<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 June 30, 1997)
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
incorporation or organization) number)
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 June 30, 1997.
<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................ 9
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS ........................................... 20
Item 2. CHANGES IN SECURITIES ....................................... 21
Item 3. DEFAULTS UPON SENIOR SECURITIES.............................. 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 21
Item 5. OTHER INFORMATION............................................ 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 21
SIGNATURES ............................................................ S-1
2
<PAGE>
EAGLE FINANCE CORP.
BALANCE SHEETS
AS OF JUNE 30, 1997 AND 1996 AND DECEMBER 31, 1996
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- DECEMBER 31,
1997 1996 1996
----------- -------------- ------------
<S> <C> <C> <C>
Finance receivables, net $39,753,660 $119,473,972 $54,663,926
Nonrefundable acquisition discount (796,936) (5,378,439) (1,443,164)
Allowance for credit losses (4,296,219) (8,892,423) (6,045,514)
----------- -------------- ------------
34,660,505 105,203,110 47,175,248
Excess servicing receivable 2,882,771 -- 1,050,590
Cash 3,658,884 1,654,451 1,271,594
Money market investments 552,863 554,155 552,651
Prepaid expenses and debt issuance costs 1,118,333 1,030,745 1,554,082
Repossessed or titled assets 1,857,819 4,761,981 4,249,443
Income tax receivable -- -- 4,732,346
Deferred income tax benefit 1,470,529 4,908,341 1,004,912
Other assets 2,705,487 1,282,148 2,176,696
----------- -------------- ------------
$48,907,191 $119,394,931 $63,767,562
----------- -------------- ------------
----------- -------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debt $20,048,498 $81,902,675 $32,827,893
Subordinated debt 17,631,728 17,970,114 17,977,720
Accrued interest 502,991 367,353 468,533
Accounts payable and accrued liabilities 2,099,063 2,986,945 1,893,737
Unearned insurance commissions 1,209 30,252 5,158
Dealer reserves 273,590 270,701 286,783
----------- -------------- ------------
Total liabilities 40,557,079 103,528,040 53,459,824
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 41,891 41,891 41,891
Additional paid-in capital 13,514,422 13,514,422 13,514,422
Retained earnings (5,206,201) 2,310,578 (3,248,575)
----------- -------------- ------------
Total stockholders' equity 8,350,112 15,866,891 10,307,738
----------- -------------- ------------
$48,907,191 $119,394,931 $63,767,562
----------- -------------- ------------
----------- -------------- ------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fee income $ 3,178,395 $ 7,279,401 $ 6,605,984 $ 15,359,907
Interest expense (1,310,153) (2,483,799) (2,760,479) (4,872,722)
------------ ------------ ----------- -------------
Net interest income 1,868,242 4,795,602 3,845,505 10,487,185
Provision for credit losses (2,793,321) (2,200,000) (3,168,321) (4,896,000)
------------ ------------ ----------- -------------
Net interest income after provision
for credit losses (925,079) 2,595,602 677,184 5,591,185
Other income:
Servicing income 1,659,117 1,676,033 2,439,572 2,353,410
Gain on sale of finance receivables 2,621,232 -- 2,621,232 --
Insurance commissions 2,634 13,850 5,044 35,085
------------ ------------ ----------- -------------
Total other income 4,282,983 1,689,883 5,065,848 2,388,495
Income before operating expenses 3,357,904 4,285,485 5,743,032 7,979,680
Operating expenses:
Salaries and related costs 1,951,323 2,138,417 3,986,468 3,882,362
Other operating expenses 1,856,188 1,995,982 3,714,190 3,807,780
------------ ------------ ----------- -------------
Total operating expenses 3,807,511 4,134,399 7,700,658 7,690,142
------------ ------------ ----------- -------------
Income (loss) before income taxes (449,607) 151,086 (1,957,626) 289,538
Applicable income taxes -- 26,784 -- 78,984
------------ ------------ ----------- -------------
Net income (loss) $ (449,607) $ 124,302 $(1,957,626) $ 210,554
------------ ------------ ----------- -------------
------------ ------------ ----------- -------------
Per share data:
Net income (loss) per common share
(primary) $(0.11) $0.03 $(0.47) $0.05
Net income (loss) per common share
(fully diluted) $(0.11) $0.03 $(0.47) $0.05
Average number of common shares
outstanding (primary) 4,189,100 4,189,100 4,189,100 4,189,100
Average number of common shares
outstanding (fully diluted) 4,189,100 4,189,100 4,189,100 4,192,400
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Common stock:
Balance at beginning of period $ 41,891 $ 41,891 $ 41,891 $ 41,891
Stock options exercised -- -- -- --
----------- ----------- ----------- -----------
41,891 41,891 41,891 41,891
----------- ----------- ----------- -----------
Additional paid-in capital:
Balance at beginning and end of period 13,514,422 13,514,422 13,514,422 13,514,422
Retained earnings:
Balance at beginning of period (4,756,594) 2,186,276 (3,248,575) 2,100,024
Net income (loss) (449,607) 124,302 (1,957,626) 210,554
----------- ----------- ----------- -----------
(5,206,201) 2,310,578 (5,206,201) 2,310,578
----------- ----------- ----------- -----------
Total stockholders' equity $ 8,350,112 $15,866,891 $ 8,350,112 $15,866,891
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (449,607) $ 124,302 $ (1,957,626) $ 210,554
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for credit losses 2,793,321 2,200,000 3,168,321 4,896,000
Net finance receivable (charge-offs)
recoveries against allowance (2,887,052) (5,315,282) (4,917,616) (6,811,412)
Decrease (increase) in:
Prepaid expenses unrelated to debt 80,438 217,443 151,574 172,738
Excess servicing receivable (2,034,862) -- (1,832,181) --
Repossessed or titled assets 1,054,529 (314,795) 2,391,624 (332,841)
Other assets (161,198) 103,323 (528,791) (29,102)
Income tax receivable 3,406,729 (772,071) 4,266,729 (772,071)
Increase (decrease) in:
Accrued interest 250,180 (364,988) 34,458 (135,481)
Accrued income tax 15 (710,644) 1,925 (683,144)
Accounts payable and accrued
liabilities (412,552) (125,671) 203,401 (193,382)
Unearned insurance commissions (2,627) (11,968) (3,949) (15,863)
Dealer reserves (3,091) (24,451) (13,193) (22,163)
Nonrefundable dealer reserves (1,943,844) (444,363) (646,228) (4,049,713)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities (309,621) (5,439,165) 318,448 (7,765,880)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments (7,863) (9,155) (212) (9,155)
Proceeds from bulk sale/securitization of
vehicle retail installment notes 30,750,043 21,470,402 30,750,043 34,282,274
Principal collected on finance receivables 3,786,113 12,300,627 9,949,907 27,139,870
Finance receivables originated or
acquired (net of write-offs) (11,617,665) (17,382,429) (25,789,684) (35,177,250)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities 22,910,628 16,379,445 14,910,054 26,235,739
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from draws on bank lines 29,592,066 12,700,000 39,229,348 29,280,583
Repayments of borrowings (51,092,066) (23,950,000) (51,092,066) (48,480,583)
Debt to affiliate (140,764) 489,774 (916,677) 451,118
Proceeds from issuance of other debt 7,714 14,320 50,768 55,728
Repayment of other debt (4,217) (130,913) (396,760) (130,913)
Debt issuance cost 73,383 (102,432) 284,175 (60,558)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities (21,563,884) (10,979,251) (12,841,212) (18,884,625)
------------ ------------ ------------ ------------
Cash, net change 1,037,123 (38,971) 2,387,290 (414,766)
Cash at beginning of period 2,621,761 1,693,422 1,271,594 2,069,217
------------ ------------ ------------ ------------
Cash at end of period $ 3,658,884 $ 1,654,451 $ 3,658,884 $ 1,654,451
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental cash flow disclosures - cash paid
during the period for:
Interest $ 1,094,431 $ 1,828,772 $ 2,760,479 $ 3,931,756
Income taxes and Illinois replacement tax $ 15 $ 1,509,500 $ 1,925 $ 1,534,200
</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 1996 Annual Report on Form 10-K.
