<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 0-22474
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AMERICAN BUSINESS FINANCIAL SERVICES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 87-0418807
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Presidential Boulevard, Bala Cynwyd, PA 19004
- - ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(610) 668-2440
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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As of February 11, 1997, there were 2,353,166 shares of the registrant's Common
Stock issued and outstanding.
Transitional Small Business Disclosure Format Yes No X
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB - DECEMBER 31, 1996
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet.......................................................................1
Statements of Consolidated Operations............................................................2
Consolidated Statement of Stockholders' Equity...................................................3
Statements of Consolidated Cash Flows............................................................4
Notes to Consolidated Financial Statements.......................................................7
Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition............8
Part II Other Information..........................................................................................13
Item 1. Legal Proceedings
Item 2. Changes in Securitites
Item 3. Defaults upon Senior Securitites
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
1996
(unaudited)
-----------
Cash and cash equivalents $ 3,034,952
Loans and lease receivables - net
Available for sale 26,396,556
Other 882,632
Other receivables 23,078,793
Prepaid expenses 2,437,487
Property and equipment - net 1,759,430
Other assets 9,873,618
-----------
Total assets $67,463,468
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt $51,554,991
Accounts payable and accrued expenses 3,924,998
Deferred income taxes 2,744,909
Other liabilities 2,617,322
-----------
Total liabilities 60,842,220
-----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001
Authorized 1,000,000 shares
Issued and outstanding - none
Common stock, par value $.001
Authorized 9,000,000 shares
Issued and outstanding 2,353,166 2,353
Additional paid-in capital 1,931,699
Retained earnings 5,287,228
-----------
7,221,280
Less note receivable 600,032
-----------
Total stockholder' equity 6,621,248
-----------
Total liabilities and stockholders' equity $67,463,468
===========
See notes to consolidated financial statements.
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Gain on sale of loans $ 3,859,359 $ 3,863,481 $ 8,232,594 $ 3,918,843
Interest and fees 1,345,682 638,441 2,480,910 1,527,115
Other income 116,640 55,319 192,287 55,785
----------- ----------- ----------- -----------
5,321,681 4,557,241 10,905,791 5,501,743
----------- ----------- ----------- -----------
EXPENSES
Interest 1,109,184 663,902 2,150,843 1,115,692
Provision for credit losses 100,000 246,927 400,000 291,751
Payroll and related costs 322,438 179,931 521,049 310,524
Sales and marketing 1,477,284 568,249 2,846,537 1,060,468
General and administrative 551,274 457,653 1,447,952 718,683
----------- ----------- ----------- -----------
3,560,180 2,116,662 7,366,381 3,497,118
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,761,501 2,440,579 3,539,410 2,004,625
PROVISION FOR INCOME TAXES 616,814 854,203 1,239,082 701,619
----------- ----------- ----------- -----------
NET INCOME $ 1,144,687 $ 1,586,376 $ 2,300,328 $ 1,303,006
=========== =========== =========== ===========
NET INCOME PER SHARE $ .46 $ .67 $ .93 $ .58
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,473,277 2,353,166 2,468,045 2,240,660
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
---------------------------
Additional Total
Number of Paid-In Retained Note Stockholders'
Shares Amount Capital Earnings Receivable Equity
--------- ------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, 2,353,166 $ 2,353 $ 1,931,699 $ 3,057,495 $ (600,032) $ 4,391,515
July 1, 1996
Cash dividends
($.03 per share) -- -- -- (70,595) -- (70,595)
Net income -- -- -- 2,300,328 -- 2,300,328
--------- ------- ----------- ----------- ------------ -------------
BALANCE
December 31, 1996 2,353,166 $ 2,353 $ 1,931,699 $ 5,287,228 $ (600,032) $ 6,621,248
========= ======= =========== =========== ============ =============
</TABLE>
See notes to consolidated financial statements
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 2,300,328 $ 1,303,006
Adjustments to reconcile net income to net
cash (used in) provided by operating activities
Gain in sales of loans/leases (8,198,414) (3,918,843)
Amortization of origination
fees and costs 165,773 149,357
Amoritization of deferred
servicing rights 151,031 5,389
