<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(For the Quarterly Period ended March 31, 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
________________________
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . .3
Statements of Income. . . . . . . . . . . . . . . . . . . . . .. .4
Statements of Changes in Stockholders' Equity . . . . . . . . . . 5
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . ..6
Notes to Financial Statements . . . . . . . . . . . . . . . . . ..7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . .9
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . .. . . . 22
Item 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . .. . . . 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . .. . . . 22
Item 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . .. . . . 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . .. . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .S-1
2
<PAGE>
EAGLE FINANCE CORP.
BALANCE SHEETS
AS OF MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
MARCH 31,
----------------------------- December 31,
1998 1997 1997
----------- ----------- ------------
<S> <C> <C>
Finance receivables, owned . . . . . . . . . . . . . . . . . $ 9,757,136 $43,458,745 $28,455,232
Nonrefundable acquisition discount . . . . . . . . . . . . . (130,849) (2,740,780) (1,179,708)
Allowance for credit losses. . . . . . . . . . . . . . . . . (1,249,624) (4,389,950) (2,986,419)
----------- ----------- -----------
Finance receivables, net owned . . . . . . . . . . . . . . . 8,376,663 36,328,015 24,289,105
----------- ----------- -----------
Finance receivables, Installment Contract sales. . . . . . . 22,566,454 -- 27,060,820
Allowance for credit losses related to Installment
Contract sales . . . . . . . . . . . . . . . . . . . . . . (2,890,042) -- (3,353,808)
Additional allowance represented on titled assets,
Installment Contract sales . . . . . . . . . . . . . . . . (375,676) -- (470,113)
----------- ----------- -----------
Finance receivables, net Installment Contract sales. . . . 19,300,736 -- 23,236,899
----------- ----------- -----------
Finance receivables, owned, held for sale, net . . . . . . . -- 19,213,406 --
Excess servicing receivable. . . . . . . . . . . . . . . . . -- 847,909 --
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,452,820 2,621,761 1,809,248
Money market investments . . . . . . . . . . . . . . . . . . -- 545,000 552,521
Prepaid expenses and debt issuance costs . . . . . . . . . . 825,938 1,272,154 1,029,970
Repossessed or titled assets . . . . . . . . . . . . . . . . 1,414,205 2,912,348 2,091,011
Income tax receivable. . . . . . . . . . . . . . . . . . . . 801,464 3,872,346 1,268,152
Deferred income tax benefit. . . . . . . . . . . . . . . . . -- 1,004,912 --
Other assets . . . . . . . . . . . . . . . . . . . . . . . 1,133,057 2,544,289 548,913
----------- ----------- -----------
$34,304,883 $71,162,140 $54,825,819
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable, Installment Contract Sales. . . . . . . . . . $19,676,412 $ -- $23,707,012
Senior debt. . . . . . . . . . . . . . . . . . . . . . . . . -- 41,689,262 15,034,111
Subordinated debt. . . . . . . . . . . . . . . . . . . . . . 17,567,177 17,628,231 17,543,768
Accrued interest . . . . . . . . . . . . . . . . . . . . . . 181,767 252,811 162,370
Accrued income tax . . . . . . . . . . . . . . . . . . . . . -- 1,910 --
Accounts payable and accrued liabilities . . . . . . . . . . 671,281 2,509,690 694,577
Unearned insurance commissions . . . . . . . . . . . . . . . -- 3,836 --
Dealer reserves. . . . . . . . . . . . . . . . . . . . . . . -- 276,681 --
----------- ----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 38,096,637 62,362,421 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). . . . . . . . . . . . . . . . . (17,427,247) (4,756,594) (15,951,512)
----------- ----------- -----------
Total stockholders' equity (deficit) . . . . . . . . . . . . (3,791,754) 8,799,719 (2,316,019)
----------- ----------- -----------
$34,304,883 $71,162,140 $54,825,819
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Interest income, owned:
Interest and fee income, owned receivables . . . . . . . . . . $ 1,210,973 $ 3,427,589
Interest expense, owned receivables (senior and
subordinated debt) . . . . . . . . . . . . . . . . . . . . . (875,228) (1,450,326)
----------- -----------
Net interest income, owned receivables,. . . . . . . . . . . . . 335,745 1,977,263
Provision for credit losses, owned receivables . . . . . . . . . -- (375,000)
----------- -----------
Net interest income after provision for credit losses,
owned receivables. . . . . . . . . . . . . . . . . . . . . . . 335,745 1,602,263
----------- -----------
Interest income, Installment Contract sales:
Interest income, Installment Contract sales. . . . . . . . . . 1,452,437 --
Interest expense, Installment Contract sales (notes payable) . (517,692) --
Provision for credit losses, Installment Contract sales. . . . (719,786) --
----------- -----------
Net interest income after provision for credit losses,
Installment Contract sales . . . . . . . . . . . . . . . . . . 214,959 --
----------- -----------
Other income:
Service fee income . . . . . . . . . . . . . . . . . . . . . . 825,712 780,455
Commission and other . . . . . . . . . . . . . . . . . . . . . -- 2,410
----------- -----------
Total other income . . . . . . . . . . . . . . . . . . . . . . . 825,712 782,865
----------- -----------
Income before operating expenses . . . . . . . . . . . . . . . . 1,376,416 2,385,128
