UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
Commission File Number: 0-22474
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 87-0418807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Presidential Boulevard, Bala Cynwyd, PA 19004
(Address of principal executive offices) (Zip Code)
(610) 668-2440
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
As of May 1, 1996, there were 2,353,166 shares of the registrant's
Common Stock issued and outstanding.
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, June 30,
1996 1995
(unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 798,799 $ 4,734,368
Loans and lease receivables - Net
Available for sale 23,444,138 8,668,956
Other 499,345 328,401
Other receivables 9,233,203 4,529,072
Prepaid expenses 1,109,008 594,046
Property and equipment - Net of
accumulated depreciation and
amortization 1,102,661 687,678
Other assets 4,038,440 2,632,375
----------- -----------
Total assets $40,225,594 $22,174,896
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES
Debt $33,045,205 $17,824,007
Accounts payable and
accrued expenses 2,475,710 1,117,930
Deferred income taxes 575,869 704,304
Other liabilities 1,320,039 385,241
37,416,823 20,031,482
STOCKHOLDERS' EQUITY
Common stock - par value $.001
Authorized 5,000,000 shares
Issued and outstanding
2,128,154 shares - June 30, 1995 and
2,353,166 shares - March 31, 1996
2,353 2,128
Additional paid-in capital 1,931,699 1,331,892
Retained earnings 1,474,751 809,394
3,408,803 2,143,414
Less note receivable 600,032
2,808,771 2,143,414
Total liabilities and stockholders'
equity $40,225,594 $22,174,896
<FN>
See notes to consolidated statements.
</TABLE>
<PAGE>
<TABLE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Interest and fee income $ 872,796 $ 930,882 $2,454,622 $2,927,344
Interest expense 632,834 331,367 1,748,526 831,457
--------- ---------- ---------- ---------
Net interest income 239,962 599,515 706,096 2,095,887
Provision for
credit losses 13,883 101,185 305,634 137,387
--------- ---------- ---------- ---------
Net interest income after
provision for credit
losses 226,079 498,330 400,462 1,958,500
Other income 54,993 1,618,857 3,974,910 1,696,314
--------- ---------- ---------- ---------
281,072 2,117,187 4,375,372 3,654,814
OPERATING EXPENSES
Payroll and
related costs 143,591 220,822 454,115 760,837
Sales and marketing 715,654 528,785 1,776,122 1,035,566
General and
administrative 402,826 420,377 1,121,509 752,546
---------- ---------- ---------- ----------
1,262,071 1,169,984 3,351,746 2,548,949
========== ========== ========== ==========
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (980,999) 947,203 1,023,626 1,105,865
PROVISION (CREDIT) FOR (343,350) 392,027 358,269 464,463
INCOME TAXES ----------- ---------- ---------- ----------
NET INCOME (LOSS) $ (637,649) $ 555,176 $ 665,357 $ 641,402
---------- ----------- ---------- ----------
NET INCOME (LOSS)
PER SHARE $ (.27) $ .26 $ .29 $ .30
---------- ----------- ---------- -----------
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 2,353,166 2,128,152 2,278,160 2,128,152
----------- ----------- ---------- -----------
<FN>
See Notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Unaudited)
<CAPTION>
Nine Months Ended
March 31,
<S> <C> <C>
1996 1995
------------ ------------
CASH FLOW FROM OPERATIONS
Net Income $ 665,357 $ 641,402
Adjustments to reconcile net income
to net cash provided by
operating activities
Amortization of loan and
lease origination cost 244,231 498,721
Amortization of deferred
servicing costs 13,780
Provision for losses 305,634 137,387
Depreciation and amortization of
property and equipment 217,356 120,932
Amortization of financing and
organization costs 378,034 296,904
Deferred income taxes (128,435)
Accounts recovered (written off) 3,000 (87,126)
Gain on sale of loans (3,973,968) (1,584,749)
(Increase ) decrease in
accrued interest and
fees on loan receivable (170,944) 128,258
Decrease in other receivables 5,914,610 178,657
Increase in prepaid expenses (514,962) (262,556)
Increase in other assets (73,317) (126,818)
Increase in accounts payable and
accrued expenses 1,357,780 1,485,705
Increase in other liabilities 934,798 253,139
----------- -----------
Net cash provided by
operating activities 5,172,954 1,679,856
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Loans and leases originated (39,431,191) (10,403,963)
Loan and lease payments received 1,705,977 2,206,438
Decrease in securitization
gain receivable 44,183
Principal receipts on investments 20,820
Proceeds of loans sold 14,287,075
Purchase of property and equipment (547,488) (268,362)
---------- ----------
Net cash used in investing
activities (23,920,624) (8,465,887)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Financing costs incurred (409,097) (282,058)
Net proceeds of
(principal payments on)
revolving lines of credit 4,095,000 27,569
Proceeds of term notes payable - bank 250,000
Principal payments on
term notes payable - bank (200,617)
Principal payments on
notes payable - other (5,504) (3,557)
Proceeds from issuance of
subordinated debentures 13,322,965 8,154,220
Principal payments on
subordinated debentures (2,441,263) (990,727)
----------- ----------
Net cash provided by
financing activities 14,812,101 6,704,830
----------- -----------
</TABLE>
<PAGE>
<TABLE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
INCREASE (DECREASE) IN CASH
(Unaudited)
<CAPTION>
Nine Months Ended
March 31,
1996 1995
------------ -------------
<S> <C> <C>
NET DECREASE IN CASH AND
CASH EQUIVALENTS $ (3,935,569) (81,201)
CASH AND CASH EQUIVALENTS - BEGINNING 4,734,368 82,583
CASH AND CASH EQUIVALENTS - ENDING $ 798,799 $ 1,382
------------ --------------
</TABLE>
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 780,990 $ 329,580
Income Taxes 78,475 12,929
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
During the nine months ended March 31, 1995, the Company sold $9.8 million of
loans in exchange for a receivable of the same amount.