Provision for credit losses 400,000 291,751
Accounts written off (58,335) (46,492)
Depreciation and amortization of
property and equipment 223,821 135,111
Amortization of financing and
organization costs 285,441 233,262
(Increase) decrease in accrued
interest and fees on loan and
lease receivables (684,226) (70,529)
Decrease (increase) in
other receivables (9,634) 626,134
(Increase) in prepaid expenses (921,892) (372,481)
Decrease in other assets 129,177 109
Increase in accounts payable and
accrued expenses 792,828 1,178,228
Increase (decrease) in deferred
income taxes 1,238,638 (128,435)
Increase in other liabilities 740,516 507,759
------------ ------------
Net cash used in operating activities (3,444,978) (106,674)
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Loan and leases originated (53,750,073) (20,967,495)
Loan and lease payments received 1,594,235 758,136
Proceeds of loans and leases sold 40,000,000 9,068,162
Purchase of property and equipment (530,356) (196,188)
Decrease in securitization gain receivable -- 29,564
Principal receipts on investments 36,287 11,784
Initial overcollateralzation (1,200,000)
------------ ------------
Net cash used in investing activities (13,849,907) (11,296,037)
------------ ------------
</TABLE>
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Financing costs incurred (512,457) (297,831)
Net proceeds of (principal payments on)
revolving lines of credit 3,961,041 2,500,000
Dividends paid (70,595) --
Principal payments on note
payable, other (18,457) (2,912)
Proceeds from insurance of subordinated
debentures 14,609,499 8,186,981
Principal payments on subordinated
debentures (2,984,493) (1,240,800)
------------ ------------
Net cash provided by financing activities 14,984,538 9,145,438
------------ ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (2,310,317) (2,257,273)
CASH AND CASH EQUIVALENTS - BEGINNING PERIOD 5,345,269 4,734,368
------------ ------------
CASH AND CASH EQUIVALENTS - END PERIOD $ 3,034,952 $ 2,477,095
============ ============
</TABLE>
See notes to consolidated financial statements
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
INCREASE (DECREASE) IN CASH
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------------
1996 1995
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,156,639 $ 474,607
Income Taxes -- 78,475
Noncash transactions recorded in connection
with the sale of and foreclosure on loans
receivable
Increase in other receivable, securitization gains 8,793,425 10,662,924
Increase in other assets
Investment, held to maturity -- 1,261,285
Foreclosed real estate held for sale 134,280 --
Other holdings held for sale 73,442 --
Transfer from loans and leases, other 250,380 --
Mortgage servicing rights 3,000,201 --
Increase in fixed assets -- 51,425
----------- -----------
$12,251,728 $11,975,634
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
During the six months ended December 31, 1995, stock options for 225,012 shares
of common stock were exercised. The shares with a price of $600,032 were issued
in exchange for a note receivable for the same amount.
See notes to consolidated financial statements.
-6-
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements are unaudited and
include the accounts of American Business Financial Services, Inc. ("ABFS")
and its wholly owned subsidiaries, collectively the "Company". All
significant intercompany transactions and balances have been eliminated.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) have been made which are necessary to present fairly
the financial position of the Company as of December 31, 1996, and the
results of its operations for the three and six months ended December 31,
1996 and 1995. The results of operations experienced for the three and six
month periods ended December 31, 1996 are not necessarily indicative of the
results to be experienced for the fiscal year ended June 30, 1997.
The statements and related notes have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principals have been omitted pursuant to such rules and regulations. The
accompanying notes should be read in conjunction with the Company's June
30, 1996 annual financial statements.
1995 amounts have been reclassified to conform to current account
classifications.
2. DEBT
Debt is summarized as follows:
Warehouse credit facility (a) $ 6,309,506
Subordinated debentures (b) 43,975,764
Subordinated debentures (c) 1,269,721
-----------
$51,554,991
===========
(a) This represents the balance due under a $25,000,000 warehouse line of
credit expiring in March, 1997 and bearing interest at the 30 day
LIBOR plus 1.25%.
(b) This represents aggregate sales made pursuant to a public offering of
debentures. These debentures mature during the period of January 1997
through December 2006 and are subordinate to all of the Company's
Senior Indebtedness.
