<PAGE>
THE FOLLOWING ITEMS WERE THE
SUBJECT OF A FORM 12b-25 AND
ARE INCLUDED HEREIN:
6, 7, 7A, 8, 9, 14(a)(1),
14(a)(2) AND 14(d). ITEMS 3,
10, 11, 12, 13 AND 14(a)(3),
AS AMENDED, ARE ALSO INCLUDED
HEREIN.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
/X/ AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For transition period from ________________ to ________________
Commission File Number: 0-24286
-------
EAGLE FINANCE CORP.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2464365
- - ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1425 TRI-STATE PARKWAY, GURNEE, ILLINOIS 60031-4060
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 855-7150
- - -------------------------------------------------- --------------
Securities registered pursuant to Section 12(b) of the Act:
- - ----------------------------------------------------------
Name of each Exchange
Title of each class on which registered
------------------- -------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
- - ----------------------------------------------------------
COMMON STOCK, $0.01 PAR VALUE PER SHARE
---------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this form
10-K. [X]
<PAGE>
The aggregate market value of voting common stock of Registrant held by
non-affiliates as of April 30, 1998 was $494,000.(1) At April 30, 1998, the
total number of shares of common stock outstanding was 4,228,690.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- - ----------------------
(1) Based on the closing price of Registrant's common stock on April 30, 1998
on the Nasdaq National Market, and reports of beneficial ownership filed by
directors and executive officers of Registrant and by beneficial owners of
more than 5% of the outstanding shares of common stock of Registrant;
however, such determination of shares owned by affiliates does not
constitute an admission of affiliate status or beneficial interest in
shares of common stock of Registrant.
<PAGE>
EAGLE FINANCE CORP.
1997 FORM 10-K/A - AMENDMENT NO. 1
________________________
TABLE OF CONTENTS
________________________
PAGE
NUMBER
PART II
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . 2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . 2
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . 5
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. . . . 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . 38
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . 46
<PAGE>
PART I
ITEM 1. BUSINESS
Included in the Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1998 (the "Initial Form 10-K")
ITEM 2. PROPERTIES
Included in the Initial Form 10-K.
ITEM 3. 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 Company intends to defend vigorously the claims made in the
complaint.
1
<PAGE>
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 the Illinois Wage
Assignment Act by collecting wages after the assignments expired. The
parties have reached a settlement agreement, which the court has approved.
Payments pursuant to the settlement must be 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 sales contract 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's ruling in a similar case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Included in the Initial Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Included in the Initial Form 10-K.
2
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the years
in the five-year period ended December 31, 1997 are derived from the
financial statements of the Company. The selected financial data should be
read in conjunction with the Financial Statements, including the Notes
thereto, and other financial data included elsewhere herein and the following
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SELECTED FINANCIAL AND OPERATING INFORMATION
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 (1) 1993
--------- ------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Automobile portfolio interest and fee income, owned $ 11,436 $ 26,326 $ 26,779 $ 12,328 $ 5,278
--------- --------- --------- --------- ---------
Total interest and fee income....................... $ 11,752 $ 26,653 $ 27,100 $ 12,723 $ 5,517
Total interest expense.............................. 5,476 9,060 8,093 2,712 1,232
--------- --------- --------- --------- ---------
Net interest income before provision for
credit losses.................................... 6,276 17,593 19,007 10,011 4,285
Provision for credit losses......................... 6,251 13,184 9,538 254 455
--------- --------- --------- --------- ---------
Net interest income after provision for credit
losses.............................................. 25 4,409 9,469 9,757 3,830
--------- --------- --------- --------- ---------