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
During the nine months ended March 31, 1996 the following non-cash transactions
were recorded in connection with the sale and foreclosure on loan and lease
receivables:
Increase in other assets $ 1,336,285
Increase in other receivables 10,662,924
Increase in fixed assets 84,851
Decrease in loan and lease receivables $12,084,060
During the nine months ended March 31, 1996, stock options for 225,012 shares
of common stock were exercised. The shares with a price of $600,032 were
issued in exchange for a note receivable for the same amount.
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying interim consolidated financial statements are unaudited
and include the accounts of American Business Financial
Services, Inc. (ABFS) and its wholly owned subsidiaries, collectively
the "Company". All significant intercompany transactions and balances
have been eliminated.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) have been made which are necessary to present fairly
the financial position of the Company as of March 31, 1996, and the
results of its operations for the nine months ended
March 31, 1996 and 1995.
The statements and related notes have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principals have been omitted pursuant to such rules and
regulations. The accompanying notes should be read in conjunction with
the Company's June 30, 1995 annual financial statements.
1995 amounts have been reclassified to conform to current account
classifications.
2. DEBT
Debt is summarized as follows: March 31,
1996
Bank line of credit (a) $ 2,595,000
Subordinated debentures (b) 27,305,070
Subordinated debentures (c) 1,376,576
Note payable (d) 18,559
Bank term loan (e) 250,000
Bank loan (f) 1,500,000
$33,045,205
(a) This represents the balance due under a $3,500,000 revolving line
of credit expiring December 1996 and bearing interest at prime
plus 1.6%.
(b) This represents aggregate sales made pursuant to public offering of
debentures. These debentures mature during the period of April 1996
through March 2006 and are subordinate to all of the Company's
Senior Indebtedness.
(c) This represents aggregate sales made pursuant to a total public
offering of debentures. These debentures mature in April 1996
through October 1998 and are subordinate to all of the Company's
Senior Indebtedness. Payment of principal and interest is
guaranteed by ABC but such guarantee is subordinate to ABC's Senior
Indebtedness.
(d) This represents an equipment collateralized note payable in monthly
installments of $655 including interest at 11.8%; final payment due
in March 1999.
<PAGE>
(e) This represents the balance due under a $260,000 term bank loan
bearing interest at prime plus 2%.
(f) This represents the balance due under a $3,000,000 demand bank
loan bearing interest at prime plus 2% maturing May 26, 1996.
3. COMMON STOCK
On September 12, 1995, the Board of Directors declared a 3-for-2 stock
split common stock to stockholders of record on October 1, 1995. All
references in the accompanying financial statements to the number of
common shares and per-share amounts have been retroactively adjusted for
the split.
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 and is shown as a reduction of stockholders' equity on the
accompanying balance sheet.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
consolidated financial statement and the notes thereto included in Item 1 of
this Quarterly Report and the financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1995.
RESULTS OF OPERATIONS
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 quarterly 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 or
the fiscal year.
Interest and fee income for the nine months ended March 31, 1996 decreased
by 16% from $2,927,344 to $2,454,622. The decrease results from the Company's
current strategy of securitizing or bulk selling its loans as opposed to
maintaining the loans in its portfolio, which the Company did in prior years.
Interest and fee income consists of the following three items: (i) interest
income, (ii) fee income and (iii) amortization of origination costs.
Interest income earned on loans and leases held in the Company's portfolio
was $1,516,639 representing a 23% increase over last year's comparable period.