Operating expenses:
Salaries and related costs . . . . . . . . . . . . . . . . . . 1,252,804 2,035,145
Collection expenses. . . . . . . . . . . . . . . . . . . . . . 466,123 445,749
Other operating expenses . . . . . . . . . . . . . . . . . . . 1,133,224 1,412,253
----------- -----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . 2,852,151 3,893,147
----------- -----------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . (1,475,735) (1,508,019)
Applicable income taxes. . . . . . . . . . . . . . . . . . . . . -- --
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,475,735) $(1,508,019)
----------- -----------
----------- -----------
Weighted average common shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,228,690 4,189,100
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,228,690 4,189,100
Per share net income (loss) attributable to common shares:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.35) $(0.36)
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.35) $(0.36)
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Common stock:
Balance at beginning of period. . . . . . . . . . . . . . . $ 42,287 $ 41,891
Additional paid-in capital:
Balance at beginning and end of period . . . . . . . . . . 13,593,206 13,514,422
Retained earnings:
Balance at beginning of period. . . . . . . . . . . . . . . (15,951,512) (3,248,575)
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . (1,475,735) (1,508,019)
----------- ----------
(17,427,247) (4,756,594)
----------- ----------
Total stockholders' equity (deficit). . . . . . . . . . . . . $(3,791,754) $8,799,719
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
EAGLE FINANCE CORP.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,475,735) $ (1,508,019)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for credit losses . . . . . .. . . . . . . . -- 375,000
Net finance receivable charge-offs
against allowance . . . . . . . . . . .. . . . . . . . (1,736,795) (2,030,564)
Decrease (increase) in:
Prepaid expenses . . . . . . . . . . . . . . . . . . . 54,597 71,136
Excess servicing receivable. . . . . . . . . . . . . . -- 202,681
Repossessed or titled assets . . . . . . . . . . . . . 676,806 1,337,095
Other assets . . . . . . . . . . . . . . . . . . . . . (584,144) (367,593)
Income tax receivable. . . . . . . . . . . . . . . . . 466,688 860,000
Increase (decrease) in:
Accrued interest . . . . . . . . . . . . . . . . . . . 19,397 (215,722)
Accrued income tax . . . . . . . . . . . . . . . . . . -- 1,910
Accounts payable and accrued liabilities . . . . . . . (23,296) 615,953
Unearned insurance commissions . . . . . . . . . . . . -- (1,322)
Dealer reserves. . . . . . . . . . . . . . . . . . . . -- (10,102)
Nonrefundable acquisition discount . . . . . . . . . . (1,048,859) 1,297,616
----------- ----------
Net cash provided by (used in) operating activities . . . . .. (3,651,341) 628,069
---------- ----------
Cash flows from investing activities:
Proceeds from sale of investments. . . . . . . . . . . . . . 552,521 7,651
Proceeds from bulk sale of vehicle
retail installment notes. . . . . . . . . . . . . . . . . 14,353,152 --
Principal collected on finance
receivables, owned. . . . . . . . . . . . . . . . . . . . 2,226,487 6,163,794
Principal new originations and
repurchases of finance receivables. . . . . . . . . . . . (167,100) (18,508,865)
Principal write-off on finance
receivables, owned. . . . . . . . . . . . . . . . . . . . 2,286,157 4,336,846
Principal collected (net of write-offs),
Installment Contract sales. . . . . . . . . . . . . . . . 3,936,163 --
----------- ----------
Net cash provided by (used in) investing activities. . . . . . 23,186,780 (8,000,574)
----------- ----------
Cash flows from financing activities:
Repayments of borrowings, Installment Contract sales . . . . (4,030,600) --
Proceeds from draws on bank line of credit agreements . . . -- 9,637,282
Repayments of borrowings under bank
line of credit agreements . . . . . . . . . . . . . . . . (14,997,499) --
Debt to affiliate. . . . . . . . . . . . . . . . . . . . . . (36,612) (775,913)
Proceeds from issuance of other debt . . . . . . . . . . . . -- 43,054
Repayment of other debt. . . . . . . . . . . . . . . . . . . 23,409 (392,543)
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . 149,435 210,792
----------- ----------
Net cash provided by (used in) financing activities. . . . . . (18,891,867) 8,722,672
----------- ----------
Cash, net change . . . . . . . . . . . . . . . . . . . . . . . 643,572 1,350,167
Cash at beginning of period. . . . . . . . . . . . . . . . . . 1,809,248 1,271,594
----------- -----------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . $ 2,452,820 $ 2,621,761
----------- -----------
----------- -----------
Supplemental cash flow disclosures - cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 855,801 $ 1,666,048
Income taxes and Illinois replacement tax. . . . . . . . . . $ 595 $ 1,910
</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 Financial Accounting Standards
Board Statement ("FASB") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FASB 125"). FASB 125 was
effective for transfers and servicing of financial assets and retirements of
liabilities occurring after December 31, 1997, and has been applied
prospectively. FASB 125 provides accounting and reporting standards for
transfers and servicing of financial assets and retirements of liabilities based
on consistent application of a financial components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings.
