<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, 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
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
- - --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 87-0418807
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Presidential Boulevard, Bala Cynwyd, PA 19004
- - ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(610) 668-2440
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __X__ No _____
As of February 1, 1998, there were 3,523,406 shares of the registrants Common
Stock issued and outstanding.
Transitional Small Business Disclosure Format Yes _____ No __X__
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
FORM 10-QSB - DECEMBER 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.......................................................................................2
Consolidated Statements of Operations.............................................................................3
Consolidated Statement of Stockholders' Equity....................................................................4
Consolidated Statements of Cash Flows.............................................................................5
Notes to Consolidated Financial Statements........................................................................7
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.............................9
Part II Other Information................................................................................................18
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>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1997
------------ -------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 4,333,367 $ 501,936
Loans and lease receivables - net
Available for sale 85,591,691 35,711,821
Other 3,704,227 1,143,566
Other receivables 61,898,022 39,644,161
Prepaid expenses 2,343,401 1,181,654
Property and equipment - net 5,644,254 2,863,345
Other assets 33,505,372 18,430,049
------------ ------------
Total assets $197,020,334 $103,988,532
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt $142,469,642 $ 56,486,229
Accounts payable and accrued expenses 7,648,730 6,081,630
Deferred income taxes 8,002,858 4,630,981
Other liabilities 2,799,818 5,877,664
------------ ------------
Total liabilities 160,921,048 73,076,504
------------ ------------
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 3,523,406 at December 31, and
3,503,166 at June 30 3,523 3,503
Additional paid-in capital 23,255,957 22,669,477
Retained earnings 13,439,838 8,839,080
------------ ------------
36,695,805 31,508,557
Less note receivable 600,032 600,032
------------ ------------
Total stockholder's equity 36,099,286 30,912,028
------------ ------------
Total liabilities and stockholder's equity $197,020,334 $103,988,532
============ ============
</TABLE>
See notes to consolidated financial statements
2
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AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------- -------------------------------------------
1997 1996 1997 1996
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Gain on sale of loans $ 6,584,289 $ 3,774,594 $15,105,678 $ 7,855,444
Interest and fees 5,074,707 1,228,056 7,379,074 2,363,284
Servicing income 454,811 221,113 835,124 295,782
Other income 117,664 13,153 117,869 14,131
----------- ----------- ----------- -----------
Total Revenue 12,231,471 5,236,916 23,437,745 10,528,641
----------- ----------- ----------- -----------
EXPENSES
Interest 3,076,500 1,109,184 4,936,301 2,150,843
Provision for credit losses 132,986 15,235 163,873 22,850
Payroll and related costs 1,016,501 322,438 1,867,200 521,049
Sales and marketing 3,049,103 1,477,284 5,373,606 2,846,537
General and administrative 2,601,387 551,274 3,966,718 1,447,952
----------- ----------- ----------- -----------
Total Expenses 9,876,477 3,475,415 16,307,698 6,989,231
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,354,994 1,761,501 7,130,047 3,539,410
PROVISION FOR INCOME TAXES 800,698 616,814 2,424,216 1,239,082
----------- ----------- ----------- -----------
NET INCOME $ 1,554,296 $ 1,144,687 $ 4,705,831 $ 2,300,328
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE
Basic $ 0.44 $ 0.49 $ 1.34 $ 0.98
=========== =========== =========== ===========
Diluted $ 0.42 $ 0.47 $ 1.28 $ 0.94
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------
Additional Total
Number of Paid-In Retained Notes Stockholders'
Shares Amount Capital Earnings Receivable Equity
------ ------ ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE 3,503,166 $ 3,503 $ 22,669,477 $ 8,839,080 $ (600,032) $ 30,912,028
July 1, 1997
Cash dividends
($.03 per share) (105,073) (105,073)
Shares issued for
Acquisition 20,240 20 499,980 500,000
Non employee
Options 86,500 86,500
Net income 4,705,831 4,705,831
--------- --------- ------------ ------------ ---------- ------------
