 1998, respectively. At March 31, 1997, the Company has available unused revolving lines of credit of $50,000,000, $7,500,000 and $15,000,000. The lines expire in September 1997, May, 1998 and December, 1999, respectively. Advances under the lines, if any, are collateralized by certain loans receivable. One of the loan agreements contains various restrictive covenants, including the following: the Company must maintain (on a consolidated basis) a ratio of F-13 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 7. DEBT -- (Continued) subordinated debt to bank debt (as defined) of not less than 1.50:1, a ratio of senior indebtedness to capital funds (as defined) of not more than .95:1, minimum capital funds (as defined) of $23,200,000, and minimum pre-tax income of $3,000,000, and may not pay any dividends in excess of the lesser of 33% of current year net income or $250,000. 8. COMMON AND PREFERRED STOCK On May 31, 1996, the stockholders approved an amended and restated Certificate of Incorporation which increased the authorized common shares from five million shares to nine million shares and established a class of preferred shares with one million shares authorized. On September 12, 1995, the Board of Directors declared a 3 for 2 stock split of common stock to stockholders of record on October 1, 1995. The stock split has been reflected in the accompanying consolidated financial statements. 9. STOCK OPTIONS On May 31, 1996, the stockholders approved a non-employee director stock option plan which authorizes the grant to non-employee directors of options to purchase 135,000 shares of common stock at a price equal to the market price of the stock at the date of grant. Options are fully vested when granted and expire ten years after grant. At March 31, 1997, 25,000 shares were available for future grants under this plan. Transactions under this plan were as follows:
Number of Price Per Shares Share ----------- -------------- Options granted and outstanding, June 30, 1996 ...... 90,000 $ 5.00 -------- ------------- Options granted .................................... 20,000 17.75 Options exercised .................................... -- -- -------- ------------- Options outstanding, March 31, 1997 .................. 110,000 $ 5.00-$17.75 ======== =============
The Company has an employee stock option plan which authorizes the grant to employees of options to purchase 460,000 shares of common stock at a price equal to the market price of the stock at the date of grant. Options are fully vested when granted and expire five to ten years after grant. At March 31, 1997, 13,988 shares were available for future grants under this plan. Transactions under the plan were as follows: Number of Price Per Shares Share ----------- ------------- Options outstanding, July 1, 1994 ...... 225,010 $ 2.67 Options granted ........................ 43,500 2.67 ---------- ------------ Options outstanding, June 30, 1995 ...... 268,512 2.67 ---------- ------------ Options granted ........................ 22,500 $ 5.00 Options exercised ........................ (225,012) 2.67 ---------- ------------ Options outstanding, June 30, 1996 ...... 66,000 2.67-5.00 ---------- ------------ Options granted ........................ 155,000 17.75-20.00 Options exercised ........................ -- -- ---------- ------------ Options outstanding, March 31, 1997 ...... 221,000 $2.67-$20.00 ========== ============ On September 29, 1995, options for 225,012 shares were exercised at $2.67 per share by an officer of the Company. The purchase price of $600,032 was advanced to the officer, by the Company, on a ten year loan F-14 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 9. STOCK OPTIONS -- (Continued) with interest at 6.46%, payable annually. The loan is secured by 450,000 shares of the Company's stock (at the date of exercise, market value of collateral was approximately $1,200,000) and is shown as a reduction of stockholders' equity on the accompanying balance sheet. On July 1, 1996, the Company adopted Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," which requires either the fair value of employee stock-based compensation plans be recorded as a component of compensation expense in the statement of income as of the date of grant of awards related to such plans, or the impact of such fair value on net income and earnings per share be disclosed on a pro forma basis in a footnote to financial statements for awards granted after December 15, 1994, if the accounting for such awards continues to be in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"). The Company will continue such accounting under the provisions of APB 25. The pro forma effects on net income and earnings per share for the nine months ended March 31, 1997 and 1996 and for the year ended June 30, 1996 are immaterial and accordingly, additional information is not considered necessary. The Company intends to amend its employee stock option plan to allow for the granting of 150,500 options to certain officers and employees upon the successful completion of a public offering. 10. INCOME TAXES The provision for income taxes consists of the following: Year Ended June 30, 1996 1995 - ---------------------- ------------ ------------- Current Federal ...... $ -- $ 27,075 State ......... -- -- ---------- ---------- -- 27,075 ---------- ---------- Deferred Federal ...... 858,617 457,439 State ......... (56,650) (171,648) ---------- ---------- 801,967 285,791 ---------- ---------- $ 801,967 $ 312,866 ========== ========== The current provision for federal income taxes for the year ended June 30, 1995 is net of the tax benefit of approximately $249,000 from the utilization of net operating loss carryforwards. F-15 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 10. INCOME TAXES -- (Continued) The cumulative temporary differences resulted in net deferred income tax assets or liabilities consisting primarily of:
Nine Months Ended March 31, Year Ended June 30, 1997 1996 1995 ------------- ------------- ---------- Deferred income tax assets Allowance for credit losses ........................ $ 560,426 $ 287,214 $ 62,568 Net operating loss carryforwards .................. 219,555 461,954 126,435 Loan and lease receivable ........................... 68,058 68,058 -- Accrued expenses .................................... -- 246,500 -- ------------ ------------ ---------- 848,039 1,063,726 189,003 Less valuation allowance ........................... 148,500 148,500 126,435 ------------ ------------ ---------- 699,539 915,226 62,568 ------------ ------------ ---------- Deferred income tax liabilities Loan and lease origination costs/fees, net ......... 326,400 368,849 365,679 Book over tax basis of property and equipment ...... 131,751 131,751 54,965 Other receivables ................................. 2,226,868 1,548,423 346,228 Servicing rights .................................... 1,916,811 372,474 -- ------------ ------------ ---------- 4,601,830 2,421,497 766,872 ------------ ------------ ---------- Net deferred income tax liabilities .................. $ 3,902,291 $ 1,506,271 $ 704,304 ============ ============ ==========
The valuation allowance represents the income tax effect of State net operating loss carryforwards of the Company which are not presently expected to be utilized. A reconciliation of income taxes at federal statutory rates to the Company's tax provision is as follows:
Year Ended June 30, 1996 1995 - ----------------------------------------------------- ------------- ---------- Federal income tax at statutory rates ............ $1,061,005 $ 303,927 State income tax, net of federal tax benefit ...... -- (48,614) Nondeductible expenses ........................... 13,545 11,080 Increase in state tax valuation allowance ......... -- 46,453 Other, net ....................................... (272,583) 20 ------------ ---------- $ 801,967 $ 312,866 ============ ==========
For income tax reporting, the Company has net operating loss carryforwards aggregating approximately $1,650,000 available to reduce future state income taxes for various states as of June 30, 1996. If not used substantially all of the carryforwards will expire at various dates from June 30, 1997 to June 30, 1999. 11. COMMITMENT AND CONTINGENCIES Commitment The Company leases certain of its facilities under a five-year operating lease expiring in January 2003, at a minimum annual rental of $636,495. The lease contains a renewal option for an additional five year period F-16 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 11. COMMITMENT AND CONTINGENCIES -- (Continued) at an increased annual rental. Rent expense under all operating leases for such facilities was $373,694 and $199,368 for the years ended June 30, 1996 and 1995, respectively. Rent expense under all operating leases for such facilities was $460,930 and $240,285 for the nine months ended March 31, 1997 and 1996, respectively. Contingencies A subsidiary of the Company makes home equity loans on behalf of unaffiliated lenders for a fee equal to a percentage of the loan amount. Certain agreements require that all or a portion of the fee be refunded if the loan is paid off during the first six to twelve months after origination. At March 31, 1997 approximately $57,000 of income is subject to this provision. The actual amount of the fee refunded during the nine months ended March 31, 1997 which was recorded as income prior to July 1, 1996 was $19,246. At June 30, 1996 and 1995, approximately $292,000 and $394,000, respectively, of fee income is subject to this provision. The actual amount of the fee refunded during the years ended June 30, 1996 and 1995, which was recorded as income prior to July 1, 1995 and 1994, was $138,187 and $14,267, respectively. The Company is a defendant in a lawsuit filed by one of its competitors for alleged interference with existing contractual relations between the competitor and its customers and vendors. Currently, the Company is negotiating a settlement which is expected to be immaterial to the Company's operations. As of March 31, 1997, the lawsuit was settled for an immaterial amount. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS No market exists for certain of the Company's assets and liabilities, therefore, fair value estimates are based on judgments regarding credit risk, investor expectation of future economic conditions, normal cost of administration and other risk characteristics, including interest rates and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of assets and liabilities that are not considered financial instruments. The table below summarizes the information about the fair value of the financial instruments recorded on the Company's financial statements at June 30, 1996.
June 30, 1996 ---------------------------- Carrying Fair Value Value ------------- ------------ Assets Cash and cash equivalents ..................... $ 5,345,269 $ 5,345,269 Loans and leases available for sale ............ 18,332,602 20,800,000 Excess spread ................................. 13,447,674 13,447,674 Servicing rights ................................. 1,387,511 1,387,511 Liabilities Borrowings under revolving lines of credit ...... $ 2,348,465 $ 2,348,465 Subordinated debt .............................. 33,620,479 33,620,479
F-17 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) The methodology and assumptions utilized to estimate the fair value of the Company's financial instruments are as follows: Cash and Cash Equivalents -- For these short-term instruments the carrying amount approximates fair value. Loans and Leases Available for Sale -- The Company has estimated the fair values reported based upon recent sales and securitizations. Excess Spread -- Fair value is determined using estimated discounted future cash flows taking into consideration anticipated prepayment rates. Servicing Rights -- Fair value is determined using estimated discounted future cash flows taking into consideration anticipated prepayment rates. Borrowings Under Revolving Lines of Credit -- The carrying value reported approximates the fair value due to the short-term nature of the borrowings, and the variable rate of interest charged on the borrowings. Subordinated Debt -- The fair value of fixed maturity subordinated debentures is estimated using the rates currently offered for debentures of similar maturities. 13. HEDGING TRANSACTIONS The Company regularly securitizes and sells fixed rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to the loans held for sale by selling U.S. Treasury securities short. The Company classifies these sales as hedges of specific loans held for sale and does not record the derivative securities on its financial statements. The gain or loss derived from these sales is deferred and recognized as an adjustment to gain on sale of loans when the loans are securitized. At June 30, 1996, the Company sold short $15,000,000 of U.S. Treasury securities due June 30, 1998 to settle on September 30, 1996. The deferred loss at June 30, 1996 was approximately $27,000. During the year ended June 30, 1996, the Company included a gain of $35,312 on short sales of U.S. Treasury securities as part of gains on sales of loans. During the nine months ended March 31, 1997, the Company included a loss of $31,055 on short sales of U. S. Treasury securities as part of gains on sales of loans. 14. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Although the Company believes that it has made reasonable estimates of the excess spread receivables likely to be realized, the rate of prepayment and the amount of defaults realized by the Company are estimates and actual experience may vary from its estimates. Higher levels of future prepayments, delinquencies and/or liquidations could result in decreased excess spreads and the write down of the receivable, which would adversely affect the Company's income in the period of adjustment. F-18 AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (Information as of March 31, 1997 and for the Nine Months Ended March 31, 1997 and 1996 is unaudited) 14. USE OF ESTIMATES -- (Continued) The Company's revenues and net income have fluctuated in the past and may fluctuate in the future principally as a result of the timing and size of its securitizations. Since the Company does not recognize gains on the sale of such loans until it consummates a securitization thereof, the Company's operating results for a given period can fluctuate significantly as a result of the timing and level of securitizations. 15. RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), establishing financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation plans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, which generally does not result in compensation expense recognition for most plans. The Company expects to remain with the existing accounting and will disclose in a footnote to the financial statements pro forma net income and earnings per share, as if SFAS No. 123 had been adopted. The accounting requirements of this Statement are effective for transactions entered into during fiscal years that begin after December 15, 1995; however, companies are required to disclose information for awards granted in their first fiscal year beginning after December 15, 1994. The Company intends to utilize the intrinsic value method of accounting. In June 1996, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). Pursuant to SFAS No. 125, after a transfer of financial assets, an entity would be required to recognize all financial assets and servicing it controls and liabilities it has incurred and, conversely, would not be required to recognize financial assets when control has been surrendered and liabilities when extinguished. SFAS No. 125 provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 will be effective with respect to the transfer and servicing of financial assets and the extinguishment of liabilities occurring after December 31, 1996, with earlier application prohibited. The Company has not completed its analysis of the impact SFAS No. 125 may have on the financial condition and results of operations of the Company. F-19 =============================================================================== No person is authorized to give any information or to make any representation not contained or incorporated by reference in this Prospectus, and if given or made, such information or representation must not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any sale made in connection herewith shall, under any circumstances, create any implication that there has been no change in the facts set forth in this Prospectus or in the affairs of the Company since the date hereof. This Prospectus, even when accompanied by an appropriate Prospectus Supplement, does not constitute an offer to sell or solicitation of any offer to buy the Notes by anyone in any jurisdictions in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation of any offer to buy the Notes is not qualified to do so, or to any person to whom it is unlawful to make such an offer or solicitation. ----------------------------------- TABLE OF CONTENTS Page ----- Available Information ........................... 3 Prospectus Summary .............................. 4 Highlights of Terms of the Notes Offered ......... 11 Risk Factors .................................... 12 The Company .................................... 19 Use of Proceeds ................................. 19 Description of the Notes and the Indenture ...... 19 Selected Consolidated Financial Data ............ 27 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................... 29 Business ....................................... 44 Management ....................................... 57 Certain Relationships and Related Transactions 66 Principal Stockholders ........................... 67 Market for Common Stock and Related Stockholder Matters ........................... 69 Plan of Distribution ........................... 69 Legal Matters .................................... 70 Experts .......................................... 70 Index to Consolidated Financial Statements ...... F-1 Consolidated Financial Statements ............... F-3 ================================================================================ ================================================================================ $125,000,000 AMERICAN BUSINESS FINANCIAL SERVICES INC. [LOGO] Subordinated Investment Notes and Adjustable Rate Subordinated Money Market Notes ---------- PROSPECTUS ---------- May ____, 1997 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. The Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and the Bylaws (the "Bylaws") of ABFS provide for indemnification of its directors and officers to the full extent permitted by Delaware law. In the event that the Delaware General Corporation Law (the "Corporation Law") is amended to authorize corporate action further eliminating or limiting the personal liability of directors and officers, the Certificate of Incorporation and Bylaws provide the personal liability of the directors and officers of ABFS shall be so eliminated or limited. Section 145 of the Corporation Law provides, in substance, that Delaware corporations shall have the power, under specified circumstances, to indemnify their directors, officers, employees and agents in connection with actions, suits or proceedings brought against them by a third party or in the right of the corporation, by reason of the fact that they were or are such directors, officers, employees or agents, against expenses incurred in any such action, suit or proceeding. Section 145 of the Corporation Law provides that a company may pay the expenses incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon an undertaking by or on behalf of such director or officer to repay such amount if it is ultimately determined that he or she is not entitled to be indemnified by the corporation. The Certificate of Incorporation and Bylaws of ABFS provide that ABFS shall pay such expenses. The Company has obtained insurance to cover the Company's directors and executive officers for liabilities which may be incurred in connection with the offer, sale and registration of the Common Stock. Item 25. Other Expenses of Issuance and Distribution. The following table sets forth the estimated expenses to be incurred in connection with the offering of the Investment Notes and the Money Market Investment Accounts, other than under writing discounts and commissions, which ABFS does not anticipate paying: II-1 SEC Registration Fee*............................................. $ 37,879 NASD Filing Fee................................................... 0 Printing, Engraving and Mailing .................................. 30,000 Legal Fees and Expenses........................................... 40,000 Accounting Fees and Expenses...................................... 15,000 Blue Sky Fees and Expenses........................................ 10,000 Miscellaneous..................................................... 2,967,121 ----------- TOTAL..................................................... $3,100,000 =========== _________________ * Exact; all other fees and expenses are estimates Item 26. Recent Sales of Unregistered Securities. On September 29, 1995, ABFS issued 225,012 shares of common stock to Anthony J. Santilli, President of ABFS, upon the exercise of stock options at a price of $2.67 per share. Exemption from registration for the issuance described above was claimed pursuant to Section 4(2) of the Securities Act, in reliance upon the fact that such sales did not involve a public offering. Therefore, such securities are subject to certain transfer restrictions. Item 27. Financial Statements and Exhibits The following documents were filed as part of this Registration Statement. (a) Financial Statements: AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES Reports of Independent Certified Public Accountants Consolidated balance sheets as of June 30, 1996 and 1995 and March 31, 1997 (unaudited) Consolidated statements of operations for the years ended June 30, 1996, 1995 and 1994 and the nine months ended March 31, 1997 and 1996 (unaudited) Consolidated statements of stockholders' equity for the years ended June 30, 1996, 1995 and 1994 and the nine months ended March 31, 1997 (unaudited) II-2 Consolidated statements of cash flows for the years ended June 30, 1996, 1995 and 1994 and the nine months ended March 31, 1997 and 1996 (unaudited) Notes to Consolidated Financial Statements (b) Exhibits:
Regulation S-B Exhibit Number Description - -------------- ----------- 3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference from Exhibit 3.1 of ABFS' Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996 filed on September 27, 1996, File No. 0-22472 (the "1996 Form 10-KSB")). 3.2 Bylaws of ABFS (Incorporated by reference from Exhibit 3.2 of the Registration Statement on Form SB-2 filed December 27, 1996, Registration Number 333-18919 (the "1997 Form SB-2")). 4.1 Form of unsecured Investment Note (Incorporated by reference from Exhibit 4.1 of Amendment No. 1 to the Registration Statement on Form SB-2 filed April 29, 1994, Registration Number 33-76390 (the "Form SB-2")). 4.2 Form of unsecured Investment Note issued pursuant to Indenture with First Trust, National Association, a national banking association. (Incorporated by reference from Exhibit 4.5 of Amendment No. One to the Registration Statement on Form SB-2 filed on December 14, 1995, Registration Number 33-98636 (the "1996 Form SB-2")). 4.3 Form of Indenture by and between ABFS and First Trust, National Association, a national banking association (Incorporated by reference from Exhibit 4.6 of the Registration Statement on Form SB-2 filed on October 26, 1995, Registration Number 33-98636). 4.4 Form of Indenture by and between ABFS and First Trust, National Association, a national banking association. 4.5 Form of unsecured Investment Note.* 5 Opinion of Blank Rome Comisky & McCauley. - -------------------------------- * Previously filed.