(c) This represents aggregate sales made pursuant to a prior public
offering of debentures. These debentures mature in January 1997
through October 1998 and are subordinate to all of the Company's
Senior Indebtedness. Payment of principal and interest is guaranteed
by ABC but such guarantee is subordinate to ABC's Senior Indebtedness.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Company's Consolidated Financial Statements and the accompanying notes thereto
included in Item 1 of this Quarterly Report, and the financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's Annual Report on Form
10-KSB for the year ended June 30, 1996.
BALANCE SHEET INFORMATION
Total assets increased $20.6 million, or 43.9%, to $67.5 million at
December 31, 1996 from $46.9 million at June 30, 1996 due primarily to increases
in loan and lease receivables, other receivables and other assets. Loan and
lease receivables available for sale increased $8.8 million as a result of
increased originations primarily due to increased originations of non-conforming
mortgage loans, typically originated to credit impaired borrowers, secured by
mortgages on single family homes ("Home Equity Loans"). Other receivables,
consisting primarily of the excess spread related to the Company's
securitizations, increased $9.0 million, or 63.8%, to $23.1 million at December
31, 1996, from $14.1 million at June 30, 1996 due to the Company's retention of
the excess spread in connection with its loan securitization. Other assets
increased $3.4 million, or 52.3 %, to $9.9 million at December 31, 1996 from
$6.5 million at June 30, 1996 due primarily to an increase in mortgage servicing
rights obtained in connection with the Company's loan securitizations.
Total liabilities increased $18.3 million, or 43.1%, to $60.8 million
at December 31, 1996 from $42.5 million at June 30, 1996 primarily due to an
increase in debt. The increase in debt was due to net sales of subordinated
debentures of $11.6 million during the six months ended December 31, 1996 and a
net increase in institutional debt of $6.3 million as the Company utilized its
lines of credit to fund loan demand. At December 31, 1996, the Company had $45.2
million of subordinated debentures outstanding. The Company's ratio of total
debt to equity at December 31, 1996 was 7.8:1 as compared to 8.2:1 at June 30,
1996.
RESULTS OF OPERATIONS
During fiscal 1996 and the six months ended December 31, 1996, the
Company experienced record levels of total revenues and net income as a result
of increases in originations and securitizations. The Company's total revenues
increased $6.8 million, or 121.4%, between fiscal 1995 and 1996 while net income
increased $1.7 million, or 292.6%, during the same fiscal period. Total revenues
increased $5.4 million and net income increased $1.0 million for the six months
ended December 31, 1996 as compared to the six months ended December 31, 1995.
Since the Company's securitization strategy requires the Company to
build an inventory of loans over time, the Company may experience fluctuations
in operating results as a consequence of incurring costs and expenses in a
fiscal period prior to the fiscal period in which the securitization is
consummated. As such, the results of operations for a given period may not be
indicative of results for subsequent comparable periods.
Total Revenues. Total revenues increased $5.4 million, or 98.2%, to
$10.9 million in the six months ended December 31, 1996 from $5.5 million for
the six months ended December 31, 1995. The increase in total revenues was
primarily the result of gains on sales of loans through securitizations.
Gain on Sale of Loans. Gain on sale of loans increased $4.3 million to
$8.2 million for the six months ended December 31, 1996 from $3.9 million for
the six months ended December 31, 1995. The increase was the result of a sale of
$16.1 million of loans secured by real estate and other business assets
("Business Purpose Loans") and $23.9 million of Home Equity Loans through a
securitization in September of 1996. The Company recognized a gain of $7.0
million (representing the fair value of the excess spread of $7.9 million less
$900,000 of costs associated with the transaction) on the Company's
participation in the $40.0 million of loans sold through this securitization.
The Company recognized $1.2 million of gain on sale of loans through excess
mortgage servicing rights received in connection with prior securitizations.
-8-
<PAGE>
Given the unseasoned nature of the loans securitized and the lack of supporting
financial information thereon, the Company was previously unable to reasonably
estimate the value of such excess mortgage servicing rights. The recognition of
excess mortgage servicing rights will be included in the gain on sale of loans
sold through securitizations occuring in future periods in accordance with
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers
and Servicing of Financial Assets".
