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PROSPECTUS DATED OCTOBER 16, 1996
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[LOGO]
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
$50,000,000 PRINCIPAL AMOUNT
THREE, SIX, EIGHTEEN AND THIRTY MONTH SUBORDINATED INVESTMENT NOTES;
ONE, TWO, THREE, FOUR, FIVE, SEVEN AND TEN YEAR SUBORDINATED INVESTMENT NOTES
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This Prospectus relates to the offer and sale of up to $50,000,000 in
principal amount (the "Offering") of unsecured, subordinated notes (the
"Investment Notes" or the "Notes") of American Business Financial Services,
Inc., a Delaware corporation ("ABFS" or the "Issuer"). The Investment Notes will
be offered on an ongoing and continuous "best-efforts" basis by ABFS. The
Investment Notes will be subordinated to all "Senior Debt" of the Company (as
hereinafter defined), which includes the debt of ABFS and its subsidiaries. See
"Summary of the Terms -- Subordination of Investment Notes." As of the date of
this Prospectus, there was no Senior Debt outstanding. There is no limitation on
the amount of Senior Debt the Company can incur. As of the date of the
Prospectus, the Issuer had an aggregate of approximately $37.8 million in
principal amount of indebtedness outstanding which ranks pari passu (i.e.,
equally) in right of payment to the Investment Notes offered hereby.
Investment Notes will be issued in the minimum amount of $1,000. Purchasers
of the Investment Notes will elect a maturity when they subscribe for the
Investment Notes. The Notes may be extended by the Company, at its option, for
an identical term unless the holder thereof requests payment within seven (7)
days of the original maturity. Interest rates paid will depend on the term to
maturity of the Investment Note. See "Summary of Terms -- Investment Notes." The
Notes will be issued pursuant to an Indenture of Trust between the Issuer and
First Trust, N.A., as Trustee. For a full description of the terms and
provisions of the Investment Notes offered hereby, see "Description of the
Investment Notes and The Indenture."
The Issuer 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 Investment Notes must be sold in the
Offering. ABFS reserves the right to withdraw or cancel the Offering at anytime.
In the event of such withdrawal or cancellation, the Investment Notes previously
sold will remain outstanding until maturity and pending subscriptions will be
irrevocable. See "Plan of Distribution."
The Notes will be issued in registered form. It is presently anticipated
that there will be no trading market for the Investment Notes. The Investment
Notes will not be transferable without the prior written consent of the Company.
Such consent will be withheld in the event that the Company determines 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 Issuer and First Trust, N.A.. See "Description of the Investment
Notes and The Indenture."
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 INVESTMENT NOTES OFFERED HEREUNDER ARE NOT CERTIFICATES OF DEPOSIT
("CDS"). PAYMENT OF PRINCIPAL AND INTEREST ON THE INVESTMENT NOTES IS NOT
GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR ANY OTHER ENTITY.
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 COMPANY'S SOURCES OF FUNDS FOR THE
REPAYMENT OF PRINCIPAL, AT MATURITY, AND THE ONGOING PAYMENT OF INTEREST ON THE
INVESTMENT 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. FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BEFORE PURCHASING THE INVESTMENT NOTES, SEE "RISK
FACTORS" AT PAGE 4 HEREOF.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF INVESTMENT NOTES
UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT SETTING FORTH THE INTEREST RATES
THEN BEING OFFERED ON THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO PUBLIC COMMISSIONS AND PROCEEDS TO THE
(1) DISCOUNTS (2) COMPANY (2)(3)
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Per Note........................................... 100% -0- 100%
Total.............................................. $50,000,000 -0- $50,000,000
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(FOOTNOTES ON FOLLOWING PAGE)
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(1) The Investment 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 Investment
Notes and, accordingly, is not presently obligated to pay any commissions in
connection with the sale of the Investment 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 Investment Note sold through any such agent,
depending on numerous factors. ABFS may agree to indemnify such
broker-dealers against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. ABFS may also agree to reimburse such
broker-dealers for costs and expenses, up to a maximum percentage to be
determined, based upon a percentage of Investment Notes sold. See "Plan of
Distribution."
(3) Before deducting other expenses incurred in connection with the Offering
payable by ABFS estimated at approximately $1.4 million.
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 herein is correct as of any time subsequent to its date.
AVAILABLE INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, 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 Issuer, 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 Issuer is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports
and other information with the Commission. Such reports and other information
filed by the Issuer 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 Issuer's common stock,
par value $0.001 per share (the "Common Stock"), is traded on the Philadelphia
Stock Exchange under the symbol "AFX". Reports, proxy statements and other
information concerning the Issuer can be inspected at the offices of the
Philadelphia Stock Exchange located at 1900 Market Street, Philadelphia,
Pennsylvania 19103.
The Issuer intends to provide holders of the Notes ("Noteholders") with
annual reports containing audited financial statements and with such other
periodic reports as the Issuer may from time to time provide to stockholders of
the Issuer or as otherwise deemed appropriate or as may be required by law.
Unless otherwise indicated, all information in the Prospectus has been
adjusted to reflect a three for two stock split declared by the Board of
Directors of ABFS which was paid on November 1, 1995 to stockholders of record
of the Company on October 1, 1995.
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere herein.
THE ISSUER AND ITS PRINCIPAL OPERATING ENTITIES. The Company operates
primarily throughout the Mid-Atlantic Region of the United States. The Company
began operations as a commercial finance company in 1988 and initially offered
commercial loans to credit impaired customers whose borrowing needs were not
being serviced by commercial banks. Since its inception, ABFS has significantly
expanded its product line and geographic scope.
Currently, ABFS, through its principal direct and indirect subsidiaries,
American Business Credit, Inc. ("ABC"), HomeAmerican Credit, Inc., American
Business Leasing, Inc. and HomeAmerican Consumer Discount Company, originates,
services and sells a full spectrum of financial services products, including
business, consumer and home equity loans and business leases. ABFS and its
direct and indirect subsidiaries are referred to herein collectively as the
"Company." As of June 30, 1996, the Company maintained a total loan and lease
portfolio of $18,966,927, with an average yield of 15.23%.
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 offices for its
operating 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."
SECURITIES OFFERED. This offering relates to $50,000,000 in principal
amount of unsecured, subordinated, term notes (the "Investment Notes" or the
"Notes") issued by ABFS pursuant to an Indenture of Trust between the Issuer and
First Trust, N.A., 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.
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 will be able to 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 regarding Notes may be made
only with the prior written consent of ABFS. Such consent will be withheld in
the event that the Company determines that such transfer might result in a
violation of any state or federal securities or other applicable law and
possibly under other circumstances.
The term of the 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 upcoming maturity dates. The holder may request
repayment for a period of up to seven (7) days after the maturity date of the
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 Note, the Note will be extended for an identical term. If the Company
intends to repay the Note and to not permit the holder to extend the term, it
will notify the holder of its intention at least seven (7) days prior to the
expiration of the applicable term. Any Notes which are so extended will be
extended at the interest rate then being offered by the Company, for newly
issued Notes of like term and denomination. A tabular summary of the terms of
the Notes appears on the following page.
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The Investment Notes will be subordinated to all Senior Debt of the Company.
As of the date of this Prospectus, 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 hereafter 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. 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 Noteholders. See
"Description of Investment Notes and Indenture."
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
possibly repaying Senior Debt and debt which ranks pari passu (I.E., equally)
with the Notes. See "Use of Proceeds."
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HIGHLIGHTS OF TERMS OF INVESTMENT NOTES OFFERED
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THREE AND SIX MONTHS INVESTMENT EIGHTEEN, THIRTY MONTHS AND ONE,
NOTES TWO, THREE, FOUR, FIVE, SEVEN AND
TEN YEARS INVESTMENT NOTES
TYPES OF NOTE OFFERED Unsecured, Subordinated Fixed Term Unsecured, Subordinated Fixed term
Notes Notes
DENOMINATION OF INITIAL PURCHASE AND Minimum purchase: $1,000 per Note or Minimum purchase: $1,000 per Note or
ADDITIONAL PURCHASES any amount in excess thereof. any amount in excess thereof.
ANNUAL INTEREST RATE Fixed upon issuance. Purchasers will Fixed upon issuance. Purchasers will
elect a term length and the interest elect a term length and the interest
rate applicable to such Note will be rate applicable to such Note will be
based upon the term length chosen. based upon the term length chosen.
PAYMENT OF INTEREST Interest will be compounded daily Interest will be compounded daily
and paid at maturity. and, at the election of the holder,
paid at maturity, monthly,
quarterly, semi-annually or
annually.
REDEMPTION BY HOLDER May be redeemed by the holder only May be redeemed by the original
at maturity. holder upon the occurrence of a
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 Notes
and Indenture".)
REDEMPTION BY COMPANY Not redeemable until maturity. Not redeemable until maturity.
FORM In fully registered form and non- In fully registered form and non-
negotiable. Not transferable without negotiable. Not transferable without
the Company's prior written consent. the Company's prior written consent.
AUTOMATIC EXTENSION If the Company does not notify the If the Company does not notify the
holder of its intention to repay the holder of its intention to repay the
Note at least seven (7) days prior Note at least seven (7) days prior
to maturity or if not redeemed by to maturity or if not redeemed by
holder within seven (7) days after holder within seven (7) days after
its ma- its ma-
turity date, the Note will be turity date, the Note will be
extended automatically for a period extended automatically for a period
equal to the original term. Notes to equal to the original term. Notes to
be extended will be extended at a be extended will be extended at a
fixed rate equal to the rate then fixed rate equal to the rate then
being offered on newly-issued Notes being offered on newly-issued Notes
of like tenor, term and denomination of like tenor, term and denomination
at their at their
respective maturity dates. respective maturity dates.
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THE SECURITIES 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 INVESTMENT NOTES OFFERED HEREUNDER ARE NOT
CERTIFICATES OF DEPOSIT. PAYMENT OF PRINCIPAL AND INTEREST ON THE INVESTMENT
NOTES IS NOT GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND OR OTHER
ENTITY. 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 COMPANY'S SOURCES OF
FUNDS FOR THE REPAYMENT OF PRINCIPAL, AT MATURITY, AND THE ONGOING PAYMENT OF
INTEREST ON THE INVESTMENT NOTES.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Investment Notes.
ABSENCE OF INSURANCE AND REGULATION. The Investment 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 as commercial banks and thrift institutions are. The Company is not
a commercial bank or savings/thrift institution. The Company is dependent upon
proceeds from the continuing sale of Investment 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 source of funds for repayment of principal at maturity and the
ongoing payment of interest on the Investment Notes. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS OF MAKING LOANS SECURED BY REAL PROPERTY. The Company makes most of
its loans based on independent appraiser estimates of the fair market value of
the real estate offered to collateralize its loans. Current internal credit
guidelines of the Company for business loans to be kept in its portfolio
generally provide for a maximum overall loan to value ratio of 75% of the
appraised value of the real estate collateral. It is possible that the actual
resale value of the property collateralizing such loans may decrease below
appraised estimates of value. Notwithstanding the loan to value ratios currently
maintained by the Company, 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. Such a decrease could result
in some or all of such loans being under-collateralized, presenting a greater
risk of non-payment in the event of a default. See "Business."
LENDING RISKS. 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
sources such as commercial banks. To the extent that such loans may be
considered to be of a riskier nature than loans made by traditional sources of
commercial financing, holders of the Notes of the Company may be deemed to be at
greater risk than if the Company's business loans were made to other types of
borrowers. In addition, the Company makes its loans in a circumscribed
geographic area. This practice may subject the Company to the risk that a
downturn in the economy in this area of the country would more greatly affect
the Company than if its lending business and its portfolio were more
diversified. While the Company has historically experienced relatively little
prepayment activity on its portfolio, due principally to the pre-payment fees
associated therewith, certain agreements in connection with home equity loans
sold to unaffiliated lenders 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. See "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION. Certain segments of the Company's lending businesses are
highly competitive. Certain lenders against which the Company competes have
substantially greater resources, greater experience, as well as a more
established market presence than the Company. The future profitability of the
Company will depend upon its ability to compete in the marketplace of which
there can be no assurance. See "Business."
