<PAGE>
As filed with the Securities and Exchange Commission on August 21, 2000
Registration No. 333-40248
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. ONE TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0418807
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ANTHONY J. SANTILLI
Chairman, President, Chief Executive Officer,
Chief Operating Officer and Director
American Business Financial Services, Inc.
Balapointe Office Center
111 Presidential Boulevard
Bala Cynwyd, PA 19004
(610) 668-2440
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
JANE K. STORERO, ESQUIRE
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, Pennsylvania 19103-6998
(215) 569-5500
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective registration statement filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective registration statement filed pursuant
to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434 please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
Subject to Completion, Dated August 21, 2000
[LOGO]
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
$350,000,000 of Subordinated Debt Securities
American Business Financial Services, Inc. is offering the subordinated
investment notes and the adjustable-rate, subordinated money market notes. We
offer investment notes with maturities of three months to 120 months. The money
market notes have no stated maturity. For a more detailed description of these
securities, see "Highlights of Terms of the Debt Securities" and "Description of
the Debt Securities Offered and the Indenture." We will provide the interest
rates currently being offered on the debt securities in a supplement to this
prospectus. You should read this prospectus and the rate supplement carefully
before you invest.
We will receive all of the proceeds from the sale of the debt
securities which we estimate will total approximately $342.1 million after
paying expenses.
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 the FDIC, any governmental or private insurance fund, or any other
entity.
These debt securities are our unsecured obligations. 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 or be sustained.
An investment in these securities involves risks and uncertainties.
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.
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
Page
Prospectus Summary.............................................................3
Highlights of Terms of The Debt Securities Offered............................10
Risk Factors..................................................................11
Forward Looking Statements....................................................22
Use of Proceeds...............................................................23
Description of The Debt Securities Offered and The Indenture..................24
Selected Consolidated Financial Data..........................................38
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations........................................40
Business......................................................................83
Where You Can Find More Information..........................................103
Management...................................................................105
Market For Common Stock and Related Stockholder Matters......................110
Plan of Distribution.........................................................112
Legal Matters................................................................112
Experts......................................................................112
Index To Consolidated Financial Statements...................................F-1
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It does
not contain all of the information that is necessary to make an informed
investment decision. 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. According to these business arrangements, we will
purchase home equity loans that do not meet the underwriting guidelines of the
selling institution for loans it holds in its portfolio but that do meet our
underwriting criteria. We refer to these business arrangements 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 into 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. These
institutions have historically provided loans only to
3
<PAGE>
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 prefer 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.
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. Next, we sell a portion of the certificates, notes or
other securities to investors for cash. Often the originator of the loans
retains the servicing rights, which is the right to service the loans for a fee.
The originator may also retain an interest in the cash flows generated by the
securitized loans referred to as an interest-only strip 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 from our principal operating office located in
Pennsylvania and branch offices located in Florida and Arizona. We 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."
4
<PAGE>
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.
5
<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
------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Gain on sale of loans and leases.................... $63,025 $45,789 $64,490 $40,778 $19,942 $ 8,721 $ 1,350
Interest and fees................................... 14,219 12,717 16,553 17,386 5,584 3,245 4,058
Interest accretion on interest-only strips.......... 11,902 699 2,021 538 101 -- --
Other............................................... 3,417 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
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
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 strips....................... 258,772 178,218 95,913 37,507 32,639 13,448
Receivable for sold loans and leases....... 62,651 66,086 2,377 960 26 86
Servicing rights........................... 66,081 43,210 18,472 8,083 5,907 1,388
Total assets............................... 533,757 396,301 226,551 103,989 46,894 22,175
Subordinated debt.......................... 329,038 211,652 112,182 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>
6
<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
</TABLE>
<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>
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 managed portfolio 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 managed portfolio at end of
period..................................... .85 .68 .85 .16 .34 1.01 4.29
Loan and lease losses as a percentage
of the average total managed
portfolio 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>
7
<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 in this prospectus as debt securities. In connection with this
offering of debt securities, we have entered into an agreement called an
indenture with U.S. Bank Trust National Association, a national banking
association who will act as the trustee. The indenture provides detailed
information regarding the terms of debt securities and what happens in the event
we fail to make a payment. The trustee monitors our compliance with the terms of
the indenture and takes actions to protect the rights of holders of the debt
securities if we do not comply with these terms. 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 a 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 the FDIC or other government agencies or 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. 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 available for sale loans, working
capital, and cash generated from additional debt financing. See "Risk Factors --
Since we do not set aside funds to repay the debt securities offered and you
must rely on our revenues from operations and other sources for repayment, if
our sources of repayment are not adequate, you could lose all or a part of your
investment."
Subordinated Obligations. The debt securities are second in right of
repayment, or subordinated, to our senior debt and debt of our subsidiaries,
other than the senior debt. 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 and debt of
our subsidiaries.
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 March 31, 2000, we had $329.0 million 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. Purchasers may not
transfer rights of ownership in the security by the endorsement and delivery of
the statement to another purchaser. See "Provisions Relating to All Securities"
for information on how to transfer this debt security.
8
<PAGE>
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.
Use of Proceeds. Assuming that we sell all of the $350.0 million of
debt securities offered, we will receive net proceeds of approximately $342.1
million after paying expenses which we estimate to be approximately $7.9
million. We may use up to approximately $140.0 million to $160.0 million of the
net proceeds to repay maturing notes with maturities of 1 day to 10 years and
interest rates ranging from 6.15% to 12.90%. We intend to use the remainder of
the net proceeds we receive from the sale of the debt securities for our general
corporate purposes as described under "Use of Proceeds."
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 costs
and expenses related to those sales. If we use brokers, expenses of the offering
will increase and the proceeds we receive will be less than currently estimated.
9
<PAGE>
HIGHLIGHTS OF TERMS OF THE DEBT SECURITIES OFFERED
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
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
Purchase and Additional
Purchases..................... Minimum purchase: $1,000 per security Minimum purchase: $1,000 per security or
or any amount in excess of $1,000. any amount in excess of $1,000.
-----------------------------------------------------------------------------------------------------------------------
Annual Interest Rate.......... Fixed upon issuance. You may choose a We will adjust the interest rate paid
term length and the applicable interest from time to time in our sole
rate will be based upon the term chosen. discretion. The rate shall not be less
than 4.0% per year. We will notify
holders in writing at least 14 days
prior to any decrease in the interest
rate. No interest will be paid for any
day on which the principal balance is
below $1,000.
-----------------------------------------------------------------------------------------------------------------------
Payment of Interest........... Interest 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
compounded daily and paid at maturity. month. No checks will be issued in
Interest on investment notes with payment of interest. Accrued interest
maturities of one year or greater will will be added to principal in each
be compounded daily and, at the election account in the form of additional
of the holder, paid at maturity, securities.
monthly, quarterly, semi-annually or
annually.
-----------------------------------------------------------------------------------------------------------------------
Redemption by Holder.......... Investment notes with remaining May be redeemed by the holder upon
maturities of less than one year are not written notice to us with payment to be
redeemable prior to maturity. Investment made within 10 business days of our
notes with remaining maturities of one receipt of such notice from the holder.
year or greater may be redeemed by the Redemptions must be at least $500,
holder, who is a natural person, except for redemptions to close an
following his/her total permanent account. Redemptions may be made by
disability (as described under the drafts, which are similar to checks. We
heading "Description of the Debt will charge a service fee if you use
Securities Offered and the Indenture _ more than three (3) drafts per month.
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").
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[CONTINUED]
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Investment Notes Money Market Notes
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 transaction statement will be issued, (A transaction statement will be issued,
not an individual promissory note.) Not 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.
-----------------------------------------------------------------------------------------------------------------------
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.
Risks Related to the Offering
Because the debt securities are not insured against loss by the FDIC or any
governmental agency, you could lose your entire investment.
Neither the FDIC nor any other 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 available for sale loans, 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.
Because our business operations are generally not subject to regulation and
examination by federal banking regulators, these protections are not available
to protect purchasers of our debt securities.
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."
11
<PAGE>
Our residential lending business is subject to government regulation and
licensing requirements which may hinder our ability to operate profitably and
repay the notes.
Our residential lending business is subject to extensive regulation,
supervision and licensing by various state departments of banking or financial
services. Our lending business is also 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 departments of banking or financial
services in the 47 states where we are licensed with respect to originating,
processing, underwriting, selling and servicing home equity loans and
conventional first mortgage loans. We are also subject to Federal Reserve Board
regulations related to residential mortgage lending and servicing and the
Department of Housing and Urban Development regulation and reporting
requirements. Failure to comply with these requirements can lead to, among other
remedies, termination or suspension of licenses, rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
Federal and state government agencies have recently begun to consider,
and in some instances have adopted, legislation to restrict lenders' ability to
charge rates and fees in connection with subprime residential mortgage loans and
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, this legislation may
limit our ability to impose fees, charge interest rates on consumer loans to
those borrowers with problem credit 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 profitably and
repay the notes. See "Business -- Regulation."
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 our subsidiaries.
As of May 31, 2000, there was $140.4 million of senior debt and subsidiary debt
outstanding. As of March 31, 2000, there was $57.3 million 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."
12
<PAGE>
Since we do not set aside funds to repay the debt securities offered and you
must rely on our revenues from operations and other sources for repayment, if
our sources of repayment are not adequate, you could lose all or a part of your
investment.
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.
Because funds are not 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."
Since our management has broad discretion over how to use the proceeds from the
offering, they could use the proceeds in a manner contrary to the best interests
of investors.
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. As a result,
management could use the funds in a manner contrary to the best interest of
investors. See "Use of Proceeds."
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.
13
<PAGE>
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 interest-only strips and servicing rights we
retain when we securitize loans could be inaccurate and could result in reduced
profits and impair our ability to repay the notes.
We generally retain interest-only strips and servicing rights in the
securitization transactions we complete. We estimate the fair value of the
interest-only strips and servicing rights based upon established 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
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
established 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 and impair our ability to repay the notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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, the
lack of adequate funds would reduce our profitability and restrict our ability
to repay the notes upon maturity. 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."
14
<PAGE>
Lending to credit-impaired borrowers may result in higher delinquencies in our
managed portfolio which could result in a reduction in profits and restrict our
ability to repay the notes.
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. Historically, we have experienced a higher rate of delinquencies on
loans made to these credit-impaired borrowers as compared to delinquency rates
experienced by banks on loans to conforming borrowers. 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. Higher than anticipated
delinquencies, foreclosures or losses in our sold and serviced loans, would
reduce our profits which could restrict our ability to repay the notes upon
maturity. 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 which could restrict our ability to repay the
notes when due.
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 size of securitizations. If we do not close securitizations 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 and origination of additional loans.
Our ability to complete securitizations depends on several factors,
including:
o conditions in the securities markets generally including market
interest rates;
o conditions in the asset-backed securities markets specifically;
and
o the credit quality of our managed portfolio.
Any substantial impairment in the size or availability of the 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 --
Securitizations."
15
<PAGE>
A change in market interest rates may result in a reduction in our profits and
impair our ability to repay the notes.
Rapid changes, either upward or downward, in interest rates may
adversely affect our profits. Any future rise in interest rates may:
o reduce customer demand for our products;
o widen investor spread requirements and increase
overcollateralization requirements in future securitizations;
o increase our cost of funds;
o reduce 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;
o reduce the profit we will realize in securitizations or other
sales of loans; and
o limit our access to borrowings in the capital markets.
Gain on sale of loans may be unfavorably impacted to the extent that we
hold fixed rate mortgages 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. Any reduction in
our profits could impair our ability to repay the notes upon maturity. In
addition, an increase in interest rates could increase interest costs on all
sources of borrowed funds and reduce spreads on securitized loans which could
negatively impact our liquidity and capital resources by reducing cash flows
which would decrease our profitability.
Since a portion of the certificates issued to investors by
securitization trusts are floating rate certificates, the interest rates on
these certificates adjust based on an 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.
16
<PAGE>
If we are not able to sustain the levels of growth in revenues and earnings that
we experienced in the past, our future profits may be reduced and our ability to
repay the notes may be impaired.
During the year ended June 30, 1999 and 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 in the past depends upon a variety of factors outside our
control, including:
o interest rates,
o conditions in the asset-backed securities markets,
o economic conditions in our primary market area,
o competition, and
o regulatory restrictions.
Our ability to sustain the levels of growth experienced in the past
will become increasingly difficult in light of rising interest rates experienced
during the nine months ended March 31, 2000 as compared to a falling or stable
interest rate environment. If we are unable to sustain our levels of growth, our
profits may be reduced and our ability to repay the notes upon maturity
impaired. See "-A change in market interest rates may result in a reduction in
our profits and impair our ability to repay the notes" and "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 which could impair our
ability to repay the notes.
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 which could
impair our ability to repay the notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Interest Rate Risk
Management."
17
<PAGE>
If we are unable to continue to successfully implement our business strategy,
our revenues may decrease which could impair our ability to repay the notes.
Our business 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
implement our business strategy and successfully leverage our fixed costs which
could result in a reduction in our revenues and impair our ability to repay the
notes. See "Business -- Lending and Leasing Activities."
If loan prepayment rates are higher than anticipated, our profits could be
reduced and our ability to repay the notes impaired.
A significant decline in market interest rates could increase the level
of loan prepayments, which would decrease 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 strips and servicing rights, adversely impacting earnings during
the period of adjustment which would result in a reduction in our profitability
and limit our ability to repay the notes upon maturity. 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 and our ability to repay the notes impaired.
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 and limit our ability to repay the notes upon
maturity. See "Business - Lending and Leasing Activities" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
18
<PAGE>
A decline in value of the collateral securing our loans could result in an
increase in losses on foreclosure which could reduce our profitability and limit
our ability to repay the notes.
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 which could
reduce our profitability and limit our ability to repay the notes. 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 and our ability to repay the notes
impaired.
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 and
impair our ability to repay the notes. See "Business--Lending and Leasing
Activities."
If we are unable to implement an effective hedging strategy, our net income may
be reduced which would reduce the funds available to repay the notes.
We have implemented a hedging strategy in an attempt to mitigate the
effect of changes in interest rates on our fixed rate mortgage loans 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 and our
ability to repay the notes.
19
<PAGE>
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 and our ability to repay
the notes. 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 which would reduce the funds available to repay the notes.
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 which would reduce the funds available to repay
the notes. See "Business -- Lending and Leasing Activities" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Our securitization agreements require us to retain some risk on loans that do
not meet the requirements in these agreements which could result in a reduction
in revenues which would reduce the funds available to repay the notes.
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."
Claims by borrowers or investors could result in reduced revenues which would
reduce the funds available to repay the notes.
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.
20
<PAGE>
Although no material claims or legal actions are currently assessed
against us, any claims asserted in the future may result in legal expenses,
liability, and 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 which could reduce
the funds available to repay the notes.
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. Any reduction in revenues could
reduce the funds available to repay the notes. 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 and the funds available to repay the notes.
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.
To date there have been three instances where we have determined not to
foreclose on the real estate collateralizing a delinquent loan because of
environmental considerations. Any losses we may sustain on these three loans
will not have a material adverse effect on our profitability.
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."
21
<PAGE>
FORWARD LOOKING STATEMENTS
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. These
forward-looking statements regarding our business and prospects are based upon
numerous assumptions about future conditions, which may ultimately prove to be
inaccurate. Actual events and results may materially differ from anticipated
results described in those statements. Forward-looking statements involve risks
and uncertainties described under "Risk Factors" as well as other portions of
the prospectus, 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.
22
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds resulting from the sale of the debt
securities will be approximately $342.1 million net of estimated offering
expenses if we sell all of the securities we are offering through this
prospectus. We may use approximately $140.0 million to $160.0 million 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%. A portion of the indebtedness to be
repaid was issued within one year and was used for the general corporate
purposes described below. The remainder of the proceeds will be used for general
corporate purposes including, but not limited to:
o financing the future growth of our loan portfolios and capital
expenditures;
o the repayment of warehouse credit facilities and lines of credit;
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, 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
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.
23
<PAGE>
DESCRIPTION OF THE DEBT SECURITIES OFFERED AND THE INDENTURE
General
The debt securities represent our unsecured debt obligations. In
connection with this offering of debt securities, we have entered into an
agreement, called an indenture, with U.S. Bank Trust National Association, a
national banking association. 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 in the indenture of some of the 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. The stock we hold in our subsidiaries, as well as any of our
other assets, is available to repay the debt securities in the event of default.
In the event of our default and liquidation of our subsidiaries to repay the
noteholders, we must pay or make provisions for the payment of creditors of the
subsidiaries from the assets of the subsidiaries before the remaining assets of
the subsidiaries can be used to repay the holders of the debt securities. See
"-- Provisions Relating to All Securities -- Subordination."
The debt securities are not secured by any collateral or lien. The debt
securities do not contain 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 and you must rely on
our revenues from operations and other sources for repayment, if our sources of
repayment are not adequate, you could lose all or a part of your investment."
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
24
<PAGE>
send each holder a transaction statement which will indicate our acceptance of
the order.
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 will
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 are fully registered in those names as we
direct only if:
o we, at our option, advise the trustee in writing of its election to
terminate the book-entry system, or
o 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 the 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.
25
<PAGE>
We will compute interest on investment notes on the basis of an actual
calendar year and interest will compound daily. We will pay interest on
investment notes with terms of less than twelve months 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. Holders must request to change the election 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.
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 specified
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 term of the investment note will automatically
extend 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.
Until either we or the holder terminate or redeem the investment notes,
they will continue to renew in this manner. 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 will 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 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 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:
26
<PAGE>
o the lowest interest rate then being paid on the investment notes we
offer to the general public; or
o the rate we pay on the investment note immediately prior to its
maturity.
