<PAGE>
As filed with the Securities and Exchange Commission on June 27, 2000
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
Proposed Maximum
Amount Offering Price Per Proposed
Title of each class of to be Subordinated Maximum Amount of
Securities to be registered Registered Debenture(1) Offering Price Registration fee
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinated Debentures.............. $350,000,000 $1,000 $350,000,000 $92,400
===========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
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>
Subject to Completion, Dated June 27, 2000
[LOGO]
-------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
-------------------------------------------------------------------------------
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
$350,000,000 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
interest on balances of less than
$1,000.
-----------------------------------------------------------------------------------------------------------------------
Payment of Interest............. Periodic cash payments. Interest paid in the form of additional
securities.
-----------------------------------------------------------------------------------------------------------------------
Redemption by Holder............ Upon death or total disability of Redemptions of $500 or greater permitted
natural persons for securities with upon 10 business days written notice to
remaining maturities one year or us. Redemption by draft also available.
greater as described in this
prospectus.
-----------------------------------------------------------------------------------------------------------------------
Redemption by Company........... Redeemable upon 90 days written Redeemable upon 30 days written notice.
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 $342.1 million of the proceeds
from the sale of the debt securities and money market notes after paying
expenses. We estimate expenses to be $7.9 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.
These debt securities are not certificates of deposit or other
obligations of or guaranteed by a depository institution. The payment of
principal and interest on these securities is not insured by the FDIC or
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 and 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 11 for information that should be considered by
prospective purchasers of these securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-----------------------------
The date of this prospectus is __________ __, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................................................................................3
Highlights of Terms of The Debt Securities Offered...............................................................10
Risk Factors.....................................................................................................11
Use of Proceeds..................................................................................................21
Description of The Debt Securities Offered and The Indenture.....................................................22
Selected Consolidated Financial Data.............................................................................35
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................37
Business.........................................................................................................71
Where You Can Find More Information..............................................................................90
Management.......................................................................................................91
Principal Stockholders...........................................................................................93
Market For Common Stock and Related Stockholder Matters..........................................................95
Plan of Distribution.............................................................................................97
Legal Matters....................................................................................................97
Experts..........................................................................................................97
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.
General Information Regarding Our Business
American Business Financial Services, Inc. is a diversified financial
services company operating throughout the United States. We originate loans
through a combination of channels including a national processing center located
at our centralized operating office in Bala Cynwyd, Pennsylvania, and 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 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; and
o mortgage loans 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 conventional first mortgage
loans.
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 for loans
held in portfolio but that do meet our underwriting criteria which is referred
to in this document as the Bank Alliance Program.
Prior to December 31, 1999, we also originated equipment leases.
Effective December 31, 1999, we de-emphasized the leasing origination business
as a result of our strategy of focusing on our most profitable lines of
business. We are continuing to service the remaining leases in our managed
portfolio, which totaled $134.8 million in gross receivables at March 31, 2000
and we may from time to time consider originating or purchasing new leases.
Our loan customers 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 histories 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. Leases in our managed portfolio were typically made
to small businesses or proprietorships with less than 100 employees and
favorable credit histories.
3
<PAGE>
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 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, 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 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 retains
the right to service the loans for a fee referred to as servicing rights and may
also retain an interest in the cash flows generated by the securitized loans
referred to as a residual interest which is subordinate to the regular interest
sold to investors. Through March 31, 2000, we had securitized an aggregate of
$2.0 billion of loans and leases, consisting of $280.1 million of business
purpose loans, $1.6 billion of home equity loans, and $161.6 million 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 generally offer this debt
without the assistance of an underwriter or dealer. At March 31, 2000, we had
$329.0 million in subordinated debt outstanding. This debt had a weighted
average interest rate of 10.1% and a weighted average maturity of 21 months as
of March 31, 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
We 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 various electronic commerce initiatives, the acquisition of other
finance companies or related companies, the purchase of portfolios of loans, 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 is located at
Balapointe Office Centre, 111 Presidential Boulevard, Bala Cynwyd, Pennsylvania
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>
Nine Months Ended
March 31, Year Ended June 30,
------------------- --------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data: (Dollars in thousands, except per share data)
Revenues:
Gain on sale of loans and leases.... $ 63,025 $ 45,789 $ 65,640 $ 41,316 $ 20,043 $ 8,721 $ 1,350
Interest and fees................... 26,122 13,416 17,424 17,386 5,584 3,245 4,058
Other............................... 3,416 2,004 3,360 633 335 129 143
-------- -------- -------- -------- -------- -------- -------
Total revenues........................ 92,563 61,209 86,424 59,335 25,962 12,095 5,551
Total expenses........................ 73,458 45,078 64,573 41,445 16,960 8,974 4,657
-------- -------- -------- -------- -------- -------- -------
Operating income before income taxes.. 19,105 16,131 21,851 17,890 9,002 3,121 894
Income taxes.......................... 7,642 5,704 7,763 6,435 3,062 802 313
-------- -------- -------- -------- -------- -------- -------
Net income............................ $ 11,463 $ 10,427 $ 14,088 $ 11,455 $ 5,940 $ 2,319 $ 581
======== ======== ======== ======== ======== ======== =======
Per Common Share Data:
Basic earnings per common share(a).. $ 3.32 $ 2.82 $ 3.83 $ 3.10 $ 2.03 $ 0.96 $ 0.26
Diluted earnings per common share(a) 2.74 3.72
3.23 2.98 1.95 0.96 0.26
Cash dividends declared per common share 0.22 0.115 0.165 0.06 0.06 0.03 --
</TABLE>
----------------------
(a) Amounts for the nine months ended March 31, 1999 and for the years ended
June 30, 1999, 1998, 1997, 1996 and 1995 have been retroactively adjusted to
reflect the effect of a 5% stock dividend declared August 18, 1999 as if the
additional shares had been outstanding for each period presented.
<TABLE>
<CAPTION>
March 31, June 30,
--------- --------------------------------------------------
2000 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data: (In thousands)
Cash and cash equivalents.................. $ 45,399 $22,395 $ 4,486 $ 5,014 $ 5,345 $ 4,734
Loan and lease receivables, net
Available for sale...................... 33,259 33,776 62,382 35,712 18,003 8,669
Other................................... 10,819 6,863 4,096 1,144 534 328
Interest-only and residual strips.......... 258,772 178,218 95,913 37,507 32,639 13,448
Receivable for sold loans and leases....... 62,651 66,086 2,552 960 26 86
Servicing rights........................... 66,081 43,210 18,473 8,083 5,907 1,388
Total assets............................... 533,757 396,301 226,551 103,989 46,894 22,175
Subordinated debt.......................... 329,038 211,653 115,182 56,486 33,620 17,800
Total liabilities.......................... 467,265 338,055 183,809 73,077 42,503 20,031
Stockholders' equity....................... 66,492 58,246 42,742 30,912 4,392 2,143
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
----------------------- -------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Originations:
Business Purpose Loans............ $ 81,056 $ 42,721 $ 64,818 $ 52,335 $ 38,721 $ 28,872 $ 18,170
Home Equity Loans................. 668,704 449,891 634,820 328,089 91,819 36,479 16,963
Conventional First Mortgage Loans. 31,590 50,230 66,519 33,671 -- -- --
Equipment Leases.................. 19,631 76,745 96,289 70,480 8,004 5,967 2,220
Loans and Leases sold:
Securitizations................... 710,993 523,694 777,598 384,700 115,000 36,506 9,777
Other............................. 77,645 83,952 105,751 51,594 3,817 19,438 31,948
Total managed loan and lease
portfolio............................ 1,697,216 1,011,758 1,176,918 559,398 176,651 59,891 17,774
Average loan/lease size:
Business Purpose Loans............ 88 76 80 83 78 78 71
Home Equity Loans................. 69 82 74 62 51 47 46
Conventional First Mortgage Loans. 151 164 165 154 -- -- --
Equipment Leases.................. 19 24 23 21 11 11 12
Weighted average interest rate on
Loans and leases originated:
Business Purpose Loans............ 15.96% 15.99% 15.91% 15.96% 15.91% 15.83% 16.05%
Home Equity Loans................. 11.19 10.82 11.05 11.95 11.69 9.94 12.68
Conventional First Mortgage Loans. 8.57 7.34 7.67 8.22 -- -- --
Equipment Leases.................. 11.25 11.45 11.40 12.19 15.48 17.22 15.85
Nine Months Ended
March 31, Year Ended June 30,
----------------------- -------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
Financial Ratios: (Dollars in thousands, except per share data)
Return on average assets................ 3.29% 4.84% 4.56% 6.93% 7.87% 6.71% 3.37%
Return on average equity................ 24.35 28.88 28.10 31.10 33.65 70.96 31.36
Total delinquencies as a percentage
of total portfolio serviced, at end
of period............................ 3.18 3.22 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 .68 .85 .16 .34 1.01 4.29
Loan and lease losses as a percentage
of the average total portfolio
serviced during the period........... .24 .10 .12 .12 .07 .33 .66
Pre-tax income as a percentage of total
revenues............................. 20.64 26.35 25.28 30.15 33.99 25.81 16.11
Ratio of earnings to fixed charges...... 1.69 1.97 1.92 2.23 2.56 1.97 1.54
</TABLE>
6
<PAGE>
Overview of the Offering
The Offering. We are offering up to $350.0 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. There is no minimum amount of debt
securities that 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 -- Since we do not set aside
funds to repay the debt securities offered, holders of the debt securities must
rely on our revenues from operations and other sources for repayment."
Subordinated Obligations. The debt securities are second in right of
repayment, or subordinated, to our senior debt and certain debt of our
subsidiaries. As of May 31, 2000 and March 31, 2000, we had $140.4 million and
$57.3 million, respectively, of senior debt and subsidiary debt outstanding.
There is no limitation on the amount of senior debt or subsidiary debt we may
incur. 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 May 31, 2000 and March 31, 2000, we had $369.9 million and
$329.0 million, 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 is irrevocable upon submission to 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 send an initial transaction statement
to each purchaser which shows each purchaser's ownership. 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. See
"Provisions Relating to All Securities" for information on how to transfer this
debt security.
Overview of Terms of Debt Securities. For an overview of the debt
securities, see "Highlights of Terms of Debt Securities Offered" and
"Description of the Debt Securities Offered" appearing in this prospectus.
7
<PAGE>
Use of Proceeds. We intend to use the net proceeds resulting from the
sale of the debt securities for our general corporate purposes, including
funding loan originations, capital expenditures and general operating
activities, paying interest and operating expense, repayment of existing debt,
funding overcollateralization requirements in connection with securitizations,
repurchasing our common stock and possible unspecified acquisitions of related
businesses or assets. In addition, we may use a portion of the proceeds to repay
maturing notes with maturities of 1 day to 10 years and interest rates ranging
from 6.15% to 12.90%. See "Use of Proceeds."
8
<PAGE>
<TABLE>
<CAPTION>
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HIGHLIGHTS OF TERMS OF THE DEBT SECURITIES OFFERED
-----------------------------------------------------------------------------------------------------------------------
Investment Notes Money Market Notes
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Types of Security Offered..... Unsecured, subordinated, fixed term Unsecured, adjustable rate, subordinated
subordinated debt security. debt security.
-----------------------------------------------------------------------------------------------------------------------
Denomination of Initial Minimum purchase: $1,000 per security Minimum purchase: $1,000 per security or
Purchase and Additional or any amount in excess of $1,000. any amount in excess of $1,000.
Purchases.....................
-----------------------------------------------------------------------------------------------------------------------
Annual Interest Rate.......... Fixed upon issuance. You may choose a We will adjust the interest rate paid from
term length and the applicable interest time to time in our sole discretion. The rate
will be based upon the term chosen. 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 on investment notes with Interest will be compounded daily and
maturities of less than one year will be credited monthly at the end of each month.
compounded daily and paid at maturity. No checks will be issued in payment of
Interest on investment notes with interest. Accrued interest will be added
maturities of one year or greater will to principal in each account in the form of
be compounded daily and, at the election additional securities.
of the holder, paid at maturity,
monthly, quarterly, semi-annually or
annually.
-----------------------------------------------------------------------------------------------------------------------
Redemption by Holder.......... Investment notes with remaining May be redeemed by the holder upon written
maturities of less than one year are not notice to us with payment to be made within
redeemable prior to maturity. 10 business days of our receipt of such
Investment notes with remaining notice from the holder. Redemptions must
maturities of one year or greater may be be at least $500, except for redemptions to
redeemed by the holder, who is a natural close an account. Redemptions may be made
person, following his/her total by drafts, which are similar to checks. We
permanent disability (as described under will charge a service fee if you use more
the heading "Description of the Debt than three (3) drafts per month.
Securities Offered and the Indenture --
Provisions Relating to Investment
Notes"), or by the holder's estate after
his/her death, at the principal amount
plus accrued interest. Any holder who
is not a natural person, such as a
trust, partnership or corporation, 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......... Redeemable upon 90 days written notice Redeemable upon 30 days written notice to
to the holder. the holder.
-----------------------------------------------------------------------------------------------------------------------
Form/Transferability.......... In book-entry form and non-negotiable. In book-entry form and non-negotiable. (A
(A transaction statement will be issued, transaction statement will be issued, not
not an individual promissory note.) Not an individual promissory note.) Not
transferable without our prior written transferable without our prior written
consent. consent.
-----------------------------------------------------------------------------------------------------------------------
Maturity...................... Investment notes are offered with terms No fixed maturity.
to maturity of three to 120 months, the
term of each note is established at the
time of purchase.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
HIGHLIGHTS OF TERMS OF THE DEBT SECURITIES OFFERED
-----------------------------------------------------------------------------------------------------------------------
Investment Notes Money Market Notes
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Extension........... The investment notes will be Not applicable.
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 Monthly statements detailing the current
current balance and interest rate paid balance and interest rate paid on each
on each note will be mailed to each account will be mailed to each holder no
holder no later than the tenth business later than the tenth business day following
day following the end of each calendar the end of each month.
quarter.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
RISK FACTORS
Before you invest in our debt securities, you should be aware that
there are various risks, including those described in this section. 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 words or phrases such as "will
likely result," "may," "are expected to," "will continue to," "is anticipated,"
"estimate," "projected," "intends to" or other similar words. Forward-looking
statements are subject to certain risks and uncertainties, which 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 by
any governmental agency.
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
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 generally not subject to examination by federal
banking regulators.
Currently, our operations are not regulated or subject to examination
in the same manner as commercial banks, savings banks and thrift institutions.
Although, if approved, our industrial loan company will be subject to such
regulation, currently our 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."
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Since the debt securities are unsecured and second in right of repayment to our
senior debt borrowed from institutional lenders, in the event of insolvency,
debt holders would be repaid only if funds remain after the repayment of our
senior debt.
The debt securities offered by this prospectus will be subordinated, or
second in right of repayment, to our senior debt and debt of certain
subsidiaries. As of May 31, 2000 and March 31, 2000, there was $140.4 million
and $57.3 million, respectively, of senior debt and subsidiary 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."
Since we do not set aside funds to repay the debt securities offered, holders of
the debt securities must rely on our revenues from operations and other sources
for repayment.
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. To the extent revenues
from operations are not sufficient to repay the debt, holders may lose all or a
part of their investment. 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 may not be transferred
without our prior written consent. There is no established trading market for
the debt securities. Due to the non-transferable 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 would 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."
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Risks Related to Our Business
Since we have historically experienced negative cash flows from our operations
and expect to do so in the foreseeable future, our ability to repay the
investment notes could be impaired.
We have historically experienced negative cash flow from operations
since 1996 primarily because our strategy of selling loans through
securitization requires us to build an inventory of loans over time. During the
period we are building this inventory of loans, we incur costs and expenses. We
do not recognize a gain on the sale of loans until we complete a securitization,
which may not occur until a subsequent period. In addition, our gain on a
securitization results from our retained interests in the securitized loans,
consisting primarily of interest-only strips, which do not generate cash flow
immediately. We expect this negative cash flow from operations to continue in
the foreseeable future. Should we continue to experience negative cash flows
from operations, it could impair our ability to make principal and interest
payments due under the terms of the investor notes. At March 31, 2000, there was
$206.0 million of investment notes which will mature through June 30, 2001.
We obtain the funds to repay the investment notes at their maturities
by securitizing our loans, selling whole loans and selling additional investment
notes. We may in the future generate cash flows by securitizing or selling
interest-only strips and selling servicing rights generated in past
securitizations. If we are unable in the future to securitize our loans, to sell
whole loans, or to realize cash flows from interest-only strips and servicing
rights generated in past securitizations, our ability to repay the investment
notes could be impaired. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Our estimates of the value of residual interests and servicing rights we retain
when we securitize loans could be inaccurate and could result in reduced
profits.
We generally retain residual interests and servicing rights in the
securitization transactions we complete. We estimate the fair value of the
residual interests and servicing rights based upon certain discount rates and
prepayment and default assumptions. Together, these two assets represent 61% of
our total assets at March 31, 2000. The value of our interest-only strips and
residual strips totaled $259.0 million and the value of our servicing rights
totaled $66.0 million at March 31, 2000. Although we believe that these amounts
represent the fair value of these assets, the amounts were estimated based on
discounting the expected cash flows to be received in connection with our
securitizations using certain discount rates, prepayment rates and default rate
assumptions. Changes in market interest rates may impact our discount rate
assumptions and our actual prepayment and default experience may vary materially
from these estimates. Even a small unfavorable change in these assumptions
utilized could have a significant adverse impact on the value of these assets.
In the event of an unfavorable change in these assumptions, the fair value of
these assets would be overstated, requiring an adjustment which would adversely
affect our income in the period of adjustment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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Since we depend upon the availability of financing to fund our continuing
operations, any failure to obtain adequate funding could hurt our profitability
and restrict our ability to repay the notes on maturity.
For our ongoing operations, we depend upon frequent financings,
including the sale of unsecured subordinated debt securities and warehouse
credit facilities or lines of credit. If we are unable to renew or obtain
adequate funding under a warehouse credit facility, or other borrowings, our
profitability would be reduced and our ability to repay the notes upon maturity
would be restricted. To the extent that we are not successful in maintaining or
replacing existing subordinated debt securities upon maturity, we may have to
limit our loan originations or sell loans earlier than intended and restructure
our operations. Limiting our originations or earlier sales of loans could reduce
our profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Lending to credit-impaired borrowers may result in higher delinquencies in our
managed portfolio which could result in a reduction in profits.
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. 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 profits would be
reduced. 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 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.
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, we rely
primarily on securitizations to generate cash proceeds for the repayment of our
warehouse credit facilities, repayment of other borrowings, repurchases of our
common stock and origination of additional loans.
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.
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Any substantial impairment of the securitization market for our loans could
result in our inability to continue to originate loans and repay the notes upon
maturity. See "Business --Securitizations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
A change in market interest rates may result in a reduction in 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:
o reduce customer demand for our products;
o increase our cost of funds;
o increase 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 reduce the profit we will realize in securitizations or other sales
of loans.
Gain on sale of loans may be unfavorably impacted to the extent
fixed-rate mortgage loans held in the available for sale portfolio are held
prior to securitization and a change in rates reduces the spread between the
average coupon rate on fixed rate loans and the weighted average pass-through
rate to investors for interests issued in connection with the securitization.
