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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB/A
(Mark One)
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 000-22474
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AMERICAN BUSINESS FINANCIAL SERVICES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 87-0418807
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
111 Presidential Boulevard, Bala Cynwyd, PA 19004
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(Address of Principal Executive Offices)(Zip Code)
(610) 668-2440
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value
$.001 per share
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(title of class)
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 reports), and (2)
has been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Check if is there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB.
[ ]
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State issuer's revenues for its most recent fiscal year: $12,378,733.
The aggregate market value for the 750,109 shares of common stock, $.001
par value per share (the "Common Stock"), held by non-affiliates of the
Registrant as of August 30, 1996 was $12,564,326.
The number of shares outstanding of the Registrant's sole class of Common
Stock as of August 30, 1996 was 2,353,166 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Transitional Small Business Disclosure Format (Check one):
[ ] Yes [ X ] No
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ITEM 1. DESCRIPTION OF BUSINESS
FORWARD LOOKING STATEMENTS
When used in this Form 10-KSB and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"projected" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to changes in interest rate, credit risk related to
the Company's borrowers, market conditions and real estate values in the
Company's lending area, competition, the Company's dependence on debt financing
and securitizations to fund operations, fluctuations in quarterly operating
results, unseasoned nature of the Company's consumer loan and leasing
portfolios, state and federal regulation and licensing requirements applicable
to the Company's lending activities and environmental concerns that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
GENERAL. American Business Financial Services, Inc. ("ABFS" or
collectively with its subsidiaries the "Company") 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 American Business Credit, Inc. ("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.
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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. and ABFS 1996-1, 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".
All information contained herein has been adjusted to reflect a 3 for 2
stock split declared by the Board of Directors of ABFS and paid on November 1,
1995 to stockholders of record of the Company on October 1, 1995.
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.
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 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
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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.
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,
home equity loans and possibly business leases and enter into securitizations of
these portfolios. 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.
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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
(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 existence of
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 a qualified appraiser on a FNMA form including pictures of
comparable properties and generally 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.
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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.
COMPETITION. As a finance company, ABC competes against many other finance
companies, some of which have larger capitalization and better name recognition.
ABC competes with these larger entitles 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.
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.
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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, credit, employment history and other demographic and
personal information. If the application demonstrates the existence of
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.
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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.
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.
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, and has 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.
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.
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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.
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.
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ITEM 2. DESCRIPTION OF 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.
ITEM 3. 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 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 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.
12
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 31, 1996. All
members of the board were reelected at such meeting for terms of one year. The
following table lists other matters voted upon at such meeting and the number of
votes cast for and against such proposal, as well as, the number of abstentions
and broker non-votes received thereon.
Proposal Number of Votes
-------- ---------------
BROKER
FOR AGAINST ABSTAIN NON-VOTES
---- ------- ------- ---------
Approval of Amendment
and Restatement of
the Company's 1,704,059 685 616 0
Certificate of
Incorporation
Approval of the Company's
Non-Employee Director
Stock Option Plan. 1,702,339 1,413 1,608 0
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION. 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
PSE 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.
(b) STOCKHOLDERS. As of August 30, 1996, there was approximately 120
record holders and approximately 500 beneficial holders of the Common Stock.
(c) DIVIDENDS. 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
13
<PAGE>
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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-collaterization 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 debentures (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 debenture 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 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
14
<PAGE>
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 debentures 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 "Item 2 - Description of Property."
15
<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 originatination 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 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
orginations 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 liabilites 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 of $19,687,982 during fiscal
1996 and a net increase in institutional debt
16
<PAGE>
of $2,348,465. At June 30, 1996, the Company had approximately $33,600,000 of
subordinated debentures outstanding. The Company's ratio of total debt
(subordinated debentures plus credit facilities) to equity at June 30, 1996 was
8.2:1.
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 source or short
term source of funds which it utilizes and the interest rates it earns on its
portfolio of loans.
17
<PAGE>
The following table sets forth certain information concering the lending
and loan and lease origination and sale activities of the Company for each of
fiscal 1996.
