<PAGE>
As filed with the Securities and Exchange Commission on October 13, 1999
Registration No. 333-87333
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
PRE-EFFECTIVE AMENDMENT
NO. ONE TO FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0418807
- -------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
(Address, including zip code, and telephone number,
including area code, of registrant=s
principal executive offices)
ANTHONY J. SANTILLI
Chairman, President, Chief Executive Officer,
Chief Operating Officer and Director
American Business Financial Services, Inc.
Balapointe Office Center
111 Presidential Boulevard
Bala Cynwyd, PA 19004
(610) 668-2440
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
JANE K. STORERO, ESQUIRE
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, Pennsylvania 19103-6998
(215) 569-5500
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective registration statement filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective registration statement filed pursuant
to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434 please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
[GRAPHIC OMITTED]
American Business Financial Services, Inc.
$300,000,000 of Subordinated Debt Securities
The following terms apply to the subordinated investment notes and the
adjustable-rate, subordinated money market notes we are offering. For a more
detailed description of these securities, see "Highlights of Terms of the Debt
Securities," "Prospectus Summary -- Description of Debt Securities Offered" and
"Description of the Debt Securities Offered and the Indenture."
Terms of Debt Securities Offered
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Investment Notes Money Market Notes
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Annual Interest Rate ...... Fixed upon issuance based upon the Adjustable upon notice to holders, but
term length chosen. not less than 4.0% per year. No inter-
est on balances of less than $1,000.
- -----------------------------------------------------------------------------------------------------------------
Payment of Interest ....... Periodic cash payments. Interest paid in the form of additional
securities.
- -----------------------------------------------------------------------------------------------------------------
Redemption by Holder ...... Upon death or total disability for secu- Redemptions of $500 or greater per-
rities with remaining maturities mitted upon 10 business days written
greater than one year. notice to us. Redemption by draft also
available.
- -----------------------------------------------------------------------------------------------------------------
Redemption by Company ..... Not redeemable. Redeemable upon 30 days written
notice.
- -----------------------------------------------------------------------------------------------------------------
Maturity .................. Three months to 120 months. No fixed maturity.
- -----------------------------------------------------------------------------------------------------------------
Transferability ........... Upon our prior written consent Upon our prior written consent.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
We will receive a total of approximately $292.5 million of the proceeds
from the sale of the debt securities and money market notes after paying
expenses. We estimate expenses to be $7.5 million. We do not presently intend
to use registered broker-dealers to assist with the sale of the debt
securities. If we elect to use broker-dealers on a best efforts basis in
connection with future sales of the investment notes or money market notes, we
anticipate that we will pay commissions of up to 10% of the sales price to
those brokers and we may reimburse those brokers for certain costs and
expenses. If we use brokers, expenses of the offering will increase and the
proceeds we receive will be less than currently estimated.
We will provide the interest rates currently being offered on the debt
securities in a supplement to this prospectus. You should read this prospectus
and the rate supplement carefully before you invest.
We are not subject to state or federal statutes or regulations applicable
to banks and/or savings and loan associations with regard to insurance, the
maintenance of reserves, the quality or condition of our assets or other
matters. These debt securities are not certificates of deposit. The payment of
principal and interest on these securities is not guaranteed by any
governmental or private insurance fund or any other entity. Our sources of
funds for the repayment of principal at maturity and the ongoing payment of
interest on these debt securities include revenues from operations, including
the securitization or sale of loans from our portfolio working capital, and
cash generated from additional debt financing. These debt securities are
unsecured. We do not contribute funds to a separate account such as a sinking
fund to repay the debt represented by these securities upon maturity.
There is no public trading market for these securities. Due to the
non-negotiable nature of these securities, it is unlikely that an active
trading market will develop.
An investment in these securities involves certain risks. These securities
are unsecured obligations, which are subordinated to our senior debt. You
should consider carefully the risk factors and the other information set forth
in this prospectus before you decide to purchase these securities. See "Risk
Factors" beginning on page 9 for information that should be considered by
prospective purchasers of these securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
---------------------
The date of this prospectus is October __, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary .................................................................... 3
Highlights of the Terms of the Debt Securities Offered ................................ 8
Risk Factors .......................................................................... 9
Use of Proceeds ....................................................................... 17
Description of the Debt Securities Offered and the Indenture .......................... 18
Selected Consolidated Financial Data .................................................. 27
Management's Discussion and Analysis of Financial Condition and Results of Operations . 29
Business .............................................................................. 46
Where You Can Find More Information ................................................... 58
Management ............................................................................ 59
Principal Stockholders ................................................................ 61
Market for Common Stock and Related Stockholder Matters ............................... 62
Plan of Distribution .................................................................. 63
Legal Matters ......................................................................... 63
Experts ............................................................................... 63
Index to Consolidated Financial Statements ............................................ F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not
contain all of the information that is important to you. To fully understand
the offering, you should read the entire prospectus carefully, including the
"Risk Factors" and the consolidated financial statements and the related notes
before you decide to purchase these securities. References in this prospectus
to "ABFS," "we," "us," and "our" refer to American Business Financial Services,
Inc. and its subsidiaries. Certain financial information contained in this
document has been adjusted to reflect a 5% stock dividend declared on August
18, 1999 and paid on September 27, 1999.
General Information Regarding Our Business
American Business Financial Services, Inc. is a diversified financial
services company operating throughout the United States. We originate loans and
leases through a retail branch network of offices. Through our principal direct
and indirect subsidiaries, we originate, service and sell:
o loans to businesses secured by real estate and other business assets,
which we refer to in this document as business purpose loans;
o mortgage loans, typically to credit-impaired borrowers, which are secured
by first and second mortgages on single-family residences and which do not
satisfy the eligibility requirements of Fannie Mae, Freddie Mac or similar
buyers which we refer to in this document as home equity loans;
o mortgage loans to borrowers with favorable credit histories which are
secured by first mortgages on one-to four-unit residential properties,
most of which satisfy the eligibility requirements of Fannie Mae and
Freddie Mac, which are referred to in this document as first mortgage
loans; and
o small ticket business equipment leases, which generally involve amounts
of $2,000 to $250,000.
In addition, we have entered into business arrangements with several
financial institutions pursuant to which we will purchase home equity loans
that do not meet the underwriting guidelines of the selling institution but
that do meet our underwriting criteria which is referred to in this document as
the Bank Alliance Program.
Our loan customers currently fall primarily in two categories. 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 the most favorable
credit characteristics. These borrowers generally have impaired or
unsubstantiated credit characteristics and/or unverifiable income. The second
category of customers includes borrowers who would qualify for loans from
traditional lending sources but who still elect to use our products and
services. Our experience has indicated that these borrowers are attracted to
our loan products as a result of our marketing efforts, the personalized
service provided by our staff of highly trained lending officers and our timely
response to loan requests. Historically, both categories of customers have been
willing to pay our origination fees and interest rates even though they are
generally higher than those charged by traditional lending sources. Our lease
customers are typically small businesses or proprietorships with less than 100
employees and favorable credit histories.
We were incorporated in Delaware in 1985 and we began operations in 1988,
initially offering business purpose loans secured by real estate through our
subsidiary, American Business Credit.
The ongoing securitization of our loans and leases is a central part of
our current business strategy. A securitization is a financing technique often
used by originators of financial assets to raise capital. A securitization
involves the transfer of a pool of financial assets, in our case loans or
leases, to a trust in exchange for certificates, notes or other securities
issued by the trust and representing an undivided interest in the trust assets.
The transfer to the trust could involve a sale or pledge of the financial
assets
3
<PAGE>
depending on the particular transaction. A portion of the certificates, notes
or other securities are then sold to investors for cash. Often the originator
of the loans or leases retains the right to service the assets for a fee and
may also retain an interest in the cash flows generated by the securitized
assets referred to as a residual interest which is subordinate to the regular
interest sold to investors. Through June 30, 1999, we had securitized an
aggregate of $1.3 billion of loans and leases, consisting of $201.3 million of
business purpose loans, $969.8 million of home equity loans, and $152.3 of
equipment leases. We retain the servicing rights on all securitized loans and
leases. See "Business -- Securitizations."
In addition to securitizations, we fund our operations with subordinated
debt that we offer by means of this prospectus which was declared effective by
the SEC from our principal operating office located in Pennsylvania and branch
offices located in Florida and Arizona. We have offered this debt without the
assistance of an underwriter or dealer. At June 30, 1999, we had $212.9 million
in subordinated debt outstanding. This debt had a weighted average interest
rate of 9.35% and a weighted average maturity of 21 months as of June 30, 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
We intend to continue to use funds generated from the securitization of
loans and leases as well as the sale of subordinated debt to increase our loan
and lease originations and investments in operations required to position us
for expansion into new geographic markets, including the development of the
Internet as a distribution channel. We also continue to explore a variety of
strategic options to broaden our product offerings and reduce our cost of
funds. To achieve these goals, we may consider the acquisition of other finance
companies or related companies, the purchase of portfolios of loans, the
establishment or purchase of a state or federally chartered financial
institution or industrial loan company, the issuance of secured credit cards,
the origination and servicing of loans insured by the Small Business
Administration and the engagement of independent NASD registered brokers to
assist in the sale of the subordinated debt securities. We cannot assure you
that we will engage in any of the activities listed above or the impact of
those activities on our financial condition or results of operations.
Our principal executive office is located at 103 Springer Building, 3411
Silverside Road, Wilmington, Delaware 19810. The telephone number at that
address is (302) 478-6160. Our principal operating office and the executive
offices of our subsidiaries are located at Balapointe Office Centre, 111
Presidential Boulevard, Suite 215, Bala Cynwyd, PA 19004. The telephone number
at the Balapointe Office Centre is (610) 668-2440. We maintain a site on the
World Wide Web at www.abfsonline.com. The information on our web site is not
and should not be considered part of this document.
4
<PAGE>
Summary Consolidated Financial Data
You should consider our consolidated financial information set forth below
together with the more detailed consolidated financial statements, including
the related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Gain on sale of loans and leases ....... $ 65,640 $ 41,316 $ 20,043 $ 8,721 $ 1,350
Interest and fees ...................... 17,424 17,386 5,584 3,245 4,058
Other .................................. 3,360 633 335 129 143
--------- --------- --------- -------- --------
Total revenues ........................... 86,424 59,335 25,962 12,095 5,551
Total expenses ........................... 64,573 41,445 16,960 8,974 4,657
--------- --------- --------- -------- --------
Operating income before income taxes ..... 21,851 17,890 9,002 3,121 894
Income taxes ............................. 7,763 6,435 3,062 802 313
--------- --------- --------- -------- --------
Net income ............................... $ 14,088 $ 11,455 $ 5,940 $ 2,319 $ 581
========= ========= ========= ======== ========
Per Common Share Data:
Net income (a) ......................... $ 3.72 $ 2.98 $ 1.95 $ 0.96 $ 0.26
Cash dividends declared ................ 0.165 0.06 0.06 0.03 --
</TABLE>
- -------------
(a) Amounts have been retroactively adjusted to reflect the effect of a 5%
stock dividend declared August 18, 1999 as if the shares had been
outstanding for each period presented.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......... $ 22,395 $ 4,486 $ 5,014 $ 5,345 $ 4,734
Loan and lease receivables, net
available for sale ............... 33,776 62,382 35,712 18,003 8,669
Other ............................. 6,863 4,096 1,144 534 328
Total assets ...................... 396,301 226,551 103,989 46,894 22,175
Subordinated debt ................. 212,902 115,182 56,486 33,620 17,800
Total liabilities ................. 338,055 183,809 73,077 42,503 20,031
Stockholders' equity .............. 58,246 42,742 30,912 4,392 2,143
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
Originations:
Business Purpose Loans ......... $ 64,818 $ 52,335 $ 38,721 $ 28,872 $ 18,170
Home Equity Loans .............. 634,820 328,089 91,819 36,479 16,963
First Mortgage Loans ........... 66,519 33,671 -- -- --
Equipment Leases ............... 96,289 70,480 8,004 5,967 2,220
Loans and Leases sold:
Securitizations ................ 777,598 384,700 115,000 36,506 9,777
Other .......................... 105,751 51,594 3,817 19,438 31,948
Total managed loan and lease
portfolio ...................... 1,176,918 559,398 176,651 59,891 17,774
Average loan/lease size:
Business Purpose Loans ......... 80 83 78 78 71
Home Equity Loans .............. 74 62 51 47 46
First Mortgage Loans ........... 165 154 -- -- --
Equipment Leases ............... 23 21 11 11 12
Weighted average interest rate on
loans and leases originated:
Business Purpose Loans ......... 15.91% 15.96% 15.91% 15.83% 16.05%
Home Equity Loans .............. 11.05 11.95 11.69 9.94 12.68
First Mortgage Loans ........... 7.67 8.22 -- -- --
Equipment Leases ............... 11.40 12.19 15.48 17.22 15.85
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets ........... 4.56% 6.93% 7.87% 6.71% 3.37%
Return on average equity ........... 28.10 31.10 33.65 70.96 31.36
Total delinquencies as a percentage
of total portfolio serviced, at
end of period ..................... 3.19 3.01 2.15 2.30 3.84
Real estate owned as a percentage
of total portfolio serviced, at
end of period ..................... .85 .16 .34 1.01 4.29
Loan and lease losses as a
percentage of the average total
portfolio serviced during the
period ............................ .12 .12 .07 .33 .66
Pre-tax income as a percentage of
total revenues .................... 25.28 30.15 33.99 25.81 16.11
Ratio of earnings to fixed charges . 1.92 2.23 2.56 1.97 1.54
</TABLE>
6
<PAGE>
Overview of the Offering
The Offering. We are offering up to $300.0 million of subordinated
investment notes and adjustable rate subordinated money market debt securities
referred to herein as debt securities. The debt securities will be issued
pursuant to an indenture between us and U.S. Bank, Trust National Association,
a national banking association as trustee. No minimum amount of debt securities
must be sold in the offering. We may withdraw or cancel the offering at any
time. In the event of such withdrawal or cancellation, the debt securities
previously sold will remain outstanding until maturity and pending orders will
be irrevocable. See "Plan of Distribution."
Unsecured Obligations. The debt securities are not insured, guaranteed or
secured by any lien on any of our assets. We do not intend to contribute funds
to a separate fund, such as a sinking fund, to provide funds to repay the debt
securities upon maturity. See "Risk Factors -- We are not required to set aside
funds to repay the debt securities offered."
Subordinated Obligations. The debt securities will be second in right of
repayment, or subordinated, to our senior debt. As of June 30, 1999 and August
30, 1999, we had $58.7 million and $154.2 million, respectively, of senior debt
outstanding. There is no limitation on the amount of senior debt we may incur.
In addition, at June 30, 1999 and August 30, 1999, there was $6.0 million and
$5.5 million, respectively, of subsidiary debt which is senior in right of
payment to the debt securities. See "Description of the Debt Securities Offered
and the Indenture" for a description of what constitutes senior debt.
Parity Debt. Upon liquidation or dissolution, our indebtedness, other than
the senior debt, will have rights equal to those of the debt securities being
offered. As of June 30, 1999 and August 30, 1999, we had $206.9 million and
$225.5, respectively, of indebtedness which will rank equally in right of
payment with the debt securities. See "Description of the Debt Securities
Offered and the Indenture."
Orders. Your order will be irrevocable upon acceptance by us. We may
reject your order in whole or in part, for any reason. If your order is not
accepted by us, we will promptly refund the funds you paid with your order to
you without deduction of any costs and without interest. See "Plan of
Distribution."
Upon acceptance of an order, we will issue a confirmation statement
reflecting ownership to each purchaser. This statement is not a negotiable
instrument, and no rights of ownership in the security may be transferred by
the endorsement and deliver of the statement to a purchaser.
Overview of Terms of Debt Securities. For an overview of the debt
securities, see "Highlights of Terms of Debt Securities Offered" below and
"Description of the Debt Securities Offered" appearing in this prospectus.
Use of Proceeds. We intend to use the net proceeds resulting from the sale
of the debt securities for our general corporate purposes, including financing
the growth of our loan and lease portfolios, the repayment of our outstanding
debt and possible unspecified acquisitions of related businesses or assets. We
are reviewing our strategic options with respect to growth through acquisitions
and otherwise. This initiative may include consideration of, and discussion
with, various potential targets from time to time including mortgage companies,
leasing companies, banks and thrifts. No specific allocation of such proceeds
has been determined as of the date of this prospectus. See "Use of Proceeds."
7
<PAGE>
HIGHLIGHTS OF TERMS OF THE DEBT SECURITIES OFFERED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Investment Notes
- -------------------------------------------------------------------------------------------
<S> <C>
Types of Security Offered ........... Unsecured, subordinated, fixed term
subordinated debt security.
- -------------------------------------------------------------------------------------------
Denomination of Initial Purchase Minimum purchase: $1,000 per security or any
and Additional Purchases ........... amount in excess of $1,000.
- -------------------------------------------------------------------------------------------
Annual Interest Rate ................ Fixed upon issuance. You may choose a term
length and the applicable interest rate will be
based upon the term chosen.
- -------------------------------------------------------------------------------------------
Payment of Interest ................. Interest on investment notes with remaining
maturities of less than one year will be
compounded daily and paid at maturity.
Interest on investment notes with maturities of
one year or greater will be compounded daily
and, at the election of the holder, paid at
maturity, monthly, quarterly, semi-annually or
annually.
- -------------------------------------------------------------------------------------------
Redemption by Holder ................ Investment notes with remaining maturities of
less than one year are not redeemable prior to
maturity. Investment notes with maturities of
one year or greater may be redeemed by the
holder following his/her total permanent
disability (as described under the heading
"Description of the Debt Securities Offered
and the Indenture C Provisions Relating to
Investment Notes"), or by his/her estate after
death, at the principal amount plus accrued
interest. Otherwise, the holder will have no
right to cause redemption prior to maturity (for
joint holders, see "Description of the Debt
Securities Offered and the Indenture--
Provisions Relating to Investment Notes").
- -------------------------------------------------------------------------------------------
Redemption by Company ............... Not redeemable until maturity.
- -------------------------------------------------------------------------------------------
Form/Transferability ................ In book-entry form and non-negotiable. (A
confirmation statement will be issued, not an
individual promissory note.) Not transferable
without our prior written consent.
- -------------------------------------------------------------------------------------------
Maturity ............................ Investment notes are offered with terms to
maturity of three to 120 months, the term of
each note is established at the time of
purchase.
- -------------------------------------------------------------------------------------------
Automatic Extension ................. The investment notes will be automatically
extended for a period equal to the original
term unless: (i) we notify the holder at least
seven days prior to the maturity date that an
extension will not be provided; or (ii) the
holder elects to redeem his/her notes within
seven days after the maturity date. Investment
notes to be extended will be extended at a
fixed rate equal to the rate then being offered
on newly issued investment notes of like tenor,
term and denomination at their respective
maturity dates.
- -------------------------------------------------------------------------------------------
Periodic Statements ................. Quarterly statements detailing the current
balance and interest rate paid on each note will
be mailed to each holder no later than the
tenth business day following the end of each
calendar quarter.
- -------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Money Market Notes
<S> <C>
- -------------------------------------------------------------------------------------------
Types of Security Offered ........... Unsecured, adjustable rate, subordinated debt
security.
- -------------------------------------------------------------------------------------------
Denomination of Initial Purchase Minimum purchase: $1,000 per security or any
and Additional Purchases ........... amount in excess of $1,000.
- -------------------------------------------------------------------------------------------
Annual Interest Rate ................ We will adjust the interest rate paid from time
to time in our sole discretion. The rate shall
not be less than 4.0% per year. We will notify
holders in writing at least 14 days prior to any
decrease in the interest rate. No interest will be
paid for any day on which the principal
balance is below $1,000.
- -------------------------------------------------------------------------------------------
Payment of Interest ................. Interest will be compounded daily and credited
monthly at the end of each month. No checks
will be issued in payment of interest. Accrued
interest will be added to principal in each
account in the form of additional securities.
- -------------------------------------------------------------------------------------------
Redemption by Holder ................ May be redeemed by the holder upon written
notice to us with payment to be made within
10 business days of our receipt of such notice
from the holder. Redemptions must be at least
$500, except for redemptions to close an
account. Redemptions may be made by drafts,
which are similar to checks. We will charge a
service fee if you use more than three (3)
drafts per month.
- -------------------------------------------------------------------------------------------
Redemption by Company ............... Redeemable upon 30 days written notice to the
holder.
- -------------------------------------------------------------------------------------------
Form/Transferability ................ In book-entry form and non-negotiable. (A
confirmation statement will be issued, not an
individual promissory note.) Not transferable
without our prior written consent.
- -------------------------------------------------------------------------------------------
Maturity ............................ No fixed maturity.
- -------------------------------------------------------------------------------------------
Automatic Extension ................. Not applicable.
- -------------------------------------------------------------------------------------------
Periodic Statements ................. Monthly statements detailing the current
balance and interest rate paid on each account
will be mailed to each holder no later than the
tenth business day following the end of each
month.
- -------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
RISK FACTORS
Before you invest in our debt securities, you should be aware that there
are various risks, including those described below. You should consider
carefully these risk factors together with all of the other information
included in this prospectus and the rate supplement provided to you with this
prospectus before you decide to purchase any debt securities we are offering.
Some of the information in this prospectus or the documents incorporated
by reference in this prospectus may contain forward-looking statements. You can
identify these statements by phrases such as "will likely result," "may," "are
expected to," "is anticipated," "estimate," "projected," "intends to" or other
similar words. Forward-looking statements are subject to certain risks and
uncertainties, including but not limited to the following:
o market conditions and real estate values in our primary lending area;
o credit risk related to our borrowers;
o our dependence on securitizations;
o our ability to sustain our revenue and earnings growth;
o our ability to implement our growth strategy;
o competition;
o our dependence on debt financing to fund our operations;
o changes in interest rates;
o our ability to implement an effective hedging strategy the geographic
concentration of our loans;
o risks associated with leasing activities;
o state and federal regulation and licensing requirements applicable to
our lending activities;
o claims by borrowers or investors;
o dependence on key personnel;
o environmental regulation;
o risks associated with year 2000 computer problems; and
o the properties of the debt securities being offered.
All of the above risks could cause our actual results to differ materially from
historical earnings and those presently anticipated. When considering
forward-looking statements, you should keep these risk factors in mind as well
as the other cautionary statements in this prospectus. You should not place
undue reliance on any forward-looking statement.
Risks Related to the Offering
The debt securities offered by this prospectus are not insured against loss.
No governmental or private agency insures the debt securities offered by
this prospectus. The holder of the debt securities is dependent solely upon
sources such as our earnings, proceeds from the sale or securitization of loans
and leases from our portfolio, our working capital and other sources of funds,
including proceeds from the continuing sale of subordinated debt and lines of
credit for repayment of principal at maturity and the ongoing payment of
interest on the debt securities.
Our business operations are not subject to examination by federal banking
regulators.
Since we are not a commercial bank, savings bank or thrift institution, we
are not regulated or subject to examination in the same manner as commercial
banks, savings banks and thrift institutions. Thus, our
9
<PAGE>
operations are not subject to the stringent regulatory requirements imposed
upon the operations of those entities and are not subject to periodic
compliance examinations by federal banking regulators designed to protect
investors. See "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The debt securities are unsecured and second in right of repayment to our
senior debt borrowed from institutional lenders.
The debt securities offered by this prospectus will be subordinated, or
second in right of repayment, to our senior debt. As of June 30, 1999 and
August 30, 1999, there was $58.7 million and $154.2 million, respectively, of
senior debt outstanding. There is no limitation on the amount of senior debt we
can incur. Senior debt includes any indebtedness incurred in connection with
our (including our subsidiaries) borrowings from a bank, trust company,
insurance company, or from any other institutional lender. These borrowings do
not have to be specifically designated as "senior debt." If we were to become
insolvent, our senior debt would have to be paid in full prior to payment of
debt securities in our liquidation. In addition, any indebtedness of our
subsidiaries, other than the senior debt, will have rights upon liquidation or
dissolution of the particular subsidiary prior to payment being made to the
holders of the debt securities. There may not be adequate funds remaining to
pay the principal and interest on the debt securities. See "Description of the
Debt Securities Offered and the Indenture -- Provisions Relating to All
Securities."
We are not required to set aside funds to repay the debt securities offered.
We do not contribute funds on a regular basis to a separate account,
commonly known as a sinking fund, to repay the debt securities upon maturity.
Since no funds are set aside periodically for the repayment of the debt
securities over their term, holders of the debt securities must rely on our
revenues from operations and other sources for repayment. See "Description of
the Debt Securities Offered and the Indenture -- General."
Your ability to liquidate your investment is limited because of transfer
restrictions and the lack of a trading market.
The debt securities sold under this prospectus are non-negotiable, which
means they may not be transferred without our prior written consent. There is
no established trading market for the debt securities. Due to the
non-negotiable nature of the debt securities and the lack of a market for the
sale of the debt securities, even if we permitted a transfer, investors may be
unable to liquidate their investment. See "Description of the Debt Securities
Offered and the Indenture."
Our management has broad discretion over how to use the proceeds from the
offering.
Since no specific allocation of the proceeds has been determined as of the
date of this Prospectus, our management will have broad discretion in
determining how the proceeds of the offering will be used. See "Use of
Proceeds."
Risks Related to Our Business
A decline in value of the collateral securing our loans may adversely affect
our business by reducing originations and increasing losses on foreclosure.
Our business may be adversely affected by declining real estate or other
collateral values. Any significant decline in real estate values reduces the
ability of borrowers to use home equity as collateral for borrowings. This
reduction in real estate values may reduce the number of loans we are able to
make, which will reduce the gain on sale of loans and servicing and origination
fees we will collect. Declining values will also increase the loan-to-value
ratios of loans we previously made, which in turn, increases the probability of
a loss in the event the borrower defaults and we have to sell the mortgaged
property. In addition, delinquencies and foreclosures generally increase during
economic slowdowns or recessions. As a result, the market value of the
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real estate or other collateral underlying our loans may not, at any given
time, be sufficient to satisfy the outstanding principal amount of the loans.
See "Business -- Lending and Leasing Activities" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Lending to credit-impaired borrowers may result in higher delinquencies in our
managed portfolio which could adversely impact our financial condition and
results of operation.
We market a significant portion of our loans to borrowers who are either
unable or unwilling to obtain financing from traditional sources, such as
commercial banks. Loans made to these borrowers may entail a higher risk of
delinquency and loss than loans made to borrowers who use traditional financing
sources. Total delinquent loans as a percentage of our total managed portfolio
serviced were 3.19% at June 30, 1999, as compared to 3.01% at June 30, 1998.
While we use underwriting standards and collection procedures designed to
mitigate the higher credit risk associated with lending to these borrowers, our
standards and procedures may not offer adequate protection against risks of
default. In the event loans sold and serviced by us experience higher
delinquencies, foreclosures or losses than anticipated, our results of
operations or financial condition would be adversely affected.
We maintain an allowance for credit losses on portfolio loans to account
for loans and leases that are delinquent and are expected to be ineligible for
sale into a securitization. The allowance is calculated based upon our 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. See "Business -- Lending and Leasing Activities"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our reliance upon the sale of our loans and leases through securitization may
result in fluctuating operating results.
In recent periods, a significant portion of our revenue and net income
represented gain on the sale of loans and leases in securitization
transactions. Gain on sale of loans and leases resulting from securitizations
as a percentage of total revenues was 69.6% for the fiscal year 1998 and 76.0%
for fiscal year 1999. In addition, we rely primarily on securitizations to
generate cash proceeds for:
o repayment of our warehouse credit facilities,
o repayment of other borrowings; and
o origination of additional loans and leases.
Our ability to complete securitizations depends on several conditions,
including:
o conditions in the securities markets generally,
o conditions in the asset-backed securities markets specifically; and
o the credit quality of our loans and lease portfolios.
Any substantial impairment of our securitization market for loans and leases
could have a material adverse effect on our results of operations and financial
condition. See "Business -- Securitizations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Our revenues and net income may fluctuate as a result of the timing and size of
our securitizations.
The strategy of selling loans and leases through securitizations requires
us to build an inventory of loans and leases over time. During this time we
accrue costs and expenses. We do not recognize gain on the sale of loans and
leases until we complete a securitization which may not occur until a
subsequent fiscal quarter. Operating results for a given period can fluctuate
significantly as a result of the timing and level of securitizations. If
securitizations do not close when expected, we could experience a loss for a
period. In addition, due to the timing difference between the period when costs
are incurred in connection with the
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origination of loans and leases and their subsequent sale through the
securitization, we may operate on a negative cash flow basis, which could
adversely impact our results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We may not be able to sustain the levels of revenue growth and earnings growth
that we experienced in the past.
During fiscal 1999 and fiscal 1998, we experienced record levels of total
revenue and net income as a result of increases in loan and lease originations
and the securitization of loans and leases. Total revenue increased
approximately $27.1 million, or 45.7%, between fiscal 1998 and 1999 while net
income increased approximately $2.6 million, or 23.0%. Our ability to sustain
the level of growth in total revenue and net income experienced during fiscal
1999 and fiscal 1998 depends upon a variety of factors outside our control,
including:
o interest rates,
o conditions in the asset-backed securities markets,
o economic conditions in our primary market area,
o competition, and
o regulatory restrictions.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our inability to continue to successfully implement our growth strategy may
have an adverse effect on profits.
Our growth strategy seeks to increase our loan and lease volume through
geographic expansion and further development of existing markets while
maintaining our customary origination fees, the spread between interest rates
and the interest rates we pay for capital and underwriting criteria.
