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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[ X ] Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________
Commission File No. 000-22474
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AMERICAN BUSINESS FINANCIAL SERVICES, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 87-0418807
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
111 Presidential Boulevard, Bala Cynwyd, PA 19004
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(Address of Principal Executive Offices) (Zip Code)
(610) 668-2440
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value
$.001 per share
---------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB.
[ X ]
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State issuer's revenues for its most recent fiscal year: $60,986,692.
The aggregate market value of the 1,386,725 shares of common stock,
$.001 par value per share (the "Common Stock"), held by non-affiliates of the
Registrant as of September 17, 1998 was $20.8 million.
The number of shares outstanding of the Registrant's sole class of
Common Stock as of September 18, 1998 was 3,523,406 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III -- Proxy Statement for 1998 Annual Meeting of Stockholders
Transitional Small Business Disclosure Format (Check One):
[ ] YES [ X ] NO
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Item 1. Description of Business
Forward Looking Statements
When used in this Form 10-KSB, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "projected," or similar expressions are intended to identify
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including but not limited to changes in interest rates, the
Company's dependence on debt financing and securitizations to fund operations
and fluctuations in operating results. Such factors, which are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinion or statements expressed herein with respect to future periods. As a
result, the Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made.
General
American Business Financial Services, Inc. ("ABFS" or the
"Company") is a financial services company operating primarily in the eastern
region of the United States. The Company, through its principal direct and
indirect subsidiaries, originates, sells and services loans to businesses
secured by real estate and other business assets ("Business Purpose Loans"),
non-conforming mortgage loans typically to credit-impaired borrowers, secured by
mortgages on single-family residences ("Home Equity Loans") and conforming and
jumbo loans secured by first mortgages on one to four unit residential
properties ("First Mortgage Loans"). The Company also originates small ticket
leases (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"). In addition, the Company 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 "Bank Alliance Program").
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
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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
primarily in Pennsylvania, New Jersey, New York, Delaware, Maryland, Maine,
Virginia, West Virginia, Georgia, North 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
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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 New Jersey Mortgage and Investment Company
("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 --
Asset 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
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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 with 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. See "--Lending and
Leasing Activities -- Leasing Activities."
The Company's 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. The Company's principal
operating office and the executive offices of its subsidiaries are located at
Balapointe Office Centre, 111 Presidential Boulevard, Suite 215, Bala Cynwyd, PA
19004. The telephone number at such address is (610) 668-2440.
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 American Business Credit, Inc. ("ABC") and its primary subsidiaries,
HomeAmerican Credit, Inc. (d/b/a Upland Mortgage and referred to herein as "HAC"
or "Upland"), Processing Service Center, Inc. ("PSC"), American Business
Leasing, Inc. ("ABL"), ABC Holdings Corporation ("Holdings") and NJMIC and its
subsidiary, Federal Leasing Corp. ("Federal") (the Company and its direct and
indirect subsidiaries are collectively referred to herein 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
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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."
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The following chart sets forth organizational structure of
ABFS.1
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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ABFS
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(Holding Company)
(Issues subordinated debentures)
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|
|
|
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AMERICAN BUSINESS CREDIT, INC.
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(Originates and services Business Purpose Loans)
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|
|
|
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HOME AMERICAN
NEW JERSEY CREDIT, INC. PROCESSING SERVICE AMERICAN ABC
MORTGAGE AND d/b/a CENTER, INC. BUSINESS HOLDINGS
INVESTMENT CORP. UPLAND LEASING, INC. CORP.
MORTGAGE 2
------------------ ----------------- ------------------ ---------------- -----------------
(Originates and (Originates, (Processes Bank (Originates and (Holds foreclosed
services First purchases and Alliance Program services Equipment real estate)
Mortgage and Home services Home Home Equity Loans) Leases)
Equity Loans) Equity Loans)
------------------ ----------------- ----------------- ----------------
------------------
FEDERAL
LEASING CORP.
------------------
(Originates
Equipment Leases)
------------------
</TABLE>
- -------------------
1 In addition to the corporations pictured above, the Company
organized a special corporation for each of its securitizations. Such
corporations are direct subsidiaries of ABFS.
2 Loans purchased by Upland represent loans acquired through
the Bank Alliance Program.
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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>
----------------------------------------
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 Sol
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>
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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.