<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>
Dollar Amt of Loans/Leases Originated
(Net of Refinances)
Business . . . . . . . . . . . . . . . . $5,967,126 $21,55,561 $ 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% 24.5% 16.07% 16.05%
Consumer . . . . . . . . . . . . . . . . -- -- 9.94% -- 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 $20,664,709 $ 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.
18
<PAGE>
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 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 financial condition and 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.
19
<PAGE>
Interest and fee income consists of interest income, fee income and
amortization of orgination 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 $1,403,207 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 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 subordinated debentures, 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 subordinated debt outstanding as
management utilized the proceeds from the sale of such subordinated debt to fund
the increase in loan originations experienced during fiscal 1996. Outstanding
subordinated debentures 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 increased from 8.75% to 9.02%, due to an increase in
market rates of interest.
20
<PAGE>
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
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.
21
<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
--------------------------------- ----------------------------
$ Amount % $ Amount %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Company Combined
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%
------------ -------------- ----------- --------
------------ -------------- ----------- --------
<CAPTION>
June 30, 1996 June 30, 1995
--------------------------------- ----------------------------
$ Amount % $ Amount %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Delinquency by Company
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 $ 0
------------ -----------
------------ -----------
Period of Delinquency
31-60 Days. . . . . . . . . . . . $ 0 0% $ 0 0%
61-90 Days. . . . . . . . . . . . 0 0 0 0
Over 90 Days. . . . . . . . . . . 0 0 0 0
------------ -------------- ----------- --------
Total Delinquencies . . . . . . . $ 0 0% $ 0 0%
------------ -------------- ----------- --------
------------ -------------- ----------- --------
American Business Leasing, Inc.
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 0 0
------------ -------------- ----------- --------
Total Delinquencies . . . . . . . $ 77,921 1.69% $ 88,629 4.37%
------------ -------------- ----------- --------
------------ -------------- ----------- --------
HomeAmerican Consumer Discount Co.
Total Portfolio Serviced. . . . . . $ 109,726 $ 1,065,238
------------ -----------
------------ -----------
Period of Delinquency
31-60 Days . . . . . . . . . . . $ 0 0% $ 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%
------------ -------------- ----------- --------
------------ -------------- ----------- --------
</TABLE>
22
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONTENTS
x
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Independent Auditors' Reports 24
Consolidated financial statements
Balance sheets 26-27
Statements of income 28
Statements of stockholders' equity 29
Statements of cash flows 30-32
Notes to consolidated financial statements 33-46
23
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
and Subsidiaries
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of American Business
Financial Services, Inc. and subsidiaries as of June 30, 1996, and the related
consolidated statements of income and stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1996, and
the consolidated results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
August 23, 1996
24
<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.
/s/ FISHBEIN & COMPANY, P.C.
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
September 20, 1995
25
<PAGE>
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
BALANCE SHEETS
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
June 30, 1996 1995
- - --------------------------------------------------------------------------------
ASSETS
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
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
26
<PAGE>
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
BALANCE SHEETS
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
June 30, 1996 1995
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
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATMENTS OF INCOME
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996 1995
- - --------------------------------------------------------------------------------
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
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
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.
29
<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
Increase in deferred income taxes 801,967 285,791
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 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)
- - -----------------------------------------------------------------------------------------------------
</TABLE>
30
<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 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
- - -----------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------
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
- - -----------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------
</TABLE>
31
<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>
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.
- - -----------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
32
<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 unam-
ortized 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.
33
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based upon the Company's estimate of expected
collectibility of loans and leases outstanding. The allowance is increased by
periodic charges to operations as necessary.
MORTGAGE SERVICING RIGHTS
Effective July 1, 1995, the Company adopted Financial Accounting Standards
Board Statement No. 122, "Accounting for Mortgage Servicing Rights." The
Statement amends Statement No. 65 to require recognition as a separate asset
the rights to service mortgage loans for others, however those servicing
rights are acquired. The statement requires the assessment of capitalized
mortgage servicing rights for impairment to be based on the current fair
value of those rights. Mortgage servicing rights are amortized in proportion
to and over the period of the estimated net servicing income.