2. Net income (loss) 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.
3. As of January 1, 1997, the Company adopted Financial Accounting Standards
Board Statement ("FASB") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FASB 125"). FASB 125
is effective for transfers and servicing of financial assets and retirements
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. FASB 125 provides accounting and reporting standards for
transfers and servicing of financial assets and retirements of liabilities
based on consistent application of a financial components approach that
focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Adoption of FASB 125 is
expected to have a material impact on the Company's financial position and
results of operations.
4. In February 1997, FASB Statement No. 128, "Earnings Per Share" ("FASB
128"), was issued. FASB 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. FASB 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 requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB 15.
FASB 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
7
<PAGE>
EPS data presented must be restated to conform with FASB 128. Although no
assurances can be provided, the Company does not expect adoption of FASB 128
to have a significant impact on the Company's financial statements.
In June 1997, FASB issued FASB Statement No. 130, "Reporting
Comprehensive Income", which is effective for fiscal years beginning after
December 15, 1997 ("FASB 130"). The statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. Although no assurances can be
provided, the Company does not expect adoption of FASB 130 to have a
significant impact on the Company's financial statements.
THIS REPORT MAY CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY INTENDS SUCH
FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR
FORWARD-LOOKING STATEMENTS CONTAINED IN THE PRIVATE SECURITIES REFORM ACT OF
1995, AND IS INCLUDING THIS STATEMENT FOR PURPOSES OF INDICATING SUCH INTENT.
FORWARD-LOOKING STATEMENTS THAT ARE BASED ON CERTAIN ASSUMPTIONS, AND
DESCRIBE FUTURE PLANS, STRATEGIES AND EXPECTATIONS OF THE COMPANY, ARE
GENERALLY IDENTIFIABLE BY USE OF THE WORDS "BELIEVE," "EXPECT," "INTEND,"
"ANTICIPATE," "ESTIMATE," "PROJECT" OR SIMILAR EXPRESSIONS. THE COMPANY'S
ABILITY TO PREDICT RESULTS OR THE ACTUAL EFFECT OF FUTURE PLANS OR STRATEGIES
IS INHERENTLY UNCERTAIN. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON
THE OPERATIONS AND FUTURE PROSPECTS OF THE COMPANY INCLUDE, BUT ARE NOT
LIMITED TO, CHANGES IN INTEREST RATES, GENERAL ECONOMIC CONDITIONS,
LEGISLATIVE/REGULATORY CHANGES, MONETARY AND FISCAL POLICIES OF THE U.S.
GOVERNMENT, INCLUDING POLICIES OF THE U.S. TREASURY AND THE FEDERAL RESERVE
BOARD, THE QUALITY OR COMPOSITION OF THE COMPANY'S PORTFOLIO OF FINANCE
RECEIVABLES, THE ABILITY OF THE COMPANY TO OBTAIN DEBT OR OTHER FINANCING,
COMPETITION, DEMAND FOR FINANCIAL SERVICES IN THE COMPANY'S MARKET AREA AND
ACCOUNTING PRINCIPLES, POLICIES AND GUIDELINES. THESE RISKS AND UNCERTAINTIES
SHOULD BE CONSIDERED IN EVALUATING FORWARD-LOOKING STATEMENTS AND UNDUE
RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. FURTHER INFORMATION
CONCERNING THE COMPANY AND ITS BUSINESS, INCLUDING ADDITIONAL FACTORS THAT
COULD MATERIALLY AFFECT THE COMPANY'S FINANCIAL RESULTS, IS INCLUDED IN OTHER
COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
8
<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 June 30, 1997, the Company had active relationships (I.E., the
Company purchased Installment Contracts from such dealers during the
preceding 90 days) with approximately 370 dealers located primarily in
Illinois, Florida, South Carolina, Georgia and Wisconsin, and, to a lesser
extent, in Indiana, New Mexico, Kentucky, Tennessee, Utah and Wyoming.
The following is management's discussion and analysis of the financial
condition of the Company at June 30, 1997 (unaudited) as compared to June 30,
1996 (unaudited) and December 31, 1996, and the results of operations for the
three and six months ended June 30, 1997 and 1996 (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 June 30, 1997 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. References to "net" finance
receivables or Installment Contracts shall mean finance receivables or
Installment Contracts, as appropriate, net of unearned finance charges.
RECENT DEVELOPMENTS
On April 14, 1997 and June 27, 1997, the Company sold approximately $19.2
million and $11.5 million (net), respectively, of Installment Contracts to
General Electric Capital Corporation ("GECC") under an Asset Purchase
Agreement dated as of June 25, 1996, between the Company and GECC (the "GECC
Agreement"). As of June 30, 1997, the Company serviced approximately $74.1
million (net) of Installment Contracts sold pursuant to the GECC Agreement.
SEE "--Liquidity and Capital Resources."
GENERAL
Installment Contracts represented over 99% of the Company's net finance
receivables at June 30, 1997. 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 $5,000 to
$15,000. Installment Contracts financing such purchases typically have
annual percentage rates of interest ("APRs") ranging from 21% to 33% and
repayment terms ranging from 12 to 60 months. The average original principal
amount financed under Installment Contracts outstanding at June 30, 1997 was
approximately $7,900, at an average APR of approximately 26.5%, 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 payoffs and
repossessions that occur prior to contract maturity.