Implementation of this strategy will depend in large part on our ability to:
o open or expand offices in markets with a sufficient concentration of
borrowers who meet our underwriting criteria;
o obtain adequate financing on favorable terms;
o profitably securitize our loans and leases in the secondary market on a
regular basis;
o hire, train and retain skilled employees;
o successfully implement our marketing campaigns; and
o continue to expand in the face of increasing competition from other
lenders.
Our failure with respect to any or all of these factors could impair our
ability to grow and successfully leverage our fixed costs and could have a
material adverse effect on our results of operations and financial condition.
See "Business -- Lending and Leasing Activities."
Competition from other lenders and lessors could adversely affect our profits.
The lending and leasing markets that we compete in are highly competitive.
Some competing lenders have substantially greater resources, greater
experience, lower cost of funds, and a more established market presence than we
have. If our competitors increase their marketing efforts to include our market
niche of borrowers, we may be forced to reduce the rates and fees we currently
charge in order to maintain and expand our market share. Any reduction in our
rates or fees could have an adverse impact on our results of operations. Our
profitability and the profitability of other similar lenders may attract
additional competitors into this market.
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As we expand into new geographic markets, we will face competition from
companies with established positions in these areas. We may not be able to
continue to compete successfully in the markets we serve or expand into new
geographic markets. See "Business -- Competition."
We are dependent upon the availability of financing to fund our continuing
operations.
For our ongoing operations, we are dependent upon frequent financings,
including:
o the sale of unsecured subordinated debt securities;
o warehouse credit facilities;
o lines of credit; and
o funds received from the securitization of loans and leases.
Any failure to renew or obtain adequate funding under a warehouse credit
facility, or other borrowings could hurt our profitability. To the extent that
we are not successful in maintaining or replacing existing subordinated debt
securities upon maturity, we would have to limit our loan and lease
originations or sell loans and leases earlier than intended. Limiting our
originations or our earlier sales of loans and leases could have a negative
effect on our results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
A change in market interest rates may adversely affect our profits.
Our profits are likely to be adversely affected during any period of rapid
changes, either upward or downward, in interest rates. Any future rise in
interest rates may adversely affect the following:
o customer demand for our products;
o our cost of funds;
o the spread between the rate of interest we receive on loans and interest
rates we must pay under our outstanding credit facilities and debt
securities; and
o the profit we will realize in securitizations or other sales of loans and
leases.
Any future decrease in interest rates could also reduce the amounts which
we may earn on our newly originated loans and leases. This could reduce the
spread between the interest we earn on loans and the interest we pay under our
outstanding credit facilities and subordinated debt. A decline in interest
rates could also decrease the size of the loan portfolio we service by
increasing the level of prepayments, because borrowers tend to refinance as
interest rates fall. This would result in a reduction of the servicing fees we
earn. See "Business -- Lending and Leasing Activities."
In addition, in connection with certain of our loan securitizations
undertaken, the securitization trusts have issued certificates with interest
rates which fluctuate based upon the LIBOR rate. The principal amount of these
certificates represents 10% to 15% of the amount of loans securitized. The
certificates are secured by fixed rate loans sold in the securitization. Our
profit on the sale of the certificates is in part the difference or spread
between the rate paid on the certificates and the rate paid on the loans
securing the certificates which are our residual interests. To the extent
market interest rates increase, causing the rate paid on the certificates to
increase, the value of our residual interests would be reduced or eliminated.
This would result in a reduction in our profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Decreasing interest rates could adversely effect our income due to the length
of maturities of our outstanding debt.
We are also subject to risks associated with changes in interest rates to
the extent that we have issued fixed rate subordinated debt securities with
scheduled maturities of one to ten years. At June 30, 1999, we had $93.6
million of subordinated debt securities with scheduled maturities greater than
one year. If market
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interest rates decrease in the future, the rates paid on our long term
subordinated debt could exceed the current market rate paid for similar
instruments which could result in a reduction in our profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Risk Management."
Our failure to implement an effective hedging strategy could result in losses
or negatively impact earnings.
We have implemented a hedging strategy in an attempt to mitigate the
effect of changes in interest rates on our fixed-rate mortgage loan portfolio
prior to securitization that involves in part the short sale of U.S. Treasury
securities. An effective hedging strategy is complex and no strategy can
completely insulate us from interest rate risk. In fact, poorly designed
strategies or improperly executed transactions may increase rather than
mitigate interest rate risk. Hedging involves transaction and other costs, and
these costs could increase as the period covered by the hedging protection
increases or in periods of rising and fluctuating interest rates. In addition,
the short sale of U.S. Treasury securities is not an effective hedge against
the risk that the difference between the treasury rate and the rate needed to
attract potential buyers of asset backed securities may widen. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Risk Management."
An economic downturn in the eastern region of the United States could affect
our financial performance more than other businesses which are more
geographically diversified.
Although we are licensed in numerous states, we currently originate loans
primarily in the eastern region of the United States. The concentration of
loans in a specific geographic region subjects us to the risk that a downturn
in the economy in the eastern region of the country would more greatly affect
us than if our lending business were more geographically diversified. See
"Business -- Lending and Leasing Activities" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Our securitization agreements require us to retain risk on loans and leases
that do not meet the requirements in these agreements.
Although we sell substantially all of the loans and leases we originate
through securitizations, all of the securitization agreements require that we
replace or repurchase loans or leases which do not conform to the
representations and warranties made by us at the time of sale.
Additionally, when borrowers are delinquent in making monthly payments on
loans included in a securitization trust, we are required to advance interest
payments for the delinquent loans if we deem that the advances will be
ultimately recoverable. These advances require funding from our capital
resources but have priority of repayment from the succeeding month's
collections. See "Business -- Securitizations."
Our estimation of the value of residual interests we retain when we securitize
loans could be inaccurate and could result in reduced profits.
We generally retain residual interests in the securitization transactions
we complete. A residual interest is a retained interest in the cash flow of
securitized loans and leases. We estimate the residual interests to be received
in connection with our securitizations based upon certain prepayment and
default assumptions. Our actual prepayment and default experience may vary
materially from these estimates. As a result, the gain we recognize upon the
sale of loans and leases may be overstated because actual prepayments or losses
are greater than we originally estimated. Higher levels of future prepayments,
delinquencies and/or liquidations could result in the decreased value of
residual interests which would adversely affect our income in the period of
adjustment. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks associated with leasing activities may reduce our future profitability.
There are risks associated with leasing which are different than those
associated with our mortgage lending operations. While our equipment leases are
secured by a lien on the leased equipment, the equipment
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is subject to the risk of damage, destruction or obsolescence prior to the
termination of the lease. In the case of our fair market value leases, lessees
may choose not to exercise their option to purchase the equipment for its fair
market value at the termination of the lease. When this happens, we may have to
sell the equipment to third party buyers at a discount. Our financial results
may be adversely affected by losses in the value of our leased equipment. See
"Business -- Lending and Leasing Activities."
Our lending business is subject to government regulation and licensing
requirements which may hinder our ability to operate profitably.
Our lending business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject
to various laws and judicial and administrative decisions imposing requirements
and restrictions on all or part of our home equity and first mortgage lending
activities. Our home equity and first mortgage lending activities are subject
to regulation under various federal laws including the following:
o Truth-in-Lending Act and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994);
o the Equal Credit Opportunity Act and Regulation B, as amended;
o the Real Estate Settlement Procedures Act and Regulation X;
o the Home Mortgage Disclosure Act; and
o the Fair Debt Collection Practices Act.
We are also subject to examinations by state regulatory authorities with
respect to originating, processing, underwriting, selling and servicing home
equity loans and first mortgage loans. These rules and regulations impose
licensing obligations, prohibit discrimination, regulate collection,
foreclosure and claims handling, payment features, mandate certain disclosures
and notices to borrowers and, in some cases, fix maximum interest rates, and
fees. Failure to comply with these requirements can lead to, among other
remedies, termination or suspension of licenses, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcement
actions.
Although we believe that we have implemented systems and procedures to
facilitate compliance with the foregoing requirements and believe that we are
in compliance in all material respects with applicable local, state and federal
laws, rules and regulations, more restrictive laws, rules and regulations may
be adopted in the future that could make compliance more difficult or
expensive. See "Business -- Regulation."
Claims by borrowers or investors could have an impact on our operations.
In the ordinary course of our business, we are subject to claims made
against us by borrowers and private investors arising from, among other things:
o losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentation, error and omission
by our employees, officers and agents (including our appraisers);
o incomplete documentation; and
o failure to comply with various laws and regulations applicable to our
business.
Although there are no material claims or legal actions currently assessed
against us, any claims asserted in the future may result in legal expenses or
liability which could have a material adverse effect on our results of
operations and financial condition. See "Business -- Legal Proceedings."
We depend on the services of key people, and the loss of any of these people
could disrupt our operations and result in reduced revenues.
The success of our operations depends on the continued employment of our
senior level management, and most notably Anthony J. Santilli, our Chairman,
President and Chief Executive Officer. If key members of the senior level
management were for some reason unable to perform their duties or were to leave
us for any reason, we may not be able to find capable replacements. See
"Management."
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Environmental laws and regulations may restrict our ability to foreclose on
loans secured by real estate.
In the course of our business, we have acquired, and may acquire in the
future, properties securing loans which are in default. Under various federal,
state and local environmental laws which pertain primarily to commercial
properties, a current or previous owner or operator of real property may be
required to investigate and clean up hazardous or toxic substances or chemical
releases on the property. In addition, the owner or operator may be held liable
to a governmental entity or to third parties for property damage, personal
injury, investigation and cleanup costs relating to the contaminated property.
Our ability to foreclose on the real estate collateralizing our loans, may
be limited by these environmental laws. While we would not knowingly make a
loan collateralized by real property that was contaminated, it is possible that
the environmental contamination would not be discovered until after we had made
the loan.
The costs of investigation, remediation or removal of hazardous substances
may be substantial and can easily exceed the value of the property. The
presence of hazardous substances, or the failure to properly eliminate the
substances from the property, can hurt the owner's ability to sell or rent the
property and prevent the owner from using the property as collateral for a
loan. Even people who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or remediation of
the substances at the disposal or treatment facility, whether or not the
facility is owned or operated by the person who arranged for the disposal or
treatment.
In addition to federal or state regulations, 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
the property. See "Business -- Loan and Lease Servicing."
Problems related to the year 2000 could cause system failures that impair our
operations.
Many currently installed computer systems and software products in the
United States and worldwide use two digits rather than four to define the
applicable year. Software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, such as a temporary
inability to process loan or other transactions, send statements or late
notices, or engage in similar routine business activities. This problem has
been referred to as the "Year 2000" issue. We are in the process of ensuring
our systems recognize the year 2000 as the year 2000 and not as the year 1900
by obtaining certifications from vendors regarding the Year 2000 compliance of
their products as well as testing our applications. We currently estimate that
the costs associated with this Year 2000 compliance program will be
approximately $500,000. Although we currently estimate that our information
technology systems will be Year 2000 compliant by the end of 1999, there can be
no assurance that unforeseen events would prevent us from meeting this
deadline.
We have contacted vendors with which we do a significant amount of
business to determine whether they are Year 2000 compliant and to determine the
extent to which their computer systems are subject to Year 2000 issues. We
cannot predict the extent to which Year 2000 issues will affect these third
parties, or the extent to which we would be vulnerable to the failure of these
parties to remedy any Year 2000 issues on a timely basis. Since the failure of
our vendors to convert their systems on a timely basis may have a material
adverse effect on us, we are developing a contingency plan in the event these
vendors are not Year 2000 compliant on a timely basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
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USE OF PROCEEDS
We intend to use the net proceeds resulting from the sale of the debt
securities (estimated to be approximately $292.5 million net of estimated
offering expenses if all of the securities we are offering through this
prospectus are sold) for general corporate purposes. General corporate purposes
may include:
o financing the future growth of our loan and lease portfolios;
o the repayment of warehouse credit facilities, lines of credit and our
maturing debt;
o possible future acquisitions of related businesses or assets; and
o general operating activities.
The precise amounts and timing of the application of such proceeds depends
upon many factors, including, but not limited to, the amount of any such
proceeds, actual funding requirements and the availability of other sources of
funding. Until the proceeds are used, we may invest the proceeds, depending on
our cash flow requirements, in short and long-term investments, including, but
not limited to:
o treasury bills,
o commercial paper,
o certificates of deposit,
o securities issued by U.S. government agencies,
o money market funds; and
o repurchase agreements.
Our investment policies permit significant flexibility as to the types of such
investments that we may make. We may also maintain daily unsettled balances
with certain broker-dealers. We are reviewing our strategic options with
respect to growth through acquisitions and otherwise. Our initiative may
include consideration of, and discussions with, potential target institutions
from time to time, which may include mortgage companies, leasing companies,
banks and thrifts. As of the date of this prospectus, we had no commitments or
agreements with respect to any material acquisitions.
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DESCRIPTION OF THE DEBT SECURITIES OFFERED AND THE INDENTURE
General
The debt securities represent our unsecured debt obligations. The debt
securities will be issued under the indenture between U.S. Bank Trust, National
Association a national banking association, as trustee and us. The terms of the
debt securities include those stated in the indenture and those made part of
the indenture by reference to the Trust Indenture Act of 1939, in effect on the
date the indenture is qualified under that act. The debt securities are subject
to all terms and conditions of the indenture and Trust Indenture Act. We refer
you to the indenture and the Trust Indenture Act for a complete understanding
of the debt securities. The following includes a summary of some provisions of
the indenture, and a copy of the indenture is available from us upon request.
This summary does not purport to be complete and is qualified in its entirety
by reference to the indenture, including the definitions therein of certain
terms used below.
The debt securities will be subordinated in right of payment to, or
subordinate to, the prior payment in full of all senior debt further described
in our prospectus, whether outstanding on the date of the indenture or incurred
following the date of the indenture. There is no limit on the amount of senior
debt we may incur. See "--Provisions Relating to All
Securities--Subordination."
The debt securities are not secured by any collateral or lien. There are
no provisions for a sinking fund or similar fund providing for payments on the
debt securities. See "Risk Factors -- We are not required to set aside funds to
repay the debt securities offered."
Debt securities may be purchased in the minimum amount of $1,000 or any
amount in excess of $1,000. You may not cumulate separate purchases to satisfy
the minimum denomination requirement.
Provisions Relating to Investment Notes
Maturity. We are offering investment notes with terms ranging from three
to 120 months. You will select the term of each investment note upon your
order.
Book Entry. Upon acceptance of an order, we will credit our book-entry
registration and transfer system to the account of the purchaser of the
investment note, the principal amount of such security owned of record by such
purchaser. Upon acceptance of your order, we will send each purchaser a
confirmation statement which will indicate our acceptance of the order. The
laws of some jurisdictions require that certain purchasers of securities take
physical delivery of these securities in definitive form. These legal
requirements may impair the ability to transfer the record ownership of the
investment notes.
The record owners of investment notes issued in a book-entry interest form
will not receive or be entitled to receive physical delivery of a note or
certificate evidencing such indebtedness. The registered owners of the accounts
we establish upon the purchase or transfer of investment notes shall be deemed
to be the owners of the investment notes under the indenture. The person
holding a book-entry interest in the investment notes must rely upon the
procedures established by the trustee to exercise any rights of a holder of
investment notes under the indenture. We will provide the trustee with
information regarding the establishment of new accounts and the transfer of
existing accounts on a quarterly basis.
We will provide the trustee with information, as requested, regarding the
total amount of any principal and/or interest due to book-entry owners with
regard to the investment notes on any interest payment date or upon redemption.
On each interest payment date, we will credit interest due on each account. We
shall determine the interest payments to be made to the book-entry accounts and
maintain, supervise and review any records relating to book-entry beneficial
interests in the notes.
Book-entry interests in the accounts evidencing ownership of the
investment notes are exchangeable for actual notes in denominations of $1,000
and any amount in excess of $1,000 and fully registered in those names as we
direct only if: (i) we, at our option, advise the trustee in writing of its
election to terminate the book-entry system, or (ii) after the occurrence of an
event of default under the indenture, holders of the investment notes
aggregating more than 50% of the aggregate outstanding amount of the investment
notes advise the trustee in writing that the continuation of a book-entry
system is no longer in the best interests of
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the holders of investment notes and the trustee notifies all registered holders
of these securities, of the occurrence of any such event and the availability
of definitive notes to holders of these securities requesting such notes.
Subject to the exceptions described above, the book-entry interests in these
securities shall not otherwise be exchangeable for fully registered notes.
Interest. The interest rate payable on an investment note will be
determined based upon the maturity date and term established for such
investment note at the time of order. Prevailing rates will be set forth in a
supplement to this prospectus. We will establish the interest rates payable on
the investment notes from time to time based on market conditions and our
financial requirements. We constantly re-evaluate our interest rates based upon
this analysis. Once determined, the rate of interest payable on an investment
note will remain fixed for the original term of the investment note.
We will compute interest on investment notes on the basis of an actual
calendar year and interest will compound daily. Interest on investment notes
with terms of less than twelve months will be paid at maturity. Purchasers of
investment notes with terms of twelve months or greater may elect to have
interest paid monthly, quarterly, semiannually, annually or at maturity. This
election may be changed one time by the holder during the term of these longer
term investment notes. Request to change the election must be made in writing
to us. No specific form of change of election is required. Any interest not
otherwise paid on an interest payment date will be paid at maturity.
We reserve the right to vary from time to time, at our discretion, the
interest rates we offer on the investment notes based on numerous factors other
than length of term to maturity. These factors may include, but are not limited
to: the desire to attract new investors; investment notes in excess of certain
principal amounts; investment notes purchased for IRA and/or Keogh accounts;
rollover investments; and investment notes beneficially owned by persons
residing in particular geographic localities. We may make a decision to vary
interest rates in the future based on our fundraising objectives including, but
not limited to, the attraction of new investors in particular regions, the
encouragement of the rollover of investment notes by current holders,
circumstances in the financial markets and the economy, additional costs which
we may incur in selling investment notes in a particular jurisdiction which may
at the time be relevant to our operations and other factors.
Automatic Extension. The investment note will be automatically extended
for a term identical to the term of the original investment note unless:
o We notify the holder at least seven days prior to the maturity date of
our intention not to extend the investment note; or
o The holder elects to redeem the investment note within seven days after
the maturity date.
The investment notes will continue to renew in this manner until
termination or redemption under the indenture and the investment notes by
either the holder or us. Interest shall continue to accrue from the first day
of such renewed term. Each renewed investment note will continue in all its
provisions, including provisions relating to payment, except that the interest
rate payable during any renewed term shall be the interest rate which is then
being offered on similar investment notes being offered as of the renewal date.
If similar investment notes are not then being offered, the interest rate upon
renewal will be the rate specified by us on or before the maturity date, or the
investment note's then current rate if no such rate is specified. If we notify
you of our intention to repay an investment note at maturity, no interest will
accrue after the date of maturity. Otherwise, if a holder requests repayment
within seven days after its maturity date, we will pay interest during the
period after its maturity date and prior to repayment at the lower of: (i) the
lowest interest rate then being paid on the investment notes being offered by
us to the general public; or (ii) the rate being paid on such investment note
immediately prior to its maturity. As a courtesy, we provide a request for
repayment form with such notice. Use of such form by a holder is not a
condition of repayment. Requests for repayment may also be made to us in
writing.
Place and Method of Payment. Principal and interest on the investment
notes will be payable at our principal executive office, as it may be
established from time to time, or at such other place as we may designate for
that purpose; provided, however, that payments may be made at our option by
check or draft mailed to the person entitled thereto at his/her address
appearing in the register which we maintain for that purpose.
19
<PAGE>
Redemption by Us. We will have no right to prepay an investment note. The
holder has no right to require us to prepay any such investment note prior to
its maturity date as originally stated or as it may be extended, except as
indicated below.
Redemption by the Holder upon Death or Total Permanent Disability. Except
for investment notes with remaining maturities of less than 12 months, an
investment note may be redeemed at the election of the holder following his/her
total permanent disability, as established to our satisfaction, or by his/her
estate following his/her death. The redemption price, in the event of such a
death or disability, will be the principal amount of the investment note, plus
interest accrued and not previously paid, to the date of redemption. If spouses
are joint record owners of an investment note, the election to redeem will
apply when either record owner dies or becomes subject to a total permanent
disability. In other cases of investment notes jointly held by persons who are
not legally married, the election to redeem upon the death of one joint owner
will not apply.
We may modify the foregoing policy on redemption after death or disability
in the future. However, no modification will affect the right of redemption
applicable to any outstanding investment note.
For the purpose of determining the right of a holder to demand early
repayment of an investment note, total permanent disability shall mean a
determination by a physician chosen by us that the holder, who was gainfully
employed on a full time basis at the time of purchase, is unable to work on a
full time basis, defined as working at least forty hours per week, during the
succeeding twenty-four months.
Quarterly Statements. We will provide holders of the investment notes with
quarterly statements, which will indicate, among other things, the current
account balance (including interest paid). These statements will be mailed not
later than the tenth business day following the end of each calendar quarter.
Provisions Relating to Money Market Notes
Maturity. The money market notes have no stated maturity and are
redeemable at any time in minimum amounts of $500 (or a lesser amount available
to close an account) at the option of the holder. See "-- Redemptions by the
Holder of Money Market Notes."
Book-Entry System. Upon acceptance of an order, we will credit our
book-entry registration and transfer system, the principal amount of the money
market notes owned of record by such purchaser to the account of the purchaser
of the money market note. Upon acceptance of your order, we will send each
purchaser a confirmation statement which will indicate our acceptance of the
order. The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of those securities in definitive form. These
legal requirements may impair your ability to transfer the record ownership of
the money market notes.
The record owners of money market notes issued in a book-entry only form
will not receive or be entitled to receive physical delivery of a note or
certificate. The registered owners of the accounts we establish upon the
purchase or transfer of money market notes shall be deemed to be the owners of
the money market notes under the indenture. Each person holding a book-entry
interest in the money market notes must rely upon the procedures established by
the trustee to exercise any rights of a holder of the money market notes under
the indenture. We shall provide the trustee with information regarding the
establishment of new accounts and the transfer of existing accounts on a
quarterly basis.
We will make the information regarding the total amount of any principal
and/or interest, upon which will be paid in the form of additional securities,
due to book-entry owners with regard to the money market notes on any interest
payment date or upon redemption will be made available to the trustee upon the
trustee's request. On each interest payment date, we will credit each account
interest due on such account. We shall determine the interest payments to be
made to the book-entry accounts and will maintain, supervise and review any
records relating to book- entry beneficial interests in money market notes.
Book-entry interests in the accounts evidencing ownership of the money
market notes are exchangeable for actual notes in denominations of $1,000 and
any amount in excess of $1,000 and fully registered in such names as we direct
only if: (i) we, at our option, advise the trustee in writing of our election
to terminate the book-entry system, or (ii) after the occurrence of an event of
default under the Indenture, holders of the
20
<PAGE>
money market notes aggregating more than 50% of the aggregate outstanding
amount of the money market notes advise the trustee in writing that the
continuation of a book-entry system is no longer in the best interests of the
holders of money market notes and the trustee notifies all registered holders
of the money market notes, of the occurrence of any such event and the
availability of definitive notes to holders of these securities requesting the
notes. Subject to the foregoing, the book-entry interests in the money market
notes shall not otherwise be exchangeable for fully registered notes.
Interest. We will adjust the interest rates payable on the money market
notes from time to time in our sole discretion provided that the rate shall not
be less than 4.0% per year. We will provide written notice to all holders of
the money market notes at least 14 days prior to any decrease in the interest
rate to be paid thereon. The notice shall set forth the new interest rate to be
paid and the effective date of the change. We reserve the right to increase the
interest rate paid on the money market notes at any time without prior notice
to the holders of the money market notes. Investors may inquire about the
interest rate then being paid on the outstanding money market notes by calling
us at (800) 776-4001.
Interest on each account with a balance of at least $1,000 accrues daily
and is credited monthly on the last day of each calendar month. Interest
accrued during each monthly period will not be paid by check but will be added
to the note holder's principal balance of the account in the form of additional
securities. Interest will continue to accrue on the principal balance of each
security through the date of redemption. If a holder redeems the security in
full, the principal balance of the account (including accrued interest) will be
paid by check as soon as practicable. No interest shall be paid for any day the
principal amount in any account is less than $1,000.
Subject to the limitations set forth in this prospectus, we may vary, at
our discretion, the interest rates we offer on the money market notes based on
numerous factors. These factors may include, but are not limited to: the desire
to attract new investors; money market notes in excess of certain principal
amounts; money market notes purchased for IRA and/or Keogh accounts; rollover
investments; and money market notes beneficially owned by persons residing in
particular geographic localities. As of the date of this prospectus, we are not
offering money market notes at varying rates to different investors. However,
we may make a decision to vary interest rates in the future based on our
fundraising objectives including, but not limited to, the attraction of new
investors in particular regions, circumstances in the financial markets and the
economy, any additional costs which may be incurred by us in selling money
market notes in a particular jurisdiction which may at the time be relevant to
our operations and other factors.
Redemption by the Holder of Money Market Notes. The holder of the money
market notes may redeem the security at any time in minimum amounts of $500 (or
any amount to close an account) upon not less than 10 business days written
notice to us or pursuant to the draft procedure described below.
To the extent a holder of the money market notes redeems the money market
notes and purchases new ones, the redemptions are treated as being made on a
first-in, first-out basis.
In addition, subject to any established minimum redemption amount, a
holder of money market notes may make redemptions by draft, which is similar to
a check, made payable to the order of any payee. At the request of a holder, we
will provide drafts drawn on us that will be payable through our designated
bank. All authorized signers on a money market note must submit specimen
signatures to us and must agree to abide by our rules and regulations
pertaining to money market notes. Certain banks may not provide cash at the
time of deposit of a draft, but will wait until they have received payment from
our designated bank. When a draft is presented to the bank for payment, the
bank, as agent of the holder, will cause us to redeem a sufficient amount from
the holder's money market note to cover the amount of the draft. If a holder of
more than one money market note wishes to redeem less than all of that holder's
money market notes, then the holder must direct as to which of the holder's
money market notes to redeem in whole or in part. Interest continues to accrue
on the amount of a money market note covered by a draft until the draft is
presented to our bank for payment. The bank will return a draft if the amount
of collected funds in the holder's money market notes is insufficient to cover
the draft or if the signature(s) on the draft is (are) not, in our judgment,
the same as the specimen signature(s) previously submitted to us. We reserve
the right to charge a fee for the dishonor of a draft or for a stop payment
order.
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<PAGE>
Neither we nor our bank will return canceled drafts to the holders of
money market notes, although we will provide you with copies of drafts upon
request and payment of a service charge. Holders of money market notes will
receive statements as described under "-Monthly Statements", which will reflect
draft transactions.
We will charge holders a $20 service fee for each draft presented in
excess of three drafts during any statement period. We may increase our service
charge by providing 30 days' prior written notice to each holder of a money
market note.
Redemption by Us. We will have the right to redeem a money market note at
any time upon thirty days written notice to the holder of the note.
Place and Method of Payment Upon Redemption. Payments upon the redemption
of the money market notes will be payable at our principal executive office, as
it may be established from time to time, or at such other place as we may
designate for that purpose. However, we may, at our option, make payments by
check or draft mailed to the person entitled thereto at his/her address
appearing in the register which we maintain for that purpose.
Monthly Statements. We will provide holders of the money market notes with
monthly statements which will indicate, among other things, the current account
balance (including interest credited and withdrawals made, if any) and the
interest rate paid on those money market notes as of the month end preceding
the issuance of the statement. Such statements will be mailed not later than
the tenth business day following the end of each month. We shall provide
additional statements as the holders of these securities may reasonably request
from time to time. Holders requesting such additional statements may be
required to pay all charges incurred by us in providing such additional
statements.
Provisions Relating to All Securities
Form and Denominations/Transfers. The debt securities are not negotiable
debt instruments and, subject to certain exceptions, will be issued only in
book-entry form. Upon the submission of an order, we will issue a confirmation
statement reflecting the ownership of a debt security to each purchaser upon
our acceptance of the order. The confirmation statement is not a negotiable
instrument, and no rights of record ownership can be transferred without our
prior written consent. Each holder of a debt security will receive a periodic
statement indicating any transactions in the holder's account, as well as
interest credited. Ownership of debt securities may be transferred on our
register only by written notice to us signed by the owner(s) or such owner's
duly authorized representative on a form to be supplied by us and with our
written consent (which consent shall not be unreasonably withheld). We may
also, in our discretion, require an opinion from such holder's counsel that the
proposed transfer will not violate any applicable securities laws and/or a
signature guarantee in connection with such transfer. Upon transfer of a debt
security, we will provide the new owner of such security with a confirmation
statement which will evidence the transfer of the account on our records.
Interest Accrual Date. Interest on the debt securities will accrue from
the date of purchase. The date of purchase will be deemed to be, for accepted
orders, the date we receive funds, if the funds are received prior to 3:00 p.m.
on a business day, or the next business day if the funds are received on a
non-business day or after 3:00 p.m. on a business day. For this purpose, our
business days will be deemed to be Monday through Friday, except for legal
holidays in the State of Delaware.