ORIGINATION COSTS AND FEES AND AMORTIZATION
Direct origination costs, net of origination fees, are deferred and amortized
over the contractual life of the receivable using the interest method.
Unamortized amounts are recognized as (expense) income when the receivable is
sold or paid in full.
PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line and declining balance methods over the
estimated useful lives of the assets (ranging from 5 to 10 years). Expenditures
for additions, renewals and betterments are capitalized; expenditures for
maintenance and repairs are charged to expense as incurred.
FINANCING COSTS AND AMORTIZATION
Costs incurred in obtaining revolving lines of credit are amortized using the
straight-line method over the terms of the agreements.
Financing costs incurred in connection with public offerings of debentures are
amortized using the interest method over the term of the related debentures.
INVESTMENTS, HELD TO MATURITY
The investments classified as held to maturity consist of mortgage-backed
securities that the Company has the positive intent and ability to hold to
maturity. These investments are stated at amortized cost, which approximates
market.
Foreclosed property held for sale is stated at the lower of cost or fair market
value.
34
<PAGE>
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 out-
standing; 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.
35
<PAGE>
2. LOAN AND LEASE RECEIVABLES
JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Substantially all of the leases are sales-type leases whereby the lessee has the
right to purchase the leased equipment at 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 re-
course ($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>
36
<PAGE>
3. ALLOWANCE FOR CREDIT LOSSES
BALANCE, July 1, 1994 $ 78,000
Provision for credit losses 165,143
Accounts written off (87,885)
- - -------------------------------------------------------------------------------
BALANCE, June 30, 1995 155,258
Provision to credit losses 681,228
Accounts written off (129,062)
- - -------------------------------------------------------------------------------
BALANCE, June 30, 1996 $ 707,424
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
4.OTHER RECEIVABLES
JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
37
<PAGE>
6. OTHER ASSETS
JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
7. DEBT
JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
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 -
38
<PAGE>
JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
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 re-
strictive 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 divi-
dends in excess of the lesser of 33% of current year net income or $250,000.
8. COMMON AND PREFERRED STOCK
On May 31, 1996, the stockholders approved an amended and restated Certificate
of Incorporation which increased the authorized common shares from five million
shares to nine million shares and established a class of preferred shares with
one million shares authorized.
On September 12, 1995, the Board of Directors declared a 3 for 2 stock split of
common stock to stockholders of record on October 1, 1995. The stock split has
been reflected in the June 30, 1995 consolidated financial statements.
39
<PAGE>
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:
NUMBER OF PRICE PER
SHARES SHARE
- - -------------------------------------------------------------------------------
Options granted and
outstanding, June 30,1996 90,000 $ 5.00
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
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:
NUMBER OF PRICE PER
SHARES SHARE
- - -------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
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
40
<PAGE>
Company's stock (at 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.
10. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
Current
Federal $ - $ 27,075
State - -
- - -------------------------------------------------------------------------------
- 27,075
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Deferred
Federal 858,617 457,439
State (56,650) (171,648)
- - -------------------------------------------------------------------------------
801,967 285,791
- - -------------------------------------------------------------------------------
$ 801,967 $ 312,866
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
The current provision for federal income taxes for the year ended June 30, 1995
is net of the tax benefit of approximately $249,000 from the utilization of net
operating loss carryforwards.
41
<PAGE>
The cumulative temporary differences resulted in net deferred income tax assets
or liabilities consisting primarily of:
JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
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.
42
<PAGE>
A reconciliation of income taxes at federal statutory rates to the Company's tax
provision is as follows:
YEAR ENDED JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
Federal income tax at statutory rates $ 1,061,005 $ 303,927
State income tax, net of federal tax benefit - (48,614)
Nondeductible expenses 13,545 11,080
Increase in state tax valuation allowance - 46,453
Other, net (272,583) 20
- - -------------------------------------------------------------------------------
$ 801,967 $ 312,866
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
For income tax reporting, the Company has net operating loss carryforwards
aggregating approximately $1,650,000 available to reduce future state income
taxes for various states. 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.
43
<PAGE>
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.