The Company's leasing subsidiary, which commenced operations in January 1995,
contributed $391,000 of the increase. Interest income from loans decreased
$102,000 as the average loan portfolio decreased from $8.2 million to $6.1
million during the nine months ended March 31, 1996 and 1995, respectively.
The average loan portfolio decreased as a result of the Company completing a
securitization mid-way through the current nine month period. During the
comparable nine month period, the Company did not complete a securitization
until the last month of the period.
Fee income, consisting of premium and points on loans, is earned when
loans are closed, funded and immediately sold to unrelated third party
purchases. Fee income decreased from $2,197,874 for the nine months ended
March 31, 1995 to $1,123,624 for the nine months ended March 31, 1996. The
decrease resulted from a decrease in the number of loans sold immediately
after funding from 357 to 259. This decrease is a result of the Company's
current strategy of keeping most loans originated in its portfolio until they
are securitized or sold in bulk. Home equity loans were not kept in portfolio
until October 1995. Prior to that time, all home equity loans originated were
sold for fee income. During the period October 1995 through March 1996, over
200 home equity loans were placed into the Company's portfolio.
The third component of interest and fee income is amortization of
origination costs. During the nine months ended March 31, 1996 amortization
of origination costs was $185,641 as compared to $498,721 recognized during
the comparable period last year. Amortization of origination costs
attributable to leasing increased by $141,927 as the leasing subsidiary was
in operation for the full nine months of the current year and only three months
of the prior year. However, amortization of origination costs attributable to
mortgage loans decreased by $455,007. Approximately $200,000 of the decrease
is the result of more loans being prepaid during the nine months ended
March 31, 1995 than during the comparable period of the current year. When a
loan is prepaid, all remaining unamortized origination costs associated with
such loan must be written off. In addition, loans originated during the nine
months ended March 31, 1995 generally had terms of five years while those
originated in the current nine month period generally have fifteen year terms.
Since origination cost is amortized over the term of the loan, the lengthening
of the loan term causes a decrease in the monthly amortization of origination
cost recognized for such loans. Finally, the amount of origination cost
recognized is effected by the length of time each loan is held in portfolio.
Since the Company securitized its loan portfolio in March 1995, the average
loan was held for 4.5 months during the nine months ended March 31, 1995. In
the current period, a securitization took place in October 1995, reducing the
average holding period to 2.5 months.
<PAGE>
Interest expense for the nine months ended March 31, 1996 increased
significantly to $1,748,526 or 110% over the $831,457 reported for the nine
months ended March 31, 1995. $972,336 of the increase was caused by an
increase in the amount of the Company's subordinated debt outstanding. Average
subordinated debt outstanding was $23 million during the first nine months of
fiscal 1996 as compared to $10.7 million during the comparable period of fiscal
1995. Average weighted interest rate on the subordinated debt also increased
from 8.71% to 8.91%. Offsetting the increased interest on the subordinated
debt was a $55,000 decrease in interest expense associated with the Company's
$3.5 million warehouse line of credit. As sales of subordinated debt increased
and funds from the securitization became available, the Company was able to
place less need on its warehouse line of credit.
During the nine months ended March 31, 1996, the Company increased the
provision for credit losses to $305,654 from $137,387 for the comparable 1995
period, resulting in an allowance for credit losses at March 31, 1996 of
$421,829. Although loan charge-offs historically have been minimal, management
has adopted a policy of increasing the coverage ratio in line with industry
standards. There can be no assurance that charge-offs will continue to be
minimal in future periods.
Other income consists of gain on sale of loans and miscellaneous income.
This income category increased from $1,696,314 for the nine months ended
March 31, 1995 to $3,974,910 for the nine months ended March 31, 1996. The
increase is primarily attributable to gains recognized on the securitization
of loans. During the current period, a gain of approximately $3.8 million
was recognized on a securitization of $14.5 million of business loans as
compared to a gain of approximately $1.4 million recognized in the comparable
period on a securitization of $9.7 million of business loans. The Company
intends to continue its securitization strategy and has subsequent to
March 31, 1996 completed a securitization of $22 million of business and
consumer home equity loans. The gain from this $22 million securitization will
be reflected in the Company's fiscal fourth quarter.
Operating expenses for the nine months ended March 31, 1996 increased 31%
to $3,351,746 as compared to $2,548,949 for the nine months ended March 31,
1995. The largest component of this increase was sales and marketing expenses
which increased from $1,035,566 to $1,776,122. The increase was directly
attributable to increases in print and direct mail campaign advertising for
the Company's debenture and loan products and the start of a radio advertising
program for the home equity product. The expanded advertising campaigns fueled
demand for the Company's loan products, resulting in the Company originating
$44 million of loans during the nine months ended March 31, 1996 as compared to
$26.6 million for the 1995 comparable period. The Company expanded its service
area by offering its business loan products in Maryland and New York City and
its subordinated debentures in Florida and plans to enter the Virginia market
as it extends its service area along the Southeastern Atlantic coast.