BALANCE
December 31, 1997 3,523,406 $ 3,523 $ 23,255,957 $ 13,439,838 $ (600,032) $ 36,099,286
========= ========= ============ ============ ========== ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------------------------
1997 1996
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities
Net Income $ 4,704,418 $ 1,155,641
Adjustments to reconcile net income to net
cash (used) provided by operating
Activities
Gain on sales of loans/leases (17,583,166) (4,373,235)
Amortization of origination fees and costs 40,380 86,321
Amortization of deferred servicing rights 582,229 51,643
Amortization of goodwill 261,381 --
Amortization of deferred expenses 28,641 --
Amortization of financing and organization costs 328,166 127,933
Depreciation and amortization of
Property and equipment 566,699 106,980
Loans expensed -- --
Provision for credit losses 981,603 300,000
Accounts written off (206,075) (50,443)
Loans originated for sale (132,081,371) (20,880,727)
Proceeds of loans and leases sold 99,996,008 26,676,311
Increase in accrued interest and fees on
Loan and lease receivables (761,337) (44,809)
Decrease (increase) in other receivables 5,363,314 (1,083,286)
Increase in prepaid expenses (450,224) (1,134,877)
Decrease (increase) in other assets (697,652) 299,466
Increase in accounts payable and accrued expenses 1,284,332 1,154,427
Increase in deferred income taxes 274,085 622,268
Increase (decrease) in other liabilities (3,220,594) 295,107
------------- -------------
Net cash provided by (used in) operating activities (38,389,163) 3,308,720
------------- -------------
Cash flows from investing activities
Leases originated for portfolio (24,139,658) (2,091,191)
Loan and lease payments received 4,451,544 856,130
Purchase of property and equipment (1,950,369) (231,783)
Decrease in securitization gain receivable 891,939 --
Principal receipts on investments 289,178 16,245
Initial overcollateralization of loans (2,000,000) --
Purchase of subsidiary (11,000,000) --
Cash acquired upon purchase of subsidiary 1,414,905 --
Sale of investments 5,000,000 --
------------- -------------
Net cash used in investing activities (27,042,461) (1,450,599)
------------- -------------
</TABLE>
5
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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,
-------------------------------------------
1997 1996
-------------------- -------------------
<S> <C> <C>
Cash flows from financing activities
Financing costs incurred (795,317) (244,368)
Net proceeds of (principal payments on)
Revolving lines of credit 42,376,103 (2,348,465)
Record fair value options granted 86,500 --
Dividends paid (105,073) (35,297)
Principal payments on capital lease obligation (38,257) --
Principal payments on note payable, other -- (104)
Proceeds from issuance of subordinated debentures 35,508,262 5,945,884
Principal payments on subordinated debentures (12,281,163) (1,708,450)
------------ ------------
Net cash provided by financing activities 64,751,055 1,609,200
------------ ------------
Net increase (decrease) in cash and cash equivalents (680,569) 3,467,321
Cash and cash equivalents, beginning of period 5,013,936 5,345,269
------------ ------------
Cash and cash equivalents, end of period 4,333,367 8,812,590
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 3,213,387 $ 888,622
------------ ------------
Income taxes $ 50,000 $ --
------------ ------------
Noncash transaction recorded in connection with the sale of
Loans receivable
Increase in other receivables, securitization gains $ 21,142,019 $ 5,563,603
Increase in other assets - Mortgage servicing rights 3,826,321 574,210
------------ ------------
$ 24,968,340 $ 6,137,813
------------ ------------
Noncash transactions recorded in connection with
Reclassification of loan and lease receivable
Increase in loans receivable-other $ 18,500 $ --
------------ ------------
Increase in other assets $ 160,546 $ --
------------ ------------
Decrease in debt $ (482,231) $ --
------------ ------------
Decrease in other receivables $ (206,300) $ --
------------ ------------
Noncash transactions recorded in connection with the purchase
of wholly owned subsidiary
Stock issued 500,000 --
Goodwill 5,597,766 --
------------ ------------
$ 6,097,766 $ --
------------ ------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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".
The result of operations of New Jersey Mortgage and Investment Corp.
and Subsidiaries are included since October 1, 1997, the date of
acquisition. All significant inter-company transactions and balances
have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim
periods are not necessarily indicative of financial results for the
full year. These unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997. The year-end balance
sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles.