In addition, the fair value estimates presented do not include the value of
assets and liabilities that are not considered financial instruments.
The table below summarizes the information about the fair value of the financial
instruments recorded on the Company's financial statements at June 30, 1996:
JUNE 30, 1996
- - -------------------------------------------------------------------------------
CARRYING FAIR
VALUE VALUE
- - -------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 5,345,269 $ 5,345,269
Loans and leases available
for sale 18,332,602 20,800,000
Excess Spread 13,447,674 13,447,674
Servicing Rights $ 1,387,511 $ 1,387,511
44
<PAGE>
JUNE 30, 1996
- - -------------------------------------------------------------------------------
CARRYING FAIR
VALUE VALUE
- - -------------------------------------------------------------------------------
LIABILITIES
Borrowings under revolving
lines of credit $ 2,348,465 $ 2,348,965
Subordinated debentures 33,620,479 33,620,479
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.
EXCESS SPREAD - Fair value is determined using estimated discounted future
cash flows taking into consideration anticipated prepayment rates.
SERVICING RIGHTS - Fair value is determined using estimated discounted
future cash flows taking into consideration anticipated prepayment rates.
BORROWINGS UNDER REVOLVING LINES OF CREDIT - The carrying value reported
approximates the fair value due to the short-term nature of the borrowings,
and the variable rate of interest charged on the borrowings.
SUBORDINATED DEBT - The fair value of fixed maturity subordinated debentures
is estimated using the rates currently offered for debentures of similar
maturities.
13. HEDGING TRANSACTIONS
The Company regularly securitizes and sells fixed rate mortgage loans. To
offset the effects of interest rate fluctuations on the value of its fixed rate
loans held for sale, the Company in certain cases will hedge its interest rate
risk related to the loans held for sale by selling U.S. Treasury securities
short. The Company classifies these sales as hedges of specific loans held for
sale and does not record the derivative securities on its financial statements.
The gain or loss derived from these sales is deferred and recognized as an
adjustment to gain on sale of loans when the loans are securitized.
45
<PAGE>
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.
14. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Although the Company believes that it has made reasonable estimates of the
excess spread receivables likely to be realized, the rate of prepayment and
the amount of defaults realized by the Company are estimates and actual
experience may vary from its estimates. Higher levels of future prepayments,
delinquencies and/or liquidations could result in decreased excess spreads
and the write down of the receivable, which would adversely affect the
Company's income in the period of adjustment.
The Company's revenues and net income have fluctuated in the past and may
fluctuate in the future principally as a result of the timing and size of its
securitizations. Since the Company does not recognize gains on the sale of
such loans until it consummates a securitization thereof, the Company's
operating results for a given period can fluctuate significantly as a result
of the timing and level of securitizations.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), establishing financial accounting
and reporting standards for stock-based employee compensation plans. SFAS No.
123 encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation costs for those plans
using the intrinsic value based method of accounting, which generally does not
result in compensation expense recognition for most plans. The Company
expects to remain with the existing accounting and will disclose in a
footnote to the financial statements pro forma net income and, earnings per
share, as if SFAS No. 123 had been adopted. The accounting requirements of
this Statement are effective for transactions entered into during fiscal
years that begin after December 15, 1995; however, companies are required to
disclose information for awards granted in their first financial year
beginning after December 15, 1994. The Company intends to utilize the
intrinsic value method of accounting.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 125"). Pursuant to SFAS No. 125, after a transfer of
financial assets, an entity would be required to recognize all financial
assets and servicing its controls and liabilities it has incurred and,
conversely, would not be required to recognize financial assets when control
has been surrendered and liabilities when extinguished. SFAS No. 125 provides
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 125 will be effective
with respect to the transfer and servicing of financial assets and the
extinguishment of liabilities occurring after December 31, 1996, with earlier
application prohibited.
46
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 11, 1996, the Company engaged BDO Seidman, LLP as the
Company's independent accountants to succeed Fishbein and Company,
P.C. For additional information regarding the Company's change in
accountants, see the Company's Current Report on Form 8-K, dated March
11, 1996, which report is hereby incorporated by reference herein.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(a) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
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.