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Regulation S-B Exhibit Number Description - -------------- ----------- 10.1 Loan and Security Agreement between Upland Mortgage and BankAmerica Business Credit, Inc. dated May 23, 1996 (Incorporated by reference from the 1996 Form 10-KSB). 10.2 Amended and Restated Stock Option Plan (Incorporated by reference from Exhibit 10.2 of the 1997 Form SB-2). 10.3 Stock Option Award Agreement (Incorporated by reference from Exhibit 10.1 of the Registration Statement on Form S-11 filed on February 26, 1993, Registration No. 33-59042 (the "Form S-11")). 10.4 Line of Credit Agreement by and between American Business Credit, Inc. and Eagle National Bank (Incorporated by reference from Exhibit 10.4 of Amendment No. 1 to the Registration Statement on Form SB-2 filed on April 29, 1993, Registration No. 33-59042 (the "1993 Form SB-2")). 10.5 Agreement dated April 12, 1993 between American Business Credit, Inc. and Eagle National Bank (Incorporated by reference from Exhibit 10.5 of the 1993 Form SB-2). 10.6 1995 Stock Option Plan for Non-Employee Directors (Incorporated by reference from Exhibit 10.6 of the Amendment No. 1 to the 1997 Form SB-2 filed on February 4, 1997 Registration No. 333-18919 (the "Amendment No. 1 to the 1997 Form SB-2")). 10.7 Form of Option Award Agreement for Non-Employee Directors Plan for Formula Awards (Incorporated by reference from Exhibit 10.13 of the 1996 Form 10-KSB). 10.8 Interim Warehouse and Security Agreement between Upland Mortgage and Prudential Securities Realty Funding Corporation dated April 25, 1996 (Incorporated by reference from Exhibit 10.14 of the 1996 Form 10- KSB). 10.9 Lease dated January 7, 1994 by and between TCW Realty Fund IV Pennsylvania Trust and ABFS (Incorporated by reference from Exhibit 10.9 of the Registration Statement on Form SB-2 filed March 15, 1994, File No. 33-76390).
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Regulation S-B Exhibit Number Description - -------------- ----------- 10.10 First Amendment to Agreement of Lease by and between TCW Realty Fund IV Pennsylvania Trust and ABFS dated October 24, 1994. (Incorporated by reference from Exhibit 10.9 of ABFS' Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995 (the "1995 Form 10-KSB")). 10.11 Second Amendment to Agreement of Lease by and between TCW Realty Fund IV Pennsylvania Trust and ABFS dated December 23, 1994 (Incorporated by reference from Exhibit 10.10 of the 1995 Form 10-KSB). 10.12 Third Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated July 25, 1995 (Incorporated by reference from Exhibit 10.11 of the 1995 Form 10-KSB). 10.13 Revolving Credit and Security Agreement dated August 12, 1994 between ABFS, American Business Credit, Inc., HomeAmerican Credit, Inc. and Meridian Bank (Incorporated by reference from Exhibit 10.7 of the 1995 Form 10-KSB). 10.14 Promissory Note of Anthony J. Santilli, Jr. and Stock Pledge Agreement dated September 29, 1995 (Incorporated by reference from Exhibit 10.14 of the 1996 Form SB-2). 10.15 Form of Employment Agreement with Anthony J. Santilli, Jr., Beverly Santilli and Jeffrey M. Ruben (Incorporated by reference from Exhibit 10.15 of the Amendment No. 1 to the 1997 Form SB-2). 10.16 Management Incentive Plan (Incorporated by reference from Exhibit 10.16 of the 1997 Form SB-2). 10.17 Loan and Security Agreement dated December 12, 1996 between American Business Credit, Inc. and Finova Capital Corporation (Incorporated by reference from Exhibit 10.17 of the 1997 Form SB-2). 10.18 Form of Option Award Agreement for Non-Employee Directors Plan for Non-Formula Awards (Incorporated by reference from Exhibit 10.18 of the Amendment No. 1 to the 1997 Form SB-2). 10.19 Form of Pooling and Servicing Agreement related to the Company's loan securitizations (Incorporated by reference from Exhibit 4.1 of ABFS' Quarterly Report on Form 10-QSB for the quarter ended March 31, 1995 (the "March 31, 1995 Form 10-QSB")).
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Regulation S-B Exhibit Number Description - -------------- ----------- 10.20 Form of Sales and Contribution Agreement related to the Company's loan securitizations (Incorporated by reference from Exhibit 4.1 of the March 31, 1995 Form 10-QSB). 10.21 Amendments to the Interim Warehouse and Security Agreement between Upland Mortgage and Prudential Securities Realty Funding Corporation. 10.22 Fourth Amendments to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated April 9, 1996. 10.23 Fifth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated October 8, 1996. 10.24 Sixth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated March 31, 1997. 16 Letter on Change in Certifying Accountant (Incorporated by reference from ABFS' Current Report on Form 8-K dated March 11, 1996, File No. 0-22472). 21 Subsidiaries of the Company. 23.1 Consent of Fishbein & Company, P.C. 23.2 Consent of Blank Rome Comisky & McCauley (See Exhibit 5). 23.3 Consent of BDO Seidman LLP. 24.1 Power of attorney (included on signature page). 25 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 on Form T-1.* 27 Financial Data Schedule (Incorporated by reference from ABFS' Quarterly Report on Form 10-QSB for the quarter ended March 31, 1997, File No. 0-22472). 99.1 Form of Prospectus Supplement. 99.2 Advertising Materials and Order Forms. _________________ * Previously filed.
Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-B for a Registration Statement on Form SB-2. II-6 Item 28. Undertakings. (a) As to Rule 415. The small business issuer will: (1) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-7 (c) The small business issuer hereby will: (1) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (2) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-8 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, the City of Philadelphia, Commonwealth of Pennsylvania on May 23, 1997. AMERICAN BUSINESS FINANCIAL SERVICES, INC. Date: May 23, 1997 By:/S/ ANTHONY J. SANTILLI, JR. ------------ ----------------------------------- Anthony J. Santilli, Jr., Chairman, President, Chief Executive Officer, Chief Operating Officer, Treasurer and Director (Duly Authorized Officer) KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Anthony J. Santilli, his true and lawful attorney-in-fact and agent with full power of substitution or resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documentation in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.
Signature Capacity Date - ---------------------------- --------------------------------------------- ----------- /S/ ANTHONY J. SANTILLI, JR. Chairman, President, Chief Executive Officer, May 23, 1997 - ---------------------------- Chief Operating Officer, Treasurer and ----------- Anthony J. Santilli, Jr. Director (Principal Executive and Operating Officer) /S/ DAVID M. LEVIN Senior Vice President-Finance and Chief May 23, 1997 - ---------------------------- Financial Officer (Principal Financial and ----------- David M. Levin Accounting Officer) /S/ LEONARD BECKER Director May 23, 1997 - ---------------------------- ----------- Leonard Becker /S/ RICHARD KAUFMAN Director May 23, 1997 - ---------------------------- ----------- Richard Kaufman /s/ MICHAEL DELUCA Director May 23, 1997 - ---------------------------- ----------- Michael DeLuca /S/ HAROLD SUSSMAN Director May 23, 1997 - ---------------------------- ------------ Harold Sussman
II-9 EXHIBIT INDEX S-B Exhibit Numbers Description - ------------------- ----------- 4.4 Form of Indenture 4.5 Form of unsecured Investment Note* 5 Opinion of Blank Rome Comisky & McCauley 10.21 Amendments to the Interim Warehouse and Security Agreement between Upland Mortgage and Prudential Securities Realty Funding Corporation 10.22 Fourth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated April 9, 1996 10.23 Fifth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated October 8, 1996 10.24 Sixth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust and ABFS dated March 31, 1997 21 Subsidiaries of the Company 23.1 Consent of Fishbein & Company, P.C. 23.2 Consent of Blank Rome Comisky & McCauley (See Exhibit 5) 23.3 Consent of BDO Seidman LLP 24.1 Power of Attorney (included on signature page) 25 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 on Form T-1* 99.1 Form of Prospectus Supplement 99.2 Advertising Materials and Order Forms ________________ * Previously filed. II-10 EX-4.4 2 FORM OF INDENTURE Exhibit 4.4 INDENTURE AMERICAN BUSINESS FINANCIAL SERVICES, INC., as Obligor $125,000,000.00 Unsecured, Subordinated Investment Notes and Unsecured, Adjustable Rate Subordinated Money Market Notes ----------------------- ----------------------- FIRST TRUST NATIONAL ASSOCIATION, a national banking association as Trustee Dated as of May __, 1997 ----------------------- TABLE OF CONTENTS
ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE............................................................1 Section 1.1 Definitions............................................................................1 Section 1.2 Other Definitions......................................................................5 Section 1.3 Incorporation by Reference of Trust Indenture Act......................................5 Section 1.4 Rules of Construction..................................................................5 ARTICLE II. THE SECURITIES.......................................................................................6 Section 2.1 Form and Dating........................................................................6 Section 2.2 Execution and Authentication...........................................................8 Section 2.3 Registrar and Paying Agent.............................................................8 Section 2.4 Paying Agent to Hold Money in Trust....................................................9 Section 2.5 Securityholder Lists...................................................................9 Section 2.6 Transfer and Exchange.................................................................10 Section 2.7 Payment of Principal and Interest; Principal and Interest Rights Preserved...........................................................................11 Section 2.8 Replacement Securities................................................................13 Section 2.9 Outstanding Securities................................................................13 Section 2.10 Treasury Securities...................................................................13 Section 2.11 Temporary Securities.................................................................14 Section 2.12 Cancellation..........................................................................14 Section 2.13 Defaulted Interest....................................................................14 Section 2.14 Book Entry Registration...............................................................14 Section 2.15 Initial and Monthly Statements........................................................15 ARTICLE III. REDEMPTION.........................................................................................16 Section 3.1 Redemption of Investment Notes........................................................16 Section 3.2 Redemption of Money Market Notes......................................................16 ARTICLE IV. COVENANTS...........................................................................................17 Section 4.1 Payment of Securities.................................................................17 Section 4.2 Maintenance of Office or Agency.......................................................17 Section 4.3 SEC Reports and Other Reports.........................................................18 Section 4.4 Compliance Certificate................................................................19 Section 4.5 Stay, Extension and Usury Laws........................................................19 Section 4.6 Liquidation...........................................................................20 ARTICLE V. SUCCESSORS...........................................................................................20 Section 5.1 When the Company May Merge. etc.......................................................20 Section 5.2 Successor Corporation Substituted.....................................................20
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ARTICLE VI. DEFAULTS AND REMEDIES...............................................................................21 Section 6.1 Events of Default.....................................................................21 Section 6.2 Acceleration..........................................................................22 Section 6.3 Other Remedies........................................................................22 Section 6.4 Waiver of Past Defaults...............................................................22 Section 6.5 Control by Majority...................................................................23 Section 6.6 Limitation on Suits...................................................................23 Section 6.7 Rights of Holders to Receive Payment..................................................23 Section 6.8 Collection Suit by Trustee............................................................24 Section 6.9 Trustee May File Proofs of Claim......................................................24 Section 6.10 Priorities............................................................................25 Section 6.11 Undertaking for Costs.................................................................25 ARTICLE VII. TRUSTEE............................................................................................25 Section 7.1 Duties of Trustee.....................................................................25 Section 7.2 Rights of Trustee.....................................................................26 Section 7.3 Individual Rights of Trustee..........................................................27 Section 7.4 Trustee's Disclaimer..................................................................27 Section 7.5 Notice of Defaults....................................................................27 Section 7.6 Reports by Trustee to Holders.........................................................28 Section 7.7 Compensation and Indemnity............................................................28 Section 7.8 Replacement of Trustee................................................................29 Section 7.9 Successor Trustee by Merger, etc......................................................30 Section 7.10 Eligibility; Disqualification.........................................................30 Section 7.11 Preferential Collection of Claims Against Company.....................................30 ARTICLE VIII. DISCHARGE OF INDENTURE............................................................................30 Section 8.1 Termination of Company's Obligations..................................................30 Section 8.2 Application of Trust Money............................................................32 Section 8.3 Repayment to Company..................................................................32 Section 8.4 Reinstatement.........................................................................32 ARTICLE IX. AMENDMENTS..........................................................................................32 Section 9.1 Without Consent of Holders............................................................32 Section 9.2 With Consent of Holders...............................................................33 Section 9.3 Compliance with Trust Indenture Act...................................................35 Section 9.4 Revocation and Effect of Consents.....................................................35 Section 9.5 Notation on or Exchange of Investment Notes...........................................35 Section 9.6 Trustee to Sign Amendments, etc.......................................................36 ARTICLE X. SUBORDINATION........................................................................................36 Section 10.1 Agreement to Subordinate..............................................................36
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Section 10.2 Liquidation: Dissolution: Bankruptcy..................................................36 Section 10.3 Default of Designed Senior Debt.......................................................37 Section 10.4 When Distribution Must Be Paid Over...................................................38 Section 10.5 Notice by Company.....................................................................38 Section 10.6 Subrogation...........................................................................39 Section 10.7 Relative Rights.......................................................................39 Section 10.8 Subordination May Not Be Impaired by the Company or Holders of Senior Debt.........................................................................39 Section 10.9 Distribution or Notice to Representative..............................................40 Section 10.10 Rights of Trustee and Paying Agent....................................................41 Section 10.11 Authorization to Effect Subordination.................................................41 Section 10.12 Article Applicable to Paying Agent....................................................41 Section 10.13 Miscellaneous.........................................................................41 ARTICLE XI. MISCELLANEOUS.......................................................................................42 Section 11.1 Trust Indenture Act Controls..........................................................42 Section 11.2 Notices...............................................................................42 Section 11.3 Communication by Holders with Other Holders...........................................43 Section 11.4 Certificate and Opinion as to Conditions Precedent....................................43 Section 11.5 Statements Required in Certificate or Opinion.........................................44 Section 11.6 Rules by Trustee and Agents...........................................................44 Section 11.7 Legal Holidays........................................................................44 Section 11.8 No Recourse Against Others............................................................44 Section 11.9 Duplicate Originals...................................................................45 Section 11.10 Governing Law.........................................................................45 Section 11.11 No Adverse Interpretation of Other Agreements.........................................45 Section 11.12 Successors............................................................................45 Section 11.13 Severability..........................................................................45 Section 11.14 Counterpart Originals.................................................................45 Section 11.15 Table of Contents, Headings, etc......................................................45
iii CROSS-REFERENCE TABLE* - ---------------------- Trust Indenture Act Section Indenture Section ----------- ----------------- 310(a)(1)............................................................7.10 (a)(2)...............................................................7.10 (a)(3)...............................................................N.A. (a)(4)...............................................................N.A. (a)(5)...............................................................N.A. (b).............................................................7.8; 7.10 (c)..................................................................N.A. 311(a)...............................................................7.11 (b)..................................................................7.11 (c)..................................................................N.A. 312(a)................................................................2.5 (b)..................................................................11.3 (c)..................................................................11.3 313(a)................................................................7.6 (b)(1)...............................................................N.A. (b)(2)................................................................7.6 (c).............................................................7.6; 11.2 (d)...................................................................7.6 314(a).....................................................4.3; 4.4; 11.2 (b)..................................................................N.A. (c)(1)...............................................................11.4 (c)(2)...............................................................11.4 (c)(3)...............................................................N.A. (d)..................................................................N.A. (e)..................................................................11.5 (f)..................................................................N.A. 315(a).............................................................7.1(b) (b).............................................................7.5; 11.2 (c)................................................................7.1(a) (d)................................................................7.1(c) (e)..................................................................6.11 316(a)(last sentence)................................................2.10 (a)(1)(A).............................................................6.5 (a)(1)(B).............................................................6.4 (a)(2)...............................................................N.A. (b)...................................................................6.7 (c)..................................................................N.A. 317(a)(1).............................................................6.8 (a)(2)................................................................6.9 (b)...................................................................2.4 318(a)...............................................................11.1 N.A. means not applicable * This Cross Reference Table is not part of the Indenture iv INDENTURE dated as of ___________, 1997, by American Business Financial Services, Inc., a Delaware corporation (the "Company"), and First Trust National Association, a national banking association, a member of the First Bank System and a Minnesota Trust Company, as trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Unsecured, Subordinated Investment Notes and the Unsecured Adjustable Rate Subordinated Money Market Notes of the Company issued pursuant to the Company's registration statement on Form SB-2 declared effective by the Securities and Exchange Commission on or about ____________, 1997 (collectively, the "Notes"): ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions. "Account" means the record of beneficial ownership of a Money Market Note maintained by the Company. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Agent" means any Registrar, Paying Agent or co-registrar of the Notes. "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "Company" means American Business Financial Services, Inc., unless and until replaced by a successor in accordance with Article V hereof and thereafter means such successor. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is originally dated, located at 180 East 5th Street, Saint Paul, Minnesota 55101, Attention: Mr. Richard Prokosch, Corporate Finance. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means, as of any date, generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession, which are in effect from time to time. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Holder" or "Securityholder" means a Person in whose name a Security is registered. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing the balance deferred and unpaid of the purchase price of any property (including capital Lease obligations) or representing any hedging obligations, except any such balance that constitutes an accrued expense or a trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and hedging obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, and also includes, to the extent not otherwise included, (a) the Guarantee of items that would be included within this definition, and (b) liability for items that would arise by operation of a Person's status as a general partner of a partnership. "Indenture" means, this Indenture as amended or supplemented from time to time. "Interest Accrual Date" means with respect to any Security, the date the Company accepts funds for the purchase of the Security if such funds are received by 3:00 p.m. (EDT) on a Business Day, or if such funds are not so received, on the next Business Day. "Interest Accrual Period" means, as to each Security, the period from the later of the Issue Accrual Date of such Security or the day after the last Payment Date upon which an interest payment was made until the following Payment Date during which interest accrues on each Security with respect to any Payment Date. "Investment Notes" or "Investment Note" means the Company's Unsecured Subordinated Investment Note(s) issued under this Indenture. "Issue Date" means, with respect to an Investment Note, the date on which such Investment Note is first executed, authenticated and delivered and, with respect to a Money Market Note, the date on which such Money Market Note is initially registered on the books and records of the Registrar. 