<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(For the Quarterly Period Ended March 31, 1996)
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Transition Period From to
---------------- ---------------
Commission File Number: 0-24286
EAGLE FINANCE CORP.
---------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-2464365
------------------------ ----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1425 TRI-STATE PARKWAY, GURNEE, ILLINOIS 60031-4060
- - ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(847) 855-7150
--------------------------------------------------
(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
------- -------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE:
10,000,000 SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE, WERE AUTHORIZED
AND 4,189,100 SHARES WERE ISSUED AND OUTSTANDING AS OF MARCH 31, 1996.
<PAGE>
EAGLE FINANCE CORP.
FORM 10-Q
------------------------
TABLE OF CONTENTS
------------------------
PAGE
NUMBER
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Income. . . . . . . . . . . . . . . . . . . . . 4
Statements of Changes in Stockholders' Equity . . . . . . . . 5
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . . . 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . 18
Item 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . . 18
Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
2
<PAGE>
EAGLE FINANCE CORP.
BALANCE SHEETS
As of March 31, 1996 and 1995 and December 31, 1995
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------------- --------------
1996 1995 1995
------------ ------------ --------------
<S> <C> <C> <C>
Finance receivables, net . . . . . . . . . . $135,862,572 $91,080,217 $145,718,866
Nonrefundable acquisition discount . . . . . (5,822,802) (10,913,407) (9,428,152)
Allowance for credit losses. . . . . . . . . (12,007,705) (1,248,800) (10,807,835)
------------ ----------- ------------
118,032,065 78,918,010 125,482,879
Cash . . . . . . . . . . . . . . . . . . . . 1,693,422 1,364,456 2,069,217
Money market investments . . . . . . . . . . 545,000 -- 545,000
Prepaid expenses and debt issuance costs . . 1,145,756 145,516 1,142,925
Repossessed or titled assets . . . . . . . . 4,447,186 825,750 4,429,140
Deferred income tax. . . . . . . . . . . . . 4,136,270 359,041 4,136,270
Other assets . . . . . . . . . . . . . . . . 1,385,471 512,107 1,253,046
------------ ----------- ------------
$131,385,170 $82,124,880 $139,058,477
------------ ----------- ------------
------------ ----------- ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Senior debt. . . . . . . . . . . . . . . . . $ 92,662,901 $58,997,049 $100,651,557
Subordinated debt. . . . . . . . . . . . . . 18,086,706 1,346,863 18,045,298
Accrued interest . . . . . . . . . . . . . . 732,341 538,570 502,834
Accrued income tax . . . . . . . . . . . . . 710,644 796,276 683,144
Accounts payable and accrued liabilities . . 3,112,618 3,891,456 3,180,328
Unearned insurance commissions . . . . . . . 42,220 93,683 46,115
Dealer reserves. . . . . . . . . . . . . . . 295,152 12,204 292,864
------------ ----------- ------------
Total liabilities. . . . . . . . . . . . . . 115,642,582 65,676,101 123,402,140
Stockholders' equity:
Preferred Stock, authorized 3,000,000 shares;
none issued . . . . . . . . . . . . . . . -- -- --
Common Stock: $.01 par value, authorized
10,000,000 shares, issued and outstanding
4,189,100 shares at March 31, 1996 and
December 31, 1995 and 4,180,000 shares at
March 31, 1995. . . . . . . . . . . . . . 41,891 41,800 41,891
Additional paid-in capital . . . . . . . . . 13,514,422 13,392,437 13,514,422
Retained earnings. . . . . . . . . . . . . . 2,186,275 3,014,542 2,100,024
------------ ----------- ------------
Total stockholders' equity . . . . . . . . . 15,742,588 16,448,779 15,656,337
------------ ----------- ------------
$131,385,170 $82,124,880 $139,058,477
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF INCOME
Three Months Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Interest Income:
Interest and fee income . . . . . . . . . . . . . . . . . . . $8,080,506 $4,848,233
Interest expense. . . . . . . . . . . . . . . . . . . . . . . (2,388,923) (1,419,729)
---------- ----------
Net interest income. . . . . . . . . . . . . . . . . . . . . . . 5,691,583 3,428,504
Provision for credit losses. . . . . . . . . . . . . . . . . . . (2,696,000) 12,723
---------- ----------
Net interest income after provision for credit losses. . . . . . 2,995,583 3,441,227
Other Income:
Servicing income. . . . . . . . . . . . . . . . . . . . . . . 677,377 546,236
Insurance commissions . . . . . . . . . . . . . . . . . . . . 21,235 81,892
---------- ----------
Total other income . . . . . . . . . . . . . . . . . . . . . . . 698,612 628,128
Income before operating expenses . . . . . . . . . . . . . . . . 3,694,195 4,069,355
Operating Expenses:
Salaries and related costs. . . . . . . . . . . . . . . . . . 1,743,945 1,079,888
Other operating expenses. . . . . . . . . . . . . . . . . . . 1,811,799 963,383
---------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . 3,555,744 2,043,271
---------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . . . 138,451 2,026,084
Applicable income taxes. . . . . . . . . . . . . . . . . . . . . 52,200 786,121
---------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $86,251 $1,239,963
---------- ----------
---------- ----------
Per share data:
Net income per common share (primary) . . . . . . . . . . . . $0.02 $0.30
----- -----
----- -----
Net income per common share (fully diluted) . . . . . . . . . $0.02 $0.29
----- -----
----- -----
Average number of common shares outstanding (primary) . . . . 4,304,000 4,180,000
---------- ----------
---------- ----------
Average number of common shares outstanding (fully diluted) . 4,304,000 4,254,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Common Stock:
Balance at beginning of period. . . . . . . . . . . $ 41,800 $ 41,800
Stock options exercised . . . . . . . . . . . . . . 91 --
----------- -----------
41,891 41,800
----------- -----------
Paid in Capital:
Balance at beginning and end of period. . . . . . . 13,514,422 13,392,437
Retained Earnings:
Balance at beginning of period. . . . . . . . . . . 2,100,024 1,774,579
Net income. . . . . . . . . . . . . . . . . . . . . 86,251 1,239,963
----------- -----------
2,186,275 3,014,542
----------- -----------
Total Stockholders' Equity . . . . . . . . . . . . . . $15,742,588 $16,448,779
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Eagle Finance Corp.