2. ACQUISITION
Effective October 1, 1997, the Company acquired all of the outstanding
stock of New Jersey Mortgage and Investment Corp. ("NJMIC"), a mortgage
and leasing company based in Roseland, New Jersey. The purchase price
for the stock consisted of an initial payment of $11.0 million and
issuance of 20,240 shares of ABFS common stock, and includes contingent
payments of up to $9.0 million in the future if NJMIC achieves certain
performance targets. On October 1, 1997, NJMIC had total assets of
$18.5 million, liabilities of $18.7 million, including subordinated
debt of $9.9 million, and stockholders' deficit of $200,000. The
acquisition of NJMIC was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based on the fair values at the date
of acquisition. The fair value of NJMIC's assets approximated the
liabilities assumed and accordingly, the majority of the purchase price
was recorded as goodwill. Any contingent payments will result in an
increase in the amount of recorded goodwill.
7
<PAGE>
3. DEBT
Debt is summarized as follows:
Warehouse lines of credit $ 49,114,422
Subordinated debentures (a) 79,326,839
Subordinated debentures (b) 661,721
Subordinated debentures (c) 6,579,667
Senior subordinated note (d) 3,000,000
Notes payable - acquisition 3,380,029
Capitalized lease obligations 406,964
-------------
$ 142,469,642
=============
(a) Represents aggregate sales made pursuant to total public offerings
of debentures. These debentures mature during the period of
January 1998 through December 2007 and are subordinate to all of
the Company's Senior Indebtedness.
(b) Represents aggregate sales made pursuant to a prior public
offering of debentures. These debentures mature during the period
January 1998 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.
(c) Represents aggregate sales made pursuant to a prior private
offering of debentures. These debentures mature during the period
March 1998 through May 2002 and are subordinate to all of the
Company's Indebtedness.
(d) Represents a senior subordinated note due July 1, 2002 and is
subordinate to all of the Company's Senior Indebtedness.
8
<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, 1997.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-QSB, 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 rates, the
Company's dependence on debt financing and securitizations to fund operations,
the Company's ability to implement its growth strategy and fluctuations in
operating results. Such factors, which are discussed in Management's Discussion
and Analysis of Financial Condition and Results of Operations, could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinion or statements expressed
herein with respect to future periods. As a result, 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.
GENERAL
ABFS is a financial services company operating primarily in the eastern
region of the United States. The Company, through its principal direct and
indirect subsidiaries, originates, sells and services loans to businesses
secured by real estate and other business assets ("Business Purpose Loans"),
non-conforming mortgage loans typically to credit impaired borrowers, secured by
first and second mortgages on single-family residences ("Home Equity Loans") and
conforming and jumbo loans secured by first mortgages on one-to four-unit
residential properties ("First Mortgage Loans"). The Company also originates
small ticket leases and, to a lesser extent, middle market leases for the
acquisition of business equipment ("Equipment Leases").
ACQUISITION
Effective October 1, 1997, the Company acquired all of the outstanding
stock of New Jersey Mortgage and Investment Corp. ("NJMIC"), a mortgage and
leasing company based in Roseland, New Jersey. The purchase price for the stock
consisted of an initial payment of $11.0 million and issuance of 20,240 shares
of ABFS common stock, and includes contingent payments of up to $9.0 million in
the future if NJMIC achieves certain performance targets. On October 1, 1997,
NJMIC had total assets of $18.5 million, liabilities of $18.7 million, including
subordinated debt of $9.9 million, and stockholders' deficit of $200,000. The
acquisition of NJMIC was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to assets acquired and
liabilities assumed based on the fair values at the date of acquisition. The
fair value of NJMIC's assets approximated the liabilities assumed and
accordingly, the majority of the purchase price was recorded as goodwill. Any
contingent payments will result in an increase in the amount of recorded
goodwill.
NJMIC is a full-service diversified residential lender, which directly
and through its subsidiary offers a broad range of loan and lease products,
including Home Equity Loans, First Mortgage Loans and Equipment Leases.
Historically, NJMIC originated loans for sale to third parties with servicing
released. The Company intends that NJMIC will continue to originate First
Mortgage Loans for sale in the secondary market, and the Home Equity Loans
originated by NJMIC will be securitized and sold pursuant to the Company's
current
9
<PAGE>
securitization program. Loans originated by NJMIC are secured by properties
located in 15 states. Such loans are originated through its network of six
branch sales offices and three satellite offices located in eight states. Home
Equity Loan customers primarily include credit-impaired borrowers, while
borrowers on its First Mortgage Loans are generally borrowers with favorable
credit histories.