Although the average loan coupon rate is fixed at the time the loan 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. Therefore,
if market rates required by investors increase prior to securitization of the
loans, the spread between the average coupon rate on the loans and the
pass-through rate to investors may be reduced or eliminated which would reduce
or eliminate our profit on the sale of the loans.
Since a portion of the certificates issued to investors by
securitization trusts are floating, these interest rate certificates adjust
based on established index plus a spread. The fair value of the excess cash flow
we will receive from these trusts would be reduced as a result of any changes in
rates paid on the floating certificates. At March 31, 2000, $143.6 million of
debt issued by securitization was floating rate debt representing 9.38% of total
debt issued by securitization trusts.
If we are not able to sustain the levels of growth in revenues and earnings that
we experienced in the past our profits may be reduced.
During the nine months ended March 31, 2000, 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. Our ability to
sustain the level of growth in total revenue and net income experienced during
the nine months ended March 31, 2000 depends upon a variety of factors outside
our control, including:
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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.
If we are unable to sustain our levels of growth, our profits may be reduced.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Decreasing market interest rates could reduce our profitability due to the
length of maturities of our outstanding subordinated debt.
We are 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 March 31, 2000, we had $149.9
million of subordinated debt securities with scheduled maturities greater than
one year which is not subject to early redemption at our option. If market
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."
If we are unable to continue to successfully implement our growth strategy, our
revenues may decrease.
Our growth strategy seeks to increase our loan volume through further
development of existing markets while maintaining our customary origination
fees, the spread between loan 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 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 inability to achieve any or all of these factors could impair our ability to
grow and successfully leverage our fixed costs and could result in a reduction
in our revenues. See "Business -- Lending and Leasing Activities."
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If loan prepayment rates are higher than anticipated, our profits could be
reduced.
A significant decline in market interest rates could increase the level
of loan prepayments, thereby decreasing the size of the total managed loan
portfolio and the related projected cash flows. Higher than anticipated rates of
loan prepayments could require a write down of the fair value of the related
interest-only and residual strips and servicing rights, adversely impacting
earnings during the period of adjustment which would result in a reduction in
our profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
A decline in real estate values could result in a reduction in originations
which could reduce our revenues.
Our business may be adversely affected by declining real estate 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 which
could reduce our revenues. See "Business - Lending and Leasing Activities" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
A decline in value of the collateral securing our loans could result in an
increase in losses on foreclosure which could reduce our profitability.
Declining real estate 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 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."
If we experience losses in the value of our leased equipment securing the leases
we hold, our revenues may be reduced.
The equipment which secures the leases we hold 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 which may result in reduced revenues. See
"Business--Lending and Leasing Activities."
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If we are unable to implement an effective hedging strategy, our net income may
be reduced.
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 the use of derivative financial
instruments such as futures, interest rate swaps and forward pricing of
securitizations. 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, this
interest rate hedging strategy may not be effective 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."
Competition from other lenders could adversely affect our profitability.
The lending 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 profitability. Our profitability and
the profitability of other similar lenders may attract additional competitors
into this market. See "Business -- Competition."
An economic downturn in the eastern half of the United States could result in
reduced revenues.
We currently originate loans primarily in the eastern half 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 half of
the country would more greatly affect us than if our lending business were more
geographically diversified. As a result, an economic downturn in this region
could result in reduced revenues. See "Business -- Lending and Leasing
Activities" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Our securitization agreements require us to retain some risk on loans that do
not meet the requirements in these agreements which could result in a reduction
in revenues.
Although we sell substantially all of the loans we originate through
securitizations, all of the securitization agreements require that we replace or
repurchase loans 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 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 conventional
first mortgage lending activities. We are also subject to examinations by state
regulatory authorities with respect to originating, processing, underwriting,
selling and servicing home equity loans and conventional first mortgage loans.
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.
Federal and state governments have recently begun to consider, and in
some instances have adopted, legislation to restrict lenders' ability to charge
certain rates and fees in connection with subprime residential mortgage loans,
loans to borrowers with problem credit. Such legislation also imposes various
loan term restrictions, e.g., limits on balloon loan features. Frequently
referred to generally as "predatory lending" legislation, such legislation may
limit our ability to impose certain fees, charge certain interest rates on
certain consumer loans and may impose additional regulatory restrictions on our
business.
Although we believe that we have implemented systems and procedures to
facilitate compliance with the foregoing requirements, more restrictive laws,
rules and regulations may be adopted in the future that could make compliance
more difficult or expensive and hinder our ability to operate profitability. See
"Business -- Regulation."
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Claims by borrowers or investors could result in reduced revenues.
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 result in reduced revenues. 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. 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 which could disrupt
operations and result in reduced revenues. See "Management."
Environmental laws and regulations may restrict our ability to foreclose on
loans secured by real estate or increase costs associated with those loans which
could reduce our revenues.
Our ability to foreclose on the real estate collateralizing our loans,
may be limited by environmental laws which pertain primarily to commercial
properties that require, a current or previous owner or operator of real
property 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.
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.
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."
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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 $342.1 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, but are not limited to:
o financing the future growth of our loan portfolios and capital
expenditures;
o the repayment of warehouse credit facilities, lines of credit
and our maturing debt;
o funding our overcollateralization requirements in connection
with securitizations;
o paying interest and operating expenses;
o possible future acquisitions of related businesses or assets,
although none are currently contemplated;
o repurchasing our common stock; and
o general operating activities.
In addition, we may use a portion of the proceeds to repay maturing
notes with maturities of 1 day to 10 years and interest rates ranging from 6.15%
to 12.90%. The indebtedness to be discharged which was issued within one year
was used for purposes set forth above. 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 -- Since we do not set aside funds to
repay the debt securities offered, holders of the debt securities must rely on
our revenues for operations and other sources for repayment."
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, which record holder is referred to as the holder or registered holder
in this document and in the indenture. Also upon acceptance of an order, we will
send each holder a transaction statement which will indicate our acceptance of
the order.
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The holders of investment notes issued in a book-entry form will not
receive or be entitled to receive physical delivery of a note or certificate
evidencing such indebtedness. The holders 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 holder of 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 holders 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 notations 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 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. Holders 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 change in election form is required. Any interest not otherwise
paid on an interest payment date will be paid at maturity.
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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 the holder
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.
Optional Renewal Programs. From time to time, we may offer in our sole
discretion certain investment note holders the ability to extend the maturity of
an existing investment note. This extension option if and when offered shall not
be subject to the 90 day notice of redemption described herein. If extended
pursuant to this option, a new note will be issued in accordance with the terms
and interest rate prevailing at the extension date.
24
<PAGE>
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.
Redemption by Us. We have the right to redeem any investment note at
any time, prior to its stated maturity, upon 90 days written notice to the
holder of the 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.
Investment notes with remaining maturities of one year or greater may be
redeemed at the election of the holder, who is a natural person, 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 registered holders of an investment note, the election to
redeem will apply when either registered holder 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 holder will not apply. If the investment note is held by a person who
is not a natural person such as a trust, partnership, corporation or other
similar entity, the redemption upon death or disability does 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.
25
<PAGE>
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 that purchaser to the account of the purchaser
of the money market note which record holder is referred to as the holder or
registered holder in this document and in the indenture. Upon acceptance of the
purchaser's order, we will send each purchaser a transaction 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 the holder's
ability to transfer the record ownership of the money market notes.
The registered holders 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 holders 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 registered holders 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 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.
26
<PAGE>
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
27
<PAGE>
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 insufficient funds, the dishonor of a draft, a stop payment order,
account research and other services.
If checks are lost, stolen or otherwise held or used by an unauthorized
individual, the rightful holder of the money market note checks must notify us
within 24 hours; otherwise we will not be responsible for any misappropriation
of the underlying funds.
In our sole discretion, check writing capabilities may be deferred for
up to 30 days from the date of opening an account. In such event, the money
market notes may be redeemed upon 10 business days written notice to us.
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 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 have the right to redeem a money market note at
any time upon 30 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.
28
<PAGE>
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
transaction statement reflecting the ownership of a debt security to each
purchaser upon our acceptance of the order. The transaction 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 transaction
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.
Right of Set-off In Certain Circumstances. Subject to the provisions of
applicable law, if the holder of an investment note or a money market note is a
borrower or guarantor on a loan, lease or other obligation owned by one of our
direct or indirect subsidiaries or affiliates, and that obligation becomes
delinquent or otherwise in default, we may have the right to set-off principal
and interest payments due on the investment note or money market note against
all sums due by the holder to our subsidiary or affiliate pursuant to the
set-off terms contained in the loan, lease, other indebtedness or the guarantee.
If we elect to exercise our right of set-off, the investment note or money
market note shall automatically be deemed redeemed as of the date of set-off
without regard to any notice period otherwise applicable to any redemption by
us.
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. The debt securities are not
guaranteed by any of our subsidiaries.
29
<PAGE>
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 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 May 31, 2000 and March 31, 2000, there
was $140.4 million, $57.3 million, respectively, of senior debt and subsidiary
debt outstanding. There is no limitation under the indenture on the amount of
senior debt or subsidiary debt we can incur. 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 May 31, 2000 and March 31, 2000, we had
$369.9 million and $329.0 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 (other than the proposed industrial loan company) 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 -- Since the debt securities are unsecured and second in right
of repayment to our senior debt borrowed from institutional lenders, in the
event of insolvency, debt holders would be repaid only if funds remain after the
repayment of our senior debt."
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;
30
<PAGE>
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 (i) the day which is five business days after the receipt by
representatives of senior debt of such written notice of acceleration or (ii)
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.
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):
31
<PAGE>
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;
32
<PAGE>
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;
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.
33
<PAGE>
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.
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>
Nine Months Ended
March 31, Year Ended June 30,
-------------------- ---------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data: (Dollars in thousands, except per share data)
Revenues:
Gain on sale of loans and leases....... $ 63,025 $ 45,789 $ 65,640 $ 41,316 $ 20,043 $ 8,721 $ 1,350
Interest and fees...................... 26,122 13,416 17,424 17,386 5,584 3,245 4,058
Other.................................. 3,416 2,004 3,360 633 335 129 143
-------- -------- -------- -------- -------- -------- -------
Total revenues........................... 92,563 61,209 86,424 59,335 25,962 12,095 5,551
Total expenses........................... 73,458 45,078 64,573 41,445 16,960 8,974 4,657
-------- -------- -------- -------- -------- -------- -------
Operating income before income taxes..... 19,105 16,131 21,851 17,890 9,002 3,121 894
Income taxes............................. 7,642 5,704 7,763 6,435 3,062 802 313
-------- -------- -------- -------- -------- -------- -------
Net income............................... $ 11,463 $ 10,427 $ 14,088 $ 11,455 $ 5,940 $ 2,319 $ 581
======== ======== ======== ======== ======== ======== =======
Per Common Share Data:
Basic earnings per common share(a)..... $ 3.32 $ 2.82 $ 3.83 $ 3.10 $ 2.03 $ 0.96 $ 0.26
Diluted earnings per common share(a)... 3.23 2.74 3.72 2.98 1.95 0.96 0.26
Cash dividends declared per common
share .............................. 0.22 0.115 0.165 0.06 0.06 0.03 --
</TABLE>
------------------
(a) Amounts for the nine months ended March 31, 1999 and for the years ended
June 30, 1999, 1998, 1997, 1996 and 1995 have been retroactively adjusted
to reflect the effect of a 5% stock dividend declared August 18, 1999 as
if the additional shares had been outstanding for each period presented.
<TABLE>
<CAPTION>
March 31, June 30,
--------- --------------------------------------------------
2000 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data: (In thousands)
Cash and cash equivalents.................. $ 45,399 $22,395 $ 4,486 $ 5,014 $ 5,345 $ 4,734
Loan and lease receivables, net
Available for sale...................... 33,259 33,776 62,382 35,712 18,003 8,669
Other................................... 10,819 6,863 4,096 1,144 534 328
Interest-only and residual strips.......... 258,772 178,218 95,913 37,507 32,639 13,448
Receivable for sold loans and leases....... 62,651 66,086 2,552 960 26 86
Servicing rights........................... 66,081 43,210 18,473 8,083 5,907 1,388
Total assets............................... 533,757 396,301 226,551 103,989 46,894 22,175
Subordinated Debt.......................... 329,038 211,653 115,182 56,486 33,620 17,800
Total liabilities.......................... 467,265 338,055 183,809 73,077 42,503 20,031
Stockholders' equity....................... 66,492 58,246 42,742 30,912 4,392 2,143
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
-------------------- ------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data: (Dollars in thousands, except per share data)
Originations:
Business Purpose Loans............. $ 81,056 $ 42,721 $ 64,818 $ 52,335 $ 38,721 $ 28,872 $ 18,170
Home Equity Loans.................. 668,704 449,891 634,820 328,089 91,819 36,479 16,963
Conventional First Mortgage Loans.. 31,590 50,230 66,519 33,671 -- -- --
Equipment Leases................... 19,631 76,745 96,289 70,480 8,004 5,967 2,220
Loans and Leases sold:
Securitizations.................... 710,993 523,694 777,598 384,700 115,000 36,506 9,777
Other.............................. 77,645 83,952 105,751 51,594 3,817 19,438 31,948
Total managed loan and lease
portfolio........................... 1,697,216 1,011,758 1,176,918 559,398 176,651 59,891 17,774
Average loan/lease size:
Business Purpose Loans............. 88 76 80 83 78 78 71
Home Equity Loans.................. 69 82 74 62 51 47 46
Conventional First Mortgage Loans.. 151 164 165 154 -- -- --
Equipment Leases................... 19 24 23 21 11 11 12
Weighted average interest rate on
Loans and leases originated:
Business Purpose Loans............. 15.96% 15.99% 15.91% 15.96% 15.91% 15.83% 16.05%
Home Equity Loans.................. 11.19 10.82 11.05 11.95 11.69 9.94 12.68
Conventional First Mortgage Loans.. 8.57 7.34 7.67 8.22 -- -- --
Equipment Leases................... 11.25 11.45 11.40 12.19 15.48 17.22 15.85
At or For the
Nine Months
Ended March 31, At or For the Year Ended June 30,
----------------- --------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
Financial Ratios:
Return on average assets................ 3.29% 4.84% 4.56% 6.93% 7.87% 6.71% 3.37%
Return on average equity................ 24.35 28.88 28.10 31.10 33.65 70.96 31.36
Total delinquencies as a percentage
of total portfolio serviced, at end
of period............................ 3.18 3.22 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 .68 .85 .16 .34 1.01 4.29
Loan and lease losses as a percentage
of the average total portfolio
serviced during the period............ .24 .10 .12 .12 .07 .33 .66
Pre-tax income as a percentage of total
revenues.............................. 20.64 26.35 25.28 30.15 33.99 25.81 16.11
Ratio of earnings to fixed charges....... 1.69 1.97 1.92 2.23 2.56 1.97 1.54
</TABLE>
36
<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 nine months ended March 31, 2000 and 1999 and
the fiscal 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.
General
American Business Financial Services, Inc. is a diversified financial
services company operating throughout the United States. We originate, sell and
service business purpose loans, home equity loans and conventional first
mortgage loans through our principal direct and indirect subsidiaries. We also
underwrite, process and purchase home equity loans through the Bank Alliance
Program whereby we purchase home equity loans from financial institutions that
do not meet the underlying guidelines of the selling institutions for loans held
in portfolio but meet our underwriting criteria. Loans originated primarily
consist of fixed rate loans secured by first or second mortgages on single
family residences. Our customers include credit impaired borrowers and other
borrowers who would qualify for loans from traditional sources but who are
attracted to our loan products due to our personalized service, and timely
response to loan applications. We originate loans through a combination of
channels including a centralized processing center located in Bala Cynwyd,
Pennsylvania and a retail branch network of 18 offices. In addition, we sell
subordinated debt securities to the public, the proceeds of which are used to
fund loan originations and our operations.
Due to the current rising interest rate environment, we expect our
ability to originate loans at rates that will maintain our current level of
profitability will become more difficult. We are addressing this challenge by
carefully monitoring our product pricing, the actions of our competition and
market trends in order to continue to originate loans in as profitable a manner
as possible.
Prior to December 31, 1999 we also originated equipment leases.
Effective December 31, 1999, we de-emphasized the leasing origination business
in keeping with our strategy of focusing on our most profitable lines of
business. We are continuing to service the remaining leases in our managed
portfolio, which totaled $134.8 million in gross receivables at March 31, 2000
and we may from time to time consider originating or purchasing new leases.
A recent focus by certain governmental regulatory agencies relates to
predatory lending practices by companies in our industry. Sanctions have been
imposed on certain industry competitors for practices including but not limited
to charging borrowers excess fees, imposing higher interest rates than the
borrower's credit risk warrants and failing to disclose the material terms of
loans to the borrowers. We have reviewed our lending policies in light of these
actions against other lenders and we believe we are in compliance with all
lending related guidelines. To date, no sanctions or recommendations from
governmental regulatory agencies regarding our practices related to predatory
lending have been imposed. We are unable to predict whether state or federal
regulatory authorities will require changes in our lending practices in the
future or the impact of such changes on our profitability. See "Risk Factors -
Our lending business is subject to government regulation and licensing
requirements which may hinder our ability to operate profitably."
37
<PAGE>
Securitizations
The ongoing securitization of loans is a central part of our current
business strategy. We sell loans and have in the past sold leases through
securitizations with servicing retained in order to fund additional loan
originations and to provide additional sources of revenue through retained
mortgage and lease servicing rights. For the nine months ended March 31, 2000,
we completed securitizations aggregating $711.0 million, consisting of $78.9
million in business purpose loans, $622.9 million in home equity loans and $9.2
million in equipment leases. 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
$63.0 million, $65.6 million, $41.3 million and $20.0 million, respectively, for
the nine months ended March 31, 2000 and 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 68.1%, 76.0%, 69.6% and 75.5% for the nine
months ended March 31, 2000 and 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.
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 serviced. Any substantial reduction in the size or availability of the
securitization market for loans could have a material adverse effect on our
results of operations and financial condition.
Recent movements in market interest rates may negatively impact the
profitability of our securitizations due to increases in rates demanded in the
asset backed securities markets. We are continuously monitoring market rate
fluctuations and our product pricing in order to best manage these changes and
maintain our current profitability on securitizations. See "Risk Factors - A
change in market interest rates may result in a reduction in our profits."
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 through securitizations requires building an inventory of loans 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 may be unfavorably impacted to the extent we
hold fixed-rate mortgage loans in our available for sale portfolio prior to
securitization. A significant variable affecting the gain on sale of loans in a
securitization is the spread between the average coupon rate on fixed rate
loans, and the weighted average pass-through rate to investors for interests
issued in connection with a securitization. Although the loan coupon rate is
fixed at the time the loan 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. Therefore, if market rates required by investors increase
prior to securitization of the loans, the spread between the average coupon rate
on the loans and the pass-through rate to investors may be reduced or
eliminated. See "Interest Rate Risk Management" for further detail. In addition,
due to the timing difference between the period when costs are incurred in
connection with the origination of loans 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.