Subordination. The indebtedness evidenced by the debt securities, and any
interest thereon, are subordinated to all of our senior debt. The term senior
debt is defined for this purpose to include any indebtedness (whether
outstanding on the date of this prospectus or thereafter created) incurred by
us in connection with borrowings by us (including our subsidiaries) from a
bank, trust company, insurance company, or from any other institutional lender,
whether such indebtedness is or is not specifically designated by us as being
"senior debt" in its defining instruments. As of June 30, 1999 and August 30,
1999, there was $58.7 million and $154.2 million, respectively, of senior debt
outstanding. There is no limitation under the indenture on the amount of senior
debt we can incur. The debt securities are not guaranteed by any of our
subsidiaries. Accordingly, in the event of a liquidation or dissolution of one
of our subsidiaries, the law requires that creditors of that subsidiary be
paid, or provision for such payment be made, from the assets of
22
<PAGE>
that subsidiary prior to distributing any remaining assets to us as a
shareholder of that subsidiary. Therefore, in the event of liquidation or
dissolution of a subsidiary, creditors of that subsidiary will receive payment
of their claims prior to any payment to the holders of the debt securities. As
of June 30, 1999 and August 30, 1999, there was $6.0 million and $5.5 million,
respectively, of such debt outstanding. Any of our indebtedness, other than
that described as senior debt and the debt of the subsidiaries, will have
rights upon liquidation or dissolution of us which ranks equally in right of
payment to the debt securities being offered. As of June 30, 1999 and August
30, 1999, we had $206.9 million and $225.5 million, respectively, of debt
outstanding, which ranks equally in right of payment to the debt securities
offered.
For a discussion of our status as a holding company and the lack of
insurance or guarantees in support of the debt securities, see "Risk
Factors--Our business operations are not subject to examination by federal
banking regulators."
In the event of any liquidation, dissolution or any other winding up of
us, or of any receivership, insolvency, bankruptcy, readjustment,
reorganization or similar proceeding under the U.S. Bankruptcy Code or any
other applicable federal or state law relating to bankruptcy or insolvency, or
during the continuation of any event of default (as described below), no
payment may be made on the notes until all senior debt has been paid. If any of
the above events occurs, holders of senior debt may also submit claims on
behalf of holders of the notes and retain the proceeds for their own benefit
until they have been fully paid, and any excess will be turned over to the
holders of the debt securities. If any distribution is nonetheless made to
holders of the debt securities, the money or property distributed to them must
be paid over to the holders of the senior debt to the extent necessary to pay
senior debt in full. See "Risk Factors--The debt securities are unsecured and
second in right of repayment to our senior debt borrowed from institutional
lenders."
Events of Default. The indenture provides that each of the following
constitutes an event of default:
o default for 30 days in the payment of interest when due on the debt
securities (whether or not prohibited by the subordination provisions of
the indenture);
o default in payment of principal when due on the debt securities (whether
or not prohibited by the subordination provisions of the indenture) and
continuation of the default for 30 days;
o our failure to observe or perform any covenant, condition or agreement
with respect to the liquidation, consolidation or merger or other
disposition of substantially all of our assets of (after notice and
provided such default is not cured within 60 days after receipt of
notice);
o our failure for 60 days after notice to comply with certain other
agreements in the indenture or the debt securities; and
o certain events of bankruptcy or insolvency with respect to us.
If any event of default occurs and is continuing, the trustee or the
holders of at least a majority in principal amount of the then outstanding
notes may declare the unpaid principal of and any accrued interest on the debt
securities to be due and payable immediately. However, so long as any senior
debt is outstanding, a declaration of this kind will not become effective until
the earlier of (x) the day which is five business days after the receipt by
representatives of senior debt of such written notice of acceleration or (y)
the date of acceleration of any senior debt. In the case of an event of default
arising from certain events of bankruptcy or insolvency, with respect to us,
all outstanding debt securities will become due and payable without further
action or notice. Holders of the notes may not enforce the indenture or the
debt securities except as provided in the indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
notes may direct the trustee in its exercise of any trust or power. The trustee
may withhold from holders of the notes notice of any continuing default or
event of default (except a default or event of default relating to the payment
of principal or interest) if the trustee determines that withholding notice is
in the interest of the holders.
The holders of a majority in aggregate principal amount of the debt
securities then outstanding by notice to the trustee may, on behalf of the
holders of all of the notes, waive any existing default or event of default and
its consequences under the indenture, except a continuing default or event of
default in the payment of interest on, or the principal of, the notes.
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<PAGE>
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture, and we are required upon becoming aware of any
default or event of default, to deliver to the trustee a statement specifying
such default or event of default.
Amendment, Supplement and Waiver. Except as provided in this prospectus,
the indenture or the terms of the debt securities may be amended or
supplemented with the consent of the holders of at least a majority in
principal amount of the debt securities then outstanding, and any existing
default or compliance with any provision of the indenture or the debt
securities may be waived with the consent of the holders of a majority in
principal amount of the then outstanding notes.
Without the consent of each holder of the investment notes affected, an
amendment or waiver may not (with respect to any investment notes held by a
nonconsenting holder of investment notes):
o reduce the principal amount of any investment note whose holder must
consent to an amendment, supplement or waiver;
o reduce the principal of or change the fixed maturity of any security or
alter the redemption provisions or the price at which we shall offer to
repurchase the investment note;
o reduce the rate of or change the time for payment of interest, including
default interest, on any investment note;
o waive a default or event of default in the payment of principal or
premium, if any, or interest on or redemption payment with respect to the
investment notes (except a rescission of acceleration of the investment
notes by the holders of at least a majority in aggregate principal amount
of the investment notes and a waiver of the payment default that resulted
from such acceleration);
o make any investment note payable in money other than that stated in the
investment notes;
o make any change in the provisions of the indenture relating to waivers of
past defaults or the rights of holders of investment notes to receive
payments of principal of or interest on the investment notes;
o make any change to the subordination provisions of the indenture that
adversely affects holders of investment notes;
o modify or eliminate holders' redemption rights (provided that no
modification or elimination is permitted as to any securities issued with
such right); or
o make any change in the foregoing amendment and waiver provisions.
Without the consent of each holder of the money market notes affected, an
amendment or waiver may not (with respect to any money market notes held by a
nonconsenting holder of money market notes):
o reduce the principal amount of money market notes whose holders must
consent to an amendment, supplement or waiver (other than as a result of
withdrawals made by the holder of the note);
o reduce the principal of any money market note (other than as a result of
withdrawals made by the holder of the note) or alter the redemption
provisions of the money market note or the price at which we shall offer
to repurchase the money market note;
o reduce the rate of interest on the money market notes, other than the
rate adjustments provided for pursuant to the terms of the money market
notes or change the time for payment of interest, including default
interest, on any money market note;
o waive a default or event of default in the payment of principal or
premium, if any, or interest on or redemption payment with respect to the
money market notes (except a rescission of acceleration of the money
market notes by the holders of at least a majority in aggregate principal
amount of the money market notes and a waiver of the payment default that
resulted from such acceleration);
o make any money market note payable in money other than that stated in the
money market notes;
24
<PAGE>
o make any change in the provisions of the indenture relating to waivers of
past Defaults or the rights of holders of money market notes to receive
payments of principal of or interest on the money market notes;
o make any change to the subordination provisions of the indenture that
adversely affects holders of money market notes;
o modify or eliminate redemption right of holders of the money market
notes; or
o make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of the
debt securities, we and/or the trustee may amend or supplement the indenture or
the debt securities to cure any ambiguity, defect or inconsistency; to provide
for assumption of our obligations to holders of the debt securities in the case
of a merger or consolidation; to provide for additional certificates or
certificated securities; to make any change that would provide any additional
rights or benefits to the holders of the notes or that does not adversely
affect the legal rights under the indenture of any such holder, including an
increase in the aggregate dollar amount of debt securities which may be
outstanding under the indenture; to modify our policy to permit redemptions of
the investment notes upon the death or total permanent disability of any holder
of the investment notes (but such modification shall not adversely affect any
then outstanding security); or to comply with requirements of the SEC in order
to effect or maintain the qualification of the indenture under the Trust
Indenture Act.
The Trustee. The indenture contains certain limitations on the rights of
the trustee, should it become one of our creditors, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
claim as security or otherwise. The trustee will be permitted to engage in
other transactions with us.
Subject to certain exceptions, the holders of a majority in principal
amount of the then outstanding debt securities will have the right to direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the trustee. The indenture provides that in case an event
of default specified in the indenture shall occur and not be cured, the trustee
will be required, in the exercise of its power, to use the degree of care of a
reasonable person in the conduct of his own affairs. Subject to such
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of notes,
unless the holder shall have offered to the trustee security and indemnity
satisfactory to it against any loss, liability or expense.
Reports to Trustee. We will provide the trustee with quarterly reports
which shall contain the information reasonably requested by the trustee. These
quarterly reports will include information regarding the outstanding balance,
interest credited, withdrawals made and interest rate paid on each account
related to each account we maintain during the preceding quarterly period.
No Personal Liability of Directors, Officers, Employees and
Stockholders. No director, officer, employee, incorporator or stockholder of
ours, shall have any liability for any obligations of ours under the notes, the
indenture or for any claim based on, in respect to, or by reason of, these
obligations or their creation. Each holder of the debt securities waives and
releases these persons from any liability. The waiver and release are part of
the consideration for issuance of the debt securities. We have been advised
that the waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the SEC that such a waiver is against
public policy.
Service Charges. We reserve the right to assess service charges for
replacing lost or stolen investment notes (for which an affidavit from the
holder will be required), changing the registration of any security to reflect
a change in name of the holder, or a transfer (whether by operation of law or
otherwise) of a security by the holder to another person.
Interest Withholding. With respect to those investors who do not provide
us with a fully executed Form W-8 or Form W-9, we will withhold 31% of any
interest paid. Otherwise, no interest will be withheld, except on debt
securities held by foreign business entities. It is our policy that no sale
will be made to anyone refusing to provide a fully executed Form W-8 or Form
W-9.
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<PAGE>
Additional Securities. We may offer from time to time additional classes
of securities with terms and conditions different from the debt securities
being offered. We will amend or supplement this prospectus if and when we
decide to offer to the public any additional class of security under this
prospectus.
Variations by State. We reserve the right to offer different securities
and to vary the terms and conditions of the offer (including, but not limited
to, additional interest payments and service charges for all notes) depending
upon the state where the purchaser resides.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should consider our selected consolidated financial information set
forth below together 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 in this
prospectus.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Gain on sale of loans and leases ............ $ 65,640 $ 41,316 $ 20,043 $ 8,721 $ 1,350
Interest and fees ........................... 17,424 17,386 5,584 3,245 4,058
Other ....................................... 3,360 633 335 129 143
--------- --------- --------- -------- --------
Total revenues ............................... 86,424 59,335 25,962 12,095 5,551
Total expenses ............................... 64,573 41,445 16,960 8,974 4,657
--------- --------- --------- -------- --------
Operating income before income taxes ......... 21,851 17,890 9,002 3,121 894
Income taxes ................................. 7,763 6,435 3,062 802 313
--------- --------- --------- -------- --------
Net income ................................... $ 14,088 $ 11,455 $ 5,940 $ 2,319 $ 581
========= ========= ========= ======== ========
Per Common Share Data:
Net income (a) .............................. $ 3.72 $ 2.98 $ 1.95 $ 0.96 $ 0.26
Cash dividends declared ..................... 0.165 0.06 0.06 0.03 --
</TABLE>
(a) Amounts have been retroactively adjusted to reflect the effect of a 5%
stock dividend declared August 18, 1999 as if the shares had been
outstanding for each period presented.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......... $ 22,395 $ 4,486 $ 5,014 $ 5,345 $ 4,734
Loan and lease receivables, net
available for sale ............... 33,776 62,382 35,712 18,003 8,669
Other ............................. 6,863 4,096 1,144 534 328
Total assets ...................... 396,301 226,551 103,989 46,894 22,175
Subordinated debt ................. 212,902 115,182 56,486 33,620 17,800
Total liabilities ................. 338,055 183,809 73,077 42,503 20,031
Stockholders' equity .............. 58,246 42,742 30,912 4,392 2,143
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
Originations:
Business Purpose Loans .......................... $ 64,818 $ 52,335 $ 38,721 $ 28,872 $ 18,170
Home Equity Loans ............................... 634,820 328,089 91,819 36,479 16,963
First Mortgage Loans ............................ 66,519 33,671 -- -- --
Equipment Leases ................................ 96,289 70,480 8,004 5,967 2,220
Loans and Leases sold:
Securitizations ................................. 777,598 384,700 115,000 36,506 9,777
Other ........................................... 105,751 51,594 3,817 19,438 31,948
Total managed loan and lease portfolio ........... 1,176,918 559,398 176,651 59,891 17,774
Average loan/lease size:
Business Purpose Loans .......................... 80 83 78 78 71
Home Equity Loans ............................... 74 62 51 47 46
First Mortgage Loans ............................ 165 154 -- -- --
Equipment Leases ................................ 23 21 11 11 12
Weighted average interest rate on loans and leases
originated:
Business Purpose Loans .......................... 15.91% 15.96% 15.91% 15.83% 16.05%
Home Equity Loans ............................... 11.05 11.95 11.69 9.94 12.68
First Mortgage Loans ............................ 7.67 8.22 -- -- --
Equipment Leases ................................ 11.40 12.19 15.48 17.22 15.85
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Financial Ratios:
Return on average assets ................................. 4.56% 6.93% 7.87% 6.71% 3.37%
Return on average equity ................................. 28.10 31.10 33.65 70.96 31.36
Total delinquencies as a percentage of total portfolio
serviced, at end of period .............................. 3.19 3.01 2.15 2.30 3.84
Real estate owned as a percentage of total portfolio
serviced, at end of period .............................. .85 .16 .34 1.01 4.29
Loan and lease losses as a percentage of the average
total portfolio serviced during the period .............. .12 .12 .07 .33 .66
Pre-tax income as a percentage of total revenues ......... 25.28 30.15 33.99 25.81 16.11
Ratio of earnings to fixed charges ....................... 1.92 2.23 2.56 1.97 1.54
</TABLE>
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<PAGE>
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, for the years ended June 30, 1999, 1998 and 1997 should
be read in conjunction with the consolidated financial statements and the
accompanying notes to the consolidated financial statements, and other detailed
information appearing in this document.
Securitizations
The ongoing securitization of loans and leases is a central part of our
current business strategy. We sell loans and leases through securitizations
with servicing retained in order to fund growing loan and lease originations
and to provide additional sources of revenue through retained mortgage and
lease servicing rights. In fiscal 1999, we completed securitizations
aggregating $777.6 million, consisting of $71.9 million in business purpose
loans, $613.0 million in home equity loans and $92.6 million in equipment
leases. Such securitizations generated gains on the sale of loans and leases of
$65.6 million, $41.3 million and $20.0 million, respectively, for fiscal years
ended June 30, 1999, 1998 and 1997. Gain on sale of loans and leases resulting
from securitizations as a percentage of total revenues was 76.0%, 69.6% and
75.5% for the years ended June 30, 1999, 1998 and 1997, respectively. We rely
primarily on securitizations to generate cash proceeds for repayment of
warehouse credit facilities and other borrowings and to originate additional
loans and leases.
Several factors affect our 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. Any substantial reduction in the size or availability of
the securitization market for loans and leases could have a material adverse
effect on our results of operations and financial condition.
Our 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
securitizations and changes in market interest rates. The strategy of selling
loans and leases through securitizations require building an inventory of loans
and leases over time, during which time costs and expenses are incurred. Since
a gain on sale is not recognized until a securitization is completed, which may
not occur until a subsequent quarter, operating results for a given quarter can
fluctuate significantly as a result of the timing and level of securitizations.
If securitizations do not close when expected, we could experience a materially
adverse effect on our results of operations for a quarter. The gain on sale of
loans and leases may be unfavorably impacted to the extent we hold fixed-rate
mortgage loans or leases in our available for sale portfolio prior to
securitization. A significant variable affecting the gain on sale of loans and
leases in a securitization is the spread between the average coupon rate on
fixed rate loans and leases, and the weighted average pass-through rate to
investors for interests issued in connection with a securitization. Although
the loan and lease coupon rate is fixed at the time the loan or lease is
originated, the pass-through rate to investors is not fixed until the pricing
of the securitization which occurs just prior to the sale of the loans and
leases. Therefore, if market rates required by investors increase prior to
securitization of the loans and leases, the spread between the average coupon
rate on the loans and leases and the pass-through rate to investors may be
reduced or eliminated. In addition, due to the timing difference between the
period when costs are incurred in connection with the origination of loans and
leases and their subsequent sale through the securitization process, we may
operate on a negative cash flow basis, which could adversely impact our results
of operations and financial condition.
We also rely upon funds generated by the sale of subordinated debt and
other borrowings to fund our operations. At June 30, 1999, $212.9 million of
subordinated debt was outstanding and credit facilities and lines of credit
totaling $275.0 million were available, of which $51.5 million was drawn upon
on such date. In addition, we had a $100.0 million commercial paper conduit to
finance equipment lease origination of which $3.2 million was utilized at June
30, 1999. We expect to continue to rely on such borrowings to fund loans and
leases prior to securitization.
Certain Accounting Considerations
As a fundamental part of our business and financing strategy, we
securitize the majority of our loans and leases by selling them to trusts for
cash and a retained interest in the securitized loans and leases which is
29
<PAGE>
called a residual interest. The trust issues multi-class securities which
derive their cash flows from a pool of securitized loans and leases. These
securities which represent the remaining interest in the trust called the
regular interests, are sold to public investors. We also retain servicing on
securitized loans and leases.
As the holder of the residual interests in a securitization, we are
entitled to receive certain excess (or residual) 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 investors in the
trust, servicing fees, trustee fees and, if applicable, insurance fees.
Overcollateralization requirements, representing an excess of the aggregate
principal balances of loans and leases in a securitized pool over investor
interests, are established to provide credit enhancement for the trust
investors. In order to meet the required overcollateralization levels the trust
initially retains the excess cash flow until after the overcollateralization
requirements, which are specific to each securitization, are met.
Gain on sale of loans and leases through securitizations represent the
difference between our net proceeds and the allocated cost of loans and leases
securitized. 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,
based upon their relative fair values. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", which was effective for fiscal
quarters beginning after December 15, 1998, we classified our residual
interests as available-for-sale securities. Available-for-sale securities are
carried at fair value, with subsequent adjustments to fair value recorded in
stockholders' equity and reported as a component of comprehensive income. Prior
to the adoption of SFAS No. 134, the differences between the fair value of
residual interests and their allocated costs was recorded as gain on
securitization and included in gain on sale of loans and leases. The adoption
of SFAS No. 134 did not have a material effect on our financial condition, but
reduced the recorded gain on sale by approximately $5.7 million pre-tax in the
third and fourth quarters of fiscal year 1999.
The calculation of the fair value of the residual interest is based upon
the present value of the future expected excess cash flows and utilizes certain
assumptions made by management at the time loans and leases are sold. These
assumptions include the discount rate used to calculate present value, the
rates of prepayment and default rates on the pool of loans. 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 and lease
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 loans and leases and other considerations. Although we believe we have
made reasonable estimates of prepayment rates and default assumptions, the
actual prepayment and default experience may materially vary from our
estimates. The gain recognized upon the sale of loans and leases will have been
overstated if prepayments or losses are greater than estimated. Additionally,
certain of our securitization trusts have issued floating rate certificates
supported by fixed rate mortgages. The fair value of the excess cash flow we
will receive would be affected by any changes in the rates paid on the floating
rate certificates.
To the extent that prepayments or delinquencies differ from the estimates
made, adjustments of the gain on sale of loans and leases may be required.
Higher levels of future prepayments, delinquencies and/or liquidations could
result in a reduction in the value of residual interests which would adversely
affect income in the period of adjustment.
We also sell loans with servicing released referred to as whole loan
sales. Gains on whole loan sales equal the difference between the net proceeds
from such sales and the loans' net carrying value. The net carrying value of
loans is equal to their principal balance plus unamortized origination costs
and fees. Gains from these sales are recorded as fee income.
The timing of sales of loans and leases and the amount of loans and leases
sold will impact earnings from quarter to quarter. Subsequent to the initial
recognition of the residual interests in a securitization, ongoing assessments
are made to determine the fair value of the expected future excess cash flows
based upon current market conditions. At June 30, 1999, investments in residual
interests in securitizations totaled $178.2 million including investments in
interest-only strips of $139.6 million and investments in overcollateralization
of $38.6 million.
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<PAGE>
When loans or leases are sold through a securitization, the servicing on
the loans or leases is retained and the fair value of contractual servicing
fees net of the allocated costs of servicing is recognized as a separate asset
for accounting purposes. Fair value of servicing rights is determined 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, default rates and
discount rates. These assumptions are similar to those used to value the
residual interests retained in a securitization. Periodically, capitalized
servicing rights are evaluated for impairment, which is measured as the excess
of unamortized cost over fair value. We have generally found that
non-conforming borrowers are less sensitive to interest rates than monthly
payment balances. Therefore, interest rates are not considered as a predominant
risk characteristic for purposes of evaluating impairment. At June 30, 1999,
servicing rights totaled $43.2 million, compared to $18.5 million at June 30,
1998.
Results of Operations
Summary Financial Results
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30, Percentage Change
------------------------------------------ -----------------------
1999 1998 1997 '99/'98 '98/'97
------------ ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues ....................... $ 86,424 $ 59,335 $ 25,962 45.7% 128.5%
Total expenses ....................... $ 64,573 $ 41,445 $ 16,960 55.8% 144.4%
Net income ........................... $ 14,088 $ 11,455 $ 5,940 23.0% 92.8%
Return on average equity ............. 28.10% 31.10% 33.65%
Return on average assets ............. 4.56% 6.93% 7.87%
Earnings per share:
Basic ............................... $ 3.83 $ 3.10 $ 2.03 23.5% 52.7%
Diluted ............................. $ 3.72 $ 2.98 $ 1.95 24.8% 52.8%
Dividends declared per share ......... $ 0.165 $ 0.06 $ 0.06
</TABLE>
Overview
For fiscal 1999, net income increased $2.6 million, or 23.0%, to $14.1
million from $11.5 million for fiscal 1998. Basic earnings per common share
increased 23.5% to $3.83 on average common shares of 3,682,070, compared to
$3.10 per share on average common shares of 3,692,492 for fiscal 1998. Diluted
earnings per common share increased 24.8% to $3.72 on average common shares of
3,791,204, compared to $2.98 per share on average common shares of 3,847,428
for fiscal 1998. All average common share and earnings per common share amounts
have been retroactively adjusted to reflect the effect of a 5% stock dividend
declared August 18, 1999. See note 10 in the consolidated financial statements
for further description.
The increases in net income and earnings per share primarily resulted from
the impact of increases in the volume of loans and leases securitized during
the periods and increases in the collection of fee income due to the increase
in loans and leases available for sale and securitized loans and leases for
which servicing was retained, referred to as the total managed portfolio.
In the second quarter of fiscal 1999, we increased our quarterly dividend
by 233% to $0.05 per share. Dividends of $0.165 were paid in fiscal 1999
compared to dividends of $0.06 in fiscal 1998. The common dividend payout ratio
based on diluted earnings per share was 4.2% for fiscal 1999, compared to 1.9%
for fiscal 1998.
Our growth strategy is dependent upon our ability to increase loan and
lease origination volume through both geographic expansion and growth in
current markets. The implementation of this strategy will depend in large part
on a variety of factors outside of our control, including, but not limited to,
the ability to obtain adequate financing on favorable terms and profitably
securitize loans and leases on a regular basis and continue to expand in the
face of increasing competition. Our failure with respect to any of these
factors could impair our ability to successfully implement our growth strategy,
which could adversely affect our results of operations and financial condition.
31
<PAGE>
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Total Revenues. Total revenues increased $27.1 million, or 45.7%, to $86.4
million for the year ended June 30, 1999 from $59.3 million for the year ended
June 30, 1998. The increase was primarily attributable to increases in gains on
sale of loans and leases through securitizations and servicing income.
Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $24.3 million, or 58.9%, to $65.6 million for the year ended June 30,
1999 from $41.3 million for the year ended June 30, 1998. The increase was the
result of selling $777.6 million of loans and leases through securitizations in
fiscal 1999, including $71.9 million of business purpose loans, $613.0 million
of home equity loans and $92.6 million of equipment leases, compared to $54.1
million of business purpose loans, $270.9 million of home equity loans and
$59.7 million of equipment leases in fiscal 1998.
Gain on sale of loans and leases as a percentage of loans and leases
securitized was 8.44% in fiscal 1999, compared to 10.74% in fiscal 1998.
Factors impacting the year to year comparability of the gain percentage
included: the adoption of SFAS No. 134 on January 1, 1999 which reduced pre-tax
gains by approximately 0.75%; a decline in the average coupon on loans and
leases originated during fiscal 1999; and an increase in the rate required to
be paid to investors in fiscal 1999 securitizations.
Gain on sale of loans and leases securitized represents the difference
between the net proceeds received, and the allocated cost of loans and leases
securitized. The allocated cost of the loans and leases securitized is
determined by allocating their net carrying value between the loans and leases
securitized, the retained residual interests in the securitization and the
mortgage servicing rights retained, based upon their relative fair values. The
calculation of the fair value of the residual interest is based upon the
present value of the future expected excess cash flows and utilizes certain
assumptions made by management at the time loans and leases are sold.
Assumptions used in the estimation of the fair value of residual interests
include the discount rate used to calculate present value and the rates of
prepayment and default on the pool of loans. See "Interest Rate Risk Management
- -- Interest-only Strips and Servicing Assets" for more information regarding
these assumptions.
The following schedule details loan and lease originations during the
fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
Year Ended June 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Business Purpose Loans ......... $ 64,818 $ 52,335 $ 38,721
Home Equity Loans .............. 701,339 361,760 91,819
Equipment Leases ............... 96,289 70,480 8,004
--------- --------- ---------
$ 862,446 $ 484,575 $ 138,544
========= ========= =========
Interest and Fee Income. Interest and fee income was $17.4 million for the
year ended June 30, 1999, substantially unchanged from the year ended June 30,
1998. Interest and fee income consists primarily of income earned on loans and
leases while held in our portfolio, premiums earned on whole loan sales and
other ancillary fees collected in connection with loan and lease originations.
Interest income decreased $2.3 million, or 22.1%, to $8.2 million for the
year ended June 30, 1999 as compared to $10.5 million for the year ended June
30, 1998. This decrease was primarily attributable to a reduction in the
duration of time portfolio loans accrued interest income prior to
securitization and a reduction in the average coupon earned on loans and leases
originated, from 11.63% in fiscal 1998 to 11.30% in fiscal 1999. The decline in
the average coupon in fiscal 1999 primarily resulted from competitive pricing
in the home equity lending market.
Fee income increased $2.3 million, or 34.2%, to $9.2 million for the year
ended June 30, 1999 from $6.9 million for the year ended June 30, 1998. 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 on whole
loan sales. During the year ended June 30, 1999, we completed approximately
$105.8 million of whole loan sales as compared to $51.6 million during the year
ended June 30, 1998.
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<PAGE>
Servicing Income. Servicing income is comprised of contractual and
ancillary fees collected on securitized loans and leases, less amortization of
the servicing assets recorded at the time the loans and leases are securitized.
Servicing income increased $2.8 million, or 597.7%, to $3.3 million for the
year ended June 30, 1999, from $0.5 million for the year ended June 30, 1998.
This increase resulted from the higher average total managed portfolio, which
was $915.8 million during the year ended June 30, 1999 compared to $368.0
million during the year ended June 30, 1998. As a percentage of the average
managed portfolio, servicing income increased to 0.36% for the year ended June
30, 1999, from 0.13% for the year ended June 30, 1998, as a result of the
origination of loans with prepayment fees and the collection of other ancillary
fees.
Total Expenses. Total expenses increased $23.1 million, or 55.8%, to $64.6
million for the year ended June 30, 1999, from $41.4 million for the year ended
June 30, 1998. As described in more detail below, this increase was primarily a
result of higher interest expense attributable to sales of subordinated debt
securities and borrowings used to fund loan and lease originations and
increases in sales and marketing, and general and administrative expenses.
These increases related to the growth in loan and lease originations, the
growth in the total managed portfolio and the continued building of support
area infrastructure to support the increases in originated and managed
portfolios.
Interest Expense. Interest expense increased $9.2 million, or 70.0%, to
$22.4 million for the year ended June 30, 1999 from $13.2 million for the year
ended June 30, 1998. The increase was attributable to an increase in the amount
of subordinated debt outstanding during fiscal 1999, the proceeds of which were
used to fund loan and lease originations and investments in operations required
to position us for future growth, and the costs related to greater utilization
of warehouse and credit line facilities to fund loan and lease originations.
Average subordinated debt outstanding during the year ended June 30, 1999 was
$156.6 million compared to $85.8 million during the year ended June 30, 1998.
Average interest rates paid on outstanding subordinated debt increased to 9.32%
for the year ended June 30, 1999 from 9.23% for the year ended June 30, 1998
due to increases in the rates offered on subordinated debt in order to respond
to general increases in market rates and to attract additional funds. The
average outstanding balances under warehouse and other credit lines were $102.6
million during the year ended June 30, 1999, compared to $57.6 million during
the year ended June 30, 1998.
Provision for Credit Losses. The provision for credit losses on portfolio
loans and leases for fiscal 1999 was $0.9 million, compared to $0.5 million for
fiscal 1998. An allowance for credit losses for portfolio loans and leases and
other receivables is maintained primarily to account for loans and leases that
are delinquent and are expected to be ineligible for sale into a future
securitization. The allowance is calculated 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, periodic analysis of the
portfolio, economic conditions and trends, historical credit loss experience,
borrowers ability to repay and collateral considerations. Although we maintain
an allowance for credit losses at the level we consider adequate to provide for
potential losses, there can be no assurances that actual losses will not exceed
the estimated amounts or that an additional provision will not be required. The
allowance for credit losses was $0.7 million at June 30, 1999 as compared to
$0.9 million at June 30, 1998.