Interest income, Installment Contract sale.......... 4,723 -- -- -- --
Interest expense, Installment Contract sale......... 1,597 -- -- -- --
--------- --------- --------- --------- ---------
Net interest income before provision for credit
losses, Installment Contract sale.................. 3,126 -- -- -- --
Provision for credit losses, Installment Contract
sale............................................... 2,883 -- -- -- --
--------- --------- --------- --------- ---------
Net interest income after provision for credit
losses, Installment Contract sale.................. 243 -- -- -- --
--------- --------- --------- --------- ---------
Servicing income.................................... 1,629 5,107 2,119 841 586
Gain on securitization.............................. -- 612 -- -- --
Insurance commissions............................... 6 66 255 147 65
Operating expenses.................................. 14,485 16,202 11,321 5,627 2,795
Income tax expense (benefit)(2)..................... 121 (659) 197 1,167 --
--------- --------- --------- --------- ---------
Net income (loss)................................... $(12,703) $ (5,349) $ 325 $ 3,951 $ 1,686
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common share........................... $ (3.02) $ (1.28) $0.08 $0.93 $ 0.37
Weighted average number of
common shares outstanding(3)..................... 4,204,394 4,189,100 4,183,490 3,377,973 2,800,000
OPERATING AND OTHER DATA:
Net finance receivables (owned or serviced)......... $ 98,961 $ 151,630 $ 184,882 $ 100,620 $ 28,847
Average interest rate on net finance receivables(5).. 24.90% 22.82% 22.43% 26.72% 23.94%
Average interest rate on interest bearing
liabilities.......................................... 12.08 9.23 9.17 8.56 7.82
--------- ------- --------- --------- ---------
Net interest spread.................................. 12.82% 13.59% 13.26% 18.16% 16.12%
Net interest margin.................................. 13.30% 15.06% 15.73% 21.02% 18.60%
Total allowance for credit losses, dealer reserves
and nonrefundable acquisition discount as a
percentage of net finance receivables (owned).... 14.64 14.22 14.09 12.67 15.44
Net charge-offs as a percentage of average net
finance receivables (owned or serviced) (6)....... 17.33 19.60 15.57 10.89 10.24
Operating expenses as a percentage of average net
finance receivables (owned or serviced)........... 10.84 9.37 7.35 10.48 10.14
Ratio of earnings to fixed charges(7)................ (0.66)x 0.51x 1.06x 2.81x 2.22x
Return (loss) on average assets...................... (22.42)% (5.03)% 0.29% 9.32% 8.18%
Return (loss) on average equity...................... (180.75)% (34.85)% 1.86% 46.76% 42.57%
Net income (loss) as a percentage of revenues(8) (108.09) (22.88) 1.52 35.92 34.16
BALANCE SHEET DATA:
Finance receivables (owned), net (9)................. $ 28,455 $ 54,664 $145,719 $ 78,864 $ 24,297
Nonrefundable acquisition discount................... (1,180) (1,443) (9,428) (8,671) (2,749)
Allowance for credit losses.......................... (2,986) (6,046) (10,808) (1,249) (1,000)
Total assets(10)..................................... 54,826 63,768 139,058 71,245 20,998
Total debt(10)....................................... 56,825 50,806 118,697 52,528 15,922
Dealer reserves...................................... -- 287 293 74 2
Stockholders' equity (deficit)....................... (2,316) 10,308 15,656 15,209 $ 4,088
</TABLE>
3
<PAGE>
________________________
4
<PAGE>
(1) The December 31, 1994 data reflect the effect of the Company's July, 1994
initial public offering in which the Company sold 1,380,000 shares of its
common stock.
(2) In connection with the Company's July 1994 initial public offering, the
Company elected to terminate its election to be treated as a subchapter S
corporation for tax purposes. As a result of this change in tax status,
1994 became the first year in which the Company recorded any income tax
expense.
(3) Earnings per common share reflect a 38.8% income tax adjustment to
subchapter S corporation earnings for the periods prior to July 21, 1994,
the date the Company terminated its subchapter S corporation election.
Basic and fully diluted earnings per share is reflected, except that, for
1994, fully diluted earnings per share was $0.91.
(4) Weighted average number of common shares outstanding for periods prior to
April 14, 1994 reflect the effect of the Company's 11,666.667-for-1 stock
split effected on that date.
(5) For the years ended December 31, 1994 and 1993, average interest rate
earned includes the impact of the accretion to income from nonrefundable
acquisition discount of $1.3 million and $580,000, respectively.
(6) 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
(120 days for certain securitized receivables) contractually delinquent.