4. 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
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,
7
<PAGE>
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. Although no
assurances can be provided, the Company does not expect adoption of FASB 130 to
have a significant impact on the Company's financial condition or results of
operations.
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, when adopted, will 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, CHANGES IN INTEREST RATES, GENERAL ECONOMIC CONDITIONS,
LEGISLATIVE/REGULATORY CHANGES, MONETARY AND FISCAL POLICIES OF THE U.S.
GOVERNMENT, INCLUDING POLICIES OF THE U.S. TREASURY AND THE FEDERAL RESERVE
BOARD, THE QUALITY OR COMPOSITION OF THE COMPANY'S PORTFOLIO OF FINANCE
RECEIVABLES, THE ABILITY OF THE COMPANY TO OBTAIN DEBT OR OTHER FINANCING,
COMPETITION, DEMAND FOR FINANCIAL SERVICES IN THE COMPANY'S MARKET AREA AND
ACCOUNTING PRINCIPLES, POLICIES AND GUIDELINES. THESE RISKS AND UNCERTAINTIES
SHOULD BE CONSIDERED IN EVALUATING FORWARD-LOOKING STATEMENTS AND UNDUE
RELIANCE SHOULD NOT BE PLACED ON SUCH STATEMENTS. FURTHER INFORMATION
CONCERNING THE COMPANY AND ITS BUSINESS, INCLUDING ADDITIONAL FACTORS THAT
COULD MATERIALLY AFFECT THE COMPANY'S FINANCIAL RESULTS, IS INCLUDED IN OTHER
COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is a specialized financial services company 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 has made and
continues to service 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 March 31, 1998 (unaudited) as compared to March 31,
1997 (unaudited) and December 31, 1997, and the results of operations for the
three months ended March 31, 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 months ended
March 31, 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.
The Company experienced a significant deterioration in its financial
condition primarily due to significant operating losses during the first quarter
of 1998, and the years 1997 and 1996, 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 requirement of its Asset
Purchase Agreement dated as of June 25, 1996, as amended, between the Company
and General Electric Capital Corporation (the "GECC Agreement") and the
Indenture dated as of April 15, 1995, under a supplement to which $17 million of
its outstanding subordinated notes were issued. At March 31, 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.
RECENT DEVELOPMENTS
SALES OF FINANCE RECEIVABLES/DEBT RETIREMENT
On April 30, 1998 the Company sold net retail installment contracts
("Installment Contracts") of $148,000 to a competitor for $133,000 in cash, net
of non-refundable acquisition discount and allowances for credit losses,
respectively. The resulting gain or loss on this transaction after the
allocation of applicable allowance for credit losses is not expected to be
material.
DELISTING OF COMMON STOCK FROM NASDAQ MARKET
The Company's common stock, $0.01 per value par share (the "Common
Stock"), ceased to be quoted on the NASDAQ National Market beginning May 13,
1998. Any trading in the Company's Common Stock will now be conducted in the
over-the-counter market in the so-called "pink sheets" published by the
National Quotation Bureau or the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. As a
9
<PAGE>
consequence of the delisting from the NASDAQ National Market, a shareholder
will likely find it more difficult to sell, or to obtain quotations as to
prices of, the Company's Common Stock.
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 July 1, 1998,
the Company had outstanding approximately $17.6 million of subordinated debt,
including $17.0 million of Notes. Scheduled monthly interest of 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
$449,000, inclusive of penalty interest.
GENERAL
Installment Contracts represented over 99% of the Company's net finance
receivables at March 31, 1998. Installment Contracts are purchased on a
non-recourse basis from automobile dealers and are typically secured by
medium-priced used automobiles. The automobiles are purchased by non-prime
consumers at retail prices typically ranging from approximately $5,000 to
$15,000. Installment Contracts financing such purchases typically have annual
percentage rates of interest ("APRs") ranging from 21% to 33% and repayment
terms ranging from 12 to 60 months. The average original principal amount
financed under Installment Contracts outstanding at March 31, 1998 was
approximately $8,100, at an average APR of approximately 20.9%, with an
average original term of approximately 42 months. The Company's experience
has shown, however, that the average life of the Company's Installment
Contracts is substantially less than 42 months due to payoffs and
repossessions that occur prior to contract maturity.
