<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File
SEPTEMBER 30, 1997 No. 0-23854
RELIANCE ACCEPTANCE GROUP, INC.
Exact Name of Registrants as Specified in Charter
DELAWARE 36-3235321
- -------------------------------- --------------------------
State or Other Jurisdiction of I. R. S. Employer
Incorporation or Organization Identification Number
400 NORTH LOOP 1604 EAST, SUITE 200
SAN ANTONIO, TEXAS 78232
Address of Principal Executive Offices
(210) 496-5910
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
- -----
The number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date:
Class Outstanding at November 12, 1997
- -------------------------------- --------------------------------
Common Stock, $.01 Par Value 10,907,303
Exhibit Index is located on page 26
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
<S> <C>
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996.......................................... 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996........................... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996..................................... 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of the Results
of Operations and Financial Condition............................................. 14
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings.................................................................. 23
Item 3. Defaults Upon Senior Securities.................................................... 23
Item 5. Other Information.................................................................. 23
Item 6. Exhibits and Reports on Form 8-K................................................... 24
</TABLE>
2
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
PART I
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Cash ($3,583 restricted as of September 30, 1997) $ 11,857 $ 4,546
Short-term investments --- 2,110
Finance receivables, net 374,684 383,348
Nonrefundable dealer discounts (3,100) (10,718)
Allowance for credit losses (51,366) (4,913)
-------- --------
320,218 367,717
Repossessions 2,541 5,927
Income tax asset 30,694 9,180
Other assets 8,410 11,528
Net assets of discontinued operations --- 152,014
-------- --------
Total assets $373,720 $553,022
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commercial paper $ --- $147,326
Other debt 321,607 221,394
Accounts payable and other liabilities 4,753 8,651
-------- --------
Total liabilities 326,360 377,371
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized --- ---
Common stock, $.01 par value; 40,000,000 shares authorized
10,907,303 and 15,036,720 shares issued and outstanding
at September 30, 1997, and December 31, 1996 respectively 109 150
Class A common stock, $.01 par value 2,000,000 shares authorized --- ---
Surplus 87,899 82,793
Retained earnings (40,648) 92,708
-------- --------
Total stockholders' equity 47,360 175,651
-------- --------
Total liabilities and stockholders' equity $373,720 $553,022
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
--------------------- ----------------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fee income $ 18,852 $18,837 $ 61,556 $51,774
Interest expense 10,239 5,686 24,952 14,706
-------- ------- -------- -------
Net interest income 8,613 13,151 36,604 37,068
Provision for credit losses 10,000 -- 93,125 --
-------- ------- -------- -------
Net interest income after provision
for credit losses (1,387) 13,151 (56,521) 37,068
Other income 800 221 2,240 928
Operating expense:
Salaries and employee benefits 5,694 3,904 16,067 10,780
Occupancy 423 254 1,193 683
Furniture, fixtures and equipment 423 151 741 386
Computer processing 113 93 349 321
Repossession & repair expense 1,376 1,267 4,886 3,976
Other operating expense 2,218 1,141 9,207 4,336
Restructuring charges 1,941 -- 1,941 --
-------- ------- -------- -------
Total operating expense 12,188 6,810 34,384 20,482
-------- ------- -------- -------
Income (loss) from continuing operations before income taxes (12,775) 6,562 (88,665) 17,514
Income taxes -- 2,620 (25,798) 6,853
-------- ------- -------- -------
Net income (loss) from continuing operations (12,775) 3,942 (62,867) 10,661
-------- ------- -------- -------
Discontinued operations:
Income from discontinued operations before income taxes -- 5,928 3,610 17,633
Income taxes -- 2,000 1,328 5,486
-------- ------- -------- -------
Net income from discontinued operations -- 3,928 2,282 12,147
-------- ------- -------- -------
Gain from split-off of discontinued operations -- -- 45,208 --
-------- ------- -------- -------
Net income (loss) $(12,775) $ 7,870 $(15,377) $22,808
======== ======= ======== =======
Earnings (loss) per share from continuing operations $ (1.17) $ 0.26 $ (5.43) $ 0.69
Earnings per share from discontinued operations -- 0.25 0.20 0.79
Earnings per share from gain -- -- 3.90 --
-------- ------- -------- -------
Earnings (loss) per share $ (1.17) $ 0.51 $ (1.33) $ 1.48
======== ======= ======== =======
Cash dividends declared per share $ -- $ 0.09 $ 0.09 $ 0.27
======== ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (15,377) $ 22,808
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Gain from split-off (45,208) --
Provision for credit losses 93,125 --
Dealer discount accretion -- (3,106)
Depreciation and amortization 1,356 327
Other adjustments to net income, net 61
Net changes in other assets and liabilities (32,233) (14,683)
--------- ---------
Net cash provided by operating activities 1,663 5,407
--------- ---------
Cash flows from investing activities:
Sales finance contract collections 143,573 100,825
Sales finance contract purchases (151,020) (213,209)
Net cash received from split-off 53,771 --
Net (increase) decrease in assets of discontinued operations prior to split-off 3,471 (7,575)
Other, net 120 (1,373)
--------- ---------
Net cash used in investing activities 49,915 (121,332)
--------- ---------
Cash flows from financing activities:
Proceeds from commercial paper 301,626 840,091
Repayment of commercial paper (448,952) (776,071)
Proceeds from other debt 274,648 295,470
Repayments of other debt (174,435) (243,910)
Net proceeds from issuance of common stock 3,068 1,560
Dividends paid (2,332) (3,656)
--------- ---------
Net cash provided by financing activities (46,377) 113,484
--------- ---------
Net (decrease) increase in cash and cash equivalents 5,201 (2,441)
Cash and cash equivalents, beginning of period 6,656 4,829
--------- ---------
Cash and cash equivalents, end of period $ 11,857 $ 2,388
========= =========
Impact of Split-off:
Proceeds:
Net Cash $ 53,771
Bank qualified auto receivables 31,992
Redemption of Stock 117,000
---------
202,763
Net assets of discontinued operations at split-off (155,485)
Assets written off (2,070)
---------
Gain from split-off $ 45,208
=========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The consolidated organization consists of Reliance Acceptance Group, Inc.