<TABLE>
<CAPTION>
Year Ended June 30,
Loan Type 1998 1997 1996
- ------------------------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
Business Purpose Loans ................... 60.5% 60.0% 58.9%
Home Equity Loans ........................ 76.6 72.0 68.8
First Mortgage Loans ..................... 79.9 --
</TABLE>
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 % 1996 % 1995 %
-------- ------ -------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania . $150,048 31.06% 53,834 38.85% $ 33,324 46.57% $ 17,913 46.57%
New Jersey ... 128,025 26.38 40,725 29.39 20,986 29.33 16,300 42.38
New York ..... 54,907 11.31 8,343 6.02 7,417 10.36 1,534 3.99
Florida ...... 23,905 4.93 3,670 2.65 674 0.94 149 0.39
Georgia ...... 23,084 4.76 10,092 7.28 181 0.25 98 0.25
Virginia ..... 13,138 2.71 5,469 3.95 104 0.15 111 0.29
California ... 12,709 2.62 -- -- -- -- -- --
Maryland ..... 11,748 2.42 5,010 3.61 4,408 6.16 1,191 3.10
Delaware ..... 10,823 2.23 3,117 2.25 2,724 3.81 481 1.25
Connecticut .. 5,964 1.23 2,005 1.45 87 0.12 5 0.01
North Carolina 5,144 1.06 4,245 3.06 78 0.11 6 0.02
Texas ........ 6,430 1.33 -- -- -- -- -- --
Other ........ 38,650 7.98 2,073 1.49 1,575 2.20 673 1.75
-------- ------ -------- ------ -------- ------ -------- ------
Total $484,575 100.00% $138,583 100.00% $ 71,558 100.00% $ 38,461 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
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
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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."
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 and to generate fee income objectives and subsequently
sell such loans to Upland.
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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 Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA")
standards to permit their sale in the secondary market. NJMIC typically sells
such loans to third parties with servicing released. NJMIC also originates
Federal Housing Authority ("FHA") and Veterans Administration ("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.
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
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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.
There are risks inherent in this type of activity which differ
in certain respects from those which exist in the Company's lending activities.
While the Equipment Leases made by the Company are secured by a lien on the
equipment leased, such equipment is subject to the risk of damage, destruction
or technological obsolescence prior to the termination of the lease. In the case
of the Company's 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 the Company may be required to
sell such equipment to third party buyers at a discount or otherwise dispose of
such equipment.
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
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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.
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 to include
the states of Illinois, Ohio and Delaware in addition to its offices in Georgia,
Maryland, South Carolina and Florida. 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 located 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. 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.
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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 underlying guidelines. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Asset 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. 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 be joint and several 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 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.
Although the Company's loans are primarily secured by residential real estate,
there is a risk that the Company could be required to investigate or clean up an
environmentally
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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.
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.
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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 generally
includes pictures of comparable properties and pictures of the subject
property's interior. With respect to Business Purpose Loans, Home Equity Loans
and First Mortgage Loans, the appraisal is completed by an independent qualified
appraiser on a pre-defined FNMA form.
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 the Company, 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. In addition, the Company currently originates loans in a circumscribed
geographic area which primarily includes the states located in the eastern
region of the United States. This practice may subject the Company to the risk
that a downturn in the economy in such region of the country would more greatly
affect the Company than if its lending business were more geographically
diversified.
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.
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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 and $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.
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.
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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."
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
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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.
The various segments of the Company's lending businesses are
highly competitive. Certain lenders against which the Company competes have
substantially greater resources, greater experience and lower cost of funds, as
well as a more established market presence than the Company. To the extent the
Company's competitors increase their marketing efforts to include the Company's
market niche of borrowers, the Company may be forced to reduce the rates and
fees it currently charges for such loans in order to maintain and expand its
market share. Any reduction in such rates or fees could have an adverse impact
on the Company's results of operations. In addition, even after the Company has
made a loan to a borrower, the borrower may refinance the loan with another
lender at more favorable rates and terms. Furthermore, the profitability of the
Company and other similar lenders is attracting additional competitors into this
market, with the possible effect of reducing the Company's ability to charge its
customary origination fees and interest rates. In addition, as the Company
expands into new geographic markets, it will face competition from lenders with
established positions in these areas. There can be no assurance that the Company
will be able to continue to compete successfully in the markets it serves or
expand into new geographic markets. Such an event could have a material adverse
effect on the Company's results of operations and financial condition.