In addition to the allowance for credit losses on portfolio loans and
leases, certain assumptions are made regarding the expected impact of credit
losses on the fair value of interest-only strips and residual interests created
in securitizations. See "Interest Rate Risk Management -- Interest-only Strips
and Servicing Assets" for more information regarding these credit loss
assumptions.
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<PAGE>
The following table summarizes changes in the allowance for credit losses
for the year fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
Year Ended June 30,
---------------------------------
1999 1998 1997
----------- -------- --------
Balance at beginning of period ......... $ 881 $ 338 $ 330
Acquired through acquisition ........... -- 719 --
Provision for credit losses ............ 928 491 106
Charge offs, net of recoveries ......... (1,107) (667) (98)
-------- ------ -----
Balance at end of period ............... $ 702 $ 881 $ 338
======== ====== =====
The following table summarizes the changes in the allowance for credit
losses by loan and lease type for the fiscal year ended June 30, 1999 (in
thousands).
<TABLE>
<CAPTION>
Business Home
Purpose Equity Equipment
Loans Loans Leases Total
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period ......... $ 49 $ 433 $ 399 $ 881
Provision for credit losses ............ 278 296 354 928
Charge offs, net of recoveries ......... (301) (486) (320) (1,107)
------ ------ ------ --------
Balance at end of period ............... $ 26 $ 243 $ 433 $ 702
====== ====== ====== ========
</TABLE>
The increase in net charge offs in fiscal 1999 primarily relates to the
maturing of the total managed portfolio. Charge offs related to loan and lease
securitizations generally have been recorded in ABFS's books if an impaired
loan is repurchased from the securitization.
Employee Related Costs. Employee related costs increased $0.3 million, or
5.7% to $5.3 million for the year ended June 30, 1999 from $5.0 million for the
year ended June 30, 1998. The increase was primarily the result of additions to
staff in support of the increased marketing efforts, loan and lease
originations and servicing activities. Management anticipates that these
expenses will continue to increase in the future as our expansion continues and
loan and lease originations continue to increase.
Sales and Marketing Expenses. Sales and marketing expenses increased $9.4
million, or 65.7%, to $23.6 million for the year ended June 30, 1999 from $14.2
million for the year-end June 30, 1998. The increases were primarily
attributable to targeted television and radio advertising related to home
equity loans and advertising costs resulting from increased newspaper and
direct mail advertising related to sales of subordinated debt and loan
products. During fiscal 1999, targeted television advertising was intensified
in Chicago, Florida and Georgia. Subject to market conditions, we plan to
continue to expand our service area throughout the United States. As a result,
it is anticipated that sales and marketing expenses will continue to increase
in the future.
General and Administrative Expenses. General and administrative expenses
increased $3.8 million, or 44.8%, to $12.3 million for the year ended June 30,
1999 from $8.5 million for the year ended June 30, 1998. The increase was
primarily 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 and in the volume of total
loans and leases managed during fiscal 1999 and the continued building of
support area infrastructure to support the increases in originations and the
managed portfolio.
Income Taxes. Income taxes increased $1.4 million, or 20.6%, to $7.8
million for the year ended June 30, 1999 from $6.4 million for the year ended
June 30, 1998 due to an increase in income before income taxes. The effective
tax rate for the year ended June 30, 1999 was 35.5%, compared to 36% for the
year ended June 30, 1998.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Total Revenues. Total revenues increased $33.4 million, or 128.5%, to
$59.3 million for the year ended June 30, 1998 from $26.0 million for the year
ended June 30, 1997. The increase was attributable to increases in gain on sale
of loans and leases through securitizations and interest and fee income and
servicing income.
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<PAGE>
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 selling $384.7 million of loans and leases through
securitizations, including sales of $54.1 million of business purpose loans,
$270.9 million of home equity loans and $59.7 million of equipment leases 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. There were no sales of
leases through securitization 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 the volume of loans and leases originated and retained in our portfolio
prior to securitization and an increase in fee income as a result of an
increase in whole loan sales and other ancillary fees earned in connection with
loan and lease originations.
Servicing Income. Servicing income increased $0.2 million, or 68.2%, to
$0.5 million for the year ended June 30, 1998 from $0.3 million for the year
ended June 30, 1997 as a result of an increase in the average managed portfolio
to $368.0 million during the year ended June 30, 1998 from $118.3 million
during the year ended June 30, 1997.
Total Expenses. Total expenses increased $24.5 million, or 144.4%, to
$41.4 million for the year ended June 30, 1998 from $17.0 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 managed portfolio of loans
and leases, geographic expansion of our market and the October 1, 1997
acquisition and operation of New Jersey Mortgage and Investment Corp. 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 subordinated debt outstanding, greater utilization of warehouse lines of
credit to fund loans and leases and debt assumed and incurred in connection
with the acquisition of New Jersey Mortgage. 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 9.23%
for the year ended June 30, 1998 from 8.99% for the year ended June 30, 1997
due to increases in the rates offered on subordinated debt in order to attract
additional funds and higher rates paid on subordinated debt assumed in the
acquisition of New Jersey Mortgage. Interest expense on lines of credit was
$4.2 million for the year ended June 30, 1998 compared to $0.5 million for the
year ended June 30, 1997 due to the increase in warehouse lines to fund loan
and lease originations. In addition, approximately $14.5 million of debt was
assumed in the acquisition of New Jersey Mortgage resulting in approximately
$1.1 million of additional interest expense for the year ended June 30, 1998.
Provision for Credit Losses. The allowance for credit losses was $0.9
million at June 30, 1998 as compared to $0.3 million at June 30, 1997. The
provision for credit losses increased by $0.4 million to $0.5 million for the
year ended June 30, 1998 from $0.1 million for the year ended June 30, 1997.
Employee Related Costs. Employee 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 to support the increased marketing efforts, loan and
lease originations and servicing activities and the addition of personnel added
upon the acquisition of New Jersey Mortgage.
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
originations of home equity loans and sales of subordinated debt securities.
General and Administrative Expenses. General and administrative expenses
increased $5.4 million, or 174.4%, to $8.5 million for the year ended June 30,
1998 from $3.1 million for the year ended June 30, 1997. The increase was
attributable to increases in rent, telephone, office expenses, professional
fees and other
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<PAGE>
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, goodwill recorded from the acquisition of New
Jersey Mortgage was amortized on the straight-line method over fifteen years
resulting in a charge of $0.8 million 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.
Financial Condition
Balance Sheet Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents .......................... $ 22,395 $ 4,486 $ 5,014
Loan and lease receivables, net:
Available for sale ................................ 33,776 62,382 35,712
Other ............................................. 6,863 4,096 1,144
Interest-only strips and other receivables ......... 253,936 100,737 39,644
Servicing rights ................................... 43,210 18,472 8,083
Total assets ....................................... 396,301 226,551 103,989
Subordinated debt and notes payable ................ 270,343 144,585 56,486
Total liabilities .................................. 338,055 183,809 73,077
Total stockholders' equity ......................... 58,246 42,742 30,912
Book value per common share ........................ $ 16.24 $ 11.55 $ 8.40
</TABLE>
June 30, 1999 Compared to June 30, 1998
Total assets increased $169.7 million, or 74.9%, to $396.3 million at June
30, 1999 from $226.6 million at June 30, 1998 due primarily to increases in
interest-only strips and other receivables, cash and cash equivalents and
servicing rights.
Cash and cash equivalents increased $17.9 million, or 399.2% to $22.4 at
June 30, 1999 from $4.5 million at June 30, 1998 primarily due to receipts from
sales of subordinated debt securities.
Interest-only strips and other receivables (comprised mainly of
interest-only and residual strips created in connection with securitizations)
increased $153.2 million, or 152.1%, to $253.9 million at June 30, 1999 from
$100.7 million at June 30, 1998. During fiscal 1999, $777.6 million in loan and
lease securitizations were completed resulting in the recognition of $90.5
million of interest-only strips. At June 30, 1999, other receivables included
$66.1 million due on sold loans compared to $2.4 million at June 30, 1998.
Servicing rights increased $24.7 million, or 133.9%, to $43.2 million at
June 30, 1999 from $18.5 million at June 30, 1998 due primarily to the
recording of $30.3 million of servicing rights obtained in connection with loan
and lease securitizations, partially offset by amortization of servicing
rights.
Loan and lease receivables - available for sale decreased $28.6 million,
or 45.9%, at June 30, 1999, primarily due to the timing and size of fourth
quarter fiscal 1999 securitizations. Mortgage loans securitized in the fourth
quarter of fiscal 1999 were $220.0 million compared to $120.0 million in the
fourth quarter of fiscal 1998.
Total liabilities increased $154.3 million, or 83.9%, to $338.1 million at
June 30, 1999 from $183.8 million at June 30, 1998 due primarily to increases
in subordinated debt and notes payable. The increase in subordinated debt and
notes payable of $125.7 million, or 87.0%, was primarily attributable to $101.2
million
36
<PAGE>
of net sales of subordinated debt securities. Subordinated debt in the amount
of $212.9 million was outstanding at June 30, 1999. Additional borrowings of
$51.5 million, net of repayments, were obtained under warehouse and line of
credit facilities to fund lending and leasing activities. See "Liquidity and
Capital Resources" for further detail.
Accounts payable and accrued expenses increased $11.3 million, or 72.4%,
to $26.8 million at June 30, 1999 from $15.6 million at June 30, 1998 due to
growth in lending and leasing activities resulting in larger accruals for
interest expense and other operating expenses. Deferred income taxes increased
$5.7 million, or 52.8%, to $16.6 million at June 30, 1999 from $10.9 million at
June 30, 1998 due to timing differences in recognition of income from
securitizations.
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 million 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. Interest-only strips and other receivables increased
$61.1 million, or 154.1%, to $100.7 million at June 30, 1998, from $39.6
million at June 30, 1997 and servicing rights increased $10.4 million, or
128.5%, to $18.5 million at June 30, 1998 from $8.1 million at June 30, 1997,
both due to loan and lease securitizations during fiscal 1998. Other assets
increased $15.7 million, or 152.4%, to $26.0 million at June 30, 1998 from
$10.3 million at June 30, 1997 due to the recognition of $16.2 million of
goodwill, net of amortization, resulting from the acquisition of New Jersey
Mortgage.
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 subordinated debt and notes payable and to a lesser extent
increases in other liabilities. The increase in subordinated debt and notes
payable 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 warehouse lines of
credit of $26.5 million due to growth in lending and leasing activities, and a
net increase of $12.4 million of debt assumed and incurred in the acquisition
of New Jersey Mortgage. At June 30, 1998, $115.2 million of subordinated debt
was outstanding. Accounts payable and accrued expenses increased $9.5 million,
or 155.7%, to $15.6 million at June 30, 1998 due to growth in 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 due mainly to
tax accruals on income for the year ended June 30, 1998.
Managed Portfolio Quality
Total delinquencies (loans and leases with payments past due more than 30
days) in the total managed portfolio were $37.6 million at June 30, 1999 as
compared to $16.8 million and $3.8 million, respectively, at June 30, 1998 and
1997. Total delinquent loans and leases as a percentage of the total portfolio
serviced (the "delinquency rate") was 3.19% at June 30, 1999 as compared to
3.01% and 2.15%, respectively, at June 30, 1998 and 1997. Increases in the
delinquency rates were attributable to the maturation of the total managed
portfolio, which was $1,176.9 million at June 30, 1999, compared to $559.4
million and $176.7 million, respectively, at June 30, 1998 and 1997. Delinquent
loans and leases in the available for sale portfolio were $1.8 million at June
30, 1999.
Total real estate owned ("REO"), comprising foreclosed properties and
deeds acquired in lieu of foreclosure, increased to $9.9 million, or 0.85% of
the total managed portfolio at June 30, 1999 compared to $0.9 million and $0.6
million, respectively, at June 30, 1998 and 1997. The increase in REO reflects
the seasoning of the portfolio and the results of loss mitigation initiatives
of quick repossession of collateral through accelerated foreclosure processes
and "Cash For Keys" programs. Cash for Keys is a program whereby in certain
select situations, when collateral values of loans support the action, a
delinquent borrower
37
<PAGE>
may be offered a monetary payment in exchange for the deed to a property held
as collateral for the loan. This process eliminates the need to initiate a
formal foreclosure process which could take many months. Included in total REO
at June 30, 1999 was $0.7 million carried on our books, and $9.2 million in
loan securitization trusts.
The following table provides data concerning delinquency experience, REO
and loss experience for the loan and lease portfolio serviced (dollars in
thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------
1999 1998 1997
Delinquency by Type Amount % Amount % Amount %
- ---------------------------------------------------- ------------ ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Business Purpose Loans
Total managed portfolio ............................ $ 148,932 $ 101,250 $ 68,979
========== ========= =========
Period of delinquency
31-60 days ........................................ $ 1,506 1.01% $ 1,236 1.22% $ 1,879 2.72%
61-90 days ........................................ 475 .32 928 .92 462 .67
Over 90 days ...................................... 8,612 5.78 3,562 3.52 718 1.04
---------- ---- --------- ---- --------- ----
Total delinquencies ............................... $ 10,593 7.11% $ 5,726 5.66% $ 3,059 4.43%
========== ==== ========= ==== ========= ====
REO ................................................ $ 2,881 $ 611 $ 605
========== ========= =========
Home Equity Loans
Total managed portfolio ............................ $ 858,806 $ 349,685 $ 98,211
========== ========= =========
Period of delinquency
31-60 days ........................................ $ 4,836 .56% $ 3,726 1.08% $ 262 .27%
61-90 days ........................................ 4,149 .48 1,022 .30 341 .35
Over 90 days ...................................... 15,346 1.79 3,541 1.02 115 .12
---------- ---- --------- ---- --------- ----
Total delinquencies ............................... $ 24,331 2.83% $ 8,289 2.40% $ 718 .73%
========== ==== ========= ==== ========= ====
REO ................................................ $ 7,067 $ 311 $ --
========== ========= =========
Equipment Leases
Total managed portfolio ............................ $ 169,180 $ 108,463 $ 9,461
========== ========= =========
Period of delinquency
31-60 days ........................................ $ 389 .23% $ 1,000 .92% $ 29 .31%
61-90 days ........................................ 425 .25 320 .30 -- --
Over 90 days ...................................... 1,826 1.08 1,478 1.36 4 .04
---------- ---- --------- ---- --------- ----
Total delinquencies ............................... $ 2,640 1.56% $ 2,798 2.58% $ 33 .35%
========== ==== ========= ==== ========= ====
Combined
- -----------------------------------------------------
Total managed portfolio ............................ $1,176,918 $ 559,398 $ 176,651
========== ========= =========
Period of delinquency
31-60 days ........................................ $ 6,731 .57% $ 5,962 1.07% $ 2,170 1.23%
61-90 days ........................................ 5,049 .43 2,270 .41 803 .45
Over 90 days ...................................... 25,784 2.19 8,581 1.53 837 .47
---------- ---- --------- ---- --------- ----
Total delinquencies ............................... $ 37,564 3.19% $ 16,813 3.01% $ 3,810 2.15%
========== ==== ========= ==== ========= ====
REO ................................................ $ 9,948 $ 922 $ 605
========== ========= =========
Losses experienced during the period(a)(b) ......... $ 1,137 .12% $ 667 .12% $ 98 .07%
========== ==== ========= ==== ========= ====
</TABLE>
(a) Percentage based on average total managed portfolio.
(b) Losses recorded on our books were $1.1 million, losses absorbed by
securitization trusts were $30,000 for the year ended June 30, 1999. We
recorded all losses on our books for the years ended June 30, 1998 and
1997.
38
<PAGE>
The following table summarizes net charge off experience by loan type for
the fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
Years Ending June 30,
-------------------------------
1999 1998 1997
---------- -------- -------
Business purpose loans ......... $ 301 $ 138 $ 34
Home equity loans .............. 486 -- --
Equipment Leases ............... 320 529 64
------- ----- ----
Total ....................... $ 1,107 $ 667 $ 98
======= ===== ====
Interest Rate Risk Management
A primary market risk exposure that we face is interest rate risk.
Profitability and financial performance is sensitive to changes in U.S.
Treasury yields, LIBOR yields and the spread between the effective rate of
interest received on loans and leases available for sale or securitized
(generally fixed interest rates) and the interest rates paid pursuant to credit
facilities or the pass-through rate to investors for interests issued in
connection with securitizations. Also, a substantial and sustained increase in
market interest rates could adversely affect our ability to originate and
purchase loans and leases. The overall objective of our interest rate risk
management strategy is to mitigate the effects of changing interest rates on
profitability and the fair value of interest rate sensitive assets (primarily
interest-only strips, servicing rights and loans and leases available for
sale).
Interest Rate Sensitivity. The following table provides information about
financial instruments that are sensitive to changes in interest rates. For
interest-only strips and servicing rights, the table presents projected
principal cash flows utilizing certain assumptions including prepayment and
default rates. For debt obligations, the table presents principal cash flows
and related average interest rates by expected maturity dates (dollars in
thousands):
<TABLE>
<CAPTION>
Amount Maturing in Years Ending June 30,
----------------------------------------
2000 2001 2002
------------- ----------- -----------
<S> <C> <C> <C>
Rate Sensitive Assets:
Loans and leases available for
sale (a) .............................. $ 32,512 $ 14 $ 16
Interest-only strips ................... 29,611 38,091 37,921
Servicing rights ....................... 15,208 11,829 8,968
Investments held to maturity ........... 126 128 133
Rate Sensitive Liabilities:
Fixed interest rate borrowings ......... 119,683 34,923 25,055
Average interest rate .................. 8.71% 9.46% 10.22%
Variable interest rate borrowings ...... $ 56,170 $ -- $ --
Average interest rate .................. 6.45%
<CAPTION>
Amount Maturing in Years Ending June 30,
------------------------------------------------------------------
Fair
2003 2004 Thereafter Total Value
----------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Loans and leases available for
sale (a) .............................. $ 18 $ 20 $ 1,196 $ 33,776 $ 35,152
Interest-only strips ................... 34,987 27,900 106,082 274,592 178,217
Servicing rights ....................... 6,771 5,101 13,777 61,654 43,210
Investments held to maturity ........... 143 145 763 1,438 911
Rate Sensitive Liabilities:
Fixed interest rate borrowings ......... 9,049 12,315 13,148 214,173 214,745
Average interest rate .................. 10.56% 10.64% 11.36% 9.36%
Variable interest rate borrowings ...... $ -- $ -- $ -- $ 56,170 $ 56,170
Average interest rate .................. 6.45%
</TABLE>
<PAGE>
- ------------
(a) Loans and leases available for sale are generally held for less than three
months prior to securitization therefore all loans and leases which
qualify for securitization are reflected as maturing in the year ended
June 30, 2000.
Loans and Leases Available for Sale. Gain on sale of loans and leases may
be unfavorably impacted to the extent fixed-rate mortgage loans or leases in
the available for sale portfolio are held prior to securitization. A
significant variable affecting the gain on sale of loans and leases in a
securitization is the spread between the average coupon rate on fixed rate
loans and leases, and the weighted average pass-through rate to investors for
interests issued in connection with the securitization. Although the average
loan and lease coupon rate is fixed at the time the loan or lease is
originated, the pass-through rate to investors is not fixed until the pricing
of the securitization which occurs just prior the sale of the loans and leases.
In addition, a portion of the certificates are based on a floating interest
rate. Therefore, if market rates required by investors increase prior to
securitization of the loans and leases, the spread between the average coupon
rate on the loans and leases and the pass-through rate to investors may be
reduced or eliminated.
39
<PAGE>
Hedging strategies are utilized in an attempt to mitigate the effect of
changes in interest rates on fixed-rate loan and lease portfolios between the
date of origination and the date of securitization. These strategies include
the utilization of derivative financial instruments such as futures and forward
pricing on securitizations. The nature and quality of hedging transactions are
determined based on various factors, including market conditions and the
expected volume of mortgage loan and lease originations and purchases. The gain
or loss derived from these hedging transactions is deferred and recognized as
an adjustment to the gain on sale of loans and leases when the loans and leases
are securitized. During fiscal 1999, net losses of approximately $2.0 million
were incurred on hedging transactions (futures contracts), which were
recognized as an offset to the gains on sale recorded on securitizations during
the year. At June 30, 1999 no such contracts were outstanding. At June 30,
1999, we were obligated to satisfy a lease securitization prefund requirement
of $9.0 million of business equipment leases.
In the future we may expand the types of derivative financial instruments
we use to hedge interest rate risk. Such instruments could include interest
rate swaps and interest rate options or other derivative instruments.
We have implemented a hedging strategy in an attempt to mitigate the
effect of changes in market value of fixed-rate mortgage loans held for sale.
However, an effective interest rate risk management strategy is complex and no
such strategy can completely insulate us 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. Such costs could increase as the period covered by the hedging
protection increases. It is expected that such loss would be offset by income
realized from the securitizations in that period or in future periods. As a
result, we may be prevented from effectively hedging fixed-rate loans held for
sale, without reducing income in current or future periods due to the costs
associated with hedging activities. See "Risk Factors -- Our failure to
implement an effective hedging strategy could result in losses or negatively
impact earnings."
Interest-only Strips and Servicing Assets. A significant decline in
market interest rates could increase the level of loan prepayments, thereby
decreasing the size of the total managed loan and lease portfolio and the
related projected cash flows. Higher than anticipated rates of loan prepayments
could require a write down of the fair value of related interest-only strips
and servicing rights, adversely impacting earnings during the period of
adjustment. The following chart presents certain key assumptions used in the
initial valuations and June 30, 1999 revaluation of residual interests from
securitizations (interest-only strips and mortgage servicing assets):
<TABLE>
<CAPTION>
Initial Periodic
Valuation Revaluation
---------------------- ----------------------
<S> <C> <C>
Discount rates
Home equity loans ................. 11.0% 11.0%
Business purpose loans ............ 11.0% 11.0%
Business equipment leases ......... 11.0% 11.0%
Annual prepayment rates
Home equity loans ................. 2.0% - 24.0% (a) 2.0% - 24.0% (a)
Business purpose loans ............ 3.0% - 13.0% (b) 3.0% - 15.0% (b)
Business equipment leases ......... -- (c) -- (c)
Annual credit loss rates
Home equity loans ................. 0.25% 0.25%
Business purpose loans ............ 0.25% 0.25%
Business equipment leases ......... 0.50% 0.50%
Actual cumulative credit losses
Home equity loans ................. -- 0.05%
Business purpose loans ............ -- 0.19%
Business equipment leases ......... -- 0.71%
</TABLE>
- ------------
(a) Ramped over 12 to 18 months
(b) Ramped over 24 months
(c) Residual values are continuously adjusted based on actual experience.
40
<PAGE>
It is estimated that a 100 basis point (1.0%) increase in prepayment rates
would decrease the fair value of interest-only strips by approximately $4.3
million and the fair value of servicing assets by approximately $1.0 million.
We attempt to minimize prepayment risk on interest-only strips and
servicing assets by requiring prepayment fees on business purpose loans and
home equity loans, where permitted by law. Currently, approximately 94% of
business purpose loans and 80% of home equity loans in the managed portfolio
are subject to prepayment fees. In addition, we have found that credit impaired
borrowers are less sensitive to interest rates than monthly payment balances
further reducing prepayment expectations.
Subordinated Debt. We also experience interest rate risk to the extent
that as of June 30, 1999 approximately $93.6 million of our liabilities were
comprised of subordinated debt with scheduled maturities of greater than one
year. To the extent that market interest rates demanded for subordinated debt
increase in the future, the rates paid on replacement debt could exceed rates
currently paid thereby increasing interest expense and reducing net income.
Liquidity and Capital Resources
Our business requires continual access to short and long-term sources of
debt financing. Our cash requirements include the funding of loan and lease
originations, payment of interest expense, funding of overcollaterization
requirements in connection with securitizations, payment of operating expenses
and funding of capital expenditures.
We continue to significantly rely on access to the asset-backed securities
market through securitizations to generate cash proceeds for the repayment of
debt and to fund ongoing operations. As a result of the terms of the
securitizations, we will receive less cash flow from the portfolios of loans
and leases securitized than we would otherwise receive absent securitizations.
Additionally, pursuant to the terms of the securitizations, we 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 demands on our
cash flow than either selling loans with servicing released or maintaining a
portfolio of loans and leases.
A significant portion of loan originations are non-conforming mortgages to
subprime borrowers. Certain participants in the non-conforming mortgage
industry have experienced greater than anticipated losses on their
securitization residual interests due to the effects of increased credit losses
and increased prepayment rates, resulting in some competitors exiting the
business or recording valuation allowances or write downs for these conditions
in fiscal 1999. In addition, unusual movements in the capital markets in fiscal
1999 resulted in increased demand for U.S. Treasury securities which had an
adverse impact on the demand for asset-backed securities including those backed
by non-conforming mortgage loans. As a result, some participants experienced
restricted access to capital required to fund loan originations, and have been
precluded from participation in the asset-backed securitization market.
However, we have maintained our ability to obtain funding and to securitize
loans and leases. Factors that have minimized the effect of adverse market
conditions on ABFS include our ability to originate loans and leases through
established retail channels, focus on credit underwriting, assessment of
prepayment fees on loans, diversification of lending in the home equity,
business loan and equipment lease markets and the ability to raise capital
through sales of subordinated debt securities pursuant to a registered public
offering.
Subject to economic, market and interest rate conditions, we intend to
continue to implement additional securitizations of our loan and lease
portfolios. Any delay or impairment in our ability to securitize loans and
leases, as a result of market conditions or otherwise, could adversely affect
the results of operations.
To a limited extent, we intend to continue to augment the interest and fee
income earned on loan and lease portfolios by selling loans and leases either
at the time of origination or from our portfolio to unrelated third parties.
These transactions also create additional liquid funds available for lending
activities.
We also rely on borrowings such as subordinated debt and warehouse credit
facilities to fund operations. At June 30, 1999, a total of $212.9 million of
subordinated debt was outstanding, and credit facilities totaling $375.0
million were available, of which $54.7 million was drawn upon at such date.
41
<PAGE>
During fiscal 1999, we sold $101.3 million in principal amount of
subordinated debt securities with maturities ranging between one day and ten
years. As of June 30, 1999, approximately $206.9 million of subordinated debt
was outstanding. Under a shelf registration statement declared effective by the
Securities and Exchange Commission on October 20, 1998, we registered $250.0
million of subordinated debt of which $122.0 million was available for issuance
at June 30, 1999. The proceeds from sales of subordinated debt securities will
be used to fund general operating and lending activities. We intend to meet our
obligation to repay such debt as it matures with income from operations,
including securitization or sale of loans or leases, working capital and cash
generated from additional debt financing. The utilization of funds for the
repayment of such obligations should not adversely affect operations.
The following is a description of the warehouse and line of credit
facilities that are utilized to fund origination of loans and leases prior to
securitization. All of these facilities are senior in right of payment to the
subordinated debt.
Our subsidiaries had an aggregate $100.0 million Interim Warehouse and
Security Agreements with Prudential Securities Credit Corporation expiring
August 31, 1999 to fund loan originations. The agreement was subsequently
increased to $150.0 million and extended to August 31, 2000. The obligations
under these agreements are guaranteed by ABFS. Under these agreements, the
subsidiaries may obtain advances subject to certain conditions, which
extensions of credit bear interest at a specified margin over the LIBOR rate.
The obligations under these agreements are collateralized by pledged loans. At
June 30, 1999, $0.1 million of this facility was drawn upon.
We along with certain of our subsidiaries, obtained a $150.0 million
warehouse credit facility from a syndicate of banks led by Chase Bank of Texas
N.A. expiring October 1, 2000. Under this warehouse facility, advances may be
obtained, 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. Obligations under the facility are
collateralized by certain pledged loans and other collateral related thereto.
The facility also requires the obligation to meet certain financial ratios and
contains restrictive covenants, including covenants limiting loans to and
transaction with affiliates, the issuance of additional debt, and the types of
investments that can be purchased. At June 30, 1999, $42.6 million of this
facility was drawn upon.
In September 1998 our subsidiaries, American Business Leasing, Inc. and
Federal Leasing Corp, entered into a credit agreement with First Union National
Bank pursuant to which First Union committed to extend $20.0 million of credit
in the form of a warehouse line of credit to such entities to enable them to
fund eligible lease receivables. The agreement terminates in September 2000.
Under the First Union line of credit, American Business Leasing and Federal
Leasing may obtain advances in increments of $500,000 or greater, subject to
certain conditions, which extensions of credit shall bear interest at either
the LIBOR rate plus a margin or the prime rate set by First Union less a margin
at the borrower's option. This agreement has a term of two years unless
accelerated upon an event of default as described in the agreement. The
obligation under the First Union line of credit is collateralized by pledged
leases and other collateral related thereto. This obligation is guaranteed by
us and certain of our subsidiaries. At June 30, 1999, $3.8 million of this line
of credit was being utilized.
