<PAGE>
As filed with the Securities and Exchange Commission on October 19, 1998
Registration No. 333-63859
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0418807
- ----------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
ANTHONY J. SANTILLI, JR.
Chairman, President, Chief Executive Officer,
Chief Operating Officer and Director
American Business Financial Services, Inc.
Balapointe Office Center
111 Presidential Boulevard
Bala Cynwyd, PA 19004
(610) 668-2440
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
JANE K. STORERO, ESQUIRE
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, Pennsylvania 19103-6998
(215) 569-5500
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
<PAGE>
If this Form is a post-effective registration statement filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective registration statement filed pursuant
to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434 please check the following box. |_|
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission or any applicable State Securities Commission
becomes effective. This prospectus in not an offer to sell these Securities and
it is not an offer to buy these securities in any state where the offer or sale
is not permitted.
Subject to Completion, Dated October 19, 1998
[GRAPHIC OMITTED]
$250,000,000 of Debt Securities
The following terms apply to the subordinated investment notes and the
adjustable-rate, subordinated money market debt securities we are offering. For
a more detailed description of the terms of the securities offered, see
"Highlights of Terms of the Debt Securities," "Prospectus Summary --
Description of Debt Securities Offered" and "Description of the Debt Securities
Offered and the Indenture."
Terms of Debt Securities Offered
<TABLE>
<CAPTION>
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Investment Notes Money Market Notes
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<S> <C> <C>
Minimum Initial Purchase ..... $1,000 $ 1,000
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Annual Interest Rate ......... Fixed upon issuance based upon the Adjustable by the Company upon
term length chosen. notice, but not less than 4.0% per year.
No interest on balances of less than
$ 1,000.
- -----------------------------------------------------------------------------------------------------------------------
Payment of Interest .......... Periodic cash payments. Interest paid in the form of additional
securities.
- -----------------------------------------------------------------------------------------------------------------------
Redemption by Holder ......... Upon death or total disability for secu- Redemptions of $500 or greater per-
rities with maturities greater than one mitted upon 10 business days written
year. notice to the Company.
- -----------------------------------------------------------------------------------------------------------------------
Redemption by Company ........ Not redeemable. Redeemable upon 30 days written
notice.
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Maturity ..................... Three months to 120 months. No fixed maturity.
- -----------------------------------------------------------------------------------------------------------------------
Transferability .............. Upon prior written consent of the Upon prior written consent of the
Company. Company.
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</TABLE>
We will receive approximately $243.8 million of the proceeds from the sale
of the Notes after paying expenses which we estimate to be $6.2 million. We do
not intend to utilize the services of registered broker-dealers to assist with
the sale of the Notes at this time. If we elect to use broker-dealers on a best
efforts basis in connection with future sales of the Notes, it is anticipated
that commissions of up to 10% of the sales price will be paid to such brokers
and we may agree to reimburse brokers for certain costs and expenses. If
brokers are utilized, expenses of the Offering will increase and the proceeds
we receive will be less than currently stated.
<PAGE>
We will provide the interest rates currently being offered on the debt
securities in a supplement to this Prospectus. You should read this Prospectus
and the rate supplement carefully before you invest.
We are not subject to state or federal statutes or regulations applicable
to banks and/or savings and loan associations with regard to insurance, the
maintenance of reserves, the quality or condition of our assets or other
matters. These debt securities are not certificates of deposit. The payment of
principal and interest on these debt securities is not guaranteed by any
governmental or private insurance fund or any other entity. Our revenues from
operations, including the securitization or sale of loans from our portfolio,
our working capital, and cash generated from additional debt financing
represent our sources of funds for the repayment of principal at maturity and
the ongoing payment of interest on these debt securities. Further, we do not
contribute funds to a separate account called a sinking fund to repay the debt
represented by these securities upon maturity.
There is no public trading market for these debt securities. Due to the
non-negotiable nature of these debt securities, it is unlikely that an active
trading market will develop.
An investment in these securities involves certain risks. These securities
are unsecured obligations which are subordinated to our senior debt. You should
consider carefully the risk factors and the other information set forth in this
prospectus before you decide to purchase these securities. See "Risk Factors"
on page 11 for information that should be considered by prospective purchasers
of these securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed on the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
---------------------
The date of this Prospectus is ___________________, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Information Regarding this Prospectus ................................................. 2
Highlights of Terms of the Debt Securities Offered .................................... 3
Prospectus Summary .................................................................... 4
Risk Factors .......................................................................... 11
The Company ........................................................................... 18
Use of Proceeds ....................................................................... 18
Description of the Debt Securities Offered and the Indenture .......................... 19
Selected Consolidated Financial Data .................................................. 27
Management's Discussion and Analysis of Financial Condition and Results of Operations . 29
Business .............................................................................. 45
Where You Can Find More Information ................................................... 58
Management ............................................................................ 60
Principal Stockholders ................................................................ 62
Market for Common Stock and Related Stockholder Matters ............................... 64
Plan of Distribution .................................................................. 65
Legal Matters ......................................................................... 65
Experts ............................................................................... 65
Index to Consolidated Financial Statements ............................................ F-1
</TABLE>
INFORMATION REGARDING THIS PROSPECTUS
We wrote this Prospectus using the Securities and Exchange Commission's
("SEC's") "Plain English" rule. This rule requires that we write without the
"legalese" typically found in most documents filed with the SEC in order to
provide you with a more meaningful and understandable document. Although the
tone and wording may differ from what you are familiar with, we are not alone
in adopting this progressive approach prior to the effective date of such rule.
Other well-known companies have started preparing their documents using the
Plain English rule. We voluntarily followed the Plain English initiative
because we are very committed to providing you with useful and understandable
information.
2
<PAGE>
HIGHLIGHTS OF TERMS OF THE DEBT SECURITIES OFFERED
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Investment Notes
- ---------------------------------------------------------------------------------------------
<S> <C>
Types of Security Offered ........... Unsecured, subordinated, fixed term note.
- ---------------------------------------------------------------------------------------------
Denomination of Initial Purchase
and Additional Purchases ........... Minimum purchase: $1,000 per security or any
amount in excess thereof.
- ---------------------------------------------------------------------------------------------
Annual Interest Rate ................ Fixed upon issuance. You may choose a term
length and the interest rate applicable to such
security will be based upon the term length
chosen.
- ---------------------------------------------------------------------------------------------
Payment of Interest ................. Interest on Investment Notes with maturities of
less than one year will be compounded daily
and paid at maturity. Interest on Investment
Notes with maturities of one year or greater
will be compounded daily and, at the election
of the holder, paid at maturity, monthly,
quarterly, semi-annually or annually.
- ---------------------------------------------------------------------------------------------
Redemption by Holder ................ Investment Notes with maturities of less than
one year are not redeemable prior to maturity.
Investment Notes with maturities of one year
or greater may be redeemed by the holder
following his/her Total Permanent Disability,
or by his/her estate after death, at the principal
amount plus accrued interest. Otherwise, the
holder will have no right to cause redemption
prior to maturity (for joint holders, see
"Description of the Debt Securities Offered
and the Indenture--Provisions Related to
Investment Notes).
- ---------------------------------------------------------------------------------------------
Redemption by Company ............... Not redeemable until maturity.
- ---------------------------------------------------------------------------------------------
Form/Transferability ................ In fully registered form and non-negotiable.
Not transferable without our prior written
consent.
- ---------------------------------------------------------------------------------------------
Maturity ............................ Investment Notes are offered with terms to
maturity of three to 120 months.
- ---------------------------------------------------------------------------------------------
Automatic Extension ................. The Investment Notes will be automatically
extended for a period equal to the original
term unless: (i) we notify the holder at least
seven days prior to the maturity date that an
extension will not be provided; or (ii) the
holder elects to redeem such notes within
seven days after the maturity date. Investment
Notes to be extended will be extended at a
fixed rate equal to the rate then being offered
on newly issued Investment Notes of like
tenor, term and denomination at their
respective maturity dates.
- ---------------------------------------------------------------------------------------------
Periodic Statements ................. Quarterly statements detailing the current
balance and interest rate paid on each note will
be mailed to each holder no later than the
tenth business day following the end of each
calendar quarter.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Money Market Notes
- ---------------------------------------------------------------------------------------------
<S> <C>
Types of Security Offered ........... Unsecured, adjustable rate, subordinated debt
security.
- ---------------------------------------------------------------------------------------------
Denomination of Initial Purchase
and Additional Purchases ........... Minimum purchase: $1,000 per security or any
amount in excess thereof.
- ---------------------------------------------------------------------------------------------
Annual Interest Rate ................ The interest rate paid will be adjusted by us
from time-to-time in our sole discretion
provided that such rate shall not be less than
4.0% per year. Holders will be notified in
writing at least 14 days prior to any decrease
in the interest rate to be paid. No interest will
be paid for any day on which the principal
balance is below $1,000.
- ---------------------------------------------------------------------------------------------
Payment of Interest ................. Interest will be compounded daily and credited
monthly at the end of each month. No checks
will be issued in payment of interest. Accrued
interest will be added to principal in each
account in the form of additional securities.
- ---------------------------------------------------------------------------------------------
Redemption by Holder ................ May be redeemed by the holder upon written
notice to us with payment to be made with
10 business days of our receipt of such notice
from the holder. Redemptions must be at least
$500, except for redemptions to close an
account.
- ---------------------------------------------------------------------------------------------
Redemption by Company ............... Redeemable upon 30 days written notice to
the holder.
- ---------------------------------------------------------------------------------------------
Form/Transferability ................ In book-entry form and non-negotiable.
(A monthly statement will be issued, not an
individual promissory note.) Note transferable
without our prior written consent.
- ---------------------------------------------------------------------------------------------
Maturity ............................ No fixed maturity.
- ---------------------------------------------------------------------------------------------
Automatic Extension ................. Not applicable.
- ---------------------------------------------------------------------------------------------
Periodic Statements ................. Monthly statements detailing the current
balance and interest rate paid on each account
will be mailed to each holder no later than the
tenth business day following each month end.
- ---------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand the
Offering fully, you should read the entire Prospectus carefully, including the
"Risk Factors" and the Consolidated Financial Statements and Notes thereto
before you decide to purchase these securities. References in this Prospectus
to "ABFS," "the Company," "we," "us," and "our" refer to American Business
Financial Services, Inc. and its subsidiaries.
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
language such as "will likely result," "may," "are expected to," "is
anticipated," "estimate," "projected," "intends to" or other similar words.
Such statements are subject to certain risks and uncertainties, including but
not limited to absence of insurance of the Notes, subordination of debt
represented by the Notes, absence of a sinking fund for the repayment of the
Notes, credit risk related to our borrowers, increase in non-performing loans
and leases, market conditions and real estate values in our primary lending
area, lack of a public market for the Notes, competition, factors affecting our
ability to implement our growth strategy, our dependence on debt financing to
fund our operations, dependence on securitizations and fluctuations in
operating results, our ability to sustain levels of growth, geographic
concentration of our loans, risks associated with leasing activities,
contingent risks, state and federal regulation and licensing requirements
applicable to our lending activities, risks associated with Year 2000
compliance and environmental concerns that could cause our actual results to
differ materially from historical earnings and those presently anticipated or
projected. When considering such forward-looking statements, you should keep in
mind these risk factors and other cautionary statements in this prospectus. You
should not place undue reliance on any forward-looking statement which speaks
only as of the date made.
General
We are a financial services company operating primarily in the eastern
region of the United States. We originate, sell and service 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"). We also originate small ticket
leases (generally $5,000 to $250,000) and, to a lesser extent, middle market
leases (generally $250,001 to $1.0 million) for the acquisition of business
equipment ("Equipment Leases").
Our customers currently consist primarily of two groups. The first
category of customers includes credit-impaired borrowers who are generally
unable to obtain financing from banks or savings and loan associations that
have historically provided loans only to individuals with favorable credit
characteristics. These borrowers generally have impaired or unsubstantiated
credit characteristics and/or unverifiable income and respond favorably to our
marketing efforts. The second category of customers includes borrowers who
would qualify for loans from traditional lending sources but elect to utilize
our products and services. Our experience has indicated that these borrowers
are attracted to our loan products as a result of our marketing efforts, the
personalized service provided by our staff of highly trained lending officers
and our timely response to loan requests. Historically, both categories of
customers have been willing to pay our origination fees and interest rates
which are generally higher than those charged by traditional lending sources.
We also market First Mortgage Loans to borrowers with favorable credit
histories. The Company's lease customers are typically small businesses or
proprietorships with less than 100 employees and favorable credit histories.
Business Purpose Loans
We currently originate Business Purpose Loans in approximately nine states
in the eastern region of the United States through a retail network of
salespeople. We focus our marketing efforts on small businesses who do not meet
all of the credit criteria of commercial banks and small businesses that our
research indicates are predisposed to using our products and services.
The Business Purpose Loans we originate are secured by real estate. In
substantially all cases, we receive additional collateral in the form of, among
other things, personal guarantees, pledges of securities, assignments of
contract rights, life insurance and lease payments and liens on business
equipment and other business assets, as available. Our Business Purpose Loans
are generally originated with fixed rates and typically have origination fees
of 5.0% to 6.0%. Business Purpose Loans typically have significant prepayment
fees which we believe tend to extend the average life of such loans and make
these loans more attractive products to securitize. We originated $52.3 million
of Business Purpose Loans for the year ended June 30, 1998. See
"Business--Lending and Leasing Activities--Business Purpose Lending."
4
<PAGE>
Home Equity Loans
We entered the Home Equity Loan market in 1991. We originate Home Equity
Loans primarily to credit-impaired borrowers through retail marketing which
includes telemarketing operations, direct mail, radio and television
advertisements. We currently originate Home Equity Loans in the eastern region
of the United States as well as in Illinois, Ohio, Indiana, Kentucky, Missouri,
Mississippi, Michigan and Tennessee. We originated $328.1 million of Home
Equity Loans during the year ended June 30, 1998.
In fiscal 1996, we entered into exclusive business arrangements with
several financial institutions pursuant to which we will purchase Home Equity
Loans that do not meet the underwriting guidelines of the selling institution
but meet our underwriting criteria (the "Bank Alliance Program"). We believe
that the Bank Alliance Program is a unique method of increasing our production
of Home Equity Loans to credit-impaired borrowers. We intend to expand our Bank
Alliance Program with financial institutions across the United States. See
"Business--Lending and Leasing Activities--Home Equity Lending."
First Mortgage Lending
We began offering First Mortgage Loans in October 1997 in connection with
our acquisition of New Jersey Mortgage and Investment Corp. ("NJMIC"). NJMIC
has been originating mortgage loans since 1939. We originate First Mortgage
Loans for sale in the secondary market with servicing released. Our first
mortgage lending market area includes 29 states. We originated $33.7 million of
First Mortgage Loans during the year ended June 30, 1998. See "Lending and
Leasing Activities--First Mortgage Lending."
Equipment Leases
We began offering Equipment Leases in December 1994 to complement our
business purpose lending program. We originate leases throughout the United
States. We believe that cross-selling opportunities exist for offering lease
products to Business Purpose Loan customers and offering Business Purpose Loans
to lease customers. We originated $70.5 million of Equipment Leases during the
year ended June 30, 1998. In the past, we held leases in our portfolio to
generate income. In fiscal 1998, we began securitizing our Equipment Lease
portfolio. We intend to continue to securitize our lease portfolio subject to
economic and market conditions. See "Business--Lending and Leasing
Activities--Leasing Activities."
Securitization of Loans and the Subordinated Debt Program
The ongoing securitization of loans and leases is a central part of our
current business strategy. A securitization involves the transfer of our loans
or leases to a trust in exchange for certificates or securities issued by the
trust. A portion of such certificates are then sold to investors. Through June
30, 1998, we had securitized an aggregate of $545.9 million of loans and
leases, consisting of $129.4 million of Business Purpose Loans, and $356.8
million of Home Equity Loans. In addition, during fiscal 1998, we securitized
$59.7 million of Equipment Leases. We retain the servicing rights on all
securitized loans and leases. See "Business--Securitizations."
We intend to continue to utilize funds generated from the securitization
of loans and leases as well as the sale of subordinated debt to increase our
loan and lease originations and to expand into new geographic markets, with an
initial focus on the continued expansion in the southeastern and midwestern
regions of the United States.
In addition to securitizations, we fund our operations with subordinated
debt that we market directly to individuals from our principal operating office
located in Pennsylvania and branch offices located in Florida and Arizona. At
June 30, 1998, we had $105.5 million in subordinated debt outstanding which was
sold through public offerings. Such debt had a weighted average coupon of 9.35%
and a weighted average maturity of 22.7 months. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Principal Offices
Our principal executive office is located at 103 Springer Building, 3411
Silverside Road, Wilmington, Delaware 19810. The telephone number at such
address is (302) 478-6160. Our principal operating office is located at Bala
Pointe Office Centre, 111 Presidential Boulevard, Bala Cynwyd, PA 19004. The
telephone number at such address is (610) 668-2440.
5
<PAGE>
Summary Consolidated Financial Data
Our consolidated financial information set forth below should be read in
conjunction with the more detailed Consolidated Financial Statements, including
the Notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- ---------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Gain on sale of loans ........... $ 41,316 $ 20,043 $ 8,721 $ 1,350 $ 110
Interest and fees ............... 17,386 5,583 3,244 4,058 2,367
Other ........................... 2,285 856 129 143 156
-------- -------- -------- ------- ------
Total revenue ..................... 60,987 26,482 12,094 5,551 2,633
Total expenses .................... 43,097 17,480 8,974 4,657 2,299
-------- -------- -------- ------- ------
Operating income before income
taxes and cumulative effect of
accounting change ............... 17,890 9,002 3,121 894 334
Income before cumulative effect
accounting change ............... 11,454 5,940 2,319 581 137
Cumulative effect of accounting
change on prior years ........... -- -- -- -- (52)
Income taxes ...................... 6,436 3,062 802 313 197
-------- -------- -------- ------- ------
Net income ........................ $ 11,454 $ 5,940 $ 2,319 $ 581 $ 85
======== ======== ======== ======= ======
Per Common Share Data(1):
Income before cumulative effect
of accounting change ........... $ 3.26 $ 2.13 $ 1.01 $ .27 $ .04
Net income ...................... 3.13 2.04 1.01 .27 .04
Cash dividends declared ......... .06 .06 0.03 -- --
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......... $ 4,486 $ 5,014 $ 5,345 $ 4,734 $ 83
Loan and lease receivables, net
available for sale .............. 62,382 35,712 18,003 8,669 3,181
other ........................... 4,097 1,144 534 328 5,538
Interest only strips and other
receivables ..................... 100,737 39,644 13,713 4,327 939
Total assets ...................... 226,551 103,989 46,894 22,175 12,284
Subordinated debt ................. 115,182 56,486 33,620 17,800 7,171
Total liabilities ................. 183,809 73,077 42,503 20,031 10,721
Stockholders' equity .............. 42,742 30,912 4,392 2,143 1,562
</TABLE>
- -------------
(1) Per share information for fiscal year 1994 has been restated to reflect the
3 for 2 stock split effected on November 1, 1995.
6
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
Originations:
Business Purpose Loans ......... $ 52,335 $ 38,721 $ 28,872 $ 18,170 $ 11,793
Home Equity Loans .............. 328,089 91,819 36,479 16,963 22,231
First Mortgage Loans ........... 33,671 -- -- -- --
Equipment Leases ............... 70,480 8,004 5,967 2,220 --
Loans and Leases sold:
Securitizations ................ 384,700 115,000 36,506 9,777 --
Other .......................... 51,594 3,817 19,438 31,948 30,562
Total loan and lease portfolio
serviced(1) .................... 559,398 176,651 59,891 17,774 8,407
Average loan/lease size:
Business Purpose Loans ......... 83 78 78 71 57
Home Equity Loans .............. 62 51 47 46 51
First Mortgage Loans ........... 154 -- -- -- --
Equipment Leases ............... 21 11 11 12 --
Weighted average interest rate on
loans and leases originated:
Business Purpose Loans ......... 15.96% 15.91% 15.83% 16.05% 16.03%
Home Equity Loans .............. 11.95 11.69 9.94 12.68 8.65
First Mortgage Loans ........... 8.22 -- -- -- --
Equipment Leases ............... 12.19 15.48 17.22 15.85 --
</TABLE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets .............. 6.93% 7.87% 6.71% 3.37% 0.87%
Return on average equity .............. 31.10 33.65 70.96 31.36 5.58
Total delinquencies as a
percentage of total portfolio
serviced(2), at end of period ....... 3.01 2.15 2.30 3.84 6.85
Allowance for credit losses to total
portfolio serviced, at end of
period .............................. 1.00 1.00 1.18 .87 .93
Real estate owned as a percentage
of total portfolio serviced, at
end of period ....................... .16 .34 1.01 4.29 2.63
Loan and lease losses as a
percentage of the average total
portfolio serviced during the
period .............................. .18 .08 .33 .66 .15
Pre-tax income as a percentage of
total revenues ...................... 29.33 33.99 25.81 16.11 12.69
Ratio of earnings to fixed charges..... 1.77 1.98 1.40 1.35 1.16
</TABLE>
- -------------
(1) Total portfolio serviced includes all loans and leases in the servicing
portfolio, including loans and leases sold through securitizations and
serviced as well as loans and leases held in portfolio pending sale or
otherwise.
(2) Total delinquencies includes loans and leases delinquent over 30 days,
exclusive of real estate owned.
7
<PAGE>
Description of Debt Securities Offered
General. We are offering up to $250.0 million of subordinated investment
notes ("Investment Notes) and the adjustable rate subordinated money market
debt securities ("Money Market Notes") (collectively, the "Notes") which
represent debt obligations of our Company. The Notes will be issued pursuant to
an Indenture of Trust between us and U.S. Bank Trust National Association, a
national banking association as trustee (the "Indenture"). The Notes are not
insured, guaranteed or secured by any lien on any of our assets. We do not
intend to contribute funds to a separate fund (i.e., a sinking fund) on a
regular basis to provide funds to repay the Notes upon maturity. See "Risk
Factors--Absence of Sinking Fund/No Security."
The Notes will be second in right of repayment (i.e., subordinated) to all
of our Senior Debt. As of June 30, 1998 and September 30, 1998, we had $26.5
million and $53.4 million of Senior Debt outstanding, respectively. There is no
limitation on the amount of Senior Debt we may incur. Senior Debt is any
indebtedness (whether outstanding on the date hereof or hereafter created)
incurred in connection with borrowings by us (including our subsidiaries) from
a bank, trust company, insurance company, other institutional lender or other
entity which lends funds in connection with its primary business activities,
whether or not such indebtedness is specifically designated as being "Senior
Debt." In addition, any indebtedness of our subsidiaries, other than the Senior
Debt, will have rights upon liquidation or dissolution of the particular
subsidiary prior to payment being made to the holders of the Notes. Such debt
totaled $9.5 million and $9.0 million as of June 30, 1998 and September 30,
1998, respectively. Our indebtedness, other than the Senior Debt, will have
rights upon liquidation or dissolution which ranks equally in right of payment
to the Notes offered hereby. As of June 30, 1998 and September 30, 1998,
respectively, we had $105.5 million and $121.9 million of indebtedness which
ranks equally in right of payment with the Notes. See "Description of the Debt
Securities Offered and the Indenture--Provisions Related to All Securities."
We may reject your subscription in whole or in part, for any reason.
Subscriptions will be irrevocable upon acceptance by us. If your subscription
is not accepted by us, your subscription funds will be promptly refunded to you
without deduction of any costs and without interest. We expect that such
subscriptions will be refunded within 48 hours after we have received the
subscription. No minimum amount of Notes must be sold in the Offering. We may
withdraw or cancel the Offering at any time. In the event of such withdrawal or
cancellation, the Notes previously sold will remain outstanding until maturity
and pending subscriptions will be irrevocable. See "Plan of Distribution."
These securities are not secured by any of our assets and are second in
right of payment to our Senior Debt. We are not subject to state or federal
statutes or regulations applicable to commercial banks and/or savings and loan
associations with regard to insurance, the maintenance of reserves, the quality
or condition of our assets or other matters. These securities are not
certificates of deposit. Payment of principal and interest on these securities
is not guaranteed by any governmental or private insurance fund or other
entity. Our revenues from operations, including the securitization or sale of
loans or leases from our portfolio, our working capital and cash generated from
additional debt financing represent our sources of funds for the repayment of
principal, at maturity, and the ongoing payment of interest on these
securities.
Investment Notes. The Investment Notes are offered in minimum
denominations of $1,000 and any amount in excess thereof. The Investment Notes
are offered at fixed maturities ranging from three to 120 months. The term of
each Investment Note is established at the time of purchase. The interest rate
paid on the Investment Notes will change based upon the maturity you select.
The Investment Notes will be issued in fully registered form which means
each purchaser will receive a promissory note evidencing our repayment
obligation. The Investment Notes are not transferable to any person or entity
without our prior written consent. We reserve the right, in our reasonable
discretion, to withhold such consent for various reasons, including but not
limited to our determination that such transfer might result in a violation of
any state or federal securities or other applicable law. We may also require a
signature guarantee in connection with such transfer.
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The term of the Investment Notes may, with our consent, be extended in
accordance with the procedure set forth below. We will provide notice to the
holder of an Investment Note regarding the upcoming maturity date. The holder
may request repayment for a period of up to seven days after the maturity date
of the Investment Note. As a courtesy, we provide a request for repayment form
with such notice. (Use of such form by a holder is not a condition of
repayment.) Requests for repayment may also be made to us by letter. If the
holder does not request repayment within seven days after the maturity date
the Investment Note will be extended for an identical term. If we do not intend
to permit the holder to extend the term, we will notify the holder of our
intention at least seven days prior to the expiration of the applicable term.
Any Investment Notes which are so extended will be extended at the interest
rate then being offered by us for newly issued Investment Notes of like term
and denomination.
We will mail holders of the Investment Notes a quarterly statement which
will indicate the holder's current balance and interest paid. These statements
will be mailed to holders of the Investment Notes no later than the tenth
business day following each calendar quarter. We will also provide the Trustee
with quarterly reports regarding the Investment Notes. These quarterly reports
will contain the information requested by the Trustee such as the outstanding
balance and interest rate paid on the Investment Notes during the preceding
quarterly period. See "Highlights of Terms of the Debt Securities Offered" on
page 3 hereof.
Money Market Notes. The Money Market Notes are offered in minimum
denominations of $1,000 and any amount in excess thereof. The Money Market
Notes have no stated maturity and are redeemable in minimum amounts of $500 (or
in lesser amounts to close an account) at the option of the holder upon written
notice to us. The payment due upon redemption shall be made within 10 business
days of our receipt of such notice from the holder. The Money Market Notes may
also be redeemed by us at any time upon thirty days written notice to the
holder.
Purchasers of Money Market Notes will not receive a promissory note to
document our repayment obligations. Only in certain limited circumstances
described herein will a certificate or note representing the securities be
issued to any holder. Instead, we will maintain a record of each holder's
interest in the security through the establishment and maintenance of an
account for each purchaser of such security. Upon subscription, a transaction
statement reflecting ownership will be issued to each purchaser upon our
acceptance of the purchaser's subscription. Such statement is not a negotiable
instrument, and no rights of ownership in a Money Market Note may be
transferred by the endorsement and delivery of such statement to a purchaser.
The Money Market Notes are not transferable to any other person or entity
without our prior written consent. We reserve the right, in our reasonable
discretion, to withhold such consent for various reasons, including but not
limited to our determination that such transfer might result in a violation of
any state or federal securities or other applicable law. We may require a
signature guarantee in connection with such transfer. Upon transfer of this
security, we will provide the transferee of the security with a transaction
statement which will evidence the transfer of the ownership of the account on
our records. We shall provide the Trustee with information regarding the
establishment of new accounts and transfers of existing accounts on a bi-weekly
basis.
The interest rate paid on the Money Market Notes will be adjusted by us
from time- to- time in our sole discretion provided that such rate shall not be
less than 4.0% per year. We will provide written notice to all holders of the
Money Market Notes at least 14 days prior to any decrease in the interest rate
to be paid thereon, which notice shall set forth the new interest rate to be
paid and the effective date of such change. We reserve the right to increase
the interest rate paid on the Money Market Notes at any time without prior
notice to the holders of the Money Market Notes. Interest on the Money Market
Notes will be compounded daily and credited monthly on the last day of each
calendar month. Instead of paying interest by check, accrued interest will be
paid in the form of additional Money Market Notes. No interest will be paid on
the Money Market Notes for any day during which the principal balance of an
account is less than $1,000.
We will mail holders of the Money Market Notes a monthly statement which
will indicate the holder's current balance (including interest credited and
withdrawals made) and interest rate paid on the
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securities during the preceding calendar month. These statements will be mailed
to holders of the securities no later than the tenth business day following
each month end. We will provide the Trustee with quarterly reports regarding
Money Market Notes. These quarterly reports will contain the information
requested by the Trustee such as the outstanding balance, interest credited,
withdrawals made and interest rate paid on the accounts during the preceding
quarterly period. See "Highlights of Terms of the Debt Securities Offered" on
page 3 hereof.
Use of Proceeds
We intend to utilize the net proceeds resulting from the sale of the Notes
for our general corporate purposes, including financing the future growth of
our loan and lease portfolios, the repayment of our outstanding debt and
possible unspecified acquisitions of related businesses or assets (although
none are currently contemplated). No specific allocation of such proceeds has
been determined as of the date of this Prospectus. See "Use of Proceeds."
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RISK FACTORS
Before you invest in our Notes, you should be aware that there are various
risks, including those described below. You should consider carefully these
risk factors together with all of the other information included in this
prospectus and the rate supplement provided to you with this prospectus before
you decide to purchase any Notes offered hereby.
Absence of Insurance and Regulation
No governmental or private agency insures the Notes which represent our
debt obligations to purchasers of such Notes. Consequently, an investment in
our Notes is not insured against loss and the purchaser is dependent solely
upon our earnings, proceeds from the sale or securitization of loans and leases
from our portfolio, our working capital and other sources of funds, including
proceeds from the continuing sale of subordinated debt and institutional lines
of credit for repayment of principal at maturity and the ongoing payment of
interest on the Notes. In addition, no public or private entity guarantees the
Notes or provides for the repayment if we do not have sufficient funds to make
principal and interest payments. Finally, since we are not a commercial bank,
savings bank or thrift institution, we are not regulated or subject to
examination in the same manner as commercial banks, savings banks and thrift
institutions. Thus, our operations are not subject to the stringent regulatory
requirements imposed upon the operations of such entities and are not subject
to periodic compliance examinations by federal banking regulators designed to
protect investors. See "Business" and "Management's Discussion and Analysis of
Financial Condition, and Results of Operations."
Subordination of Debt Represented by the Notes
The Notes will be second in right of repayment (i.e., subordinated) to all
of our Senior Debt. As of June 30, 1998 and September 30, 1998, there was $26.5
million and $53.4 million of Senior Debt outstanding, respectively. There is no
limitation on the amount of Senior Debt we can incur. Senior Debt is any
indebtedness incurred in connection with borrowings by us (including our
subsidiaries) from a bank, trust company, insurance company, or from any other
institutional lender, whether or not such indebtedness is specifically
designated as being "Senior Debt." If we were to become insolvent, such Senior
Debt would have a priority of right to repayment in connection with our
liquidation. In addition, any indebtedness of our subsidiaries, other than the
Senior Debt, will have rights upon liquidation or dissolution of the particular
subsidiary prior to payment being made to the holders of the Notes. As of June
30, 1998 and September 30, 1998, such debt totaled $9.5 million and $9.0
million, respectively. As a result, there is no guarantee of repayment of the
Notes upon our liquidation. See "Description of the Debt Securities Offered and
the Indenture--Provisions Related to All Securities."
Absence of Sinking Fund/No Security
The Notes are not secured by any of our assets. In addition, the Company
does not contribute funds on a regular basis to a separate account called a
sinking fund to repay the Notes upon maturity. Since no funds are
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set aside periodically for the repayment of the Notes over their term, holders
of the Notes must rely on our revenues from operations and other sources for
repayment. See "Absence of Insurance and Regulation" and "Description of the
Debt Securities Offered and the Indenture--General."
Limited Liquidity--Lack of Trading Market
The Notes are our non-negotiable debt obligations which means the Notes
are not transferable without our prior written consent. In addition, there is
no established trading market for the Notes. Due to the non-negotiable nature
of the Notes and the lack of a market for the sale of the Notes, even if we
permitted a transfer, investors may be unable to liquidate their investment.
See "Description of the Debt Securities Offered and the Indenture."
Decline in Collateral Value May Adversely Affect Loan-to-Value Ratios
Our business may be adversely affected by declining real estate values.
Any material decline in real estate values reduces the ability of borrowers to
use home equity to support borrowings and increases the loan-to-value ratios of
loans previously made by us, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of a borrower default.
Further, delinquencies, foreclosures and losses generally increase during
economic slowdowns or recessions. As a result, there can be no assurance that
the market value of the real estate underlying such loans will at any time be
equal to or in excess of the outstanding principal amount of such loans. See
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Credit-Impaired Borrowers May Result in Increased Delinquency and Loss
Rates/Increase in Non-Performing Loans and Leases and Allowance for Losses
We market loans, in part, to borrowers who, for one reason or another, are
not able, or do not wish, to obtain financing from traditional sources, such as
commercial banks. Loans made to such borrowers may entail a higher risk of
delinquency and loss than loans made to borrowers who utilize traditional
financing sources. As a result, we may experience higher delinquency rates and
losses in the event of adverse economic conditions than those experienced by
traditional lenders. At June 30, 1998, total delinquent loans as a percentage
of our total loan portfolio owned and serviced was 3.11% as compared to 2.26%
at June 30, 1997. While we utilize underwriting standards and collection
procedures designed to mitigate the higher credit risk associated with lending
to such borrowers, no assurance can be given that such standards or procedures
will offer adequate protection against this risk. In the event loans sold and
serviced by us experience higher delinquencies, foreclosures or losses than
anticipated, our results of operations or financial condition could be
adversely affected. See "Business."
