<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, 1998)
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 No X
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 4,228,690 shares were issued and outstanding as of May 31, 1998.
<PAGE>
EAGLE FINANCE CORP.
FORM 10-Q
________________________
TABLE OF CONTENTS
________________________
<TABLE>
<CAPTION>
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<S> <C>
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Statements of Income (Loss). . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Changes in Stockholders' Equity (Deficit). . . . . . . . . .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
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . 22
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . . . . . . . . 24
Item 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . . . 24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . 24
Item 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-1
</TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
As more fully described in the notes to the Financial Statements, financial
information has been restated to conform the Company's quarterly reporting for
1997 and 1998 to the provisions of Financial Accounting Standards Board
Statement ("FASB") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("FASB 125").
2
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EAGLE FINANCE CORP.
BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997 AND DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1998 1997 1997
------------ ------------ ---------------
<S> <C> <C> <C>
Finance receivables, owned . . . . . . . . . . . . $7,826,531 $39,753,660 $28,455,232
Nonrefundable acquisition discount . . . . . . . . (98,617) (796,936) (1,179,708)
Allowance for credit losses. . . . . . . . . . . . (1,284,039) (4,296,219) (2,986,419)
------------ ------------ ---------------
Finance receivables, net owned . . . . . . . . . . 6,443,875 34,660,505 24,289,105
------------ ------------ ---------------
Finance receivables, Installment Contract sales. . 18,553,340 28,804,642 27,060,820
Allowance for credit losses related to
Installment Contract sales. . . . . . . . . . . (2,549,076) (3,374,101) (3,353,808)
Additional allowance represented on titled assets,
Installment Contract sales. . . . . . . . . . . (312,200) (150,765) (470,113)
------------ ------------ ---------------
Finance receivables, net Installment Contract
sales . . . . . . . . . . . . . . . . . . . . . 15,692,064 25,279,776 23,236,899
------------ ------------ ---------------
Excess servicing receivable. . . . . . . . . . . . -- 670,335 --
Cash . . . . . . . . . . . . . . . . . . . . . . . 349,676 3,658,884 1,809,248
Money market investments . . . . . . . . . . . . . 3,000,000 552,863 552,521
Prepaid expenses and debt issuance costs . . . . . 543,843 896,718 834,674
Prepaid expenses other . . . . . . . . . . . . . . 84,983 221,615 195,296
Repossessed or titled assets . . . . . . . . . . . 1,073,972 2,008,584 2,091,011
Income tax receivable. . . . . . . . . . . . . . . 776,457 1,470,529 1,268,152
Other assets . . . . . . . . . . . . . . . . . . . 460,304 2,159,838 548,913
------------ ------------ ---------------
$ 28,425,174 $ 71,579,647 $54,825,819
------------ ------------ ---------------
------------ ------------ ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable, Installment Contract Sales. . . . . $16,004,264 $25,430,541 $23,707,012
Senior debt. . . . . . . . . . . . . . . . . . . . -- 20,048,498 15,034,111
Subordinated debt. . . . . . . . . . . . . . . . . 17,543,768 17,631,728 17,543,768
Accrued interest . . . . . . . . . . . . . . . . . 496,818 502,991 162,370
Accounts payable and accrued liabilities . . . . . 1,002,832 2,100,272 694,577
Dealer reserves. . . . . . . . . . . . . . . . . . -- 273,590 --
------------ ------------ ---------------
Total liabilities. . . . . . . . . . . . . . . . . 35,047,682 65,987,620 57,141,838
Stockholders' equity (deficit):. . . . . . . . . .
Preferred Stock, authorized 3,000,000 shares;
none issued . . . . . . . . . . . . . . . . . . -- -- --
Common Stock: $.01 par value, authorized
10,000,000 shares, issued and outstanding
4,228,690 shares. . . . . . . . . . . . . . . . 42,287 41,891 42,287
Additional paid-in capital . . . . . . . . . . . . 13,593,206 13,514,422 13,593,206
Retained earnings (deficit). . . . . . . . . . . . (20,258,001) (7,964,286) (15,951,512)
------------ ------------ ---------------
Total stockholders' equity (deficit) . . . . . . . (6,622,508) 5,592,027 (2,316,019)
------------ ------------ ---------------
$ 28,425,174 $ 71,579,647 $54,825,819
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income, owned:
Interest and fee income, owned receivables . . $ 408,924 $ 3,178,395 $ 1,619,897 $ 6,605,984
Interest expense, owned receivables (senior
and subordinated debt) . . . . . . . . . . . (463,973) (1,310,153) (1,339,201) (2,760,479)
----------- ----------- ----------- -----------
Net interest income, owned receivables . . . . . . (55,049) 1,868,242 280,696 3,845,505
Provision for credit losses, owned receivables . . (725,600) (2,793,321) (725,600) (3,168,321)
----------- ----------- ----------- -----------
Net interest income after provision
for credit losses, owned receivables. . . . . . (780,649) (925,079) 444,904 677,184
----------- ----------- ----------- -----------
Interest income, Installment Contract sales:
Interest income, Installment Contract sales . . 1,163,038 1,046,283 2,615,475 1,046,282
Interest expense, Installment Contract sales
(notes payable). . . . . . . . . . . . . . . (435,800) (350,441) (953,492) (350,441)
Provision for credit losses, Installment
Contract sales . . . . . . . . . . . . . . . (440,559) (896,020) (1,160,345) (896,020)
----------- ----------- ----------- -----------
Net interest income after provision for credit
losses, Installment Contract sales. . . . . . . 286,679 (200,178) 501,638 (200,179)
----------- ----------- ----------- -----------
Other income:
Service fee income. . . . . . . . . . . . . . . 923,275 1,722,442 1,748,987 2,502,897
Commission and other. . . . . . . . . . . . . . -- 2,634 -- 5,044
----------- ----------- ----------- -----------
Total other income . . . . . . . . . . . . . . . . 923,275 1,725,076 1,748,987 2,507,941
----------- ----------- ----------- -----------
Income before operating expenses . . . . . . . . . 429,305 599,819 1,805,721 2,984,946
Operating expenses:
Salaries and related costs. . . . . . . . . . . 1,057,099 1,951,323 2,309,903 3,986,468
Collection expenses . . . . . . . . . . . . . . 334,878 831,257 801,001 831,257
Other operating expenses. . . . . . . . . . . . 1,868,082 1,024,931 3,001,306 2,882,933
----------- ----------- ----------- -----------
Total operating expenses . . . . . . . . . . . . . 3,260,059 3,807,511 6,112,210 7,700,658
----------- ----------- ----------- -----------
Loss before income taxes . . . . . . . . . . . . . (2,830,754) (3,207,692) (4,306,489) (4,715,712)
Applicable income taxes. . . . . . . . . . . . . . -- -- -- --
----------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . $(2,830,754) $(3,207,692) $(4,306,489) $(4,715,712)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . 4,228,690 4,189,100 4,228,690 4,189,100
Diluted . . . . . . . . . . . . . . . . . . . . 4,228,690 4,189,100 4,228,690 4,189,100
Per share net income (loss) attributable to
common shares:
Basic . . . . . . . . . . . . . . . . . . . . . $(0.67) $(0.77) $(1.02) $(1.13)
Diluted . . . . . . . . . . . . . . . . . . . . $(0.67) $(0.77) $(1.02) $(1.13)
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997.
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Common stock:
Balance at beginning of period. . . . . . . . . $ 42,287 $ 41,891 $ 42,287 $ 41,891
Additional paid-in capital:
Balance at beginning and end of period. . . . . 13,593,206 13,514,422 13,593,206 13,514,422
Retained earnings: . . . . . . . . . . . . . . . .
Balance at beginning of period. . . . . . . . . (17,427,247) (4,756,594) (15,951,512) (3,248,575)
Net income (loss) . . . . . . . . . . . . . . . (2,830,754) (3,207,692) (4,306,489) (4,715,711)
------------ ----------- ------------- --------------
(20,258,001) (7,964,286) (20,258,001) (7,964,286)
------------ ----------- ------------- --------------
Total stockholders' equity (deficit) . . . . . . . $(6,622,508) $5,592,027 $(6,622,508) $5,592,027
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . $(2,830,754) $(3,207,692) $(4,306,489) $(4,715,711)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:.
Provision for credit losses . . . . . . . 725,600 2,793,321 725,600 3,168,321
Net finance receivable charge-offs
against allowance. . . . . . . . . . . (691,185) (2,887,052) (2,427,980) (4,917,616)
Decrease in: . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . 55,716 80,438 110,313 151,574
Excess servicing receivable. . . . . . -- 177,574 -- 380,255
Repossessed or titled assets . . . . . 340,233 903,764 1,017,039 2,240,859
Other assets . . . . . . . . . . . . . 672,753 384,451 88,609 16,858
Income tax receivable. . . . . . . . . 25,007 3,406,729 491,695 4,266,729
Increase (decrease) in: . . . . . . . . .
Accrued interest . . . . . . . . . . . 315,051 250,180 334,448 34,458
Accounts payable and accrued
liabilities . . . . . . . . . . . . 331,551 (415,164) 308,255 201,377
Dealer reserves. . . . . . . . . . . . -- (3,091) -- (13,193)
Nonrefundable acquisition discount. . . . (32,232) (1,943,844) (1,081,091) (646,228)
------------ ------------- ------------- --------------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . . (1,088,260) (460,386) (4,739,601) 167,683
------------ ------------- ------------- --------------
Cash flows from investing activities:. . . . . . .