In October 1998, American Business Leasing and American Business Lease
Funding Corporation, a wholly-owned subsidiary of American Business Leasing,
entered into a $100.0 million commercial paper conduit underwritten by First
Union Capital Markets to finance equipment lease production. The agreement
allows for up to two sales of equipment leases per month into the conduit. The
agreement terminates on October 14, 1999 unless terminated earlier in the event
of default described therein. The cost of financing is the average interest
rate on commercial paper plus a margin. At June 30, 1999, $3.2 million of this
facility was being utilized. If we do not extend the term of this agreement, we
will utilize other lines of credit currently available to us to fund lease
production or may explore other financing arrangements.
In December 1998, we and our subsidiaries, American Business Credit, Home
American Credit and New Jersey Mortgage entered into an agreement with Chase
Bank pursuant to which Chase Bank committed to extend $5.0 million of credit in
the form of a Security Agreement against the Class R Certificate of the ABFS
Mortgage Loan Trust 1998-2. Under the Chase Bank line of credit American
Business Credit, Home American
42
<PAGE>
Credit and New Jersey Mortgage may borrow up to $5.0 million, subject to
certain conditions, which extensions of credit shall bear interest at the LIBOR
rate plus a margin. Such agreement has a term of one year unless accelerated
upon an event of default as described in such agreement. At June 30, 1999, $5.0
million of this line of credit was being utilized.
As of June 30, 1999, $175.9 million of debt was scheduled to mature during
the twelve months ending June 30, 2000 which was mainly comprised of maturing
subordinated debt, warehouse lines of credit and other debt incurred in
connection with the acquisition of New Jersey Mortgage. We currently expect to
refinance the maturing debt through extensions of maturing debt or new debt
financing and, if necessary, may retire the debt through cash flow from
operations and loan sales or securitizations. Despite the current use of
securitizations to fund loan growth, we are also dependent upon other
borrowings to fund a portion of our operations. We intend to continue to
utilize debt financing to fund operations in the future.
Any failure to renew or obtain adequate funding under a warehouse credit
facility, or other borrowings, or any substantial reduction in the size or
pricing in the markets for loans and leases, could have a material adverse
effect on our results of operations and financial condition. To the extent we
are not successful in maintaining or replacing existing financing, we may have
to curtail loan and lease production activities or sell loans and leases rather
than securitize them, thereby having a material adverse effect on our results
of operations and financial condition.
We lease our corporate headquarters facilities under a five-year operating
lease expiring in January 2003 at a minimum annual rental of approximately $2.2
million. The lease contains a renewal option for an additional period at
increased annual rental. We also leases a facility in Roseland, New Jersey
which functions as the loan production headquarters for New Jersey Mortgage and
its subsidiaries at an annual rental cost of approximately $0.8 million. 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,
branch offices are leased on a short-term basis in various cities throughout
the United States. The leases for the branch offices are not material to
operations. See note 14 of the notes to consolidated financial statements for
information regarding lease payments.
Year 2000 Update
A Year 2000 ("Y2K") Task Force was established to assess Y2K issues and to
implement a Y2K compliance program. The Task Force, which meets weekly,
includes members of the Information Technology Department, Finance Department,
Legal Department, representatives from all business units, and an independent
consultant with Y2K expertise. The Task Force reports monthly to executive
management. The Task Force has completed an assessment of the core information
technology (IT) systems and is continuing the process of evaluating the
remainder of the non-core IT systems as well as non-IT systems. The non-IT
systems include the telecommunications systems, business machines and building
and premises systems.
The Task Force has adopted a five-phase approach to assess Y2K issues and
to address those issues that are reasonably within its control:
Phase 1 -- Awareness: One of the first tasks performed by the Task Force
was to generate greater awareness of Y2K issues. The awareness process included
contacting all business units to educate management regarding the Y2K program
and to discern any potential issues. Each business unit has assigned a point of
contact to assist the Task Force in the assessment and compliance process.
Awareness efforts will continue throughout the span of the project.
Phase 2 -- Assessment: An inventory has been conducted of all IT hardware
and software, including business applications, operating systems, third-party
products, and internal and external interfaces that may be at risk. Each
critical system was reviewed, rated for importance to business operations and
identified as "retain" or "retire." This process has been completed for all
core and non-core IT systems. We are in the process of replacing most core IT
systems due to strategic and growth reasons unrelated to the Y2K issue. The
process began in 1996 and completion is anticipated by September 30, 1999. All
systems acquired as part of this enhancement project must be certified by their
vendors as Y2K compliant. Non-IT systems have been evaluated, which include the
telecommunications systems, business machines, building and premises systems
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<PAGE>
and key suppliers, whose Y2K failures could have a material impact on our
operation. This part of the assessment, which was dependent on obtaining
specific responses from third parties, was completed as of June 30, 1999. The
assessment phase also includes the development of appropriate response plans,
which may include repair, conversion, replacement or elimination of affected
systems.
Phase 3 -- Renovation: This phase involves the remediation of Y2K issues
identified as a result of the assessment. With the exception of a single,
vendor-provided application, all core IT system remediation efforts were
completed on schedule (June 30, 1999). The vendor of the non-compliant
application has committed to remediate and successfully test the system,
achieving Y2K compliance by September 30, 1999 (See Phase 4 -- Validation).
Phase 4 -- Validation: This phase involves establishing a test
environment, performing systems tests and validating the results. The systems
to be used for testing have been acquired, and the validation process has
begun. Y2K testing and verification of all new "replacement" systems will be
done as part of their implementation process. Test plans have been written,
with verification testing projected to be completed by September 30, 1999. We
have successfully completed Y2K testing of a suite of applications currently
providing service to many of the key business units. In addition, the data
processing infrastructure which includes mainframe, network and server related
equipment, has been tested and validated as compliant.
Phase 5 -- Implementation: This phase involves the deployment of the
appropriate Y2K compliant strategy based on the results of the Assessment,
Renovation and Validation phases.
Year 2000 Risks and Contingency Plans
The majority of the IT hardware and infrastructure is less than 2 years
old, minimizing exposure to Y2K issues. This inventory is being checked against
vendor provided Y2K information for validation. Also, we intend that all new
hardware and software acquisitions are represented and warranted by the vendors
as Y2K compliant and that any systems developed by in-house programmers will
continue to be created using Y2K compliant tools, platforms, and procedures.
We have contacted suppliers who provide necessary goods and services,
including banking institutions who provide financial services, to evaluate
their Y2K compliance plans. As responses are received, their responses are
reviewed and evaluated to ensure that no Y2K related event will materially
impede the ability of our suppliers to continue to provide needed goods and
services as the Year 2000 is approached and reached. We believe all responses
received indicate that these goods and services are, or will be, Year 2000
compliant. The failure of our suppliers to address their Y2K issues on a timely
basis may have a material adverse effect on our operations.
Based upon the current status, we have targeted the end of September 1999
for completion of our Y2K compliance program. However, no assurance can be
given that we will meet this time frame. We currently estimate that the costs
directly associated with the Y2K compliance program will be approximately $0.5
million. This budgeted amount does not include the costs associated with the
"replacement" systems as referenced in Phase 2. The funds necessary to complete
the systems replacement project and the Y2K compliance program are included in
the Information Technology operating budget. Approximately $0.1 million of the
amount budgeted for costs directly associated with the Y2K compliance program
have been expended as of June 30, 1999.
We are in the process of developing a contingency plan that will be used
in the event that any hardware, software or other computer systems, or those of
our vendors are not Y2K compliant, based on risks identified as a result of the
assessment and testing phase of our Year 2000 compliance program.
While we fully expect that the precautions being taken will prepare us for
entering Year 2000, there is always the potential for risk. Our failure or any
of our material suppliers failure to bring their systems into Year 2000
compliance on a timely basis may have a material adverse effect on our
operations.
Fourth Quarter Results
For the fourth quarter of fiscal 1999, net income increased $0.3 million,
or 6.5%, to $3.7 million from $3.4 million for the comparable period of fiscal
1998. Basic earnings per common share increased 8.6% to
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$1.01 on average common shares of 3,626,072, compared to $0.93 per share on
average common shares of 3,699,576 for the comparable period of fiscal 1998.
Diluted earnings per common share increased 11.2% to $0.99 on average common
shares of 3,730,236, compared to $0.89 per share on average common shares of
3,905,831 for the comparable period of fiscal 1998.
The increases in net income and earnings per share primarily resulted from
the impact of increases in the volume of loans and leases securitized during
the periods and increases in the collection of fee income due to the increase
in the total managed portfolio.
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on operations. These pronouncements should be read in conjunction
with the significant accounting policies, which have been adopted, that are set
forth in note 1 of the notes to the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities."
("SFAS No. 133"). SFAS No. 133 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 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 a recognized asset or liability or an unrecognized firm commitment
(fair value hedge), (b) a hedge of the exposure to variable cash flows of a
forecasted transaction (cash flow hedge), 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. At the time of issuance
SFAS No. 133 was to be effective on a prospective basis for all fiscal quarters
of fiscal years beginning after June 15, 1999. Subsequently, the effective date
of the standard was delayed until years beginning after June 15, 2000. The
adoption of this standard is not expected to have a material effect on our
financial condition or results of operations.
45
<PAGE>
BUSINESS
General
We are a diversified financial services company operating throughout the
United States. Through our principal direct and indirect subsidiaries, American
Business Credit, Inc., HomeAmerican Credit, Inc. (doing business as Upland
Mortgage), American Business Leasing, Inc., New Jersey Mortgage and Investment
Corp. and Federal Leasing Corp., we originate, service and sell business
purpose loans, home equity loans, first mortgage loans and equipment leases. We
also underwrite, process and purchase home equity loans through our Bank
Alliance Program.
We were incorporated in Delaware in 1985 and began operations as a finance
company in 1988, initially offering business purpose loans to customers whose
borrowing needs we believed were not being adequately serviced by commercial
banks. Since our inception, we have significantly expanded our product line and
geographic scope and currently offer our loan products in 44 states and our
lease products throughout the United States.
Subsidiaries
As a holding company, our activities have been limited to: (i) holding the
shares of our operating subsidiaries, and (ii) raising capital for use in the
subsidiaries' lending operations. ABFS is the parent holding company of
American Business Credit, Inc. and its primary subsidiaries, HomeAmerican
Credit, Inc. (doing business as Upland Mortgage), Processing Service Center,
Inc., American Business Leasing, Inc., ABC Holdings Corporation and New Jersey
Mortgage and Investment Corp. and its subsidiary, Federal Leasing Corp.
American Business Credit, a Pennsylvania corporation incorporated in 1988
and acquired by us in 1993, originates, services and sells business purpose
loans. Home American Credit, a Pennsylvania corporation incorporated in 1991,
originates and sells home equity loans. Home American Credit acquired Upland
Mortgage Corp. in 1996 and since that time has conducted business as "Upland
Mortgage." Upland Mortgage also purchases home equity loans through the Bank
Alliance Program. Processing Service Center processes home equity loan
applications for financial institutions as part of the Bank Alliance Program.
Incorporated in 1994, American Business Leasing commenced operations in 1995
and originates and services equipment leases.
New Jersey Mortgage and Investment Corp., a New Jersey corporation
organized in 1938 and acquired by us in October 1997, is currently engaged in
the origination and sale of home equity loans, as well as first mortgage loans.
New Jersey Mortgage originates loans secured by real estate. These loans are
originated through New Jersey Mortgage's network of branch sales offices and
three satellite offices. New Jersey Mortgage has been offering mortgage loans
since 1939. We currently sell first mortgage loans originated by American
Household Mortgage, a division of New Jersey Mortgage, in the secondary market
with servicing released. We also securitize home equity loans originated by New
Jersey Mortgage pursuant to our existing current securitization program.
New Jersey Mortgage's wholly-owned subsidiary, Federal Leasing Corp., is a
Delaware corporation which was organized in 1974. Federal Leasing Corp.
generally originates equipment leases throughout the United States and has in
the past sold such leases through securitizations and retains the servicing
rights with respect to the leases. We intend to evaluate the continued
securitization of equipment leases based upon market and economic conditions in
the future.
ABC Holdings Corporation, a Pennsylvania corporation, was incorporated in
1992 to hold properties acquired through foreclosure.
We also have numerous special purpose subsidiaries that were incorporated
solely to facilitate our securitizations. Some of those companies are Delaware
investment holding companies. The stock of these subsidiaries is held by
various subsidiaries of ours. As part of the acquisition of New Jersey Mortgage
and Federal Leasing Corp., we also acquired FLC Financial Corp. and FLC II
Financial Corp., the Delaware
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<PAGE>
investment holding companies incorporated to facilitate the securitization of
Federal Leasing Corp.'s leases. The stock of these companies is held by Federal
Leasing Corp. 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 securitizations completed through
Federal Leasing Corp. prior to its acquisition by us. See "-- Securitizations."
The following chart sets forth our basic organizational structure(1).
[GRAPHIC OMITTED]
- ------------
(1) In addition to the corporations pictured above, we organized at least one
special purpose corporation for each of these securitizations.
(2) Loans purchased by Upland Mortgage represent loans acquired through the
Bank Alliance Program.
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<PAGE>
Lending and Leasing Activities
General. The following table sets forth certain information concerning our
loan and lease origination, purchase and sale activities for the years
indicated. We did not originate first mortgage loans prior to October 1997.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1999 1998 1997
-------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Loans/Leases Originated/Purchased
(Net of refinances)
Business purpose loans .............................. $ 64,818 $ 52,335 $38,721
Home equity loans ................................... $634,820 $328,089 $91,819
First mortgage loans ................................ $ 66,519 $ 33,671 --
Equipment leases .................................... $ 96,289 $ 70,480 $ 8,004
Other loans ......................................... -- -- $ 39
Number of Loans/Leases Originated/Purchased
Business purpose loans .............................. 806 632 498
Home equity loans ................................... 8,251 5,292 1,791
First mortgage loans ................................ 781 218 --
Equipment leases .................................... 4,138 3,350 743
Other loans ......................................... -- -- 8
Average Loan/Lease Size
Business purpose loans .............................. $ 80 $ 83 $ 78
Home equity loans ................................... $ 74 $ 62 $ 51
First mortgage loans ................................ $ 165 $ 154 --
Equipment leases .................................... $ 23 $ 21 $ 11
Other loans ......................................... -- -- $ 5
Weighted Average Interest Rate on Loans/Leases
Originated/Purchased
Business purpose loans .............................. 15.91% 15.96% 15.91%
Home equity loans ................................... 11.05% 11.95% 11.69%
First mortgage loans ................................ 7.67% 8.22% --
Equipment leases .................................... 11.40% 12.19% 15.48%
Other loans ......................................... -- -- 20.83%
Weighted Average Term (in months)
Business purpose loans .............................. 169 172 184
Home equity loans ................................... 261 244 218
First mortgage loans ................................ 322 340 --
Equipment leases .................................... 50 49 40
Other loans ......................................... -- -- 59
Loans/Leases Sold
Business purpose loans .............................. $ 71,931 $ 54,135 $38,083
Home equity and First mortgage loans ................ $613,069 $322,459 $80,734
Equipment leases .................................... $ 92,597 $ 59,700 --
Other loans ......................................... -- -- $ 58
Number of Loans/Leases Sold
Business purpose loans .............................. 911 629 497
Home equity and First mortgage loans ................ 8,074 4,753 1,631
Equipment leases .................................... 4,363 3,707 --
Other loans ......................................... -- -- 8
Weighted Average Rate on Loans/Leases Originated..... 11.30% 11.63% 13.09%
</TABLE>
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The following table sets forth information regarding the average
loan-to-value ratios for loans we originated during the periods indicated. We
did not originate any first mortgage loans prior to October 1997.
Year Ended June 30,
------------------------------------
Loan Type 1999 1998 1997
- -------------------------------- ---------- ---------- ----------
Business purpose loans ......... 61.5% 60.5% 60.0%
Home equity loans .............. 78.0 76.6 72.0
First mortgage loans ........... 78.0 79.9 --
The following table shows the geographic distribution of our loan and
lease originations and purchases during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 % 1998
------------ ----------- ------------
<S> <C> <C> <C>
(dollars in thousands)
New Jersey ............. $ 236,976 27.48% $ 128,025
New York ............... 163,580 18.97 54,907
Pennsylvania ........... 139,992 16.23 150,048
Florida ................ 61,312 7.11 23,905
Georgia ................ 59,395 6.89 23,084
Illinois ............... 27,663 3.21 --
California ............. 20,487 2.38 12,709
Maryland ............... 19,625 2.28 11,748
Ohio ................... 17,155 1.99 --
Virginia ............... 17,126 1.99 13,138
Delaware ............... 14,254 1.65 10,823
Connecticut ............ 14,052 1.63 5,964
North Carolina ......... 13,648 1.58 5,144
Texas .................. 6,631 .77 6,430
Other .................. 50,550 5.84 38,650
---------- ------ ---------
Total ............... $ 862,446 100.00% $ 484,575
========== ====== =========
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
% 1997 % 1996 %
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
New Jersey ............. 26.38% $ 40,725 29.39% $ 20,986 29.33%
New York ............... 11.31 8,343 6.02 7,417 10.36
Pennsylvania ........... 31.06 53,834 38.85 33,324 46.57
Florida ................ 4.93 3,670 2.65 674 0.94
Georgia ................ 4.76 10,092 7.28 181 0.25
Illinois ............... -- -- -- -- --
California ............. 2.62 -- -- -- --
Maryland ............... 2.42 5,010 3.61 4,408 6.16
Ohio ................... -- -- -- -- --
Virginia ............... 2.71 5,469 3.95 104 0.15
Delaware ............... 2.23 3,117 2.25 2,724 3.81
Connecticut ............ 1.23 2,005 1.45 87 0.12
North Carolina ......... 1.06 4,245 3.06 78 0.11
Texas .................. 1.33 -- -- -- --
Other .................. 7.98 2,073 1.49 1,575 2.20
------ --------- ------ -------- ------
Total ............... 100.00% $ 138,583 100.00% $ 71,558 100.00%
====== ========= ====== ======== ======
</TABLE>
<PAGE>
Business Purpose Loans. Through our subsidiary, American Business Credit,
we currently originate business purpose loans through a retail network of
salespeople in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey,
New York, Ohio, Pennsylvania and Virginia. We focus our marketing efforts on
small businesses who do not meet all of the credit criteria of commercial banks
and small businesses that our research indicates may be predisposed to using
our products and services.
We originate 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. We do not target any particular industries
or trade groups and, in fact, take precautions against concentration 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, in most cases, these loans are 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.
Our business purpose loans generally ranged from $15,000 to $500,000 and
had an average loan size of approximately $80,000 for the loans originated
during the year ended June 30, 1999. Generally, our business purpose loans are
made at fixed rates and for terms ranging from five to 15 years. We generally
charge origination fees for these loans of 5.0% to 6.0% of the original
principal balance. The weighted average interest rate charged on the business
purpose loans originated by us was 15.91% for the year ended June 30, 1999 .
The business purpose loans we securitized during the past fiscal year had a
weighted average loan-to-value ratio, based solely upon the real estate
collateral securing the loans, of 61.5% at the time of securitization. See "--
Securitizations." We originated $64.8 million of business purpose loans for the
year ended June 30, 1999.
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Generally, we compute interest due on its outstanding loans using the
simple interest method. Where permitted by applicable law, we impose a
prepayment fee. Although prepayment fees imposed vary based upon applicable
state law, the prepayment fees on our business purpose loan documents generally
amount to a significant portion of the outstanding loan balance. We believe
that such prepayment terms tend to extend the average life of our loans by
discouraging prepayment which makes these loans more attractive for
securitization. Whether a prepayment fee is imposed and the amount of such fee,
if any, is negotiated between the individual borrower and American Business
Credit prior to closing of the loan.
Home Equity Loans. We originate home equity loans through Upland Mortgage
and New Jersey Mortgage primarily to credit-impaired borrowers through retail
marketing which includes telemarketing operations, direct mail, radio and
television advertisements as well as through our interactive web site. We
entered the home equity loan market in 1991. Currently, we are licensed to
originate home equity loans in 44 states across the United States.
Home equity loans originated and funded by our subsidiaries are generally
securitized. In addition, we sell home equity loans to one of several third
party lenders, at a premium and with servicing released. Currently, we build
portfolios of home equity loans for the purpose of securitizing such loans.
Home equity loan applications are obtained from potential borrowers over
the phone, in person or over the Internet through our interactive web site. 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 $10,000 to $250,000 and had an
average loan size of approximately $74,000 for the loans originated during the
year ended June 30, 1999. During the year ended June 30, 1999, we originated
$634.8 million of home equity loans. Generally, home equity loans are made at
fixed rates of interest and for terms ranging from five to 30 years. Such loans
generally have origination fees of approximately 2.0% of the aggregate loan
amount. For the year ended June 30, 1999, the weighted average interest rate
received on such loans was 11.05% and the average loan-to-value ratio was 78.0%
for the loans originated by us during such period. We attempt to maintain our
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 us.
In fiscal 1996, through Upland Mortgage and in conjunction with Processing
Service Center, Inc., we entered into exclusive business arrangements with
several financial institutions which provide for Upland Mortgage's purchase of
home equity loans that do not meet the underlying guidelines of the selling
institutions but meet our underwriting criteria. This program is called the
Bank Alliance Program. The Bank Alliance Program is designed to provide an
additional source of home equity loans, 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 allows these financial institutions to
originate loans to credit-impaired borrowers in order to achieve certain
community reinvestment goals and to generate fee income and subsequently sell
such loans to Upland Mortgage. We believe that the Bank Alliance Program is a
unique method of increasing our production of home equity loans.
Under this program, a borrower who fails to meet a financial institution's
underwriting guidelines will be referred to Processing Service Center, Inc.
which will process the loan application and underwrite the loan pursuant to
Upland Mortgage's underwriting guidelines. If the borrower qualifies under
Upland Mortgage's underwriting standards, the loan will be originated by the
financial institution and subsequently sold to Upland Mortgage.
Since the introduction of this program, we have entered into agreements
with twenty-two financial institutions which provide us with the opportunity to
underwrite, process and purchase loans generated by the branch networks of such
institutions which consist of in excess of 1,500 branches located in Colorado,
Delaware, Florida, Georgia, Indiana, Maryland, Michigan, Nebraska, New
Hampshire, New Jersey, Ohio, Pennsylvania and Tennessee. During fiscal 1999,
Upland Mortgage purchased in excess of $35.0 million of loans pursuant to this
program. We intend to continue to expand the Bank Alliance Program with
financial institutions across the United States.
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During fiscal 1999, we launched an Internet loan distribution channel
under the name www.UplandMortgage.com. Through this interactive web site,
borrowers can calculate interest payments and submit and an application via the
Internet. The Upland Mortgage Internet platform provides borrowers with
convenient access to the mortgage loan application process, 7 days a week, 24
hours a day. We believe that the addition of this distribution channel
maximizes the efficiency of the application process and could reduce our
transaction costs in the future to the extent the volume of loan applications
received via the web page increases. Throughout the loan processing period,
borrowers who submit applications on line are supported by our staff of highly
trained loan officers. We intend to continue to enhance our web site in order
to permit online underwriting, approval and processing of a loan application.
First Mortgage Loans. We began offering first mortgage loans in October
1997 in connection with our acquisition of New Jersey Mortgage. New Jersey
Mortgage has been originating mortgage loans since 1939. We originate first
mortgage loans and sell them in the secondary market with servicing released.
Our first mortgage lending market area is primarily the eastern region of the
United States. We originated $66.5 million of first mortgage loans during the
year ended June 30, 1999.
The first mortgage loans are secured by one-to four-unit residential
properties located primarily in the eastern region of the United States. These
properties are generally owner-occupied single family residences but may also
include second homes and investment properties. These loans are generally made
through American Household Mortgage, a division of New Jersey Mortgage, to
borrowers with favorable credit histories and are underwritten pursuant to
Freddie Mac or Fannie Mae standards to permit their sale in the secondary
market, however, we also originate first mortgage loans which do not meet the
Freddie Mac or Fannie Mae standards for sale in the secondary market. Certain
of these first mortgage loans have balances of $240,000 or greater and are
commonly referred to as jumbo loans.
New Jersey Mortgage typically sells such loans to third parties with
servicing released. New Jersey Mortgage also originates Federal Housing
Authority ("FHA") and Veterans Administration ("VA") loans which are
subsequently sold to third parties with servicing released. This means that we
do not generally retain the right to collect and service these loans after they
are sold. New Jersey Mortgage originates such loans for sale in the secondary
market.
Equipment Leases. Through our indirect subsidiaries American Business
Leasing and Federal Leasing Corp., we began offering equipment leases in
December 1994 to complement our business purpose lending program. We currently
originate equipment leases throughout the United States. We originate 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. We generally do not target
credit-impaired lessees. All such lessees must meet certain specified financial
and credit criteria.
Generally, our 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. Our equipment leases generally
range in size from $2,000 to $250,000, with an average lease size of
approximately $23,000 for the leases originated during the year ended June 30,
1999. Leases in excess of $250,000 are generally sold on a non-recourse basis
to third parties. Our leases generally have maximum terms of seven years. The
weighted average interest rates received on leases for the year ended June 30,
1999 was 11.40%. During the year ended June 30, 1999, we originated $96.3
million of equipment leases. Generally, the interest rates and other terms and
conditions of our equipment leases are competitive with the leasing terms of
other leasing companies in our market area.
Prior to fiscal 1998, all leases originated by American Business Leasing
were generally held in our lease portfolio. Historically, Federal Leasing Corp.
sold all leases it originated through securitizations with servicing retained.
Presently, American Business Leasing and Federal Leasing Corp. periodically
sell the equipment leases, with servicing retained, through securitizations or
to Variable Funding Capital Corporation, a commercial paper conduit
underwritten by First Union Capital Market. These leases are serviced by
American Business Leasing or Federal Leasing Corp. During fiscal 1999, we sold
or securitized $92.6 million of
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equipment leases. During fiscal 1999, we streamlined our leasing activities to
focus solely on the origination of small ticket business equipment leases which
generally involve equipment valued at $2,000 to $250,000, which market we
believe is not adequately serviced by larger leasing companies. In the future,
we intend to evaluate the continued securitization of our lease portfolio
subject to market and economic conditions.
There are risks inherent in our leasing activities which are different
than those risks inherent in our mortgage lending activities. See "Risk Factors
- -- Risks associated with leasing activities may reduce our future
profitability."
Marketing Strategy
We concentrate our marketing efforts primarily on two potential customer
groups. One group, based on historical profiles, has a tendency to select our
loan and lease products because of our personalized service and timely response
to loan requests. The other group is comprised of credit-impaired borrowers who
satisfy our underwriting guidelines. We also market first mortgage loans and
leases to borrowers with favorable credit histories. See "Risk Factors --
Lending to credit-impaired borrowers may result in higher delinquencies in our
managed portfolio which could adversely impact our financial condition and
results of operations."
Our marketing efforts for business purpose loans focus on our niche market
of selected small businesses located in our market area which generally
includes the eastern half of the United States. We target businesses which we
believe would qualify for loans from traditional lending sources but would
elect to use our products and services. Our experience has indicated that these
borrowers are attracted to us as a result of our marketing efforts, the
personalized service provided by our staff of highly trained lending officers
and our timely response to loan applications. Historically, such customers have
been willing to pay our origination fees and interest rates which are generally
higher than those charged by traditional lending sources.
We market business purpose loans through various forms of advertising, and
a direct sales force. Advertising media used includes large direct mail
campaigns and newspaper and radio advertising. Our commissioned sales staff,
which consists of full-time highly trained salespersons, is responsible for
converting advertising leads into loan applications. We use a proprietary
training program involving extensive and on-going training of our lending
officers. Our sales staff uses significant person-to-person contact to convert
direct mail advertising into loan applications and maintains contact with the
borrower throughout the application process. See "-- Lending and Leasing
Activities -- Business Purpose Loans."
We market home equity loans through telemarketing, direct mail campaigns
as well as television, Internet, radio and newspaper advertisements. Our
television advertising campaign is designed to complement the other forms of
advertising we used. Our integrated approach to media advertising is intended
to maximize the effect of our advertising campaigns. We also use a network of
loan brokers.
Our marketing efforts for home equity loans are concentrated in the
eastern region of the United States. In connection with the acquisition of New
Jersey Mortgage, we expanded our branch office network to include Illinois,
Ohio, Delaware, Pennsylvania and Virginia in its existing network of offices in
Georgia, Maryland, South Carolina and Florida. We intend to open additional
sales offices in other states in the future. Loan processing, underwriting,
servicing and collection procedures are performed at our main office located in
Pennsylvania. We also use the Bank Alliance Program as an additional source of
loans as well as our Internet web site. See "-- Lending and Leasing Activities
- -- Home Equity Loans."
We market first mortgage loans through our network of loan brokers. Our
marketing efforts for first mortgage loans are concentrated in the mid-Atlantic
region of the United States. In addition, we market first mortgage loans under
the name American Household Mortgage. See "-- Lending and Leasing Activities --
First Mortgage Loans."
Through our subsidiaries, American Business Leasing and Federal Leasing
Corp., we market equipment leases throughout the United States. During 1999, we
streamlined our leasing operations to focus our marketing efforts on the
origination of small ticket business equipment leases which we believe is not
adequately serviced by large leasing companies. Our marketing efforts in the
leasing area are focused on our niche market of distributors of small to
medium-sized office, industrial and medical equipment. American
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Business Leasing and Federal Leasing Corp. primarily obtain their equipment
leasing customers through equipment manufacturers, brokers and vendors with
whom they have a relationship and through a direct sales force. See "-- Lending
and Leasing Activities -- Equipment Leases."
Loan and Lease Servicing
Generally, we service the loans and leases we maintain in our portfolio or
which we securitize in accordance with our established servicing procedures.