38
<PAGE>
Our business strategy is dependent upon our ability to identify and
emphasize lending related activities that will provide us with the most economic
value. The implementation of this strategy will depend in large part on a
variety of factors outside of our control, including, but not limited to, our
ability to obtain adequate financing on favorable terms, profitably securitize
our loans 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 strategy, which would adversely affect our
results of operations and financial condition.
Subordinated Debt and Other Borrowings
We also rely upon funds generated by the sale of subordinated debt and
other borrowings to fund our operations. At March 31, 2000, $329.0 million of
subordinated debt was outstanding and credit facilities and lines of credit
totaling $323.1 million were available, of which $81.8 million was drawn upon on
such date. We expect to continue to rely on such borrowings to fund loans prior
to securitization.
Securitization Accounting Considerations
When we securitize our loans and leases by selling them to trusts we
receive cash and a retained interest in the securitized loans and leases which
is called a residual interest. The trust issues multi-class securities, which
derive their cash flows from the pool of securitized loans and leases. These
securities, which are senior to our residual interest in the trusts, are sold to
public investors. In addition, when we securitize our loans and leases we retain
the right, for a fee, to service the loans and leases. Servicing includes
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.
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 servicing rights retained, based
upon their relative fair values.
The calculation of the fair value of residual interests 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 prepayment rate of
loans may be affected by a variety of economic and other factors, including
prevailing interest rates and the availability of alternative financing to
borrowers. The effect of those factors on loan prepayment rates may vary
depending on the type of loan. 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 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.
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. 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.
39
<PAGE>
Interest-only and residual strips and servicing rights are periodically
revalued 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. At March 31, 2000,
investments in residual interests in securitizations totaled $258.8 million
including investments in interest-only strips of $189.2 million and investments
in overcollateralization of $69.6 million.
The following chart presents certain key assumptions used in the
initial valuation of interest-only and residual strips and servicing rights from
securitizations during the third quarter of fiscal 2000, and the March 31, 2000
revaluation performed on our interest-only and residual strips and servicing
rights from previous securitizations.
<TABLE>
<CAPTION>
Quarterly
Revaluations
2000-1 of Previous
Securitization Securitizations
==========================================================================================
<S> <C> <C>
Discount rates
Home equity loans 11.0% 11.0%
Business purpose loans 11.0% 11.0%
Business equipment leases -- (e) 11.0%
Annual prepayment rate assumptions
Home equity loans 2.0 - 24.0% (a) 2.0 - 24.0% (b)
Business purpose loans 3.0 - 10.0% (c) 3.0 - 13.0% (c)
Business equipment leases -- (e) -- (d)
Actual prepayment rate experience (see table on page 41)
Annual credit loss rate (default rate) assumptions
Home equity loans
First lien 0.25% 0.25%
Second lien 0.70% 0.25-0.70%
Business purpose loans
First lien 0.25% 0.25%
Second lien 0.70% 0.25-0.70%
Business equipment leases -- (e) 0.50%
Actual cumulative credit losses (default rate)
Home equity loans -- 0.14% (f)
Business purpose loans -- 0.22% (f)
Business equipment leases -- 1.13%
==========================================================================================
</TABLE>
-----------------------
(a) Ramped over 18 months
(b) Ramped over 12 to 18 months
(c) Ramped over 24 months
(d) Residual values are continuously adjusted based on actual experience.
(e) There were no business equipment lease securitizations during the third
quarter.
(f) See "- Managed Portfolio Quality - Loss Experience" for a summary of
cumulative credit losses by loan securitization for further detail
40
<PAGE>
The following table summarizes actual prepayment experience by loan
securitization trust.
<TABLE>
<CAPTION>
Assumption Utilized for Actual Annualized
March 31, 2000 Valuation Prepayment Experience
------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Business Business Home
Purpose Home Equity Blended Purpose Equity Blended
Trust Loans Loans Rate Loans Loans Rate
--------- --------- ----------- -------- --------- -------- --------
1996-1 13.00% 24.00% 17.99% 19.67% 18.15% 19.02%
1996-2 13.00 24.00 18.77 20.35 26.85 24.06
1997-1 13.00 24.00 20.25 18.05 25.09 22.95
1997-2 13.00 24.00 20.83 16.41 24.64 22.56
1998-1 13.00 24.00 22.21 16.38 21.74 20.94
1998-2 10.83(a) 24.00 22.07 9.35 19.80 18.47
1998-3 9.21(a) 24.00 22.73 8.34 11.99 11.69
1998-4 7.58(a) 24.00 22.23 14.95 11.48 11.64
-------- ------- ------- ------- ------- -------
Weighted average-
seasoned trusts (d) 11.54% 24.00% 21.90% 14.59% 16.77% 16.48%
======== ======= ======= ======= ======= =======
1999-1 4.58%(b) 14.67%(c) 13.74% 5.73% 9.47% 9.13%
1999-2 3.33 (b) 10.67(c) 9.67 9.95 7.16 7.46
1999-3 2.08 (b) 6.67(c) 6.11 2.14 5.90 5.47
1999-4 0.83 (b) 2.67(c) 2.46 0.00 4.14 3.64
</TABLE>
------------------------
(a) Ramping to 13% over 24 months.
(b) Ramping to 10% over 24 months.
(c) Ramping to 24% over 18 months.
(d) Seasoned trusts have been established for one year or more
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 March 31, 2000,
servicing rights totaled $66.1 million, compared to $43.2 million at June 30,
1999.
41
<PAGE>
Whole Loan Sales
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.
Results of Operations
Overview
For the nine months ended March 31, 2000, net income increased $1.1
million, or 9.9% to $11.5 million from $10.4 million for the same period in
1999. Basic earnings per share increased $0.50 to $3.32 for the nine months
ended March 31, 2000, on average common shares of 3,451,000, compared to $2.82
on average common shares of 3,700,000 for the same period in fiscal 1999.
Diluted earnings per share increased $0.49 to $3.23 for the nine months ended
March 31, 2000, on average common shares of 3,538,000 compared to $2.74 on
average common shares of 3,810,000 for the same period in 1999. 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 nine
months ending March 31, 1999, fiscal 1999, and 1998 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 for all periods
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. For the nine months ended March 31, 2000, interest
accretion earned on interest-only strips also contributed significantly to the
increases in net income and earnings per share.
Dividends of $0.22 per share were paid for the nine months ended March
31, 2000 compared to dividends of $0.115 per share for the nine months ended
March 31, 1999. In the first quarter of fiscal 2000, we increased our quarterly
dividend by 40% to $0.07 per share and by an additional 14% to $0.08 per share
in the third quarter of fiscal 2000. 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 6.8% for the nine months ended
March 31, 2000 compared to 4.2% for fiscal 1999, and 1.9% for fiscal 1998.
42
<PAGE>
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.
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999.
Summary Financial Results
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
-------------------- Percentage ------------------- Percentage
2000 1999 Increase 2000 1999 Increase
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues...................... $34,146 $22,969 48.7% $92,563 $61,209 51.2%
Total expenses...................... $27,621 $17,487 58.0% $73,458 $45,078 63.0%
Net income.......................... $ 3,915 $ 3,509 11.6% $11,463 $10,427 9.9%
Return on average equity............ 24.19% 27.48% 24.35% 28.88%
Return on average assets............ 3.06% 4.45% 3.29% 4.84%
Earnings per share:
Basic............................ $ 1.16 $ 0.95 22.1% $ 3.32 $ 2.82 17.7%
Diluted.......................... $ 1.12 $ 0.92 21.7% $ 3.23 $ 2.74 17.9%
Dividends declared per share........ $ 0.08 $ 0.05 60.0% $ 0.22 $ 0.115 91.3%
</TABLE>
Net Income. For the third quarter of fiscal 2000, net income increased
$0.4 million, or 11.6%, to $3.9 million from $3.5 million for the third quarter
of fiscal 1999. Basic earnings per common share increased to $1.16 on average
common shares of 3,375,000 compared to $0.95 per share on average common shares
of 3,703,000 for the third quarter of fiscal 1999. Diluted earnings per common
share increased to $1.12 on average common shares of 3,502,000 compared to $0.92
per share on average common shares of 3,806,000 for the third quarter of fiscal
1999.
For the nine months ended March 31, 2000, net income increased $1.1
million, or 9.9%, to $11.5 million from $10.4 million for the nine months ended
March 31, 1999. Basic earnings per common share increased to $3.32 on average
common shares outstanding of 3,451,000 compared to $2.82 per share on average
common shares outstanding of 3,700,000 for the nine months ended March 31, 1999.
Diluted earnings per common share increased to $3.23 on average common shares
outstanding of 3,538,000 compared to $2.74 per share on average common shares
outstanding of 3,810,000 for the nine months ended March 31, 1999.
Increases in net income and earnings per share primarily resulted from
the growth in the volume of loans originated and securitized during the periods,
interest accretion earned on interest-only strips and increases in the
collection of fee income due to growth in loans and leases available for sale
and securitized loans and leases for which servicing was retained, referred to
as the total managed portfolio.
43
<PAGE>
As previously reported, our Board of Directors authorized the
repurchase of up to 10% of the outstanding shares of our common stock. On
January 24, 2000, the Board of Directors authorized the repurchase of an
additional 338,000 shares, representing 10.0% of the then outstanding shares. In
the third quarter of fiscal 2000, 18,000 shares were repurchased representing
0.5% of the outstanding shares. For the first nine months of fiscal 2000,
258,910 shares were repurchased representing 7.2% of the outstanding shares at
the beginning of the fiscal year. The impact of the share repurchase program was
an increase of diluted earnings per share by $0.05 and $0.09 for the three and
nine-month periods ended March 31, 2000, respectively.
Total Revenues. For the third quarter of fiscal 2000, total revenues
increased $11.1 million, or 48.7%, to $34.1 million from $23.0 million for the
third quarter of fiscal 1999. For the first nine months of fiscal 2000, total
revenues increased $31.4 million, or 51.2%, to $92.6 million from $61.2 million
for the first nine months of fiscal 1999. Growth in total revenue was the result
of increased gains on sales of loans and leases in the first nine months of
fiscal 2000, increases in interest accretion earned on our interest-only strips,
increases in interest and fees collected on loans and leases originated, and
increases in servicing income due to the growth of the total managed portfolio.
Gain on Sale of Loans and Leases. Gain on sale of loans and leases
increased $6.0 million, or 34.4%, to $23.4 million for the third quarter of
fiscal 2000 from $17.4 million in the third quarter of fiscal 1999. The increase
was the result of selling $264.0 million of loans through securitizations in the
third quarter of fiscal 2000, including, $27.2 million of business purpose loans
and $236.8 million of home equity loans compared to $16.4 million of business
purpose loans, $168.6 million of home equity loans and $19.0 million of
equipment leases in the third quarter of fiscal 1999.
For the nine months ended March 31, 2000, gain on sale of loans and
leases increased $17.2 million, or 37.6%, to $63.0 million from $45.8 million
for the nine months ended March 31, 1999. The increase was the result of the
securitization of $78.9 million of business purpose loans and $622.9 million of
home equity loans. Securitizations in the first nine months of fiscal 1999
included $41.7 million of business purpose loans, $423.3 million of home equity
loans and $67.7 million of equipment leases.
Gain on sale of loans and leases as a percentage of loans and leases
securitized was 8.9% in fiscal 2000, compared to 8.7% in fiscal 1999. Factors
impacting the gain percentage included increases in the relative percentage of
business purpose loans to home equity loans securitized. Business purpose loans
have a higher coupon rate, which results in an increased value of our residual
interests in the pool of securitized loans. In addition, due to increases in the
volume of loans originated with prepayment fees, we have reduced the annual
prepayment rate assumption on business loans and lengthened the ramping rate for
prepayments on home equity loans for fiscal 2000 securitizations. These factors
which increased the gain on sale as a percentage of loans and leases securitized
were offset by the impact of the January 1, 1999 adoption of the Statement of
Financial Accounting Standards 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). 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. In accordance with the
provisions of SFAS No. 134, as of January 1, 1999 we reclassified our 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. The adoption of SFAS No. 134 did not have a
material effect on our financial condition, but reduced gains on sale by $5.9
million pre-tax in the first six months of fiscal 2000. Fair value adjustments
in the third quarter of both fiscal 2000 and 1999 were recognized as a component
of comprehensive income.
44
<PAGE>
The following schedule details our loan and lease originations (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- --------------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Business purpose loans $ 28,815 $ 16,771 $ 81,056 $ 42,721
Home equity loans 265,966 169,725 700,294 500,121
Equipment leases 22 24,441 19,631 76,745
----------- ----------- ----------- ----------
$ 294,803 $ 210,937 $ 800,981 $ 619,587
=========== =========== =========== ==========
</TABLE>
Loan originations for our subsidiary, American Business Credit, Inc.,
which offers business purpose loans secured by real estate, increased $12.0
million, or 71.8%, to $28.8 million for the third quarter of fiscal 2000 from
$16.8 million in the third quarter of fiscal 1999. For the nine months ended
March 31, 2000, loan originations increased $38.4 million, or 89.7%, to $81.1
million from $42.7 million for the nine months ended March 31, 1999. This
increase was attributable to geographic expansion of American Business Credit's
lending program as well as refocused marketing efforts. In the third quarter of
fiscal 2000, American Business Credit launched a web site, www.abceasyloan.com
in order to increase its distribution channels for business purpose loans.
Home equity loans originated by our Consumer Mortgage Group, which
includes Upland Mortgage, New Jersey Mortgage and Investment Corp. and
Processing Service Center, Inc., increased $96.3 million, or 56.7%, to $266.0
million for the third quarter of fiscal 2000 from $169.7 million for the third
quarter of fiscal 1999. For the nine months ended March 31, 2000, loan
originations increased $200.2 million, or 40.0%, to $700.3 million from $500.1
million for the nine months ended March 31, 1999. The Consumer Mortgage Group
has redirected its marketing mix to focus on targeted direct mail, which
delivers more leads at a lower cost than broadcast marketing channels. The
Consumer Mortgage Group has continued to phase in advanced Internet technology
through its web site www.UplandMortgage.com. In addition to the ability to take
online loan applications and utilize an automated rapid credit approval process,
both of which reduce time and manual effort required for loan approval, the site
features our proprietary patent-pending Easy Loan Advisor, which provides
personalized services and solutions to retail customers through interactive web
dialog.
45
<PAGE>
Interest and Fees. Interest and fee income for the third quarter of
fiscal 2000 increased $0.5 million, or 10.6%, to $4.7 million from $4.2 million
in the third quarter of fiscal 1999. For the nine months ended March 31, 2000,
interest and fee income increased $1.5 million, or 11.8%, to $14.2 million from
$12.7 million for the nine months ended March 31, 1999. Interest and fee income
consists primarily of interest income earned on loans and leases while held in
our portfolio, premiums earned on loans sold with servicing released and other
ancillary fees collected in connection with loan and lease originations.
Interest income decreased $0.1 million, or 6.0%, to $1.7 million for
the third quarter of fiscal 2000 from $1.8 million in the third quarter of
fiscal 1999. During the nine months ended March 31, 2000, interest income
decreased $0.5 million, or 7.5%, to $5.3 million from $5.8 million for the nine
months ended March 31, 1999. The decreases are attributable to a shortening of
the time loans remain on our balance sheet prior to securitization.
Fee income increased $0.6 million, or 23.0%, to $3.0 million from $2.4
million for the third quarter of fiscal 1999. For the nine months ended March
31, 2000, fee income increased $2.0 million, or 27.8%, to $8.9 million from $6.9
million for the nine months ended March 31, 1999. The increases for the three
and nine-month periods were the result of increases in the volume of loans
originated during the periods.
Interest Accretion on Interest-only Strips. Interest accretion
represents the interest component of cash flows received on interest-only
strips. Interest accretion of $4.8 million and $11.9 million was earned in the
three-month and nine-month periods ended March 31, 2000, respectively, compared
to $0.3 million and $0.7 million in the three-month and nine-month periods ended
March 31, 1999, respectively. The increases in interest accretion reflect the
growth in interest-only strips and the maturing of the interest-only strip
portfolio in terms of generating cash flow.
Servicing Income. Servicing income is comprised of contractual and
ancillary fees collected on securitized loans and leases less amortization of
the servicing rights assets recorded at the time loans and leases are
securitized. For the third quarter of fiscal 2000, servicing income increased
$0.2 million, or 23.2%, to $1.2 million from $1.0 million for the third quarter
of fiscal 1999. These balances are comprised of cash collections of contractual
servicing and other ancillary fees of $3.7 million, net of amortization of
servicing rights of $2.5 million for the three months ended March 31, 2000 and
collections of contractual servicing and other ancillary fees of $2.5 million
net of amortization of servicing rights of $1.5 million for the three months
ended March 31, 1999. For the nine months ended March 31, 2000, servicing income
increased $1.4 million, or 73.5%, to $3.4 million from $2.0 million for the nine
months ended March 31, 1999. These balances were comprised of cash collections
of contractual servicing and other ancillary fees of $12.0 million net of
amortization of contractual servicing rights of $8.6 million for the nine months
ended March 31, 2000 and collections of contractual servicing and other
ancillary fees of $5.7 million net of amortization of servicing rights of $3.7
million for the nine months ended March 31, 1999.
46
<PAGE>
As an annualized percentage of the average managed portfolio, servicing
income for the quarter decreased to 0.31%, from 0.49% in the prior year. The
servicing income annualized percentage for the first nine months of fiscal 2000
was 0.34%, compared to 0.39% for the first nine months of fiscal 1999. These
decreases were the result of a decrease in the percentage of loans prepaying
from the third quarter of fiscal 1999. In the three-month period ended March 31,
2000, prepayment fees collected as a percentage of the average managed portfolio
were 0.08% compared to 0.13% for the three-month period ended March 31, 1999. In
addition, amortization of the servicing asset was increased for certain
securitizations based on an analysis of actual ancillary fee collection
experience for each pool of loans in the securitization trust. In the
three-month period ended March 31, 2000, amortization as a percentage of the
average managed portfolio was 0.21% compared to 0.17% for the three-month period
ended March 31, 1999.
Total Expenses. For the third quarter of fiscal 2000, total expenses
increased $10.1 million, or 58.0%, to $27.6 million from $17.5 million for the
third quarter of fiscal 1999. Total expenses increased $28.4 million, or 63.0%,
to $73.5 million for the nine months ended March 31, 2000 as compared to $45.1
million for the nine months ended March 31, 1999. As described in more detail
below, this increase was a result of increased interest expense attributable to
the sale of subordinated debt and borrowings used to fund loan and lease
originations and increases in sales and marketing, and general and
administrative expenses related to growth in loan originations, the growth of
the total managed portfolio and the continued building of support area
infrastructure and Internet capabilities.