DIRECTORS AND EXECUTIVE OFFICERS
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.
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.
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.
47
<PAGE>
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.
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 Morland 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
Science degree in 1965.
48
<PAGE>
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.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS WHO ARE NOT ALSO DIRECTORS
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 with honors and distention 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. 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.
49
<PAGE>
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 EXECUTIVE OFFICERS
The Company's Amended and Restated Certificate of Incorporation
provides 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 (the "Certificate of
Incorporation") also provides 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 (the "Bylaws") of ABFS provide that the Company shall, to
the full extent permitted by the laws of the State of Delaware, as amended from
time to time, indemnify all persons whom they may indemnify pursuant thereto.
The Bylaws of ABFS also provide that the Company may obtain insurance on behalf
of such persons.
(c) FAMILY RELATIONSHIPS
Beverly Santilli, Executive Vice President and Secretary of the
Company and President of ABC, is married to Mr. Santilli. Other than such
relationship, there are no family relationships among or between such directors
and executive officers.
(d) SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company during the fiscal year ended June 30,
1996 and written representations that no other reports were required
received by the Company, all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10% beneficial owners were complied
with except for the late filing of the Initial Statement of Beneficial
Ownership on Form 3 by Mr. Levin.
50
<PAGE>
ITEM 10. 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.
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>
Annual Compensation Long Term
Compensation
------------------------------- --------------------------
Fiscal Salary Bonus Other Restricted Securities All
Name and Year Annual Stock Underlying Other
Principal Position Compensation Award(s) $ Options (#) Compensation
- - -------------------- ------- -------- ---------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony J. Santilli, 1996 $237,500 $300,000(1) - - 22,500(3) -
Jr., Chairman, 1995 191,667 - - - - -
President, Chief 1994 175,000 - - - - -
Operating Officer,
Chairman, President,
Treasurer and
Director, ABFS
Beverly Santilli, 1996 $120,000 $ 65,000 - - - -
President, ABC and 1995 86,892 - - - - -
Executive Vice 1994 80,163 - - - - -
President, ABFS
Jeffrey M. Ruben 1996 $96,125 $50,000 - - - -
Senior Vice President 1995 80,353 - - - 7,500(4) -
and General Counsel, 1994 75,228 - - - - -
ABFS
David M. Levin 1996 $85,000 $20,000 - - - -
Senior Vice President, 1995(2) - - - - - -
Finance and Chief 1994(2) - - - - - -
Financial Officer,
ABFS
</TABLE>
- - ------------------------
(1) This represents Mr. Santilli's yearly bonus of $250,000 plus a one-time
bonus of $50,000 paid in October 1996.
(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
Mr. Ruben at an exercise price of $2.67 per share.
51
<PAGE>
The Company currently has a stock option plan for officers and key
employees, pursuant to which options to purchase 83,988 shares of Common Stock
were still remaining to be granted as of August 30, 1996. The following table
sets forth information regarding options exercised by the Named Officers during
fiscal 1996 and option values of options held by such individuals at fiscal year
end.
AGGREGATED OPTIONS/SAR EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER VALUE
OF UNEXERCISED OF UNEXCERISED
OPTIONS/ IN-THE-MONEY
SARS AT FISCAL OPTIONS/SARS AT
YEAR END FISCAL YEAR END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- - ------------------------------ ---------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Anthony J. 225,012 0 22,500/0 $143,438/0(1)
Santilli, Jr.
Chairman, President,
Chief Executive Officer,
Chief Operating Officer,
Treasurer and Director, 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)
Sr. Vice President and
General Counsel, ABFS
David M. Levin 0 0 N/A N/A
Senior Vice President -
Finance and Chief
Financial Officer, 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 $2.67 per share.
52
<PAGE>
The following table sets forth information regarding options granted to the
Named Officers during fiscal 1996. No stock appreciation rights ("SARs") were
granted in fiscal 1996.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARS
underlying granted to
Options/SARS Employees in Exercise or Base
Name granted (#) Fiscal Year Price ($/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
</TABLE>
53
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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.
