<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 MARCH 31, 1997
[ ] 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
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(Address of principal executive offices) (Zip Code)
(610) 668-2440
-------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------ ------
As of May 2, 1997, there were 3,503,166 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 - MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.................................................................... 2
Statements of Consolidated Operations.......................................................... 3
Consolidated Statement of Stockholders' Equity................................................. 4
Statements of Consolidated Cash Flows.......................................................... 5
Notes to Consolidated Financial Statements..................................................... 8
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.......... 10
Part II Other Information....................................................................................... 17
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
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>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1997
----------- ----------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 5,345,269 $25,778,328
Loans and lease receivables - net
Available for sale 17,625,178 16,151,612
Other 534,325 902,548
Other receivables 14,090,542 33,101,699
Prepaid expenses 1,341,160 3,284,255
Property and equipment - net 1,452,895 2,113,799
Other assets 6,504,794 11,846,309
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Total assets $46,894,163 $93,178,550
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt $35,987,401 $49,338,981
Accounts payable and accrued expenses 3,132,170 6,338,383
Deferred income taxes 1,506,271 3,902,291
Other liabilities 1,876,806 4,123,767
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Total liabilities 42,502,648 63,703,422
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STOCKHOLDERS' EQUITY
Preferred stock, par value $.001
Authorized 1,000,000 shares
Issued and outstanding - none -- --
Common stock, par value $.001
Authorized 9,000,000 shares
Issued and outstanding 3,503,166
In 1997 and 2,353,166 in 1996 2,353 3,503
Additional paid-in capital 1,931,699 22,669,477
Retained earnings 3,057,495 7,402,180
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4,991,547 30,075,160
Less note receivable 600,032 600,032
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Total stockholders' equity 4,391,515 29,475,128
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Total liabilities and stockholders' equity $46,894,163 $93,178,550
=========== ===========
</TABLE>
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 Nine Months Ended
March 31 March 31
-------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Gain on sale of loans $ 7,412,310 $ 55,125 $ 15,644,904 $ 3,973,968
Interest and fees 1,604,600 834,964 4,085,510 2,362,079
Other income 124,300 37,700 316,587 93,485
------------ ------------ ------------ ------------
9,141,210 927,789 20,047,001 6,429,532
------------ ------------ ------------ ------------
EXPENSES
Interest 1,451,126 632,834 3,601,969 1,748,526
Provision for credit losses 323,000 13,883 723,000 305,634
Payroll and related costs 556,796 143,591 1,077,845 454,115
Sales and marketing 2,402,856 715,654 5,249,393 1,776,122
General and administrative 1,099,801 402,826 2,547,753 1,121,509
------------ ------------ ------------ ------------
5,833,579 1,908,788 13,199,960 5,405,906
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION
(CREDIT) FOR INCOME TAXES 3,307,631 (980,999) 6,847,041 1,023,626
PROVISION (CREDIT)FOR INCOME TAXES 1,157,382 (343,350) 2,396,464 358,269
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 2,150,249 $ (637,649) $ 4,450,577 $ 665,357
============ ============ ============ ============
NET INCOME (LOSS)PER SHARE $ .70 $ (.27) $ 1.67 $ .29
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 3,068,885 2,353,166 2,667,996 2,278,160
</TABLE>
See notes to consolidated financial statements
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1997
(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
Public offering 1,150,000 1,150 20,737,778 -- -- 20,738,928
Cash dividends
($.045 per share) -- -- -- (105,892) -- (105,892)
Net income -- -- -- 4,450,577 -- 4,450,577
--------- ------------ ------------ ------------ ------------ ------------
BALANCE
March 31, 1997 3,503,166 $ 3,503 $ 22,669,477 $ 7,402,180 $ (600,032) $ 29,475,128
========= ============ ============ ============ ============ ============
</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>
Nine Months Ended
March 31,
-----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 4,450,577 $ 665,357
Adjustments to reconcile net income to net
cash provided by(used in) operating activities