Interest Expense. For the third quarter of fiscal 2000, interest
expense increased $4.0 million, or 65.1%, to $10.1 million from $6.1 million for
the third quarter of fiscal 1999. The increase was attributable to an increase
in the amount of subordinated debt outstanding during the third quarter of
fiscal 2000, the proceeds of which were used to fund loan originations, the
costs of originating loans and investments in systems technology and Internet
capabilities required to position us for future growth. Average subordinated
debt outstanding during the three months ended March 31, 2000 was $300.2 million
compared to $166.7 million during the three months ended March 31, 1999. Average
interest rates paid on subordinated debt outstanding increased to 9.96% during
the three months ended March 31, 2000 from 9.32% during the three months ended
March 31, 1999. Rates offered on subordinated debt increased in response to
general increases in market rates and to attract funds with a longer average
maturity. The average outstanding balances under warehouse lines were $111.5
million during the three months ended March 31, 2000, compared to $130.5 million
during the three months ended March 31, 1999. This decrease was due to the
increased utilization of proceeds from the sale of subordinated debt to fund
loan originations.
During the first nine months of fiscal 2000 interest expense increased
$10.5 million, or 67.0%, to $26.2 million from $15.7 million for the nine months
ended March 31, 1999. Average subordinated debt outstanding during the nine
months ended March 31, 2000 was $260.0 million compared to $143.5 million during
the nine months ended March 31, 1999. The average outstanding balances under
warehouse and other credit lines were $110.5 million during the nine months
ended March 31, 2000 compared to $99.2 million during the nine months ended
March 31, 1999. Average interest rates paid on subordinated debt increased to
9.67% for the first nine months of fiscal 2000 from 9.31% during the comparable
nine-month period. Average rates paid on subordinated debt for the fiscal 2000
nine-month period increased due to the factors listed above.
47
<PAGE>
Provision for Credit Losses. The provision for credit losses on
portfolio loans and leases for the third quarter of fiscal 2000 decreased $0.2
million, or 38.9%, to $0.3 million from $0.5 million for the quarter ended March
31, 1999. The decrease was due to decreased net charge-offs in the three months
ended March 31, 2000 which resulted in a lower provision required to maintain
the allowance for credit losses. Net charge-offs were $0.2 million in the three
months ended March 31, 2000 compared to $0.5 million in the three months ended
March 31, 1999. The difference between the two three-month period's charge-offs
was attributable to losses on securitized loans and leases absorbed on our books
in the third quarter of fiscal 1999. The provision for credit losses on
portfolio loans and leases for the nine months ended March 31, 2000 increased
$0.3 million, or 39.6%, to $1.0 million as compared to $0.7 million for the nine
months ended March 31, 1999. The increase in the provision for the nine-month
period was due to the recording of additional reserves for delinquent leases in
the second quarter of fiscal 2000. See "Managed Portfolio Quality - loss
experience" for further detail.
An allowance for credit losses for portfolio loans and leases 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 $0.5 million
at March 31, 2000 compared to $0.7 million at June 30, 1999. The changes in the
allowance for credit losses are due primarily to the write off of $1.0 million
of equipment lease receivables in fiscal 2000.
48
<PAGE>
The following table summarizes the changes in the allowance for credit
losses by loan and lease type (in thousands).
<TABLE>
<CAPTION>
Business Home
Purpose Equity Equipment
Three Months Ended March 31, 2000 Loans Loans Leases Total
------------------------------------------------ -------- ------ --------- -----
<S> <C> <C> <C> <C>
Balance at beginning of period............... $ 23 $160 $ 156 $ 339
Provision for credit losses.................. 108 (12) 235 331
(Charge-offs) recoveries, net................ (86) -- (115) (201)
----- ---- ----- -----
Balance at end of period..................... $ 45 $148 $ 276 $ 469
===== ==== ===== =====
Business Home
Purpose Equity Equipment
Nine Months Ended March 31, 2000 Loans Loans Leases Total
------------------------------------------------ -------- ------ --------- -----
Balance at beginning of period............... $ 26 $243 $ 43 $ 702
Provision for credit losses.................. 192 (1) 849 1,040
(Charge-offs) recoveries, net................ (173) (94) (1,006) (1,273)
----- ---- ------- -------
Balance at end of period..................... $ 45 $148 $ 276 $ 469
===== ==== ======= =======
</TABLE>
Charge-offs related to securitized loans and leases are generally
absorbed by securitization trusts. Therefore, 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
"Securitization Accounting Considerations" for more information regarding these
credit loss assumptions and "Managed Portfolio Quality - Loss Experience" for
information regarding actual losses.
49
<PAGE>
Sales and Marketing Expenses. For the third quarter of fiscal 2000,
sales and marketing expenses increased $0.3 million, or 4.3%, to $6.1 million
from $5.8 million for the third quarter of fiscal 1999. For the nine months
ended March 31, 2000, sales and marketing expenses increased $4.8 million, or
32.2%, to $19.9 million from $15.1 million for the nine months ended March 31,
1999. The increase for the three and nine-month periods ended March 31, 2000 was
primarily attributable to increases in marketing efforts through targeted direct
mail programs for our loan products. These targeted programs are considered to
be more cost effective than the television and radio advertising campaigns
utilized into the second quarter of fiscal 2000. In addition, we increased the
use of newspaper and periodical advertising to generate additional sales of our
subordinated debt securities. Subject to market conditions, we plan to
selectively increase the funding for advertising in markets where we believe we
can generate significant additional increases in loan originations and sales of
subordinated debt securities.
General and Administrative Expenses. For the third quarter of fiscal
2000, general and administrative expenses increased $4.5 million, or 116.0%, to
$8.3 million from $3.8 million for the third quarter of fiscal 1999. For the
nine months ended March 31, 2000, general and administrative expenses increased
$9.1 million, or 91.3%, to $19.0 million from $9.9 million for the nine months
ended March 31, 1999. The increases were primarily attributable to increases in
rent, telephone, office supplies and equipment, expenses associated with real
50
<PAGE>
estate owned, professional fees, investments in systems and technology and other
expenses incurred as a result of the previously discussed growth in loan
originations, the volume of total loans and leases managed during fiscal 2000
and the continued building of support area infrastructure and Internet
capabilities.
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
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>
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 $59.7
million of equipment leases in fiscal 1998.
Gain on sale of loans and leases as a percentage of loans and leases
securitized was 8.44% in fiscal 1999, compared to 10.74% in fiscal 1998. Factors
impacting the year to year comparability of the gain percentage included: the
adoption of SFAS No. 134 on January 1, 1999 which reduced pre-tax gains by
approximately 0.75%; a decline in the average coupon on loans and leases
originated during fiscal 1999; and an increase in the rate required to be paid
to investors in fiscal 1999 securitizations.
Gain on sale of loans and leases securitized represents the difference
between the net proceeds received, and the allocated cost of loans and leases
securitized. The allocated cost of the loans and leases securitized is
51
<PAGE>
determined by allocating their net carrying value between the loans and leases
securitized, the retained residual interests in the securitization and the
mortgage servicing rights retained, based upon their relative fair values. The
calculation of the fair value of the residual interest is based upon the present
value of the future expected excess cash flows and utilizes certain assumptions
made by management at the time loans and leases are sold. Assumptions used in
the estimation of the fair value of residual interests include the discount rate
used to calculate present value and the rates of prepayment and default on the
pool of loans. See "Securitization Accounting Considerations" and "Interest Rate
Risk Management -- Interest-only Strips and Servicing Assets" for more
information regarding these assumptions.
The following schedule details loan and lease originations during the
fiscal years ended June 30, 1999, 1998 and 1997 (in thousands):
Year Ended June 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
Business Purpose Loans ...........$ 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.
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
52
<PAGE>
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 in 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
53
<PAGE>
losses on the fair value of interest-only strips and residual interests created
in securitizations. See "-- Securitization Accounting Considerations" and "--
Managed Portfolio Quality -- Loss Experience" for more information regarding
these credit loss assumptions.
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):
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
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
======= ===== ====
</TABLE>
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.
54
<PAGE>
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.
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
55
<PAGE>
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 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
56
<PAGE>
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>
March 31, June 30,
--------- --------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 45,399 $ 22,395 $ 4,486
Loan and lease receivables, net:
Available for sale..................................... 33,259 33,776 62,382
Other.................................................. 10,819 6,863 4,096
Interest-only and residual strips......................... 258,772 178,218 95,913
Receivable for sold loans and leases...................... 62,651 66,086 3,115
Servicing rights.......................................... 66,081 43,210 18,472
Total assets.............................................. 533,757 396,301 226,551
Subordinated debt......................................... 329,038 211,652 112,182
Warehouse lines and other notes payable................... 57,302 58,691 32,403
Total liabilities......................................... 467,265 338,055 183,809
Total stockholders' equity................................ 66,492 58,246 42,742
Book value per common share............................... 19.62 16.24 11.55
Debt to tangible equity(a)................................ 9.16x 7.83x 6.94x
Adjusted debt to tangible equity(b)....................... 7.01x 7.01x 5.32x
Subordinated debt to tangible equity...................... 6.4x 4.9x 4.2x
Interest-only and residual strips to adjusted
tangible equity(c)..................................... 2.6x 2.5x 2.2x
</TABLE>
------------------------
(a) Total liabilities to tangible equity.
(b) Total liabilities less cash and secured borrowings to tangible equity.
(c) Interest-only and residual strips less overcollateralization interests to
tangible equity plus subordinated debt with a remaining maturity greater
than 5 years.
March 31, 2000 Compared to June 30, 1999.
Total assets increased $137.5 million, or 34.7%, to $533.8 million at
March 31, 2000 from $396.3 million at June 30, 1999 primarily due to increases
in cash, interest-only and residual strips and servicing rights.
57
<PAGE>
Cash increased $23.0 million, or 102.7%, to $45.4 million from $22.4
million due to an increase in sales of subordinated debt during the third
quarter of fiscal 2000.
Interest-only and residual strips, which are residual interests created
in connection with securitizations, increased $80.6 million, or 45.2%, to $258.8
million from $178.2 million at June 30, 1999. We completed $711.0 million in
loan securitizations during fiscal 2000, resulting in the recording of $81.9
million of interest-only and residual strips. In addition, for the first nine
months of fiscal 2000, interest accretion and increases in the fair value of
interest-only and residual strips were $11.9 million and $0.5 million,
respectively. These increases were offset by cash flow received during the
nine-month period from securitization trusts of $34.5 million. Cash receipts on
interest-only and residual strips include required purchases of additional
overcollateralization of $20.7 million for the nine months ended March 31, 2000.
Total overcollateralization balances included in interest-only and residual
strips were $69.6 million at March 31, 2000.
Servicing rights increased $22.9 million, or 52.9%, to $66.1 million
from $43.2 million at June 30, 1999, due to the recording of $31.4 million of
mortgage servicing rights obtained in connection with loan securitizations,
partially offset by amortization of servicing rights of $8.6 million for the
nine months ended March 31, 2000.
Total liabilities increased $129.2 million, or 38.2%, to $467.3 million
from $338.1 million at June 30, 1999 due primarily to an increase in
subordinated debt outstanding. For the first nine months of fiscal 2000
subordinated debt increased $117.4 million, or 55.5%, to $329.0 million due to
net sales of subordinated debt used to fund loan originations, the costs of
originating loans, and investments in systems and technology. Subordinated debt
was 6.4 times tangible equity at March 31, 2000, compared to 4.9 times as of
June 30, 1999. See "Liquidity and Capital Resources" for further detail.
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.
58
<PAGE>
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 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.
59
<PAGE>
Managed Portfolio Quality
The following table provides data concerning delinquency experience,
real estate owned and loss experience for the loan and lease portfolio serviced
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
------------------ ------------------- -------------------- ----------------------
2000 1999 1998 1997
------------------ ------------------- -------------------- ----------------------
Delinquency by Type Amount % Amount % Amount % Amount %
--------------------------------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Business Purpose Loans
Total managed portfolio.......... $ 205,590 $ 148,932 $101,250 $ 68,979
========== ========== ======== ========
Period of delinquency:
31-60 days..................... $ 1,302 .63% $ 1,506 1.01% $ 1,236 1.22% $ 1,879 2.72%
61-90 days..................... 990 .48 475 .32 928 .92 462 .67
Over 90 days................... 10,903 5.30 8,612 5.78 3,562 3.52 718 1.04
---------- ----- ---------- ----- -------- ----- -------- -----
Total delinquencies............ $ 13,195 6.41% $ 10,593 7.11% $ 5,726 5.66% $ 3,059 4.43%
========== ===== ========== ===== ======== ===== ======== =====
REO.............................. $ 2,314 $ 2,881 $ 611 $ 605
========== ========== ======== ========
Home Equity Loans
Total managed portfolio.......... $1,356,772 $ 858,806 $349,685 $ 98,211
========== ========== ======== ========
Period of delinquency:
31-60 days..................... $ 5,965 .44% $ 4,836 .56% $ 3,726 1.08% $ 262 .27%
61-90 days..................... 4,814 .35 4,149 .48 1,022 .30 341 .35
Over 90 days................... 28,068 2.07 15,346 1.79 3,541 1.02 115 .12
---------- ----- ---------- ----- -------- ----- -------- -----
Total delinquencies............ $ 38,847 2.86% $ 24,331 2.83% $ 8,289 2.40% $ 718 .73%
========== ===== ========== ===== ======== ===== ======== =====
REO.............................. $ 12,146 $ 7,067 $ 311 $ --
========== ========== ======== ========
Equipment Leases
Total managed portfolio.......... $ 134,854 $ 169,180 $108,463 $ 9,461
========== ========== ======== ========
Period of delinquency:
31-60 days..................... $ 597 .44% $ 389 .23% $ 1,000 .92% $ 29 .31%
61-90 days..................... 524 .39 425 .25 320 .30 --
Over 90 days................... 885 .66 1,826 1.08 1,478 1.36 4 .04
---------- ----- ---------- ----- -------- ----- -------- -----
Total delinquencies............ $ 2,006 1.49% $ 2,640 1.56% $ 2,798 2.58% $ 33 .35%
========== ===== ========== ===== ======== ===== ======== =====
Combined
Total managed portfolio.......... $1,697,216 $1,176,918 $559,398 $176,651
========== ========== ======== ========
Period of delinquency:
31-60 days..................... $ 7,864 .46% $ 6,731 .57% $ 5,962 1.07% $ 2,170 1.23%
61-90 days..................... 6,328 .37 5,049 .43 2,270 .41 803 .45
Over 90 days................... 39,856 2.35 25,784 2.19 8,581 1.53 837 .47
---------- ----- ---------- ----- -------- ----- -------- -----
Total delinquencies............ $ 54,048 3.18% $ 37,564 3.19% $ 16,813 3.01% $ 3,810 2.15%
========== ===== ========== ===== ======== ===== ======== =====
REO.............................. $ 14,460 .85% $ 9,948 .85% $ 922 .16% $ 605 .34%
========== ===== ========== ===== ======== ===== ======== =====
Losses experienced during the
period (a)(b).................... $ 3,303 .24% $ 1,137 .12% $ 667 .12% $ 98 .07%
========== ===== ========== ===== ======== ===== ======== =====
</TABLE>
------------------------------
(a) Percentage based on average total managed portfolio.
(b) Losses recorded on our books were $1.6 million ($1.3 million from
charge-offs through the allowance for credit losses and $0.3 million for
write-downs of real estate owned) at March 31, 2000. Losses absorbed by
loan securitization trusts were $1.7 million for the nine months ended
March 31, 2000. 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.
Delinquent Loans and Leases
Total delinquencies (loans and leases with payments past due greater
than 30 days) in the total managed portfolio were $54.0 million at March 31,
2000 compared to $37.6 million, $16.8 million and $3.8 million at June 30, 1999,
1998 and 1997, respectively. Total delinquencies as a percentage of the total
managed portfolio (the "delinquency rate") were 3.18% at March 31, 2000 compared
to 3.19%, 3.01% and 2.15% at June 30, 1999, 1998 and 1997, respectively on a
total managed portfolio of $1.7 billion at March 31, 2000 and $1.2 billion,
$559.4 million and $176.7
60
<PAGE>
million at June 30, 1999, 1998 and 1997, respectively. Delinquent loans and
leases in the available for sale portfolio (which are included in total
delinquencies) at March 31, 2000 were $1.0 million, or 3.0%. In addition, at
March 31, 2000, $2.3 million, or 6.9% of portfolio loans, were on non-accrual
status. See "Risk Factors -- Lending to credit-impaired borrowers may result in
higher delinquencies in our managed portfolio which could result in a reduction
in profits" for a discussion of risks associated with increases in
delinquencies.
Real Estate Owned
Total real estate owned, comprising foreclosed properties and deeds
acquired in lieu of foreclosure, increased to $14.5 million, or 0.85% of the
total managed portfolio at March 31, 2000 compared to $9.9 million, or 0.85%,
$0.9 million, or 0.16% and $0.6 million, or 0.34% at June 30, 1999, 1998 and
1997, respectively. The increase in the volume of real estate owned 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 utilized in certain select
situations, when collateral values of loans support the action, a delinquent
borrower may be offered a monetary payment in exchange for the deed to a
property held as collateral for a loan. This process eliminates the need to
initiate a formal foreclosure process, which could take many months.
Included in total real estate owned at March 31, 2000 was $1.8 million
recorded in our financial statements, and $12.7 million in loan securitization
trusts. Property acquired by foreclosure or in settlement of loan and lease
receivables is recorded in our financial statements at the lower of the cost
basis in the loan or fair value of the property less estimated costs to sell.
Loss Experience
During the first nine months of fiscal 2000, we experienced net loan
and lease charge-offs in our total managed portfolio of $3.3 million. On an
annualized basis, net loan charge-offs for the third quarter of fiscal 2000
represent 0.24% of the average total managed portfolio. Loss severity experience
on delinquent loans generally has ranged from 5% to 15% of principal and loss
severity experience on real estate owned generally has ranged from 25% to 30% of
principal. The business purpose and home equity loans we originate have average
loan-to-value ratios of 61.0% and 78.0%, respectively, and the predominant share
of our home mortgage products are first liens as opposed to junior lien loans.
We believe these factors may mitigate certain potential losses on our managed
portfolio.
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<PAGE>
The following table summarizes net charge off experience recorded on
our books through the allowance for credit losses by loan type for the nine
months ended March 31, 2000 and fiscal years ended June 30, 1999, 1998 and 1997
(in thousands):
Nine Months
Ended
March 31, Years Ending June 30,
----------- -------------------------------
2000 1999 1998 1997
---- ---- ---- ----
Business purpose loans............ $ 173 $ 301 $ 138 $ 34
Home equity loans................. 94 486 -- --
Equipment Leases.................. 1,006 320 529 64
-------- ------ ----- ------
Total............................. $ 1,273 $1,107 $ 667 $ 98
======== ====== ===== ======
62
<PAGE>
The following table summarizes the cumulative net loss experience by loan
securitization trusts through March 31, 2000.