The Company's outstanding balance of owned or serviced (i.e., managed)
Installment Contracts declined to $65.8 million at March 31, 1998 from $99.0
million at December 31, 1997 and from $143.0 million at March 31, 1997.
As part of its funding strategy, 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 three months ended March 31, 1998, as compared to the
origination of $18.5 million of Installment Contracts during the three months
ended March 31, 1997. The Company began reducing its purchases of
Installment Contracts during the fourth quarter of 1995.
10
<PAGE>
As reflected in the following table, the Company failed to originate any
finance receivables during the first quarter of 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1998 1997
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net Installment Contracts purchased(1). . . . . . . . . . . $ -- $ 18,466
Net Other Loans originated(1). . . . . . . . . . . .. . . . -- 80
---------- --------
Total . . . . . . . . . . .. . . . . . . . . . . . $ -- $ 18,546
---------- --------
---------- --------
</TABLE>
___________________
(1) Net of unearned finance charges
During the three months ended March 31, 1998, the Company sold net
retail installment contracts ("Installment Contracts") to competitors for $13.0
million in cash, net of non-refundable acquisition discount and allowances for
credit losses. 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 quarter 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 months ended March 31, 1998 and 1997 and for the year ended
December 31, 1997:
11
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------ FOR THE YEAR ENDED
1998 1997 DECEMBER 31, 1997
---------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average net finance receivables:
Total owned, net . . . . . . . . . . . . . . . . . . . . . . . $ 18,983 $ 58,574 $ 47,196
Serviced:
GECC, Installment Contract sales (1997) (1) . . . . . . . . 24,727 -- 18,651
GECC, Installment Contract sales (1996 and
prior) (1) . . . . . . . . . . . . . . . . . . . . . . . 25,251 60,945 46,095
Securitization. . . . . . . . . . . . . . . . . . . . . . . 13,052 27,753 21,720
--------- --------- ---------
Total serviced, net. . . . . . . . . . . . . . . . . . . . . . 63,030 88,698 86,466
--------- --------- ---------
Total managed, net . . . . . . . . . . . . . . . . . . . . . . 82,013 147,272 133,662
Average interest bearing liabilities (senior and subordinated
debt and related to owned receivables) . . . . . . . . . . . . 25,091 55,324 45,321
Total interest and fee income (owned) . . . . . . . . . . . . . 1,211 3,428 11,752
Total interest expense (owned). . . . . . . . . . . . . . . . . 875 1,450 5,476
--------- --------- ---------
Net interest income before provision for credit
losses (owned) . . . . . . . . . . . . . . . . . . . . . $ 336 $ 1,978 $ 6,276
--------- --------- ---------
--------- --------- ---------
Average interest bearing liabilities (Installment Contract
sales) . . . . . . . . . . . . . . . . . . . . . . . . . . 25,592 -- 23,687
Total interest and fee income (Installment Contract sales). . . 1,452 -- 4,723
Total interest expense (Installment Contract sales) . . . . . . 518 -- 1,597
--------- --------- ---------
Net interest income before provision for credit
losses (Installment Contract sales). . . . . . . . . . . $ 935 $ -- $ 3,125
--------- --------- ---------
--------- --------- ---------
Average interest rate earned on net finance
receivables (owned). . . . . . . . . . . . . . . . . . . . . . 25.52% 23.41% 24.90%
Average interest rate on interest bearing
liabilities (owned). . . . . . . . . . . . . . . . . . . 13.95% 10.49% 12.08%
--------- --------- ---------
Net interest spread (owned). . . . . . . . . . . . . . . . . . 11.56% 12.92% 12.82%
--------- --------- ---------
--------- --------- ---------
Net interest margin (owned)(2). . . . . . . . . . . . . . . . . 7.07% 13.50% 13.30%
--------- --------- ---------
--------- --------- ---------
Average interest rate earned on net owned finance
receivables (Installment Contract sales) . . . . . . . . 23.50% 0.00% 25.32%
Average interest rate on interest bearing
liabilities (Installment Contract sales) . . . . . . . . 9.59% 0.00% 6.74%
--------- --------- ---------
Net interest spread (Installment Contract sales) . . . . . . . 13.91% 0.00% 18.58%
--------- --------- ---------
--------- --------- ---------
Net interest margin (Installment Contract sales)(2) . . . . . . 15.12% 0.00% 16.76%
--------- --------- ---------
--------- --------- ---------
</TABLE>
_____________________________
(1) Prior to January 1, 1997, loan sales pursuant to the GECC Agreement 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 Agreement were accounted for as financing transactions pursuant
to SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" 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.