Through its subsidiary, Federal Leasing Corp. ("FLC"), NJMIC originates
Equipment Leases throughout the United States. Such leases are generally sold
through securitizations with servicing retained. ABFS intends to continue to
securitize these leases in the future subject to economic and market conditions.
BALANCE SHEET INFORMATION
Total assets increased $93.0 million, or 89.4%, to $197.0 million at
December 31, 1997 from $104.0 million at June 30, 1997 due primarily to
increases in loans and leases available for sale, other receivables and other
assets. Loans and leases available for sale increased $49.9 million, or 139.8%,
from $35.7 million at June 30, 1997 to $85.6 million at December 31, 1997
representing $167.8 million of loan and lease originations, of which $50.1
million was originated by NJMIC, partially offset by sales and securitizations
of loans and leases.
Interest only and residual strips created in connection with the
Company's securitizations, the primary component of other receivables, increased
$21.2 million, or 56.5%, to $58.7 million at December 31, 1997 from $37.5
million at June 30, 1997 as the Company completed a $100.0 million loan
securitization. Other assets increased $15.1 million, or 82.1%, to $33.5 million
at December 31, 1997 from $18.4 million at June 30, 1997 due primarily to the
recording of $15.7 million of goodwill in connection with the acquisition of
NJMIC and an increase in mortgage servicing rights of $3.2 million obtained in
connection with the Company's loan securitization offset by a $5.0 million
decrease in investments held for sale.
Total liabilities increased $87.8 million, or 120.1%, to $160.9 million
at December 31, 1997 from $73.1 million at June 30, 1997 due primarily to an
increase in outstanding debt and to a lesser extent, increases in accounts
payable and accrued expenses and deferred income taxes, offset by a reduction in
other liabilites. The increase in debt of $86.0 million was due to net sales of
subordinated debt, utilization of the Company's warehouse lines and other debt
incurred in connection with the acquisition of NJMIC. At December 31, 1997, the
Company had $89.6 million of subordinated debt outstanding, including $9.6
million assumed in connection with the acquisition of NJMIC. The Company
maintains two warehouse facilities for a total of $150 million, of which $49.1
million was drawn upon at December 31, 1997. The Company's ratio of total debt
to equity at December 31, 1997 was 3.9:1 compared to 1.8:1 at June 30, 1997. See
"--Liquidity and Capital Resources."
Accounts payable and accrued expenses increased $1.5 million, or 24.6%,
to $7.6 million at December 31, 1997 from $6.1 million at June 30, 1997 due to
growth in the Company's lending and leasing activities resulting in larger
accruals for interest expense and other operating expenses. Deferred income
taxes increased $3.4 million, or 73.9%, to $8.0 million at December 31, 1997
from $4.6 million at June 30, 1997 due to tax accruals on the Company's income
for the six months ended December 31. Other liabilities decreased $3.1 million,
or 52.5%, to $2.8 million at December 31, 1997 from $5.9 million at June 30,
1997 due primarily to a reduction of loans in process of $3.2 million.
Stockholders' equity increased $5.2 million to $36.1 million at
December 31, 1997 from $30.9 million at June 30, 1997, due to net income for the
six months ended December 31, 1997 of $4.7 million and the issuance of $500,000
of ABFS common stock in connection with the purchase of NJMIC, partially offset
by dividends paid.
10
<PAGE>
Results of Operations
During the six months ended December 31, 1997, the Company experienced
record levels of total revenues and net income as a result of increases in
originations and the dollar amount of loans securitized.
The Company's securitization strategy requires the Company to build an
inventory of loans over time. As a result 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. In
addition, as a result of the Company's securitization strategy, the Company may
operate on a negative operating cash flow basis, which could negatively impact
the Company's results of operations during such periods.
The Company's growth strategy is dependent upon its ability to increase
its loan volume through geographic expansion. The implementation of this
strategy will depend in large part on a variety of factors outside the control
of the Company, including, but not limited to, the Company's ability to obtain
adequate financing on favorable terms and to profitably securitize its loans on
a regular basis and continue to expand in the face of increasing competition.
The failure of any of these factors could impair the Company's ability to
successfully implement its growth strategy, which could adversely affect the
Company's results of operations and financial condition.