Servicing includes collecting and transmitting payments to investors,
accounting for principal and interest, collections and foreclosure activities,
and selling the real estate or other collateral that is acquired. At June 30,
1999, our total managed portfolio included approximately 23,000 loans and
leases with an aggregate outstanding balance of $1.2 billion. We generally
receive contractual servicing fees of 0.50% per annum based upon the
outstanding balance of securitized loans and leases serviced and the scope of
our servicing responsibilities. In addition, we receive other ancillary fees
related to the loans and leases serviced. Our servicing and collections
activities are centralized at our principal operating office located in Bala
Cynwyd, Pennsylvania.
In servicing loans and leases, we typically send an invoice to obligors on
a monthly basis advising them of the required payment and its due date. We
begin the collection process immediately after a borrower fails to make a
monthly payment. When a loan or lease becomes 45 to 60 days delinquent, it is
transferred to our work-out department. The work-out department tries 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 our attorneys 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.
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, we record it at the lower of cost or estimated fair value, less
estimated cost of disposition. After acquisition, all costs incurred in
maintaining the property are accounted for as expenses.
Our ability to foreclose on certain properties may be affected by state
and federal environmental laws. See "Risk Factors -- Environmental laws and
regulations may restrict our ability to foreclose on loans secured by real
estate."
As the servicer of securitized loans and leases, we are obligated to
advance funds for scheduled payments that have not been received from the
borrower unless we determine that our 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, first mortgage loans and equipment leases. These policies and
practices may be altered, amended and supplemented as conditions warrant. We
reserve the right to make changes in our day-to-day practices and policies.
Our loan and lease underwriting standards are applied to evaluate
prospective borrowers' credit standing and repayment ability as well as the
value and adequacy of the mortgaged property or equipment as collateral.
Initially, the prospective borrower is required to fill out a detailed
application providing pertinent credit information. As part of the description
of the prospective 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 prospective 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
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income. 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 prospective 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, we also
receive additional collateral in the form of, among other things, personal
guarantees, pledges of securities, assignments of contract rights, life
insurance and lease payments and liens on business equipment and other business
assets, as available. The business purpose loans we originated had an average
loan-to-value ratio of 61.5% for the year ended June 30, 1999.
The maximum acceptable loan-to-value ratio for home equity loans held in
portfolio or securitized is generally 90%. The home equity loans we originated
had an average loan-to-value ratio of 78.0% for the year ended June 30, 1999.
Occasionally, exceptions to these maximum loan-to-value ratios are made if
other collateral is available or if there are other compensating factors. From
time to time, we make loans with loan-to-value ratios in excess of 90% which
are sold with servicing released. Title insurance is generally obtained in
connection with all real estate secured loans.
We generally do not lend more than 95% of the appraised value in the case
of first mortgage loans, other than Federal Housing Authority and Veterans
Administration Loans. We generally require private mortgage insurance on all
first mortgage loans with loan-to-value ratios in excess of 80% at the time of
origination in order to reduce our exposure. We obtain 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 whether the mortgaged property is adequate as collateral,
we have each property considered for financing appraised. The appraisal is
completed by an independent qualified appraiser and generally includes pictures
of comparable properties and pictures of the interior of the building. With
respect to business purpose loans, home equity loans and first mortgage loans,
the appraisal is completed by an independent qualified appraiser on a Fannie
Mae 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 us, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. As a result, we cannot assure
that the market value of the real estate underlying the loans will at any time
be equal to or in excess of the outstanding principal amount of those loans.
Although we have expanded the geographic area in which we originate loans, a
downturn in the economy generally or in a specific region of the country may
have an effect on our originations. See "Risk Factors -- A decline in value of
the collateral securing our loans may adversely affect our business by reducing
originations and increasing losses on foreclosure."
In leasing, 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 their credit history. Our lease underwriting
criteria include a review of the borrower'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. In certain
situations, we may also obtain a personal guarantee on the lease.
Securitizations
Our sale of our business purpose loans, home equity loans and equipment
leases through securitization is an important financing technique. Since 1995,
we have completed approximately 14 securitization transactions. The 14 pools of
loans and leases securitized were comprised of approximately $201.3 million of
business
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purpose loans, approximately $969.8 million of home equity loans and
approximately $152.3 million of equipment leases. During fiscal 1999, the
Company securitized $71.9 million, $613.0 million and $92.6 million of business
purpose loans, home equity loans and equipment leases, respectively.
Securitization is a financing technique often used by originators of
financial assets to raise capital. A securitization involves the transfer of a
pool of financial assets, in our case loans or leases, to a trust in exchange
for cash and a retained interest in the securitized loans and leases which is
called a residual interest. The trust issues various classes of securities
which derive their cash flows from a pool of securitized loans and leases.
These securities which represent the remaining interest in the trust called the
regular interests, are sold to public investors. We also retain servicing on
securitized loans and leases. See "-- Loan and Lease Servicing."
As the holder of the residual interests in a securitization, we are
entitled to receive certain excess (or residual) 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 investors in the
trust, servicing fees, trustee fees and, if applicable, insurance fees.
Overcollateralization requirements, representing an excess of the aggregate
principal balances of loans and leases in a securitized pool over investor
interests, are established to provide credit enhancement for the trust
investors. In order to meet the required overcollateralization levels the trust
initially retains the excess cash flow until after the overcollateralization
requirements, which are specific to each securitization, are met.
We may be required either to repurchase or to replace loans or leases
which do not conform to the representations and warranties we made in the
pooling and servicing agreements entered into when the loans or leases are
pooled and sold through securitizations. As of June 30, 1999, we 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, we are required to advance interest payments with respect
to such delinquent loans or leases to the extent that we determine that such
advances will be ultimately recoverable. These advances require funding from
our capital resources but have priority of repayment from the succeeding
month's collection.
Our securitizations often include a prefunding option where a portion of
the cash received from investors is withheld until additional loans or leases
are transferred to the trust. The loans or leases to be transferred to the
trust to satisfy the preferred option 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 we fail to originate a sufficient number of qualifying loans or
leases for the prefunded account within the specified time period, our 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,
1999, 1998 and 1997 generated gain on sale of loans and leases of $65.6
million, $41.3 million and $20.0 million, respectively. These gains contributed
to our record levels of revenue and net income during these fiscal years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Accounting Considerations."
Subject to market conditions, we anticipate that we will continue to
securitize business purpose loans, home equity loans and possibly equipment
leases. We believe that a securitization program provides a number of benefits
by allowing us to diversify our funding base, provide liquidity and lower our
cost of funds.
Competition
We compete for business purpose loans against many other finance companies
and financial institutions. Although many other entities originate business
purpose loans, we have focused our lending efforts on our niche market of
businesses which may qualify for loans from traditional lending sources but who
we believe are attracted to our products as a result of our marketing efforts,
responsive customer service and rapid processing and closing periods.
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We have significant competition for home equity loans. Through Upland
Mortgage and New Jersey Mortgage, we compete with banks, thrift institutions,
mortgage bankers and other finance companies, which may have greater resources
and name recognition. We attempt to mitigate these factors through a highly
trained staff of professionals, rapid response to prospective borrowers'
requests and by maintaining a relatively short average loan processing time. In
addition, we implemented our Bank Alliance Program in order to generate
additional loan volume.
We also face significant competition for equipment leases. Through
American Business Leasing and Federal Leasing Corp., we compete with banks,
leasing and finance companies with greater resources, capitalization and name
recognition throughout their market areas. It is our intention to capitalize on
our vendor relationships and the efforts of our direct sales force to compete
with these businesses.
The various segments of our lending businesses are highly competitive. See
"Risk Factors -- Competition from other lenders and lessors could adversely
affect our profits."
Regulation
General. Our 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 Truth in Lending Act, the 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 Truth in Lending Act and Regulation Z issued under
the Truth in Lending Act contain disclosure requirements designed to provide
consumers with uniform, understandable information about the terms and
conditions of loans and credit transactions so that consumers may compare
credit terms. The Truth in Lending Act 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 us. We believe that we
are in compliance with the Truth in Lending Act in all material respects. If we
were found not to be in compliance with the Truth in Lending Act, some
aggrieved borrowers could have the right to rescind their loans and to demand,
among other things, the return of finance charges and fees paid to us. Other
fines and penalties can also be imposed under the Truth in Lending Act and
Regulation Z.
Equal Credit Opportunity and Other Laws. We are also required to comply
with the Equal Credit Opportunity Act, which prohibits creditors from
discriminating against applicants on the basis of race, color, religion,
national origin, sex, age or marital status. Regulation B issued under the
Equity Credit Opportunity Act 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 of interest
for a loan increases as a result of information obtained from a consumer credit
reporting agency, 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. It also requires that lenders provide other information and
disclosures about the loan application rejection. In addition, we are subject
to the Fair Housing Act and regulations under the Fair Housing Act, which
broadly prohibit specific discriminatory practices in connection with our home
equity lending business.
We are also subject to the Real Estate Settlement Procedures Act. The Real
Estate Settlement Procedures Act imposes, limits on the amount of funds a
borrower can be required to deposit with us 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.
We are subject to various other federal and state laws, rules and
regulations governing, the licensing of mortgage lenders and servicers,
procedures that must be followed by mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
these laws, as well as with the laws described above, may result in civil and
criminal liability.
Several of our subsidiaries are licensed and regulated by the departments
of banking or similar entities in the various states in which they are
licensed. The rules and regulations contain licensing and licensed entities
activities, among other things, prohibit discrimination, collection,
foreclosure and claims handling, payment
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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 Mortgage and New Jersey Mortgage
maintain compliance with the various federal and state laws through its
in-house counsel and outside counsel which continually review Upland Mortgage
and New Jersey Mortgage documentation and procedures and monitor and inform
Upland Mortgage on various changes in the laws.
The previously described laws and regulations are subject to legislative,
administrative and judicial interpretation. Some of these laws and regulations
have recently been enacted. Some of these laws and regulations are rarely
challenged in or interpreted by the courts. Infrequent interpretations of these
laws and regulations or an insignificant number of interpretations of recently
enacted regulations can make it difficult for us to know what is permitted
conduct under these laws and regulations. Any ambiguity under the regulations
to which we are subject may lead to regulatory investigations or enforcement
actions and private causes of action, such as class action lawsuits, with
respect to our compliance with the applicable laws and regulations.
Although we believe that we have implemented systems and procedures to
make sure that we comply with regulatory requirements and that we are in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, if more restrictive laws, rules and regulations
are enacted or more restrictive judicial and administrative interpretations of
those laws are issued, compliance with the laws could become more expensive or
difficult.
Employees
At June 30, 1999, we employed 858 people on a full-time basis and 36
people on a part-time basis. None of our employees are covered by a collective
bargaining agreement. We consider our employee relations to be good.
Property
Except for real estate acquired in foreclosure in the normal course of our
business, we do not presently hold title to any real estate for operating
purposes. The interests which we presently hold in real estate are in the form
of mortgages against parcels of real estate owned by our borrowers or their
affiliates and real estate acquired through foreclosure.
We presently lease office space at 111 Presidential Boulevard, Bala
Cynwyd, Pennsylvania, just outside the city limits of Philadelphia. We are
currently leasing this office space under lease with an annual rental cost of
approximately $2.2 million. The current lease term expires in July 31, 2003. We
also lease the Roseland, New Jersey office which functions as the headquarters
for New Jersey Mortgage and its subsidiaries. The Roseland office lease
contains a renewal option for an additional term of five years. The Roseland
office facility has a current annual rental cost of approximately $766,000. In
addition, we lease branch offices on a short term basis in various cities
throughout the United States. We do not believe that the leases for the branch
offices are material to our operations.
Legal Proceedings
On October 23, 1997, a class action suit was filed in the Superior Court
of New Jersey at Docket No. L-12066-97 against New Jersey Mortgage by Alfred G.
Roscoe on behalf of himself and others similarly situated. Mr. Roscoe sought
certification that the action could be maintained as a class action. He also
sought unspecified compensatory damages and injunctive relief. In his
complaint, Mr. Roscoe alleged that New Jersey Mortgage violated New Jersey's
Mortgage Financing on Real Estate Law, N.J. Stat. Ann. 46:10A-1 et seq., by
requiring him and other borrowers to pay or reimburse New Jersey Mortgage for
attorneys' fees and costs in connection with loans made to them by New Jersey
Mortgage. Mr. Roscoe further asserted that New Jersey Mortgage's alleged
actions violated New Jersey's Consumer Fraud Act, N.J. Stat. Ann. 56:8-1, et
seq. and constituted common law fraud and deceit.
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On February 24,1998, after oral argument before the Superior Court, an
order was entered in favor of New Jersey Mortgage and against Mr. Roscoe
granting New Jersey Mortgage Motion for Summary Judgment. Mr. Roscoe appealed
to the Superior Court of New Jersey - Appellate Division. Oral argument on the
appeal was heard on January 20, 1999 before a two-judge panel of the Appellate
Division. On February 3, 1999, the panel filed a per curiam opinion affirming
the Superior Court's ruling in favor of New Jersey Mortgage.
On March 4, 1999, a Petition for Certification for review of the final
judgment of the Superior Court was filed with the Supreme Court of New Jersey.
New Jersey Mortgage filed its Brief in Opposition to the Petition for
Certification on March 16, 1999, and Mr. Roscoe filed a reply brief. To date,
no decision has been rendered by the New Jersey Supreme Court on this matter.
Pursuant to the terms of the Agreement for Purchase and Sale of Stock of
New Jersey Mortgage between us and the former shareholders of New Jersey
Mortgage, the former shareholders are required to indemnify us up to $16.0
million to the extent of any losses over $100,000 related to, caused by or
arising from New Jersey Mortgage's failure to comply with applicable law. The
former New Jersey Mortgage shareholders have agreed to defend us in this suit.
Additionally, from time to time, we are involved as plaintiff or defendant
in various other legal proceedings arising in the normal course of our
business. While we cannot predict the ultimate outcome of these various legal
proceedings, it is management's opinion that the resolution of these legal
actions should not have a material effect on our financial position, results of
operations or liquidity.
WHERE YOU CAN FIND MORE INFORMATION
We filed a Registration Statement on Form S-2 (which, together with all
exhibits and schedules thereto, is referred to as the "registration statement")
with the SEC, with respect to the registration of the notes offered by this
prospectus. This prospectus does not contain all of the information set forth
in the registration statement and the attached exhibits. For further
information pertaining to our business, the debt securities offered by this
prospectus and related matters, you should review the registration statement,
including the exhibits filed as a part of the registration statement. Each
statement in this prospectus referring to a document filed as an exhibit to the
registration statement is qualified by reference to the exhibit for a complete
statement of its terms and conditions.
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. So long as we are subject to the SEC's reporting
requirements, we will continue to furnish the reports and other required
information to the SEC. We will furnish all holders of the notes with copies of
our annual reports containing audited financial statements and an opinion
thereon expressed by our independent auditors and will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
You may read and copy any reports, statements and other information we
file at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on
the operations of the Public Reference Room. Our SEC filings are also available
on the SEC's Internet site (http://www.sec.gov).
Our common stock is traded on the NASDAQ National Market System under the
symbol "ABFI." You may also read reports, proxy statements and other
information we file at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.
We will provide, at no cost, to each person to whom this prospectus is
delivered, upon written or oral request, copies of any of the information
included in the registration statement, which is not included in this
prospectus. Requests should be directed to:
Jeffrey M. Ruben, Esquire
American Business Financial Services, Inc.
Bala Pointe Office Centre
111 Presidential Boulevard
Bala Cynwyd, PA 19004
(610) 668-2440
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MANAGEMENT
General
All of our directors and executive officers hold office during the term
for which they are elected and until their successors are elected and
qualified.
The following table sets forth information regarding our Board of
Directors and executive officers:
<TABLE>
<CAPTION>
Name Age(1) Position
- ------------------------------ -------- ----------------------------------------------------
<S> <C> <C>
Anthony J. Santilli .......... 56 Chairman, President, Chief Executive Officer, Chief
Operating Officer and Director
Leonard Becker ............... 75 Director
Michael DeLuca ............... 67 Director
Richard Kaufman .............. 57 Director
Harold E. Sussman ............ 72 Director
Beverly Santilli ............. 40 First Executive Vice President and Secretary of
ABFS and President of American Business Credit
Jeffrey M. Ruben ............. 36 Executive Vice President and General Counsel
Albert W. Mandia ............. 52 Executive Vice President and Chief Financial
Officer(2)
</TABLE>
- ------------
(1) As of June 30, 1999.
(2) Mr. Mandia became our Chief Financial Officer on October 1, 1998.
Directors
Our Amended and Restated Certificate of Incorporation currently provides
that the Board shall consist of not less than one nor more than fifteen
directors and that within these limits the number of directors shall be as
established by the Board. The Board has set the number of directors at five or
until their successors are elected and qualified. Our Amended and Restated
Certificate of Incorporation provides that the Board of Directors shall be
divided into three classes which, have staggered terms of office, and which are
as equal in number as possible. The members of each class of directors are to
be elected for a term of three years. Our Amended and Restated Articles of
Incorporation does not permit stockholders to cumulate their votes for the
election of directors.
The principal occupation of each of our directors is set forth below. All
directors have held their present position for at least five years unless
otherwise indicated.
Anthony J. Santilli is our Chairman, President, Chief Executive Officer
and Chief Operating Officer and is an executive officer of its subsidiaries. He
has held the positions since early 1993 when we became the parent company of
American Business Credit and the positions with the subsidiaries since the
formation of American Business Credit in June 1988.
Prior to the founding of America Business Credit in 1988, Mr. Santilli was
Vice President and Department Head of the Philadelphia Savings Fund Society
("PSFS"). As such, Mr. Santilli was responsible for PSFS' commercial
relationships with small and middle market business customers. Mr. Santilli
also served as the secretary of PSFS' Asset/Liability Committee and Policy
Committee from May 1983 to June 1985 and June 1986 to June 1987.
Leonard Becker is a former 50% owner and officer of the SBIC of the
Eastern States, Inc., a federally licensed small business corporation which
made medium term loans to small business concerns. For the last
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30 years, Mr. Becker has been heavily involved in the investment in and
management of real estate; and, has been involved in the ownership of numerous
shopping centers, office buildings and apartments. Mr. Becker formerly served
as a director of Eagle National Bank and Cabot Medical Corp.
Michael DeLuca was President, Chairman of the Board, Chief Executive
Officer and a former owner of Bradford-White Corporation, a manufacturer of
plumbing products, for a period of approximately thirty years. Presently, Mr.
DeLuca serves as a Director of BWC-West, Inc., Bradford-White International and
is Chief Executive Officer and a Director of Lux Products Corporation.
Richard Kaufman is Chairman and Chief Executive Officer of Academy
Industries, Inc., a paper converting company, a position he has held since
December 1996. From 1982 to 1996, he was self employed and involved in making
and managing investments for his own benefit. From 1976 to 1982, Mr. Kaufman
was President and Chief Operating Officer of Morlan International, Inc., a
cemetery and financial services conglomerate. From 1970 to 1976, Mr. Kaufman
served as a Director and Vice President-Real Estate and Human Services Division
of Texas International, Inc., an oil and gas conglomerate.
Harold E. Sussman is currently a principal in and Chairman of the Board of
the real estate firm of Colliers, Lanard & Axilbund, a major commercial and
industrial real estate brokerage and management firm in the Philadelphia area,
with which he has been associated since 1972.
Executive Officers who are not also Directors
The following is a description of the business experience of each
executive officer who is not also a director.
Beverly Santilli, age 40, is First Executive Vice President and Secretary,
positions she has held since September 1998 and our inception, respectively.
Mrs. Santilli has held a variety of positions including Executive Vice
President and Vice President. Mrs. Santilli is also the President of American
Business Credit. Mrs. Santilli is responsible for all sales, marketing and
day-to-day operation of American Business Credit. Mrs. Santilli is also
responsible for human resources of ABFS. Prior to joining American Business
Credit 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 that bank's Private Banking Group. Mrs. Santilli is the wife of
Anthony J. Santilli.
Jeffrey M. Ruben, age 36, is Executive Vice President and General Counsel
as well as Executive Vice President and General Counsel of certain of our
subsidiaries, positions he has held since September 1998 and April 1992,
respectively. Mr. Ruben is responsible for the loan and the lease collections
departments, the asset allocation unit and the legal department. Mr. Ruben
served as Senior Vice President from April 1992 to September 1999. From June
1990 until he joined us 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. Mr. Ruben is a
member of the Pennsylvania and New Jersey Bar Associations. Mr. Ruben holds
both a New Jersey Mortgage Banker License and a New Jersey Secondary Mortgage
Banker License.
Albert W. Mandia, age 52, is the Executive Vice President and Chief
Financial Officer of ABFS, positions he has held since June 1998 and October
1998, respectively. Mr. Mandia is responsible for all financial, information
systems and investor relations functions. From 1974 to 1998, Mr. Mandia was
associated with CoreStates Financial Corp. where he last held the position of
Chief Financial Officer from February 1997 to April 1998.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of September 28, 1999 by our
directors and executive officers and each person known to be the beneficial
owners of five percent or more of our common stock, and all directors and
executive officers as a group. The business address of our officers is our
address.
<TABLE>
<CAPTION>
Name, Position and Address Number of Shares Percentage
of Beneficial Owner Beneficially Owned(1) of Class
- ------------------------------------------- ----------------------- -----------
<S> <C> <C>
Anthony J. Santilli, Chairman, President, 978,656(2)(3) 26.0%
Chief Executive Officer, Chief Operating
Officer and Director of ABFS and
Beverly Santilli, President of ABC and
First Executive Vice President and
Secretary of ABFS
Michael DeLuca, Director of ABFS 214,972(4) 5.7
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 189,589(4) 5.1
1126 Bryn Tyddyn Drive
Gladwyne, PA 19035
Leonard Becker, Director of ABFS 127,292(4) 3.4
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Harold E. Sussman, Director of ABFS 117,297(4) 3.1
Colliers, Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 26,775(5) (6)
Executive Vice President and General
Counsel of ABFS
Albert W. Mandia 13,125(7) (6)
Executive Vice President and Chief
Financial Officer of ABFS
All executive officers and directors as a 1,667,696(8) 42.5
group (7 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 spouse 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 39,375 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 13,125 and 5,250
shares of the Company's Common Stock awarded to Mrs. Santilli pursuant to
the Company's Stock Option Plan, of which options to purchase 11,025
shares are not currently exercisable within 60 days.
61
<PAGE>
(4) Includes options to purchase 28,875 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, and options to purchase 10,500
shares of Common Stock awarded to each non-employee director pursuant to
the Company's 1997 Stock Option Plan for Non-Employee Directors, all of
which are currently exercisable.
(5) Includes 525 shares held directly and an option to purchase 7,875 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 13,125 and 5,250 shares of the Company's Common Stock
awarded to Mr. Ruben pursuant to the Company's Stock Option Plan, of which
options to purchase 11,025 shares are not exercisable within 60 days.
(6) Less than one percent.
(7) Represents options to purchase 13,125 shares of the Company's Common Stock
awarded to Mr. Mandia pursuant to the Company's Stock Option Plan, 2,625
of which are currently exercisable.
(8) Includes options to purchase 273,000 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 45,360 shares of the
Company's Common Stock are not currently exercisable.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is currently traded on the NASDAQ National Market System
under the symbol "ABFI." Our common stock began trading on the NASDAQ National
Market System on February 14, 1997. Prior to February 14, 1997, our common
stock had been traded on the Philadelphia Stock Exchange under the symbol "AFX"
since May 13, 1996. Prior to the commencement of trading on the PHLX, there was
no active trading market for our common stock.
The following table sets forth the high and low sales prices of our common
stock for the periods indicated. The stock price information appearing in the
table below has been retroactively adjusted to reflect the effect of a 5% stock
dividend declared subsequent to June 30, 1999. On September 28, 1999, the
closing price of the common stock on the NASDAQ National Market System was
$12.31.
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------------------------------------------------------- ----------- -----------
<S> <C> <C>
June 30, 1997 ........................................ $21.42 $17.62
September 30, 1997 ................................... 22.86 18.57
December 31, 1997 .................................... 26.67 19.64
March 31, 1998 ....................................... 26.19 19.52
June 30, 1998 ........................................ 24.29 20.95
September 30, 1998 ................................... 20.71 11.19
December 31, 1998 .................................... 13.70 5.48
March 31, 1999 ....................................... 14.29 11.67
June 30, 1999 ........................................ 18.93 10.23
September 30, 1999 (through September 28, 1999) ...... 13.98 12.31
</TABLE>
As of September 9, 1999, there were 115 record holders and approximately
1,000 beneficial holders of our common stock.
During fiscal 1999, we paid $0.165 per share in dividends on common stock,
for an aggregate dividend payment of $575,000. During fiscal 1998, we paid
dividends of $211,000. The payment of dividends in the future is in the sole
discretion of our Board of Directors and will depend, among other things, upon
earnings, capital requirements and financial condition, as well as other
relevant factors.
On August 18, 1999, our Board of Directors declared a 5% stock dividend
paid on September 27, 1999, to stockholders of record as of September 3, 1999.
62
<PAGE>
As a Delaware corporation, we may not declare and pay dividends on capital
stock if the amount paid exceeds an amount equal to the excess of our net
assets over paid-in-capital or, if there is no excess, our net profits for the
current and/or immediately preceding fiscal year.
On October 27, 1997, we issued 20,240 shares of common stock to Stanley L.
Furst and Joel E. Furst as partial consideration for their 100% interest in New
Jersey Mortgage.
PLAN OF DISTRIBUTION
We do not currently use a broker-dealer or the agent to assist in the
sales of the debt securities. We may employ the services of a National
Association of Securities Dealers, Inc. member broker-dealer in the future for
purposes of offering the debt securities on a "best-efforts" or agency basis.
If an agreement concerning the use of the services of any broker-dealer is
reached, we may pay any the broker-dealer a commission which we estimate will
range from .5% to 10% of the sale price of any notes sold through the
broker-dealer, depending on numerous factors. We may also agree to indemnify
the broker-dealer against certain liabilities, including liabilities under the
Securities Act and to reimburse the broker-dealer for its costs and expenses,
up to a maximum to be determined, based upon the total dollar value of the
securities sold. We will otherwise offer the debt securities through our
employees in accordance with Rule 3a4-1 under the Exchange Act.
We reserve the right to reject any order, in whole or in part, for any
reason. Your order will be irrevocable upon receipt by us. In the event your
order is not accepted, we will promptly refund your funds, without deduction of
any costs and without interest. We expect that orders will be refunded within
48 hours after receipt. Once your order has been accepted, the applicable order
funds will be promptly deposited in our account. We will send a receipt to you
as soon as practicable after acceptance of your order. No minimum number of
debt securities must be sold in the offering. You will not know at the time of
order whether we will be successful in completing the sale of any or all of the
debt securities being offered. We reserve the right to withdraw or cancel the
offering at any time. In the event of such withdrawal or cancellation, orders
previously received will be irrevocable and no funds will be refunded.
We may from time to time offer investment incentives to investors. These
incentives could take the form of merchandise travel, accommodations, or other
goods or services which would be awarded to investors who satisfy total
investment, length of investment or other criteria. There are no specific
incentive programs in place on the date of this prospectus. Any specific
incentive program would be disclosed in a prospectus supplement. Investors must
consider that they will recognize income for income tax purposes based upon the
value of any incentive received.
LEGAL MATTERS
Blank Rome Comisky & McCauley LLP, a Pennsylvania limited liability
partnership, Philadelphia, Pennsylvania, will deliver an opinion stating that
the debt securities when issued as contemplated by this prospectus will be
binding obligations.
EXPERTS
Our consolidated financial statements as of June 30, 1999 and 1998 and for
the years ending June 30, 1999, 1998 and 1997 included in this prospectus, have
been audited by BDO Seidman, LLP, independent certified public accountants, as
set forth in their report appearing in this prospectus and have been included
in reliance upon that report given upon the authority of BDO Seidman, LLP as
experts in accounting and auditing.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Report of Independent Certified Public Accountants .......... F-2
Consolidated Balance Sheets ................................. F-3
Consolidated Statements of Income ........................... F-4
Consolidated Statements of Stockholders' Equity ............. F-5
Consolidated Statements of Cash Flow ........................ F-6
Notes to Consolidated Financial Statements .................. F-7
F-1
<PAGE>
[GRAPHIC OMITTED]
Report of Independent Certified Public Accountants
American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of American
Business Financial Services, Inc. and subsidiaries as of June 30, 1999 and
1998, and the related consolidated statements of income and stockholders'
equity, and cash flow for each of the years in the three-year period ended June
30, 1999. 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, 1999 and
1998, and the consolidated results of their operations and their cash flow for
each of the years in the three-year period ended June 30, 1999 in conformity
with generally accepted accounting principles.
In January 1999, the Company adopted Financial Accounting Standards Board
Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This change is discussed in Note 1 of the Notes to the
Consolidated Financial Statements.