As the loan and lease portfolio owned and serviced increased over the past
two years, the level of non-performing loans and leases also increased. Our
non-performing loans and leases owned and serviced delinquent over 30 days
increased from $1.4 million on June 30, 1996 to $3.8 million on June 30,1997
and was $16.8 million on June 30, 1998. The total delinquencies as a percentage
of the total loan and lease portfolio owned and serviced also increased from
2.30% on June 30, 1996 to 2.15% on June 30, 1997 and was 3.01% on June 30,
1998. Of the $16.8 million of delinquent loans and leases owned and serviced at
June 30, 1998, $8.6 million were delinquent over 90 days. Of the $16.8 million
of delinquent loans and leases, $2.8 million represent leases held in our
portfolio and $14.0 million represent loans sold in securitizations and
serviced by us. As a result, we have increased our allowance for credit losses
to $5.6 million at June 30, 1998 to cover potential credit losses. See Note 2
of the Notes to Consolidated Financial Statements.
We establish provisions for credit losses, which are charged to
operations, in order to maintain the allowance for credit losses at a level
which is deemed appropriate by management based upon an assessment of our prior
loss experience, the volume and type of lending being conducted, industry
standards, the level of delinquencies, economic conditions in our market area
and other factors. Although management uses its best judgment in providing for
credit losses, there can be no assurance that we will not have to continue to
increase our provision for credit losses in the future as a result of future
increases in non-performing loans
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and leases or for other reasons. Any substantial increase in the provision
could have an adverse effect on our results of operations in the period in
which such provision is made. See "Risk Factors--Dependence Upon
Securitizations and Fluctuations in Operating Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence Upon Securitizations and Fluctuations in Operating Results
In recent periods, gain on sale of loans and leases generated by our
securitizations has represented a substantial majority of our revenues and net
income. Gain on sale of loans and leases resulting from securitizations as a
percentage of total revenues was 67.7% for the year ended June 30, 1998. In
addition, we rely primarily on securitizations to generate cash proceeds for:
(i) repayment of our warehouse credit facilities, (ii) repayment of other
borrowings and (iii) origination of additional loans. Several factors affect
our ability to complete securitizations, including: (i) conditions in the
securities markets generally, (ii) conditions in the asset-backed securities
markets specifically and (iii) the credit quality of our loans and lease
portfolios. Any substantial reduction in the size or availability of the
securitization market for such assets would have a material adverse effect on
our results of operations and financial condition.
Our revenues and net income have fluctuated in the past and are likely to
fluctuate in the future principally as a result of the timing and size of our
securitizations. The strategy of selling loans and leases through
securitizations requires us to build an inventory of such assets over time,
during which time we incurs costs and expenses. Since we do not recognize gains
on the sale of such loans and leases until we consummate a securitization,
which may not occur until a subsequent period, our operating results for a
given period can fluctuate significantly as a result of the timing and level of
securitizations. If securitizations do not close when expected, we could
experience a loss for the period which could have a material adverse effect on
our results of operations. In addition, due to the timing difference between
the period when costs are incurred in connection with the origination of loans
and leases and their subsequent sale through the securitization process, we may
operate on a negative cash flow basis, which could adversely impact our results
of operations and financial condition.
We have made estimates of the interest only strips to be received in
connection with our securitizations based upon certain prepayment and default
assumptions. However, our actual prepayment and default experience may vary
materially from such estimates. As a result, the gain we recognize upon the
sale of loans and leases may be overstated to the extent that actual
prepayments or losses are greater than estimated. Higher levels of future
prepayments, delinquencies and/or liquidations could result in the decreased
value of interest only strips which would adversely affect our income in the
period of adjustment. See "Risk Factors--Credit Impaired Borrowers May Result
in Increased Delinquency and Loss Rates/Increase in Non-Performing Loans and
Leases and Allowance for Losses," "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Ability to Sustain Recent Levels of Growth and Operating Results
During fiscal 1998 and 1997, we experienced record levels of total revenue
and net income as a result of increases in loan originations and the
securitization of loans. Total revenue increased approximately $34.5 million,
or 130.2%, between fiscal 1997 and 1998 while net income increased
approximately $5.5 million, or 92.8%. Total revenue increased approximately
$14.4 million, or 119.0%, between fiscal 1996 and 1997 while net income
increased approximately $3.6 million, or 156.1%. Our ability to sustain the
level of growth in total revenue and net income experienced during fiscal 1998
and 1997 is dependent upon a variety of factors outside our control, including:
(i) interest rates, (ii) conditions in the asset-backed securities markets,
(iii) economic conditions in our primary market area, (iv) competition, and (v)
regulatory restrictions. As a result, the rate of growth experienced in fiscal
1998 and 1997 may not be sustained in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Ability to Implement our Growth Strategy
Our growth strategy is dependent upon our ability to continue to increase
our loan and lease volume through geographic expansion while maintaining our
customary origination fees, interest rate spreads and
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underwriting criteria. Implementation of this strategy will depend in large
part on our ability to: (i) expand our offices in markets with a sufficient
concentration of borrowers meeting our underwriting criteria; (ii) obtain
adequate financing on favorable terms to fund our growth strategy; (iii)
profitably securitize our loans and leases in the secondary market on a regular
basis; (iv) hire, train and retain skilled employees; (v) successfully
implement our marketing campaigns; and (vi) continue to expand in the face of
increasing competition from other lenders. Our failure with respect to any or
all of these factors could impair our ability to successfully implement our
growth strategy which could have a material adverse effect on our results of
operations and financial condition. See "Business."
Increased Competition Could Adversely Affect Results of Operations
The various segments of our lending and leasing businesses are highly
competitive. Certain lenders against which we compete have substantially
greater resources, greater experience, lower cost of funds, and a more
established market presence than us. To the extent our competitors increase
their marketing efforts to include our market niche of borrowers, we may be
forced to reduce the rates and fees we currently charge in order to maintain
and expand our market share. Any reduction in such rates or fees could have an
adverse impact on our results of operations. In addition, even after we have
made a loan to a borrower, the borrower may refinance the loan with another
lender at more favorable rates and terms. Furthermore, our profitability and
the profitability of other similar lenders may attract additional competitors
into this market. The addition of new competitors could affect our ability to
charge our current rates and fees. In addition, as we expand into new
geographic markets, we will face competition from companies with established
positions in these areas. There can be no assurance that we will be able to
continue to compete successfully in the markets we serve or expand into new
geographic markets. Such an event could have a material adverse effect on our
results of operations and financial condition. See "Business--Competition."
Dependence Upon Debt Financing
For our ongoing operations, we are dependent upon borrowings, including:
(i) our unsecured subordinated debt, (ii) our warehouse credit facilities,
(iii) lines of credit, and (iv) funds received from the securitization of loans
and leases. We had $115.2 million of subordinated debt outstanding at June 30,
1998 and had lines of credit and credit facilities of $210.0 million, $26.5
million of which was being utilized on such date. At June 30, 1998,
subordinated debt scheduled to mature during the twelve months ended June 30,
1999 totaled $62.9 million. Any failure to renew or obtain adequate funding
under a warehouse credit facility, or other borrowings, or any substantial
reduction in the size of or pricing in the markets for our loans or leases,
could have a material adverse effect on our results of operations and financial
condition. To the extent that we are not successful in maintaining or replacing
existing debt, we would have to curtail our loan and lease production
activities or sell loans and leases earlier than intended which could have a
material adverse effect on our results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Changes in Interest Rates May Adversely Affect Profitability
Our profitability is likely to be adversely affected during any period of
rapid changes in interest rates. Any future rise in interest rates may: (i)
adversely affect demand for our products, (ii) increase our cost of funds, and
(iii) adversely affect the spread between the rate of interest received on
loans and rates payable under our outstanding credit facilities or the
pass-through rate for interests issued in connection with loans and leases
securitized. In addition, any future decrease in interest rates will reduce the
amounts which we may earn on our newly originated loans and leases. A decline
in interest rates could also decrease the size of the loan portfolio we service
by increasing the level of prepayments.
In an attempt to mitigate the effect of changes in interest rates on our
fixed-rate mortgage loan portfolio prior to securitization, we implemented a
hedging strategy in August 1995. A hedging strategy involves the sale of
Treasury securities with the requirement to repurchase such securities at a
specified time in the future. We engaged in this strategy in an effort to
protect our assets from changes in market value as a result of fluctuations in
market interest rates. An effective hedging strategy is complex and no hedging
strategy can
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completely insulate us from interest rate risks. The nature and timing of
hedging transactions may impact the effectiveness of hedging strategies. Poorly
designed strategies or improperly executed transactions may increase rather
than mitigate risk. In addition, hedging involves transaction and other costs,
and such costs could increase as the period covered by the hedging protection
increases or in periods of rising and fluctuating interest rates. As a result,
we may be prevented from effectively hedging our interest rate risks without
reducing income in current periods. In addition, the sale of Treasury
securities is not an effective hedge against the risk that the difference
between the treasury rate and the rate needed to attract potential investors of
asset backed securities may widen.
We also experience interest rate risk to the extent that a portion of our
liabilities are comprised of subordinated debt with scheduled maturities of one
to ten years. At June 30, 1998, the Company had $52.3 million of subordinated
debt with scheduled maturities greater than one year. To the extent that
interest rates decrease in the future, the rates paid on such liabilities could
exceed the rates received on our newly originated loans resulting in a decrease
in our spread. Consequently, fluctuations in interest rates may adversely
affect our results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Interest Rate Risk Management."
Geographic Concentration of Loans
We currently originate loans in a limited geographic area which primarily
includes the states located in the eastern region of the United States. This
practice may subject us to the risk that a downturn in the economy in such
region of the country would more greatly affect us than if our lending business
was more geographically diversified. See "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Contingent Risks
Although we sell substantially all loans and leases we originate through
securitizations, such transactions involve an agreement that requires that we
replace or repurchase such loans or leases in very limited circumstances. As a
result of these provisions, we retain risk on substantially all loans and
leases sold. During the period of time that loans and leases are held pending
sale, we are subject to the various business risks associated with the lending
business including: (i) the risk of borrower default, (ii) the risk of
foreclosure, and (iii) the risk that a rapid increase in interest rates would
result in a decline in the value of loans to potential purchasers.
In addition, documents governing our securitizations require us to commit
to repurchase or replace loans which do not conform to the representations and
warranties made by us at the time of sale. When borrowers are delinquent in
making monthly payments on loans included in a securitization trust, we are
required to advance interest payments with respect to such delinquent loans to
the extent that we deem such advances will be ultimately recoverable. These
advances require funding from our capital resources but have priority of
repayment from the succeeding month's collections.
In the ordinary course of our business, we are subject to claims made
against us by borrowers and private investors arising from, among other things:
(i) losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions by
our employees, officers and agents (including our appraisers); (ii) incomplete
documentation; and (iii) failure to comply with various laws and regulations
applicable to our business. Although there are no currently material claims or
legal actions asserted against us, any claims asserted in the future may result
in legal expenses or liabilities which could have a material adverse effect on
our results of operations and financial condition. See "Business--Legal
Proceedings."
Risks Associated with Leasing Activities
We began offering Equipment Leases in December 1994. There are risks
inherent in our leasing activities which differ in certain respects from those
existing in our lending activities. While our Equipment Leases are secured by a
lien on the equipment leased, such equipment is subject to the risk of damage,
destruction or
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technological obsolescence prior to the termination of the lease. In the case
of our fair market value leases, lessees may choose not to exercise their
option to purchase the equipment for its fair market value at the termination
of the lease, with the result that we may be required to sell such equipment to
third party buyers at a discount or otherwise dispose of such equipment. See
"Business--Lending and Leasing Activities."
Regulatory Restrictions and Licensing Requirements
Our lending business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject
to various laws and judicial and administrative decisions imposing requirements
and restrictions on all or part of our home equity and first mortgage lending
activities. Our home equity and first mortgage lending activities are subject
to the Federal Truth-in-Lending Act and Regulation Z (including the Home
Ownership and Equity Protection Act of 1994), the Federal Equal Credit
Opportunity Act and Regulation B, as amended, the Federal Real Estate
Settlement Procedures Act and Regulation X, the Home Mortgage Disclosure Act
and the Federal Fair Debt Collection Practices Act, as well as other federal
and state statutes and regulations affecting our activities. We are also
subject to examinations by state regulatory authorities with respect to
originating, processing, underwriting, selling and servicing Home Equity Loans
and First Mortgage Loans. These rules and regulations, among other things,
impose licensing obligations, prohibit discrimination, regulate collection,
foreclosure and claims handling, payment features, mandate certain disclosures
and notices to borrowers and, in some cases, fix maximum interest rates, and
fees. Failure to comply with these requirements can lead to, among other
remedies, termination or suspension of licenses, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcement
actions.
The previously described laws and regulations are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which we are subject may lead to
regulatory investigations or enforcement actions and private causes of action,
such as class action lawsuits, with respect to our compliance with the
applicable laws and regulations.
Although we believe that we have implemented systems and procedures to
facilitate compliance with the foregoing requirements and believe that we are
in compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive. See "Business-- Regulation."
Dependence on Key Personnel
We believe that the success of our operations depends on the continued
employment of our senior level management. If members of the senior level
management were for some reason unable to perform their duties or were, for any
reason, to leave us, there can be no assurance that we would be able to find
capable replacements. We have entered into employment agreements with three of
our executive officers, including Anthony J. Santilli, Jr., our Chairman,
President and Chief Executive Officer. We also hold "key-man" insurance for
Anthony J. Santilli, Jr. and Beverly Santilli. See "Management."
Environmental Concerns
In the course of our business, we have acquired, and may acquire in the
future, properties securing loans which are in default. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real estate may be required to investigate and
clean up hazardous or toxic substances or chemical releases at such property,
and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and cleanup costs incurred
by such parties in connection with the contamination. The liability under such
laws has been interpreted to apply to all current and prior owners of the
property unless the harm is divisible and there is a reasonable basis for
allocation of responsibility. The costs of investigation, remediation or
removal of such substances may be substantial, and
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the presence of such substances, or the failure to properly remediate such
property, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. Persons who arrange
for the disposal or treatment of hazardous or toxic substances also may be
liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not the facility is owned or
operated by such person. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from
such property.
Our ability to foreclose on the real estate collateralizing our loans, if
at any time such a foreclosure would be otherwise appropriate, may be limited
by these environmental laws. While we would not make a loan collateralized by
real property as to which we had knowledge of an environmental risk or problem,
it is possible that such a risk or problem could become known after the subject
loan has been made. See "Business--Loan and Lease Servicing."
Management's Discretion Over Substantial Amount of the Proceeds of the Offering
and Possible Use for Future Unspecified Acquisitions
The net proceeds from the sale of the Notes will be utilized for general
corporate purposes, including: (i) financing the future growth of our loan and
lease portfolios; (ii) the repayment of our outstanding debt; and (iii)
possible unspecified acquisitions of related businesses or assets (although
none are currently contemplated). Since no specific allocation of such proceeds
has been determined as of the date of this Prospectus, management will have
broad discretion in allocating the proceeds of the Offering. See "Use of
Proceeds."
Year 2000 Compliance
Many currently installed computer systems and software products use two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process loan or other transactions, send statements or late
notices, or engage in similar normal business activities.
We are in the process of conducting an analysis of our systems and have
begun taking the steps necessary to bring them into compliance. We currently
estimate that the costs associated with our Year 2000 compliance program will
be approximately $300,000. Although we currently estimate that our Information
Technology systems will be Year 2000 compliant by the end of 1999, no assurance
can be given that we will meet this time frame. We are in the process of
developing a contingency plan in the event our systems are not Year 2000
compliant on a timely basis. We are also in the process of contacting vendors
with which we do a material amount of business to determine the extent to which
these parties' systems (insofar as they relate to our business) are subject to
Year 2000 issues. We are currently unable to predict and the extent to which
Year 2000 issues will affect these third parties, or the extent to which we
would be vulnerable to the failure of these parties to remediate any Year 2000
issues on a timely basis. The failure of our vendors to convert their systems
on a timely basis may have a material adverse effect on us. We have not
developed a contingency plan in the event these vendors are not Year 2000
compliant on a timely basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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THE COMPANY
We are a financial services company operating primarily throughout the
eastern region of the United States. Through our principal direct and indirect
subsidiaries, American Business Credit, Inc. (ABC), HomeAmerican Credit, Inc.
(d/b/a Upland Mortgage and referred to herein as "HAC" or "Upland"), American
Business Leasing, Inc. ("ABL"), NJMIC and Federal Leasing Corp. ("Federal"), we
originate, service and sell Business Purpose Loans, Home Equity Loans, First
Mortgage Loans and Equipment Leases. We also underwrite, process and purchase
Home Equity Loans through the Bank Alliance Program and originate a limited
number of secured and unsecured consumer loans. See "Business."
We were incorporated in Delaware in 1985 and began operations as a finance
company in 1988, initially offering Business Purpose Loans to customers whose
borrowing needs the Company believed were not being adequately serviced by
commercial banks. Since our inception, we have significantly expanded our
product line and geographic scope and currently offer our loan products in 29
states and our lease products throughout the United States.
USE OF PROCEEDS
We intend to use the net proceeds resulting from the sale of the Notes
(estimated to be approximately $243.8 million net of estimated offering
expenses if all of the Notes offered hereby are sold) for general corporate
purposes. General corporate purposes may include: (i) financing the future
growth of our loan and lease portfolios; (ii) the repayment of warehouse credit
facilities, lines of credit and our maturing debt; and (iii) possible future
acquisitions of related businesses or assets. The precise amounts and timing of
the application of such proceeds depends upon many factors, including, but not
limited to, the amount of any such proceeds, actual funding requirements and
the availability of other sources of funding. Until such time as the proceeds
are utilized, they will be invested in short and long-term investments,
including, but not limited to, treasury bills, commercial paper, certificates
of deposit, securities issued by U.S. government agencies, money market funds
and repurchase agreements, depending on our cash flow requirements. Our
investment policies permit significant flexibility as to the types of such
investments that we may make. We may also maintain daily unsettled balances
with certain broker-dealers. While from time to time we may consider potential
acquisitions, as of the date of this Prospectus, we had no commitments or
agreements with respect to any material acquisitions.
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DESCRIPTION OF THE DEBT SECURITIES OFFERED AND THE INDENTURE
General
The Notes represent debt obligations of the Company and as such will be
issued pursuant to the Indenture between the Company and U.S. Bank Trust
National Association, a national banking association, as trustee (the
"Trustee"). The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act"), in effect on the date the Indenture is
qualified thereunder. The Notes are subject to all such terms, and holders of
the Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following includes a summary of certain provisions of
the Indenture, a copy of which is available from the Company upon request. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below.
The Notes will be subordinated in right of payment to the prior payment in
full of all Senior Debt (as herein defined) of the Company, whether outstanding
on the date of the Indenture or thereafter incurred. There is no limit on the
amount of Senior Debt the Company may incur. See "--Provisions Related to All
Securities--Subordination."
The Notes are not secured by any collateral or lien. There are no
provisions for a sinking fund applicable to such debt. See "Risk
Factors--Absence of Sinking Fund/No Security."
Notes may be purchased in the minimum amount of $1,000 or any amount in
excess thereof. Separate purchases may not be accumulated to satisfy the
minimum denomination requirement.
Provisions Relating to Investment Notes
Maturity. The Investment Notes are offered by the Company at maturities
ranging from three to 120 months. The term of each Investment Note will be
chosen by the purchaser of such note upon subscription.
Form and Denominations/Transfers. The Investment Notes will be issued in
fully registered form. The Investment Notes are not negotiable instruments, and
no rights of record ownership therein can be transferred without the prior
written consent of the Company. Ownership of an Investment Note may be
transferred on the Company register only by written notice to the Company
signed by the owner(s) or such owner's duly authorized representative on a form
to be supplied by the Company and with the prior written consent of the Company
(which consent shall not be unreasonably withheld). The Company may also, in
its discretion, require an opinion from such noteholder's counsel that the
proposed transfer will not violate any applicable securities laws and/or a
signature guarantee in connection with such transfer. An Investment Note may be
purchased in the minimum amount of $1,000 or any amount in excess thereof.
Separate purchases may not be accumulated to satisfy the minimum denomination
requirement. See "Prospectus Summary--Description of Debt Securities Offered."
Interest. The interest rates payable on the Investment Notes offered
hereby will be established by the Company from time to time based on market
conditions and the Company's financial requirements. The Company constantly
re-evaluates its interest rates based upon such analysis. Once determined, the
rate of interest payable on an Investment Note will remain fixed for the
original term of the Investment Note. The interest rate payable on an
Investment Note will be determined based upon the maturity date and term
established for such Investment Note upon subscription.
Interest on Investment Notes will be computed on the basis of an actual
calendar year and will compound daily. Interest on Investment Notes with terms
of less than twelve months will be paid at maturity. Purchasers of Investment
Notes with terms of twelve months or greater may elect to have interest paid
monthly, quarterly, semiannually, annually or at maturity. This election may be
changed one time by the holder during the term of these longer term Investment
Notes. Requests to change such election are required to be made to the Company
in writing. No specific form of change of election is required to be submitted
to the Company. Any interest not otherwise paid on an interest payment date
will be paid at maturity.
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The Company reserves the right to vary from time to time, in its
discretion, the interest rates it offers on the Investment Notes based on
numerous factors other than length of term to maturity. Such factors may
include, but are not limited to: the desire to attract new investors;
Investment Notes in excess of certain principal amounts; Investment Notes
purchased for IRA and/or Keogh accounts; rollover investments; and Investment
Notes beneficially owned by persons residing in particular geographic
localities. The Company may make a decision to vary interest rates in the
future based on its fund raising objectives including, but not limited to, the
attraction of new investors in particular regions, the encouragement of the
rollover of Investment Notes by current holders, circumstances in the financial
markets and the economy, additional costs which may be incurred by the Company
in selling Investment Notes in a particular jurisdiction which may at the time
be relevant to the Company's operations and other factors.
Interest Accrual Date. Interest on the Investment Notes will accrue from
the date of purchase, which is deemed to be, for accepted subscriptions, the
date the Company receives funds, if received prior to 3:00 p.m. on a business
day, or the next business day if the Company receives such funds on a
non-business day or after 3:00 p.m. on a business day. For this purpose, the
Company's business days will be deemed to be Monday through Friday, except for
Delaware legal holidays.
Interest Withholding. With respect to those investors who do not provide
the Company with a fully executed Form W-8 or Form W-9, the Company will
withhold 31% of any interest paid. Otherwise, no interest will be withheld,
except on the Investment Notes held by foreign business entities. It is the
Company's policy that no sale will be made to anyone refusing to provide a
fully executed Form W-8 or Form W-9.
Automatic Extension. The Investment Note will be extended automatically
for a term identical to the term of the original Investment Note unless: (i)
the Company notifies the holder at least seven days prior to the maturity date
of its intention not to extend the note; or (ii) the holder elects to redeem
the note within the seven days after the maturity date. The Investment Notes
will continue to renew as described herein absent some action permitted under
the Indenture and the Investment Notes by either the holder or the Company.
Interest shall continue to accrue from the first day of such renewed term. Such
Investment Note, as renewed, will continue in all its provisions, including
provisions relating to payment, except that the interest rate payable during
any renewed term shall be the interest rate which is then being offered by the
Company on similar Investment Notes being offered as of the renewal date. If
similar Investment Notes are not then being offered, the interest rate upon
renewal will be the rate specified by the Company on or before the maturity
date, or the Investment Note's current rate if no such rate is specified. If
the Company gives notice to a holder of the Company's intention to repay an
Investment Note at maturity, no interest will accrue after the date of
maturity. Otherwise, if a holder requests repayment within seven days after its
maturity date, the Company will pay interest during the period after its
maturity date and prior to repayment at the lower of: (i) the lowest interest
rate then being paid on the Investment Notes being offered by the Company to
the general public; or (ii) the rate being paid on such Investment Note
immediately prior to its maturity. As a courtesy, the Company provides a
request for repayment form with such notice. Use of such form by a holder is
not a condition of repayment. Requests for repayment may also be made to the
Company by letter.
Place and Method of Payment. Principal and interest on the Investment
Notes will be payable at the principal executive office of the Company, as it
may be established from time to time, or at such other place as the Company may
designate for that purpose; provided, however, that payments may be made at the
option of the Company by check or draft mailed to the person entitled thereto
at his/her address appearing in the register which the Company maintains for
that purpose.
Redemption by the Company. The Company will have no right to prepay an
Investment Note. The holder has no right to require the Company to prepay any
such Investment Note prior to its maturity date as originally stated or as it
may be extended, except as indicated below.
Redemption by the Holder upon Death or Total Permanent Disability. Except
for Investment Notes with maturities of less than 12 months, an Investment Note
may be redeemed at the election of the holder following his/her Total Permanent
Disability, as established to the satisfaction of the Company, or by his/her
estate following his/her death. The redemption price, in the event of such a
death or disability, will be the
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principal amount of the Investment Note, plus interest accrued and not
previously paid, to the date of redemption. If spouses are joint record owners
of an Investment Note, the election to redeem will apply when either record
owner dies or becomes subject to a Total Permanent Disability. In other cases
of Investment Notes jointly held, the election will not apply.
The Company may modify the foregoing policy on redemption after death or
disability. However, no such modification will affect the right of redemption
applicable to any then outstanding Investment Note. Should the Company modify
such policy at a future date, written notice of such modification will be sent
to all owners of those outstanding Investment Notes which were purchased while
the policy was in effect (but such notice will not affect the right to redeem
such outstanding Investment Notes after the owner's death or disability.)
For the purpose of determining the right of a holder to demand early
repayment of an Investment Note, Total Permanent Disability shall mean a
determination by a physician chosen by the Company that the holder, who was
gainfully employed on a full time basis at the time of purchase, is unable to
work on a full time basis, defined as working at least forty hours per week,
during the succeeding twenty-four months.
Quarterly Statements. The Company shall provide holders of the Investment
Notes with quarterly statements which will indicate, among other things, the
current account balance (including interest paid). Such statements will be
mailed not later than the tenth business day following the end of each calendar
quarter.
Provisions Relating to Money Market Notes
Maturity/Redemption. The Money Market Notes have no stated maturity and
are redeemable at any time in minimum amounts of $500 (except to close an
account) at the option of the holder upon not less than ten business days
written notice to the Company.
Form and Denominations/Transfers. The Money Market Notes are not
negotiable debt instruments and will be issued only in book-entry form. See
"--Book Entry System." Upon subscription, a transaction statement reflecting
the ownership of a Money Market Note will be issued to each purchaser upon the
Company's acceptance of the subscription. Such statement is not a negotiable
instrument, and no rights of record ownership therein can be transferred
without the prior written consent of the Company. Each holder of a Money Market
Note will receive a monthly statement indicating any transactions in the
holder's account, as well as interest credited. Ownership of a this security
may be transferred on the Company's register only by written notice to the
Company signed by the owner(s) or such owner's duly authorized representative
on a form to be supplied by the Company and with the prior written consent by
the Company (which consent shall not be unreasonably withheld). The Company may
also, in its discretion, require an opinion from such holder's counsel that the
proposed transfer will not violate any applicable securities laws and/or a
signature guarantee in connection with such transfer. Upon transfer of a Money
Market Note, the Company will provide the new owner of such security with a
transaction statement which will evidence the transfer of the account on the
Company's records.
Book-Entry System. Upon acceptance of an order, the Company will credit
its book-entry registration and transfer system to the account of the purchaser
of the Money Market Note, the principal amount of such security owned of record
by such purchaser. The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such legal requirements may impair the ability to transfer the
record ownership of the Money Market Notes.
The record owners of these securities issued in a book-entry interest form
will not receive or be entitled to receive physical delivery of a note or
certificate evidencing such indebtedness. The registered owners of the accounts
established by the Company in connection with the purchase or transfer of Money
Market Notes shall be deemed to be the owners of the Money Market Notes under
the Indenture. Such person holding a book-entry interest in the Money Market
Notes must rely upon the procedures established by the Trustee to exercise any
rights of a holder of such securities under the Indenture. The Company shall
provide the Trustee with information regarding the establishment of new
accounts and the transfer of existing accounts on a bi-weekly basis.
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The information regarding the total amount of any principal and/or
interest (which shall be paid in the form of additional securities) due to
book-entry owners with regard to the Money Market Notes on any interest payment
date or upon redemption will be made available by the Company to the Trustee
upon the Trustee's request. On each interest payment date, the Company will
credit each account on the applicable interest payment date based upon the
applicable interest rate due on such account and the amount of these securities
held of record in the account. The Company shall have the responsibility for
determining the interest payments to be made to the book-entry accounts and for
maintaining, supervising and reviewing any records relating to book-entry
beneficial interests in these securities.
Book-entry interests in the accounts evidencing ownership of the Money
Market Notes are exchangeable for actual notes in denominations of $1,000 and
any amount in excess thereof and fully registered in such names as the Company
directs if: (i) the Company at its option advises the Trustee in writing of its
election to terminate the book-entry system, or (ii) after the occurrence of an
Event of Default, holders of the Money Market Notes aggregating more than 50%
of the aggregate outstanding amount of the Money Market Notes advise the
Trustee in writing that the continuation of a book-entry system is no longer in
the best interests of the holders of Money Market Notes and the Trustee
notifies all registered holders of these securities, of the occurrence of any
such event and the availability of definitive notes to holders of these
securities requesting such notes. Subject to the foregoing, the book-entry
interests in these securities shall not otherwise be exchangeable for fully
registered notes.
Interest. The interest rates payable on the Money Market Notes offered
hereby will be adjusted by the Company from time to time in its sole discretion
provided that such rate shall not be less than 4.0% per year. The Company will
provide written notice to all holders of the Money Market Notes at least 14
days prior to any decrease in the interest rate to be paid thereon, which
notice shall set forth the new interest rate to be paid and the effective date
of such change. The Company reserves the right to increase the interest rate
paid on the Money Market Notes at any time without prior notice to the holders
of the Money Market Notes. Investors may inquire about the interest rate then
being paid on the outstanding Money Market Notes by calling the Company at
(610) 668-2440.
Interest on each account with a balance of at least $1,000 accrues daily
and is credited monthly on the last day of each calendar month. Interest
accrued during each monthly period will not be paid by check but will be added
to the noteholder's principal balance of the account in the form of additional
securities. Interest will continue to accrue on the principal balance of each
security through the date of redemption. If a holder redeems the security in
full, the principal balance of the account (including accrued interest) will be
paid by check as soon as practicable. No interest shall be paid for any day the
principal amount in any account is less than $1,000.
Subject to the limitations set forth herein, the Company may vary, in its
discretion, the interest rates it offers on the Money Market Notes based on
numerous factors. Such factors may include, but are not limited to: the desire
to attract new investors; Money Market Notes in excess of certain principal
amounts; Money Market Notes purchased for IRA and/or Keogh accounts; rollover
investments; and Money Market Notes beneficially owned by persons residing in
particular geographic localities. As of the date hereof, the Company is not
offering Money Market Notes at varying rates to different investors. However,
the Company may make a decision to vary interest rates in the future based on
its fund raising objectives including, but not limited to, the attraction of
new investors in particular regions, circumstances in the financial markets and
the economy, any additional costs which may be incurred by the Company in
selling Money Market Notes in a particular jurisdiction which may at the time
be relevant to the Company's operations and other factors.
Interest Accrual Date. Interest on the Money Market Notes will accrue from
the date of purchase, which is deemed to be, for accepted subscriptions, the
date the Company receives funds, if received prior to 3:00 p.m. on a business
day, or the next business day if the Company receives such funds on a
non-business day or after 3:00 p.m. on a business day. For this purpose, the
Company's business days will be deemed to be Monday through Friday, except for
Delaware legal holidays.
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Interest Withholding. With respect to those investors who do not provide
the Company with a fully executed Form W-8 or Form W-9, the Company will
withhold 31% of any interest paid. Otherwise, no interest will be withheld,
except on Money Market Notes held by foreign business entities. It is the
Company's policy that no sale will be made to anyone refusing to provide a
fully executed Form W-8 or Form W-9.
Redemption by the Holder of Money Market Notes. The holder of the Money
Market Notes may redeem the security at any time in minimum amounts of $500 (or
any amount to close an account) upon not less than 10 business days written
notice to the Company.
To the extent a holder of the Money Market Notes redeems the Money Market
Notes and purchases new ones, the redemptions are treated as being made on a
first-in, first-out basis.
Redemption by the Company. The Company will have the right to redeem a
Money Market Note at any time upon thirty days written notice to the holder
thereof.
Place and Method of Payment upon Redemption. Payments upon the redemption
of the Money Market Notes will be payable at the principal executive office of
the Company, as it may be established from time to time, or at such other place
as the Company may designate for that purpose; provided however, that payments
may be made at the option of the Company by check or draft mailed to the person
entitled thereto at his/her address appearing in the register which the Company
maintains for that purpose.
Reports to Trustee. The Company shall provide the Trustee with quarterly
reports which shall contain such information as the Trustee shall reasonably
request including information regarding the outstanding balance, interest
credited, withdrawals made and interest rate paid on each account related to
each Money Market Note maintained by the Company during the preceding quarterly
period.