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.
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
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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.
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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.
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.
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, age 39, is Executive Vice President and
Secretary of ABFS and President of ABC. 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, age 35, is Senior Vice President and General
Counsel of ABFS and its subsidiaries. Mr. Ruben is responsible for the Company's
legal and regulatory compliance matters. From June 1990 until he joined the
Company in April 1992, Mr. Ruben was an attorney with the law firm of Klehr,
Harrison, Harvey, Branzburg & Ellers in Philadelphia, Pennsylvania. From
December 1987 until June 1990, Mr. Ruben was employed as a credit analyst with
the CIT Group Equipment Financing, Inc. From July 1985 until December 1987, Mr.
Ruben was a Portfolio Administrator with LFC Financial Corp. in Radnor,
Pennsylvania. Mr. Ruben is a member of the Pennsylvania and New Jersey Bar
Associations. Mr. Ruben holds both a New Jersey Mortgage Banker License and a
New Jersey Secondary Mortgage Banker License.
David M. Levin, age 53, is Senior Vice President - Finance and
Chief Financial Officer of the Company. He has held these positions since May
1995 and October 1995, respectively. 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.
Albert W. Mandia, age 50, is currently Executive Vice President-Finance
of the Company. Effective October 1, 1998, Mr. Mandia will become an executive
officer of the Company and will hold the title of the Chief Financial Officer.
From 1974 to 1998, Mr. Mandia was associated with CoreStates Financial Corp.
where he most recently held the position of Chief Financial Officer.
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Item 2. Description of Property
Except for real estate acquired in foreclosure as part of the
Company's normal course of business, neither ABFS nor its subsidiaries presently
hold title to any real estate for operating purposes. The interests which the
Company presently holds in real estate are in the form of mortgages against
parcels of real estate owned by the Company's borrowers or affiliates of such
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.
Item 3. 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 shareholders of NJMIC, such
former shareholders are required to indemnify the Company up to $16.0 million in
connection with any losses related to, caused by or arising from NJMIC's failure
to comply with applicable law to the extent such losses exceed $100,000. Such
former shareholders have agreed to defend the Company in this suit.
Additionally, from time to time, the Company is involved as
plaintiff or defendant in various other legal proceedings arising in the normal
course of its business. While the ultimate outcome of these various legal
proceedings cannot be predicted with certainty, it is the opinion of management
that the resolution of these legal actions should not have a material effect on
the Company's financial position, results of operations or liquidity.
23
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the quarter ended June 30,
1998.
24
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholders Matters
The Company's Common Stock is currently traded on the NASDAQ
National Market System under the symbol "ABFI." The Common Stock began trading
on the NASDAQ National Market System on February 14, 1997. Prior to February 14,
1997, the 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 the Common Stock.
The following table sets forth the high and low sales prices
of the Common Stock from the date on which the Common Stock commenced trading on
the PHLX through June 30, 1998. On June 30, 1998, the closing price of the
Common Stock on the NASDAQ National Market System was $22.00.
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
As of June 30, 1998, there were 103 record holders and
approximately 1,200 beneficial holders of the Common Stock.
During fiscal 1998, the Company paid dividends on its Common
Stock then outstanding of $.06 per share, for an aggregate dividend payment of
$210,778. The payment by the Company of dividends in the future is in the sole
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, its capital requirements and financial condition, as
well as other relevant factors.
As a Delaware corporation, the Company may not declare and pay
dividends on its capital stock if the amount paid exceeds an amount equal to the
excess of the Company's net assets over paid-in-capital or, if there is no
excess, its net profits for the current and/or immediately preceding fiscal
year.
On September 29, 1995, ABFS issued 225,012 shares of Common
Stock to Anthony J. Santilli, Jr., President of ABFS, upon the exercise of stock
options at a price of $2.67 shares.
25
<PAGE>
On October 27, 1997, the Company issued 20,240 shares of
Common Stock to Stanley L. Furst and Joel E. Furst as partial consideration for
their 100% interest in NJMIC.
Exemption from registration for the issuance described above
was claimed pursuant to Section 4(2) of the Securities Act of 1933, as amended,
in reliance upon the fact that such sales did not involve a public offering.