Net losses (net recoveries)
<TABLE>
<CAPTION>
Cumulative Losses Original Pool Balance Cumulative Loss Percentage
------------------------------------- ----------------------------------- ----------------------------------------
Business Home Business Home Business Home Combined
Trust Purpose Equity Combined Purpose Equity Combined Purpose Equity Combined Annualized
---------- -------- ------ -------- -------- ------ -------- -------- ------- -------- ----------
(in thousands) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996-1 $ 69 $ 11 $ 80 $ 13 $ 9 $ 22 0.53% 0.12% 0.36% 0.09%
1996-2 218 88 306 16 24 40 1.36 0.37 0.77 0.24
1997-1 104 302 406 22 53 75 0.47 0.57 0.54 0.18
1997-2 (8) 353 345 23 77 100 (0.03) 0.46 0.35 0.13
1998-1 139 417 556 16 89 105 0.87 0.47 0.53 0.25
1998-2 - 389 389 15 105 120 - 0.37 0.32 0.18
1998-3 - 157 157 17 183 200 - 0.09 0.08 0.05
1998-4 (27) 218 191 9 71 80 (0.30) 0.31 0.24 0.17
1999-1 41 12 53 16 169 185 0.26 0.01 0.03 0.03
1999-2 (23) 4 (19) 30 190 220 (0.08) - (0.01) (0.01)
1999-3 - 10 10 28 194 222 - 0.01 - 0.01
1999-4 - - - 25 197 222 - - - -
------- ------- ------- -------- ------ --------
$ 513 $1,961 $2,474 $230 $1,361 $ 1,591
======= ======= ======= ======== ====== ========
</TABLE>
Weighted average cumulative loss percentages for all securitization trusts:
Business purpose 0.22%
Home equity 0.14%
Combined 0.16%
The expected impact of credit losses for delinquent loans and real estate
owned property held by securitization trusts are reflected through
assumptions for credit losses used in the estimation of the fair value of
our interest-only and residual strips and servicing rights. See
"Securitization Accounting Considerations" for further information
regarding these assumptions.
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<PAGE>
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. A substantial and sustained increase in market interest rates
could adversely affect our ability to originate and purchase loans. 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 balances (primarily loans and leases available for sale,
interest-only strips, servicing rights and subordinated debt).
Due to the current rising interest rate environment, we expect the
challenge to originate loans at rates that will maintain our current level of
profitability will increase. In addition, recent movements in market interest
rates may negatively impact the profitability of our securitizations due to
increases in rates demanded in the asset backed securities markets. We are
continuously monitoring market rate fluctuations, our product pricing, actions
of our competition and market trends in order to best manage these changes and
maintain our current profitability on loan originations and securitizations.
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 After March 31, 2000
----------------------------------------------------------------------------------------------
Months Months Months Months Months There- Fair
1 to 12 13 to 24 25 to 36 37 to 48 49 to 60 after Total Value
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Loans and leases available for $ 31,424 $ 30 $ 34 $ 39 $ 44 $ 1,687 $ 33,258 $34,522
sale (a)..........................
Interest-only strips.............. 39,117 52,495 50,599 46,908 39,024 138,556 366,699 258,772
Servicing rights.................. 20,866 16,613 12,843 9,920 7,685 26,240 94,167 66,081
Investments held to maturity...... 58 59 70 87 118 392 1,349 868
Rate Sensitive Liabilities:
Fixed interest rate borrowings.... $179,663 $72,915 $24,584 $10,443 $19,964 $ 22,168 $329,737 $327,848
Average interest rate............. 9.45% 10.61% 10.61% 10.82% 11.54% 11.73% 10.12%
Variable interest rate borrowings. $ 46,345 $ 301 $ 2,881 $ 1,079 $ 5,997 $ -- $ 56,603 $ 56,603
Average interest rate............. 7.39% 7.91% 7.91% 7.91% 7.91% 0.00% 7.48%
</TABLE>
------------------------
(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 within
twelve months.
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<PAGE>
Loans and Leases Available for Sale. Gain on sale of loans may be
unfavorably impacted to the extent fixed-rate mortgage loans in the available
for sale portfolio are held prior to securitization. A significant variable
affecting the gain on sale of loans in a securitization is the spread between
the average coupon rate on fixed rate loans, and the weighted average
pass-through rate to investors for interests issued in connection with the
securitization. Although the average loan coupon rate is fixed at the time the
loan 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.
Therefore, if market rates required by investors increase prior to
securitization of the loans, the spread between the average coupon rate on the
loans and the pass-through rate to investors may be reduced or eliminated.
Hedging strategies may be utilized in an attempt to mitigate the effect
of changes in interest rates on fixed-rate loan 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 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 when the loans are securitized. During
the nine month period ended March 31, 2000, cash losses of $0.2 million and cash
gains of $0.8 million were incurred on hedging transactions (futures contracts),
and were recognized as a component of the gain on sale recorded on
securitizations during the periods. At March 31, 2000, we had open hedge
contracts for the short-sale of $50.0 million of U.S. Treasury securities.
Unrealized losses on these contracts were $0.2 million at March 31, 2000. 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 which was satisfied in the first quarter of fiscal 2000.
In the future, we intend to expand the types of derivative financial
instruments we use to hedge interest rate risk. The U.S. Treasury Department has
embarked on a repurchase program as a result of budget surpluses resulting in
less liquidity in the Treasury market. The asset-backed security market is
moving toward pricing that is based on the Eurodollar and the interest rate swap
markets. As a result, we plan to incorporate Eurodollar futures and interest
rate swaps as part of our future hedging strategy. We believe the correlation
between hedging instruments and securitization pricing will strengthen under
this new pricing convention.
We may use hedging 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. 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 securitizations
in that period or in future periods. As a result, we may
65
<PAGE>
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.
Interest-only and Residual Strips and Servicing Assets. A portion of
the certificates issued to investors by securitization trusts are floating
interest rate certificates based on one-month LIBOR plus a spread. The fair
value of the excess cash flow we will receive from these trusts would be
affected by any changes in rates paid on the floating rate certificates. At
March 31, 2000, $143.6 million of debt issued by loan securitization trusts was
floating rate debt based on LIBOR, representing 9.38% of total debt issued by
loan securitization trusts. For the nine months ended March 31, 2000 increases
in one-month LIBOR resulted in a decrease in the fair value of our interest-only
and residual strips of $2.9 million. In accordance with generally accepted
accounting principles, the changes in fair value were recognized as part of net
adjustments to other comprehensive income, which is a component of retained
earnings.
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. Revaluation of our interest-only and residual
strips and servicing rights are periodically performed. As part of the
revaluation process, assumptions used for prepayment rates are monitored against
actual experience and adjusted if warranted. It is estimated that a 100 basis
point increase in prepayment rates would decrease the fair value of
interest-only and residual strips by approximately $6.8 million and the fair
value of servicing rights by approximately $1.6 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 95% 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, further reducing
prepayment expectations.
Subordinated Debt. We also experience interest rate risk to the extent
that as of March 31, 2000 approximately $149.9 million of our liabilities were
comprised of fixed rate 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 to fund our operations. Our cash requirements include the
funding of loan originations, capital expenditures and general operating
activities, payment of interest and operating expense, repayment
66
<PAGE>
of existing debt, funding of overcollaterization requirements in connection with
securitizations, repurchase of our common stock and possible unspecified
acquisitions of related businesses or assets. We rely on borrowings such as
subordinated debt and warehouse credit facilities to fund these business
activities. At March 31, 2000, a total of $329.0 million of subordinated debt
was outstanding, and credit facilities totaling $323.1 million were available,
of which $81.8 million was drawn upon.
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 may 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 our 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.
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 our business 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 and business loan 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 transact 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
our 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.
Subordinated Debt Securities. During the first nine months of fiscal
2000, we sold $117.4 million in principal amount of subordinated debt
securities, net of redemptions, with maturities ranging between one day and ten
years. As of March 31, 2000, $329.0 million of subordinated debt was
outstanding. 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,
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<PAGE>
approximately $211.7 million of subordinated debt was outstanding. Under a shelf
registration statement declared effective by the Securities and Exchange
Commission on October 15, 1999, we registered $300.0 million of subordinated
debt, of which $170.0 million was available for future issuance at March 31,
2000. 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, cash flows from interest-only and
residual strips, working capital and cash generated from additional debt
financing. The utilization of funds for the repayment of such obligations should
not adversely affect operations.
Credit Facilities. The following is a description of the warehouse and
line of credit facilities that are utilized to fund origination of loans prior
to securitization. All of these facilities are senior in right of payment to the
subordinated debt. The warehouse revolving lines of credit are secured by loan
and lease receivables. The other credit facilities are secured with certain
residual interests in securitization trusts. The warehouse credit agreements
require that we maintain specific covenants regarding net worth, leverage and
other standards. At March 31, 2000, we were in compliance with the terms of all
loan covenants.
<TABLE>
<CAPTION>
Amount Amount
Committed Utilized
--------- --------
(in thousands)
<S> <C> <C>
Warehouse revolving line of credit, expiring August 2000: $150,000
On balance sheet warehouse facility $ 4,493
Off balance sheet conduit facility 21,407
Warehouse revolving line of credit, expiring October 2000 150,000 31,774
-------- -------
Total warehouse facilities 300,000 57,674
-------- -------
Revolving line of credit, expiring December 2000 5,000 5,000
Repurchase agreement 4,677 4,677
Commercial paper conduit for lease production, maturity matches
underlying leases 13,401
On balance sheet lease funding facility 10,659
Off balance sheet conduit facility 2,742
-------- -------
Total credit facilities $323,078 $81,752
======== =======
</TABLE>
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 us. 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. In March
of 2000, these agreements were amended to provide for the sale of loans into an
off balance sheet conduit facility. At March 31, 2000, $25.9 million of this
facility was drawn upon including $4.5 million in the on balance sheet facility.
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<PAGE>
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 us 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 March 31, 2000, $31.8 million of this facility was
drawn upon.
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 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. The agreement
expires December 31, 2000 unless accelerated upon an event of default as
described in such agreement. At March 31, 2000, $5.0 million of this line of
credit was being utilized.
Subsequent to March 31, 2000 our subsidiaries, American Business
Credit, Home American Credit and New Jersey Mortgage obtained a $25 million
warehouse line of credit facility from Residential Funding Corporation which
expires December 31, 2000. Under this warehouse facility, advances may be
obtained, subject to certain conditions. Interest rates on the advances are
based on LIBOR plus a margin. The obligations under this agreement are
collateralized by pledged loans. The facility requires us to meet certain
financial ratios and contains certain other restrictive covenants.
As of March 31, 2000, $236.4 million of debt was scheduled to mature
during the next twelve months which was mainly comprised of maturing
subordinated debt, warehouse lines of credit. 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, 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 production activities or sell loans rather than securitize them,
thereby having a material adverse effect on our results of operations and
financial condition.
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<PAGE>
We lease our corporate headquarters facilities under a five-year
operating lease expiring in July 2003 at a minimum annual rental of
approximately $2.2 million. We also lease a facility in Roseland, New Jersey
under an operating lease expiring July 2003 at an annual rental of $0.8 million.
The corporate headquarters and Roseland leases have a renewal provision 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
Prior to December 31, 2000, we performed certain activities to ensure
our information technology systems and those of our significant vendors were
Year 2000 compliant. Since January 1, 2000, there have been no disruptions to
our operations due to Year 2000 related events.
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.
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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. and New Jersey Mortgage and
Investment Corp., we originate, service and sell business purpose loans, home
equity loans and conventional first mortgage loans. 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 have licenses to offer our home
equity loan products in 47 states.
Prior to December 31, 1999, we also originated equipment leases.
Effective December 31, 1999, we de-emphasized the leasing origination business
as a result of our strategy of focusing on our most profitable lines of
business. We are continuing to service the remaining leases in our managed
portfolio, which totaled $134.8 million in gross receivables at March 31, 2000
and we may from time to time consider originating or purchasing new leases.
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., Tiger Relocation Company (formerly 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
currently services equipment leases held in our managed portfolio.
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<PAGE>
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 conventional first
mortgage loans. New Jersey Mortgage originates loans secured by real estate.
These loans are originated through New Jersey Mortgage's network of six branch
sales offices and three satellite offices. New Jersey Mortgage has been offering
mortgage loans since 1939. We currently sell conventional 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.
currently services leases previously originated and sold through securitization.
Tiger Relocation Company, formerly 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. 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. See "-- Securitizations."
Our newly formed subsidiary, Upland Corporation, has filed an
application with the Federal Deposit Insurance Corporation, and the Utah
Department of Financial Institutions, for a Utah Industrial Loan Corporation
charter. If regulatory approval is obtained, the industrial loan charter would
allow us to originate residential mortgage loan products under one centralized
jurisdiction. The industrial loan subsidiary would also provide us with the
ability to offer home equity lines of credit with card access, Small Business
Administration guaranteed business loans, and FDIC-insured certificates of
deposit. No assurance can be given as to whether or during what time period the
necessary regulatory approvals will be obtained or the conditions that would be
imposed in connection with these approvals.
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<PAGE>
The following chart sets forth our basic organizational structure and
our primary subsidiaries(a).
-------------------------------------------------------------
ABFS
-------------------------------------------------------------
(Holding Company)
(Issues subordinated debt securities)
-------------------------------------------------------------
-------------------------------------------------------------
AMERICAN BUSINESS CREDIT, INC.
-------------------------------------------------------------
(Originates and services business purpose loans)
-------------------------------------------------------------
-----------------------------------------------------------------------
----------------- ---------------- ----------------- ------------ --------------
HOME AMERICAN
NEW JERSEY CREDIT, INC. PROCESSING AMERICAN TIGER
MORTGAGE AND d/b/a SERVICE BUSINESS RELOCATION
INVESTMENT CORP. UPLAND CENTER, INC. LEASING, INC. COMPANY
MORTGAGE
----------------- ---------------- ----------------- ------------ --------------
(Originates and (Originates, (Processes bank (Services (Holds
services purchases and alliance equipment foreclosed
conventional services home program leases) real estate)
first mortgage equity loans)(b) home equity
and home loans)
equity loans)
----------------- ---------------- ----------------- ------------ --------------
----------------- ---------------- ----------------- ------------ --------------
FEDERAL
LEASING CORP.
----------------- ---------------- ----------------- ------------ --------------
(Services
equipment
leases)
----------------- ---------------- ----------------- ------------ --------------
---------------------
(a) In addition to the corporation pictured above, we organized at
least one special purpose corporation for each securitization.
(b) Loans purchased by Upland Mortgage represents 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 periods
indicated. We did not originate conventional first mortgage loans prior to
October 1997.
<TABLE>
<CAPTION>
Nine Months
Ended
March 31, Year Ended June 30,
----------- ---------------------------------------
2000 1999 1998 1997
-------- -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans/Leases Originated/Purchased
(Net of refinances)
Business purpose loans............................... $ 81,056 $ 64,818 $ 52,335 $38,721
Home equity loans.................................... $668,704 $634,820 $328,089 $91,858
Conventional First Mortgage Loans.................... $ 31,590 $ 66,519 $ 33,671 --
Equipment leases..................................... $ 19,631 $ 96,289 $ 70,480 $ 8,004
Number of Loans/Leases Originated/Purchased
Business purpose loans............................... 921 806 632 498
Home equity loans.................................... 9,641 8,251 5,292 1,799
Conventional First Mortgage Loans.................... 209 781 218 --
Equipment leases..................................... 1,020 4,138 3,350 743
Average Loan/Lease Size
Business purpose loans............................... $ 88 $ 80 $ 83 $ 78
Home equity loans.................................... $ 69 $ 74 $ 62 $ 51
Conventional First Mortgage Loans.................... $ 151 $ 165 $ 154 --
Equipment leases..................................... $ 19 $ 23 $ 21 $ 11
Weighted Average Interest Rate on Loans/Leases
Originated/Purchased
Business purpose loans............................... 15.96% 15.91% 15.96% 15.91%
Home equity loans.................................... 11.19% 11.05% 11.95% 11.69%
Conventional First Mortgage Loans.................... 8.57% 7.67% 8.22% --
Equipment leases..................................... 11.25% 11.40% 12.19% 15.48%
Weighted Average Term (in months)
Business purpose loans............................... 172 169 184
172
Home equity loans.................................... 256 261 244 218
Conventional First Mortgage Loans.................... 346 322 340 --
Equipment leases..................................... 50 50 49 40
Loans/Leases Sold
Business purpose loans............................... $ 78,857 $ 71,931 $ 54,135 $38,083
Home equity and Conventional First Mortgage $662,874 $613,069 $322,459 $80,792
Loans................................................
Equipment leases..................................... $ 9,263 $ 92,597 $ 59,700 --
Number of Loans/Leases Sold
Business purpose loans............................... 897 911 629 497
Home equity and Conventional First Mortgage 8,655 8,074 4,753 1,639
Loans................................................
Equipment leases..................................... 469 4,363 3,707 --
Weighted Average Rate on Loans/Leases Originated .... 11.57% 11.30% 11.63% 13.09%
</TABLE>
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<PAGE>
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 conventional first mortgage loans prior to October 1997.
<TABLE>
<CAPTION>
Nine Months
Ended
March 31, Years Ending June 30,
----------- --------------------------------
Loan Type 2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Business purpose loans.................... 60.9% 61.5% 60.5% 60.0%
Home equity loans......................... 79.1 78.0 76.6 72.0
Conventional First Mortgage Loans......... 85.2 78.0 79.9 --
</TABLE>
The following table shows the geographic distribution of our loan and
lease originations and purchases during the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended March 31, Year Ended June 30,
------------------------------------------ ------------------------------------------------------
2000 % 1999 % 1999 % 1998 % 1997
-------- ------ -------- ------ -------- ------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New York........ $226,332 28.26% $109,295 17.64% $163,580 18.97% $ 54,907 11.31% $ 8,343
New Jersey...... 145,767 18.20 180,419 29.12 236,976 27.48 128,025 26.38 40,725
Pennsylvania.... 111,874 13.97 96,689 15.61 139,992 16.23 150,048 31.06 53,834
Florida......... 64,054 8.00 44,223 7.14 61,312 7.11 23,905 4.93 3,670
Illinois........ 33,158 4.14 20,351 3.28 27,663 3.21 -- -- --
Georgia......... 29,498 3.68 44,286 7.15 59,395 6.89 23,084 4.76 10,092
Ohio............ 28,516 3.56 10,919 1.76 17,155 1.99 -- --
Maryland........ 18,259 2.28 12,416 2.00 19,625 2.28 11,748 2.42 5,010
Virginia........ 17,080 2.13 10,625 1.71 17,126 1.99 13,138 2.71 5,469
North Carolina.. 16,052 2.00 7,687 1.24 13,648 1.58 5,144 1.06 4,245
Connecticut..... 15,426 1.93 10,807 1.74 14,052 1.63 5,964 1.23 2,005
Massachusetts... 13,948 1.74 -- -- -- -- -- -- --
Delaware........ 10,903 1.36 10,465 1.69 14,254 1.65 10,823 2.23 3,117
Other........... 65,095 8.13 61,405 9.91 77,668 9.01 57,789 11.93 2,073
-------- ------ -------- ------ -------- ------ -------- ------ --------
Total...... $800,981 100.00% $619,587 100.00% $862,446 100.00% $484,575 100.00% $138,583
======== ====== ======== ====== ======== ====== ======== ====== ========
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
-------------------------------
% 1996 %
------- -------- -------
<S> <C> <C> <C>
New York........ 6.02% $ 7,417 10.36%
New Jersey...... 29.39 20,986 29.33
Pennsylvania.... 38.85 33,324 46.57
Florida......... 2.65 674 0.94
Illinois........ -- -- --
Georgia......... 7.28 181 0.25
Ohio............ -- -- --
Maryland........ 3.61 4,408 6.16
Virginia........ 3.95 104 0.15
North Carolina.. 3.06 78 0.11
Connecticut..... 1.45 87 0.12
Massachusetts... -- -- --
Delaware........ 2.25 2,724 3.81
Other........... 1.49 1,575 2.20
------ ------- ------
Total...... 100.00% $71,558 100.00%
====== ======= ======
</TABLE>
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<PAGE>
Business Purpose Loans. Through our subsidiary, American Business
Credit, we currently originate business purpose loans on a regular basis in
Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Maryland, New
Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina and
Virginia through a network of salespeople and through our business loan web
site, www.abceasyloan.com. 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 generally 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 and approximately $88,000 for the nine
months ended March 31, 2000. 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 and 15.96%
for the nine months ended March 31, 2000. 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 and $81.1
million of business purpose loans for the nine months ended March 31, 2000.