Monthly Statements. The Company shall provide holders of the Money Market
Notes with monthly statements which will indicate, among other things, the
current account balance (including interest credited and withdrawals made, if
any) and the interest rate paid on the such securities as of the month end
preceding the issuance of the statement. Such statements will be mailed not
later than the tenth business day following each month end. The Company shall
provide additional statements as the holders of these securities may reasonably
request from time to time. Holders requesting such additional statements may be
required to pay all charges incurred by the Company in providing such
additional statements.
Provisions Related to All Securities
Subordination. The indebtedness evidenced by the Notes, and any interest
thereon, are subordinated to all Senior Debt of the Company. The term Senior
Debt is defined for this purpose to include any indebtedness (whether
outstanding on the date hereof or thereafter created) incurred by the Company
in connection with borrowings by the Company (including its subsidiaries) from
a bank, trust company, insurance company, or from any other institutional
lender, whether such indebtedness is or is not specifically designated by the
Company as being "Senior Debt" in its defining instruments. As of June 30, 1998
and September 30, 1998, there was $26.5 million and $53.4 million of Senior
Debt outstanding, respectively. There is no limitation under the Indenture on
the amount of Senior Debt the Company can incur. The Notes are not guaranteed
by any subsidiaries of ABFS. Accordingly, in the event of a liquidation or
dissolution of a subsidiary of ABFS, the law requires that creditors of that
subsidiary be paid, or provision for such payment be made, from the assets of
that subsidiary prior to distributing any remaining assets to ABFS as a
shareholder of that subsidiary. Therefore, in the event of liquidation or
dissolution of a subsidiary, creditors of such subsidiary will receive payment
of their claims prior to any payment to the holders of the Notes. As of June
30, 1998 and September 30, 1998, there was $9.5 million and $9.0 million of
such debt outstanding, respectively. Any indebtedness of ABFS, other than that
described as Senior Debt and the debt of the subsidiaries, will have rights
upon liquidation or dissolution of ABFS which ranks equally in right of payment
to the Notes offered hereby. As of June 30, 1998 and September 30, 1998, the
Company had $105.5 million and $121.9 million of debt outstanding,
respectively, which ranks equally in right of payment to the Notes offered.
For a discussion of the Company's status as a holding company and the lack
of insurance or guarantees in support of the Notes, see "Risk Factors--Absence
of Insurance and Regulation."
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In the event of any liquidation, dissolution or any other winding up of
the Company, or of any receivership, insolvency, bankruptcy, readjustment,
reorganization or similar proceeding under the Federal Bankruptcy Code or any
other applicable federal or state law relating to bankruptcy or insolvency, or
during the continuation of any Event of Default (as described below), no
payment may be made on the Notes until all Senior Debt has been paid. In any
such event, holders of Senior Debt may also submit claims on behalf of holders
of the Notes and retain the proceeds for their own benefit until they have been
fully paid, and any excess will be turned over to the holders of the Notes. If
any distribution is nonetheless made to holders of the Notes, the money or
property distributed to them must be paid over to the holders of the Senior
Debt to the extent necessary to pay Senior Debt in full. See "Risk
Factors--Subordination of Debt Represented by the Notes."
Events of Default. The Indenture provides that each of the following
constitutes an Event of Default: (i) default for 30 days in the payment of
interest when due on the Notes (whether or not prohibited by the subordination
provisions of the Indenture); (ii) default in payment of principal when due on
the Notes (whether or not prohibited by the subordination provisions of the
Indenture) and continuation thereof for 30 days; (iii) failure by the Company
to observe or perform any covenant, condition or agreement with respect to the
liquidation, consolidation or merger or other disposition of substantially all
of the assets of the Company (after notice and provided such default is not
cured within 60 days after receipt of notice); (iv) failure by the Company for
60 days after notice to comply with certain other agreements in the Indenture
or the Notes; and (v) certain events of bankruptcy or insolvency with respect
to the Company.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least a majority in principal amount of the then outstanding
Notes may declare the unpaid principal of and any accrued interest on the Notes
to be due and payable immediately; provided, however, that so long as any
Senior Debt is outstanding, such declaration shall not become effective until
the earlier of (x) the day which is five Business Days after the receipt by
representatives of Senior Debt of such written notice of acceleration or (y)
the date of acceleration of any Senior Debt. In the case of an Event of Default
arising from certain events of bankruptcy or insolvency, with respect to the
Company, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture, except a continuing Default or Event of Default in the payment
of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
Amendment, Supplement and Waiver. Except as provided herein, the Indenture
or the Notes may be amended or supplemented with the consent of the holders of
at least a majority in principal amount of the Notes then outstanding, and any
existing Default or compliance with any provision of the Indenture or the Notes
may be waived with the consent of the holders of a majority in principal amount
of the then outstanding Notes.
Without the consent of each holder of the Investment Notes affected, an
amendment or waiver may not (with respect to any Investment Notes held by a
nonconsenting holder of Investment Notes): (i) reduce the principal amount of
any Investment Note whose holder must consent to an amendment, supplement or
waiver; (ii) reduce the principal of or change the fixed maturity of any
security or alter the redemption provisions thereof or the price at which the
Company shall offer to repurchase the Investment Note; (iii) reduce the rate of
or change the time for payment of interest, including default interest, on any
Investment Note; (iv) waive a
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Default or Event of Default in the payment of principal or premium, if any, or
interest on or redemption payment with respect to the Investment Notes (except
a rescission of acceleration of the Investment Notes by the holders of at least
a majority in aggregate principal amount of the Investment Notes and a waiver
of the payment default that resulted from such acceleration); (v) make any
Investment Note payable in money other than that stated in the Investment
Notes; (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Investment Notes to
receive payments of principal of or interest on the Investment Notes; (vii)
make any change to the subordination provisions of the Indenture that adversely
affects holders of Investment Notes; (viii) modify or eliminate holders'
redemption rights (provided that no modification or elimination is permitted as
to any securities issued with such right); or (ix) make any change in the
foregoing amendment and waiver provisions.
Without the consent of each holder of the Money Market Notes affected, an
amendment or waiver may not (with respect to any Money Market Notes held by a
nonconsenting holder of Money Market Notes): (i) reduce the principal amount of
Money Market Notes whose holders must consent to an amendment, supplement or
waiver (other than as a result of withdrawals made by the holder thereof); (ii)
reduce the principal of any Money Market Note (other than as a result of
withdrawals made by the holder thereof) or alter the redemption provisions
thereof or the price at which the Company shall offer to repurchase the Money
Market Note; (iii) reduce the rate of interest on the Money Market Notes, other
than the rate adjustments provided for pursuant to the terms of the Money
Market Notes or change the time for payment of interest, including default
interest, on any Money Market Note; (iv) waive a Default or Event of Default in
the payment of principal or premium, if any, or interest on or redemption
payment with respect to the Money Market Notes (except a rescission of
acceleration of the Money Market Notes by the holders of at least a majority in
aggregate principal amount of the Money Market Notes and a waiver of the
payment default that resulted from such acceleration); (v) make any Money
Market Note payable in money other than that stated in the Money Market Notes;
(vi) make any change in the provisions of the Indenture relating to waivers of
past Defaults or the rights of holders of Money Market Notes to receive
payments of principal of or interest on the Money Market Notes; (vii) make any
change to the subordination provisions of the Indenture that adversely affects
holders of Money Market Notes; (viii) modify or eliminate redemption right of
holders of the Money Market Notes; or (ix) make any change in the foregoing
amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Company and/or the Trustee may amend or supplement the Indenture or
the Notes to cure any ambiguity, defect or inconsistency; to provide for
assumption of the Company's obligations to holders of the Notes in the case of
a merger or consolidation; to provide for additional certificates or
certificated securities; to make any change that would provide any additional
rights or benefits to the holders of the Notes or that does not adversely
affect the legal rights under the Indenture of any such holder, including an
increase in the aggregate dollar amount of Notes which may be outstanding under
the Indenture; to modify the Company's policy to permit redemptions of the
Investment Notes upon the death or Total Permanent Disability of any holder of
the Investment Notes (but such modification shall not adversely affect any then
outstanding security); or to comply with requirements of the SEC in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act.
The Trustee. The Indenture contains certain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions with the Company.
The holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Notes, unless such holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
No Personal Liability of Directors, Officers, Employees and Stockholders.
No director, officer, employee, incorporator or stockholder of the Company, as
such, shall have any liability for any obligations of
25
<PAGE>
the Company under the Notes, the Indenture or for any claim based on, in
respect to, or by reason of, such obligations or their creation. Each holder of
the Notes waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the SEC that such a waiver is against public policy.
Service Charges. The Company reserves the right to assess service charges
for replacing lost or stolen Investment Notes (for which an affidavit from the
holder will be required), changing the registration of any security when such
change is occasioned by a change in name of the holder, or a transfer (whether
by operation of law or otherwise) of a security by the holder to another
person.
Additional Securities. The Company may offer from time to time additional
classes of securities with terms and conditions different from the Notes
offered hereby. The Company will amend this Prospectus if and when it decides
to offer to the public any additional class of security hereunder.
Variations by State. The Company reserves the right to offer different
securities and to vary the terms and conditions of the offer (including, but
not limited to, additional interest payments and service charges for all Notes)
depending upon the state where the purchaser resides.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our consolidated financial information set forth below should be read in
conjunction with the more detailed Consolidated Financial Statements, including
the Notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------ ------------ --------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Gain on sale of loans .......................... $ 41,316 $ 20,043 $ 8,721 $ 1,350 $ 110
Interest and fees .............................. 17,386 5,583 3,244 4,058 2,367
Other .......................................... 2,285 856 129 143 156
--------- --------- -------- -------- ------
Total revenue ................................... 60,987 26,482 12,094 5,551 2,633
Total expenses .................................. 43,097 17,480 8,974 4,657 2,299
--------- --------- -------- -------- ------
Operating income before income taxes and
cumulative effect of accounting change ......... 17,890 9,002 3,121 894 334
Income before cumulative effect accounting
change ......................................... 11,454 5,940 2,319 581 137
Cumulative effect of accounting change on
prior years .................................... -- -- -- -- (52)
Income taxes .................................... 6,436 3,062 802 313 197
--------- --------- -------- -------- ------
Net income ...................................... $ 11,454 $ 5,940 $ 2,319 $ 581 $ 85
========= ========= ======== ======== ======
Per Common Share Data(1):
Income before cumulative effect of
accounting change ............................ $ 3.26 $ 2.13 $ 1.01 $ .27 $ .04
Net income ..................................... 3.13 2.04 1.01 .27 .04
Cash dividends declared ........................ .06 .06 0.03 -- --
</TABLE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------ ------------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .......................... $ 4,486 $ 5,014 $ 5,345 $ 4,734 $ 83
Loan and lease receivables, net
available for sale ................................ 62,382 35,712 18,003 8,669 3,181
other ............................................. 4,097 1,144 534 328 5,538
Interest only strips and other receivables ......... 100,737 39,644 13,713 4,327 939
Total assets ....................................... 226,551 103,989 46,894 22,175 12,284
Subordinated debt .................................. 115,182 56,486 33,620 17,800 7,171
Total liabilities .................................. 183,809 73,077 42,503 20,031 10,721
Stockholders' equity ............................... 42,742 30,912 4,392 2,143 1,562
</TABLE>
- ------------
(1) Per share information for fiscal year 1994 has been restated to reflect the
3 for 2 stock split effected on November 1, 1995.
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------ ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
Originations:
Business Purpose Loans ............................ $ 52,335 $ 38,721 $ 28,872 $ 18,170 $ 11,793
Home Equity Loans ................................. 328,089 91,819 36,479 16,963 22,231
First Mortgage Loans .............................. 33,671 -- -- -- --
Equipment Leases .................................. 70,480 8,004 5,967 2,220 --
Loans and Leases sold:
Securitizations ................................... 384,700 115,000 36,506 9,777 --
Other ............................................. 51,594 3,817 19,438 31,948 30,562
Total loan and lease portfolio serviced(1) ......... 559,398 176,651 59,891 17,774 8,407
Average loan/lease size:
Business Purpose Loans ............................ 83 78 78 71 57
Home Equity Loans ................................. 62 51 47 46 51
First Mortgage Loans .............................. 154 -- -- -- --
Equipment Leases .................................. 21 11 11 12 --
Weighted average interest rate on loans and
leases originated:
Business Purpose Loans ............................ 15.96% 15.91% 15.83% 16.05% 16.03%
Home Equity Loans ................................. 11.95 11.69 9.94 12.68 8.65
First Mortgage Loans .............................. 8.22 -- -- -- --
Equipment Leases .................................. 12.19 15.48 17.22 15.85 --
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets ......................... 6.93% 7.87% 6.71% 3.37% 0.87%
Return on average equity ......................... 31.10 33.65 70.96 31.36 5.58
Total delinquencies as a percentage of total
portfolio serviced(2), at end of periodx ........ 3.01 2.15 2.30 3.84 6.85
Allowance for credit losses to total portfolio
serviced, at end of period ...................... 1.00 1.00 1.18 .87 .93
Real estate owned as a percentage of total
portfolio serviced, at end of period ............ .16 .34 1.01 4.29 2.63
Loan and lease losses as a percentage of the
average total portfolio serviced during the
period .......................................... .18 .08 .33 .66 .15
Pre-tax income as a percentage of total
revenues ........................................ 29.33 33.99 25.81 16.11 1 2.69
Ratio of earnings to fixed charges ............... 1.77 1.98 1.40 1.35 1.16
</TABLE>
- ------------
(1) Total portfolio serviced includes all loans and leases in the servicing
portfolio, including loans and leases sold through securitizations and
serviced as well as loans and leases held in portfolio pending sale or
otherwise.
(2) Total delinquencies includes loans and leases delinquent over 30 days,
exclusive of real estate owned.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information is intended to assist you in understanding and
evaluating the financial condition and results of operations of the Company,
for the years ended June 30, 1998, 1997 and 1996. The information in this
section should be read in conjunction with the Company's Consolidated Financial
Statements and the accompanying Notes thereto, beginning on page F-1, "Selected
Consolidated Financial Data" beginning on page 27 of this Prospectus and other
detailed information regarding the Company appearing in this Prospectus. All
operations of the Company are conducted through ABC and its subsidiaries.
General
ABFS is a financial service organization operating primarily in the
eastern region of the United States. The Company, through its principal direct
and indirect subsidiaries, originates sells and services Business Purpose
Loans, Home Equity Loans, First Mortgage Loans and Equipment Leases. The
Company also underwrites, processes and purchases Home Equity Loans through the
Bank Alliance Program. Loans originated by the Company primarily consist of
fixed rate loans secured by first or second mortgages on single family
residences. The Company's customers include credit impaired borrowers and other
borrowers who would qualify for loans from traditional sources but who the
Company believes are attracted to the Company's loans and lease products due to
the Company's personalized service and timely response to loan or lease
applications. The Company originates loans and leases through its retail branch
network comprised of 31 offices. A significant portion of the Company's loan
and lease production is securitized with the Company retaining the right to
service the loans and leases.
The ongoing securitization of loans and leases is a central part of the
Company's current business strategy. Prior to 1995, the Company sold
substantially all of the loans it originated in the secondary market with
servicing released. Since such time, the Company has sold loans through
securitizations with servicing retained in order to fund growing loan and lease
originations and to provide additional sources of revenue through retained
mortgage servicing rights. In fiscal 1998, the Company began securitizing its
lease portfolio. The Company has completed nine securitizations aggregating
$129.4 million in Business Purpose Loans, $356.8 million in Home Equity Loans
and $59.7 million in Equipment Leases. Such securitizations generated gain on
the sale of loans and leases of $41.3 million, $20.0 million and $8.6 million,
respectively, for fiscal years ended June 30, 1998, 1997 and 1996. In recent
periods, gain on sale of loans and leases generated by the Company's
securitizations have represented a substantial majority of the Company's
revenues and net income. Gain on sale of loans and leases resulting from
securitizations as a percentage of total revenues was 67.7 %, 75.5% and 71.1%
for the years ended June 30, 1998, 1997 and 1996, respectively. The Company
relies primarily on securitizations to generate cash proceeds for repayment of
its warehouse credit facilities and other borrowings and to enable the Company
to originate additional loans and leases. Several factors affect the Company's
ability to complete securitizations, including conditions in the securities
markets generally, conditions in the asset-backed securities markets
specifically and credit quality of the portfolio of loans and leases serviced
by the Company. Any substantial reduction in the size or availability of the
securitization market for the Company's loans and leases could have a material
adverse effect on the Company's results of operations and financial condition.
The Company's quarterly revenues and net income have fluctuated in the
past and may fluctuate in the future principally as a result of the timing and
size of its securitizations. The strategy of selling loans and leases through
securitizations requires the Company to build an inventory of loans and leases
over time, during which time the Company incurs costs and expenses. Since the
Company does not recognize gains on sale until it consummates a securitization,
which may not occur until a subsequent quarter, the Company's operating results
for a given quarter can fluctuate significantly as a result of the timing and
level of securitizations. If securitizations do not close when expected, the
Company could experience a loss for the quarter which could have a materially
adverse effect on the Company's results of operations. In addition, due to the
timing difference between the period when costs are incurred in connection with
the origination of loans and leases and their subsequent sale through the
securitization process, the Company may operate a negative cash flow basis,
which could adversely impact the Company's results of operations and financial
condition. See "Risk Factors--Dependence on Securitization and Fluctuations in
Operating Results" and "--Results of Operations."
29
<PAGE>
The Company also relies upon funds generated by the sale of subordinated
debt and other borrowings to fund its operations. At June 30, 1998, the Company
had $115.2 million of subordinated debt outstanding and credit facilities and
lines of credit totaling $210.0 million, of which $26.5 million was drawn upon
on such date. The Company expects to continue to rely on such borrowings to
fund loans and leases prior to securitization. See "Risk Factors--Dependence on
Debt Financing" and "--Liquidity and Capital Resources."
Acquisition of NJMIC
Effective October 1, 1997, the Company acquired all of the issued and
outstanding stock of NJMIC, a mortgage and leasing company based in Roseland,
New Jersey. The purchase price for the NJMIC stock consisted of an initial
payment of $11.0 million in cash, $5.0 million in notes payable and issuance of
20,240 shares of the Company's common stock, par value $0.001 per share (the
"Common Stock"), and includes contingent payments of up to $4.0 million in the
future if NJMIC achieves certain performance targets. On October 1, 1997, NJMIC
had total assets of $19.6 million, liabilities of $18.7 million, including
subordinated debt of $9.9 million, and stockholders' equity of $900,000. The
acquisition of NJMIC was accounted for using the purchase method of accounting
and resulted in the recognition of $16.9 million in goodwill which is being
amortized using the straight-line method over 15 years and is included in other
assets. Any contingent payments will result in an increase in the amount of
recorded goodwill.
NJMIC is a diversified residential lender, which directly and through its
subsidiary offers a range of loan and lease products, including Home Equity
Loans, First Mortgage Loans and Equipment Leases. First Mortgage Loans are
underwritten pursuant to Federal Home Loan Mortgage Corporation ("FHLMC") or
Federal National Mortgage Association ("FNMA") standards and also include
Federal Housing Authority ("FHA") and Veterans' Administration ("VA") loans.
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 that the majority of Home
Equity Loans originated by NJMIC will be securitized and sold pursuant to the
Company's current securitization program. NJMIC originates loans secured by
real estate in 29 states. Such loans are originated through NJMIC's eight-state
network of six branch sales offices and three satellite offices. Home Equity
Loan customers primarily include credit-impaired borrowers, while borrowers on
First Mortgage Loans are generally borrowers with favorable credit histories.
See Note 1 of the Notes of the Consolidated Financial Statements for additional
information regarding the acquisition of NJMIC.
Through its subsidiary, Federal, NJMIC originates Equipment Leases
throughout the United States. Such leases are generally sold through
securitizations with servicing retained. The Company intends to continue to
securitize these leases in the future subject to economic and market
conditions.
Certain Accounting Considerations
As a fundamental part of its business and financing strategy, the Company
securitizes the majority of its loans and leases in trusts. A trust is a
multi-class security which derives its cash flows from a pool of mortgages. The
Company sells the regular interests in the trust and retains the residual
interests in the trust.
Gains on servicing released loan and lease sales equal the difference
between the net proceeds to the Company from such sales and the loans' net
carrying value of the loans and leases. The net carrying value of loans and
leases is equal to their principal balance plus unamortized origination
costs/fees. Gains from these sales, which are pre-approved by the buyers, are
recorded as fee income.
Gains on servicing retained sales of loans and leases through
securitization represent the difference between the net proceeds to the Company
and the allocated cost of loans and leases securitized. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 125, the allocated
cost of the loans and leases securitized is determined by allocating their net
carrying value between the loans and leases securitized, the residual interests
and the mortgage servicing rights retained by the Company based upon their
relative fair values. At origination, the Company classifies the residual
interests as trading securities, which are carried at fair value. The
differences between the fair value of residual interests and their allocated
costs is recorded as gain on securitization and is included in gain on sale of
loans and leases revenue.
30
<PAGE>
In a securitization, the Company exchanges loans or leases for regular
interests and a residual interest in a trust. The regular interests are
immediately sold to the public for cash. As the holder of the residual
interest, the Company is entitled to receive certain excess cash flows. These
cash flows are the difference between the payments made by the borrowers and
the sum of the scheduled and prepaid principal and interest paid to the holders
of the regular interests, servicing fees, trustee fees and, if applicable,
insurance fees. In order to meet the overcollateralization levels which are
established in the securitization documentation, the trust initially retains
such cash flow. The Company begins receiving these excess cash flows after the
overcollateralization requirements, which are specific to each securitization.
The overcollateralization causes the aggregate principal amount of the loans or
leases in the related pool to exceed the aggregate principal balance of the
outstanding regular interests. The excess serves as credit enhancement for the
regular interests of the trust.
The calculation of the fair value of the residual interest (interest only
strip receivable) is based upon the present value of the future expected excess
cash flows and utilizes certain estimates made by management at the time loans
and leases are sold. These estimates include the discount rate used to
calculate present value and the rate of prepayment. The rate of prepayment of
loans may be affected by a variety of economic and other factors, including
prevailing interest rates and the availability of alternative financing to
borrowers. The effect of those factors on loan prepayment rates may vary
depending on the type of loan or lease. Estimates of prepayment rates are made
based on management's expectation of future prepayment rates, which are based,
in part, on the historical rate of repayment of the Company's loans and other
considerations. Accordingly, the Company's estimates are subjective and there
can be no assurance as to the accuracy of management's estimates. Although the
Company believes it has made reasonable estimates of prepayment rates and
default assumptions, the actual prepayment and default experience may
materially vary from its estimates. The gain recognized by the Company upon the
sale of loans and leases will have been overstated if prepayments or losses are
greater than estimated. To the extent that prepayments, delinquencies and/or
liquidations differ from the Company's estimates, adjustments of the Company's
gain on sale of loans and leases during the period of adjustment may be
required. Higher levels of future prepayments, delinquencies and/or
liquidations could result in decreased interest only strips which would
adversely affect the Company's income in the period of adjustment. The Company
establishes a reserve for loan and lease losses equal to one percent of the
amount securitized and evaluates such reserve periodically for adequacy.
Losses, of which there have been none to date, would be charged to operations
as incurred.
The timing of sales of the Company's loans and leases may impact the
Company's earnings from quarter to quarter. Accordingly, both the timing of
sales of the Company's loans and leases and the amount of loans and leases sold
will impact the Company's earnings from quarter to quarter. Subsequent to the
initial recognition of the interest-only strip receivables, on going
assessments are made to determine the fair value of the expected future excess
cash flows based upon current market conditions. At June 30, 1998, the
Company's investments in interest only strips were $75.1 million and its
investment in the overcollateralization was $25.3 million. See "Risk
Factors--Dependence Upon Securitizations and Fluctuations in Operating
Results."
When loans or leases are sold through a securitization, the Company
retains the servicing on the loans or leases sold which is recognized as a
separate asset for accounting purposes. The Company determines the fair value
of servicing rights by computing the present value of projected net cash flows
expected to be received over the life of the loans or leases securitized. Such
projections incorporate assumptions, including servicing costs, prepayment
rates and discount rates, consistent with those a related third party would
utilize to value such servicing rights. These assumptions are similar to those
used by the Company to value the interest only strips. The Company periodically
evaluates capitalized servicing rights for impairment, which is measured as the
excess of unamortized cost over fair value. The Company has generally found
that non-conforming borrowers are payment sensitive rather than interest rate
sensitive. Therefore, the Company does not consider interest rates as a
predominant risk characteristic for purposes of evaluating impairment. As of
June 30, 1998, servicing rights totaled $18.5 million.
Financial Condition
June 30, 1998 compared to June 30, 1997. Total assets increased $122.6
million, or 117.9%, to $226.6 million at June 30, 1998 from $104.0 million at
June 30, 1997 due primarily to increases in loans and leases
31
<PAGE>
available for sale, other receivables and other assets. Loans and leases
available for sale increased $26.7 million, or 74.7%, to $62.4 million at June
30, 1998, from $35.7 at June 30, 1998. The increase was the result of increases
in originations, net of sales, of $44.2 million during year ended June 30, 1998
as compared to $19.7 million for the year ended June 30, 1997. Other
receivables consist primarily of the interest only strips and
overcollateralizations created in connection with the Company's
securitizations. The interest only strips increased $45.3 million, or 152.0%,
to $75.1 million at June 30, 1998, from $29.8 million at June 30, 1997.
Overcollateralizations increased $16.2 million, or 178.0% to $25.3 million at
June 30, 1998 from $9.1 million at June 30, 1997. Other assets increased $26.1
million, or 141.8%, to $44.5 million at June 30, 1998 from $18.4 million at
June 30, 1997 due primarily to an increase in mortgage servicing rights
obtained in connection with the Company's loan and lease securitizations and
the recognition of $16.2 million of goodwill, net of amortization, resulting
from the acquisition of NJMIC.
Total liabilities increased $110.7 million, or 151.4%, to $183.8 million
at June 30, 1998 from $73.1 million at June 30, 1997 due primarily to a net
increase in outstanding debt and to a lesser extent increases in other
liabilities. The net increase in debt of $88.1 million was due to net sales of
subordinated debt of $49.2 million during the year ended June 30, 1998, an
increase in institutional debt of $26.5 million due to growth in the Company's
lending and leasing activities, and a net increase of $12.4 million of debt
assumed and incurred in the acquisition of NJMIC. At June 30, 1998, the Company
had $115.2 million of subordinated debt outstanding. The Company's ratio of
total debt to equity at June 30, 1998 was 3.4:1 compared to 1.8:1 a June 30,
1997. This increase was due to the use of additional borrowings to fund lending
and leasing activities and the additional debt assumed as described above.
Accounts payable and accrued expenses increased $9.5 million, or 155.7%,
to $15.6 million at June 30, 1998 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 $6.3 million, or 137.0%, to
$10.9 million at June 30, 1998 from $4.6 million at June 30, 1997. Tax accruals
on the Company's income for the year ended June 30, 1998 resulted in $5.9
million of the increase, the remaining $400,000 was acquired through the
acquisition of NJMIC.
Stockholders' equity increased $11.8 million to $42.7 million at June 30,
1998 from $30.9 million at June 30, 1997 due to net income for the year ended
June 30, 1998 which was slightly offset by dividends paid.
June 30, 1997 compared to June 30, 1996. Total assets increased $57.1
million, or 121.7%, to $104.0 million at June 30, 1997 from $46.9 million at
June 30, 1996 due primarily to increases in loans and lease receivables
available for sale, other receivables and other assets. The increase in loan
and lease receivables available for sale of $17.7 million, or 98.3%, to $35.7
million at June 30, 1997 from $18.0 million at June 30, 1996 was due to the
Company's strategy of building an inventory of loans for ultimate sale in
securitizations. Other receivables, consists primarily of the interest only
strips and overcollateralizations related to the Company's securitizations. The
excess spread increased $25.5 million, or 190.3%, to $38.9 million at June 30,
1997, from $13.4 million at June 30, 1996. Other assets increased $11.9
million, or 183.1%, to $18.4 million at June 30, 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 $30.6 million, or 72.0%, to $73.1 million at
June 30, 1997 from $42.5 million at June 30, 1996 primarily due to increases in
all categories of liabilities. The net increase in debt of $20.5 million was
due to net sales of subordinated debt of $22.8 million during the year ended
June 30, 1997 and a decrease in institutional debt of $2.3 million as the
Company repaid its institutional debt with proceeds from its securitizations.
At June 30, 1997, the Company had $56.5 million of subordinated debt
outstanding. The Company's ratio of total debt to equity at June 30, 1997 was
1.8:1 compared to 8.2:1 at June 30, 1996. This decrease was due to additional
equity raised during a public offering in February 1997. Accounts payable and
accrued expenses increased $3.0 million, or 96.8%, to $6.1 million at June 30,
1997 from $3.1 million at June 30, 1996 due to growth in the Company's
activities resulting in larger accruals for interest expense and other
operating expenses. Deferred income taxes increased $3.1 million, or 206.7%, to
$4.6 million at June 30, 1997 from $1.5 million at June 30, 1996 due to tax
accruals on the Company's income for the year ended June 30, 1997.
32
<PAGE>
Stockholders' equity increased $26.5 million to $30.9 million at June 30,
1997 from $4.4 million at June 30, 1996 due to a public offering of the
Company's Common Stock and net income slightly offset by dividends paid on the
Company's Common Stock. On February 14, 1997 the Company raised $20.7 million
of equity through the sale of 1,150,000 shares of its Common Stock in an
underwritten public offering.
Results of Operations
During fiscal 1998 and 1997, the Company experienced record levels of
total revenues and net income as a result of increases in originations and
securitizations. Total revenue increased $34.5 million and net income increased
$5.5 million for the fiscal year ended June 30, 1998, as compared to the fiscal
year ended June 30, 1997. Total revenue increased $14.4 million, or 119.0%,
between fiscal 1997 and 1996 while net income increased $3.6 million, or
156.1%, during the same fiscal period. The Company's ability to sustain the
level of growth in total revenue and net income experienced during these
periods is dependent upon a variety of factors outside the control of the
Company, including interest rates, conditions in the asset- backed securities
markets, economic conditions in the Company's primary market area, competition
and regulatory restrictions. As a result, the rate of growth experienced during
fiscal 1998 and 1997, may not be sustained in the future. See "Risk
Factors--Ability of the Company to Sustain Recent Levels of Growth and
Operating Results."
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997.
Total Revenue. Total revenue increased $34.5 million, or 130.2%, to $61.0
million for the year ended June 30, 1998 from $26.5 million for the year ended
June 30, 1997. The increase was attributable to increases in gain on sale of
loans and leases through securitizations, interest and fee income and servicing
income.
Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $21.3 million, or 106.5%, to $41.3 million for the year ended June
30, 1998 from $20.0 million for the year ended June 30, 1997. The increase was
the result of sales of $54.1 million of Business Purpose Loans, $270.9 million
of Home Equity Loans and $59.7 million of Equipment Leases through
securitization in fiscal 1998 compared to the sale of $38.1 million of Business
Purpose Loans and $76.9 million of Home Equity Loans in fiscal 1997. The
Company did not participate in a sale of leases through securitization during
the year ended June 30, 1997. The Company recognized net gains of $41.3 million
(representing the fair value of the interest only and residual strips of $46.9
million less $5.6 million of costs associated with these transactions) on the
Company's participation in $384.7 million of loans and leases sold through
securitizations during the year ended June 30, 1998 as compared to net gains of
$20.0 million recognized in connection with the sale of loans through
securitizations during the year ended June 30, 1997.
Interest and Fee Income. Interest and fee income increased $11.8 million,
or 210.7%, to $17.4 million for the year ended June 30, 1998 from $5.6 million
for the year ended June 30, 1997. The increase was primarily due to increases
in interest income as a result of the increased amount of loans and leases
retained in the Company's portfolio prior to securitization and an increase in
fee income as a result of an increase in loans sold with servicing released and
other ancillary fees earned in connection with loan and lease originations.
Interest income consists primarily of interest income the Company earns on
the loans and leases held in its portfolio. Interest income increased $5.8
million, or 123.4%, to $10.5 million for the year ended June 30, 1998 as
compared to $4.7 million for the year ended June 30, 1997. The increase was
attributable to increased gross originations of Business Purpose Loans, Home
Equity Loans and Equipment Leases as shown below.
Loan and Lease Originations
Year Ended June 30,
-------------------------
1998 1997
----------- -----------
(In Thousands)
Business Purpose Loans ......... $ 52,335 $ 38,721
Home Equity Loans .............. 328,089 91,819
First Mortgage Loans ........... 33,671 --
Equipment Leases ............... 70,480 8,004
33
<PAGE>
Fee income includes premiums earned when loans are closed, funded and
immediately sold, with servicing released, to unrelated third party purchasers
as well as other ancillary fees earned (application fees, commitment fees,
document preparation fees and late charges earned on loans and leases held in
portfolio) in connection with loan and lease originations. Fee income increased
$6.0 million, or 762.5%, to $6.9 million for the year ended June 30, 1998 from
$843,000 for the year ended June 30, 1997. The increase in fee income was due
to an increase in ancillary fees earned in connection with increased
originations and an increase in fees earned upon the sale of loans to third
parties. During the year ended June 30, 1998, the Company sold approximately
$51.6 million of loans to third parties as compared to $3.8 million during the
year ended June 30, 1997.