Gain on sales of loans/leases (15,666,664) (3,973,968)
Amortization of origination
fees and costs 267,576 244,231
Amortization of deferred
servicing rights 295,101 13,780
Provision for credit losses 723,000 305,634
Accounts (written off) (50,064) (39,603)
Depreciation and amortization of
property and equipment 356,647 217,356
Amortization of financing and
organization costs 441,329 378,034
(Increase) in accrued interest
and fees on loan and
lease receivables (932,781) (170,944)
Decrease in other receivables 316,211 5,914,610
(Increase) in prepaid expenses (1,768,660) (514,962)
Decrease (increase) in other assets 256,072 (73,317)
Increase in accounts payable and
accrued expenses 3,206,214 1,357,780
Increase (decrease) in deferred
income taxes 2,396,020 (128,435)
Increase in other liabilities 2,246,961 934,798
------------ ------------
Net cash provided by (used in) operating activities (3,462,461) 5,130,891
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Loan and leases originated/purchased (95,382,351) (39,431,191)
Loan and lease payments received 3,297,512 1,748,040
Proceeds of loans and leases sold 87,167,675 14,287,075
Purchase of property and equipment (1,017,551) (547,488)
Decrease in securitization gain receivable -- 44,183
Principal receipts on investments 56,868 20,820
Initial overcollateralzation (3,450,000) --
------------ ------------
Net cash used in investing activities (9,327,847) (23,878,561)
------------ ------------
</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>
Nine Months Ended
March 31,
-----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Financing costs incurred (761,249) (409,097)
Net proceeds of (principal payments on)
revolving lines of credit (2,348,465) 4,095,000
Proceeds of term notes payable - bank 250,000
Dividends paid (105,892) --
Principal payments on note
payable, other (18,459) (5,504)
Proceeds from issuance of subordinated
debt 22,731,381 13,322,965
Principal payments on subordinated
debt (7,012,877) (2,441,263)
Proceeds of public offering - net of
related costs 20,738,928 --
------------ ------------
Net cash provided by financing activities 33,223,367 14,812,101
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 20,433,059 (3,935,569)
CASH AND CASH EQUIVALENTS -BEGINNING OF PERIOD 5,345,269 4,734,368
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 25,778,328 $ 798,799
============ ============
</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>
Nine Months Ended
March 31,
-----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 2,193,098 $ 780,990
Income Taxes -- 78,475
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Noncash transactions recorded in connection
with the sale of and foreclosure on loans
receivable
Increase in other receivable, securitization gains 15,877,367 10,603,519
Increase in other assets
Investment, held to maturity -- 1,087,277
Foreclosed real estate held for sale 134,280 59,405
Other holdings held for sale 131,617 --
Transfer from loans and leases, other 479,019 --
Mortgage servicing rights 4,814,850 250,000
Increase in fixed assets -- 83,859
----------- -----------
$21,437,133 $12,084,060
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
During the nine months ended March 31, 1996, stock options for 225,012 shares of
common stock were exercised. The shares with an exercise price of $600,032 were
issued in exchange for a note receivable for the same amount.
See notes to consolidated financial statements.
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<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(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 March 31, 1997, and the results of
its operations for the three and nine months ended March 31, 1997 and 1996.
The results of operations experienced for the three and nine month periods
ended March 31, 1997 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.
1996 amounts have been reclassified to conform to current account
classifications.
2. DEBT
Debt is summarized as follows:
Subordinated debt (a) $48,142,260
Subordinated debt (b) 1,196,721
-----------
$49,338,981
===========
(a) This represents aggregate sales made pursuant to a public offering of
subordinated debt. This debt matures during the period of April
1997 through March 2007 and is subordinate to all of the Company's
Senior Indebtedness.
(b) This represents aggregate sales made pursuant to a prior public offering
of subordinated debt. This debt matures in April 1997 through October
1998 and is 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.
-8-
<PAGE>
3. COMMON STOCK
On February 20, 1997, the Company sold 1,150,000 shares of common stock in
an underwritten public offering.
4. GAIN ON SALE OF LOANS
Effective January1, 1997, the Company adopted Financial Accounting Standards
Board Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). Under
SFAS 125, the Company recognized an unrealized gain of approximately $1.8
million related to loans sold in the quarter ended March 31, 1997.
5. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
outstanding. Earnings per share amounts for the three months and nine months
ended March 31, 1997 assume the exercise of all stock options having an
exercise price less than the average market price of the common stock using
the Treasury method. The effect of outstanding stock options is not dilutive
for the three and nine months ended March 31, 1996.
6. STOCK OPTIONS
On February 20, 1997, the Company awarded options for 150,000 shares common
stock at $20 per share. The options vest over a five year period. The
options were awarded to executive officers and other employees of the
Company.
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<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 $46.3 million, or 98.7%, to $93.2 million at
March 31, 1997 from $46.9 million at June 30, 1996 due primarily to increases in
cash, other receivables and other assets. Cash increased $20.4 million as a
result of the net proceeds from the sale of 1,150,000 shares (including 150,000
shares sold pursuant to the underwriters' overallotment option) of the Company's
common stock in an underwritten public offering. Other receivables, consisting
primarily of the excess spread related to the Company's securitizations,
increased $19.0 million, or 134.8%, to $33.1 million at March 31, 1997, from
$14.1 million at June 30, 1996 due to the Company's retention of the excess
spread in connection with its loan securitizations. Other assets increased $5.3
million, or 81.5%, to $11.8 million at March 31, 1997 from $6.5 million at June
30, 1996 due primarily to an increase in mortgage servicing rights obtained in
connection with the Company's loan securitizations.
Total liabilities increased $21.2 million, or 49.9%, to $63.7 million
at March 31, 1997 from $42.5 million at June 30, 1996 primarily due to a net
increase in debt, accounts payable and accrued expenses and deferred income
taxes. The net increase in debt was due to net sales of subordinated debt of
$15.7 million during the nine months ended March 31, 1997 and a net decrease in
institutional debt of $2.3 million as the Company repaid its institutional debt
with proceeds from its securitizations. At March 31, 1997, the Company had $49.3
million of subordinated debt outstanding. The Company's ratio of total debt to
equity at March 31, 1997 was 1.7:1 as compared to 8.2:1 at June 30, 1996.
Accounts payable and accrued expenses increased $3.2 million, or 103.2%, to $6.3
million at March 31, 1997 from $3.1 million at June 30, 1996 due to growth in
the Company's operations resulting in larger accruals for advertising and
interest. Deferred income taxes increased $2.4 million, or 160.0%, to $3.9
million at March 31, 1997 from $1.5 million at June 30, 1996 due to additional
tax accruals on the Company's income for the nine months ended March 31, 1997.
Stockholders' equity increased $25.1 million to $29.5 million at March 31, 1997
from $4.4 million at June 30, 1996 due to proceeds of the Company's common stock
offering of $20.7 million and net income (net of dividends) of $4.4 million.
RESULTS OF OPERATIONS
During the nine months ended March 31, 1997, the Company experienced
records levels of total revenues and net income as a result of increases in
originations and securitizations. Total revenues increased $13.6 million and net
income increased $3.8 million for the nine months ended March 31, 1997 as
compared to the nine months ended March 31, 1996.
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.
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<PAGE>
Total Revenues. Total revenues increased $13.6 million, or 212.5%, to
$20.0 million for the nine months ended March 31, 1997 from $6.4 million for the
nine months ended March 31, 1996. Total revenues increased $8.2 million, or
883.6%, to $9.1 million for the three months ended March 31, 1997 from $928,000
for the three months ended March 31, 1996. These increases in total revenues
were primarily the result of gains on sales of loans through securitizations.
