<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
JUNE 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 August 12, 1997
- ---------------------------- ------------------------------------
Common Stock, $.01 Par Value 10,907,303
Exhibit Index is located on page 28
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
-------------------------------
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996........... 3
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 1997
and 1996..................................... 4
Condensed Consolidated Statements of Cash Flows
Three and Six Months Ended June 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.................................... 12
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings......................... 24
Item 3. Defaults Upon Senior Securities........... 25
Item 5. Other Information......................... 25
Item 6. Exhibits and Reports on Form 8-K.......... 25
</TABLE>
2
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
PART I
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
__________________
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 13,840 $ 4,546
Short-term investments 2,300 2,110
Finance receivables, net 430,214 383,348
Nonrefundable dealer discount (9,335) (10,718)
Allowance for credit losses (59,602) (4,913)
----------- ------------
361,277 367,717
Repossessions 3,584 5,927
Income tax assets 30,670 9,180
Other assets 8,955 11,528
Net assets of discontinued operations --- 152,014
----------- ------------
Total assets $ 420,626 $ 553,022
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commercial paper $ 99 $ 147,326
Other debt 358,180 221,394
Accounts payable and other
liabilities 2,214 8,651
----------- ------------
Total liabilities 360,493 377,371
----------- ------------
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 June 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 (27,875) 92,708
----------- ------------
Total stockholders' equity 60,133 175,651
----------- ------------
Total liabilities and
stockholders' equity $ 420,626 $ 553,022
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fee income $ 21,390 $17,540 $ 42,704 $ 32,937
Interest expense 7,805 4,831 14,713 9,020
--------- -------- -------- -------
Net interest income 13,585 12,709 27,991 23,917
Provision for credit losses 60,925 -- 83,125 --
--------- -------- -------- -------
Net interest income after provision
for credit losses (47,340) 12,709 (55,134) 23,917
--------- -------- -------- -------
Other income 716 339 1,440 707
Operating expense:
Salaries and employee benefits 5,550 3,680 10,374 6,876
Occupancy 416 214 770 429
Furniture, fixtures and equipment 166 138 318 235
Computer processing 128 110 236 228
Repossession & repair expense 1,959 1,274 3,510 2,709
Other operating expense 5,095 1,792 6,989 3,195
--------- -------- -------- -------
Total operating expense 13,314 7,208 22,197 13,672
--------- -------- -------- -------
Income from continuing operations before income taxes (59,938) 5,840 (75,891) 10,952
Income taxes (19,749) 2,274 (25,798) 4,233
--------- -------- -------- -------
Net income from continuing operations (40,189) 3,566 (50,093) 6,719
--------- -------- -------- -------
Discontinued operations:
Income from discontinued operations before income taxes -- 6,445 3,610 11,705
Income taxes -- 1,936 1,328 3,486
--------- -------- -------- -------
Net income from discontinued operations -- 4,509 2,282 8,219
--------- -------- -------- -------
Gain from split-off of discontinued operations -- -- 45,208 --
--------- -------- -------- -------
Net income $(40,189) $ 8,075 $ (2,603) $14,938
========= ======== ======== =======
Earnings per share from continuing operations $(3.69) $ 0.23 $ (4.20) $ 0.44
Earnings per share from discontinued operations -- 0.29 0.19 0.53
Earnings per share from gain -- -- 3.79 --
--------- -------- -------- -------
Earnings per share $ (3.69) $ 0.52 (0.22) $ 0.97
========= ======== ======== =======
Cash dividends declared per share $ -- $ 0.09 $ 0.09 $ 0.18
========= ======== ======== =======
</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 six months ended
June 30,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (2,603) $ 14,938
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain from split-off (45,208) --
Provision for credit losses 83,125 --
Dealer discount accretion -- (2,255)
Depreciation and amortization 908 158
Other adjustments to net income, net -- 68
Net changes in other assets and liabilities (35,101) (2,210)
------------ -----------
Net cash provided by operating activities 1,121 10,699
------------ -----------
Cash flows from investing activities:
Sales finance contract collections 100,222 58,367
Sales finance contract purchases (138,962) (143,685)
Net cash received from split-off 53,771 --
Net (increase) decrease in assets of discontinued operations prior to split-off 3,471 (4,867)
Other, net (434) (498)
------------ -----------
Net cash used in investing activities 18,068 (90,683)
------------ -----------
Cash flows from financing activities:
Proceeds from commercial paper 301,626 481,441
Repayment of commercial paper (448,853) (424,580)
Proceeds from long-term debt 274,648 176,950
Repayments of long-term debt (137,862) (155,850)
Net proceeds from issuance of common stock 3,068 979
Dividends paid (2,332) (2,332)
------------ -----------
Net cash provided by financing activities (9,705) 76,608
------------ -----------
Net (decrease) increase in cash and cash equivalents 9,484 (3,376)
Cash and cash equivalents, beginning of period 6,656 4,829
------------ -----------
Cash and cash equivalents, end of period $ 16,140 $ 1,453
============ ===========
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)
------------
$ 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. 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 in the quarter ended March 31, 1997. 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 six month periods
ended June 30, 1997 are not necessarily indicative of the results to be expected
for the full year.