(formerly known as Cole Taylor Financial Group, Inc.) (the "Company" or the
"Parent Company") and its subsidiary, Reliance Acceptance Corporation
(formerly known as Cole Taylor Finance Co.) (the "Finance Company"). The
Finance Company operates through wholly-owned subsidiaries under the name
Reliance Acceptance Corporation.
On February 12, 1997 (the "Closing Date"), pursuant to an Amended and Restated
Exchange Agreement (the "Share Exchange Agreement") dated as of June 12, 1996,
the Company and the Taylor Family Group, completed the exchange of (a) 1 share
of Common Stock, $.01 par value per share, of Taylor Capital Group, Inc., a
subsidiary of the Company, holding, among other things, all of the capital stock
of Cole Taylor Bank (the "Bank"), CT Mortgage Company, Inc. (the "Mortgage
Company") and an investment in Alpha Capital Fund II, L. P. ("Alpha Capital"),
which went to the Taylor Family Group, for (b) all of the 4.5 million shares of
Common Stock, $.01 par value per share, of the Company owned by the Taylor
Family Group, which went to the Company (the "Share Exchange"). Prior to the
Share Exchange, the Bank transferred to Cole Taylor Auto Finance, Inc. ("Auto
Sub"), a newly formed subsidiary of the Bank, which was subsequently transferred
to the Company prior to the Share Exchange, the Bank's used automobile
receivables business consisting of, among other things, used automobile finance
contracts with a fair market value of $31 million, and $52.03 million in cash.
At the same time as the Share Exchange, the Finance Company, a subsidiary of the
Company, was merged with and into Auto Sub (the "Merger"), and the surviving
corporation was renamed Reliance Acceptance Corporation.
The condensed consolidated financial statements report the operations of the
Finance Company and applicable assets, liabilities and expenses of the Parent
Company as continuing operations. The split-off entity, consisting of the Bank
and Mortgage Company, qualifies as discontinued operations as defined in
Accounting Principles Board Opinion 30 (APB 30). Accordingly, the Company's
consolidated balance sheet as of December 31, 1996 is presented to reflect the
split-off entity's net assets as discontinued operations. The Bank and Mortgage
Company operations and a portion of the Parent Company expenses, prior to the
Closing Date, are reported as discontinued operations. In addition, all expenses
directly attributable to the split-off transaction are reported in discontinued
operations. The split-off was accounted for as a non-reciprocal distribution to
stockholders and an accounting gain of $45 million was recorded by the Company.
The accounting and reporting policies conform to generally accepted accounting
principles and to the general reporting practices within the finance industry.
All significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates may differ from actual
results.
6
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The unaudited interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain disclosures required by generally accepted accounting
principles are not included herein.
In the opinion of management of the Company, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
consolidated financial position and consolidated results of operations for the
periods presented. The results of operations for the three and nine month
periods ended September 30, 1997 are not necessarily indicative of the results
to be expected for the full year. These statements have been prepared as if the
Company is a going concern; however, the Company has limited Liquidity at
present. See "Liquidity" section in "Management's Discussion and Analysis of the
Results of Operations and Financial Condition".
2. Finance Receivables and Nonrefundable Dealer Discounts:
The following table summarizes the components of finance receivables on the
dates shown (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Gross finance receivables $470,538 $507,166
Less:
Unearned finance charges 94,911 123,092
Unearned insurance commissions 943 726
------------- -------------
Finance receivables, net 374,684 383,348
Nonrefundable dealer discounts 3,100 10,718
Allowance for credit losses 51,366 4,913
------------- -------------
$320,218 $367,717
============= =============
</TABLE>
7
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In conjunction with the financing of installment contracts, agreements are
entered into with dealers whereby a nonrefundable dealer discount is established
to protect the Finance Company from potential losses associated with such
contracts. The following table summarizes the activity in the allowance for
credit losses and nonrefundable dealer discount for the nine month periods
ending September 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Balance at January 1 $ 15,631 $ 12,655
Nonrefundable dealer discounts established 11,448 16,551
Discount accretion -- (3,106)
Provision 93,125 --
Net charges to dealer discount/allowance (65,738) (12,135)
------------ ------------
Balance at September 30 $ 54,466 $ 13,965
============ ============
</TABLE>
Effective January 1, 1996, the Company's accounting treatment for nonrefundable
dealer discount was revised to follow guidelines analogous to the treatment
prescribed in AICPA Practice Bulletin 6, Amortization of Discounts on Certain
Acquired Loans. The Company stratifies its installment contracts receivable by
month of purchase (referred to as "pools") to evaluate the adequacy of the
nonrefundable dealer discount allocated to such pools. If the nonrefundable
dealer discount associated with an individual pool of installment contracts
receivable are estimated to be insufficient to cover known and currently
estimable losses for that pool, an allowance for credit losses is used to absorb
such deficiency. Any required increase in the allowance for credit losses is
recognized as an additional provision for credit losses. If the nonrefundable
dealer discount associated with an individual pool of installment contracts
receivable is estimated to exceed known and currently estimable losses for that
pool, such excess may be accreted to interest income over the remaining life of
the respective pool, using a method that approximates the level yield method.
Management's evaluation as to the adequacy of the nonrefundable dealer discount
to absorb losses is based on historical experience of the portfolio, estimates
of the collectibility of the accounts, the value of the underlying collateral,
and current economic conditions.
8
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Other Debt:
The following table reflects certain aspects of other debt of the Parent and
Finance Companies:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
----------------------------------------------------------
(in thousands)
PARENT COMPANY:
<S> <C> <C>
Subordinated notes bearing interest at 9% payable monthly,
maturing June 15, 2001 $ 25,000 $ 25,000
$30 million unsecured revolving loan, bearing interest at
prime rate or LIBOR plus 1.5%, maturing June 30, 1997; a
commitment fee of .25% per annum on the unused portion
of the credit line is payable annually; paid in full and
canceled February 12, 1997 --- 22,700
FINANCE COMPANY:
Revolving credit agreement bearing interest at reference
rate plus 1.75% to 2.50%, maturing November 21, 1997 223,900 55,550
Reliance Auto Receivable Corporation $126,060,667 Asset
Backed Notes, Series 1996-A, bearing interest at a
rate of 6.10% 72,707 118,144
-------------------------- ------------------------
Total $321,607 $221,394
========================== ========================
</TABLE>
The Company had $25 million of subordinated debt outstanding at September 30,
1997. On May 12, 1997, Duff & Phelps downgraded the Company's subordinated debt
rating from BB to B- citing various adverse credit factors. In October 1997,
LaSalle National Bank resigned as trustee for this issue. As such, the Company
is currently seeking a new trustee.