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,251 $ 1,239,962
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses. . . . . . . . . . . . . . . . . . . 2,696,000 12,722
Net finance receivable (charge-offs) recoveries against allowance (1,496,130) (12,722)
Decrease (increase) in:
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . (44,705) 63,666
Repossessed or titled assets . . . . . . . . . . . . . . . . . (18,046) (159,325)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . (132,425) (212,122)
Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Increase (decrease) in:
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 229,507 419,141
Accrued income tax . . . . . . . . . . . . . . . . . . . . . . 27,500 555,971
Accounts payable and accrued liabilities . . . . . . . . . . . (67,710) 920,853
Unearned insurance commissions . . . . . . . . . . . . . . . . (3,895) (10,214)
Dealer reserves. . . . . . . . . . . . . . . . . . . . . . . . 2,288 (61,724)
Nonrefundable acquisition discount . . . . . . . . . . . . . . (3,605,350) 2,242,287
------------ ------------
Net cash provided by (used in) operating activities. . . . . . . . . (2,326,715) 4,998,495
------------ ------------
Cash flows from investing activities:
Proceeds from bulk sale of vehicle retail installment notes. . . . 12,811,872 18,993,923
Principal collected on finance receivables . . . . . . . . . . . . 14,839,243 7,552,706
Finance receivables originated or acquired (net of write-offs) . . (17,794,821) (38,762,803)
------------ ------------
Net cash provided by (used in) investing activities. . . . . . . . . 9,856,294 (12,216,174)
------------ ------------
Cash flows from financing activities:
Proceeds from draws on bank lines. . . . . . . . . . . . . . . . . 16,580,583 150,100,000
Repayments of borrowings . . . . . . . . . . . . . . . . . . . . . (24,530,583) (143,094,532)
Debt issued to an affiliate. . . . . . . . . . . . . . . . . . . . (38,656) 755,769
Proceeds from issuance of other debt . . . . . . . . . . . . . . . 41,408 79,555
Debt issuance cost . . . . . . . . . . . . . . . . . . . . . . . . 41,874 (88,743)
Repayment of other debt. . . . . . . . . . . . . . . . . . . . . . -- (25,299)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Deferred tax credit to additional paid-in capital. . . . . . . . . -- --
------------ ------------
Net cash provided by (used in) financing activities. . . . . . . . . (7,905,374) 7,726,750
------------ ------------
Cash, net change . . . . . . . . . . . . . . . . . . . . . . . . . . (375,795) 509,071
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . 2,069,217 855,385
------------ ------------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . . . $1,693,422 $1,364,456
------------ ------------
------------ ------------
Supplemental cash flow disclosures - cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,102,984 $1,000,588
Income taxes and Illinois replacement tax. . . . . . . . . . . . . $ 24,700 $ 210,147
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
EAGLE FINANCE CORP.
NOTES TO FINANCIAL STATEMENTS
1. The financial statements of Eagle Finance Corp., a Delaware
corporation (the "Company"), are unaudited, but in the opinion of management
reflect all necessary adjustments, consisting only of normal recurring accruals,
for a fair presentation of results as of the dates and for the periods covered
by the financial statements. The results for the interim periods are not
necessarily indicative of the results of operations that may be expected for the
fiscal year. Management suggests that the unaudited interim financial
statements contained herein be read in conjunction with the financial statements
and the accompanying notes to the financial statements included in the Company's
1995 Annual Report on Form 10-K, as amended.
2. Net income per common share amounts are based on the weighted average
number of common shares and common stock equivalents outstanding as reflected on
Exhibit 11 to this Quarterly Report on Form 10-Q.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a specialized financial services company engaged
primarily in acquiring and servicing automobile retail installment sales
contracts ("Installment Contracts") for purchases of late model used automobiles
by "non-prime" consumers, who typically have limited access to traditional
sources of consumer credit. To a lesser extent, the Company also makes direct
consumer loans and finance leases and purchases other retail installment sale
contracts (collectively "Other Loans") and offers, as agent, insurance and other
products related to consumer finance transactions (collectively "Insurance
Products"). The Company maintains its corporate headquarters and a regional
office near Chicago in Gurnee, Illinois, and operates two other regional offices
in Tampa and Orlando, Florida.
As of March 31, 1996, the Company had active relationships (I.E., the
Company purchased Installment Contracts from such dealers during the preceding
90 days) with approximately 380 dealers located primarily in Illinois, Georgia,
Florida, South Carolina and Texas, and, to a lesser extent, in Utah, Arizona,
Indiana, Tennessee, Wyoming, Idaho, Kentucky, New Mexico, Nevada, Ohio and
Colorado.
The following is management's discussion and analysis of the financial
condition of the Company at March 31, 1996 (unaudited) as compared to March 31,
1995 (unaudited) and December 31, 1995, and the results of operations for the
three months ended March 31, 1996 and 1995 (unaudited). This discussion should
be read in conjunction with the Company's financial statements and notes thereto
appearing elsewhere in this quarterly report. Data for the three months ended
March 31, 1996 are not necessarily indicative of results expected for the full
fiscal year. The ratios and percentages provided below are calculated using the
detailed financial information contained in the Company's financial statements
and the financial data included elsewhere in this Form 10-Q.
RECENT DEVELOPMENTS
On February 6, 1996 the Company sold approximately $11.5 million (net)
of Installment Contracts to General Electric Capital Corporation ("GECC") under
the Asset Purchase Agreement dated as of September 27, 1994, as amended, between
the Company and GECC (the "GECC Agreement"). After giving effect to this sale,
as of March 31, 1996, the Company serviced approximately $43.5 million (net) of
Installment Contracts sold to GECC pursuant to the GECC Agreement. SEE
"Liquidity and Capital Resources."
On April 15, 1996, the Company announced an adjustment to its
previously reported 1995 financial results. The adjustment, effective the
fourth quarter of 1995, related to the manner in which the Company established
its reserves for credit losses during 1995. SEE "-- Accounting Matters" and "--
Credit Loss Experience."
GENERAL
Installment Contracts represented approximately 99.6% of the Company's
net finance receivables at March 31, 1996. Installment Contracts are purchased
on a non-recourse basis from automobile dealers and are typically secured by
medium-priced used automobiles. The automobiles are purchased by non-prime
consumers at retail prices typically ranging from approximately $6,000 to
$15,000. Installment Contracts financing such purchases typically have annual
percentage rates of interest ("APRs") ranging from 21% to 31% and repayment
terms ranging from 12 to 60 months. The average original principal amount
financed under Installment Contracts outstanding at March 31, 1996 was
approximately $9,200, at an average APR of approximately 27%, with an average
original term of approximately 40 months. The Company's experience has shown,
however, that the average life of the Company's Installment Contracts is
substantially less than 40 months due to the amount of payoffs and repossessions
that occur prior to contract maturity.
The Company's portfolio of owned finance receivables, net of unearned
finance charges, declined to $135.9 million at March 31, 1996 from $145.7
million at December 31, 1995 and increased from $91.1 million at March 31, 1995.