2 "Maturity Date" means, with respect to any Security, the date on which the principal of such Security becomes due and payable as therein provided. "Maturity Record Date" means, with respect to any Security, as of 11:59 p.m. of the date fifteen days prior to the Maturity Date or Redemption Date applicable to such Security. "Money Market Notes" or "Money Market Note" means the Company's Unsecured Adjustable Rate, Subordinated Money Market Note(s) issued pursuant to this Indenture. "Notes" means the Company's Unsecured, Subordinated Investment Notes and the Unsecured, Adjustable Rate, Subordinated Money Market Notes issued under this Indenture. "Obligations" means any principal, interest (including Post-Petition Interest), penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means the Chairman of the Board or principal executive officer of the Company, the President or operating officer of the Company, the Chief Financial Officer or principal financial officer of the Company, the Treasurer, any Assistant Treasurer, Controller or principal officer of the Company, Secretary or any Vice-President of the Company. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the principal executive officer, principal operating officer, principal financial officer or principal accounting officer of the Company. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Payment Date" means the last day of each calendar month or such other date as determined by the Holder and the Company as set forth in the Investment Note or if such day is not a Business Day, the Business Day immediately following such day and, with respect to a specific Security, the Maturity Date or Redemption Date of such Security. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Post-Petition Interest" means interest accruing after the commencement of any bankruptcy or insolvency case or proceeding with respect to the Company or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, at the rate applicable to such Indebtedness, whether or not such interest is an allowable claim in any such proceeding. "Redemption Date" has the meaning given in Article III hereof. 3 "Redemption Price" means, with respect to any Security to be redeemed, the principal amount of such Security plus the interest accrued but unpaid during the Interest Accrual Period up to the Redemption Date for such security. "Regular Record Date" means, with respect to a particular Payment Date, as of 11:59 p.m. of the date fifteen days prior to such Payment Date. "Responsible Officer" when used with respect to the Trustee, means any officer in its Corporate Trust Office, or any other assistant officer of the Trustee in its Corporate Trust Office customarily performing functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "SEC" means the Securities and Exchange Commission. "Securities" means, the Notes issued pursuant to this Indenture. "Senior Debt" means any Indebtedness (whether outstanding on the date hereof or thereafter created) incurred by the Company in connection with borrowings by the Company (including its subsidiaries) from a bank, trust company, insurance company, any other institutional lender or other entity which lends funds in connection with its primary business activities whether such Indebtedness is or is not specifically designated by the Company as being "Senior Debt" in its defining instruments. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "Total Permanent Disability" means a determination by a physician chosen by the Company that the Holder of a Security, who was gainfully employed on a full time basis at the Issue Date of such security is unable to work on a full time basis during the succeeding twenty-four months. For purposes of this definition, "working on a full time basis" shall mean working at least forty hours per week. "Trustee" means First Trust National Association, a national banking association, until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "U.S. Government Obligations" means direct obligations of the United States of America, or any agency or instrumentality thereof for the payment of which the full faith and credit of the United States of America is pledged. 4 Section 1.2 Other Definitions. Defined in Term Section ---- ------- "Bankruptcy Law"................................................6.1 "Custodian".....................................................6.1 "Event of Default"..............................................6.1 "Legal Holiday"................................................11.7 "Paying Agent"..................................................2.3 "Payment Blockage Period"......................................10.3 "Payment Notice"...............................................10.3 "Registrar".....................................................2.3 Section 1.3 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities; "indenture security holder" means a Securityholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Securities means the Company or any successor obligor upon the Securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.4 Rules of Construction. Unless the context otherwise requires: 1. a term has the meaning assigned to it; 2. an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; 5 3. references to GAAP, as of any date, shall mean GAAP in effect in the United States as of such date; 4. "or" is not exclusive, 5. words in the singular include the plural, and in the plural include the singular; and 6. provisions apply to successive events and transactions. ARTICLE II. THE SECURITIES Section 2.1 Form and Dating. The Investment Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, the terms of which are incorporated in and made a part of this Indenture. The outstanding aggregate principal amount of Securities outstanding at any time is limited to $125.0 million, provided, however, that the Company and the Trustee may, without the consent of any Holder, increase such aggregate principal amount of Securities which may be outstanding at any time. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject or usage. Each Investment Note shall be dated the date of its authentication. Each Investment Note shall be in such denomination as may be designated from time to time by the Company but in no event in a denomination less than $1,000. Each Investment Note shall have a term of not less than three months and not greater than ten years as shall be designated by the Company from time to time. Except as provided in Section 2.14 hereof, each Money Market Note shall not be evidenced by a promissory note. The record of beneficial ownership of the Money Market Notes shall be maintained and updated by the Company through the establishment and maintenance of Accounts. Each Money Market Note shall be in such denominations as may be designated from time to time by the Company but in no event in an original denomination less than $1,000. Each Money Market Note shall have no stated term to maturity and shall be redeemable in increments of $500 (except in the case of the redemption of the entire account) at the option of the Holder written notice to the Company as provided in Article III of this Indenture. The payment due upon redemption shall be made within 10 Business Days of the Company's receipt of such notice from the Holder. Each Money Market Note shall also be redeemable by the Company upon 30 days written notice to the Holder thereof. Each Security shall bear interest from and commencing on its Interest Accrual Date at such rate of interest as the Company shall determine from time to time; provided, however, that the interest rate will be fixed for the term of the Investment Notes upon issuance, subject to change upon extension and the interest rate paid on the Money Market Notes shall be adjusted by the Company from time to time in its sole discretion provided that such rate shall not be less than 4.0% per year. The Company shall provide written notice to all Holders of the Money Market Notes at least 14 days prior to any decrease in the interest rate to be paid thereon, which notice shall set forth the new interest rate to be paid and the effective date of such change. The Company shall have the right to increase the interest rate paid on the Money Market Notes at any time without prior notice to the Holders of the Money Market Notes. 6 Interest on an Investment Note with a term of six (6) months or less will compound daily and be payable at maturity. Interest on an Investment Note of longer duration will compound daily and the Holder thereof may elect to have interest paid monthly, on the fifteenth day of each calendar month, quarterly, on January 15, April 15, July 15 and October 15, semi-annually, on January 15 and July 15, annually, on January 15, or upon maturity. A Holder may change this election once during the term of the Investment Note. Interest on a Money Market Note shall compound daily and will be payable in the form of additional notes. Interest shall be payable on a monthly basis at the end of each calendar month on any Account with a balance of $1,000 or more. No interest will be paid on any Account for any day during which the principal balance of such account is less than $1,000. The Company will give each Holder of an Investment Note (existing as of the applicable Maturity Record Date) a written notice at least seven days prior to the Maturity Date of the Investment Note held by such Holder reminding such Holder of the pending maturity of the Investment Note and noticing the Holder of the Company's intention to repay, or if the Company does not intend to repay the Investment Note, reminding the Holder that the automatic extension provision described in the next paragraph will take effect unless the Holder requests payment. Such notice shall also state that payment of principal of an Investment Note be made upon presentation and surrender of such Investment Note and shall specify the place where such Investment Note may be presented and surrendered for the making of such payment. If the Company gives notice to a Holder of the Company's intention to repay an Investment Note at maturity, no interest will accrue after the Maturity Date for such Investment Note. Otherwise, if a Holder requests repayment within seven days after the Maturity Date, the Company will pay interest on the Investment Note during the period after the Investment Note's Maturity Date and prior to redemption at the lower of (i) the lowest interest rate then being paid on Investment Notes being offered by the Company to the general public or (ii) the rate being paid on such Investment Note immediately prior to its maturity. If, within seven days after the Maturity Date of an Investment Note, a Holder of such Investment Note has not demanded repayment of the Investment Note, and the Company has not noticed its intention to repay such Security at least seven days prior to maturity, such Investment Note shall be extended automatically for the same term, and shall be deemed to have been renewed by the Holder thereof as of the Maturity Date. An Investment Note will continue to renew as described herein absent some permitted action be either the Holder or the Company. Interest shall continue to accrue from the first day of such renewed term. Such Investment Note, as renewed, will continue in all its provisions, including provisions relating to payment, except that the interest rate payable during any renewed term shall be the interest rate which is being offered by the Company on similar Investment Notes as of the renewal date. If similar Investment Notes are not then being issued, the interest rate upon renewal will be the rate specified by the Company on or before the Maturity Date of such Investment Note, or the Investment Note's current rate if no such rate is specified. Investment Notes with a duration of greater than six (6) months are subject to early repayment at the election (a) of the Holder only upon the occurrence cf a Total Permanent Disability of such Holder (or if such Investment Note is held jointly by a husband and wife, upon the Total Permanent 7 Disability of one of such spouses), (b) of a Holder's estate after a Holder's death or (c) if such Investment Note is held jointly by a husband and wife, of a Holder upon the death of such Holder's spouse. Otherwise, Holders will have no right to demand early repayment. The terms and provisions contained in the Investment Notes shall constitute, and are hereby expressly made, a part of this Indenture and to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, and the Holders by accepting the Investment Notes, expressly agree to such terms and provisions and to be bound thereby. In case of a conflict, the provisions of this Indenture shall control. Section 2.2 Execution and Authentication. Two Officers of the Company shall sign the Investment Notes for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Investment Notes. If an Officer whose signature is on an Investment Note no longer holds that office at the time the Security is authenticated by the Trustee, the Investment Note shall nevertheless be valid. An Investment Note shall not be valid until authenticated by the authorized manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Investment Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by two Officers of the Company, authenticate Investment Notes for original issue. The aggregate principal amount of Investment Notes outstanding at any time may not exceed the amount set forth in Section 2.1 hereof. Such order shall specify the amount of the Investment Notes to be authenticated and the date(s) upon which the original issue thereof is to be authenticated. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Investment Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate an Investment Note whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company. A Money Market Note shall not be validly issued until a transaction statement executed by a duly authorized officer of the Company is sent to the purchaser or transferee thereof and an Account is established by the Company in the name of such purchaser or transferee. Section 2.3 Registrar and Paying Agent. The Company shall maintain (i) an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Securities may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more 8 additional paying agents. The term "Registrar" includes any co-registrar, and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without prior notice to any Securityholder; provided that the Company shall promptly notify the Securityholders of the name and address of any Agent not a party to this Indenture. The Company may act as Paying Agent and/or Registrar. In the event the Company utilizes any Agent other than the Company or the Trustee, the Company shall enter into an appropriate agency agreement with such Agent, which agreement shall incorporate the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.7 hereof. The Company shall be the initial Registrar and Paying Agent. The Company initially appoints Trustee as agent for service of notices and demands in connection with the Securities. The Company shall act as Registrar and Paying Agent until such time as the Company gives the Trustee written notice to the contrary. Section 2.4 Paying Agent to Hold Money in Trust. Prior to each due date of the principal or interest on any Security, the Company shall deposit with the Paying Agent sufficient funds to pay principal, premium, if any, and interest then so becoming due and payable in cash. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal or interest on the Securities, and will notify the Trustee promptly in writing of any default by the Company in making any such payment. While any such default continues, the Trustee shall require a Paying Agent (if other than the Company) to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company) shall have no further liability for the money delivered to the Trustee. If the Company acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Securityholders all money held by it as Paying Agent. The Company shall notify the Trustee in writing at least 5 days before the Payment Date of the name and address of the Paying Agent if a person other than the Company is named Paying Agent at any time or from time to time. Section 2.5 Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee each quarter during the term of this Indenture and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders, and the aggregate principal amount outstanding and the Company shall otherwise comply with TIA Section 312(a). 9 Section 2.6 Transfer and Exchange. 1. Transfer and Exchange of Investment Notes. The Investment Notes are not negotiable instruments and cannot be transferred by mere endorsement and delivery. No rights of record ownership to a Security may be transferred without the prior written consent of the Company (which consent shall not be unreasonably withheld). When Investment Notes are presented to the Registrar with the request: (x) to register the transfer of the Investment Notes, or (y) to exchange the Investment Notes for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Investment Notes presented or surrendered for register of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by the Holder thereof or by his attorney, duly authorized in writing; (ii) shall be accompanied by the written consent of the Company to such transfer or exchange; and (iii) if requested by the Company, an opinion of Holder's counsel (which counsel shall be reasonably acceptable to the Company) that the transfer does not violate any applicable securities laws and\or signature guarantee. 2. Transfer and Exchange of Money Market Notes. The Money Market Notes are not negotiable instruments and cannot be transferred without the prior written consent of the Company (which consent shall not be unreasonably withheld). Requests to Registrar for the transfer of the Accounts maintained for the benefit of the Holders of the Money Market Notes shall be: (i) made to the Registrar in writing on a form supplied by the Company; (ii) duly executed by the current holder of the Account, as reflected on the Company's records as of the date of receipt of such transfer request, or his attorney duly authorized in writing; (iii) accompanied by the written consent of the Company to the transfer; and (iv) if requested by the Company, an opinion of Holder's counsel (which counsel shall be reasonably acceptable to the Company) that the transfer does not violate any applicable securities laws and/or a signature guarantee. 10 Upon transfer of a Money Market Note, the Company will provide the new registered owner of the Money Market Note with an initial transaction statement which will evidence the transfer of the account on the Company's records. Such initial transaction statement shall meet the applicable requirements of Section 8-408 of the Delaware Uniform Commercial Code or any successor provision. (b) Obligations with respect to Transfers and Exchanges of Securities. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Investment Notes at the Registrar's written request. (ii) The Company may assess service charges to a Holder for any registration or transfer or exchange, and the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange pursuant to Section 9.5 hereof). (iii) All Investment Notes issued upon any registration of transfer or exchange of Investment Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under the Indenture, as the Investment Notes surrendered upon such registration of transfer or exchange. (iv) Prior to due presentment for registration of transfer of any Investment Note, the Trustee, any Agent and the Company may deem and treat the person in whose name any Investment Note is registered as the absolute owner of such Investment Note for the purpose of receiving payment of principal of and interest on such Investment Note and for all other purposes whatsoever, whether such Investment Note is overdue, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. (v) The Company shall treat the individual or entity listed on each Account maintained by the Company as the absolute owner of the Money Market Note represented thereby for purposes of receiving payments thereon and for all other purposes whatsoever. Section 2.7 Payment of Principal and Interest; Principal and Interest Rights Preserved. (a) Each Security shall accrue interest at the rate specified for such Security and such interest shall be payable on each Payment Date following the Issue Date for such Security, until the principal thereof becomes due and payable. Any installment of interest payable on a Security that is caused to be punctually paid or duly provided for by the Company on the applicable Payment Date 11 shall be paid to the Holder in whose name such Security is registered in the Security Register on the applicable Regular Record Date: (i) with respect to the Investment Notes outstanding, by check mailed to such Holder's address as it appears in the Security Register on such Regular Record Date, and (ii) with respect to the Money Market Notes outstanding, by crediting the Account of each Holder of a Money Market Note as of the last day of each calendar date month following the Issue Date with additional Money Market Notes in an amount equal to the interest due on the balance maintained in the Account during the preceding calendar month provided that no interest shall accrue for any day in which the balance in an Account is less than $1,000. The payment of any interest payable in connection with the payment of any principal payable with respect to such Security on a Maturity Date or Redemption Date shall be payable as provided below. Any funds with respect to which such checks were issued which remain uncollected shall be held in accordance with Section 8.3 hereof. Any installment of interest not punctually paid or duly provided for shall be payable in the manner and to the Holders specified in Section 2.13 hereof. (b) Each of the Investment Notes shall have stated maturities of principal as shall be indicated in each such Security. The principal of each Investment Note shall be paid in full no later than the Maturity Date thereof unless the term of such Security is extended pursuant to Section 2.1 hereof or such Investment Note becomes due and payable at an earlier date by acceleration, redemption or otherwise. The interest rate paid on the Money Market Notes shall be adjusted by the Company from time to time in its sole discretion provided that such rate shall not be less than 4.0% per year. The Company shall provide written notice to all Holders of the Money Market Notes at least 14 days prior to any decrease in the interest rate to be paid thereon, which notice shall set forth the new interest rate to be paid and the effective date of such change. The Company shall have the right to increase the interest rate paid on the Money Market Notes at any time without prior notice to the Holders of the Money Market Notes. Interest on each Security shall be due and payable on each Payment Date at the interest rate applicable to such Security for the Interest Accrual Period related to such Security and such Payment Date. Notwithstanding any of the foregoing provisions with respect to payments of principal of and interest on the Securities, if the Securities have become or been declared due and payable following an Event of Default, then payments of principal of and interest on the Securities shall be made in accordance with Article 6 hereof. The principal payment made on any Investment Note on any Maturity Date (or the Redemption Price of any Security required to be redeemed), and any accrued interest thereon, shall be payable only upon presentation and surrender of such Investment Note on or after the Maturity Date or Redemption Date therefor at the office or agency of the Company maintained by it for such purpose pursuant to Section 2.3 hereof or at the office of any Paying Agent for such Investment Note. The principal payment made on any Money Market Note on any Redemption Date and any accrued interest thereon, shall be payable within 10 Business Days of the Company's receipt of written notice executed by the Holder or his duly authorized representative on a form acceptable to the Company at the office or agency of the Company maintained by it for such purpose pursuant to Section 2.3 hereof or at the office of any Paying Agent for such Money Market Notes. All such payments made upon redemption of the Money Market Notes shall be made in U.S. dollars. 