Therefore, such securities are subject to certain transfer restrictions.
Item 6. Management's Discussion and Analysis or Plan of Operation
26
<PAGE>
Selected Consolidated Financial Data
The consolidated financial information set forth below for
ABFS 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
------- ------- ------- ------- -------
Statement of Income Data: (Dollars in Thousands, except per share data)
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $ 58 $ 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 -- --
June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
-----------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents.................................. $ 4,4886 $ 5,014 $ 5,34 $ 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
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
---------- ---------- ----------- ---------- ----------
Other Data: (Dollars in Thousands)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 ...................... 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 --
At or For the Year Ended June 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ----------- ---------- ----------
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, at end of period (1) ............................ 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 changes ........................... 1.77 1.98 1.40 1.35 1.16
</TABLE>
- -----------------------------
(1) Total delinquencies includes loans and leases delinquent over 30 days,
exclusive of real estate owned.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following financial review and analysis of the financial condition
and results of operations of the Company, for the years ended June 30, 1998,
1997 and 1996 should be read in conjunction with the Company's Consolidated
Financial Statements and the accompanying notes thereto and other detailed
information regarding the Company appearing elsewhere herein. All operations of
the Company are conducted through ABC and its subsidiaries.
28
<PAGE>
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
29
<PAGE>
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.
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.
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 FHLMC or FNMA standards and also include FHA and 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.
30
<PAGE>
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.
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
31
<PAGE>
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.
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.
32
<PAGE>
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 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
33
<PAGE>
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.
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.
34
<PAGE>
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.
35
<PAGE>
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
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
36
<PAGE>
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.
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 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
37
<PAGE>
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
38
<PAGE>
Leases. During the 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
39
<PAGE>
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 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.
40
<PAGE>
Asset 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 %
- ------------------------------------------- ---------- ---------- --------- ---------- --------- ----------
Business Purpose Loans (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
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........................................ $ - - $ - - $ - -
========== ========== ========= ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Delinquency by Type Amount % Amount % Amount %
- ------------------------------------------- ---------- ---------- --------- ---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
========== ========== ========== ========== ========= ==========
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>
41
<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.
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
42
<PAGE>
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 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.
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
43
<PAGE>
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.
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.
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
<TABLE>
<CAPTION>
Amount Maturing in Years Ending June 30,
--------------------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(Dollars in Thousands)
Rate Sensitive Assets
<S> <C> <C> <C> <C> <C>
Interest Only Strips $ 21,685 $ 19,785 $ 15,752 $ 13,487 $ 11,805
Prepayment rate 3%-24% 9%-24% 13%-24% 13%-24% 13%-24%
Servicing Rights $ 2,761 $ 4,228 $ 4,218 $ 3,505 $ 2,909
Prepayment rate 3%-24% 9%-24% 13%-24% 13%-24% 13%-24%
Rate Sensitive Liabilities
Fixed interest rate borrowings $ 62,873 $ 16,406 $ 9,960 $ 7,824 $ 9,208
Average interest rate 8.77% 9.62% 10.03% 10.87% 10.58%
Variable interest rate borrowings $ 26,488 -- -- -- --
Average interest rate 7.04% -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Amount Maturing in Years Ending June 30,
----------------------------------------
Fair
Thereafter Total Value
--------- -------- --------
Rate Sensitive Assets
<S> <C> <C> <C>
Interest Only Strips $100,670 $183,184 $100,426
Prepayment rate 13%-24% 13%-24%
Servicing Rights $ 11,799 $ 29,420 $ 18,531
Prepayment rate 13%-24% 13%-24%
Rate Sensitive Liabilities
Fixed interest rate borrowings $ 8,911 $115,182 $115,182
Average interest rate 11.19% 10.24%
Variable interest rate borrowings -- $ 26,488 $ 26,488
Average interest rate -- 7.07%
</TABLE>
44
<PAGE>
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.
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.
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.
45
<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 insurance 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.
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.
46
<PAGE>
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.
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.
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
47
<PAGE>
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.
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.
48
<PAGE>
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.
Item 7. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants........................50
Consolidated Balance Sheets...............................................51
Consolidated Statements of Income.........................................53
Consolidated Statements of Stockholders' Equity...........................54
Consolidated Statements of Cash Flows.....................................55
Notes to Consolidated Financial Statements...............................58-83
49
<PAGE>
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.