Proceeds from sale of investments . . . . . . . (3,000,000) (7,863) (2,447,479) (212)
Proceeds from bulk sale of vehicle retail
installment notes. . . . . . . . . . . . . . 163,463 30,750,043 14,516,615 30,750,043
Principal collected on finance receivables,
owned. . . . . . . . . . . . . . . . . . . . 894,200 3,786,113 3,120,687 9,949,907
Principal new originations and repurchases
of finance receivables . . . . . . . . . . . (971,610) (12,855,876) (1,139,310) (31,364,741)
Principal write-off on finance receivables,
owned. . . . . . . . . . . . . . . . . . . . 1,844,552 1,238,211 4,130,709 5,575,057
Finance receivables, Installment Contract
sales. . . . . . . . . . . . . . . . . . . . -- (30,750,043) -- (30,750,043)
Principal collected (net of write-offs),
Installment Contract sales. . . . . . . . . . 3,608,672 5,470,267 7,544,835 5,470,267
------------ ------------- ------------- --------------
Net cash provided by (used in) investing
activities. . . . . . . . . . . . . . . . . . 2,539,277 (2,369,148) 25,726,057 (10,369,722)
------------ ------------- ------------- --------------
Cash flows from financing activities:. . . . . . .
Proceeds from Installment Contract sales. . . . -- 30,750,043 -- 30,750,043
Repayments of borrowings, Installment Contract
sales. . . . . . . . . . . . . . . . . . . . (3,672,148) (5,319,502) (7,702,748) (5,319,502)
Proceeds from draws on bank line of credit
agreements . . . . . . . . . . . . . . . . . -- 29,592,066 -- 39,229,348
Repayments of borrowings under bank line of
credit agreements. . . . . . . . . . . . . . -- (51,092,066) (14,997,499) (51,092,066)
Debt to affiliate . . . . . . . . . . . . . . . -- (140,764) (36,612) (916,677)
Proceeds from issuance of other debt. . . . . . -- 7,714 -- 50,768
Repayment of other debt . . . . . . . . . . . . (23,409) (4,217) -- (396,760)
Debt issuance costs . . . . . . . . . . . . . . 141,396 73,383 290,831 284,175
------------ ------------- ------------- --------------
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . . (3,554,161) 3,866,657 (22,446,028) 12,589,329
------------ ------------- ------------- --------------
Cash, net change . . . . . . . . . . . . . . . . . (2,103,144) 1,037,123 (1,459,572) 2,387,290
Cash at beginning of period. . . . . . . . . . . . 2,452,820 2,621,761 1,809,248 1,271,594
------------ ------------- ------------- --------------
Cash at end of period. . . . . . . . . . . . . . . $349,676 $3,658,884 $349,676 $3,658,884
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Supplemental cash flow disclosures - cash paid
during the period for:
Interest . . . . . . . . . . . . . . . . . . . $141,796 $1,094,431 $997,597 $2,760,479
Income taxes and Illinois replacement tax. . . $ -- $ 15 $ 595 $ 1,925
</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 1997 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 FASB 125. 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.
4. The Company has restated the financial statements for the three and six
months ended June 30, 1997 to restate transactions recorded in prior periods
as gain on sale in order to reflect such transactions as financing
transactions pursuant to the provisions of FASB 125. Such restatement
affects the accounting treatment of Installment Contract (as defined below)
sales to General Electric Capital Corporation ("GECC") pursuant to the Asset
Purchase Agreement dated as of June 25, 1996, as amended, between the Company
and GECC (including the related Servicing Agreement, the "GECC Agreements")
(the "1997 GECC Transactions") that occurred during the second and third
quarters of 1997. The restatement resulted in the following increases
(decreases) for the three and six months ended June 30, 1997:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1997 June 30, 1997
------------------- ----------------
<S> <C> <C>
Gain on securitization . . . . . . . . . . . . $(2,621,232) $(2,621,232)
Interest income, Installment Contract sales. . 1,046,283 1,046,283
Interest expense, Installment Contract sales . 350,441 350,441
Provision for credit losses, Installment
Contract sales . . . . . . . . . . . . . . . 896,020 896,020
Service fee income . . . . . . . . . . . . . . (63,325) (63,325)
Net income . . . . . . . . . . . . . . . . . . (2,758,085) (2,758,085)
Retained earnings. . . . . . . . . . . . . . . (2,758,085) (2,758,085)
Net income per share . . . . . . . . . . . . . $ (0.66) $ (0.66)
</TABLE>
5. In February 1997, FASB Statement No. 128, "Earnings Per Share" ("FASB
128"), was issued. FASB 128 superseded 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
7
<PAGE>
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
replaced 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
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 condition or results
of operations.
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.
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS 131 requires disclosures for
each segment that are similar to those required under current standards with
the addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. SFAS 131 is effective for fiscal years beginning
after December 15, 1997 with earlier application permitted.
In management's opinion, SFAS Nos. 130 and 131, did not have a material
effect of 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, ACTIONS BY CREDITORS OR OTHER THIRD PARTIES, THE RESOLUTION OF
LEGAL PROCEEDINGS IN WHICH THE COMPANY IS (OR MAY BECOME) INVOLVED, 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
8
<PAGE>
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As more fully described in Note 4 to the Financial Statements, financial
information in this report as of, and for the three and six months ended, June
30, 1997 has been restated.
The Company experienced a significant deterioration in its financial
condition primarily due to significant operating losses during the first six
months of 1998, and in prior years, that resulted from adverse changes in the
sub-prime automobile finance industry and a significant deterioration in the
quality of the Company's assets. The Company has been unable to maintain
adequate levels of income and net worth to satisfy the requirements of the
GECC Agreements (as defined below) and the Indenture dated as of April 15,
1995, under a supplement to which $17 million of its outstanding subordinated
notes were issued (the "Indenture") and, as of June 30, 1998 was in default
under the GECC Agreements and the Indenture. At June 30, 1998, the Company's
funding was effectively limited to its internally generated cash. The
Company, among other actions, has restructured operations to reduce overhead
and suspended the acquisition of Installment Contracts. As previously
announced, the Company has been exploring strategic alternatives and is
presently engaged in an orderly liquidation for the benefit of interested
stakeholders that is expected to be completed during the second or third
quarter of 1999. SEE "--Recent Developments--Sale of Company Assets."
The Company is a specialized financial services company currently
engaged primarily in 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 services direct
consumer loans and finance leases and 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 a regional office in
Tampa, Florida.
The following is management's discussion and analysis of the financial
condition of the Company at June 30, 1998 (unaudited) as compared to June 30,
1997 (unaudited) and December 31, 1997, and the results of operations for the
three and six months ended June 30, 1998 and 1997 (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 and six months ended June 30, 1998 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.
9
<PAGE>
RECENT DEVELOPMENTS
SALE OF COMPANY ASSETS
The Company has entered into a letter of intent (the "Letter of Intent") with
Eagle Acquisition Services LLC ("Acquisition LLC") pursuant to which a
subsidiary of Acquisition LLC ("New Eagle") has agreed, subject to certain
conditions, to acquire certain assets from, and assume certain liabilities
of, the Company. New Eagle has agreed to acquire all of the assets of the
Company except for cash, marketable securities, tax credits and NOL
carryforwards, Company-owned finance receivables (including those that have
been charged off) and repossessed vehicles. As part of the transaction and
subject to the concurrence of certain third parties, the Company and New
Eagle will enter into an arrangement whereby New Eagle will service the
Company's finance receivables as well as assume certain servicing obligations
to third parties including GECC. The sub-servicing arrangement is primarily
intended to allow the stakeholders to enjoy the value of the GECC servicing
relationship and to ensure that the Company's obligations under the GECC
Agreements are performed.
The transaction with New Eagle is contingent on the completion of due
diligence and a financial review by New Eagle, the execution of a definitive
purchase agreement and ancillary documents, and the raising of equity capital
by Acquisition LLC and/or New Eagle. The parties presently believe that the
transaction will be completed during late 1998. Persons that are presently
affiliated with the Company (including certain executive officers and
directors of the Company and their respective relatives and affiliated
companies) are expected to be investors in, and affiliated with,
Acquisition LLC and New Eagle.
WAIVER FROM GECC
The Company has received a waiver from GECC with respect to all current
and past defaults (as of the date of such waiver) under the GECC Agreements.
Subject to the compliance with certain obligations including those set forth
below, the waiver is effective through November 15, 1998.
In connection with the waiver granted by GECC, (i) Eagle acknowledged the
right of GECC to terminate the servicing agreement, (ii) certain financial and
performance covenants were modified for the period ending November 15, 1998,
(iii) Eagle agreed to additional reporting obligations, (iv) the level and
structures of reserve accounts established under the GECC Agreements were
modified, (v) GECC agreed to pay to the Company under certain circumstances, a
one-time reserve refund fee in the event the servicing agreement is terminated
by GECC prior to January 14, 1999, (vi) Eagle's repurchase right was revised to
permit it to repurchase all contracts serviced pursuant to the GECC Agreements
when the principal balance thereon is no more than $1 million, and (vii) Eagle
agreed to waive and release GECC from any and all claims that Eagle may have
against GECC arising on or before August 3, 1998 with respect to the GECC
Agreements.
DEFAULT ON SUBORDINATED DEBT
The Company has suspended payments under its outstanding subordinated debt.
Subordinated debt primarily consists of the Rising Interest Subordinated
Redeemable Securities due 2005 (the "Notes"). At August 1, 1998, the Company
had outstanding approximately $17.6 million of subordinated debt, including
$17.0 million of Notes. Scheduled monthly interest on the subordinated debt
equals approximately $150,000, and the amount of interest due and owing as of
the date of filing of this report is approximately $620,000, inclusive of
penalty interest. Scheduled monthly interest has been accrued although
unpaid. The amount of such accrual approximated $464,000 for the three months
ended June 30, 1998. LaSalle National
10
<PAGE>
Bank, as Trustee, has notified the Company that a number of Event of Defaults
have occurred under the Indenture between the Company and the Trustee.