As a courtesy, we provide a request for repayment form with the notice. Use of
the form by a holder is not a condition of repayment. Holder may also request
repayment by writing to us.
Optional Renewal Programs. From time to time, we may offer, in our sole
discretion, some investment note holders the ability to extend the maturity of
an existing investment note. This extension option if and when offered will not
be subject to the 90 day notice of redemption described in this prospectus. If
the holder elects to extend the investment note, we will issue a new note in
accordance with the terms and interest rate prevailing at the extension date.
Place and Method of Payment. We will pay principal and interest on the
investment notes at our principal executive office or at another place that we
designate for that purpose. However, we may choose to make payments by check or
draft mailed to the persons entitled to the payments at their addresses
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
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 means 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, at least forty hours per week, during the succeeding
twenty-four months.
27
<PAGE>
Quarterly Statements. We will provide holders of the investment notes
with quarterly statements, which will indicate, among other things, the current
account balance (including interest paid). These statements will be mailed not
later than the tenth business day following the end of each calendar quarter.
Provisions Relating to Money Market Notes
Maturity. The money market notes have no stated maturity and are
redeemable at any time in minimum amounts of $500 (or a lesser amount available
to close an account) at the option of the holder. See "--Redemptions by the
Holder of Money Market Notes."
Book-Entry System. Upon acceptance of an order, we will credit our
book-entry registration and transfer system, the principal amount of the money
market notes owned of record by 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 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 will 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 will 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, which we will pay 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 available to the trustee upon the
trustee's request. On each interest payment date, we will credit each account,
the interest due. We will 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 are fully registered in the names of the
accounts as we direct only if:
28
<PAGE>
o we, at our option, advise the trustee in writing of our election to
terminate the book-entry system, or
o 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.
The book-entry interests in the money market notes are not otherwise be
exchangeable for fully registered notes.
Interest. We will adjust the interest rates payable on the money market
notes from time to time in our sole discretion provided that the rate will 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.
The notice will 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 current interest rate 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 specified
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.
29
<PAGE>
Redemption by the Holder of Money Market Notes. The holder of the money
market notes may redeem the security at any time in minimum amounts of $500 (or
any amount to close an account) upon not less than 10 business days written
notice to us or pursuant to the draft procedure described below.
To the extent a holder of the money market notes redeems the money
market notes and purchases new ones, the redemptions are treated as being made
on a first-in, first-out basis.
In addition, subject to any established minimum redemption amount, a
holder of money market notes may make redemptions by draft, which is similar to
a check, made payable to the order of any payee. At the request of a holder, we
will provide drafts drawn on us that will be payable through our designated
bank. All authorized signers on a money market note must submit specimen
signatures to us and must agree to abide by our rules and regulations pertaining
to money market notes. Some 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 the holders 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.
30
<PAGE>
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. We will make payments upon
the redemption of the money market notes at our principal executive office, or
at another place that we may designate for that purpose. However, we may, at our
option, make payments by check or draft mailed to the persons entitled to the
payments at their addresses 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. The statements will be mailed not later than the
tenth business day following the end of each month. We will provide additional
statements as the holders of these securities may reasonably request from time
to time. We may require holders requesting additional statements to pay all
charges incurred by us in providing the additional statements.
Provisions Relating to All Securities
Form and Denominations/Transfers. The debt securities are not
negotiable debt instruments and, subject to some 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 purchasers cannot transfer record ownership 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. Owners may transfer ownership of the debt securities on our
register only by written notice to us signed by the owners or the owners' duly
authorized representatives on a form we supply and with our written consent
(which we will not unreasonably withhold). We may also, in our discretion,
require an opinion from the holder's counsel that the proposed transfer will not
violate any applicable securities laws and/or a signature guarantee in
connection with the transfer. Upon transfer of a debt security, we will provide
the new owner of the 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 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 are
Monday through Friday, except for legal holidays in the State of Delaware.
Right of Set-off In Circumstances Described in this Section. 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
31
<PAGE>
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 will 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, 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 created later) 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 the
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. Accordingly, in the event of a liquidation or dissolution of
one of our subsidiaries, the law requires that we pay or make provisions for
payment of the creditors of that subsidiary 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,
$140.4 million of senior debt and subsidiary debt were outstanding, and as of
March 31, 2000, $57.3 million of senior debt and subsidiary debt were
outstanding. The provisions of indenture do not limit 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 we had $369.9 million, and as
of March 31, 2000 we had $329.0 million of debt outstanding, which ranks equally
in right of payment to the debt securities offered.
For a discussion of the lack of insurance or guarantees to support the
repayment of the debt securities, see "Risk Factors -- Because our business
operations are generally not subject to regulation and examination by federal
banking regulators, these protections are not available to protect purchasers of
our debt securities."
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
32
<PAGE>
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;
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 (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 other agreements
described in the indenture or the debt securities; and
o specific events of bankruptcy or insolvency with respect to us.
If any event of default occurs and continues, 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 we have any
outstanding senior debt, a declaration of this kind will not become effective
until the earlier of:
o the day which is five business days after the receipt by
representatives of senior debt of such written notice of acceleration
or
o the date of acceleration of any senior debt.
In the case of an event of default arising from specific 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 these 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.
33
<PAGE>
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, we may amend or supplement 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.
The holders of a majority in principal amount of the then outstanding notes, may
waive any existing default or compliance with any provision of the indenture or
the debt securities.
Without the consent of each holder of the investment notes affected, an
amendment or waiver may not (with respect to any investment notes held by a
nonconsenting holder of investment notes):
o reduce the principal amount of any investment note whose holder must
consent to an amendment, supplement or waiver;
o reduce the principal of or change the fixed maturity of any security
or alter the redemption provisions or the price at which we shall
offer to repurchase the investment note;
o reduce the rate of or change the time for payment of interest,
including default interest, on any investment note;
o waive a default or event of default in the payment of interest,
principal or premium, if any, 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 or interest on the investment notes;
34
<PAGE>
o make any change to the subordination provisions of the indenture that
adversely affects holders of investment notes;
o modify or eliminate holders' redemption rights (provided that no
modification or elimination is permitted as to any securities issued
with such right); or
o make any change in the foregoing amendment and waiver provisions.
Without the consent of each holder of the money market notes affected,
an amendment or waiver may not (with respect to any money market notes held by a
nonconsenting holder of money market notes):
o reduce the principal amount of money market notes whose holders must
consent to an amendment, supplement or waiver (other than as a result
of withdrawals made by the holder of the note);
o reduce the principal of any money market note (other than as a result
of withdrawals made by the holder of the note) or alter the
redemption provisions of the money market note or the price at which
we shall offer to repurchase the money market note;
o reduce the rate of interest on the money market notes, other than the
rate adjustments provided for pursuant to the terms of the money
market notes or change the time for payment of interest, including
default interest, on any money market note;
o waive a default or event of default in the payment of interest,
principal or premium, if any, 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 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
35
<PAGE>
o make any change in the foregoing amendment and waiver provisions.
However, 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:
o 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;
o to provide for additional certificates or certificated securities;
o 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;
o 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
o 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 imposes restrictions on the trustee, should
it become one of our creditors, regarding payments of claims, property received
and proceeds on the sale of property received as security or otherwise. The
trustee will be permitted to engage in other transactions with us.
Subject to exceptions described in the indenture, 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 occurs and is not 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 those
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 has offered 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 will 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 related to each
account we maintain during the preceding quarterly period.
36
<PAGE>
No Personal Liability of Directors, Officers, Employees and
Stockholders. No director, officer, employee, incorporator or stockholder of
ours, will 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 that the SEC views these waivers as 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, we will not withhold interest, except on debt
securities held by foreign business entities. We will not sell 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, different interest rates, additional interest payments and service charges
for all notes) depending upon the state where the purchaser resides.
37
<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
------- ------- ------- ------- ------- ------- ------
Statement of Income Data: (Dollars in thousands, except per share data)
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Gain on sale of loans and leases............. $63,025 $45,789 $64,490 $40,778 $19,942 $ 8,721 $1,350
Interest and fees............................ 14,219 12,717 16,553 17,386 5,584 3,245 4,058
Interest accretion on interest-only strips .. 11,902 699 2,021 538 101 -- --
Other........................................ 3,417 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 strips.......................... 258,772 178,218 95,913 37,507 32,639 13,448
Receivable for sold loans and leases.......... 62,651 66,086 2,377 960 26 86
Servicing rights.............................. 66,081 43,210 18,472 8,083 5,907 1,388
Total assets.................................. 533,757 396,301 226,551 103,989 46,894 22,175
Subordinated debt............................. 329,038 211,652 112,182 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>
38
<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)
Other Data:
<S> <C> <C> <C> <C> <C> <C> <C>
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 managed portfolio 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 managed portfolio at end of
period.................................... .85 .68 .85 .16 .34 1.01 4.29
Loan and lease losses as a percentage
of the average total managed portfolio
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>
39
<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 offer
subordinated debt securities to the public, the proceeds of which are used to
repay existing debt, to fund loan originations and our operations and for
general corporate purposes.
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 than during a stable or falling
interest rate environment. 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.
The rising rate environment could also unfavorably impact our liquidity and
capital resources. Rising interest rates could impact our short-term liquidity
by widening investor spread requirements in pricing future securitizations,
increasing the levels of overcollateralization in future securitizations,
limiting our access to borrowings in the capital markets and limiting our
ability to sell our subordinated debt securities at favorable interest rates. In
a rising interest rate environment, short-term and long-term liquidity could
also be impacted by increased interest costs on all sources of borrowed funds,
including the subordinated debt, and by reducing spreads on our securitized
loans which would reduce our cash flows. See "Liquidity and Capital Resources"
for a discussion of both long and short term liquidity and "Risk Factors -- If
we are unable to sustain the levels of growth in revenues and earnings that we
experienced in the past, our future profits may be reduced and our ability to
repay the notes may be impaired."
40
<PAGE>
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 state and federal banking regulatory agencies, state
attorneys general offices, the Federal Trade Commission, the U.S. Department of
Justice and the U.S. Department of Housing and Urban Development relates to
predatory lending practices by companies in our industry. Sanctions have been
imposed on selected 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 those 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."
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. This strategy generates the cash
proceeds to repay warehouse and line of credit facilities, 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. These securitizations
generated non-cash gains on the sale of loans and leases of $63.0 million for
the nine months ended March 31, 2000 and $64.5 million for the fiscal year ended
June 30, 1999. Gain on sale of loans and leases resulting from securitizations
as a percentage of total revenues was 68.1% for the nine months ended March 31,
2000 and 74.6% for the year ended June 30, 1999.
Our quarterly revenues and net income may fluctuate in the future
principally as a result of the timing, size and profitability of our
securitizations. The strategy of selling loans through securitizations requires
building an inventory of loans or leases over time, during which time we incur
costs and expenses. Since a gain on sale is not recognized until a
securitization is closed, which may not occur until a subsequent quarter,
operating results for a given quarter can fluctuate significantly. If
securitizations do not close when expected, we could experience a materially
adverse effect on our results of operations for a quarter. 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 have operated on a negative cash flow basis in the
past and anticipate that we will continue to do so in the foreseeable future,
which could adversely impact our results of operations and financial condition.
See "Liquidity and Capital Resources" for a discussion of our liquidity and cash
flows and "Risk Factors -- 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.
41
<PAGE>
Several factors affect our ability to complete securitizations on a
profitable basis, including conditions in the securities markets generally, such
as fluctuations in interest rates described below, conditions in the
asset-backed securities markets relating to the types of financial assets we
originate and credit quality of the managed portfolio of loans. 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 will negatively impact the
profitability of our future securitizations. The profitability of our
securitizations may be unfavorably impacted to the extent we hold fixed rate
mortgage loans pending securitization and market interest rates increase prior
to the securitization of those fixed rate loans. Although the loan coupon rate
is fixed at the time the loan is originated, the interest rate paid to investors
in the securitization, called the pass-through rate, is not fixed until the
pricing of the securitization which occurs just prior to the sale of the loans.
Our gain on sale of loans in a securitization will be reduced if the spread
between the average coupon rate on our fixed rate loans, and the weighted
average pass-through rate paid to investors for interests issued in connection
with a securitization declines. Since our September 1998 mortgage loan
securitization, the pass-through rates on the asset-backed securities issued in
our securitizations have increased by approximately 1.5%. During this period,
the average coupon on our loans securitized has increased 0.7%. The spread
between the average coupon rate on the loans and the pass-through rate to
investors could be reduced further if, for example, market interest rates
continue to increase. Because the coupon on our loans securitized has been
relatively high, we have been able to absorb this net reduction in spread and
have continued to access the asset-backed securities markets. We estimate that
each 0.1% reduction in the spread reduces the gain on sale of loans as a
percentage of loans securitized by approximately 0.25%. See "Interest Rate Risk
Management" for further detail. We are continuously monitoring market rate
fluctuations, our loan pricing and our hedging strategy in order to attempt to
manage these changes and maintain our current level of profitability in
connection with the securitization of loans. See "Risk Factors - A change in
market interest rates may result in a reduction in our profits and impair our
ability to repay the notes."
In addition, as the spread is reduced, we are required to increase the
level of overcollateralization which is required to provide additional
protection to trust investors. Decreased spread has contributed to an increase
in the required final overcollateralization amount by approximately 1.0% of the
initial balance of loans securitized. Since September 1999 the increase in the
overcollateralization amount negatively impacts the timing of the cash flows
from the interest-only strips. See "Securitization Accounting Considerations"
for a discussion of overcollateralization amounts.
42
<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.
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.
The following table summarizes the volume of loan and lease
securitizations and whole loan sales for the nine months ended March 31, 2000
and 1999 and for the fiscal years ended June 30, 1999, 1998 and 1997 (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Fiscal Year Ended June 30,
--------------------- ------------------------------------
2000 1999 1999 1998 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Securitizations:
Business loans................ $ 78.9 $ 41.7 $ 71.9 $ 54.1 $ 38.1
Home equity loans............. 622.9 423.3 613.0 270.9 76.9
Equipment leases.............. 9.2 67.7 92.6 59.7 --
Total...................... 711.0 532.7 777.6 384.7 115.0
Whole loan sales.............. 77.6 83.9 105.8 51.6 3.8
</TABLE>
Subordinated Debt and Other Borrowings
We also rely upon funds generated by the sale of subordinated debt and
other borrowings to fund our operations and to repay subordinated debt. At March
31, 2000, $329.0 million of subordinated debt was outstanding and warehouse and
line of credit facilities totaling $323.8 million were available, of which $81.5
million was drawn upon on that date. We expect to continue to rely on the
borrowings to fund loans prior to securitization. See "Liquidity and Capital
Resources" for a discussion of short-term and long-term liquidity.
43
<PAGE>
Securitization Accounting Considerations
When we securitize our loans and leases by selling them to trusts we
receive cash and an interest-only strip, which represents our retained interest
in the securitized loans and leases. 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 interest-only strips in the trusts,
are sold to public investors. In addition, when we securitize our loans and
leases we retain the right, for a fee paid to us, to service the loans and
leases which creates an asset that we refer to as our servicing rights.
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 interest-only strips received in a securitization,
we are entitled to receive excess (or residual) cash flows. These cash flows are
the difference between the payments made by the borrowers on securitized loans
and leases and the sum of the scheduled and prepaid principal and pass-through
interest paid to the investors in the trust, servicing fees, trustee fees and,
if applicable, surety fees. Surety fees are paid to an unrelated insurance
entity to provide protection for the trust investors. Overcollateralization is
the excess of the aggregate principal balances of loans and leases in a
securitized pool over investor interests. Overcollateralization requirements are
established to provide additional protection for the trust investors.
The overcollateralization requirements for a mortgage loan
securitization, which are different for each securitization, include:
(1) The initial requirement, which is a percentage of the original balance
of loans securitized and is paid in cash at the time of sale;
(2) The final target, which is a percentage of the original balance of
loans securitized and is funded from the monthly excess cash flow; and
(3) The stepdown overcollateralization requirement, which is a percentage
of the remaining balance of loans securitized. During the stepdown
period, the overcollateralization amount is gradually reduced through
cash payments to us. The stepdown period begins at the later of 30
months or when the remaining balance of loans securitized is less than
50% of the original balance of securitized loans.
The following table provides information regarding the nature and
principal balances of mortgage loans securitized in each trust, the securities
issued by each trust, and the overcollateralization requirements of each trust.