SEE "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Credit Loss Experience -- Allowance and Provision
for Credit Losses/Charge-Offs."
(7) For purposes of calculating the historical ratio of earnings to fixed
charges, earnings consist of income before income taxes and fixed charges.
Fixed charges consist of interest charges and one-third of rentals.
(8) Revenues consist of net interest income, gain on sale of finance
receivables, servicing income and insurance commissions.
(9) Net of unearned finance charges.
(10)Includes Installment Contract sales of $23.2 million and related
indebtedness of $23.7 million. SEE Note 1 to the Company's Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 which 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.
The following management's discussion and analysis provides
information regarding the Company's financial condition as of December 31,
1997 and 1996 and its results of operations for the years ended December 31,
1997, 1996 and 1995. The management's discussion and analysis should be read
in conjunction with the preceding "Selected Financial Data" and the Company's
Financial Statements and the Notes thereto and the other financial data
included elsewhere in this Annual Report on Form 10-K. The financial
information provided below has been rounded in order to simplify its
presentation. However, the ratios and percentages provided below are
calculated using the detailed financial information contained in the
Company's Financial Statements, the Notes thereto and the financial data
included elsewhere herein.
5
<PAGE>
The Company experienced a significant deterioration in its financial
condition primarily due to significant operating losses during 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 requirements of its revolving credit agreement
with a group of nine commercial banks (the "Revolving Credit Agreement"),
that certain 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
December 31, 1997, the Company's funding was effectively limited to its
internally generated cash. The Company, among other actions, has
restructured operations to reduce overhead. During 1997, the Company adopted
more conservative credit underwriting criteria, which resulted in a reduction
in the volume of Installment Contracts purchased from dealers. The Company
continues to seek a merger, sale or recapitalization. There is no assurance
that the Company will be successful in these efforts and the failure of such
efforts would have a material adverse effect on the Company's financial
condition and raise substantial doubt about the Company's ability to continue
as a going concern.
RECENT EVENTS
SALES OF FINANCE RECEIVABLES/DEBT RETIREMENT
On February 23, 1998 and March 23, 1998 the Company sold net retail
installment contracts ("Installment Contracts") to competitors for $12.5
million and $471,000 in cash net of non-refundable acquisition discount and
allowances for credit losses, respectively. Proceeds were applied to payoff
all outstanding amounts under the Company's Revolving Credit Agreement. As a
result, the Revolving Credit Agreement was terminated shortly after the March
23, 1998 sale. Any resulting gain or loss on this transaction was not
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 on May 13, 1998.
Trading, if any, in the Company's Common Stock may now be conducted in the
over-the-counter market through 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 consequence of the delisting
from the NASDAQ National Market, a shareholder will find it more difficult or
impossible to sell, or to obtain quotations as to prices of, the Company's
Common Stock.
FOURTH QUARTER ADJUSTMENTS
During the fourth quarter, the Company reduced the amount of its
Excess Servicing Receivable asset and restricted cash in connection with its
1996 securitization of Installment Contracts to zero as a result of
anticipated increased loss experience. Additionally, the Company eliminated
approximately $2.0 million that had initially been recorded as gain on sale
during the second and third quarters with respect to Installment Contract
sales to GECC pursuant to the GECC Agreement (the "1997 GECC Transactions")
in order to reflect such transactions as financing transactions pursuant to
the provisions of Statement of Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS 125").
GENERAL
The Company's outstanding balance of owned or serviced (i.e., managed)
Installment Contracts declined $52.7 million during 1997 to $99.0 million
(net). This decline reflects (i) the Company's emphasis on addressing credit
losses (rather than portfolio growth), (ii) limited funding availability and
(iii) the Company's suspension of Installment Contract purchases beginning in
October 1997 until alternative funding sources become available.