SUBORDINATION OF DEBT REPRESENTED BY SECURITIES. The Notes will be
subordinate in claim and right to all "Senior Debt" of the Company. As of the
date of this Prospectus 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
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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 Noteholders. There can
be no assurance that any holder of the Company's indebtedness would be repaid
upon a liquidation of the Company. See "Description of the Investment Notes and
the Indenture."
ABSENCE OF SINKING FUND. The Investment 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 Noteholders.
RESIDENTIAL MORTGAGE FORECLOSURES. The ability of a lender to avoid losses
in its loan portfolio when a particular loan becomes delinquent or in default
depends upon its ability to foreclose on the collateral it has accepted to
collateralize such loan. In the case of the Company, the majority of that
collateral is real estate. The Company's ability to foreclose on such real
estate mortgages securing its loans is regulated by state law. While the
precedents for such an action are extremely rare, in the past, certain
jurisdictions, not including Pennsylvania or New Jersey, have, during difficult
economic times, declared a moratorium on principal residence mortgage
foreclosures. To the Company's knowledge, no such moratoriums are in effect at
this time anywhere in the United States but there can be no assurance that such
moratorium(s) will not be enacted in the future. Certain states may grant to
mortgagors of foreclosed property a statutory right of redemption. The Company
does not view any such statutory right of redemption as a material risk in
foreclosing mortgaged property in the states in which it conducts its business
but there can be no assurances that such statutory right of redemption will not
be a material risk.
RELIANCE ON MANAGEMENT. 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. Currently, the Company does not have
employment agreements with any of its executive officers. In addition, the
Company does not hold "key-man" insurance for its executive officers other than
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. Such laws
typically impose cleanup responsibility and 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.
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The ability of the Company to foreclose on the real estate mortgages
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 mortgage loan collateralized by 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 mortgage loan has
been made.
DEPENDENCE UPON DEBT FINANCING. For its ongoing operations, the Company is
dependent upon borrowings such as that represented by the Investment Notes and
the Company's institutional lines of credit as well as funds received from the
securitization of loans. The Company has a Revolving Credit and Security
Agreement with a regional commercial bank in the amount of $3,500,000 which
expires in December 1996. In addition, a subsidiary of the Company entered into
an Interim Warehouse and Security Agreement with another lender. This credit
facility is in the amount of $25,000,000 and expires in March 1997. This
subsidiary also has a $7,500,000 Loan and Security Agreement with a commercial
bank which expires in May 1998. At the present time, the Company intends to
utilize the proceeds of the sale of the Investment Notes offered hereunder to
finance its lending activities and as working capital. The Company's ability to
continue to operate at present and to expand its operations in the future will
at least, in part, be dependent upon the Company's continued access to such
sources of debt financing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 possible unspecified acquisitions of related businesses or assets
(although none are currently contemplated). Proceeds received to date were used
to fund the origination of loans and operations and it is currently anticipated
that proceeds from the Offering will continue to be used for such purposes.
Management will have broad discretion in allocating the proceeds of the
Offering.
DEPENDENCE UPON SECURITIZATIONS AND FLUCTUATIONS IN OPERATING
RESULTS. Since March 1995, the Company has pooled and sold through
securitizations an increasing percentage of the business loans which it
originates. Accordingly, adverse changes in the securitization market could
impair the Company's ability to sell loans through securitizations on a
favorable or timely basis. The Company is substantially dependent on sales of
business loans as a source of revenues and any such impairment could have a
material adverse effect upon the Company's results of operations and financial
condition. Furthermore, 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's results of operations may be adversely affected for that period.
The documents governing the Company's previous securitizations require the
Company to build over-collateralization levels through retention of excess
servicing distributions and application thereof to reduce the principal balances
of the senior interests issued by the related trust. This application causes the
aggregate principal amount of the loans in the related pool to exceed the
aggregate principal balance of the outstanding investor certificates. Such
excess amounts serve as credit enhancement for the related trust and therefore
fund losses realized on the loans held by such trust. The Company continues to
be subject to the risks of default and foreclosure following the sale of loans
through securitizations to the extent excess servicing distributions are
required to be retained or applied to reduce principal from time to time. In
addition, such retention diverts cash which would otherwise flow to the Company
through its retained interest
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in the transaction, thereby slowing the flow of cash to the Company. In the
event that the Company is unable to obtain alternative sources of cash, such
diversion could have a material adverse effect on the Company's liquidity.
As a result of securitizations, the Company now derives a significant
portion of its income by realizing gains upon the sale of loans due to the
excess spread associated with such loans at the time of sale. Excess spread
represents the excess of the interest rate payable by an obligor on a loan over
the interest rate passed through to the purchaser acquiring an interest in such
loan, less the Company's servicing fee and other applicable recurring fees. When
loans are sold in securitizations, the Company recognizes as current revenue and
as an associated receivable the present value of the excess spread expected to
be realized over the anticipated average life of loans sold less future
estimated credit losses relating to the loans sold. These excess spreads and the
associated receivable are computed using prepayment, loss, delinquency 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 to the net present value of the estimated
remaining future excess spreads.
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 utilized by the Company are estimates and actual experience
may 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
anticipated. 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. Should the estimated average loan life assumed for this purpose be
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RECENT OPERATING INCOME LEVELS. During fiscal 1996, the Company experienced
record levels of total revenues and net income as a result of increases in loan
originations and the securitizations of loans. Total revenues increased
approximately $6.7 million, or 119%, between fiscal 1995 and 1996 while net
income increased approximately $1.2 million, or 299%, during the same fiscal
period. The Company's ability to sustain the level of growth in total revenues
and net income experienced during fiscal 1996 is dependent upon a variety of
factors outside the control of the Company, including interest rates, economic
conditions in the Company's primary market area, competition and regulatory
restrictions. As a result, the rate of growth experienced in fiscal 1996 may not
be sustained in the future. See "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, the Company retains some degree of risk on
substantially all loans sold. During the period of time that loans are held
pending sale, the Company is subject to the various business risks associated
with the lending business including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers.
In addition, documents governing the Company's securitizations require the
Company to commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale. When
borrowers are delinquent in making monthly payments on loans included in a
securitization trust, the Company is required to advance interest payments with
respect to such delinquent loans to the extent that the Company deems such
advances ultimately recoverable. These advances require funding from the
Company's capital resources but have priority of repayment from the succeeding
month's collections.
7
<PAGE>
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 of
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. The Company believes that liability
with respect to any currently asserted claims or legal actions is not likely to
be material to the Company's results of operations or financial condition;
however, 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.
DIVERSIFICATION OF THE BUSINESS. The Company's involvement in consumer
lending and commercial leasing is relatively new. Therefore, the Company is not
able to predict with any certainty whether it will be able to operate such lines
of business profitability either in the short or long term. There are also risks
inherent in such lines of business which in some cases differ from those which
exist in the Company's principal line of business as a commercial finance
company. Certain of the smaller loans made by HomeAmerican Consumer Discount
Company may be made on an unsecured basis. The Company does not at this time
intend to aggressively pursue this line of business, but rather views this
business as a complement to its business and home equity lending operations.
While the equipment leases made by American Business Leasing, Inc. 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 American Business Leasing, Inc.'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 American Business Leasing, Inc. may be required to sell such
equipment to third party buyers at a discount or otherwise dispose of such
equipment. See "Business."
LIMITED LIQUIDITY -- LACK OF TRADING MARKET. The Investment Notes are
non-negotiable and are therefor not transferable without the prior written
consent of the Company. Due to the length of the term of certain of the
Investment Notes, the non-negotiable nature of the Investment Notes, and the
lack of a market for the sale of the Investment 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.
ECONOMIC CONDITIONS, CHANGES IN INTEREST RATES AND RELATED
UNCERTAINTIES. Financial service companies are affected, directly and
indirectly, by economic conditions, and by governmental policies. Economic
downturns could result in decreased demand for credit, declining real estate
values and the delinquency of outstanding loans. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowing. Because of the Company's focus on borrowers who are unable or
unwilling to obtain financing from sources such as commercial banks, the actual
rates of delinquencies, foreclosures and losses on such loans could be higher
under adverse economic conditions than those experienced in the commercial
lending business generally. The Company's operations are dependent to a large
degree on interest rate spread which is the difference between interest from
loans and income from the securitization of loans and costs related to loan
securitizations and debt financing. The Company's ability to generate revenues
is dependent upon its ability to make loans at rates in excess of and for
amounts at least equivalent to its outstanding indebtedness including the
indebtedness of the Notes and costs related to loan securitizations. The
Company's profitability will be affected by fluctuations in interest rates. For
example, any future rise in interest rates, while increasing the income yield on
the Company's assets, may adversely affect loan demand and the cost of funds.
Conversely, any future decrease in interest rates may reduce the amounts which
the Company may earn on its assets, but increase loan demand and reduce the cost
of funds.
8
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Management does not expect any one particular factor to affect the Company's
results of operations. However, a downtrend in several areas could have an
adverse impact on the Company's profitability.
REGULATORY RESTRICTIONS AND LICENSING REQUIREMENTS. The Company's consumer
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 part or all of its operations. The Company's consumer 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 ("ECOA"),
the Federal Real Estate Settlement Procedures Act ("RESPA") 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, securitizing and servicing 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.
Although the Company believes that it has systems and procedures to
facilitate compliance with these 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.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize selected consolidated financial data for ABFS
and its subsidiaries and is qualified in its entirety by the more detailed
consolidated financial statements, including the notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Revenues........................... $ 1,720,506 $ 2,043,989 $ 2,632,667 $ 5,644,077 $ 12,378,733
Operating income (loss) before income taxes
(recoverable), extraordinary items and
cumulative effect of accounting change...... (208,178) 66,532 334,140 893,903 3,120,663
Net income............................... 31,634 41,322 84,644 581,037 2,318,696
Per common share data
Net income............................... $ .02 $ .02 $ .04 $ .27 $ 1.01
Cash dividends declared.................. None None None None $ 0.03
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets................................. $ 5,367,774 $ 7,270,122 $ 12,283,829 $ 22,174,896 $ 46,894,163
Long-Term Debt............................... $ 933,091 $ 1,529,459 $ 3,984,854 $ 8,958,618 $ 14,780,617
</TABLE>
USE OF PROCEEDS
The net proceeds resulting from the sale of the Notes (estimated to be
approximately $48.6 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. Corporate general purposes may include replacing some or all
of the Company's Senior Debt, and debt which ranks pari passu, (i.e., equally)
in right of payment to the Notes, including maturing Notes; financing of future
growth; enlargement of the Company's business loan portfolio; enlargement of a
lease portfolio; enlargement of a small consumer loan portfolio; the
establishment of a warehouse portfolio of home equity loans as well as other
finance related activities; and 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.
10
<PAGE>
DESCRIPTION OF THE INVESTMENT NOTES AND THE INDENTURE
The Notes will be issued pursuant to an Indenture (the "Indenture") between
the Company and First Trust, N.A., as trustee (the "Trustee"). The terms of the
Investment 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 Investment Notes are subject to all such terms, and holders of Investment
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 Investment Notes will be general unsecured, subordinated term notes,
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, and 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 Investment Notes are not secured by any collateral or lien. There are no
provisions for a sinking fund applicable to the Notes.
FORM AND DENOMINATIONS. The Investment Notes will be issued in fully
registered form. The 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 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. See "Summary of Terms." 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 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
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<PAGE>
Company is not offering varying interest rates to investors on 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 and the
encouragement of the rollover of Investment Notes by current holders,
circumstances in the financial markets and the economy and other factors,
including, but not limited to, any additional costs incurred by the Company in
selling Investment Notes in a particular jurisdiction which may at the time be
relevant to the Company's operations.