BDO Seidman, LLP
Philadelphia, Pennsylvania
September 9, 1999
F-2
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
------------ -----------
(dollar amounts in
thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................... $ 22,395 $ 4,486
Loan and lease receivables, net
Available for sale ................................................. 33,776 62,382
Other .............................................................. 6,863 4,096
Interest-only strips and other receivables .......................... 253,936 100,737
Prepaid expenses .................................................... 1,671 2,572
Property and equipment, net ......................................... 10,671 7,785
Servicing rights .................................................... 43,210 18,472
Other assets ........................................................ 23,779 26,021
-------- --------
Total assets ........................................................ $396,301 $226,551
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Subordinated debt and notes payable ................................ $270,343 $144,585
Accounts payable and accrued expenses .............................. 26,826 15,563
Deferred income taxes .............................................. 16,604 10,864
Other liabilities .................................................. 24,282 12,797
-------- --------
Total liabilities ................................................... 338,055 183,809
======== ========
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:
3,703,514 shares in 1999 (including treasury shares of 116,550 in
1999), and 3,699,576 shares in 1998 .............................. 3 3
Additional paid-in capital ......................................... 23,339 23,256
Accumulated other comprehensive income ............................. 3,354 --
Retained earnings .................................................. 33,596 20,083
Treasury stock, 116,550 shares ..................................... (1,446) --
-------- --------
58,846 43,342
Note receivable .................................................... (600) (600)
-------- --------
Total stockholders' equity .......................................... 58,246 42,742
-------- --------
Total liabilities and stockholders' equity .......................... $396,301 $226,551
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(dollar amounts in thousands, except per
share data)
<S> <C> <C> <C>
Revenues
Gain on sale of loans and leases ................ $ 65,640 $ 41,316 $ 20,043
Interest and fees ............................... 17,424 17,386 5,584
Servicing income ................................ 3,321 476 283
Other income .................................... 39 157 52
-------- -------- --------
Total revenues ................................... 86,424 59,335 25,962
-------- -------- --------
Expenses .........................................
Interest ........................................ 22,427 13,190 5,175
Provision for credit losses ..................... 928 491 106
Employee related costs .......................... 5,318 5,030 1,618
Sales and marketing ............................. 23,595 14,237 6,964
General and administrative ...................... 12,305 8,497 3,097
-------- -------- --------
Total expenses ................................... 64,573 41,445 16,960
-------- -------- --------
Income before provision for income taxes ......... 21,851 17,890 9,002
Provision for income taxes ....................... 7,763 6,435 3,062
-------- -------- --------
Net income ....................................... $ 14,088 $ 11,455 $ 5,940
======== ======== ========
Earnings per common share
Basic ........................................... $ 3.83 $ 3.10 $ 2.03
Diluted ......................................... $ 3.72 $ 2.98 $ 1.95
======== ======== ========
Average common shares (in thousands)
Basic ........................................... 3,682 3,692 2,921
Diluted ......................................... 3,791 3,847 3,049
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended June 30, 1999, 1998 and 1997
------------------------------------------------------
Common Stock
----------------------- Accumulated
Number Additional Other
Of Shares Paid-In Comprehensive
Outstanding Amount Capital Income
------------- -------- ------------ ---------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Balance, June 30, 1996 ........ 2,471 $ 2 $ 1,932 $ --
Sale of common stock, net
of offering expenses of
$2,261 ....................... 1,208 1 20,737 --
Cash dividends ($.06 per
share) ....................... -- -- -- --
Net income .................... -- -- -- --
----- --- -------- -------
Balance, June 30, 1997 ........ 3,679 3 22,669 --
Common stock issued for
acquisition .................. 21 -- 500 --
Issuance of non-employee
stock options ................ -- -- 87 --
Cash dividends ($.06 per
share) ....................... -- -- -- --
Net income .................... -- -- -- --
----- --- -------- -------
Balance, June 30, 1998 ........ 3,700 3 23,256 --
Comprehensive income:
Net income .................. -- -- -- --
Unrealized gains on
investment securities -- -- -- 3,354
----- --- -------- -------
Total comprehensive income -- -- -- 3,354
Issuance of non-employee
stock options ................ -- -- 73 --
Exercise of stock options ..... 4 -- 10 --
Cash dividends ($0.165 per
share) ....................... -- -- -- --
Repurchase of treasury
shares ....................... (117) -- -- --
----- --- -------- -------
Balance, June 30, 1999 ........ 3,587 $ 3 $ 23,339 $ 3,354
===== === ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30, 1999, 1998 and 1997
---------------------------------------------------------
Total
Retained Treasury Note Stockholders'
Earnings Stock Receivable Equity
------------ ------------- ------------ --------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Balance, June 30, 1996 ........ $ 3,057 $ -- $ (600) $ 4,391
Sale of common stock, net
of offering expenses of
$2,261 ....................... -- -- -- 20,738
Cash dividends ($.06 per
share) ....................... (158) -- -- (158)
Net income .................... 5,940 -- -- 5,940
-------- --------- ------- --------
Balance, June 30, 1997 ........ 8,839 -- (600) 30,911
Common stock issued for
acquisition .................. -- -- -- 500
Issuance of non-employee
stock options ................ -- -- -- 87
Cash dividends ($.06 per
share) ....................... (211) -- -- (211)
Net income .................... 11,455 -- -- 11,455
-------- --------- ------- --------
Balance, June 30, 1998 ........ 20,083 -- (600) 42,742
Comprehensive income:
Net income .................. 14,088 -- -- 14,088
Unrealized gains on
investment securities -- -- -- 3,354
-------- --------- ------- --------
Total comprehensive income 14,088 -- -- 17,442
Issuance of non-employee
stock options ................ -- -- -- 73
Exercise of stock options ..... -- -- -- 10
Cash dividends ($0.165 per
share) ....................... (575) -- -- (575)
Repurchase of treasury
shares ....................... -- (1,446) -- (1,446)
-------- --------- ------- --------
Balance, June 30, 1999 ........ $ 33,596 $ (1,446) $ (600) $ 58,246
======== ========= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income .............................................................. $ 14,088 $ 11,454 $ 5,940
Adjustments to reconcile net income to net cash used in operating
activities
Gain on sales of loans and leases .................................... (65,640) (41,316) (20,051)
Depreciation and amortization ........................................ 10,826 5,340 1,992
Provision for credit losses .......................................... 928 491 106
Provision for credit losses from acquired subsidiary ................. -- 694 --
Accounts written off, net ............................................ (1,107) (667) (98)
Loans and leases originated for sale .................................... (909,372) (486,196) (136,358)
Proceeds from sale of loans and leases .................................. 819,814 418,609 117,823
(Increase) decrease in accrued interest and fees on loan and lease
receivables ............................................................ (2,767) 6,164 (1,288)
Decrease in interest-only strips and other receivables .................. 7,046 7,177 3,162
Decrease (increase) in prepaid expenses ................................. 901 (1,391) (1,266)
Increase in accounts payable and accrued expenses ....................... 11,465 9,199 2,949
Increase in deferred income taxes ....................................... 5,539 5,333 3,125
Increase in loans in process ............................................ 11,484 6,455 4,001
Other, net .............................................................. (9,113) (12,808) (6,946)
-------- -------- --------
Net cash used in operating activities ..................................... (105,908) (71,462) (26,909)
======== ======== ========
Cash flows from investing activities
Loan and lease payments received ........................................ 9,200 19,003 4,555
Leases originated for portfolio ......................................... -- -- (8,004)
Purchase of property and equipment ...................................... (5,819) (4,085) (1,738)
Proceeds from sale of property and equipment ............................ 684 -- --
Decrease in securitization gain receivable .............................. -- 2,884 107
Initial overcollateralization of loans .................................. (4,825) (5,378) (3,450)
Purchase of investments ................................................. -- (2,986) (5,000)
Principal receipts and maturity of investments .......................... 3,428 5,101 81
Purchase of subsidiary, net ............................................. -- (9,585) --
-------- -------- --------
Net cash provided by (used in) investing activities ....................... 2,668 4,954 (13,449)
======== ======== ========
Cash flows from financing activities
Financing costs incurred ................................................ (2,986) (2,041) (1,053)
Proceeds from issuance of subordinated debentures ....................... 168,357 73,884 33,991
Principal payments on subordinated debentures ........................... (70,636) (25,044) (11,125)
Net borrowings on revolving lines of credit ............................. 25,241 19,750 (2,348)
Proceeds from repurchase agreement ...................................... 4,677 -- --
Principal payments on debt, other ....................................... (1,566) (445) (18)
Dividends paid .......................................................... (575) (211) (158)
Recorded fair value of options granted .................................. 73 87 --
Exercise of employee stock options ...................................... 10 -- --
Repurchase of treasury stock ............................................ (1,446) -- --
Proceeds from public offering, net of related costs ..................... -- -- 20,738
-------- -------- --------
Net cash provided by financing activities ................................. 121,149 65,980 40,027
======== ======== ========
Net increase (decrease) in cash and cash equivalents ...................... $ 17,909 $ (528) $ (331)
Cash and cash equivalents at beginning of year ............................ 4,486 5,014 5,345
-------- -------- --------
Cash and cash equivalents at end of year .................................. $ 22,395 $ 4,486 $ 5,014
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ............................................................. $ 18,900 $ 10,647 $ 2,877
======== ======== ========
Income taxes ......................................................... $ 3,750 $ 50 $ --
======== ======== ========
Supplemental disclosure of noncash financing activity
Noncash transaction recorded in connection with acquisition of subsidiary
Decrease in acquisition debt ......................................... $ (1,001) $ (3,418) $ --
Decrease in loan and lease receivables ............................... 1,001 3,418 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
American Business Financial Services, Inc. ("ABFS"), together with its
subsidiaries (the "Company"), is a diversified retail financial service
organization operating throughout the United States. The Company originates,
sells and services loans to businesses secured by real estate and other
business assets, mortgage and home equity loans, typically to credit impaired
borrowers secured by first and second mortgages and business equipment leases.
In addition the Company sells subordinated debt securities to the public, the
proceeds of which are used to fund loan and lease originations and the
Company's operations.
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 have been prepared in accordance with generally accepted accounting
principles. All significant intercompany balances 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, credit loss 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.
Certain prior period financial statement balances have been reclassified
to conform to current period presentation. All outstanding share, average
common share, earnings per common share and stock option amounts have been
retroactively adjusted to reflect the effect of a 5% stock dividend declared
August 18, 1999. See note 10 for further description.
Cash and Cash Equivalents
Cash equivalents consist of short-term investments with an initial
maturity of three months or less.
Loan and Lease Receivables
Loan and lease receivables -- available 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 and fees) or
market value. Market value is determined by quality of credit risk, types of
loans originated, current interest rates, economic conditions, and other
relevant factors.
Loan and lease receivables -- other is comprised mainly of accrued
interest and fees on loans and leases and lease equipment residuals receivable
from a third party.
Allowance for Credit Losses
The Company's allowance for credit losses on portfolio loans and leases is
maintained to account for loans and leases that are delinquent and are expected
to be ineligible for sale into a securitization. The allowance is calculated
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, periodic analysis of the portfolio, economic conditions and trends,
historical credit loss experience, borrowers ability to repay, and collateral
considerations.
Additions to the allowance arise from the provision for credit losses
charged to operations or from the recovery of amounts previously charged off.
Loan and lease charge offs reduce the allowance.
F-7
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
In addition to the allowance for credit losses on portfolio loans and
leases, the Company makes certain assumptions regarding the expected impact of
credit losses on the fair value of interest-only strips and residual interests.
See note 4 for more information regarding these credit loss assumptions.
Loan and Lease Origination Costs and Fees
Direct loan and lease origination costs and loan fees such as points and
other closing fees are recorded as an adjustment to the cost basis of the
related loan and lease receivable and are recognized in the Statement of Income
as an adjustment to the gain on sale recorded at the time the loans and leases
are securitized.
Interest-only Strips and Residual Interests
The Company sells a majority of its originated loans and leases through
securitizations. In connection with these securitizations, the Company retains
certain residual interests in the trusts to which the loans or leases are
transferred. The residual interests entitle the Company to receive certain
excess (or residual) cash flows which are derived from payments made to the
trust from the securitized loans and leases after deducting payments to
investors in the securitization trust and other miscellaneous fees. These cash
flows are projected over the life of the loans and leases using certain
prepayment and default assumptions. Excess cash flows are retained by the trust
until certain overcollateralization levels are established. The
overcollateralization causes the aggregate principal amount of the related
securitization pool to exceed the aggregate balance of the investor notes. The
overcollateralization serves as credit enhancement for the investors. The
securitization trusts and its investors have no recourse to other assets of the
Company for failure of the securitized loans and leases to pay when due.
The fair values of the excess cash flows are estimated based on a
discounted cash flow analysis, and are recorded by the Company at the time
loans and leases are securitized. Cash flows are discounted from the date the
cash is expected to be available to the Company (the "cash-out method"). Cash
flows are discounted using an interest rate management believes an unrelated
purchaser would require.
Interest-only strips and residual interests are periodically revalued by
the Company based on a discounted cash flow analysis of loans and leases
remaining in the trusts. The assumptions for prepayment and default rates are
monitored against actual experience and adjusted if warranted.
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 requires that
after the securitization of a mortgage loan held for sale, an entity classify
the resulting mortgage-backed security or other retained interests based on its
ability and intent to hold or sell those investments. SFAS No. 134 became
effective for fiscal quarters beginning after December 15, 1998. In accordance
with the provisions of SFAS No. 134, the Company has reclassified its retained
interests from trading securities to available-for-sale securities. As
available-for-sale securities, subsequent adjustments to the fair value of
retained interests are recorded in stockholders' equity and reported as a
component of comprehensive income.
Servicing Rights
Upon the securitization of loans and leases, the Company retains servicing
rights. The Company capitalizes the costs associated with the rights to service
securitized loans and leases based on the servicing rights' relative fair value
to other consideration received in a securitization. The fair value of
servicing rights is estimated based on a discounted cash flow analysis which
considers contractual fees for servicing (generally 0.5% of outstanding loans
and leases serviced) and the rights to collect ancillary servicing related fees
from
F-8
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
the loans and leases, net of costs to service the loans and leases. Assumptions
used to value servicing rights are consistent with assumptions used to value
residual interests in securitizations. Servicing rights are amortized in
proportion to, and over the period of, estimated future servicing income.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization is computed using the
straight-line method over the estimated useful life of the assets ranging from
3 to 15 years.
Financing Costs and Amortization
Financing costs incurred in obtaining revolving lines of credit are
recorded in other assets and are amortized using the straight-line method over
the terms of the agreements. Financing costs incurred in connection with public
offerings of subordinated debt securities are also recorded in other assets and
are amortized over the term of the related debt.
Investments Held to Maturity
Investments classified as held to maturity recorded in other assets
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.
Real Estate Owned
Property acquired by foreclosure or in settlement of loan and lease
receivables is recorded in other assets, and is carried at the lower of the
cost basis in the loan or fair value of the property less estimated costs to
sell.
Revenue Recognition
The Company derives its revenue principally from gain on sale of loans and
leases, interest and fees on loans and leases, and servicing income.
Gains on sales of loans and leases through securitizations represent the
difference between the net proceeds to the Company, including retained
interests in the securitization, and the allocated cost of loans and leases
securitized. The allocated cost of loans and leases securitized is determined
by allocating their net carrying value between the loans and leases, the
residual interests and the servicing rights retained by the Company based upon
their relative fair values.
Interest and fee income consists of interest earned on loans and leases
while held in the Company's portfolio, premiums earned on loans sold with
servicing released and other ancillary fees collected in connection with loan
and lease origination. Interest income is recognized based on 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 will cause earlier
suspension if collection is doubtful.
Servicing income is recognized as contractual fees and other fees for
servicing loans and leases are collected, net of amortization of servicing
rights assets.
Derivative Financial Instruments
The primary market risk exposure that the Company faces is interest rate
risk. The Company utilizes hedging strategies to mitigate the effect of changes
in interest rates on its fixed-rate loan and lease portfolios
F-9
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
between the date of origination and the date of securitization. These
strategies include the utilization of derivative financial instruments such as
futures and forward pricing on securitizations. The nature and quality of
hedging transactions are determined by the Company's management based on
various factors, including market conditions and the expected volume of
mortgage loan and lease originations and purchases. The gain or loss derived
from these hedging transactions is deferred and recognized as an adjustment to
the gain on sale of loans and leases when the loans and leases are securitized.
The Company had no contracts open at June 30, 1999 or 1998, other than an
obligation to satisfy a lease securitization prefund requirement of $9.0
million and $14.0 million, respectively, at June 30, 1999 and 1998.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return.
Under the asset and liability method used by the Company to provide for
income taxes, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement and tax basis carrying amounts of existing assets and liabilities.
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 $11.0 million in cash, a note payable of $5.0
million and the issuance of 20,240 shares of the Company's common stock. The
purchase agreement included a provision for a series of contingent payments to
the former stockholders of NJMIC totaling $4.0 million based on NJMIC's
attainment of certain performance targets over a three year period. To date the
Company has paid $1.3 million of the total amount of potential contingent
payments.
The transaction was accounted for under the purchase method and
accordingly the results of NJMIC have been included with the Company's since
the date of acquisition. As a result of the transaction the Company recorded
approximately $16.9 million of goodwill, which is being amortized using the
straight-line method over 15 years. Any contingent payments made will be
recorded as additional goodwill.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 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
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 a recognized asset or
liability or an unrecognized firm commitment (fair value hedge), (b) a hedge of
the exposure to variable cash flows of a forecasted transaction (cash flow
hedge), 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. At the time
of issuance SFAS No. 133 was to be effective on a prospective basis for all
fiscal quarters of fiscal years beginning after June 15, 1999. Subsequently the
effective date of the standard was delayed until years beginning after June 15,
2000. The adoption of this standard is not expected to have a material effect
on the Company's financial condition or results of operations.
F-10
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. LOAN AND LEASE RECEIVABLES
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Real estate secured loans .................................... $ 21,027 $ 51,196
Leases (net of unearned income of $1,543 and $1,845) ......... 13,451 12,067
-------- --------
34,478 63,263
Less allowance for credit losses on loan and lease receivables
available for sale .......................................... 702 881
-------- --------
$ 33,776 $ 62,382
======== ========
</TABLE>
Real estate secured loans have contractual maturities of up to 30 years.
At June 30, 1999 and 1998, the accrual of interest income was suspended on
real estate secured loans of $85 thousand and $718 thousand respectively. Based
on its evaluation of the collateral related to these loans, the Company expects
to collect all contractual interest and principal.
Substantially all leases originated by the Company are direct finance-type
leases whereby the lessee has the right to purchase the leased equipment at the
lease expiration for a nominal amount.
3. ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1999 1998 1997
----------- --------- --------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year ........... $ 881 $ 338 $ 330
Acquired through acquisition ........... -- 719 --
Provision for credit losses ............ 928 491 106
Charge offs, net of recoveries ......... (1,107) (667) (98)
----- ----- -----
Balance at end of year ................. $ 702 $ 881 $ 338
===== ===== =====
</TABLE>
4. SECURITIZATIONS
During fiscal 1999, the Company sold $71.9 million of business purpose
loans and $613.0 million of home equity loans in four securitizations and $92.6
million of equipment leases in numerous sales to a commercial paper conduit and
two securitizations. During fiscal 1998 the Company sold $54.1 million of
business purpose loans and $270.9 million of home equity loans in three
securitizations and $59.7 million of equipment leases in one securitization.
In fiscal 1999, cash proceeds from the securitizations of business purpose
loans and home equity loans were $685.0 million, with pretax gains of $62.5
million. Cash proceeds from the securitization of equipment leases were $91.1
million with pretax gains of $2.6 million. In fiscal 1998, cash proceeds from
the securitization of business purpose loans and home equity loans were $325.0
million, with pretax gains of $41.2 million. Cash proceeds from the
securitization of equipment leases were $13.7 million with pretax gains of $0.3
million.
F-11
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. SECURITIZATIONS -- (Continued)
The following chart presents certain key assumptions used in the valuation
of residual interests from securitizations (interest-only strips and mortgage
servicing assets).
<TABLE>
<CAPTION>
Initial Periodic
Valuation Revaluation
------------------------ ------------------------
<S> <C> <C>
Discount rates
Home equity loans ................. 11.0% 11.0%
Business purpose loans ............ 11.0% 11.0%
Business equipment leases ......... 11.0% 11.0%
Annual prepayment rates
Home equity loans ................. 2.0% - 24.0% (1) 2.0% - 24.0% (1)
Business purpose loans ............ 3.0% - 13.0% (2) 3.0% - 15.0% (2)
Business equipment leases ......... -- (3) -- (3)
Annual credit loss rates
Home equity loans ................. 0.25% 0.25%
Business purpose loans ............ 0.25% 0.25%
Business equipment leases ......... 0.50% 0.50%
</TABLE>
- ------------
(1) Ramped over 12 to 18 months
(2) Ramped over 24 months
(3) Residual values are continuously adjusted based on actual experience.
5. INTEREST-ONLY STRIPS AND OTHER RECEIVABLES
June 30,
---------------------------
1999 1998
------------ ------------
(in thousands)
Interest-only and residual strips--
Available for sale ....................... $ 172,411 $ --
Trading assets ........................... 5,806 95,913
Receivable for sold loans ................. 66,086 2,377
Advances to securitization trusts ......... 6,266 738
Other ..................................... 3,367 1,709
--------- ---------
$ 253,936 $ 100,737
========= =========
SFAS No. 134, which became effective January 1, 1999, requires that after
the securitization of a mortgage loan held for sale, the resulting
mortgage-backed security or other retained interests be classified based on the
Company's ability and intent to hold or sell the investments. As a result,
retained interests previously classified as trading assets, as required by
prior accounting principles, have been reclassified to available-for-sale. The
effect of SFAS No. 134 on net income and net income per share was $3.3 million
and $0.88, respectively.
Interest-only strips include overcollateralized balances that represent
undivided interests in the securitizations maintained to provide credit
enhancements to the investors. At June 30, 1999 and 1998, overcollateralized
principal balances were $38.6 million and $25.3 million, respectively.
F-12
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. INTEREST-ONLY STRIPS AND OTHER RECEIVABLES -- (Continued)
The activity for interest-only strip receivables is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Balance at beginning of year ........................ $ 95,913 $ 37,507
Initial recognition of interest-only strips ......... 90,480 64,379
Interest accretion and other ........................ 2,370 740
Cash receipts ....................................... (13,900) (6,713)
Net adjustments to fair value ....................... 3,354 --
---------- --------
Balance at end of year .............................. $ 178,217 $ 95,913
========== ========
</TABLE>
6. SERVICING RIGHTS
The serviced loan and lease portfolio, which includes loans and leases
sold to investors and those retained by the Company, is as follows (in
thousands):
June 30,
-----------------------------
1999 1998
-------------- ------------
Home equity loans .............. $ 858,806 $ 349,685
Business purpose loans ......... 148,932 101,250
Equipment leases ............... 169,180 108,463
----------- ---------
$ 1,176,918 $ 559,398
=========== =========
The activity for the loan and lease servicing rights asset is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Balance at beginning of year .................... $ 18,472 $ 8,083
Initial recognition of servicing rights ......... 30,289 12,041
Amortization .................................... (5,551) (1,652)
---------- ----------
Balance at end of year .......................... $ 43,210 $ 18,472
======== =========
</TABLE>
Servicing rights are periodically valued by the Company based on a
discounted cash flow analysis of loans and leases remaining in the
securitization trusts. A review for impairment is performed on a disaggregated
basis for the predominant risk characteristics, herein referred to as a
stratum, of the underlying loans and leases, which consist of loan type and
credit quality. Key assumptions used in the periodic valuation of the servicing
assets are described in note 4. 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 for impairments. Impairments if
they occurred would be recognized in a valuation allowance for each impaired
stratum in the period of impairment. At June 30, 1999 and 1998, the carrying
value of servicing rights approximated fair value.
F-13
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Computer equipment and software ........................ $ 7,548 $ 5,383
Office furniture and equipment ......................... 8,271 5,527
Leasehold improvements ................................. 1,756 1,102
Transportation equipment ............................... 260 217
-------- -------
17,835 12,229
Less accumulated depreciation and amortization ......... 7,164 4,444
-------- -------
$ 10,671 $ 7,785
======== =======
</TABLE>
Depreciation and amortization expense for property and equipment was $2.9
million, $1.7 million and $0.5 million for the years ended June 30, 1999, 1998
and 1997, respectively.
8. OTHER ASSETS
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Deposits ............................................................. $ 198 $ 146
Financing costs, debt offerings, net of accumulated amortization of
$3,903 and $2,891 ................................................... 4,487 2,525
Investments held to maturity (mature July 1999 through April 2011) 1,014 5,639
Real estate owned .................................................... 843 716
Goodwill, net of accumulated amortization of $1,913 and $780 ......... 15,018 16,151
Other ................................................................ 2,219 844
-------- --------
$ 23,779 $ 26,021
======== ========
</TABLE>
F-14
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. SUBORDINATED DEBT AND NOTES PAYABLE
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Subordinated debt, due July 1999 through June 2009, interest at
rates ranging from 6.15% to 11.5%; subordinated to all of the
Company's senior indebtedness. ....................................... $ 206,918 $ 105,652
Subordinated debt, due July 1999 through May 2003; interest rates
ranging from 9.0% to 11.99%; subordinated to all of the Compa-
ny's senior indebtedness. ............................................ 4,735 6,530
Note payable, $150,000 revolving line of credit expiring October
2000; interest rates ranging from LIBOR plus 1.375% to LIBOR
plus 2.0%; collateralized by loan and other receivables in the
amount of $42,626. ................................................... 42,626 25,720
Note payable, $20,000 revolving line of credit expiring September
2000; interest at prime less 1.0% or LIBOR at the Company's
option; collateralized by lease receivables in the amount of
$3,764. .............................................................. 3,764 --
Note payable, $5,000 revolving line of credit expiring December
1999; interest at LIBOR plus 2.0% payable monthly; collateral-
ized by certain residual interests in securitized loans with a value
of $17,949. .......................................................... 5,000 --
Note payable, $100,000 revolving line of credit expiring August
2000; interest at LIBOR plus 1.25%, payable monthly; collateral-
ized by loan and lease receivables in the amount of $102. ............ 102 531
Repurchase agreement, due July 1999, interest at LIBOR plus 0.5%;
collateralized by certain lease -backed securities in the amount of
$5,806. .............................................................. 4,677 --
Senior subordinated debt, due July 1999 through December 1999;
interest at 12.0%, payable monthly; subordinated to certain sub-
sidiary's senior indebtedness. ....................................... 1,250 3,000
Note payable, acquisition, July 1999 through October 2000; interest
at 8.0%, payable monthly. ............................................ 581 2,915
Capitalized lease, due July 1999 through December 2001; interest at
7.7% payable monthly; collateralized by certain office equipment
with a value of $527. ................................................ 527 --
Other notes payable ................................................... 163 237
--------- ---------
$ 270,343 $ 144,585
========= =========
</TABLE>
Principal payments on debt for the next five years are as follows: year
ending June 30, 2000 -- $176.0 million; 2001 -- $35.0 million; 2002 -- $25.0
million; 2003 -- $9.0 million; and 2004 -- $12.0 million.
The loan agreements provide for certain covenants regarding net worth and
financial matters. At June 30, 1999, the Company is in compliance with the
terms of the loan covenants.
F-15
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. STOCKHOLDERS' EQUITY
On August 18, 1999, the Company's Board of Directors declared a 5% stock
dividend to be paid on September 27, 1999 to shareholders of record on
September 3, 1999. In addition the Board resolved that all outstanding stock
options would be adjusted for the dividend. Accordingly, all outstanding
shares, earnings per common share, average common share and stock option
amounts have been retroactively adjusted to reflect the effect of the stock
dividend.
In July 1998, the Company's Board of Directors authorized the repurchase
of up to 10% of the outstanding shares of its common stock over a one-year
period. In May 1999, the repurchase period was extended for an additional one
year to July 2000. As of June 30, 1999, 111,000 shares or 3% of the Company's
outstanding shares were repurchased under the July 1998 authorization at a cost
of $1.4 million.
In the second quarter of fiscal 1999, the Company increased its quarterly
dividend by 233% to $0.05 per share. Dividends of $0.165 were paid in the year
ended June 30, 1999 compared to $0.06 in each of the years ended June 30, 1998
and 1997.
The Company has a loan receivable from an officer of the Company for $600
thousand, which was an advance for the exercise of stock options to purchase
225,012 shares of the Company's common stock. The loan is due in September 2005
(earlier if the stock is disposed of). Interest at 6.46% is payable annually.
The loan is secured by 225,012 shares of the Company's stock, and is shown as a
reduction of stockholders' equity on the accompanying balance sheet.
In February 1997, the Company sold 1,150,000 shares of common stock
through a public offering, resulting in net proceeds of $20.7 million.
11. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan, which was established
in 1995, available to all employees who have been with the Company for six
months and have reached the age of 21. Employees may generally contribute up to
15% of their salary each year, subject to IRS imposed limitations. 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 $263 thousand and $108 thousand for the years ended June 30, 1999 and 1998
respectively.
12. STOCK OPTION PLANS
The Company has a stock option plan that provides for the periodic
granting of options to key employees ("the Employee Plan"). The options are
generally granted at the market price of the Company's stock on the date of
grant and expire five to ten years from date of grant. Options either fully
vest when granted or over periods of up to five years. At June 30, 1999,
substantially no shares were available for future grant under this plan.