2. FINANCE RECEIVABLES AND NONREFUNDABLE DEALER DISCOUNT:
The following table summarizes the components of finance receivables on the
dates shown (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Gross finance receivables $ 551,380 $ 507,166
Less:
Unearned finance charges 120,153 123,092
Unearned insurance commissions 1,013 726
------------ ------------
Finance receivables, net 430,214 383,348
Nonrefundable dealer discount 9,335 10,718
Allowance for credit losses 59,602 4,913
------------ ------------
$ 361,277 $ 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 nonrefundable
dealer discount and allowance for credit losses for the six month periods ending
June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Balance at January 1 $ 15,631 $12,655
Nonrefundable dealer discount 11,233 11,353
established
Discount accretion -- (2,255)
Provision 83,125 --
Net charges to dealer discount/allowance (41,052) (9,498)
----------- ----------
Balance at June 30 $ 68,937 $12,255
=========== ==========
</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 is estimated to be deficient 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>
June 30, 1997 December 31, 1996
----------------------------------
(in thousands)
<S> <C> <C>
PARENT COMPANY:
Subordinated notes bearing
interest at 9% payable monthly, $ 25,000 $ 25,000
maturing June 15, 2001
$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 December 15, 1997 244,938 55,550
Reliance Auto Receivable
Corporation $126,060,667 Asset
Backed Notes, Series 1996-A,
bearing interest at a rate
of 6.10% 88,242 118,144
-------- --------
Total $358,180 $221,394
======== ========
</TABLE>
The revolving credit agreement borrowings are secured by the Finance Company's
receivables. The agreement includes financial covenants relating to the ratio
of debt to adjusted tangible net worth (as defined), the ratios 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), 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.
As of December 31, 1996, the Finance Company was in default of covenants
relating to the ratio of debt to adjusted tangible net worth (as defined), the
ratio of adjusted net income (as defined) to interest expense, the ratio of
unsubordinated debt to borrowing base (as defined), and minimum adjusted
tangible net worth (as defined). The Finance Company received waivers from the
lenders 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 required financial statements.
The Finance Company has received a waiver from the lenders regarding
noncompliance with these covenants as of March 31, 1997.
9
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 1997, the Finance Company was in default of 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 Company anticipates that unless the agreement is
amended or the lender waives such defaults, the Company will be in default of
the net worth covenant for July 31, 1997 when July financial statements are
delivered to the lender and a covenant relating to the permissible level of over
advance if and when the lender delivers notice of default. There is no assurance
that any such amendment or waiver will be executed. The Company has requested
such an amendment or waiver, and the bank group is currently considering the
matter.