12 (c) All computations of interest due with respect to any Security shall be made, unless otherwise specified in the Security, based upon the actual number of days (e.g., 365 or 366) in the applicable year. Section 2.8 Replacement Securities. If any mutilated Investment Note is surrendered to the Company, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Investment Note, the Company shall issue and the Trustee, upon the written order of the Company signed by two Officers of the Company if required by the Trustee, shall authenticate a replacement Security if the Trustee's requirements for replacements of Investment Notes are met. If required by the Trustee or the Company, an unsecured indemnity agreement must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if an Investment Note is replaced. The Company and the Trustee may charge for their expenses in replacing an Investment Note. Every replacement security is an additional obligation of the Company and shall be entitled to all benefits of this Indenture equally and proportionately with all other Investment Notes duly issued hereunder. Section 2.9 Outstanding Securities. The Securities outstanding at any time are (i) all the Investment Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, and those described in this Section as not outstanding, and (ii) the outstanding balances of all of the Accounts representing the Money Market Notes maintained by the Company or such other entity as the Company designates as Registrar, and those described in this Section as not outstanding. If an Investment Note is replaced pursuant to Section 2.8 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Investment Note is held by a bona fide purchaser. If the principal amount of any Security is considered paid under Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to accrue. Subject to Section 2.10 hereof, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. Section 2.10 Treasury Securities. In determining whether the holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or any Affiliate of the Company shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only 13 Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Section 2.11 Temporary Securities. Until the Investment Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Investment Notes. Temporary Investment Notes shall be substantially in the form of Investment Notes but may have variations that the Company and the Trustee consider appropriate for temporary Investment Notes. Without unreasonable delay, the Company shall prepare and the Trustee, upon receipt of the written order of the Company signed by two Officers of the Company, shall authenticate the Investment Notes in exchange for temporary Investment Notes. Until such exchange, temporary Investment Notes shall be entitled to the same rights, benefits and privileges as Investment Notes. Section 2.12 Cancellation. The Company at any time may deliver Investment Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Investment Notes surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Investment Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Investment Notes (subject to the record retention requirement of the Exchange Act) unless the Company directs them to be returned to it. All cancelled Investment Notes held by the Trustee shall be destroyed and certification of their destruction delivered to the Company unless by a written order, signed by one Officer of the Company, the Company shall direct that cancelled Investment Notes be returned to it. Section 2.13 Defaulted Interest. If the Company defaults in a payment of interest on any Security, it shall pay the defaulted interest plus, to the extent lawful, any interest payable on the defaulted interest, to the Holder of such Security on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least 5 Business Days prior to the payment date, in each case at the rate provided in the Security. The Company shall, with written notification to the Trustee, fix or cause to be fixed each such special record date and payment date. At least 15 days before any such special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to Securityholder(s) a notice that states the special record date, the related payment date and the amount of such interest to be paid. Section 2.14 Book Entry Registration. The Registrar shall maintain a book entry registration and transfer system through the establishment of Accounts for the benefit of Holders of Money Market Notes as the sole method of recording the ownership and transfer of ownership interests in such Money Market Notes. The registered owners of the Accounts established by the Company in connection with the purchase or 14 transfer of the Money Market Notes shall be deemed to be the Holders of the Money Market Notes outstanding for all purposes under this Indenture. The Company shall promptly notify the Registrar of the acceptance of a subscriber's order to purchase a Money Market Note and the Registrar shall credit its book-entry registration and transfer system to the Account of each Money Market Note purchaser, the principal amount of such Money Market Note owned of record by the purchaser. The total amount of any principal and/or interest (which shall be paid in the form of additional notes) due and payable to book entry owners of the Accounts maintained by the Company as provided in this Indenture shall be credited to such Accounts by the Company within the time frames provided in this Indenture. The Company shall notify the Trustee no less frequently than bi-weekly of the establishment of new accounts and the transfer of existing accounts. Book-entry accounts representing interests in the Money Market Notes shall not be exchangeable for Money Market Notes in denominations of $2,500 and any amount in excess thereof and fully registered in the names as the Company directs unless (a) the Company at its option advises the Trustee in writing of its election to terminate the book-entry system, or (b) after the occurrence of any Event of Default, Holders of a majority of the Money Market Notes then outstanding (as determined based upon the latest quarterly statement provided to the Trustee pursuant to Section 4.3(d) hereof) advise the Trustee in writing that the continuation of the book-entry system is no longer in the best interests of such holders and the Trustee notifies all Holders of the Money Market Notes of such event and the availability of definitive notes to the Holders of Money Market Notes requesting such notes in definitive form. Section 2.15 Initial and Monthly Statements. (1) The Company shall provide initial transaction statements which meet the applicable requirements of Section 8-408 of Article 8 of the Delaware Uniform Commercial Code or any successor section to initial purchasers, registered owners, registered pledgees, former registered owners and former pledgees, as required by Section 8-408, within two business days of the occurrence of the events specified in such section. (2) The Company shall send each Holder of a Money Market Note (and each registered pledgee) via U.S. mail not later than ten business days after each month end in which such Holder had an outstanding balance in such holder's Account, a statement which indicates as of the calendar month end preceding the mailing: (a) the balance of such Account; (b) interest credited; (c) withdrawals made, if any; and (d) the interest rate paid on such Account during the preceding calendar month. Such monthly statements shall also include, among other things, the information required by the applicable provisions of Section 8-408 of Article 8 of the Delaware Uniform Commercial Code or any successor section. The Company shall provide additional statements as the holders or registered pledgees of the Money Market Notes may reasonably request from time to time. The Company may charge such holders or pledgees requesting such statements a fee to cover the charges incurred by the Company in providing such additional statements. 15 ARTICLE III. REDEMPTION Section 3.1 Redemption of Investment Notes. The Company may not redeem, in whole or in part, any Investment Note prior to the scheduled Maturity Date of the Security. In addition, except as provided in this Article III, the Company shall have no mandatory redemption or sinking fund obligations with respect to any of the Investment Notes. Upon the death or Total Permanent Disability of a Holder of an Investment Note, the estate of such Holder (in the event of death) or such Holder (in the event of Total Permanent Disability) may require the Company to redeem, in whole and not in part, the Investment Note held by such Holder by delivering to the Company an irrevocable election (a "Redemption Election") requiring the Company to make such redemption. In the event an Investment Note is held jointly by two or more Persons, the Company shall not be required to redeem such Investment Note until each joint holder of such Investment Note has either died or suffered a Total Permanent Disability. Notwithstanding the foregoing sentence, if an Investment Note is held jointly by a husband and wife, such Investment Note shall be subject to the elective redemption provisions of this Article III upon the death or Total Permanent Disability of either spouse. Upon receipt of a Redemption Election, the Company shall designate the Redemption Date for such Investment Note, which Redemption Date shall be no more than fifteen days after the Company's receipt of the Redemption Election, and shall pay the Redemption Price to the estate of the Holder or the Holder, as the case may be, in accordance with the provisions set forth in Section 2.7 hereof. No interest shall accrue on an Investment Note to be redeemed under this Article III for any period of time after the Redemption Date for such Investment Note and after the Company has tendered the Redemption Price to the Estate of the Holder or to the Holder, as the case may be. Section 3.2 Redemption of Money Market Notes. The Company may not redeem, in whole or in part, any Money Market Note except upon 30 days prior written notice to the Holder thereof listed on the records maintained by the Company. In addition, except as provided in this Article III, the Company shall have no mandatory redemption or sinking fund obligations with respect to any of the Money Market Notes. Any Holder of a Money Market Note may require the Company to redeem, in whole and or in part, in increments of $500 (except in the case of redemption of an entire account), the Money Market Note held by such Holder by delivering to the Company an irrevocable election (a "Redemption Election") requiring the Company to make such redemption. Upon receipt of a Redemption Election, the Company shall designate the Redemption Date for such Money Market Note, which Redemption Date shall be within 10 Business Days after the Company's receipt of the Redemption Election, and shall pay the Redemption Price to the Holder or his duly authorized attorney in fact, as the case may be, in accordance with the provisions set forth in Section 2.7 hereof. No interest shall accrue on a Money Market Note to be redeemed under this Section 3.2 of Article III 16 for any period of time after the Redemption Date for such Money Market Note and after the Company has tendered the Redemption Price to the Holder of the Money Market Note or his duly authorized attorney in fact. ARTICLE IV. COVENANTS Section 4.1 Payment of Securities. The Company shall duly pay the principal of and interest on each Security on the dates and in the manner provided in the note evidencing the Investment Notes, or in the case of the Money Market Notes, as described in the Prospectus related to such securities. Principal and interest (to the extent such interest is paid in cash) shall be considered paid on the date due if the Paying Agent, if other than the Company, holds at least one Business Day before that date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal and interest then due; provided, however, that principal and interest shall not be considered paid within the meaning of this Section 4.1 if money is held by the Paying Agent for the benefit of holders of Senior Debt pursuant to the provisions of Article 10 hereof. The payment of interest on the Money Market Notes shall be paid in the form of additional notes as provided for in Section 2.1 hereof. Such Paying Agent shall return to the Company, no later than 5 days following the date of payment, any money (including accrued interest) that exceeds such amount of principal and interest paid on the Securities in accordance with this Section 4.1. To the extent lawful, the Company shall pay interest (including Post-Petition Interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate borne by the Securities, compounded semi-annually; it shall pay interest (including Post-Petition Interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate, compounded semi-annually. Section 4.2 Maintenance of Office or Agency. The Company will maintain an office or agency (which may be an office of the Trustee, Registrar or coregistrar) where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. 17 The Company hereby designates its office at Balapointe Office Centre, 111 Presidential Boulevard, Bala Cynwyd, Pennsylvania as one such office or agency of the Company in accordance with Section 2.3. Section 4.3 SEC Reports and Other Reports. (a) The Company shall file with the Trustee, within 15 days after filing with the SEC, copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If the Company is not subject to the requirements of such Section 13 or 15(d) of the Exchange Act, the Company shall continue to file with the SEC and the Trustee on the same timely basis such reports, information and other documents as it would file if it were subject to the requirements of Section 13 or 15(d) of the Exchange Act. The Company shall also comply with the provisions of TIA Section 314(a). Notwithstanding anything contrary herein the Trustee shall have no duty to review such documents for purposes of determining compliance with any provisions of the Indenture. (b) So long as any of the Securities remain outstanding, the Company shall cause an annual report to stockholders and each quarterly or other financial report furnished by it generally to stockholders to be filed with the Trustee at the time of such mailing or furnishing to stockholders. If the Company is not required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, the Company shall cause its financial statements, including any notes thereto (and, with respect to annual reports, an auditors' report by the Company's certified independent accountants) and a "Management's Discussion and Analysis of Financial Condition or Plan of Operations," comparable to that which would have been required to appear in annual or quarterly reports filed under Section 13 or 15(d) of the Exchange Act to be so filed with the Trustee within 120 days after the end of each of the Company's fiscal years and within 60 days after the end of each of the first three quarters of each such fiscal year. (c) Whether or not required by the rules and regulations of the SEC, the Company shall file a copy of all such information with the SEC for public availability and make such information available to investors who request it in writing. (d) The Company, or such other entity as the Company shall designate as Registrar for the Money Market Notes as provided in Section 7.3 hereof, shall provide the Trustee with quarterly management reports which provide the Trustee with such information regarding the Accounts maintained by the Company for the benefit of the Holders of the Money Market Notes as the Trustee may reasonably request which information shall include at least the following: (1) the outstanding balance of each Account; (2) interest credited or withdrawals made for the period; (3) the amount of interest paid in the form of additional notes at each month end and (3) the interest rate paid on each Account maintained by the Company during the preceding quarterly period. 18 Section 4.4 Compliance Certificate. (a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year (October 28 if the Company has a June 30 year end), an Officers' Certificate stating that a review of the activities of the Company during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his knowledge each has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge and what action each is taking or proposes to take with respect thereto) and that to the best of his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Securities are prohibited or if such event has occurred, a description of the event and what action each is taking or proposes to take with respect thereto. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the annual financial statements delivered pursuant to Section 4.3 above shall be accompanied by a written statement of the Company's independent public accountants that in making the examination necessary for certification of such financial statements nothing has come to their attention which would lead them to believe that the Company has violated the provisions of Section 4. 1 of this Indenture or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company will, so long as any of the Securities are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. Section 4.5 Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all beneficial advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. 19 Section 4.6 Liquidation. The Board of Directors or the stockholders of the Company may not adopt a plan of liquidation that provides for, contemplates or the effectuation of which is preceded by (a) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company otherwise than substantially as an entirety (Section 5.1 of this Indenture being the Section hereof which governs any such sale, lease, conveyance or other disposition substantially as an entirety) and (b) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and of the remaining assets of the Company to the holders of capital stock of the Company, unless the Company, prior to making any liquidating distribution pursuant to such plan, makes provision for the satisfaction of the Company's Obligations hereunder and under the Securities as to the payment of principal and interest. ARTICLE V. SUCCESSORS Section 5.1 When the Company May Merge, etc. The Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions to another corporation, Person or entity unless (a) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (b) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made assumes all the obligations of the Company pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee, under the Securities and this Indenture; and (c) immediately after such transaction no Default or Event of Default exists. The Company shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture comply with this Indenture. The Trustee shall be entitled to conclusively rely upon such Officers' Certificate and Opinion of Counsel. Section 5.2 Successor Corporation Substituted. Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.1, the successor corporation formed by such consolidation or into or with which the Company, is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person has been named as the Company herein; provided, however, that the Company 20 shall not be released or discharged from the obligation to pay the principal of or interest on the Securities. ARTICLE VI. DEFAULTS AND REMEDIES Section 6.1 Events of Default. An "Event of Default" occurs if: (1) the Company defaults in the payment of interest on a Security when the same becomes due and payable and the Default continues for a period of 30 days, whether or not such payment is prohibited by the provisions of Article 10 hereof; (2) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at maturity, upon a required redemption or otherwise, and the Default continues for a period of 30 days, whether or not prohibited by the provisions of Article 10 hereof; (3) the Company fails to observe or perform any covenant, condition or agreement on the part of the Company to be observed or performed pursuant to Section 4.6 or 5.1 hereof; (4) the Company fails to comply with any of its other agreements or covenants in, or provisions of, the Securities or this Indenture and the Default continues for the period and after the notice specified below; (5) the Company pursuant to or within the meaning of any Bankruptcy Law (a) commences a voluntary case; (b) consents to the entry of an order for relief against it in an involuntary case; (c) consents to the appointment of a Custodian of it or for all or substantially all of its property; (d) makes a general assignment for the benefit of its creditors; or (e) admits in writing its inability to pay debts as the same become due; or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (a) is for relief against the Company in an involuntary case; (b) appoints a Custodian of the Company or for all or substantially all of its property; (c) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 120 consecutive days; and The term "Bankruptcy Law" means title II, U.S. Code or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. 21 A Default under clause (3) or (4) of Section 6.1 is not an Event of Default until the Trustee or the Holders of at least a majority in principal amount of the then outstanding Securities notify the Company of the Default and the Company does not cure the Default or such Default is not waived within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." Section 6.2 Acceleration. If an Event of Default (other than an Event of Default specified in clauses (5) or (6) of Section 6.1) occurs and is continuing, the Trustee by notice to the Company or the Holders of at least a majority in principal amount of the then outstanding Securities by written notice to the Company and the Trustee may declare the unpaid principal of and any accrued interest on all the Securities to be due and payable. Upon such declaration the principal and interest shall be due and payable immediately; provided, however, that if any Indebtedness or Obligation is outstanding pursuant to the Senior Debt, upon a declaration of acceleration by the Holders, all principal and interest under this Indenture shall be due and payable upon the earlier of (x) the day which is 5 Business Days after the receipt by each of the Company and the holders of Senior Debt of such written notice of acceleration or (y) the date of acceleration of any Indebtedness under any Senior Debt. If an Event of Default specified in clause (5) or (6) of Section 6.1 occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the then outstanding Securities by written notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. Section 6.3 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 6.4 Waiver of Past Defaults. Holders of a majority in principal amount of the then outstanding Securities by notice to the Trustee may waive an existing Default or Event of Default and its consequences except a continuing Default or Event of Default in the payment of the principal of or interest on any Security held by a non-consenting Holder. Upon actual receipt of any such notice of waiver by a Responsible Officer of the Trustee, such Default shall cease to exist, and any Event of Default arising therefrom shall be 22 deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 6.5 Control by Majority. The Holders of a majority in principal amount of the then outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it, provided, that indemnification for the Trustee's fees and expenses, in a form reasonably satisfactory to the Trustee, shall have been provided. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Securityholders, or that may involve the Trustee in personal liability. Section 6.6 Limitation on Suits. A Securityholder may pursue a remedy with respect to this Indenture or the Securities only if: (1) the Holder gives to the Trustee written notice of a continuing Event of Default; (2) the Holders of at least a majority in principal amount of the then outstanding Securities make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (5) during such 60 day period the Holders of a majority in principal amount of the then outstanding Securities do not give the Trustee a direction inconsistent with the request. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. Section 6.7 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, but subject to Article 10 hereof, the right of any Holder of a Security to receive payment of principal and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. 23 Section 6.8 Collection Suit by Trustee. If an Event of Default specified in Section 6.1 (1) or (2) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid on the Securities and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.9 Trustee May File Proofs of Claim. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Securityholders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Securities), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Securityholder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders of the Securities may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. If the Trustee does not file a proper claim or proof of debt in the form required in any such proceeding prior to 30 days before the expiration of the time to file such claims or proofs, then any holder of Senior Debt shall have the right to demand, sue for, collect and receive the payments and distributions in respect of the Securities which are required to be paid or delivered to the holders of Senior Debt as provided in Article 10 hereof and to file and prove all claims therefor and to take all such other action in the name of the Holders or otherwise, as such holder of Senior Debt may determine to be necessary or appropriate for the enforcement of the provisions of Article 10. 