RESOLUTION OF LITIGATION
The Company has settled or otherwise resolved all outstanding non-ordinary
course litigation with the exception of certain ongoing litigation in the State
of Texas. See "Other Information--Legal Proceedings."
GENERAL
Installment Contracts represented 99% of the Company's net finance
receivables at June 30, 1998. The Company's outstanding balance of owned or
serviced (i.e., managed) Installment Contracts declined to $52.3 million as
June 20, 1998 from $99.0 million at December 31, 1997 and from $135.3 million
at June 30, 1997.
The Company periodically sells net Installment Contracts to GECC, with
servicing retained. The Company accounted for Installment Contract sales to
GECC during 1997 ("1997 GECC Transactions") as financing transactions
pursuant to the provisions of SFAS 125, which is effective for loan sale
transactions occurring after December 31, 1996. Prior to 1997, the Company
accounted for Installment Contract sales with GECC as off-balance sheet sales
transactions pursuant to the provisions of Statement of Accounting Standards
No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse"
("SFAS 77"), thereby removing the related receivables from the balance sheet
while recognizing any subsequent servicing income as received.
Interest and servicing income on managed Installment Contracts accounts
for most of the Company's revenue. The Company did not originate Installment
Contracts during the six months ended June 30, 1998, as compared to the
origination of $31.0 million of Installment Contracts during the six months
ended June 30, 1997. The Company began reducing its purchases of Installment
Contracts during the fourth quarter of 1995.
As reflected in the following table, the Company did not originate any
finance receivables during the six months ended June 30, 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------------- ------------------------------------------
1998 1997 1998 1997
------------------- -------------------- ------------------- ---------------------
% 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). . . . . . $ -- 0% $13,817 100% $-- 0% $31,014 100%
Net Other
Loans originated (1). . -- 0% 57 0% -- 0% 116 0%
---------- ------- ---------- ------- -------- ------- --------- --------
Total. . . . . . . . . . . $ -- 0% $13,874 100% $-- 0% $31,130 100%
---------- ------- ---------- ------- -------- ------- --------- --------
---------- ------- ---------- ------- -------- ------- --------- --------
</TABLE>
___________________
(1) Net of unearned finance charges
During the six months ended June 30, 1998, the Company sold net retail
installment contracts ("Installment Contracts") to competitors for $13.0 million
in cash, net of non-refundable acquisition
11
<PAGE>
discount and allowances for credit losses. Most proceeds were applied to pay
off all outstanding amounts under the Company's Revolving Credit Agreement.
As a result, the Revolving Credit Agreement was terminated on March 26, 1998.
FINANCIAL OVERVIEW
During 1997 and the first half of 1998, several sub-prime automobile
finance companies, including the Company, experienced poor loan performance,
higher delinquency rates and increased credit losses on their owned or serviced
receivables. In addition, during the past several months, a number of finance
companies have made strategic decisions to exit the industry. This has
contributed to a significant reduction in traditional and non-traditional
lending to the industry and a material decline in public market investment into
the sub-prime automobile industry through the sale of equity securities,
subordinated debt instruments and securitized notes.
The following table sets forth certain data relating to the Company's net
income for the three and six months ended June 30, 1998 and 1997 and for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, FOR THE YEAR ENDED
1998 1997 1998 1997 DECEMBER 31, 1997
---------- ------- ---------- ----------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average net finance receivables
Total owned, net. . . . . . . . . . . . . . . . . . $ 8,717 $ 49,121 $ 14,435 $ 52,586 $ 47,196
Serviced:
GECC, Installment Contract
sales (1997) (1). . . . . . . . . . . . . . . 20,619 21,910 22,688 21,910 18,651
GECC, Installment Contract
sales (1966 and prior) (1). . . . . . . . . . 19,327 49,998 22,328 55,534 46,095
Securitization . . . . . . . . . . . . . . . . . 10,287 23,351 11,695 25,582 21,720
---------- ------- ---------- ----------- ----------------
Total serviced, net . . . . . . . . . . . . . . . . 50,233 95,259 56,711 103,026 86,466
---------- ------- ---------- ----------- ----------------
Total managed, net. . . . . . . . . . . . . . . . . 58,950 144,380 71,146 155,612 133,662
Average interest bearing
liabilities (senior and
subordinated debt and related to
owned receivables) . . . . . . . . . . . . . . . 17,569 45,456 21,867 49,114 45,321
Total interest and fee income
(owned) . . . . . . . . . . . . . . . . . . . . . . 409 3,178 1,620 6,606 11,752
Total interest expense (owned) . . . . . . . . . . . . 464 1,310 1,339 2,760 5,476
---------- ------- ---------- ----------- ----------------
Net interest income (loss) before
provision for credit losses
(owned). . . . . . . . . . . . . . . . . . . . . $ (55) $ 1,868 $ 281 $ 3,846 $ 6,276
---------- ------- ---------- ----------- ----------------
Average interest bearing liabilities
(Installment Contract sales). . . . . . . . . . . . 17,893 19,524 19,752 19,524 23,687
Total interest and fee income
(Installment Contract sales). . . . . . . . . . . . 1,163 1,046 2,615 1,046 4,723
Total interest expense (Installment
Contract sales) . . . . . . . . . . . . . . . . . . 436 350 953 350 1,597
---------- ------- ---------- ----------- ----------------
Net interest income before
provision for credit losses
(Installment Contract sales) . . . . . . . . . . $ 727 $ 696 $ 1,662 $ 696 $ 3,125
---------- ------- ---------- ----------- ----------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Average interest rate earned on
net finance receivables (owned) . . . . . . . . . . 18.77% 25.88% 22.44% 25.12% 24.90%
Average interest rate on interest
bearing liabilities (owned). . . . . . . . . . . . 10.56% 11.53% 12.25% 11.24% 12.08%
---------- ------- ---------- ----------- ------------
Net interest spread (owned). . . . . . . . . . . . . . 8.20% 14.35% 10.20% 13.88% 12.82%
---------- ------- ---------- ----------- ------------
Net interest margin (owned) (2). . . . . . . . . . . . (2.53)% 15.21% 3.89% 14.63% 13.30%
---------- ------- ---------- ----------- ------------
Average interest rate earned on net
owned finance receivables
(Installment Contract sales) . . . . . . . . . . 22.56% 19.10% 23.06% 19.10% 25.32%
Average interest rate on interest
bearing liabilities (Installment
Contract sales). . . . . . . . . . . . . . . . . 9.74% 7.18% 9.65% 7.18% 6.74%
---------- ------- ---------- ----------- ------------
Net interest spread (Installment
Contract sales). . . . . . . . . . . . . . . . . 12.82% 11.92% 13.40% 11.92% 18.58%
---------- ------- ---------- ----------- ------------
Net interest margin (Installment
Contract sales) (2). . . . . . . . . . . . . . . 14.11% 12.70% 14.65% 12.70% 16.76%
---------- ------- ---------- ----------- ------------
</TABLE>
- ---------------------------------
(1) Prior to January 1, 1997, loan sales pursuant to the GECC Agreements were
accounted for as off-balance sheet sales transactions pursuant to SFAS No.
77 "Accounting for Sales with Recourse" with servicing and bonus servicing
fee income recognized or earned. Effective January 1, 1997, sales pursuant
to the GECC Agreements were accounted for as financing transactions
pursuant to FASB 125 with interest income recognized on the loan balances
under the interest method; interest expense recognized at GECC's fixed
spread and charge-off and related provisions for loan losses reflected as
transactions impacting the allowance for loan losses, Installment Contract
sales.
(2) 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 revenue is the servicing
income earned by the Company on Installment Contracts sold or securitized.
Servicing income is derived from base servicing fees for loan administration and
collection services and bonus or excess servicing fees paid based on the
performance of the Installment Contracts sold or securitized. The increase in
servicing income was due to higher levels of bonus servicing fees earned in 1998
as a percentage of average serviced receivables and the absence of excess
servicing amortization expense. The following table sets forth certain data
relating to servicing fees for the periods shown:
13
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED
1998 1997 1998 1997 DECEMBER 31, 1997
---------------------------------- ----------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
Base Servicing fees(1) . . . . . . $231,451 $ 566,746 $ 570,759 $1,252,785 $2,108,397
Bonus/excess servicing fees . . . . 691,824 1,333,271 1,178,228 1,630,367 2,251,853
Amortization of excess servicing
rights. . . . . . . . . . . . . . -- (177,575) -- (380,255) (1,050,590)
Adjustment to excess servicing
rights. . . . . . . . . . . . . . -- -- -- -- (1,681,317)
--------- ------------ ------------ --------------- ------------
Net servicing fees. . . . . . . . . $923,275 $1,722,442 $1,748,987 $2,502,897 $1,628,343
--------- ------------ ------------ --------------- ------------
--------- ------------ ------------ --------------- ------------
</TABLE>
(1) Servicing Fees in respect of pre-1997 GECC Transactions are recorded as
income when received (I.E., on a cash-flow basis). A Portion of the
bonus/excess servicing fees reflects cash flows from pre-1997 GECC
Transactions. GECC Transactions occurring after January 1, 1997 were
accounted for as financing transactions and have no corresponding servicing
income.
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."
For the six months ended June 30, 1998, the average interest rate earned on
net finance receivables (owned) decreased by 2.68 percentage points over
comparable 1997 periods. The effective cost of borrowings increased 8.99% to
12.25% for the six months ended June 30, 1998 compared to 11.24% in the 1997
period.
Another significant component of the Company's financial performance 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 is attempting to reduce the number of its employees and operating
expenses.