The revolving credit agreement was extended, effective July 11, 1997, until
December 15, 1997. Terms of the extension include 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 to reduce it down to $200
million. The extension also provides for additional amounts of permissible over
advances, provided that the aggregate amount of all over advances must be no
greater than $14,547,000 between July 11 and August 31, 1997, $12,000,000 from
September 1, 1997, through and including September 30, 1997, $9,000,000 from
October 1, 1997 through and including October 31, 1997, $5,000,000 from November
1, 1997 through and including November 30, 1997 and $0 thereafter. The Finance
Company is in violation of this covenant, and the lender has verbally informed
the Finance Company that the lender will shortly deliver a notice of default for
this breach, although the lender has stated it will not seek to enforce
available remedies at this time. Additional financing sources may be necessary
to reduce the facility as planned and will be necessary to provide the Company
with the funds necessary to provide liquidity and maintain and grow its business
and earnings. In this regard, the Company is in the process of retaining a
nationally recognized firm to act as its financial advisor and to arrange for
such financial restructuring. The Company has begun the process of arranging
these additional funds but no agreements are yet in place. There can be no
assurance agreements will be reached. Until such a restructuring occurs, the
Company will continue to reduce its base of finance receivables in order to meet
the terms of the revolving credit agreement. Failure to secure additional
funding sources would have a material adverse effect on the Company's liquidity
and earnings.
During the fourth quarter of 1996, the Finance Company borrowed $126,060,667 at
a fixed rate of 6.10% in a securitized debt financing transaction. The current
unpaid balance of $88,302,636 at June 30, 1997 is secured by $93,523,746 of the
Company's finance receivables at June 30, 1997. 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 equalling all excess collections(as
defined). As of June 30, 1997, the Finance Company was in default of the
covenants relating to the ratio of delinquent receivables and defaulted
receivables described above. The note insurer has waived this default, with
respect to the more rapid pay down of the notes, subject to the reservation of
certain future rights relating to remedies for such default. Based on the
current level of defaulted receivables, the Finance Company will continue to be
in default of at least the defaulted receivables covenants through the end of
1997. As a result the Finance Company will request waivers from the note insurer
on a monthly basis and 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.
10
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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>
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 six months ended June 30,
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
For the period For the three For the six
of Jan. 1, 1997 months ended months ended
to Feb. 11, 1997 June 30, 1996 June 30, 1996
----------------- ------------- -------------
<S> <C> <C> <C>
Net interest income $ 8,566 $ 18,128 $ 35,776
Provision for loan losses (420) (1,053) (2,052)
Noninterest income 1,930 4,052 7,753
Noninterest expense (6,466) (14,682) (29,772)
Income taxes (1,328) (1,936) (3,486)
------- -------- --------
Net Income $ 2,282 $ 4,509 $ 8,219
======= ======== ========
</TABLE>
11
<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 six months ended June 30, 1997 as
compared to the same period in 1996, and the financial condition of the Company
as of June 30, 1997 compared to December 31, 1996. This discussion should be
read in conjunction with the condensed consolidated financial statements and
accompanying notes presented elsewhere in this Form 10-Q.
The consolidated organization consists of Reliance Acceptance Group, Inc.
(the "Company" or the "Parent Company") and its subsidiary, Reliance Acceptance
Corporation (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. 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, 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, prior to the Closing Date, directly attributable to the split-off
transaction are reported in discontinued
12
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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
in the quarter ended March 31, 1997. 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.
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.
13
<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.
The Finance Company commenced operations in January 1993, and at June 30, 1997,
operated in sixteen states. The Finance Company's headquarters are located in
San Antonio, Texas. To date, the Finance Company's operations have focused on
purchasing closed-end retail sales finance contracts, primarily in connection
with sales of used automobiles.
The Finance Company purchases 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
FINANCE RECEIVABLES
Net finance receivables increased 12.2% to $430 million at June 30, 1997; from
$383 million at December 31, 1996. The increase in finance receivables was
primarily attributable to 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. The Finance Company's production volume
was $56 million during the second quarter of 1997, compared to $93 million
during the first quarter of 1997. The Finance Company's production volume for
its own portfolio, aside from the Bank-qualified program, will be severely
curtailed during the remainder of 1997, as the Finance Company will probably
have to use virtually all of its net cash flow to pay down its revolving credit
agreement to $200 million. If the Finance Company is able to consummate a
restructuring of its funding, the Finance Company may then be able to put some
of its cash flow into new loans, which may over time increase the level of
finance receivables and earnings.
The Finance Company's offices in Texas accounted for approximately 38% of gross
finance receivables as of June 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 June 30, 1997 was 54
compared to 37 at June 30, 1996 and 53 at December 31, 1996.