24 Section 6.10 Priorities. If the Trustee collects any money pursuant to this Article, it shall, subject to the provisions of Article 10 hereof, pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.7, including payment of all compensation, expenses and liabilities incurred, and all advances made, if any, by the Trustee and the costs and expenses of collection; Second: to holders of Senior Debt to the extent required by Article 10 hereof; Third: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Securityholders. Section 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by Holders of more than 10% in principal amount of the then outstanding Securities. ARTICLE VII. TRUSTEE Section 7.1 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) The duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth 25 in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon resolutions, statements, reports, documents, orders, certificates, opinions or other instruments furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any of the above that are specifically required to be furnished to the Trustee pursuant to this Indenture, the Trustee shall examine them to determine whether they substantially conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (2) of this Section. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 7.2 Rights of Trustee. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented to it by the proper Person. The Trustee need not investigate any fact or matter stated in the document. The Trustee shall have no duty to inquire as to the performance of the Issuers' covenants in Article 4. In addition, the Trustee shall not be deemed to have knowledge of any Default or any Event of Default except any Default or Event of Default of which the Trustee shall have received written notification or obtained actual knowledge. 26 (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through agents, attorneys, custodians or nominees and shall not be responsible for the misconduct or negligence or the supervision of any agents, attorneys, custodians or nominees appointed by it with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (f) The Trustee shall not be deemed to have notice of an Event of Default for any purpose under this Indenture unless notified of such Event of Default by the Company, the Paying Agent (if other than the Company) or a Holder of the Securities. Section 7.3 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or an Affiliate of the Company with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 7.10 and 7.11. Section 7.4 Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities or any money paid to the Company or upon the Company's direction under any provision hereof, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee and it shall not be responsible for any statement or recital herein or any statement in the Securities or any other document in connection with the sale of the Securities or pursuant to this Indenture other than its certificate of authentication. Section 7.5 Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee, the Trustee shall mail to Securityholders a notice of the Default or Event of Default within 90 days after it occurs. At least 5 Business Days prior to the mailing of any notice to Securityholders under this Section 7.5, the Company shall provide the Company with notice of its 27 intent to mail such notice. Except in the case of a Default or Event of Default in payment on any Security, the Trustee may withhold the notice if and so long as the Responsible Officers of the Trustee in good faith determines that withholding the notice would have no material adverse effect on the Securityholders. Section 7.6 Reports by Trustee to Holders. Within 60 days after the end of each fiscal year beginning with the June 30, 1997 fiscal year, the Trustee shall mail to Securityholders a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the 12 months preceding the reporting date, no report need be prepared or transmitted). The Trustee also shall comply with TIA Section 313(b). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). Commencing at the time this Indenture is qualified under the TIA, a copy of each report mailed to Securityholders under this Section 7.6 (at the time of its mailing to Securityholders) shall be filed with the SEC and each stock exchange, if any, on which the Securities are listed. The Company shall promptly notify the Trustee when the Securities are listed on any stock exchange. Section 7.7 Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and its performance of the duties and services required hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth in the second next paragraph. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder, except to the extent the Company is prejudiced thereby. The Company shall defend the claim and the Trustee shall reasonably cooperate in such defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such one counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company under this Section 7.7 shall survive the satisfaction and discharge of this Indenture. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through its own negligence or bad faith. 28 To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on the Securities. Such lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(5) or (6) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. Section 7.8 Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.8. The Trustee may resign at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Securities may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if. (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a Custodian or public officer takes charge of the Trustee or its property; (4) the Trustee becomes incapable of acting as Trustee under this Indenture, or (5) the Company so elects, provided such replacement Trustee is qualified and reasonably acceptable. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Securities may appoint a different successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 30 days after notice that the Trustee has resigned or has been removed, the Company or the Trustee or the Holders of at least a majority in principal amount of the then outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee after written request by any Securityholder who has been a Securityholder for at least 6 months fails to comply with Section 7.10, such Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 29 A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to all Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the lien provided for in Section 7.7. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring Trustee. Section 7.9 Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. Section 7.10 Eligibility; Disqualification. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America or of any state or territory thereof or of the District of Columbia authorized under such laws to exercise corporate trustee power, shall be subject to supervision or examination by Federal, state, territorial or District of Columbia authority and shall have a combined capital and surplus of at least $500,000 as set forth in its most recent published annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee is subject to TIA Section 310(b). Section 7.11 Preferential Collection of Claims Against Company. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE VIII. DISCHARGE OF INDENTURE Section 8.1 Termination of Company's Obligations. This Indenture shall cease to be of further effect (except that the Company's obligations under Section 7.7 and 8.4, and the Company's, Trustee's and Paying Agent's obligations under Section 8.3 shall survive) when all outstanding Investment Notes theretofore authenticated and issued have been delivered (other than destroyed, lost or stolen Investment Notes which have been replaced or paid) to the Trustee for cancellation and all outstanding Money Market Notes redeemed and the Company has 30 paid all sums payable by the Company hereunder. In addition, the Company may terminate all of their obligations under this Indenture if: (1) the Company irrevocably deposits in trust with the Trustee or at the option of the Trustee, with a trustee reasonably satisfactory to the Trustee and the Company under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, money or U.S. Government Obligations sufficient (as certified by an independent public accountant designated by the Company) to pay principal and interest on the Securities to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, provided that (i) the trustee of the irrevocable trust shall have been irrevocably instructed to pay such money or the proceeds of such U.S. Government Obligations to the Trustee and (ii) the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of said principal and interest with respect to the Securities; (2) the Company delivers to the Trustee an Officers' Certificate stating that all conditions precedent to satisfaction and discharge of this Indenture have been complied with; and (3) no Event of Default or event (including such deposit) which, with notice or lapse of time, or both, would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit. Then, this Indenture shall cease to be of further effect (except as provided in this paragraph), and the Trustee, on demand of the Company, shall execute proper instruments acknowledging confirmation of and discharge under this Indenture. The Company may make the deposit only if Article X hereof does not prohibit such payment. However, the Company's obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 4.1, 4.2, 4.3, 7.7, 7.8, 8.3 and 8.4 and the Trustee's and Paying Agent's obligations in Section 8.3 shall survive until the Securities are no longer outstanding. Thereafter, only the Company's obligations in Section 7.7 and 8.4 and the Company's, Trustee's and Paying Agent's obligations in Section 8.3 shall survive. After such irrevocable deposit made pursuant to this Section 8.1 and satisfaction of the other conditions set forth herein, the Trustee upon written request shall acknowledge in writing the discharge of the Company's obligations under this Indenture except for those surviving obligations specified above. In order to have money available on a payment date to pay principal or interest on the Securities, the U.S. Government Obligations shall be payable as to principal or interest at least one Business Day before such payment date in such amounts as will provide the necessary money. U.S. Government Obligations shall not be callable at the issuer's option. 31 Section 8.2 Application of Trust Money. The Trustee or a trustee satisfactory to the Trustee and the Company shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8. 1. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal and interest on the Securities. Section 8.3 Repayment to Company. The Trustee and the Paying Agent shall promptly pay to the Company upon written request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal or interest that remains unclaimed for two years after the date upon which such payment shall have become due; provided, however, that the Company shall have either caused notice of such payment to be mailed to each Securityholder entitled thereto no less than 30 days prior to such repayment or within such period shall have published such notice in a newspaper of widespread circulation published in the City of Philadelphia. After payment to the Company, Securityholders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. Section 8.4 Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.2 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.1 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.2; provided, however, that if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment, as long as no money is owed to the Trustee by the Company, from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE IX. AMENDMENTS Section 9.1 Without Consent of Holders. The Company and the Trustee may amend this Indenture or the Securities without the consent of any Securityholder: 32 (1) to cure any ambiguity, defect or inconsistency; (2) to comply with Section 5.1; (3) to provide for additional uncertificated Securities or certificated Securities; (4) to make any change that does not adversely affect the legal rights hereunder of any Securityholder, including but not limited to an increase in the aggregate dollar amount of Securities which may be outstanding under this Indenture; (5) make any change in the second paragraph of Article 3; provided, however, that no such change shall adversely affect the rights of any outstanding Security; or (6) to comply with any requirements of the SEC in connection with the qualification of this Indenture under the TIA. Section 9.2 With Consent of Holders. The Company and the Trustee may amend this Indenture or the Securities with the written consent of the Holders of at least a majority in principal amount of the then outstanding Securities. The Holders of a majority in principal of the then outstanding Securities may also waive any existing default or compliance with any provision of this Indenture or the Securities. However, without the consent of the Holder of each Investment Note affected, an amendment or waiver under this Section may not (with respect to any Investment Note held by a nonconsenting Holder): (1) reduce the principal amount of Investment Notes whose Holders must consent to an amendment, supplement or waiver; (2) reduce the rate of or change the time for payment of interest, including default interest, on any Investment Note; (3) reduce the principal of or change the fixed maturity of any Investment Note or alter the redemption provisions or the price at which the Company shall offer to purchase such Investment Note pursuant to Section 3.1 of Article III hereof; (4) make any Investment Note payable in money other than that stated in the Investment Note; (5) Modify or eliminate the right of the estate of a Holder or a Holder to cause the Company to redeem an Investment Note upon the death or Total Permanent Disability of a Holder pursuant to Article III; provided, however, that the Company may not modify or eliminate such right, as it may be in effect on the Issue Date, of any Investment Note which was issued with such right. After an amendment under this subsection 9.1(5) becomes 33 effective, the Company shall mail to the Holders of each Investment Note then outstanding a notice briefly describing the amendment. (6) make any change in Section 6.4 or 6.7 hereof or in this sentence of this Section 9.2; (7) make any change in Article X that adversely affects the rights of any Securityholders; or (8) waive a Default or Event of Default in the payment of principal of, or premium, if any, or interest on, or redemption payment with respect to, any Security (except a rescission of acceleration of the Investment Notes by the Holders of at least a majority in aggregate principal amount of the Investment Notes and a waiver of the payment default that resulted from such acceleration). Without the consent of each Holder of Money Market Notes affected, an amendment or waiver under this Section may not (with respect to any Money Market Note held by a nonconsenting Holder): (1) reduce the principal amount (other than as a result of withdrawals made by the Holder) of a Money Market Note whose Holder must consent to an amendment, supplement or waiver; (2) reduce the rate of interest paid on the Money Market Notes, other than interest rate adjustments as provided for in Article II hereof, or change the time for payment of interest, including default interest, on any Security; (3) reduce the principal of (other than as a result of withdrawals made by the Holder) or alter the redemption provisions or the price at which the Company shall offer to purchase such Money Market Note pursuant to Section 3.2 of Article III hereof; (4) make any Money Market Note payable in money other than that stated in this Indenture; (5) make any change in Section 6.4 or 6.7 hereof or in this sentence of this Section 9.2; (6) make any change in Article 10 that adversely affects the rights of any Securityholders; or (7) waive a Default or Event of Default in the payment of principal of, or premium, if any, or interest on, or redemption payment with respect to, any Money Market Note (except a rescission of acceleration of the Money Market Notes by the Holders of at least a majority in aggregate principal amount of the Money Market Notes and a waiver of the payment default that resulted from such acceleration). 34 It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section becomes effective, the Company shall mail to the Holders of each Security affected thereby a notice briefly describing the amendment or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. Subject to Sections 6.4 and 6.7 hereof, the Holders of a majority in principal amount of the Securities then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Securities. Section 9.3 Compliance with Trust Indenture Act. If at the time this Indenture shall be qualified under the TIA, every amendment to this Indenture or the Securities shall be set forth in a supplemental indenture that complies with the TIA as then in effect. Section 9.4 Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Securityholder. The Company may fix a record date for determining which Holders must consent to such amendment or waivers. If the Company fixes a record date, the record date shall be fixed at (i) the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders furnished to the Trustee prior to such solicitation pursuant to Section 2.5, or (iii) such other date as the Company shall designate. Section 9.5 Notation on or Exchange of Investment Notes. The Trustee may place an appropriate notation about an amendment or waiver on any Investment Note thereafter authenticated. The Company in exchange for all Investment Notes may issue and the Trustee shall authenticate new Investment Notes that reflect the amendment or waiver. Failure to make the appropriate notation or issue a new Investment Note shall not affect the validity and effect of such amendment or waiver. 35 Section 9.6 Trustee to Sign Amendments, etc. The Trustee shall sign any amendment or supplemental indenture authorized pursuant to this Article 9 if, in the Trustee's reasonable discretion, the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or supplemental indenture, the Trustee shall be entitled to receive, if requested, an indemnity reasonably satisfactory to it and to receive and, subject to Section 7.1, shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel (or written advice of counsel) as conclusive evidence that such amendment or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. The Company may not sign an amendment or supplemental indenture until its Board of Directors approves it. ARTICLE X. SUBORDINATION Section 10.1 Agreement to Subordinate. The Company agrees, and each Securityholder by accepting a Security consents and agrees, that the Indebtedness evidenced by the Securities and the payment of the principal of and interest on the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full, in cash, cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, of all Obligations due in respect of Senior Debt of the Company whether outstanding on the date hereof or hereafter incurred, and that the subordination is for the benefit of the holders of Senior Debt. For purposes of the Article 10, a payment or distribution on account of the Securities may consist of cash, property or securities, by set-off or otherwise, and a payment or distribution on account of any of the Securities shall include, without limitation, any redemption, purchase or other acquisition of the Securities. Section 10.2 Liquidation: Dissolution: Bankruptcy. (a) Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon (i) any dissolution or winding-up or total or partial liquidation or reorganization of the Company whether voluntary or involuntary and whether or not involving insolvency or bankruptcy or (ii) any bankruptcy or insolvency case or proceeding or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its assets, (iii) any assignment for the benefit of creditors or any other marshaling of assets of the Company, all obligations due, or to become due, in respect of Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt) shall first interfeasibly be paid in full, or provision shall have been made for such payment, in cash, cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, before any payment is made on account of the principal of, premium, if any, or interest 36 on the Securities, except that Securityholders may receive securities that are subordinated to at least the same extent as the Securities are to (x) Senior Debt and (y) any securities issued in exchange for Senior Debt. Upon any such dissolution winding-up, liquidation or reorganization, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the Securities or the Trustee under this Indenture would be entitled, except for the provisions hereof, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Holders of the Securities or by the Trustee under this Indenture if received by them, directly to the holders of Senior Debt (pro rata to such holders on the basis of the amounts of Senior Debt held by such holders) or their Representative or Representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Debt may have been issued, as their interests may appear, for application to the payment of Senior Debt remaining unpaid until all such Senior Debt has been indefeasibly paid in full, or provisions shall have been made for such payment, in cash, cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of Senior Debt. (b) For purposes of this Article X, the words "cash, property or securities" shall not be deemed to include securities of the Company or any other corporation provided for by a plan of reorganization or readjustment which are subordinated, to at least the same extent as the Securities, to the payment of all Senior Debt then outstanding or to the payment of all securities issued in exchange therefor to the holders of Senior Debt at the time outstanding. The consolidation of the Company with, or the merger of the Company with or into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Article 5 shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article V. Section 10.3 Default of Designed Senior Debt. (a) In the event and during the continuation of any default in the payment of principal of (or premium, if any) or interest on any Senior Debt, or any amount owing from time to time under or in respect of Senior Debt or in the event that any nonpayment event of default with respect to any Senior Debt shall have occurred and be continuing and shall have resulted in such Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, or (b) in the event that any other nonpayment event of default with respect to any Senior Debt shall have occurred and be continuing permitting the holders of such Senior Debt (or a trustee on behalf of the holders thereof) to declare such Senior Debt due and payable prior to the date on which it would otherwise have become due and payable, then the Company shall make no payment, direct or indirect (including any payment which may be payable by reason of the payment of any other Indebtedness of the Company being subordinated to the payment of the Securities) (other than securities that are subordinated to at least the same extent as the Securities are to (x) Senior Debt and (y) any securities issued in exchange for Senior Debt) unless and until (i) such event of default shall have been cured or waived or shall have ceased to exist or such acceleration shall have been 37 rescinded or annulled, or (ii) in case of any nonpayment event of default specified in (b), during the period (a "Payment Blockage Period") commencing on the date the Company and the Trustee receive written notice (a "Payment Notice") of such event of default (which notice shall be binding on the Trustee and the Securityholders as to the occurrence of such an event of default) from a holder of the Senior Debt to which such default relates and ending on the earliest of (A) 179 days after such date, (B) the date, if any, on which such Senior Debt to which such default relates is discharged or such default is waived by the holders of such Senior Debt or otherwise cured and (C) the date on which the Trustee receives written notice from the holder of such Senior Debt to which such default relates terminating the Payment Blockage Period. No new Payment Blockage Period may be commenced within 360 days after the receipt by the Trustee of any prior Payment Blockage Notice. For all purposes of this Section 