Gain on Sale of Loans. Gain on sale of loans increased $11.6 million to
$15.6 million for the nine months ended March 31, 1997 from $4.0 million for the
nine months ended March 31, 1996. Gain on sale of loans increased $7.3 million
to $7.4 million for the three months ended March 31, 1997 from $55,000 for the
three months ended March 31, 1996. The increases were the result of sales of
$29.3 million of loans secured by real estate and other business assets
("Business Purpose Loans") and $57.9 million of loans secured by real estate on
single family residences ("Home Equity Loans") through securitizations in
September 1996 and March 1997 as compared to the sale of $14.5 million of
Business Purpose Loans through securitization in October 1995. During the three
months ended March 31, 1997, the Company completed a $75.0 million
securitization of Business Purpose and Home Equity Loans, including a $27.8
million pre-funded portion which is expected to close during the fourth quarter
of fisacl 1997. The Company did not complete in a securitization during the
three months ended March 31, 1996. During the nine months ended March 31, 1997,
the Company recognized net gains of $14.4 million (representing the fair value
of the excess spread of $16.1 million less $1.7 million of costs associated with
these transactions) on the Company's participation in the $87.2 million of loans
sold through securitizations. During the nine months ended March 31, 1997, the
Company recognized $1.2 million of gain on sale of loans through excess mortgage
servicing rights received in connection with prior securitizations. Given the
unseasoned nature of the loans securitized and the lack of supporting financial
information thereon, the Company was previously unable to reasonably estimate
the value of such excess mortgage servicing rights.
Interest and Fee Income. Interest and fees income consists of interest
income, fee income and amortization of origination costs. Interest and fee
income increased $1.7 million, or 70.8%, to $4.1 million for the nine months
ended March 31, 1997, from $2.4 million for the nine months end March 31, 1996.
Interest and fee income increased $800,000, or 100.0%, to $1.6 million for the
three months ended March 31, 1997 from $800,000 for the three months ended March
31, 1996. The increases in interest income were the result of an increased
amount of loans retained in portfolio prior to securitization.
Interest income consists of interest income the Company earns on the
loans and leases it holds in its portfolio. Interest income from loans and
leases held in portfolio increased $1.8 million to $3.3 million for the nine
months ended March 31, 1997 or a 120.0% increase over the $1.5 million reported
for the nine months ended March 31, 1996. Interest income from loans and leases
held in portfolio increased $823,000 to $1.4 million for the three months ended
March 31, 1997, or a 142.6% increase over $577,000 for the three months ended
March 31, 1996. The increases were attributable to increased originations of
Business Purpose Loans, Home Equity Loans and Equipment Leases, as well as
management's decision to retain Home Equity Loans in portfolio in contemplation
of future securitizations.
During the nine months ended March 31, 1997, the Company originated
approximately $57.8 million of Home Equity Loans, $27.6 million of Business
Purpose Loans and $5.6 million of Equipment Leases. During the nine months ended
March 31, 1996, the Company originated $24.2 million of Home Equity Loans, $20.5
million of Business Purpose Loans and $4.2 million of Equipment Leases. The
majority of the Home Equity Loans originated during the nine months ended March
31, 1996 were sold to third parties (with servicing released). Beginning in
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<PAGE>
October 1995, as part of the Company's securitization strategy, the Company
placed Home Equity Loans into its held for sale portfolio until sold as part of
a securitization. Prior to the implementation of the securitization strategy,
the Company originated and immediately sold such loans. As a result of the
Company's securitization strategy, the Company holds a greater amount of Home
Equity Loans in its portfolio thereby generating an increase in interest income
and a decrease in fee income, as described below.
Fee income, includes primarily premium and points earned when loans are
closed, funded and immediately sold to unrelated third party purchasers. Fee
income decreased $31,000 from $1,090,000 for the nine months ended March 31,
1996 to $1,059,000 for the nine months ended March 31, 1997. Fee income
decreased $35,000 from $337,000 for the three months ended March 31, 1996 to
$312,000 for the three months ended March 31, 1997. The reductions in fee income
for the three and nine month periods were due to the Company's current strategy
of building a portfolio of loans and securitizing them. As a result of this
strategy, the Company is generally not selling loans upon origination which has
resulted in a reduction in fee income.
The third component of interest and fee income is amortization of
origination costs. During the nine months ended March 31, 1997, amortization of
origination costs was $268,000 compared to $245,000 recognized during the nine
months ended March 31, 1996. During the three months ended March 31, 1997,
amortization of origination costs was $102,000 compared to $96,000 recognized
during the three months ended March 31, 1996. The increases were attributable to
increases in the amortization of lease origination costs of $81,000 during the
nine month period ($26,000 in the three month period) resulting from an increase
in the Equipment Lease portfolio. The increases were partially offset by the
amortization of loan origination costs which decreased by $58,000 during the
nine month period ($20,000 in the three month period). 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 $7.8 million, or 144.4%, to
$13.2 million for the nine months ended March 31, 1997 from $5.4 million for the
nine months ended March 31, 1996. Total expenses increased $3.9 million, or
205.3%, to $5.8 million for the three months ended March 31, 1997 from $1.9
million for the three months ended March 31, 1996. As described in more detail
below, these increases were primarily a result of increased interest and sales
expense attributable to the Company's continued sale of subordinated debt. Also
contributing to the increases in total expenses were increases in provision for
credit losses, payroll, sales and marketing and general and administrative
expenses related to increased loan and lease originations.