FINANCIAL CONDITION
Total assets decreased $26.4 million (48.2%) to $28.4 million at June 30,
1998 from $54.8 million at December 31, 1997 primarily due to a decrease in net
finance receivables (net of dealer reserves, nonrefundable acquisition discount
and allowance for credit losses) to $6.4 million at June 30, 1998 from $24.3
million at December 31, 1997. This decline in assets and finance receivables
is, in part, attributable to the sale of Installment Contracts in order to
extinguish indebtedness due under the Revolving Credit Agreement. The net
amount of owned or serviced Installment Contracts decreased to $52.3 million at
June 30, 1998 from $99.0 million at December 31, 1997. The net amount of owned
or serviced Installment Contracts was $135.3 million at June 30, 1997.
Total liabilities decreased $22.1 million (38.7%) to $35.0 million at June
30, 1998 from $57.1 million at December 31, 1997, primarily due to a decrease in
senior and subordinated debt to $17.5 million at June 30, 1998 from $32.6
million at December 31, 1997. The decrease in senior and subordinated debt was
primarily the result of the Company extinguishing all borrowings under the
14
<PAGE>
Revolving Credit Agreement (as a result of Installment Contract sales) from a
$15.0 million balance at December 31, 1997. SEE "--Liquidity and Capital
Resources." Total liabilities and stockholders' equity (deficit) decreased
$26.4 million (48.5%) to $28.4 million at June 30, 1998 from $54.8 million at
December 31, 1997.
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, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Automobile portfolio interest and fee
income, owned receivables. . . . . . . . . $ 355 $ 3,110 $ 1,507 $ 6,460
------- ------- ------- -------
Total interest and fee income, owned
receivables. . . . . . . . . . . . . . . . $ 409 $ 3,178 $ 1,620 $ 6,606
Total interest expense, senior and
subordinated debt. . . . . . . . . . . . . 464 1,310 1,339 2,760
------- ------- ------- -------
Net interest income (loss) before provision for
credit losses. . . . . . . . . . . . . . . (55) 1,868 281 3,846
Provision for credit losses, owned portfolio 726 2,793 726 3,168
------- ------- ------- -------
Net interest income (loss) after provision for
credit losses, owned receivables . . . . . (781) (925) (445) 678
------- ------- ------- -------
Interest income, Installment Contract sales. 1,163 1,046 2,615 1,046
Interest expense, Installment Contract sales 436 350 953 350
Provision for credit losses, Installment
Contract sales . . . . . . . . . . . . . . 441 896 1,160 896
------- ------- ------- -------
Net interest income (loss) after provision for
credit losses, Installment Contract sales (1) 286 (200) 502 (200)
------- ------- ------- -------
Other Income:
Servicing income (from Installment
Contracts). . . . . . . . . . . . . . 923 1,722 1,749 2,503
Insurance products commissions . . . . . . -- 3 -- 5
------- ------- ------- -------
Total other income . . . . . . . . . . . . . 923 1,725 1,749 2,508
------- ------- ------- -------
Salaries and related costs . . . . . . . . . 1,057 1,951 2,310 3,986
Collection expenses. . . . . . . . . . . . . 335 831 801 831
Other operating expenses . . . . . . . . . . 1,867 1,026 3,001 2,885
------- ------- ------- -------
Total operating expenses . . . . . . . . . . 3,259 3,808 6,112 7,702
------- ------- ------- -------
Loss before taxes. . . . . . . . . . . . . . (2,831) (3,208) (4,306) (4,716)
Taxes . . . . . . . . . . . . . . . . . . . -- -- -- --
------- ------- ------- -------
Net loss . . . . . . . . . . . . . . . . . . $(2,831) $(3,208) $(4,306) $(4,716)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(1) 1997 data available only for the three months ended June 30, 1997,
annualized quarterly.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30,
1997. The Company experienced a net loss of $4.3 million for the six months
ended June 30, 1998 reflecting a $410,000
15
<PAGE>
improvement over the $4.7 million loss for the comparable 1997
period. Comparisons between the 1998 and 1997 periods are heavily influenced
by the Company's reduced operating scale in 1998 as compared to 1997.
Interest and fee income from owned receivables decreased 75.5% to $1.6
million from $6.6 million as a result of a 72.6% reduction in average net
finance receivables owned. Total interest expense decreased 51.5% to $1.3
million for the six months ended June 30, 1998 from $2.8 million for the six
months ended June 30, 1997. The reduction resulted from a decrease in the
amount of average debt outstanding relating to owned receivables. Total debt
outstanding at June 30, 1998 decreased to $17.5 million from total debt
outstanding of $37.7 million at June 30, 1997. This decrease is a result of
the retirement of senior secured indebtedness during 1998. The average debt
outstanding for the six months ended June 30, 1998 decreased to $21.9 million
from $49.1 million for the six months ended June 30, 1997. The weighted
average interest rate paid for borrowed funds increased to 12.25% for the six
months ended June 30, 1998 from 11.24% for the six months ended June 30,
1997.
Provision for credit losses decreased to $726,000 for the six months
ended June 30, 1998 compared to a provision of $3.2 million for the six
months ended June 30, 1997. 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."
The Company's presentation for GECC Installment Contract sales changed
as a result of the Company's adoption of FASB 125, effective January 1, 1997.
The Company reports 1997 loan sales as financing transactions, while loan
sales occurring in 1996 and prior periods are reported as receivables sold.
Interest income in 1998 from Installment Contract sales increased $1.6
million to $2.6 million for the six months ended June 30, 1998 from the $1.0
million earned during the comparable 1997 period. Interest income in 1998
from Installment Contract sales was reduced by debt related interest expense
of $953,000 for the six months ended June 30, 1998 compared to $350,000 in
the comparable 1997 period. For the six months ended June 30, 1998, the
provision for credit losses on Installment Contract sales increased $264,000
to $1.2 million from $896,000 in the comparable 1997 period. Net interest
income on Installment Contract sales, after provision for credit losses, for
the six months ended June 30, 1998 was $502,000 compared to a $200,000 loss
in the comparable 1997 period. For all periods prior to the January 1, 1997
effective date of FASB 125, GECC Installment Contract sales revenue was
included in service fee income.
Other income, consisting primarily of income from servicing fees and net
interest income on Installment Contract sales, decreased to $1.7 million for
the six months ended June 30, 1998 from $2.5 million for the six months ended
June 30, 1997, primarily as a result of lower outstanding receivables
serviced for third parties.
Total operating expenses decreased 20.8% to $6.1 million for the six
months ended June 30, 1998 compared to $7.7 million for the six months ended
June 30, 1997. The number of full time equivalent employees decreased 54.2%
at June 30, 1998 when compared to June 30, 1997. The full financial impact
of staffing reductions will be reflected in future periods. The Company's
other operating expenses increased 2.4% to $3.8 million for the six months
ended June 30, 1998 compared to $3.7 million the six months ended June 30,
1997. Other operating expenses for the six months ended June 30, 1998 were
impacted by professional fees and costs associated with ongoing litigation.
No income tax expense was recorded for the six months ended June 30,
1998 or for the six months ended June 30, 1997.
16
<PAGE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED
JUNE 30, 1997. The Company experienced a net loss of $2.8 million for the
three months ended June 30, 1998 reflecting a $377,000 improvement over
the $3.2 million loss for the comparable 1997 period. Comparisons between
the 1998 and 1997 periods are heavily influenced by the Company's reduced
operating scale in 1998 as compared to 1997.
Interest and fee income from owned receivables decreased 87.1% to
$409,000 from $3.2 million as a result of an 82.3% reduction in average net
finance receivables owned. Total interest expense decreased 64.6% to
$464,000 for the three months ended June 30, 1998 from $1.3 million for the
three months ended June 30, 1997. The reduction resulted from a decrease in
the amount of average debt outstanding relating to owned receivables. The
total subordinated debt outstanding at June 30, 1998 decreased to $17.5
million from the total senior and subordinated debt outstanding of $37.7
million at June 30, 1997. The average debt outstanding for the three months
ended June 30, 1998 decreased to $17.6 million from $45.5 million for the
three months ended June 30, 1997. The weighted average interest rate paid
for borrowed funds decreased to 10.56% for the three months ended June 30,
1998 from 11.53% for the three months ended June 30, 1997.
Provision for credit losses decreased to $726,000 for the three months
ended June 30, 1998 compared to a provision of $2.8 million for the three
months ended June 30, 1997. 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."
The Company's presentation for GECC Installment Contract sales changed
as a result of the Company's adoption of FASB 125, effective January 1, 1997.
The Company reports 1997 loan sales as financing transactions, while loan
sales occurring in 1996 and prior periods are reported as receivables sold.
Interest income in 1998 from Installment Contract sales increased $117,000 to
$1.2 million for the three months ended June 30, 1998 from the $1.0 million
earned during the comparable 1997 period. Interest income in 1998 from
Installment Contract sales was reduced by debt related interest expense of
$436,000 for the three months ended June 30, 1998 compared to $350,000 in the
comparable 1997 period. For the three months ended June 30, 1998, the
provision for credit losses on Installment Contract sales decreased $455,000
to $441,000 from $896,000 in the comparable 1997 period. Net interest income
on Installment Contract sales, after provision for credit losses, for the
three months ended June 30, 1998 was $286,000 compared to a $200,000 loss in
the comparable 1997 period. For all periods prior to the January 1, 1997
effective date of FASB 125, GECC Installment Contract sales revenue was
included in service fee income.
Other income, consisting primarily of income from servicing fees and net
interest income on Installment Contract sales, decreased $802,000 for the
three months ended June 30, 1998 from $1.7 million to $923,000 million for
the three months ended June 30, 1997 primarily as a result of lower
Securitization and GECC (1996 and prior) outstandings.