6
<PAGE>
Finance receivables managed (owned or serviced) as of December
31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Total owned, net . . . . . . . . . . . . . . . . . . . . . . $ 28,455,232 $ 54,663,926
------------- -------------
Serviced:
GECC Installment Contract sale (1997) (1) . . . . . . . . 27,060,820 --
GECC Installment Contract sale (1996 and prior) (1) . . . 28,798,501 66,717,919
Securitization. . . . . . . . . . . . . . . . . . . . . . 14,646,770 30,247,885
------------- -------------
Total serviced, net. . . . . . . . . . . . . . . . . . . . . 70,506,091 96,965,804
------------- -------------
Total managed, net . . . . . . . . . . . . . . . . . . . . . $ 98,961,323 $ 151,629,730
------------- -------------
------------- -------------
</TABLE>
_______________
(1) For 1995 and 1996, Installment Contract sales pursuant to the GECC
Agreement were accounted for as off-balance sheet sales transactions
pursuant to SFAS No. 77, "Reporting by Transferors for Transfers of
Receivables with Recourse" ("SFAS 77"), and servicing and bonus servicing
fee income is recognized as earned. Effective January 1, 1997, sales
pursuant to the GECC Agreement were accounted for as financing transactions
pursuant to SFAS 125, and interest income is recognized on the Installment
Contract balances under the interest method. Interest expense is
recognized at GECC's fixed spread and charge-off and related provisions for
credit losses are reflected as transactions impacting the allowance for
credit losses, Installment Contract sales.
Interest and servicing income on the Company's portfolio of managed
Installment Contracts accounts for most of the Company's revenue. The net
amount of Installment Contracts purchased declined to $57.2 million during
the year ended December 31, 1997 from $105.9 million during the year ended
December 31, 1996. The Company began reducing its purchases of Installment
Contracts during the fourth quarter of 1995. This trend continued through
1997 and 1996 as the Company sought to improve the quality of Installment
Contracts purchased. This decision was prompted by unacceptable credit
performance trends on previously purchased Installment Contracts.
As reflected in the following table, the finance receivables originated
by the Company during the periods presented below consist primarily of
Installment Contracts.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Installment Contracts purchased(1). . . . . . . . . . . $ 57,204 $ 105,906 $ 186,162
Net Other Loans originated(1) . . . . . . . . . . . . . . . 267 528 417
--------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,471 $ 106,434 $ 186,579
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
_______________________
(1) Net of unearned finance charges.
As part of its funding strategy, the Company sold $37.0 million and
$64.8 million of net Installment Contracts to GECC, with servicing retained,
during the years ended December 31, 1997 and 1996, respectively. The Company
accounted for the 1997 GECC Transactions as financing transactions pursuant
to the provisions of SFAS 125, which is effective for Installment Contract
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 SFAS 77, thereby
removing the related receivables from the balance sheet while recognizing any
subsequent servicing income as received. SEE "-- Accounting Matters" and
Note 1 to the Company's Financial Statements. During 1997, the Company also
sold $14.4 million of net Installment Contracts to competitors, for which
servicing rights were relinquished. (Additionally, during 1996, the Company
sold $9.6 million of net Installment Contracts originated from dealers
located in Texas to a competitor. This sale reflects the Company's decision
to substantially reduce its business in Texas.) There was no related gain or
loss on sales of Installment Contracts to competitors. If there was a gain
or loss, it would have been recorded at the time the Installment Contracts
were sold. SEE "-- Liquidity and Capital Resources" and Notes 4 and 5 to the
Company's Financial Statements.
7
<PAGE>
During the fourth quarter of 1996, the Company completed the
securitization of approximately $35.2 million (net) of Installment Contracts
through a transaction agented by Greenwich Capital Markets, Inc. (the
"Securitization"). The transaction was structured to create three classes of
certificates, which were rated by Duff & Phelps Credit Rating Co. and Fitch
Investors Service L.P. The Company recognized a gain on the transaction of
approximately $612,000. The Company capitalized the retained servicing
rights on the Installment Contracts securitized. The net amount of
Installment Contracts serviced by the Company for third parties was $70.5
million and $97.0 million at December 31, 1997 and 1996, respectively. SEE
"-- Liquidity and Capital Resources" and Notes 4 and 5 to the Company's
Financial Statements.