Interest Expense. Interest expense increased $1.9 million, or 111.8 %,
to $3.6 million for the nine months ended March 31, 1997 from $1.7 million for
the nine months ended March 31, 1996. Interest expense increased $818,000, or
$129.2%, to $1.5 million for the three months ended March 31, 1997 from $633,000
for the three months ended March 31, 1996. The increases were primarily
attributable to increases in the amount of the Company's subordinated debt
outstanding during such periods, the proceeds of which were utilized to fund the
Company's loan growth. Average subordinated debt outstanding was $41.5 million
during the nine months ended March 31, 1997 compared to $23.0 million during the
nine months ended March 31, 1996 and $47.9 million during the three months ended
March 31, 1997 as compared to $27.1 million during the three months ended March
31, 1996. Average interest rates paid on the subordinated debt increased to
9.04% for the nine months ended March 31, 1997 from 8.96% for the nine months
ended March 31, 1996 and to 9.04% for the three months ended March 31, 1997 from
8.96%
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<PAGE>
for the three months ended March 31, 1996. Such increases in rates were due to
an increase in the volume of debt with maturities of greater than one year which
bear higher interest rates than shorter term debt.
Interest expense on lines of credit utilized by the Company for the nine months
ended March 31, 1997 was $504,000, as compared to $205,000 for the nine months
ended March 31, 1996. Interest expense on lines of credit utilized by the
Company for the three months ended March 31, 1997 was $8,000 compared to $29,000
for the three months ended March 31, 1996. The increases were due to the
Company's partial utilization of warehouse lines of credit to fund Home Equity
Loans and Business Purpose Loans.
Allowance for Credit Losses. The Company maintains an allowance for
credit losses based upon management's estimate of the expected collectibility of
loans and leases outstanding. The allowance is determined based upon
management's estimate of potential losses in the portfolio in light of economic
conditions, the credit history of the borrowers, and the nature and
characteristics of the underlying collateral as well as the Company's historical
loss experience. Although the Company's historical loss experience has been
minimal, the increase in the allowance reflects the increase in originations.
Although the Company maintains its allowance for credit losses at the level it
considers adequate to provide for potential losses, there can be no assurances
that actual losses will not exceed the estimated amounts or that additional
provisions will not be required. The Company had an allowance for credit losses
of $1.4 million at March 31, 1997. The allowance is increased through a
provision for credit losses. The provision for credit losses increased by
$417,000 to $723,000 for the nine months ended March 31, 1997 from $306,000 for
the nine months ended March 31, 1996 and by $309,000 to $323,000 for the three
months ended March 31, 1997 as compared to $14,000 for the three months ended
March 31, 1996. The ratio of the allowance for credit losses to total net loan
and lease receivables serviced remained at 1.0% at March 31, 1997 and March 31,
1996. From the inception of the Company's business in 1988 through March 31,
1997, the Company has experienced a total of approximately $303,000 in net loan
and lease losses. The Company's delinquency rate as a percentage of the total
portfolio serviced was 2.46% at March 31, 1997 and 3.08% at March 31, 1996.
Payroll and Related Costs. Payroll and related costs increased
$624,000, or 137.4%, to $1.1 million for the nine months ended March 31, 1997
from $454,000 for the nine months ended March 31, 1996. Payroll and related
costs increased $413,000, or 286.8%, to $557,000 for the three months ended
March 31, 1997 from $144,000 for the three months ended March 31, 1996. The
increases were due to increases in the number of administrative employees as a
result of the Company's growth in loan and lease originations as well as
increases in loans serviced. Management anticipates that these expenses will
continue to increase in the future as the Company's expansion and increasing
originations continue.