F-16
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. STOCK OPTION PLANS -- (Continued)
A summary of stock option activity under the Employee Plan for the years
ended June 30, 1999, 1998 and 1997, retroactively adjusted for the effect of
the 5% stock dividend described in note 10, follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
----------- -----------------
<S> <C> <C>
Options outstanding, June 30, 1996 ......... 69,300 $ 3.30
Options granted ............................ 169,575 18.98
------- --------
Options outstanding, June 30, 1997 ......... 238,875 14.43
Options granted ............................ 106,575 22.95
Options canceled ........................... (9,450) 19.51
------- --------
Options outstanding, June 30, 1998 ......... 336,000 18.10
Options granted ............................ 14,175 17.86
Options exercised .......................... (3,937) 2.54
Options canceled ........................... (41,475) 20.48
------- --------
Options outstanding, June 30, 1999 ......... 304,763 $ 16.74
======= ========
</TABLE>
The following tables summarize information about stock options outstanding
under the Employee Plan at June 30, 1999:
Options Outstanding
Weighted
Remaining
Range of Exercise Number of Contractual Weighted-Average
Prices of Options Shares Life in Years Exercise Price
- ----------------------- ----------- --------------- -----------------
$2.54 - $4.76 ......... 65,363 1.0 $ 3.34
14.29 - 16.90 ......... 10,500 3.3 15.75
19.05 ................. 131,250 7.2 19.05
19.52 - 24.76 ......... 97,650 8.5 22.72
------- --- --------
304,763 6.1 $ 16.74
======= === ========
Options Exercisable
Weighted
Remaining
Range of Exercise Number of Contractual Weighted-Average
Prices of Options Shares Life in Years Exercise Price
- ----------------------- ----------- --------------- -----------------
$2.54 - $4.76 ......... 65,625 1.0 $ 3.34
14.29 - 16.90 ......... 10,500 3.3 15.75
19.05 ................. 59,325 6.5 19.05
19.52 - 24.76 ......... 23,730 8.4 22.72
------ --- --------
159,180 4.3 $ 12.92
======= === ========
F-17
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. STOCK OPTION PLANS -- (Continued)
The Company accounts for stock options issued under the Employee Plan
using the intrinsic value method, and, accordingly, no expense is recognized
where the exercise price equals or exceeds the fair value of the shares at the
date of grant. Had the Company accounted for stock options granted under the
Employee Plan using the fair value method, pro forma net income and earnings
per share would have been as follows (in thousands except per share amounts):
June 30,
--------------------------------------------
1999 1998 1997
------------- ------------- ------------
Net income
As reported ............... $ 14,088 $ 11,455 $ 5,940
Pro forma ................. 13,811 10,956 5,361
Earnings per share - basic
As reported ............... $ 3.83 $ 3.10 $ 2.03
Pro forma ................. 3.75 2.97 1.84
Earnings per share - diluted
As reported ............... $ 3.72 $ 2.98 $ 1.95
Pro forma ................. 3.64 2.85 1.76
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1999 1998 1997
----------------- ----------------- ---------------
<S> <C> <C> <C>
Expected volatility ............. 30% 30% 25%
Expected life ................... 5-10yrs. 5-10yrs. 5yrs.
Risk-free interest rate ......... 4.50%-5.68% 5.39%-6.17% 6.31%-6.90%
</TABLE>
The Company also has a non-employee director stock option plan ("the
Director Plan") that provides for the granting of options to non-employee
directors. Options are generally granted at the market price of the stock on
the date of grant, fully vest when granted and expire three to ten years after
the date of grant.
A summary of activity under the Director Plan for the three years ended
June 30, 1999, 1998 and 1997, retroactively adjusted for the effect of the 5%
stock dividend described in note 10, follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
----------- -----------------
<S> <C> <C>
Options outstanding, June 30, 1996 ......... 94,500 $ 4.76
Options granted ............................ 21,000 16.90
------ --------
Options outstanding, June 30, 1997 ......... 115,500 6.97
Options granted ............................ 21,000 22.14
------- --------
Options outstanding, June 30, 1998 ......... 136,500 9.30
Options granted ............................ 21,000 14.29
------- --------
Options outstanding, June 30, 1999 ......... 157,500 $ 9.97
======= ========
</TABLE>
The fair value of options granted under the Director Plan is expensed on
the date of grant. The Company recognized expense of $73 thousand and $87
thousand for the years ended June 30, 1999 and 1998, respectively.
F-18
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal ................................. $ 1,268 $ 1,087 $ --
------- ------- -------
Deferred
Federal ................................. 6,495 5,348 3,062
State ................................... -- -- --
------- ------- -------
6,495 5,348 3,062
------- ------- -------
Total provision for income taxes ......... $ 7,763 $ 6,435 $ 3,062
======= ======= =======
</TABLE>
The current provision for federal income taxes for the year ended June 30,
1997 is net of the tax benefit of approximately $0.5 million from the
utilization of net operating loss carryforwards. There were no tax benefits
from the utilization of net operating loss carryforwards in the years ended
June 30, 1999 or 1998.
The cumulative temporary differences resulted in net deferred income tax
assets or liabilities consisting primarily of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred income tax assets
Allowance for credit losses ........................... $ 4,039 $ 1,212
Net operating loss carryforwards ...................... 11,262 5,777
Loan and lease receivables ............................ -- 659
-------- --------
15,301 7,648
-------- --------
Less valuation allowance ............................... 6,845 5,777
-------- --------
8,456 1,871
-------- --------
Deferred income tax liabilities
Loan and lease origination costs/fees, net ............ 1,123 1,253
Book over tax basis of property and equipment ......... 47 741
Interest-only strips and other receivables ............ 19,886 8,396
Servicing rights ...................................... 4,004 2,345
-------- --------
25,060 12,735
-------- --------
Net deferred income taxes .............................. $ 16,604 $ 10,864
======== ========
</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.
F-19
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. INCOME TAXES -- (Continued)
A reconciliation of income taxes at federal statutory rates to the
Company's tax provision is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax at statutory rates ......... $ 7,429 $ 6,083 $ 3,062
Nondeductible items ........................... 528 349 --
Other, net .................................... (194) 3 --
------- ------- -------
$ 7,763 $ 6,435 $ 3,062
======= ======= =======
</TABLE>
For income tax reporting, the Company has net operating loss carryforwards
aggregating approximately $85.5 million available to reduce future state income
taxes for various states as of June 30, 1999. If not used, substantially all of
the carryforwards will expire at various dates from June 30, 2000 to June 30,
2002.
14. COMMITMENTS AND CONTINGENCIES
As of June 30, 1999, the Company leases property under noncancelable
operating leases requiring minimum annual rentals as follows (in thousands):
Year ending June 30, Amount
- --------------------------------- ----------
2000 .......................... $ 3,598
2001 .......................... 3,347
2002 .......................... 3,024
2003 .......................... 2,041
2004 .......................... 48
Thereafter .................... --
--------
$ 12,058
========
Rent expense for leased property was $2.9 million, $1.7 million and $0.5
million respectively, for the years ended June 30, 1999, 1998 and 1997.
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 officers
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.
F-20
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. 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 sought
certification that the action could be maintained as a class action. He also
sought unspecified compensatory damages and injunctive relief. In his
complaint, Mr. Roscoe alleged that NJMIC violated New Jersey's Mortgage
Financing on Real Estate Law, N.J. Stat. Ann. 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 asserted
that NJMIC's alleged actions violated New Jersey's Consumer Fraud Act, N.J.
Stat. Ann. 56:8-1, et seq. and constituted common law fraud and deceit
On February 24, 1998, after oral argument before the Superior Court, an
order was entered in favor of NJMIC and against Mr. Roscoe granting NJMIC
Motion for Summary Judgment. Mr. Roscoe appealed to the Superior Court of New
Jersey -- Appellate Division. Oral argument on the appeal was heard on January
20, 1999 before a two-judge panel of the Appellate Division. On February 3,
1999, the panel filed a per curiam opinion affirming the Superior Court's
ruling in favor of NJMIC.
On March 4, 1999, a Petition for Certification for review of the final
judgment of the Superior Court was filed with the Supreme Court of New Jersey.
New Jersey Mortgage filed its Brief in Opposition to the Petition for
Certification on March 16, 1999, and Mr. Roscoe filed a reply brief. To date,
no decision has been rendered by the New Jersey Supreme Court on this matter.
Pursuant to the terms of the Agreement for Purchase and Sale of Stock of
NJMIC between the Company and the former shareholders of NJMIC, the former
shareholders are required to indemnify the Company up to $16.0 million to the
extent of any losses over $100,000 related to, caused by or arising from
NJMIC's failure to comply with applicable law. The former NJMIC 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
our business. While the Company cannot predict the ultimate outcome of these
various legal proceedings, it is management's opinion that the resolution of
these legal actions should not have a material effect on the Company's
financial position, results of operations or liquidity.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
No market exists for certain of the Company's assets and liabilities.
Therefore, fair value estimates are based on judgments regarding credit risk,
investor expectation of future economic conditions, 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.
F-21
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
The following table summarizes the carrying amounts and fair value
estimates of financial instruments recorded on the Company's financial
statements at June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
June 30, 1999
--------------------------
Carrying Fair
Value Value
------------ -----------
<S> <C> <C>
Assets
Cash and cash equivalents .............................. $ 22,395 $ 22,395
Loan and leases available for sale ..................... 33,776 35,152
Interest-only strips and other residual assets ......... 178,217 178,217
Servicing rights ....................................... 43,210 43,210
Investments held to maturity ........................... 1,014 911
Liabilities
Subordinated debt and notes payable .................... $ 270,343 $ 270,915
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
---------------------------
Carrying Fair
Value Value
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents .............................. $ 4,486 $ 4,486
Loan and leases available for sale ..................... 62,382 63,685
Interest-only strips and other residual assets ......... 95,913 95,913
Servicing rights ....................................... 18,472 19,310
Investments held to maturity ........................... 5,639 5,639
Liabilities
Subordinated debt and notes payable .................... $ 144,585 $ 144,585
</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 available for sale -- Fair value is determined by recent
sales and securitizations.
Interest-only strips -- Fair value is determined using estimated discounted
future cash flows taking into consideration anticipated prepayment rates
and credit loss rates of the underlying loans and leases.
Servicing rights -- Fair value is determined using estimated discounted
future cash flows taking into consideration anticipated prepayment rates
and credit loss rates of the underlying loans and leases.
Investments held to maturity -- Represent mortgage loan backed securities
retained in securitizations. Fair value is determined using estimated
discounted future cash flows taking into consideration anticipated
prepayment rates and credit loss rates of the underlying loans and leases.
Subordinated debt and notes payable -- The fair value of fixed debt is
estimated using the rates currently available to the Company for debt of
similar terms.
F-22
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
The carrying value of investment securities at June 30, 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Held-to-Maturity:
Mortgage backed securities retained
in securitizations ............... $1,014 $ -- $ (103) $ 911
Available for sale:
Lease backed securities retained
in securitizations. .............. 4,818 253 -- 5,071
------ ---- ------ ------
Total ............................. $5,832 $253 $ (103) $5,982
====== ==== ====== ======
</TABLE>
17. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1999 1998 1997
------------- ------------- ------------
(in thousands except per share data)
<S> <C> <C> <C>
(Numerator)
Net income .......................................... $ 14,088 $ 11,455 $ 5,940
--------- --------- --------
(Denominator)
Average Common Shares
Average common shares outstanding .................. 3,682 3,692 2,921
Average potentially dilutive shares ................ 109 155 128
Average common and potentially dilutive shares ..... 3,791 3,847 3,049
--------- --------- --------
Earnings per common share
Basic .............................................. $ 3.83 $ 3.10 $ 2.03
Diluted ............................................ 3.72 2.98 1.95
</TABLE>
18. SEGMENT INFORMATION
The Company adopted the Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information" as
of July 1, 1998 ("SFAS No. 131"). SFAS No. 131 establishes standards for the
way companies report information about operating segments in annual financial
statements and in interim financial reports. The adoption of SFAS No. 131 did
not affect the Company's results of operations or financial position.
The Company has three operating segments: Loan and Lease Origination,
Servicing, and Investment Note Services.
The Loan and Lease Origination segment originates business purpose loans
secured by real estate and other business assets, home equity loans typically
to credit-impaired borrowers, conventional first mortgage loans secured by one
to four family residential real estate and small ticket and middle market
business equipment leases.
The Servicing segment services the loans and leases the Company originates
both while held in the Company's portfolio and subsequent to securitization.
Servicing activities include billing and collecting payments from borrowers,
transmitting payments to investors, accounting for principal and interest,
collections and foreclosure activities and disposing of real estate owned.
The Investment Note Services segment markets the Company's subordinated
debt securities pursuant to a registered public offering. The proceeds from the
sale of subordinated debt are used to fund the Company's general operating and
lending activities.
F-23
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
18. SEGMENT INFORMATION -- (Continued)
All Other mainly represents segments that do not meet the SFAS No. 131
quantitative or defined thresholds for determining reportable segments,
financial assets not related to operating segments, unallocated overhead and
other expenses of the Company unrelated to the reportable segments identified.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Reconciling items represent elimination of inter-segment income and
expense items.
<TABLE>
<CAPTION>
Year ended June 30, 1999
----------------------------------------------------------------------------------
Loan and Investment
Lease Note Reconciling
Origination Services Servicing All Other Items Consolidated
------------- ------------ ----------- ----------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
External revenues:
Gain on sale of loans and leases ......... $ 65,640 $ -- $ -- $ -- $ -- $ 65,640
Interest income .......................... 5,733 321 -- 2,120 -- 8,174
Non-interest income ...................... 5,225 88 7,265 4 -- 12,582
Inter-segment revenues .................... -- 23,630 -- 25,080 (48,710) --
Operating expenses:
Interest expense ......................... 14,313 14,995 415 16,333 (23,630) 22,426
Non-interest expense ..................... 23,270 6,344 2,574 9,931 -- 42,119
Inter-segment expense .................... 24,490 590 -- -- (25,080) --
Income tax expense ........................ 5,161 750 1,519 333 -- 7,763
-------- -------- -------- --------- ------- ---------
Net income ................................ $ 9,364 $ 1,360 $ 2,757 $ 607 $ -- $ 14,088
======== ======== ======== ========= ======= =========
Segment assets ............................ $ 66,969 $ 28,131 $ 44,921 $ 256,280 $ -- $ 396,301
======== ======== ======== ========= ======= =========
</TABLE>
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should rely only on the information contained or incorporated by reference
in this prospectus. We have authorized no one to provide you with different
information. You should not assume that the information in this prospectus,
including information incorporated by reference, is accurate as of any date
other than the date on the front of the prospectus. This prospectus is not an
offer to sell nor is it seeking an offer to buy the securities in any
jurisdiction where that offer or sale is not permitted. The information in this
prospectus is correct only as of the date of this prospectus, regardless of the
time of the delivery of this prospectus or any sale of securities.
[GRAPHIC OMITTED]
$300,000,000
of
Subordinated Investment Notes
and Adjustable Rate Subordinated
Money Market Notes
---------------------
PROSPECTUS
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Debt Securities, other than underwriting
discounts and commissions, which ABFS does not anticipate paying:
SEC Registration Fee* $ 83,400
Printing, Engraving and Mailing 80,000
Legal Fees and Expenses 100,000
Accounting Fees and Expenses 50,000
Blue Sky Fees and Expenses 20,000
Miscellaneous 7,166,600
----------
TOTAL $7,500,000
==========
* Exact; all other fees and expenses are estimates
Item 15. Indemnification of Directors and Officers.
The Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and the Bylaws (the "Bylaws") of ABFS provide for
indemnification of its directors and officers to the full extent permitted by
Delaware law. In the event that the Delaware General Corporation Law (the
"Corporation Law") is amended to authorize corporate action further eliminating
or limiting the personal liability of directors and officers, the Certificate of
Incorporation and Bylaws provide the personal liability of the directors and
officers of ABFS shall be so eliminated or limited.
Section 145 of the Corporation Law provides, in substance, that Delaware
corporations shall have the power, under specified circumstances, to indemnify
their directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by a third party or in
II-1
<PAGE>
the right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding.
Section 145 of the Corporation Law provides that a company may pay the
expenses incurred by an officer or director in defending any civil, criminal,
administrative, or investigative action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding upon an undertaking by or
on behalf of such director or officer to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by the corporation.
The Certificate of Incorporation and Bylaws of ABFS provide that ABFS shall pay
such expenses.
The Company maintains insurance to cover the Company's directors and
executive officers for liabilities which may be incurred by the Company=s
directors and executive officers in the performance of their duties.
Item 16. Exhibits
Exhibit
Number Description
------ -----------------------------------------------------------------
4.1 Form of unsecured Investment Note (Incorporated by reference from
Exhibit 4.1 of Amendment No. 1 to the Registration Statement on
Form SB-2 filed April 29, 1994, Registration Number 33-76390).
4.2 Form of unsecured Investment Note issued pursuant to Indenture
with First Trust, National Association, a national banking
association (Incorporated by reference from Exhibit 4.5 of
Amendment No. One to the Registration Statement on Form SB-2
filed on December 14, 1995, Registration Number 33-98636 (the
"1995 Form SB-2").
4.3 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by
reference from Exhibit 4.6 of the Registration Statement on Form
SB-2 filed on October 26, 1995, Registration Number 33-98636).
4.4 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by
reference from Exhibit 4.4 of the Registration Statement on Form
SB-2 filed March 28, 1997, Registration Number 333-24115 (the
"1997 Form SB-2")).
4.5 Form of unsecured Investment Note (Incorporated by reference from
Exhibit 4.5 of the 1997 Form SB-2).
4.6 Form of Indenture by and between ABFS and First Trust, National
Association, a national banking association (Incorporated by
reference from Exhibit 4.4 of
<PAGE>
Exhibit
Number Description
------ -----------------------------------------------------------------
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 Registrant's
Registration Statement on Form S-2, No. 333-63859, filed
September 21, 1998).
4.9 Form of Unsecured Investment Note (Incorporated by reference from
Exhibit 4.9 of Registrant's Registration Statement on Form S-2,
No. 333-63859, filed September 21, 1998).
4.10 Form of Indenture by and between ABFS and U.S. Bank Trust
National Association.*
5 Opinion of Blank Rome Comisky & McCauley LLP.*
10.1 Loan and Security Agreement between Upland Mortgage and
BankAmerica Business Credit, Inc. dated May 23, 1996
(Incorporated by reference from the 1996 Form 10-KSB).
10.2 Amended and Restated Stock Option Plan (Incorporated by reference
from Exhibit 10.2 of ABFS' Quarterly Report on Form 10-QSB from
the quarter ended September 30, 1997, File No. 0-22474).
10.3 Stock Option Award Agreement (Incorporated by reference from
Exhibit 10.1 of the Registration Statement on Form S-11 filed on
February 26, 1993, Registration No. 33-59042 (the "Form S-11")).
10.4 Line of Credit Agreement by and between American Business Credit,
Inc. and Eagle National Bank (Incorporated by reference from
Exhibit 10.4 of Amendment No. 1 to the Registration Statement on
Form SB-2 filed on April 29, 1993, Registration No. 33-59042 (the
"1993 Form SB-2")).
10.5 Agreement dated April 12, 1993 between American Business Credit,
Inc. and Eagle National Bank (Incorporated by reference from
Exhibit 10.5 of the 1993 Form SB-2).
- ----------------
* Previously filed.
<PAGE>
Exhibit
Number Description
------ -----------------------------------------------------------------
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).
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 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, Beverly
Santilli and Jeffrey M. Ruben (Incorporated by reference from
Exhibit 10.15 of the Amendment No. 1 to the 1996 Form SB-2).
<PAGE>
Exhibit
Number Description
------ -----------------------------------------------------------------
10.16 Amendment One to Anthony J. Santilli 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")).
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).
<PAGE>
Exhibit
Number Description
------ -----------------------------------------------------------------
10.26 Sixth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated March 31, 1997 (Incorporated by reference
from Exhibit 10.24 to the Amendment No. 1 to the 1997 SB-2).
10.27 Agreement for Purchase and Sale of Stock between Stanley L.
Furst, Joel E. Furst and ABFS dated October 27, 1997
(Incorporated by reference from ABFS' Current Report on Form 8-K
dated October 27, 1997, File No. 0-22747).
10.28 Credit Agreement between American Business Credit, Inc.,
HomeAmerican Credit, Inc., and American Business Leasing, Inc.,
as co-borrowers, American Business Financial Services, Inc., as
parent, Chase Bank of Texas, NA, as administrative agent and
certain lenders (Incorporated by reference from Exhibit 10.24 of
ABFS' Annual Report on Form 10-KSB for the fiscal year ended June
30, 1997 filed on September 29, 1997, File No. 0-22474).
10.29 Standard Form of Office Lease and Rider to Lease dated April 2,
1993 by and between 5 Becker Associates and NJMIC (Incorporated
by reference from Exhibit 10.29 of Post-Effective Amendment No. 1
to the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).
10.30 First Amendment of Lease by and between 5 Becker Associates and
NJMIC dated July 27, 1994 (Incorporated by reference from Exhibit
10.30 of Post-Effective Amendment No. 1 to the Registration
Statement on Form SB-2 filed on January 22, 1998, Registration
No. 333-2445).
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).
<PAGE>
Exhibit
Number Description
------ -----------------------------------------------------------------
10.34 Form of Standard Terms and Conditions of Lease Acquisition
Agreement related to NJMIC's lease securitizations dated May 1,
1995 and March 1, 1996 (Incorporated by reference from Exhibit
10.34 of Post-Effective Amendment No. 1 to the Registration
Statement on Form SB-2 filed on January 22, 1998, Registration
No. 333-2445).
10.35 Amended and Restated Specific Terms and Conditions of Servicing
Agreement related to NJMIC's lease securitization dated May 1,
1995 (Incorporated by reference from Exhibit 10.35 of
Post-Effective Amendment No. 1 to the Registration Statement on
Form SB-2 filed on January 22, 1998, Registration No. 333-2445).
10.36 Amended and Restated Specific Terms and Conditions of Lease
Acquisition Agreement related to NJMIC's lease securitization
dated May 1, 1995 (Incorporated by reference from Exhibit 10.36
of Post-Effective Amendment No. 1 to the Registration Statement
on Form SB-2 filed on January 22, 1998, Registration No.
333-2445).
10.37 Specific Terms and Conditions of Servicing Agreement related to
NJMIC's lease securitization dated March 1, 1996 (Incorporated by
reference from Exhibit 10.37 of Post-Effective Amendment No. 1 to
the Registration Statement on Form SB-2 filed on January 22,
1998, Registration No. 333-2445).
10.38 Specific Terms and Conditions of Lease Acquisition Agreement
related to NJMIC's lease securitization dated March 1, 1996
(Incorporated by reference from Exhibit 10.38 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed
on January 22, 1998, Registration No. 333-2445).
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 Registrant's Registration Statement on Form S-2, No.
333-63859, filed September 21, 1998).
10.40 Form of Unaffiliated Seller's Agreement related to the Company's
home equity loan securitizations dated March 27, 1997, September
29, 1997, February 1, 1998 and June 1, 1998 (Incorporated by
reference from Exhibit 10.40 of Registrant's Registration
Statement on Form S-2, No. 333-63859, filed September 21, 1998).
<PAGE>
Exhibit
Number Description
------ -----------------------------------------------------------------
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 Registrant's Registration Statement on Form S-2,
No. 333-63859, filed September 21, 1998).
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 Registrant's Registration Statement on Form
S-2, No. 333-63859, filed September 21, 1998).
10.43 Amendments to the Credit Agreement between American Business
Credit, Inc., HomeAmerican Credit, Inc., American Business
Leasing, Inc., New Jersey Mortgage & Investment Corp., and
Federal Leasing Corp. as co-borrowers, American Business
Financial Services, Inc., as parent, Chase Bank of Texas, NA, as
administrative agent for lenders (Incorporated by reference from
Exhibit 10.43 of Registrant's Registration Statement on Form S-2,
No. 333-63859, filed September 21, 1998).
10.44 $100.0 Million Receivables Purchase Agreement, dated September
30, 1998 among American Business Lease Funding Corporation,
American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Capital Markets and First Union
National Bank, as liquidity agent. (Incorporated by reference
from Exhibit 10.1 of the Registrant's September 30, 1998 Form
10-Q).
10.45 $20.0 Million Credit Agreement, dated September 28, 1998 between
American Business Leasing, Inc., Federal Leasing Corp. and First
Union National Bank. (Incorporated by reference from Exhibit 10.2
of the Registrant's September 30, 1998 Form 10-Q).
10.46 Interim Warehouse and Security Agreement, dated August 3, 1998,
among Prudential Securities Credit Corporation, as lender, and
Federal Leasing, Inc. and American Business Leasing, Inc., as
borrowers, and Amendments One and Two thereto. (Incorporated by
reference from Exhibit 10.3 of the Registrant's September 30,
1998 Form 10-Q).
<PAGE>
Exhibit
Number Description
------ -----------------------------------------------------------------
10.47 Amended and Restated Credit Agreement, dated October 1, 1998,
between American Business Credit, Inc., HomeAmerican Credit,
Inc., American Business Leasing, Inc., New Jersey Mortgage and
Investment Corp., as co-borrowers, American Business Financial
Services, Inc., as parent and Chase Bank of Texas. (Incorporated
by reference from Exhibit 10.4 of the Registrant's September 30,
1998 Form 10-Q)
10.48 $5,000,000 Loan Agreement dated as of December 30, 1998, between
American Business Credit, Inc., HomeAmerican Credit, Inc., New
Jersey Mortgage and Investment Corp. as co-borrowers, and Chase
Bank of Texas as lender. (Incorporated by reference from Exhibit
10.1 of the Registrant's December 31, 1998 Form 10-Q).
10.49 Amendment to First Amended and Restated Interim Warehouse and
Security Agreement dated June 7, 1997 among Prudential Securities
Credit Corporation and Home American Credit, Inc., New Jersey
Mortgage and American Business Credit, Inc. and ABFS as Guarantor
(Incorporated by reference to Exhibit 10.44 of the Form 10-K for
the year ended June 30, 1999).
11 Statement of Computation of Per Share Earnings (Included in Note
16 of the Notes to Consolidated Financial Statements).
12 Computation of Ratio of Earnings to Fixed Charges.*
21 Subsidiaries of the Company (Incorporated by reference from
Exhibit 21 of the Registrant's Form 10-K for the year ended June
30, 1999 filed on September 16, 1999.)
23.1 Consent of Blank Rome Comisky & McCauley LLP (See Exhibit 5).*
23.2 Consent of BDO Seidman LLP.
25 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 on Form T-1.*
27 Financial Data Schedule (Incorporated by reference from Exhibit
27 of the Registrant's Form 10-K for the year ended June 30,
1999.
99.1 Form of Prospectus Supplement.*
99.2 Advertising Materials and Order Forms.*
- --------------
* Previously filed.
<PAGE>
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-K for a Registration Statement on Form S-2.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sells
securities, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement. Notwithstanding
the foregoing, any increase or decrease in
volume of securities offered (if the total
dollar value of securities offered would not
exceed that which was registered) and any
deviation from the low or high end of the
estimated maximum offering range may be
reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price
represent no more than a 20% change in the
maximum aggregate offering price set forth in
the "calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement
relating to the securities offered therein, and the
offering of such securities at that time shall be the
initial bona fide offering thereof;
(3) To remove form registration by means of a post-effective
amendment any of the securities that remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished
<PAGE>
pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are
not set forth in the prospectus, to deliver, or cause to be delivered to
each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(d) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1),
or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities
offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide
offering thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of
Philadelphia, Commonwealth of Pennsylvania on October 13, 1999.
Date: October 13, 1999 By:/s/ Anthony J. Santilli
------------------------------------------------
Anthony J. Santilli, Chairman, President,
Chief Executive Officer, Chief Operating Officer
and Director (Duly Authorized Officer)
----------------
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- -------------------------------------- ------------------------------------------------ ------------------------
<S> <C> <C>
/s/ Anthony J. Santilli Chairman, President, Chief Executive October 13, 1999
- ---------------------------------- Officer, Chief Operating Officer and
Anthony J. Santilli Director (Principal Executive and
Operating Officer)
/s/ Albert W. Mandia Executive Vice President and Chief October 13, 1999
- ---------------------------------- Financial Officer (Principal Financial
Albert W. Mandia and Accounting Officer)
/s/ Leonard Becker Director October 13, 1999
- ----------------------------------
Leonard Becker
/s/ Richard Kaufman Director October 13, 1999
- ----------------------------------
Richard Kaufman
/s/ Michael DeLuca Director October 13, 1999
- ----------------------------------
Michael DeLuca
/s/ Harold Sussman Director October 13, 1999
- ----------------------------------
Harold Sussman
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Numbers Description
- --------------- -----------
4.10 Form of Indenture by and between ABFS and U.S. Bank Trust
National Association, a national banking association.*
5 Opinion of Blank Rome Comisky & McCauley LLP.*
11 Statement of Computation of Per Share Earnings. (Included in
Note 16 of the Notes to Consolidated Financial Statements).*
12 Statement of Computation of Ratios.*
21 Subsidiaries of the Company (Incorporated by reference from
Exhibit 21 of the Registrant's Form 10-K for the year ended
June 30, 1999).*
23.1 Consent of Blank Rome Comisky & McCauley LLP (See Exhibit
5).*
23.2 Consent of BDO Seidman LLP.
25 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 on Form T-1.*
99.1 Form of Prospectus Supplement.*
99.2 Advertising Materials and Order Forms.*
<PAGE>
EXHIBIT 23.2
------------
Consent of BDO Seidman LLP.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Business Financial Services, Inc.
Bala Cynwyd, PA
We hereby consent to the incorporation in this Registration Statement
on Pre-effective Amendment No. One to the Form S-2 of our report dated
September 9, 1999, relating to the consolidated financial statements of
American Business Financial Services, Inc. and subsidiaries.
We also consent to the reference to our firm under the caption
"Experts" in the Prospectus.
/s/ BDO Seidman, LLP
----------------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
October 13, 1999