- - -------------------------------------------------------------------------------
NAME AND POSITION NUMBER OF SHARES PERCENTAGE OF CLASS
(IF APPLICABLE) BENEFICIALLY
OWNED(1)
- - -------------------------------------------------------------------------------
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%
Lanyard & 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 1,669,757 67.5%
directors as a group
(eight persons)
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
54
<PAGE>
- - ---------------
(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
(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.
55
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company does not have any formal policy concerning the direct or
indirect pecuniary interest of any of its officers, directors, security holders
or affiliates in any investment to be acquired or disposed of by the Company or
in any transaction to which the Company is a party or has an interest. The
Company will not enter into any such transactions unless approved by a majority
of the entire Board of Directors, not including any interested director.
On September 29, 1995, the Company made a loan in the amount of $600,032 to
Anthony J. Santilli, Jr., 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 in 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."
56
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number Description
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by Reference to Exhibit 3.1 of the Annual
Report on Form 10-KSB for the year ended June 30, 1996
filed on September 27, 1996, File No. 0-22474 (the "1996
Form 10-KSB")).
3.2 Bylaws (Incorporated by Reference to Exhibit 3.2 of the
Registration Statement on Form SB-2 filed on December 27,
1996, Registration 333-18919 (the "1996 Form SB-2")).
4.1 Form of Unsecured Subordinated Investment Note (Incorporated
by Reference to Exhibit 4.1 of Amendment No. 1 to the
Registration Statement on Form SB-2 filed June 23, 1993,
Registration Number 33-62154 (the "Form SB-2")).
4.2 Form of Unsecured Subordinated Investment Note issued
pursuant to the Indenture with First Trust National
Association (Incorporated by reference to Exhibit 4.5 of the
Amendment No. 1 to the Registration Statement on Form
SB-2 filed on December 14, 1995, Registration Number 33-98636
(the "1995 Form SB-2")).
4.3 Form of Indenture by and between ABFS and First Trust
National Association (Incorporated by reference to Exhibit
4.6 of the Registration Statement on Form SB-2 filed on
October 26, 1995, Registration No. 33-98636).
10.1 Promissory Note of Anthony J. Santilli, Jr. and Stock Pledge
Agreement dated September 29, 1996 (Incorporated by
reference to Exhibit 10.14 of the 1995 Form SB-2).
10.2 Amended and Restated Stock Option Plan (Incorporated by
Reference to Exhibit 10.2 of the 1996 Form SB-2).
10.3 Stock Option Award Agreement (Incorporated by Reference to
Exhibit 10.3 of the Registration Statement on Form S-11
filed on February 26, 1993, Registration No. 33-59042).
10.4 Line of Credit Agreement by and between American Business
Credit, Inc. and Eagle National Bank (Incorporated by
Reference to Exhibit 10.4 of the Form SB-2).
57
<PAGE>
Exhibit Number Description
10.5 Agreement dated April 12, 1993 between American Business
Credit, Inc. and Eagle National Bank (Incorporated by
Reference to Exhibit 10.5 of the Form SB-2).
10.6 Loan and Security Agreement between BankAmerica Business
Credit, Inc. and Upland Mortgage dated May 23, 1996
(Incorporated by Reference to Exhibit 10.15 of the
1996 Form 10-KSB).
10.7 Revolving Credit and Security Agreement by and between ABFS,
ABC, HAC and Meridian Bank dated August 12, 1994
(Incorporated by Reference to Exhibit 10.7 of the Annual
Report on Form 10-KSB for the year ended June 30, 1995
(the "1995 10-KSB")).
10.8 Agreement of Lease between TCW Realty Fund IV Pennsylvania
Trust (Landlord) and American Business Financial Services,
Inc. (Tenant) dated January 7, 1994 (Incorporated by
Reference to Exhibit 10.8 of the 1995 Form 10-KSB).