Total operating expenses decreased 14.4% to $3.3 million for the three
months ended June 30, 1998 compared to $3.8 million for the three months
ended June 30, 1997. The Company's other operating expenses increased 82.0%
to $1.9 million for the three months ended June 30, 1998 compared to $1.0
million the three months ended June 30, 1997. Other operating expenses for
the three months ended June 30, 1998 were impacted by professional fees and
costs associated with ongoing litigation.
No income tax expense was recorded for the three months ended June 30, 1998
or for the three months ended June 30, 1997.
17
<PAGE>
CREDIT LOSS EXPERIENCE
The Company's credit loss reserves are comprised of three components:
nonrefundable acquisition discount, allowance for credit losses and
refundable dealer reserves. The total of allowance for credit losses,
nonrefundable acquisition discount and dealer reserves equaled 17.7% and
12.8% of net owned finance receivables at June 30, 1998 and 1997,
respectively. At June 30, 1998, the Company maintained credit loss reserves
equal to 13.7% for potential losses on 1997 GECC Installment Contract sale
transactions.
NONREFUNDABLE ACQUISITION DISCOUNT AND DEALER RESERVES. In an effort 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 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 on its owned
receivables for the three and six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period. . . . . $ 131 $3,017 $1,180 $1,730
Additions applicable to new volume. . . -- 1,432 -- 3,102
Additions/Reductions applicable to
accounts sold . . . . . . . . . . . . 5 (3,104) (1,232) (3,104)
Gross charge-off. . . . . . . . . . . . (1,141) (1,002) (1,682) (3,293)
Recoveries. . . . . . . . . . . . . . . 1,104 727 1,833 2,635
------- ------- ------- -------
Balance at end of period. . . . . . . . $ 99 $1,070 $ 99 $1,070
------- ------- ------- -------
------- ------- ------- -------
Balance at end of period as a percentage
of net finance receivables (owned) at
end of period . . . . . . . . . . . . 1.26% 2.69% 1.26% 2.69%
</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, probable loan impairment, 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 Company's charge-offs through nonrefundable
18
<PAGE>
acquisition discount and allowance for credit losses, as a percentage of average
owned finance receivables (net) annualized, was $2.3 million, or 31.6%, during
the six months ended June 30, 1998, and $5.6 million, or 21.2%, during the
corresponding period in 1997. The annualized percentage for 1998 losses is
distorted as a result of Installment Contract sale transactions undertaken in
order to retire senior secured indebtedness and the repurchase of bankrupt
accounts previously sold to GECC. Installment Contract sales and replacements
generally exclude delinquent accounts, thereby leaving a disproportionate number
of delinquent accounts in the remaining owned receivables pool.
The following table reflects the Company's allowance and provision for
credit losses on its owned portfolio (excluding Installment Contract sales) for
the three and six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period. . . . . $1,250 $4,390 $2,986 $6,046
Provision charged to expense. . . . . . 726 2,793 726 3,169
Gross charge-off. . . . . . . . . . . . (700) (2,902) (2,449) (4,959)
Recoveries. . . . . . . . . . . . . . . 8 15 21 40
------ ------ ------ ------
Balance at end of period. . . . . . . . $1,284 $4,296 $1,284 $4,296
------ ------ ------ ------
------ ------ ------ ------
Allowance as a percentage of net
finance receivables (owned) at end of
period. . . . . . . . . . . . . . . . 16.41% 10.81% 16.41% 10.81%
</TABLE>
Changes in the allowance for credit losses, in the Company's Installment
Contract sales portfolio (1997 GECC Transactions), for the three and six
months ended June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period. . . . . $ 2,890 $ -- $ 3,353 $ --
Original allowance for credit losses. -- 3,104 -- 3,104
Additional funding to allowance for
credit losses . . . . . . . . . . . 440 896 1,160 896
Gross losses run thru allowance . . . (1,141) (671) (2,849) (671)
Recoveries (less expenses & other
charges). . . . . . . . . . . . . . 360 45 885 45
------- ------- ------- -------
Balance at end of period. . . . . . . . $ 2,549 $ 3,374 $ 2,549 $ 3,374
------- ------- ------- -------
------- ------- ------- -------
Allowance as a percentage of net
Installment Contract sales at end of
period. . . . . . . . . . . . . . . 13.74% 11.71% 13.74% 11.71%
</TABLE>
Total charge-off as a percentage of average net Installment Contract
sales finance receivables (annualized) was 15.16% and 17.32% for the three
and six months ended June 30, 1998.
19
<PAGE>
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 $5.4 million, $14.0 million and $11.8 million, representing
10.5%, 14.2% and 8.7% of net managed finance receivables, as of June 30,
1998, December 31, 1997, and June 30, 1997, respectively. Managed finance
receivables that were 60 days and greater contractually delinquent (net of
unearned finance charges) were $1.4 million, $4.0 million and $3.1 million,
representing 2.7%, 4.1% and 2.3% of net managed finance receivables as of
June 30, 1998, December 31, 1997, and June 30, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through cash flow from operations
and from the periodic sales of finance receivables.
Net cash provided by (used in) operating activities totaled ($1.1)
million and ($460,000) during the three months ended June 30, 1998 and 1997,
respectively. For the six months ended June 30, 1998 and 1997, net cash
provided by (used in) operating activities totaled ($4.7) million and
$168,000 respectively. Net cash used in operating activities for the three
and six months ended June 30, 1998 and 1997 was affected by net operating
losses, decreased income tax receivables, decreased repossessed or titled
assets and the net change in the allowance for credit losses. For the six
months ended June 30, 1998, a significant decline in the nonrefundable
acquisition discount occurred.
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, 1998 and 1997 was $2.5 million and ($2.4)
million, respectively. For the six months ended June 30, 1998 and 1997, net
cash provided by (used in) investing activities was $25.7 million and ($10.4)
million, respectively. During the six months ended June 30, 1998, cash
provided from the sale of Installment Contracts was $14.5 million.
Net cash provided by (used in) financing activities for the three months
ended June 30, 1998 and the comparable 1997 period primarily reflects
borrowings and repayments under the Revolving Credit Agreement. Net cash
provided by (used in) financing activities for the three months ended June
30, 1998 was ($3.6) million and net cash provided by financing activities for
the three months ended June 30, 1997 was $3.9 million. Net cash provided by
financing activities for the six months ended June 30, 1998 and 1997 was
($22.4) million ($15.0 million of which was used to retire senior secured
indebtedness) and $12.6 million, respectively.
Although no assurances can be provided in this regard, the Company
intends to meet its short-term liquidity needs with cash flow from
operations. As evidenced by the Letter of Intent, the Company is undertaking
an orderly liquidation for the benefit of its interested stakeholders, which
the Company currently believes will be completed during 1999. Accordingly,
the Company presently expects to have limited long-term liquidity needs.
The Company must comply with customary financial and other covenants under
the Indenture. At June 30, 1998, the Company was in breach of the
20
<PAGE>
Indenture. The Company negotiated and received during August 1998, a waiver
with GECC with respect to certain breaches under the GECC Agreement. The
Company expects to remain in violation of the Indenture. No assurance can be
given that either or both of the Company's subordinated lenders (or trustee
under the Indenture) and GECC will not take adverse action. SEE "--Recent
Developments."
At June 30, 1998, the Company had total subordinated debt of $17.5
million as compared to total senior and subordinated debt of $32.6 million at
December 31, 1997 and $17.6 million at June 30, 1997. The Company has
suspended payments owing under all outstanding subordinated notes.
The following table presents the Company's debt instruments and the weighted
average interest rates on such instruments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE TWELVE MONTHS
1998 1997 ENDED DECEMBER 31, 1997
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SENIOR:
Revolving Credit Agreement . . . . . $ -- 0.00% $19,900 8.59% $14,997 12.83%
Loan from Commonly Controlled
Company . . . . . . . . . . . . . -- 0.00% 148 6.75% 37 6.75%
SUBORDINATED:
Notes payable . . . . . . . . . . . . 17,543 12.25% 17,632 12.18% 17,543 12.21%
------ ------- ------
Total debt . . . . . . . . . . . . . . $17,543 12.25% $37,680 11.24% $32,577 12.08%
------ ------- ------
------ ------- ------
The following table sets forth information with respect to maturities of
senior and subordinated debt at June 30, 1998:
LOANS FROM
COMMONLY
SENIOR BANK CONTROLLED SUBORDINATED
YEAR LINES OF CREDIT COMPANY NOTES PAYABLE TOTAL
- ---- --------------- ----------- ------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1998. . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0 $ 10 $ 10
1999. . . . . . . . . . . . . . . . . . . . . . . . . -- -- 813 813
2000. . . . . . . . . . . . . . . . . . . . . . . . . -- -- 809 809
2001. . . . . . . . . . . . . . . . . . . . . . . . . -- -- 875 875
2002. . . . . . . . . . . . . . . . . . . . . . . . . -- -- 812 812
Thereafter . . . . . . . . . . . . . . . . . . . . . -- -- 14,224 14,224
------- ------ ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0 $17,543 $17,543
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
The Company has purchased interest rate caps and interest rate collars
in an aggregate notional amount of $35 million. SEE "Quantitative and
Qualitative Disclosures About Market Risk." The interest rate cap purchased
by the Company in an aggregate notional amount of $15 million provides a
return to the Company if the three-month LIBOR rate exceeds 10.5%. The
interest rate cap expired in July 1998.
The interest rate collars, in an aggregate notional amount of $20
million, provides a return to the Company if 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
collar expires in September 2000.