Generally, we compute interest due on our outstanding loans using the
simple interest method. Where permitted by applicable law, we generally 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.
During fiscal 2000, we launched an Internet loan distribution channel
under the name www.abceasyloan.com. The www.abceasyloan.com web site provides
borrowers with convenient access to the business loan application process, 7
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<PAGE>
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.
Home Equity Loans. We originate home equity loans through our Consumer
Mortgage Group which includes Upland Mortgage and New Jersey Mortgage and
Investment Corp. We also purchase loans through Processing Service Center, Inc.
We originate home equity loans primarily to credit-impaired borrowers through
various channels including retail marketing which includes telemarketing
operations, direct mail, radio and television advertisements as well as through
our interactive web site, www.UplandMortgage.com. We entered the home equity
loan market in 1991. Currently, we are licensed to originate home equity loans
in 47 states throughout the United States.
Home equity loans originated and funded by our subsidiaries are
generally securitized. In addition, we may 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 writing, 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
ten to fifteen 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 and approximately $69,000 for loans originated during
the nine months ended March 31, 2000. During the year ended June 30, 1999, we
originated $634.8 million of home equity loans. During the nine months ended
March 31, 2000, we originated $668.7 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.
For the nine months ended March 31, 2000, the weighted average interest rate
received was 11.19% and the average loan-to-value ratio was 79.1% for loans
originated during this 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
negotiated with the borrower 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.
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<PAGE>
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 for loans held in portfolio 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. This program
targets traditional financial institutions, such as banks, which because of
their strict underwriting and credit guidelines have generally provided mortgage
financing only to the most credit-worthy borrowers. This program 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 for portfolio loans 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 31 financial institutions to 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 various states
throughout the country. During the nine months ended March 31, 2000, Upland
Mortgage purchased $36.9 million of loans pursuant to this program. 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.
During fiscal 1999, we launched an Internet loan distribution channel
under the name www.UplandMortgage.com. Through this interactive web site,
borrowers can examine available loan options, calculate interest payments, and
submit 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. Throughout the loan processing period,
borrowers who submit applications on line are supported by our staff of highly
trained loan officers. During fiscal 2000 we continued to phase in advanced
Internet technology through our web site, www.UplandMortgage.com. In addition to
the ability to take online loan applications and utilize an automated rapid
credit approval process, both of which reduce time and manual effort required
for loan approval, the site features our proprietary software, Easy Loan Wizard,
which provides personalized services and solutions to retail customers through
interactive web dialog. We have applied to the U.S. Patent and Trademark Office
to patent this product.
Conventional First Mortgage Loans. We began offering conventional 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
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originate conventional first mortgage loans and sell them in the secondary
market with servicing released. Our conventional first mortgage lending market
area is primarily the eastern region of the United States. We originated $66.5
million of conventional first mortgage loans during the year ended June 30, 1999
and $31.6 million of conventional first mortgage loans during the nine months
ended March 31, 2000.
The conventional 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 in excess of $252,700 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. Prior to December 31, 1999, we also originated
equipment leases. Effective December 31, 1999, we de-emphasized the leasing
origination business as a result of our strategy of focusing on our most
profitable lines of business. We are continuing to service the remaining leases
in our managed portfolio, which totaled $134.8 million in gross receivables at
March 31, 2000 and we may from time to time consider originating or purchasing
new leases. Equipment leases held in our portfolio included leases to
corporations, partnerships, other entities and sole proprietors on various types
of business equipment including, but not limited to, computer equipment,
automotive repair equipment, construction equipment, commercial equipment,
medical equipment and industrial equipment.
Generally, our equipment leases consist 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 $19,000 for the leases originated during the
nine months ended March 31, 2000. Our leases generally had maximum terms of
seven years. The weighted average interest rates received on leases for the year
ended June 30, 1999 was 11.40% and for the nine months ended March 31, 2000 was
11.25%. During the nine months ended March 31, 2000, we originated $19.6 million
of equipment leases. During the year ended June 30, 1999, we originated $96.3
million of equipment leases. Generally, the interest rates and other terms and
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conditions of our equipment leases are competitive with the leasing terms of
other leasing companies in our market area.
There are risks inherent in holding a portfolio of leases which are
different than those risks inherent in our mortgage lending activities. See
"Risk Factors -- If we experience losses in the value of our leased equipment
securing the leases we hold, our revenues may be reduced."
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 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 conventional first mortgage
loans 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,
our business loan web site, www.abceasyloan.com 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 advertising leads 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 radio and television
advertising, direct mail campaigns and through our web site,
www.UplandMortgage.com. During fiscal 2000, the Consumer Mortgage Group
redirected its marketing mix to focus on targeted direct mail, which we believe
delivers more leads at a lower cost than broadcast marketing channels. Our
integrated approach to media advertising which utilizes a combination of direct
mail and Internet advertising is intended to maximize the effect of our
advertising campaigns. We also use a network of loan brokers.
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Our marketing efforts for home equity loans are strategically located
throughout the eastern region of the United States. We intend to open additional
sales offices in the future. Loan processing, underwriting, servicing and
collection procedures are performed at our centralized operating office located
in Bala Cynwyd, 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 utilize branches in various eastern
states to market our loans.
We market conventional first mortgage loans through our network of loan
brokers. Our marketing efforts for conventional first mortgage loans are
concentrated in the mid-Atlantic region of the United States. In addition, we
market conventional first mortgage loans under the name American Household
Mortgage. See "--Lending and Leasing Activities - Conventional First Mortgage
Loans."
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 March 31, 2000, our
total managed portfolio included approximately 29,402 loans and leases with an
aggregate outstanding balance of $1.7 billion. We generally receive contractual
servicing fees for 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 the processing center located at our
operating office 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
referred to our legal collection group for the initiation of foreclosure
proceedings or other legal remedies. In addition, after a loan becomes 61 days
delinquent, our loss mitigation unit becomes involved. Our loss mitigation unit
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
foreclosure, replevin or other legal action is initiated. 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
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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. 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. See "Risk Factors - Environmental laws and
regulations may restrict our ability to foreclose on loans secured by real
estate or increase costs associated with those loans which could reduce our
revenues."
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 and conventional first mortgage loans. 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 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 generally obtain and review an independent
credit bureau report on the credit history of the borrower and verification of
the borrower's 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
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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 60.9% based solely on the real estate collateral securing the loan for
the nine months ended March 31, 2000.
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 79.1% for the nine months ended
March 31, 2000. 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 may be 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 conventional first mortgage loans, other than Federal Housing Authority
and Veterans Administration Loans. We generally require private mortgage
insurance on all conventional 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 property securing
the loan. With respect to business purpose loans, home equity loans and
conventional 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 could result in a reduction in originations
and an increase in losses on foreclosure which could reduce our profitability."
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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 17 securitization transactions. The 17 pools of loans and
leases securitized were comprised of approximately $280.1 million of business
purpose loans, approximately $1.6 billion of home equity loans and approximately
$161.6 million of equipment leases. During fiscal 1999, we securitized $71.9
million, $613.0 million and $92.6 million of business purpose loans, home equity
loans and equipment leases, respectively. During the nine months ended March 31,
2000, we securitized $78.9 million, $622.9 million and $9.2 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 or private 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 on the loans 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 March 31, 2000, 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.
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The securitization of loans and leases during the nine months ended
March 31, 2000 and the years ended June 30, 1999, 1998 and 1997 generated gain
on sale of loans and leases of $63.0 million, $65.6 million, $41.3 million and
$20.0 million, respectively. 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 and home equity loans. 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.
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.
The various segments of our lending businesses are highly competitive.
See "Risk Factors - Competition from other lenders and lessors could adversely
affect our profitability."
Regulation
General. Our business is highly regulated by both federal and state
laws. All home equity and conventional first mortgage loans must meet the
requirements of, among other statutes, the Truth in Lending Act, the Real Estate
Settlement Procedures Act, the Equal Credit Opportunity Act of 1974 and their
accompanying Regulations Z, X and B, respectively.
Truth in Lending. The Truth in Lending Act and Regulation Z 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 including the
same 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/or 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.
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Equal Credit Opportunity and Other Laws. We are also required to comply
with the Equal Credit Opportunity Act and Regulation B, which prohibit creditors
from discriminating against applicants on the basis of race, color, religion,
national origin, sex, age or marital status. Regulation B also 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 and
Regulation X which impose 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 the fees which may be paid to third
parties; and imposes 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 of the various states impose licensing
and other restrictions on lending activities such as prohibiting discrimination
and regulating collection, foreclosure procedures and claims handling, payment
features, and, in some cases, these laws 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 review Upland
Mortgage and New Jersey Mortgage documentation and procedures and monitor and
inform Upland Mortgage on various changes in the laws.
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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 laws
and 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. See
"Risk Factors - Our lending business is subject to government regulation and
licensing requirements which may hinder our ability to operate profitably."
Federal and state governments have recently begun to consider, and in
some instances have adopted, legislation to restrict lenders' ability to charge
certain rates and fees in connection with subprime residential mortgage loans,
loans to borrowers with problem credit. Such legislation also imposes various
loan term restrictions, e.g., limits on balloon loan features. Frequently
referred to generally as "predatory lending" legislation, such legislation may
limit our ability to impose certain fees, charge certain interest rates on
certain consumer loans and may impose additional regulatory restrictions on our
business.
The Gramm-Leach-Bliley Act, which was signed into law at the end of
1999, contains comprehensive consumer financial privacy restrictions. The
various federal enforcement agencies, including the Federal Trade Commission,
have issued final regulations to implement this act; however, compliance with
the new regulations is voluntary until July 1, 2001. These restrictions fall
into two basic categories. First, a financial institution must provide various
notices to consumers about an institution's privacy policies and practices.
Second, this act gives consumers the right to prevent the financial institution
from disclosing non-public personal information about the consumer to
non-affiliated third parties, with certain exceptions. As with any new
regulations, we intend to prepare the appropriate disclosures and internal
procedures to assure compliance with these new requirements.
Although we believe that we have implemented systems and procedures to
make sure that we comply with regulatory requirements, 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.
Truth in Savings. If we receive the regulatory approval to operate an
industrial loan company, we will offer certificates of deposit through our
industrial loan company and will be subject to the disclosure requirements
contained in the Truth in Savings Act and Regulation DD which require depository
institutions to provide uniform disclosures to consumers about the rates and
terms of certificates of deposit and other retail deposit accounts. These
disclosures enable consumers to make meaningful comparisons among depository
institutions. Failure to comply with these disclosure requirements would subject
the depository institution to claims for damages from account holders, as well
as, other fines and penalties imposed by the regulatory agencies.
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Federal Deposit Insurance Corporation. If we receive the regulatory
approval to operate an industrial loan company, the deposits of our industrial
loan company will be insured by the Federal Deposit Insurance Corporation up to
limits permitted by applicable law. As such, the Federal Deposit Insurance
Corporation will exercise primary regulatory supervision over our industrial
loan company. The Federal Deposit Insurance Corporation will also oversee the
compliance of our industrial loan company with consumer protection laws and
regulations applicable to lending and deposit products, as set forth above. In
addition, if we receive regulatory approval to operate an industrial loan
company, the Federal Deposit Insurance Corporation will establish the reporting,
capital and reserve requirements of our industrial loan company in accordance
with the Federal Deposit Insurance Act. Currently, we are unable to predict what
capital requirements will be imposed on our industrial loan company. If our
industrial loan company fails to comply with the applicable regulatory
requirements, the industrial loan company would be subject to enforcement
actions by the Federal Deposit Insurance Corporation.
Employees
At March 31, 2000, we employed 883 people on a full-time basis and 25
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 term
expires in July 2003 and 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
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.
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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:
Name Age(1) Position
------------------------------ -------------------------------------------
Anthony J. Santilli..... 57 Chairman, President, Chief Executive Officer,
Chief Operating Officer and Director
Leonard Becker.......... 76 Director
Michael DeLuca.......... 68 Director
Richard Kaufman......... 58 Director
Harold E. Sussman....... 74 Director
Beverly Santilli........ 40 First Executive Vice President and Secretary of
ABFS and President of American Business Credit
Jeffrey M. Ruben........ 37 Executive Vice President and General Counsel
Albert W. Mandia ....... 52 Executive Vice President and Chief Financial
Officer
Milt Riseman ........... 63 Chairman of Consumer Mortgage Group
Ralph J. Hall .......... 51 Chairman of Business Alliance Group
-----------------------
(1) As of March 31, 2000.
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. He has held the positions with the subsidiaries since
the formation of American Business Credit in June 1988.
90
<PAGE>
Prior to the founding of American 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, respectively.
Leonard Becker is a former 50% owner and officer of the SBIC of the
Eastern States, Inc., a federally licensed small business corporation which made
medium term loans to small business concerns. For the last 30 years, Mr. Becker
has been heavily involved in the investment in and management of real estate,
and has been involved in the ownership of numerous shopping centers, office
buildings and apartments. Mr. Becker formerly served as a director of Eagle
National Bank and Cabot Medical Corp.
Michael DeLuca was President, Chairman of the Board, Chief Executive
Officer and a former owner of Bradford-White Corporation, a manufacturer of
plumbing products, for a period of approximately thirty years. Presently, Mr.
DeLuca serves as a Director of BWC-West, Inc., Bradford-White International and
is Chief Executive Officer and a Director of Lux Products Corporation.
Richard Kaufman is Chairman and Chief Executive Officer of Academy
Industries, Inc., a paper converting company, a position he has held since
December 1996. From 1982 to 1996, he was self employed and involved in making
and managing investments for his own benefit. From 1976 to 1982, Mr. Kaufman was
President and Chief Operating Officer of Morlan International, Inc., a cemetery
and financial services conglomerate. From 1970 to 1976, Mr. Kaufman served as a
Director and Vice President-Real Estate and Human Services Division of Texas
International, Inc., an oil and gas conglomerate.
Harold E. Sussman is currently a principal in and Chairman of the Board
of the real estate firm of Colliers, Lanard & Axilbund, a major commercial and
industrial real estate brokerage and management firm in the Philadelphia area,
with which he has been associated since 1972.
Executive Officers who are not also Directors
The following is a description of the business experience of each
executive officer who is not also a director.
91
<PAGE>
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 37, 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 our 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.
Milt Riseman, age 63, is Chairman of the Consumer Mortgage Group, a
position he has held since June 1999. Mr. Riseman is responsible for the sales,
marketing and day-to-day operation of Upland Mortgage, including the Upland
Mortgage retail operation at the Bala Cynwyd, Pennsylvania headquarters, and the
Upland branch operation, which includes 12 offices throughout the United States.
He is also responsible for the consumer mortgage web site,
www.UplandMortgage.com. Mr. Riseman was President of Advanta Mortgage from
February 1994 until 1999. He joined Advanta in 1992 as Senior Vice President,
administration. From 1986 until 1992, Mr. Riseman was President of Citicorp
Acceptance Corp. He joined Citicorp in 1965, and in 1978, he moved into general
management positions in the bank's New York region.
Ralph J. Hall, age 51, is Chairman of the Business Alliance Group, a
position he held since joining the Company in May 2000. Mr. Hall is responsible
for leading the Company's New Jersey Mortgage and Processing Service Center
subsidiaries in their business development efforts. He will also lead the
growing business opportunities presented by business-to-business commerce. Mr.
Hall was President and Chief Executive Officer of GreenPoint Mortgage Corp.,
North Carolina and Executive Vice President of GreenPoint Bank, New York, from
July 1995 to April 2000. From 1992 to 1994, Mr. Hall was General Manager and
Chief Operating Officer of GMAC Mortgage Corp., Philadelphia, Pennsylvania.
Before joining GMAC Mortgage, he was President and Chief Executive Officer of
GMAC Capital Corp. in Utah. Mr. Hall has also held positions with Citicorp,
Arthur Anderson & Co., and Shell Oil Company.
92
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of June 15, 2000 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, 1,009,646 (2) (3) 28.6%
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 224,972 (4) 6.7
Lux Products
6001 Commerce Park
Mt. Laurel, NJ 08054
Richard Kaufman, Director of ABFS 199,589 (4) 4.5
1126 Bryn Tyddyn Drive
Gladwyne, PA 19035
Leonard Becker, Director of ABFS 123,417 (5) 3.7
Becker Associates
111 Presidential Blvd., Suite 140
Bala Cynwyd, PA 19004
Harold E. Sussman, Director of ABFS 127,297 (4) 3.8
Colliers, Lanard & Axilbund
399 Market Street, 3rd Floor
Philadelphia, PA 19106
Jeffrey M. Ruben 46,775 (6) 0.6
Executive Vice President and General
Counsel of ABFS
Albert W. Mandia 34,125 (7) 0.2
Executive Vice President and Chief
Financial Officer of ABFS
Milt Riseman 20,000 (8) (10)
Chairman of the Consumer Mortgage Group
Ralph J. Hall 20,000 (8) (10)
Chairman of the Business Alliance Group
All executive officers and directors as a group (10 1,805,821 (9) 46.8
persons)
</TABLE>
93
<PAGE>
-----------------------------------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the SEC. Accordingly they may include securities owned by
or for, among others, the wife and/or minor children or the individual and
any other relative who has the same home as such individual, as well as
other securities as to which the individual has or shares voting or
investment power or has the right to acquire under outstanding stock
options within 60 days after the date of this table. Beneficial ownership
may be disclaimed as to certain of the securities.
(2) Shares listed are held in joint tenancy by Mr. and Mrs. Santilli.
(3) Includes options to purchase 49,375 shares of common stock awarded to Mr.
Santilli pursuant to the Company's Stock Option Plan, of which 30,975 are
currently exercisable, and options to purchase 38,375 shares of common
stock awarded to Mrs. Santilli pursuant to the Company's Stock Option
Plan, of which 9,975 are currently exercisable.
(4) Includes options to purchase 49,375 shares of common stock awarded
pursuant to the Company's Non-Employee Directors Stock Option Plan, all of
which are currently exercisable.
(5) Includes options to purchase 26,875 shares of common stock awarded
pursuant to the Company's Non-Employee Directors Stock Option Plan, all of
which are currently exercisable.
(6) Includes options to purchase 38,375 shares of common stock awarded
pursuant to the Company's Stock Option Plan, of which 9,975 are currently
exercisable.
(7) Includes options to purchase 33,125 shares of common stock awarded
pursuant to the Company's Stock Option Plan, of which 5,250 are currently
exercisable.