Sales and Marketing Expenses. Sales and marketing expenses increased
$3.4 million, or 188.9% to $5.2 million for the nine months ended March 31, 1997
from $1.8 million for the nine months ended March 31, 1996. Sales and marketing
expenses increased $1.7 million, or 237.4%, to $2.4 million for the three months
ended March 31, 1997 from $716,000 for the three months ended March 31, 1996.
The increases were attributable to increases in advertising costs as a result of
increased newspaper, direct mail and radio advertising related to the Company's
sales of subordinated debt and loan products. In addition, the Company initiated
a television advertising program for the sale of its home equity product.
Subject to market conditions, the Company plans to expand its service area
throughout the eastern United States. As a result, it is anticipated that sales
and marketing expenses will continue to increase in the future.
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<PAGE>
General and Administrative Expenses. General and administrative
expenses increased $1.4 million, or 127.3%, to $2.5 million for the nine months
ended March 31, 1997 from $1.1 million for the nine months ended March 31, 1996.
General and administrative expenses increased $697,000, or 173.0%, to $1.1
million for the three months ended March 31, 1997 from $403,000 for the three
months ended March 31, 1996. The increases were 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 three and nine
months ended March 31, 1997.
Income Taxes. Income taxes increased $2.0 million to $2.4 million for
the nine months ended March 31, 1997 from $358,000 for the nine months ended
March 31, 1996. Income taxes increased $1.5 million to $1.2 million for the
three months ended March 31, 1997 from a credit of $343,000 for the three months
ended March 31, 1996. The increases were due to increases in income before
taxes.
Net Income. Net income increased $3.8 million to $4.5 million for the
nine months ended March 31, 1997 as compared to $665,000 for the nine months
ended March 31, 1996. As a result of the increase, earnings per share increased
to $1.67 on weighted average common shares outstanding of 2,667,996 for the nine
months ended March 31, 1997 compared to $0.29 on weighted average common shares
outstanding of 2,278,160 for the nine months ended March 31, 1996.
Net income increased $2.8 million to $2.2 million for the three months
ended March 31, 1997 from a loss of $638,000 for the three months ended March
31, 1996. Earnings per share were $0.70 on weighted average common shares
outstanding of 3,068,885 for the three months ended March 31, 1997 compared to a
loss of $0.27 per share on weighted average common shares outstanding of
2,353,166 for the three months ended March 31, 1996.
LIQUIDITY AND CASH 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. In addition, the Company utilized the
capital market to sell additional shares of its common stock. The Company's cash
requirements include the funding of loan originations, payment of interest
expense, funding over-collaterization requirements, operating expenses and
capital expenditures.
During the third quarter of fiscal year 1997, the Company completed an
underwritten public offering of 1,150,000 shares of common stock, at $20 per
share, resulting in net proceeds of approximately $20.7 million.
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 nine months ended March 31, 1997,
the Company sold $87.2 million of Business Purpose Loans and Home Equity Loans
through two securitizations. The securitizations resulted in net proceeds of
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<PAGE>
approximately $83.7 million. The Company has utilized the proceeds of the
securitizations to fund the origination of new loans and leases and to repay
funds borrowed pursuant to the Company's warehouse credit 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 nine months ended
March 31, 1997, the Company had a net gain on sale of loans through
securitizations of $14.4 million. The Company uses a portion of the proceeds of
a securitization, net of fees and costs of the securitization, to repay its
warehouse credit facilities. Additionally, in a securitization, the Company
obtains the right to receive excess cash flows generated by the securitized
loans held in the trust referred to herein as the excess spread and capitalizes
mortgage servicing rights, each of which creates non-cash taxable income.
Consequently, the income tax payable and the expenses related to the
securitizations negatively impact the Company's cash flow. As a result, the
Company may operate on a negative operating cash flow basis which could
negatively impact the Company's results of operations during such periods.
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 conditions, the Company
intends to continue to implement additional securitizations of its loan
portfolios and may in the future securitize its Equipment Lease portfolio.
Adverse conditions in the securitization market could impair the Company's
ability to sell loans through securitizations on a favorable or timely basis.