12
<PAGE>
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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------ FOR THE YEAR ENDED
1998 1997 DECEMBER 31, 1997
--------------- -------- ------------------
<S> <C> <C> <C>
Base servicing fees (1). . . . . . . . . . . . . . . . . . . . . $339,308 $686,039 $2,108,397
Bonus/excess servicing fees. . . . . . . . . . . . . . . . . . . 486,504 297,096 2,251,853
Amortization of excess servicing rights. . . . . . . . . . . . . -- (202,680) (1,050,590)
Adjustment to excess servicing rights. . . . . . . . . . . . . . -- -- (1,681,317)
-------- -------- ----------
Net servicing fees . . . . . . . . . . . . . . . . . . . . . . . $825,712 $780,455 $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."
The Company's liabilities are generally more interest-rate sensitive than
its finance receivables. As a result, significant increases in the Company's
cost of funds borrowed under its Revolving Credit Agreement are having an
adverse effect on profitability. SEE "--Liquidity and Capital Resources."
For the three months ended March 31, 1998, the average interest rate earned
on net finance receivables (owned) increased by 2.11 percentage points over
comparable 1997 periods. Generally, it would be anticipated that improved
margins would result in improved profitability; however, due to significant
increases in funding costs resulting from subordinated debt representing a
higher proportion of outstanding debt and actions taken by lenders that are
party to the Revolving Credit Agreement, the average interest rate on interest
bearing liabilities increased to 13.95% for the three months ended March 31,
1998 represents an increase of 3.46 percentage points over comparable 1997
periods. The effective cost of borrowing under the Revolving Credit Agreement
increased 98.5% to 20.5% for the three months ended March 31, 1998 compared to
10.33% in the 1997 period. The Company attempts to mitigate the adverse effect
of interest rate fluctuations by entering into interest rate protection
agreements.
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
13
<PAGE>
Company's Installment Contracts. The Company is reducing the number of its
employees, operating expenses and increasing workloads in light of improving
asset quality and reduced levels of managed receivables.
FINANCIAL CONDITION
Total assets decreased $20.5 million (37.4%) to $34.3 million at March 31,
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 $8.4 million at March 31, 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 decrease
in owned finance receivables was offset, in part, by an increase in finance
receivables of $19.3 million (net) resulting from the 1997 GECC Transactions
which were accounted for as financing transactions. SEE "--Liquidity and
Capital Resources." The net amount of owned or serviced Installment Contracts
decreased to $65.8 million at March 31, 1998 from $99.0 million at December 31,
1997. The net amount of owned or serviced Installment Contracts was $143.0
million at March 31, 1997.
Total liabilities decreased $19.0 million (33.3%) to $38.1 million at March
31, 1998 from $57.1 million at December 31, 1997, primarily due to a decrease in
senior and subordinated debt to $17.5 million at March 31, 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
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 decreased $1.5 million
(37.4%) to ($3.8 million) at March 31, 1998 from ($2.3 million) at December 31,
1997.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain data relating to the Company's
results of operations for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1998 1997
------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Automobile portfolio interest and fee income,
owned receivables. . . . . . . . . . . . . . . . . . . . . . . $1,152 $3,350
Total interest and fee income, owned receivables . . . . . . . . $1,211 $3,427
Total interest expense, senior and subordinated debt . . . . . . 875 1,450
Net interest income before provision for credit losses . . . . . 336 1,977
Provision for credit losses, owned portfolio . . . . . . . . . . 0 375
------- ------
Net interest income after provision for credit losses,
owned receivables. . . . . . . . . . . . . . . . . . . . . . . 336 1,602
------- ------
Interest income, Installment Contract sales. . . . . . . . . . . 1,452 --
Interest expense, Installment Contract sales . . . . . . . . . . (518) --
Provision for credit losses, Installment Contract sales. . . . . (720) --
------- ------
Net interest income after provision for credit losses,
Installment Contract sales . . . . . . . . . . . . . . . . . . 214 --
------- ------
Other Income:
Servicing income (from Installment Contracts). . . . . . . . . . 826 781
Insurance products commissions . . . . . . . . . . . . . . . . . -- 2
Total other income . . . . . . . . . . . . . . . . . . . . . . . 826 783
Salaries and related costs . . . . . . . . . . . . . . . . . . . 1,253 2,035
Collection expenses. . . . . . . . . . . . . . . . . . . . . . . 466 446
Other operating expenses . . . . . . . . . . . . . . . . . . . . 1,133 1,412
------- ------
Total operating expenses . . . . . . . . . . . . . . . . . . . . 2,852 3,893
------- ------
Loss before taxes. . . . . . . . . . . . . . . . . . . . . . . . (1,476) (1,508)
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,476) $(1,508)
------- -------
------- -------
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED MARCH
31, 1997. The Company experienced a net loss of $1.5 million for the three
months ended March 31, 1998 reflecting a $32,000 improvement over the $1.5
million loss for the comparable 1997 period, primarily due to (i) the decrease
in net interest income before provision for credit losses ($1.6 million) due to
reduced earning assets as a result of the purchase of fewer Installment
Contracts and additional sales of Installment Contracts; offset by (ii) reduced
operating expenses ($1.0 million) and (iii) a reduced provision for credit
losses ($375,000), and increased income from Installment Contract sales and
servicing income. Comparisons between the 1998 and 1997 periods are heavily
influenced by the Company's reduced operating scale.