The Company's income before income taxes declined to $86,000 for the three
months ended March 31, 1996 from $1.2 million for the three months ended March
31, 1995.
8
<PAGE>
Interest income on the Company's portfolio of Installment Contracts
accounts for most of the Company's revenue. The net amount of Installment
Contracts purchased declined to $28.7 million during the three months ended
March 31, 1996 from $40.6 million during the three months ended March 31, 1995.
As reflected in the following table, the finance receivables originated by the
Company during the periods presented below consist primarily of Installment
Contracts. This is a result of the Company's strategic decision in 1988 to
focus on the purchase of Installment Contracts in the non-prime automobile
finance market.
<TABLE>
<CAPTION>
For the three months ended March 31,
-------------------------------------------------------
1996 1995
------------------------- ----------------------------
% of % of
Amount Total Amount Total
---------- ------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Installment Contracts purchased (1). . . . . $28,748 99.3% $40,574 99.8%
Net Other Loans originated (1) . . . . . . . . . 200 0.7% 89 0.2%
------- --- ------- ---
Total. . . . . . . . . . . . . . . . . . . . . . $28,948 100% $40,663 100%
------- --- ------- ---
------- --- ------- ---
</TABLE>
- - ------------------------------------
(1) Net of unearned finance charges.
As part of its funding strategy, the Company sold $11.5 million (net)
of Installment Contracts to GECC during the three-month period ended March 31,
1996. No gains or losses were recorded at the time the Installment Contracts
were sold, and the Company did not capitalize any servicing fees in connection
with the sales. The Company retained servicing rights on the Installment
Contracts sold. The Company recognizes servicing income over the life of the
related receivables as a percentage of receivables outstanding. The Company is
also eligible to receive bonus servicing fees based on portfolio performance.
Bonus servicing fees are recognized as income as earned. The net amount of
Installment Contracts serviced by the Company for third parties was $43.5
million and $36.7 million at March 31, 1996 and 1995, respectively.
ACCOUNTING MATTERS
Historically, the Company recorded, at the time it purchased
Installment Contracts, a portion of contract interest (which would otherwise
have been recorded as unearned finance charges) as nonrefundable acquisition
discount when the credit risk and potential for future losses warrant such an
allocation. For the three-month period ended March 31, 1996, however, the
Company did not allocate any portion of contract interest (which would otherwise
have been recorded as unearned finance charges) from Installment Contracts
purchased during the period to nonrefundable acquisition discount. Instead, the
Company established reserves for credit losses on its portfolio of Installment
Contracts through the recognition of a provision for credit losses that
supplemented the balance of nonrefundable acquisition discount. The Company may
allocate contract interest to nonrefundable acquisition discount for Installment
Contracts purchased after March 31, 1996, although no assurance can be given as
to whether such allocations will be made or, if they are, at what level.
SEE "-- Credit Loss Experience."
PROFITABILITY
The following table sets forth certain data relating to the Company's
net income for the three months ended March 31, 1996 and 1995 and for the year
ended December 31, 1995:
9
<PAGE>
<TABLE>
<CAPTION>
For the three months ended March 31, For the year ended
--------------------------------------
1996 1995 December 31, 1995
------------------ ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Average net finance receivables(1) . . . . . . . . . . . . $139,577 $89,155 $120,830
Average interest bearing liabilities . . . . . . . . . . . $114,308 $60,477 $ 88,276
Total interest and fee income. . . . . . . . . . . . . . . $ 8,081 $ 4,848 $ 27,100
Total interest expense . . . . . . . . . . . . . . . . . . 2,389 1,419 8,093
-------- ------- --------
Net interest income before provision for credit losses . . $ 5,692 $ 3,429 $ 19,007
-------- ------- --------
-------- ------- --------
Average interest rate earned on net finance receivables(2) 23.16% 21.75% 22.43%
Average interest rate on interest bearing liabilities. . . 8.36% 9.39% 9.17%
-------- ------- --------
Net interest spread. . . . . . . . . . . . . . . . . . . . 14.80% 12.36% 13.26%
-------- ------- --------
-------- ------- --------
Net interest margin(3) . . . . . . . . . . . . . . . . . . 16.31% 15.38% 15.73%
-------- ------- --------
-------- ------- --------
</TABLE>
- - ---------------------------------
(1) Excludes average net finance receivables serviced for third parties of
$41.4 million, $24.6 million and $33.1 million for the three months ended
March 31, 1996 and 1995 and the year ended December 31, 1995,
respectively.
(2) Average interest rates earned typically are less than average APRs
charged to consumers due to the Company's historical policy of allocating
to nonrefundable acquisition discount, at the time Installment Contracts
are purchased, a portion of contract interest (which would otherwise have
been recorded as unearned finance charges) when the credit risk and
potential for losses warrant such allocation. During 1995, the Company
made such allocations, which had the effect of reducing the interest rate
earned on Installment Contracts. During the first quarter of 1996, the
Company did not allocate to nonrefundable acquisition discount any
contract interest that would otherwise have been recorded as unearned
finance charges. SEE "-- Accounting Matters" and "-- Credit Loss
Experience."
(3) Net interest margin represents net interest income on an annualized basis
divided by average net finance receivables.
The principal component of the Company's net income is its net interest
spread. Net interest spread represents the difference between interest earned
on finance receivables and interest paid for borrowed funds. The laws of
certain states establish the maximum interest rates, and prescribe the types and
maximum amounts of fees, insurance premiums and other amounts that consumers may
be charged. As is common in its market segment, the Company's Installment
Contracts generally bear the maximum allowable interest rates, fees, premiums
and other charges permitted under state law.
The Company's liabilities are generally more interest-rate sensitive
than its finance receivables. Since the first quarter of 1995, interest rates
have declined, thereby reducing the Company's cost of funds on its primary
source of funding, which is a $120 million Amended and Restated Revolving Credit
Agreement with a group of commercial banks with CoreStates Bank, N.A. as agent
(the "Revolving Credit Agreement"). Pursuant to the Revolving Credit Agreement,
the Company has the option of borrowing funds at an interest rate equal to
either the prime rate of the agent bank or the LIBOR rate plus 2.0%. The prime
rate was 8.25% on March 31, 1996 and the three-month LIBOR rate was 5.44% on
such date.