9
<PAGE>
The Company's outstanding balance of owned or serviced (i.e., managed)
Installment Contracts declined to $135.3 million at June 30, 1997 from $151.6
million at December 31, 1996 and from $176.0 million at June 30, 1996. This
decline reflects the Company's emphasis on addressing credit losses (rather
than portfolio growth) during 1996 and 1997.
Interest and servicing income on managed Installment Contracts accounts
for most of the Company's revenue. The net amount of Installment Contracts
purchased declined to $31.0 million during the six months ended June 30, 1997
from $57.5 million during the six months ended June 30, 1996. As reflected
in the following table, the finance receivables (purchased or originated) by
the Company during the periods presented below consist primarily of
Installment Contracts.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------- ---------------------------------------
1997 1996 1997 1996
---------------- ---------------- ------------------ -----------------
% OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ------ ------- ----- ------- ----- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Installment Contracts
purchased (1)............. $13,817 100% $28,722 99% $31,014 100% $57,477 99%
Net Other
Loans originated (1)...... 57 0% 102 1% 116 0% 190 1%
------- ------ ------- ----- ------- ----- ------- ------
Total........................ $13,874 100% $28,824 100% $31,130 100% $57,652 100%
------- ------ ------- ----- ------- ----- ------- ------
------- ------ ------- ----- ------- ----- ------- ------
- -------------------
(1) Net of unearned finance charges
</TABLE>
SECURITIZATION TRANSACTIONS
The Company sells or securitizes (each, a "Securitization" or
"Securitization Transaction") Installment Contracts on a regular basis in
order to generate liquidity and to enable the Company to purchase additional
Installment Contracts. Securitization Transactions include the sale of
distinct portfolios of Installment Contracts with the servicing of the
Installment Contracts retained by the Company. The servicing arrangements
generally provide for the Company to earn a base servicing fee, computed as a
percentage of the outstanding balance of the Installment Contracts, as
compensation for its duties as servicer. In addition, the servicing
arrangements typically provide that the Company is entitled to certain bonus
and excess servicing fees, which represent collections on the securitized
portfolio of Installment Contracts in excess of the amounts corresponding to
(i) principal reductions on securitized Installment Contracts, (ii) an agreed
upon rate of return and (iii) certain expenses (including, primarily, base
servicing fees). Base servicing fees, bonus servicing fees and excess
servicing fees are referred to herein, collectively, as "Servicing Fees."
The Company generally recognizes gains on its Securitization
Transactions. Gains are determined based upon the difference between the
sale proceeds and the Company's recorded investment in the Installment
Contracts included in a Securitization Transaction. Additionally, gains are
also comprised of the Company's estimates of excess servicing receivables
("ESRs") for each Securitization Transaction. ESRs represent the present
value of the anticipated Servicing Fees on a securitized portfolio of
Installment Contracts. Aggregate ESRs are recorded as an asset, and a
corresponding gain is recorded in the period the Securitization occurs. To
the extent that the actual future performance of the subject Installment
Contracts results in lower Servicing Fees than estimated, the recorded ESRs
will be adjusted (at least quarterly) with corresponding charges made against
10
<PAGE>
income in the period in which the adjustment is made. To the extent that the
actual Servicing Fees are greater than estimated, the Company will record
additional servicing fee income over the periods in which excess Servicing
Fees are collected during the life of the subject portfolios.
During the quarter ended June 30, 1997, the Company sold (with servicing
retained) $30.7 million of Installment Contracts to GECC. Consistent with the
Company's adoption of FASB 125, effective January 1, 1997, a gain of $2.6
million was recognized and capitalized in the quarter ended June 30, 1997.
The Company intends to continue to record gains or losses, as appropriate,
resulting from future Securitizations in a manner consistent with generally
accepted accounting principles. The net amount of Installment Contracts
serviced by the Company for third parties was $95.5 million and $56.5 million
at June 30, 1997 and 1996, respectively. SEE "--Profitability" and
"--Liquidity and Capital Resources."
PROFITABILITY
The following table sets forth certain data relating to the Company's net
income for the three and six months ended June 30, 1997 and 1996 and for the
year ended December 31, 1996:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE THREE MONTHS FOR THE
ENDED JUNE 30, ENDED JUNE 30, YEAR ENDED
--------------------- --------------------- DECEMBER 31,
1997 1996 1997 1996 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average net finance receivables
Owned................................................... $ 49,121 $133,892 $ 52,586 $136,859 $116,797
Serviced................................................ 89,782 44,565 90,506 42,907 56,041
-------- -------- -------- -------- --------
Managed............................................ 138,903 178,457 143,092 179,766 172,838
Average interest bearing liabilities........................ 45,456 110,586 49,114 112,689 98,202
Total interest and fee income (owned)...................... 3,178 7,279 6,606 15,360 26,653
Total interest expense (owned)............................. 1,310 2,483 2,760 4,873 9,059
-------- -------- -------- -------- --------
Net interest income before provision for
credit losses (owned)................................... $ 1,868 $ 4,796 $ 3,846 $ 10,487 $ 17,594
-------- -------- -------- -------- --------
Average interest rate earned on
net finance receivables (owned)......................... 25.88% 21.75% 25.12% 22.45% 22.82%
Average interest rate on interest
bearing liabilities (owned)................................ 11.53% 8.98% 11.24% 8.65% 9.23%
-------- -------- -------- -------- --------
Net interest spread (owned)................................ 14.35% 12.76% 13.88% 13.80% 13.59%
-------- -------- -------- -------- --------
Net interest margin (owned) (1)............................ 15.21% 14.33% 14.63% 15.33% 15.06%
-------- -------- -------- -------- --------
</TABLE>
- --------------------------
(1) Net interest margin represents net interest income on an annualized basis
divided by average net finance receivables.
A 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. As
a result, the Company has limited ability to offset increases in its
cost of funds.
An increasingly larger component of the Company's profitability is the
servicing income earned on Securitization Transactions by the Company.
11
<PAGE>
Servicing income is derived from base servicing fees for Installment Contract
administration and collection services and bonus or excess servicing fees
paid based on the performance of the securitized Installment Contracts. The
increase in servicing income was due to higher levels of Installment
Contracts serviced by the Company. The following table sets forth certain
data relating to servicing fees for the periods shown:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE THREE MONTHS FOR THE
ENDED JUNE 30, ENDED JUNE 30, YEAR ENDED
------------------------- ------------------------- DECEMBER 31,
1997 1996 1997 1996 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Base servicing fees....................... $ 689,129 $ 312,426 $1,375,168 $ 620,680 $1,712,437
Bonus/excess servicing fees(1)........... 1,556,359 1,363,607 1,853,455 1,732,730 3,705,841
Amortization of ESRs(1).................. (586,371) -- (789,051) -- (310,693)
---------- ---------- ---------- ---------- ----------
Net servicing fees....................... $1,659,117 $1,676,033 $2,439,572 $2,353,410 $5,107,585
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ---------------------------
(1) Servicing Fees in respect of pre-1997 Securitization Transactions with
GECC are recorded as income when received (I.E., on a cash-flow basis).