Servicing Income. Servicing income increased $1.3 million, or 161.5%, to
$2.1 million for the year ended June 30, 1998 from $803,000 for the year ended
June 30, 1997 as a result of an increase in the average serviced portfolio to
$368.0 million during the year ended June 30, 1998 from $118.3 million during
the year ended June 30, 1997. As a percentage of the average servicing
portfolio, servicing income decreased to 0.58% for the year ended June 30, 1998
from 0.68% for the year ended June 30, 1997.
Total Expenses. Total expenses increased $25.6 million, or 146.3%, to
$43.1 million for the year ended June 30, 1998 from $17.5 million for the year
ended June 30, 1997. This increase was related to the increase in loan and
lease originations, costs associated with a larger serviced portfolio of loans
and leases, geographic expansion of the Company's market area through the
opening of several new offices and the acquisition and operation of NJMIC and
subsidiaries.
Interest Expense. Interest expense increased $8.0 million, or 153.8%, to
$13.2 million for the year ended June 30, 1998 from $5.2 million for the year
ended June 30, 1997. The increase was attributable to increases in the amount
of the Company's subordinated debt outstanding, greater utilization of the
Company's warehouse lines of credit to fund loans and leases and debt assumed
and incurred in connection with the acquisition of NJMIC. Average subordinated
debt outstanding was $85.8 million during the year ended June 30, 1998 compared
to $44.4 million during the year ended June 30, 1997. Average interest rates
paid on the subordinated debt increased to 9.52% for the year ended June 30,
1998 from 9.29% for the year ended June 30, 1997 due to increases in the rates
offered by the Company on its subordinated debt offered in order to attract
additional funds and higher rates paid on subordinated debt assumed in the
acquisition of NJMIC. Interest expense on lines of credit was $4.2 million for
the year ended June 30, 1998 compared to $461,000 for the year ended June 30,
1997. The Company incurred and assumed approximately $14.5 million of debt in
the acquisition of NJMIC resulting in approximately $1.1 million of additional
interest expense for the year ended June 30, 1998.
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. The
allowance is increased through the provision for credit losses. The Company had
an allowance for credit losses of $5.6 million at June 30, 1998 as compared to
$1.8 million at June 30, 1997. The provision for credit losses increased by
$1.4 million, or 116.7%, to $2.6 million for the year ended June 30, 1998 from
$1.2 million for the year ended June 30, 1997. The ratio of the allowance for
credit losses to total net loan and lease receivables serviced was 1.0% at June
30, 1998 and June 30, 1997. Total delinquencies were $16.8 million at June 30,
1998 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 3.01% at June 30, 1998 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 portfolio serviced, which was $559.4
million at June 30, 1998, and $176.7 million at June 30, 1997. See "--Loan and
Lease Quality."
Employee Related Costs. Payroll and related costs increased $3.4 million,
or 212.5% to $5.0 million for the year ended June 30, 1998 from $1.6 million
for the year ended June 30, 1997. The increase was primarily
34
<PAGE>
the result of additional staff needed in the Home Equity and Equipment Leasing
subsidiaries to support the increased marketing efforts, loan and lease
originations and servicing activities and the addition of personnel added
through the acquisition of NJMIC. Management anticipates that these expenses
will continue to increase in the future as the Company's expansion continues
and loan and lease originations continue to increase.
Sales and Marketing Expenses. Sales and marketing expenses increased $7.2
million, or 102.9%, to $14.2 million for the year ended June 30, 1998 from $7.0
million for the year-end June 30, 1997. The increase was attributable to
greater usage of newspaper, direct mail and television advertising relating to
the Company's originations of Home Equity Loans, Business Purpose Loans and
Equipment Leases. Subject to market conditions, the Company plans to continue
to expand its market area. As a result, it is anticipated that sales and
marketing expense will continue to increase in the future.
General and Administrative Expenses. General and administrative expenses
increased $6.5 million, or 180.6%, to $10.1 million for the year ended June 30,
1998 from $3.6 million for the year ended June 30, 1997. The increase was
attributable to increases in rent, telephone, office expenses, professional
fees and other expenses incurred as a result of previously discussed increases
in loan and lease originations, servicing and branch operations experienced
during the year ended June 30, 1998. In addition, the Company began amortizing
the goodwill recorded from the acquisition of NJMIC on the straight-line method
over fifteen years resulting in a charge of $780,000 for the year ended June
30, 1998.
Income Taxes. Income taxes increased $3.3 million, or 106.5%, to $6.4
million for the year ended June 30, 1998 from $3.1 million for the year ended
June 30, 1997 due to an increase in income before income taxes and an increase
in the effective tax rate from 34% for the year ended June 30, 1997 to 36% for
the year ended June 30, 1998.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Total Revenue. Total revenue increased $14.4 million, or 119.0%, to $26.5
million for the year ended June 30, 1997 from $12.1 million for the year ended
June 30, 1996. The increase in total revenue was primarily the result of
increased gains on sales of loans through securitizations.
Gain on Sale of Loans. Gain on sale of loans increased $11.3 million, or
129.9%, to $20.0 million for the year ended June 30, 1997 from $8.7 million for
the year ended June 30, 1996. This increase was primarily the result of sales
of $38.1 million of Business Purpose Loans and $76.9 million of Home Equity
Loans through securitization in September 1996 and March 1997 compared to the
sale of $27.5 million of Business Purpose Loans and $9.0 million of Home Equity
Loan through securitizations in October 1995 and May 1996. The Company
recognized net gains of $20.0 million (representing the fair value of the
interest only and residual strips of $21.5 million less $2.7 million of costs
associated with these transactions) on the Company's participation in the
$115.0 million of loans sold through securitizations during the year ended June
30, 1997. The Company recognized $1.2 million of gain on sale of loans through
mortgage servicing rights received in connection with prior securitizations.
Given the unseasoned nature of the loans securitized, the Company lacked
sufficient experience to estimate and record the value of late and other
ancillary fees.
Interest and Fee Income. Interest and fee income consists of interest
income, fee income and amortization of origination costs. Interest and fee
income increased $2.5 million, or 73.5%, to $5.9 million for the year ended
June 30, 1997 from $3.4 million for the year ended June 30, 1996 due to an
increase in interest income as a result of an increased amount of loans
retained in portfolio prior to securitization.
Interest income consists primarily of interest income the Company earns on
the loans and leases held in its portfolio. Interest income increased $2.5
million, or 113.6%, to $4.7 million for the year ended June 30, 1997 as
compared to $2.2 million for the year ended June 30, 1996. The increase was
attributable to increased originations of Business Purpose Loans, Home Equity
Loans and Equipment Leases described below, as well as management's decision to
retain such loans and leases in portfolio in contemplation of future
securitizations.
During the year ended June 30, 1997, the Company originated approximately
$91.8 million of Home Equity Loans, $38.7 million of Business Purpose Loans and
$8.0 million of Equipment Leases. During the
35
<PAGE>
year ended June 30, 1996, the Company originated $36.5 million of Home Equity
Loans, $28.9 million of Business Purpose Loans and $6.0 million of Equipment
Leases. Approximately $15.3 million of Home Equity Loans originated during
fiscal 1996 were sold to third parties (with servicing released). Beginning in
October 1995, as part of the Company's securitization strategy, the Company
placed Home Equity Loans into its held for sale portfolio until ultimate sale
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 premium and points earned when loans are closed or
funded and immediately sold to unrelated third party purchasers as well as
other ancillary fees collected in connection with loan and lease originations.
Fee income increased $100,000, or 6.7%, from $1.5 million for the year ended
June 30, 1996 to $1.6 million for the year ended June 30, 1997. The increase in
fee income was due to an increase in ancillary fees collected in connection
with increased originations partially offset by a reduction in fees earned upon
the sale of loans to third parties.
The third component of interest and fee income is amortization of
origination costs. During the year ended June 30, 1997, amortization of
origination costs was $418,000 compared to $305,000 recognized during the year
ended June 30, 1996. The increase was attributable to an increase in the
amortization of lease origination costs resulting from an increase in the
Equipment Lease portfolio.
Total Expenses. Total expenses increased $8.5 million, or 94.4%, to $17.5
million for the year ended June 30, 1997 from $9.0 million for the year ended
June 30, 1996. This increase was related to the increase in loan and lease
originations for the year ended June 30, 1997 as well as the costs associated
with a larger portfolio of loans and leases serviced and the opening of several
new office locations.
Interest Expense. Interest expense increased $2.5 million, or 92.6%, to
$5.2 million for the year ended June 30, 1997 from $2.7 million for the year
ended June 30, 1996. The increase was primarily attributable to an increase in
the amount of the Company's subordinated debt outstanding. Average subordinated
debt outstanding was $44.4 million during the year ended June 30, 1997 compared
to $25.0 million during the year ended June 30, 1996. Average interest rates
paid on the subordinated debt increased to 9.29% for the year ended June 30,
1997 from 9.02% for the year ended June 30, 1996 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 year ended June 30, 1997 was $461,000 compared
to $120,000 for the year ended June 30, 1996. The increase was due to the
Company's utilization of its warehouse lines of credit to fund Home Equity
Loans and Business Purpose Loans.
Provision for Credit Losses. The Company had an allowance for credit
losses of $1.8 million at June 30, 1997. The allowance is increased through a
provision for credit losses. The provision for credit losses increased by
$473,000, or 71.4%, to $1.2 million (includes a $100,000 provision related to
the Company's loan and lease portfolio and a $1.1 million provision related to
the Company's securitizations) for the year ended June 30, 1997 from $681,000
(includes a $397,000 provision related to the Company's loan and lease
portfolio and a $284,000 provision related to the Company's securitizations)
for the year ended June 30, 1996. See Note 3 of the Notes to Consolidated
Financial Statements. The ratio of the allowance for credit losses to total net
loan and lease receivables serviced was 1.00% at June 30, 1997 and 1.18% at
June 30, 1996. From the inception of the Company's business in 1988 through
June 30, 1997, the Company has experienced a total of approximately $351,000 in
net loan and lease losses. The Company's delinquency rate as a percentage of
the total portfolio serviced was 2.15% at June 30, 1997 and 2.30% at June 30,
1996.
Employee Related Costs. Payroll and related costs increase $400,000, or
33.3%, to $1.6 million for the year ended June 30, 1997 from $1.2 million for
the year ended June 30, 1996. The increase was due to an increase in the number
of employees as a result of the Company's growth in loan and lease originations
and an increase in loans and leases 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 $4.3
million, or 159.3%, to $7.0 million for the year ended June 30, 1997 from $2.7
million for the year ended June 30, 1996. The
36
<PAGE>
Company increased its advertising costs for newspaper, direct mail and radio
campaigns related to its business purpose and home equity loan products. In
addition, the Company initiated a television-advertising program for the sale
of its home loan equity products. Subject to market conditions, the Company
plans to continue to expand its service area throughout the eastern United
States. As a result, it is anticipated that sales and marketing expenses will
continue to increase in the future.
General and Administrative Expenses. General and administrative expenses
increased $1.6 million, or 80.0%, to $3.6 million for the year ended June 30,
1997 from $2.0 million for the year ended June 30, 1996. This increase was
primarily attributable to increases in rent, telephone, office expense,
professional fees and other expenses incurred as a result of previously
discussed increases in loan and lease originations and servicing experienced
during the year ended June 30, 1997.
Income Taxes. Income taxes increased $2.3 million, or 287.5%, to $3.1
million for the year ended June 30, 1997 from $802,000 for the year ended June
30, 1996 due to an increase in income before taxes and an increase in the
effective tax rate from 25.7% for the year ended June 30, 1996 to 34.0% for the
year ended June 30, 1997.
37
<PAGE>
Loan and Lease Quality
The following table provides data concerning delinquency experience, real
estate owned ("REO") and loss experience for the Company's loan and lease
portfolio serviced. The Company did not originate First Mortgage Loans prior to
October 1997.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- -----------------------
Delinquency by Type Amount % Amount % Amount %
- ---------------------------------------------- ----------- ---------- ---------- ---------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Business Purpose Loans
Total portfolio serviced ..................... $101,250 $ 68,979 $ 37,950
======== ======== ========
Period of delinquency
31-60 days .................................. $ 1,236 1.22% $ 1,879 2.72% $ 86 .23%
61-90 days .................................. 928 .92 462 .67 118 .31
Over 90 days ................................ 3,562 3.52 718 1.04 1,033 2.72
-------- ----- -------- ------ -------- -----
Total delinquencies ......................... $ 5,726 5.66% $ 3,059 4.43% $ 1,237 3.26%
======== ===== ======== ====== ======== =====
REO .......................................... $ 611 $ 605 $ 608
======== ======== ========
Home Equity Loans
Total portfolio serviced ..................... $345,924 $ 98,179 $ 17,224
======== ======== ========
Period of delinquency
31-60 days .................................. $ 3,726 1.08% $ 262 .27% $ -- --
61-90 days .................................. 1,022 .30 341 .35 -- --
Over 90 days ................................ 3,541 1.02 83 .08 -- --
-------- ----- -------- ------ -------- -----
Total delinquencies ......................... $ 8,289 2.40% $ 686 .70% -- --
======== ===== ======== ====== ======== =====
REO .......................................... $ 311 $ -- $ --
======== ======== ========
First Mortgage Loans
Total portfolio serviced ..................... $ 3,761 $ -- $ --
======== ======== ========
Period of delinquency
31-60 days .................................. $ -- -- $ -- -- $ -- --
61-90 days .................................. -- -- -- -- -- --
Over 90 days ................................ -- -- -- -- -- --
-------- ----- -------- ------ -------- -----
Total delinquencies ......................... $ -- -- $ -- -- $ -- --
======== ===== ======== ====== ======== =====
REO .......................................... $ -- -- $ -- -- $ -- --
======== ===== ======== ====== ======== =====
Equipment Leases
Total portfolio serviced ..................... $108,463 $ 9,461 $ 4,607
======== ======== ========
Period of delinquency
31-60 days .................................. $ 1,000 .92% $ 29 .31% $ 23 .50%
61-90 days .................................. 320 .30 -- -- 14 .30
Over 90 days ................................ 1,478 1.36 4 .04 41 .89
-------- ----- -------- ------ -------- -----
Total delinquencies ......................... $ 2,798 2.58% $ 33 .35% $ 78 1.69%
======== ===== ======== ====== ======== =====
Other Loans
Total portfolio serviced ..................... $ -- $ 32 $ 110
======== ======== ========
Period of delinquency
31-60 days .................................. $ -- -- $ -- -- $ -- --
61-90 days .................................. -- -- -- -- 18 16.36%
Over 90 days ................................ -- -- 32 100.00% 50 45.45
-------- ----- -------- ------ -------- -----
Total delinquencies ......................... $ -- -- $ 32 100.00% $ 68 61.81%
======== ===== ======== ====== ======== =====
<PAGE>
Company Combined
- -----------------------------------------------
Total portfolio serviced ..................... $559,398 $176,651 $ 59,891
======== ======== ========
Period of delinquency
31-60 days .................................. $ 5,962 1.07% $ 2,170 1.23% $ 109 .18%
61-90 days .................................. 2,270 .41 803 .45 150 .25
Over 90 days ................................ 8,581 1.53 837 .47 1,124 1.87
-------- ----- -------- ------ -------- -----
Total delinquencies ......................... $ 16,813 3.01% $ 3,810 2.15% $ 1,383 2.30%
======== ===== ======== ====== ======== =====
REO .......................................... $ 922 $ 605 $ 608
======== ======== ========
Losses experienced during the period ......... $ 667 .12% $ 98 .06% $ 129 .22%
======== ===== ======== ====== ======== =====
Allowance for credit losses at end of
period ...................................... $ 5,594 1.00% $ 1,764 1.00% $ 707 1.18%
======== ===== ======== ====== ======== =====
</TABLE>
38
<PAGE>
The following table sets forth the Company's loss experience for the
periods indicated.
Year Ended June 30,
---------------------------
1998 1997 1996
-------- ------ -------
(In Thousands)
Business Purpose Loans ......... $ 138 $ 34 $ 92
Home Equity Loans .............. -- -- --
Other Loans .................... -- -- 37
Equipment Leases ............... 529 64 --
----- ---- -----
Total losses ................ $ 667 $ 98 $ 129
===== ==== =====
Since the Company sells all of the First Mortgage Loans it originates in
the secondary market with servicing released, the Company has not experienced
any losses on such loans to date. As a result such loans do not appear in the
table above.
The increase in the dollar amount of the Company's loans and leases
delinquent over 30 days to $16.8 million at June 30, 1998 as compared to $3.8
million at June 30, 1997 reflects the continued growth of the Company's loan
and lease portfolio serviced. The Company's total delinquencies as a percentage
of the total loan and lease portfolio serviced increased from 2.15% at June 30,
1997 to 3.01% at June 30, 1998. The increase in the dollar amount of the
Company's loans and leases delinquent at June 30, 1997 as compared to June 30,
1996 reflects the continued growth of the Company's loan and lease portfolio
serviced. The Company's loans and leases delinquent over 30 days increased to
$3.8 million at June 30, 1997 from $1.4 million at June 30, 1996. Total
delinquencies, as a percentage of the total loan and lease portfolio serviced
were 2.15% at June 30, 1997 as compared to 2.30% at June 30, 1996. See "Risk
Factors--Credit-Impaired Borrowers May Result in Increased Delinquency and Loss
Rates/Increase in Non-Performing Loans and Leases and Allowance for Losses."
Interest Rate Risk Management
The Company's profitability is largely dependent upon the spread between
the effective rate of interest received on the loans originates or the
pass-through rate for interests issued in connection with the securitization of
loans. The Company's spread may be negatively impacted to the extent it holds
fixed-rate mortgage loans in its held for sale portfolio prior to
securitization. The adverse effect on the Company's spread may be the result of
increases in interest rates during the period the loans are held prior to
securitization or as a result of an increase in the rate required to be paid to
investors in connection with the securitization.
The Company implemented a hedging strategy in an attempt to mitigate the
effect of changes in interest rates on its fixed-rate mortgage loan portfolio
between the date of origination and securitization. This strategy involves
short sales of a combination of U.S. Treasury securities with a duration, which
closely matches the duration of the certificates sold in the securitization
process. The settlement date of the short sale, as well as the buy back of the
Treasury securities coincides with the anticipated settlement date of the
underlying securitization. At June 30, 1998, the Company had no outstanding
short sales. During the year ended June 30, 1998, the Company incurred a loss
of approximately $2.0 million on short sales of securities. The Company also
prefunds loan originations in connection with its loan securitizations, which
enables the Company to determine in the current period the rate to be received
by the investors on loans to be originated and securitized in a future period.
The nature and quantity of hedging transactions are determined by the
Company's management based on various factors, including market conditions and
the expected volume of mortgage loan originations and purchases.
The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against changes in market value of its
fixed-rate mortgage loans held for sale. However, an effective interest rate
risk management strategy is complex and no such strategy can completely
insulate the Company from interest rate changes. The nature and timing of
hedging transactions may impact the effectiveness of
39
<PAGE>
hedging strategies. Poorly designed strategies or improperly executed
transactions may increase rather than mitigate risk. In addition, hedging
involves transaction and other costs, and such costs could increase as the
period covered by the hedging protection increases. In the event of a decrease
in market interest rates, the Company would experience a loss on the purchase
of Treasury securities to cover the short sale which would be reflected on the
Company's financial statements during the period in which the purchase of the
Treasury securities occurred. Such loss would be offset by the income realized
from the securitization in future periods. As a result, the Company may be
prevented from effectively hedging its fixed-rate loans held for sale, without
reducing the Company's income in current periods due to the costs associated
with the Company's hedging activities.
In the future, the Company intends to continue to engage in short sales of
Treasury securities as part of its interest rate risk management strategy and
may utilize prefunding accounts as an additional hedge. The sale of Treasury
securities is not however an effective hedge against the risk that the
difference between the treasury rate and the rate needed to attract potential
investors of asset backed securities (the "Spread") may widen.
The Company also experiences interest rate risk to the extent that as of
June 30, 1998 approximately $52.3 million of its liabilities were comprised of
subordinated debt with scheduled maturities of greater than one year. To the
extent that interest rates decrease in the future, the rates paid on such
liabilities could exceed the rates received on new loan originations resulting
in a decrease in the Company's spread. See "Risk Factors--Changes in Interest
Rates May Adversely Affect Profitability."
Interest Rate Sensitivity
The Company's primary market risk exposure is interest rate risk.
Profitability may be directly affected by the level of and fluctuations in,
interest rates, which affect the Company's ability to earn a spread between
interest received on its loans and the costs of its borrowings, which are tied
to various maturities of the London Inter-Bank Offered Rate ("LIBOR"). The
profitability of the Company may be adversely affected during any period of
unexpected or rapid changes in interest rates. A substantial and sustained
increase in interest rates could adversely affect the Company's ability to
originate and purchase loans. A significant decline in interest rates could
increase the level of loan prepayments, thereby decreasing the size of the
Company's loan servicing portfolio. To the extent that servicing rights and
interest only strips have been capitalized on the books of the Company, higher
than anticipated rates of loan prepayments could require the Company to write
down the value of such servicing rights and interest only strips, adversely
impacting earnings during the period of adjustment. Fluctuating interest rates
also may affect the net interest income earned by the Company resulting from
the difference between the yield to the Company on loans held pending
securitization and the interest paid by the Company for funds borrowed under
the Company's warehouse facilities. See "Risk Factors--Changes in Interest
Rates may Adversely Affect Profitability."
The Company manages its interest rate risk on servicing and interest only
strips by requiring prepayment fees on Business Purpose and Home Equity Loans,
where permitted by law. Currently, approximately 75% of the Business Purpose
Loans and 69% of the Home Equity Loans have prepayment fees.
The Company manages its interest rate risk on loans in portfolio awaiting
securitization by using short sales of Treasury securities. See "--Interest
Rate Risk Management."
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related average
interest rates by expected maturity dates. For interest only strips and
servicing rights, the table presents principal cash flows and related
prepayment assumptions.
40
<PAGE>
<TABLE>
<CAPTION>
Amount Maturing in Years Ending June 30,
-------------------------------------------
1999 2000 2001
------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Rate Sensitive Assets
Interest Only Strips ............. $ 21,685 $ 19,785 $ 15,752
Prepayment rate ................. 3%-24% 9%-24% 13%-24%
Servicing Rights ................. $ 2,761 $ 4,228 $ 4,218
Prepayment rate ................. 3%-24% 9%-24% 13%-24%
Rate Sensitive Liabilities
Fixed interest rate borrowing..... $ 62,873 $ 16,406 $ 9,960
Average interest rate ........... 8.77% 9.62% 10.03%
Variable interest rate
borrowings ..................... 26,488 -- --
Average interest rate ........... 7.04% -- --
<CAPTION>
Amount Maturing in Years Ending June 30,
--------------------------------------------------------------------------
Fair
2002 2003 Thereafter Total Value
------------- ------------- -------------- -------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets
Interest Only Strips ............. $ 13,487 $ 11,805 $ 100,670 $ 183,184 $ 100,426
Prepayment rate ................. 13%-24% 13%-24% 13%-24% 13%-24%
Servicing Rights ................. $ 3,505 $ 2,909 $ 11,799 $ 29,420 $ 18,531
Prepayment rate ................. 13%-24% 13%-24% 13%-24% 13%-24%
Rate Sensitive Liabilities
Fixed interest rate borrowing..... $ 7,824 $ 9,208 $ 8,911 $ 115,182 $ 115,182
Average interest rate ........... 10.87% 10.58% 11.19% 10.24%
Variable interest rate
borrowings ..................... -- -- -- $ 26,488 $ 26,488
Average interest rate ........... -- -- -- 7.07%
</TABLE>
Liquidity and Capital Resources
The Company's business requires continual access to short and long-term
sources of debt financing. The Company's cash requirements arise from loan and
lease origination and purchases, advances and funding of overcollateralization
requirements in connection with securitizations, repayment of debt upon
maturity, payment of operating and interest expenses and capital expenditures.
The Company continues to rely significantly on securitizations to generate
cash 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 portfolio of loans and leases 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 leases
and in that capacity will be obligated to advance funds in certain
circumstances which may create greater demand on the Company's cash flow than
either selling or maintaining portfolios of loans and leases. See "--General"
and "--Results of Operations."
<PAGE>
Subject to economic, market and interest rate conditions, the Company
intends to continue to implement additional securitizations of its loan and
lease portfolios. Any delay or impairment of the Company's ability to
securitize its loans and leases, as a result of market conditions or otherwise,
could adversely affect the Company's results of operations. See "Risk
Factors--Dependence Upon Securitizations and Fluctuations in Operating
Results."
To a limited extent, the Company intends to continue to augment the
interest and fee income it earns on its loan and lease portfolios, by selling
loans and leases 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 also relies on borrowings such as its subordinated debt and
warehouse credit facilities to fund its operations. At June 30, 1998, the
Company had a total of $115.2 million of subordinated debt outstanding,
including $9.5 million and $127,000 issued by NJMIC and American Business
Finance Corporation ("ABFC"), respectively, and available credit facilities
totaling $210.0 million, of which $26.5 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, $9.5 million was outstanding at
June 30, 1998 and included maturity dates ranging from August 1998 to May 2003.
In addition during the year ended June 30, 1998, ABFS sold $71.6 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 June 30, 1998, ABFS has approximately
$105.5 million of subordinated debt outstanding (exclusive of subordinated debt
of its subsidiaries, NJMIC and ABFC). The proceeds of such sales of debt have
been used to fund general operating and lending activities. The Company intends
to meet its obligation to repay such debt as it matures with income generated
through its lending activities. The utilization of funds for the repayment of
such obligations should not adversely affect the Company's operations.
41
<PAGE>
The Company's subsidiaries have an aggregate $100.0 million Interim
Warehouse and Security Agreement with Prudential Securities Credit Corporation.
In July 1997, the Company and certain of its subsidiaries obtained a
$110.0 million warehouse credit facility from a syndicate of banks led by Chase
Bank of Texas N.A. Under this warehouse facility, the Company may obtain
advances, subject to certain conditions, including sublimits based upon the
type of collateral securing the advance. Interest rates on the advances are
based upon 30-day LIBOR plus a margin. The Company's obligations under the
facility are collateralized by certain pledged loans and leases and other
collateral related there to. The facility also requires the Company to meet
certain financial ratios and contains restrictive covenants, including
covenants limiting loans to and transactions with affiliates, the issuance of
additional debt, and the types of investments that can be made by the Company
and its subsidiaries. The facility has a term of two years.
As of June 30, 1998, the Company had $90.7 million of debt scheduled to
mature during the year ending June 30, 1999 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 loans and
lease sales or securitizations. The Company intends to continue to utilize debt
financing to fund its operations in the future. Any failure to renew or obtain
adequate finding under a warehouse credit facility, or other borrowings, or any
substantial reduction in the size of or pricing in the markets for the
Company's loans and leases, could have a material adverse effect on the
Company's results of operations and financial condition. To the extent the
Company is not successful in maintaining or replacing existing financing, it
would have to curtail its loan and lease production activities or sell loan and
lease production activities or sell loans and leases rather than securitize
them, thereby having a material adverse effect on the Company's results of
operations and financial condition. See "Risk Factors--
Dependence Upon Debt Financing."
The Company leases its corporate headquarters facilities under a five-year
operating lease expiring in January 2003 at a minimum annual rental of
approximately $1.9 million. 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 loan production
headquarters for NJMIC and its subsidiaries at an annual rental cost of
approximately $575,000. The current lease term expires on July 31, 2003 and
contains a renewal option for an additional term of five years at an increased
annual rental. 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. See Note 11 of the Notes
to Consolidated Financial Statements for information regarding the Company's
lease payments.
Many existing computer programs, including those utilized by the Company,
use only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, many computer applications could fail or create
erroneous results by or at the Year 2000.
In 1997, the Company established its Year 2000 Task Force to assess the
Company's Year 2000 issues and to implement the Company's Year 2000 compliance
program. Such task force includes members of the Company's Information
Technology Department, Finance Department and certain officers of the Company's
operating subsidiaries. The Company has completed an initial assessment of its
core information technology systems and is in the process of testing the
remainder of its information technology systems as well as non-information
technology systems, which include the Company's telecommunication systems,
business machines and building and premises systems.
The Company's core applications systems are currently client/server based
and hosted by Intel servers or a Unisys mainframe. The Company is currently in
the process of replacing all core systems for business functionality and growth
reasons which are unrelated to the Year 2000 issue. The Company commenced this
replacement process in 1996 and currently anticipates that it will be completed
by the end of 1999. It is the Company's intention to have all systems that will
be developed or acquired as part of this replacement process to be Year 2000
compliant.
42
<PAGE>
Based upon the current status of the its Year 2000 compliance program, the
Company has targeted the fourth quarter of 1999 for completion of the Year 2000
compliance program. The Company is in the process of developing a contingency
plan in the event its systems are not Year 2000 compliant on a timely basis. As
part of its Year 2000 compliance program, the Company intends to hire a
consultant to validate the Company's assessment of its Year 2000 issue and to
assist the Company's internal Information Technology Department in managing the
Year 2000 compliance program. The Company currently estimates that the costs
directly associated with its Year 2000 compliance program will be approximately
$300,000. The funds necessary to complete the Year 2000 compliance program will
come from the Company's Information Technology operating budget.
As part of its Year 2000 compliance program, the Company is contacting and
surveying vendors with whom which the Company does a material amount of
business to determine whether these parties' systems (to the extent they relate
to the Company's business) are subject to Year 2000 issues. The failure of the
Company's vendors to convert their systems on a timely basis may have a
material adverse effect on the Company's operations. The Company is in the
process of developing a contingency plan in the event these vendors are not
Year 2000 compliant on a timely basis. See "Risk Factors--Year 2000
Compliance."
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on the Company's operations. These pronouncements should be read
in conjunction with the significant accounting policies, which the Company has
adopted that are set forth in the Note 1 of the Notes to the Company's
Consolidated Financial Statements.
In February, 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
per Share" which is effective for annual and interim periods ending after
December 15, 1997, and requires retroactive application to all periods
presented. It supersedes the presentation of basic earnings per share, which
does not consider the effect of common stock equivalents. The computation of
diluted earnings per share gives effect to all dilutive potential common shares
that were outstanding during the period. The adoption of this standard did not
have a material effect on the Company's net income per share in years ended
June 30, 1998, 1997 and 1996.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" which is effective for annual and interim periods beginning after
December 15, 1997. This statement requires that all items that are required to
be recognized under accounting standards as comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. Currently, the Company does not have any items which
would be required to be reported under SFAS No. 130. See Note 1 to the
Company's Consolidated Financial Statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
and Enterprise Related Information" which is effective for financial statements
issued for years beginning after December 15, 1997. This statement established
standards for the method that public entities report information about
operating segment in annual financial statements and requires that those
enterprises report selected information about operating results in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographical areas and major
customers. The adoption of this standard is not expected to have a material
effect on the Company's financial reporting.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign currency denominated
forecasted transaction.
43
<PAGE>
SFAS No. 133 amends SFAS No. 52 "Foreign Currency Translation" to permit
special accounting for a hedge of a foreign currency forecasted transaction
with a derivative. It supersedes SFAS No. 80 "Accounting for Futures Contracts,
Risk and Financial Instruments with Concentrations of Credit Risk" and No. 119
"Disclosure and Derivative Financial Instruments and Fair Value of Financial
Instruments." Such statement also amends SFAS No. 107 "Disclosures about Fair
Value of Financial Instruments" to include in SFAS No. 107 the disclosure
provisions about concentrations of credit risk from SFAS No. 105. SFAS No. 133
also nullifies or modifies the consensus reached on a number of issues
addressed by the Emerging Issues Task Force.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this statement should be
as of the beginning of an entity's fiscal quarter following June 15, 1999. On
that date, hedging relationships must be designated anew and documented
pursuant to the provisions of this statement. Earlier application of all of the
provisions of this statement is encouraged, but it is permitted only as of the
beginning of any fiscal quarter that begins after issuance of this Statement.
This statement should not be applied retroactively to financial statements of
prior periods. The Company has not completed an analysis of the potential
effects of SFAS No. 133 on the Company's financial condition and results of
operations. See Note 1 to the Company's Consolidated Financial Statements.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars (except with respect to securities which are
carried at market value), without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
44
<PAGE>
BUSINESS
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 Business Purpose Loans,
Home Equity Loans and First Mortgage Loans. The Company also originates
Equipment Leases. In addition, the Company commenced implementation of the Bank
Alliance Program in fiscal 1996 pursuant to which it has entered into exclusive
business arrangements with several financial institutions pursuant to which the
Company will purchase Home Equity Loans that do not meet the underwriting
guidelines of the selling institution but that do meet the Company's
underwriting criteria.
The Company's customers currently consist primarily of two groups. The
first category of customers includes credit-impaired borrowers who are
generally unable to obtain financing from banks or savings and loan
associations that have historically provided loans only to individuals with
favorable credit characteristics. These borrowers generally have impaired or
unsubstantiated credit characteristics and/or unverifiable income and respond
favorably to the Company's marketing efforts. The second category of customers
includes borrowers who would qualify for loans from traditional lending sources
but elect to utilize the Company's products and services. The Company's
experience has indicated that these borrowers are attracted to the Company's
loan products as a result of its marketing efforts, the personalized service
provided by the Company's staff of highly trained lending officers and the
timely response to loan requests. Historically, both categories of customers
have been willing to pay the Company's origination fees and interest rates
which are generally higher than those charged by traditional lending sources.
The Company also markets First Mortgage Loans to borrowers with favorable
credit histories. The Company's lease customers are typically small businesses
or proprietorships with less than 100 employees with favorable credit
histories.