/s/ BDO Seidman, LLP
- ----------------------------
Philadelphia, Pennsylvania
September 11, 1998
50
<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
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
52
<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.
53
<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 Total
-----------------------
Number of Paid-In Retained Note Stockholders'
Shares Amount Capital Earnings Receivable Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 2,128,154 $ 2,128 $ 1,331,892 $ 809,394 $ -- $ 2,143,414
Options exercised 225,012 225 599,807 -- (600,032 ) --
Cash dividends
($.03 per share) -- -- -- (70,595 ) -- (70,595)
Net income -- -- -- 2,318,696 -- 2,318,696
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 2,353,166 2,353 1,931,699 3,057,495 (600,032 ) 4,391,515
Common stock issued
in acquisition 1,150,000 1,150 20,737,778 -- -- 20,738,928
Cash dividends
($.06 per share) -- -- -- (158,248) -- (158,248)
Net income -- -- -- 5,939,833 -- 5,939,833
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 3,503,166 3,503 22,669,477 8,839,080 (600,032 ) 30,912,028
Common stock issued
in acquisition 20,240 20 499,980 -- -- 500,000
Nonemployee options -- -- 86,500 -- -- 86,500
Cash dividends
($.06 per share) -- -- -- (210,778 ) -- (210,778)
Net income -- -- -- 11,454,416 -- 11,454,416
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 3,523,406 $ 3,523 $ 23,255,957 $ 20,082,718 $ (600,032 ) $ 42,742,166
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
54
<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 1,916,029 -- --
subsidiary
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 sales 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 )
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 )
- --------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
57
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
1. Summary of Business
Significant
Accounting American Business Financial Services, Inc. ("ABFS"), together with its
Policies 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.
</TABLE>
58
<PAGE>
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.
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.
59
<PAGE>
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.
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.
60
<PAGE>
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.
61
<PAGE>
The following chart presents certain
weighted-average estimates used in the initial
recording of the interest-only strips
receivable:
<TABLE>
<CAPTION>
<S> <S> <C> <C>
Year ended June 30, 1998 1997
-------------------------------------------------------------------------------
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% - 13.0% 3.0% - 9.5%
-------------------------------------------------------------------------------
(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.
Income Taxes
The Company files a consolidated federal
income tax return.
The Company uses the liability method in
accounting for income taxes.
</TABLE>
62
<PAGE>
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.
63
<PAGE>
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.
64
<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," 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.
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.
65
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
2. Loan and Lease <C> <C> <C>
Receivables June 30, 1998 1997
--------------------------------------------------------------------------------
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.
66
<PAGE>
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.
The serviced loan and lease portfolio, which
includes loans and leases sold to investors
and those retained by the Company, is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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 Portfolio Securitizations Total
--------------------------------------------------------------------------------
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>
67
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
4. Interest Only Strips and
Other June 30, 1998 1997
receivables --------------------------------------------------------------------------------
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.
The activity in the interest-only strip
receivables is summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended June 30, 1998 1997
-------------------------------------------------------------------------------
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>
68
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
5. Property and
Equipment June 30, 1998 1997
--------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
6. Other Assets
June 30, 1998 1997
--------------------------------------------------------------------------------
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>
69
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
7. Subordinated Debt
and Notes Payable June 30, 1998 1997
--------------------------------------------------------------------------------
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 September 1998; interest at
LIBOR plus 1.25%, payable monthly;
collateralized 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 --
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
June 30, 1998 1997
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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 In May 1996, the stockholders approved an
Preferred Stock 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.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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:
Number of Weighted-Average
Shares Exercise Price
-------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
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:
Number of Weighted-Average
Shares Exercise Price
-------------------------------------------------------------------------------
Options granted and outstanding,
June 30, 1998 20,000 $ 23.25
-------------------------------------------------------------------------------
</TABLE>
72
<PAGE>
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>
<S> <C> <C> <C> <C> <C>
Number of Weighted-Average
Shares Exercise Price
-------------------------------------------------------------------------------
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>
73
<PAGE>
The following tables summarize information
about stock options outstanding at June
30,1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Options Outstanding
-------------------------------------------------------------------------------
Weighted
Remaining
Range of Number Contractual Weighted-Average
Exercise Prices of Shares Life in Years Exercise Price
of Options
-------------------------------------------------------------------------------
$ 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
-------------------------------------------------------------------------------
Options Exercisable
-------------------------------------------------------------------------------
Weighted
Remaining
Range of Number Contractual Weighted-Average
Exercise Prices of Shares Life in Years Exercise Price
of Options
-------------------------------------------------------------------------------
$ 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.