14
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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 delinquent 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
6/30/97 12/31/96 6/30/96
-------- ---------- ---------
<S> <C> <C> <C>
Delinquent receivables, gross (60 days
or more past due) $ 19,812 $ 8,839 $ 2,567
Repossessed assets 3,584 5,927 6,646
-------- --------- --------
Total delinquent receivables and
repossessed assets $ 23,396 $ 14,766 $ 9,213
======== ========= ========
Delinquent receivables to gross finance
receivables 3.59% 1.74% 0.60%
Delinquent receivables and repossessed
assets to gross finance receivables plus
repossessed assets 4.22% 2.88% 2.11%
</TABLE>
The Company's ratios reported above reflect significantly increasing trends with
respect to the level of nonperforming loans and repossessions.
15
<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, activity in the nonrefundable dealer discount,
allowance for credit losses, charges to dealer discount and related ratios:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
------------------- --------------------
<S> <C> <C>
Finance receivables, net, end of period $ 430,214 $318,547
Average finance receivables, net 425,789 277,176
Allowance for credit loss/Nonrefundable dealer
discount at January 1 $ 15,631 $ 12,655
Nonrefundable dealer discount established 11,233 11,353
Discount accretion -- (2,255)
Provision 83,125 --
Net charges to allowance for credit loss/dealer discount (41,052) (9,498)
---------- ---------
Allowance for credit loss/Nonrefundable dealer
discount at June 30 $ 68,937 $ 12,255
========== ========
Net charges to average finance receivables, net
(annualized) 19.3% 6.9%
Allowance for credit loss/Dealer discount to
finance receivables, net at end of period 16.0% 3.9%
</TABLE>
Net charges were $41.0 million and $9.5 million for the six month periods ending
June 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 severity of repossessions (expressed as average loss per vehicle,
which is currently running at more than 50% per unit). These trends have
dramatically increased the level of nonperforming loans and repossessions since
1996.
16
<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 Percent Losses
Subprime Originated Balance Liquidated To Date Expected Losses Remaining Losses
Pool $ $ $ 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 -
2Q93 3,259 8 99.8 152 4.7 152 4.7 0 0.0 2.4
3Q93 7,546 73 99.0 369 4.9 371 4.9 2 0.0 2.5
4Q93 9,217 121 98.7 368 4.0 371 4.0 3 0.0 2.1
------------------------------------------------------------------------------------------------------
21,369 202 99.1 943 4.4 948 4.4 5 0.0 2.3
1Q94 16,053 549 96.6 861 5.4 876 5.5 16 0.1 2.8
2Q94 22,085 1,686 92.4 1,569 7.1 1,640 7.4 71 0.3 4.2
3Q94 29,010 3,783 87.0 2,534 8.7 2,723 9.4 189 0.7 5.0
4Q94 30,652 5,705 81.4 3,587 11.7 3,990 13.0 403 1.3 7.1
------------------------------------------------------------------------------------------------------
97,800 11,723 88.0 8,551 8.7 9,229 9.4 679 0.7 5.8
1Q95 33,030 7,753 76.5 3,913 11.8 4,493 13.6 579 1.8 7.5
2Q95 49,082 14,851 69.7 6,233 12.7 7,500 15.3 1,267 2.6 8.5
3Q95 58,166 20,641 64.5 8,880 15.3 11,127 19.1 2,247 3.9 10.9
4Q95 68,326 26,926 60.6 12,266 18.0 15,868 23.2 3,601 5.3 13.4
------------------------------------------------------------------------------------------------------
208,603 70,170 66.4 31,292 15.0 38,987 18.7 7,694 3.7 11.0
1Q96 78,236 38,690 50.5 13,202 16.9 18,758 24.0 5,556 7.1 14.4
2Q96 77,792 44,543 42.7 11,648 15.0 18,103 23.3 6,454 8.3 14.5
3Q96 70,098 47,842 31.7 7,654 10.9 16,122 23.0 8,469 12.1 17.7
4Q96 77,135 63,653 17.5 4,525 5.9 17,741 23.0 13,216 17.1 20.8
------------------------------------------------------------------------------------------------------
303,260 194,728 35.8 37,030 12.2 70,724 23.3 33,694 11.1 17.3
1Q97 81,932 73,626 10.1 2,166 2.6 18,816 23.0 16,651 20.3 22.6
2Q97 42,888 42,017 2.0 116 0.3 9,544 22.3 9,428 22.0 22.4
------------------------------------------------------------------------------------------------------
124,821 115,642 7.4 2,282 1.8 28,360 22.7 26,078 20.9 22.6
755,854 392,466 48.1 80,098 10.6 148,248 19.6 68,150 9.0 17.4
Other 37,749 787 2.1
------- ------
Total 430,214 68,937 16.0
======= ======
</TABLE>
17
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
DEBT
The Finance Company's primary debt is a $250 million secured senior debt
revolving credit agreement with a group of several lenders, led by Bank America