The Company was incorporated in Delaware in 1985, began operations in 1988
and initially offered Business Purpose Loans. The Company currently originates
Business Purpose Loans through a retail network of salespeople in Pennsylvania,
Delaware, New Jersey, New York, Virginia, Maryland, Connecticut and Ohio. The
Company focuses its marketing efforts on small businesses who do not meet all
of the credit criteria of commercial banks and small businesses that the
Company's research indicates are predisposed to using the Company's products
and services.
The Business Purpose Loans originated by the Company are secured by real
estate. In substantially all cases, the Company receives additional collateral
in the form of, among other things, personal guarantees, pledges of securities,
assignments of contract rights, life insurance and lease payments and liens on
business equipment and other business assets, as available. The Company's
Business Purpose Loans are generally originated with fixed rates and typically
have origination fees of 5.0% to 6.0%. The weighted average interest rate
received on the Business Purpose Loans originated by the Company was 15.96% for
the year ended June 30, 1998. Business Purpose Loans typically have significant
prepayment fees which the Company believes tend to extend the average life of
such loans and make these loans more attractive products to securitize. The
Business Purpose Loans securitized in the Company's last two securitizations
had a weighted average loan-to-value ratio (based solely upon the real estate
collateral securing the loans) of 60.5% at the time of securitization.
The Company's strategy for expanding its business purpose lending program
focuses on motivating borrowers through the investment in retail marketing and
sales efforts rather than on emphasizing discounted pricing or a reduction in
underwriting standards. The Company utilizes a proprietary training program
involving extensive and on-going training of its loan officers. The Company
originated $52.3 million of Business Purpose Loans for the year ended June 30,
1998. See "--Lending and Leasing Activities --
Business Purpose Lending."
ABFS entered the Home Equity Loan market in 1991. The Company originates
Home Equity Loans primarily to credit-impaired borrowers through retail
marketing which includes telemarketing operations, direct mail, radio and
television advertisements. The Company currently originates Home Equity Loans
in Pennsylvania, New Jersey, New York, Delaware, Maryland, Maine, Virginia,
West Virginia, Georgia, North
45
<PAGE>
Carolina, South Carolina, Florida, Connecticut, Illinois, Ohio, Indiana,
Kentucky, Missouri, Mississippi, Michigan and Tennessee. The Company originated
$328.1 million of Home Equity Loans during the year ended June 30, 1998. The
weighted average interest rate on Home Equity Loans originated by the Company
was 11.95% for the year ended June 30, 1998.
The Company initiated the Bank Alliance Program in fiscal 1996. The
Company believes that the Bank Alliance Program is a unique method of
increasing the Company's production of Home Equity Loans to credit-impaired
borrowers. Currently, the Company has entered into agreements with eight
financial institutions which provide the Company with the opportunity to
underwrite, process and purchase Home Equity Loans generated by the branch
networks of such institutions which consist of approximately 1,000 branches
located in Pennsylvania, Delaware, New Jersey and Maryland. The Company is also
negotiating with other financial institutions regarding their participation in
the program. The Company intends to expand its Bank Alliance Program with
financial institutions across the United States. See "-- Lending and Leasing
Activities -- Home Equity Lending."
ABFS began offering First Mortgage Loans in October 1997 in connection
with its acquisition of NJMIC. NJMIC has been originating mortgage loans since
1939. The Company originates First Mortgage Loans for sale in the secondary
market with servicing released. The Company's first mortgage lending market
area includes 29 states. The Company originated $33.7 million of First Mortgage
Loans during the year ended June 30, 1998. See "-- Lending and Leasing
Activities -- First Mortgage Lending."
ABFS began offering Equipment Leases in December 1994 to complement its
business purpose lending program. The Company originates leases on a nationwide
basis. The Company originated $70.5 million of Equipment Leases during the year
ended June 30, 1998. The weighted average interest rate received on the
Equipment Leases originated by the Company was 12.19% for the year ended June
30, 1998. In the past, the Company held all Equipment Leases originated in its
lease portfolio to generate interest income. In fiscal 1998, the Company began
securitizing its Equipment Lease portfolio. The Company intends to continue to
securitize its Equipment Lease portfolio subject to market and economic
conditions. See "--Lending and Leasing Activities."
From the inception of the Company's business in 1988 through June 30,
1998, the Company has experienced total net loan and lease losses of
approximately $1.0 million. The Company's losses on its total loan and lease
portfolio serviced totaled $667,000, $98,000 and $129,000, respectively, for
the years ended June 30, 1998, 1997 and 1996. The Company's loans and leases
delinquent over 30 days (excluding real estate owned) represented 3.01% of the
total loan and lease portfolio serviced at June 30, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Loan and Leases Quality."
The ongoing securitization of loans and leases is a central part of the
Company's current business strategy. Through June 30, 1998, the Company had
securitized an aggregate of $545.9 million of loans and leases, consisting of
$129.4 million of Business Purpose Loans and $356.8 million of Home Equity
Loans. In addition, during fiscal 1998, the Company securitized $59.7 million
of Equipment Leases. The Company retains the servicing rights on its
securitized loans and leases. See "-- Securitizations."
In addition to securitizations, the Company funds its operations with
subordinated debt that the Company markets directly to individuals from the
Company's principal operating office located in Pennsylvania and branch offices
located in Florida and Arizona. At June 30, 1998, the Company had $115.2
million in subordinated debt outstanding which was sold through public
offerings. Such debt had a weighted average coupon of 9.35% and a weighted
average maturity of 22.7 months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company intends to continue to utilize funds generated from the
securitization of loans and leases as well as the sale of subordinated debt to
increase its loan and lease originations and to expand into new geographic
markets, with an initial focus on the continued expansion in the southeastern
and midwestern regions of the United States.
46
<PAGE>
Subsidiaries
ABFS' only activity as of the date hereof has been: (i) acting as the
holding company for its operating subsidiaries and (ii) raising capital for use
in the Company's lending operations. ABFS is the parent holding company of ABC
and its primary subsidiaries, Upland, Processing Service Center, Inc. ("PSC"),
ABL and ABC Holdings Corporation ("Holdings") and NJMIC and its subsidiary,
Federal. The Company and its direct and indirect subsidiaries are collectively
referred in this Prospectus as the "Company."
ABC, a Pennsylvania corporation incorporated in 1988 and acquired by the
Company in 1993, originates, services and sells Business Purpose Loans. HAC, a
Pennsylvania corporation incorporated in 1991, originates and sells Home Equity
Loans. HAC acquired Upland Mortgage Corp. in 1996 and since such time has
conducted business as "Upland Mortgage." Upland also purchases Home Equity
Loans through the Bank Alliance Program. PSC processes Home Equity Loan
applications for financial institutions as part of the Bank Alliance Program.
Incorporated in 1994, ABL commenced operations in 1995 and originates and
services Equipment Leases.
NJMIC, a New Jersey corporation organized in 1938 and acquired by the
Company in October 1997, is currently engaged in the origination and sale of
Home Equity Loans, as well as First Mortgage Loans. NJMIC originates loans
secured by real estate located in 29 states. Such loans are originated through
NJMIC's eight-state network of six branch sales offices and three satellite
offices. NJMIC has been offering mortgage loans since 1939. Historically, NJMIC
sold loans it originated in the secondary market with servicing released. The
Company intends to continue to sell First Mortgage Loans originated by NJMIC in
the secondary market with servicing released. The Company intends to securitize
Home Equity Loans originated by NJMIC pursuant to the Company's current
securitization program.
NJMIC's wholly-owned subsidiary, Federal, is a Delaware corporation which
was organized in 1974. Federal generally originates leases throughout the
United States and sells such leases through securitizations and maintains the
servicing on such leases.
Holdings, a Pennsylvania corporation, was incorporated in 1992 to hold
properties acquired through foreclosure.
The Company's indirect subsidiaries, ABFS 1995-1, Inc., ABFS 1995-2, Inc.,
ABFS 1996-1, Inc., ABFS 1996-2, Inc., ABFS 1997-1, Inc., ABFS 1997-2, Inc.,
ABFS 1998-1, Inc., ABFS 1998-2, Inc., ABFS 1998 A-1, Inc., ABFS 1998 A-2, Inc.,
ABFS Finance LLC and ABFS Residual LLC, were incorporated to facilitate the
Company's securitizations. Certain of such companies are Delaware investment
holding companies. The stock of such subsidiaries is held by various
subsidiaries of ABFS. In connection with the acquisition of NJMIC and Federal,
the Company acquired FLC Financial Corp. and FLC II Financial Corp., the
Delaware investment holding companies incorporated to facilitate the
securitization of Federal's leases. The stock of such companies is held by
Federal. None of these corporations engage in any business activity other than
holding the subordinated certificate, if any, and the interest only and
residual strips created in connection with the Company's securitizations. See
"--Securitizations."
47
<PAGE>
The following chart sets forth organizational structure of ABFS.(1)
[GRAPHIC OMITTED]
- ------------
(1) In addition, to the corporations pictured above, the Company organizes a
special purpose corporation for each of its securitizations. Such
corporations are indirect subsidiaries of ABFS.
(2) Loans purchased by Upland represent loans acquired through the Bank
Alliance Program.
48
<PAGE>
Lending and Leasing Activities
General. The following table sets forth certain information concerning the
loan and lease origination, purchase and sale activities of the Company for the
years indicated. The Company did not originate First Mortgage Loans prior to
October 1997.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1998 1997 1996
-------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans/Leases Originated/Purchased
(Net of Refinances)
Business Purpose Loans ..................... $ 52,335 $ 38,721 $ 28,872
Home Equity Loans .......................... $ 328,089 $ 91,819 $ 36,479
First Mortgage Loans ....................... $ 33,671 -- --
Equipment Leases ........................... $ 70,480 $ 8,004 $ 5,967
Other Loans ................................ -- $ 39 $ 240
Number of Loans/Leases Originated/Purchased
Business Purpose Loans ..................... 632 498 371
Home Equity Loans .......................... 5,292 1,791 772
First Mortgage Loans ....................... 218 -- --
Equipment Leases ........................... 3,350 743 530
Other Loans ................................ -- 8 52
Average Loan/Lease Size
Business Purpose Loans ..................... $ 83 $ 78 $ 78
Home Equity Loans .......................... $ 62 $ 51 $ 47
First Mortgage Loans ....................... $ 154 -- --
Equipment Leases ........................... $ 21 $ 11 $ 11
Other Loans ................................ -- $ 5 $ 5
Weighted Average Interest Rate on Loans/Leases
Originated/Purchased
Business Purpose Loans ..................... 15.96% 15.91% 15.83%
Home Equity Loans .......................... 11.95% 11.69% 9.94%
First Mortgage Loans ....................... 8.22% -- --
Equipment Leases ........................... 12.19% 15.48% 17.22%
Other Loans ................................ -- 20.83% 24.50%
Weighted Average Term (in months)
Business Purpose Loans ..................... 172 184 169
Home Equity Loans .......................... 244 218 194
First Mortgage Loans ....................... 340 -- --
Equipment Leases ........................... 49 40 42
Other Loans ................................ -- 59 50
Loans/Leases Sold
Business Purpose Loans ..................... $ 54,135 $ 38,083 $ 28,252
Home Equity Loans .......................... $ 292,549 $ 80,734 $ 24,325
First Mortgage Loans ....................... $ 29,910 -- --
Equipment Leases ........................... $ 59,700 $ -- $ 2,259
Other Loans ................................ -- $ 58 $ 1,108
Number of Loans/Leases Sold
Business Purpose Loans ..................... 629 497 378
Home Equity Loans .......................... 4,561 1,631 512
First Mortgage Loans ....................... 192 -- --
Equipment Leases ........................... 3,707 -- 193
Other Loans ................................ -- 8 252
Weighted Average Rate on Loans/Leases
Originated ................................. 11.63% 13.09% 12.97%
</TABLE>
49
<PAGE>
The following table sets forth information regarding the average
loan-to-value ratios for loans originated by the Company during the periods
indicated. The Company did not originate any First Mortgage Loans prior to
October 1997.
Year Ended June 30,
------------------------------------
Loan Type 1998 1997 1996
- -------------------------------- ---------- ---------- ----------
Business Purpose Loans ......... 60.5% 60.0% 58.9%
Home Equity Loans .............. 76.6 72.0 68.8
First Mortgage Loans ........... 79.9 -- --
The following table shows the geographic distribution of the Company's
loan and lease originations and purchases during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1998 % 1997
------------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Pennsylvania ........... $ 150,048 31.06% $ 53,834
New Jersey ............. 128,025 26.38 40,725
New York ............... 54,907 11.31 8,343
Florida ................ 23,905 4.93 3,670
Georgia ................ 23,084 4.76 10,092
Virginia ............... 13,138 2.71 5,469
California ............. 12,709 2.62 --
Maryland ............... 11,748 2.42 5,010
Delaware ............... 10,823 2.23 3,117
Connecticut ............ 5,964 1.23 2,005
North Carolina ......... 5,144 1.06 4,245
Texas .................. 6,430 1.33 --
Other .................. 38,650 7.98 2,073
--------- ------ --------
Total ................ $ 484,575 100.00% $138,583
========= ====== ========
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
% 1996 % 1995 %
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Pennsylvania ........... 38.85% $ 33,324 46.57% $ 17,913 46.57%
New Jersey ............. 29.39 20,986 29.33 16,300 42.38
New York ............... 6.02 7,417 10.36 1,534 3.99
Florida ................ 2.65 674 0.94 149 0.39
Georgia ................ 7.28 181 0.25 98 0.25
Virginia ............... 3.95 104 0.15 111 0.29
California ............. -- -- -- -- --
Maryland ............... 3.61 4,408 6.16 1,191 3.10
Delaware ............... 2.25 2,724 3.81 481 1.25
Connecticut ............ 1.45 87 0.12 5 0.01
North Carolina ......... 3.06 78 0.11 6 0.02
Texas .................. -- -- -- -- --
Other .................. 1.49 1,575 2.20 673 1.75
------ -------- ------ -------- ------
Total ................ 100.00% $ 71,558 100.00% $ 38,461 100.00%
====== ======== ====== ======== ======
</TABLE>
<PAGE>
Business Purpose Lending. Through its subsidiary, ABC, the Company
originates Business Purpose Loans to corporations, partnerships, sole
proprietors and other business entities for various business purposes
including, but not limited to, working capital, business expansion, equipment
acquisition and debt-consolidation. The Company does not target any particular
industries or trade groups and, in fact, takes precautions against
concentrations of loans in any one industry group. All Business Purpose Loans
are collateralized by a first or second mortgage lien on a principal residence
or some other parcel of real property, such as office and apartment buildings
and mixed use buildings, owned by the borrower, a principal of the borrower, or
a guarantor of the borrower. In addition, such loans are generally further
collateralized by personal guarantees, pledges of securities, assignments of
contract rights, life insurance and lease payments and liens on business
equipment and other business assets, as available.
Business Purpose Loans generally range from $15,000 to $350,000 and had an
average loan size of approximately $83,000 for the loans originated during the
year ended June 30, 1998. Generally, Business Purpose Loans are made at fixed
rates and for terms ranging from five to 15 years. Such loans generally have
origination fees of 5.0% to 6.0% of the aggregate loan amount. For the year
ended June 30, 1998, the weighted average interest rate received on such loans
was 15.96% and the average loan-to-value ratio was 60.5% for the loans
originated by the Company during such period. During the year ended June 30,
1998, the Company originated $52.3 million of Business Purpose Loans.
Generally, the Company computes interest due on its outstanding loans
using the simple interest method. Where permitted by applicable law, a
prepayment fee is imposed. Although prepayment fees imposed vary based upon
applicable state law, the prepayment fees provided for in the Company's
Business Purpose Loan documents generally amount to a significant portion of
the outstanding loan balance. The Company believes that such prepayment terms
tend to extend the average life of such loans and make such loans more
attractive products to securitize. Whether a prepayment fee is imposed and the
amount of such fee, if any, is negotiated between the Company and the
individual borrower prior to consummation of the loan. See
"--Securitizations."
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Home Equity Lending. The Company originates Home Equity Loans primarily
to credit-impaired borrowers through Upland and NJMIC. Historically, Home
Equity Loans originated and funded by the Company were sold to one of several
third party lenders, at a premium and with servicing released. Currently, the
Company builds portfolios of Home Equity Loans for the purpose of securitizing
such loans.
Home Equity Loan applications are obtained from potential borrowers over
the phone and in person. The loan request is then processed and closed. The
loan processing staff generally provides its home equity borrowers with a loan
approval within 24 hours and closes its Home Equity Loans within approximately
seven to ten days of obtaining a loan approval.
Home Equity Loans generally range from $15,000 to $250,000 and had an
average loan size of approximately $62,000 for the loans originated during the
year ended June 30, 1998. Generally, Home Equity Loans are made at fixed rates
of interest and for terms ranging from 5 to 30 years. Such loans generally have
origination fees of approximately 2.0% of the aggregate loan amount. For the
year ended June 30, 1998, the weighted average interest rate received on such
loans was 11.95% and the average loan-to-value ratio was 76.6% for the loans
originated by the Company during such period. During the year ended June 30,
1998, the Company originated $328.1 million of Home Equity Loans. The Company
attempts to maintain its interest and other charges on Home Equity Loans
competitive with the lending rates of other finance companies and banks. Where
permitted by applicable law, a prepayment fee may be imposed and is generally
charged to the borrower on the prepayment of a Home Equity Loan except in the
event the borrower refinances a Home Equity Loan with the Company.
In fiscal 1996, Upland, in conjunction with PSC, implemented the Bank
Alliance Program which is designed to provide an additional source of Home
Equity Loans. The Bank Alliance Program targets traditional financial
institutions, such as banks, which because of their strict underwriting and
credit guidelines have generally provided mortgage financing only to the most
credit-worthy borrowers. This program enables such financial institutions to
originate loans to credit-impaired borrowers in order to achieve certain
community reinvestment objectives and to generate fee income and subsequently
sell such loans to Upland.
Under this program, a borrower who fails to meet a financial institution's
underwriting guidelines will be referred to PSC which will process the loan
application and underwrite the loan pursuant to Upland's underwriting
guidelines. If the borrower qualifies under Upland's underwriting standards,
the loan will be originated by the financial institution and subsequently sold
to Upland.
Since the introduction of this program, agreements have been entered into
with eight financial institutions which provide the Company with the
opportunity to underwrite, process and purchase loans generated by the branch
networks of such institutions which consist of approximately 1,000 branches
located in Pennsylvania, Delaware, New Jersey and Maryland. During fiscal 1998,
the Company purchased $22.3 million of loans, pursuant to this program. The
Company continues to market this program to other regional and national banking
institutions. The Company is also negotiating with other financial institutions
regarding their participation in the program.
First Mortgage Loans. In October 1997 in connection with its acquisition
of NJMIC, the Company commenced originating First Mortgage Loans secured by
one-to four-unit residential properties located primarily in the eastern region
of the United States. Such properties are generally owner-occupied single
family residences but may also include second homes and investment properties.
Such loans are generally made to borrowers with favorable credit histories and
are underwritten pursuant to FHLMC or FNMA standards to permit their sale in
the secondary market. NJMIC typically sells such loans to third parties with
servicing released. NJMIC also originates FHA and VA loans which are
subsequently sold to third parties with servicing released. NJMIC originates
such loans for sale in the secondary market. During the year ended June 30,
1998, NJMIC originated $33.7 million of First Mortgage Loans.
Leasing Activities. The Company through its indirect subsidiaries, ABL and
Federal, originates Equipment Leases to corporations, partnerships, other
entities and sole proprietors on various types of business equipment including,
but not limited to, computer equipment, automotive equipment, construction
equipment, commercial equipment, medical equipment and industrial equipment.
The Company generally does not target credit-impaired borrowers. All such
lessees must meet certain specified financial and credit criteria. The Company
originates leases throughout the United States.
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Generally, the Company's Equipment Leases are of two types: (i) finance
leases which have a term of 12 to 60 months and provide a purchase option
exercisable by the lessee at $1.00 or 10% of the original equipment cost at the
termination of the lease, and (ii) fair market value or true leases which have
a similar term but provide a purchase option exercisable by the lessee at the
fair market value of the equipment at the termination of the lease. The
Company's Equipment Leases generally range in size from $5,000 to $250,000,
with an average lease size of approximately $21,000 for the leases originated
during the year ended June 30, 1998. Leases in excess of $250,000 are generally
sold on a non-recourse basis to third parties. The Company's leases generally
have maximum terms of five years. The weighted average interest rates received
on such leases for the year ended June 30, 1998 was 12.19%. During the year
ended June 30, 1998, the Company originated $70.5 million of Equipment Leases.
Generally, the interest rates and other terms and conditions of the Company's
Equipment. Leases are competitive with the leasing terms of other leasing
companies in its market area.
In the past all leases originated by ABL were generally held in the
Company's lease portfolio. Historically, Federal sold all leases originated by
it through securitizations with servicing retained. At June 30, 1998, the
principal value of the Company's lease portfolio totaled $11.4 million. Such
leases are serviced by ABL or Federal. ABL has developed relationships with
third party purchasers of leases and from time to time will sell a portion of
the leases it originates to such third parties. The sale of leases to third
party purchasers may or may not require ABL to retain the servicing rights to
such leases. During fiscal 1998, the Company completed a securitization of
$59.7 million of Equipment Leases. The Company intends to continue to
securitize its lease portfolio subject to market and economic conditions. See
"Risk Factors--Risks Associated with Leasing Activities."
Marketing Strategy
The Company concentrates its marketing efforts primarily on two potential
customer groups, one of which, based on historical profiles, displays a
pre-disposition for being customers of the Company's loan and lease products
and the other being credit-impaired borrowers that satisfy the Company's
underwriting guidelines. The Company also markets First Mortgage Loans and
leases to borrowers with favorable credit histories.
The Company's marketing efforts for Business Purpose Loans focus on the
Company's niche market of selected small businesses located in the Company's
market area which generally includes the eastern region of the United States.
The Company targets businesses which it believes would qualify for loans from
traditional lending sources but would elect to utilize the Company's products
and services. The Company's experience has indicated that these borrowers are
attracted to the Company as a result of its marketing efforts, the personalized
service provided by the Company's staff of highly trained lending officers and
the timely response to loan applications. Historically, such customers have
been willing to pay the Company's origination fees and interest rates which are
generally higher than those charged by traditional lending sources.
The Company markets Business Purpose Loans through various forms of
advertising, and a direct sales force. Advertising media utilized includes
large direct mail campaigns and newspaper and radio advertising. The Company's
commissioned sales staff, which consists of full-time highly trained sales
persons, are responsible for converting advertising leads into loan
applications. The Company utilizes a proprietary training program involving
extensive and on-going training of its lending officers. The Company's sales
staff utilizes significant person-to-person contact to convert direct mail
advertising into loan applications and maintains contact with the borrower
throughout the application process.
The Company markets Home Equity Loans through telemarketing, direct mail
campaigns as well as television, radio and newspaper advertisements. The
Company's television advertising campaign initiated in September 1996 was
designed to complement the other forms of advertising utilized by the Company.
During fiscal 1998, the Company expanded its television advertising campaign
with four new television spots. The Company's integrated approach to media
advertising is intended to maximize the effect of the Company's advertising
campaigns. The Company also utilizes a network of loan brokers.
The Company's marketing efforts for Home Equity Loans are concentrated in
the eastern region of the United States. In connection with the acquisition of
NJMIC, the Company expanded its branch office network
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to include the states of Illinois, Ohio and Delaware in addition to its offices
in Georgia, Maryland, South Carolina and Florida. During fiscal 1998, the
Company opened offices in Maryland, New Jersey, Tennessee and Virginia. The
Company may open additional sales offices in other states in the future. Loan
processing, underwriting, servicing and collection procedures are performed at
the Company's main office in Pennsylvania. The Company also utilizes the Bank
Alliance Program as an additional source of loans. See "--Lending and Leasing
Activities--Home Equity Lending."
The Company markets First Mortgage Loans through its network of loan
brokers. The Company's marketing efforts for First Mortgage Loans are
concentrated in the mid-Atlantic region of the United States.
The Company, through ABL and Federal, markets its Equipment Leases
throughout the United States. During fiscal 1998, the Company opened regional
offices in California and Minnesota. The Company's marketing efforts in the
leasing area are focused on the Company's niche market of distributors of small
to medium-sized office, industrial and medical equipment. ABL and Federal
primarily obtain their equipment leasing customers through equipment
manufacturers, brokers and vendors with whom they have a relationship and
through a direct sales force.
Loan and Lease Servicing
Generally, the Company services the loans and leases it maintains in its
portfolio or which are securitized by the Company in accordance with its
established servicing procedures. Servicing includes collecting and
transmitting payments to investors, accounting for principal and interest,
collections and foreclosure activities, and disposing of real estate owned. At
June 30, 1998, the Company's total servicing portfolio included 22,253 loans
and leases with an aggregate outstanding balance of $559.4 million. The Company
generally receives servicing fees of 0.50% to 0.75% per annum based upon the
outstanding balance of securitized loans serviced and the Company's
responsibilities related to collections and accounting for such loans. The
Company's servicing and collections activities will continue to be centralized
at the Company's principal operating office located in Bala Cynwyd,
Pennsylvania.
In servicing its loans and leases, the Company typically sends an invoice
to borrowers on a monthly basis advising them of the required payment and its
due date. The Company initiates the collection process immediately after a
borrower fails to make a monthly payment. More specifically, when a loan or
lease becomes 45 to 60 days delinquent, it is transferred to the Company's
work-out department. The work-out department attempts to reinstate a delinquent
loan or lease, seek a payoff, or occasionally enter into a modification
agreement with the borrower to avoid foreclosure. All proposed work-out
arrangements are evaluated on a case-by-case basis, based upon the borrower's
past credit history, current financial status, cooperativeness, future
prospects and the reasons for the delinquency. If the loan or lease becomes
delinquent 61 days or more and a satisfactory work-out arrangement with the
borrower is not achieved or the borrower declares bankruptcy, the matter is
immediately referred to counsel for collection. Legal action may be initiated
prior to a loan or lease becoming delinquent over 60 days if management
determines that the circumstances warrant such action.
The Company believes that the low level of delinquencies experienced by
the Company during prior periods is due, in large part, to the Company's
maintenance of a high level of borrower contact and a servicing relationship
appropriate to the Company's borrowing base and a consistent application of the
Company's underwriting guidelines. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Loan and Lease Quality."
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until it is sold. When property
is acquired or expected to be acquired by foreclosure or deed in lieu of
foreclosure, it is recorded at the lower of cost or estimated fair value, less
estimated cost of disposition. After acquisition, all costs incurred in
maintaining the property are expensed.
The Company's ability to foreclose on certain properties may be affected
by state and federal environmental laws which impose liability on the property
owner for the costs related to the investigation and clean up of hazardous or
toxic substances or chemicals released on the property. Although the Company's
loans are primarily secured by residential real estate, there is a risk that
the Company could be required to
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investigate or clean up an environmentally damaged property which is discovered
after acquisition by the Company. To date, the Company has not been required to
perform any investigation or clean up activities nor has it been subject to any
environmental claims. See "Risk Factors--Environmental Concerns."
The Company in its capacity as the servicer of securitized loans and
leases is obligated to advance funds (an "Advance") in respect of each monthly
loan or lease payment that accrued during the collection period for the loans
or leases but was not received, unless the Company determines that such
Advances will not be recoverable from subsequent collections in respect to the
related loans or leases. See "--Securitizations."
Underwriting Procedures and Practices
Summarized below are certain of the policies and practices which are
followed in connection with the origination of Business Purpose Loans, Home
Equity Loans and First Mortgage Loans and the origination of Equipment Leases.
It should be noted that such policies and practices will be altered, amended
and supplemented as conditions warrant. The Company reserves the right to make
changes in its day-to-day practices and policies in its sole discretion.
The Company's loan underwriting standards are applied to evaluate
prospective borrowers' credit standing and repayment ability and the value and
adequacy of the mortgaged property as collateral. Initially, the borrower is
required to fill out a detailed application providing pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower is required to provide information concerning assets, liabilities,
income, credit, employment history and other demographic and personal
information. If the application demonstrates the borrower's ability to repay
the debt as well as sufficient income and equity, loan processing personnel
obtain and review an independent credit bureau report on the credit history of
the borrower and verification of the borrower's income by obtaining and
reviewing one or more of the borrower's pay stubs, income tax returns, checking
account statements, W-2 tax forms or verification of business or employment
forms. Once all applicable employment, credit and property information is
obtained, a determination is made as to whether sufficient unencumbered equity
in the property exists and whether the prospective borrower has sufficient
monthly income available to meet the borrower's monthly obligations.
Generally, Business Purpose Loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the
independent appraised fair market value of the real estate collateral securing
the loan) on the properties collateralizing the loans of no greater than 75%.
Business Purpose Loans collateralized by commercial real estate must generally
have an overall loan-to-value ratio (based solely on the independent appraised
fair market value of the real estate collateral securing the loan) of no
greater than 60% percent. In addition, in substantially all instances, the
Company also receives additional collateral in the form of, among other things,
personal guarantees, pledges of securities, assignments of contract rights,
life insurance and lease payments and liens on business equipment and other
business assets, as available. The Business Purpose Loans originated by the
Company had an average loan-to-value ratio of 60.5% for the year ended June 30,
1998.
The maximum acceptable loan-to-value ratio for Home Equity Loans held in
portfolio or securitized is generally 90%. The Home Equity Loans originated by
the Company had an average loan-to-value ratio of 76.6% for the year ended June
30, 1998. Occasionally, exceptions to these maximum loan-to-value ratios are
made if other collateral is available or if there are other compensating
factors. Title insurance is generally obtained in connection with all real
estate secured loans.
The Company generally does not lend more than 95% of the appraised value
in the case of First Mortgage Loans, other than FHA and VA Loans. The Company
generally requires private mortgage insurance on all such First Mortgage Loans
with loan-to-value ratios in excess of 80% at the time of origination in order
to reduce its exposure. The Company obtains mortgage insurance certificates
from the FHA on all FHA loans and loan guaranty certificates from the VA on all
VA loans regardless of the loan-to-value ratio on the underlying loan amount.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraisal is
completed by an independent qualified appraiser and
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generally includes pictures of comparable properties and pictures of the
subject property's interior. With respect to Business Purpose, Home Equity
Loans and First Mortgage Loans, the appraisal is completed by an independent
qualified appraiser on a FNMA form. See "Risk Factors--Decline in Collateral
Value May Adversely Affect Loan-to-Value Ratios."
In the leasing area, while a security interest in the equipment is
retained in connection with the origination of the lease, the lease is not
dependent on the value of the equipment as the principal means of securing the
lease. The underwriting standards applicable to leases place primary emphasis
on the borrower's financial strength and its credit history. The Company's
lease underwriting criteria includes a review of the subject company's credit
reports, financial statements, bank references and trade references, as well as
the credit history and financial statements of the principals of the borrower.
The Company typically obtains personal guarantees on its Equipment Leases.
Securitizations
The sale of the Company's Business Purpose Loans, Home Equity Loans and
Equipment Leases through securitizations is an important objective of the
Company. In furtherance of this objective, since 1995 the Company has sold in
the secondary market senior interests in nine pools of loans it securitized.
The nine pools of loans securitized were comprised of $129.4 million of
Business Purpose Loans, $356.8 million of Home Equity Loans and $59.7 million
of Equipment Leases.
Generally, a securitization involves the transfer by the Company of
receivables representing a series of loans or leases to a single purpose trust
in exchange for certificates or securities issued by the trust. The
certificates represent an undivided ownership interest in the loans or leases
transferred to the trust. The certificates consist of a class of senior
certificates and interest only strips and may also include a class of
subordinated certificates. In connection with securitizations, the senior
certificates are sold to investors and the subordinate certificates, if any,
and the interest only strips are typically retained by the Company. As a result
of the sale of the senior certificates, the Company receives a cash payment
representing a substantial portion of the principal balance of the loans held
by the trust. The senior certificates entitle the holder to be repaid the
principal of its purchase price and the certificates bear interest at a stated
rate of interest. The stated rate of interest is typically substantially less
than the interest rate required to be paid by the borrowers with respect to the
underlying loans. As a consequence, the Company is able to receive cash for a
portion of its portfolio and to pay the principal and interest required by the
senior certificates with the cash flows from the underlying loans or leases
owned by the trust. However, since the interest in the loans or leases held by
the Company (the subordinate certificate and the interest only strips) is
subordinate to the senior certificate, the Company retains a significant
portion of the risk that the full value of the underlying loans or leases will
not be realized. Additionally, the holder of the senior certificates will
receive certain additional payments on account of principal in order to reduce
the balance of the senior certificates in proportion to the subordinated amount
held by the Company. The additional payments of principal are designed to
increase the senior certificate holder's protection against loan and lease
losses. In the typical subordination structure, the Company, as the holder of
the interest only strips will be entitled to receive all of the remaining
interest in the loans or leases at the time of the termination of the trust.
See "Risk Factors --Dependence Upon Securitizations and Fluctuations in
Operating Results."
The pooling and servicing agreements that govern the distribution of cash
flows from the loans and leases included in the securitization trusts require
the over-collateralization of the senior certificates by using interest
receipts on the loans or leases to reduce the outstanding principal balance of
the senior certificates to a pre-set percentage of the loans or leases. The
over-collateralization percentage may be reduced over time according to the
delinquency and loss experience of the loans and leases. The Company's interest
in each over-collateralized amount is reflected in the Company's financial
statements as an other receivable. To the extent that a loss is realized on the
loans or leases, losses will be paid first out of the interest only strips
received and ultimately out of the over-collateralization amount available to
the interest only strips, and the subordinated certificates, if available. If
losses exceed the Company's projected amount, the excess losses will result in
a reduction in the value of the interest only strips held by the Company. See
"Risk Factors--Dependence Upon Securitizations and Fluctuations in
Operating Results."