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
Pennsylvania 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 accounts 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 (7) 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 the same 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 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 or telephone.
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 Total Permanent
Disability, as established to the satisfaction of the Company, or by his estate
following his death. The redemption price, in the event of such a
12
<PAGE>
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 Issuer 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.
SUBORDINATION. The indebtedness evidenced by the Investment Notes, and any
interest thereon, are subordinated to all "Senior Debt" of the Company. 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 the date of this
Prospectus, 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 Noteholders. Any
indebtedness of ABFS, other than that described as Senior Debt, will have rights
upon liquidation or dissolution of ABFS which ranks parri passu in right of
payment to the Investment Notes offered hereby.
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 Investment Notes until all Senior Debt has been paid. In any
such event, holders of Senior Debt may also submit claims on behalf of
Noteholders and retain the proceeds for their own benefit until they have been
fully paid, and any excess will be turned over to the Noteholders. If any
distribution is nonetheless made to Noteholders, 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.
EVENTS OF DEFAULT. The Indenture provides that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment when due
of interest on the Investment Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
principal on the Investment Notes (whether or not prohibited by the
subordination provisions of the Indenture) and continuation thereof for 30 days;
(iii) failure by
13
<PAGE>
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 Investment 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 Investment
Notes may declare all of the Investment Notes to be due and payable immediately;
provided, however, that so long as any Senior Debt is outstanding, such
declaration shall not become effective until the earlier of (x) the day which is
five Business Days after the receipt by representatives of Senior Debt of such
written notice of acceleration or (y) the date of acceleration of any Senior
Debt. In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, all outstanding
Investment Notes will become due and payable without further action or notice.
Holders of the Investment Notes may not enforce the Indenture or the Investment
Notes except as provided in the Indenture. Subject to certain limitations,
holders of a majority in principal amount of the then outstanding Investment
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from holders of the Investment 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 Investment
Notes then outstanding by notice to the Trustee may on behalf of the holders of
all of the Investment 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 Investment
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 Investment Notes then
outstanding, and any existing Default or compliance with any provision of the
Indenture or the Investment Notes may be waived with the consent of the holders
of a majority in principal amount of the then outstanding Investment Notes.
Without the consent of each holder 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 Notes whose holders must
consent to an amendment, supplement or waiver, (ii) reduce the principal of or
change the fixed maturity of any 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.
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<PAGE>
Notwithstanding the foregoing, without the consent of any holder of
Investment Notes, the Company and/or the Trustee may amend or supplement the
Indenture or the Investment Notes to cure any ambiguity, defect or
inconsistency; to provide for assumption of the Company's obligations to holders
of the Investment Notes in the case of a merger or consolidation; to make any
change that would provide any additional rights or benefits to the holders of
the Investment 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 Investment Notes which may be outstanding under the Indenture; to
modify the Company's policy to permit redemptions of Investment Notes upon the
death or Total Permanent Disability of any holder of Investment Notes (but such
modification shall not adversely affect any then outstanding Note); or to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING 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
Investment 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 Investment Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
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 address appearing in the register which the Company maintains for that
purpose.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
SHAREHOLDERS. No director, officer, employee, incorporator or shareholder of
the Company, as such, shall have any liability for any obligations of the
Company under the Investment 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 Investment Notes by accepting an Investment Note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Investment Notes. Such waiver may not be effective to waive
liabilities under the federal securities laws and it is the view of the
Securities and Exchange Commission that such a waiver is against public policy.
REPORTS. The Company publishes annual reports containing audited financial
statements and quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year. Copies of such reports will be
sent to Noteholders.
SERVICE CHARGES. The Company reserves the right to assess service charges
for replacing lost or stolen Investment Notes (for which an affidavit from the
holder will be required), changing the registration of any Investment 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 the Investment Note by the holder
to another person.
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ADDITIONAL SECURITIES. The Company may offer from time to time additional
classes of Notes with terms and conditions different from the Investment 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
Investment Notes and to vary the terms and conditions of the offer (including,
but not limited to, additional interest payments and service charges for all
Investment Notes) depending upon the state where the purchaser resides.
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<PAGE>
BUSINESS
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
GENERAL. ABFS was incorporated in Delaware in 1985 under the name Kingsway
Enterprises, Inc., which name was subsequently changed to Geriaco. In early
1993, ABFS acquired one hundred percent ownership of ABC through a tender offer
to the equity security holders of ABC, offering shares of ABFS's Common Stock in
exchange for each share of ABC common stock and preferred stock outstanding,
pursuant to which the former shareholders of ABC gained control of ABFS and the
Geriaco name was changed to ABFS. ABFS's only activity as of the date hereof has
been: (i) acting as the holding company for the Company's operating subsidiaries
and (ii) raising capital for use in the Company's lending operations and
otherwise. The Company presently employs 120 people on a full time basis and two
people on a part-time basis.
ABFS, through its business lending subsidiary ABC, began its operations in
1988 as a privately-held enterprise offering commercial loans to credit impaired
customers whose borrowing needs were not being serviced by commercial banks.
Since its inception, ABFS has significantly expanded its product line and
geographic scope. Currently, ABFS is a full service financial services company
operating primarily throughout the Mid-Atlantic Region of the United States.
ABFS, through direct and indirect subsidiaries described below, originates,
services, purchases and sells a full spectrum of financial services products,
including business, consumer and home equity loans and business leases.
ABFS is the parent holding company of ABC and its subsidiaries, American
Business Finance Corporation, HomeAmerican Credit, Inc., Processing Service
Center, Inc., HomeAmerican Consumer Discount Company, American Business Leasing,
Inc., and ABC Holdings Corporation (collectively, the "Company"). The Company's
subsidiaries, ABFS 1995-1, Inc., ABFS 1995-2, Inc., ABFS 1996-1, Inc. and ABFS
1996-2, Inc. were incorporated to facilitate the Company's securitizations and
do not engage in any business activity other than holding the subordinated
certificate and the residual. See "-- Securitizations." American Business
Finance Corporation was incorporated in connection with the issuance of
subordinated debentures in 1990 through 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." ABC Holdings Corporation was incorporated to hold properties
acquired through foreclosure. Processing Service Center, Inc. processes home
equity loan applications for local banks. The Company's principal businesses are
described herein.
ABFS's Common Stock is traded on the Philadelphia Stock Exchange under the
symbol "AFX".
BUSINESS STRATEGY. The Company's objective is to enhance its significance
as a participant in the financial services industry. The Company believes that
its growth has been sustained by its commitment to servicing segments of the
market which the Company believes are not adequately serviced by commercial
banks. In servicing its markets, the Company stresses the importance of customer
service, including prompt response to requests for loans or leases. The Company
remains committed to increasing revenues by: (i) developing new financial
services profit centers; (ii) broadening its geographic business base; (iii)
expanding its capabilities to service an expanding customer base and portfolio
of customer loans; and (iv) continuing to utilize securitizations of its loan
(the process of aggregating loans into pools that are used to collateralize
securities which are issued to third party investors) and possibly its lease
portfolios. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SECURITIZATIONS. The sale of the Company's home equity and business loans
through securitizations is an important objective of the Company. In furtherance
of this objective, the Company, during fiscal year 1996, sold in the secondary
market senior interests in two pools of loans it
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securitized. 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 a residual interest
and may include a class of subordinated certificates. In connection with
securitizations, the senior certificates are sold to investors and the
subordinate certificates, if any, and residual interest 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 will 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 certificate 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 residual interest) 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 of the subordinated amount held by the Company. The
additional payments of principal are designed to increase the senior certificate
holder's protection against loan losses. In the typical subordination structure,
the Company, as the holder of the residual interest in the trust 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 interests by using interest receipts on the
mortgage loans to reduce the outstanding principal balance of the senior
interests to a pre-set percentage of the mortgage 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 "residual". To the extent that a loss is realized on the loans,
losses will be paid first out of the excess interest spread received and
ultimately out of the overcollateralization amount available to the residual
certificates, and the subordinated certificate, if available. If losses exceed
the Company's projected amount, the excess losses will result in a reduction in
the value of the residual certificate 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.
The Company generally retains the servicing rights with respect to all loans
securitized . Such loans are serviced by ABC, a subsidiary of the Company. See
"American Business Credit, Inc."
As set forth in greater detail below, subject to market conditions, the
Company anticipates that it will continue to build portfolios of business loans
and home equity loans and enter into securitizations of these portfolios. The
Company may also consider the securitization of business 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.
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AMERICAN BUSINESS CREDIT, INC.
GENERAL. ABC, a Pennsylvania corporation incorporated in 1988, is a
commercial finance company which originates, services and sells business loans
collateralized by real estate. ABC typically makes loans to owners of small
businesses who do not meet all of the credit criteria of commercial banks, but
who ABC determines has the business purpose, motivation and real estate
collateral required to repay his, her or its obligation. ABC has sustained
growth in this business by carefully identifying a niche market and building an
experienced organization capable of responding to customer needs and servicing
the loan portfolios.
LENDING. ABC operates in Pennsylvania, Delaware, New Jersey, New York,
Virginia and Maryland and plans to expand into the Southeastern Region of the
United States. ABC makes business loans to corporations, partnerships, sole
proprietors and other business entities. ABC primarily makes loans to borrowers
with non-perfect credit histories. As a result, ABC typically requires lower
loan-to-value ratios (amount of loan as compared to appraised value of
collateral securing the loan) than are typically required of borrowers with
unblemished credit histories. All 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. ABC,
generally, further collateralizes its loans by obtaining a lien on the
borrower's other tangible and intangible assets by filing appropriate Uniform
Commercial Code financing statements.
ABC makes loans for various business purposes including, but not limited to,
working capital, business expansion, equipment acquisition and
debt-consolidation. ABC does not target any particular industries or trade
groups and, in fact, takes precautions against concentrations of loans in any
one industry group.
Loans made by ABC generally range from $15,000 to $350,000 and have an
average balance of approximately $70,000.
STRATEGY. ABC markets its business loans through various forms of
advertising, and a direct sales force. The advertising includes large direct
mail campaigns directed at owners of small businesses located in its service
area. Newspaper and radio advertising are also utilized. ABC's marketing efforts
are principally undertaken by its commissioned sales staff, which consists of
full time professional sales persons who are responsible for converting
advertising leads into loan applications.
LENDING POLICIES AND PRACTICES. Summarized below are certain of the lending
policies and practices which ABC follows. It should be noted that such policies
and practices will be altered, amended and supplemented as conditions warrant.
ABC reserves the right to make changes in its day to day practices and policies
in its sole discretion. Such changes may be made by management without a vote of
the Company's shareholders.
ABC endeavors at all times to keep its interest and other charges
competitive with the lending rates of other finance companies. Generally, loans
are made at fixed rates for fixed terms ranging from one to fifteen years.
Generally, ABC computes interest due on its outstanding loans using the simple
interest method. ABC requires that title insurance be obtained in connection
with its loans. In all instances, ABC permits borrowers to prepay such loans.
Where permitted by applicable law, ABC may impose a prepayment penalty. Whether
a prepayment fee is imposed and the amount of such fee, if any, is negotiated
between ABC and the individual borrower prior to consummation of the loan.
Generally, ABC will not make a loan collateralized by residential real
estate where the overall loan to value ratio (based on independent appraised
fair market value) on the properties collateralizing the loans is equal to or
greater than seventy-five (75%) percent. Generally, ABC will not make a loan
collateralized by commercial real estate where the overall loan to value ratio
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(based on independent appraised fair market value) is equal to or greater than
sixty (60%) percent. Occasionally, exceptions to these maximum levels are made
if other collateral is available or if there are other compensating factors.
UNDERWRITING PROCEDURES. ABC's 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, ABC obtains and reviews
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.
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.
Once all applicable employment, credit and property information is obtained,
a determination is made by ABC 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.