PROFITABILITY AND RECENT TRENDS
During 1997, several sub-prime automobile finance companies, including
the Company, experienced poor finance receivables 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
trend was the direct result of several factors including: (i) the increased
levels of outstanding consumer debt and personal bankruptcies; (ii) the
heightened demand created by the increased supply of capital and used
automobile inventories; (iii) the need to attract consumers with lower credit
qualifications to meet this additional demand; (iv) economic uncertainties
and financial difficulties within the sub-prime automobile industry as well
as management upheavals at certain industry leaders; and (v) the impact of
increased levels of competition on Installment Contract yields. These
factors have 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 $6.6 million decline in 1997 earnings was primarily a result of
reduced net interest income as a result of fewer Installment Contract
purchases and fewer Installment Contracts owned due to additional sales of
Installment Contracts and a $2.7 million valuation adjustment to previously
recognized net assets related to the Securitization of Installment Contracts.
The decrease in 1997 earnings was partially offset by a reduced provision for
credit losses on owned receivables and reduced operating expenses.
The following table sets forth certain data relating to the Company's
net income before provision for credit losses for the years ended December
31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average owned finance receivables, net (1) . . . . . . . . . $ 47,196 $116,797 $120,830
Average interest bearing liabilities . . . . . . . . . . . . 45,321 98,202 88,276
Total interest and fee income. . . . . . . . . . . . . . . . 11,752 26,653 27,100
Total interest expense . . . . . . . . . . . . . . . . . . . 5,476 9,059 8,093
-------- -------- --------
Net interest income before provision for credit losses . . . $ 6,276 $ 17,594 $ 19,007
-------- -------- --------
-------- -------- --------
Average interest rate on owned finance receivables, net. . . 24.90% 22.82% 22.43%
Average interest rate on interest bearing liabilities. . . . 12.08% 9.23% 9.17%
-------- -------- --------
Net interest spread. . . . . . . . . . . . . . . . . . . . . 12.82% 13.59% 13.26%
-------- -------- --------
-------- -------- --------
Net interest margin(2) . . . . . . . . . . . . . . . . . . . 13.30% 15.06% 15.73%
-------- -------- --------
-------- -------- --------
</TABLE>
________________________
(1) Excludes average net finance receivables serviced (including 1997 GECC
Transaction receivables) for third parties of $86.5 million, $56.0 million
and $33.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The 1997 GECC Transactions were accounted for as financing
transactions. SEE Note 1 to the Company's Financial Statements.
(2) Net interest margin represents net interest income divided by average
finance receivables, net owned.
8
<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 interest rates, fees, premiums and other
charges at or near the maximum amounts permitted under state law. As a
result, the Company has limited ability to offset increases in its cost of
funds.
An increasingly larger component of the Company's profitability is the
servicing income earned by the Company on Installment Contracts sold or
securitized. Servicing income is derived from base servicing fees for
finance receivables administration and collection services and bonus or
excess servicing fees paid based on the performance of the Installment
Contracts sold or securitized. Net servicing income of $1.6 million was
earned in 1997, reflecting a decline of $3.5 million from the $5.1 million
earned in 1996. Although base servicing fees increased to $2.1 million in
1997 from $1.7 million in 1996 (as a result of a greater level of average
serviced assets), the 1997 base servicing fee increase was offset by a
$740,000 increase to the amortization of the excess servicing receivable and
a $1.7 million adjustment to reflect the outlook as of December 31, 1997 with
respect to future credit losses, recoveries and prepayment rates on the
Securitization and 1997 Installment Contract sales. SEE Note 5 to the
Company's Financial Statements.
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 year ended December 31, 1997, the average interest rate earned
on net finance receivables (owned) increased 2.08% over the comparable 1996
period. Generally, it would be anticipated that improved margins would result
in improved profitability; however, due to significant increases in funding
costs resulting from actions taken by lenders that are party to the Revolving
Credit Agreement, the average interest rate on interest bearing liabilities
increased 2.85% for the year ended December 31, 1997 over the comparable 1996
period.
Pursuant to an October 1997 amendment to the Revolving Credit Agreement,
the Company borrowed funds at an interest rate equal to the prime rate of the
agent bank plus 3% (representing an increase from the prime rate, the
previous interest rate on borrowings). The Revolving Credit Agreement was
retired subsequent to December 31, 1997. SEE "-- Recent Developments" and
Note 16 to the Company's Financial Statements.