The revolving credit agreement borrowings are secured by the Finance Company's
receivables. Outstanding borrowings bear interest at a floating rate equal to
the prime rate, plus 1.75%, so long as no "Over Advance" (as defined) exists.
If an Over Advance exists, the outstanding borrowings bear interest at a
floating rate equal to the prime rate plus 2.5% and all Over Advances bear
interest at 15%. Furthermore, because of the existence of Events of Default,
the Facility bears interest at a per annum rate of 3% greater than the rates set
forth above. In addition to the stated interest rate, the Company also is
required to pay a monthly Amendment Fee equal to one-twelfth of one percent of
the then effective Total Credit Facility. In the event that all of the
obligations are not paid in full on or before December 15, 1997, the Company
is obligated to pay an additional fee equal to 2% of the then effective Total
Credit Facility.
The agreement includes financial covenants relating to the ratio of debt to
adjusted tangible net worth (as defined), the ratio of the allowance for loan
losses and nonrefundable dealer discount to finance receivables, the ratio of
unsubordinated debt to borrowing base (as defined), the ratio of adjusted net
income (as defined) to interest expense and to fixed charges (as defined),
minimum adjusted tangible net worth (as defined), and the charge off policy. It
also contains restrictions, among others, as to dividend payments, merger or
disposal of assets, repurchases of securitized receivables and creation of liens
on assets owned or acquired, delinquencies, levels of permissible over advances,
and permitted expenses associated with an approved cash operating budget.
9
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1996, the Finance Company was in default of covenants
relating to the ratio of debt to adjusted tangible net worth, the ratio of
adjusted net income to interest expense, the ratio of unsubordinated debt to
borrowing base, and minimum adjusted tangible net worth. The Finance Company
received waivers from the lender regarding noncompliance with these covenants as
of December 31, 1996 and January 31, 1997.
As of March 31, 1997, the Finance Company was in default of covenants relating
to the ratio of adjusted net income to interest expense, the ratio of minimum
adjusted tangible net worth and failure to submit certain required financial
statements. The Finance Company received a waiver from the lenders regarding
noncompliance with these covenants as of March 31, 1997.
As of June 30, 1997, the Finance Company was in default of the covenants
relating to the ratio of net income to interest expense and the ratio of minimum
adjusted tangible net worth. The Finance Company received a waiver from the
lenders regarding noncompliance with these covenants as of June 30, 1997. The
lenders also waived their rights to withdraw cash from the Finance Company's
collection account that arose out of the foregoing events of default. The June
30 waiver and amendment also significantly lowered the Company's advance rate
against notes receivable, resulting in an immediate significant over advance
under the revolving credit agreement.
The revolving credit agreement was extended, effective July 11, 1997, and
currently terminates on November 21, 1997. Terms of the extension included an
increased interest rate, a significantly lower advance rate against notes
receivable (which was effected by the amendment of June 30, 1997) and the
reduction of the $250 million revolver by $10 million a month beginning August
31, 1997, down to $200 million. The extension also provided for additional
amounts of permissible over advances, provided that the aggregate amount of all
over advances would be no greater than $14,547,000 between July 11 and August
31, 1997, $12,000,000 between September 1, 1997, and September 30, 1997,
$9,000,000 between October 1, 1997 and November 7, 1997 and $5,000,000
thereafter.
By late August 1997, the Finance Company was again in default of the revolving
credit agreement covenants regarding permissible over advances and minimum
adjusted tangible net worth. As a result, the Finance Company entered into a
forbearance letter agreement (the "Forbearance Letter") with the lender, as of
September 5, 1997. Under the Forbearance Letter, the lender agreed not to
exercise its remedies for the Company's defaults in exchange for the Finance
Company's agreements pursuant thereto. Terms of the Forbearance Letter included:
1) termination of any commitment by the lender to make advances under the
revolving credit agreement, 2) limitation on the use of collections subject to
permitted expenses in an operating budget, with funds exceeding a cash balance
of $5 million remitted to the lender, 3) execution of an amended and restated
loan agreement providing for a co-lending arrangement with each of the eight
lenders, and 4) a further 3% increase in the interest rate, with such additional
interest occruing and becoming payable in full at maturity. This increase in
rate brought the applicable rates to 14% on that portion of the loan ($186
million in principal amount at October 31, 1997) that was not in over advance
and 18% for that portion of the loan ($21 million in principal amount at October
31, 1997) that was in over advance. This initial period of forbearance ended
October 7, 1997.
10
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of September 30, 1997 and as of the date hereof, the Finance Company was in
default of covenants relating to the ratio of debt to adjusted tangible net
worth, the ratio of adjusted net income to interest expense, the ratio of the
allowance for loan losses and nonrefundable dealer discount to finance
receivables, the minimum adjusted tangible net worth, the failure to reduce the
over advances to permitted levels and certain specified delinquency levels.
The revolving credit agreement was amended and restated effective October 7,
1997, to amend, restate and consolidate the Existing Credit Agreement in its
entirety, to reflect the former participants under the Existing Credit Agreement
as direct lenders, to incorporate the terms of the Forbearance Letter, and to
acknowledge that events of default were outstanding and would remain outstanding
under the amended and restated agreement relating to the ratio of debt to
adjusted tangible net worth, the minimum adjusted tangible net worth, failure to
reduce over advances to required levels, and certain specified delinquency
levels. The restated revolving credit agreement was to mature November 7, 1997,
at which time the lenders' forbearance would also expire.
In addition to the covenant defaults described in the preceding paragraph, the
Finance Company was also in violation of the covenants, as of September 30,
1997, relating to the ratio of adjusted net income to interest expense and the
ratio of the previous twelve months of charge offs to the allowance for loan
losses and nonrefundable dealer discount, neither of which were included as
existing events of default in the October 7, 1997, amendment and restatement of
the Credit Facility owing to the fact that final results for September were not
yet available and therefore were not subject to forbearance.