Total interest expense decreased to $875,000 million for the three months
ended March 31, 1998 from $1.5 million for the three months ended March 31,
1997. The decrease resulted from a decrease in the amount of average debt
outstanding relating to owned receivables. The total subordinated debt
outstanding at March 31, 1998 decreased to $17.5 million from the total senior
and subordinated debt outstanding of $59.3 million at March 31, 1997. The
average debt outstanding for the three months ended March 31, 1998 decreased to
$25.1 million from $55.3 million for the three months ended March 31, 1997. The
weighted average interest rate paid for borrowed funds increased to 13.95% for
the three months ended March 31, 1998 from 10.49% for the three months ended
March 31, 1997. This is a result of the subordinated debt representing a higher
proportion of total debt and the impact of higher borrowing
15
<PAGE>
costs under the Revolving Credit Agreement, which increased 98.5% from the
comparable period in 1997 to 20.5% for the three months ended March 31, 1998.
No provision for credit losses was recorded in the three months ended March
31, 1998 compared to a provision of $375,000 for the three months ended March
31, 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 introduction of SFAS 125 effective January 1, 1997. Loan sales
occurring in 1997 are reported as financing transactions; loan sales occurring
in 1996 and prior periods are reported as receivables sold. Interest income in
1998 from Installment Contract sales of $1.5 million was reduced by debt related
interest expense of $518,000 and the $720,000 provision for credit losses on
Installment Contract sales. Net interest income on Installment Contract sales,
after provision for credit losses, for the period ended March 31, 1998 was
$214,000. For all periods prior to the January 1, 1997 effective date of SFAS
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 increased $826,000 for the three
months ended March 31, 1998 from $783,000 for the three months ended March 31,
1997.
Total operating expenses decreased 26.7% to $2.9 million for the three
months ended March 31, 1998 compared to $3.9 million for the three months ended
March 31, 1997. The number of full time equivalent employees decreased 42.0% at
March 31, 1998 when compared to March 31, 1997. The full financial impact of
staffing reductions will be reflected in future periods. The Company's other
operating expenses decreased 16.2% to $1.6 million for the three months ended
March 31, 1998 compared to $1.9 million the three months ended March 31, 1997.
No income tax expense was recorded for the three months ended March 31,
1998 or for the three months ended March 31, 1997.
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 14.15% and 11.82% of net owned
finance receivables at March 31, 1998 and 1997, respectively. At March 31,
1998, the Company maintained credit loss reserves equal to 12.81% for potential
losses on 1997 GECC Installment Contract sale transactions.
NONREFUNDABLE ACQUISITION DISCOUNT AND DEALER RESERVES. In order to
achieve an acceptable rate of return and appropriately reflect credit risks
generally associated with the Company's automobile finance business, the Company
purchases Installment Contracts from dealers at a discount from their principal
amount. The Company negotiates the amount of the discount with dealers based
upon various criteria, including the credit risk associated with the contracts
being purchased and market pricing factors. The discount is nonrefundable, is
equal to the difference between (a) the total principal amount to be repaid
under the Installment Contract and (b) net funds paid to the dealer, and is
allocated to the nonrefundable acquisition discount account. As part of the
Company's financing of retail installment sales contracts (other than
Installment Contracts), refundable dealer reserves may be established to protect
the Company from losses associated with such contracts, and are shown as a
liability of the Company.
16
<PAGE>
The following table presents a reconciliation of the changes in
nonrefundable acquisition discount and dealer reserves on its owned receivables
for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1997
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . . . . $ 1,176 $1,730
Additions applicable to new volume . . . . . . . . . . . . . . . -- 1,670
Reductions applicable to accounts sold . . . . . . . . . . . . . (1,237) --
Gross charge-off . . . . . . . . . . . . . . . . . . . . . . . . (537) (2,309)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . 729 1,926
-------- ------
Balance at end of period . . . . . . . . . . . . . . . . . . . . $ 131 $3,017
-------- ------
-------- ------
Balance at end of period as a percentage of net
finance receivables (owned) at end of period
(excluding finance receivables held for sale). . . . . . . . . 1.34% 6.94%
</TABLE>
ALLOWANCE AND PROVISION FOR CREDIT LOSSES/CHARGE-OFFS. The Company
maintains an allowance for credit losses at a level that management believes is
adequate to absorb potential losses in its finance receivables portfolio.