Another component of the Company's profitability is the level of its
operating expenses. Operating expenses decreased $1.7 million (10.6%) from
the prior year, but it increased as a percentage of average managed
receivables to 10.8% in 1997. The increase as a percentage of average
managed receivables is due to fewer Installment Contract purchases and the
sale of Installment Contracts to competitors. The Company has consolidated
operations and reduced staffing to reduce operating expenses.
FINANCIAL CONDITION
Total assets decreased $9.0 million (14.0%) to $54.8 million at December
31, 1997 from $63.8 million at December 31, 1996 primarily due to decreases
in owned finance receivables (net of dealer reserves, nonrefundable
acquisition discount and allowance for credit losses) to $24.3 million at
December 31, 1997 from $47.2 million at December 31, 1996. The decrease in
owned finance receivables was offset, in part, by an increase in finance
receivables of $23.2 million (net) resulting from the 1997 GECC Transactions.
During 1997, the Company sold Installment Contracts of approximately $37.0
million to GECC. These Installment Contracts constituted the 1997 GECC
Transactions and were accounted for as financing transactions. The Company
also sold approximately $14.4 million (net) of Installment Contracts to
competitors during 1997. The net amount of owned or serviced Installment
Contracts decreased to $98.9 million at December 31, 1997 from $151.6 million
at December 31, 1996.
9
<PAGE>
Total liabilities increased $3.7 million (6.9%) to $57.1 million at
December 31, 1997 from $53.5 million at December 31, 1996 primarily due to
the notes payable arising in connection with the 1997 GECC Transactions and
the treatment of such transactions pursuant to SFAS 125. The decrease in
senior debt was primarily the result of decreased borrowings under the
Revolving Credit Agreement to $15.0 million at December 31, 1997 from $32.8
million at December 31, 1996 as a result of applying the proceeds of sales of
Installment Contracts to the Revolving Credit Agreement.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table sets forth certain data relating to the Company's
results of operations for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Automobile portfolio interest and fee income, owned receivables. . . . . . . . . . . $11,436 $26,326 $26,779
------- ------- -------
Total interest and fee income, owned receivables . . . . . . . . . . . . . . . . . . $11,752 $26,653 $27,100
Total interest expense, senior and subordinated debt . . . . . . . . . . . . . . . . (5,476) (9,060) (8,093)
------- ------- -------
Net interest income before provision for credit losses . . . . . . . . . . . . . . . 6,276 17,594 19,007
Provision for credit losses, owned receivables . . . . . . . . . . . . . . . . . . . (6,251) (13,184) (9,538)
------- ------- -------
Net interest income after provision for credit losses, owned receivables . . . . . . 25 4,410 9,469
------- ------- -------
Interest income, Installment Contract sales. . . . . . . . . . . . . . . . . . . . . 4,723 -- --
Interest expense, Installment Contract sales . . . . . . . . . . . . . . . . . . . . (1,597) -- --
Provision for credit losses, Installment Contract sales. . . . . . . . . . . . . . . (2,883) -- --
------- ------- -------
Net interest income after provision for credit losses, Installment Contract
sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 -- --
Other income:
Servicing income (from Installment Contracts) . . . . . . . . . . . . . . . . . 1,628 5,107 2,119
Gain on sale of finance receivables (net) . . . . . . . . . . . . . . . . . . . -- 612 --
Insurance Products commissions. . . . . . . . . . . . . . . . . . . . . . . . . 6 66 255
------- ------- -------
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,634 5,785 2,374
------- ------- -------
Salaries and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,434 8,011 5,745
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,050 8,191 5,576
------- ------- -------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,484 16,202 11,321
------- ------- -------
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 (659) 197
------- ------- -------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(12,703) $(5,349) $ 325
------- ------- -------
------- ------- -------
</TABLE>
COMPARISON OF 1997 TO 1996. The Company experienced a net loss of $12.7
million for the year ended December 31, 1997 compared to net loss of $5.3
million for the year ended December 31, 1996.