Total Revenues. Total revenues increased $12.9 million, or 122.9%, to
$23.4 million for the six months ended December 31, 1997 from $10.5 million for
the six months ended December 31, 1996. Total revenues increased $7.0 million,
or 134.6%, to $12.2 million for the three months ended December 31, 1997 from
$5.2 million for the three months ended December 31, 1996. The increases in
total revenues were the result of gains on sale of loans through securitization
as well as an increase in interest and fees earned due to growing levels of loan
and lease production.
Gain on Sale of Loans. Gain on sale of loans increased $7.3 million, or
93.6%, to $15.1 million for the six months ended December 31, 1997 from $7.8
million for the six months ended December 31, 1996. Gain on sale of loans
increased $2.9 million, or 78.4%, to $6.6 million for the three months ended
December 31, 1997 from $3.7 million for the three months ended December 31,
1996. The increases were the result of sales of $23.1 million of "Business
Purpose Loans and $76.9 million of Home Equity Loans through a securitization in
September 1997, including a pre-funded portion of $40.0 million which was
completed in December 1997, as compared to the sale of $16.1 million of Business
Purpose Loans and $23.9 million of Home Equity Loans through a securitization in
September 1996. During the six months ended December 31, 1997, the Company
recognized a gain of $14.7 million (representing the fair value of the interest
only and residual strips of $17.6 million less $2.9 million of costs associated
with the transaction) on the Company's funding of the $100.0 million of loans
sold pursuant to the securitization described above.
Interest and Fees. Interest and fee income increased $5.0 million, or
208.3%, to $7.4 million for the six months ended December 31, 1997 from $2.4
million for the six months ended December 31, 1996. Interest and fee income
increased $3.8 million, or 292.3%, to $5.1 million for the three months ended
December 31, 1997 from $1.3 million for the three months ended December 31,
1996. The increases in interest and fee income were the result of an increase in
the amount of loans and leases originated and retained in the Company's
portfolio prior to securitization.
11
<PAGE>
Interest income consists primarily of interest income the Company earns
on loans and leases held in its portfolio. Interest income increased $2.5
million, or 131.6%, to $4.4 million for the six months ended December 31, 1997
from $1.9 million for the six months ended December 31, 1996. Interest income
increased $1.7 million, or 170.0%, to $2.7 million for the three months ended
December 31, 1997 from $1.0 million for the three months ended December 31,
1996. The increases were attributable to increased originations of Business
Purpose Loans, Home Equity Loans and Equipment Leases. Of the increases noted,
$1.0 million was attributable to loans and leases originated by NJMIC.
During the six months ended December 31, 1997, the Company originated
approximately $23.2 million of Business Purpose Loans, $121.8 million of Home
Equity Loans, and $22.8 million of Equipment Leases. During the six months ended
December 31, 1996, the Company originated $17.8 million of Business Purpose
Loans, $30.2 million of Home Equity Loans, and $3.8 million of Equipment Leases.
Fee income, includes primarily premium and points earned when loans are
closed, funded and immediately sold to unrelated third party purchasers, and
ancillary fees collected on loan originations. Fee income increased $1.9
million, or 271.4%, to $2.6 million for the six months ended December 31, 1997
from $700,000 for the six months ended December 31, 1996. Fee income increased
$1.6 million, or 400.0%, to $2.0 million for the three months ended December 31,
1997 from $400,000 for the three months ended December 31, 1996. The increases
in fee income, of which $1.3 million is attributable to NJMIC, were due to an
increase in ancillary fees collected in connection with increased loan
originations.
Servicing Income. Servicing income increased $539,000, or 182.1%, to
$835,000 for the six months ended December 31, 1997 from $296,000 for the six
months ended December 31, 1996. Servicing income increased $234,000, or 105.9%,
to $455,000 for the three months ended December 31, 1997 from $221,000 for the
three months ended December 31, 1996. The increases were the result of the
increase in the Company's loan and lease portfolio serviced from $103.9 million
at December 31, 1996 to $344.9 million at December 31, 1997.
Total Expenses. Total expenses increased $9.3 million, or 132.9%, to
$16.3 million for the six months ended December 31, 1997 from $7.0 million for
the six months ended December 31, 1996. Total expenses increased $6.4 million,
or 182.9%, to $9.9 million for the three months ended December 31, 1997 from
$3.5 million for the three months ended December 31, 1996. As described in more
detail below, these increases were a result of increased interest attributable
to the Company's continued sale of subordinated debt and increases in payroll,
sales and marketing, and general and administrative expenses related to
increased loan and lease originations. Of the increases noted, $1.3 million was
attributable to expenses of NJMIC.