44
<PAGE>
Summary of Selected Mortgage Loan Securitization Trust Information
Current Balances as of March 31, 2000
($ in millions)
<TABLE>
<CAPTION>
2000-1 1999-4 1999-3 1999-2 1999-1 1998-4 1998-3 1998-2
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Original balance of loans securitized:
Business loans $ 25 $ 25 $ 28 $ 30 $ 16 $ 9 $ 17 $ 15
Home equity loans 212 197 194 190 169 71 183 105
Total 237 222 222 220 185 80 200 120
Current balance of loans securitized:
Business loans $ 25 $ 25 $ 26 $ 28 $ 15 $ 7 $ 14 $ 12
Home equity loans 211 194 188 178 148 59 147 69
Total 236 219 214 206 163 66 161 81
Weighted average coupon on loans
securitized:
Business loans 16.10% 16.05% 15.78% 15.79% 16.01% 16.04% 15.96% 15.93%
Home equity loans 11.39% 11.12% 10.95% 10.52% 10.69% 10.85% 10.78% 10.74%
Total 11.91% 11.69% 11.54% 11.24% 11.19% 11.40% 11.22% 11.51%
Percentage of first mortgage loans 77% 79% 82% 88% 89% 89% 89% 85%
Weighted average loan-to-value 78% 76% 76% 76% 77% 77% 78% 77%
Weighted average remaining term(months)
on loans securitized 246 241 244 246 245 245 243 215
Original balance of Trust Certificates $235 $220 $219 $219 $184 $ 79 $ 198 $118
Current balance of Trust Certificates $234 $214 $208 $200 $155 $ 62 $ 151 $ 75
Weighted average pass-through interest
rate to Trust Certificate holders 7.71% 7.32% 7.34% 7.05% 6.56% 6.61% 6.26% 6.47%
Highest Trust Certificate 7.93% 7.68% 7.49% 7.13% 6.58% 7.08% 6.43% 6.85%
pass-through rate
Overcollateralization requirements:
Initial 0.75% 1.00% 1.00% 0.50% 0.50% 1.00% 1.00% 1.50%
Final target 5.95% 5.50% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Stepdown overcollateralization 11.90% 11.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Annual surety wrap fee 0.19% 0.21% 0.21% 0.19% 0.19% 0.20% 0.20% 0.22%
</TABLE>
na = not applicable
<PAGE>
Summary of Selected Mortgage Loan Securitization Trust Information
Current Balances as of March 31, 2000
($ in millions)
<TABLE>
<CAPTION>
1998-1 1997-2 1997-1 1996-2 1996-1
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Original balance of loans securitized:
Business loans $ 16 $ 23 $ 22 $ 16 $ 13
Home equity loans 89 77 53 24 9
Total 105 100 75 40 22
Current balance of loans securitized:
Business loans $ 10 $ 15 $ 10 $ 7 $ 5
Home equity loans 53 36 21 7 4
Total 63 51 31 14 9
Weighted average coupon on loans
securitized:
Business loans 15.95% 15.90% 15.89% 15.95% 15.83%
Home equity loans 11.11% 11.62% 11.44% 11.36% 10.63%
Total 11.88% 12.86% 12.92% 13.55% 13.48%
Percentage of first mortgage loans 79% 72% 70% 69% 68%
Weighted average loan-to-value 74% 72% 70% 67% 67%
Weighted average remaining term(months)
on loans securitized 204 198 175 145 141
Original balance of Trust Certificates $103 $ 98 $ 73 $ 39 $ 22
Current balance of Trust Certificates $ 57 $ 44 $ 26 $ 11 $ 7
Weighted average pass-through interest
rate to Trust Certificate holders 6.68% 6.74% 7.37% 7.53% 7.95%
Highest Trust Certificate pass-through rate 7.15% 7.13% 7.53% 7.53% 7.95%
Overcollateralization requirements:
Initial 1.50% 2.00% 3.00% 3.00% -
Final target 5.50% 7.00% 8.00% 10.00% 7.00%
Stepdown overcollateralization 11.00% 14.00% 16.00% 20.00% na
Annual surety wrap fee 0.23% 0.26% 0.26% 0.28% na
</TABLE>
na = not applicable
45
<PAGE>
Gains 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 interest-only strips and the servicing rights retained, based
upon their relative fair values.
The calculation of the fair value of interest-only strips is based upon
a discounted cash flow analysis which estimates the present value of the future
expected excess cash flows utilizing assumptions made by management at the time
loans are sold. These original assumptions include the rate used to calculate
the present value of expected future cash flows, referred to as the discount
rate, the rates of prepayment and credit loss 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 and credit
loss rates are made based on management's expectation of future experience,
which are based, in part, on the historical experience and in the case of
prepayment rate assumptions, consideration of the impact of changes in market
interest rates. Our interest-only strips and servicing rights are periodically
evaluated based upon the present value of the expected future cash flows from
our interest-only strips and servicing rights related to the loans remaining in
the trusts. The current assumptions for prepayment and credit loss rates are
monitored against actual experience and would be adjusted if necessary. As of
March 31, 2000, we believe our estimates of prepayments and credit losses
adequately reflected historical experience.
The following table below provides information regarding the initial
and current assumptions applied in determining the fair values of mortgage loan
related interest-only strips and servicing rights. The assumptions for
prepayment rates and credit loss rates are compared to actual experience. The
length of time before a pool of mortgage loans reaches its expected constant
prepayment rate is referred to as the "prepayment ramp period." Through March
31, 2000, there were no adjustments to the initial assumptions, which continue
to be applied in subsequent reviews of the carrying values of the interest-only
strips and servicing rights. At the time of the sales, the initial assumptions
for prepayment rates and credit loss rates were representative of expectations
for the securitized portfolios' performance, and have been supported by actual
managed loan portfolio performance. We use an 11% discount rate, in calculating
the fair value of interest-only strips and servicing rights. The discount rate
takes into consideration the all-in cost of the mortgage loan securitization
trusts' investor certificates and the asset quality and performance
characteristics of the mortgage loan securitizations.
46
<PAGE>
Summary of Material Mortgage Loan Securitization Valuation Assumptions
and Actual Experience
($ in millions)
<TABLE>
<CAPTION>
2000-1 1999-4 1999-3 1999-2 1999-1 1998-4 1998-3 1998-2
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-only strip discount rate:
Initial valuation 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Current valuation 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Servicing rights discount rate:
Initial valuation 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Current valuation 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Prepayment rates:
Initial assumption:
Expected Constant Prepayment Rate (CPR):
Business loans 10% 10% 10% 10% 10% 13% 13% 13%
Home equity loans 24% 24% 24% 24% 24% 24% 24% 24%
Ramp period (months) (a):
Business loans 24 24 24 24 24 24 24 24
Home equity loans 18 18 18 18 18 12 12 12
Current assumption:
Expected Constant Prepayment Rate (CPR):
Business loans 10% 10% 10% 10% 10% 13% 13% 13%
Home equity loans 24% 24% 24% 24% 24% 24% 24% 24%
Ramp period (months):
Business loans 24 24 24 24 24 24 24 24
Home equity loans 18 18 18 18 18 12 12 12
CPR adjusted to reflect ramp:
Business loans 3.00% 3.61% 4.52% 5.43% 6.35% 9.09% 10.39% 11.70%
Home equity loans 2.00% 4.58% 8.45% 12.32% 16.19% 24% 24% 24%
Blended rate 2.10% 4.47% 7.97% 11.38% 15.28% 22.39% 22.83% 22.20%
Actual CPR experience:
Business loans - - 2.14% 9.95% 5.73% 14.95% 8.34% 9.35%
Home equity loans - 4.14% 5.90% 7.16% 9.47% 11.48% 11.99% 19.80%
Blended rate - 3.64% 5.47% 7.46% 9.13% 11.64% 11.69% 18.47%
Credit loss rates:
Annual credit loss rate:
Initial assumption 0.40% 0.30% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Current assumption 0.40% 0.30% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Actual experience - - 0.01% -0.01% 0.03% 0.17% 0.05% 0.18%
Cumulative credit loss rate:
Initial assumption 1.85% 1.35% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20%
Current assumption 1.85% 1.35% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20%
Cumulative experience to date - - - -0.01% 0.03% 0.24% 0.08% 0.32%
Servicing fees:
Contractual fees 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ancillary fees 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 0.75% 0.75%
</TABLE>
(a) The prepayment ramp is the length of time before a pool of mortgage loans
reaches its expected Constant Prepayment Rate. The business loan prepayment
ramp begins at 3% in month one. The home equity loan prepayment ramp begins
at 2% in month one.
<PAGE>
Summary of Material Mortgage Loan Securitization Valuation Assumptions
and Actual Experience
($ in millions)
<TABLE>
<CAPTION>
1998-1 1997-2 1997-1 1996-2 1996-1
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest-only strip discount rate:
Initial valuation 11.0% 11.0% 11.0% 11.0% 11.0%
Current valuation 11.0% 11.0% 11.0% 11.0% 11.0%
Servicing rights discount rate:
Initial valuation 11.0% 11.0% 11.0% 11.0% 11.0%
Current valuation 11.0% 11.0% 11.0% 11.0% 11.0%
Prepayment rates:
Initial assumption:
Expected Constant Prepayment Rate (CPR):
Business loans 13% 13% 13% 13% 13%
Home equity loans 24% 24% 24% 24% 24%
Ramp period (months) (a):
Business loans 24 24 24 24 24
Home equity loans 12 12 12 12 12
Current assumption:
Expected Constant Prepayment Rate (CPR):
Business loans 13% 13% 13% 13% 13%
Home equity loans 24% 24% 24% 24% 24%
Ramp period (months):
Business loans 24 24 24 24 24
Home equity loans 12 12 12 12 12
CPR adjusted to reflect ramp:
Business loans 13% 13% 13% 13% 13%
Home equity loans 24% 24% 24% 24% 24%
Blended rate 22.21% 20.83% 22.25% 18.77% 17.99%
Actual CPR experience:
Business loans 16.38% 16.41% 18.05% 20.35% 19.67%
Home equity loans 20.74% 24.64% 25.09% 26.85% 18.15%
Blended rate 20.94% 22.56% 22.95% 24.06% 19.02%
Credit loss rates:
Annual credit loss rate:
Initial assumption 0.25% 0.25% 0.25% 0.25% 0.25%
Current assumption 0.25% 0.25% 0.25% 0.25% 0.25%
Actual experience 0.25% 0.13% 0.18% 0.24% 0.09%
Cumulative credit loss rate:
Initial assumption 1.20% 1.20% 1.20% 1.20% 1.20%
Current assumption 1.20% 1.20% 1.20% 1.20% 1.20%
Cumulative experience to date 0.53% 0.35% 0.54% 0.77% 0.36%
Servicing fees:
Contractual fees 0.50% 0.50% 0.50% 0.50% 0.50%
Ancillary fees 0.75% 0.75% 0.75% 0.75% 0.75%
</TABLE>
(a) The prepayment ramp is the length of time before a pool of mortgage loans
reaches its expected Constant Prepayment Rate. The business loan prepayment
ramp begins at 3% in month one. The home equity loan prepayment ramp begins
at 2% in month one.
47
<PAGE>
Although we believe we have made reasonable estimates of prepayment
rates and credit loss assumptions, the actual prepayment and credit loss
experience may materially vary from our estimates. To the extent that
prepayments or credit losses differ materially from the estimates made,
adjustments of our interest-only strips and servicing rights may be required in
accordance with Statement of Financial Accounting Standards No. 115. Levels of
future prepayments and credit loss assumptions higher than those initially
estimated could result in a reduction in the value of interest-only strips and
servicing rights which would adversely affect income in the period of
adjustment. Additionally, some 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 may be affected by any changes in the rates
paid on the floating rate certificates.
Lease Securitizations. Information related to our two lease
securitizations is presented in the table below. As of December 31, 1999, we
de-emphasized the lease origination business but continue to service the
remaining leases in our managed portfolio.
Summary of Selected Lease Securitization Information
Current Balances as of March 31, 2000
($ in millions)
<TABLE>
<CAPTION>
1999-a 1998-a
-------- --------
<S> <C> <C>
Original balance of leases securitized......................... $ 82 $ 80
Current balance of leases securitized.......................... $ 64 $ 36
Weighted average yield on leases securitized................... 11.17% 12.09%
Weighted average remaining term (months) on
on leases securitized..................................... 36 24
Original balance of Trust Certificates......................... $ 78 $ 76
Current balance of Trust Certificates.......................... $ 61 $ 33
Weighted average pass-through interest rate
to Trust Certificate holders.............................. 6.55% 6.15%
Overcollateralization requirements............................. 3% 3%
Annual surety wrap fee......................................... 0.29% 0.29%
Valuation Assumptions
Residual interests discount rate:
Initial valuation........................................... 11.0% 11.0%
Current valuation........................................... 11.0% 11.0%
Servicing rights discount rate:
Initial valuation........................................... 11.0% 11.0%
Current valuation........................................... 11.0% 11.0%
Prepayment rates............................................ (a) (a)
Credit loss rates:
Annual credit loss rate:
Initial assumption........................................ 0.50% 0.50%
Current assumption........................................ 0.50% 0.50%
Actual experience......................................... 0.45% 0.63%
Servicing Fees:
Contractual fees............................................ 0.50% 0.50%
Ancillary fees.............................................. 0.30% 0.30%
</TABLE>
---------------------
(a) The equipment leasing portfolio has experienced insignificant prepayments,
less than 1.5% annualized. Should a lease terminate early, any impact on
the valuation of lease securitization assets would be recorded upon
termination of the lease.
48
<PAGE>
At March 31, 2000, investments in interest-only strips in
securitizations totaled $258.8 million including investments in
overcollateralization of $69.6 million.
When loans or leases are sold through a securitization, the servicing
on the loans or leases is retained and we capitalize the benefit associated with
the rights to service securitized loans and leases based on those servicing
rights relative fair value to other consideration received in the
securitization. Fair value of servicing rights is determined by computing the
present value of projected net cash flows from contractual servicing fees and
ancillary servicing fees, net of costs to service expected to be received over
the life of the loans or leases securitized. These projections incorporate
assumptions, including prepayment rates, credit loss rates and discount rates.
These assumptions are similar to those used to value the interest-only strips
retained in a securitization. Periodically, capitalized servicing rights are
evaluated for impairment, which is measured as the excess of unamortized cost
over fair value. Interest rates are not considered as a predominant risk
characteristic for purposes of evaluating impairment. We have generally found
that the non-conforming mortgage market is less sensitive to changes in interest
rates than the conventional mortgage market where borrowers have more favorable
credit history for the following reasons. First, there are relatively few
lenders willing to supply credit to non-conforming borrowers which limits those
borrowers' opportunity to refinance. Second, interest rates available to
non-conforming borrowers tend to adjust much slower than conventional mortgage
rates which reduces the non-conforming borrowers' opportunity to capture
economic value from refinancing. Also, a majority of loans to our borrowers
require prepayment fees. As a result, the prepayment experience on our managed
portfolio is more stable than the mortgage market in general. This stability
favorably impacts our ability to value the future cash flows from our servicing
rights and interest-only strips because it increases the predictability of
future cash flows. At March 31, 2000, servicing rights totaled $66.1 million,
compared to $43.2 million at June 30, 1999.
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.
49
<PAGE>
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.
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 increases in gains recorded on loans and leases
securitized and increases in 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.
See "--Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31,
1999 and "--Year Ended June 30, 1999 Compared to Year Ended June 30, 1988" for a
more detailed discussions of results of operations for the nine months ended
March 31, 2000 and the fiscal years ended June 30, 1999 and 1998.
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.
Our business strategy is dependent upon our ability to increase loan
origination volume through both geographic expansion and growth in current
markets to realize efficiencies in the infrastructure and loan production
channels we have been building. 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.
See "Risk Factors - If we are unable to successfully implement our business
strategy, our revenues may decrease which could impair our ability to repay the
notes."
50
<PAGE>
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 gains recorded on the higher volume of loans originated and securitized,
interest accretion earned on interest-only strips and increases in fee income
due to growth in the total managed portfolio.
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.
The Board of Directors initiated the stock repurchase program in view of the
current price level of our common stock and our earnings over the past two
fiscal years. 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 for
the three month period ending March 31, 2000, and $0.09 for the nine-month
period ended March 31, 2000.
51
<PAGE>
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 revenues was the
result of increases in gains on securitizations of mortgage loans, increases in
interest accretion earned on our interest-only strips, increases in interest and
fees on loans originated, and increases in servicing income due to the growth of
the total managed portfolio.
Gain on Sale of Loans and Leases. For the three months ended March 31,
2000, gains of $23.4 million were recorded on the securitization of $264.0
million of loans. This is an increase of $6.0 million, or 34.4%, over gains of
$17.4 million recorded on securitizations of $204.0 million of loans and leases
for the three months ended March 31, 1999.
For the nine months ended March 31, 2000, gains of $63.0 million were
recorded on securitizations of $711.0 million of loans and leases. This is an
increase of $17.2 million, or 37.6%, over gains of $45.8 million recorded on
securitizations of $532.7 million of loans and leases for the nine months ended
March 31, 1999.
The following table summarizes the volume of loan and lease
securitizations by type of loan securitized for the three and nine-month periods
ended March 31, 2000 and 1999 (in millions):
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ------------------------
2000 1999 2000 1999
------------- ------------ ------------- ----------
Business loans $ 27.2 $ 16.4 $ 78.9 $ 41.7
Home equity loans 236.8 168.6 622.9 423.3
Equipment leases - 19.0 9.2 67.7
------------- ------------ ------------- ---------
Total $ 264.0 $ 204.0 $ 711.0 $ 532.7
============= ============ ============= =========
The increase in securitization gains for the three months ended March
31, 2000 was primarily due to the higher volume of loans securitized as
reflected in the table above. The securitization gain as a percentage of loans
securitized, 8.9% for the three months ended March 31, 2000, was down from 9.2%
on loans securitized for the three months ended March 31, 1999. The gain
percentage for the three months ended March 31, 1999 including leases
securitized was 8.5%. The decrease in the gain percentage on loans securitized
for the three months ended March 31, 2000 was primarily due to a reduction in
the spread between the average coupon on loans securitized and the pass-through
rate paid to investors and an increase in the credit loss assumption in the
fiscal 2000 loan securitizations. The unfavorable impact of these factors was
partially offset by the higher percentage of business loans securitized.
Business loans securitized, which have a higher coupon than home equity loans,
represented 10.3% of total loans securitized for the three months ended March
31, 2000, compared to 8.8% of total loans securitized for the three months ended
March 31, 1999. The higher percentage of business loans resulted in an increased
value of the interest-only strips generated from the pool of securitized loans.
See "Securitization Accounting Considerations" for more detail on average
coupons on loans securitized, pass-through rates paid to investors and credit
loss assumptions.