As of November 7, 1997, the Finance Company and lenders agreed to extend the
maturity of the revolving credit agreement and the forbearance period through
November 21, 1997. There is no assurance that it will be extended further.
Failure to receive an extension of the revolving credit agreement and
forbearance at such time could cause the Finance Company to seek the protection
afforded by bankruptcy proceedings.
During the fourth quarter of 1996, the Finance Company through a securitization
subsidiary borrowed $126,060,667 at a fixed rate of 6.10% in a securitized debt
financing transaction. The gross unpaid balance of $72,758,743 at September 30,
1997 was secured by $79,180,679 of the Company's finance receivables and $3.6
million in cash. Under the agreement, all principal portions of payments
received on the underlying collateral plus interest at 6.10% are paid monthly to
the noteholders. The remaining collections from the collateral, less a 3%
servicing fee paid monthly to the Finance Company, are retained by the Trustee
as additional collateral subject to a maximum credit support amount (as
defined).
The agreement includes financial covenants relating to the ratio of
delinquencies (as defined), the ratio of defaulted receivables (as defined), and
minimum requirements for tangible net worth (as defined). Violation of these
provisions has resulted in an increase in the credit support amount to a level
equaling all excess collections (as defined).
As of September 30, 1997, the Finance Company was in default of the covenants
relating to the ratio of delinquent receivables, defaulted receivables, tangible
net worth, and the obligation to repurchase certain receivables whose terms were
modified in violation of the Finance Company's extension policy. The note
insurer has waived these defaults, with respect to the more rapid pay down of
the notes and possible replacement of the Finance Company as servicer of the
11
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
receivables, subject to the reservation of certain future rights relating to
remedies for such default. Based on the current level of delinquent and
defaulted receivables, the Finance Company will continue to be in default of
these covenants through the end of 1997. As a result, the Finance Company will
request waivers from the note insurer on a monthly basis, although there can be
no assurance that any such waivers will be received. If waivers are not
received, all excess collections on the receivables and cash reserves held by
the securitization subsidiary may be used to pay down the notes on an
accelerated basis. In addition, the Finance Company could be replaced as the
servicer causing the Finance Company to lose the 3% servicing fee and, perhaps
more importantly, providing a practical impediment to transferring servicing
rights in a merger, sale or recapitalization. The Note Insurer has indicated
that both of these options are under consideration. Additionally, the risk
exists that the securitization subsidiary will contain no equity at the end of
the securitization, i.e. there would be no cash remaining to be distributed to
the Finance Company in the subsidiary after all notes are paid in full, unless
collections on outstanding receivables improve.
4. Net Assets of Discontinued Operations:
The assets and liabilities of the discontinued operations have been separately
classified on the balance sheet as net assets of discontinued operations. A
summary of these assets and liabilities follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
ASSETS:
Cash and due from banks $ 67,032
Federal funds sold 5,675
Interest-bearing deposits in other banks 14,564
Investment securities 403,789
Loans, net 1,205,055
Premises, leasehold improvements and equipment, net 15,314
Other assets 113,202
----------
Total assets - discontinued operations 1,824,631
----------
LIABILITIES:
Deposits 1,406,775
Borrowing 248,268
Accrued interest, taxes and other liabilities 17,574
----------
Total liabilities - discontinued operations 1,672,617
----------
Net assets of discontinued operations $ 152,014
==========
</TABLE>
12
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the net income of the discontinued operations for the period of
January 1, 1997 to February 11, 1997 and the three and nine months ended
September 30, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
For the period of For the three months For the nine months
Jan. 1, 1997 ended ended
to Feb. 11, 1997 September 30, 1996 September 30, 1996
----------------- -------------------- -------------------
<S> <C> <C> <C>
Net interest income $ 8,566 $ 18,128 $ 54,135
Provision for loan losses (420) (1,053) (3,005)
Noninterest income 1,930 4,052 12,195
Noninterest expense (6,466) (14,682) (45,692)
Income taxes (1,328) (1,936) (5,486)
------- -------- --------
Net Income $ 2,282 $ 4,509 $ 12,147
======= ======== ========
</TABLE>
5. Tax Matters
The Taxpayer Relief Act of 1997 ("the Act") was signed into law in August of
1997. A provision of the Act is to reduce a corporation's net operating loss
carryback period from three years to two years beginning after August 5, 1997.
For tax reporting purposes, this new law allows net operating losses, if any,
incurred in 1998 to be carried back to 1996, when the Company reported modest
taxable income, compared to prior law, which would have permitted any 1998 net
operating losses to carry back to 1995, when the Company reported significant
taxable income. For financial reporting purposes, the change in the tax law will
increase the uncertainty regarding the realizability of the full deferred tax
asset that is recorded in the September 30, 1997 financial statements, because
as of January 1, 1998, the reversal of temporary tax differences that gave rise
to deferred taxes, primarily the provision for credit losses, can no longer be
carried back to periods of significant taxable income. Additionally, the Company
has recorded a valuation allowance on deferred tax assets for temporary
differences and it is likely that it will continue to do so in the fourth
quarter of 1997 due to the reduced carryback period.
13
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Item 2
The following presents management's discussion and analysis of the results of
operations of the Company for the three and nine months ended September 30,
1997, and the financial condition of the Company as of September 30, 1997. This
discussion should be read in conjunction with the condensed consolidated
financial statements and accompanying notes presented elsewhere in this
Form 10-Q.