Interest Expense. Interest expense increased $2.7 million, or 122.7%,
to $4.9 million for the six months ended December 31, 1997 from $2.2 million for
the six months ended December 31, 1996. Interest expense increased $1.8 million,
or 150.0%, to $3.0 million for the three months ended December 31, 1997 from
$1.2 million for the three months ended December 31, 1996. The increases were
primarily attributable to an increase in the amount of the Company's
subordinated debt outstanding during the periods, the proceeds of which were
used to fund the Company's increased loan and lease originations and the
purchase of NJMIC, and increased utilization of warehouse facilities. Average
subordinated debt outstanding was $75.1 million during the six months ended
December 31, 1997 compared to $38.8 million during the six months ended December
31, 1996. Average interest rates paid on the subordinated debt increased to
9.30% from 8.89% for the comparable six-month periods as a result of the higher
rates offered during the first two quarters of fiscal 1998 in order to attract
additional funds. Interest expense on lines of credit utilized by the Company
for the six months ended December 31, 1997 was $1.0 million, compared to $24,000
for the six months ended December 31, 1996. The increase was due to the higher
utilization of warehouse lines of credit to fund loan and lease originations.
12
<PAGE>
Provision 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 based upon a variety of factors, including but not
limited to, economic conditions and credit and collateral considerations.
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 the
provision for credit losses. The Company had an allowance for credit losses of
$3.4 million at December 31, 1997 as compared to $1.8 million at June 30, 1997.
The provision for credit losses was $1.0 million (includes a $200,000 provision
related to the Company loan and lease portfolio and a $800,000 provision related
to the Company's securitizations) for the six months ended December 31, 1997 as
compared to $400,000 (includes a $23,000 provision related to the Company's loan
and lease portfolio and a $377,000 provision related to the Company's
securitizations) for the six months ended December 31, 1996. The ratio of the
allowance for credit losses to net loan and lease receivables serviced was 1.00%
at December 31, 1997 and at June 30, 1997. Total delinquencies were $11.4
million at December 31, 1997 as compared to $3.8 million at June 30, 1997. The
Company's loans and leases delinquent more than 30 days as a percentage of the
total portfolio serviced (the "delinquency rate") was 3.30% at December 31, 1997
as compared to 2.15% at June 30, 1997. The increase in the delinquency rate was
attributable to the maturation of the Company's total managed portfolio which
was $344.9 million at December 31, 1997 and $176.7 million at June 30, 1997.
Payroll and Related Costs. Payroll and related costs increased $1.4
million, or 264.7%, to $1.9 million for the six months ended December 31, 1997
from $521,000 for the six months ended December 31, 1996. Payroll and related
costs increased $695,000, or 241.6%, to $1.1 million for the three months ended
December 31, 1997 from $322,000 for the three months ended December 31, 1996.
The increases were due to an increase in the number of administrative employees
as a result of the Company's growth in loan and lease originations, as well as
an increase in loans and leases serviced. Management anticipates that these
expenses will continue to increase in the future as the Company's geographic
expansion continues.
Sales and Marketing Expenses. Sales and marketing expenses increased
$2.6 million, or 92.9%, to $5.4 million for the six months ended December 31,
1997 from $2.8 million for the six months ended December 31, 1996. Sales and
marketing expenses increased $1.7 million, or 121.4%, to $3.1 million for the
three months ended December 31, 1997 from $1.4 million for the three months
ended December 31, 1996. The increases were attributable to greater usage of
newspaper, direct mail and television advertising related to the Company's
originations of loans and leases. Subject to market conditions, the Company
plans to continue to expand its service area throughout the 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 $2.5 million, or 166.7%, to $4.0 million for the six months
ended December 31, 1997 from $1.5 million for the six months ended December 31,
1996. General and administrative expenses increased $2.0 million, or 371.9%, to
$2.6 million for the three months ended December 31, 1997 from $551,000 for the
three months ended December 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 fiscal 1998.
Income Taxes. Income taxes increased $1.2 million, or 100.0%, to $2.4
million for the six months ended December 31, 1997 from $1.2 million for the six
months ended December 31, 1996. Income taxes increased $184,000, or 29.8%, to
$801,000 for the three months ended December 31, 1997 from $617,000 for the
three months ended December 31, 1996. The increases were due to increases in
income before taxes.