(8) Includes options to purchase 20,000 shares of common stock awarded to the
Company's Stock Option Plan, of which none are currently exercisable.
(9) Includes options to purchase 374,250 shares of common stock awarded to
directors and officers of the Company of which 231,175 are currently
exercisable.
(10) Less than one percent.
94
<PAGE>
MARKET FOR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Our common stock is currently traded on the NASDAQ National Market
System under the symbol "ABFI." Our common stock began trading on the NASDAQ
National Market System on February 14, 1997. Prior to February 14, 1997, our
common stock had been traded on the 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 June 23, 2000, the
closing price of the common stock on the NASDAQ National Market System was
$10.31.
Quarter Ended High Low
---------------------------------------- --------- -------
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...................... 13.75 11.69
December 31, 1999 ...................... 13.00 9.34
March 31, 2000.......................... 26.00 11.63
June 30, 2000 (through June 23, 2000)... 18.38 10.00
As of May 31, 2000, there were 125 record holders and approximately
1,300 beneficial holders of our common stock.
During the nine months ended March 31, 2000, we paid $0.22 per share in
dividends on our common stock, for an aggregate dividend payment of $778,000.
During fiscal 1999, we paid $0.165 per share in dividends on our common stock,
for an aggregate dividend payment of $575,000. During fiscal 1998, we paid
dividends of $211,000 on our common stock. 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.
The stock price information in the table has been adjusted to reflect this stock
dividend.
95
<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.
96
<PAGE>
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 Securities Exchange Act of 1934.
We may reject any order, in whole or in part, for any reason. Your
order is 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.
97
<PAGE>
AMERICAN BUSINESS FINANCIAL SERVICES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Quarterly Financial Information:
Consolidated Balance Sheets as of March 31, 2000
and June 30, 1999....................................................... F-2
Consolidated Statements of Income for the three and nine months ended
March 31, 2000 and 1999................................................. F-3
Consolidated Statements of Stockholders' Equity for the nine months ended
March 31, 2000 and 1999................................................. F-4
Consolidated Statements of Cash Flow for the nine months ended
March 31, 2000 and 1999................................................. F-5
Notes to Consolidated Financial Statements.................................... F-7
Audited Annual Financial Information:
Report of Independent Certified Public Accountants............................ F-13
Consolidated Balance Sheets as of June 30, 1999 and 1998...................... F-14
Consolidated Statements of Income for the years ended
June 30, 1999, 1998 and 1997............................................ F-15
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1999, 1998 and 1997............................................ F-16
Consolidated Statements of Cash Flow for the years ended
June 30, 1999, 1998 and 1997............................................ F-17
Notes to Consolidated Financial Statements.................................... F-19
</TABLE>
F-1
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------------------- ---------
(Unaudited) (Note)
<S> <C> <C>
Assets
Cash and cash equivalents $ 45,399 $ 22,395
Loan and lease receivables, net
Available for sale 33,259 33,776
Other 10,819 6,863
Interest-only and residual strips 258,772 178,218
Receivable for sold loans and leases 62,651 66,086
Prepaid expenses 4,412 1,671
Property and equipment, net 17,299 10,671
Servicing rights 66,081 43,210
Other assets 35,065 33,411
---------- ----------
Total assets $ 533,757 $ 396,301
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Subordinated debt $ 329,038 $ 211,652
Warehouse lines and other notes payable 57,302 58,691
Accounts payable and accrued expenses 27,148 26,826
Deferred income taxes 26,198 16,604
Other liabilities 27,579 24,282
---------- ----------
Total liabilities 467,265 338,055
---------- ----------
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: 3,639,704 and 3,703,514 shares (including treasury
shares of 250,300 and 116,550) 4 3
Additional paid-in capital 24,284 23,339
Accumulated other comprehensive income 3,663 3,354
Retained earnings 42,125 33,596
Treasury stock, 250,300 and 116,550 shares (2,984) (1,446)
---------- ----------
67,092 58,846
Note receivable (600) (600)
---------- ----------
Total stockholders' equity 66,492 58,246
---------- ----------
Total liabilities and stockholders' equity $ 533,757 $ 396,301
========== ==========
</TABLE>
Note: The balance sheet at June 30, 1999 has been derived from the audited
financial statements at that date. See accompanying notes to consolidated
financial statements.
F-2
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- ------------------------
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues
Gain on sale of loans and leases $ 23,412 $ 17,417 $ 63,025 $ 45,789
Interest and fees 4,723 4,271 14,219 12,717
Interest accretion on interest-only strips 4,836 307 11,902 699
Servicing income 1,173 952 3,412 1,967
Other income 2 22 5 37
--------- ---------- --------- ----------
Total revenues 34,146 22,969 92,563 61,209
--------- ---------- --------- ----------
Expenses
Interest 10,112 6,126 26,175 15,674
Provision for credit losses 331 542 1,040 745
Employee related costs 2,820 1,157 7,342 3,666
Sales and marketing 6,081 5,830 19,945 15,083
General and administrative 8,277 3,832 18,956 9,910
--------- ---------- --------- ----------
Total expenses 27,621 17,487 73,458 45,078
--------- ---------- --------- ----------
Income before provision for income taxes 6,525 5,482 19,105 16,131
Provision for income taxes 2,610 1,973 7,642 5,704
--------- ---------- --------- ----------
Net income $ 3,915 $ 3,509 $ 11,463 $ 10,427
========= ========== ========= ==========
Earnings per common share:
Basic $ 1.16 $ 0.95 $ 3.32 $ 2.82
Diluted $ 1.12 $ 0.92 $ 3.23 $ 2.74
Average common shares:
Basic 3,375 3,703 3,451 3,700
Diluted 3,502 3,806 3,538 3,810
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------------- Accumulated
Number Additional Other
Of Shares Paid-In Comprehensive Retained
Outstanding Amount Capital Income Earnings
--------------- ----------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1999 3,587 $ 3 $ 23,339 $ 3,354 $ 33,596
Comprehensive income:
Net income -- -- -- -- 11,463
Unrealized gains on investment securities -- -- -- 309 --
-------- ------- ----------- ---------- ----------
Total comprehensive income -- -- -- 309 11,463
-------- ------- ----------- ---------- ----------
Exercise of stock options 61 1 211 -- --
Issuance of non-employee stock options -- -- 130 -- --
Repurchase of treasury shares (259) -- -- -- --
Cash dividends ($0.22 per share) -- -- -- -- (778)
Stock dividend (5% of outstanding shares):
Issuance of treasury shares -- -- -- -- --
Issuance of new shares -- -- 604 -- (2,156)
-------- ------- ----------- ---------- ----------
Balance, March 31, 2000 3,389 $ 4 $ 24,284 $ 3,663 $ 42,125
======== ======= =========== ========== ==========
Balance, June 30, 1998 3,699 $ 3 $ 23,256 $ -- $ 20,083
Comprehensive income:
Net income -- -- -- -- 10,427
Unrealized gains on investment securities -- -- -- 1,190 --
-------- ------- ----------- ---------- ----------
Total comprehensive income -- -- -- 1,190 10,427
-------- ------- ----------- ---------- ----------
Exercise of stock options 4 -- 10 -- --
Issuance of non-employee stock options -- -- 73 -- --
Cash dividends ($0.115 per share) -- -- -- -- (404)
-------- ------- ----------- ---------- ----------
Balance, March 31, 1999 3,703 $ 3 $ 23,339 $ 1,190 $ 30,106
======== ======= =========== ========== ==========
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Total
Treasury Note Stockholders'
Stock Receivable Equity
------------ -------------- ----------------
<S> <C> <C> <C>
Balance, June 30, 1999 $ (1,446) $ (600) $ 58,246
Comprehensive income:
Net income -- -- 11,463
Unrealized gains on investment securities -- -- 309
---------- --------- -----------
Total comprehensive income -- -- 11,772
---------- --------- -----------
Exercise of stock options -- -- 212
Issuance of non-employee stock options -- -- 130
Repurchase of treasury shares (3,090) -- (3,090)
Cash dividends ($0.22 per share) -- -- (778)
Stock dividend (5% of outstanding shares):
Issuance of treasury shares 1,552 -- 1,552
Issuance of new shares -- -- (1,552)
---------- --------- -----------
Balance, March 31, 2000 $ (2,984) $ (600) $ 66,492
========== ========= ===========
Balance, June 30, 1998 $ -- $ (600) $ 42,742
Comprehensive income:
Net income -- -- 10,427
Unrealized gains on investment securities -- -- 1,190
---------- --------- -----------
Total comprehensive income -- -- 11,617
---------- --------- -----------
Exercise of stock options -- -- 10
Issuance of non-employee stock options -- -- 73
Cash dividends ($0.115 per share) -- -- (404)
---------- --------- -----------
Balance, March 31, 1999 $ -- $ (600) $ 54,038
========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 11,463 $ 10,427
Adjustments to reconcile net income to net
cash used in operating activities:
Gain on sale of loans and leases (63,025) (45,789)
Depreciation and amortization 13,945 7,497
Interest accretion on interest-only and residual strips (11,901) (699)
Provision for credit losses 1,040 745
Accounts written off, net (1,273) (761)
Loans and leases originated for sale (844,365) (653,805)
Proceeds from sale of loans and leases 788,638 599,738
Principal payments on loans and leases 3,377 8,015
Increase in accrued interest and fees on
loan and lease receivables (3,956) (1,676)
Purchase of initial overcollateralization on securitized loans
and leases (7,342) (3,724)
Required purchases of additional overcollateralization on
securitized loans and leases (20,710) (11,490)
Cash flow from interest-only and residual strips 34,474 26,482
Decrease in receivable for loans and leases sold 13,361 2,537
Increase in prepaid expenses (2,741) (1,220)
Increase in accounts payable and accrued expenses 322 5,720
Increase (decrease) in deferred income taxes 9,403 (1,145)
Increase in loans in process 3,297 9,255
Decrease in other, net (1,195) (1,297)
----------- -----------
Net cash used in operating activities (77,188) (51,190)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment, net (9,758) (3,668)
Purchase of investment - (646)
Principal receipts on investments 24 699
----------- -----------
Net cash used in investing activities (9,734) (3,615)
----------- -----------
</TABLE>
F-5
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow (Continued)
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Financing Activities:
Proceeds from issuance of subordinated debt $ 177,055 $ 111,616
Redemptions of subordinated debt (59,670) (44,022)
Net borrowings on revolving lines of credit (10,225) 6,828
Borrowings, lease financing facility 12,294 -
Principal payments on lease financing facility (1,635) -
Principal payments on note payable, other (1,822) (686)
Financing costs incurred (2,545) (2,218)
Cash dividend paid (778) (405)
Exercise of employee stock options 212 10
Issuance of non-employee stock options 130 73
Repurchase of treasury stock (3,090) -
---------- ----------
Net cash provided by financing activities 109,926 71,196
---------- ----------
Net increase in cash and cash equivalents 23,004 16,391
Cash and cash equivalents, beginning of period 22,395 4,486
---------- ----------
Cash and cash equivalents, end of period $ 45,399 $ 20,877
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 19,280 $ 13,302
Income taxes $ 500 $ 2,755
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2000
1. Basis of Financial Statement Presentation
American Business Financial Services, Inc., 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 and conventional first mortgage and
home equity loans, including loans to credit impaired borrowers secured
by first and second mortgages. In addition, the Company continues to
service its portfolio of business equipment leases, and to originate a
minimal amount of new leases. The Company also sells subordinated debt
securities to the public, the proceeds of which are used to fund loan
originations and the Company's operations.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and the elimination of intercompany
balances) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended March 31,
2000 are not necessarily indicative of financial results that may be
expected for the full year ended June 30, 2000. These unaudited
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999.
Certain prior period financial statement balances have been
reclassified to conform to the current period presentation. All prior
period outstanding share, 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, and paid September 27,
1999.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued
the Statement of Financial Accounting Standards 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 entities 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 in August 1999, the FASB issued the Statement of Financial
Accounting Standards No. 137, which deferred the effective date of the
standard 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-7
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2000
1. Basis of Financial Statement Presentation - (Continued)
In October 1999, the 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, 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, had been reclassified to available-for-sale on
January 1, 1999.
2. Loan and Lease Receivables - Available for Sale
Loan and lease receivables available for sale which are held in the
Company's portfolio were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---------- --------
<S> <C> <C>
Real estate secured loans $ 14,111 $ 21,027
Leases, net of unearned income of $2,696
and $1,543 19,617 13,451
---------- --------
33,728 34,478
Less: Allowance for credit losses on loans and leases
available for sale 469 702
---------- --------
$ 33,259 $ 33,776
========== ========
</TABLE>
3. Interest-Only and Residual Strips
Activity for interest-only and residual strips during the nine-month
period ended March 31, 2000 was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period $ 178,218
Initial recognition of interest-only and residual strips,
including initial overcollateralization of $7,342 81,917
Required purchases of additional overcollateralization 20,710
Interest accretion 11,901
Cash flow from interest-only and residual strips (34,474)
Net adjustments to fair value 500
---------
Balance at end of period $ 258,772
=========
</TABLE>
Interest-only and residual strips include overcollateralization
balances that represent excess principal balances of loans and leases
in securitization trusts over investor interests maintained to provide
credit enhancement to investors in securitization trusts. In order to
meet the required overcollateralization levels, the trust initially
retains residual cash flows until overcollateralization requirements,
which are specific to each securitization, are met. At March 31, 2000,
the Company's investment in overcollateralization was $69.6 million.
F-8
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2000
4. Servicing Rights
Activity for servicing rights during the nine-month period ended March
31, 2000 was as follows (in thousands):
Balance at beginning of period $ 43,210
Initial recognition of servicing rights 31,439
Amortization (8,568)
----------
Balance at end of period $ 66,081
==========
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, referred
to as a stratum, of the underlying loans and leases, which consist of
loan type and credit quality and other factors. Impairments if they
occurred would be recognized in a valuation allowance for each impaired
stratum in the period of impairment. As of March 31, 2000, no valuation
allowance for impairment was required.
5. Other Assets
Other assets were comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Goodwill, net of accumulated amortization
of $2,814 and $1,913 $ 15,450 $ 15,018
Financing costs, debt offering costs, net of
accumulated amortization of $5,014 and $3,903 5,902 4,487
Due from securitization trusts for servicing
related activities 7,131 6,266
Investments held to maturity (mature April 2000
through April 2011) 990 1,014
Real estate owned 1,781 843
Other 3,811 5,783
--------- --------
$ 35,065 $ 33,411
========= ========
</TABLE>
F-9
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2000
6. Subordinated Debt and Warehouse Lines and Other Notes Payable
Subordinated debt was comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
----------- ----------
<S> <C> <C>
Subordinated debentures (a) $ 325,539 $ 206,918
Subsidiary subordinated debentures (b) 3,499 4,734
----------- ---------
Total subordinated debentures $ 329,038 $ 211,652
=========== =========
</TABLE>
Warehouse lines and other notes payable were comprised of the following
(in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
----------- ----------
<S> <C> <C>
Warehouse revolving line of credit (c) $ 31,774 $ 42,627
Warehouse revolving line of credit (d) -- 3,764
Warehouse revolving line of credit (e) 4,493 102
Revolving line of credit (f) 5,000 5,000
Repurchase agreement (g) 4,677 4,677
Lease funding facility (h) 10,659 --
Senior subordinated debt (i) -- 1,250
Other debt 699 1,271
------------ -----------
Total warehouse lines and other notes payable $ 57,302 $ 58,691
============ ===========
</TABLE>
(a) Subordinated debentures due April 2000 through March 2009,
interest rates ranging from 6.15% to 12.90%; subordinated to all
of the Company's indebtedness.
(b) Subsidiary subordinated debentures due April 2000 through May
2003, interest rates ranging from 9.00% to 11.99%; subordinated to
all of the Company's indebtedness.
(c) $150 million warehouse revolving line of credit expiring October
2000, interest rates ranging from LIBOR plus 1.375% to LIBOR plus
2.0%, collateralized by certain loan receivables.
(d) $20 million warehouse revolving line of credit expired January
2000, interest rates at prime less 1.0% or LIBOR at the Company's
option, collateralized by lease receivables.
(e) $150 million warehouse line of credit expiring August 2000,
interest rate of LIBOR plus 1.0%, collateralized by certain loan
receivables.
(f) $5 million revolving line of credit expiring December 2000,
interest rate of LIBOR plus 2.0%, collateralized by certain
residual interests in securitization trusts.
(g) Repurchase agreement due April 2000, interest rate of LIBOR plus
0.5%, collateralized by certain lease backed securities.
(h) Lease funding facility due April 2000 through December 2004,
interest rate of LIBOR plus 1.775%, collateralized by certain
lease receivables.
(i) Senior subordinated debt due December 1999, interest rate of
12.0%, subordinated to certain subsidiary's senior indebtedness.
F-10
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2000
7. Earnings Per Share
Following is a reconciliation of the Company's basic and diluted
earnings per share calculations (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- --------------------------
2000 1999 2000 1999
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Earnings
(a) Net income $ 3,915 $ 3,509 $ 11,463 $ 10,427
Average Common Shares
(b) Average common shares outstanding 3,375 3,703 3,451 3,700
Average potentially dilutive shares 127 103 87 110
------ -------- --------- ---------
(c) Average common and potentially dilutive
shares 3,502 3,806 3,538 3,810
====== ======== ========= =========
Earnings Per Common Share
Basic (a/b ) $ 1.16 $ 0.95 $ 3.32 $ 2.82
Diluted ( a/c ) $ 1.12 $ 0.92 $ 3.23 $ 2.74
</TABLE>
8. Segment Information
The Company has three operating segments: Loan Origination, Servicing,
and Investment Note Services.
The Loan Origination segment originates business purpose loans secured
by real estate and other business assets and home equity loans
including loans to credit-impaired borrowers and conventional first
mortgage loans secured by one to four family residential real estate.
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 funds the Company's general
operating and lending activities through the offering of the Company's
subordinated debt securities.
All Other mainly represents segments that do not meet the Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of
an Enterprise and Related Information" 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.
F-11
<PAGE>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2000
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>
Nine months ended
March 31, 2000 Loan Investment Note Reconciling
(in thousands) Origination Services Servicing All Other Items Consolidated
-------------- -------------- -------------- ------------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
External revenues:
Gain on sale of loans and
Leases $ 63,025 $ -- $ -- $ -- $ -- $ 63,025
Interest income 3,760 -- -- 13,473 -- 17,233
Non-interest income 1,535 -- 10,770 -- -- 12,305
Inter-segment revenues -- 26,134 -- 7,699 (33,833) --
Operating expenses:
Interest expense 19,136 19,402 168 13,603 (26,134) 26,175
Non-interest expense 27,280 6,194 6,240 7,569 -- 47,283
Inter-segment expense 7,699 -- -- -- (7,699) --
Income tax expense 5,682 215 1,745 -- -- 7,642
------------ ----------- ----------- ------------ ------------ ------------
Net income $ 8,523 $ 323 $ 2,617 $ -- $ -- $ 11,463
============ =========== =========== ============ ============ ============
Segment assets $ 116,870 $ 51,347 $ 67,370 $ 298,170 $ -- $ 533,757
============ =========== =========== ============ ============ ============
</TABLE>
F-12
<PAGE>
Report of Independent Certified Public Accountants
American Business Financial Services, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of American
Business Financial Services, Inc. and subsidiaries as of June 30, 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.