The increase in securitization gains for the nine months ended March
31, 2000 was also due to a higher volume of loans securitized as reflected in
the table above. The securitization gain as a percentage of loans securitized,
9.0% for the nine months ended March 31, 2000, was down from 9.2% on loans
securitized for the nine months ended March 31, 1999. Including leases
securitized, the gain percentages on loans and leases securitized for the nine
months ended March 31, 2000 and 1999 were 8.9% and 8.6%, respectively. The
decrease in the gain percentage on loans securitized for the nine months ended
March 31, 2000 was due to a reduction in the spread between the average coupon
on loans securitized and the pass-through rate paid to investors, increases in
the credit loss assumptions beginning with the 1999-4 mortgage loan
securitization and 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). See "Securitization Accounting
Considerations" for more detail on average coupons on loans, pass-through rates
paid to investors and credit loss assumptions. The impact of SFAS No. 134 is
discussed below.
52
<PAGE>
The unfavorable impacts of the reduction in spread for the nine months
ended March 31, 2000, increases in credit loss assumptions beginning with the
1999-4 mortgage loan securitization, and the impact SFAS No. 134 were partially
offset by the following factors:
o A higher percentage of business loans securitized. For the nine
months ended March 31, 2000, business loans securitized, which
have a higher coupon than home equity loans, represented 11.2% of
total loans securitized, compared to 9.0% of total loans
securitized for the nine months ended March 31, 1999. The higher
percentage of business loans resulted in an increased value of the
interest-only strips generated from the pool of securitized loans.
o A reduction in the annual prepayment rate assumption on business
loans and an increase in the length of the prepayment ramp period
for home equity loans. 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
prepayment ramp period for home equity loans for mortgage loan
securitizations beginning with the 1999-1 mortgage loan
securitization. Reducing the annual prepayment assumption and
lengthening the prepayment ramp period is supported by our
experience with loans having prepayment fees, as discussed below,
that fewer borrowers will prepay, and those prepaying will do so
more slowly. The percentage of home equity loans containing
prepayment fees increased from less than 50% of loans originated
to over 85% over the nine-month period ending October 31, 1998. As
a result of this increase in the percentage of loans originated
having prepayment fees, we have lengthened the prepayment ramp
period on home equity loans from 12 to 18 months beginning with
the 1999-1 mortgage loan securitization. This increase in the
length of the prepayment ramp period for home equity loans was
supported by actual cumulative prepayment experience through March
31, 1999, which demonstrated that only 25% of home equity loans
having prepayment fees were actually prepaid by the borrowers,
while 47% of home equity loans without prepayment fees were
prepaid. This cumulative historical performance demonstrates that
it is nearly twice as likely that a loan without a prepayment fee
will be prepaid. See "Securitization Accounting Considerations"
for a comparison of the prepayment assumptions used in our
valuation of interest-only strips and servicing rights to actual
historical experience.
SFAS 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 interest-only strips from trading securities to
available for sale securities. As available for sale securities, the difference
on the date of securitization between the fair value of an interest-only strip
and its allocated cost is recorded in stockholders' equity and reported as a
component of comprehensive income. Fair value adjustments of $5.9 million
pre-tax were recorded as a component of comprehensive income in the first six
months of fiscal 2000. In the first six months of fiscal 1999, which was prior
to the adoption of SFAS No. 134 and the resulting reclassification from trading
securities to available for sale securities, all differences on the date of
securitization between fair value and allocated cost of interest-only strips
were recognized in securitization gains. In the third quarters of fiscal 1999
and 2000 and the fourth quarter of fiscal 1999, fair value differences were
recognized as a component of comprehensive income. The adoption of SFAS No. 134
did not have a material effect on our financial condition.
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.
53
<PAGE>
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.
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 available for sale loans and
leases, premiums earned on whole loan sales and other ancillary fees collected
in connection with loan and lease originations.
Interest income decreased $0.1 million, or 5.5%, 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 period. Loan origination related fees which are mainly
comprised of application fees and other fees collected in connection with the
loan approval and closing process increased $3.3 million or 73.4% for the nine
months ended March 31, 2000 from the nine months ended March 31, 1999 mainly due
to a 35.4% increase in loan originations in the current nine month period. This
increase was offset by a $0.7 million decrease in the collection of lease
origination related fees due to our de-emphasis of the leasing origination
business in the current fiscal year.
54
<PAGE>
Included in fee income are premiums earned on whole loan sales.
Premiums on whole loan sales were $0.6 million for both of the three-month
periods ended March 31, 2000 and 1999. Premiums on whole loan sales decreased
17.6% to $1.4 million for the nine months ended March 31, 2000 from $1.7 million
for the nine months ended March 31, 1999. The decrease in premiums for the
nine-month period from the prior year nine-month period was due primarily to a
decrease in the volume of whole loan sales in the current year. The volume of
whole loan sales decreased 7.5% to $77.6 million for the nine months ended March
31, 2000 from $83.9 million for the nine months ended March 31, 1999. The
decrease was due to a decrease in the average premium earned on whole loan sales
in the current year.
Interest Accretion on Interest-only Strips. Interest accretion
represents the yield component of cash flows received on interest-only strips.
Interest accretion of $4.8 million was recorded in the three month period ended
March 31, 2000 and $11.9 million was recorded in the nine-month period ended
March 31, 2000, compared to $0.3 million in the three month period ended March
31, 1999 and $0.7 million in nine-month period ended March 31, 1999.
The increases in interest accretion reflect growth of $93.0 million or
74.5% in the average balance of interest-only strips from $124.8 million for the
nine months ended March 31, 1999 to $217.9 million for the nine months ended
March 31, 2000 and growth in cash flow received from interest-only strips. Cash
flows received on interest-only strips were $14.5 million and $34.5 million,
respectively, for the three and nine-month periods ended March 31, 2000,
compared to $10.6 million and $26.5 million, respectively, for the three and
nine-month periods ended March 31, 1999. The growth in cash flow supports the
expected performance of interest-only strips and the expected return on these
assets. Because of the performance of our interest-only strips in generating
cash flow and satisfying final target overcollateralization requirements, in the
fourth quarter of fiscal 1999, we began to recognize greater amounts of interest
accretion on interest-only strips.
Servicing Income. Servicing income is comprised of contractual and
ancillary fees collected on securitized loans and leases less amortization of
the servicing rights assets that are recorded at the time loans and leases are
securitized. Ancillary fees include prepayment fees, late fees and other
servicing compensation. 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. 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.
The following table summarizes the components of servicing income for
the three months ended March 31, 2000 and 1999 and for the nine months ended
March 31, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
March 31, March 31,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Contractual and ancillary fees................. $ 3.7 $ 2.5 $12.0 $ 5.7
Amortization of servicing rights............... 2.5 1.5 8.6 3.7
----- ----- ----- -----
Net servicing income........................... $ 1.2 $ 1.0 $ 3.4 $ 2.0
===== ===== ===== =====
</TABLE>
55
<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 from the third quarter of fiscal 1999 in
the percentage of loans prepaying. 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 rights was increased for some
securitization pools based on our quarterly 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.
The origination of loans with prepayment fees impacts our servicing
income in two ways. First, prepayment fees reduce the likelihood of a borrower
prepaying their loan. This results in prolonging the length of time a loan is
outstanding which increases the contractual servicing fees to be collected over
the life of the loan. Additionally, the terms of our servicing agreements with
the securitization trusts allow us to retain prepayment fees collected from
borrowers as part of our compensation for servicing loans.
Amortization of the servicing rights asset for securitized loans and
leases is calculated individually for each securitization pool and is recognized
in proportion to, and over the period of, estimated future servicing income on
that particular pool of loans or leases. As discussed above, during the third
quarter of fiscal 2000, fees collected for loan prepayments were lower than
anticipated due to our favorable prepayment experience. Amortization rates for
some pools of loans were increased to maintain a steady decrease in the
unamortized carrying value of the servicing rights during this period to offset
the lower volume of fees collected. We perform a valuation analysis of servicing
rights on a quarterly basis to determine the fair value of our servicing rights.
If our valuation analysis indicates the carrying value of servicing rights are
not recoverable through future cash flows from contractual servicing and other
ancillary fees, a valuation allowance would be recorded. To date, our valuation
analysis has not indicated any impairment and no valuation allowance has been
required. Impairment is measured as the excess of carrying value over fair
value.
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 employee related costs, 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.
56
<PAGE>
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,
operating activities, repayments of maturing subordinated debt 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 and other lines of
credit 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. Borrowings under warehouse lines of
credit are secured by mortgage loans and represent advances of cash to us,
usually at 98% of the principal amount of the mortgage loan used as collateral.
These borrowings are for a limited duration, generally no more than 270 days,
pending the ultimate sale of the mortgage loans through securitization or whole
loan sale, either of which will generate the proceeds necessary to retire the
borrowing.
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.
Employee Related Costs. For the third quarter of fiscal 2000, employee
related costs increased $1.6 million, to $2.8 million, from $1.2 million in the
third quarter of fiscal 1999. For the nine months ended March 31, 2000, employee
related costs increased $3.6 million, to $7.3 million from $3.7 million for the
nine months ended March 31, 1999. These increases were primarily attributable to
an increase in the number of staff in the marketing, loan servicing and other
business support areas to support the growth in loan originations and total
managed portfolio.
Provision for Credit Losses. The provision for credit losses 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. 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 higher level of
charge-offs in the three months ended March 31, 1999 was attributable to losses
we recorded on securitized loans and leases which we repurchased from the
securitization trusts in the third quarter of fiscal 1999. While we are under no
obligation to do so, at times we repurchase some foreclosed and delinquent loans
for ease of administration and to maximize the economic recovery. The related
charge-offs on these repurchased loans are provided for in our provision for
credit losses in the period of charge-off.
57
<PAGE>
Charge-offs related to securitized loans and leases are generally
recognized by securitization trusts. To account for these charge-offs,
assumptions are made regarding the expected impact of credit losses in
determining the fair value of interest-only strips and servicing rights. See
"Securitization Accounting Considerations" for more information regarding these
credit loss assumptions.
The provision for credit losses 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 primarily due to recording charge-offs of
delinquent leases in the second quarter of fiscal 2000.
An allowance for credit losses for available for sale 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 available for sale loans
and leases, 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.
The following table summarizes the changes in the allowance for credit
losses by loan and lease type for the three and nine-month periods ended March
31, 2000 (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 $ 433 $ 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>
58
<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. Expenses for direct mail advertising increased $3.9 million for the nine
months ended March 31, 2000 compared to the prior year nine-month period due to
increased use of 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.
Television and radio advertising costs decreased by $2.4 million in the first
nine months of fiscal 2000 compared to the prior year nine-month period. In
addition, we increased the use of newspaper and periodical advertising by $1.1
million to generate additional sales of our loan products and subordinated debt
securities. The remaining increase in sales and marketing expense was due to
increased expenditures on various Internet and short-term telemarketing programs
undertaken by the loan origination operations and expenditures for various
corporate communications and initiatives. 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
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 0.06 175.0% 0%
</TABLE>
59
<PAGE>
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, increases in interest
accretion on interest-only strips and servicing income.
Gain on Sale of Loans and Leases. For the year ended June 30, 1999,
gains of $64.5 million were recorded on the securitization of $777.6 million of
loans and leases. This is an increase of $23.7 million, or 58.1%, over gains of
$40.8 million recorded on securitizations of $384.7 million of loans and leases
for the year ended June 30, 1998.
The following table summarizes the volume of loan and lease
securitizations by type of loan securitized for the years ended June 30, 1999,
1998 and 1997 (in millions):
Year Ended June 30,
------------------------------------------
1999 1998 1997
------------- ------------ -------------
Business loans $ 71.9 $ 54.1 $ 38.1
Home equity loans 613.0 270.9 76.9
Equipment leases 92.7 59.7 -
------------- ------------ -------------
Total $ 777.6 $ 384.7 $ 115.0
============= ============ =============
The increase in securitization gains for fiscal 1999 was primarily due
to the higher volume of loans securitized as reflected in the table above. The
securitization gain as a percentage of loans securitized, 9.1% for fiscal 1999,
was down from 12.3% on loans securitized for fiscal 1998. Including leases
securitized, the gain percentages on loans and leases securitized for the fiscal
years ended June 30, 1999 and 1998 were 8.3% and 10.6%, respectively. The
decrease in the gain percentage on loans securitized for fiscal 1999 was
primarily due to a reduction in the spread between the average coupon on loans
securitized and the pass-through rate paid to investors, a lower percentage of
business loans securitized for fiscal 1999, and the impact of the January 1,
1999 adoption of SFAS No. 134. For fiscal 1999, business loans securitized,
which have a higher coupon than home equity loans, represented 10.5% of total
loans securitized, compared to 16.6% of total loans securitized for fiscal 1998.
The lower percentage of business loans securitized resulted in a reduced value
of the interest-only strips generated from the pool of securitized loans. See
"Securitization Accounting Considerations" for more detail on average coupons on
loans securitized and pass-through rates paid to investors. The impact of SFAS
No. 134 is discussed below.
The unfavorable impacts of the reduction in spread for fiscal 1999, a
lower percentage of business loans securitized for fiscal 1999, and the impact
SFAS No. 134 were partially offset by a reduction in the annual prepayment rate
assumption on business loans and an increase in the length of the prepayment
ramp period for home equity loans. 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 prepayment ramp period for home
equity loans for mortgage loan securitizations beginning with the 1999-1
securitization. Reducing the annual prepayment assumption and lengthening the
prepayment ramp period is supported by our experience with loans having
prepayment fees, as discussed below, that fewer borrowers will prepay, and those
prepaying will do so more slowly. The percentage of home equity loans containing
prepayment fees increased from less than 50% of loans originated to over 85%
over the nine-month period ending October 31, 1998. As a result of this increase
in the percentage of loans originated having prepayment fees, we have lengthened
the prepayment ramp period on home equity loans from 12 to 18 months beginning
with the 1999-1 mortgage loan securitization. This increase in the length of the
prepayment ramp period for home equity loans was supported by actual cumulative
prepayment experience through March 31, 1999, which demonstrated that only 25%
of home equity loans having prepayment fees were actually prepaid by the
borrowers, while 47% of home equity loans without prepayment fees were prepaid.
This cumulative historical performance demonstrates that it is nearly twice as
likely that a loan without a prepayment fee will be prepaid. See "Securitization
Accounting Considerations" for a comparison of the prepayment assumptions used
in our valuation of interest-only strips and servicing rights to actual
historical experience.
SFAS 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 interest-only strips from trading securities to
available for sale securities. As available for sale securities, the difference
on the date of securitization between the fair value of an interest-only strip
and its allocated cost is recorded in stockholders' equity and reported as a
component of comprehensive income. Fair value adjustments of $5.8 million
pre-tax were recorded as a component of comprehensive income in the third and
fourth quarters of fiscal 1999. In fiscal 1998, which was prior to the adoption
of SFAS No. 134 and the resulting reclassification from trading securities to
available for sale securities, all differences on the date of securitization
between fair value and allocated cost of interest-only strips were recognized in
securitization gains. The adoption of SFAS No. 134 did not have a material
effect on our financial condition.
60
<PAGE>
Gain on sale of loans and leases securitized represents the difference
between the net proceeds received, and the allocated cost of loans and leases
securitized. The allocated cost of the loans and leases securitized is
determined by allocating their net carrying value between the loans and leases
securitized, the retained interest-only strips in the securitization and the
mortgage servicing rights retained, based upon their relative fair values. The
calculation of the fair value of the interest-only strips is based upon the
present value of the future expected excess cash flows and utilizes assumptions
made by management at the time loans and leases are sold. Assumptions used in
the estimation of the fair value of interest-only strips 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" 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):
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
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
============= ============= ==============
</TABLE>
Interest and Fee Income. Interest and fee income was $16.6 million for
the year ended June 30, 1999, a decrease of $0.8 million, or 4.8% from the year
ended June 30, 1998. Interest and fee income consists primarily of income earned
on available for sale loans and leases, premiums earned on whole loan sales and
other ancillary fees collected in connection with loan and lease originations.
Interest income decreased $3.1 million, or 29.5%, to $7.4 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 available for sale 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. An increase in loan and lease
origination related fees, which are primarily comprised of application fees and
other fees collected in connection with the loan and lease approval and closing
process, of $2.8 million was partially offset by a decrease in premiums on whole
loan sales.
Premiums on whole loan sales decreased 15.7% to $2.3 million for the
fiscal year ended June 30, 1999 from $2.7 million for fiscal year ended June 30,
1998. The decrease in premiums on whole loan sales for the year ended June 30,
1999 was due to a decrease in the average premium earned on whole loan sales.
For fiscal 1998, the average premium earned on whole loan sales was 5.2%
compared to 2.2% in fiscal 1999. The decrease was due to general market
corrections in the whole loan sale market where purchasers of whole loans were
no longer willing to pay the level of premiums previously earned. The decrease
in the average premium earned was partially offset by a 105.0% increase in the
volume of whole loan sales in fiscal 1999 to $105.8 million from $51.6 million
during fiscal 1998.
Interest Accretion on Interest-only Strips. Interest accretion
represents the interest component of cash flows received on interest-only
strips. Interest accretion of $2.0 million was recorded for the year ended June
30, 1999 compared to $0.5 for the year ended June 30, 1998. The increase in
interest accretion reflects the growth in the average balance of interest-only
strips of 111.4%, or $135.5 million for the year ending June 30, 1999 from $64.1
million for the year ending June 30, 1998 and growth in cash flow received on
interest-only strips. Cash flows received on interest-only strips was $32.9
million for the year ended June 30, 1999, compared to $13.4 million for the year
ended June 30, 1998. Because of the cash flow performance of the interest-only
strips, we began to recognize greater amounts of accretion in the fourth quarter
of fiscal 1999.
61
<PAGE>
Servicing Income. Servicing income is comprised of contractual and
ancillary fees collected on securitized loans and leases, less amortization of
the servicing rights recorded at the time the loans and leases are securitized.