SERVICING OF LOANS. Generally, ABC will be responsible for servicing the
loans it maintains in its portfolio or which are securitized by the Company in
accordance with its established servicing procedures. In servicing its loans,
ABC initiates the collection process one day after a borrower misses a monthly
due date. When a loan becomes forty-five (45) to sixty (60) days delinquent, it
is transferred to ABC's loan work-out department. The work-out department
attempts to reinstate a delinquent loan, seek a payoff, or occasionally enter
into a loan modification agreement with the borrower to avoid foreclosure. If a
borrower declares bankruptcy, the matter is immediately referred to counsel. ABC
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
ABC determines that such advances will not be recoverable from subsequent
collections in respect to the related loans.
PURCHASING OF EXISTING LOANS. In the normal course of business, ABC may in
the future purchase business/commercial loan portfolios from individuals, banks,
other commercial finance companies as well as other sources of commercial loans.
Any loans so purchased would be collateralized by real estate located in ABC's
market area. Each such individual loan would be reviewed by a lending officer of
ABC prior to acquisition to see if the loan and all related matters conform to
ABC's lending procedures and policies.
SALE AND SECURITIZATION OF LOANS. In the normal course of its business, ABC
sells loans which it has made to unrelated third party investors through the (i)
sale of individual loans; (ii) bulk sale of several loans; and (iii)
securitization of an entire portfolio of loans. Such sales may occur shortly
after the consummation of a loan by ABC, out of ABC's portfolio or after ABC has
built a portfolio of loans. In all instances, ABC sells such loans to unrelated
entities for a premium, thereby generating income for ABC. Since the Company has
recently emphasized the securitization of its loans, the sale of individual
loans and the bulk sale of loans have become, on a relative basis, a smaller
portion of ABC's day to day business.
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COMPETITION. As a finance company, ABC competes against many other finance
companies and financial institutions. ABC competes with these entities by
focusing on servicing a portion of this market which ABC believes is not
adequately serviced by banks and by providing highly responsive and quick
customer service. See "Risk Factors -- Competition."
HOMEAMERICAN CREDIT, INC.
GENERAL. HomeAmerican Credit, Inc. d/b/a Upland Mortgage ("HAC" or
"Upland"), which was incorporated in Pennsylvania in 1991, is principally a
consumer home equity lender currently operating in Pennsylvania, New Jersey,
Delaware, Maryland and Virginia.
In February of 1996, HAC acquired substantially all of the assets of Upland
Mortgage Corporation, a Pennsylvania, New Jersey and Delaware mortgage broker.
Believing Upland Mortgage's name had better recognition and marketing potential
HAC adopted Upland's name and now does business as "Upland Mortgage". HAC is
herein after referred to as Upland.
In recent years, Upland has experienced growth in its loan business in a
highly competitive business environment. Upland is expanding its professional,
service oriented infrastructure to accommodate and service an increasing volume
of home equity loans. The Processing Service Center, Inc., an ABC subsidiary
("PSC"), has recently entered into business arrangements with certain banks
pursuant to which PSC will process non-conforming first and second mortgage
loans generated by the banks for purchase by Upland. Upland intends to utilize
this relationship to expand its lending base.
LENDING. Upland primarily originates residential mortgages and consumer
home equity loans but will originate business loans in limited situations where
certain state licensing does not permit ABC to make such loans. Historically,
each of the non-business residential mortgages and home equity consumer loans
originated and funded by Upland were sold to one of several third party lenders,
at a premium. Currently, Upland builds portfolios of consumer home equity loans
for the purpose of selling or securitizing such loans.
STRATEGY. Upland primarily markets its residential mortgage and consumer
home equity loans through print advertisement in newspapers, radio
advertisements and through direct mail campaigns. Beginning in September of
1996, Upland embarked on a television advertising campaign for the marketing of
its home equity loan products. Supporting this television campaign will be radio
and print advertising designed to capitalize on the Company's television ads.
LENDING POLICIES AND PRACTICES. Upland takes applications from potential
borrowers over the phone and in person. The loan request is then processed and
closed. Upland attempts to provide its home equity borrowers with a loan
approval within 24 hours and to close its home equity loans within five days of
obtaining a loan approval.
Upland attempts to maintain its interest and other charges competitive with
the lending rates of other finance companies and banks. Generally, its consumer
home equity loans are made at fixed rates for fixed terms and may extend for a
term of up to thirty (30) years. Its residential mortgage loans are offered in
varied forms. In all instances, Upland permits borrowers to prepay their loans.
Where permitted by applicable law, Upland may impose a prepayment penalty.
Whether a prepayment penalty is imposed and the amount of such penalty , if any,
is negotiated between Upland and the individual borrower prior to closing of the
loan. In the majority of cases, Upland does not impose a prepayment penalty.
UNDERWRITING PROCEDURES. Upland's 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,
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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, Upland obtains and reviews 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.
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 a qualified appraiser on a Federal National Mortgage Association
("FNMA") form including pictures of comparable properties.
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.
SERVICE AREA. Upland is licensed to act and currently operates as a first
and second mortgage banker/lender in Pennsylvania, New Jersey, Delaware,
Maryland and Virginia. Upland has recently been granted licenses to act as a
mortgage lender in Georgia, North Carolina, Connecticut and Florida. Upland
anticipates beginning to lend on a limited basis in those states during calendar
year 1997. Upland currently conducts its business from two offices. Its primary
or main office is located at the Company's main offices and its branch office is
located in Cherry Hill, New Jersey. Upland may open additional locations within
or outside of its present service area as its markets develop in such other
areas.
REGULATION. The consumer home equity lending business is highly regulated
by both federal and state laws. All consumer loans must meet the requirements of
the federal Truth-In-Lending Act, the Real Estate Settlement Procedures Act and
Federal Reserve Regulations X, Z and B. In addition to the federal laws, Upland
is licensed and regulated by the Departments of Banking 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."
COMPETITION. Upland has significant competition in the consumer home equity
market. Upland competes with banks, thrift institutions and other financial
companies, which may have greater resources and name recognition. Upland
attempts to mitigate these factors through a highly trained staff of
professionals and rapid response to prospective borrowers' requests. See "Risk
Factors -- Competition."
AMERICAN BUSINESS LEASING, INC.
GENERAL. American Business Leasing, Inc. ("ABL"), a Pennsylvania
corporation, was incorporated in December of 1994 for the purpose of offering
financing in the form of leasing to businesses for equipment acquisition
purposes. Since the commencement of its business in 1995, ABL has identified and
pursued a niche in the leasing market, small to medium-sized office and
industrial equipment. ABL had established a lease portfolio of approximately
$4.5 million as of June 30, 1996.
LEASING. ABL markets its products and originates business equipment leases
throughout the United States with primary emphasis on the Northeast corridor of
the United States. ABL makes business leases to corporations, partnerships,
other entities and sole proprietors. All such lessees must meet certain
specified financial and credit criteria.
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ABL leases various types of business equipment including, but not limited
to, computer equipment, phone systems, copiers, and construction equipment. ABL
does not target any particular industry or trade group and avoids the
concentration of leases in any one particular industry group. While ABL retains
a security interest in and to the equipment, it is not dependent on the value of
the equipment as the principal means of securing the lease. The primary security
for the lease is the borrower's financial strength and its credit history.
Generally, ABL's leases are of two types: (i) finance leases which have a
term of twelve (12) to sixty (60) months and provide a purchase option
exercisable by the lessee at $1.00 at the termination of the lease and (ii) fair
market value or true leases which have a similar term but provide a purchase
option exercisable by the lessee at the fair market value of the equipment at
the termination of the lease.
ABL's leases generally range in size from $1,000 to $250,000, with an
average lease size of approximately $12,000.
STRATEGY. ABL primarily obtains its business leasing customers through
equipment manufacturers, brokers and vendors with whom it has a relationship and
through a direct sales force. The Company also believes that ABL will benefit
from the customer base and advertising efforts of ABC and that ABC may benefit
as well from ABL's network of vendors.
LEASING POLICIES AND PRACTICES. Generally, ABL's interest rate and other
terms and conditions of its leases are competitive with the leasing terms of
other leasing companies in the area. As stated above, the leases are for terms
of twelve (12) to sixty (60) months and are structured with purchase options
whose exercise prices range from $1.00 to the fair market value of the equipment
at the time of the lease termination.
ABL secures all of its leases with a lien on the leased equipment. However,
creditworthiness and financial strength of the lessee are the primary criteria
utilized by ABL in determining whether to enter into a lease arrangement with a
specific lessee. Currently, ABL retains all leases it makes in its lease
portfolio and services all such leases. It is anticipated that in the future,
ABL may develop relationships with third party purchasers of leases and will
sell a portion of the leases it makes 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.
It should be noted that the above policies and practices may and will be
altered, amended and supplemented as conditions and circumstances warrant. ABL
reserves the right to make changes in its day to day practices and policies in
its sole discretion.
SALE OF LEASES. The Company has and intends to continue to build its lease
portfolio which may be at the appropriate time sold in bulk. The Company may, in
the future, attempt to securitize its lease portfolio provided economic
conditions warrant such activity.
SERVICE AREA. ABL markets, services and originates business equipment
leases throughout the United States with particular emphasis on the Northeastern
corridor of the United States. ABL conducts its business operations from the
Company's main offices. As markets develop in other areas, ABL may open
additional offices within or outside its present service area.
COMPETITION. ABL has significant competition in the equipment leasing
industry. ABL competes with banks, leasing and financial companies with greater
resources, capitalization and name recognition throughout its market area. It is
the intention of ABL to capitalize on its vendor relationships and the efforts
of its direct sales force to combat these competitive factors. See "Risk Factors
- -- Competition."
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HOMEAMERICAN CONSUMER DISCOUNT COMPANY
HomeAmerican Consumer Discount Company ("HCDC"), a Pennsylvania corporation,
was incorporated in November 1993 for the purpose of offering secured and
unsecured small consumer loans (I.E., loans up to $15,000) to residents of
Pennsylvania and New Jersey. Currently, HCDC builds a portfolio and
periodically, sells such portfolio of loans to third party investors. As of June
30, 1996, HCDC maintained a portfolio of small consumer loans of approximately
$100,000. The Company presently views this line of business as ancillary to its
principal lines of business and does not actively pursue small consumer loans.
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 HAC's or ABC's borrowers or affiliates of HAC's or ABC's
borrowers and real estate acquired through foreclosure.
The Company presently leases office space at 111 Presidential Boulevard,
Bala Cynwyd, Pennsylvania, just outside the city limits of Philadelphia. The
Company is currently leasing its office space under a five (5) year lease with a
current year annual rental of approximately $431,000. 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 February 1997.
Upland leases its New Jersey office in Cherry Hill, New Jersey.
LEGAL PROCEEDINGS
On or about February 17, 1995, American Business Leasing, Inc. was served
with a Writ of Summons captioned MONTGOMERY LEASING COMPANY V. AMERICAN BUSINESS
LEASING, INC., AMERICAN BUSINESS CREDIT, INC. AND AMERICAN BUSINESS FINANCIAL
SERVICES, INC., Court of Common Pleas of Montgomery County (Pennsylvania), No.
95-03554. In connection therewith, on or about May 18, 1995, American Business
Leasing, Inc. was served a complaint captioned MONTGOMERY LEASING COMPANY V.
AMERICAN BUSINESS LEASING, AMERICAN BUSINESS CREDIT, AMERICAN BUSINESS FINANCIAL
SERVICES, INC., DONNA WESEMANN AND CHRISTINE ADAMS, Court of Common Pleas of
Montgomery County (Pennsylvania) No. 95-07219. The complaint alleges that the
named defendants acted in a conspiracy to damage the plaintiff; misappropriated
assets of the plaintiff; interfered with the plaintiff's contractual
relationships and with plaintiff's prospective business opportunities.
Currently, the Company is in the process of negotiating a settlement agreement
with Montgomery Leasing Company.