10.9 First Amendment to Agreement of Lease by and between TCW
Realty Fund IV Pennsylvania Trust and ABFS dated October 24,
1994 (Incorporated by Reference to Exhibit 10.9 of the
1995 Form 10-KSB).
10.10 Second Amendment to Agreement of Lease by and between TCW
Realty Fund IV Pennsylvania Trust and ABFS dated December
23, 1994 (Incorporated by Reference to Exhibit 10.10 of the
1995 Form 10-KSB).
10.11 Third Amendment to Agreement of Lease by and between TCW
Realty Fund IV Pennsylvania Trust and ABFS dated July 25,
1995 (Incorporated by Reference to Exhibit 10.11 of the
1995 Form 10-KSB).
10.12 1995 Stock Option Plan for Non-Employee Directors
(Incorporated by Reference to Exhibit 10.6 of the
1996 Form SB-2).
10.13 Form of Option Award Agreement (Incorporated by Reference
to Exhibit 10.13 of the 1996 Form 10-KSB).
10.14 Interim Warehouse and Security Agreement between Upland
Mortgage and Prudential Securities Realty Funding
Corporation dated April 25, 1996 (Incorporated by
Reference to Exhibit 10.14 of the 1996 Form 10-KSB).
11 Statement of Computation of Per Share Earnings (Included in
Note 1 of the Notes to Consolidated Financial Statements).
16 Letter on Change in Certifying Accountant (Incorporated by
reference to ABFS's Current Report on Form 8-K dated March
11, 1996, File No. 0-22472).
21 Subsidiaries of the Company.
22 Published Report Regarding Matters Submitted to a
Shareholder Vote (Incorporated by Reference to Form 8-K
dated February 12, 1993).
27 Financial Data Schedule (Incorporated by Reference to
Exhibit 27 of the Annual Report on Form 10-KSB for the year
ended June 30, 1996 filed on September 27, 1996, File
No. 0-22474).
58
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: February 27, 1997 By: /s/ Anthony J. Santilli, Jr.
------------------ ----------------------------
Name: Anthony J. Santilli, Jr.
Title: Chairman, President, Chief
Executive Officer, Chief
Operating Officer, Treasurer &
Director (Duly Authorized
Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Anthony J. Santilli, Jr.
- - -----------------------------------
Name: Anthony J. Santilli, Jr.
Title: Chairman, President, Chief Executive Officer,
Chief Operating Officer, Treasurer,
and Director
(Principal Executive and Operating Officer)
Date: February 27, 1997
-------------------
/s/ Harold Sussman /s/ Michael DeLuca
- - ----------------------------------- ------------------------------
Name: Harold Sussman Name: Michael DeLuca
Title: Director Title: Director
Date: February 27, 1997 Date: February 27, 1997
------------------------- ------------------
/s/ David M. Levin /s/ Richard Kaufman
- - ---------------------------------- ------------------------------
Name: David M. Levin Name: Richard Kaufman
Title: Senior Vice President - Finance Title: Director
and Chief Financial Officer
(Principal Financial and Accounting Date: February 27, 1997
Officer) -------------------
Date: February 27, 1997
------------------
- - ----------------------------------
Name: Leonard Becker
Title: Director
Date:
- - -------------------
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
PARENT SUBSIDIARY JURISDICTION
OF INCORPORATION
- - --------------------------- -------------------------------------- -----------------
<S> <C> <C>
American Business Financial American Business Credit, Inc. ("ABC") Pennsylvania
Services, Inc. ("ABFS")
ABFS ABFS Securities, Inc. Delaware
ABC Processing Service Center, Inc. Pennsylvania
ABC HomeAmerican Credit, Inc. ("HAC")(1) Pennsylvania
ABC HomeAmerican Consumer Discount, Inc. Pennsylvania
ABC American Business Leasing, Inc. Pennsylvania
ABC ABC Holdings Corporation Pennsylvania
ABC American Business Finance Corporation Delaware
ABC & HAC ABFS 1995-1, Inc. Delaware
ABC & HAC ABFS 1995-2, Inc. Delaware
ABC & HAC ABFS 1996-1, Inc. Delaware
ABC & HAC ABFS 1996-2, Inc. Delaware
</TABLE>
(1) HomeAmerican Credit, Inc. is doing business as Upland Mortgage.