As a result, there is no amortization of ESRs with respect to Installment
Contracts included in such Securitization Transactions. A portion of the
bonus/excess servicing fees reflects cash flows from pre-1997
Securitization Transactions with GECC. The October 1996 Securitization
with Greenwich Capital Markets Inc. was accounted for in accordance with
FASB 125.
The Company maintains credit loss reserves to absorb potential losses in
its finance receivables portfolio. Credit loss reserves for the Company's
Installment Contracts portfolio are comprised of nonrefundable acquisition
discount and allowance for credit losses. SEE "--Credit Loss Experience."
The Company's liabilities are generally more interest-rate sensitive than
its finance receivables. As a result, significant increases in the Company's
cost of funds borrowed under its Revolving Credit Agreement could have a
material adverse effect on its profitability. The Company has attempted to
mitigate the adverse effect of increases in interest rates by entering into
interest rate protection agreements. The Company has purchased an interest
rate cap and interest rate collars that provide limited interest rate
protection. SEE "--Liquidity and Capital Resources." Additionally, the
Company may utilize alternative financing structures, such as a fixed rate
senior or subordinated debt, securitizations or whole loan sales to attempt
to mitigate the adverse effect of interest rate increases.
Another significant component of the Company's profitability is the level
of its operating expenses. Operating expenses are influenced by the level of
volume and delinquency in the Company's Installment Contracts. The Company
increased the number of employees in early 1996 in order to address increases
in delinquencies.
12
<PAGE>
FINANCIAL CONDITION
Total assets decreased $14.9 million (23.3%) to $48.9 million at
June 30, 1997 from $63.8 million at December 31, 1996 primarily due to
a decrease in net finance receivables (net of dealer reserves,
nonrefundable acquisition discount and allowance for credit losses) to
$34.7 million at June 30, 1997 from $47.2 million at December 31,
1996. Total assets were $119.4 million at June 30, 1996 and net
finance receivables (net of dealer reserves, nonrefundable acquisition
discount and allowance for credit losses) were $105.2 million at such
date. This decline in assets and finance receivables is, in part,
attributable to the securitization of Installment Contracts and lower
Installment Contract acquisition levels resulting in reduced
receivables outstanding. The Securitization of Installment Contracts
was part of the Company's financing plan. SEE "--Liquidity and
Capital Resources." The net amount of owned or serviced Installment
Contracts decreased to $135.3 million at June 30, 1997 from $151.6
million at December 31, 1996. The net amount of owned or serviced
Installment Contracts was $176.0 million at June 30, 1996.
Total liabilities decreased $12.9 million (24.1%) to $40.6
million at June 30, 1997 from $53.5 million at December 31, 1996,
primarily due to a decrease in total debt to $37.7 million at June 30,
1997 from $50.8 million at December 31, 1996. The decrease in total
debt was primarily the result of a reduction in borrowings under the
Revolving Credit Agreement to $19.9 million at June 30, 1997 from
$31.8 million at December 31, 1996. SEE "--Liquidity and Capital
Resources." Total liabilities and stockholders' equity decreased
$14.9 million (23.3%) to $48.9 million at June 30, 1997 from $63.8
million at December 31, 1996.
RESULTS OF OPERATIONS
The following table sets forth certain data relating to the
Company's results of operations for the three and six months ended
June 30, 1997 and 1996:
<TABLE>
<CAPTION> FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
1997 1996 1997 1996
--------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Automobile portfolio interest and
fee income................................. $3,110 $7,205 $ 6,460 $15,222
--------- -------- --------- ---------
Total interest and fee income................. $3,178 $7,279 $ 6,606 $15,360
Total interest expense........................ 1,310 2,483 2,760 4,873
--------- -------- --------- ---------
Net interest income before provision for
credit losses.............................. 1,868 4,796 3,846 10,487
Provision for credit losses................... 2,793 2,200 3,169 4,896
--------- -------- --------- ---------
Net interest income after provision for
credit losses.............................. (925) 2,596 677 5,591
--------- -------- --------- ---------
Other Income:
Servicing income (from Installment
Contracts)................................. 1,659 1,676 2,440 2,353
Gain on securitization........................ 2,621 -- 2,621 --
Insurance products commissions................ 2 14 5 36
--------- -------- --------- ---------
Total other income............................ 4,282 1,690 5,066 2,389
--------- -------- --------- ---------
Salaries and related costs.................... 1,951 2,138 3,986 3,882
Other operating expenses...................... 1,856 1,997 3,715 3,808
--------- -------- --------- ---------
Total operating expenses...................... 3,807 4,135 7,701 7,690
--------- -------- --------- ---------
Income (loss) before taxes.................... (450) 151 (1,958) 290
Taxes......................................... -- 27 -- 79
--------- -------- --------- ---------
Net income (loss)............................. $ (450) $ 124 $ (1,958) $ 211
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
13
<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE 30,
1996. The Company experienced a net loss of $2.0 million for the six months
ended June 30, 1997 compared to net income of $211,000 for the comparable
1996 period, primarily due to the decrease in net interest income before
provision for credit losses. Net interest income before the provision for
credit losses decreased 63.3% to $3.8 million for the six months ended June
30, 1997 from $10.5 million for the comparable 1996 period, primarily as a
result of a decline in the outstanding balance of net finance receivables
owned by the Company. The net finance receivables outstanding at June 30,
1997 decreased to $39.8 million from $119.5 million at June 30, 1996, due to
increased Securitizations and reduced originations of Installment Contracts.
SEE "--Liquidity and Capital Resources."
Total interest expense decreased to $2.8 million for the six months ended
June 30, 1997 from $4.9 million for the six months ended June 30, 1996. The
decrease resulted from a decrease in the amount of average debt outstanding,
which was partially offset by higher borrowing rates. The total debt
outstanding at June 30, 1997 decreased to $37.7 million from $99.9 million at
June 30, 1996. The average debt outstanding for the six months ended June
30, 1997 decreased to $49.1 million from $112.7 million for the six months
ended June 30, 1996. The weighted average interest rate paid for borrowed
funds increased to 11.24% for the six months ended June 30, 1997 from 8.65%
for the six months ended June 30, 1996 primarily as a result of the
subordinated debt representing a higher proportion of total debt.