Additionally, on or about August 24, 1995, American Business Leasing, Inc.
filed a complaint against Montgomery Leasing Company, the above named plaintiff,
Uriel and Arlene Yogev, shareholders and officers of Montgomery Leasing Company,
and Mark Halpern, Georgeann Fusco and Furnan & Halpern, P.C. attorneys for
Montgomery Leasing Company. The complaint is captioned AMERICAN BUSINESS
LEASING, INC. V. MONTGOMERY LEASING COMPANY, URIEL YOGEV, ARLENE YOGEV, FURMAN &
HALPERN, P.C., MARK HALPERN AND GEORGEANN FUSCO, Court of Common Pleas of
Montgomery County (Pennsylvania). The American Business Leasing complaint seeks
damages from the defendants based on abuse of process as a result of their
malicious filing of their above referenced complaint and conspiracy to drive
American Business Leasing, Inc. out of business. The complaint also seeks
damages from Montgomery Leasing Company and the Yogevs for interfering with
contractual relationships and prospective business
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opportunities and defamation based on statements made by the Yogev's and
Montgomery Leasing Company as to American Business Leasing, Inc. Upon settlement
of the suit brought by Montgomery Leasing Company, described above, it is
anticipated that this suit will be settled as well.
The Company is also involved in various legal proceedings of its business
loan borrowers. These actions were instituted in the normal course of business
to obtain repayment of monies under the terms of the business loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Set forth below is a discussion concerning the consolidated financial
condition and consolidated results of operations of the Company for the fiscal
years ended June 30, 1996 and 1995.
The following financial review and analysis is intended to assist
prospective investors in understanding and evaluating the financial condition
and earnings performance of the Company, for the years ended June 30, 1996 and
1995. The Company operates on a fiscal year ending June 30. The information
below 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 appearing elsewhere in this Prospectus. All
operations of the Company are conducted through ABC and its subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to fund its loans principally through (i)
institutional debt financing, (ii) the securitization and sales of loans which
it purchases or originates, (iii) the sale of the Company's registered
subordinated debentures, and (iv) retained earnings. 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.
Between November 1990 and February 1994, American Business Finance
Corporation ("ABFC"), an indirect subsidiary of ABFS, sold approximately
$1,700,000 in principal amount of subordinated debentures which mature at
varying times between September 1996 and June 1998. In February 1994, the
Company ceased selling subordinated debentures through ABFC. As of June 30,
1996, approximately $1,300,000 of subordinated debt was outstanding
In addition, between July 1993 and June 1996, ABFS sold $48,169,910 in
principal amount of subordinated notes, including the Investment Notes,
(including redemptions and repurchases by investors) pursuant to registered
offerings with varying maturities ranging between three months and ten years. As
of June 30, 1996, approximately $32,300,000 of subordinated debentures were
outstanding. The proceeds of such Note sales have been used to fund general
operating and lending activities. The Company intends to meet its obligations to
repay such debentures as they mature 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.
During the fiscal year 1996, the Company completed two loan securitizations.
These securitizations which were consummated in October 1995 and May 1996,
involved $14,500,000 of
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business loans and $22,000,000 of business and home equity loans, respectively.
These securitizations resulted in proceeds of approximately $34.2 million. The
Company intends to utilize the proceeds of the securitizations to fund the
origination of new loans and leases. In accordance with 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.
Additionally, pursuant to the terms of the securitizations, ABC 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 ABC determines that such advances will not be recoverable from subsequent
collections in respect of the related loan. ABC's obligation to advance funds in
its capacity as servicer of the loans may create greater demands on the
Company's cash flow than either selling loans or maintaining a portfolio of
loans.
Subject to economic, market and interest rate conditions, the Company
intends to continue to implement additional securitizations of its loan
portfolios and may in the future securitize its 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 in the Company's
results of operations.
The Company's Revolving Credit and Security Agreement with CoreStates Bank,
N.A. (formerly Meridian Bank) was renewed as of December 1995 and expires in
December 1996. The credit facility is in the amount of $3,500,000, bears an
interest rate equal to the bank's prime rate plus 1.6%.
In April 1996, Upland entered into an Interim Warehouse and Security
Agreement with Prudential Securities Realty Funding Corporation. The credit
facility is for $25,000,000, bears interest at the 30 day LIBOR plus 1.25% and
expires in September 1996. Subsequent to fiscal year end, this credit facility
was extended to March 1997.
Additionally, in May 1996, Upland entered into a $7,500,000 Revolving Loan
and Security Agreement with BankAmerica Business Credit, Inc. The credit
facility bears interest at the bank's prime rate plus 1.25% and expires in May
1998.
The Company is currently discussing the possibility of obtaining additional
lines of credit with other lenders and providers of credit.
As of June 30, 1996, the Company had $21,206,784 of debt scheduled to mature
during the fiscal year ending June 30, 1997, including approximately $18.85
million of Subordinated Debt and approximately $2.35 million of debt under a
revolving credit facility. It is currently anticipated that the maturing credit
facility will be paid from the proceeds of the Company's next securitization.
The Company currently expects to refinance the $18.85 million of maturing debt
through extensions of maturing debentures or new debt financing and, if
necessary, may retire the debt through cash flow from operations and loan sales
or securitizations. Despite the Company's current use of securitizations to fund
loan growth, the Company continues to be dependent upon borrowings to fund a
portion of its operations. As a result, the Company's ability to continue to
expand its operations in the future will at least, in part, be dependent on the
Company's continuing access to debt financing.
The Company from time to time considers potential acquisitions of related
businesses or assets which could have a material impact upon the Company's
liquidity position.
The Company leases certain of its facilities under a five-year operating
lease expiring in November 2000 at a minimum annual rental of $430,637. The
lease contains a renewal option for an additional period at increased annual
rental. See "Business -- Property."
26
<PAGE>
INTEREST RATE RISK MANAGEMENT
The Company is subject to interest rate risk to the extent it holds fixed
rate mortgage loans in its held for sale portfolio prior to securitization. In
August 1995, the Company implemented an "interest-rate lock" 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 matches 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
$15,000,000 of U.S. Treasury securities. The deferred loss related to these
activities was approximately $27,000 at June 30, 1996. The Company also prefunds
loan originations in connection with its loan 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.
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.
BALANCE SHEET INFORMATION
Total assets increased $24,719,267, or 111%, to $46,894,163 at June 30, 1996
from $22,174,896 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 increased $9,162,146, or 102%, from $8,997,357 at
June 30, 1995 to $18,159,503 at June 30, 1996 as a result of the Company's
strategy of holding loans in its portfolio prior to securitization. Other
receivables increased $9,853,470, or 233%, from $4,237,072 at June 30, 1995 to
$14,090,542 at June 30, 1996 due to the Company's retention of the residual
interest in the trusts in connection with its loan securitizations. Other assets
increased $3,580,419, or 122%, from $2,924,375 to $6,504,794 at June 30, 1996
due primarily to an increase in subordinated certificates obtained as a result
of the Company's securitizations.
Total liabilities increased $22,471,166, or 112%, from $20,031,482 to
$42,502,648 at June 30, 1996 primarily due to an increase in debt. The increase
in debt was due to sales of subordinated debentures (including the Investment
Notes) of $19,687,982 during fiscal 1996 and a net increase in institutional
debt of $2,348,465. At June 30, 1996, the Company had approximately $33,600,000
of subordinated debentures outstanding (including the Investment Notes). The
Company's ratio of total debt (subordinated debentures plus credit facilities)
to equity at June 30, 1996 was 8.2:1.
27
<PAGE>
Stockholders' equity increased $2,248,101, or 105%, due to an increase in
retained earnings net of dividends paid.
RESULTS OF OPERATIONS
OVERVIEW
The Company derives income from three basic sources: interest and other
charges paid on its loans, loan origination fees and the sale and securitization
of loans, not necessarily in that order.
All of the Company's loans and leases are made at fixed rates. Generally due
to such circumstances, a general rise or fall in interest rates in the economy
will have the effect of decreasing or increasing the "spread" which the Company
enjoys between its cost of funds on any variable rate sources or short term
sources of funds which it utilizes and the interest rates it earns on its
portfolio of loans.
The following table sets forth certain information concerning the lending
and loan and lease origination and sale activities of the Company for fiscal
1996 and 1995.
<TABLE>
<CAPTION>
COMBINED
YEAR ENDED
YEAR ENDED JUNE 30, 1996 JUNE 30,
-------------------------------------------------------------- -----------
ABL ABC(1) HAC(2) HACD COMBINED 1995
---------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dollars Amt. of Loans Originated (Net of
Refinances)
Business........................................ $5,967,126 $ 21,525,561 $ 7,346,836 -- $34,839,523 $20,390,122
Consumer........................................ -- -- $36,479,393 $ 240,049 $36,719,442 $18,071,345
Number of Loans/Leases Originated
Business........................................ 530 266 105 -- 901 450
Consumer........................................ -- -- 772 52 824 602
Average Loan/Lease Size
Business........................................ 11,259 80,923 69,970 -- 38,668 70,700
Consumer........................................ -- -- 47,253 4,616 44,562 30,109
Weighted Average Interest Rate
Business........................................ 17.22% 15.82% 15.88% -- 16.07% 16.05%
Consumer........................................ -- -- 9.94% 24.5% 10.06% 18.60%
Weighted Average Term (in months)
Business........................................ 42 169 171 -- 148 213
Consumer........................................ -- -- 194 50 193 132
Dollar Amount of Loans/Leases Sold
Business........................................ $2,258,829 $420,664,709 $ 7,587,956 -- $30,511,494 $24,761,552
Consumer........................................ -- -- $24,324,720 $1,107,788 $25,432,508 $16,962,883
Number of Loans/Leases Sold
Business........................................ 193 268 110 -- 571 384
Consumer........................................ -- -- 512 252 764 365
</TABLE>
- --------------
(1) All ABC loans are business loans.
(2) All HAC loans, as indicated, are either (i) business loans or (ii)
conventional consumer home equity loans or consumer sales finance
transactions.
The Company's strategy of selling loans through securitizations requires the
Company to build an inventory of loans over time. Accordingly, 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.
As a result of securitizations, the Company derives a significant portion of
its income by realizing gains upon the sale of loans due to the excess spread
associated with such loans at the time of sale. Excess spread represents the
excess of the interest rate payable by an obligator on a
28
<PAGE>
loan over the interest rate passed through to the purchaser acquiring an
interest in such loans, less the Company's servicing fee and other applicable
recurring fees. When loans are sold in securitizations, the Company recognizes
as current revenue and an associated receivable the present value of the excess
spread expected to be realized over the anticipated average life of loans sold
less future estimated credit losses relating to the loans sold. These excess
spreads and the associated receivable are computed using prepayment, loss,
delinquency 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 to the net present
value of the estimated remaining future excess spreads. The receivable is also
reduced to reflect the receipt of cash.
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 utilized by the Company are estimates and actual experience
may 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
anticipated. Higher levels of future payments, 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.
Should the estimated average loan life assumed for this purpose be 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. If the Company's assumptions are correct or if prepayment, delinquencies
and/or liquidations are less than assumed, the Company would realize additional
income in the adjustment periods.
The following discussion provides information which management believes is
relevant to an understanding of the Company's results of operations. This
discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto included herein.
FISCAL 1996 COMPARED WITH FISCAL 1995
Total revenues increased $6,734,656, or 119%, to $12,378,733 in fiscal 1996
from $5,644,077 in fiscal 1995. As described in more detail below, the increase
in revenues was primarily the result of higher gains on sales of loans through
securitizations.
Gain on sale of loans increased $7,562,232, or 524%, to $9,005,193 for the
year ended June 30, 1996 from $1,442,961 for the comparable period of 1995. This
increase was the result of increased loan sales through securitizations in
fiscal 1996. The Company consummated loan securitizations in October 1995 and
May 1996 generating gain on securitizations of $8,858,839 (representing the fair
value of residual certificates of $10,447,862 less $1,589,023 of costs
associated with the transactions) on the Company's participation in $36.5
million of loans sold through securitizations.