Interest and Fee Income. Interest and fees income consists of interest
income, fee income and amortization of origination costs. Interest and fee
income increased $1.0 million, or 66.7%, to $2.5 million in the six months ended
December 31, 1996 from $1.5 million in the six months ended December 31, 1995
due to an increase in interest income as a result of a larger amount of loans
retained in portfolio prior to the securitization.
Interest income consists of interest income the Company earns on the
loans and leases it holds in its portfolio. Interest income from loans and
leases held in portfolio increased $921,000 to $1.9 million for the six months
ended December 31, 1996 or a 94.2 % increase over the $978,000 reported for the
six months ended December 31, 1995. The increase was attributable to increased
originations of Business Purpose Loans, Home Equity Loans and small ticket
leases (generally $10,000 to $150,000) for the acquisition of business equipment
("Equipment Leases"), as well as management's decision to retain Home Equity
Loans in portfolio in contemplation of future securitizations.
During the six months ended December 31, 1996, the Company originated
approximately $30.2 million of Home Equity Loans, $17.8 million of Business
Purpose Loans and $3.8 million of Equipment Leases. During the six months ended
December 31, 1995, the Company originated $11.4 million of Home Equity Loans,
$12.4 million of Business Purpose Loans and $2.5 million of Equipment Leases.
The majority of the Home Equity Loans originated during the six months ended
December 31, 1995 were sold to third parties (with servicing released).
Beginning in October 1995, as part of the Company's securitization strategy, the
Company placed Home Equity Loans into its held for sale portfolio until sold as
part of a securitization. Prior to the implementation of the securitization
strategy, the Company originated and immediately sold such loans. As a result of
the Company's securitization strategy, the Company holds a greater amount of
Home Equity Loans in its portfolio thereby generating an increase in interest
income and a decrease in fee income, as described below.
Fee income, includes primarily premium and points earned when loans are
closed, funded and immediately sold to unrelated third party purchasers. Fee
income decreased $6,000 from $753,000 for the six months ended December 31, 1995
to $747,000 for the six months ended December 31, 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
generally not selling loans upon origination, thereby reducing fee income.
The third component of interest and fee income is amortization of
origination costs. During the six months ended December 31, 1996, amortization
of origination costs was $166,000 compared to $149,000 recognized during the six
months ended December 31, 1995. The increase was attributable to an increase in
the amortization of lease origination costs of $55,000 resulting from an
increase in the lease portfolio. This increase was partially offset by the
amortization of loan origination costs which decreased by $38,000. The decrease
in amortization of loan origination costs resulted from the Company's change in
its amortization policy, effective October 1, 1996, to exclude loans originated
or purchased which were designated to be sold within the following twelve
months.
Total Expenses. Total expenses increased $3.9 million, or 111.4%, to
$7.4 million for the six months ended December 31, 1996 from $3.5 million for
the six months ended December 31, 1995. As described in more detail below, this
increase was primarily a result of increased interest and sales expense
attributable to the Company's continued sale of subordinated debentures. Also
contributing to the increase in total expenses was increases in provision for
credit losses, payroll, sales and marketing and general and administrative
expenses related to increased loan and lease originations.
Interest Expense. Interest expense increased $1.1 million, or 100.0%,
to $2.2 million for the six months ended December 31, 1996 from $1.1 million for
the six months ended December 31, 1995. The increase was primarily attributable
to an increase in the amount of the Company's subordinated debentures
outstanding, the proceeds of which were utilized to fund the Company's loan
growth. Average subordinated debentures outstanding were $38.8 million during
the six months ended December 31, 1996 as compared to $21.2 million during the
six months ended December 31, 1995. Average interest rates paid on the
subordinated debentures increased to 9.03% for the six ended December 31,
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<PAGE>
1996 from 8.89% for the six months ended December 31, 1995 due to an increase in
the volume of debentures with maturities of greater than one year which bear
higher interest rates than shorter term debentures. Interest expense on lines of
credit utilized by the Company during the six months ended December 31, 1996 was
$401,000, as compared to $173,000 during the six months ended December 31, 1995.