The provision for credit losses decreased $1.7 million to $3.2 million
for the six months ended June 30, 1997 from $4.9 million for the six months
ended June 30, 1996. The decline in the provision for credit losses was due,
in part, to the decline in the outstanding balance of net finance receivables
owned by the Company. SEE "--Credit Loss Experience."
Other income, consisting primarily of income from Servicing Fees and
gains on Securitization Transactions, increased 112% to $5.1 million for the
six months ended June 30, 1997 from $2.4 million for the six months ended
June 30, 1996. Servicing income, net of ESR amortization, was $2.4 million
for the six months ended June 30, 1997 and 1996. Gains on sale of $2.6
million were recognized for the six months ended June 30, 1997. No
comparable gain was recognized for the six months ended June 30, 1996. This
increase reflects the increased amount of servicing-retained Securitizations
of finance receivables by the Company. SEE "--Profitability."
Total operating expenses remained at $7.7 million for the six months
ended June 30, 1997 compared to $7.7 million for the six months ended June
30, 1996. Salaries and related costs increased $104,000 from the
corresponding period in 1996 to $4.0 million for the six months ended June
30, 1997, due primarily to normal pay increases. The number of full time
equivalent employees decreased 18.7% at June 30, 1997 when compared to June
30, 1996. The Company's other operating expenses decreased to $3.7 million
for the six months ended June 30, 1997 compared to $3.8 million the six
months ended June 30, 1996. Total operating expenses (annualized) as a
percentage of average net finance receivables owned or serviced increased to
10.8% for the six months ended June 30, 1997 as compared to 8.6% for the six
months ended June 30, 1996, principally as a result of a decrease in owned or
serviced finance receivables.
No income tax expense was recorded for the six months ended June 30,
1997, while $79,000 was recorded for the six months ended June 30, 1996. The
decrease was due to the net loss experienced for the six months ended June
30, 1997 as compared to a net profit for the corresponding period in 1996.
14
<PAGE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO THREE MONTHS ENDED JUNE
30, 1996. The Company experienced a net loss of $450,000 for the three
months ended June 30, 1997 compared to net income of $124,000 for the
comparable 1996 period.
Net interest income before the provision for credit losses decreased
61.0% to $1.9 million for the three months ended June 30, 1997 from $4.8
million for the comparable 1996 period, primarily as a result of a decline in
the outstanding balance of net finance receivables owned by the Company.
Total interest expense decreased to $1.3 million for the three months
ended June 30, 1997 from $2.5 million for the three months ended June 30,
1996. The decrease resulted from a decrease in the amount of average debt
outstanding, which was partially offset by higher borrowing rates. The
weighted average interest rate paid for borrowed funds increased to 11.53%
for the three months ended June 30, 1997 from 8.98% for the three months
ended June 30, 1996 primarily as a result of the subordinated debt
representing a higher proportion of total debt.
The provision for credit losses increased $0.6 million to $2.8 million
for the three months ended June 30, 1997 from $2.2 million for the three
months ended June 30, 1996. The increase in the provision for credit losses
was due, in part, to increasing reserves and allowances available for losses
to 13.5% of net finance receivables owned by the Company from 12.2% at June
30, 1996. SEE "--Credit Loss Experience."
Other income, consisting primarily of income from Servicing Fees and
gains on Securitization Transactions, increased 153% to $4.3 million for the
three months ended June 30, 1997 from $1.7 million for the three months ended
June 30, 1996. Servicing income, net of ESR amortization, was $1.7 million
for the three months ended June 30, 1997 and 1996. Gains on sale of $2.6
million were recognized for the three months ended June 30, 1997. No
comparable gain was recognized for the three months ended June 30, 1996. This
increase reflects the increased amount of servicing-retained Securitizations
of finance receivables by the Company. SEE "--Profitability."
Total operating expenses decreased to $3.8 million for the three months
ended June 30, 1997 compared to $4.1 million for the three months ended June
30, 1996. Salaries and related costs decreased $187,000 from the
corresponding period in 1996 to $2.0 million for the three months ended June
30, 1997, due primarily to a decreasing number of employees and benefit costs
offset by normal pay increases. The Company's other operating expenses
decreased to $1.9 million for the three months ended June 30, 1997 compared
to $2.0 million the three months ended June 30, 1996. Total operating
expenses (annualized) as a percentage of average net finance receivables
owned or serviced increased to 11.0% for the three months ended June 30, 1997
as compared to 9.3% for the three months ended June 30, 1996.
No income tax expense was recorded for the three months ended June 30,
1997, while $27,000 was recorded for the three months ended June 30, 1996.
The decrease was due to the cumulative net loss experienced for the 1997 tax
year as compared to a net profit for the corresponding period in 1996.
CREDIT LOSS EXPERIENCE
The Company's credit loss reserves are comprised of three components:
nonrefundable acquisition discount; an allowance for credit losses; and
refundable dealer reserves. The total of allowance for credit losses,
nonrefundable acquisition discount and dealer reserves equaled 13.5% and
12.2% of net owned finance receivables at June 30, 1997 and 1996,
respectively.
15
<PAGE>
NONREFUNDABLE ACQUISITION DISCOUNT AND DEALER RESERVES. 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
principal amount. The Company negotiates the amount of the discount with
dealers based upon various criteria, including the credit risk associated
with the contracts being purchased and market pricing factors. The discount
is nonrefundable, is equal to the difference between (a) the total principal
amount to be repaid under the Installment Contract and (b) net funds paid to
the dealer, and is allocated to the nonrefundable acquisition discount
account. As part of the Company's financing of retail installment sales
contracts (other than Installment Contracts), refundable dealer reserves may
be established to protect the Company from losses associated with such
contracts, and are shown as a liability of the Company.
The following table presents a reconciliation of the changes in
nonrefundable acquisition discount and dealer reserves for the three and six
months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION> FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
1997 1996 1997 1996
--------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period............... $3,017 $6,118 $1,730 $ 9,721
Additions applicable to new volume........... 1,432 2,897 3,102 5,382
Reductions applicable to accounts sold....... (3,104) (2,701) (3,104) (3,982)
Losses charged, net of recoveries............ (275) (665) (658) (5,472)
--------- -------- --------- ---------
Balance at end of period..................... $1,070 $5,649 $1,070 $ 5,649
--------- -------- --------- ---------
--------- -------- --------- ---------
Balance at end of period as a percentage
of net finance receivables (owned) at
end of period............................. 2.69% 4.73% 2.69% 4.73%
</TABLE>
ALLOWANCE AND PROVISION FOR CREDIT LOSSES/CHARGE-OFFS. The Company
maintains an allowance for credit losses at a level that management believes
is adequate to absorb potential losses in its finance receivables portfolio.