The most significant factors in the Company's $7.4 million decline in
earnings between 1997 and 1996 was (i) the $14.9 million reduction in
interest and fee income due to reduced earning assets as a result of the
purchase of fewer Installment Contracts and additional sales of Installment
Contracts; (ii) the $4.2 million reduction (net) in other income; and (iii)
higher effective costs for borrowed money for the financing of owned
receivables. SEE "-- Notes 4 and 5 to the Company's Financial Statements."
Net interest income from owned receivables before the provision for
credit losses decreased by 64.3% to $6.3 million for the year ended December
31, 1997 from $17.6 million for the year ended December 31, 1996, primarily
as the result of a decrease in Installment Contracts owned, thereby reducing
the amount of interest income-producing assets.
10
<PAGE>
Interest expense, excluding that relating to the 1997 GECC Transactions,
decreased to $5.5 million for the year ended December 31, 1997 from $9.1
million for the year ended December 31, 1996. The decrease resulted from a
decrease in the average amount of borrowed funds outstanding throughout the
year. The average debt outstanding during 1997, excluding that relating to
the 1997 GECC Transactions, decreased to $45.3 million from $98.2 million
during 1996, and the average interest rate paid for borrowed funds increased
30.9% to 12.08% in 1997 from 9.23% in 1996, primarily as a result of
subordinated debt representing a higher proportion of outstanding debt and
actions taken by lenders that are party to the Revolving Credit Agreement.
The effective rate of interest paid to Revolving Credit Agreement lenders
increased to 15.5% in 1997, 74.6% above the comparable 1996 rate.
The Company's financial presentation for sales of Installment Contracts
to GECC changed in 1997 due to the implementation of SFAS 125 (which became
effective January 1, 1997). The 1997 GECC Transactions are reported as
financing transactions, while those Installment Contract sales to GECC
occurring in 1996 and prior periods are reported as sales transactions.
Interest income in 1997 from the 1997 GECC Transaction of $4.7 million was
reduced by related interest expense of $1.6 million and a related provision
for credit losses of $2.9 million. Net interest income, after provision for
credit losses, on Installment Contract sales for the year ended December 31,
1997 was $243,000. In 1996, GECC Installment Contract sales revenue was
included in servicing fee income.
There was no gain on sale in 1997 compared to $612,000 in the year ended
December 31, 1996 due to the absence of securitization activity in 1997.
Other income, primarily consisting of servicing income and bonus
servicing income, decreased $4.2 million to $1.6 million for 1997. Service
fee income declined by $1.8 million to $3.3 million in 1997 from the $5.1
million recorded in the year ended December 31, 1996. The reduction in
servicing income in 1997 is attributable to a $1.1 million decrease in
servicing fees and a $740,000 increase in amortization expense resulting from
the Securitization. The Company recorded a ($2.7 million) adjustment to
reflect the declining outlook on its Securitization with respect to future
credit losses, recoveries and prepayment rates and recorded an adjustment of
$1.7 million as of December 31, 1997.
Operating expenses decreased 10.6% to $14.5 million for the year ended
December 31, 1997 compared to $16.2 million for the year ended December 31,
1996. Salaries and related costs decreased 7.2% from the prior year to $7.4
million for the year ended December 31, 1997, due primarily to reductions in
the number of employees notwithstanding normal pay increases and increased
benefits costs. The Company's other operating expenses decreased 13.9% to
$7.1 million for the year ended December 31, 1997 compared to the year ended
December 31, 1996, due to a 22.6% reduction in average net finance
receivables owned or serviced. Operating expenses as a percentage of average
net finance receivables owned or serviced increased to 10.84% for the year
ended December 31, 1997 as compared to 9.37% for the year ended December 31,
1996.
The Company had an income tax expense of $121,000 for the year ended
December 31, 1997 compared to an income tax benefit of ($659,000) for the
year ended December 31, 1996. The 1997 expense related to a pretax loss of
$12.6 million incurred in 1997 versus pretax loss of $6.0 million in 1996.
The effective tax rates on income before income taxes was (11.0%) in 1996.