Interest and fee income consists of interest income, fee income and
amortization of origination costs. Interest and fee income decreased $706,927,
or 17%, to $3,350,716 in fiscal 1996 from $4,057,643 in fiscal 1995 due to a
decline in fee income as a result of the Company's securitization program
discussed below.
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 $777,609 to $2,180,816 in fiscal 1996 or a 55% increase
over the $1,403,901 reported for fiscal 1995. The Company's leasing subsidiary,
which commenced operations in January 1995 contributed $493,000 of the increase.
The remaining increase was attributable to increased originations of consumer
and business loans, as well as, management's decision to retain home equity
loans in portfolio in contemplation of securitization in the future. During
fiscal 1996, the Company
29
<PAGE>
originated approximately $37,000,000 of consumer loans and $35,000,000 of
business loans. During fiscal 1995, the Company originated approximately
$18,000,000 of consumer loans, the majority of which were sold to third parties
(with servicing released). 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 has the ability to hold a greater amount of 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 purchases. Fee
income decreased $1,692,152 from $3,167,188 for fiscal 1995 to $1,475,036 for
fiscal 1996. 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 $207,616 from $512,752 to $305,136 at June 30, 1996.
Amortization of origination costs attributable to leasing activities increased
$166,830 as the leasing company was only in operation for six months of the
prior fiscal year. However, amortization of origination costs attributable to
mortgage loans decreased $374,446 in fiscal 1996. The amount of origination cost
recognized is in part determined by the length of time a loan is held in
portfolio. In fiscal 1995, the Company securitized its loan portfolio in March
1995 resulting in the average loan being held in portfolio for 5.5 months. In
fiscal 1996, loans were securitized in October 1995 and May 1996, reducing the
average holding period to three months.
Total expenses increased $4,507,896, or 95%, to $9,258,070 in 1996 from
$4,750,174 in 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 the Investment Notes, and increased payroll,
sales and marketing and general and administrative expenses related to increased
loan originations during fiscal 1996.
Interest expense increased $1,454,747, or 120%, to $2,667,858 in fiscal 1996
from $1,213,111 in fiscal 1995. The increase was primarily attributable to an
increase in the amount of the Company's Investment Notes outstanding as
management utilized the proceeds from the sale of such Investment Notes to fund
the increase in loan originations experienced during fiscal 1996. Outstanding
subordinated debentures (including the Investment Notes) issued for terms
ranging from three months to ten years and rates ranges from 7% to 10.5%
increased from an average $12.0 million in fiscal 1995 to $25.0 million during
fiscal 1996. Average interest rate paid on the subordinated debt (including the
Investment Notes) increased from 8.75% to 9.02%, due to an increase in market
rates of interest.
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 experienced during fiscal 1996. 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 such
losses will not exceed the estimated amounts or that additional provisions will
not be required. The allowance is increased through an increase in the provision
for credit losses. The Company had an allowance for credit losses of $707,424 at
June 30, 1996. The provision for credit losses increased to $681,228 from
$165,143 in the prior period. The increase in the
30
<PAGE>
provision for credit losses was due to the increases in the Company's loan and
lease portfolios. The ratio of the allowance for credit losses to total net loan
and lease receivables, was 3.86% at June 30, 1996 as compared to 1.76% at June
30, 1995.
Payroll and related costs increased $208,045, or 21%, to $1,203,260 in
fiscal 1996 from $995,215 in fiscal 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. Management anticipates that such expenses will continue to increase
in the future as the Company expands its service area.
Sales and marketing expenses increased $1,174,946, or 78%, to $2,685,173 in
fiscal 1996 from $1,510,227 in fiscal 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 debentures and loan products and
the initiation of a radio advertising program for the home equity loan product.
In fiscal 1997, the Company intends to expand its home equity loan advertising
programs through the use of television. 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 fiscal 1996, the
Company offered its subordinated debentures in Florida and business loan
products in Maryland and New York City. The Company plans to continue to expand
its service area along the Atlantic Coast subject to market conditions in the
future. As a result of the Company's planned expansion, it is anticipated that
sales and marketing expenses will continue to increase in future periods.
General and administrative expenses increased $1,154,073, or 133%, to
$2,020,551 in 1996 from $866,478 in 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.
Net income increased $1,737,659, or 299%, from $581,037 at June 30, 1995 to
$2,318,696. 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 fiscal
1996 compared to $.27 on weighted average common shares outstanding of 2,128,154
for fiscal 1995 representing a 274% increase for 1996 from 1995.
The Company's ability to sustain the level of growth in net income
experienced during fiscal 1996 is dependent upon a variety of factors outside
the control of the Company, including interest rates, economic conditions in the
Company's primary market area, competition and regulatory restrictions. As a
result, it is unlikely that the rate of growth experienced in fiscal 1996 will
be sustained in the future.
31
<PAGE>
ASSET QUALITY
The following table provides data concerning delinquency experience, real
estate owned ("REO") properties and loss experience for the Company's serviced
portfolios. Total Portfolio Serviced by ABC includes business loans originated
by HAC. Neither HAC, ABL nor HACD had REO for the periods presented.
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
--------------------- ---------------------
DELINQUENCY BY COMPANY AMOUNT % AMOUNT %
- ---------------------------------------------------------------------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C>
AMERICAN BUSINESS CREDIT INC.
Total Portfolio Serviced.............................................. $37,949,806 $14,677,938
----------- -----------
----------- -----------
Period of delinquency
31-60 Days.......................................................... $ 37,291 .10% $ 141,033 .96%
61-90 Days.......................................................... 180,942 .48 75,484 .51
Over 90 Days........................................................ 1,018,955 2.69 309,895 2.11
----------- ----- ----------- -----
Total Delinquencies................................................. $ 1,237,188 3.26% $ 526,412 3.59%
----------- ----- ----------- -----
----------- ----- ----------- -----
REO................................................................... $ 444,270 $ 641,287
HOMEAMERICAN CREDIT, INC.
Total Portfolio Serviced.............................................. $17,223,996 $ --
----------- -----------
----------- -----------
Period of delinquency................................................. -- -- -- --
31-60 Days.......................................................... -- -- -- --
61-90 Days.......................................................... -- -- -- --
Over 90 Days........................................................ -- -- -- --
----------- ----- ----------- -----
Total Delinquencies................................................. -- -- -- --
----------- ----- ----------- -----
----------- ----- ----------- -----
AMERICAN BUSINESS LEASING
Total Portfolio Serviced.............................................. $ 4,607,367 $ 2,031,063
----------- -----------
----------- -----------
Period of delinquency.................................................
31-60 Days.......................................................... $ 23,309 .51% $ 48,649 2.40%
61-90 Days.......................................................... 13,503 .29 39,980 1.97
Over 90 Days........................................................ 41,109 .89 -- --
----------- ----- ----------- -----
Total Delinquencies................................................. $ 77,921 1.69% $ 88,629 4.37%
----------- ----- ----------- -----
----------- ----- ----------- -----
HOMEAMERCIAN CONSUMER DISCOUNT
Total Portfolio Serviced.............................................. $ 109,726 $ 1,065,238
----------- -----------
----------- -----------
Period of delinquency
31-60 Days.......................................................... $ -- --% $ 16,114 1.51%
61-90 Days.......................................................... 18,163 16.55 30,000 2.82
Over 90 Days........................................................ 50,271 45.82 20,971 1.97
----------- ----- ----------- -----
Total Delinquencies................................................. $ 68,434 62.37% $ 67,085 6.30%
----------- ----- ----------- -----
----------- ----- ----------- -----
<CAPTION>
COMPANY COMBINED
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio Serviced.............................................. $59,890,895 $17,774,239
----------- -----------
----------- -----------
Period of delinquency
31-60 Days.......................................................... $ 60,600 .10% $ 205,796 1.16%
61-90 Days.......................................................... 212,608 .35 145,464 .82
Over 90 Days........................................................ 1,110,335 1.85 330,866 1.86
----------- ----- ----------- -----
Total Delinquencies................................................. $ 1,383,543 2.30% $ 682,126 3.84%
----------- ----- ----------- -----
----------- ----- ----------- -----
REO................................................................... $ 444,270 .74% $ 641,287 3.61%
----------- ----- ----------- -----
----------- ----- ----------- -----
Dollar Amount of Losses Experienced................................... $ 129,062 .22% $ 87,885 .49%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
Although the Company's total delinquencies as a percentage of the total
portfolio serviced did not increase during fiscal 1996, the dollar amount of the
total loan delinquencies increased during such period which is reflective of the
increase in the Company's total loan portfolio serviced.
32
<PAGE>
MANAGEMENT
The present management structure of the Company is as follows: Anthony J.
Santilli, Jr. is Chairman, President, Chief Executive and Operating Officer,
Treasurer and a Director of the Company. Beverly Santilli is President of ABC
and an Executive Vice President of ABFS. Jeffrey M. Ruben, Senior Vice President
and General Counsel of the Company, is responsible for compliance and other
legal matters. David M. Levin, CPA, Senior Vice President -- Finance and Chief
Financial Officer, is responsible for the Company's accounting functions. Harold
Sussman, Michael DeLuca, Richard Kaufman and Leonard Becker are directors of the
Company but 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 shall
qualify.
DIRECTORS
The Board of Directors of the Company is currently comprised of five (5)
persons who are serving for terms expiring at the next annual meeting of the
Company's shareholders. The following is a description of the business
experience of the Company's Board of Directors.
ANTHONY J. SANTILLI, JR. - CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER,
CHIEF OPERATING OFFICER, TREASURER AND DIRECTOR
Anthony J. Santilli, Jr., age 53, is the Chairman, President, Chief
Executive Officer, Chief Operating Officer, Treasurer and a Director of the
Company and is an executive officer of its subsidiaries. He has held the
positions with the Company since early 1993 when the Company became the parent
company of American Business Credit, Inc. and the positions with the
subsidiaries since the formation of ABC in June 1988. In addition, Mr. Santilli
is a member of the Company's Executive and Finance Committees.
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.
Mr. Santilli graduated with a Bachelor of Science Degree in Economics from
St. Joseph's University, Philadelphia, PA and with a Master of Business
Administration in Marketing from Drexel University, Philadelphia, PA.
LEONARD BECKER - DIRECTOR
Mr. Becker, age 73, has been a Director of the Company since 1993 and a
director of ABC since 1988. Mr. Becker is a member of the Company's Executive
and Finance Committees.
Mr. 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 building
and apartments. Mr. Becker formerly served as a Director for Eagle National Bank
and Cabot Medical Corp.
Mr. Becker graduated from Temple University with a Bachelor of Science
degree in Business Administration in 1968.
33
<PAGE>
MICHAEL DELUCA - DIRECTOR
Mr. DeLuca, age 65, has been a Director of the Company since 1993 and a
director of ABC since 1991. He is a member of the Company's Audit, Compensation
and Finance Committees.
Mr. DeLuca was President, Chairman of the Board and 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 - DIRECTOR
Mr. Kaufman, age 54, has been a Director of the Company since 1993 and a
director of ABC since 1988. Mr. Kaufman is a member of the Company's
Compensation, Executive and Finance Committees.
Mr. Kaufman has been self employed since 1982 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.
Mr. Kaufman graduated from Michigan State University with a Bachelor of Arts
degree in 1965.
HAROLD E. SUSSMAN - DIRECTOR
Mr. Sussman, age 71, has been a Director of the Company since 1993 and a
director of ABC since 1988. Mr. Sussman is a member of the Company's Audit and
Compensation Committees. Mr. Sussman is currently a principal in the real estate
firm of Lanard & Axilbund, Inc., a major commercial and industrial real estate
brokerage and management firm in the Philadelphia area, with which he has been
associated since 1972.
EXECUTIVE OFFICERS WHO ARE NOT ALSO DIRECTORS
The following is a description of the business experience of each executive
officer who is not also a director.