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The Company may be required either to repurchase or to replace loans or
leases which do not conform to the representations and warranties made by the
Company in the pooling and servicing agreements entered into when the loans or
leases are pooled and sold through securitizations. As of June 30, 1998, the
Company had not been required to repurchase or replace any such loans or
leases. When borrowers are delinquent in making scheduled payments on loans or
leases included in a securitization trust, the Company is required to advance
interest payments with respect to such delinquent loans or leases to the extent
that the Company deems such advances will be ultimately recoverable. These
advances require funding from the Company's capital resources but have priority
of repayment from the succeeding month's collection.
The Company generally retains the servicing rights with respect to all
loans and leases securitized. See "--Loan and Lease Servicing."
The Company's securitizations are often structured to provide for a
portion of the loans or leases included in the trust to be funded with loans or
leases originated by the Company during a period subsequent to the
securitization. The amount of the aggregate trust value to be funded in the
future is referred to as the "prefunded account." The loans or leases to be
included in such account must be substantially similar in terms of collateral,
size, term, interest rate, geographic distribution and loan-to-value ratio as
the loans or leases initially transferred to the trust. To the extent the
Company fails to originate a sufficient number of qualifying loans or leases
for the prefunded account within the specified time period, the Company's
earnings during the quarter in which the funding was to occur would be reduced.
The securitization of loans and leases during the years ended June 30,
1998, 1997 and 1996 generated gain on sale of loans and leases of $41.3
million, $20.0 million and $8.7 million, respectively. Such gains contributed
to the Company's record levels of revenue and net income during such periods.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors--Dependence upon Securitizations and Fluctuations
in Operating Results."
Subject to market conditions, the Company anticipates that it will
continue to build portfolios of Business Purpose Loans, Home Equity Loans, and
Equipment Leases and enter into securitizations of these portfolios. The
Company believes that a securitization program provides a number of benefits by
allowing the Company to diversify its funding base, provide liquidity and lower
its cost of funds.
Competition
The Company competes for Business Purpose Loans against many other finance
companies and financial institutions. Although many other entities originate
Business Purpose Loans, the Company has focused its lending efforts on its
niche market of businesses which may qualify for loans from traditional lending
sources but who the Company believes are attracted to the Company's products as
a result of the Company's marketing efforts and responsive customer service and
rapid processing and closing periods.
The Company has significant competition for Home Equity Loans. Through
Upland and NJMIC, the Company competes with banks, thrift institutions,
mortgage bankers and other finance companies, which may have greater resources
and name recognition. The Company attempts to mitigate these factors through a
highly trained staff of professionals, rapid response to prospective borrowers'
requests and maintaining a short average loan processing time. In addition, the
Company recently implemented the Bank Alliance Program in order to generate
additional loan volume. See "--Lending and Leasing Activities--Home Equity
Lending."
The Company has significant competition for Equipment Leases. Through ABL
and Federal, the Company competes with banks, leasing and finance companies
with greater resources, capitalization and name recognition throughout its
market area. It is the intention of the Company to capitalize on its vendor
relationships, cross-selling opportunities, and the efforts of its direct sales
force to combat these competitive factors. See "Risk Factors--Increased
Competition Could Adversely Affect Results of Operations."
Regulation
General. The home equity and first mortgage lending business is highly
regulated by both federal and state laws. All Home Equity and First Mortgage
Loans must meet the requirements of, among other statutes, the Federal Truth in
Lending Act ("TILA"), the Federal Real Estate Settlement Procedures Act
("RESPA"), the Equal Credit Opportunity Act of 1974, as amended ("ECOA") and
their accompanying Regulations Z, X and B, respectively.
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Truth in Lending. The TILA and Regulation Z promulgated thereunder contain
certain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give consumers the ability to compare
credit terms. TILA also guarantees consumers a three day right to cancel
certain transactions and imposes specific loan feature restrictions on certain
loans of the type originated by the Company. Management of the Company believes
that it is in compliance with TILA in all material respects. If the Company
were found not to be in compliance with TILA, certain aggrieved borrowers could
have the right to rescind their loans and to demand, among other things, the
return of finance charges and fees paid to the Company. Other fines and
penalties can also be imposed under TILA and Regulation Z.
Other Lending Laws. The Company is also required to comply with the ECOA,
which prohibits creditors from discriminating against applicants on certain
prohibited bases, including race, color, religion, national origin, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. Among other
things, it also requires certain disclosures by the lender regarding consumer
rights and requires lenders to advise applicants of the reasons for any credit
denial. In instances where the applicant is denied credit or the rate or charge
for loans increases as a result of information obtained from a consumer credit
reporting agency, another statute, the Fair Credit Reporting Act of 1970, as
amended, requires lenders to supply the applicant with the name and address of
the reporting agency whose credit report was used in determining to reject a
loan application, and certain additional information and disclosures. In
addition, the Company and NJMIC are subject to the Fair Housing Act and
regulations thereunder, which broadly prohibit certain discriminatory practices
in connection with the Company's home equity lending business.
The Company is also subject to RESPA. RESPA imposes, among other things,
limits on the amount of funds a borrower can be required to deposit with the
Company in any escrow account for the payment of taxes, insurance premiums or
other charges; limits on fees paid to third parties; and various disclosure
requirements.
In addition, the Company is subject to various other federal and state
laws, rules and regulations governing, among other things, the licensing of,
and procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
such laws, as well as with the laws described above, may result in civil and
criminal liability.
Upland is licensed and regulated by the departments of banking or similar
entities in the various states in which it is licensed. The rules and
regulations contain such licensing and licensed entities activities, among
other things, prohibit discrimination, collection, foreclosure and claims
handling, payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, and fees. Failure to
comply with these requirements can lead to termination or suspension of
licenses, certain rights of rescission for mortgage loans, individual and class
action lawsuits and administrative enforcement actions. Upland maintains
compliance with the various federal and state laws through its in-house counsel
which continually review Upland's documentation and procedures and monitor and
apprise Upland on various changes in the laws.
The previously described laws and regulations are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead to
regulatory investigations or enforcement actions and private causes of action,
such as class action lawsuits, with respect to the Company's compliance with
the applicable laws and regulations.
Although the Company believes that it has implemented systems and
procedures to facilitate compliance with the foregoing requirements and
believes that it is in compliance in all material respects with applicable
local, state and federal laws, rules and regulations, there can be no assurance
that more restrictive laws, rules and regulations, and judicial and
administrative interpretations thereof will not be adopted in the future that
could make compliance more difficult or expensive.
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Employees
At June 30, 1998, the Company employed 619 people on a full-time basis and
19 people on a part-time basis. None of the Company's employees are covered by
a collective bargaining agreement. The Company considers its employee relations
to be good.
Property
Except for real estate acquired in foreclosure as part of the Company's
normal course of business, neither ABFS nor its subsidiaries presently hold
title to any real estate for operating purposes. The interests which the
Company presently holds in real estate are in the form of mortgages against
parcels of real estate owned by Upland's or ABC's borrowers or affiliates of
Upland's or ABC's borrowers and real estate acquired through foreclosure.
The Company presently leases office space at 111 Presidential Boulevard,
Bala Cynwyd, Pennsylvania, just outside the city limits of Philadelphia. The
Company is currently leasing its office space under a five year lease with a
current year annual rental cost of approximately $1.9 million. Such lease
contains a five-year renewal option at an increased annual rental amount. The
Company also leases the Roseland, New Jersey office which functions as the
headquarters for NJMIC and its subsidiaries. The current lease term expires on
July 31, 2003. Such lease contains a renewal option for an additional term of
five years. This office facility has a current annual rental cost of
approximately $575,000. In addition, the Company leases branch offices on a
short term basis in various cities throughout the United States. Management
does not believe that the leases for the branch offices are material to the
Company's operations.
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 filed a motion for summary
judgment seeking to dismiss the suit. The Superior Court granted NJMIC's motion
and the case was dismissed with prejudice on February 20, 1998. Mr. Roscoe
filed a Notice of Appeal with the Superior Court. NJMIC intends to vigorously
defend the appeal filed by Mr. Roscoe.
Pursuant to the terms of the Agreement for Purchase and Sale of Stock of
NJMIC between the Company and the former stockholders of NJMIC, such former
stockholders 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 stockholders 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.
WHERE YOU CAN FIND MORE INFORMATION
We filed a Registration Statement on Form S-2 (together with all exhibits
and schedules thereto, the "Registration Statement") with the SEC, with respect
to the registration of the Notes offered by this Prospectus. This Prospectus
does not contain all of the information set forth in such Registration
Statement and the exhibits thereto. For further information pertaining to the
Company, the Notes offered by this
58
<PAGE>
Prospectus and related matters, you should review the Registration Statement,
including the exhibits filed as a part thereof. Each statement in this
Prospectus referring to a document filed as an exhibit to such Registration
Statement is qualified by reference to the exhibit for a complete statement of
its terms and conditions.
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. So long as we are subject to the SEC's reporting
requirements, we will continue to furnish the reports and other information
required thereby to the SEC. We will furnish all holders of the Notes with
copies of our annual reports containing audited financial statements and an
opinion thereon expressed by our independent auditors and will make available
copies of quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
You may read and copy any reports, statements and other information we
file at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on
the operations of the Public Reference Room. Our SEC filings are also available
on the SEC's Internet site (http://www.sec.gov).
Our Common Stock is traded on the NASDAQ National Market System under the
symbol "ABFI." You may also read reports, proxy statements and other
information we file at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.
The SEC allows us to "incorporate by reference" the information we file
with them, which means we can disclose information to you by referring you to
those documents. Information incorporated by reference is part of this
Prospectus.
We will provide, at no cost, to each person to whom this Prospectus is
delivered, upon written or oral request, copies of any of all of the documents
that are incorporated by reference in this Prospectus but not delivered with
the Prospectus or information included in the Registration Statement which is
not included in this Prospectus. Requests should be directed to Jeffrey M.
Ruben at:
American Business Financial Services, Inc.
Bala Pointe Office Centre
111 Presidential Boulevard
Suite 215
Bala Cynwyd, PA 19004
(610) 668-2440
59
<PAGE>
MANAGEMENT
General
The present management structure of our Company is as follows: Anthony J.
Santilli, Jr. is Chairman, President, Chief Executive Officer, Chief Operating
Officer and a Director of the Company. Beverly Santilli is President of ABC and
First Executive Vice President and Secretary of ABFS. Jeffrey M. Ruben is
Executive Vice President and General Counsel of the Company. David M. Levin, CPA
is the Senior Vice President-- Finance. Albert W. Mandia is Executive Vice
President and Chief Financial Officer of the Company. Harold Sussman, Michael
DeLuca, Richard Kaufman and Leonard Becker are non-employee directors of our
Company and take no part in the day-to-day operating activities of our Company.
All directors and executive officers of our Company hold office during the term
for which they are elected and until their successors are elected and qualified.
The following table sets forth information regarding our Company's Board
of Directors and executive officers:
<TABLE>
<CAPTION>
Name Age(1) Position
- --------------------------- -------- --------------------------------------------------------------
<S> <C> <C>
Anthony J. Santilli, Jr. 55 Chairman, President, Chief Executive Officer, Chief Operating
Officer and Director
Leonard Becker ............ 75 Director
Michael DeLuca ............ 67 Director
Richard Kaufman ........... 66 Director
Harold E. Sussman ......... 72 Director
Beverly Santilli .......... 39 First Executive Vice President and Secretary of ABFS and President
of ABC
Jeffrey M. Ruben .......... 35 Executive Vice President and General Counsel of ABFS
Albert W. Mandia .......... 50 Executive Vice President and Chief Financial Officer(2)
David M. Levin ............ 53 Senior Vice President--Finance
</TABLE>
- ------------
(1) As of June 30, 1998.
(2) Mr. Mandia became the Company's Chief Financial Officer on October 1, 1998.
Directors
Our Amended and Restated Certificate of Incorporation currently provides
that the Board shall consist of not less than one nor more than fifteen
directors and that within these limits the number of directors shall be as
established by the Board. The Board has set the number of directors at five or
until their successors are elected and qualified. Our Amended and Restated
Certificate of Incorporation provides that the Board of Directors shall be
divided into three classes, having staggered terms of office, which are as
equal in number as possible. The members of each class of directors are to be
elected for a term of three years. Our Amended and Restated Articles of
Incorporation does not permit stockholders to cumulate their votes for the
election of directors.
The principal occupation of each of our directors is set forth below. All
directors have held their present position for at least five years unless
otherwise indicated.
Anthony J. Santilli, Jr. is the Chairman, President, Chief Executive
Officer and Chief Operating Officer of the Company and is an executive officer
of its subsidiaries. He has held the positions with the Company since early
1993 when the Company became the parent company of ABC and the positions with
the subsidiaries since the formation of ABC in June 1988.
Prior to the founding of ABC in 1988, Mr. Santilli was Vice President and
Department Head of the Philadelphia Savings Fund Society ("PSFS"). As such, Mr.
Santilli was responsible for PSFS' commercial relationships with small and
middle market business customers. Mr. Santilli also served as the secretary of
PSFS' Asset/Liability Committee and Policy Committee from May 1983 to June 1985
and June 1986 to June 1987, respectively.
60
<PAGE>
Leonard Becker is a former 50% owner and officer of the SBIC of the
Eastern States, Inc., a federally licensed small business corporation which
made medium term loans to small business concerns. For the last 30 years, Mr.
Becker has been heavily involved in the investment in and management of real
estate; and, has been involved in the ownership of numerous shopping centers,
office buildings and apartments. Mr. Becker formerly served as a director of
Eagle National Bank and Cabot Medical Corp.
Michael DeLuca was President, Chairman of the Board, Chief Executive
Officer and a former owner of Bradford-White Corporation, a manufacturer of
plumbing products, for a period of approximately thirty years. Presently, Mr.
DeLuca serves as a Director of BWC-West, Inc., Bradford-White International and
is Chief Executive Officer and a Director of Lux Products Corporation.
Richard Kaufman is Chairman and Chief Executive Officer of Academy
Industries, Inc., a paper converting company, a position he has held since
December 1996. From 1982 to 1996, he was self employed and involved in making
and managing investments for his own benefit. From 1976 to 1982, Mr. Kaufman
was President and Chief Operating Officer of Morlan International, Inc., a
cemetery and financial services conglomerate. From 1970 to 1976, Mr. Kaufman
served as a Director and Vice President-Real Estate and Human Services Division
of Texas International, Inc., an oil and gas conglomerate.
Harold E. Sussman is currently a principal in and Chairman of the Board of
the real estate firm of Colliers, Lanard & Axilbund, a major commercial and
industrial real estate brokerage and management firm in the Philadelphia area,
with which he has been associated since 1972.
Executive Officers who are not also Directors
The following is a description of the business experience of each
executive officer who is not also a director.
Beverly Santilli is First Executive Vice President and Secretary of ABFS
and President of ABC. Mrs Santilli was appointed First Executive Vice President
of the Company in October 1998. Prior to such time, she was Executive Vice
President of the Company. Mrs. Santilli is responsible for all sales, marketing
and human resources for ABC and for the day-to-day operation of ABC. Prior to
joining ABC and from September 1984 to November 1987, Mrs. Santilli was
affiliated with PSFS initially as an Account Executive and later as a Commercial
Lending Officer with such institution's Private Banking Group. Mrs. Santilli is
the wife of Anthony J. Santilli, Jr.
Jeffrey M. Ruben is Executive Vice President and General Counsel of ABFS
and its subsidiaries, positions he has held since October 1998 and April 1992,
respectively. Mr. Ruben served as Senior Vice President of the Company from
April 1992 to October 1998. Mr. Ruben is responsible for the loan and lease
collection departments and the Company's asset allocation unit as well as the
Company's legal and regulatory compliance matters. From June 1990 until he
joined the Company in April 1992, Mr. Ruben was an attorney with the law firm
of Klehr, Harrison, Harvey, Branzburg & Ellers in Philadelphia, Pennsylvania.
From December 1987 until June 1990, Mr. Ruben was employed as a credit analyst
with the CIT Group Equipment Financing, Inc. From July 1985 until December
1987, Mr. Ruben was a Portfolio Administrator with LFC Financial Corp. in
Radnor, Pennsylvania. Mr. Ruben is a member of the Pennsylvania and New Jersey
Bar Associations. Mr. Ruben holds both a New Jersey Mortgage Banker License and
a New Jersey Secondary Mortgage Banker License.
Albert W. Mandia is Executive Vice President--Finance of the Company and
the Company's Chief Financial Officer, positions he has held since June 1, 1998
and October 1, 1998, respectively. Effective October 1, 1998, Mr. Mandia became
an executive officer of the Company. From 1974 to 1998, Mr. Mandia was
associated with CoreStates Financial Corp. where he most recently held the
position of Chief Financial Officer.
David M. Levin is Senior Vice President--Finance a position he has held
since May 1995. Mr. Levin was Chief Financial Officer of the Company from
October 1995 to October 1998. Prior to joining the Company, Mr. Levin was
associated with Fishbein & Company, P.C., Certified Public Accountants
(previous auditors for the Company), as a staff member from 1983 to 1988 and as
a shareholder from 1989 to 1995. Mr. Levin is a Certified Public Accountant.
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of October 1, 1998 by our directors
and executive officers and each person known to be the beneficial owners of
five percent or more of our Common Stock, and all directors and executive
officers as a group. The business address of the officers of ABFS is that of
the Company.
<TABLE>
<CAPTION>
Name, Position and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned(1) of Class
- ------------------------------------------------------ ------------------------ -----------
<S> <C> <C>
Anthony J. Santilli, Jr., Chairman, President, Chief 927,044(2)(3) 25.6%
Executive Officer, Chief Operating Officer and
Director of ABFS and Beverly Santilli, President of
ABC and First Executive Vice President and Secretary
of ABFS
Michael DeLuca, Director of ABFS 204,735 (4) 5.7
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 180,561 (4) 5.1
1126 Bryn Tyddyn Drive
Gladwyne, PA 19035
Leonard Becker, Director of ABFS 121,230 (4) 3.4
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Harold E. Sussman, Director of ABFS 111,711 (4) 3.1
Colliers, Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 25,500 (5) (6)
Executive Vice President and General Counsel of
ABFS
David M. Levin 17,500 (7) (6)
Senior Vice President--Finance of ABFS
Albert W. Mandia 12,500 (8) (6)
Executive Vice President and Chief Financial
Officer of ABFS
Wellington Management Company, LLP, 474,400 (9) 13.5
Bay Pond Partners, L.P., Wellington Hedge
Management, LLC and Wellington Hedge
Management, Inc.
75 State Street
Boston, MA 02109
All executive officers and directors as a group 1,600,781 (10) 42.5
(9 persons)
</TABLE>
62
<PAGE>
- ------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the SEC. Accordingly they may include securities owned by
or for, among others, the wife and/or minor children or the individual and
any other relative who has the same home as such individual, as well as
other securities as to which the individual has or shares voting or
investment power or has the right to acquire under outstanding stock
options within 60 days after the date of this table. Beneficial ownership
may be disclaimed as to certain of the securities.
(2) Shares listed are held in joint tenancy by Mr. and Mrs. Santilli.
(3) Includes options to purchase 32,500 shares of Common Stock awarded to Mr.
Santilli pursuant to our 1997 Employee Stock Option Plan, all of which are
currently exercisable. Also includes options to purchase 12,500 and 5,000
shares of Common Stock awarded to Mrs. Santilli pursuant to our 1997
Employee Stock Option Plan, of which options to purchase 14,000 shares are
not currently exercisable within 60 days.
(4) Includes options to purchase 27,500 shares of Common Stock awarded to each
of our non-employee directors pursuant to our 1995 Stock Option Plan for
Non-Employee Directors and options to purchase 10,000 shares of Common
Stock granted to each non-employee director pursuant to our 1997 Stock
Option Plan for Non-Employee Directors, all of which are currently
exercisable.
(5) Includes 500 shares held directly and an option to purchase 7,500 shares
of Common Stock awarded to Mr. Ruben pursuant to our 1997 Employee Stock
Option Plan which option is currently exercisable. Also includes options
to purchase 12,500 and 5,000 shares of Common Stock awarded to Mr. Ruben
pursuant to our 1997 Employee Stock Option Plan, of which options to
purchase 14,000 shares are not exercisable within 60 days.
(6) Less than one percent.
(7) Includes options to purchase 12,500 and 5,000 shares of Common Stock
awarded to Mr. Levin pursuant to our 1997 Employee Stock Option Plan, of
which options to purchase 14,000 shares are not currently exercisable
within 60 days.
(8) Represents options to purchase 12,500 shares of Common Stock awarded to
Mr. Mandia pursuant to our Stock Option Plan, none of which are currently
exercisable within 60 days.
(9) As reported in an amended Schedule 13G dated January 12, 1998 filed by
Wellington Management Company, LLP ("WMC"). Of the 474,000 shares reported
as beneficially owned by WMC, shared voting was reported with respect to
460,000 shares and shared dispositive power was reported with respect to
474,000 shares. All of the shares beneficially owned by WMC are owned of
record by clients of WMC, none of which hold more than 5.0% of such shares
except for Bay Pond Partners, L.P., whose ownership is described herein.
In a Schedule 13G dated February 17, 1998 filed by Bay Pond Partners, L.P.
("BPP"), a limited partnership, its general partner, Wellington Hedge
Management, LLC ("WHML"), and Wellington Hedge Management, Inc. ("WHMI"),
the managing member of WHML, each of BPP, WHML and WHMI reported shared
voting and dispositive power with respect to the 291,500 shares (8.3% of
the outstanding shares) beneficially owned by them.
(10) Includes options to purchase 255,000 shares of Common Stock awarded to our
directors and officers pursuant to the our stock option plans of which
options to purchase 54,500 shares of Common Stock are not currently
exercisable.
63
<PAGE>
MARKET FOR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Our Common Stock is currently traded on the NASDAQ National Market System
under the symbol "ABFI." Our Common Stock began trading on the NASDAQ National
Market System on February 14, 1997. Prior to February 14, 1997, our Common
Stock had been traded on the PHLX under the symbol "AFX" since May 13, 1996.
Prior to the commencement of trading on the PHLX, there was no active trading
market for our Common Stock.
The following table sets forth the high and low sales prices of our Common
Stock for the periods indicated. On September 30, 1998, the closing price of
the Common Stock on the NASDAQ National Market System was $13.875.
Quarter Ended High Low
----------------------------- --------- ---------
September 30, 1996 .......... $ 19.50 $ 11.13
December 31, 1996 ........... 20.00 17.25
March 31, 1997 .............. 24.50 19.00
June 30, 1997 ............... 22.50 18.50
September 30, 1997 .......... 24.00 19.50
December 31, 1997 ........... 28.00 20.625
March 31, 1998 .............. 27.50 20.50
June 30, 1998 ............... 25.50 22.00
September 30, 1998 .......... 21.75 11.75
As of September 30, 1998, there were 103 record holders and approximately
1,200 beneficial holders of our Common Stock.
During fiscal 1998, dividends paid on our Common Stock outstanding was
$0.06 per share, for an aggregate dividend payment of $210,788. During fiscal
1997, dividends paid on our Common Stock outstanding was $0.06 per share, for
an aggregate dividend payment of $158,248. The payment of dividends in the
future is in the sole discretion of our Board of Directors and will depend,
among other things, upon earnings, capital requirements and financial
condition, as well as other relevant factors.
As a Delaware corporation, we may not declare and pay dividends on its
capital stock if the amount paid exceeds an amount equal to the excess of our
net assets over paid-in-capital or, if there is no excess, its net profits for
the current and/or immediately preceding fiscal year.
As of June 30, 1998, there were 452,500 shares of our Common Stock subject
to options. In addition, there were an additional 154,488 shares reserved for
issuance under our option plans. Subsequent to June 30, 1998, options to
purchase 5,000 shares of Common Stock were awarded to each non-employee
director pursuant to the terms of the 1997 Stock Option Plan for Non-Employee
Directors, Mr. Santilli was awarded an option to purchase 5,000 shares of
Common Stock and options to purchase an aggregate of 6,500 shares were awarded
to other employees of the Company.
64
<PAGE>
PLAN OF DISTRIBUTION
Currently, the services of a broker-dealer or dealers as an agent to
assist in the sales of the Notes offered hereby are not being utilized. We may
employ the services of a National Association of Securities Dealers, Inc.
("NASD") member broker-dealer in the future for purposes of offering the Notes
on a "best-efforts" or agency basis. If an agreement concerning the use of the
services of any broker-dealer is reached, we may pay any such broker-dealers an
estimated commission ranging from .5% to 10% of the sale price of any Notes
sold through any such broker-dealer, depending on numerous factors. We may also
agree to indemnify such broker-dealer against certain liabilities, including
liabilities under the Securities Act and to reimburse such broker-dealer for
its costs and expenses, up to a maximum to be determined, based upon the total
dollar value of the Notes sold. We will otherwise offer the Notes through its
employees in accordance with Rule 3a4-1 under the Exchange Act.
We reserve the right to reject any subscription hereunder, in whole or in
part, for any reason. Subscriptions will be irrevocable upon receipt by us. In
the event a subscription is not accepted, your subscription funds will be
promptly refunded to the subscriber, without deduction of any costs and without
interest. We expect that subscriptions will be refunded within 48 hours after
receipt of the subscription. Once your subscription has been accepted, the
applicable subscription funds will be promptly deposited in our account. A
receipt will be sent to you as soon as practicable thereafter after acceptance
of your subscription. No minimum number of Notes must be sold in the Offering.
You will not know at the time of subscription whether we will be successful in
completing the sale of any or all of the Notes offered hereby. We reserve the
right to withdraw or cancel the Offering at anytime. In the event of such
withdrawal or cancellation, subscriptions previously received will be
irrevocable and no subscription funds will be refunded.
LEGAL MATTERS
Blank Rome Comisky & McCauley LLP, Philadelphia, Pennsylvania, will deliver
an opinion stating that the Notes when issued as contemplated by this
Prospectus will be binding obligations of the Company.
EXPERTS
The Consolidated Financial Statements of the Company and subsidiaries as
of June 30, 1998 and 1997 and for the years ending June 30, 1998, 1997 and 1996
included in this Prospectus, have been audited by BDO Seidman, LLP, independent
certified public accountants, as set forth in their report appearing herein and
have been included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Report of Independent Certified Public Accountants .......... F-2
Consolidated Balance Sheets ................................. F-3
Consolidated Statements of Income ........................... F-4
Consolidated Statements of Stockholders' Equity ............. F-5
Consolidated Statements of Cash Flows ....................... F-6
Notes to Consolidated Financial Statements .................. F-7
F-1
<PAGE>
[LETTERHEAD OMITTED]
Report of Independent Certified Public Accountants
American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1998 and
1997, and the related consolidated statements of income and stockholders'
equity, and cash flows for each of the years in the three year period ended
June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1998 and
1997, and the consolidated results of their operations and their cash flows for
the each of the years in the three year period ended June 30, 1998 in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Philadelphia, Pennsylvania
September 11, 1998
F-2
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................... $ 4,485,759 $ 5,013,936
Loan and lease receivables, net
Available for sale ................................................. 62,381,973 35,711,821
Other .............................................................. 4,096,554 1,143,566
Interest only strips and other receivables .......................... 100,736,564 39,644,161
Prepaid expenses .................................................... 2,572,182 1,181,654
Property and equipment, net ......................................... 7,784,663 2,863,345
Other assets ........................................................ 44,493,365 18,430,049
------------- -------------
Total assets ........................................................ $ 226,551,060 $ 103,988,532
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Subordinated debt and notes payable ................................ $ 144,584,819 $ 56,486,229
Accounts payable and accrued expenses .............................. 15,563,254 6,081,630
Deferred income taxes .............................................. 10,863,538 4,630,981
Other liabilities .................................................. 12,797,283 5,877,664
------------- -------------
Total liabilities ................................................... 183,808,894 73,076,504
------------- -------------
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, 3,523,406 shares in 1998 and 3,503,166 shares
in 1997 ......................................................... 3,523 3,503
Additional paid-in capital ......................................... 23,255,957 22,669,477
Retained earnings .................................................. 20,082,718 8,839,080
------------- -------------
43,342,198 31,512,060
Note receivable .................................................... (600,032) (600,032)
------------- -------------
Total stockholders' equity .......................................... 42,742,166 30,912,028
------------- -------------
Total liabilities and stockholders' equity .......................... $ 226,551,060 $ 103,988,532
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues
Gain on sales of loans .......................... $ 41,316,062 $ 20,042,579 $ 8,720,776
Interest and fees ............................... 17,386,098 5,583,432 3,244,539
Servicing income ................................ 2,128,011 803,476 106,177
Other income .................................... 156,521 52,266 22,824
------------- ------------- ------------
Total revenues ................................... 60,986,692 26,481,753 12,094,316
------------- ------------- ------------
Expenses
Interest ........................................ 13,189,832 5,174,925 2,667,858
Provision for credit losses ..................... 491,168 105,941 396,811
Employee related costs .......................... 5,029,603 1,618,479 1,203,260
Sales and marketing ............................. 14,237,316 6,964,074 2,685,173
General and administrative ...................... 10,149,060 3,616,647 2,020,551
------------- ------------- ------------
Total expenses ................................... 43,096,979 17,480,066 8,973,653
------------- ------------- ------------
Income before provision for income taxes ......... 17,889,713 9,001,687 3,120,663
Provision for income taxes ....................... 6,435,297 3,061,854 801,967
------------- ------------- ------------
Net income ....................................... $ 11,454,416 $ 5,939,833 $ 2,318,696
============= ============= ============
Earnings per common share
Basic ........................................... $ 3.26 $ 2.13 $ 1.01
============= ============= ============
Diluted ......................................... $ 3.13 $ 2.05 $ 1.01
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended June 30, 1998, 1997 and 1996
----------------------------------------
Common Stock
----------------------- Additional
Number of Paid-In
Shares Amount Capital
----------- ---------- --------------
<S> <C> <C> <C>
Balance, July 1, 1995 ................ 2,128,154 $ 2,128 $ 1,331,892
Options exercised .................... 225,012 225 599,807
Cash dividends ($.03 per share) ...... -- -- --
Net income ........................... -- -- --
--------- ------- ------------
Balance, June 30, 1996 ............... 2,353,166 2,353 1,931,699
Sale of Common Stock net of
offering expenses of $2,261,072 ..... 1,150,000 1,150 20,737,778
Cash dividends ($.06 per share) ...... -- -- --
Net income ........................... -- -- --
--------- ------- ------------
Balance, June 30, 1997 ............... 3,503,166 3,503 22,669,477
Common stock issued in
acquisition ......................... 20,240 20 499,980
Nonemployee options .................. -- -- 86,500
Cash dividends ($.06 per share) ...... -- -- --
Net income ........................... -- -- --
--------- ------- ------------
Balance, June 30, 1998 ............... 3,523,406 $ 3,523 $ 23,255,957
========= ======= ============
<CAPTION>
Years ended June 30, 1998, 1997 and 1996
---------------------------------------------------
Total
Retained Note Stockholders'
Earnings Receivable Equity
---------------- --------------- ----------------
<S> <C> <C> <C>
Balance, July 1, 1995 ................ $ 809,394 $ -- $ 2,143,414
Options exercised .................... -- (600,032) --
Cash dividends ($.03 per share) ...... (70,595) -- (70,595)
Net income ........................... 2,318,696 -- 2,318,696
------------ ----------- ------------
Balance, June 30, 1996 ............... 3,057,495 (600,032) 4,391,515
Sale of Common Stock net of
offering expenses of $2,261,072 ..... -- -- 20,738,928
Cash dividends ($.06 per share) ...... (158,248) -- (158,248)
Net income ........................... 5,939,833 -- 5,939,833
------------ ----------- ------------
Balance, June 30, 1997 ............... 8,839,080 (600,032) 30,912,028
Common stock issued in
acquisition ......................... -- -- 500,000
Nonemployee options .................. -- -- 86,500
Cash dividends ($.06 per share) ...... (210,778) -- (210,778)
Net income ........................... 11,454,416 -- 11,454,416
------------ ----------- ------------
Balance, June 30, 1998 ............... $ 20,082,718 $ (600,032) $ 42,742,166
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
1998 1997 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ....................................................... $ 11,454,416 $ 5,939,833 $ 2,318,696
Adjustments to reconcile net income to net cash (used in)
operating activities
(Gain) on sales of loans/leases ................................. (41,316,052) (20,051,241) (8,685,463)
Amortization of origination fees and costs ...................... 68,257 419,620 305,136
Amortization of servicing rights ................................ 1,651,522 520,670 69,489
Provision for credit losses- loans/leases ....................... 491,168 105,941 396,811
Provision for credit losses-securitizations ..................... 2,089,674 1,048,725 284,417
Provision for credit losses acquired from subsidiary ............ 1,916,029 -- --
Accounts written off ............................................ (667,339) (96,639) (129,063)
Non employee stock options ...................................... 86,500 -- --
Depreciation and amortization of property and equipment ......... 1,669,263 513,323 318,493
Amortization of financing and organization costs ................ 1,171,110 537,653 505,012
Amortization of goodwill ........................................ 779,880 -- --
Loans and leases originated ..................................... (486,196,294) (136,357,451) (54,505,000)
Proceeds from sale of loans and leases .......................... 477,610,052 143,571,512 52,093,789
(Decrease) increase in accrued interest and fees on loan
and lease receivables .......................................... 6,164,413 (1,288,364) (268,010)
(Increase) in other receivables ................................. (55,135,729) (23,636,513) (9,902,163)
(Increase) in prepaid expenses .................................. (1,390,528) (1,266,059) (747,114)
(Increase) in other assets ...................................... (12,808,155) (6,945,626) (832,991)
Increase in accounts payable and accrued expenses ............... 9,198,856 2,949,461 2,014,259
Increase in deferred income taxes ............................... 5,333,351 3,124,710 801,967
Increase in other liabilities ................................... 6,455,008 4,000,858 1,491,565
-------------- -------------- -------------
Net cash used in operating activities ............................. (71,374,598) (26,909,587) (14,470,170)
-------------- -------------- -------------
Cash flows from investing activities
Leases originated for portfolio .................................. $ -- $ (8,003,561) $ (5,967,812)
Loan and lease payments received ................................. 19,003,398 4,554,535 4,549,979
Purchase of property and equipment ............................... (4,085,081) (1,737,695) (1,022,926)
Decrease in securitization gain receivable ....................... 2,883,685 106,752 58,693
Principal receipts on investments ................................ 101,015 81,383 33,307
Initial overcollateralization of loans ........................... (5,378,000) (3,450,000) --
Purchase of investments .......................................... (2,986,268) (5,000,000) --
Sale of investments .............................................. 5,000,000 -- --
Purchase of subsidiary, net ...................................... (9,585,603) -- --
-------------- -------------- -------------
Net cash provided by (used in) investing activities ............... 4,953,146 (13,448,586) (2,348,759)
-------------- -------------- -------------
<PAGE>
Cash flows from financing activities
Financing costs incurred ......................................... (2,040,979) (1,052,667) (662,950)
Net proceeds of (principal payments on) revolving lines
of credit ....................................................... 19,750,032 (2,348,465) 2,348,465
Principal payments on capital leases ............................. (445,221) -- --
Dividends paid ................................................... (210,778) (158,248) (70,595)
Principal payments on note payable, other ........................ -- (18,457) (5,605)
Proceeds from issuance of subordinated debentures ................ 73,883,893 33,991,099 19,687,962
Principal payments on subordinated debentures .................... (25,043,672) (11,125,350) (3,867,447)
Proceeds from public offering, net of related costs .............. -- 20,738,928 --
-------------- -------------- -------------
Net cash provided by financing activities ......................... 65,893,275 40,026,840 17,429,830
-------------- -------------- -------------
Net (decrease) increase in cash and cash equivalents .............. $ (528,177) $ (331,333) $ 610,901
Cash and cash equivalents, beginning of year ...................... 5,013,936 5,345,269 4,734,368
-------------- -------------- -------------
Cash and cash equivalents, end of year ............................ $ 4,485,759 $ 5,013,936 $ 5,345,269
============== ============== =============
Supplemental disclosures of cash flow information
Cash paid during the year for Interest ........................... $ 10,646,980 $ 2,875,620 $ 1,183,745
============== ============== =============
Income taxes ..................................................... $ 50,000 $ -- $ 78,475
============== ============== =============
Reclassification of other assets, leased equipment to property
and equipment ................................................... $ -- $ 186,077 $ 60,784
============== ============== =============
Reclassification of prepaid expenses to other assets ............. $ -- $ 1,425,565 $ --
============== ============== =============
Supplemental schedules of noncash investing and financing activities
During the fiscal year ended June 30, 1996, stock options for 225,012 shares of common stock were exercised. Shares with
a total price of $600,032 were issued in exchange for a note receivable of the same amount.