FINANCIAL CONDITION
Total assets decreased $7.7 million (5.5%) to $131.4 million at March
31, 1996 from $139.1 million at December 31, 1995 primarily due to a decline in
finance receivables (net of dealer reserves, nonrefundable acquisition discount
and allowance for credit losses) to $118.0 million at March 31, 1996 from $125.5
million at December 31, 1995. The first quarter decline in asset and finance
receivables is, in part, attributable to the sale of approximately $11.5 million
(net) of Installment Contracts during the quarter. Total assets were $82.1
million at March 31, 1995 and net finance receivables were $78.9 million at such
date. The net amount of Installment Contracts owned or serviced for third
parties by the Company decreased to $179.3 million at March 31, 1996 from
$184.9 million at
10
<PAGE>
December 31, 1995. The net amount of Installment Contracts owned or serviced
for third parties was $127.9 million at March 31, 1995.
Total liabilities decreased $7.8 million (6.3%) to $115.6 million at
March 31, 1996 from $123.4 million at December 31, 1995, primarily due to a
decrease in total debt to $110.7 million at March 31, 1996 from $118.7 million
at December 31, 1995. The decrease in total debt was primarily the result of
reduced borrowings under the Revolving Credit Agreement to $91.7 million at
March 31, 1996 from $99.6 million at December 31, 1995. SEE "-- Liquidity and
Capital Resources." Total liabilities were $65.7 million at March 31, 1995,
which included total debt of $60.3 million primarily comprised of borrowings
under the Revolving Credit Agreement of $57.8 million.
RESULTS OF OPERATIONS
The following table sets forth certain data relating to the Company's
results of operations for the three months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------
1996 1995
----------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Automobile portfolio interest and fee income . . . . . . . . . . . . . . . $8,017 $4,746
------ ------
Total interest and fee income. . . . . . . . . . . . . . . . . . . . . . . $8,081 $4,848
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 2,389 1,420
------ ------
Net interest income before provision for credit losses . . . . . . . . . . 5,692 3,428
Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . 2,696 (13)
------ ------
Net interest income after provision for credit losses. . . . . . . . . . . 2,996 3,441
------ ------
Other Income:
Servicing income (from Installment Contracts) . . . . . . . . . . . . . 677 546
Insurance products commissions. . . . . . . . . . . . . . . . . . . . . 21 82
------ ------
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698 628
------ ------
Salaries and related costs . . . . . . . . . . . . . . . . . . . . . . . . 1,744 1,080
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,812 963
------ ------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . 3,556 2,043
------ ------
Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 2,026
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 786
------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86 $1,240
------ ------
------ ------
</TABLE>
Net income decreased by 93% to $86,000 for the three months ended March
31, 1996 from $1.2 million for the comparable 1995 period, primarily due to the
difference in the manner in which the Company established reserves for credit
losses during the two periods and the resulting increase in the provision for
credit losses for the three months ended March 31, 1996. SEE "-- Credit Loss
Experience."
Net interest income before the provision for credit losses increased
68% to $5.7 million for the three months ended March 31, 1996 from $3.4 million
for the comparable 1995 period, primarily as a result of increased income from
the Installment Contracts portfolio. The average interest rate earned on net
finance receivables and net interest spread for the three months ended March 31,
1996, as compared to the corresponding figures for the three months ended March
31, 1995, improved slightly as a result of the manner in which the Company
established its reserves for credit losses. SEE "-- Credit Loss Experience --
Nonrefundable Acquisition Discount and Dealer Reserves." During the three
months ended March 31, 1996, the Company sold (net) Installment Contracts
totaling $11.5 million, compared to sales of $17.1 million during the three
months ended March 31, 1995. The Company's periodic sales of finance
receivables have a negative effect on interest and fee income; however, these
sales result in increased servicing income.
Total interest expense increased to $2.4 million for the three months
ended March 31, 1996 from $1.4 million for the three months ended March 31,
1995. The increase resulted from an increase in the amount of borrowed funds,
11
<PAGE>
offset by a decline in interest rates paid on borrowed funds. The total debt
outstanding at March 31, 1996 increased to $110.7 million from $60.3 million at
March 31, 1995, and the weighted average interest rate paid for borrowed funds
declined from 9.39% as of March 31, 1995 to 8.36% as of March 31, 1996.
The provision for credit losses was $2.7 million for the three months
ended March 31, 1996 as compared to ($13,000) for the three months ended March
31, 1995. This significant increase was due to the manner in which the Company
established its reserves for credit losses during the two periods and higher
losses experienced on Installment Contracts during the three months ended March
31, 1996 than during the corresponding period in 1995. Unlike during the
corresponding period in 1995, during the three months ended March 31, 1996, the
Company did not allocate to nonrefundable acquisition discount contract interest
from Installment Contracts purchased during the period that would otherwise have
been recorded as unearned finance charges. The increase in the provision for
credit losses replenished reserves by increasing the allowance for credit
losses. The allowance for credit losses along with nonrefundable acquisition
discount and dealer reserves is available to absorb credit losses in the
Company's finance receivables portfolio. SEE "-- Credit Loss Experience --
Allowance and Provision for Credit Losses/Charge-offs."
Other income, including servicing income and commissions from the sale
of Insurance Products, increased 11% to $699,000 for the three months ended
March 31, 1996 from $628,000 for the three months ended March 31, 1995,
primarily due to an increase in servicing income to $677,000 (24.0%) for the
three months ended March 31, 1996 from $546,000 for the three months ended March
31, 1995. The increase in servicing income corresponds to the increased average
amount of finance receivables serviced by the Company for third parties during
the three months ended March 31, 1996 as compared to the comparable 1995 period.
Income from the sale of Insurance Products was $21,000 during the three months
ended March 31, 1996 as compared to $82,000 during the three months ended March
31, 1995.
Total operating expenses increased 74% to $3.6 million for the three
months ended March 31, 1996 compared to the three months ended March 31, 1995.
Salaries and related costs increased 61% from the corresponding period in 1995
to $1.7 million for the three months ended March 31, 1996, due primarily to the
growth of the Company, as evidenced by increases in the amount of owned or
serviced finance receivables, and a corresponding substantial increase in the
number of employees, normal pay increases and increased benefits costs. The
Company's other operating expenses increased 88% to $1.8 million for the three
months ended March 31, 1996 compared to the three months ended March 31, 1995,
also due to the growth of the Company. Total operating expenses as a percentage
of average net finance receivables owned or serviced increased to 7.86% for the
three months ended March 31, 1996 as compared to 7.19% for the three months
ended March 31, 1995.
Income tax expense decreased 93% to $52,000 for the three months ended
March 31, 1996 from $786,000 for the three months ended March 31, 1995. The
decrease resulted from a lower level of pretax income during the three months
ended March 31, 1996 versus the corresponding period in 1995.
CREDIT LOSS EXPERIENCE
The Company's profitability is dependent upon its credit loss
experience. The Company believes that because transportation is essential to
many of its consumers, such consumers are likely to give priority to payments
required under the Company's Installment Contracts over other consumer credit
obligations. In addition, the Company believes that its knowledge of used
automobiles and their collateral value, as well as the Company's collection
efforts, have contributed positively to the Company's charge-off experience.