21
<PAGE>
Total stockholders' equity (deficit) at June 30, 1998 was ($6.6) million as
compared to ($2.3) million at December 31, 1997 and $5.6 million at June 30,
1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has only limited involvement with derivative financial
instruments (consisting of interest rate caps, collars and floors ranging in
maturity from three to five years, and totaling $35 million in notional
principal amount) and does not use them for trading purposes. At June 30,
1998 and at December 31, 1997, the Company was a party to a $15 million
interest rate cap agreement which entitles the Company to receive payments
from a counterparty whenever, and based upon the amount by which, the
three-month LIBOR rate exceeds 10.5%. The interest rate cap expired in July
1998. At June 30, 1998 and December 31, 1997, the Company was a party to an
interest rate collar agreement of $20 million. This agreement entitles the
Company to receive payments from the counterparty whenever, and based upon
the amount by which, the three-month LIBOR rate exceeds 8%. The interest
rate collar agreement requires the Company to make payments to the
counterparty whenever, and based upon the amount by which, the three-month
LIBOR rate is less than 5%.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but it does not
expect any counterparties to fail to meet their obligations given their high
credit ratings. Premiums paid for interest rate caps and collars are
amortized into interest expense over the term of the instrument. Interest
expense will be reduced (increased) on a current basis if payments are
received (paid) under these instruments.
22
<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.
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. During July, 1998, a verbal agreement regarding
settlement was reached among the parties and the Company accrued its expected
settlement expense as of June 30, 1998.
2. 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 filed a motion for summary judgment which the Court fully granted
during July, 1998.
3. DRAKE AND MITCHELL V. EAGLE FINANCE CORP., is pending in the
Circuit Court of Cook County, Illinois, and is designated as Case No. 97 L
6521. The plaintiffs have filed a class action complaint alleging that the
Company has violated the Illinois Uniform Commercial Code and the Illinois
Sales Finance Agency Act arising out of the repossession of cars purchased by
the plaintiffs. The Company has responded to the written discovery initiated
by the plaintiffs and has filed its answer, affirmative defenses and
counterclaim to the plaintiffs' second amended complaint. In its
counterclaim, the Company asserts that it is entitled to a set-off due to the
plaintiffs' failures to comply with the terms of their respective retail
installment sales contracts. The plaintiffs have withdrawn their motion for
class certification without prejudice, and have represented that they would
be interested in discussing the settlement of the remaining individual
claims. The parties have agreed to settle the individual claims for a total
of $3,000.00. Settlement occurred in August, 1998.
4. CLEVELAND V. WALLACE AUTO SALES, INC., ET AL., was filed on
September 19, 1997, 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 contracts through which the plaintiffs
purchased a used automobile. The complaint is alleged as a class action, and
includes unnamed, and still unknown, directors
23
<PAGE>
and officers of the Company. The Company filed a Motion to Dismiss, and the
court has dismissed all counts and all defendants with prejudice. The
plaintiff's appealed the court's decision to the Seventh Circuit Court of
Appeals. Briefing of the appeal has been stayed pending the Seventh Circuit
Court's ruling in a similar case.
5. DELAUGHTER V. SOLARMAR SYSTEMS CORP., a class action complaint by
Robert DeLaughter and Mozell Engram, was filed on May 13, 1998, in the
Circuit Court of the 11th Judicial Circuit in Dade County, Florida and is
designated by case number 98-10887 CA 22. The class action complaint by
Robert DeLaughter and Mozell Engram names the Company and Solarmar Systems
Corp. as defendants. The putative class of plaintiffs are consumers who
entered into home improvement contracts with Solarmar, and, in connection
with those contracts, executed promissory notes and mortgages as payment and
collateral for the cost of the home improvements. The Company purchased the
notes and mortgages from Solarmar and subsequently re-sold them to Solarmar.
The complaint seeks, in count I, a declaratory judgment concerning the
validity of the notes and mortgages, and, in count II, a ruling ordering the
Company and Solarmar to issue satisfactions of the notes and mortgages. The
only monetary relief sought is statutory attorneys' fees in connection with
count II. The Company is incapable of satisfying the notes and mortgages due
to prior reassignment to Solarmar. The Company has moved for an order of
summary judgment on all asserted claims and the awarding of attorneys' fees.
6. TRINITY LITIGATION, the Company is presently a party to
approximately fifteen legal actions arising in connection with installment
contracts purchased from Trinity Acceptance Group, Inc. Counsel for the
plaintiffs in these actions has advised the Company that he represents more
than 100 other individuals for whom legal actions have not been filed. The
Company is presently attempting to reach a global settlement with the counsel
for the plaintiff. No assurances can be given that the Company will be
successful in settling these actions or that any settlement, if reached,
would not have an adverse material effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default under the terms of its subordinated
indebtedness. This is more fully disclosed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
24
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
10.1 Letter of Intent dated August 6, 1998 between
the Company and Eagle Acquisition Services L.L.C.
10.2 Waiver letter from General Electric Capital
Corporation, dated August 3, 1998.
11 Statement re computation of per share earnings
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K - The Company did not file any reports on
Form 8-K during the three months ended June 30, 1998
25
<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 20, 1998 /s/ 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 Letter of Intent dated August 6, 1998 between the Company and Eagle
Acquisition Services L.L.C.
10.2 Waiver letter from General Electric Capital Corporation, dated
August 3, 1998.
11 Statement re computation of per share earnings
27 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
EAGLE ACQUISITION SERVICES L.L.C.
152 West 57th Street
New York, New York 10019
Telephone: (212) 757-8966
Telecopier: (212) 757-8972
August 6, 1998
Board of Directors
Eagle Finance Corp.
1425 Tri-State Parkway, Suite 140
Gurnee, Illinois 60031
Gentlemen:
This letter sets forth the principal terms on which Eagle Acquisition
Services L.L.C. ("EASC"), through a newly-formed subsidiary of EASC ("New
Eagle"), would acquire certain of the assets, and assume certain of the
liabilities, of Eagle Finance Corp. (the "Company").
1.FORM OF TRANSACTION, CONSIDERATION AND OTHER TERMS.
(a) FORMATION OF TRANSACTION. Subject to the terms and conditions set
forth herein, EASC proposes to effect a transaction pursuant to which New Eagle
would purchase, free and clear of all liens, claims and other encumbrances of
any kind, the following assets owned by the Company (collectively, the
"Assets"):
(i) all furniture, fixtures, equipment, supplies and other
tangible personal property owned by the Company and used in
the operation of the Company's automobile finance business
(the "Business") and the right to receive all utility and
rent deposits related to the Office Leases (as such term is
defined below);
(ii) all books, records, customer lists and similar data used in
the Business (which books and records shall not include the
corporate books and records of the Company);
(iii) all leases (the "WPT Leases") between the Company and
Wonderlic Personal Test, Inc. ("WPT");
(iv) the rights under the agreement between WPT and the Company
relating to the Eagle Credit Index;
(v) the leases of the Company's offices in Gurnee, Illinois and
Tampa, Florida (the "Office Leases"); and
<PAGE>
(vi) all tradenames, copyrights and other intellectual property
rights of any kind owned by the Company and used in the
Business (some of which, at the option of New Eagle, may be
placed in a third party escrow).
In addition, the Company and EASC acknowledge the significant value of the
Company's rights under the servicing agreement (including the rights under
related asset purchase agreements) with General Electric Capital Corporation
(the "GECC Agreements"). The Company and EASC agree to take appropriate and
reasonable actions to preserve such value including either entering a
sub-servicing arrangement (as contemplated in the Servicing Agreement
referenced in subsection (e) below with, or assigning to, New Eagle the
Company's rights (subject to related obligations and together with the
off-balance sheet reserves associated therewith). Any such sub-servicing
arrangement or assignment shall provide that an agreed upon portion of any
amounts realized by New Eagle (as servicing fees or otherwise) on any such
reserves (referred to herein as the "GECC Reserve Participation") shall be
paid to the Company after receipt thereof by New Eagle during the 12 months
following the Closing and on an agreed upon accelerated basis for amounts due
after the June 30, 1999. In this regard, the parties anticipate that New
Eagle would provide to the Company a proposal relating to such accelerated
payment no later than March 31, 1999.
It is understood and agreed by the parties that the Assets shall not include
the Company's cash, marketable securities, tax credits, net operating loss
carryforward, Company-owned finance receivables, repossessed vehicles or
charged-off finance receivables.
(b) CONSIDERATION. In consideration for its acquisition of the
Assets, New Eagle agrees to assume certain specified liabilities as set forth
in more detail below at the Closing and to pay to the Company, if
appropriate, the GECC Reserve Participation.
(c) ASSUMPTION OF LIABILITIES. New Eagle would assume the following
disclosed ordinary course obligations or liabilities of the Business
including those due to be performed after the Closing under the Office
Leases, the WPT Leases, the employee stay bonus and, if appropriate, the GECC
Agreements (collectively, the "Assumed Liabilities"). No other obligations,
contingencies or liabilities of the Company or the Business would be assumed
by New Eagle or EASC.
(d) EMPLOYEES. At the Closing, New Eagle would be permitted, but
would not be obligated, to offer employment to current employees of the
Company on such terms as New Eagle, in its sole discretion, may determine.
Without limiting the foregoing, the Company has been advised that most of its
employees would be offered employment with New Eagle. Additionally, the
Company understands that the employment of certain senior executives would be
phased-in over a period of time determined by New Eagle and acceptable to the
respective senior executive.
(e) SERVICING AGREEMENT. At the Closing, the Company and New Eagle
would enter into a servicing agreement substantially in the form attached
hereto as Exhibit A (the "Servicing Agreement"). The Company would retain
the right to sell owned and charge-off receivables remaining after two
hundred and seventy (270) days. New Eagle would have the
2
<PAGE>
right of first refusal to purchase receivables at 95% of the highest cash
offering price. Closing of such sale would occur on or before June 30, 1999.