Management evaluates the adequacy of the allowance for credit losses by
reviewing credit loss experience and delinquency trends using static pool
analysis, the value of the underlying collateral and general economic
conditions and trends. If the amount of nonrefundable acquisition discount
associated with a specific pool of Installment Contracts is determined to be
insufficient, in the opinion of management, to absorb projected losses for
that pool, a provision for credit losses would be charged against earnings.
The Company's general policy is to charge-off delinquent accounts when they
are deemed uncollectible, and in any event prior to their becoming 90 days
contractually delinquent. The amount of the Company's charge-offs, and the
charge-off rate as a percentage of average owned Installment Contracts (net),
was $2.5 million, or 20.1%, during the three months ended June 30, 1997, and
$6.4 million, or 19.1%, during the corresponding period in 1996.
The following table reflects the Company's allowance for credit losses
and provision for credit losses for the three and six months ended June 30,
1997 and 1996:
16
<PAGE>
<TABLE>
<CAPTION> FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
1997 1996 1997 1996
--------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period............... $ 4,390 $ 12,008 $ 6,046 $10,807
Provision charged to expense................. 2,793 2,200 3,169 4,896
Losses charged net of recoveries............. (2,887) (5,316) (4,919) (6,811)
--------- -------- --------- ---------
Balance at end of period..................... $ 4,296 $ 8,892 $ 4,296 $ 8,892
--------- -------- --------- ---------
--------- -------- --------- ---------
Allowance as a percentage of net
finance receivables (owned) at end of
period.................................... 10.81% 7.44% 10.81% 7.44%
</TABLE>
DELINQUENCIES
The Company monitors delinquencies in the managed finance receivables
portfolio to gauge overall credit trends. Managed finance receivables that
were 30 days and greater contractually delinquent (net of unearned finance
charges) were $11.8 million, $16.6 million and $14.6 million, representing
8.7%, 11.0% and 8.3% of net managed finance receivables, as of June 30, 1997,
December 31, 1996, and June 30, 1996, respectively. Managed finance
receivables that were 60 days and greater contractually delinquent (net of
unearned finance charges) were $3.1 million, $3.4 million and $2.7 million,
representing 2.3%, 2.2% and 1.5% of net managed finance receivables as of
June 30, 1997, December 31, 1996, and June 30, 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through cash flow from operations,
borrowings under that certain Revolving Credit Agreement dated June 30, 1995
among the Company, CoreStates Bank, N.A., as agent, and seven other
commercial banks (as amended, the "Revolving Credit Agreement"), proceeds
from subordinated indebtedness and from the periodic sale or securitization
of Installment Contracts and other finance receivables.
Net cash provided by (used in) operating activities totaled ($310,000)
and ($5.4) million during the three months ended June 30, 1997 and 1996,
respectively. For the six months ended June 30, 1997 and 1996, net cash
provided by (used in) operating activities totaled $318,000 and ($7.8)
million, 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 provision for credit losses and the nonrefundable acquisition
discount accounts. Net cash provided by operating activities was affected by
reductions in income tax receivables and repossessed assets for the three and
six months ended June 30, 1997. Net cash used in operating activities for
the three and six months ended June 30, 1997 and 1996 was affected by the
significant decline in the nonrefundable acquisition discount account and by
the net change in the allowance for credit losses.
Net cash provided by (used in) investing activities represents the net
investment in, or liquidation of, finance receivables, which for the
three-month period ended June 30, 1997 and 1996 was $22.9 million and $16.4
million, respectively. For the six months ended June 30, 1997 and 1996, net
cash provided by (used in) investing activities was $14.9 million and $26.2
million, respectively. During the three and six months ended June 30, 1997,
cash provided from the sale/securitization of Installment Contracts was $30.8
million. Cash provided from the sale/securitization of Installment Contracts
was $21.5 million and $34.3 million for the three and six months ended June
30, 1996
Net cash provided by (used in) financing activities for the three
and six months ended June 30, 1997 and the comparable 1996 periods
largely result from borrowings and repayments under the Revolving
17
<PAGE>
Credit Agreement. Net cash provided by (used in) financing activities
for the three months ended June 30, 1997 was ($21.6) million and net
cash provided by financing activities for the three months ended June
30, 1996 was ($11.0) million. For the six months ended June 30, 1997
and 1996, net cash provided by (used in) financing activities was
($12.8) million and ($18.9) million, respectively.
The self-liquidating nature of Installment Contracts and Other Loans
enables the Company to maintain higher debt-to-equity ratios 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- and long-term liquidity needs with cash flow from operations,
borrowings under the Revolving Credit Agreement, the sale or securitization
of finance receivables and the proceeds from the issuance of securities in
the capital markets.
The maximum availability under the Revolving Credit Agreement was $10.1
million at June 30, 1997. The facility matures September 30, 1997. The
Company has the option of borrowing funds under the Revolving Credit
Agreement at an interest rate equal to either the prime rate of the agent
bank or the LIBOR rate plus 2.5% (which rate represents an increase from the
rate of LIBOR plus 2.0% that was available to the Company through September
26, 1996). On June 30, 1997, the three-month LIBOR borrowing rate under the
Revolving Credit Agreement was 8.31% compared to 7.44% on June 30, 1996. The
prime rate was 8.50% on June 30, 1997 and the three-month LIBOR rate was
5.81% on such date.
The Company must comply with customary financial and other covenants
under the Revolving Credit Agreement. At June 30, 1997, the Company was in
breach of the tangible net worth, interest coverage ratio and subordinated
debt limitation covenant under the Revolving Credit Agreement and the
interest coverage ratio covenant under its agreements with GECC. The Company
has received waivers with respect to these breaches (which, pursuant to the
Revolving Credit Agreement, are measured on the last day of each quarter) for
all periods through September 30, 1997. The Revolving Credit Agreement
waiver also provides for, among other things: (i) a reduction in the total
amount of the facility to $30 million; and (ii) a reduction in the borrowing
base, generally, to 75% of eligible receivables. The Company expects to
remain in violation of these covenants for the near term.
The Company is continuing negotiations with its current lenders and
alternative lenders to provide financing beyond September 30, 1997. In any
event, the Company anticipates relying more heavily during 1997 and
thereafter upon alternative funding sources, such as securitization
financing. No assurance can be given that the Revolving Credit Agreement, or
an equivalent facility, will be in place beyond September 30, 1997, or that
alternative funding transactions will be successfully completed, although
management does believe that existing and/or alternative funding sources will
continue to provide the Company with sufficient liquidity to maintain
existing operations.