NONREFUNDABLE ACQUISITION DISCOUNT. In order to achieve an acceptable
rate of return and appropriately reflect credit risks generally associated with
the Company's automobile finance business, the Company purchases Installment
Contracts from dealers at a discount from their stated principal amount. For
example, the Company may pay a dealer $8,280 for an Installment Contract with a
stated principal amount of $9,200, resulting in a "discount" of $920. The
discount is nonrefundable and is allocated to the nonrefundable acquisition
discount account against which collectible repossession expenses,
value-enhancing reconditioning expenses and other losses of principal that may
arise in connection with defaulted Installment Contracts are charged.
12
<PAGE>
The amount of the discount in the price paid to dealers for an
Installment Contract, and any additional amounts allocated to nonrefundable
acquisition discount at the time Installment Contracts are purchased from
contract interest (which would otherwise have been recorded as unearned finance
charges), are based upon a number of factors, including an evaluation of the
credit risks associated with the particular Installment Contract, the overall
size and composition of the Installment Contracts portfolio, past loss
experience with the portfolio, delinquencies, potential substandard and doubtful
credits, competitive factors, economic conditions and other factors that, in
management's judgment, deserve consideration in estimating losses and
maintaining an acceptable rate of return with respect to such Installment
Contract. The Company establishes the level of nonrefundable acquisition
discount (including any amount that would otherwise have been recorded as
unearned finance charges) with respect to its Installment Contracts when it
purchases Installment Contracts, and does not add to the amount of nonrefundable
acquisition discount previously recorded with respect to those Installment
Contracts. Additional credit loss reserves with respect to its Installment
Contracts portfolio may be established by increasing the allowance for credit
losses. SEE "-- Allowance and Provision for Credit Losses/Charge-Offs."
The Company regularly evaluates and monitors its Installment Contracts
portfolio by analyzing the portfolio as a whole as well as in "batches" or
"static pools" consisting of its purchases of Installment Contracts during
quarterly periods. If the Company determines by application of its credit
policies and standards and a detailed analysis of its "static pool reports,"
which include a comparison to the historical performance of other static pools,
that the amount of nonrefundable acquisition discount exceeds the amount
believed necessary to offset projected losses for Installment Contracts in such
static pool that are expected to become impaired in the foreseeable future, the
Company may reduce the amount of nonrefundable acquisition discount established
for that pool and recognize a corresponding amount of income over the average
remaining life of the static pool. Conversely, if the Company determines that
the amount of nonrefundable acquisition discount for a given static pool is not
sufficient to offset projected losses for Installment Contracts in such static
pool that are expected to become impaired in the foreseeable future, the Company
may increase its allowance for credit losses in order to establish an
appropriate credit loss reserve for that pool.
Except for amounts of interest allocated to nonrefundable acquisition
discount, the Company reflects on its books as "unearned finance charges" the
capitalized interest for the life of substantially all of its Installment
Contracts. Generally, the amount of unearned finance charges attributable to a
particular Installment Contract is reduced and a corresponding amount is
recognized as income over the life of the Installment Contract according to the
interest (actuarial) method. Historically, the Company recorded, when it
purchased Installment Contracts, a portion of contract interest (which would
otherwise have been recorded as unearned finance charges) to nonrefundable
acquisition discount in recognition of credit risks and the potential for future
losses. For the three-month period ended March 31, 1996, however, the Company
did not allocate any portion of contract interest (which would otherwise have
been recorded as unearned finance charges) from Installment Contracts purchased
during the period to nonrefundable acquisition discount. Instead, the Company
established reserves for credit losses on its portfolio of Installment Contracts
through the recognition of a provision for credit losses that supplemented the
balance of nonrefundable acquisition discount. The Company may allocate
contract interest to nonrefundable acquisition discount for Installment
Contracts purchased after March 31, 1996, although no assurance can be given as
to whether such allocations will be made or, if they are, at what level.
As part of the Company's financing of retail installment sale contracts
(other than Installment Contracts), refundable dealer reserves may be
established to protect the Company from potential losses associated with such
contracts. A portion of the proceeds from these retail installment sale
contracts is retained by the Company and is available to the Company to offset
losses on related receivables. The amount of reserves is based upon various
criteria, one of which is the credit risk associated with retail installment
sale contracts. The Company's allowance for credit losses provides further
coverage in the event dealer reserves for retail installment sale contracts are
insufficient to absorb credit losses in their entirety.
The following table presents a reconciliation of the changes in
nonrefundable acquisition discount for the three months ended March 31, 1996
and 1995:
13
<PAGE>
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------
1996 1995
----------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Balance at January 1,. . . . . . . . . . . . . . . . . . . . . . . . . . . $9,423 $ 8,671
Additions applicable to new volume . . . . . . . . . . . . . . . . . . . . 2,481 8,055
Reductions applicable to accounts sold . . . . . . . . . . . . . . . . . . (1,281) (2,018)
Losses charged, net of recoveries. . . . . . . . . . . . . . . . . . . . . (4,802) (3,795)
------ ------
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . $5,821 $10,913
------ ------
------ ------
</TABLE>
The substantial decrease in the amount of the nonrefundable
acquisition discount is attributable to the manner in which the Company
establishes its credit loss reserves. Effective the fourth quarter of 1995,
the Company reversed a portion of the contract interest that had been
allocated to nonrefundable acquisition discount during 1995 and increased the
provision for credit losses. Additionally, during the three months ended
March 31, 1996, the Company did not allocate contract interest (which would
otherwise have been recorded as unearned finance charges) to nonrefundable
acquisition discount. SEE "--Accounting Matters." In addition, during the
three months ended March 31, 1995, the Company allocated a greater amount to
nonrefundable acquisition discount (including a portion of contract interest
that would otherwise have been recorded as unearned finance charges) than the
amount of actual credit losses charged against nonrefundable acquisition
discount. In contrast, during the three months ended March 31, 1996, the
Company recorded an amount to nonrefundable acquisition discount that was
less than the amount of actual credit losses charged against nonrefundable
acquisition discount.