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
Certain statements contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward-looking statements
that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management, and that are subject to certain risks or uncertainties. Such
forward-looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. When used herein, the words
"anticipate," " believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such forward-
looking statements. The Company cautions readers of this Quarterly Report on
Form 10-Q that a number of important factors could cause the Company's actual
results, performance or achievements in 1997 and beyond to differ materially
from the results, performance or achievements expressed in, or implied by, such
forward-looking statements. These factors include, without limitation, risks
associated with dependence on a single business segment and other risks and
uncertainties relating to the separation of the traditional commercial and
consumer banking business from the Company in the split-off: dependence on sales
of automobiles and related demand by consumers for financing; general economic
and business conditions affecting the Company's customers; the continued ability
of the Company to (a) find expansion opportunities and to successfully implement
the Company's expansion strategy, (b) to obtain new sources of funds through
securitizations of automobile loans, public or private offerings of debt
securities or otherwise, or maintain existing sources of funds, (c) to establish
and maintain relationships with automobile dealers and (d) to purchase an
increased number of loans meeting the Company's underwriting standards; changes
in interest rates; the adequacy of the Finance Company's dealer reserves and
allowance for credit losses; competition from other finance companies and
financial institutions; the impact of any other strategic transactions
undertaken by the Company; federal and state legislation, regulation and
supervision; the risk that a portion of the sales finance contracts purchased by
the Finance Company will become defaulted contracts or be subject to certain
claims of defenses which automobile buyers may assert against automobile dealers
or the Finance Company as the holder of the contracts; contractual restrictions
on the payment of dividends. These and other factors are more fully described in
the Company's other filings with the Securities and Exchange Commission,
including, without limitation, the Company's Proxy Statement for its 1996 Annual
Meeting of Stockholders and the Company's Prospectus dated May 25, 1994.
Further, the statements herein are made based on the assumption that the Company
continues as a going concern. See "Liquidity" in "Management's Discussion and
Analysis of the Results of Operations and Financial Condition."
14
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Overview
The Company has operated in the financial services industry, engaged primarily
in the banking and consumer loan acceptance business. As a result of the split-
off, the Finance Company, along with the used automobile receivables business of
the Bank, constitutes the sole business operations of the Company. This
Management's Discussion and Analysis of Results of Operations and Financial
Condition focuses on the continuing operations of the Company and the Finance
Company. See Note 1 in "Notes to Condensed Consolidated Financial Statements"
for the "Basis of Presentation".
The Finance Company commenced operations in January 1993, and at September 30,
1997, operated in fifteen states. The Finance Company's headquarters are located
in San Antonio, Texas. To date, the Finance Company's operations had primarily
focused on purchasing closed-end retail sales finance contracts associated with
sales of used automobiles.
The Finance Company purchased each sales finance contract in accordance with its
underwriting standards and procedures. The majority of automobiles financed by
the Finance Company range in age from used current year models to those that are
five years old with less than 100,000 miles. Typically, loans have terms ranging
from 24 to 60 months at annual interest rates between 18% and 25%. Accounts are
repayable in monthly installments and are assessed late payment fees if
scheduled payments are not made within ten days of their due date.
FINANCIAL CONDITION
General Condition
The Company's financial condition continued to deteriorate during the third
quarter of 1997, and has worsened from that date up to the present time. The
Company has no present ability to originate any significant amount of
receivables, and is limited to using its net positive cash flow to pay down the
lenders under the revolving credit agreement and to spending under a pre-
approved weekly budget submitted to its senior lenders. Without the ability to
originate loans, the Company has suffered a loss of employees and experienced
low employee morale. The Finance Company has consolidated, centralized and
reduced its operations, bringing its number of offices down from 53 at December
31, 1996 to 24 at October 31, 1997 and is planning to reduce this further to
only seven centralized collection centers by year end. The Company at November
10 had 284 employees, down from 385 at September 30, 1997 and 578 employees at
April 30, 1997, and anticipates that it will have less than 250 employees by
year end 1997. See "Liquidity" in "Management's Discussion and Analysis of the
Results of Operations and Financial Condition".
15
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Finance Receivables
Net finance receivables declined 2.3% to $375 million at September 30, 1997 from
$383 million at December 31, 1996. The decline in finance receivables was
primarily attributable to the curtailment, during the third quarter, of new
business production for its own portfolio, partially offset by the receipt of
$31 million of used automobile finance contracts from the Bank pursuant to the
Share Exchange Agreement and increased production volume in existing offices
during the first half of the year. The production curtailment is a result of the
current inability of the company to raise capital for generating new business.
The Finance Company's production volume was $12 million during the third quarter
compared to $70 million during the third quarter of 1996, $56 million during the
second quarter of 1997 and $93 million during the first quarter of 1997. The
Finance Company has used virtually all of its excess cash flow (cash flow after
operating expenses) to pay down its revolving credit agreement.
The Company's offices in Texas accounted for approximately 38% of gross finance
receivables as of September 30, 1997, offices in Georgia accounted for
approximately 12%, and each of the remaining states where offices are located
accounted for less than 10%. The total number of offices at November 10 was 17,
compared to 34 at September 30, 1997, 46 at September 30, 1996 and 53 at
December 31, 1996.
Delinquencies and Repossessions
The Company generally suspends the accrual of interest when an account becomes
90 or more days contractually delinquent.
If an account becomes 60 or more days contractually past due, it is classified
as delinquent. The following table sets forth certain information with respect
to the Company's 60 day and greater contractually delinquent receivables and
repossessed assets (in thousands):
<TABLE>
<CAPTION>
As of As of As of
9/30/97 12/31/96 9/30/96
------- -------- -------
<S> <C> <C> <C>
Gross delinquent receivables (60 days or more past due) $35,449 $ 8,839 $ 5,631
Repossessed assets 2,541 5,927 6,480
------- ------- -------
Total gross delinquent receivables and repossessed $37,990 $14,766 $12,111
assets
======= ======= =======
Delinquent receivables to gross finance receivables 7.53% 1.74% 1.21%
Delinquent receivables and repossessed assets to gross
finance receivables plus repossessed assets 8.03% 2.88% 2.57%
</TABLE>
The Company's ratios reported above reflect significantly increasing trends with
respect to the level of nonperforming loans and repossessions.
16
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Allowance for Credit Losses and Nonrefundable Dealer Discount
The following table summarizes, for the periods indicated, period end and
average net finance receivables in addition to the activity in the nonrefundable
dealer discount, allowance for credit losses, charges to dealer discount and
related ratios:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Finance receivables, net, end of period $374,684 $348,663
Average finance receivables, net 413,128 295,499
Allowance for credit loss/Nonrefundable dealer
discount at January 1 $ 15,631 $ 12,655
Nonrefundable dealer discount established 11,448 16,551
Discount accretion -- (3,106)
Provision 93,125 --
Net charges to allowance for credit loss/dealer discount (65,738) (12,135)
-------- --------
Allowance for credit loss/Nonrefundable dealer
discount at September 30 $ 54,466 $ 13,965
======== ========
Annualized charges to average net finance receivables 21.2% 5.5%
Allowance for credit loss/Dealer discount to net finance
receivables at end of period 14.5% 4.0%
</TABLE>
Net credit losses were $65.7 million and $12.1 million for the nine month
periods ending September 30, 1997 and 1996, respectively. The increase in loss
experience is due to the significantly increasing trends with respect to both
the repossession frequency and the severity of loss on repossessions (expressed
as average loss per vehicle, which is currently running at approximately 65% of
the contract balance outstanding per unit). Consequently, additional provisions
for credit losses may be necessary in the future.