Management evaluates the adequacy of the allowance for credit losses by
reviewing credit loss experience and delinquency trends using static pool
analysis, the value of the underlying collateral and general economic conditions
and trends. If the amount of nonrefundable acquisition discount associated with
a specific pool of Installment Contracts is determined to be insufficient, in
the opinion of management, to absorb projected losses for that pool, a provision
for credit losses would be charged against earnings. The Company's general
policy is to charge-off delinquent accounts when they are deemed uncollectible,
and in any event prior to their becoming 90 days contractually delinquent. The
Company's charge-offs through nonrefundable acquisition discount and allowance
for credit losses, as a percentage of average owned Installment Contracts (net)
annualized, was $1.5 million, or 32.64%, during the three months ended March 31,
1998, and $2.4 million, or 16.42%, 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 Revolving Credit
Agreement indebtedness. Installment Contract sales 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 months ended March 31, 1998 and 1997:
17
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1997
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period. . . . . . . . . . . . . . . . . $ 2,986 $ 6,046
Provision charged to expense. . . . . . . . . . . . . . . . . . -- 375
Finance receivables charged off . . . . . . . . . . . . . . . . (1,749) (2,028)
Recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (3)
-------- ---------
Balance at end of period. . . . . . . . . . . . . . . . . . . . $ 1,250 $ 4,390
-------- ---------
-------- ---------
Allowance as a percentage of net finance receivables
(owned) at end of period (excluding finance
receivables held for sale in 1997) . . . . . . . . . . . . . 12.81% 10.10%
</TABLE>
Changes in the allowance for credit losses, in the Company's Installment
Contract sales portfolio, for the three months ended March 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
For the three months ended March 31,
1998 1997
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period. . . . . . . . . . . . . . . . . 3,354 $ --
Original allowance for credit losses . . . . . . . . . . . . . -- --
Gross losses run thru allowance. . . . . . . . . . . . . . . . (1,709) --
Recoveries less expenses & other charges . . . . . . . . . . . 525 --
Additional funding to allowance for credit losses. . . . . . . 720 --
-------- ------
Balance at end of period. . . . . . . . . . . . . . . . . . . . $ 2,890 $ --
-------- ------
-------- ------
</TABLE>
Total charge-off as a percentage of average net Installment Contract sales
finance receivables (annualized) was 19.15% for the three months ended March 31,
1998.
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 $6.7 million, $14.0 million and $13.0 million, representing 10.3%, 14.2%
and 9.1% of net managed finance receivables, as of March 31, 1998, December 31,
1997, and March 31, 1997, respectively. Managed finance receivables that were
60 days and greater contractually delinquent (net of unearned finance charges)
were $1.9 million, $4.0 million and $3.0 million, representing 2.8%, 4.1% and
2.1% of net managed finance receivables as of March 31, 1998, December 31, 1997,
and March 31, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through cash flow from operations and
from the periodic sale or securitization of Installment Contracts and other
finance receivables.
Net cash provided by (used in) operating activities totaled ($3.7) million
and $628,000 during the three months ended March 31, 1998 and 1997,
respectively. Net cash used in operating activities for the three months ended
March 31, 1998 and 1997 was affected by net operating losses, a significant
decline in the nonrefundable acquisition discount account and by the net change
in the allowance for credit losses.
Net cash provided by (used in) investing activities represents the net
investment in, or liquidation of, finance receivables, which for the three-month
period ended March 31, 1998 and 1997 was $23.2
18
<PAGE>
million and ($8.0) million, respectively. During the three months ended
March 31, 1998, cash provided from the sale of Installment Contracts was
$14.4 million.
Net cash provided by (used in) financing activities for the three months
ended March 31, 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 March 31,
1998 was ($19.0) million, ($15.0) million of which was used to extinguish the
Revolving Credit Agreement. Net cash provided by financing activities for the
three months ended March 31, 1997 was $8.7 million.
The self-liquidating nature of Installment Contracts and Other Loans
enables the Company to maintain higher debt-to-equity ratios than in most other
businesses. The amount of debt the Company incurs from time to time depends on
the Company's need for cash and its ability to borrow funds. Although no
assurances can be provided in this regard, the Company intends to meet its
short- and long-term liquidity needs with cash flow from operations, borrowings
under the Revolving Credit Agreement, the sale or securitization of finance
receivables and the proceeds from the issuance of securities in the capital
markets.
The Company must comply with customary financial and other covenants under
the Indenture. At March 31, 1998, the Company was in breach of the interest
coverage ratio and delinquency trigger covenant under its agreements with GECC;
and the leverage covenant under its subordinated debt indenture. The Company is
seeking waivers with respect to these breaches. The Company expects to remain
in violation of these covenants. 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 in response to the ongoing breaches of covenants.
SEE "--Recent Events."