Servicing income increased $2.8 million, or 597.7%, to $3.3 million for the year
ended June 30, 1999, from $0.5 million for the year ended June 30, 1998. This
increase resulted from the higher average total managed portfolio, which was
$915.8 million during the year ended June 30, 1999 compared to $368.0 million
during the year ended June 30, 1998, an increase of 148.9%. As a percentage of
the average managed portfolio, servicing income increased to 0.36% for the year
ended June 30, 1999, from 0.13% for the year ended June 30, 1998, as a result of
the increase in the origination of loans with prepayment fees and the collection
of other ancillary fees. The origination of loans with prepayment fees increases
our servicing income in two ways. Prepayment fees reduce the likelihood of
borrowers prepaying their loans. This results in prolonging the period these
loans are outstanding which increases the contractual servicing fees collected
over the life of the loans. Additionally, the terms of our servicing agreements
with securitization trusts allow us to retain prepayment fees collected from
borrowers as part of our compensation for servicing loans. As a result, if a
borrower does prepay a loan, we are compensated for the loss of the remaining
contractual servicing fees that would have been collected over the remaining
term of the loan by receiving a lump sum fee at the time the prepayment occurs.
The following table summarizes the components of servicing income for
the years ended June 30, 1999, 1998 and 1997 (in millions):
Year Ended June 30,
-------------------------
1999 1998 1997
---- ---- ----
Contractual and ancillary fees............$ 8.9 $ 2.2 $ 0.8
Amortization of servicing rights.......... 5.6 1.7 0.5
Net servicing income......................$ 3.3 $ 0.5 $ 0.3
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.
62
<PAGE>
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 operating activities, repayments of maturing subordinated debt and
investments in operations required to position us for future growth, and the
interest 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 for fiscal
1999 was $0.9 million, compared to $0.5 million for fiscal 1998. An allowance
for credit losses for available for sale 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 available for sale loans and leases,
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.
The following table summarizes changes in the allowance for credit
losses for the 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>
63
<PAGE>
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>
Net charge-offs increased $0.4 million in fiscal 1999 primarily due to
the growth in the total managed portfolio which increased 110.4% from $559.4
million as of June 30, 1998 to $1.2 billion as of June 30, 1999. Net charge-offs
as a percentage of the total managed portfolio were 0.12% in fiscal 1999, equal
to the percentage in fiscal 1998. The increase in losses recorded on our books
related to loans repurchased from our securitization trusts. While we are under
no obligation to do so, at times we purchase foreclosed and delinquent loans for
ease of administration and to maximize the economic recovery. The related
charge-offs on these loans are provided for in our provision for credit losses
in the period of charge-off.
Charge-offs related to securitized loans and leases generally will be
recognized by the securitization trusts. To account for these charge-offs,
assumptions are made regarding the expected impact of credit losses in
determining the fair value of interest-only strips and servicing rights. See
"Securitization Accounting Considerations" for more information regarding these
credit loss assumptions.
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. The number of employees at June 30, 1999,
1998 and 1997 were 894, 638 and 250, respectively. 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
$7.7 million, or 54.2%, to $21.9 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.
64
<PAGE>
General and Administrative Expenses. General and administrative
expenses increased $5.5 million, or 64.7%, to $14.0 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
total 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 $20.8 million, or 104.5%, to $40.8 million for the year ended June 30,
1998 from $19.9 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 held as available for
sale prior to securitization and an increase in fee income as a result of an
increase in premiums on whole loan sales and other fees earned in connection
with loan and lease originations. The volume of whole loan sales was $51.6
million for fiscal 1998, compared to $3.8 million in fiscal 1997.
Servicing Income. Servicing income increased $0.2 million, or 68.2%, to
$0.5 million for the year ended June 30, 1998 from $0.3 million for the year
ended June 30, 1997 as a result of an increase in the average managed portfolio
to $368.0 million during the year ended June 30, 1998 from $118.3 million during
the year ended June 30, 1997.
Total Expenses. Total expenses increased $24.5 million, or 144.4%, to
$41.4 million for the year ended June 30, 1998 from $17.0 million for the year
ended June 30, 1997. This increase was related to the increase in loan and lease
originations, costs associated with a larger managed portfolio of loans and
leases, geographic expansion of our market and the October 1, 1997 acquisition
and operation of New Jersey Mortgage and Investment Corp. and subsidiaries.
65
<PAGE>
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 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. The increase was primarily due to a
$0.4 million increase in charge-offs on equipment leases.
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
related to 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
over fifteen years resulting in a charge of $0.8 million for the year ended June
30, 1998.
66
<PAGE>
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 strips...................................... 258,772 178,218 95,913
Receivable for sold loans and leases...................... 62,651 66,086 2,377
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)(d)............................. 9.16x 7.83x 6.94x
Adjusted debt to tangible equity(b)(d).................... 7.01x 7.01x 5.32x
Subordinated debt to tangible equity(d)................... 6.4x 4.9x 4.2x
Interest-only strips to adjusted
tangible equity(c)(d).................................. 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 strips less overcollateralization interests to tangible
equity plus subordinated debt with a remaining maturity greater than 5
years.
(d) Tangible equity is calculated as total stockholders' equity less
goodwill.
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 strips and servicing rights.
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.
67
<PAGE>
Interest-only strips created in connection with securitizations,
increased $80.6 million, or 45.2%, to $258.8 million at March 31, 2000 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 strips. In addition, for the first nine months of fiscal 2000,
interest accretion was $11.9 million and increases in the fair value of
interest-only strips reported in comprehensive income were $0.5 million. These
increases were partially offset by cash flow of $34.5 million received during
the nine-month period from securitization trusts. Cash receipts on interest-only
strips include required purchases of additional overcollateralization of $20.7
million for the nine months ended March 31, 2000. Purchases of additional
overcollateralization include $7.3 million paid to meet the initial
overcollateralization requirements of securitizations closed during the nine
months ended March 31, 2000 and $13.4 million withheld from excess cash flows by
securitization trusts to fund final target overcollateralization levels. Total
overcollateralization balances included in interest-only strips were $69.6
million at March 31, 2000. See "Securitization Accounting Consideration" for
more information regarding overcollateralization requirements.
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
sales of subordinated debt used to fund loan originations, operating activities,
repayments of maturing subordinated debt 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 increased $82.3 million, or 85.8%, to $178.2
million at June 30, 1999 from $95.9 million at June 30, 1998. During fiscal
1999, $777.6 million in loan and lease securitizations were completed resulting
in the recognition of $93.2 million of interest-only strips. During fiscal 1999,
$2.0 million of interest accretion and increases in the fair value of
interest-only strips of $3.4 million were recorded. These increases were
partially offset by cash flow of $32.9 million received during fiscal 1999 from
securitization trusts. Cash receipts on interest-only strips include required
purchases of overcollateralization of $21.5 million. Purchases of additional
overcollateralization include $4.8 million paid to meet the initial
overcollateralization requirements of securitizations closed during fiscal 1999
and $16.7 million withheld from excess cash flows by securitization trusts to
fund final target overcollateralization levels.
68
<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.
69
<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>
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>
<PAGE>
------------------------------
(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 provision 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 at June 30, 1999. Total delinquencies as a
percentage of the total managed portfolio (the "delinquency rate") were 3.18% at
March 31, 2000 compared to 3.19% at June 30, 1999 on a total managed portfolio
of $1.7 billion at March 31, 2000 and $1.2 billion at June 30, 1999. Delinquent
loans and leases held as available for sale (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 available for sale 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 and restrict our ability to repay the notes."
70
<PAGE>
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% at
June 30, 1999, $0.9 million, or 0.16% at June 30, 1998 and $0.6 million, or
0.34% at June 30, 1997. The increase in the volume of real estate owned reflects
the seasoning of the managed 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
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 loans we originate have average loan-to-value
ratios of 61.0%. The home equity loans we originate have average loan to value
ratios of 78.0% and the predominant share of our home mortgage products are
first liens as opposed to junior lien loans. We believe these factors may
mitigate some potential losses on our managed portfolio.
71
<PAGE>
The following table summarizes net charge off experience recorded on
our books by loan type for the nine months ended March 31, 2000 and fiscal years
ended June 30, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Nine Months
Ended
March 31, Years Ending June 30,
--------- -----------------------------------
2000 1999 1998 1997
--------- ------- -------- ---------
<S> <C> <C> <C> <C>
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
========= ======= ======== =========
</TABLE>
The expected impact of credit losses for delinquent loans and real
estate owned property held by securitization trusts are accounted for through
assumptions for credit losses used in the estimation of the fair value of our
interest-only strips and servicing rights. See "Securitization Accounting
Considerations" for further information regarding these credit loss assumptions.
72
<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 attempt to manage these changes
and maintain our current profitability on loan originations and securitizations.
See "Securitizations" for further detail.
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 assumptions including prepayment and default
rates. See "Securitization Accounting Considerations" for more information on
these assumptions. 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
sale (a) ....................... $ 31,424 $ 30 $ 34 $ 39 $ 44 $ 1,687 $ 33,258 $ 34,522
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) For purposes of this table, all loans and leases which qualify for
securitization are reflected as maturing within twelve months, since
loans and leases available for sale are generally held for less than
three months prior to securitization.
73
<PAGE>
Loans and Leases Available for Sale. Gain on sale of loans may be
unfavorably impacted to the extent fixed rate available for sale mortgage loans
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. 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 could have a material adverse effect on our results
of operations and financial condition. We estimate that each 0.1% reduction in
the spread reduces the gain on sale of loans as a percentage of loans
securitized by approximately 0.25%.
Hedging strategies may be utilized in an attempt to mitigate the effect
of changes in interest between the date rate commitments on loans are made and
the date the fixed rate pass-through certificates to be issued by a
securitization trust are priced, a period typically less than 90 days.
These strategies include the utilization of derivative financial
instruments such as futures and forward pricing on securitizations. The nature
and quality of hedging transactions are determined based on various factors,
including market conditions and the expected volume of mortgage loan and lease
originations and purchases. Derivative contracts are designated as hedges for
the next subsequent securitization at the time the contract is entered into.
Fixed rate pass-through certificates issued by securitization trusts are
generally priced to yield a spread above a benchmark rate based on U.S. Treasury
securities with a three-year maturity. We hedge potential rate changes in this
security with futures contracts on a similar underlying security. This provides
strong correlation between our hedge contracts and the ultimate pricing we will
receive on the subsequent securitization. The gain or loss derived from these
hedging transactions is deferred and recognized as an adjustment to the gains on
sale of loans and leases when the loans and leases are securitized. The
effectiveness of our hedges are continuously monitored. If correlation did not
exist, the related gain or loss on the contract would be recognized as an
adjustment to income in the period incurred.
During the nine-month period ended March 31, 2000, cash losses of $0.2
million, and cash gains of $0.3 million were incurred on hedging transactions
(futures contracts), and were recognized as a component of gains on sale
recorded on securitizations during the period. During fiscal 1999, net losses of
approximately $2.0 million were incurred on hedging transactions (futures
contracts), and were recognized as reductions to the gains on sale for the
securitizations during the year. We had no hedging contracts open at June 30,
1999 but were obligated to satisfy a lease securitization prefund requirement of
$9.0 million which was satisfied in the first quarter of fiscal 2000. The
following schedule details outstanding hedge positions at March 31, 2000 (in
thousands):
<TABLE>
<CAPTION>
Treasury Forward
Futures Treasury
Contracts Sales Total
---------- ---------- ----------
<S> <C> <C> <C>
Notional Amount.................................... $ 30,000 $ 20,000 $ 50,000
Unrealized Losses.................................. $ (121) $ (78) $ (199)
</TABLE>
If interest rates on Treasury securities decreased by 100 basis points,
the above hedge positions would result in a loss of approximately $1.5 million.
74
<PAGE>
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. While Treasury rates and the
pass-through rate of securitizations are generally strongly correlated, this
correlation has not held in periods of financial market disruption.
Additionally, poorly designed strategies or improperly executed transactions may
increase rather than mitigate risk. 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 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 Strips and Servicing Rights. 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 mortgage 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 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. It is estimated that a 1.0% increase
in one-month LIBOR would decrease the fair value of interest-only strips by
approximately $3.0 million.
A significant change in market interest rates could increase or
decrease the level of loan prepayments, thereby changing 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 related interest-only strips and servicing rights, adversely impacting
earnings during the period of adjustment. Revaluation of our interest-only
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 (for example, from 24% to 25% on home equity
loans and from 10% to 11% on business loans) would decrease the fair value of
interest-only strips by approximately $6.8 million and the fair value of
servicing rights by approximately $1.6 million. See "Securitization Accounting
Considerations" for further information regarding these assumptions.
75
<PAGE>
We attempt to minimize prepayment risk on interest-only strips and
servicing rights 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 total managed portfolio are
subject to prepayment fees.
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
Because we have historically experienced negative cash flows from
operations, our business requires continual access to short and long-term
sources of debt to generate the cash required to fund our operations. Our cash
requirements include funding loan originations and capital expenditures,
repaying existing subordinated debt, paying interest expense and operating
expenses, and in connection with our securitizations, funding
overcollateralization requirements and servicer obligations. At times, we have
used cash to repurchase our common stock and could in the future use cash for
unspecified acquisitions of related businesses or assets.
Borrowings against warehouse and credit facilities provide the primary
funding source for loan originations. These borrowings represent cash advanced
to us for a limited duration, generally no more than 270 days, and are secured
by the loans. The ultimate sale of the loans through securitization or whole
loan sale generates the cash proceeds necessary to repay the borrowings under
these facilities. See "Credit Facilities" below for a more detailed description
on these facilities.
Cash flow from operations and the issuance of subordinated debt fund
our remaining cash requirements discussed above. We rely significantly on our
ability to issue subordinated debt to meet these requirements since our cash
flow from operations is not sufficient to meet these requirements. Our cash
requirements include the obligation to repay maturing subordinated debt. In the
process of growing our businesses over the last three years, we have issued
subordinated debt to partially fund that growth and to partially fund maturities
of subordinated debt. We expect that our historical levels of negative cash flow
from operations will decline in the future and then become positive as the rate
of increase in our operating cash expenditures begins to level, then decline due
to an expected decrease in the rate of growth in loan production and as we
realize efficiencies in the infrastructure and loan production channels we have
been building and as the cash flows from our interest-only strips increase. The
cash balances that we have built over the last 21 months are sufficient to cover
approximately 27% of the $167 million of subordinated debt maturities due within
one year. Cash balances have increased from $4 million at June 30, 1998, to $22
million at June 30, 1999 and $45 million at March 31, 2000.
76
<PAGE>
We continue to significantly rely on access to the asset-backed
securities market through securitizations to generate cash proceeds for the
repayment of borrowings under warehouse and credit facilities and to create our
interest-only strips and servicing rights which will provide future cash flows.
It is our expectation that future cash flows from our interest-only strips and
servicing rights will generate more of the cash flows required to meet
maturities of our subordinated debt.
A significant portion of our loan originations are non-conforming
mortgages to subprime borrowers. Some participants in the non-conforming
mortgage industry have experienced greater than anticipated losses on their
securitization interest-only strips and servicing rights due to the effects of
increased delinquencies, 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. Factors that have minimized the effect of adverse market
conditions on our business include our ability to originate loans 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 for future loan originations. Any delay or
impairment in our ability to securitize loans, as a result of market conditions
or otherwise, could adversely affect our liquidity and results of operations.
Additionally, we act as the servicer of the loans and leases
securitized and in that capacity will be obligated to advance funds in some
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. When borrowers are delinquent in making monthly payments on mortgage
loans included in a securitization trust, we are required to advance interest
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 mortgage loan payments.
To a limited extent, we intend to continue to augment the interest and
fee income earned on loans and leases by selling loans and leases in whole loan
sales to unrelated third parties. These transactions also create additional
liquid funds available for lending activities.
At March 31, 2000, a total of $329.0 million of subordinated debt was
outstanding, and warehouse and credit facilities totaling $323.1 million were
available, of which $81.8 million was drawn upon.
77
<PAGE>
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, 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 and
maturities of subordinated debt. We intend to meet our obligation to repay such
debt as it matures with cash flow from operations, cash flows from interest-only
strips, and cash generated from additional debt financing. The utilization of
funds for the repayment of such obligations should not adversely affect
operations.
78
<PAGE>
Credit Facilities. The following is a description of the warehouse and
line of credit facilities that are utilized to fund origination of loans and our
operations. All of our on balance sheet 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 interest-only strips or other assets. 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
Amount Utilized-on Utilized-off
Committed Balance Sheet Balance Sheet
---------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Revolving credit facilities:
Warehouse revolving line of credit, expiring August 2000.... $ 150,000 $ 4,493 $ 21,407
Warehouse revolving line of credit, expiring October 2000... 150,000 31,774 -
---------- --------- ---------
Total warehouse facilities.................................. 300,000 36,267 21,407
Revolving line of credit, expiring December 2000............ 5,000 5,000 -
Repurchase agreement........................................ 4,677 4,677 -
---------- --------- ---------
Total revolving credit facilities........................... 309,677 45,944 21,407
Other credit facilities and notes payable:
Commercial paper conduit for lease production,
maturity matches underlying leases..................... 13,401 10,659 2,742
Other debt.................................................. 699 699 -
---------- --------- ---------
Total credit facilities..................................... $ 323,777 $ 57,302 $ 24,149
========== ========= =========
</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
79
<PAGE>
under these agreements are guaranteed by us. Under these agreements, the
subsidiaries may obtain advances subject to specific conditions, which
extensions of credit bear interest at a specified margin over the LIBOR rate.
The obligations described in 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.