10.3, no Event of Default which existed or was commencing with respect to the Senior Debt to which a Payment Blockage Period relates on the date such Payment Blockage Period commenced shall be or be made the basis for the commencement or any subsequent Payment Blockage Period unless such event of default is cured or waived for a period of not less than 180 consecutive days. Section 10.4 When Distribution Must Be Paid Over. If the Trustee or any Securityholder receives any payment with respect to the Securities, whether in cash property or securities (other than securities that are subordinated to at least the same extent of the Securities are to (x) Senior Debt and (y) any securities issued in exchange for Senior Debt at a time when such payment is prohibited by Article X hereof), such payment shall be held by the Trustee or such Securityholder, in trust for the benefit of, and shall be paid forthwith over and delivered to, the holders of Senior Debt (pro rata to such holders on the basis of the amount of Senior Debt held by such holders) for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full, in cash, cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, in accordance with the terms of such Senior Debt, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Securityholders or the Company or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article X, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. Section 10.5 Notice by Company. The Company shall promptly notify the Trustee and the Paying Agent in writing of any facts known to the Company that would cause a payment of any Obligations with respect to the Company 38 to violate this Article, but failure to give such notice shall not affect the subordination of the Securities to the Senior Debt provided in this Article. Section 10.6 Subrogation. After all Senior Debt is paid in full, in cash, cash equivalents or otherwise in a manner satisfactory to the holders of such Senior Debt, and until the Securities are paid in full, Securityholders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Securities) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Securityholders have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt which otherwise would have been made to Securityholders is not, as between the Company and Securityholders, a payment by the Company on the Senior Debt. Section 10.7 Relative Rights. This Article defines the relative rights of Securityholders and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Company and Securityholders, the obligations of the Company, which are absolute and unconditional, to pay principal of and interest on the Securities in accordance with their terms; (2) affect the relative rights of Securityholders and creditors of the Company other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Securityholder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Securityholders. If the Company fails because of this Article to pay principal of or interest on a Security on the due date, the failure is still a Default or Event of Default. Section 10.8 Subordination May Not Be Impaired by the Company or Holders of Senior Debt. No right of any present or future holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Securities and the Obligations related thereto shall be prejudiced or impaired by any act or failure to act by any such holder or by the Company, the Trustee or any Agent or by the failure of the Company to comply with this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. Without limiting the effect of the preceding paragraph, any holder of Senior Debt may at any time and from time to time without the consent of or notice to any other holder or to the Trustee, 39 without impairing or releasing any of the rights of any holder of Senior Debt under this Indenture, upon or without any terms or conditions and in whole or in part: (a) change the manner, place or term of payment, or change or extend the time of payment of, renew or alter any Senior Debt or any other liability of the Company to such holder, any security therefor, or any liability incurred directly or indirectly in respect thereof, and the provisions of this Article X shall apply to the Securities as so changed, extended, renewed or altered; (b) notwithstanding the provisions of Section 5.1 hereof, sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, any Senior Debt or any other liability of the Company to such holder or any other liabilities incurred directly or indirectly in respect thereof or hereof or any offset thereagainst; (c) exercise or refrain from exercising any rights or remedies against the Company or others or otherwise act or refrain from acting or, for any reason, fail to file, record or otherwise perfect any security interest in or lien on any property of the Company or any other Person; and (d) settle or compromise any Senior Debt or any other liability of the Company to such holder, or any security therefor, or any liability incurred directly or indirectly in respect thereof. All rights and interests under this Indenture of any holder of Senior Debt and all agreements and obligations of the Trustee, the Holders, and the Company under Article 6 and under this Article 10 shall remain in full force and effect irrespective of (i) any lack of validity or enforceability of any agreement or instrument relating to any Senior Debt or (ii) any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Trustee, any Holder, or the Company. Any holder of Senior Debt hereby authorized to demand specific performance of the provisions of this Article 10, whether or not the Company shall have complied with any of the provisions of this Article 10 applicable to it, at any time when the Trustee or any Holder shall have failed to comply with any of these provisions. The Trustee and the Holders irrevocably waive any defense based on the adequacy of a remedy at law that might be asserted as a bar to such remedy of specific performance. Section 10.9 Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their representative. Upon any payment or distribution of assets of the Company referred to in this Article X, the Trustee and the Securityholders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which bankruptcy, dissolution, winding-up, liquidation or reorganization proceedings are pending or upon any certificate of any representative of any holder of Senior Debt or 40 of the liquidating trustee or agent or other Person making any distribution, delivered to the Trustee or to the Securityholders, for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article X. Section 10.10 Rights of Trustee and Paying Agent. Notwithstanding the provisions of this Article X or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment or distribution by the Trustee, or the taking of any action by the Trustee, and the Trustee or Paying Agent may continue to make payments on the Securities unless it shall have received at its Corporate Trust Division at least 5 Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Securities to violate this Article, which notice, unless specified by a holder of Senior Debt as such, shall not be deemed to be a Payment Notice. The Trustee may conclusively rely on such notice. Only the Company or a holder of Senior Debt may give the notice. Nothing in this Article X shall apply to amounts due to, or impair the claims of, or payments to, the Trustee under or pursuant to Section 7.7 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. Section 10.11 Authorization to Effect Subordination. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate, as between the holders of Senior Debt and the Securityholders, the subordination as provided in this Article X, and appoints the Trustee his attorney-in-fact for any and all such purposes. Section 10.12 Article Applicable to Paying Agent. In case at any time any Paying Agent (other than the Trustee or the Company) shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article X shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article X in addition to or in place of the Trustee. Section 10.13 Miscellaneous. (a) The agreements contained in this Article 10 shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Senior Debt is rescinded or must otherwise be returned by any holder of Senior Debt upon the insolvency, bankruptcy or reorganization of the Company or otherwise, all as though such payment had not been made. 41 (b) The Trustee shall notify all holders of Senior Debt (of whose identity the Trustee has received reasonable advance written notice) of the existence of any Default or Event of Default under Section 6.1 promptly after a Responsible Officer of the Trustee actually becomes aware thereof; provided, however, that at least 5 Business Days prior to the notification of any holder of Senior Debt under this Section 7.5, the Company shall provide the Company with notice of its intent to provide such notification. ARTICLE XI. MISCELLANEOUS Section 11.1 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. Section 11.2 Notices. Any notice, instruction, direction, request or other communication by the Company, the Trustee or any other holder of Senior Debt to the others is duly given if in writing and delivered in person or mailed by first-class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the other's address: If to the Company: AMERICAN BUSINESS FINANCIAL SERVICES, INC. Balapointe Office Centre 111 Presidential Boulevard Bala Cynwyd, PA 19004 Attention: Anthony J. Santilli, Jr. Chairman, President and Chief Executive Officer Telecopier: (215) 668-1468 With a copy to: BLANK ROME COMISKY & McCAULEY 4 Penn Center Plaza Philadelphia, Pennsylvania 19103-2599 Attention: Jane K. Storero, Esquire Telecopier: (215) 569-5555 42 If to the Trustee: FIRST TRUST NATIONAL ASSOCIATION, a national banking association 180 East 5th Street Saint Paul, Minnesota 55101 Attention: Mr. Richard Prokosch, Corporate Finance Telecopier: (612) 244-0711 If to a holder of Senior Debt, such address as such holder of Senior Debt shall have provided in writing to the Company and the Trustee. The Company, the Trustee or a holder of Senior Debt by notice to the Company and the Trustee may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Securityholders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; 5 Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Securityholder shall be mailed by first-class mail, certified or registered, return receipt requested, to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Securityholders, it shall mail a copy to the Trustee and each Agent at the same time. Section 11.3 Communication by Holders with Other Holders. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Trustee is subject to Section 312(b). The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). Section 11.4 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.5) stating that, in the 43 opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 11.5) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been complied with. Section 11.5 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion whether such covenant or condition has been complied with; and (4) a statement whether, in the opinion of such Person, such condition or covenant has been complied with. Section 11.6 Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 11.7 Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions in the City of Wilmington or at a place of payment are authorized or obligated by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 11.8 No Recourse Against Others. No director, officer, employee, agent, manager or stockholder of the Company as such, shall have any liability for any obligations of the Company under the Securities or this Indenture or for any 44 claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. Section 11.9 Duplicate Originals. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. Section 11.10 Governing Law. THE INTERNAL LAW OF THE STATE OF DELAWARE SHALL GOVERN THIS INDENTURE AND THE SECURITIES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF. Section 11.11 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 11.12 Successors. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. Section 11.13 Severability. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 11.14 Counterpart Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Section 11.15 Table of Contents, Headings, etc. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions thereof. 45 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, as of the day and year first written above. AMERICAN BUSINESS FINANCIAL SERVICES, INC. (SEAL) By: ____________________________ Name: Title: Attest: - ------------------------- FIRST TRUST NATIONAL ASSOCIATION, a national banking association, as Trustee (SEAL) By: ____________________________ Name: Title: Attest: - ------------------------- 46 EX-5 3 OPINION OF BLANK ROME COMISKY AND MCCAULEY [On Blank Rome Letterhead] March 27, 1997 American Business Financial Services, Inc. 103 Springer Building 3411 Silverside Road Wilmington, DE 19810 Re: American Business Financial Services, Inc. Unsecured, Subordinated Investment Notes and Unsecured, Adjustable Rate, Subordinated Money Market Notes Registration Statement on Form SB-2 ------------------------------------------------------- Gentlemen: We have acted as counsel to American Business Financial Services, Inc. (the "Company") in connection with the Registration Statement on Form SB-2 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to the offer and sale by the Company of up to $125,000,000 in principal amount of unsecured, subordinated investment notes and unsecured, adjustable rate, subordinated money market notes (the "Subordinated Debentures"). The Subordinated Debentures will be issued pursuant to an indenture to be entered into between the Company and First Trust, National Association, a national banking association, as trustee (the "Indenture"). This opinion is being furnished pursuant to the requirements of Item 601(b)(5) of Regulation S-B. In rendering this opinion, we have examined only the documents listed on Exhibit "A" attached hereto. We have not performed any independent investigation other than the document examination described. Our opinion is therefore qualified in all respects by the scope of that document examination. We have assumed and relied, as to questions of fact and mixed questions of law and fact, on the truth, completeness, authenticity and due authorization of all certificates, documents and records examined and the genuineness of all signatures. We have also assumed that the Indenture will be in the form filed as an exhibit to the Registration Statement and will have been duly executed and delivered by the Company and First Trust, National Association, a national banking association, as trustee. This opinion is limited to the laws of the State of Delaware and no opinion is expressed as to the laws of any other jurisdiction. Based upon and subject to the foregoing, we are of the opinion that the Subordinated Debentures that are being offered and sold by the Company pursuant to the Registration Statement, when issued by the American Business Financial Services, Inc. March 27, 1997 Page 2 Company as contemplated by the Registration Statement and in accordance with the Indentures, will be binding obligations of the Company. The opinions expressed herein are qualified in all respects by the following: (a) no opinion is rendered as to the availability of equitable remedies including, but not limited to, specific performance and injunctive relief; (b) the effect of bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium and other similar laws or equitable principles affecting creditors' rights or remedies; and (c) the effect of applicable law and court decisions which may now or hereafter limit or render unenforceable certain rights and remedies. This opinion is given as of the date hereof. We assume no obligation to update or supplement this opinion to reflect any facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. This opinion is strictly limited to the matters stated herein and no other or more extensive opinion is intended, implied or to be inferred beyond the matters expressly stated herein. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus, which is part of the Registration Statement. Sincerely, /s/ Blank Rome Comisky & McCauley BLANK ROME COMISKY & McCAULEY EXHIBIT "A" 1. The Company's Amended and Restated Certificate of Incorporation. 2. The Company's Amended and Restated Bylaws. 3. The Company's Minute Books from June 1995 through the date hereof. 4. Form of Indenture filed as an exhibit to the Registration Statement. 5. The Registration Statement. 6. Good Standing Certificate from the Secretary of State of the State of Delaware dated March 26, 1997. EX-10.21 4 AMENDMENTS TO THE INTERIM WAREHOUSE AND SECURITY AGREEMENT BETWEEN UPLAND MORTGAGE AND PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION CREDIT INCREASE CONFIRMATION AND NOTE AMENDMENT No. 1 TO THE INTERIM WAREHOUSE AND SECURITY AGREEMENT AND THE SECURED NOTE Dated September 27, 1996 Reference is made to (x) the Interim Warehouse and Security Agreement, dated as of April 25, 1996 (the "Interim Warehouse Agreement") between Prudential Securities Realty Funding Corporation (the "Lender") and HomeAmerican Credit, Inc. d/b/a Upland Mortgage (the "Borrower") and (y) the Secured Note dated as of April 25, 1996 (the "Note") from the Borrower to the Lender. Section 1. Amendment of the Interim Warehouse Agreement and Note (a) The "Maturity Date" referenced in the Interim Warehouse Agreement and in the Note is hereby amended to be the earliest of (i) March 31, 1997 and (ii) the date on which a Securitization occurs (other than the ABFS Mortgage Loan Trust 1996-2 Securitization (the "96-2 Securitization")). (b) Section 4(B) of the Interim Warehouse Agreement is hereby amended by adding the following representations and warranties after subsection 11: 12. Every person who has a fee interest in any property subject to a mortgage given in connection with such Mortgage Loan has signed the instrument creating such mortgage. 13. Every person, upon whose credit the Lender relied in originating or purchasing a Mortgage Loan, has signed the related Mortgage Note. Section 2. Confirmation of the Interim Warehouse Agreement and Note As amended by Section 1 hereof all provisions of the Interim Warehouse Agreement and of the Note are reconfirmed as of the date hereof. The Borrower, in addition, hereby reconfirms and remakes as of the date hereof each and every of its representations, warranties and covenants set forth in the Interim Warehouse Agreement. ATTEST: HOMEAMERICAN CREDIT, INC. D/B/A UPLAND MORTGAGE ___________________________ By: /s/ Anthony J. Santilli -------------------------------- Name: Anthony J. Santilli Title: Chief Executive Officer ATTEST: ___________________________ PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION By: /s/ Jeffrey K. French ------------------------------- Name: Jeffrey K. French Title: Vice President 2 Approval as to Legality I, Jeffrey M. Ruben, Esq., counsel to the Borrower hereby confirm that: (c) I delivered, on April 25, 1996, the opinion letter, a copy of which is attached hereto (the "Opinion Letter") relating to the Interim Warehouse Agreement and the Note. (d) I have represented the Borrower in connection with its execution and delivery of the Credit Increase Confirmation and Note Amendment (the "Confirmation") to which this Approval as to Legality is attached. (e) I hereby extend, as of the date hereof, the opinions set forth in the Opinion Letter to cover both the Confirmation itself as well as the transactions described on the Confirmation and confirm, as of the date hereof, and subject to any and all assumptions and qualifications set forth therein, the opinions set forth in the Opinion Letter. Yours truly, /s/ Jeffrey M. Ruben ---------------------------------- Jeffrey M. Ruben, Esq. Dated: September 27, 1996 3 CREDIT INCREASE CONFIRMATION AND NOTE AMENDMENT NO. 2 TO THE INTERIM WAREHOUSE AND SECURITY AGREEMENT, THE SECURED NOTE AND THE GUARANTY Dated March 13, 1997 Reference is made to (x) the Interim Warehouse and Security Agreement, dated as of April 25, 1996 (as amended by the Credit Increase Confirmation and Note Amendment No. 1, dated September 27, 1996 ("Amendment No. 1")) (the "Interim Warehouse Agreement") between Prudential Securities Credit Corporation (formerly Prudential Securities Realty Funding Corporation) (the "Lender") and HomeAmerican Credit, Inc. d/b/a Upland Mortgage (the "Borrower"), (y) the Secured Note dated as of April 25, 1996 (as amended by Amendment No. 1) (the "Note") from the Borrower to the Lender, and (z) the Guaranty, given as of April 25, 1996 (the "Guaranty"), by American Business Financial Services, Inc. ("ABFS"). Section 1. Amendment of the Interim Warehouse Agreement and Note (a) Section 1(A)(1) of the Interim Warehouse Agreement is hereby deleted and replaced in its entirety by the following paragraph. 1. The Lender agrees to lend to the Borrower up to $50,000,000 (such borrowing, the "Loan") to be made in one or more advances (each, an "Advance"); provided, however, that, at any time when funds are on deposit in a Pre-Funding Account (as defined herein), the amount of the Loan shall not exceed the amount on deposit in such Pre-Funding Account. The Borrower agrees that the Loan shall be used to warehouse fixed and adjustable rate, first or second lien, residential mortgage loans that are to be included in a Securitization (the "Mortgage Loans"), as such Mortgage Loans are identified to the Lender in writing and in electronic form from time to time. Such Mortgage Loans may be (a) included at the time of closing of the Securitization or (b) purchased by the Securitization trust subsequent to closing with funds on deposit in an account (a "Pre-Funding Account") relating to the Securitization and designated for such purpose. All Mortgage Loans financed hereunder shall be closed loans; i.e., this facility shall not be used for "wet" or "table" fundings. The Lender may refuse to lend against any Mortgage Loan(s) which the Lender reasonably believes will not be eligible for inclusion in a securitized pool either (x) due to the characteristics of such Mortgage Loan or (y) due to the expected aggregate characteristics of the Mortgage Loans. (b) Section 1(A)(2)(iii) of the Interim Warehouse Agreement is hereby deleted and replaced in its entirety by the following paragraph. (iii) the Lender shall have received (A) in connection with each Advance, no later than 12:00 noon (Eastern Standard Time) on the related Funding Date, a certificate from the Custodian referred to below to the effect that it has in its possession and has reviewed the mortgage files relating to the Mortgage Loans being pledged in connection with the Advance being made on such Funding Date and has found no material deficiencies in such mortgage files (the "Custodian's Certification") and (B) prior to the initial Advance, a legal opinion from counsel (which may be in-house counsel) to the Borrower in the form of Exhibit B-1 attached hereto; (c) Section 9 of the Interim Warehouse Agreement is hereby amended by adding the following two paragraphs after paragraph B. C. On the fifth business day of each calendar month, the Borrower shall provide the Lender with a report both in hardcopy and on a computer diskette or via electronic transmission, which report shall contain information concerning the portfolio performance data with respect to the Pledged Mortgage Loans, including, without limitation, information regarding any outstanding delinquencies, prepayments in whole or in part and any repurchases by the Borrower, in a format as may be agreed upon by the Borrower and the Lender from time to time. D. In conjunction with the delivery of each of the financial statements to be delivered by the Borrower pursuant to Section 9(B), the Borrower shall deliver to the Lender an officer's certificate of the Borrower certifying that, as of the date of delivery of such financial statements, the Borrower is in compliance with all the terms of this Agreement including, without limitation, each of the covenants set forth in Section 4(C). Section 2. Amendment of the Guaranty (a) Paragraph 9 of the Guaranty is hereby deleted and replaced in its entirety by the following. 9. The Guarantor covenants with the Lender that, during the term of this Guaranty: (i) the Guarantor's stated net worth less intangible assets shall not be less than $22,000,000; (ii) the Guarantor shall maintain a minimum of $15,000,000 of outstanding subordinated debentures maturing in more than one year; (iii) the Guarantor's minimum adjusted capital shall not be less than $37,000,000, such amount being the sum of (x) the Guarantor's stated net worth less intangible assets and (y) the Guarantor's outstanding subordinated debentures maturing in more than one year; (iv) the Guarantor's leverage ratio shall not exceed 3:1, such ratio being the ratio of (x) the excess of (A) the Guarantor's total liabilities over (B) outstanding subordinated debentures maturing in more than one year, to (y) the sum of (A) the Guarantor's stated net worth less intangible assets and (B) outstanding subordinated debentures 2 maturing in more than one year; and (v) the subordinated debentures shall be subordinate to the Guarantor's obligations hereunder. (b) Paragraph 10 of the Guaranty is hereby deleted and replaced in its entirety by the following. 