At March 31, 1998, the Company had total subordinated debt of $17.6 million
as compared to total senior and subordinated debt of $32.6 million at December
31, 1997 and $59.3 million at March 31, 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 THREE MONTHS ENDED MARCH 31,
------------------------------------ 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 0.00% $41,400 8.33% $14,997 12.83%
Loan from Commonly Controlled
Company . . . . . . . . . . . . . . 0 0.00% 289 6.75% 37 6.75%
SUBORDINATED:
Notes payable . . . . . . . . . . . . . 17,567 12.20% 17,628 12.18% 17,543 12.21%
--------- ------- -------
Total debt. . . . . . . . . . . . . . . $ 17,567 12.20% $59,317 10.49% $32,577 12.08%
--------- ------- -------
--------- ------- -------
</TABLE>
The following table sets forth information with respect to maturities of
senior and subordinated debt at March 31, 1998:
19
<PAGE>
<TABLE>
<CAPTION>
LOANS FROM
COMMONLY
SENIOR BANK CONTROLLED SUBORDINATED
YEAR LINES OF CREDIT COMPANY NOTES PAYABLE TOTAL
---- --------------- ----------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1998 . . . . . . . . . . . . . . . $ 0 $ 0 $ 10,275 $ 10,275
1999 . . . . . . . . . . . . . . . 816 816
2000 . . . . . . . . . . . . . . . 812 812
2001 . . . . . . . . . . . . . . . 878 878
2002 . . . . . . . . . . . . . . . 815 815
Thereafter. . . . . . . . . . . . . 3,971 3,971
------ ------- -------- --------
Total. . . . . . . . . . . . . . $ 0 $ 0 $ 17,567 $ 17,567
------ ------- -------- --------
------ ------- -------- --------
</TABLE>
The Company has purchased interest rate caps and interest rate collars in
an aggregate notional amount of $35 million. 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
expires 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.
The GECC Agreement provides for the purchase by GECC of Installment
Contracts, on a revolving basis, having a maximum principal amount of up to $80
million (net) outstanding through June 25, 1998. As of March 31, 1998, $44.6
million (net) principal amount of Installment Contracts was outstanding pursuant
to the GECC Agreement. The term of the GECC Agreement expires June 25, 1998.
Total stockholders' equity at March 31, 1998 was ($3.8) million as compared
to ($2.3) million at December 31, 1997 and $8.8 million at March 31, 1997.
20
<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. The
litigation is still in its initial stages although it has been pending for
almost two years. The parties have attempted to negotiate a settlement, but
those attempts were unsuccessful. Discovery is scheduled to begin shortly, and a
stipulation and order with regard to the composition of the class has been
entered. The Company intends to defend vigorously the claims made in the
complaint.
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 on the
ground that Solarmar's claims are barred by the applicable statute of
limitations. The Court partially granted the motion by dismissing the three
breach of contract claims. All other causes of action were not dismissed. The
parties are currently engaged in discovery and no trial date has been set. The
Company intends to defend vigorously the claims made in the complaint.
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.
4. HALL V. EAGLE FINANCE CORP., is pending in the Circuit Court of Cook
County, Illinois, and is designated as Case No. 97 CH 9328. The class action
Complaint alleges that the Company has violated
21
<PAGE>
the Illinois Wage Assignment Act by collecting wages after the assignment
expired. The parties have reached a settlement agreement which the court has
approved. Payments pursuant to the settlement have been made.
5. 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 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.
6. 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 intends to defend vigorously the claims made in the
complaint.
ITEM 2. CHANGES IN SECURITIES - 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
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
------- -----------
11 Statement re computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K - The Company did not file any reports on
Form 8-K during the three months ended March 31, 1998
23
<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: July 6, 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
- ------- -----------
11 Statement re computation of per share earnings
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
EAGLE FINANCE CORP.
COMPUTATION OF NET INCOME PER SHARE
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1998 1997
--------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Income data:
1. Income (loss) before income taxes . . . . . . . $ (1,476) $ (1,508)
2. Applicable income taxes . . . . . . . . . . . . -- --
--------- ---------
3. Net income (loss) . . . . . . . . . . . . . . . $ (1,476) $ (1,508)
--------- ---------
--------- ---------
Number of outstanding shares:
4. Weighted average common shares
outstanding, adjusted for stock splits . . . . 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
Net income (loss) per share:
8. Net income (loss) per common shares (Line 3/4). ($0.35) ($0.36)
9. Fully diluted net income (loss) per common (Line 3/7) ($0.35) ($0.36)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,452,820
<SECURITIES> 0
<RECEIVABLES> 32,323,590
<ALLOWANCES> 4,646,191
<INVENTORY> 0
<CURRENT-ASSETS> 30,130,219
<PP&E> 4,174,664<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,304,883
<CURRENT-LIABILITIES> 20,529,460
<BONDS> 17,567,177
0
0
<COMMON> 42,287
<OTHER-SE> (3,834,041)
<TOTAL-LIABILITY-AND-EQUITY> 34,304,883
<SALES> 0
<TOTAL-REVENUES> 3,489,122
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,852,151
<LOSS-PROVISION> 719,786
<INTEREST-EXPENSE> 1,392,920
<INCOME-PRETAX> (1,475,735)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,475,735)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
<FN>
<F1>PP&E DOES NOT APPLY -- FIGURE REPRESENTS OTHER ASSETS
</FN>
</TABLE>