13
<PAGE>
Net Income. Net income increased $2.4 million or 104.3%, to $4.7
million for the six months ended December 31, 1997 from $2.3 million for the six
months ended December 31, 1996. Basic earnings per common share increased to
$1.34 on weighted average common shares outstanding of 3,510,426 for the six
months ended December 31, 1997 compared to $.98 per share on weighted average
common shares outstanding of 2,353,166 for the six months ended December 31,
1996. Fully diluted earnings per common share increased to $1.28 on weighted
average common shares outstanding of 3,663,584 for the six months ended December
31, 1997 compared to $.94 per share on weighted average common shares
outstanding of 2,438,279 for the six months ended December 31, 1996.
Net income increased $400,000 or 36.4%, to $1.5 million for the three
months ended December 31, 1997 from $1.1 million for the three months ended
December 31, 1996. Basic earnings per common share decreased to $.44 on weighted
average common shares outstanding of 3,517,686 for the three months ended
December 31, 1997 compared to $.49 per share on weighted average common shares
outstanding of 2,353,166 for the three months ended December 31, 1996. Fully
diluted earnings per common share decreased to $.42 on weighted average common
shares outstanding of 3,683,167 for the three months ended December 31, 1997
compared to $.47 per share on weighted average common shares outstanding of
2,461,619 for the three months ended December 31, 1996. The decreases in
earnings per common share was attributed to a 50% increase in the weighted
average shares outstanding resulting from an underwritten public offering of
1,150,000 shares of the Company's common stock during the third quarter of
fiscal year 1997.
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. In addition the Company has utilized the
capital market to sell additional common stock. The Company's cash requirements
include the funding of loan originations, payment of interest expense, funding
of over-collaterization requirements in connection with its securitizations,
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 portfolios,
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.
The Company continues to significantly rely on securitizations to
generate cash proceeds for the repayment of debt and to fund its ongoing
operations. 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. 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 which
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. Any delay or
impairment in the Company's ability to securitize its loans, as a result of
market conditions or otherwise, could adversely affect the Company's results of
operations.
14
<PAGE>
The Company also relies on borrowings such as its subordinated debt and
warehouse credit facilities or lines of credit to fund its operations. At
December 31, 1997, the Company had a total of $89.6 million of subordinated debt
outstanding including $9.6 million and $700,000 issued by NJMIC and American
Business Finance Corporation ("ABFC"), respectively, and available credit
facilities and lines of credit totaling $150.0 million, of which $49.1 million
was drawn upon at such date.
Effective October 1, 1997, ABFS assumed $9.9 million of subordinated
debt previously issued by NJMIC. Of this amount, $9.6 million was outstanding at
December 31, 1997 and included maturity dates ranging from March 1998 to July
2002. In addition, during the six months ended December 31, 1997, ABFS sold
$35.1 million in principal amount of subordinated debt (including redemptions
and repurchases by investors), pursuant to a registered public offering with
maturities ranging between one day and ten years. As of December 31, 1997, ABFS
had approximately $89.5 million of subordinated debt outstanding. 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 it
matures with income generated through its lending activities and funds generated
from repayment of outstanding loans. The repayment of such obligations should
not adversely affect the Company's operations.
The Company's subsidiaries have an aggregate $50.0 million Interim
Warehouse and Security Agreement with Prudential Securities Realty Funding
Corporation. In July 1997, the Company and certain of its subsidiaries obtained
a $100.0 million warehouse credit facility from a syndicate of banks led by
Chase Bank of Texas N. A. ("CBT"). The facility has a term of two years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" in the Company's Form 10-KSB for the
year ended June 30, 1997 (File No. 000-22474) for additional information on this
credit facility. At December 31, 1997, a total of $49.1 million of these credit
facilities was 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, 1997, the Company had $94.7 million of debt
scheduled to mature during the twelve months ending December 31, 1998 which was
comprised of maturing subordinated debt, warehouse facilities and other debt
incurred in connection with the acquisition of NJMIC. The Company currently
expects to refinance the maturing debt through extensions of maturing debt or
new debt financing and, if necessary, may retire the debt through cash flow from
operations and loan sales or securitizations. 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 businesses 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 a five-year
operating lease expiring in January 2003 at a minimum annual rental of
approximately $700,000. The lease contains a renewal option for an additional
period at increased annual rental. The Company also leases a facility in
Roseland, New Jersey which functions as the headquarters for NJMIC and its
subsidiaries at an annual rental cost of approximately $248,690. The current
lease term expires on July 31, 1998 and contains two renewal options for
additional terms of five years. In addition, the Company leases branch offices
on a short-term basis in various cities throughout the United States.