We, along with some 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 specific conditions described in the agreement, 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 specified pledged loans and other collateral
related thereto. The facility also requires us to meet specific 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,
HomeAmerican 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 specific conditions described in the
agreement, 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, HomeAmerican 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 specific conditions described in the agreements. 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 specific financial ratios described in the agreement and contains 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 and 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.
80
<PAGE>
In March 2000, we amended our arrangements with a warehouse lender to
include an off-balance sheet conduit facility. This arrangement permits us to
sell loans to a conduit entity sponsored by a bankruptcy remote trust. The
sponsor of the facility has the option to re-securitize the loans, ordinarily
using longer-term certificates. We have no obligation to repurchase the loans
and neither the third party purchaser nor the sponsor has a right to require
such repurchase. If the sponsor fails to re-securitize the loans within 120
days, the third party purchaser has the right to securitize or sell the loans.
Under this arrangement, the loans have been isolated from our premises; and, as
a result, the transfer to the conduit facility is treated as a sale for
financial reporting purposes. As of March 31, 2000, we had sold approximately
$21.4 million in principal amount of loans to the conduit facility and
recognized gains on those sales totaling approximately $2.1 million.
As of July 6, 2000, UBS Principal Finance, LLC, an affiliate of UBS
Warburg, established a $200 million warehouse credit facility through which
three of our subsidiaries, American Business Credit, Inc., HomeAmerican Credit,
Inc. and New Jersey Mortgage and Investment Corp. will be able to fund a portion
of their residential mortgage loan production. This facility is structured as
off balance sheet financing through special purpose vehicles including a
corporate subsidiary of ABFS and a Delaware business trust for which the
corporate special purpose vehicle is the depositor. The lender's interest is
secured by a pledge by the Delaware business trust of specified mortgage loans
described in the agreement. Such mortgage loans will be first contributed by the
three originators to the special purpose corporation and will then be
contributed by such corporation to the Delaware business trust. Advances under
this facility bear interest at a specified margin over a defined LIBOR index
rate. In connection with the facility, each of the originating subsidiary
corporations makes extensive warranties regarding the contributed mortgage loans
and is liable for both repurchasing non-conforming mortgage loan collateral and
for the indemnification obligations described in the agreement in favor of the
lender and related parties. American Business Credit has agreed to act as the
servicer of such mortgage loans on behalf of the lender.
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.
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.
81
<PAGE>
Year 2000 Update
Prior to December 31, 2000, we performed various 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 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 specific 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.
82
<PAGE>
BUSINESS
General
We are a diversified financial services company operating throughout
the United States. Through our principal direct and indirect subsidiaries,
American Business Credit, Inc., HomeAmerican Credit, Inc. (doing business as
Upland Mortgage), American Business Leasing, Inc. 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:
(1) holding the shares of our operating subsidiaries, and
(2) 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. HomeAmerican 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.
83
<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 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.
84
<PAGE>
The following chart sets forth our basic organizational structure and
our primary subsidiaries(a).
<TABLE>
<CAPTION>
<S> <C>
-------------------------------------------------------
ABFS
-------------------------------------------------------
(Holding Company)
(Issues subordinated debt securities)
-------------------------------------------------------
|
|
-------------------------------------------------------
AMERICAN BUSINESS CREDIT, INC.
-------------------------------------------------------
(Originates and services business purpose loans)
-------------------------------------------------------
|
|------------------------------------|------------------------------------|
| | | | |
| | | | |
---------------- ------------- ------------------ ------------- ------------
HOMEAMERICAN
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 program equipment foreclosed
conventional services home home equity loans) leases) real estate)
first mortgage equity loans)
and home equity (b)
loans)
---------------- ------------- ------------------ ------------- ------------
|
|
----------------
FEDERAL
LEASING CORP.
(Services
equipment
leases)
----------------
</TABLE>
-------------
(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.
85
<PAGE>
Lending and Leasing Activities
General. The following table sets forth 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 $ 91,819
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.......................... 172 169 172 184
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
Loans........................................... $ 662,874 $ 613,069 $ 322,459 $ 80,792
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
Loans........................................... 8,655 8,074 4,753 1,639
Equipment leases................................ 469 4,363 3,707 --
Weighted Average Rate on Loans/Leases Originated...... 11.57% 11.30% 11.63% 13.09%
</TABLE>
86
<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,
----------- --------------------------------
2000 1999 1998 1997
----------- ----- ----- -----
<S> <C> <C> <C> <C>
Loan Type
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,
-----------------------------------------
2000 % 1999 %
-------- ------ -------- ------
<S> <C> <C> <C> <C>
New York........ $226,332 28.26% $109,295 17.64%
New Jersey...... 145,767 18.20 180,419 29.12
Pennsylvania.... 111,874 13.97 96,689 15.61
Florida......... 64,054 8.00 44,223 7.14
Illinois........ 33,158 4.14 20,351 3.28
Georgia......... 29,498 3.68 44,286 7.15
Ohio............ 28,516 3.56 10,919 1.76
Maryland........ 18,259 2.28 12,416 2.00
Virginia........ 17,080 2.13 10,625 1.71
North Carolina.. 16,052 2.00 7,687 1.24
Connecticut..... 15,426 1.93 10,807 1.74
Massachusetts... 13,948 1.74 -- --
Delaware........ 10,903 1.36 10,465 1.69
Other........... 70,114 8.13 61,405 9.91
-------- ------ -------- ------
Total...... $800,981 100.00% $619,587 100.00%
======== ====== ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------
1999 % 1998 % 1997 % 1996 %
------- ------ -------- ------ ------- ------ ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New York........ 163,580 18.97% $ 54,907 11.31% $ 8,343 6.02% 7,417 10.36%
New Jersey...... 236,976 27.48 128,025 26.38 40,725 29.39 20,986 29.33
Pennsylvania.... 139,992 16.23 150,048 31.06 53,834 38.85 33,324 46.57
Florida......... 61,312 7.11 23,905 4.93 3,670 2.65 674 0.94
Illinois........ 27,663 3.21 -- -- -- -- -- --
Georgia......... 59,395 6.89 23,084 4.76 10,092 7.28 181 0.25
Ohio............ 17,155 1.99 -- -- -- -- -- --
Maryland........ 19,625 2.28 11,748 2.42 5,010 3.61 4,408 6.16
Virginia........ 17,126 1.99 13,138 2.71 5,469 3.95 104 0.15
North Carolina.. 13,648 1.58 5,144 1.06 4,245 3.06 78 0.11
Connecticut..... 14,052 1.63 5,964 1.23 2,005 1.45 87 0.12
Massachusetts... -- -- -- -- -- -- -- --
Delaware........ 14,254 1.65 10,823 2.23 3,117 2.25 2,724 3.81
Other........... 77,668 9.01 57,789 11.93 2,073 1.49 1,575 2.20
-------- ------ -------- ------ -------- ------ ------- ------
Total...... $862,446 100.00% $484,575 100.00% $138,583 100.00% $71,558 100.00%
======== ====== ======== ====== ======== ====== ======= ======
</TABLE>
87
<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
days a week, 24 hours a day. We believe that the addition of this distribution
88
<PAGE>
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 online 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.
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.
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
89
<PAGE>
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 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 over 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 online 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
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
90
<PAGE>
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.
Some 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 managed 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:
(1) 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
(2) 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
91
<PAGE>
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
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 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."
Prepayment Fees. Historically, we charged prepayment fees on a
significant percentage of our business purpose loans and on less than 50% of our
home equity loans. We currently charge prepayment fees on substantially all of
our business purpose loans, and have increased the percentage of home equity
loans originated with prepayment fees to approximately 85% of home equity loans
originated. Home equity loans comprise approximately 90% of all loans we
originate and the remaining 10% are business purpose loans. The type of
prepayment fee we obtain on a home equity loan is generally a certain percentage
of the outstanding principal balance of the loan. One typical prepayment fee
provides for a fee of 5% of the outstanding principal loan balance if paid
within the first three years after the loan's origination and 2% of the
outstanding principal loan balance if prepaid between three and five years after
the loan's origination and no prepayment fee if the loan is prepaid after five
years from the date of origination. In the case of business purpose loans, the
prepayment fee generally amounts to a significant portion of the outstanding
principal loan balance and is most often calculated on the basis of the Rule of
78s formula, also known as the "sum of the digits" method.
Our ability to charge a prepayment fee is sometimes impacted by state
law, with respect to both home equity loans and business purpose loans. In the
case of home equity loans which have a "balloon" payment feature, whenever
possible, we use the Federal Alternative Mortgage Transactions Parity Act of
1982 referred to as the Parity Act to preempt state laws which limit or restrict
prepayment fees. In states which have overridden the Parity Act and in the case
of some fully amortizing home equity loans, state laws may restrict prepayment
fees either by the amount of the prepayment fee or the time period during which
it can be imposed. Similarly, in the case of business purpose loans, some states
prohibit or limit prepayment fees where the loan is below a specific dollar
threshold or is secured by residential real property.
92
<PAGE>
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.
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.
93
<PAGE>
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 as available for
sale 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 or lease 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
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 some 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
94
<PAGE>
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 some 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
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
95
<PAGE>
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
as available for sale 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.
We believe that the consistent application of the criteria described
above may mitigate some of the risks associated with lending to non-conforming
borrowers.
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."
96
<PAGE>
Loan Administration Procedures
We employ a large staff of experienced collectors and supervisors
working in shifts to manage non-performing loans. In addition, several in-house
collection attorneys and paralegals work closely with these collectors and their
managers to optimize collection efforts. The goal of our labor-intensive
collections program is to emphasize delinquency prevention.
In servicing business purpose loans and home equity loans, we typically
send an invoice to borrowers 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. We believe we begin the collection
process earlier than lenders who provide financing to credit worthy borrowers.
When a loan becomes 45 to 60 days delinquent, it is transferred to a workout
specialist in the collections department. The workout specialist tries to
reinstate a delinquent loan, seek a payoff, or occasionally enter into a
modification agreement with the borrower to avoid foreclosure. All proposed
workout 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 becomes
delinquent 61 days or more and a satisfactory workout arrangement with the
borrower is not achieved or the borrower declares bankruptcy, the matter is
immediately referred to our attorneys for collection. Due to this timing, the
foreclosure process on most delinquent loans is commenced before the loan is 100
days past due.
To our knowledge, we are one of very few lenders that has an in-house
legal staff dedicated to the collection of delinquent loans and the handling of
bankruptcy cases. As a result, we believe our delinquent loans are reviewed from
a legal perspective earlier in the collection process than is the case with
loans made by traditional lenders so that troublesome legal issues can be noted
and, if possible, resolved earlier. Our in-house legal staff also attempts to
find solutions for delinquent loans, other than foreclosure. Every loan is
analyzed to compare the property value against the loan balance and solutions
are presented to the borrower based on the results of that analysis.
In those situations where foreclosures are handled by outside counsel,
the in-house legal staff manages outside counsel to ensure that the time period
for handling foreclosures meets or exceeds established industry standards.
Frequent contact between in-house and outside counsel insures that the process
moves quickly and efficiently in an attempt to achieve a timely and economical
resolution to contested matters.
97
<PAGE>
Securitizations
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 of business purpose loans, $613.0 million of home
equity loans, and $92.6 million of equipment leases. During the nine months
ended March 31, 2000, we securitized $78.9 million of business purpose loans,
$622.9 million of home equity loans and $9.2 million of equipment leases.
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 an interest-only strip. 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 interest-only strips received in a securitization,
we are entitled to receive excess (or residual) cash flows. These cash flows are
the difference between the payments made by the borrowers on securitized loans
and leases and the sum of the scheduled and prepaid principal and pass-through
interest paid to the investors in the trust, servicing fees, trustee fees and,
if applicable, surety fees. Surety fees are paid to an unrelated insurance
entity to provide protection for the trust investors. Overcollateralization is
the excess of the aggregate principal balances of loans and leases in a
securitized pool over investor interests. Overcollateralization requirements are
established to provide additional protection for the trust investors.
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.
While we are under no obligation to do so, at times we repurchase some
foreclosed and delinquent loans for ease of administration and to maximize the
economic recovery.
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
98
<PAGE>
to satisfy the prefund option must be substantially similar in terms of
collateral, size, term, interest rate, geographic distribution and loan-to-value
ratio as the loans or leases initially transferred to the trust. To the extent
we fail to originate a sufficient number of qualifying loans or leases for the
prefunded account within the specified time period, our earnings during the
quarter in which the funding was to occur would be reduced.
The securitization of loans and leases generated gain on sale of loans
and leases during the nine months ended March 31, 2000 of $63.0 million, and
generated gain on sale of loans and leases during the year ended June 30, 1999
of $64.5 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Securitization 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 regulated by both federal and state laws. All
home equity and conventional first mortgage loans must meet the requirements of,
among other statutes and regulations, the Truth in Lending Act, the Real Estate
Settlement Procedures Act, the Equal Credit Opportunity Act of 1974, Federal
Reserve Board Regulations Z and B and Department of Housing and Urban
Development Regulation X.
99
<PAGE>
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 transactions described
in the act and imposes specific loan feature restrictions on some 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.
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 specific types of information from loan applicants.
Among other things, it also requires disclosures by the lender regarding
consumer rights and requires lenders to advise applicants of the reasons for any
credit denial. We are also required to report statistical information on loan
applicants to the Department of Housing and Urban Development which monitors
compliance with fair lending laws.
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. These laws and regulations, which are administered by the
Department of Housing and Urban Development, 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
100
<PAGE>
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, 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 their
documentation and procedures and monitor and inform them of various changes in
the laws.
The previously described laws and regulations are subject to
legislative, administrative and judicial interpretation. Some of these laws and
regulations have recently been enacted. Some of these laws and regulations are
rarely challenged in or interpreted by the courts. Infrequent interpretations of
these laws and regulations or an insignificant number of interpretations of
recently enacted regulations can make it difficult for us to know what is
permitted conduct under these laws and regulations. Any ambiguity under the 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 government agencies have recently begun to consider,
and in some instances have adopted, legislation to restrict lenders' ability to
charge rates and fees in connection with subprime residential mortgage loans and
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 fees, charge interest rates on consumer loans to
those borrowers with problem credit 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 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.
101
<PAGE>
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.
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
102
<PAGE>
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.
103
<PAGE>
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, which contains additional information and documents. 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.
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.
The following documents that we filed with the SEC, as well as all
other reports filed with the SEC since June 30, 1999 are incorporated by
reference in this prospectus:
SEC Filing Period or Date
------------------------------ -------------------
Annual Report on Form 10-K June 30, 1999
Quarterly Reports on Form 10-Q September 30, 1999
December 31, 1999
March 31, 2000
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.
104
<PAGE>
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
incorporated by reference or 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
105
<PAGE>
MANAGEMENT
General
All of our directors and executive officers hold office during the term
for which they are elected and until their successors are elected and qualified.
The following table sets forth information regarding our Board of
Directors and executive officers:
<TABLE>
<CAPTION>
Name Age(1) Position
------------------------------------------------------ ----------------------------------------------------
<S> <C> <C>
Anthony J. Santilli........................ 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
</TABLE>
-----------------------
(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.
106
<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 from May 1983 to June
1985 and as the Secretary of PSFS' Policy Committee from June 1986 to June 1987.
Leonard Becker is a self-employed real estate investor, a position he
has held since 1980. Mr. Becker was 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 from 1967 to 1980. 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.
Michael DeLuca is Chief Executive Officer and a Director of Lux
Products Corporation, a position he has held since 1991. Mr. DeLuca was
President, Chairman of the Board, Chief Executive Officer and a former owner of
Bradford-White Corporation, a manufacturer of plumbing products from 1982 to the
end of 1991. Presently, Mr. DeLuca serves as a Director of BWC-West, Inc.,
Bradford-White International.
Richard Kaufman is Chairman and Chief Executive Officer of Academy
Industries, Inc., a paper converting company, a position he has held since
December 1996. From 1982 to 1996, he was self-employed and involved in making
and managing investments for his own benefit. From 1976 to 1982, Mr. Kaufman was
President and Chief Operating Officer of Morlan International, Inc., a cemetery
and financial services conglomerate. From 1970 to 1976, Mr. Kaufman served as a
Director and Vice President-Real Estate and Human Services Division of Texas
International, Inc., an oil and gas conglomerate.
Harold E. Sussman is currently a principal in and Chairman of the Board
of the real estate firm of Colliers, Lanard & Axilbund, a major commercial and
industrial real estate brokerage and management firm in the Philadelphia area,
with which he has been associated since 1972.
Executive Officers who are not also Directors
The following is a description of the business experience of each
executive officer who is not also a director.
Beverly Santilli, age 40, is First Executive Vice President, a position
she has held since September 1998 and Secretary, a position she has held since
our inception. 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
107
<PAGE>
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, a position he has held since September 1998 .He is also Executive Vice
President and General Counsel of some of our subsidiaries, positions he has held
since April 1992. 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 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 May 2000. Mr. Hall is responsible for leading our 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.
108
<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>
109
<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 our 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 our Stock Option Plan, of which 9,975 are
currently exercisable.
(4) Includes options to purchase 49,375 shares of common stock awarded pursuant
to our 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 our 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 our Stock Option Plan, of which 9,975 are currently exercisable.
(7) Includes options to purchase 33,125 shares of common stock awarded pursuant
to our Stock Option Plan, of which 5,250 are currently exercisable.
(8) Includes options to purchase 20,000 shares of common stock awarded to our
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 which 231,175 are currently exercisable.
(10) Less than one percent.
110
<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.