17
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The following table summarizes management's estimate of anticipated losses, by
pool, and its evaluation as to the adequacy of the nonrefundable dealer discount
and allowance for credit losses (in thousands):
<TABLE>
<CAPTION>
Volume Current Losses
Subprime Originated Balance Percent To Date Expected Losses Remaining Losses
Pool $ $ Liquidated $ Vol. (%) $ Vol. (%) $ Vol. (%) O/S (%)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1Q93 1,347 - 100.0 55 4.1 55 4.1 0 0.0 0.0
2Q93 3,259 - 100.0 157 4.8 157 4.8 0 0.0 0.0
3Q93 7,546 52 99.3 369 4.9 370 4.9 1 0.0 2.5
4Q93 9,217 84 99.1 374 4.1 376 4.1 2 0.0 2.1
----------------------------------------------------------------------------------------------------------------
21,369 136 99.4 955 4.5 958 4.5 3 0.0 2.3
1Q94 16,053 335 97.9 902 5.6 912 5.7 10 0.1 3.0
2Q94 22,085 1,178 94.7 1,652 7.5 1,703 7.7 51 0.2 4.3
3Q94 29,010 2,889 90.0 2,683 9.2 2,832 9.8 150 0.5 5.2
4Q94 30,652 4,439 85.5 3,899 12.7 4,228 13.8 328 1.1 7.4
----------------------------------------------------------------------------------------------------------------
97,800 8,841 91.0 9,136 9.3 9,675 9.9 539 0.6 6.1
1Q95 33,030 6,188 81.3 4,345 13.2 4,836 14.6 491 1.5 7.9
2Q95 49,082 11,969 75.6 7,060 14.4 8,150 16.6 1,090 2.2 9.1
3Q95 58,166 16,979 70.8 10,114 17.4 12,080 20.8 1,966 3.4 11.6
4Q95 68,326 22,403 67.2 14,038 20.5 17,216 25.2 3,178 4.7 14.2
----------------------------------------------------------------------------------------------------------------
208,604 57,539 72.4 35,557 17.0 42,282 20.3 6,725 3.2 11.7
1Q96 78,236 32,917 57.9 15,816 20.2 20,944 26.8 5,128 6.6 15.6
2Q96 77,792 37,977 51.2 14,891 19.1 21,034 27.0 6,144 7.9 16.2
3Q96 70,098 40,229 42.6 11,252 16.1 17,507 25.0 6,255 8.9 15.5
4Q96 77,135 53,578 30.5 9,151 11.9 17,346 22.5 8,195 10.6 15.3
----------------------------------------------------------------------------------------------------------------
303,261 164,701 45.7 51,110 16.9 76,831 25.3 25,721 8.5 15.6
1Q97 81,932 64,690 21.0 6,010 7.3 18,844 23.0 12,834 15.7 19.8
2Q97 42,888 38,034 11.3 1,447 3.4 9,658 22.5 8,210 19.1 21.6
3Q97 2,390 2,120 11.3 8 0.3 215 9.0 207 8.7 9.8
----------------------------------------------------------------------------------------------------------------
127,210 104,844 17.6 7,465 5.9 28,717 22.6 21,251 16.7 20.3
758,244 336,061 55.7 104,223 13.7 158,463 20.9 54,240 7.2 16.1
Other 38,623 226 0.6
---------- ----------- ----------
Total 374,684 54,466 14.5
========== ===========
</TABLE>
18
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Debt
See Note 3, beginning on page 9, of the "Notes to Condensed Consolidated
Financial Statements" for a discussion of debt and the related covenants.
RESULTS OF OPERATIONS
Net Income (Loss)
For the three months ended September 30, 1997, the Company's net loss of $12.8
million represented a decrease of $16.7 million or 424.1% as compared to the
$3.9 million of income for the same period of last year. The decrease in income
was primarily attributable to the Company's $10 million provision for credit
losses, restructuring charges for branch consolidations of $1.9 million, an
increase in the interest rate on outstanding debt resulting in a decline in net
interest income of $4.5 million, and the inability of the Company to book
significant new business.
For the nine months ended September 30, 1997, the Company's net loss of $15.4
million was a decrease of $38.2 million or 167.4% as compared to the $22.8
million of income for the same period last year. The year-to-date loss included
a $45.2 million gain from the disposition of discontinued operations, recognized
in the first quarter. The Company's net loss of $62.9 million from continuing
operations represented a decrease of $73.5 million or 689.7% as compared to the
$10.7 million of income for the same period of last year. The decrease in
income from continuing operations is primarily attributable to the Company's
$93.1 million provision for credit losses established throughout the year. The
provision taken in 1997 was necessitated by significant increases in the
Company's credit losses in 1997 and the Company's analysis of these losses
employing a static pool reserve analysis, which is contained in this report (see
page 18). The provisions taken increased the Company's coverage ratio for
credit losses (ratio of total reserves to net receivables outstanding) from 4.0%
as of September 30, 1996 to 14.5% as of September 30, 1997. Management is
actively addressing the issue of the Company's increased credit losses with a
view toward significantly lowering such losses in the near term, particularly
with respect to new originations, although the Company is originating very
little volume at this time (see discussion on production volume included in
"Finance Receivables" on page 16). The Company is seeking to lower credit losses
through changes to personnel, policies and actual practices. There can be no
assurance that the Company will be able to lower such losses.
Net Interest Income
The Company's primary component of income is net interest income, which is the
difference between interest earned on finance receivables and interest paid on
debt.
For the three months ended September 30, 1997, the Company's net interest income
decreased 34.5% to $8.6 million as compared with $13.2 million for the
comparable period in 1996. The decrease is attributable to an increase in the
interest rate paid on outstanding debt, an increase in delinquencies and the
19
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
discontinuation of dealer discount accretion. The net interest margin
(annualized), which is the ratio of net interest income divided by average
finance receivables, was 8.5% as compared to the 15.8% for the same period in
1996.