Business Credit, Inc. Pursuant to the July 11, 1997 extension of the revolving
credit agreement, the $250 million revolver must be reduced by $10 million a
month beginning August 31, 1997 until maturity on December 15, 1997, at which
time the revolver's maximum principal amount will be $200 million. The
arrangement is secured by the finance receivables of the Finance Company, other
than those that are part of the securitization described below. Outstanding
borrowings bear interest at a floating rate equal to a reference rate, which is
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 a reference rate plus 2.5% and all Over Advances bear interest at
15 percent. 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 have not been paid in full on or before December 15, 1997, the
Company would have to pay an additional fee equal to 2% of the then effective
Total Credit Facility. The revolving credit 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), the charge-off policy and the
required level of reserves in relation to a rolling 12-month percentage of
charge-offs (as defined). 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. As of June 30,
1997, the Finance Company was in default of the covenants relating to the ratio
of adjusted net income to interest expense and the ratio of minimum adjustable
tangible net worth. The Finance Company has received a waiver from the lenders
regarding noncompliance with these covenants. The lenders also waived their
rights to withdraw cash from the Finance Company's collection account. 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 July 11 extension established by
covenant permissible over advances, to be reduced over the life of the facility.
The Finance Company is in violation of this covenant, and the lender has
verbally informed the Finance Company that the lender will shortly deliver
a notice of default for this breach, although the lender has stated it will not
seek to enforce available remedies at this time. In addition, the Finance
Company will be in default of the revolving credit agreement's net worth
covenant for July 31, 1997 when July financial statements are delivered to the
lender. Unless the agreement is amended or unless the lender waives such
defaults, the Finance Company will remain in default under the revolving credit
agreement. There is no assurance that any such amendment or waiver will be
executed. The Company has requested such an amendment or waiver, and the bank
group is currently considering the matter.
The Finance Company completed a securitization of finance receivables on
November 20, 1996 for approximately $126 million. The securitization was
structured as an "on balance sheet," financing transaction rather than using
"gain on sale" accounting treatment. As such, the transaction is analogous to a
fixed-rate, secured financing at an interest rate of approximately 7%. As of
June 30, 1997, the Finance Company was in default of the covenants relating to
the ratio of delinquent receivables and the ratio of defaulted receivables. The
defaults result in an increase in the credit support amount (as defined) and, if
not waived by the note insurer, in an accelerated paydown of the asset backed
notes issued in the securitization. The note insurer has waived this default,
subject to the reservation of certain future rights relating to remedies for
such default. Based on the current level of defaulted receivables, the Finance
Company will continue to be in default of at least the defaulted receivables
covenants through the end of 1997. As a result the Finance Company will request
waivers from the note insurer on a monthly basis, and 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.
18
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
If the note insurer determines not to waive such default in the future, the
Company's liquidity could be materially adversely affected, unless alternative
financing could be arranged. The proceeds of the securitization were used
primarily to pay down debt, particularly amounts drawn under the revolving
credit agreement. If market conditions warrant and if such sources of financing
are available to it, the Company may consider further securitizations, or
issuances of fixed or floating rate debt securities, either publicly or
privately placed, as alternatives to additional bank financing.
The Company has $25 million of subordinated debt outstanding at June 30, 1997.