<TABLE>
<CAPTION>
Quarter Ended High Low
-------------------------------------------- ------------ ------------
<S> <C> <C>
June 30, 1997........................... $21.42 $17.62
September 30, 1997...................... 22.86 18.57
December 31, 1997....................... 26.67 19.64
March 31, 1998.......................... 26.19 19.52
June 30, 1998........................... 24.29 20.95
September 30, 1998...................... 20.71 11.19
December 31, 1998....................... 13.70 5.48
March 31, 1999.......................... 14.29 11.67
June 30, 1999........................... 18.93 10.23
September 30, 1999...................... 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
</TABLE>
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.
111
<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.
112
<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 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
specific 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 a 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.
113
<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-14
Consolidated Balance Sheets as of June 30, 1999 and 1998...........................F-15
Consolidated Statements of Income for the years ended
June 30, 1999, 1998 and 1997.................................................F-16
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1999, 1998 and 1997.................................................F-17
Consolidated Statements of Cash Flow for the years ended
June 30, 1999, 1998 and 1997.................................................F-18
Notes to Consolidated Financial Statements.........................................F-21
</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 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>
[RESTUBED FOR ABOVE]
<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 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 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)
Nine Months Ended
March 31,
--------------------
2000 1999
-------- --------
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
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 managed 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 by the Company
were as follows (in thousands):
March 31, June 30,
2000 1999
--------- -------
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
======= =======
3. Interest-Only Strips
Activity for interest-only strips during the nine-month period ended March
31, 2000 was as follows (in thousands):
Balance at beginning of period $178,218
Initial recognition of interest-only 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 strips (34,474)
Net adjustments to fair value 500
--------
Balance at end of period $258,772
========
Interest-only 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 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):
March 31, June 30,
2000 1999
--------- -------
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
======== ========
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):
March 31, June 30,
2000 1999
-------- --------
Subordinated debentures (a) $325,539 $206,918
Subsidiary subordinated debentures (b) 3,499 4,734
-------- --------
Total subordinated debentures $329,038 $211,652
======== ========
Warehouse lines and other notes payable were comprised of the following (in
thousands):
March 31, June 30,
2000 1999
------- -------
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
======= =======
(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. In March 2000,
the Company amended its arrangements with this warehouse lender to include
an off-balance sheet conduit facility. This arrangement permits the Company
to sell loans to a conduit entity sponsored by a bankruptcy remote trust.
The sponsor of the facility has the option to re-securitize the loans,
ordinarily using longer term certificates. The Company has no obligation to
repurchase the loans and neither the third party purchaser nor the sponsor
has a right to require such repurchase. If the sponsor fails to
re-securitize the loans within 120 days, the third party purchaser has the
right to securitize or sell the loans. Under this arrangement, the loans
have been isolated from the Company; and, as a result, the transfer to the
conduit facility is treated as a sale for financial reporting purposes. As
of March 31, 2000, the Company had sold approximately $21.4 million in
principal amount of loans to the conduit facility and recognized gains on
those sales totaling approximately $2.1 million.
(f) $5 million revolving line of credit expiring December 2000, interest rate of
LIBOR plus 2.0%, collateralized by certain interest-only strips 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 by the Company 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. Transactions between reportable segments
have been reported at cost.
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 Investment
March 31, 2000 Loan 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 25,822 6,190 6,085 5,048 -- 43,145
Depreciation and amortization 1,458 4 155 2,521 -- 4,138
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>
American Business Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 2000
9. 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 a 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. NJMIC filed its Brief in Opposition to the Petition for Certification
on March 16, 1999, and Mr. Roscoe filed a reply brief.
On January 11, 2000 the Supreme Court entered an order which denied Mr.
Roscoe's Petition for Certification for review of the final judgment of the
Superior Court in favor of NJMIC and against Mr. Roscoe. Accordingly, NJMIC
has prevailed in this suit which has now been concluded.
F-13
<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-14
<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 178,218 95,913
Receivable for sold loans and leases 66,086 2,377
Prepaid expenses 1,671 2,572
Property and equipment, net 10,671 7,785
Servicing rights 43,210 18,472
Other assets 33,411 28,468
-----------------------------------------------------------------------------------------------------
Total assets $396,301 $ 226,551
-----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Subordinated debt $211,652 $ 112,182
Warehouse lines and other notes payable 58,691 32,403
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
Issue: 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-15
<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 $64,490 $40,778 $19,942
Interest and fees 16,553 17,386 5,584
Interest accretion on interest - only strips 2,021 538 101
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 21,859 14,237 6,964
General and administrative 14,041 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-16
<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 Total
Of Shares Paid-In Comprehensive Retained Treasury Note Stockholders'
Outstanding Amount Capital Income Earnings Stock Receivable Equity
------------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 2,471 $ 2 $ 1,932 $ -- $ 3,057 $ -- $(600) $ 4,391
Sale of common stock, --
net of offering expenses of $2,261 1,208 1 20,737 -- -- -- 20,738
Cash dividends ($.06 per share) -- -- -- -- (158) -- -- (158)
Net income -- -- -- -- 5,940 -- -- 5,940
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 3,679 3 22,669 -- 8,839 -- (600) 30,911
Common stock issued for acquisition 21 -- 500 -- -- -- -- 500
Issuance of non-employee stock options -- -- 87 -- -- -- -- 87
Cash dividends ($.06 per share) -- -- -- -- (211) -- -- (211)
Net income -- -- -- -- 11,455 -- -- 11,455
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 3,700 3 23,256 -- 20,083 -- (600) 42,742
Comprehensive income:
Net income -- -- -- -- 14,088 -- -- 14,088
Unrealized gains on investment
securities -- -- -- 3,354 -- -- -- 3,354
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 3,354 14,088 -- -- 17,442
Issuance of non-employee stock options -- -- 73 -- -- -- -- 73
Exercise of stock options 4 -- 10 -- -- -- -- 10
Cash dividends ($0.165 per share) -- -- -- -- (575) -- -- (575)
Repurchase of treasury shares (117) -- -- -- -- (1,446) -- (1,446)
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 3,587 $ 3 $23,339 $3,354 $33,596 $(1,446) $(600) $58,246
====================================================================================================================================
</TABLE>
See accompanying note 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 operating activities
Net income $ 14,088 $ 11,455 $ 5,940
Adjustments to reconcile net income to
net cash used in operating activities
Gain on sales of loans and leases (64,490) (40,778) (19,942)
Depreciation and amortization 10,826 5,340 1,992
Interest accretion on interest-only strips (2,021) (538) (101)
Provision for credit losses 928 491 106
Accounts written off, net (1,107) (667) (98)
Loans and leases originated for sale (918,477) (510,783) (147,521)
Principal payments on loans and leases 9,200 19,003 4,555
Proceeds from sale of loans and leases 883,349 436,294 118,817
(Increase) decrease in accrued interest
and fees on loan and lease receivables (2,767) 6,164 (1,288)
Purchase of initial overcollateralization on
securitized loans and leases (4,825) (5,376) (3,453)
Required purchases of additional
overcollateralization on securitized
loans and leases (16,682) (9,961) (4,655)
Cash flow from interest-only strips 32,927 13,382 4,643
(Increase) decrease in receivable for loans
and leases sold (70,895) (2,687) 204
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 (976) 3,393 (1,709)
---------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (101,533) (55,672) (33,701)
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-18
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Cash flows from investing activities
Purchase of property and equipment (5,819) (4,085) (1,738)
Proceeds from sale of property and equipment 684 -- --
Purchase of investments -- (2,986) (5,000)
Principal receipts and maturity of investments 3,428 5,101 81
Purchase of subsidiary, net -- (8,866) --
----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,707) (10,836) (6,657)
----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
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)
Financing costs incurred (2,986) (2,041) (1,053)
Dividends paid (575) (211) (158)
Issuance of non-employee stock options 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
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $18,900 $10,647 $2,877
=====================================================================================================================
Income taxes $ 3,750 $ 50 $ --
=====================================================================================================================
Supplemental disclosure of noncash financing activity
Noncash transaction recorded in connection with acquisition of subsidiary
Decrease in acquisition debt $(1,001) $(3,418) $ --
Decrease in loan and lease receivables 1,001 3,418 --
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Summary of Business
Significant
Accounting American Business Financial Services, Inc.
Policies ("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-21
<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.
These amounts are carried at their estimated
net recoverable value.
Allowance for Credit Losses
The Company's allowance for credit losses on
available for sale 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 available for sale loans and
leases, 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 available for sale loans and
leases, the Company makes certain assumptions
regarding the expected impact of credit
losses on the fair value of interest-only
strips. 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-22
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Summary of Interest-only Strips
Significant
Accounting The Company sells a majority of its
Policies - originated loans and leases through
(Continued) securitizations. In connection with these
securitizations, the Company receives cash
and an interest-only strip which represents
our retained interest in the securitized
loans and leases. As a holder of the
interest-only strips, the Company is entitled
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 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-23
<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 benefits 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 interest-only strips 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-24
<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
interest-only strips and the servicing rights
retained by the Company based upon their
relative fair values.
Interest and fee income consists of interest
earned on available for sale loans and
leases, 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. Premiums earned on loans sold
with servicing released, referred to as whole
loan sales, are the difference between the
net proceeds from the sale and the loans net
carrying value. The net carrying value of
loans is equal to their principal balance
plus unamortized origination costs and fees.
Interest accretion on interest-only strips
represents the interest component of cash
flows received on interest-only strips. The
interest income portion of the cash flow is
determined by the discount rate used in the
calculation of the fair value of the
interest-only strips.
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. Interest
rate risk occurs due to potential changes in
interest rates between the date fixed rate
loans and leases are originated and the date
of securitization. The Company utilizes
hedging strategies to mitigate the effect of
changes in interest between the date rate
commitments on loans are made and the date
the fixed rate pass-through certificates to
be issued by a securitization trust are
priced, a period typically less than 90 days.
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. Derivative
F-25
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Summary of contracts are designated as hedges for the
Significant next subsequent securitization at the time
Accounting the contract is entered into. Fixed rate
Policies - pass-through certificates issued by
(Continued) securitization trusts are generally priced to
yield a spread above a benchmark rate based
on U.S. Treasury securities with a three-year
maturity. The Company hedges potential rate
changes in this security with futures
contracts on a similar underlying security.
This provides strong correlation between our
hedge contracts and the ultimate pricing we
will receive on the subsequent
securitization. The gain or loss derived from
these hedging transactions is deferred and
recognized as an adjustment to the gains on
sale of loans and leases when the loans and
leases are securitized. The effectiveness of
our hedges are continuously monitored. If
correlation did not exist, the related gain
or loss on the contract would be recognized
as an adjustment to income in the period
incurred.
During fiscal 1999, net losses of
approximately $2.0 million were incurred on
hedging transactions (futures contracts),
which were recognized as reductions to the
gains on sale for the securitizations they
were designated as hedges against. The
Company had no hedge contracts in fiscal
1998.
The Company had no contracts open at June 30,
1999 or 1998, other than an obligation to
satisfy a lease securitization prefund
requirement of $9.0 million and $14.0
million, respectively, at June 30, 1999 and
1998.
Income Taxes
The Company and its subsidiaries file a
consolidated federal income tax return.
Under the asset and liability method used by
the Company to provide for income taxes,
deferred tax assets and liabilities are
recognized for the expected future tax
consequences of temporary differences between
the financial statement and tax basis
carrying amounts of existing assets and
liabilities.
Acquisition
Effective October 1, 1997, the Company
acquired all of the issued and outstanding
stock of New Jersey Mortgage and Investment
Corp. ("NJMIC"), a mortgage and leasing
company based in Roseland, New Jersey. The
purchase price for the stock consisted of
$11.0 million in cash, a note payable of $5.0
million and the issuance of 20,240 shares of
the Company's common stock. The purchase
agreement included a provision for a series
of contingent payments to the former
stockholders of NJMIC totaling $4.0 million
based on NJMIC's attainment of certain
performance targets over a three year period.
To date the Company has paid $1.3 million of
the total amount of potential contingent
payments.
F-26
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Summary of Significant The transaction was accounted for under the
Accounting Policies - purchase method and accordingly the results
(Continued) 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.
<TABLE>
<CAPTION>
2. Loan and Lease June 30, 1999 1998
Receivables -----------------------------------------------------------------
<S> <C> <C>
(in thousands)
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-27
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. Allowance for
Credit Losses Year ended June 30 1999 1998 1997
-----------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Balance at beginning of year $ 881 $ 338 $ 330
Provision for credit losses:
Home equity loans 296 - -
Business purpose loans 278 128 91
Equipment leases 354 363 15
------------------------------------------------------------------------
Total provision 928 491 106
------------------------------------------------------------------------
Acquired through acquisition - 719 -
------------------------------------------------------------------------
Charge-offs, net of recoveries:
Home equity loans (486) - -
Business purpose loans (301) (138) (34)
Equipment leases (320) (529) (64)
------------------------------------------------------------------------
Total charge-offs (1,107) (667) (98)
------------------------------------------------------------------------
Balance at end of year $ 702 $ 881 $ 338
------------------------------------------------------------------------
Ratio of net charge-offs during
the period to average
total managed portfolio 0.12% 0.12% 0.07%
Ratio of allowance to
gross receivables 2.04% 1.39% 0.94%
</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.
The Company's securitizations involve a
two-step transfer that meets the requirements
of SFAS 125. First, the Company sells the
loans and leases to a special purpose entity
("SPE") which has been established for the
limited purpose of buying and reselling the
loans and leases. Next, the SPE then sells
the loans and leases to a qualified special
purpose entity ("the Trust"), transferring
title to the loans and leases and isolating
those assets from the Company. Finally, the
Trust issues certificates to investors to
raise the cash purchase price, collects
proceeds on behalf of the certificate
holders, distributes proceeds and has a
distinct legal standing from the Company.
F-28
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
4. Securitizations- The commercial paper conduit arrangement
(Continued) provided for sale of the equipment leases
using a pooled securitization. The facility
is sponsored by a major financial institution
and requires its approval to re-securitize
the leases, ordinarily using longer-term
certificates. Should a longer-term
securitization not occur, the leases would
remain in the commercial paper conduit until
their contractual termination. The Company
has no obligation to repurchase the leases
and neither the facility nor the sponsor has
a right to require such repurchase. Under
this arrangement the leases have been
isolated from the Company; the transfer of
these leases to the conduit facility is
treated as a sale for financial reporting
purposes. The Company ceased originating
equipment leases as of December 31, 1999 and
no longer sells leases into this facility.
In fiscal 1999, cash proceeds from the
securitizations of business purpose loans and
home equity loans were $685.0 million, with
pretax gains of $61.9 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 $40.5 million. Cash
proceeds from the securitization of equipment
leases were $13.7 million with pretax gains
of $0.3 million.
Information regarding the initial and current
assumptions applied in determining the fair
values of our mortgage and lease related
interest-only strips and servicing rights are
detailed in Management's Discussion and
Analysis - Securitization Accounting
Considerations.
<TABLE>
<CAPTION>
5. Interest-Only Strips June 30, 1999 1998
---------------------------------------------------------
<S> <C> <C>
(in thousands)
Interest-only strips: $ 172,411 $ -
Available for sale
Trading assets 5,807 95,913
----------------------------------------------------------
$ 178,218 $ 95,913
==========================================================
</TABLE>
F-29
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
5. Interest-Only Strips - SFAS No. 134, which became effective January
(Continued) 1, 1999, requires that after the
securitization of a mortgage loan held for
sale, the resulting mortgage-backed security
or other retained interests be classified
based on the Company's ability and intent to
hold or sell the investments. As a result,
retained interests previously classified as
trading assets, as required by prior
accounting principles, have been reclassified
to available for sale. The effect of SFAS No.
134 on net income and net income per share
was $3.3 million and $0.88, respectively.
Interest-only strips include
overcollateralized balances that represent
undivided interests in the securitizations
maintained to provide credit enhancements to
the investors. At June 30, 1999 and 1998,
overcollateralized principal balances were
$38.6 million and $25.3 million,
respectively.
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 including
initial overcollateralization of
$4,825 and $5,376, respectively 93,175 61,289
Interest accretion 2,021 538
Required purchases of additional
overcollateralization 16,682 9,961
Cash flow from interest-only strips (32,927) (13,382)
Net adjustments to fair value 3,354 --
--------------------------------------------------------------
Balance at end of year $ 178,218 $ 95,913
==============================================================
</TABLE>
F-30
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
6. Servicing Rights The total managed and lease portfolio, which
includes loans and leases sold to investors
and those held as available for sale 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
==============================================================================
The activity for the loan and lease servicing
rights asset is summarized as follows (in
thousands):
Year ended June 30, 1999 1998
------------------------------------------------------------------------------
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-31
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
6. Servicing Rights - Servicing rights are periodically valued by
(Continued) 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 rights 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. .
<TABLE>
<CAPTION>
7. Property and June 30, 1999 1998
Equipment -------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
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-32
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
8. Other Assets June 30, 1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
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
Due from securitization trusts for
servicing related activities 7,131 738
Real estate owned 843 716
Goodwill, net of accumulated
Amortization of $1,913 and $780 15,018 16,151
Other 4,720 2,553
--------------------------------------------------------------------------
$33,411 $ 28,468
==========================================================================
</TABLE>
F-33
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Subordinated Debt Subordinated debt was comprised of the following
and Notes Payable (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 1999 1998
------------------------------------------------------------------------------------
Subordinated debentures (a) $ 206,918 $ 105,652
Subsidiary subordinated
debentures (b) 4,734 6,530
------------------------------------------------------------------------------------
Total subordinated debentures $ 211,652 $112,182
=====================================================================================
Warehouse lines and other notes payable were comprised of the following
(in thousands):
-------------------------------------------------------------------------------------
Warehouse revolving line of
credit (c) $ 42,627 $ 25,720
Warehouse revolving line of
credit (d) 3,764 --
Warehouse revolving line of
credit (e) 102 531
Revolving line of credit (f) 5,000 --
Repurchase agreement (g) 4,677 --
Senior subordinated debt (h) 1,250 3,000
Other debt 1,271 3,152
------------------------------------------------------------------------------------
Total warehouse lines and
other notes payable $ 58,691 $ 32,403
=====================================================================================
</TABLE>
(a) Subordinated debentures due July 1999 through
June 2009, interest rates ranging from 6.15% to
11.50%; subordinated to all of the Company's
indebtedness.