Noncash transactions recorded in connection with acquisition of subsidiary
(Decrease) in acquisition debt .................................. (3,418,413) -- --
Decrease in loan and lease receivables .......................... 3,418,413 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
Business
American Business Financial Services, Inc. ("ABFS"), together with its
subsidiaries (the "Company"), is a financial service organization engaged in
the business of originating (including purchasing), selling, and servicing
consumer and business mortgage loans, and business equipment leases. The
majority of the Company's loans are made to owners of single-family residences
who use the loan proceeds for such purposes as debt consolidation and financing
home improvements. Leases are originated for business equipment primarily to
owners of small businesses or professionals. The Company sells loans and leases
to investors or securitizes them in trusts. A significant portion of the loans
and leases are securitized, with the Company retaining the right to service
them. The Company's business may be affected by many factors, including real
estate and other asset values, the level and fluctuation of interest rates,
changes in the securitization market and competition.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of ABFS and its
subsidiaries, all of which are wholly owned. The consolidated financial
statements are prepared in accordance with generally accepted accounting
principles. All significant intercompany accounts and transactions have been
eliminated. In preparing the consolidated financial statements, management is
required to make estimates and assumptions which affect the reported amounts of
assets and liabilities as of the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. These estimates include,
among other things, estimated prepayment and discount rates on loans and leases
sold with servicing retained, estimated servicing revenues and costs, valuation
of collateral owned and determination of the allowance for credit losses.
Acquisition
Effective October 1, 1997, the Company acquired all of the issued and
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 $11,000,000 in cash, $5,000,000 in notes payable to
the selling stockholders, and the issuance of 20,240 shares of ABFS common
stock, and includes contingent payments of up to $4,000,000 if NJMIC achieves
certain performance targets over a three year period. The acquisition was
accounted for as a purchase transaction and resulted in the recognition of
approximately $16,900,000 of goodwill, which is being amortized using the
straight-line method over 15 years and is included in other assets. Any
contingent payments will result in an increase in the amount of recorded
goodwill.
Cash and Cash Equivalents
Cash equivalents consist of short-term debt instruments purchased with an
initial maturity of three months or less.
Loan and Lease Receivables
Loans and leases held for sale are loans and leases the Company plans to
sell or securitize and are carried at the lower of aggregate cost (principal
balance, including unamortized origination costs/fees) or market value. Market
value is determined by quality of credit risk, types of loans originated,
current interest rates, economic conditions, etc.
F-7
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING -- (Continued)
Allowance for Credit Losses
The allowance for credit losses is based upon the Company's estimate of
expected collectibility of loans and leases serviced. The allowance is
increased by periodic charges to operations in amounts sufficient to maintain
the allowance at a level considered adequate to cover anticipated losses
resulting from liquidation of outstanding loans and leases, and is based upon
periodic analysis of the portfolio, economic conditions and trends, historical
credit loss experience, borrowers' ability to repay and collateral value.
Residual Interests
The Company securitizes a majority of loans held for sale in a trust. A
trust is a multiclass security which derives its cash flows from a pool of
mortgages. The regular interests of a securitization trust are sold, and the
residual interests are retained by the Company. The securitization documents
require the Company to establish initial overcollateralization and/or build
overcollateralization levels through retention of distributions by the trust
otherwise payable to the Company as holder of the residual interest. This
overcollateralization causes the aggregate principal amount of the loans in the
related pool to exceed the aggregate principal balance of the outstanding
regular interests. The excess amounts serve as credit enhancement for the
regular interests of the trust.
The Company classifies residual interests as trading securities, which are
carried at fair value. Valuations at origination and at each reporting period
are based on a discounted cash flow analysis. The cash flows are estimated as
the excess of the coupon on each mortgage loan in the pool of underlying
mortgages over the sum of the pass-through interest rates on the regular
interests of the related securitization trust, servicing fees, trustee fees and
insurance fees. The cash flows are calculated using a discount rate
commensurate with the risk involved and include assumptions about prepayments.
Servicing Rights
Upon the securitization of servicing retained loans, the Company
capitalizes the costs associated with the right to service such loans based on
their relative fair value. The fair value is determined based on the present
value of estimated net future cash flows related to servicing income.
Assumptions used to value servicing rights are consistent with those used to
value residual interests. The cost allocated to the servicing rights is
amortized in proportion to, and over the period of, estimated future servicing
fee income.
The Company capitalized $12,041,089 and $7,216,167 of servicing rights
during the years ended June 30, 1998 and 1997, respectively. During the same
periods, amortization of servicing rights was $1,651,522 and $520,670,
respectively. The Company periodically reviews servicing rights for valuation
impairment. This review is performed on a disaggregated basis for the
predominant risk characteristics of the underlying loans, which consist of loan
type, loan-to-value ratio and credit quality. The Company generally makes loans
to credit-impaired borrowers whose borrowing needs may not be met by
traditional financial institutions due to credit exceptions. The Company has
found that credit-impaired borrowers are payment sensitive rather than interest
rate sensitive. As such, the Company does not consider interest rates a
predominant risk characteristic for purposes of valuation impairments.
Impairments are recognized in a valuation allowance for each disaggregated
stratum in the period of impairment. At June 30, 1998 and 1997, the servicing
rights approximated fair value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line and declining balance methods over the
estimated useful lives of the assets (ranging from 5 to 10 years). Expenditures
for additions, renewals and betterments are capitalized; expenditures for
maintenance and repairs are charged to expense as incurred.
F-8
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING -- (Continued)
Financing Costs and Amortization
Costs incurred in obtaining revolving lines of credit are amortized using
the straight-line method over the terms of the agreements. Financing costs
incurred in connection with public offerings of debt are amortized using the
interest method over the term of the related debt.
Investments Held to Maturity
Investments classified as held to maturity consist of asset-backed
securities that the Company has the positive intent and ability to hold to
maturity. These investments are stated at amortized cost, which approximates
market.
Property Held for Sale
Property held for sale consists of property acquired by foreclosure or in
settlement of loan and lease receivables, and is carried at the lower of
carrying value or fair value less estimated costs to sell.
Revenue Recognition
The Company derives its revenue principally from gains on sales of loans,
interest and fees on loans and leases, and servicing income.
Gains on servicing retained sales of loans through securitization
represent the difference between the net proceeds to the Company in the
securitization and the allocated cost of loans securitized. The allocated cost
of loans securitized is determined by allocating their net carrying value
between the loans, the residual interest and the servicing rights retained by
the Company based upon their relative fair values.
An allowance for credit losses equal to 1% of loans securitized is
established at the time of securitization and evaluated periodically for
adequacy.
The following chart presents certain weighted-average estimates used in
the initial recording of the interest-only strips receivable:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Discount rates
Home equity loans .......................... 11.0% 11.0%
Business purpose loans ..................... 11.0% 11.0%
Prepayment rates
Home equity loans (1) and (2) .............. 2.0% - 24.0% 2.0% - 24.0%
Business purpose loans (1) and (3) ......... 3.0% - 13% 3.0% - 9.5%
</TABLE>
- ------------
(1) Represents an annual prepayment rate (HEP/CPR).
(2) Ramped over twelve months.
(3) Ramped over twenty-four months.
The net carrying value of loans is equal to their principal balance and
unamortized origination costs/fees.
Interest income from loan and lease receivables is recognized using the
interest method. Accrual of interest income is suspended when the receivable is
contractually delinquent for 90 days or more. The accrual is resumed when the
receivable becomes contractually current, and past-due interest income is
recognized at that time. In addition, a detailed review of receivables will
cause earlier suspension if collection is doubtful.
Servicing income is recorded as earned.
F-9
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING -- (Continued)
Income Taxes
The Company files a consolidated federal income tax return.
The Company uses the liability method in accounting for income taxes.
Principal differences between the Company's financial and income tax
reporting include amortization of loan and lease origination costs/fees, the
allowance for credit losses, depreciation and amortization of property and
equipment, securitization gains, servicing rights and net operating losses.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financing Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which is effective for annual and interim periods ending after December
15, 1997 and requires retroactive application to all periods presented. It
supersedes the presentation of basic earnings per share ("EPS"), which does not
consider the effect of common stock equivalents. The computation of diluted EPS
gives effect to all dilutive potential common shares that were outstanding
during the period. The adoption of this standard did not have a material effect
on the Company's net income per share for the years ended June 30, 1998 and
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for annual and interim periods beginning after
December 15, 1997. This statement requires that all items that are required to
be recognized under accounting standards as comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. Currently, the Company does not have any items which
would be required to be reported under SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for financial
statements issued for years beginning after December 15, 1997. This statement
establishes standards for the method that public entities report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating results in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographical areas and major
customers. The adoption of this standard is not expected to have a material
effect on the Company's financial reporting.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as: (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment; (b) a hedge of the exposure to variable cash flows of a
forecasted transaction; or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign currency denominated forecasted
transaction.
SFAS No. 133 amends SFAS No. 52, "Foreign Currency Translation," to permit
special accounting for a hedge of a foreign currency forecasted transaction
with a derivative. It supersedes SFAS No.80, "Accounting for Futures
Contracts," SFAS No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and SFAS No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments." It amends SFAS
No.107, "Disclosures about Fair Value of Financial Instruments," to include the
disclosure provisions about concentrations of credit risk from SFAS No. 105.
SFAS No. 133 also nullifies or modifies the consensus reached in a number of
issues addressed by the Emerging Issues Task Force.
F-10
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING -- (Continued)
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this statement should be
as of the beginning of an entity's fiscal quarter. On that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this statement. Earlier application of all of the provisions of this
statement is encouraged, but it is permitted only as of the beginning of any
fiscal quarter that begins after issuance of this statement. This statement
should not be applied retroactively to financial statements or prior periods.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform to the 1998 presentation.
2. LOAN AND LEASE RECEIVABLES
<TABLE>
<CAPTION>
June 30,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Real estate secured loans ............................................. $ 47,971,399 $ 24,581,475
Leases (net of unearned income of $1,845,076 and $1,986,487)........... 11,401,104 8,970,238
Other loans ........................................................... -- 32,075
Unamortized origination costs/fees .................................... 4,087,636 2,466,342
------------ ------------
63,460,139 36,050,130
Less allowance for credit losses on loans and leases not sold ......... 1,078,166 338,309
------------ ------------
$ 62,381,973 $ 35,711,821
============ ============
</TABLE>
Real estate secured loans have contractual maturities of up to 30 years.
Real property of the borrower is usually pledged as collateral.
The Company sells real estate secured loans in securitizations with
servicing retained. Under terms of the sales, the purchasers have limited
recourse ($5,638,653 at June 30, 1998) should certain amounts of the loans
prove to be uncollectible. At June 30, 1998, the principal balance of
receivables securitized was approximately $473,000,000.
At June 30, 1998, the accrual of interest income was suspended on real
estate secured loans of $718,917. Based on its evaluation of the collateral
related to these loans, the Company expects to collect all contractual interest
and principal.
Substantially all of the leases are direct finance-type leases whereby the
lessee has the right to purchase the leased equipment at the lease expiration
for a nominal amount.
Other receivables consist primarily of accrued interest, repurchased loans
and advances.
F-11
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. LOAN AND LEASE RECEIVABLES -- (Continued)
The serviced loan and lease portfolio, which includes loans and leases
sold to investors and those retained by the Company, is as follows:
June 30,
--------------------------
1998 1997
------------ -----------
(In Thousands)
Home equity loans .............. $ 349,685 $ 98,179
Business purpose loans ......... 101,250 68,979
Equipment leases ............... 108,463 9,461
Other .......................... -- 32
--------- ---------
$ 559,398 $ 176,651
========= =========
3. ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Portfolio Securitizations Total
--------------- ----------------- ---------------
<S> <C> <C> <C>
Balance, July 1, 1995 ................. $ 62,258 $ 93,000 $ 155,258
Provision for credit losses ........... 396,811 284,417 681,228
Accounts written off .................. (129,062) -- (129,062)
----------- ----------- -----------
Balance, June 30, 1996 ................ 330,007 377,417 707,424
Provision for credit losses ........... 105,941 1,048,725 1,154,666
Accounts written off .................. (97,639) -- (97,639)
----------- ----------- -----------
Balance, June 30, 1997 ................ 338,309 1,426,142 1,764,451
Acquired through acquisition .......... 916,029 1,000,000 1,916,029
Provision for credit losses ........... 491,168 2,089,674 2,580,842
Accounts written off .................. (667,339) -- (667,339)
----------- ----------- -----------
Balance, June 30, 1998 ................ $ 1,078,167 $ 4,515,816 $ 5,593,983
=========== =========== ===========
</TABLE>
4. INTEREST ONLY STRIPS AND OTHER RECEIVABLES
<TABLE>
<CAPTION>
June 30,
----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Sales of loans ....................................................... $ 2,552,478 $ 960,136
Loan fees ............................................................ 1,199,566 246,294
Interest-only strips (net of Allowance for credit losses of $4,515,816
and $1,426,142) ..................................................... 95,912,759 37,507,191
Other ................................................................ 1,071,761 930,540
------------- ------------
$ 100,736,564 $ 39,644,161
============= ============
</TABLE>
Interest-only strips include overcollateralized balances which represent
undivided interests in the securitizations purchased to provide credit
enhancements to the investors. At June 30, 1998 and 1997, overcollateralized
principal balances were $25,315,523 and $9,059,249, respectively.
F-12
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. INTEREST ONLY STRIPS AND OTHER RECEIVABLES -- (Continued)
The activity in the interest-only strip receivables is summarized as
follows:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------
1998 1997
----------------- ---------------
<S> <C> <C>
Balance, beginning of year .......................... $ 38,933,333 $ 13,447,674
Initial recognition of interest-only strips ......... 64,378,927 25,749,704
Net amortization .................................... (2,883,685) (264,045)
------------- ------------
Balance, end of year ................................ $ 100,428,575 $ 38,933,333
============= ============
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Computer equipment and software ........................ $ 5,382,963 $ 2,247,786
Office furniture and equipment ......................... 5,527,080 1,641,572
Leasehold improvements ................................. 1,101,872 293,098
Transportation equipment ............................... 216,508 32,745
----------- -----------
12,228,423 4,215,201
Less accumulated depreciation and amortization ......... 4,443,760 1,351,856
----------- -----------
$ 7,784,663 $ 2,863,345
=========== ===========
</TABLE>
6. OTHER ASSETS
<TABLE>
<CAPTION>
June 30,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Deposits ................................................................. $ 146,455 $ 263,165
Financing costs, debt offerings, net of accumulated amortization of
$2,891,349 and $1,721,764 ............................................... 2,524,865 1,653,471
Investments held to maturity (mature in June 2002 through April 2011) 5,638,653 2,753,400
Investments held for sale (U.S. Treasury note due June 30, 1999) ......... -- 5,000,000
Foreclosed property held for sale ........................................ 715,763 605,177
Servicing rights ......................................................... 18,472,576 8,083,008
Goodwill, net of accumulated amortization of $779,880 .................... 16,151,053 --
Other .................................................................... 844,000 71,828
------------ ------------
$ 44,493,365 $ 18,430,049
============ ============
</TABLE>
F-13
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. SUBORDINATED DEBT AND NOTES PAYABLE
<TABLE>
<CAPTION>
June 30,
---------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
Subordinated debt, due July 1998 through October 1998; interest at
rates ranging from 8% to 12%, payable quarterly; subordinated to all
of the Company's senior indebtedness ................................... $ 127,000 $ 1,077,721
Subordinated debt, due July 1998 through June 2008, interest at rates
ranging from 7.0% to 10.5%; subordinated to all of the Company's
senior indebtedness .................................................... 105,524,694 55,408,508
Note payable, $100,000,000 revolving line of credit expiring Septem-
ber 1998; interest at LIBOR plus 1.25%, payable monthly; collater-
alized by loan and lease receivables ................................... 530,735 --
Senior subordinated debt, due July 1998 through July 2002; interest at
12%, payable monthly; subordinated to subsidiary's senior debt. ........ 3,000,000 --
Note payable, $110,000,000 revolving line of credit expiring July
1999; interest at rates ranging from LIBOR plus 1.375% to LIBOR
plus 2%; collateralized by loan and lease receivables. ................. 25,957,616 --
Subordinated debt, due August 1998 through May 2003; interest rates
ranging from 9% to 11.26%; subordinated to all of the Company's
senior indebtedness .................................................... $ 6,529,854 $ --
Note payable, acquisition, due October 1998 through October 2000;
interest at 8%, payable monthly. ....................................... 2,914,920 --
------------- ------------
$ 144,584,819 $ 56,486,229
============= ============
</TABLE>
Principal payments on debt for the next five years are as follows: year
ending June 30, 1999 -- $90,695,018; 2000 -- $17,154,414; 2001 -- $10,793,804;
2002 -- $8,824,417 and 2003 -- $9,208,389.
The loan agreements provide for certain covenants regarding net worth and
financial matters. At June 30, 1998, the Company is in compliance with terms of
the loan covenants.
8. COMMON AND PREFERRED STOCK
In May 1996, the stockholders approved an amended and restated Certificate
of Incorporation which increased the authorized common shares from 5,000,000 to
9,000,000 and established a class of preferred shares with 1,000,000 shares
authorized.
In February 1997, the Company sold 1,150,000 shares of common stock
through a public offering, resulting in net proceeds of $20,738,928.
F-14
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. STOCK OPTIONS
In May 1996, the stockholders approved a nonemployee director stock option
plan (the "1995 Plan") which authorizes the grant to nonemployee directors of
options to purchase 135,000 shares of common stock at a price equal to the
market price of the stock at the date of grant. Options are fully vested when
granted and expire 10 years after grant. At June 30, 1998, 25,000 options were
available for future grants under the 1995 Plan. Transactions under the 1995
Plan were as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
----------- -----------------
<S> <C> <C>
Options granted and outstanding, June 30, 1996 ......... 90,000 $ 5.00
Options granted ........................................ 20,000 17.75
Options exercised ...................................... -- --
------ -------
Options outstanding, June 30, 1998 and 1997 ............ 110,000 $ 7.32
======= =======
</TABLE>
In December 1997, the stockholders approved a nonemployee director stock
option plan (the "1997 Plan") which authorizes the grant to nonemployee
directors of options to purchase 120,000 shares of common stock at a price
equal to the market price of the stock at date of grant. Each nonemployee
director shall be automatically granted (subject to Board of Directors'
approval) an option to purchase 5,000 shares of common stock on October 1 of
each year commencing October 1, 1997 for a period of three years. Options are
fully vested when granted and expire three years after grant. At June 30, 1998,
100,000 options were available for future grants under the 1997 Plan.
Transactions under the 1997 Plan were as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
----------- -----------------
<S> <C> <C>
Options granted and outstanding, June 30, 1998 ......... 20,000 $ 23.25
====== ========
</TABLE>
The Company has an employee stock option plan which authorizes the grant
to employees of options to purchase 560,000 shares of common stock at a price
equal to the market price of the stock at the date of grant. Options are either
fully vested when granted or vested over a five-year period and expire 5 to 10
years after grant. At June 30, 1998, 14,988 shares were available for future
grants under this plan. Transactions under the plan were as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
------------- -----------------
<S> <C> <C>
Options outstanding, July 1, 1995 .......... 268,512 $ 2.67
Options granted ............................ 22,500 5.00
Options exercised .......................... (225,012) 2.67
-------- -------
Options outstanding, June 30, 1996 ......... 66,000 3.46
Options granted ............................ 161,500 19.93
-------- -------
Options outstanding, June 30, 1997 ......... 227,500 15.15
Options granted ............................ 101,500 24.10
Options canceled ........................... 9,000 20.49
-------- -------
Options outstanding, June 30, 1998 ......... 320,000 $ 19.00
======== =======
</TABLE>
F-15
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. STOCK OPTIONS -- (Continued)
The following tables summarize information about stock options outstanding
at June 30, 1998:
Options Outstanding
<TABLE>
<CAPTION>
Weighted
Remaining
Range of Exercise Number of Contractual Weighted-Average
Prices of Options Shares Life in Years Exercise Price
- ------------------------- ----------- --------------- -----------------
<S> <C> <C> <C>
$ 2.67 - $ 5.00 ......... 66,000 2.0 $ 3.46
$17.75 - $20.00 ......... 155,000 8.1 19.93
$20.50 - $27.00 ......... 99,000 8.9 24.10
------- --- -------
320,000 7.1 $ 19.00
======= === =======
</TABLE>
Options Exercisable
<TABLE>
<CAPTION>
Weighted
Remaining
Range of Exercise Number of Contractual Weighted-Average
Prices of Options Shares Life in Years Exercise Price
- ------------------------- ----------- --------------- -----------------
<S> <C> <C> <C>
$ 2.67 - $ 5.00 ......... 66,000 2.0 $ 3.46
$17.75 .................. 5,000 3.3 17.75
$18.50 .................. 500 4.8 18.50
$20.00 .................. 29,500 4.6 20.00
$24.25 .................. 5,000 2.3 24.25
------ --- ------
106,000 2.8 $ 9.79
======= === ======
</TABLE>
In September 1995, options for 225,012 shares were exercised at $2.67 per
share by an officer of the Company. The purchase price of $600,032 was advanced
to the officer by the Company. The loan is due in September 2005 (earlier if
the stock is disposed of) with interest only at 6.46%, payable annually. The
loan was secured by 450,012 shares of the Company's stock (at the date of
exercise, market value of collateral was approximately $1,200,000),
subsequently reduced to 225,012 shares, and is shown as a reduction of
stockholders' equity on the accompanying balance sheet.
On July 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which requires either the fair value of employee
stock-based compensation plans be recorded as a component of compensation
expense in the statement of income as of the date of grant of awards related to
such plans, or the impact of such fair value on net income and EPS be disclosed
on a pro forma basis in a footnote to financial statements for awards granted
after December 15, 1994, if the accounting for such awards continues to be in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company will continue such accounting under the provisions of APB Opinion
No. 25.
F-16
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. STOCK OPTIONS -- (Continued)
Had compensation cost for the plan been determined based on fair value at
the grant dates for awards under the plan consistent with the method prescribed
by SFAS No. 123, the Company's net income and EPS would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net income
As reported ......... $ 11,454,416 $ 5,939,833 $ 2,318,696
Pro forma ........... 10,956,709 5,360,818 2,293,278
EPS - basic
As reported ......... $ 3.26 $ 2.13 $ 1.01
Pro forma ........... 3.12 1.93 1.00
EPS - diluted
As reported ......... $ 3.13 $ 2.05 $ 1.01
Pro forma ........... 2.99 1.85 1.00
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected volatility ............. 30% 30% 25%
Expected life ................... 5-10 yrs. 5-10 yrs. 5 yrs.
Risk-free interest rate ......... 5.39%-6.17% 6.31%-6.90% 5.77%-6.01%
</TABLE>
10. INCOME TAXES
The provision for income taxes consists of the following:
Year ended June 30,
----------------------------------------------
1998 1997 1996
-------------- -------------- ------------
Current
Federal ......... $ 1,087,446 $ -- $ --
----------- ----------- ---------
Deferred
Federal ......... 5,347,851 3,061,854 858,617
State ........... -- -- (56,650)
----------- ----------- ---------
5,347,851 3,061,854 801,967
----------- ----------- ---------
$ 6,435,297 $ 3,061,854 $ 801,967
=========== =========== =========
The current provision for federal income taxes for the years ended June
30, 1998, 1997 and 1996 is net of the tax benefit of approximately -0-,
$533,000 and $249,000, respectively, from the utilization of net operating loss
carryforwards.
F-17
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. INCOME TAXES -- (Continued)
The cumulative temporary differences resulted in net deferred income tax
assets or liabilities consisting primarily of the following:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Deferred income tax assets
Allowance for credit losses ........................... $ 1,211,657 $ 599,914
Net operating loss carryforwards ...................... 5,776,717 1,888,688
Loan and lease receivables ............................ 659,607 291,379
------------ -----------
7,647,981 2,779,981
Less valuation allowance ................................. 5,776,717 1,888,688
------------ -----------
1,871,264 891,293
------------ -----------
Deferred income tax liabilities
Loan and lease origination costs/fees, net ............ 1,252,436 784,156
Book over tax basis of property and equipment ......... 741,255 372,688
Other receivables ..................................... 8,396,440 1,706,642
Servicing rights ...................................... 2,344,671 2,658,788
------------ -----------
12,734,802 5,522,274
------------ -----------
Net deferred income taxes ................................ $ 10,863,538 $ 4,630,981
============ ===========
</TABLE>
The valuation allowance represents the income tax effect of state net
operating loss carryforwards of the Company which are not presently expected to
be utilized.
A reconciliation of income taxes at federal statutory rates to the
Company's tax provision is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Federal income tax at statutory rates ......... $ 6,082,502 $ 3,061,854 $ 1,061,005
Nondeductible items ........................... 348,613 -- 13,545
Other, net .................................... 4,182 -- (272,583)
----------- ----------- -----------
$ 6,435,297 $ 3,061,854 $ 801,967
=========== =========== ===========
</TABLE>
<PAGE>
For income tax reporting, the Company has net operating loss carryforwards
aggregating approximately $45,000,000 available to reduce future state income
taxes for various states as of June 30, 1998. If not used, substantially all of
the carryforwards will expire at various dates from June 30, 1999 to June 30,
2001.
11. COMMITMENT AND CONTINGENCIES
Lease Commitment
As of June 30, 1998, the Company leases property under noncancelable
operating leases requiring minimum annual rentals as follows:
Year ending June 30, Amount
------------------------------ --------------
1999 ....................... $ 2,944,541
2000 ....................... 2,914,744
2001 ....................... 2,883,623
2002 ....................... 2,702,012
2003 ....................... 1,857,163
Thereafter ................. 48,058
------------
$ 13,350,141
============
F-18
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. COMMITMENT AND CONTINGENCIES -- (Continued)
Employment Agreements
The Company entered into employment agreements, as amended, with three
executives under which they are entitled to annual base compensation of
$800,000, collectively, adjusted for increases in the Consumer Price Index and
merit increases for one executive. The agreements terminate upon: (a) the
earlier of the executive's death, permanent disability, termination of
employment for cause, voluntary resignation (except that no voluntary
resignation may occur prior to February 2000) or 70th birthday; or (b) the
later of the fifth anniversary of the agreement or from three to five years
from the date of notice to the executive of the Company's intention to
terminate the agreement.
In addition, the executives are entitled to a cash payment equal to 299%
of the last five years average annual compensation in the event of a "change in
control," as defined in the agreement, and two of the executives are entitled
to all of the compensation discussed above.
The Company has entered into employment agreements with two other
executives under which they are entitled to minimum annual base compensation of
$350,000, collectively. These agreements terminate upon the earlier of the
executive's death, permanent disability, termination for cause, voluntary
resignation or three years.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
No market exists for certain of the Company's assets and liabilities.
Therefore, fair value estimates are based on judgments regarding credit risk,
investor expectation of future economic conditions, and normal cost of
administration and other risk characteristics, including interest rates and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
In addition, the fair value estimates presented do not include the value
of assets and liabilities that are not considered financial instruments.
The information about fair value of the financial instruments recorded on
the Company's financial statements at June 30, 1998 is summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------
Carrying Fair
Value Value
---------------- ----------------
<S> <C> <C>
Assets
Cash and cash equivalents ................... $ 4,485,759 $ 4,485,759
Loan and leases held for sale ............... 63,460,139 63,685,186
Interest-only strips ........................ 100,428,575 100,428,575
Servicing rights ............................ 18,472,576 19,309,815
Liabilities
Subordinated debt and notes payable ......... $ 144,584,819 $ 144,584,819
============= =============
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments are as follows:
Cash and Cash Equivalents -- For these short-term instruments, the
carrying amount approximates fair value.
Loans and Leases Held for Sale -- The Company has estimated the fair
values reported based upon recent sales and securitizations.
F-19
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
Interest-Only Strips -- Fair value is determined using estimated
discounted future cash flows taking into consideration anticipated
prepayment rates.
Servicing Rights -- Fair value is determined using estimated discounted
future cash flows taking into consideration anticipated prepayment rates.
Subordinated Debt -- The fair value of fixed-maturity subordinated debt is
estimated using the rates currently offered for debentures of similar
maturities.
13. HEDGING TRANSACTIONS
The Company regularly securitizes and sells fixed-rate mortgage loans. To
offset the effects of interest rate fluctuations on the value of its fixed-rate
loans held for sale, the Company may hedge its interest rate risk related to
the loans held for sale by selling forward contracts for U.S. Treasury
securities. The Company classifies these sales as hedges of specific loans held
for sale and does not record the derivative securities on its financial
statements. The gain or loss derived from these sales is deferred and
recognized as an adjustment to gain on sale of loans when the loans are
securitized. At June 30, 1998, such hedging transactions were not material.
14. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan, which was established
in 1995, available to all employees who have been with the Company for six
months and have reached the age of 21. Employees may generally contribute up to
15% of their salary each year and the Company, effective October 1, 1997, at
its discretion, may match up to 25% of the first 5% of salary contributed by
the employee. The Company's contribution expense was $107,921 for the year
ended June 30, 1998.
<PAGE>
15. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
Year ended June 30, 1998
----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- --------------- ----------
Basic EPS
Net income ............... $ 11,454,416 3,516,659 $ 3.26
Effect of dilutive securities
Stock options ............ -- 147,558 --
------------ --------- -------
Diluted EPS
Net income ............... $ 11,454,416 3,664,217 $ 3.13
============ ========= =======
Year ended June 30, 1997
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- --------------- ----------
Basic EPS
Net income ............... $ 5,939,833 2,782,291 $ 2.13
Effect of dilutive securities
Stock options ............ -- 121,463 --
----------- --------- -------
Diluted EPS
Net income ............... $ 5,939,833 2,903,754 $ 2.05
=========== ========= =======
Year ended June 30, 1996
----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- --------------- ----------
Basic EPS
Net income ............... $ 2,318,696 2,296,913 $ 1.01
Effect of dilutive securities
Stock options ............ -- -- --
----------- --------- -------
Diluted EPS Net income ... $ 2,318,696 2,296,913 $ 1.01
=========== ========= =======
F-20
<PAGE>
================================================================================
You should rely only on the information contained or incorporated by reference
in this Prospectus. We have authorized no one to provide you with different
information. You should not assume that the information in this Prospectus,
including information incorporated by reference, is accurate as of any date
other than the date on the front of the Prospectus. We are not making an offer
of these Notes in any location where the offer is not permitted.