74
<PAGE>
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.
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>
<S> <C> <C> <C> <C> <C>
June 30, 1998 1997 1996
-------------------------------------------------------------------------------
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>
75
<PAGE>
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>
<S> <C> <C> <C> <C> <C>
June 30, 1998 1997 1996
-------------------------------------------------------------------------------
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%
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
-------------------------------------------------------------------------------
</TABLE>
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.
76
<PAGE>
The cumulative temporary differences resulted
in net deferred income tax assets or
liabilities consisting primarily of the
following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998 1997
-------------------------------------------------------------------------------
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.
77
<PAGE>
A reconciliation of income taxes at federal
statutory rates to the Company's tax provision
is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998 1997 1996
-------------------------------------------------------------------------------
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>
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
11. Commitment Lease Commitment
and
Contingencies 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
-------------------------------------------------------------------------------
</TABLE>
78
<PAGE>
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 No market exists for certain of the Company's
Financial assets and liabilities. Therefore, fair value
Instruments 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.
79
<PAGE>
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>
<S> <C> <C> <C> <C> <C>
June 30, 1998
-------------------------------------------------------------------------------
Carrying Value Fair
Value
-------------------------------------------------------------------------------
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 18,472,576
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.
Interest-Only Strips - Fair value is
determined using estimated discounted
future cash flows taking into
consideration anticipated prepayment
rates.
80
<PAGE>
Servicing Rights - Fair value is
determined using estimated discounted
future cash flows taking into
consideration anticipated prepayment
rates.
Subordinated Debt and Notes Payable -
The fair value of fixed-maturity
subordinated debt is estimated using
the rates currently offered for
debentures of similar maturities.
13. Hedging The Company regularly securitizes and
Transactions 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 The Company has a 401(k) defined
Benefit Plan 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.
81
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
-------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
-------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
84
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance With Section 16(a) of the Exchange Act
The information required to be included in Item 9 of Part III
of this Form 10-KSB incorporates by reference certain information from the
Registrant's definitive proxy statement, for its 1998 annual meeting of
stockholders to be filed with the SEC not later than 120 days after the end of
the Registrant's fiscal year covered by this report.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act ("Section 16(a)") requires the
Company's directors, executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1998 all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied.
Item 10. Executive Compensation
The information required to be included in Item 10 of Part III of this
Form 10-KSB incorporates by reference certain information and the Registrant's
definitive proxy statement, for its 1998 annual meeting of stockholders to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Registrant's fiscal year covered by this report.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of June 30, 1998, the beneficial
ownership of the Company's Common Stock: (i) by each person known by the Company
to be the beneficial owner of five percent or more of the Company's outstanding
Common Stock, (ii) by each director and nominee for director of the Company,
(iii) by each executive officer whose compensation exceeded $100,000 during
fiscal 1998 (the "Named Officers"), and (iv) by the directors, director nominees
and executive officers of the Company as a group. Unless otherwise specified,
all persons listed below have sole voting and investment power with respect to
their shares.
85
<PAGE>
<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, 927,044 (2) (3) 25.9%
Chief Executive Officer, Chief Operating
Officer and Director of ABFS
and Beverly Santilli, President of ABC
and Executive Vice President and Secretary of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Michael DeLuca, Director of ABFS 199,735 (4) 5.6
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 175,561 (4) 4.9
1126 Bryn Tyddyn Drive
Gladwyne, PA 19035
Leonard Becker, Director of ABFS 116,230 (4) 3.3
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Harold E. Sussman, Director of ABFS 106,711 (4) 3.0
Colliers, Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 25,500 (5) (6)
Senior Vice President and General
Counsel of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
17,500 (7) (6)
David M. Levin
Senior Vice President - Finance and Chief
Financial Officer of ABFS
111 Presidential Blvd., Suite 215
Bala Cynwyd, PA 19004
Wellington Management Company, LLP 474,400 (8) 13.5
75 State Street
Boston, MA 02109
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Name, Position and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned(1) of Class
- ----------------------------------------------------------- ----------------------------- ---------------------
<S> <C> <C>
Bay Pond Partners, L.P., Wellington Hedge Management, 291,500(9) 8.3
LLC and Wellington Hedge Management, Inc.