/s/ BDO Seidman LLP
Philadelphia, Pennsylvania
September 9, 1999
F-13
<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-14
<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-15
<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 Retained
Outstanding Amount Capital Income Earnings
---------------------------------------------------------------------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 2,471 $ 2 $ 1,932 $ -- $ 3,057
Sale of common stock, --
net of offering expenses of $2,261 1,208 1 20,737 --
Cash dividends ($.06 per share) -- -- -- -- (158)
Net income -- -- -- -- 5,940
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 3,679 3 22,669 -- 8,839
Common stock issued for acquisition 21 -- 500 -- --
Issuance of non-employee stock options -- -- 87 -- --
Cash dividends ($.06 per share) -- -- -- -- (211)
Net income -- -- -- -- 11,455
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 3,700 3 23,256 -- 20,083
Comprehensive income:
Net income -- -- -- -- 14,088
Unrealized gains on investment securities -- -- -- 3,354 --
---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 3,354 14,088
Issuance of non-employee stock options -- -- 73 -- --
Exercise of stock options 4 -- 10 -- --
Cash dividends ($0.165 per share) -- -- -- -- (575)
Repurchase of treasury shares (117) -- -- -- --
---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 3,587 $ 3 $ 23,339 $ 3,354 $ 33,596
===========================================================================================================================
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Year ended June 30, 1999, 1998 and 1997
-----------------------------------------------------------------------------------------------
Total
Treasury Note Stockholders'
Stock Receivable Equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 $ -- $ (600) $ 4,391
Sale of common stock,
net of offering expenses of $2,261 -- -- 20,738
Cash dividends ($.06 per share) -- -- (158)
Net income -- -- 5,940
-----------------------------------------------------------------------------------------------
Balance, June 30, 1997 -- (600) 30,911
Common stock issued for acquisition -- -- 500
Issuance of non-employee stock options -- -- 87
Cash dividends ($.06 per share) -- -- (211)
Net income -- -- 11,455
-----------------------------------------------------------------------------------------------
Balance, June 30, 1998 -- (600) 42,742
Comprehensive income:
Net income -- -- 14,088
Unrealized gains on investment securities -- -- 3,354
-----------------------------------------------------------------------------------------------
Total comprehensive income -- -- 17,442
Issuance of non-employee stock options -- -- 73
Exercise of stock options -- -- 10
Cash dividends ($0.165 per share) -- -- (575)
Repurchase of treasury shares (1,446) -- (1,446)
-----------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ (1,446) $ (600) $ 58,246
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-16
<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)
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<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 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 $ --
========================================================================================================================
</TABLE>
Supplemental disclosure of noncash financing activity
-----------------------------------------------------
<TABLE>
<CAPTION>
Noncash transaction recorded in connection with acquisition of subsidiary
<S> <C> <C> <C>
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-18
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
1. Summary of Business
Significant
Accounting
Policies 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.
F-19
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
1. Summary of Cash and Cash Equivalents
Significant
Accounting Cash equivalents consist of short-term
Policies -- investments with an initial maturity of
(Continued) 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.
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.
F-20
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
1. Summary of Interest-only Strips and Residual Interests
Significant
Accounting The Company sells a majority of its
Policies - originated loans and leases through
(Continued) 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.
F-21
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
1. Summary of Servicing Rights
Significant
Accountant Upon the securitization of loans and leases,
Policies - the Company retains servicing rights. The
(Continued) 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 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.
F-22
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
1. Summary of Gains on sales of loans and leases through
Significant securitizations represent the difference
Accounting between the net proceeds to the Company,
Policies - including retained interests in the
(Continued) 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 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.
F-23
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
1. Summary of Acquisition
Significant
Accounting Effective October 1, 1997, the Company
Policies - acquired all of the issued and outstanding
(Continued) 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-24
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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.
F-25
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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-26
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
4. Securitizations - The following chart presents certain key
(Continued) 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 0.25% 0.25%
=================================================================================
</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
<TABLE>
<CAPTION>
June 30, 1999 1998
---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Interest-only and residual strips- $ 172,411 $ --
Available for sale 5,806 95,913
Trading assets 66,086 2,377
Receivable for sold loans 6,266 738
Advances to securitization trusts 3,367 1,709
Other
--------------------------------------------------------------------------------
$ 253,936 $ 100,737
================================================================================
</TABLE>
F-27
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
5. Interest-Only SFAS No. 134, which became effective January
Strips and Other 1, 1999, requires that after the
Receivables - securitization of a mortgage loan held for
(Continued) 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 SAS 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.
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>
F-28
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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):
<TABLE>
<CAPTION>
June 30, 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C>
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
=================================================================================
</TABLE>
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>
F-29
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
6. Servicing Rights - Servicing rights are periodically valued
(Continued) 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.
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.
F-30
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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-31
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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 Company'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; collateralized by
certain residual interests in securitized
loans with a value of $17,949. 5,000 --
</TABLE>
F-32
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
9. Subordinated Debt
and Notes Payable -
(Continued)
<TABLE>
<CAPTION>
June 30, 1999 1998
--------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Note payable, $100,000 revolving line of
credit expiring August 2000; interest at LIBOR
plus 1.25%, payable monthly; collateralized 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
subsidiary'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>
F-33
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
9. Subordinated Debt Principal payments on debt for the next five
and Notes Payable - years are as follows: year ending June 30,
(Continued) 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.
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.
F-34
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
10. Stockholders' The Company has a loan receivable from an
Equity - officer of the Company for $600 thousand,
(Continued) 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 The Company has a 401(k) defined contribution
Benefit Plan 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-35
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------------------------
Weighted
Remaining
Range of Exercise Number Contractual Weighted-Average
Prices of Options of Shares Life in Years Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$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
================================================================================
</TABLE>
F-36
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
12. Stock Option
Plans - (Continued)
<TABLE>
<CAPTION>
Options Exercisable
--------------------------------------------------------------------------------
Weighted
Remaining
Range of Exercise Number Contractual Weighted-Average
Prices of Options of Shares Life in Years Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$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
================================================================================
</TABLE>
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):
<TABLE>
<CAPTION>
June 30, 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
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
================================================================================
</TABLE>
F-37
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
12. Stock Option The fair value of options granted was
Plans - (Continued) 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 5-10 yrs. 5-10 yrs. 5 yrs.
Risk-free interest 4.50%-5.68% 5.39%-6.17% 6.31%-6.90%
rate
</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-38
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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.
F-39
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
13. Income Taxes - The cumulative temporary differences resulted
(Continued) 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-40
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
13. Incomes Taxes - A reconciliation of income taxes at federal
(Continued) 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 As of June 30, 1999, the Company leases
and property under noncancelable operating leases
Contingencies requiring minimum annual rentals as follows
(in thousands):
<TABLE>
<CAPTION>
Year ending June 30, Amount
--------------------------------------------------------------------------
<S> <C> <C>
2000 $ 3,598
2001 3,347
2002 3,024
2003 2,041
2004 48
Thereafter --
--------------------------------------------------------------------------
$ 12,058
==========================================================================
</TABLE>
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.
F-41
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
14. Commitments Employment Agreements
and
Contingencies - The Company entered into employment
(Continued) 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-42
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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.
F-43
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
16. Fair Value of No market exists for certain of the Company's
Financial assets and liabilities. Therefore, fair value
Instruments estimates are based on judgments regarding
credit risk, investor expectation of future
economic conditions, 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.
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> <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>
F-44
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
16. Fair Value of
Financial Instruments -
(Continued)
<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.
F-45
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
16. Fair Value of
Financial Instruments - Servicing rights - Fair value is
(Continued) 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.
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>
F-46
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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 3,682 3,692 2,921
shares outstanding
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>
F-47
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
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.
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.
F-48
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
18. Segment The accounting policies of the reportable
Information - segments are the same as those described in
(Continued) the summary of significant accounting
policies.
Reconciling items represent elimination of
inter-segment income and expense items.
<TABLE>
<CAPTION>
Loan and Investment
Year ended June 30, 1999 Lease Note Reconciling
(in thousands) Origination Services Servicing All Other Items Consolidated
-------------------------------------------------------------------------------------------------------------------------------
<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-49
<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.
AMERICAN BUSINESS
FINANCIAL SERVICES, INC.
[LOGO]
$350,000,000
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*................................ $ 92,400
NASD Filing Fee...................................... 0
Printing, Engraving and Mailing...................... 110,000
Legal Fees and Expenses.............................. 100,000
Accounting Fees and Expenses......................... 50,000
Blue Sky Fees and Expenses........................... 20,000
Miscellaneous........................................ 7,540,000
----------
TOTAL $7,912,400
==========
* Exact; all other fees and expenses are estimates
Item 15. Indemnification of Directors and Officers.
The Amended and Restated Certificate of Incorporation (the "Certificate
of Incorporation") and the Bylaws (the "Bylaws") of ABFS provide for
indemnification of its directors and officers to the full extent permitted
by Delaware law. In the event that the Delaware General Corporation Law
(the "Corporation Law") is amended to authorize corporate action further
eliminating or limiting the personal liability of directors and officers,
the Certificate of Incorporation and Bylaws provide the personal liability
of the directors and officers of ABFS shall be so eliminated or limited.
Section 145 of the Corporation Law provides, in substance, that Delaware
corporations shall have the power, under specified circumstances, to indemnify
their directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by a third party or in the right of
the corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any such action,
suit or proceeding.
Section 145 of the Corporation Law provides that a company may pay the
expenses incurred by an officer or director in defending any civil, criminal,
administrative, or investigative action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding upon an undertaking by or
on behalf of such director or officer to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by the corporation.
The Certificate of Incorporation and Bylaws of ABFS provide that ABFS shall pay
such expenses.
II-1
<PAGE>
The Company maintains insurance to cover the Company's directors and
executive officers for liabilities which may be incurred by the Company's
directors and executive officers in the performance of their duties.
Item 16. Exhibits
Exhibit
Number Description
------------- ------------------------------------------------------------
4.1 Form of Unsecured Investment Note (Incorporated by reference
from Exhibit 4.1 of Amendment No. 1 to the Registration
Statement on Form SB-2 filed April 29, 1994, Registration
Number 33-76390).
4.2 Form of Unsecured Investment Note issued pursuant to
Indenture with First Trust, National Association, a national
banking association (Incorporated by reference from Exhibit
4.5 of Amendment No. One to the Registration Statement on
Form SB-2 filed on December 14, 1995, Registration Number
33-98636 (the "1995 Form SB-2").
4.3 Form of Indenture by and between ABFS and First Trust,
National Association, a national banking association
(Incorporated by reference from Exhibit 4.6 of the
Registration Statement on Form SB-2 filed on October 26,
1995, Registration Number 33-98636).
4.4 Form of Indenture by and between ABFS and First Trust,
National Association, a national banking association
(Incorporated by reference from Exhibit 4.4 of the
Registration Statement on Form SB-2 filed March 28, 1997,
Registration Number 333-24115 (the "1997 Form SB-2")).
4.5 Form of Unsecured Investment Note (Incorporated by
reference from Exhibit 4.5 of the 1997 Form SB-2).
4.6 Form of Indenture by and between ABFS and First Trust,
National Association, a national banking association
(Incorporated by reference from Exhibit 4.4 of the
Registration Statement on Form SB-2 filed May 23, 1997,
Registration Number 333-24115).
4.7 Form of Unsecured Investment Note (Incorporated by reference
from Exhibit 4.5 of the Registration Statement on Form SB-2
filed May 23, 1997, Registration Number 333-24115).
II-2
<PAGE>
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 (Incorporated by reference from Exhibit
4.10 of Registrant's Registration Statement on Form S-2, No.
333-87333, filed September 17, 1999).
4.11 Form of Indenture by and between ABFS and U.S. Bank Trust
National Association.
4.12 Form of Investment Note.
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).
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")).
II-3
<PAGE>
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).
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).
II-4
<PAGE>
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).
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).
II-5
<PAGE>
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).
10.34 Form of Standard Terms and Conditions of Lease Acquisition
Agreement related to NJMIC's 10.34 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).
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<PAGE>
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).
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).
II-7
<PAGE>
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).
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).
II-8
<PAGE>
10.50 Lease Agreement dated August 30, 1999 related to One
Presidential Boulevard (Incorporated by reference to Exhibit
10.1 of the Registrant's September 30, 1999 Form 10-Q).
10.51 Employment Agreement between American Business Financial
Services, Inc. and Albert Mandia (Incorporated by reference
to Exhibit 10.2 of the Registrant's September 30, 1999 Form
10-Q).
10.52 Change in Control Agreement between American Business
Financial Services, Inc. and Albert Mandia (Incorporated by
reference to Exhibit 10.3 of the Registrant's September 30,
1999 Form 10-Q).
10.53 12/99 Amendment dated effective as of December 30, 1999, to
$5,000,000 Loan Agreement dated as of December 30, 1998,
between American Business Credit, Inc., HomeAmerican Credit,
Inc., and New Jersey Mortgage and Investment Corp., as
co-borrower and Chase Bank of Texas, National Association as
lender (Incorporated by reference from Exhibit 10.1 of the
Registrant's December 31, 1999 Form 10-Q).
10.54 American Business Financial Services Inc. 1999 Stock Option
Plan (Incorporated by reference from Exhibit 10.2 of the
Registrant's December 31, 1999 Form 10-Q).
10.55 Amendment No. 3 to Receivables Purchase Agreement, dated as
of October 13, 1999 among American Business Lease Funding
Corporation, American Business Leasing, Inc. and a syndicate
of financial institutions led by First Union Securities,
Inc. as Deal Agent (Incorporated by reference from Exhibit
10.3 of the Registrant's December 31, 1999 Form 10-Q).
10.56 Amendment No. 4, dated as of November 12, 1999, to the
Receivables Purchase Agreement, dated as of September 30,
1998, among American Business Lease Funding Corporation,
American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Securities, Inc. as Deal
Agent (Incorporated by reference from Exhibit 10.4 of the
Registrant's December 31, 1999 Form 10-Q).
10.57 Amendment No. 5, dated as of November 29, 1999, to the
Receivables Purchase Agreement, dated as of September 30,
1998, among American Business Lease Funding Corporation,
American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Securities, Inc. as Deal
Agent (Incorporated by reference from Exhibit 10.5 of the
Registrant's December 31, 1999 Form 10-Q).
10.58 Amendment No. 6, dated as of December 14, 1999, to the
Receivables Purchase Agreement, dated as of September 30,
1998, among American Business Lease Funding Corporation,
American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Securities, Inc. as Deal
Agent (Incorporated by reference from Exhibit 10.6 of the
Registrant's December 31, 1999 Form 10-Q).
II-9
<PAGE>
10.59 Seventh Amendment, dated as of December 31, 1999, to the
Receivables Purchase Agreement, dated as of September 30,
1998, among American Business Lease Funding Corporation,
American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Securities, Inc. as Deal
Agent (Incorporated by reference from Exhibit 10.7 of the
Registrant's December 31, 1999 Form 10-Q).
10.60 Eight Amendment, dated as of January 10, 2000, to the
Receivables Purchase Agreement, dated as of September 30,
1998, among American Business Lease Funding Corporation,
American Business Leasing, Inc. and a syndicate of financial
institutions led by First Union Securities, Inc. as Deal
Agent (Incorporated by reference from Exhibit 10.8 of the
Registrant's December 31, 1999 Form 10-Q).
10.61 2000-1 Securitization Agreement - the Sale and Servicing
Agreement, dated as of March 1, 2000, by and among
Prudential Securities Secured Financing Corporation, ABFS
Mortgage Loan Trust 2000-1, Chase Bank of Texas, N.A., as
collateral agent, The Chase Manhattan Bank, as indenture
trustee and American Business Credit, Inc., as Servicer
(Incorporated by reference from Exhibit 10.1 of the
Registrant's March 31, 2000 Form 10-Q).
10.62 The Sale and Servicing Agreement dated as of March 1, 2000
by and among ABFS Millenium, Inc., as Depositor, American
Business Credit, Inc., HomeAmerican Credit, Inc., d/b/a
Upland Mortgage and New Jersey Mortgage and Investment
Corp., as Originators, American Business Financial Services,
Inc., as Guarantor, ABFS Mortgage Loan Warehouse Trust, as
Issuer, American Business Credit, Inc., as Servicer, and The
Chase Manhattan Bank, as Indenture Trustee and Collateral
Agent (Incorporated by reference from Exhibit 10.2 of the
Registrant's March 31, 2000 Form 10-Q).
10.63 Warehousing Credit and Security Agreement dated as of May 5,
2000 between New Jersey Mortgage and Investment Corp.,
American Business Credit, Inc., HomeAmerican Credit, Inc.
d/b/a Upland Mortgage and Residential Funding Corporation.
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.
23.1 Consent of Blank Rome Comisky & McCauley LLP (See Exhibit 5).
23.2 Consent of BDO Seidman LLP.
24 Power of Attorney (Included on Signature Page).
II-10
<PAGE>
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-Q for the nine months
ended March 31, 2000.)
99.1 Form of Prospectus Supplement.
99.2 Advertising Materials and Order Forms.
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;
II-11
<PAGE>
(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 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.
II-12
<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 June 27, 2000.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: June 27, 2000 By: /s/ Anthony J. Santilli
-----------------------------------------
Anthony J. Santilli, Chairman, President,
Chief Executive Officer, Chief Operating
Officer and Director
(Duly Authorized Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Anthony J. Santilli his true and lawful
attorney-in-fact and agent with full power of substitution or resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documentation in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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 June 27, 2000
------------------------------ Officer, Chief Operating Officer and
Anthony J. Santilli Director (Principal Executive and
Operating Officer)
/s/ Albert W. Mandia Executive Vice President and Chief June 27, 2000
------------------------------ Financial Officer (Principal
Albert W. Mandia Financial and Accounting Officer)
/s/ Leonard Becker Director June 27, 2000
------------------------------
Leonard Becker
/s/ Richard Kaufman Director June 27, 2000
------------------------------
Richard Kaufman
/s/ Michael DeLuca Director June 27, 2000
------------------------------
Michael DeLuca
/s/ Harold Sussman Director June 27, 2000
------------------------------
Harold Sussman
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Numbers Description
--------------- -----------
4.11 Form of Indenture by and between ABFS and U.S. Bank Trust
National Association.
4.12 Form of Investment Note.
5 Opinion of Blank Rome Comisky & McCauley LLP
10.63 Warehousing Credit and Security Agreement dated as of May 5,
2000 between New Jersey Mortgage and Investment Corp.,
American Business Credit, Inc., HomeAmerican Credit, Inc.
d/b/a Upland Mortgage and Residential Funding Corporation.
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.
23.1 Consent of Blank Rome Comisky & McCauley LLP (See Exhibit 5).
23.2 Consent of BDO Seidman LLP.
24 Power of Attorney (Included on Signature Page)
25 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 on Form T-1.
99.1 Form of Prospectus Supplement.
99.2 Advertising Materials and Order Forms.