2. DUE DILIGENCE AND FINANCIAL REVIEW.
From and after the date hereof and until the termination of this
letter of intent, the Company shall grant EASC and New Eagle and their
counsel, accountants, advisors, representatives, agents and employees, full
and complete access to the Company's facilities, properties, information and
data, and to its accountants, personnel and other representatives, and shall
make available to EASC and New Eagle and their counsel, accountants,
advisors, representatives, agents and employees, all such other documents,
books, records and information relating to the business, affairs, financial
and other condition of the Company and its properties and its affiliates as
shall be requested by EASC or New Eagle. The parties agree that all
information furnished shall remain confidential. Without limiting the
foregoing, the Company has been advised that the due diligence review will be
completed within four weeks from the date of this letter.
3. CERTAIN COVENANTS.
The Company hereby agrees that prior to the Closing the Company will
operate its business in a manner consistent with prior practice and will use
its reasonable efforts to maintain the goodwill of its employees, customers,
suppliers and other persons with which it has commercial dealings.
4. DOCUMENTATION AND OTHER CONDITIONS.
(a) The transaction contemplated herein shall be conditional on the
completion of a due diligence review, satisfactory to EASC and New Eagle in
their sole discretion, of all relevant business, financial, legal and other
information regarding the Company and the Business.
(b) The transactions contemplated herein shall be subject to the
negotiation, execution and delivery of definitive documents, including the
Servicing Agreement and a definitive asset purchase agreement (the "Purchase
Agreement") between New Eagle and the Company, containing, among other
provisions, customary and appropriate representations and warranties, covenants
and conditions (including, without limitation, third party consents to the
assignment of the WPT Leases, the Eagle Credit Index rights and the Office
Leases and, if appropriate, the sub-servicing arrangement or assignment of the
GECC Agreements), indemnifications and other provisions.
(c) The proposal contained in this letter of intent is subject to the
ability of EASC and/or New Eagle to raise $2,000,000 of new equity capital.
(d) The parties intend to enter into the Purchase Agreement as soon as
practicable and to close (the "Closing") no later than ninety days subsequent to
the full execution of this letter of intent.
3
<PAGE>
5. PUBLICITY.
Except as required by law or as recommended by legal counsel, no party
shall make any announcement of the transactions contemplated herein to the
employees of the Company (other than key management and other persons whose
knowledge thereof is appropriate in connection herewith), news or wire
services or otherwise except with the consent and approval of the other party.
6. EXCLUSIVITY.
Except for continuing its discussions with L.M. Sandler & Sons, Inc.
or its affiliates which may continue through August 14, 1998, the Company
hereby agrees that until termination of this letter of intent, it shall not
without the prior consent of EASC, directly or indirectly, solicit any
proposal or offer concerning the sale, transfer or merger of the Company, the
sale or other transfer of the Business and/or the Assets or the sale or other
transfer of any of the capital stock of the Company (each, a "Sale").
Notwithstanding the foregoing, the Company may engage in discussions or
negotiations with, furnish nonpublic information concerning the Company, any
subsidiary of the Company, and their respective properties, assets and
business to, and grant access to the facilities of the Company or any
subsidiary of the Company to, any person that has made an unsolicited
competing proposal, but only to the extent the Company's board of directors
shall conclude in good faith on the basis of the advice of its outside
counsel that the failure to take such action would be inconsistent with its
fiduciary duties under applicable law. If the Company shall take any of the
actions referenced in the immediately preceding sentence, and shall within
one year from the date hereof sell or transfer a controlling interest in the
Company or all or substantially all of the assets of the Company to any
person other than EASC or New Eagle, the Company shall upon closing of such
transaction pay to EASC a fee of $100,000; provided, however, that such
payment shall not be required if:
(a) the Company undertakes an orderly liquidation of its assets for the
benefit of its stakeholders; or
(b) if (a) above shall not apply, unless EASC shall have taken each of
the following actions: (i) on or before September 28, 1998, EASC shall have
delivered to the Company a draft of the definitive Purchase Agreement
contemplated in paragraph 4(b) above; (ii) on or before October 13, 1998,
EASC shall have advised the Company that it has received binding
subscriptions for the new capital contemplated in paragraph 4(c) above; (iii)
neither EASC nor New Eagle shall have breached any of their obligations under
the definitive Purchase Agreement; and (iv) on or before October 28, 1998,
EASC shall have notified the Company that it is prepared to purchase the
Assets in accordance with the terms set forth in the definitive Purchase
Agreement.
7. GOVERNING LAW.
This letter of intent and the terms hereof shall be governed by and
construed in accordance with the laws of the State of Delaware without regard
to its conflicts of laws principles.
4
<PAGE>
8. EXPENSES.
Each of the parties hereto shall bear its own costs and expenses
incurred in connection with the proposed transactions contemplated herein
whether or not the Closing shall occur.
9. PRIOR AGREEMENT.
This letter of intent supersedes all prior agreements (except for the
Confidentiality Agreement executed by Mr. Arnold) and understandings of the
parties hereto with respect to the subject matter hereof.
10. TERM.
(a) Subject to subsection (b) of this Section 10, this letter of
intent shall automatically terminate ninety days subsequent to the full
execution hereof unless extended by the written agreement of the parties
hereto.
(b) Unless this letter of intent is executed by the Company and
received by EASC at c/o R. H. Arnold & Company, 44th Floor, 152 West 57th
Street, New York, New York 10019, by 5:00 p.m., New York time, on August 6,
1998, the proposals contained herein and this letter of intent shall
automatically terminate.
11. BINDING AGREEMENTS.
The parties hereto each understand and agree that the purpose of this
letter of intent is to set forth their mutual understandings regarding the
proposed transaction described herein. The parties understand and agree that
this letter of intent expresses their preliminary understandings and good
faith intentions only and does not create a binding obligation upon any party
hereto except that Sections 2, 5, 6, 7, 8 9, 10 and 11 hereof are intended to
be and are binding obligations of the parties hereto.
5
<PAGE>
If the foregoing accurately reflects your understanding, please indicate your
intent to proceed with the transaction contemplated herein by signing the
enclosed counterpart of this letter of intent in the space provided below for
such purpose, and return such signed counterpart to the undersigned.
Very truly yours,
EAGLE ACQUISITION SERVICES L.L.C.
By: /s/ Robert H. Arnold
------------------------------------
Robert H. Arnold
Chairman
Agreed and Accepted, as of this
13th day of August, 1998
EAGLE FINANCE CORP.
By: /s/ Robert J. Braasch
------------------------------------
Its: President
-----------------------------------
6
<PAGE>
SCHEDULE "A"
Servicing Fees
GECC
4% annualized prior month account balance. (MINIMUM $20.00 PER
ACCOUNT)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Bonus Servicing: 25% first $ 500,000 earned
30% to $ 1,000,000
35% to $ 1,500,000
40% to $ 2,000,000
45% to $ 2,500,000
50% beyond $ 2,500,001
</TABLE>
SECURITIZATION
4% annualized prior month account balance (MINIMUM $20.00 PER ACCOUNT)
<TABLE>
<CAPTION>
<S> <C> <C>
Repo Expenses Reimbursed - Estimate $400.00 per account
Repo Fee (Labor and Overhead) $300.00 per account
</TABLE>
EAGLE OWNED
4% annualized prior month account balance. (MINIMUM $20.000 PER ACCOUNT)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
P&L Recoveries: 25% first $ 400,000 earned
30% to $ 800,000
35% to $ 1,200,000
40% to $ 1,600,000
45% to $ 2,000,000
50% beyond $ 2,000,001
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Repo Expenses Reimbursed - Estimate $400.00 per account
Repo Fee (Labor and Overhead) $300.00 per account
</TABLE>
7
<PAGE>
EXHIBIT 10.2
[GE CAPITAL LETTERHEAD]
August 5th, 1998
VIA FACSIMILE
Robert J. Braasch
President
Eagle Finance Corp.
1425 Tri-State Parkway
Suite 140
Gurnee, IL 60031
Dear Bob:
Eagle Finance Corp. ("Eagle") and General Electric Capital Corporation
("GE Capital") entered into those certain Asset Purchase Agreements dated
September 27, 1994 and June 25, 1996 (the "Asset Purchase Agreement"), and
that certain Amended and Restated Servicing Agreement, dated as of June 25,
1996 (the "Servicing Agreement") pursuant to which GE Capital agreed to (i)
purchase from time to time portfolios of motor vehicle retail installment
contracts (the "Contracts") from Eagle, and (ii) permit Eagle to service such
Contracts, all pursuant to the terms and conditions set forth in the Asset
Purchase Agreements and the Servicing Agreement and all modifications or
amendments thereof, including without limitation, the Letter Agreement dated
January 29, 1997 (dated incorrectly, actually January 29, 1998)
(collectively, the "Agreements"). Any capitalized terms used herein without
definition shall have the meaning given to such terms in the Agreements.
Section 11.0 of the Servicing Agreement requires, for Purchased
Contracts and for the contracts serviced by Servicer in total, that (i) Eagle
maintain a Rolling Average Delinquency measurement of no greater than 10%;
and (ii) Eagle maintain a Monthly Delinquency no greater than 10% for any
three consecutive months. For the Purchased Contracts, Rolling Average
Delinquency measurement for the months of January, February, March, April and
May was 10.29%, 10.58%, 10.61%, 10.49% and 10.05%, respectively. For the
contracts serviced by Eagle in total, Rolling Average Delinquency measurement
for the months of January, February, March, April and May was 10.61%, 11.17%,
11.65%, 12.00% and 12.05%, respectively. These covenant violations would,
absent GE Capital's agreement to the contrary, constitute defaults under the
Agreements.