At June 30, 1997, the Company had total debt of $37.7 million as compared
to $50.8 million at December 31, 1996 and $99.9 million at June 30, 1996. At
June 30, 1997, $10.1 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 for the periods indicated:
18
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
FOR THE SIX MONTHS ENDED JUNE 30, TWELVE MONTHS ENDED
1997 1996 DECEMBER 31, 1996
------------------- ------------------ ------------------
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------ ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SENIOR:
Revolving Credit Agreement.............. $19,900 8.59% $80,450 8.25% $31,763 8.05%
Loan from Commonly Controlled
Company................................ 148 6.75% 1,453 6.75% 1,065 6.75%
SUBORDINATED:
Notes payable........................... 17,632 12.18% 17,970 12.14% 17,978 12.15%
------- ------- -------
Total debt................................ $37,680 11.24% $99,873 8.65% $50,806 9.23%
------- ------- -------
------- ------- -------
</TABLE>
The following table sets forth information with respect to maturities of
senior and subordinated debt at June 30, 1997:
<TABLE>
<CAPTION>
LOANS FROM
SENIOR COMMONLY
BANK LINES CONTROLLED SUBORDINATED
YEAR OF CREDIT COMPANY NOTES PAYABLE TOTAL
---- ---------- ---------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1997........................ $19,900 $148 $ 88 $20,136
1998........................ 13 13
1999........................ 833 833
2000........................ 807 807
2001........................ 869 869
Thereafter.................. 15,022 15,022
---------- ---------- ------------- --------
Total....................... $19,900 $148 $17,632 $37,680
---------- ---------- ------------- --------
---------- ---------- ------------- --------
</TABLE>
The Company has purchased interest rate caps and interest rate collars in
an aggregate notional amount of $45 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 $30 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, on a revolving basis, having a maximum principal amount of up to
$80 million (net) outstanding at any time. As of June 30, 1997, $74.1 million
(net) principal amount of Installment Contracts was outstanding pursuant to
the GECC Agreement. The term of the GECC Agreement expires June 25, 1998.
Total stockholders' equity at June 30, 1997 was $8.8 million as compared
to $10.3 million at December 31, 1996 and $15.9 million at June 30, 1996.
The Company's ability to pay dividends is limited by the Revolving Credit
Agreement.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the lawsuits described below, the Company is involved in
litigation in the normal course of business. The Company believes that the
resolution of such normal-course-of-business matters will not have a material
adverse effect on its financial position or results of operations. The
Company regularly initiates legal proceedings as a plaintiff in connection
with its routine collection activities.
The company has been named as a defendant in the following described
lawsuits:
1. REHM V. EAGLE FINANCE CORP. is pending in the United States District
Court for the Northern District of Illinois and is designated by case number
96 C 2455. The plaintiff has filed a class action complaint alleging that
the Company and three of its directors and officers have violated Section
10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated
thereunder. The litigation is now proceeding with discovery, although no
depositions have been taken. The Company intends to defend vigorously the
claims made in the complaint.
2. CLEVELAND V. WALLACE AUTO SALES, INC. ET AL. was filed on September
19, 1996 in the United States District Court for the Northern District of
Illinois and is designated by Case Number 96 C 6045. The complaint alleges
that the Company has violated the Illinois Consumer Fraud Act, the Illinois
Sales Finance Agency Act and the Federal Racketeer Influenced and Corrupt
Organizations Act arising out of the Company's purchase of retail installment
sales contracts through which the plaintiffs purchased a used automobile.
The complaint is alleged as a class action, and includes unnamed, and still
unknown, directors and officers of the Company. The Company has filed a
Motion to Dismiss, and the parties are awaiting a ruling from the court. No
discovery has been taken. The Company intends to defend vigorously the
claims made in the complaint.
3. SOLARMAR SYSTEMS CORP V. EAGLE FINANCE CORP., RONALD B. CLONTS ET
AL. was filed on September 14, 1995 in Circuit Court of the Eleventh Judicial
Circuit, Dade County, Florida, and is designated as Case No. 95-18056-CA-01.
This suit arose out of a settlement agreement entered in 1988 between the
plaintiff and the predecessor to the Company (the "Settlement Agreement"),
following the plaintiff's bankruptcy. The Company (E.F. Wonderlic &
Associates, Inc.) purchased promissory notes from the plaintiff that the
plaintiff had received in connection with the sale of hot water heating
systems to Florida homeowners. The complaint filed against the Company
alleges that the Company breached the Settlement Agreement and fraudulently
induced the plaintiff to enter into it. The plaintiff's complaint was
dismissed in June, 1996, with leave to amend, primarily on the grounds that
the claims were time-barred by the applicable Florida statute of limitations.
The plaintiff filed an amended complaint in June, 1996, which asserted
essentially the same claims of fraud, violations of the Federal Racketeer
Influenced and Corrupt Organizations Act and fraud in the inducement. The
Company intends to defend vigorously the claims made in the complaint.
4. DRAKE V. EAGLE FINANCE CORP., was filed on June 13, 1997 in the
Circuit Court of Cook County, Illinois, and is designated as Case No. 97 L
6521. The class action Complaint alleges that he Company has violated the
Uniform Commercial Code, the Illinois Consumer Fraud Act and the Illinois
Sales Finance Agency Act arising out of the notice that the Company sent to
the plaintiff's after the Company repossessed their car. The case is in the
initial pleading stages, and no discovery has been taken. The Company
intends to defend vigorously the claims made in the Complaint.
20
<PAGE>
5. HALL V. EAGLE FINANCE CORP., was filed on July 28, 1997 in the
Circuit Court of Cook County, Illinois, and is designated as Case No. 97 CH
9328. The class action Complaint alleges that the Company has violated the
Illinois Wage Assignment Act arising out of the Company's attempt to enforce
the wage assignment that the plaintiff executed when he purchased a car. The
case is in its initial pleading stage, and no discovery has been taken. The
Company intends to defend vigorously the claims made in the Complaint.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The Annual Meeting of Stockholders was held on May 20, 1997.
B. At the meeting, Charles F. Wonderlic and Robert L. Jooss were
elected to serve as Class III directors (term expires in 2000).
Continuing as Class II directors (term expires in 1999) are
Robert H. Arnold, Ronald B. Clonts and Walter J. O'Brien.
Continuing as Class I directors (term expires in 1998) are
Richard E. Wonderlic and E. Bruce Fredrickson.
C. The following individuals were elected to serve as directors of
the Company for a term of three years at the Annual Meeting. The
votes for and against such individuals are set forth below.