Since the sale of loans through securitizations is an important source of
revenues, any such delay or impairment could have a material adverse impact on
the Company's results of operations.
Despite its use of a portion of the proceeds of the securitizations to
fund loan originations, the Company continues to rely on borrowings such as its
subordinated debt and warehouse credit facilities or lines of credit to fund its
operations. At March 31, 1997, the Company had a total of $49.3 million of
subordinated debt outstanding. The Company also had available credit facilities
and lines of credit totaling $72.5 million, none of which was drawn upon as of
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 debt at rates ranging from 10.8% to 14.0%. In December
1993, the Company ceased selling subordinated debt through ABFC. As of March 31,
1997, ABFC had approximately $1.2 million of the subordinated debt outstanding.
This debt is currently maturing and will be fully extinguished by October 1998.
In addition, between July 1, 1993 and March 31, 1997, ABFS sold $75.2
million in principal amount of subordinated debt (including redemptions and
repurchases by investors), pursuant to registered public offerings with
maturities ranging between three months and ten years. As of March 31, 1997,
ABFS had approximately $48.1 million of subordinated debt outstanding (excluding
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<PAGE>
the debt of ABFC). The proceeds of such sales of debt have been used to fund
general operating and lending activities. The Company intends to meet its
obligations to repay such debt as 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.
In March 1997, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") registering $125.0 million of
subordinated debt securities for sale in a public offering. Following the
receipt of the SEC order declaring the registration statement effective, the
Company anticipates offering such securities to the public on a continuous basis
over approximately twenty months.
Upland has a $50.0 million Interim Warehouse and Security Agreement
with Prudential Securities Realty Funding Corporation. Upland also has a $7.5
million Revolving Loan and Security Agreement with BankAmerica Business Credit,
Inc. In addition, ABC has a Loan and Security Agreement with Finova Capital
Corporation. This line of credit is in the amount of $15.0 million. This line of
credit is guaranteed by the Company. At March 31, 1997, none of these credit
facilities were being utilized.
The Company is currently discussing the possibility of obtaining
additional lines of credit with other lenders and providers of credit.
As of March 31, 1997, the Company had $26.8 million of debt scheduled
to mature during the twelve months ending March 31, 1998 which was comprised of
maturing subordinated debt. The Company currently expects to refinance the
maturing debt through cash flow from operations and loan sales or
securitizations and, if necessary, may retire the debt through extensions of
maturing debt or new debt financing. Despite the Company's current use of
securitizations to fund loan growth, the Company is also dependent upon
borrowings to fund a portion of its operations. As a result, the Company intends
to continue to utilize debt financing to fund its operations in the future.
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 January 2003 at a minimum annual rental of $636,495. The lease
contains a renewal option for an additional period at increased annual rental.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On March 28, 1997, the Company filed a registration statement on Form
SB-2 with the SEC registering $125,000,000 of subordinated debentures for sale
to the public.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27: Financial Date Schedule
(b) Form 8-K: None
-17-
<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: May 14, 1997 BY: /s/ DAVID M. LEVIN
-----------------------------
David M. Levin
Senior Vice President
and Chief Financial Officer
-18-
<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 MARCH 31, 1997 AND THE NINE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 25,778,328
<SECURITIES> 0
<RECEIVABLES> 18,434,520
<ALLOWANCES> 1,380,360
<INVENTORY> 0
<CURRENT-ASSETS> 45,214,195
<PP&E> 3,289,304
<DEPRECIATION> 1,175,505
<TOTAL-ASSETS> 93,178,550
<CURRENT-LIABILITIES> 37,273,238
<BONDS> 0
0
0
<COMMON> 3,503
<OTHER-SE> 29,471,625
<TOTAL-LIABILITY-AND-EQUITY> 93,178,550
<SALES> 0
<TOTAL-REVENUES> 20,047,001
<CGS> 0
<TOTAL-COSTS> 13,199,960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 723,000
<INTEREST-EXPENSE> 3,601,969
<INCOME-PRETAX> 6,847,041
<INCOME-TAX> 2,396,464
<INCOME-CONTINUING> 4,450,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,450,577
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.67
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