The following table presents the amount of nonrefundable acquisition
discount and dealer reserves as a percentage of applicable finance receivables
of the Company:
<TABLE>
<CAPTION>
As of March 31,
--------------------------------------
1996 1995
----------------- ------------------
<S> <C> <C>
Nonrefundable acquisition discount and dealer reserves to
related receivables as a percentage of Installment Contracts
(net of unearned finance charges)(1) . . . . . . . . . . . . . . . . . . 4.52% 12.07%
Dealer reserves as a percentage of Other Loans (net of unearned
finance charges) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40% 0.73%
Allowance for credit losses as a percentage of net finance
receivables(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.84% 1.37%
Total allowance for credit losses, dealer reserves and
nonrefundable acquisition discount as a percentage of
net finance receivables(2) . . . . . . . . . . . . . . . . . . . . . . . 13.34% 13.37%
</TABLE>
- - -----------------------------------
(1) Net Installment Contracts were $135.3 million and $90.5 million for the
three months ended March 31, 1996 and 1995, respectively.
(2) Net finance receivables were $135.9 million and $91.0 million for the
three months ended March 31, 1996 and 1995, respectively.
The above table reflects the Company's increased emphasis on the allowance for
credit losses and its reduced emphasis on nonrefundable acquisition discount to
offset credit losses on the Installment Contract portfolio. SEE "--Accounting
Matters."
The amount of the allowance for credit losses increased to $12.0
million at March 31, 1996 from $1.2 million at March 31, 1995, and the allowance
for credit losses as a percentage of net finance receivables increased to 8.84%
at March 31, 1996 from 1.37% at March 31, 1995. The allowance for credit losses
is available as a reserve against losses in the Company's entire finance
receivables portfolio. The allowance for credit losses, dealer reserves and
nonrefundable acquisition discount as a percentage of net finance receivables
was 13.34% as of March 31, 1996 and 13.37% as of March 31, 1995 in order to
reflect the Company's historical credit loss experience and to take account of
those other factors necessary to establishing adequate reserves against credit
losses. SEE "--Allowance and
14
<PAGE>
Provision for Credit Losses/Charge-offs." The Company believes that it
maintains adequate reserves against credit losses in its finance receivables
portfolio.
ALLOWANCE AND PROVISION FOR CREDIT LOSSES/CHARGE-OFFS. The following
table reflects the Company's allowance for credit losses and provision for
credit losses for the three months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------
1996 1995
----------------- ------------------
(Dollars in thousands)
<S> <C> <C>)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . $10,808 $1,249
Provision charged to expense . . . . . . . . . . . . . . . . . . . . . . . 2,696 (13)
Finance receivables charged off. . . . . . . . . . . . . . . . . . . . . . (1,519) (28)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 41
------- ------
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . $12,008 $1,249
------- ------
------- ------
Allowance as a percentage of net finance receivables . . . . . . . . . . . 8.84% 1.37%
</TABLE>
The substantial increase in the allowance for credit losses as of
March 31, 1996 was the result of a $2.7 million provision for credit losses.
The substantial increase in the provision for credit losses was the result of
the manner in which the Company established its reserves for credit losses
during the three months ended March 31, 1996 as compared to the corresponding
period in 1995. During the first quarter of 1995, the Company allocated to
nonrefundable acquisition discount contract interest that would otherwise
have been recorded as unearned finance charges. During the first quarter of
1996, the Company did not make such allocations. Instead, the Company
recognized an increased provision for credit losses to replenish the reserves
for credit losses.
DELINQUENCIES. Finance receivables that were 60 days and greater
contractually delinquent (net of unearned finance charges) were $2.9 million,
$3.0 million and $2.3 million representing 2.13%, 2.06% and 2.57% of net finance
receivables, as of March 31, 1996, December 31, 1995 and March 31, 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through cash flow from operations,
borrowings under the Revolving Credit Agreement, borrowings from certain
companies and partnerships in which either or both of Charles F. Wonderlic or
Ronald B. Clonts and members of their immediate families own a direct or
indirect controlling interest (each, a "Commonly Controlled Company"),
subordinated indebtedness and from the periodic sale of Installment Contracts
and other finance receivables.
Net cash provided by (used in) operating activities totaled ($2.3)
million and $5.0 million during the three months ended March 31, 1996 and 1995,
respectively. During these periods, the primary source of net cash provided by
(used in) operating activities has been net income and the net changes in the
allowance for credit losses and the nonrefundable acquisition discount accounts.
Net cash used in operating activities for the three months ended March 31, 1996
was affected by the significant decline in the nonrefundable acquisition
discount account, which was partially offset by the net change in the allowance
for credit losses. Net cash provided by operating activities for the three
months ended March 31, 1995 was affected by the level of net income and the
increase in the nonrefundable acquisition discount account.
Net cash used in investing activities represents the net investment in
finance receivables, which for the three month period ended March 31, 1996 and
1995 was $9.9 million and ($12.2) million, respectively. During the three
months ended March 31, 1996, cash provided from the bulk sale of retail
installment contracts was $12.8 million.
Net cash provided by financing activities for the three months ended
March 31, 1996 and the comparable 1995 period largely results from borrowings
and repayments under the Revolving Credit Agreement. Net cash used in financing
activities for the three months ended March 31, 1996 was ($7.9) million and net
cash provided by financing activities for the three months ended March 31, 1995
was $7.8 million.
15
<PAGE>
The self-liquidating nature of Installment Contracts and Other Loans
enables the Company to assume a higher debt-to-equity ratio than in most other
businesses. The amount of debt the Company incurs from time to time depends on
the Company's need for cash and its ability to borrow under the terms of the
Revolving Credit Agreement. The Company intends to meet its short-term
liquidity needs with cash flow from operations and borrowings under the
Revolving Credit Agreement. The Revolving Credit Agreement provides for a
credit facility of $120 million and terminates on June 30, 1996. The Company
believes that borrowings thereunder, cash flow from operations, the sale or
securitization of finance receivables and the issuance of additional securities
in the capital markets will be sufficient to meet its long-term funding needs.
While the Company must comply with customary financial and other
covenants under the Revolving Credit Agreement, the Company believes they will
not materially limit its business strategy. Effective the fourth quarter of
1995, the Company adjusted the 1995 allocation to nonrefundable acquisition
discount of contract interest (which would otherwise have been recorded as
unearned finance charges) to a level (as a percentage of the original aggregate
contract interest on the Installment Contracts purchased during the year)
approximating the 1994 level. This adjustment, which related to the manner in
which the Company established reserves for credit losses, caused the Company to
breach the interest coverage ratio covenant under the Revolving Credit Agreement
and under its agreements with GECC. The Company has received waivers with
respect to these breaches for all periods through March 31, 1996. The Company
expects to remain in violation of the interest coverage ratio covenant for the
immediately foreseeable future. Based on its discussions with the lenders under
the Revolving Credit Agreement and with GECC, management expects no adverse
actions by its lenders or GECC regarding the Company's breach, although there
can be no assurance in this regard. The Company is continuing negotiations with
its lenders to attempt to obtain modifications to the Revolving Credit Agreement
that may, among other things, adjust certain financial covenants to be more
consistent with the Company's current method of accounting for credit loss
reserves and extend the term of the Revolving Credit Agreement beyond June 30,
1996. The Company is also pursuing, and currently anticipates relying more
heavily upon, alternative funding sources such as securitization financing. No
assurance can be given that these pursuits will be successful or that the
Company will be able to extend the Revolving Credit Agreement on terms
acceptable to the Company. If the Revolving Credit Agreement is not extended,
the Company would be required to repay the outstanding balance under the
Revolving Credit Agreement on its June 30, 1996 maturity date and seek
alternative funding sources.