[GRAPHIC OMITTED]
$250,000,000
of
Subordinated Investment Notes
and Adjustable Rate Subordinated
Money Market Notes
---------------------
PROSPECTUS
---------------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Debt Securities, other than underwriting
discounts and commissions, which ABFS does not anticipate paying:
SEC Registration Fee*............................. $ 73,750
NASD Filing Fee................................... 0
Printing, Engraving and Mailing .................. 60,000
Legal Fees and Expenses........................... 100,000
Accounting Fees and Expenses...................... 50,000
Blue Sky Fees and Expenses........................ 10,000
Miscellaneous..................................... 5,906,250
----------
TOTAL............................................ $6,200,000
----------
- --------------
* Exact; all other fees and expenses are estimates
Item 15. Indemnification of Directors and Officers.
The Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and the Bylaws (the "Bylaws") of ABFS provide for
indemnification of its directors and officers to the full extent permitted by
Delaware law. In the event that the Delaware General Corporation Law (the
"Corporation Law") is amended to authorize corporate action further eliminating
or limiting the personal liability of directors and officers, the Certificate of
Incorporation and Bylaws provide the personal liability of the directors and
officers of ABFS shall be so eliminated or limited.
Section 145 of the Corporation Law provides, in substance, that Delaware
corporations shall have the power, under specified circumstances, to indemnify
their directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by a third party or in the right of
the corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any such action,
suit or proceeding.
Section 145 of the Corporation Law provides that a company may pay the
expenses incurred by an officer or director in defending any civil, criminal,
administrative, or investigative action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding upon an undertaking by or
on behalf of such director or officer to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by the corporation.
The Certificate of Incorporation and Bylaws of ABFS provide that ABFS shall pay
such expenses.
II-1
<PAGE>
The Company maintains insurance to cover the Company's directors and
executive officers for liabilities which may be incurred by the Company's
directors and executive officers in the performance of their duties.
Item 16. Exhibits
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
4.1 Form of unsecured Investment Note (Incorporated by reference from
Exhibit 4.1 of Amendment No. 1 to the Registration Statement on Form
SB-2 filed April 29, 1994, Registration Number 33-76390).
4.2 Form of unsecured Investment Note issued pursuant to Indenture with
First Trust, National Association, a national banking association
(Incorporated by reference from Exhibit 4.5 of Amendment No. One to
the Registration Statement on Form SB-2 filed on December 14, 1995,
Registration Number 33-98636 (the "1995 Form SB-2").
4.3 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by reference
from Exhibit 4.6 of the Registration Statement on Form SB-2 filed on
October 26, 1995, Registration Number 33-98636).
4.4 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by
reference from Exhibit 4.4 of the Registration Statement on Form SB-2
filed March 28, 1997, Registration Number 333-24115 (the "1997
Form SB-2")).
4.5 Form of unsecured Investment Note (Incorporated by reference from
Exhibit 4.5 of the 1997 Form SB-2).
4.6 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by reference
from Exhibit 4.4 of the Registration Statement on Form SB-2 filed
May 23, 1997, Registration Number 333-24115).
4.7 Form of Unsecured Investment Note (Incorporated by reference from
Exhibit 4.5 of the Registration Statement on Form SB-2 filed May 23,
1997, Registration Number 333-24115).
*4.8 Form of Indenture by and between ABFS and U.S. Bank Trust, National
Association, a national banking association.
*4.9 Form of Unsecured Investment Note.
*5 Opinion of Blank Rome Comisky & McCauley LLP.
II-2
<PAGE>
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
10.1 Loan and Security Agreement between Upland Mortgage and BankAmerica
Business Credit, Inc. dated May 23, 1996 (Incorporated by reference
from the 1996 Form 10-KSB).
10.2 Amended and Restated Stock Option Plan (Incorporated by reference from
Exhibit 10.2 of ABFS' Quarterly Report on Form 10-QSB from the quarter
ended September 30, 1997, File No. 0-22474).
10.3 Stock Option Award Agreement (Incorporated by reference from Exhibit
10.1 of the Registration Statement on Form S-11 filed on February 26,
1993, Registration No. 33-59042 (the "Form S-11")).
10.4 Line of Credit Agreement by and between American Business Credit, Inc.
and Eagle National Bank (Incorporated by reference from Exhibit 10.4
of Amendment No. 1 to the Registration Statement on Form SB-2 filed on
April 29, 1993, Registration No. 33-59042 (the "1993 Form SB-2")).
10.5 Agreement dated April 12, 1993 between American Business Credit, Inc.
and Eagle National Bank (Incorporated by reference from Exhibit 10.5
of the 1993 Form SB-2).
10.6 1995 Stock Option Plan for Non-Employee Directors (Incorporated by
reference from Exhibit 10.6 of the Amendment No. 1 to the 1996 Form
SB-2 filed on February 4, 1996 Registration No. 333-18919 (the
"Amendment No. 1 to the 1997 Form SB-2")).
10.7 Form of Option Award Agreement for Non-Employee Directors Plan for
Formula Awards (Incorporated by reference from Exhibit 10.13 of the
1996 Form 10-KSB).
10.8 1997 Non-Employee Director Stock Option Plan (including form of Option
Agreement) (Incorporated by reference from Exhibit 10.1 of the
September 30, 1997 Form 10-QSB).
10.9 Interim Warehouse and Security Agreement between Upland Mortgage and
Prudential Securities Realty Funding Corporation dated April 25, 1996
(Incorporated by reference from Exhibit 10.14 of the 1996
Form 10-KSB).
10.10 Lease dated January 7, 1994 by and between TCW Realty Fund IV
Pennsylvania Trust and ABFS (Incorporated by reference from Exhibit
10.9 of the Registration Statement on Form SB-2 filed March 15, 1994,
File No. 33-76390).
II-3
<PAGE>
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
10.11 First Amendment to Agreement of Lease by and between TCW Realty Fund
IV Pennsylvania Trust and ABFS dated October 24, 1994. (Incorporated
by reference from Exhibit 10.9 of ABFS' Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1995 (the "1995 Form 10-KSB")).
10.12 Second Amendment to Agreement f Lease by and between TCW Realty Fund
IV Pennsylvania Trust and ABFS dated December 23, 1994 (Incorporated
by reference from Exhibit 10.10 of the 1995 Form 10-KSB).
10.13 Third Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated July 25, 1995 (Incorporated by reference from
Exhibit 10.11 of the 1995 Form 10-KSB).
10.14 Promissory Note of Anthony J. Santilli, Jr. and Stock Pledge
Agreement dated September 29, 1995 (Incorporated by reference from
Exhibit 10.14 of the 1995 Form SB-2).
10.15 Form of Employment Agreement with Anthony J. Santilli, Jr., Beverly
Santilli and Jeffrey M. Ruben (Incorporated by reference from Exhibit
10.15 of the Amendment No. 1 to the 1996 Form SB-2).
10.16 Amendment One to Anthony J. Santilli, Jr.'s Employment Agreement
(Incorporated by reference from Exhibit 10.3 of the September 30,
1997 Form 10-QSB).
10.17 Amendment One to Beverly Santilli's Employment Agreement
(Incorporated by reference from Exhibit 10.4 of the September 30,
1997 Form 10-QSB).
10.18 Management Incentive Plan (Incorporated by reference from Exhibit
10.16 of the 1996 Form SB-2).
10.19 Loan and Security Agreement dated December 12, 1996 between American
Business Credit, Inc. and Finova Capital Corporation (Incorporated
by reference from Exhibit 10.17 of the 1996 Form SB-2).
10.20 Form of Option Award Agreement for Non-Employee Directors Plan for
Non-Formula Awards (Incorporated by reference from Exhibit 10.18 of
the Amendment No. 1 to the 1996 Form SB-2).
10.21 Form of Pooling and Servicing Agreement related to the Company's loan
securitizations dated March 31, 1995, October 1, 1995, May 1, 1996,
August 31, 1996, February 28, 1997, September 1, 1997, February 1,
1998, and June 1, 1998 (Incorporated by reference from Exhibit 4.1 of
ABFS' Quarterly Report on Form 10-QSB for the quarter ended March 31,
1995 (the "March 31, 1995 Form 10-QSB")).
II-4
<PAGE>
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
10.22 Form of Sales and Contribution Agreement related to the Company's loan
securitizations dated March 31, 1995, October 1, 1995, May 1, 1996 and
September 27, 1996 (Incorporated by reference from Exhibit 4.1 of the
March 31, 1995 Form 10-QSB).
10.23 Amendments to the Interim Warehouse and Security Agreement between
Upland Mortgage and Prudential Securities Realty Funding Corporation.
(Incorporated by reference from Exhibit 10.21 of the Amendment No. 1
to the 1997 Form SB-2 filed on May 23, 1997 Registration No. 333-24115
(the "Amendment No. 1 to the 1997 SB-2")).
10.24 Fourth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated April 9, 1996 (Incorporated by reference from
Exhibit 10.22 to the Amendment No. 1 to the 1997 SB-2).
10.25 Fifth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust
and ABFS dated October 8, 1996 (Incorporated by reference from Exhibit
10.23 to the Amendment No. 1 to the 1997 SB-2).
10.26 Sixth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust
and ABFS dated March 31, 1997 (Incorporated by reference from Exhibit
10.24 to the Amendment No. 1 to the 1997 SB-2).
10.27 Agreement for Purchase and Sale of Stock between Stanley L. Furst,
Joel E. Furst and ABFS dated October 27, 1997 (Incorporated by
reference from ABFS' Current Report on Form 8-K dated October 27,
1997, File No. 0-22747).
10.28 Credit Agreement between American Business Credit, Inc., HomeAmerican
Credit, Inc., and American Business Leasing, Inc., as co-borrowers,
American Business Financial Services, Inc., as parent, Chase Bank of
Texas, NA, as administrative agent and certain lenders (Incorporated
by reference from Exhibit 10.24 of ABFS' Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997 filed on September 29, 1997,
File No. 0-22474).
10.29 Standard Form of Office Lease and Rider to Lease dated April 2, 1993
by and between 5 Becker Associates and NJMIC (Incorporated by
reference from Exhibit 10.29 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.30 First Amendment of Lease by and between 5 Becker Associates and NJMIC
dated July 27, 1994 (Incorporated by reference from Exhibit 10.30 of
Post-Effective Amendment No. 1 to the Registration Statement on Form
SB-2 filed on January 22, 1998, Registration No. 333-2445).
II-5
<PAGE>
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
10.31 Form of Debenture Note related to NJMIC's subordinated debt
(Incorporated by reference from Exhibit 10.31 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on
January 22, 1998, Registration No. 333-2445).
10.32 Note Agreement and Promissory Note dated July 15, 1997 issued by NJMIC
to N.M. Rothschild & Sons (Incorporated by reference from Exhibit
10.32 of Post-Effective Amendment No. 1 to the Registration Statement
on Form SB-2 filed on January 22, 1998, Registration No. 333-2445).
10.33 Form of Standard Terms and Conditions of Servicing Agreement related
to NJMIC's lease securitizations dated May 1, 1995 and March 1,
1996. (Incorporated by reference from Exhibit 10.33 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on
January 22, 1998, Registration No. 333-2445).
10.34 Form of Standard Terms and Conditions of Lease Acquisition Agreement
related to NJMIC's lease securitizations dated May 1, 1995 and
March 1, 1996 (Incorporated by reference from Exhibit 10.34 of
Post-Effective Amendment No. 1 to the Registration Statement on Form
SB-2 filed on January 22, 1998, Registration No. 333-2445).
10.35 Amended and Restated Specific Terms and Conditions of Servicing
Agreement related to NJMIC's lease securitization dated May 1, 1995
(Incorporated by reference from Exhibit 10.35 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on
January 22, 1998, Registration No. 333-2445).
10.36 Amended and Restated Specific Terms and Conditions of Lease
Acquisition Agreement related to NJMIC's lease securitization dated
May 1, 1995 (Incorporated by reference from Exhibit 10.36 of Post-
Effective Amendment No. 1 to the Registration Statement on Form SB-2
filed on January 22, 1998, Registration No. 333-2445).
10.37 Specific Terms and Conditions of Servicing Agreement related to
NJMIC's lease securitization dated March 1, 1996 (Incorporated by
reference from Exhibit 10.37 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.38 Specific Terms and Conditions of Lease Acquisition Agreement related
to NJMIC's lease securitization dated March 1, 1996 (Incorporated by
reference from Exhibit 10.38 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
II-6
<PAGE>
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
*10.39 Indenture by and among ABFS Equipment Contract Trust 1998-A, American
Business Leasing, Inc. and The Chase Manhattan Bank dated June 1,
1998.
*10.40 Form of Unaffiliated Seller's Agreement related to the Company's loan
securitizations dated March 27, 1997, September 29, 1997, February 1,
1998, and June 1, 1998.
*10.41 First Amended and Restated Interim Warehouse and Security Agreement
among Prudential Securities Credit Corporation, as lender, and
HomeAmerican Credit Inc. and American Business Credit, Inc., as
borrowers.
*10.42 Amendments to the First Amended and Restated Interim Warehouse and
Security Agreement among Prudential Securities Credit Corporation, as
lender, and HomeAmerican Credit Inc. and American Business Credit,
Inc., as borrowers.
*10.43 Amendments to the Credit Agreement between American Business Credit,
Inc., HomeAmerican Credit, Inc., American Business Leasing, Inc.,
New Jersey Mortgage & Investment Corp., and Federal Leasing Corp. as
co-borrowers, American Business Financial Services, Inc., as parent,
Chase Bank of Texas, NA, as administrative agent for lenders.
11 Statement of Computation of Per Share Earnings (Included in Note 15 of
the Notes to Consolidated Financial Statements).
*12 Statement of Computation of Ratios.
*21 Subsidiaries of the Company.
*23.1 Consent of Blank Rome Comisky & McCauley LLP (See Exhibit 5).
23.2 Consent of BDO Seidman LLP.
24 Power of Attorney (included on signature page).
*25 Statement of Eligibility and Qualification under the Trust Indenture
Act of 1939 on Form T-1.
*27 Financial Data Schedule.
99.1 Form of Prospectus Supplement.
99.2 Advertising Materials and Order Forms.
- ------------------------
* Previously filed.
II-7
<PAGE>
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-K for a Registration Statement on Form S-2.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sells
securities, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement. Notwithstanding the foregoing,
any increase or decrease in volume of
securities offered (if the total dollar
value of securities offered would not exceed
that which was registered) and any deviation
from the low or high end of the estimated
maximum offering range may be reflected in
the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and
price represent no more than a 20% change in
the maximum aggregate offering price set
forth in the "calculation of Registration
Fee" table in the effective registration
statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be the initial bona fide offering thereof;
(3) To remove form registration by means of a
post-effective amendment any of the securities that
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
II-8
<PAGE>
the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under
the Securities Act, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant under
Rule 424(b)(1), or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under
the Securities Act, each post-effective amendment
that contains a form of prospectus shall be deemed to
be a new registration statement relating to the
securities offered therein, and the offering of the
securities at that time shall be deemed to be the
initial bona fide offering thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of
Philadelphia, Commonwealth of Pennsylvania on October 16, 1998.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: October 16, 1998 By:/S/ ANTHONY J. SANTILLI, JR.
----------------------------
Anthony J. Santilli, Jr., Chairman,
President, Chief Executive Officer,
Chief Operating Officer and Director
(Duly Authorized Officer)
------------------------------
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- -------------------------------- --------------------------- ----------------------
<S> <C> <C>
/S/ ANTHONY J. SANTILLI, JR. Chairman, President, Chief Executive October 16, 1998
- -------------------------------- Officer, Chief Operating Officer and
Anthony J. Santilli, Jr. Director (Principal Executive and Operating
Officer)
/S/ ALBERT W. MANDIA Executive Vice President and Chief October 16, 1998
- -------------------------------- Financial Officer (Principal Financial and
Albert W. Mandia Accounting Officer)
* Director
- --------------------------------
Leonard Becker
* Director
- --------------------------------
Richard Kaufman
* Director
- --------------------------------
Michael DeLuca
* Director
- --------------------------------
Harold Sussman
*By: /S/ ANTHONY J. SANTILLI, JR. October 16, 1998
---------------------------------
Anthony J. Santilli, Jr.
Attorney-In-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Numbers Description
- --------------- -----------
*4.8 Form of Indenture by and between ABFS and U.S. Bank Trust,
National Association, a national banking association.
*4.9 Form of Investment Note.
*5 Opinion of Blank Rome Comisky & McCauley LLP.
*10.39 Indenture by and among ABFS Equipment Contract Trust 1998-A,
American Business Leasing, Inc. and Chase Bank of Texas, NA.
*10.40 Form of Unaffiliated Seller's Agreement related to the
Company's loan securitizations dated March 27, 1997,
September 29, 1997, February 1, 1998, and June 1, 1998.
*10.41 First Amended and Restated Interim Warehouse and Security
Agreement among Prudential Securities Credit Corporation, as
lender, and HomeAmerican Credit Inc. and American Business
Credit, Inc., as borrowers.
*10.42 Amendments to the First Amended and Restated Interim
Warehouse and Security Agreement among Prudential Securities
Credit Corporation, as lender, and HomeAmerican Credit Inc.
and American Business Credit, Inc., as borrowers.
*10.43 Amendments to the Credit Agreement between American Business
Credit, Inc., HomeAmerican Credit, Inc., American Business
Leasing, Inc., New Jersey Mortgage & Investment Corp., and
Federal Leasing Corp. as co-borrowers, American Business
Financial Services, Inc., as parent, Chase Bank of Texas, NA,
as administrative agent for lenders.
11 Statement of Computation of Per Share Earnings. (Included in
Note 15 of the Notes to Consolidated Financial Statements).
*12 Statement of Computation of Ratios.
*21 Subsidiaries of the Company.
*23.1 Consent of Blank Rome Comisky & McCauley LLP (See Exhibit 5).
23.2 Consent of BDO Seidman LLP.
24 Power of Attorney (included on signature page).
*25 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 on Form T-1.
*27 Financial Data Schedule.
99.1 Form of Prospectus Supplement.
99.2 Advertising Materials and Order Forms.
- ------------------------
* Previously filed.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
Bala Cynwyd, PA
We hereby consent to the use in this Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-2 of our report dated September 11, 1998,
relating to the consolidated financial statements of American Business Financial
Services, Inc. and subsidiaries.
We also consent to the reference to our firm under the caption "Experts"
in the Prospectus.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
October 16, 1998
<PAGE>
ABFS Investment Notes
Begin Earning These High Rates
Prospectus Supplement dated October _, 1998.
Term
Investment Notes Rate Annual Yield*
3 to 5 Months 7.75% 8.05%
6 to 11 Months 8.00% 8.32%
12 to 17 Months 8.60% 8.97%
18 to 23 Months 8.70% 9.08%
24 to 29 Months 9.00% 9.41%
30 to 35 Months 8.95% 9.36%
36 to 47 Months 9.10% 9.52%
48 to 59 Months 9.35% 9.80%
60 to 83 Months 10.35% 10.90%
84 to 119 Months 10.45% 11.01%
120 Months 10.60% 11.18%
Money Market Notes** 6.15% 6.34%
Minimum for Investment Notes and Money Market Notes $1,000
For more information, call
1-800-776-4001
[LOGO OMITTED]
BalaPointe Office Centre * 111 Presidential Boulevard,
Suite 215 * Bala Cynwyd, PA 19004
2255 Glades Road * Suite 311E *
Boca Raton, Fl 33431
2425 East Camelback Road *
Suite 1865 * Phoenix, AZ 85016
AMERICAN BUSINESS FINANCIAL SERVICES, INC. IS A NASDAQ LISTED COMPANY (ABFI).
An offer can only be made by the Prospectus dated October _, 1998, delivered in
conjunction with this Rate Supplement dated October _, 1998. See "Risk Factors"
in the Prospectus for a discussion of certain factors which should be considered
in connection with an Investment in the Notes.
* The Effective Annual Yield assumes all interest reinvested daily at the
stated rate. THE RATES FOR THE INVESTMENT NOTES ARE AVAILABLE THROUGH
NOVEMBER 23, 1998.
** The interest rate paid on the Money Market Notes is subject to change from
time to time at the Company's sole discretion provided that such rate shall
not be reduced below 4.0% per year. Written notice of any decrease in rate
will be provided to holders of such notes at least 14 days prior to the
effective date of the change. No notice will be provided in connection with
an increase in the interest rate paid on such notes.
<PAGE>
1.800.776.4001
ABFS
TRANSITION TO HIGHER GROUND
Sample A. Sample
Apt. 1-A
123 Any Street
Anytown, US 12345-6789
Dear Investor:
We are pleased to send you a copy of our newest Prospectus, dated October __,
1998, detailing a new $250,000,000 offering of American Business Financial
Services, Inc. (ABFS) Investment Notes and Money Market Securities. This new
Prospectus and replaces the Prospectus dated February 10, 1998.
Through our Investment Notes, ABFS continues to offer competitive rates and
flexible maturity options to investors. Please read the rate supplement located
on the back of the Prospectus to learn more about our investment rates and
yields.
ABFS offers a wide range of maturity options - from 3 months to 10 years - so
it's easy to select the maturity that's right for you. And no matter which
maturity you choose, your investment will grow to higher yields if the interest
is left to compound daily until maturity. You also have the option to receive
your interest as income monthly, quarterly, semi-annually or annually.
As you know, ABFS recently completed fiscal 1998. We are proud of our continued
financial performance and want to share these results with you which appear on
pages 6 and 7 of the Prospectus.
Please read the attached Prospectus carefully, including the "Risk Factors,"
before investing. To invest, simply complete, sign and mail the Investor Order
Form, along with your check payable to ABFS, in the enclosed postage-paid
envelope.
If you have any questions, please call one of our Investment Officers at
1-800-776-4001. Thank you for your interest in American Business Financial
Services Investment Notes.
Sincerely,
Ray Bucceroni
Senior Vice President
Jerry Rappaport
Senior Vice President
what's inside
-----------------------
o Investor Order Forms
o Reply Envelope
o Questions & Answers
o Prospectus
o Rate Supplement
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
BalaPointe Office Centre o 111 Presidential Boulevard,
Suite 215 o Bala Cynwyd, PA 19004
2255 Glades Road * Suite 311E *
Boca Raton, Fl 33431
2425 East Camelback Road *
Suite 1865 * Phoenix, AZ 85016
<PAGE>
short trim
investor order form - Investment Note
(Place in the prepaid envelope)
INDICATE TERM & AMOUNT OF YOUR INVESTMENT
Enclosed is my check for the purchase of an American Business Financial
Services, Inc. Investment Note(s) ($1,000 min. per note).
Please invest my funds as follows:
[ ] 3 MOS. $_____ [ ] 18 MOS. $_____ [ ] 36 MOS. $_____ [ ] 84 MOS. $_____
[ ] 6 MOS. $_____ [ ] 24 MOS. $_____ [ ] 48 MOS. $_____ [ ] 120 MOS. $_____
[ ] 12 MOS. $_____ [ ] 30 MOS. $_____ [ ] 60 MOS. $_____ [ ]
The total amount of my purchase is $________________________
Rates established at the date of purchase and set forth in the current
Prospectus and Rate Supplement and fixed until maturity.
Please check one of the following interest payment options:
[ ] Compound interest daily and pay at maturity.
If no interest option is checked, interest will be compounded daily and paid at
maturity.
[ ] Compound interest daily and pay interest by check (on maturities of
12 months or longer).
[ ] Monthly [ ] Quarterly [ ] Semi-Annually [ ] Annually
REGISTRATION INFORMATION
Please complete (print all information)
Registered Owner ___________________________ Social Security/EIN _______________
Telephone Number (include area code)( )________________ Date of Birth_________
Street Address _________________________________________________________________
City ______________________________________________ State ______ ZIP ___________
<PAGE>
Second Joint Owner (if applicable) _____________________________________________
Social Security Number _________________________________________________________
Beneficiary Name _______________________________________________________________
Beneficiary Social Security Number _____________________________________________
Custodian's Name (only one allowed by Law) _____________________________________
Minor's Name ___________________________________________________________________
Under the Uniform Gifts to Minors Act
Minor's Social Security Number _________________________________________________
SIGNATURE VERIFICATION Under penalties of perjury, I certify that:
1) The social security number shown on this form is correct.
2) I have received the Prospectus and Rate Supplement and understand that
AMERICAN BUSINESS FINANCIAL SERVICES, Inc. Investment Notes are not bank savings
or deposit accounts and are not insured by U.S. Government or any
instrumentality thereof.
3) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service (IRS) that I am subject to backup
withholding as a result of a failure to report all interest or dividends, or the
IRS has notified me that I am no longer subject to backup withholding.
4) I am a bona fide resident of the state listed above.
Only cross out subpart (3) if you are subject to backup withholding.
Signature of Registered Owner __________________________________Date ___________
Joint Signature (if applicable) ________________________________________________
PAYMENT INSTRUCTIONS
Make your checks payable to: AMERICAN BUSINESS FINANCIAL SERVICES, INC.
BalaPointe Office Centre
111 Presidential Boulevard, Suite 215
Bala Cynwyd, PA 19004
This application is neither an offer to sell nor an offer to buy securities.
Such an offer can only be made by Prospectus accompanied by a Rate Supplement.
If you require assistance in completing the order form, just call
1-800-776-4001.
<PAGE>
Frequently asked questions about
ABFS Investment Notes and
Money Market Notes . . .
Question What are American Business Financial Services, inc. (ABFS) Investment
Notes and Money Market Notes ("Notes")?
Answer ABFS Investment Notes and Money Market Notes are unsecured
subordinated debt securities issued by ABFS, a financial services
holding company. ABFS Notes represent debt obligations of ABFS.
Question Are these Notes insured or guaranteed?
Answer The Notes are not certificates of deposit or insured by the FDIC or
any other governmental or private entity. ABFS relies on revenues
from loan sales, working capital, additional debt financing, and
securitization transactions to repay principal and interest on
ABFS Notes.
Question Why should I consider including ABFS Notes in my investment portfolio?
Answer ABFS Notes pay competitive rates when compared to other investments of
similar risks and maturities. The Notes also offer flexibility to
choose from a selection of terms and interest payment options. With
Investment Notes you have the opportunity to earn high fixed rates and
eliminate the risk of market fluctuations which may affect your
principal or interest rate. Our Money Market Notes provide a higher
degree of liquidity in a variable rate investment.
ABFS Notes are subject to the risks associated with any uninsured
subordinated investment.
Question What are the investment requirements?
Answer ABFS Notes are offered at a minimum of $1,000. However, you can invest
$3,000, $5,000, $10,000, or any amount you wish. You may select terms
from 3 months to 10 years. Our Money Market Notes have no stated
maturity. You have the flexibility to choose the amount and the term
that best meets your investment needs.
The enclosed Prospectus and Rate Supplement describe our Investment
Notes, Money Market Notes, and Company in considerable detail. Please
read this material in order to make any informed decision.
Question Can I invest in ABFS Investment Notes through my IRA or KEOGH?
Answer You can invest in ABFS Investment Notes through IRAs, Keoghs, and
other qualified plans. You may use your current trustee or custodian
if they permit. Money Market Notes are not eligible for IRAs or
Keoghs. You may wish to consult a financial advisor and should review
the risk factors before making such an investment.
<PAGE>
Frequently asked questions about
ABFS Investment Notes and
Money Market Notes . . .
Question Can my interest be used to supplement my income?
Answer Yes. You may select to have your interest sent to you monthly,
quarterly, semi-annually, or annually on Investment Notes with
maturities of 12 months or longer...or you may want to take advantage
of the power of compound interest and leave your interest until
maturity.
Question May I redeem my ABFS Investment Note before maturity?
Answer Redemptions will be permitted prior to maturity only in the event of
death or, in certain cases, total permanent disability of a
registered owner. Money Market Notes may be redeemed at any time.
Question What fees or commissions will I pay?
Answer Absolutely none. There are no fees and no commissions. You pay nothing
extra and nothing is deducted. This means every dollar of your
investment is earning interest for you. An annual maintenance fee may
be charged by the custodian for IRA/KEOGH/SEP accounts.
Question How do I invest?
Answer It's easy. After reading the Prospectus and Rate Supplement, simply
complete and sign the appropriate Investor Order Form. Please be
certain to indicate how long you wish to invest and how often you want
to receive your interest. Finally, return the Investor Order Form
along with your check, payable to American Business Financial
Services, Inc., in the self-addressed stamped envelope provided.
This brochure is neither an offer to sell nor a solicitation of an offer to buy
securities. Such an offer can only be made by Prospectus accompanied by a Rate
Supplement. Investments should be considered only after a careful review of all
risk factors contained in the Prospectus.
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. (ABFS)
PROVIDES FINANCIAL PRODUCTS AND SERVICES TO INDIVIDUALS AND
BUSINESSES THROUGH OUR SPECIALIZED COMPANIES.
ABFS operates through our financial organizations:
[LOGO OMMITED]
Our business loan company has helped many small businesses realize their full
potential with loans ranging from $15,000 to $350,000. With our network of
highly trained sales professionals, ABC does business primarily in the eastern
region of the United States. Real estate collateral is required.
[LOGO OMMITED]
Our equipment leasing company offers small-ticket leases directly to commercial
customers, and through equipment vendors and lease brokers nationwide. ABL
delivers a streamlined application process, quick approval, and customized lease
programs to meet your needs.
[LOGO OMMITED]
NJMIC has built its reputation in the direct-to-broker lending business by
delivering first and second mortgages quickly and easily. As a recognized
industry leader in lending to people with past or even present credit problems,
we offer a loan program for every type of borrower. NJMIC operates through its
eight state network of branch and satellite offices.
[LOGO OMMITED]
The Processing Service Center, Inc. and the Bank Alliance Program(R) bring
success to client banks by increasing loan volume thus generating fee income,
and providing additional CRA credit. PSC does this simply by adding a sub-prime
home equity loan product alternative to the bank's existing product mix.
[LOGO OMMITED]
Upland Mortgage offers first and second mortgages personalized to suit the needs
of our customers. We make loans to customers with perfect and less-than-perfect
credit for debt consolidation, home improvement, and a variety of other consumer
needs. Upland conducts business primarily in the eastern region of the United
States. Upland Mortgage offers an easy application process and some of the most
competitive rates around.
For more information, call
1-800-776-4001
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
BalaPointe Office Centre o 111 Presidential Boulevard,
Suite 215 o Bala Cynwyd, PA 19004
AMERICAN BUSINESS FINANCIAL SERVICES, INC. IS A NASDAQ LISTED COMPANY (ABFI).
An offer can only be made by the Prospectus delivered in conjunction with a Rate
Supplement. See "Risk Factors" in the Prospectus for a discussion of certain
factors which should be considered in connection with an Investment in the
Notes. *The Effective Annual Yield assumes all interest reinvested daily at the
stated rate. The interest rate paid on the Money Market Notes is subject to
change from time to time at the Company's sole discretion provided that such
rate shall not be reduced below 4.0% per year. Written notice of any decrease in
rate will be provided to holders of such notes at least 14 days prior to the
effective date of the change. No notice will be provided in connection with an
increase in the interest rate paid on such notes.
<PAGE>
investor order form - Money Market Note
(Place in the prepaid envelope)
Enclosed is my check for the purchase of an American Business Financial
Services, Inc. Money Market Note(s).
The total amount of my purchase is (minimum $1,000) $___________________________
Initial rate is established at the date of purchase and is calculated as set
forth in the current Prospectus.
See the current Rate Supplement for a listing of current rates.
REGISTRATION INFORMATION
Please complete (print all information)
Registered Owner __________________________ Social Security/EIN ________________
Telephone Number (include area code)( ) ______________ Date of Birth _________
Street Address _________________________________________________________________
City ________________________________________________ State _____ ZIP __________
Second Joint Owner (if applicable) _____________________________________________
Social Security Number _________________________________________________________
Beneficiary Name _______________________________________________________________
Beneficiary Social Security Number _____________________________________________
Custodian's Name (only one allowed by Law) _____________________________________
Minor's Name ___________________________________________________________________
Under the Uniform Gifts to Minors Act
Minor's Social Security Number _________________________________________________
<PAGE>
SIGNATURE VERIFICATION Under penalties of perjury, I certify that:
1) The social security number shown on this form is correct.
2) I have received the Prospectus and Rate Supplement and understand that
AMERICAN BUSINESS FINANCIAL SERVICES, Inc. Money Market Notes are not bank
savings or deposit accounts and are not insured by U.S. Government or any
instrumentality thereof.
3) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service (IRS) that I am subject to backup
withholding as a result of a failure to report all interest or dividends, or the
IRS has notified me that I am no longer subject to backup withholding.
4) I am a bona fide resident of the state listed above.
Only cross out subpart (3) if you are subject to backup withholding.
Signature of Registered Owner __________________________________Date ___________
Joint Signature (if applicable) ________________________________________________
PAYMENT INSTRUCTIONS
Make your checks payable to: AMERICAN BUSINESS FINANCIAL SERVICES, INC.
BalaPointe Office Centre
111 Presidential Boulevard, Suite 215
Bala Cynwyd, PA 19004
This application is neither an offer to sell nor an offer to buy securities.
Such an offer can only be made by Prospectus accompanied by a Rate Supplement.
If you require assistance in completing the order form, just call
1-800-776-4001.
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