10. As long as this Guaranty is in effect, Guarantor shall (i) promptly upon preparation, but in no event later than 45 days following the end of its first three fiscal quarters, deliver to Lender its unaudited company-prepared financial statements as of the end of such fiscal quarter, prepared in accordance with GAAP, and (ii) promptly upon preparation, but in no event later than 90 days following the end of its fourth fiscal quarter, deliver to Lender its audited and certified financial statements, prepared in accordance with GAAP, as of the end of and for the most recently ended fiscal year, which audits and certification shall be prepared by a nationally recognized independent accounting firm or by a regionally recognized independent accounting firm with the prior written consent of Lender, which consent shall not be unreasonably withheld. In all cases, financial statements shall include, without limitation, a balance sheet, a profit and loss statement and a statement of cash flows. In conjunction with the delivery of each of the financial statements to be delivered by the Guarantor pursuant to this Paragraph 10, the Guarantor shall deliver to the Lender an officer's certificate of the Guarantor certifying that, as of the date of delivery of such financial statements, the Guarantor is in compliance with all the terms of this Guaranty including, without limitation, each of the covenants set forth in Paragraph 9. Section 3. Confirmation of the Interim Warehouse Agreement, Note and Guaranty (a) As amended by Section 1 hereof all provisions of the Interim Warehouse Agreement and of the Note are reconfirmed as of the date hereof. The Borrower, in addition, hereby reconfirms and remakes as of the date hereof each and every of its representations, warranties and covenants set forth in the Interim Warehouse Agreement. (b) As amended by Section 2 hereof all provisions of the Guaranty are reconfirmed as of the date hereof. ABFS, in addition, hereby reconfirms and remakes as of the date hereof each and every of its representations, warranties and covenants set forth in the Guaranty. 3 HOMEAMERICAN CREDIT, INC. D/B/A UPLAND MORTGAGE, as Borrower By:/s/ Anthony J. Santilli, Jr. ----------------------------------------- Name: Anthony J. Santilli, Jr. Title Chairman AMERICAN BUSINESS FINANCIAL SERVICES, INC., as Guarantor By:/s/ Anthony J. Santilli, Jr. ----------------------------------------- Name: Anthony J. Santilli, Jr. Title Chairman PRUDENTIAL SECURITIES CREDIT CORPORATION, as Lender By: /s/ Elizabeth W. Castagna --------------------------------------- Name: Elizabeth W. Castagna Title: Treasurer Approval as to Legality I, Jeffrey M. Ruben, Esq., counsel to the Borrower and ABFS hereby confirm that: (A) I delivered, on April 25, 1996, (i) the opinion letter, a copy of which is attached hereto (the "Borrower Opinion Letter") relating to the Interim Warehouse Agreement and the Note and (ii) the opinion letter, a copy of which is attached hereto (the "ABFS Opinion Letter") relating to the Guaranty. (B) I have represented the Borrower and ABFS in connection with their execution and delivery of the Credit Increase Confirmation and Note Amendment (the "Confirmation") to which this Approval as to Legality is attached. (C) I hereby extend, as of the date hereof, the opinions set forth in the Borrower Opinion Letter and the ABFS Opinion Letter to cover both the Confirmation itself as well as the transactions described on the Confirmation and confirm, as of the date hereof, and subject to any and all assumptions and qualifications set forth therein, the opinions set forth in both the Borrower Opinion Letter and the ABFS Opinion Letter. Yours truly, /s/ Jeffrey M. Ruben -------------------------------- Jeffrey M. Ruben, Esq. Dated: March 13, 1997 CREDIT INCREASE CONFIRMATION AND NOTE AMENDMENT NO. 3 TO THE INTERIM WAREHOUSE AND SECURITY AGREEMENT, THE SECURED NOTE AND THE GUARANTY Dated March 27, 1997 Reference is made to (x) the Interim Warehouse and Security Agreement, dated as of April 25, 1996 (as amended by the Credit Increase Confirmation and Note Amendment No. 1, dated September 27, 1996 ("Amendment No. 1") and Credit Increase Confirmation and Note Amendment No. 2, dated March 13, 1997 ("Amendment No. 2")) (the "Interim Warehouse Agreement") between Prudential Securities Credit Corporation (formerly Prudential Securities Realty Funding Corporation) (the "Lender") and HomeAmerican Credit, Inc. d/b/a Upland Mortgage (the "Borrower"), (y) the Secured Note dated as of April 25, 1996 (as amended by Amendment No. 1 and Amendment No. 2) (the "Note") from the Borrower to the Lender, and (z) the Guaranty, given as of April 25, 1996 (as amended by Amendment No. 2) (the "Guaranty"), by American Business Financial Services, Inc. ("ABFS"). Section 1. Amendment of the Interim Warehouse Agreement and Note (a) The "Maturity Date" referenced in the Interim Warehouse Agreement and in the Note is hereby amended to be the earliest of (i) September 30, 1997 and (ii) the date on which a Securitization closes (other than the ABFS Mortgage Loan Trust 1997-1 Securitization (the "97-1 Securitization"). Section 2. Amendment of the Guaranty (a) Paragraph 9 of the Guaranty is hereby deleted and replaced in its entirety by the following. 9. The Guarantor covenants with the Lender that, during the term of this Guaranty: (i) the Guarantor's stated net worth less intangible assets shall not be less than $22,000,000; (ii) the Guarantor shall maintain a minimum of $15,000,000 of outstanding subordinated debentures maturing in more than one year; (iii) the Guarantor's minimum adjusted capital shall not be less than $37,000,000, such amount being the sum of (x) the Guarantor's stated net worth less intangible assets and (y) the Guarantor's outstanding subordinated debentures maturing in more than one year; (iv) the Guarantor's leverage ratio shall not exceed (a) 3.5:1 for the period from April 1, 1997 through June 30, 1997 and (b) 3.75:1 for the period from July 1, 1997 through September 30, 1997, such ratio being the ratio of (x) the excess of (A) the Guarantor's total liabilities over (B) outstanding subordinated debentures maturing in more than one year, to (y) the sum of (A) the Guarantor's stated net worth less intangible assets and (B) outstanding subordinated debentures maturing in more than one year; and (v) the subordinated debentures shall be subordinate to the Guarantor's obligations hereunder. Section 3. Confirmation of the Interim Warehouse Agreement, Note and Guaranty (a) As amended by Section 1 hereof all provisions of the Interim Warehouse Agreement and of the Note are reconfirmed as of the date hereof. The Borrower, in addition, hereby reconfirms and remakes as of the date hereof each and every of its representations, warranties and covenants set forth in the Interim Warehouse Agreement. (b) As amended by Section 2 hereof all provisions of the Guaranty are reconfirmed as of the date hereof. ABFS, in addition, hereby reconfirms and remakes as of the date hereof each and every of its representations, warranties and covenants set forth in the Guaranty. 2 HOMEAMERICAN CREDIT, INC. D/B/A UPLAND MORTGAGE, as Borrower By:/s/ Anthony J. Santilli, Jr. ----------------------------------------- Name: Anthony J. Santilli, Jr. Title Chairman AMERICAN BUSINESS FINANCIAL SERVICES, INC., as Guarantor By:/s/ Anthony J. Santilli, Jr. ----------------------------------------- Name: Anthony J. Santilli, Jr. Title Chairman PRUDENTIAL SECURITIES CREDIT CORPORATION, as Lender By: /s/ Elizabeth W. Castagna --------------------------------------- Name: Elizabeth W. Castagna Title: Treasurer Approval as to Legality I, Jeffrey M. Ruben, Esq., counsel to the Borrower and ABFS hereby confirm that: (D) I delivered, on April 25, 1996, (i) the opinion letter, a copy of which is attached hereto (the "Borrower Opinion Letter") relating to the Interim Warehouse Agreement and the Note and (ii) the opinion letter, a copy of which is attached hereto (the "ABFS Opinion Letter") relating to the Guaranty. (E) I have represented the Borrower and ABFS in connection with their execution and delivery of the Credit Increase Confirmation and Note Amendment (the "Confirmation") to which this Approval as to Legality is attached. (F) I hereby extend, as of the date hereof, the opinions set forth in the Borrower Opinion Letter and the ABFS Opinion Letter to cover both the Confirmation itself as well as the transactions described on the Confirmation and confirm, as of the date hereof, and subject to any and all assumptions and qualifications set forth therein, the opinions set forth in both the Borrower Opinion Letter and the ABFS Opinion Letter. Yours truly, /s/ Jeffrey M. Ruben -------------------------------- Jeffrey M. Ruben, Esq. Dated: March 27, 1997 EX-10.22 5 FOURTH AMENDMENT TO LEASE BETWEEN TCW REALTY FUND IV PENNSYLVANIA TRUST AND ABFS DATED APRIL 9, 1996 FOURTH AMENDMENT TO AGREEMENT OF LEASE DATED JANUARY 7, 1994 THIS FOURTH AMENDMENT TO AGREEMENT OF LEASE is made this 9th day of April, 1996, by and between TCW Realty Fund IV Pennsylvania Trust (the "Landlord") and American Business Financial Services, Inc. ("Tenant"). WHEREAS, Tenant and Landlord entered into that certain Agreement of Lease (the "lease") dated January 7, 1994, wherein Tenant leased from Landlord suite 215 containing approximately 7,555 rentable square feet located on the second floor of the office building located at 111 Presidential Boulevard, Bala Cynwyd, PA (the "Lease"); and WHEREAS, Tenant and Landlord entered into that certain First Amendment to Agreement of Lease dated October 24, 1994, wherein Tenant expanded its Premises to include Suite 252A comprising an additional area of 780 rentable square feet; and WHEREAS, Tenant and Landlord entered into that certain Second Amendment to Agreement of Lease dated December 23, 1994, wherein Tenant further expanded its Premises to include Suite 253 comprising approximately 1,650 rentable square feet; and WHEREAS, Tenant and Landlord entered into that certain Third Amendment to Agreement of Lease dated July 25, 1995, wherein Tenant further expanded its Premises to include Suites 256, 142, 252, 253, and 249; and WHEREAS, Tenant and Landlord wish to further amend said Agreement of Lease upon the terms and conditions hereinafter set forth; and WHEREAS, all undefined terms used herein shall have the same meaning as in the Lease. NOW THEREFORE, in consideration of the foregoing and the terms, covenants and agreements hereinafter set forth, Landlord and Tenant hereby agree as follows: 1. Effective May 1, 1996, Tenant's Leased Premises shall include Suite 146 containing approximately 3,091 rentable square feet. Landlord shall deliver Suite 146 in "as-is, where-is" condition with reasonable wear and tear from prior occupants. page 1 of 4 2. Tenant covenants and agrees to pay regular and monthly installments of Base Rent on or before the first day of each month for Suite 146 from May 1, 1996 until the expiration or sooner termination of the Lease in accordance with the following schedule: Year PSF Monthly Base Rent ---- --- ----------------- 1 05/01/96 - 10/31/96 $23.00 $5,924.42 2 11/01/96 - 10/31/97 $23.69 $6,102.15 3 11/01/97 - 10/31/98 $24.40 $6,285.03 4 11/01/98 - 10/31/99 $25.13 $6,473.07 5 11/01/99 - 10/31/2000 $25.88 $6,666.25 3. Landlord shall provide Tenant with an Improvement Allowance (the "Improvement Allowance") in a sum up to but not more than $37,000.00. The Improvement Allowance shall only be utilized to improve the Leased Premises in any manner Tenant desires provided that all such improvements shall, at a minimum, conform to the minimum building standard specifications of the Landlord. All improvements to the Leased Premises and expenditures from the Improvement Allowance shall first be approved by Landlord whose approval shall not be unreasonably withheld nor delayed. Tenant shall, at Tenant's sole cost, retain all necessary architects, engineers and or space planners to determine Tenant's desired layout for any and all improvements to be made hereunder and Tenant shall promptly provide all necessary drawings and plans to Landlord's approved contractors so as not to delay completion. Tenant shall, upon presentation, pay, as Additional Rent, any and all invoices for any expense in excess of the Improvement Allowance incurred in the course of improving the Leased Premises. It is hereby understood and agreed that delays in the completion of any of the improvements to be made hereunder shall not operate to delay or excuse any of Tenant's obligations pursuant to this Amendment of the Agreement of Lease. 4. Tenant's Base Year for Suite 146, only, shall be the calendar year 1996. - ----- 5. Effective May 1, 1996, "Tenant's Proportionate Share", as the term is defined in Paragraph (4) of the Lease, shall increase by .0179 (1.79%) such that Tenant's Proportionate Share shall then be .1096 (10.96%). Tenant's Total Leased Premises shall comprise approximately 18,909 square feet. page 2 of 4 6. All other terms and conditions contained in the Lease not specially modified or amended herein, shall remain unchanged and continue in full force and effect. 7. Exculpation. This Fourth Amendment to Agreement of Lease is executed and delivered by (the "Trustee") not personally but solely as trustee under and pursuant to that certain Declaration of Trust of TCW Realty Fund IV Pennsylvania Trust dated as of May 10, 1991. Notwithstanding anything to the contrary set forth herein, it is expressly understood and agreed by and between the parties hereto (i) that each of the covenants, undertakings, obligations, representations, warranties and agreements herein made on the part of Trustees, while in form purporting to be covenants, undertakings, obligations, representations, warranties and agreements of Trustees, are nevertheless each and every one of them made and intended not a personal covenants, undertakings, obligations, representations, warranties and agreements of Trustees for the purpose or with the intent of binding Trustees personally, but are instead made and intended for the purpose of binding only the assets of TCW Realty Fund IV Pennsylvania Trust; (ii) that no personal liability or personal responsibility is or on account of any covenants, undertakings, obligations, representations, warranties and agreements contained in this Agreement of Lease, either express or implied, all such liability or personal responsibility (if any) being expressed waived and released; and (iii) Tenant agrees to look solely to the assets of TCW Realty Fund IV Pennsylvania Trust for the enforcement of any claims against Trustees arising pursuant to this Fourth Amendment to Agreement of Lease. 8. The individuals signing this Addendum on behalf of the Tenant represent and affirm that they have authority to bind Tenant and that any and all requisite approvals of the Board of Directors, of Tenant, conferring such authority have been obtained. Tenant shall, upon request, deliver to Landlord a resolution of the Board of Directors of Tenant ratifying this Fourth Amendment to Agreement of Lease. [SIGNATURES ON NEXT PAGE] page 3 of 4 IN WITNESS WHEREOF, Landlord and Tenant have caused this Fourth Amendment to Agreement of Lease to be executed by their duly authorized representatives on the date first set forth above. LANDLORD: TCW REALTY FUND IV PENNSYLVANIA TRUST, A Pennsylvania Business Trust BY: /s/ Timothy M. Shine BY: /s/ Mary Jane Turner ------------------------------- -------------------------------- Timothy M. Shine* Mary Jane Turner* *not individually but solely as trustee under Declaration of Trust dated May 10, 1991. TENANT: AMERICAN BUSINESS FINANCIAL SERVICES, INC. a Delaware Corporation BY: /s/ Jeffrey M. Ruben BY: /s/ Anthony J. Santilli, Jr. ---------------------------- ---------------------------- Its: Senior Vice President Its: Chairman ---------------------------- ---------------------------- page 4 of 4 EX-10.23 6 FIFTH AMENDMENT TO LEASE BETWEEN TCW REALTY FUND IV PENNSYLVANIA TRUST AND ABFS DATED OCTOBER 8, 1996 FIFTH AMENDMENT TO AGREEMENT OF LEASE THIS FIFTH AMENDMENT TO AGREEMENT OF LEASE is made this 8th day of October, 1996, by and between TCW Realty Fund IV Pennsylvania Trust (the "Landlord") and American Business Financial Services, Inc. ("Tenant"). WHEREAS, Tenant and Landlord entered into that certain Agreement of Lease (the "lease") dated January 7, 1994, wherein Tenant leased from Landlord suite 215 containing approximately 7,555 rentable square feet located on the second floor of the office building located at 111 Presidential Boulevard, Bala Cynwyd, PA (the "Lease"); and WHEREAS, Tenant and Landlord entered into that certain First Amendment to Agreement of Lease dated October 24, 1994, wherein Tenant expanded its Premises to include Suite 252A comprising an additional area of 780 rentable square feet; and WHEREAS, Tenant and Landlord entered into that certain Second Amendment to Agreement of Lease dated December 23, 1994, wherein Tenant further expanded its Premises to include Suite 253 comprising approximately 1,650 rentable square feet; and WHEREAS, Tenant and Landlord entered into that certain Third Amendment to Agreement of Lease dated July 25, 1995, wherein Tenant further expanded its Premises to include Suites 256, 142, 252, 253, and 249; and WHEREAS, Tenant and Landlord entered into that certain Fourth Amendment to Agreement of Lease dated April 9, 1996, wherein Tenant further expanded its Premises to include Suite 146 comprising approximately 3,091 rentable square feet; and WHEREAS, Tenant and Landlord wish to further amend said Agreement of Lease upon the terms and conditions hereinafter set forth; and WHEREAS, all undefined terms used herein shall have the same meaning as in the Lease. NOW THEREFORE, in consideration of the foregoing and the terms, covenants and agreements hereinafter set forth, Landlord and Tenant hereby agree as follows: 1. The Lease for Suites 142, 252, 252A, 253 and 256 is hereby extended for an additional period of Two (2) years and Three (3) months, commencing November 1, 2000 (the "Commencement Date") and expiring at 12:00 p.m. midnight, local time, on January 31, 2003 (the "Expiration Date"). PAGE 1 OF 6 2. Effective November 1, 2000, the Base Rent schedule for Suites 142, 252, 252A, 253 and 256 will be in accordance with the following schedule: Period PSF Monthly Base Rent 11/01/00 - 10/31/01 $24.92 $17,156.87 l1/01/01 - 01/31/03 $25.67 $17,674.28 3. The Lease for Suite 146 is hereby extended for an additional period of Two (2) years and Three (3) months, commencing November 1, 2000 (the "Commencement Date") and expiring at 12:00 p.m. midnight, local time, on January 31, 2003 (the "Expiration Date"). 4. Effective November 1, 2000, the Base Rent schedule for Suite 146 will be in accordance with the following schedule: Period PSF Monthly Base Rent 11/01/00 - 10/31/01 $26.66 $6,867.76 11/01/01 - 01/31/03 $27.46 $7,073.19 5. The Lease for Suite 215 is hereby extended for an additional period of Two (2) years and Three (3) months, commencing November 1, 2000 (the "Commencement Date") and expiring at 12:00 p.m. midnight, local time, on January 31, 2003 (the "Expiration Date"). 6. Effective November 1, 2000, the Base Rent schedule for Suite 215 will be in accordance with the following schedule: Period PSF Monthly Base Rent 11/01/00 - 10/31/01 $22.75 $14,321.94 11/01/01 - 01/31/03 $23.43 $14,752.71 7. The Lease for Suite 151 is hereby extended for an additional period of Three (3) years and Three (3) months, commencing November 1, 1999 (the "Commencement Date") and expiring at 12:00 p.m. midnight, local time, on January 31, 2003 (the "Expiration Date"). 8. Effective November 1, 1999, the Base Rent schedule for Suite 151 will be in accordance with the following schedule: Period PSF Monthly Base Rent 11/01/99 - 10/31/00 $21.32 $2,753.33 PAGE 2 OF 6 11/01/00 - 10/31/01 $21.96 $2,836.45 11/01/01 - 01/31/03 $22.62 $2,921.60 9. Effective November 15, 1996, Tenant's Leased Premises shall include Suite 107 containing approximately 2,808 rentable square feet. 10. Tenant covenants and agrees to pay regular and monthly installments of Base Rent on or before the first day of each month for Suite 107 from November 15, 1996 until the expiration or sooner termination of the Lease in accordance with the following schedule: Period PSF Monthly Base Rent 11/15/96 - 11/30/97 $24.00 $5,616.00 12/01/97 - 11/30/98 $24.72 $5,784.48 12/01/98 - 11/30/99 $25.46 $5,957.64 12/01/99 - 11/30/00 $26.23 $6,137.82 12/01/00 - 01/31/03 $27.01 $6,320.34 11. Effective November 15, 1996, Tenant's Base Year with respect to Suite 107, only, shall be the calendar year 1997. Effective November 15, 1996, ----- "Tenant's Proportionate Share" as the term is defined in Paragraph (4) of the Lease, shall increase by .0163 (1.63%) such that Tenant's Proportionate Share shall then be .1349 (13.49%). Tenant's Total Leased Premises shall thereafter comprise approximately 23,267 rentable square feet. 12. Effective February 1, 1997, Tenant's Leased Premises shall include Suite 115 and 104 containing approximately 2,062 rentable square feet and 3,209 rentable square feet, respectively. 13. Tenant covenants and agrees to pay regular and monthly installments of Base Rent on or before the first day of each month for Suites 115 and 104 from February 1, 1997 until the expiration or sooner termination of the Lease in accordance with the following schedule: Period PSF Monthly Base Rent 02/01/97 - 01/31/98 $24.00 $10,542.00 02/01/98 - 01/31/99 $24.72 $10,858.26 02/01/99 - 01/31/00 $25.46 $11,183.31 02/01/00 - 01/31/01 $26.23 $11,521.53 02/01/01 - 01/31/03 $27.01 $11,864.14 14. Effective February 1, 1997, Tenant's Base Year with respect to Suites 115 and 104, only, shall be the calendar year 1997. Effective February 1, ----- 1997, "Tenant's Proportionate Share" as the term is defined in Paragraph (4) of the Lease, shall increase by .0306 (3.06%) such that PAGE 3 OF 6 Tenant's Proportionate Share shall then be .1654 (16.54%). Tenant's Total Leased Premises shall thereafter comprise approximately 28,538 rentable square feet. 15. Tenant Improvements: Landlord will provide Tenant with an Improvement Allowance in the following amounts, to be utilized for Tenant Improvements, only, with all such work to be approved by Landlord in advance, and such approval not to be unreasonably withheld or delayed, and disbursed on the following dates: Area Allowance Disbursement Date Suite 107 $30,000 11/15/96 Suite 115 $37,116 02/01/97 Suite 104 $24,068 02/01/97 Suite 215 $29,140 11/01/00 Suite 142/146 $29,491 11/01/00 Suite 253/252 $14,395 11/01/00 In the event total construction costs for each of the respective suites (inclusive of fees and permits) exceeds the above allowance, Tenant may elect to pay such overage as Additional Rent promptly upon commencement of the Lease term, or at its discretion Tenant shall have the right to exercise within three (3) days after the receipt of Landlord's notice of such excess costs, and during the budgeting phase but prior to actual commencement of construction, to notify Landlord of its desire to eliminate certain items from the scope of work to reduce the aforesaid excess costs. Any sums not utilized fully within sixty (60) days of the Disbursement Date will revert to the Landlord. Notwithstanding anything contained hereinabove to the contrary, with respect to the above allowances for Suites 215, 142, 146, 253 and 252, only, on or within Sixty (60) days following November 1, 2000, Tenant may submit actual paid receipts for all reasonable tenant improvements performed in the Premises with Landlord's prior consent from the date of this Agreement and prior to November 1, 2000. Within thirty (30) days after presentation of the receipts, Landlord will reimburse Tenant in an amount up to but not to exceed the substantiated receipts or the allowance, whichever is lesser. Any remaining allowance, if any, may be utilized within Sixty (60) days of November 1, 2000, for additional Tenant Improvements, or such unused allowance will revert to the Landlord. 16. Right of First Refusal: Tenant will be given the right of refusal to lease Suites 109, 111, 209, 211 and 150 upon the expiration of each of their respective lease terms, which are 03/05/98, 08/31/98, 03/04/98, 04/30/98 and 07/31/98, respectively. Tenant may at anytime at least seven (7) months prior to the expiration of the current tenants' lease terms, exercise its option rights by notifying Landlord of its intent to expand into the respective suite(s). Landlord and Tenant will have thirty (30) days from the date of Tenant's notice to negotiate in good faith the terms of the expansion, which will be consistent with fair market terms then being offered by the PAGE 4 OF 6 Landlord for other comparable space in BalaPointe Office Centre, and will not be conditioned on any extension of the Lease Term for any other spaces currently under lease to Tenant. In the event Tenant and Landlord fail to negotiate a binding agreement within the thirty (30) day period, the option for such suite will be void, and Landlord shall have no further obligation to Tenant with respect to such suite. 