On May 12, 1997, Duff & Phelps downgraded the Company's subordinated debt rating
from BB to B- citing various adverse credit factors. The Company's management
is actively addressing these concerns.
19
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS
NET INCOME
For the three months ended June 30, 1997, the Company's net loss of $40.2
million represented a decrease of $43.8 million or 1,227.0% as compared to the
$3.6 million of income for the same period of last year. The decrease in income
is primarily attributable to the Company's $60.9 million provision for credit
losses established during the quarter. For the six months ended June 30, 1997,
the Company's net loss of $2.6 million is a decrease of $17.5 million or 117.4%
as compared to the $14.9 million of income for the same period last year. The
$2.6 million loss for the six months ended June 30, 1997, included a $45.2
million gain from the disposition of discontinued operations, recognized in the
first quarter. For the six months ended June 30, 1997, the Company's net loss
of $50.1 million from continuing operations represented a decrease of $56.8
million or 845.5% as compared to the $6.7 million of income for the same period
of last year. The decrease in income from continuing operations is primarily
attributable to the Company's $83.1 million provision for credit losses
established during the six months ended June 30, 1997. The additional provision
taken in the second quarter of 1997 was necessitated by significant increases in
the Company's credit losses in the second quarter of 1997 and the Company's
analysis of these losses employing a static pool reserve analysis, which is
contained in this report (see page 17). The additional provisions taken during
the second quarter significantly increased the Company's coverage ratio for
credit losses (ratio of total reserves to net finance receivables) from 7.5% as
of March 31, 1997 to 16.0% as of June 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. The Company is seeking to lower credit losses through
changes to personnel, policies and actual practices.
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
borrowings. For the three and six months ended June 30, 1997, the Company's net
interest income increased 6.9% to $13.6 million and 17.0% to $28.0 million as
compared with $12.7 million and $23.9 million for the comparable periods in
1996. The increase is attributable to an increase in average net receivables,
offset by an increase in delinquencies and the discontinuation of dealer
discount accretion. The net interest margin (annualized), which is the ratio
of net interest income divided by average finance receivables was 12.3% and 13.
2% in the three and six months ended June 30, 1997 as compared to the 16.9%
and 17.2% for the same periods in 1996. During the first and second quarters of
1997, the decrease in net interest margin was a result of higher interest
expense due to increased use of 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.
20
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
OPERATING EXPENSES
In addition to interest expense, the Company incurs operating expenses in the
conduct of its business. The following table summarizes the components of
operating expenses for the three and six months ended June 30, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 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 5,550 5.0 3,680 4.9 10,374 4.9 6,876 5.0
Occupancy 416 0.4 214 0.3 770 0.4 429 0.3
Furniture, fixtures and equipment 166 0.2 138 0.2 318 0.1 235 0.2
Computer processing 128 0.1 110 0.1 236 0.1 228 0.1
Repossession & repair expense 1,959 1.8 1,274 1.7 3,510 1.7 2,709 2.0
Other operating expenses 5,095 4.6 1,792 2.4 6,989 3.2 3,195 2.3
------ ---- ----- --- ------ ---- ------ ---
Total operating expense 13,314 12.1 7,208 9.6 22,197 10.4 13,672 9.9
====== ==== ===== === ====== ==== ====== ===
</TABLE>
ANR = Average net finance receivables
For the three and six months ended June 30, 1997, operating expenses increased
84.7% and 62.4%, respectively as compared to the previous 1996 periods. 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 9.6% and 9.9% to 12.1% and 10.4% for the three and six month
periods ending June 30, 1996 and 1997, respectively. Excluding the $2.5 million
waiver fee, operating expenses were 9.8% and 9.3% for the three and six month
periods ending June 30, 1997, respectively, as compared with 9.6% and 9.9% for
the same periods of 1996. Salaries and employee benefits, occupancy, furniture,
fixtures and equipment, and other operating expenses increased as a result of
the opening of 17 new branches and an accompanying increase in headcount to 567
at June 30, 1997, from 371 at June 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. Salaries and employee benefits
also increased as a result of hiring several senior and middle level managers,
including a new president and chief operating officer.
LIQUIDITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Company's ability to repay borrowings as they mature and to make new loans and
investments as opportunities arise.