FOR AGAINST WITHHELD
-------- ------- --------
1. Charles F. Wonderlic 3,914,623 0 43,915
2. Robert L. Jooss 3,914,623 0 43,915
D. Ratification of KPMG Peat Marwick LLP as the Company's
independent auditors.
FOR AGAINST WITHHELD ABSTAINED
--------- ------- -------- ---------
3,907,063 28,825 22,450 200
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Fourth Amendment to Amended and Restated
Revolving Credit Agreement dated June 30, 1997
11 Statement re computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K - The Company did not file any reports on
Form 8-K during the three months ended June 30, 1997.
21
<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: August 13, 1997 ROBERT J. BRAASCH
----------------------------------
Robert J. Braasch
President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
S-1
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- --------------
10.1 Form of Fourth Amendment to Amended and Restated Revolving Credit
Agreement dated June 30, 1997
11 Statement re computation of per share earnings
27 Financial Data Schedule
<PAGE>
CoreStates Bank, N.A.
P.O. Box 7618
Philadelphia, PA 19101-7618
CORESTATES
BANK
June 30, 1997
Mr. Robert J. Braasch
President
Eagle Finance Corp.
1425 Tri-State Parkway
Suite 140
Gurnee, IL 60031
Re: Extension of Termination Date and Waiver
Dear Bob:
Reference is hereby made to that certain Amended and Restated Revolving
Credit Agreement, as amended from time to time ("Credit Agreement") dated
June 30, 1995, by and among Eagle Finance Corp. ("Borrower"), the Agent
(identified on the signature pages of this letter) and the "Lenders"
(identified below as signatories hereto). All capitalized terms not otherwise
defined herein shall have the meanings respectively ascribed to them in the
Credit Agreement.
Eagle has requested an extension of the Termination Date until September 30,
1997 and continuation of the covenant waivers through said date. The Agent
and Lenders acknowledge and agree as follows:
1) The definition of Termination Date shall be deleted and replaced with the
following:
"Termination Date means the earlier of (1) September 30, 1997, or (2) the
date of termination of the commitments pursuant to Section 2.02 and Section
9.01.
2) The Bank Group's commitment will be reduced to $30,000,000.
The Credit Agreement is amended by deleting the number $50,000,000 in the
29th line of Section 2.01 and replacing it with the number $30,000,000. In
connection with the above stated reduction in the aggregate Commitments of
all the Banks, each Bank's Commitment is reduced pro rata to the amount
opposite each Bank's name below.
CoreStates Bank, N.A. $4,875,000
Harris Trust & Savings Bank 3,000,000
Bank One, Chicago 3,750,000
Fleet Bank 3,750,000
LaSalle National Bank 3,750,000
<PAGE>
NBD Bank 3,750,000
Sumitomo Bank, Limited 2,500,000
The Northern Trust Company 2,500,000
Cole Taylor Bank 2,125,000
3) During the extension period, BDO Seidman shall perform an examination
requested by Agent and cause a written report thereof to be promptly
submitted to Banks (the cost and expenses of which shall be the sole
responsibility of the Borrower), which examination shall include a review
of Borrower's reports related to underwriting and underwriting exceptions
for newly purchased accounts (which review shall include a sampling of such
accounts to test the validity of the reports).
4) Borrower shall, contemporaneously with execution hereof, pay Agent in good
funds, for the benefit of, and to be distributed to Banks based on their
respective Pro Rata Percentages, an Extension Fee of $300,000. The Banks
hereby agree that if the Borrower terminates the Commitments and satisfies
all obligations of every kind of Borrower to Agent and Lenders prior to the
Termination Date, then the Banks will refund $150,000 of the Extension Fee
to the Borrower.
Upon execution of this letter agreement, a formal amendment will be prepared by
the Agent's counsel.
This letter may be executed in counterparts, all of which taken together shall
constitute one and the same agreement, and any of the parties hereto may execute
this letter agreement by signing any such counterpart. The Credit Agreement, as
amended hereby and as previously amended, remains in full force and effect.
Each of the undersigned, by its signature hereto, hereby evidences its consent
to the terms and conditions of this letter to be effective only upon the Agent's
receipt of an executed counterpart or facsimile by Borrower and Lenders and
delivery thereof to the Borrower.
CoreStates Bank, N.A., as Agent and Lender
By: ______________________________________
______________________________________
Harris Bank and Savings Bank
By: ______________________________________
______________________________________
Bank One, Chicago, N.A
By: ______________________________________
______________________________________
2
<PAGE>
Cole Taylor Bank
By: ______________________________________
______________________________________
Fleet Bank, N.A
By: ______________________________________
______________________________________
NBD Bank
By: ______________________________________
______________________________________
LaSalle National Bank
By: ______________________________________
______________________________________
The Sumitomo Bank, Limited
Chicago Branch
By: ______________________________________
______________________________________
The Northern Trust Company
By: ______________________________________
______________________________________
Agreed to this 30th day of June, 1997
Eagle Finance Corporation
By: ______________________________________
______________________________________
Attest: __________________________________
__________________________________
3
<PAGE>
EXHIBIT 11
EAGLE FINANCE CORP.
COMPUTATION OF NET INCOME PER SHARE
For the Three and Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -------------------
1997 1996 1997 1996
-------- ---- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income data:
1. Income (loss) before income taxes........................ $ (450) $151 $(1,958) $ 290
2. Applicable income taxes.................................. -- 27 -- 79
-------- ---- -------- ------
3. Net income............................................... $ (450) $124 (1,958) $ 211
-------- ---- -------- ------
-------- ---- -------- ------
Number of outstanding shares:
4. Weighted average common shares
outstanding, adjusted for stock splits................... 4,189 4,189 4,189 4,189
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)............ -- -- -- 3
7. Common shares outstanding (Line 4-5+6)................... 4,189 4,189 4,189 4,192
Net income per share:
8. Net income (loss) per common shares (Line 3/4)........... $(0.11) $0.03 $(0.47) $0.05
9. Fully diluted net income (loss) per common (Line 3/7).... $(0.11) $0.03 $(0.47) $0.05
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,658,884
<SECURITIES> 552,863
<RECEIVABLES> 41,224,189
<ALLOWANCES> 5,093,155
<INVENTORY> 0
<CURRENT-ASSETS> 38,872,252
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,907,191
<CURRENT-LIABILITIES> 22,925,351
<BONDS> 17,631,728
0
0
<COMMON> 41,891
<OTHER-SE> 8,308,221
<TOTAL-LIABILITY-AND-EQUITY> 48,907,191
<SALES> 0
<TOTAL-REVENUES> 11,671,832
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,700,658
<LOSS-PROVISION> 3,168,321
<INTEREST-EXPENSE> 2,760,479
<INCOME-PRETAX> (1,957,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,957,626)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