17. All other terms and conditions contained in the Lease not specially modified or amended herein, shall remain unchanged and continue in full force and effect. 18. Exculpation. This Fifth Amendment to Agreement of Lease is executed and delivered by the undersigned trustees (the "Trustees") not personally but solely as Trustees under and pursuant to that certain Declaration of Trust of TCW Realty Fund IV Pennsylvania Trust dated as of May 10, 1991. Notwithstanding anything to the contrary set forth herein, it is expressly understood and agreed by and between the parties hereto (i) that each of the covenants, undertakings, obligations, representations, warranties and agreements herein made on the part of Trustees, while in form purporting to be covenants, undertakings, obligations, representations, warranties and agreements of Trustees, are nevertheless each and every one of them made and intended not a personal covenants, undertakings, obligations, representations, warranties and agreements of Trustees for the purpose or with the intent of binding Trustees personally, but are instead made and intended for the purpose of binding only the assets of TCW Realty Fund IV Pennsylvania Trust; (ii) that no personal liability or personal responsibility is or on account of any covenants, undertakings, obligations, representations, warranties and agreements contained in this Agreement of Lease, either express or implied, all such liability or personal responsibility (if any) being expressly waived and released; and (iii) Tenant agrees to look solely to the assets of TCW Realty Fund IV Pennsylvania Trust for the enforcement of any claims against Trustees arising pursuant to this Fifth Amendment to Agreement of Lease. 19. The individuals signing this Addendum on behalf of the Tenant represent and affirm that they have authority to bind Tenant and that any and all requisite approvals of the Board of Directors of Tenant, conferring such authority have been obtained. Tenant shall, upon request, deliver to Landlord a resolution of the Board of Directors of Tenant ratifying this Fifth Amendment to Agreement of Lease. [Signatures on Next Page) PAGE 5 OF 6 IN WITNESS WHEREOF, Landlord and Tenant have caused this Fifth Amendment to Agreement of Lease to be executed by their duly authorized representatives on the date first set forth above. LANDLORD: TCW REALTY FUND IV PENNSYLVANIA TRUST, A Pennsylvania Business Trust BY: /s/ Joseph Markling BY: /s/ Pamela Muller ------------------------- ------------------------------ Joseph Markling* Authorized Signatory *not individually but solely as trustee under Declaration of Trust dated May 10, 1991. TENANT: AMERICAN BUSINESS FINANCIAL SERVICES, INC. a Delaware Corporation BY: /s/ Jeffrey M. Ruben BY: /s/ Anthony J. Santilli, Jr. ------------------------- ------------------------------ Its: S.V.P. Its: PRES. ------------------------- ------------------------------ ---------------------------------- (Seal) ---------------------------------- (Seal) ---------------------------------- (Seal) PAGE 6 OF 6 EX-10.24 7 SIXTH AMENDMENT TO LEASE BETWEEN TCW REALTY FUND IV PENNSYLVANIA TRUST AND ABFS DATED MARCH 31, 1997 SIXTH AMENDMENT TO AGREEMENT OF LEASE THIS SIXTH AMENDMENT TO AGREEMENT OF LEASE is made this 31st day of March, 1997, by and between TCW Realty Fund IV Pennsylvania Trust (the "Landlord") and American Business Financial Services, Inc. ("Tenant"). WHEREAS, Tenant and Landlord entered into that certain Agreement of Lease (the "Lease") dated January 7, 1994, wherein Tenant leased from Landlord suite 215 containing approximately 7,555 rentable square feet located on the second floor of the office building located at 111 Presidential Boulevard, Bala Cynwyd, PA (the "Building"); and WHEREAS, Tenant and Landlord entered into that certain First Amendment to Agreement of Lease dated October 24, 1994, wherein Tenant expanded its Premises to include Suite 252A comprising an additional area of 780 rentable square feet; and WHEREAS, Tenant and Landlord entered into that certain Second Amendment to Agreement of Lease dated December 23, 1994, wherein Tenant further expanded its Premises to include Suite 253 comprising approximately 1,650 rentable square feet; and WHEREAS, Tenant and Landlord entered into that certain Third Amendment to Agreement of Lease dated July 25, 1995, wherein Tenant further expanded its Premises to include Suites 256, 142, 252, 253, and 249; and WHEREAS, Tenant and Landlord entered into that certain Fourth Amendment to Agreement of Lease dated April 9, 1996, wherein Tenant further expanded its Premises to include Suite 146 comprising approximately 3,091 rentable square feet; and WHEREAS, Tenant and Landlord entered into that certain Fifth Amendment to Agreement of Lease dated October 8, 1996, wherein Tenant extended the respective lease terms and modified the Base Rent schedules for Suites 142, 146, 151, 215, 252, 252A, 253, 256 comprising approximately 20,459 rentable square feet; and wherein Tenant further expanded its Premises to include Suites 102, 107, 115 comprising approximately 8,079 rentable square feet; and WHEREAS, Tenant and Landlord wish to further amend said Agreement of Lease upon the terms and conditions hereinafter set forth; and WHEREAS, all undefined terms used herein shall have the same meaning as in the Lease. NOW THEREFORE, in consideration of the foregoing and the terms, covenants and agreements hereinafter set forth, Landlord and Tenant hereby agree as follows: PAGE 1 OF 3 1. Effective May 1, 1997, Tenant's Leased Premises shall include Suites 247 and 248 containing approximately 2,676 rentable square feet for a period of five (5) years, nine (9) months commencing May 1, 1997 (the "Commencement Date") and expiring at 12:00 p.m. midnight, local time, on January 31, 2003 (the "Expiration Date") 2. Effective May 1, 1997, the Base Rent schedule for Suites 247 and 248 will be as follows: Period PSF Monthly Annually ------ --- ------- -------- 1 5/l/97 - 4/30/98 $24.00 $5,352.00 $64,224.00 2 5/1/98 - 4/30/99 $24.72 $5,512.56 $66,150.72 3 5/l/99 - 4/30/00 $25.46 $5,677.58 $68,130.96 4 5/1/00 - 4/30/01 $26.22 $5,847.06 $70,164.72 5 5/1/01 - 4/30/02 $27.00 $6,021.00 $72,252.00 6 5/l/02 - 1/31/03 $27.82 $6,203.86 $74,446.32 3. Effective May 1, 1997, Tenant's Base Year with respect to Suites 247 and 248, only, shall be the calendar year 1997. ----- 4. Effective May 1, 1997, "Tenant's Proportionate Share" as the term is defined in Paragraph (4) of the Lease, shall increase by .0155 (1.55%) such that Tenant's Proportionate Share shall then be .1810 (18.10%). Tenant's Total Leased Premises shall thereafter comprise approximately 31,214 rentable square feet. 5. Suites 247 and 248 shall be delivered to Tenant in broom clean condition. 6. Landlord shall provide Tenant with an improvement allowance of up to but not to exceed Thirteen Thousand Three Hundred Eighty Dollars ($13,380.00) to be utilized for the purposes of performing renovations to the Premises. 7. All other terms and conditions contained in the Lease, as previously modified, not specially modified or amended herein, shall remain unchanged and continue in full force and effect. 8. Exculpation. This Sixth Amendment to Agreement of Lease is executed and delivered by the undersigned trustees (the "Trustees") not personally but solely as Trustees under and pursuant to that certain Declaration of Trust of TCW Realty Fund IV Pennsylvania Trust dated as of May 10, 1991. Notwithstanding anything to the contrary set forth herein, it is expressly understood and agreed by and between the parties hereto (I) that each of the covenants, undertakings, obligations, representations, warranties and agreements herein made on the part of Trustees, while in form purporting to be covenants, undertakings, obligations, representations, warranties and agreements of Trustees, are nevertheless each and every one of them made and PAGE 2 OF 3 intended not a personal covenants, undertakings, obligations, representations, warranties and agreements of Trustees for the purpose or with the intent of binding Trustees personally, but are instead made and intended for the purpose of binding only the assets of TCW Realty Fund IV Pennsylvania Trust; (ii) that no personal liability or personal responsibility is or on account of any covenants, undertakings, obligations, representations, warranties and agreements contained in this Agreement of Lease, either express or implied, all such liability or personal responsibility (if any) being expressly waived and released; and (iii) Tenant agrees to look solely to the assets of TCW Realty Fund IV Pennsylvania Trust for the enforcement of any claims against Trustees arising pursuant to this Sixth Amendment to Agreement of Lease. 9. This Amendment supersedes all prior or contemporaneous agreements and/or negotiations, written or oral, regarding the subject matter, terms and conditions of this Sixth Amendment to Agreement of Lease. IN WITNESS WHEREOF, Landlord and Tenant have caused this Sixth Amendment to Agreement of Lease to be executed by their duly authorized representatives on the date first set forth above. LANDLORD: TCW REALTY FUND IV PENNSYLVANIA TRUST, A Pennsylvania Business Trust BY: /s/ Joseph Markling BY: /s/ Mary Jane Turner ------------------------------- -------------------------------- Joseph Markling* Mary Jane Turner* *not individually but solely as trustee under Declaration of Trust dated May 10, 1991. TENANT: AMERICAN BUSINESS FINANCIAL SERVICES, INC. a Delaware Corporation BY: /s/ Anthony J. Santilli, Jr. BY: /s/ Raymond S. Bucceroni -------------------------------- -------------------------------- Anthony J. Santilli, Jr. Raymond S. Bucceroni President Senior Vice President ------------------------------------ (Seal) ------------------------------------ (Seal) PAGE 3 OF 3 EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE COMPANY
JURISDICTION PARENT SUBSIDIARY OF INCORPORATION - ------------------------------- ----------------------------------------------- ------------------------------ American Business American Business Credit, Inc. ("ABC") Pennsylvania Financial Services, Inc. ("ABFS") ABFS ABFS Securities, Inc. Delaware ABC Processing Service Center, Inc. Pennsylvania ABC HomeAmerican Credit, Inc. ("HAC")(1) Pennsylvania ABC HomeAmerican Consumer Discount, Inc. Pennsylvania ABC American Business Leasing, Inc. Pennsylvania ABC ABC Holdings Corporation Pennsylvania ABC American Business Finance Corporation Delaware ABC & HAC ABFS 1995-1, Inc. Delaware ABC & HAC ABFS 1995-2, Inc. Delaware ABC & HAC ABFS 1996-1, Inc. Delaware ABC & HAC ABFS 1996-2, Inc. Delaware ABC & HAC ABFS 1997-1, Inc. Delaware (1) HomeAmerican Credit, Inc. is doing business as Upland Mortgage.
EX-23.1 9 CONSENT OF FISHBEIN & COMPANY, P.C. CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS American Business Financial Services, Inc. We hereby consent to the use in this Registration Statement on Form SB-2 Amendment #1 of our report dated September 20, 1995, relating to the consolidated financial statements of American Business Financial Services, Inc. and subsidiaries. We also consent to the reference to our firm under the caption "Experts" in the Prospectus. /s/ Fishbein & Company, P.C. FISHBEIN & COMPANY, P.C. Elkins Park, Pennsylvania May 21, 1997 EX-23.3 10 CONSENT OF BDO SEIDMAN LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS American Business Financial Services, Inc. Bala Cynwyd, PA We hereby consent to the use in this Amendment No. 1 to the Registration Statement on Form SB-2 of our report dated August 23, 1996, relating to the consolidated financial statements of American Business Financial Services, Inc. and subsidiaries. We also consent to the reference to our firm under the caption "Experts" in the Prospectus. /s/ BDO Seidman, LLP BDO SEIDMAN, LLP Philadelphia, Pennsylvania May 21, 1997 EX-99.1 11 FORM OF PROSPECTUS SUPPLEMENT Your Money Can Begin Earning These High Rates PROSPECTUS SUPPLEMENT DATED MAY XX, 1997. Investment Notes Annual Term Rate Yield* 3 Months 7.15% 7.41% 6 Months 7.35% 7.62% 12 Months 8.35% 8.70% 18 Months 8.50% 8.87% 24 Months 8.75% 9.14% 30 Months 9.35% 9.80% 36 Months 9.50% 9.96% 48 Months 9.75% 10.24% 60 Months 10.50% 11.06% 7 Years 10.60% 11.18% 10 Years 10.75% 11.34% Minimum for Investment Notes $1,000 New Money Market Note-- Rate 6.15% - Annual Yield 6.34%* For More Information, Call 1-800-776-4001 LOGO American Business Financial Services Inc. BalaPointe Office Centre 111 Presidential Boulevard, Suite 215 o Bala Cynwyd, PA 19004 1-800-776-4001 American Business Financial Services, Inc. is a NASDAQ listed Company (ABFI). An offer can only be made by the Prospectus dated May XX, 1997, delivered in conjunction with this Rate Supplement dated May XX, 1997. See "Risk Factors" for a discussion of certain factors which should be considered in connection with an Investment in the Notes. *The Effective Annual Yield assumes all interest reinvested daily at the stated rate. The rates for the Investment Notes are available through June 20, 1997. The interest rate paid on the Money Market Notes is subject to change from time to time in the Company's sole discretion provided that such rate shall not be reduced below 4.0% per year. Written notice of any decrease in rate will be provided to holders of such notes at least 14 days prior to the effective date of the change. No notice will be provided in connection with an increase in the interest rate paid on such notes. EX-99.2 12 ADVERTISING MATERIALS AND ORDER FORMS American Business Financial Services Inc. {LOGO] 1-800-776-4001 Dear Investor: The attached Prospectus, dated May XX, 1997, describes our new $125,000,000 offering of American Business Financial Services, Inc. (ABFS) Investment Notes and introduces ABFS Money Market Notes. Now, for the first time, ABFS investors will have the opportunity to select from our new Money Market Note which offers a variable rate with no fixed maturity or our more traditional fixed rate/fixed term Investment Note. ABFS is offering an annual yield for our new Money Market Notes of 6.34%. Our 10 year Investment Note earns annual yields as high as 11.34%. Other rates and terms are available; refer to the interest rate supplement located on the back page to see how much you will earn on investments of $1000 or more. Investors have purchased over $74 million in American Business Financial Services Investment Notes. The time has come today to invest in American Business Financial Services. Whatever term you choose, your investment will grow to higher yields when interest is left to compound daily until maturity. Of course, our Investment Notes with maturities of 12 months and longer allow you to elect to receive your interest as income monthly, quarterly, semi-annually or annually. You should carefully read the attached Prospectus before investing. To invest, complete and return the attached order form along with your check in the postage-paid envelope provided. If you have any questions, or require additional information, please call 1-800-776-4001. Sincerely, American Business Financial Services, Inc. /s/Anthony J. Santilli, Jr. Anthony J. Santilli, Jr. Chairman and Chief Executive Officer WHAT'S INSIDE * Investor Order Forms * Reply Envelope * Questions & Answers * Prospectus * Rate Supplement Financial experience you can count on. BalaPointe Office Centre 111 Presidential Boulevard, Suite 215 Bala Cynwyd, PA 19004 Frequently Asked Questions About ABFS Investment Notes And Money Market Notes . . . [Q] What are American Business Financial Services, Inc. (ABFS) Investment Notes and Money Market Notes (NOTES)? [A] ABFS Investment Notes and Money Market Notes ("Notes") are unsecured subordinated promissory notes issued by American Business Financial Services, Inc., a financial services holding company. ABFS Notes represent debt obligations of American Business Financial Services, Inc. [Q] Are these notes insured or guaranteed? [A] The Notes are not certificates of deposit or insured by the FDIC or any other governmental or private entity. ABFS relies on revenues from loan sales, working capital, additional debt financing and securitization transactions to repay principal and interest on ABFS Notes. [Q] Why should I consider including ABFS Notes in my investment portfolio? [A] ABFS Notes pay highly competitive rates when compared to other investments of similar risks and maturities. The Notes also offer flexibility to choose from a selection of terms and interest payment options. With Investment Notes you have the opportunity to earn high fixed rates and eliminate the risk of market fluctuations which may affect your principal or interest rate. Our Money Market Notes provide a higher degree of liquidity in a variable rate investment. ABFS Notes are subject to the risks associated with any uninsured subordinated investment. [Q] What are the investment requirements? [A] ABFS Notes are offered at a minimum of $1,000. However, you can invest $3,000, $5,000, $10,000, or any amount you wish. You may select terms from 3 months to 10 years. Our Money Market Notes have no stated maturity. You have the flexibility to choose the amount and the term that best meets your investment needs. The enclosed prospectus and rate supplement describe our Investment Notes, Money Market Notes and Company in considerable detail. Please read the material in order to make any informed decisions. Frequently Asked Questions About ABFS Investment Notes And Money Market Notes . . . [Q] Can I invest in ABFS Investment Notes through my IRA or Keogh? [A] You can invest in ABFS Investment Notes through IRAs, Keoghs and other qualified plans. You may use your current trustee or custodian if they permit. Money Market Notes are NOT eligible for IRAs or Keoghs. You may wish to consult a financial advisor and should review the risk factors before making such an investment. [Q] Can my interest be used to supplement my income? [A] Yes. You may select to have your interest sent to you monthly, quarterly, semi-annually or annually on Investment Notes with maturities of 12 months or longer...or you may want to take advantage of the power of compound interest and leave your interest until maturity. [Q] May I redeem my ABFS Investment Note before maturity? [A] Redemptions will be permitted prior to maturity only in the event of death or, in certain cases, total permanent disability of a registered owner. Money Market Notes may be redeemed at any time. [Q] What fees or commissions will I pay? [A] Absolutely none. There are no fees and no commissions. You pay nothing extra and nothing is deducted. This means every dollar of your investment is earning interest for you. An annual maintenance fee may be charged by the custodian for IRA/KEOGH/SEP ACCOUNTS. [Q] How do I invest? [A] It's easy. After reading the prospectus and rate supplement, simply complete and sign the appropriate Investor Order Form. Please be certain to indicate how long you wish to invest and how often you want to receive your interest. Finally, return the Investor Order Form along with your check, payable to American Business Financial Services, Inc., in the self addressed stamped envelope provided. This brochure is neither an offer to sell nor a solicitation of an offer to buy securities. Such an offer can only be made by Prospectus accompanied by a Rate Supplement. Investments should be considered only after a careful review of all risk factors contained in the prospectus. If you require assistance in completing the order form, just call 1-800-776-4001 Investor Order Form - Investment Note (Place in the pre-paid envelope) INDICATE TERM & AMOUNT OF YOUR INVESTMENT Enclosed is my check for the purchase of an American Business Financial Services., Inc. Investment Note(s) ($1,000 min. per note.) Please invest my funds as follows: [ ] 3 MOS. $_____ [ ] 18 MOS. $_____ [ ] 36 MOS. $_____ [ ] 84 MOS. $_____ [ ] 6 MOS. $_____ [ ] 24 MOS. $_____ [ ] 48 MOS. $_____ [ ] 120 MOS. $_____ [ ] 12 MOS. $_____ [ ] 30 MOS. $_____ [ ] 60 MOS. $_____ The total amount of my purchase is $__________________________ Rates established at the date of purchase and set forth in the current prospectus rate supplement and fixed until maturity. Please check one of the following interest payment options: [ ] Compound interest daily and pay at maturity. If no interest option is checked, interest will be compounded daily and paid at maturity. [ ] Compound interest daily and pay interest by check (on maturities of 12 months or longer). [ ] Monthly [ ] Quarterly [ ] Semi-Annually [ ] Annually REGISTRATION INFORMATION Please complete (Print all information) Registered Owner____________________________ Social Security/EIN________________ Telephone Number (include area code)( )________________Date of Birth_________ Street Address__________________________________________________________________ City___________________________________________________State____ZIP_____________ Second Joint Owner (if applicable)______________________________________________ Social Security Number__________________________________________________________ Beneficiary Name________________________________________________________________ Beneficiary Social Security Number______________________________________________ Custodian's Name (Only one allowed by Law)______________________________________ Minor's Name____________________________________________________________________ Minor's Social Security Number__________________________________________________ Under the Uniform Gifts to Minors Act SIGNATURE VERIFICATION Under penalties of perjury, I certify that: 1) The social security number shown on this form is correct. 2) I have received the prospectus and understand that AMERICAN BUSINESS FINANCIAL SERVICES, Inc. Investment Note(s) are not bank savings or deposit accounts and are not insured by U.S. Government or any instrumentality thereof. 3) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to backup withholding. 4) I am a bona fide resident of the state listed above. Only cross out subpart (3) if you are subject to backup withholding. Signature of Registered Owner ________________________________Date_____________ Joint Signature (if applicable)_________________________________________________ PAYMENT INSTRUCTIONS Make your checks payable to: AMERICAN BUSINESS FINANCIAL SERVICES, INC. BalaPointe Office Center 111 Presidential Boulevard, Suite 215 Bala Cynwyd, PA 19004 This application is neither an offer to sell nor an offer to buy securities. Such an offer can only be made by Prospectus accompanied by a Rate Supplement. INVESTOR ORDER FORM - MONEY MARKET NOTE (Place in the pre-paid envelope) Enclosed is my check for the purchase of an American Business Financial Services, Inc. Money Market Note(s). The total amount of my purchase is (minimum $1,000) $ -------------------------- Initial Rate is established at the date of purchase and is calculated as set forth in the current prospectus. - ------------------------------------------------------------------------------- REGISTRATION INFORMATION Please complete (print all information) Registered Owner Social Security/EIN -------------------------- ------------------ Telephone Number (include area code)( ) Date of Birth -------------- ---------- Street Address ----------------------------------------------------------------- City State ZIP --------------------------------------- ---------------- ------------ Second Joint Owner (if applicable) --------------------------------------------- Social Security Number --------------------------------------------------------- Beneficiary Name --------------------------------------------------------------- Beneficiary Social Security Number --------------------------------------------- Custodian's Name (Only one allowed by Law) ------------------------------------- Minor's Name ------------------------------------------------------------------ Minor's Social Security Number ------------------------------------------------- Under the Uniform Gifts to Minors Act SIGNATURE VERIFICATION Under penalties of perjury, I certify that: 1) The social security number shown on this form is correct. 2) I have received the prospectus and understand that AMERICAN BUSINESS FINANCIAL SERVICES, Inc. Money Market Note(s) are not bank savings or deposit accounts and are not insured by U.S. Government or any instrumentality thereof. 3) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to backup withholding. 4) I am a bona fide resident of the state listed above. Only cross out subpart (3) if you are subject to backup withholding. Signature of Registered Owner Date --------------------------------- ------------- Joint Signature (if applicable) ------------------------------------------------ PAYMENT INSTRUCTIONS Make your checks payable to: AMERICAN BUSINESS FINANCIAL SERVICES, INC. BalaPointe Office Center 111 Presidential Boulevard, Suite 215 Bala Cynwyd, PA 19004 This application is neither an offer to sell nor an offer to buy securities. Such an offer can only be made by Prospectus accompanied by a Rate Supplement. If you require assistance in completing the order form, just call 1-800-776-4001 -----END PRIVACY-ENHANCED MESSAGE-----