21
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The Company's purchase of sales finance contracts are primarily 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.
The Company's primary source of funds is the $250 million secured senior debt
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 below. The revolving credit agreement was extended in July, 1997 to
December 15, 1997. Terms of the extension include an increased interest rate, a
significantly lower advance rate against notes receivable and the reduction of
the $250 million revolver by $10 million a month beginning August 31, 1997 to
reduce it down to $200 million. The Company also has covenants relating to the
amount of permissible over advances under the revolving credit agreement.
Barring unforeseen circumstances, the Company will have continuing over advances
until it refinances the revolving credit agreement. Moreover, additional
financing sources may be necessary to reduce the facility as planned and will be
necessary to provide the Company with the funds necessary to provide liquidity
and maintain and grow its business and earnings. The Company has begun the
process of arranging these additional funds but no final agreements are yet in
place. Failure to secure additional funding sources could have a material
adverse effect on the Company's liquidity and earnings.
The Company completed a securitization of finance receivables on November 20,
1996 for approximately $126 million. The securitization was structured as an
"on balance sheet" financing transaction. As such, the transaction is analogous
to a fixed-rate, secured financing. The proceeds of the securitization were used
primarily to pay down debt, particularly amounts drawn under the revolving
credit agreement. If market conditions warrant and if such sources of financing
are available to it, the Company may consider further securitizations, or
issuances of fixed or floating rate debt securities, either publicly or
privately placed.
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
22
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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.
23
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MANAGEMENT CHANGES AND LAWSUITS
On May 6, 1997, Thomas L. Barlow resigned as the Company's President
and Chief Executive Officer. He was replaced by Howard B. Silverman,
the Company's Chairman, who then took on the additional position of
Chief Executive Officer. On June 10, 1997, Jack E. Plunkitt assumed
the posts of President and Chief Operating Officer of the Company. He
was also elected a Director of the Company.
On May 23, 1997, Mr. Barlow brought suit against the Company and Mr.
Silverman in state court in San Antonio, Texas, alleging breach of Mr.
Barlow's Employment Agreement, breach of his Change of Control
Severance Agreement, fraud, libel and slander, and tortious
interference. In part, Mr. Barlow alleges that he was terminated
rather than voluntarily resigned and that the juxtaposition of the
Company's reports of a $9.9 million loss from continuing operations in
the first quarter, combined with allegedly inaccurate reports of his
resignation, amounted to defamation. As part of his lawsuit, Mr.
Barlow also alleges that the Company's financial results for the last
quarter of 1996 and the first quarter of 1997 were inaccurately
understated.
The Company believes that Mr. Barlow's claims are without merit and
intends to vigorously contest Mr. Barlow's lawsuit. An adverse
judgment in this matter could have a material adverse effect on the
Company's results of operations or financial condition (in a
particular period).
Three other former executives of the Company have also indicated that
they will seek compensation from the Company based on alleged breaches
of change of control severance agreements or employment agreements.
The Company believes it possesses meritorious defenses to those claims
as well. If all such claims were decided against the Company, these
matters could, in the aggregate, have a material adverse effect on the
Company's results of operations or financial condition (in a
particular period).
24
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
PART II - OTHER INFORMATION (Continued)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See first and second paragraphs on page 18.
ITEM 5. OTHER INFORMATION
NEW MANAGEMENT
During the second quarter, the Company put an entirely new senior
management team in place. On May 6, Howard B. Silverman, then Chairman
of the Board of Directors of the Company, became Chief Executive
Officer as well. Jack E. Plunkitt was named President and Chief
Operating Officer in June 1997, and at the same time, Calvin Profitt,
III became Senior Vice President-Operations. Along with James D.
Dolph, Senior Vice President-Chief Financial Officer, and James I.
Kaplan, Senior Vice President-General Counsel & Corporate Secretary,
both of whom became full-time employees of the Company in the first
quarter of 1997, these management changes mean that all officers at or
above the senior vice-president level, other than Mr. Silverman, are
new to the Company in 1997, and Mr. Silverman has only held the
position of Chief Executive Officer since May 1997. Mr. Kaplan was
with the predecessor Cole Taylor Financial Group, Inc. since 1991.