(b) Subsidiary subordinated debentures due July 1999
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 September 2000, interest rates at prime
less 1.0% or LIBOR at the Company's option,
collateralized by lease receivables.
(e) $100 million warehouse line of credit expiring
August 2000, interest rate of LIBOR plus 1.25%,
collateralized by certain loan receivables.
(f) $5 million revolving line of credit expiring
December 1999, interest rate of LIBOR plus 2.0%,
collateralized by certain interest-only strips.
(g) Repurchase agreement due July 1999, interest rate
of LIBOR plus 0.5%, collateralized by certain
lease backed securities.
(h) Senior subordinated debt due July 1999 through
December 1999, interest rate of 12.0%,
subordinated to certain subsidiary's senior
indebtedness.
F-34
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
9. Subordinated Debt Principal payments on debt for the next five years
and Notes Payable - are as follows: year ending June 30, 2000 - $176.0
(Continued) million; 2001 - $35.0 million; 2002 - $25.0 million;
2003 - $9.0 million; and 2004 - $12.0 million.
The Company's subordinated debt securities are
subordinated in right of payment to, or subordinate
to, the prior payment in full of all senior debt as
defined in the indentures related to such debt,
whether outstanding on the date of the applicable
indenture or incurred following the date of the
indenture. There is no limit on the amount of senior
debt the Company may incur. The Company's assets,
including the stock it holds in its subsidiaries, are
available to repay the subordinated debt in the event
of default following payment to holders of the senior
debt. In the event of the Company's default and
liquidation of its subsidiaries to repay the debt
holders, creditors of the subsidiaries must be paid
or provision made for their payment from the assets
of the subsidiaries before the remaining assets of
the assets of the subsidiaries can be used to repay
the holders of the subordinated debt securities.
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. The Company's Board of Directors initiated
the stock repurchase program in view of the current
price level of the Company's common stock and its
earnings over the past two fiscal years.
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-35
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
10. Stockholders' The Company has a loan receivable from an officer of
Equity - the Company for $600 thousand, which was an advance
(Continued) 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 plan,
Benefit 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-36
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
12. Stock Option Plans A summary of stock option activity under the Employee
(Continued) 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>
$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-37
<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>
$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-38
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
12. Stock Option The fair value of options granted was estimated on
Plans - (Continued) 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 rate 4.50%-5.68% 5.39%-6.17% 6.31%-6.90%
</TABLE>
The Company also has a non-employee director stock
option plan ("the Director Plan") that provides for
the granting of options to non-employee directors.
Options are generally granted at the market price of
the stock on the date of grant, fully vest when
granted and expire three to ten years after the date
of grant.
A summary of activity under the Director Plan for the
three years ended June 30, 1999, 1998 and 1997,
retroactively adjusted for the effect of the 5% stock
dividend described in note 10, follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, June 30, 1996 94,500 $ 4.76
Options granted 21,000 16.90
--------------------------------------------------------------------------------
Options outstanding, June 30, 1997 115,500 6.97
Options granted 21,000 22.14
--------------------------------------------------------------------------------
Options outstanding, June 30, 1998 136,500 9.30
Options granted 21,000 14.29
--------------------------------------------------------------------------------
Options outstanding, June 30, 1999 157,500 $ 9.97
================================================================================
</TABLE>
The fair value of options granted under the Director
Plan is expensed on the date of grant. The Company
recognized expense of $73 thousand and $87 thousand
for the years ended June 30, 1999 and 1998,
respectively.
F-39
<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-40
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Income Taxes - The cumulative temporary differences resulted in net
(Continued) 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-41
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Incomes Taxes - A reconciliation of income taxes at federal statutory
(Continued) 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 property
and under noncancelable operating leases requiring
Contingencies minimum annual rentals as follows (in thousands):
Year ending June 30, Amount
-----------------------------------------------------
2000 $ 3,598
2001 3,347
2002 3,024
2003 2,041
2004 48
Thereafter --
-----------------------------------------------------
$ 12,058
=====================================================
Rent expense for leased property was $2.9 million,
$1.7 million and $0.5 million respectively, for the
years ended June 30, 1999, 1998 and 1997.
F-42
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
14. Commitments Employment Agreements
and
Contingencies - The Company entered into employment agreements, as
(Continued) 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-43
<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 a 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. NJMIC
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 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-44
<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 assets
Financial and liabilities. Therefore, fair value estimates are
Instruments 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>
Assets
Cash and cash equivalents $ 22,395 $ 22,395
Loan and leases available
for sale 33,776 35,152
Interest-only strips 178,218 178,217
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-45
<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 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-46
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
16. Fair Value of Servicing rights - Fair value is determined using
Financial estimated discounted future cash flows taking into
Instruments - consideration anticipated prepayment rates and credit
(Continued) 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-47
<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
shares outstanding 3,682 3,692 2,921
Average potentially
dilutive shares 109 155 128
Average common and
potentially
dilutive shares 3,791 3,847 3,049
------------------------------------------------------------------------------
Earnings per common
share
Basic $ 3.83 $ 3.10 $ 2.03
Diluted 3.72 2.98 1.95
==============================================================================
</TABLE>
F-48
<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 divided its operations into three
reportable 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 as available
for sale 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. Transactions
between reportable segments have been reported at
cost.
F-49
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
18. Segment The reporting segments follow the same accounting
Information - policies used for the Company's consolidated
(Continued) financial statements as described in the summary of
significant accounting policies. Management evaluates
a segment's performance based upon profit or loss
from operations before income taxes.
Reconciling items represent elimination of
inter-segment income and expense items, and are
included to reconcile segment data to the
consolidated financial statements.
<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 $ 64,490 $ -- $ -- $ -- $ -- $ 64,490
Interest income 6,883 321 -- 2,120 -- 9,324
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 21,885 4,730 2,274 9,058 -- 37,947
Depreciation and amortization 1,385 1,614 300 873 -- 4,172
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>
Prior to fiscal 1999 the Company was managed by legal
entity, not by functional division as is the current
practice. Due to this organizational structure
change, comparative information is not presented for
the year ended June 30, 1998.
F-50
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
19. Quarterly Data The following table is a summary of financial data by
Statement (Unaudited) quarters for the years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Quarters Ended Fiscal Year 1999
(in thousands, except per share data) June 30, March 31, December 31, September 30,
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Gain on sale of loans and leases $ 18,701 $17,417 $ 14,775 $ 13,597
Interest and fees 3,836 4,271 3,907 4,539
Interest accretion on interest-only strips 1,322 307 208 184
Servicing income 1,354 952 525 490
Other income 2 22 1 14
-----------------------------------------------------------------------------------------------------------------------
Total revenues 25,215 22,969 19,416 18,824
Total expenses 19,495 17,487 13,949 13,642
-----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 5,720 5,482 5,467 5,182
Provision for income taxes 2,059 1,973 1,969 1,762
-----------------------------------------------------------------------------------------------------------------------
Net income $3,661 $3,509 $ 3,498 $ 3,420
=======================================================================================================================
Earnings per common share
Basic $ 1.01 $0.95 $ 0.95 $ 0.92
Diluted $ 0.98 $0.92 $ 0.92 $ 0.90
=======================================================================================================================
</TABLE>
F-51
<PAGE>
American Business Financial
Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
For the Quarters Ended Fiscal Year 1998
(in thousands, except per share data) June 30, March 31, December 31, September 30,
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Gain on sale of loans and leases $ 15,553 $ 10,292 $ 6,476 $ 8,457
Interest and fees 5,782 4,225 5,075 2,304
Interest accretion on interest-only loan strips 231 135 108 64
Servicing income 60 163 84 169
Other income 2 37 118 --
-----------------------------------------------------------------------------------------------------------------------
Total revenues 21,628 14,852 11,861 10,994
Total expenses 16,073 9,647 9,506 6,219
-----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 5,555 5,205 2,355 4,775
Provision for income taxes 2,118 1,893 801 1,623
-----------------------------------------------------------------------------------------------------------------------
Net income $ 3,437 $ 3,312 $ 1,554 $ 3,152
=======================================================================================================================
Earnings per common share
Basic $ 0.93 $ 0.89 $ 0.42 $ 0.86
Diluted $ 0.89 $ 0.86 $ 0.40 $ 0.83
=======================================================================================================================
</TABLE>
F-52
<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.
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.
II-1
<PAGE>
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).
--------------------
* Previously filed.
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")).
--------------------
* Previously filed.
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).
--------------------
* Previously filed.
II-4
<PAGE>
10.18 Management Incentive Plan (Incorporated by reference from Exhibit
10.16 of the 1996 Form SB-2).
10.19 Loan and Security Agreement dated December 12, 1996 between American
Business Credit, Inc. and Finova Capital Corporation (Incorporated by
reference from Exhibit 10.17 of the 1996 Form SB-2).
10.20 Form of Option Award Agreement for Non-Employee Directors Plan for
Non-Formula Awards (Incorporated by reference from Exhibit 10.18 of
the Amendment No. 1 to the 1996 Form SB-2).
10.21 Form of Pooling and Servicing Agreement related to the Company's loan
securitizations dated March 31, 1995, October 1, 1995, May 1, 1996,
August 31, 1996, February 28, 1997, September 1, 1997, February 1,
1998, and June 1, 1998 (Incorporated by reference from Exhibit 4.1 of
ABFS' Quarterly Report on Form 10-QSB for the quarter ended March 31,
1995 (the "March 31, 1995 Form 10-QSB")).
10.22 Form of Sales and Contribution Agreement related to the Company's loan
securitizations dated March 31, 1995, October 1, 1995, May 1, 1996 and
September 27, 1996 (Incorporated by reference from Exhibit 4.1 of the
March 31, 1995 Form 10-QSB).
10.23 Amendments to the Interim Warehouse and Security Agreement between
Upland Mortgage and Prudential Securities Realty Funding Corporation.
(Incorporated by reference from Exhibit 10.21 of the Amendment No. 1
to the 1997 Form SB-2 filed on May 23, 1997 Registration No.
333-24115(the "Amendment No. 1 to the 1997 SB-2")).
10.24 Fourth Amendment to Lease between TCW Realty Fund IV Pennsylvania
Trust and ABFS dated April 9, 1996 (Incorporated by reference from
Exhibit 10.22 to the Amendment No. 1 to the 1997 SB-2).
10.25 Fifth Amendment to Lease between TCW Realty Fund IV Pennsylvania Trust
and ABFS dated October 8, 1996 (Incorporated by reference from Exhibit
10.23 to the Amendment No. 1 to the 1997 SB-2).
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).
--------------------
* Previously filed.
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 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).
--------------------
* Previously filed.
II-6
<PAGE>
10.35 Amended and Restated Specific Terms and Conditions of Servicing
Agreement related to NJMIC's lease securitization dated May 1, 1995
(Incorporated by reference from Exhibit 10.35 of Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 filed on
January 22, 1998, Registration No. 333-2445).
10.36 Amended and Restated Specific Terms and Conditions of Lease
Acquisition Agreement related to NJMIC's lease securitization dated
May 1, 1995 (Incorporated by reference from Exhibit 10.36 of
Post-Effective Amendment No. 1 to the Registration Statement on Form
SB-2 filed on January 22, 1998, Registration No. 333-2445).
10.37 Specific Terms and Conditions of Servicing Agreement related to
NJMIC's lease securitization dated March 1, 1996 (Incorporated by
reference from Exhibit 10.37 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.38 Specific Terms and Conditions of Lease Acquisition Agreement related
to NJMIC's lease securitization dated March 1, 1996 (Incorporated by
reference from Exhibit 10.38 of Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 filed on January 22, 1998,
Registration No. 333-2445).
10.39 Indenture by and among ABFS Equipment Contract Trust 1998-A, American
Business Leasing, Inc. and The Chase Manhattan Bank dated June 1, 1998
(Incorporated by reference from Exhibit 10.39 of Registrant's
Registration Statement on Form S-2, No. 333-63859, filed September 21,
1998).
10.40 Form of Unaffiliated Seller's Agreement related to the Company's home
equity loan securitizations dated March 27, 1997, September 29, 1997,
February 1, 1998 and June 1, 1998 (Incorporated by reference from
Exhibit 10.40 of Registrant's Registration Statement on Form S-2, No.
333-63859, filed September 21, 1998).
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).
--------------------
* Previously filed.
II-7
<PAGE>
10.42 Amendments to the First Amended and Restated Interim Warehouse and
Security Agreement among Prudential Securities Credit Corporation, as
lender, and HomeAmerican Credit Inc. and American Business Credit,
Inc., as borrowers (Incorporated by reference from Exhibit 10.42 of
Registrant's Registration Statement on Form S-2, No. 333-63859, filed
September 21, 1998).
10.43 Amendments to the Credit Agreement between American Business Credit,
Inc., HomeAmerican Credit, Inc., American Business Leasing, Inc., New
Jersey Mortgage & Investment Corp., and Federal Leasing Corp. as
co-borrowers, American Business Financial Services, Inc., as parent,
Chase Bank of Texas, NA, as administrative agent for lenders
(Incorporated by reference from Exhibit 10.43 of Registrant's
Registration Statement on Form S-2, No. 333-63859, filed September 21,
1998).
10.44 $100.0 Million Receivables Purchase Agreement, dated September 30,
1998 among American Business Lease Funding Corporation, American
Business Leasing, Inc. and a syndicate of financial institutions led
by First Union Capital Markets and First Union National Bank, as
liquidity agent. (Incorporated by reference from Exhibit 10.1 of the
Registrant's September 30, 1998 Form 10-Q).
10.45 $20.0 Million Credit Agreement, dated September 28, 1998 between
American Business Leasing, Inc., Federal Leasing Corp. and First Union
National Bank. (Incorporated by reference from Exhibit 10.2 of the
Registrant's September 30, 1998 Form 10-Q).
10.46 Interim Warehouse and Security Agreement, dated August 3, 1998, among
Prudential Securities Credit Corporation, as lender, and Federal
Leasing, Inc. and American Business Leasing, Inc., as borrowers, and
Amendments One and Two thereto. (Incorporated by reference from
Exhibit 10.3 of the Registrant's September 30, 1998 Form 10-Q).
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).
--------------------
* Previously filed.
II-8
<PAGE>
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).
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).
--------------------
* Previously filed.
II-9
<PAGE>
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).
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).
--------------------
* Previously filed.
II-10
<PAGE>
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.*
10.64 Sale and Servicing Agreement dated as of July 6, 2000 by and among
ABFS Greenmont, Inc., as Depositor, HomeAmerican Credit, Inc., d/b/a
Upland Mortgage, and New Jersey Mortgage and Investment Corp., as
Originators and Subservicers, ABFS Mortgage Loan Warehouse Trust
2000-2, as Trust, American Business Credit, Inc., as an Originator and
Servicer, American Business Financial Services, Inc., as Sponsor, and
The Chase Manhattan Bank, as Indenture Trustee and Collateral Agent.
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 (Included in Exhibit 5).
23.2 Consent of BDO Seidman LLP.
24 Power of Attorney (Included on Signature Page).*
25 Statement of Eligibility and Qualification under the Trust Indenture
Act of 1939 on Form T-1.*
27 Financial Data Schedule (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, Form of Order Forms and Other
Materials.
--------------------
* Previously filed.
II-11
<PAGE>
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-K for a Registration Statement on Form S-2.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sells securities,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would
not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "calculation
of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be the initial bona fide offering thereof;
(3) To remove form registration by means of a post-effective
amendment any of the securities that remain unsold at the
termination of the offering.
--------------------
* Previously filed.
II-12
<PAGE>
(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-13
<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 Pre-Effective Amendment No. One
to 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 August 18, 2000.
AMERICAN BUSINESS FINANCIAL SERVICES, INC.
Date: August 18, 2000 By: /s/ Anthony J. Santilli
------------------------------------------------
Anthony J. Santilli, Chairman, President,
Chief Executive Officer, Chief Operating Officer
and Director (Duly Authorized Officer)
---------------------
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
------------------------ ----------------------------------- -------------------
<S> <C> <C>
/s/ Anthony J. Santilli Chairman, President, Chief Executive August 18, 2000
------------------------ Officer, Chief Operating Officer and
Anthony J. Santilli Director (Principal Executive and
Operating Officer)
* Executive Vice President and Chief _________, 2000
------------------------ Financial Officer (Principal Financial
Albert W. Mandia and Accounting Officer)
* Director _________, 2000
------------------------
Leonard Becker
* Director _________, 2000
------------------------
Richard Kaufman
* Director _________, 2000
------------------------
Michael DeLuca
* Director _________, 2000
------------------------
Harold Sussman
* By:/s/ Anthony J. Santilli August 18, 2000
-----------------------
Anthony J. Santilli
Attorney-In-Fact
</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.*
10.64 Sale and Servicing Agreement dated as of July 6, 2000 by
and among ABFS Greenmont, Inc., as Depositor, HomeAmerican
Credit, Inc., d/b/a Upland Mortgage, and New Jersey
Mortgage and Investment Corp., as Originators and
Subservicers, ABFS Mortgage Loan Warehouse Trust 2000-2, as
Trust, American Business Credit, Inc., as an Originator and
Servicer, American Business Financial Services, Inc., as
Sponsor, and The Chase Manhattan Bank, as Indenture Trustee
and Collateral Agent.
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 (Included in
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, Form of Order Form and Other
Materials.
--------------------
* Previously filed.