<PAGE>
Eagle has requested that GE Capital waive all current and past
defaults arising under the Agreements. In consideration for and pursuant to
the terms set forth in this letter agreement, GE Capital agrees and hereby
does waive all current and past defaults (including those described above)
arising under the Agreements for the period through and including August 15,
1998. If Eagle provides GE Capital with a copy of an accepted letter of
intent in form as shown in Exhibit A or such other form and substance
acceptable to GE Capital in its discretion and as having the effect of
resolving, in a timely manner, and in GE Capital's discretion, the financial
problems that Eagle is currently experiencing, than GE Capital shall shall
waive any existing defaults through and including November 15, 1998, on which
date GE Capital shall reset covenants in its reasonable discretion.
In consideration for the accommodations granted herein, the parties agree as
follows:
(1) Eagle acknowledges the covenant violations set forth herein and
GE Capital's right to immediately terminate servicing in accordance with the
terms of the Servicing Agreement.
(2) From the date hereof through November 15, 1998 ("Waiver
Period") only, the following performance and financial covenants shall
replace the portfolio performance and financial covenants of Sections 9.0(e),
9.0(f), 9.0(g), 11.0 (b), 11.0(c), and 11.0(d) of the Amended And Restated
Servicing Agreement: (a) Servicer's Debt Ratio exceeds 8:1; (b) Servicer's
Minimum Tangible Net Worth is less than Eight Million Dollars ($8,000,000);
(c) Servicer's fiscal 1998 year-to-date losses exceed Six Million Dollars
($6,000,000); (d) the Purchase Contracts in total as a group have a Rolling
Average Delinquency greater than eleven percent (11%) or a Rolling Average
Charge-Off greater than two percent (2%); or (e) the motor vehicle
installment contracts serviced by Servicer in total as a separate group have
a Rolling Average Delinquency greater than thirteen percent (13%) or a
Rolling Average Charge-Off greater than two percent (2%). Except as
expressly waived or replaced by this Agreement, all terms, conditions and
obligations set forth in the Amended And Restated Servicing Agreement shall
remain and be in full force and effect and any breach of such terms,
conditions or obligations shall constitute Events of Default hereunder. For
the purposes of calculating year-to-date losses in clause (c) above, the
following, as further defined in Exhibit "C" shall be excluded: (i)
Settlement Costs; (ii) Lease Termination Expenses; (iii) expenses related to
the termination of employees; and (iv) Asset Write-Downs.
(3) Effective immediately, Eagle shall provide the monthly reports,
including reporting for Purchased Contracts, by the tenth calendar day of the
following month and shall provide reporting related to the Eagle serviced,
owned and securitized portfolios by the twenty-fifth (25th) calendar day of
the following month.
(4) On or before August 15, 1998, Eagle shall provide GE Capital
with a copy of an accepted letter of intent in form as shown in Exhibit "A"
or such other form and substance acceptable to GE Capital and as having the
effect of resolving, in a timely manner, and in GE Capital's judgment, the
financial problems that Eagle is currently experiencing.
2
<PAGE>
(5) The Reserve Accounts established for each of the Asset Purchase
Agreements shall be combined into and maintained as one account (the "Reserve
Account"). Eagle shall not permit the Reserve Account to be less than: (i)
twelve and eight-nine one hundredths percent (12.89%) of Borrower's
Outstanding Principal Balance of the aggregate Purchased Contracts (under all
Assets Purchase Agreements) effective with the ordinary course July, 1998
settlement; (ii) thirteen and one quarter percent (13.25%) of Borrower's
Outstanding Principal Balance of the aggregate Purchased Contracts (under all
Assets Purchase Agreements) effective with the ordinary course August, 1998
settlement; (iii) thirteen and six-tenths percent (13.6%) of Borrower's
Outstanding Principal Balance of the aggregate Purchased Contracts (under all
Assets Purchase Agreements) effective with the ordinary course September,
1998 settlement; and (iv) the greater of fourteen percent (14%) of Borrower's
Outstanding Principal Balance of the aggregate Purchase Contracts (under all
Assets Purchase Agreements), or one hundred ten percent (110%) of the Rolling
Average Delinquency of aggregate Purchased Contracts, effective with the
ordinary course October, 1998 settlement. With respect aggregate Purchased
Contracts (under all Asset Purchased Agreements combined), in no event shall
the Reserve Account be less than one hundred twenty-five thousand dollars
($125,000) or one hundred percent (100%) of the Borrower's Outstanding
Principal Balance of the Purchased Contracts, whichever is less.
(6) If GE Capital terminates the Servicing Agreement and transfers
servicing from Servicer within sixty (60) days of the Waiver Period, then GE
Capital shall, on the date in which GE Capital assumes servicing of the
Purchased Contracts, provide to Eagle a one-time reserve refund in an amount
equal to the lesser of (i) the amount by which the Reserve Account exceeds
thirteen and three-tenths percent (13.3%) of, or (ii) seven tenths of one
percent (0.7%) of the then Borrower's Outstanding Principal Balance of
Purchased Contracts as of the last day of the calendar month in which
Servicer concluded servicing Purchased Contracts.
(7) Section 12.13 of Amended and Restated Servicing Agreement is
hereby amended to read as follows: "Repurchase. At Servicer's election and
upon not less than five (5) days prior written notice to Company, Servicer
can repurchase from Company Purchased Contracts that pertain to the aggregate
Purchased Contracts (under all Asset Purchase Agreements) in the event that
the total Borrower's Outstanding Principal Balance for such aggregate
Purchased Contracts (under all Asset Purchase Agreements combined) is equal
to or less than One Million Dollars ($1,000,000)."
(8) Eagle will either (i) provide to GE Capital original contracts
for, or (ii) repurchase, the accounts shown in Exhibit "B" within thirty (30)
days of this Agreement.
(9) Eagle, for itself and its subsidiaries, affiliates,
shareholders, agents, successors and assigns, hereby waives and affirmatively
agrees not to allege or otherwise pursue any or all defenses, affirmative
defenses, claims, counterclaims, causes of action; or set offs of any kind
whatsoever that it may have against GE Capital arising from or in any way
related to the Agreements, Eagle's right to service the Contracts under the
Agreements or GE Capital's
3
<PAGE>
administration of or conduct under the Agreements which have occurred on or
before the date of this Agreement.
In the event that Eagle has not agreed to a satisfactory letter of
intent as described in paragraph numbered 4 above by 8/15/98, then GE Capital
shall be entitled to terminate the Servicing Agreement in accordance to the
terms thereof and Eagle agrees to cooperate with GECC as described under
Section 11.2 of the Servicing Agreement.
Except as expressly provided in this waiver, all terms and conditions
of the Agreement shall continue in full force and effect. This waiver shall
be effective only in the specific instance, for the specific provisions, and
for the specific period for which it has been given.
If not accepted by Eagle, this waiver offer will expire at 10:00 am
CST on Wednesday, August 5th, 1998. If Eagle chooses to accept this waiver,
a signed copy should be sent to GE Capital via facsimile (847-277-5976),
with an original to follow via overnight mail.
4
<PAGE>
This waiver may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
taken together shall constitute one and the same instrument.
Very truly yours,
General Electric Capital Corporation
By: /s/ David C. Schmidt 8/5/98
------------------------------------
Title: Account Executive
---------------------------------
Acknowledged, accepted and agreed:
EAGLE FINANCE CORP.
By: /s/ Robert J. Braasch 8/5/98
---------------------------------
Title: President
-------------------------------
5
<PAGE>
[EXHIBITS NOT INCLUDED]
6
<PAGE>
EXHIBIT 11
EAGLE FINANCE CORP.
COMPUTATION OF NET INCOME PER SHARE
For the Three and Six Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED June 30,
1998 1997 1998 1997
------------ --------- ------------ -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income data:
1. Income (loss) before income taxes . . . . . . . . . . $(2,831) $(3,208) $(4,306) $(4,716)
2. Applicable income taxes . . . . . . . . . . . . . . . -- -- -- --
------------ --------- ------------ -------
3. Net income (loss) . . . . . . . . . . . . . . . . . . $(2,831) $(3,208) $(4,306) $(4,716)
------------ --------- ------------ -------
------------ --------- ------------ -------
Number of outstanding shares:
4. Weighted average common shares
outstanding, adjusted for stock splits . . . . . . 4,229 4,189 4,229 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) . . . . -- -- -- --
7. Common shares outstanding (Line 4-5+6). . . . . . . . 4,229 4,189 4,229 4,189
Net income per share:
8. Net income (loss) per common shares (Line 3/4). . . . $(0.67) $(0.77) $(1.02) $(1.13)
9. Fully diluted net income (loss) per common (Line 3/7) $(0.67) $(0.77) $(1.02) $(1.13)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 349,676
<SECURITIES> 3,000,000
<RECEIVABLES> 26,379,871
<ALLOWANCES> 4,243,932
<INVENTORY> 0
<CURRENT-ASSETS> 25,485,615
<PP&E> 2,939,559<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,425,174
<CURRENT-LIABILITIES> 17,503,914
<BONDS> 17,543,768
0
0
<COMMON> 42,287
<OTHER-SE> (6,664,795)
<TOTAL-LIABILITY-AND-EQUITY> 28,425,174
<SALES> 0
<TOTAL-REVENUES> 5,984,359
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,112,210
<LOSS-PROVISION> 1,885,945
<INTEREST-EXPENSE> 2,292,693
<INCOME-PRETAX> (4,306,489)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,306,489)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
<FN>
<F1>PP&E DOES NOT APPLY - FIGURE REPRESENTS OTHER ASSETS.
</FN>
</TABLE>