The increase was due to the Company's partial utilization of its $25.0 million
warehouse line of credit to fund Home Equity Loans.
Allowance for Credit Losses. The Company maintains an allowance for
credit losses based upon management's estimate of the expected collectibility of
loans and leases outstanding. The allowance is determined based upon
management's estimate of potential losses in the portfolio in light of economic
conditions, the credit history of the borrowers, and the nature and
characteristics of the underlying collateral as well as the Company's historical
loss experience. Although the Company's historical loss experience has been
minimal, the increase in the allowance reflects the increase in originations.
Although the Company maintains its allowance for credit losses at the level it
considers adequate to provide for potential losses, there can be no assurances
that actual losses will not exceed the estimated amounts or that additional
provisions will not be required. The allowance is increased through a provision
for credit losses. The provision for credit losses increased by $108,000 to
$400,000 for the six months ended December 31, 1996 from $292,000 for the six
months ended December 31, 1995. The Company had an allowance for credit losses
of $1.0 million at December 31, 1996. The ratio of the allowance for credit
losses to total net loan and lease receivables serviced was 1.0% at December 31,
1996 as compared to 1.2% at December 31, 1995. From the inception of the
Company's business in 1988 through December 31, 1996, the Company has
experienced a total of approximately $311,000 in net loan and lease losses.
Payroll and Related Costs. Payroll and related costs increased
$210,000, or 67.5%, to $521,000 for the six months ended December 31, 1996 from
$311,000 for the six months ended December 31, 1995. The increase was due to
both an increase in the number of administrative employees as a result of the
Company's growth in loan and lease originations and an increase in loans
serviced for others. Management anticipates that such expense will continue to
increase in the future as the Company's expansion and increasing originations
continue.
Sales and Marketing Expenses. Sales and marketing expenses increased
$1.7 million, or 154.5%, to $2.8 million for the six months ended December 31,
1996 from $1.1 million in the six months ended December 31, 1995. The increase
was attributable to increases in advertising costs as a result of increased
newspaper, direct mail and radio advertising related to the Company's sales of
subordinated debentures and loan products. In addition, the Company initiated a
television advertising program for the sale of its home equity product. Subject
to market conditions, the Company plans to expand its service area throughout
the eastern United States. As a result, it is anticipated that sales and
marketing expenses will continue to increase in the future.
General and Administrative Expenses. General and administrative
expenses increased $681,000, or 94.7%, to $1.4 million for the six months ended
December 31, 1996 from $719,000 for the six months ended December 31, 1995. The
increase was primarily attributable to increases in rent, telephone, office
expense, professional fees and other expenses incurred as a result of previously
discussed increases in loan and lease originations and loan servicing
experienced during the six months ended December 31, 1996.
Income Taxes. Income Taxes increased $498,000 to $1.2 million for the
six months ended December 31, 1996 from $702,000 for the six months ended
December 31, 1995 due to an increase in income before taxes.
Net Income. Net income increased $1.0 million to $2.3 million for the
six months ended December 31, 1996 as compared to $1.3 million for the six
months ended December 31, 1995. As a result of the increase, earnings per share
increased to $0.93 on weighted average common shares outstanding of 2,468,045
compared to $0.58 on weighted average common shares outstanding of 2,240,660.
-10-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to fund its loans principally through (i) the
securitization and sales of loans which it originates, (ii) the sale of the
Company's registered subordinated debentures, (iii) institutional debt
financing, 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.
In recent periods, the Company has significantly increased its reliance
on securitizations to generate cash proceeds for the repayment of debt and to
fund its ongoing operations. During the six months ended December 31, 1996, the
Company completed a securitization involving $40.0 million of Business Purpose
Loans and Home Equity Loans. The securitization results in net proceeds of
approximately $38.8 million. The Company has utilized the proceeds of the
securitizations to fund the origination of new loans and leases and to repay
funds borrowed pursuant to the Company's warehouse of financing facilities. As a
result of the terms of the securitizations, the Company will receive less cash
flow from the portfolios of loans securitized than it would otherwise receive
absent securitizations.