The leases for the branch offices are not material to the Company's operations.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 23, 1997, a class action suit was filed in the Superior
Court of New Jersey at Docket No. L-12066-97 against NJMIC by Alfred G. Roscoe
on behalf of himself and others similarly situated. Mr. Roscoe is seeking
certification that the action may be maintained as a class action as well as
unspecified compensatory damages and injunctive relief. In his complaint, Mr.
Roscoe alleges that NJMIC violated New Jersey's Mortgage Financing on Real
Estate Law, N.J.S.A. 46:10A-1 et seq. by requiring him and other borrowers to
pay or reimburse NJMIC for attorneys' fees and costs in connection with loans
made to them by NJMIC. Mr. Roscoe further asserts that NJMIC's alleged actions
violated New Jersey's Consumer Fraud Act, N.J.S.A. 56:8-1, et seq. and
constitute common law fraud and deceit. NJMIC intends to vigorously defend this
suit.
Pursuant to the terms of the Agreement for Purchase and Sale of Stock
of NJMIC between the Company and the former shareholders of NJMIC, such former
shareholders are required to indemnify the Company up to $16.0 million in
connection with any losses related to, caused by or arising from NJMIC's failure
to comply with applicable law to the extent such losses exceed $100,000. Such
former shareholders have agreed to defend the Company in this suit.
Additionally, from time to time, 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
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Meeting") was held
on December 16, 1997. The following is a description of the matters submitted to
stockholders for their approval at the Meeting and the votes cast with respect
thereto:
<TABLE>
<CAPTION>
Proposal Votes Cast
-------- ----------
Broker
For Withheld Non-Votes
--- -------- ---------
<S> <C> <C> <C>
I. Election of Directors:
Anthony J. Santilli (one year term) 3,286,827 52,453 0
Richard Kaufman (one year term) 3,286,830 52,450 0
Leonard Becker (two year term) 3,286,830 52,450 0
Michael DeLuca (three year term) 3,286,830 52,450 0
Harold E. Sussman (three year term) 3,286,830 52,450 0
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Proposal Votes Cast
-------- ----------
Broker
For Against Abstain Non-Votes
--- ------- -------- ---------
<S> <C> <C> <C> <C>
II. To (a) approve amendments to the
Company's Amended and Restated Stock
Option Plan ("Stock Option Plan")
which (i) increase the number of
shares issuable under the Stock
Option Plan by 185,000 shares to
560,000 shares; and (ii) limit the
amount of options which may be
awarded to any individual under the
Stock Option Plan to 75% of the
shares reserved for issuance under
the Stock Option Plan; and (b) ratify
the class of employees which may
receive shares pursuant to the Stock
Option Plan. 2,313,725 57,420 32,540 935,595
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
III. To approve the 1997 Non-Employee
Director Stock Option Plan. 2,312,202 58,337 33,146 935,595
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K:
On October 31, 1997, the Company filed a current report on Form 8-K to
report the acquisition of NJMIC.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and 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 13, 1998 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 DECEMBER 31, 1997 AND THE SIX MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 4,333,367
<SECURITIES> 0
<RECEIVABLES> 90,501,538
<ALLOWANCES> 1,205,620
<INVENTORY> 0
<CURRENT-ASSETS> 100,858,676
<PP&E> 9,039,516
<DEPRECIATION> 3,395,262
<TOTAL-ASSETS> 197,020,334
<CURRENT-LIABILITIES> 101,799,606
<BONDS> 0
0
0
<COMMON> 3,523
<OTHER-SE> 36,095,763
<TOTAL-LIABILITY-AND-EQUITY> 197,020,334
<SALES> 0
<TOTAL-REVENUES> 23,437,745
<CGS> 0
<TOTAL-COSTS> 16,307,698
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 981,603
<INTEREST-EXPENSE> 4,936,301
<INCOME-PRETAX> 7,130,047
<INCOME-TAX> 2,424,216
<INCOME-CONTINUING> 4,705,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,705,831
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.28
</TABLE>