Management of the Company has set several objectives. These include
returning the Company to profitability, restructuring the Company's
finances to provide liquidity and asset growth, improving credit
quality through adherence to underwriting policies and better asset
collection and disposal practices, consolidating branches and reducing
operating expenses. Achievement of these objectives is critical to the
future success of the Company. Some of them, such as restructuring of
the Company's finances, involve decisions by third parties that cannot
be assured or predicted. Other factors, such as the performance of
loan pools originated in 1995, 1996 and early 1997 under previous
management, will also impact the Company's future success and cannot
be predicted with certainty at this time.
The most critical immediate objective is restructuring of the
Company's finances to provide for liquidity and asset growth. Until
this task is finalized, the Company will need to use substantially all
available net cash flow to reduce amounts borrowed under the revolving
credit agreement, which limits the Company's profitability and growth.
The Company is considering numerous proposals regarding this
restructuring, but none have been finalized, and there is no assurance
that the necessary restructuring will, in fact, take place.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index on page 28.
25
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
PART II - OTHER INFORMATION (Continued)
(b) Reports on Form 8-K -
(1) The Company filed a Current Report on Form 8-K dated May
15, 1997 to provide information regarding certain
significant management changes.
(2) The Company filed a Current Report on Form 8-K dated July
1, 1997 to provide information regarding a significant
management change and suspension of the Company's
quarterly dividend.
26
<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: August 14, 1997
- ------------------------
________________________________
James D. Dolph
Chief Financial Officer
________________________________
Lawrence R. Canedy
Treasurer
27
<PAGE>
RELIANCE ACCEPTANCE GROUP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Documents Number
- ------- ------------------------- ------
<S> <C> <C>
11 Statement regarding computation of primary earnings per share................... 29
27 Financial Data Schedule......................................................... 30
</TABLE>
28
<PAGE>
EXHIBIT 11
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1997 1996 1997 1996
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
1 Average common shares outstanding 10,904,445 14,629,280 11,916,614 14,602,780
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 -- 775,542 -- 739,375
------------ ----------- ------------- -----------
3 Average number of common and common
equivalent shares outstanding 10,904,445 15,404,822 11,916,614 15,342,155
------------ ----------- ------------- -----------
EARNINGS
4 Net income (loss) from continuing $(40,189,000) $ 3,566,000 $(50,093,000) $ 6,719,000
operations
5 Net income from discontinued -- 4,509,000 2,282,000 8,219,000
operations
6 Gain from split-off of discontinued -- -- 45,208,000 --
operations
------------ ----------- ------------- -----------
7 Net income (loss) $(40,189,000) $ 8,075,000 $ (2,603,000) $14,938,000
============ =========== ============== ===========
PER SHARE AMOUNTS
8 Net income (loss)per share from
continuing operations (line 4/ $ (3.69) $ 0.23 $ (4.20) $ 0.44
line 3)
9 Net income per share from
discontinued operations (line -- 0.29 0.19 0.53
5/ line 3)
10 Gain per share (line 6/ line 3) -- -- 3.79 --
------------ ----------- -------------- -----------
11 Net income (loss) per share (line $ (3.69) $ 0.52 $ (0.22) $ 0.97
6/ line 3)
============ =========== ============== ===========
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,840
<SECURITIES> 2,300
<RECEIVABLES> 420,879
<ALLOWANCES> 59,602
<INVENTORY> 0
<CURRENT-ASSETS> 43,209
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 420,626
<CURRENT-LIABILITIES> 2,313
<BONDS> 358,180
<COMMON> 109
0
0
<OTHER-SE> 60,024
<TOTAL-LIABILITY-AND-EQUITY> 420,626
<SALES> 0
<TOTAL-REVENUES> 44,144
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,197
<LOSS-PROVISION> 83,125
<INTEREST-EXPENSE> 14,713
<INCOME-PRETAX> (75,891)
<INCOME-TAX> 25,798
<INCOME-CONTINUING> (50,093)
<DISCONTINUED> 2,282
<EXTRAORDINARY> 45,208
<CHANGES> 0
<NET-INCOME> (2,603)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