BEVERLY SANTILLI - EXECUTIVE VICE PRESIDENT AND SECRETARY OF ABFS PRESIDENT
OF AMERICAN BUSINESS CREDIT
Mrs. Santilli, age 37, 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 the
Philadelphia Savings Fund Society initially as an Account Executive and later as
a Commercial Lending Officer with such institution's Private Banking Group. Mrs.
Santilli graduated from Temple University in 1982. Mrs. Santilli is the wife of
Anthony J. Santilli, Jr.
JEFFREY M. RUBEN - SENIOR VICE PRESIDENT AND GENERAL COUNSEL
Mr. Ruben, age 33, 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
graduated
34
<PAGE>
with honors and distinction from the Pennsylvania State University with a degree
in Economics in 1985 and received his Juris Doctorate from Temple University Law
School in 1990. 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 - SENIOR VICE PRESIDENT - FINANCE AND CHIEF FINANCIAL OFFICER
Mr. Levin, age 51, is Senior Vice President - Finance of the Company and its
subsidiaries. Mr. Levin is also 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
graduated with a Bachelor of Arts Degree in Business Administration from Rutgers
University, New Brunswick, New Jersey and with a Master of Business
Administration in Finance from Rutgers University, Newark, New Jersey. Mr. Levin
is licensed as a Certified Public Accountant in Pennsylvania and New Jersey.
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 as a director.
The Company adopted a Non-Employee Director Stock Option Plan pursuant to
which each non-employee director of the Company received an option to purchase
22,500 shares of ABFS Common Stock at an exercise price of $5.00 per share. 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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation and By-laws
provide that to the fullest extent permitted by Delaware law, directors of the
Company shall not be personally liable to the Corporation 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 By-Laws also 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 Amended and Restated Certificate of Incorporation and the Amended and
Restated 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.
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.
35
<PAGE>
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
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ------------------------------------------
----------------------------------------------- RESTRICTED UNDERLYING
FISCAL OTHER ANNUAL STOCK OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS (#) COMPENSATION
- ---------------------------------- ------ -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 1996 $237,500 $300,000(1) -- -- 22,500(3) --
Chairman, President, Chief 1995 191,667 -- -- -- -- --
Executive Officer, Chief Operating 1994 175,000 -- -- -- -- --
Officer, Treasurer and Director of
ABFS
Beverly Santilli 1996 $120,000 $ 65,000 -- -- -- --
President, ABC and Executive Vice 1995 86,892 -- -- -- -- --
President of ABFS 1994 80,163 -- -- -- -- --
Jeffrey M. Ruben 1996 $ 96,125 $ 50,000 -- -- -- --
Sr. Vice President and General 1995 80,353 -- -- -- 7,500(4) --
Counsel of ABFS 1994 75,228 -- -- -- -- --
David M. Levin 1996 $ 85,000 $ 20,000 -- -- -- --
Senior Vice President - Finance 1995(2) -- -- -- -- -- --
and Chief Financial Officer of 1994(2) -- -- -- -- -- --
ABFS
</TABLE>
- ------------------
(1)
This represents Mr. Santilli's yearly bonus of $250,000 plus a one-time bonus
of $50,000 paid in October 1995.
(2)
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.
(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 $2.67 per share.
During fiscal 1996, the Company paid cash bonuses to certain officers and
employees based upon the Company's achievement of certain established
performance targets. Bonuses paid for fiscal 1996 to the Named Officers are
included in the Summary Compensation Table above.
The Company currently has a stock option plan for officers and key employees
pursuant to which options to purchase 83,988 shares of Common Stock were still
remaining to be granted as of August 30, 1996. The following table sets forth
information regarding options exercised by the Named Officers during fiscal 1996
and option values of options held by such individuals at fiscal year end.
36
<PAGE>
AGGREGATED OPTIONS/SAR EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
VALUE OPTIONS/ SARS AT THE-MONEY OPTIONS/SARS AT
SHARES ACQUIRED REALIZED FISCAL YEAR END FISCAL YEAR END
NAME ON EXERCISE (#) ($) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
- ----------------------------------- --------------- ----------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
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, ABC and Executive Vice
President Secretary of ABFS
Jeffrey M. Ruben 0 0 7,500/0 $65,288/0(2)
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
</TABLE>
- --------------
(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 $2.67 per share.
37
<PAGE>
The following table sets forth information regarding options granted to the
Named Officers during fiscal 1996. No stock appreciation rights ("SARs") were
granted in fiscal 1996.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ------------------------------------------------------- ------------ ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Anthony J. Santilli, Jr. 22,500 100% $ 5.00 October 1, 2005
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 General Counsel of ABFS
David M. Levin -- -- -- --
Sr. Vice President - Finance and Chief Financial
Officer of ABFS
</TABLE>
38
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 30, 1996 by the directors
of the Company, the Named Officers, each person known by the Company to be the
beneficial owners of five (5%) percent or more of the Common Stock of the
Company, and all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NAME AND POSITION (IF APPLICABLE) NUMBER OF SHARES BENEFICIALLY OWNED(1)) PERCENTAGE OF CLASS
- ------------------------------------------------------ --------------------------------------- ---------------------
<S> <C> <C>
Anthony J. Santilli, Jr. 899,544(2)(3) 37.9%
Chairman, President,
Chief Executive Officer, Chief Operating
Officer Treasurer and Director of ABFS
and Beverly Santilli, President of ABC
and Executive Vice President of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Leonard Becker, Director of ABFS 310,706(4) 13.1%
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Michael DeLuca, Director of ABFS 189,735(4) 8.0%
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 165,561(4) 7.0%
c/o Presidential Securities
3 Bala Plaza
East Suite 415
Bala Cynwyd, PA 19004
Harold Sussman, Director of ABFS 96,711(4) 4.1%
Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 7,500(5) (6)
Senior Vice President and General
Counsel of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
David M. Levin -- --
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 1,669,757 67.5%
persons)
</TABLE>
- --------------
(1)
The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly they may
include securities owned by or for, among others, the wife and/or minor
children or the individual and any other relative who has the same home as
such individual, as well as other securities as to which the individual has or
shares voting or investment power or has the right to acquire under
outstanding stock options within 60 days after the date of this table.
Beneficial ownership may be disclaimed as to certain of the securities.
(2)
Shares listed are held in joint tenancy by Mr. and Mrs. Santilli.
39
<PAGE>
(3)
Includes options to purchase 22,500 shares awarded to Mr. Santilli pursuant to
the Company's Employee Stock Option Plan.
(4)
Includes options to purchase 22,500 shares awarded to each non-employee
director of the Company pursuant to the Company's 1995 Stock Option Plan for
Non-Employee Directors.
(5)
Represents an option to purchase 7,500 shares of the Company's Common Stock
granted pursuant to the Company's Employee Stock Option Plan.
(6)
Less than one percent.
40
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company does not have any formal policy concerning the direct or
indirect pecuniary interest of any of its officers, directors, security holders
or affiliates in any investment to be acquired or disposed of by the Company or
in any transaction to which the Company is a party or has an interest. The
Company will not enter into any such transactions unless approved by a majority
of the entire Board of Directors, not including any interested director.
On September 29, 1995, the Company made a loan in the amount of $600,032 to
Anthony J. Santilli, its President and Chief Executive Officer. The proceeds of
the loan were used to exercise 225,012 stock options 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 and the principal due September 2005. The loan is secured by the
stock purchased with the proceeds of the loan as well as an additional 225,000
shares of ABFS Common Stock owned by Mr. Santilli.
Mr. Santilli is a limited guarantor on the Company's line of credit from
Meridian Bank. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock is traded on the Philadelphia Stock Exchange ("PHLX") under
the symbol "AFX". The Common Stock began trading on the PHLX on May 13, 1996.
The average high and low sales prices of the Common Stock from the date on which
the Common Stock commenced trading on the PHLX through June 30, 1996 were $17.00
and $10.00, respectively. 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. On August 30, 1996, the closing sales price of the Common Stock on
the PHLX was $16.75.
As of August 30, 1996, there was approximately 120 record holders and
approximately 500 beneficial holders of the Common Stock.
During fiscal 1996, the Company paid dividends of $0.03 per share, for an
aggregate dividend payment of $70,595. Subsequent to fiscal year end, the
Company declared a dividend of $0.015 per share for the fourth quarter of fiscal
1996. The continuing payment by the Company of dividends in the future rests
within the discretion of its Board of Directors and will depend, among other
things, upon the Company's earnings, its capital requirements and its 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 proceeding fiscal year. In addition, one of the Company's
loan agreements prohibits the payment of dividends in excess of the lesser of
33% of net income for the current year or $250,000.
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 Investment
Notes. ABFS may in the future employ the services of an NASD member
broker-dealer for purposes of offering the Investment 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 Investment Note 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 of 1933, as amended and to reimburse such broker-dealer
for its costs and expenses, up to a maximum to be determined,
41
<PAGE>
based upon the total dollar value of Investment Notes sold. ABFS will otherwise
offer the Investment Notes through its employees in accordance with Rule 3a4-1
under the Securities Exchange Act of 1934.
The Issuer 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. An Investment Note
will be sent to the subscriber as soon as practicable thereafter. No minimum
number of Investment 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 Investment 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
The validity of the Investment Notes being offered hereby have been passed
upon for the Company by Blank Rome Comisky & McCauley, Four Penn Center Plaza,
Philadelphia, Pennsylvania.
EXPERTS
The Consolidated Financial Statements of ABFS and subsidiaries as of June
30, 1996 and for the fiscal 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 fiscal year ended June 30, 1995 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 have been 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 did not contain
an adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles. In addition, there has
not been any "reportable events" as defined by Item 304(a)(1)(iv)(B) of
Regulation S-B during the periods referred to above.
42
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORTS.................................................. F-3
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1996 AND 1995....................... F-5
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 1996 AND 1995... F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30,
1996 AND 1995................................................................. F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996 AND
1995.......................................................................... F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................... F-10
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
American Business Financial Services, Inc.
and Subsidiaries
Bala Cynwyd, Pennsylvania
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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 operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Philadelphia, Pennsylvania
August 23, 1996
F-3
<PAGE>
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 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 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 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 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 the year then ended in conformity with generally accepted accounting
principles.