At March 31, 1996, the Company had total debt of $110.7 million as
compared to $118.7 million at December 31, 1995 and $60.3 million at March 31,
1995. At March 31, 1996, $16.4 million was available under the Revolving Credit
Agreement from committed financial institutions. The following table presents
the Company's debt instruments and the weighted average interest rates on such
instruments at the dates indicated:
16
<PAGE>
<TABLE>
<CAPTION>
For the three months ended March 31, December 31,
--------------------------------------------
1996 1995 1995
--------------------- --------------------- ---------------------
Balance Rate Balance Rate Balance Rate
----------- -------- ----------- -------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
SENIOR:
Revolving Credit Agreement . . . . . . $ 91,700 7.38% $ 57,795 8.77% $ 99,650 7.89%
Loan from commonly controlled company. 963 6.75% 1,202 6.75% 1,002 6.75%
SUBORDINATED:
Notes payable. . . . . . . . . . . . . 18,087 12.14% 1,347 9.61% $ 18,045 12.14%
-------- -------- --------
Total debt . . . . . . . . . . . . . . $110,750 8.36% $ 60,344 9.39% $118,697 8.52%
-------- -------- --------
-------- -------- --------
</TABLE>
The following table sets forth information with respect to maturities
of senior and subordinated debt at March 31, 1996:
<TABLE>
<CAPTION>
Loans from
Commonly
Senior Bank Controlled Subordinated
Year Lines of Credit Company Notes Payable Total
---- --------------- ---------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1996 . . . . . . . . . . . . $91,700 $963 $ 38 $ 92,701
1997 . . . . . . . . . . . . 109 109
1998 . . . . . . . . . . . . 38 38
1999 . . . . . . . . . . . . 85 85
2000 . . . . . . . . . . . . 81 81
Thereafter . . . . . . . . . 17,016 17,016
--------------- ---------- ------------- --------
Total. . . . . . . . . . . $91,700 $963 $18,087 $110,750
--------------- ---------- ------------- --------
--------------- ---------- ------------- --------
</TABLE>
The Company has purchased interest rate caps and interest rate collars
in an aggregate notional amount of $65 million. The interest rate cap purchased
by the Company in an aggregate notional amount of $15 million protects the
Company against increases in the interest rate of a portion of its revolving
debt if the three-month LIBOR rate exceeds 10.5%. The interest rate cap expires
in July 1998.
The interest rate collars purchased by the Company in an aggregate
notional amount of $50 million protect the Company against increases in the
interest rate of its revolving debt when the three-month LIBOR rate exceeds 8%.
The Company must make payments to the counterparties to the interest rate
collars if three-month LIBOR falls below 5%. The interest rate collars expire
in September 2000.
The GECC Agreement provides for the purchase by GECC of Installment
Contracts from the Company on a revolving basis of up to a maximum principal
amount of $50 million outstanding at any time. The Company has entered into
negotiations with GECC to provide for additional sales (with servicing retained)
of Installment Contracts to GECC under the agreement, although there can be no
assurance that GECC will agree to purchase additional Installment Contracts
under the agreement.
Total stockholders' equity at March 31, 1996 was $15.7 million as
compared to $15.7 million at December 31, 1995 and $16.4 million at March 31,
1995. The Company's ability to pay dividends is limited by the Revolving Credit
Agreement.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company has recently been named as a defendant in the following
described lawsuits: (i) BLAKE V. EAGLE FINANCE CORP., ET AL. -- on April 25,
1996, the Company and Charles F. Wonderlic, Ronald B. Clonts, Robert J. Braasch
and Richard E. Wonderlic were named as defendants in a class action complaint
filed by David M. Blake in the United States District Court for the Eastern
District of Missouri, Case Number 96 CV 00788 LOD (the "Blake Complaint"). The
Blake Complaint alleges common law fraud, breach of fiduciary duty, negligence
and violations of the federal Racketeer Influenced and Corrupt Organizations Act
(18 U.S.C. Section 1962 ET SEQ.) based on the filing by the Company of allegedly
inaccurate quarterly reports with the Securities and Exchange Commission during
1995 and the subsequent restatement of earnings by the Company that occurred
during April 1996; and (ii) REHM V. EAGLE FINANCE CORP., ET AL. -- on April 29,
1996, the Company and Charles F. Wonderlic, Ronald B. Clonts and Robert J.
Braasch were named as defendants in a class action complaint filed by Alfred
Rehm in the United States District Court for the Northern District of Illinois,
Case Number 96 C 2455 (the "Rehm Complaint"). The Rehm Complaint alleges
violations of Sections 10b and 20(a) of the Securities and Exchange Act of 1934
and Rule 10b-5 promulgated under Section 10b, based on allegedly inaccurate
press releases and the filing by the Company of allegedly inaccurate quarterly
reports with the Securities and Exchange Commission during 1995 and the
subsequent restatement of earnings by the Company that occurred during April
1996. As of the date of this Form 10-Q, the time for defendants to respond to
these complaints had not expired. The complaints have been forwarded to counsel
and defendants intend to vigorously defend themselves in these actions.
Item 2. CHANGES IN SECURITIES - None
Item 3. DEFAULTS UPON SENIOR SECURITIES - None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
Item 5. OTHER INFORMATION - None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re computation of per share earnings
27 Financial Data Schedule
99 Press release issued by the Company announcing earnings
for the three months ended March 31, 1996.
(b) Reports on Form 8-K - The Company did not file a report on Form
8-K during the three months ended March 31, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE FINANCE CORP.
Date: May 13, 1996 ROBERT J. BRAASCH
----------------------------------------
Robert J. Braasch
Chief Financial Officer and Senior Vice
President
(Duly Authorized Officer and Principal
Financial Officer)
S-1
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page No.
- - ------- ----------- --------
11 Statement re computation of per share earnings
27 Financial Data Schedule
99 Press release issued by the Company announcing
earnings for the three months ended March 31, 1996.
<PAGE>
EXHIBIT 11
EAGLE FINANCE CORP.