The Company's sale of loans through securitizations has resulted in
gains on sale of loans recognized by the Company. For the six months ended
December 31, 1996, the Company had gain on sale of loans through securitizations
of $7.0 million. The Company uses a portion of the proceeds of a securitization,
net of fees and costs of the securitization, to repay the warehouse credit
facilities. Additionally, in a securitization, the Company obtains the right to
receive excess cash flows generated by the securitized loans held in the trust
referred to herein as the excess spread and capitalizes mortgage servicing
rights, each of which creates non-cash taxable income. Consequently, the income
tax payable and the expenses related to the securtizations negatively impact the
Company's cash flow. As a result, the Company may operate on a negative
operating cash flow basis which could negatively impact the Company's results of
operations during such periods.
Additionally, pursuant to the terms of the securitizations, the Company
will act as the servicer of the loans and in that capacity will be obligated to
advance funds in certain circumstances in respect of each monthly loan interest
payment that accrued during the collection period for the loans but was not
received, unless the Company determines that such advances will not be
recoverable from subsequent collections in respect of the related loan. The
Company's obligation to advance funds in its capacity as servicer of the loans
may create greater demands on the Company's cash flow than either selling loans
or maintaining a portfolio of loans.
Subject to economic, market and interest rate collections, 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 on the Company's
results of operations.
Despite its use of a portion of the proceeds of the securitizations to
fund loan originations, the Company continues to rely on borrowings such as its
subordinated debentures and warehouse credit facilities or lines of credit to
fund its operations. At December 31,1996, the Company had a total of $45.2
million of subordinated debentures outstanding and available credit facilities
and lines of credit totaling $47.5 million, of which $6.3 million was drawn upon
on such date.
Between 1990 and 1993, American Business Finance Corporation ("ABFC"),
an indirect subsidiary of ABFS, sold approximately $1.7 million in principal
amount of subordinated debentures which mature at varying times between
September 1996 and June 1998. In December 1993, the Company ceased selling
subordinated debentures through ABFC. As of December 31, 1996, ABFC had
approximately $1.3 million of subordinated debentures outstanding.
-11-
<PAGE>
In addition, during the six months ended December 31, 1996, ABFS sold
$11.6 million in principal amount of subordinated debentures (including
redemptions and repurchases by investors), pursuant to registered offerings with
maturitites ranging between three months and ten years. As of December 31, 1996,
ABFS had approximately $43.9 million of subordinated debentures outstanding
(excluding the debt of ABFC). The proceeds of such sales of debentures 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 fiscal 1997, the Company intends to file a registration
statement with the Securities and Exchange Commission which would register up to
$125.0 million of subordinated debt securities for sale in a public offering.
The Company anticipates offering such securities to the public on a continuous
basis over a twenty month period.
In April 1996, Upland entered into an Interim Warehouse and Security
Agreement with Prudential Securities Realty Funding Corporation. The credit
facility is for $25.0 million, bears interest at the 30 day London Inter-Bank
Offered Rate ("LIBOR") plus 1.25% and expires March 1997. Additionally, in May
1996, Upland entered into a $7.5 million 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. In addition, in December
1996, ABC entered into a Loan and Security Agreement with Finova Capital
Corporation. This line of credit is in the amount of $15.0 million and expires
in December 1999. This line of credit bears interest at the Prime Rate plus 1.0%
and is guaranteed by the Company. At December 31, 1996, $6.3 million of these
credit facilities were being utilized.
The Company is currently discussing the possibility of obtaining
additional lines of credit with other lenders and providers of credit.
As of December 31, 1996, the Company had $31.0 million of debt
scheduled to mature during the twelve months ending December 31, 1997 which was
comprised of $24.7 million of maturing subordinated debentures and credit
facilities totaling $6.3 million. The Company currently expects to refinance the
$24.7 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. The credit facility is expected to
be repaid from funds obtained through the Company's next loan securitization.
Despite the Company's current use of securitizations to fund loan growth, the
Company is also dependent upon borrowings to fund a portion of its operations.
As a result, the Company intends to continue to utilize debt financing to fund
its operations in the future.
From time to time, the Company considers potential acquisitions of
related business or assets which could have a material impact upon the Company's
results of operations and liquidity position.