A second item of operating expenses, payroll and related costs, decreased
$306,722 from $760,837 to $454,115. Payroll and related costs attributed to
loans and leases originated and put into portfolio are deferred (along with
other costs and fees) and amortized over the lives of the loans and leases.
During the nine months ended March 31, 1996, 96% of business loans originated
were put into portfolio versus only 58% in the comparable period last year.
In addition, 51% of home equity loans originated during the current nine month
period were kept in portfolio. In the comparable 1995 period no home equity
loans originated were kept in portfolio. The increase in the percentage of
loans originated and kept in portfolio resulted in a larger percentage of
payroll costs being deferred.
The last component of operating expenses, general and administrative,
increased 49% from $752,546 to $1,121,509. This increase is attributable to
higher costs for rent, professional fees and office expense resulting from (i)
an increase in loan production, (ii) establishment of the Company's leasing
subsidiary, (iii) growth in the home equity subsidiary and (iv) geographical
expansion into Maryland and Florida.
<PAGE>
Net income for the nine months ended March 31, 1996 was $665,357 as compared
to $641,402 for the nine months ended March 31, 1995 representing an increase
of $23,955. The company experienced a net loss of $637,649 for the third
quarter of fiscal 1996 as compared to net income for the third quarter of
fiscal 1995. The third quarter loss was the result of the Company's strategy
of building an inventory of loans during the period to be sold through
securitizations. As the Company builds its inventory of loans, it incurs the
costs and expenses of originating such loans. The Company does not realize
gains on sale of such loans until it consummates a securitization thereof,
which transaction may not occur until a subsequent fiscal quarter.
Accordingly, the Company may experience fluctuations in quarterly operating
results as a result of the timing and level of such securitizations.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's primary source of funds continued to be the sale of registered
subordinated debt. During the nine months ended March 31, 1996, the Company
sold approximately $18,600,000 of new debentures. In December 1995, the
Company registered an additional $50 million of subordinated debentures and
continues to offer these instruments to the general public. The Company
maintains a $3,500,000 revolving line of credit for the funding of business
loans and a $500,000 warehouse line of credit for the funding of consumer
loans. At March 31, 1996, $2,595,000 of the revolving line was in use. The
company also obtained a short-term $3 million line of credit, secured by
equipment leases. At March 31, 1996 $1,500,000 of the line was in use. The
line was retired subsequent to March 31, 1996.
The Company has negotiated an additional $25 million warehouse line of credit
for the funding of consumer loans in the fourth quarter.
Net cash provided by operations was $5,172,954 for the nine months ended
March 31, 1996 compared to $1,679,856 for the comparable period. Net cash used
in investing activities was $23,920,624 for the nine months ended March 31,
1996 compared to $8,465,887 for the comparable period. Net cash provided by
financing activites was $14,812,101 for the nine months ended March 31, 1996
compared to $6,704,830 for the comparable period.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit: NONE
(b) Form 8-K:
The Company filed a Current Report on Form 8-K dated as of
March 11, 1996 reporting that in contemplation of its 1996 year
end financial audit, the company replaced Fishbein & Company, P.C.
with BDO Seidman, LLP as its principal independent accountant. In
connection with the audits of the Company's financial statements for
fiscal years 1994 and 1995, there were no disagreements with the
former accountant on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. The
former independent accountant's report on the financial statements for
the past two years did not contain an adverse opinion or disclaimer of
opinion, nor was it modified as to uncertainty, audit scope or
accounting principles.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
DATE: 5/15/96 BY: /s/ David M. Levin
David M. Levin
Senior Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> $ 798,799
<SECURITIES> 0
<RECEIVABLES> 24,365,312
<ALLOWANCES> 421,829
<INVENTORY> 0
<CURRENT-ASSETS> 25,851,290
<PP&E> 2,048,641
<DEPRECIATION> 945,980
<TOTAL-ASSETS> 40,225,594
<CURRENT-LIABILITIES> 23,144,057
<BONDS> 0
<COMMON> 2,353
0
0
<OTHER-SE> 2,806,418
<TOTAL-LIABILITY-AND-EQUITY> 40,225,594
<SALES> 0
<TOTAL-REVENUES> 6,429,532
<CGS> 0
<TOTAL-COSTS> 5,100,272
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 305,634
<INTEREST-EXPENSE> 1,748,526
<INCOME-PRETAX> 1,023,626
<INCOME-TAX> 358,269
<INCOME-CONTINUING> 665,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665,357
<EPS-PRIMARY> 29
<EPS-DILUTED> 29
</TABLE>