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
September 20, 1995
F-4
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Cash and cash equivalents.................................................... $ 5,345,269 $ 4,734,368
Loan and lease receivables, net
Available for sale......................................................... 17,625,178 8,668,956
Other...................................................................... 534,325 328,401
Other receivables............................................................ 14,090,542 4,237,072
Prepaid expenses............................................................. 1,341,160 594,046
Property and equipment, net of accumulated depreciation and amortization..... 1,452,895 687,678
Other assets................................................................. 6,504,794 2,924,375
---------------- ----------------
Total assets........................................................... $ 46,894,163 $ 22,174,896
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt....................................................................... $ 35,987,401 $ 17,824,007
Accounts payable and accrued expenses...................................... 3,132,170 1,117,930
Deferred income taxes...................................................... 1,506,271 704,304
Other liabilities.......................................................... 1,876,806 385,241
---------------- ----------------
Total liabilities...................................................... 42,502,648 20,031,482
---------------- ----------------
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value Authorized 1,000,000 shares Issued and
outstanding none......................................................... -- --
Common stock, par value $.001 Authorized 9,000,000 shares Issued and
outstanding 2,353,166 shares in 1996 and 2,128,154 shares in 1995........ 2,353 2,128
Additional paid-in capital................................................. 1,931,699 1,331,892
Retained earnings.......................................................... 3,057,495 809,394
---------------- ----------------
4,991,547 2,143,414
Less note receivable....................................................... 600,032 --
---------------- ----------------
Total stockholders' equity............................................. 4,391,515 2,143,414
---------------- ----------------
Total liabilities and stockholders' equity............................. $ 46,894,163 $ 22,174,896
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
REVENUES
Gain on sales of loans......................................................... $ 9,005,193 $ 1,442,961
Interest and fees.............................................................. 3,350,716 4,057,643
Other income................................................................... 22,824 143,473
-------------- --------------
Total revenues............................................................... 12,378,733 5,644,077
-------------- --------------
EXPENSES
Interest....................................................................... 2,667,858 1,213,111
Provision for credit losses.................................................... 681,228 165,143
Payroll and related costs...................................................... 1,203,260 995,215
Sales and marketing............................................................ 2,685,173 1,510,227
General and administrative..................................................... 2,020,551 866,478
-------------- --------------
Total expenses............................................................... 9,258,070 4,750,174
-------------- --------------
INCOME BEFORE INCOME TAXES....................................................... 3,120,663 893,903
INCOME TAXES..................................................................... 801,967 312,866
-------------- --------------
NET INCOME....................................................................... $ 2,318,696 $ 581,037
-------------- --------------
-------------- --------------
EARNINGS PER SHARE............................................................... $ 1.01 $ .27
-------------- --------------
-------------- --------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.................................... 2,296,913 2,128,154
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------- --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 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
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 $ 4,991,547
------------- --------- -------------- -------------- --------------
------------- --------- -------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 2,318,696 $ 581,037
Adjustments to reconcile net income to net cash (used in) provided by
operating activities
Gain on sales of loans/leases.......................................... (8,969,880) (1,442,961)
Amortization of origination fees and costs............................. 305,136 528,554
Amortization of deferred servicing rights.............................. 69,489 --
Provision for credit losses............................................ 681,228 165,143
Accounts written off................................................... (129,063) (87,885)
Depreciation and amortization of property and equipment................ 318,493 177,632
Amortization of financing and organization costs....................... 505,012 436,260
(Increase) decrease in accrued interest and fees on loan and lease
receivables.......................................................... (268,010) 119,407
Decrease (increase) in other receivables............................... 683,797 (328,081)
(Increase) in prepaid expenses......................................... (747,114) (241,164)
Decrease (increase) in other assets.................................... 332,009 (117,992)
Increase in accounts payable and accrued expenses...................... 2,014,240 328,022
Increase in deferred income taxes...................................... 801,967 285,791
Increase in other liabilities.......................................... 1,491,565 316,868
----------------- -----------------
Net cash (used in) provided by operating activities................ (592,435) 720,631
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans and leases originated.............................................. (60,472,812) (15,408,775)
Loan and lease payments received......................................... 4,549,979 3,065,676
Proceeds of loans sold................................................... 40,627,246 8,747,265
Purchase of property and equipment....................................... (1,022,926) (382,154)
Decrease in securitization gain receivable............................... 58,693 9,958
Principal receipts on investments........................................ 33,307 3,567
----------------- -----------------
Net cash (used in) investing activities............................ (16,226,513) (3,964,463)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing costs incurred................................................. (662,950) (483,732)
Net proceeds of (principal payments on) revolving line of credit......... 2,348,465 (1,999,431)
Principal payments on term notes payable, bank........................... -- (245,555)
Dividends paid........................................................... (70,595) --
Principal payments on note payable, other................................ (5,606) (4,814)
Proceeds from issuance of subordinated debentures........................ 19,687,982 12,049,581
Principal payments on subordinated debentures............................ (3,867,447) (1,420,432)
----------------- -----------------
Net cash provided by financing activities.......................... 17,429,849 7,895,617
----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................. 610,901 4,651,785
CASH AND CASH EQUIVALENTS, beginning of year............................... 4,734,368 82,583
----------------- -----------------
CASH AND CASH EQUIVALENTS, end of year..................................... $ 5,345,269 $ 4,734,368
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest............................................................... $ 1,183,745 $ 706,506
----------------- -----------------
----------------- -----------------
Income taxes........................................................... $ 78,475 $ 8,250
----------------- -----------------
----------------- -----------------
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) --
Deferred servicing rights............................................ 1,165,000 --
----------------- -----------------
$ 14,451,945 $ 4,404,951
----------------- -----------------
----------------- -----------------
Reclassification of other assets, leased equipment to fixed assets....... $ 60,784 $ --
----------------- -----------------
----------------- -----------------
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.
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 a 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 secondary market 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 (see Note 3). 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 exceed actual cash
flows, losses are recognized through the use of an allowance account. If actual
cash flows exceed anticipated cash flows, the allowance account is adjusted.
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.
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.
F-10
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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; the effect of outstanding stock options is not dilutive.
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.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 presentation.
F-11
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. LOAN AND LEASE RECEIVABLES
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1996 1995
---------------- --------------
<S> <C> <C>
Real estate secured loans........................................... $ 12,960,229 $ 4,761,778
Leases (net of unearned income of $1,136,621 and $557,880).......... 4,393,713 2,034,981
Other loans......................................................... 109,726 1,134,742
Unamortized origination costs/fees.................................. 868,934 892,713
---------------- --------------
18,332,602 8,824,214
Less allowance for credit losses.................................... 707,424 155,258
---------------- --------------
Loan and lease receivables, net..................................... $ 17,625,178 $ 8,668,956
---------------- --------------
---------------- --------------
</TABLE>
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 ($2,834,783 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 June 30, 1996, the uncollected balance of
receivables securitized was approximately $42,100,000.
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:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
----------- ----------- ----------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
origination
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
----------- ----------- ----------- --------- --------- ------------ ------------
----------- ----------- ----------- --------- --------- ------------ ------------
</TABLE>
3. ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<S> <C>
BALANCE, July 1, 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
-----------
-----------
</TABLE>
F-12
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER RECEIVABLES
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1996 1995
---------------- --------------
<S> <C> <C>
Sales of loans........................................... $ 86,090 $ 415,521
Home equity loan fees.................................... 121,874 506,236
Residuals................................................ 13,447,674 2,969,812
Other.................................................... 434,904 345,503
---------------- --------------
$ 14,090,542 $ 4,237,072
---------------- --------------
---------------- --------------
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Computer equipment and software............................ $ 1,296,769 $ 754,732
Office furniture and equipment............................. 803,445 393,423
Leasehold improvements..................................... 171,542 49,999
-------------- --------------
2,271,756 1,198,154
Less accumulated depreciation and amortization............. 818,861 510,476
-------------- --------------
$ 1,452,895 $ 687,678
-------------- --------------
-------------- --------------
</TABLE>
6. OTHER ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Deposits................................................... $ 296,582 $ 113,483
Financing costs, debt offerings, net of accumulated
amortization of $1,074,212 in 1996 and $581,324 in
1995..................................................... 1,138,455 968,393
Investments, held to maturity (mature in September 2004
through April 2011)...................................... 2,834,783 680,813
Foreclosed property held for sale.......................... 607,905 761,523
Servicing rights........................................... 1,387,511 --
Other...................................................... 239,558 400,163
-------------- --------------
$ 6,504,794 $ 2,924,375
-------------- --------------
-------------- --------------
</TABLE>
F-13
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Subordinated debentures, 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........................ $ 1,345,421 $ 1,422,421
Subordinated debentures, due July 1996 through June
2006; interest at rates ranging from 7% to 10.50%;
subordinated to all of the Company's senior
indebtedness......................................... 32,275,058 16,377,523
Note payable, $25,000,000 revolving line of credit
expiring September 1996; interest at LIBOR plus
1 1/4% (an effective rate of 6 3/4% 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;
collateralized by related equipment.................. $ 18,457 $ 24,063
---------------- ----------------
$ 35,987,401 $ 17,824,007
---------------- ----------------
---------------- ----------------
</TABLE>
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 debentures to be
offered on an ongoing and continuous basis. During the year ended June 30, 1996,
subordinated debentures of $16,810,707 were issued through this offering.
At June 30, 1996, the Company has available unused revolving lines of credit
of $7,500,000 and $3,500,000, respectively. The lines expire in December 1996
and May 1998, 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 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.
F-14
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMON AND PREFERRED STOCK -- (CONTINUED)
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 June 30, 1995 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 June 30, 1996, 45,000 shares were available for future
grants under this plan. Transactions under this plan were as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
----------- -----------
<S> <C> <C>
Options granted and outstanding, June 30, 1996...................... 90,000 $ 5.00
----------- -----------
----------- -----------
</TABLE>
The Company has an employee stock option plan which authorizes the grant to
employees of options to purchase 375,000 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 June 30, 1996, 83,988
shares were available for future grants under this plan.Transactions under the
plan were as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER SHARE
------------ ---------------
<S> <C> <C>
Options outstanding, July 1, 1994........................... 225,012 $ 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
------------ ---------------
------------ ---------------
</TABLE>
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 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.
F-15
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1996 1995
------------ -------------
<S> <C> <C>
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
------------ -------------
------------ -------------
</TABLE>
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.
The cumulative temporary differences resulted in net deferred income tax
assets or liabilities consisting primarily of:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1996 1995
-------------- ------------
<S> <C> <C>
Deferred income tax assets
Allowance for credit losses........................................... $ 287,214 $ 62,568
Net operating loss carryforwards...................................... 461,954 126,435
Loan and lease receivables............................................ 68,058 --
Accrued expenses...................................................... 246,500 --
-------------- ------------
1,063,726 189,003
Less valuation allowance................................................ 148,500 126,435
-------------- ------------
915,226 62,568
-------------- ------------
Deferred income tax liabilities
Loan and lease origination costs/fees, net............................ 368,849 365,679
Book over tax basis of property and equipment......................... 131,751 54,965
Other receivables..................................................... 1,548,423 346,228
Servicing rights...................................................... 372,474 --
-------------- ------------
2,421,497 766,872
-------------- ------------
Net deferred income tax liabilities..................................... $ 1,506,271 $ 704,304
-------------- ------------
-------------- ------------
</TABLE>
The valuation allowance represents the income tax effect of State net
operating loss carryforwards of the Company which are not presently expected to
be utilized.
F-16
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
A reconciliation of income taxes at federal statutory rates to the Company's
tax provision is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1996 1995
-------------- ------------
<S> <C> <C>
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
-------------- ------------
-------------- ------------
</TABLE>
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. 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 November 2000, at a minimum annual rental of $430,637. The
lease contains a renewal option for an additional five year period at an
increased annual rental. Rent expense under all operating leases for such
facilities was $373,694 and $199,368 for the years ended June 30, 1996 and 1995,
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 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.
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.
F-17
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------
CARRYING VALUE FAIR VALUE
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 5,345,269 $ 5,345,269
Loans and leases available for sale.................. 18,332,602 20,800,000
Residuals............................................ 13,447,674 13,447,674
LIABILITIES
Borrowings under revolving lines of credit........... $ 2,348,465 $ 2,348,965
Subordinated debentures.............................. 33,620,479 33,620,479
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments are as follows:
CASH AND CASH EQUIVALENTS For these short-term instruments the carrying
amount is a reasonable estimate of the fair value.
LOANS AND LEASES AVAILABLE FOR SALE The Company has estimated the fair
values reported based upon recent sales and securitizations.
RESIDUALS 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.
F-18
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE IN CONNECTION HEREWITH SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF. THIS PROSPECTUS, EVEN WHEN ACCOMPANIED BY AN APPROPRIATE PROSPECTUS
SUPPLEMENT, DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO
BUY THE NOTES BY ANYONE IN ANY JURISDICTIONS IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION OF
ANY OFFER TO BUY THE NOTES IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information............................... i
Summary of Terms.................................... 1
Highlights of Terms of Investment Notes Offered..... 3
Risk Factors........................................ 4
Selected Consolidated Financial Data................ 10
Use of Proceeds..................................... 10
Description of the Investment Notes and the
Indenture.......................................... 11
Business............................................ 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 25
Management.......................................... 33
Principal Stockholders.............................. 39
Certain Relationships and Related Transactions...... 41
Market for Common Equity and Related Shareholder
Matters............................................ 41
Plan of Distribution................................ 41
Legal Matters....................................... 42
Experts............................................. 42
Index to Consolidated Financial Statements.......... F-1
Consolidated Financial Statements................... F-3
</TABLE>
SUBORDINATED
INVESTMENT NOTES
[LOGO]
---------------------
PROSPECTUS
---------------------
OCTOBER 16, 1996
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
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