75 State Street
Boston, MA 02109
All executive officers and directors as a group (eight 1,568,281(10) 41.9
persons)
</TABLE>
- -------------------
(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 27,500 shares of Common Stock awarded to Mr.
Santilli pursuant to the Company's Stock Option Plan, all of which are
currently exercisable. Also includes options to purchase 12,500 and 5,000
shares of the Company's Common Stock awarded to Mrs. Santilli pursuant to
the Company's Stock Option Plan, of which options to purchase 14,000
shares are not currently within 60 days of the Record Date.
(4) Includes options to purchase 27,500 shares of Common Stock awarded to each
non-employee director of the Company pursuant to the Company's 1995 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 the Company's Common Stock awarded to Mr. Ruben pursuant to the
Company's Stock Option Plan which option is currently exercisable. Also
includes options to purchase 12,500 and 5,000 shares of the Company's
Common Stock awarded to Mr. Ruben pursuant to the Company's Stock Option
Plan, of which options to purchase 14,000 shares are exercisable within 60
days of the Record Date.
(6) Less than one percent.
(7) Includes options to purchase 12,500 and 5,000 shares of the Company's
Common Stock awarded to Mr. Levin pursuant to the Company's Stock Option
Plan, of which options to purchase 14,000 shares are not currently within
60 days of the Record Date.
(8) 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. See Footnote 9 below.
(9) As reported in a Schedule 13G dated February 17, 1998 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
shares beneficially owned by them.
(10) Includes options to purchase 222,500 shares of the Company's Common Stock
awarded to directors and officers of the Company pursuant to the Company's
stock option plans of which options to purchase 45,000 shares of the
Company's Common Stock are not currently exercisable.
87
<PAGE>
Item 12. Certain Relationships and Related Transactions
The information required to be included in Item 12 of Part III of this
Form 10-KSB incorporates by reference certain information from the Registrant's
definitive proxy statement, for its 1998 annual meeting of stockholders to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Registrant's fiscal year covered by this report.
88
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference from Exhibit 3.1 of ABFS' Annual
Report on Form 10-KSB for the fiscal year ended June 30,
1996 filed on September 27, 1996, File No. 0-22472 (the
"1996 Form 10-KSB")).
3.2 Bylaws of ABFS (Incorporated by reference from Exhibit 3.2
of the Registration Statement on Form SB-2 filed December
27, 1996, Registration Number 333- 18919 (the "1996 Form
SB-2")).
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")).
89
<PAGE>
Exhibit Number Description
- -------------- -----------
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
(Incorporated by reference from Exhibit 4.8 of the
Registration Statement on Form S-2 filed on September 21,
1998 (the "Form S-2")).
4.9 Form of Unsecured Investment Note (Incorporated by reference
from Exhibit 4.9 of the Form S-2).
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")).
90
<PAGE>
Exhibit Number Description
- -------------- -----------
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).
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 of 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).
91
<PAGE>
Exhibit Number Description
- -------------- -----------
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")).
92
<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. 0-22474).
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).
93
<PAGE>
Exhibit Number Description
- -------------- -----------
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).
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).
94
<PAGE>
Exhibit Number Description
- -------------- -----------
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).
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 (Incorporated by reference from Exhibit
10.39 of the Form S-2).
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
(Incorporated by reference from Exhibit 10.40 of the Form
S-2).
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 (Incorporated by reference from
Exhibit 10.41 of the Form S-2).
95
<PAGE>
Exhibit Number Description
- -------------- -----------
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
(Incorporated by reference from Exhibit 10.42 of the Form
S-2).
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,
National Association, as administrative agent for lenders
(Incorporated by reference from Exhibit 10.43 of the Form
S-2).
11 Statement of Computation of Per Share Earnings (Included in
Note 15 of the Notes to Consolidated Financial Statements).
21 Subsidiaries of the Company.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There has been no Current Report on Form 8-K filed
during the quarter ended June 30, 1998.