The Company leases certain of its facilities under 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.
Forward Looking Statements
When used in this Quarterly Report, the word or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"projected", "intends to" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including but not limited to changes in interest rates, credit
risk related to the Company's borrowers, market conditions and real estate
values in the Company's primary lending area, competition, factors affecting the
Company's ability to implement its growth strategy, the Company's dependence on
debt financing and securitizations to fund its operations, fluctuations in
quarterly operating results, unseasoned nature of the Company's Equipment Lease
portfolio, state and federal regulation and licensing requirements applicable to
the Company's lending activities and environmental concerns that could cause the
Company's actual results to differ materially from historical earnings and those
presently anticipated or projected. Such factors 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 this Quarterly Report.
-12-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about February 17, 1995, American Business Leasing, Inc. ("ABL")
was served with a Writ of Summons captioned Montgomery Leasing Company v.
American Business Credit, Inc. and American Business Financial Services, Inc.,
Court of Common Pleas of Montgomery Count (Pennsylvania), No. 95-03554. In
connection therewith, on or about May 18, 1995, ABL was served a complaint
captioned Montgomery Leasing Company v. American Business Credit, American
Business Financial Services, Inc., Donna Wesemann and Christine Adam, 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.
Additionally, on or about August 24, 1995, ABL filed a complaint
against Montgomery Leasing Company, the above named plaintiff, Uriel and Arlene
Yogev, shareholders and officers of 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 ABL complaint seeks
damages from the defendant based on abuse of process as a result of their
malicious filing of their above referenced complaint and conspiracy to drive ABL
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 ABL.
During the quarter ended December 31, 1996, a settlement agreement was
entered into between the parties with respect to the suits described above.
Mutual releases were entered into by the parties and payment of the agreed upon
settlement amount was paid. The settlement of this suit will not have a
material impact on the Company's financial position, results of operations or
liquidity.
The Company is involved as plaintiff or defendant in various other
legal proceedings arising in the normal course of its business. While the
ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's financial position,
results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
-13-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On January 23, 1997, the Company held its Annual Meeting of
Stockholders. Directors, Anthony J. Santilli, Jr.,Leonard Becker, Michael
DeLuca, Richard Kaufman and Harold Sussman, were elected for terms of one year.
The following indicates the votes cast in connection with the election
of directors.
VOTES CAST
-------------------------------------
Director Nominee For Against Abstain
- - ---------------- --- ------- -------
Anthony J. Santilli, Jr. 1,690,260 0 162
Leonard Becker 1,690,410 0 12
Michael DeLuca 1,690,410 0 12
Richard Kaufman 1,690,260 0 162
Harold Sussman 1,690,260 0 162
ITEM 5. OTHER INFORMATION
On December 27, 1996, the Company filed a registration statement on
Form SB-2 with the SEC registering 1,150,000 shares (including the underwriters'
over-allotment option) of its Common Stock for sale to the public in an
underwriter public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) Form 8-K: NONE
-14-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
DATE: February 12, 1997 BY: /S/ DAVID M. LEVIN
------------------
David M. Levin
Senior Vice President
and Chief Financial Officer
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of American Business Financial Services, Inc.
and Subsidiaries as of December 31, 1996 and the six months then ended and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CAPTION>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 3,034,952
<SECURITIES> 0
<RECEIVABLES> 28,328,277
<ALLOWANCES> 1,049,089
<INVENTORY> 0
<CURRENT-ASSETS> 33,529,321
<PP&E> 2,802,110
<DEPRECIATION> 1,042,680
<TOTAL-ASSETS> 67,463,468
<CURRENT-LIABILITIES> 35,088,326
<BONDS> 0
0
0
<COMMON> 2,353
<OTHER-SE> 6,618,895
<TOTAL-LIABILITY-AND-EQUITY> 67,463,468
<SALES> 0
<TOTAL-REVENUES> 10,905,791
<CGS> 0
<TOTAL-COSTS> 7,366,381
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 400,000
<INTEREST-EXPENSE> 2,150,843
<INCOME-PRETAX> 3,539,410
<INCOME-TAX> 1,239,082
<INCOME-CONTINUING> 2,300,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,300,328
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