For the nine months ended September 30, 1997, the Company's net interest income
decreased 1.3% to $36.6 million as compared with $37.1 million for the
comparable period in 1996. The net interest margin (annualized), was 11.8% as
compared to the 16.7% for the same period in 1996. The decrease in net interest
margin was a result of higher interest expense due to increased use of the
revolving credit agreement resulting from the loss of access to commercial
paper, much higher interest expense under the revolving credit agreement, the
discontinuation of income accretion from the dealer reserve, a higher
delinquency rate and the acquisition of the Bank-qualified used automobile
receivables that have a lower yield.
Operating Expenses
In addition to interest expense, the Company incurs operating expenses to
conduct its business. The following table summarizes the components of
operating expenses for the three and nine months ended September 30, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
% of % of % of % of
1997 ANR 1996 ANR 1997 ANR 1996 ANR
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits 5,694 5.7 3,904 4.7 16,067 5.2 10,780 4.9
Occupancy 423 0.4 254 0.3 1,193 0.4 683 0.3
Furniture, fixtures and equipment 423 0.4 151 0.2 741 0.2 386 0.2
Computer processing 113 0.1 93 0.1 349 0.1 321 0.1
Repossession & repair expense 1,376 1.4 1,267 1.5 4,886 1.6 3,976 1.8
Other operating expenses 2,218 2.2 1,141 1.4 9,207 3.0 4,336 1.9
Restructuring charges 1,941 1.9 -- 0.0 1,941 0.6 -- 0.0
------ ---- ----- --- ------ ---- ------ ---
Total operating expense 12,188 12.1 6,810 8.2 34,384 11.1 20,482 9.2
====== ==== ===== ==== ====== ==== ====== ====
</TABLE>
ANR = Average net finance receivables
For the three months ended September 30, 1997, operating expenses increased
79.0% from the comparable 1996 period. During the third quarter, the Company
expensed restructuring costs associated with the planned branch consolidations.
Restructuring costs include lease and severance costs. Overall, operating
expenses increased as a percentage of average net finance receivables from 8.2%
for the same period in 1996 to 12.1%. Excluding the third quarter restructuring
charges of $1.9 million, operating expenses were 10.2%, as compared with 8.2%
for the same period of 1996. Headcount declined to 385 at September 30, 1997,
from 450 at September 30, 1996. Repossession and repair increased as a result
of the significantly increasing trends with respect to the level of
nonperforming loans and resulting repossessions.
20
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
For the nine months ended September 30, 1997, operating expenses increased
67.9%, from the comparable 1996 period. Other operating expenses include a $2.5
million fee paid in June 1997 to a group of lenders, led by Bank America
Business Credit, Inc., in consideration for a waiver of certain events of
default on the senior debt revolving credit agreement. Overall, operating
expenses increased as a percentage of average net finance receivables from 9.2%
to 11.1%. Excluding the $2.5 million waiver fee and the third quarter
restructuring charges of $1.9 million, operating expenses were 9.7% as compared
with 9.2% for the same period of 1996. Salaries and employee benefits,
occupancy, furniture, fixtures and equipment, and other operating expenses
increased as a result of reaching a high of 57 branches at June 30, 1997 and 578
employees at April 30, 1997. Headcount declined to 385 at September 30, 1997,
from 450 at September 30, 1996. Repossession and repair increased as a result
of the significantly increasing trends with respect to the level of
nonperforming loans and resulting repossessions.
LIQUIDITY
In general, the Company has limited liquidity at present. The lenders, under the
revolving credit agreement, no longer have any obligation to make advances. In
addition, the Company has no meaningful access to any other financing sources at
present. As a result, the Company is seeking a merger, sale or recapitalization
of the Company, and retained Price Waterhouse LLP in the third quarter to act as
its financial advisor in this regard. Failure to obtain an extension prior to
the expiration of the revolving credit agreement, which is now set for November
21, 1997, could lead to the Company's decision to seek protection under the
federal bankruptcy code, with negative implications for stockholders. In
addition, it is possible that to effectuate a merger or sale transaction, a
bankruptcy filing requesting approval of the bankruptcy court for such
transaction may be necessary. Under this latter scenario, there can be no
assurance that a bankruptcy could be concluded in a manner that satisfies
stockholders objectives.
The Company's purchase of sales finance contracts have historically been
financed with funds drawn pursuant to the senior secured revolving credit
agreement, proceeds of asset securitization and cash flow from maturing sales
finance contracts. Prior to February 1997, the Company also used commercial
paper extensively to fund its operations. As described herein, none of these
sources of funds are currently available to finance the Company's operations,
except to a very limited extent. If the Company is not able to sell, merge or
recapitalize itself in the near term, resorting to federal bankruptcy protection
is very likely.
The Company's primary source of funds has been the revolving credit agreement
with a group of several lenders, led by Bank America Business Credit, Inc. The
arrangement is secured by the finance receivables of the Finance Company, other
than those that are part of the securitization described elsewhere herein. As
described herein (See "Notes to Financial Statements--Other Debt"), the Company
is currently operating under the terms of the Forbearance Letter, under which
the lenders agree to forbear from exercising remedies for default under the
revolving credit agreement, including acceleration of the full amount of the
loan, in exchange for certain agreements by the Finance
21
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Company, including use of all net cash flow in a manner consistent with a budget
pre-approved by the lenders. The revolving credit agreement expires on November
21, 1997, at which time the entire amount outstanding under the revolving credit
agreement is due and there is no assurance that it will be extended at that
time.
The Company's securitization of finance receivables is also currently in
default. (See Notes to Financial Statements--Other Debt), although the note
insurer is not currently exercising certain remedies for such default, which
could include replacement of the Finance Company as servicer for the securitized
receivables. In any case, further significant deterioration of the securitized
portfolio could result in the Finance Company receiving no residual cash at the
end of the securitized portfolio's life, which would otherwise be the case.
See Note 3 in the Notes to "Condensed Consolidated Financial Statements" for
further discussion of debt. Also see "Financial Condition" in "Management's
Discussion and Analysis of the Results of Operations and Financial Conditions".