COMPUTATION OF NET INCOME PER SHARE
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1996 1995
---------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Income Data:
1. Income before income taxes . . . . . . . . . . . . . . . . $138 $2,026
2. Applicable income taxes. . . . . . . . . . . . . . . . . . 52 786
---- ------
3. Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 86 $1,240
---- ------
---- ------
Number of Outstanding Shares:
4. Weighted average common shares
outstanding, adjusted for stock splits. . . . . . . . . 4,189 4,180
5. Weighted average shares of treasury
stock outstanding, adjusted for stock splits. . . . . . -- --
6. Weighted average shares reserved for stock
options (utilizing the treasury stock method) . . . . . 115 74
7. Common shares outstanding (Line 4-5+6) . . . . . . . . . . 4,304 4,254
Net Income per Share:
8. Net income per common shares (Line 3/4). . . . . . . . . . $0.02 $0.30
9. Fully diluted net income per common (Line 3/7) . . . . . . $0.02 $0.29
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,693,422
<SECURITIES> 545,000
<RECEIVABLES> 135,862,572
<ALLOWANCES> 17,830,507
<INVENTORY> 0
<CURRENT-ASSETS> 120,270,487
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 131,385,170
<CURRENT-LIABILITIES> 115,642,582
<BONDS> 0
0
0
<COMMON> 41,891
<OTHER-SE> 15,700,697
<TOTAL-LIABILITY-AND-EQUITY> 131,385,170
<SALES> 0
<TOTAL-REVENUES> 8,779,118
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,555,744
<LOSS-PROVISION> 2,696,000
<INTEREST-EXPENSE> 2,388,923
<INCOME-PRETAX> 138,451
<INCOME-TAX> 52,200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,251
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
<PAGE>
EXHIBIT 99
[EAGLE FINANCE CORP. LETTERHEAD]
CONTACT:
ROBERT J. BRAASCH/HOWARD J. ADAMSKI JOHN P. KEHOE/VAN NEGRIS
EAGLE FINANCE CORP. KEHOE, WHITE, SAVAGE & CO., INC.
(847) 855-7150 (212) 888-1616
FOR IMMEDIATE RELEASE
EAGLE FINANCE CORP. ANNOUNCES FIRST QUARTER RESULTS
Gurnee, IL - May 13, 1996 - Eagle Finance Corp. (NASDAQ:EFCW) today reported
first quarter net income of $86,000, or $0.02 per common share, on a fully
diluted basis compared to $1.2 million, or $0.29 per common share, earned in the
first quarter of 1995.
The substantial decline in the first quarter net income, from the comparable
period last year, is primarily due to the difference in the manner in which
Eagle established reserves for credit losses during the two periods. During the
three months ended March 31, 1996, Eagle did not allocate to nonrefundable
acquisition discount any contract interest that would otherwise have been
recorded as unearned finance charges. Eagle made such allocations of contract
interest during the corresponding period of 1995. Eagle may allocate contract
interest to nonrefundable acquisition discount for installment contracts
purchased after March 31, 1996, although no assurance can be given as to whether
such allocations will be made or, if they are, at what level.
Net interest income for the first quarter totaled $5.7 million, representing a
68% increase from the $3.4 million reported in the prior year period. The
increase was due to higher earning asset levels, higher effective yields on
earning assets and lower borrowing costs.
The provision for credit losses totaled $2.7 million for the three months ended
March 31, 1996 as compared to a negative provision of $13,000 for the three
months ended March 31, 1995. The significant increase was the result of the
manner in which Eagle established its reserves for credit losses during the
three months ended March 31, 1996 as compared to the corresponding period in
1995. The increase in the provision for credit losses replenished reserves by
increasing the allowance for credit losses.
Other income, representing account servicing and insurance commissions,
increased to $699,000 for the three months ended March 31, 1996 from $628,000 in
the comparable 1995 period as a result of the increased amount of third-party
finance receivables serviced by Eagle.
Total operating expenses increased 80% to $3.6 million for the three months
ended March 31, 1996 from $2.0 million incurred in the similar period a year
ago. Salaries and related costs increased 55% to $1.7 million for the three
months ended March 31, 1996 from $1.1 million in
<PAGE>
EAGLE FINANCE CORP.
May 13, 1996
Page Two
the prior period, due primarily to Eagle's growth, as evidenced by increases in
the amount of owned or serviced finance receivables, and a corresponding
substantial increase in the number of employees, normal pay increases and
increased benefits costs. Eagle's other operating expenses increased 80% to
$1.8 million for the three months ended March 31, 1996 from $1.0 million in the
comparable period in 1995, also due to Eagle's growth. Total operating expenses
as a percentage of average net finance receivables owned or serviced increased
to 7.86% for the three months ended March 31, 1996 as compared to 7.19% for the
three months ended March 31, 1995.
At March 31, 1996, Eagle's overall level of reserves for credit losses was $18.1
million, or 13.3% of net owned finance receivables. Eagle's delinquencies at
March 31, 1996, December 31, 1995 and March 31, 1995 were $10.3 million, $13.1
million and $8.4 million, respectively, or 7.6%, 9.0% and 9.3%, respectively, of
net owned finance receivables. Delinquencies on net owned or serviced finance
receivables at March 31, 1996 were 6.7%. The March, 1996 delinquency level
represents Eagle's lowest delinquency level on owned or serviced finance
receivables since its initial public offering in July, 1994.
Net finance receivables owned or serviced at March 31, 1996 were $179.3 million;
net finance receivables owned $135.9 million at March 31, 1996.
Eagle Finance Corp. is a specialized financial services company which purchases
and services installment contracts. Eagle finances the purchase of late model
used automobiles for consumers who have limited access to traditional sources of
consumer credit. Eagle is headquartered in Gurnee, Illinois and conducts its
operations through three regionally centralized offices. As of March 31, 1996,
Eagle had active relationships with approximately 380 automobile dealers located
in sixteen states.
- MORE -
-- FINANCIAL TABLES FOLLOW --
<PAGE>
EAGLE FINANCE CORP.
May 13, 1996
Page Three
EAGLE FINANCE CORP.
FINANCIAL SUMMARY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
Three months ended March 31,
(Unaudited)
1996 1995
---- ----
Revenues .......................................... $8,779 $5,476
Income before taxes ............................... $ 138 $2,026
Tax expense ....................................... $ 52 $ 786
Net income ........................................ $ 86 $1,240
Earnings per common share (primary) ............... $ .02 $ .30
Earnings per common share (fully diluted).......... $ .02 $ .29
Weighted average number of common
shares outstanding (primary) .................... 4,304 4,180
Weighted average number of common
shares outstanding (fully diluted) .............. 4,304 4,254
###