96
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<CAPTION>
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
<S> <C>
Date: September 18, 1998 By: /s/ Anthony J. Santilli, Jr.
-----------------------------
Name: Anthony J. Santilli, Jr.
Title: Chairman, President, Chief Executive Officer,
Chief Operating Officer and Director
(Duly Authorized Officer)
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
/s/Anthony J. Santilli, Jr. /s/Michael DeLuca
- ------------------------------------------------ --------------------------------
Name: Anthony J. Santilli, Jr. Name: Michael DeLuca
Title: Chairman, President, Chief Executive Title: Director
Officer, Chief Operating Officer and
Director (Principal Executive and
Operating Officer)
Date: September 18, 1998 Date: September 18, 1998
/s/Harold Sussman /s/Richard Kaufman
- ------------------------------------------------ --------------------------------
Name: Harold Sussman Name: Richard Kaufman
Title: Director Title: Director
Date: September 18, 1998 Date: September 18, 1998
/s/David M. Levin /s/Leonard Becker
- ------------------------------------------------ --------------------------------
Name: David M. Levin Name: Leonard Becker
Title: Senior Vice President - Finance Title: Director
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: September 18, 1998 Date: September 18, 1998
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
21 Subsidiaries
27 Financial Data Schedule
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
JURISDICTION
PARENT SUBSIDIARY OF INCORPORATION
- ------------------------------- ----------------------------------------------- ------------------------------
<S> <C> <C>
American Business Financial
Services, Inc. ("ABFS") American Business Credit, Inc. ("ABC") Pennsylvania
ABC Processing Service Center, Inc. Pennsylvania
ABC HomeAmerican Credit, Inc. ("HAC")(1) Pennsylvania
ABC HomeAmerican Consumer Discount, Inc. Pennsylvania
ABC American Business Leasing, Inc.("ABL") Pennsylvania
ABC ABC Holdings Corporation Pennsylvania
ABC American Business Finance Corporation Delaware
ABC August Advertising Agency Inc. Pennsylvania
ABC & HAC ABFS 1995-1, Inc. Delaware
ABC & HAC ABFS 1995-2, Inc. Delaware
ABC & HAC ABFS 1996-1, Inc. Delaware
ABC & HAC ABFS 1996-2, Inc. Delaware
ABC & HAC ABFS 1997-1, Inc. Delaware
ABC & HAC ABFS 1997-2, Inc. Delaware
ABC, HAC & New Jersey
Mortgage and Investment ABFS 1998-1, Inc. Delaware
Corp. ("NJMIC")
ABC, HAC & NJMIC ABFS 1998-2, Inc. Delaware
ABC NJMIC New Jersey
ABC Federal Leasing Corp. ("FLC") New Jersey
ABL and FLC ABFS 1998-A-1, Inc. Delaware
ABL and FLC ABFS 1998-A-2, Inc. Delaware
ABL and FLC ABFS Finance LLC Delaware
ABL and FLC ABFS Residual LLC Delaware
FLC FLC Financial Corp. Delaware
FLC FLC II Financial Corp. Delaware
</TABLE>
(1) HomeAmerican Credit, Inc. is doing business as Upland Mortgage.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of American Business Financial Services, Inc.
and Subsidiaries as of June 30, 1998 and the year ended and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,485,759
<SECURITIES> 0
<RECEIVABLES> 67,556,693
<ALLOWANCES> 1,078,166
<INVENTORY> 0
<CURRENT-ASSETS> 88,437,038
<PP&E> 12,228,423
<DEPRECIATION> 4,443,760
<TOTAL-ASSETS> 226,551,060
<CURRENT-LIABILITIES> 119,085,555
<BONDS> 0
0
0
<COMMON> 3,523
<OTHER-SE> 42,738,643
<TOTAL-LIABILITY-AND-EQUITY> 226,551,060
<SALES> 0
<TOTAL-REVENUES> 60,986,692
<CGS> 0
<TOTAL-COSTS> 43,096,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,630,910
<INTEREST-EXPENSE> 13,189,832
<INCOME-PRETAX> 17,889,713
<INCOME-TAX> 6,435,297
<INCOME-CONTINUING> 11,454,416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,454,416
<EPS-PRIMARY> 3.26
<EPS-DILUTED> 3.13
</TABLE>