ADDITIONAL ACCOUNTING PRONOUNCEMENTS
In February 1997, FASB Statement No. 128, "Earnings Per Share" (Statement 128),
was issued. Statement 128 supersedes APB Opinion No. 15, Earnings Per Share and
specifies the computation, presentation and disclosure requirements for earnings
per share (EPS) for entities with publicly held common stock or potential common
stock. Statement 128 was issued to simplify the computation of EPS and to make
the U. S. standard more compatible with the EPS standards of other countries and
that of the International Accounting Standards Committee. It replaces the
presentation of primary EPS with a presentation of basic EPS and fully diluted
EPS with diluted EPS. It also required dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS under APB 15.
Statement 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted
(although pro forma EPS disclosure in the footnotes for periods prior to
required adoption is permitted). After adoption, all prior-period EPS data
presented shall be restated to conform with Statement 128. The Company does not
expect adoption of Statement 128 to have a significant impact of the Company's
financial statements.
22
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In late October, 1997, the Company and numerous other defendants were
sued in Delaware Chancery Court in Levin v. Reliance Acceptance Group,
Inc. et al. Other defendants include all previous directors of Cole
Taylor Financial Group, Inc. in June, 1996, which includes all of the
Company's current directors except for Ms. Cathy Cole Williams, as
well as Taylor Capital Group, Inc. ("TCG"), three members of the
Taylor Family and three other former directors of Cole Taylor
Financial Group, Inc. who are now affiliated with TCG. The plaintiff
stockholder in the action, which is brought as a class action on
behalf of Reliance stockholders, claims that the split-off transaction
(described herein on page 6) violated Delaware law, in that it was
approved by stockholders who were not adequately informed of all
material facts related to the transaction, particularly the true
financial condition of the Reliance Acceptance Corporation subsidiary.
The claim seeks to rescind the split-off transaction, returning the
Company to a consolidated bank holding company or, in the alternative,
seeks comparable money damages.
The Company is also a defendant in a lawsuit that seeks class action
certification in Tennessee, alleging numerous violations with respect
to the force placing of insurance. Counsel for the Company is
currently evaluating this claim.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See pages 9 through 12.
ITEM 5. OTHER INFORMATION
NEW MANAGEMENT AND MANAGEMENT CHANGES
On September 21, 1997, James T. Moran, who is currently a Senior
Managing Director of Price Waterhouse LLP, was elected President and
Chief Executive Officer of the Company. Howard B. Silverman, who had
occupied the posts of Chairman of the Board and Chief Executive
Officer since May 6, 1997, returned to his previous post of Chairman
of the Board on September 21, 1997. Prior to Mr. Moran's election, his
predecessor as the Corporation's President, Jack E. Plunkitt, resigned
his posts and his directorships on September 16, 1997, citing personal
reasons.
23
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
PART II - OTHER INFORMATION(Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index on page 26
(b) Reports on Form 8-K - the Company filed a Current Report on Form
8-K dated September 30, 1997, to provide information regarding certain
significant management changes.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reliance Acceptance Group, Inc.
--------------------------------------
(Registrant)
Date: November 14, 1997 /s/ James D. Dolph
------------------------ --------------------------------------
James D. Dolph
Chief Financial Officer
/s/ Lawrence R. Canedy
--------------------------------------
Lawrence R. Canedy
Treasurer
/s/ Bart R. Vincent
--------------------------------------
Bart R. Vincent
Controller
25
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Documents Number
- ------- ----------------------------------------- ------------
<C> <S> <C>
11 Statement regarding computation of primary earnings per share.......... 27
27 Financial Data Schedule................................................ 28
</TABLE>
26
<PAGE>
EXHIBIT 11
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1997 1996 1997 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
1 Average common shares outstanding 10,907,303 14,773,731 11,576,480 14,646,749
2 Net additional shares assuming
stock options exercised and proceeds
used to purchase treasury stock, except
1997 periods where the assumed exercise
would be antidilutive -- 745,542 -- 713,759
------------ ----------- ------------ -----------
3 Average number of common and common
equivalent shares outstanding 10,907,303 15,478,974 11,576,480 15,360,508
------------ ----------- ------------ -----------
EARNINGS
4 Net income (loss) from continuing operations $(12,775,000) $ 3,942,000 $(62,867,000) $10,661,000
5 Net income from discontinued operations -- 3,928,000 2,282,000 12,147,000
6 Gain from split-off of discontinued
operations -- -- 45,208,000 --
------------ ----------- ------------ -----------
7 Net income (loss) $(12,775,000) $ 7,870,000 $(15,377,000) $22,808,000
============ =========== ============ ===========
PER SHARE AMOUNTS
8 Net income (loss) per share from continuing
operations (line 4/ line 3) $ (1.17) $ 0.26 $ (5.43) $ 0.69
9 Net income per share from discontinued
operations (line 5/ line 3) -- 0.25 0.20 0.79
10 Gain per share (line 6/ line 3) -- -- 3.90 --
------------ ----------- ------------ -----------
11 Net income (loss) per share (line
6/ line 3) $ (1.17) $ 0.51 $ (1.33) $ 0.97
============ =========== ============ ===========
</TABLE>
Note: In all periods, earnings per share were calculated using the treasury
stock method. Fully diluted earnings per share are not presented as they
are less than 3% dilutive.
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,857
<SECURITIES> 0
<RECEIVABLES> 371,584
<ALLOWANCES> 51,366
<INVENTORY> 0
<CURRENT-ASSETS> 41,645
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 373,720
<CURRENT-LIABILITIES> 4,753
<BONDS> 321,607
0
0
<COMMON> 109
<OTHER-SE> 47,251
<TOTAL-LIABILITY-AND-EQUITY> 373,720
<SALES> 0
<TOTAL-REVENUES> 63,796
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,384
<LOSS-PROVISION> 93,125
<INTEREST-EXPENSE> 24,952
<INCOME-PRETAX> (88,665)
<INCOME-TAX> 25,798
<INCOME-CONTINUING> (62,867)
<DISCONTINUED> 2,282
<EXTRAORDINARY> 45,208
<CHANGES> 0
<NET-INCOME> (15,377)
<EPS-PRIMARY> (1.33)
<EPS-DILUTED> (1.33)
</TABLE>