COMPARISON OF 1996 TO 1995. The Company experienced a net loss of $5.3
million for the year ended December 31, 1996 compared to net income of
$325,000 for the year ended December 31, 1995.
Net interest income before the provision for credit losses decreased by
7.4% to $17.6 million for the year ended December 31, 1996 from $19.0 million
for the year ended December 31, 1995, primarily as the result of increased
sales of Installment Contracts and the Securitization, thereby reducing the
number of interest income-producing assets. The negative effect on interest
and fee income resulting from the sale and the Securitization,
11
<PAGE>
with servicing retained, of $100 million of finance receivables (net) during
1996, compared to $44.3 million in 1995, was partially offset by a
significant increase in servicing income.
Total interest expense increased to $9.1 million for the year ended
December 31, 1996 from $8.1 million for the year ended December 31, 1995.
The increase resulted from an increase in the average amount of borrowed
funds outstanding throughout the year as well as increases in interest rates
charged for borrowed funds. The average debt outstanding during 1996
increased to $98.2 million from $88.3 million during 1995, and the average
interest rate paid for borrowed funds increased to 9.23% in 1996 from 9.17%
in 1995.
The most significant factor in the Company's $5.7 million decline in
earnings between 1995 and 1996 was a $3.7 million increase in the provision
for credit losses. This increase was a function of deteriorating credit
quality. Credit quality suffered due to higher charge-off rates for
Installments Contracts purchased during the last half of 1995 and the first
half of 1996. The Company believes that credit quality has also suffered, in
part, due to historically high levels of consumer indebtedness nationally.
SEE "-- Credit Loss Experience -- Allowance and Provision for Credit
Losses/Charge-offs." As more fully discussed in " -- Accounting Matters," the
increase in the provision for credit losses for 1996 is also due to the fact
that, unlike in 1995 (and prior years), no contract interest was allocated to
nonrefundable acquisition discount during 1996.
Other income, including servicing income and commissions from the sale
of Insurance Products, increased 141.7% to $5.8 million for the year ended
December 31, 1996 from $2.4 million for the year ended December 31, 1995,
primarily due to an increase in servicing income to $5.2 million for the year
ended December 31, 1996 from $2.1 million for the year ended December 31,
1995. This increase reflects the increased amount of servicing-retained sales
of finance receivables and the Securitization by the Company in 1996. The
Company derives its servicing income from base servicing fees and bonus or
excess servicing fees based on the performance of the finance receivables
serviced by the Company. Of the $5.1 million of servicing income earned in
1996, $3.7 million represented bonus or a excess servicing fees. Of the $2.1
million of servicing income earned in 1995, $1.1 million represented bonus or
excess servicing fees. During 1996, the Company recognized a $612,000 gain
from the sale of $35.2 million (net) of Installment Contracts to the Eagle
Auto Trust 1996-A in October 1996 and the corresponding issuance to investors
of automobile receivable-backed certificates.
Operating expenses increased 43.4% to $16.2 million for the year ended
December 31, 1996 compared to $11.3 million for the year ended December 31,
1995. Salaries and related costs increased 40.4% from the prior year to $8.0
million for the year ended December 31, 1996, due primarily to an increase in
the number of employees, normal pay increases and increased benefits costs.
The Company's other operating expenses increased 46.4% to $8.2 million for
the year ended December 31, 1996 compared to the year ended December 31,
1995, due to higher collection expenses and higher professional fees.
Operating expenses as a percentage of average net finance receivables owned
or serviced increased to 9.37% for the year ended December 31, 1996 as
compared to 7.35% for the year ended December 31, 1995. The Company believes
that it will not require an increase in the number of employees needed to
operate the Company for the foreseeable future, although there can be no
assurance in this regard.
The Company recorded an income tax benefit of ($659,000) for the year
ended December 31, 1996 as compared to an income tax expense of $197,000 for
the year ended December 31, 1995. This resulted from the pretax loss of $6.0
million in 1996 versus pretax income of $523,000 in 1995. The effective tax
rates on income before income taxes were (11.0%) and 37.7% in 1996 and 1995,
respectively.
CREDIT LOSS EXPERIENCE
The Company's credit loss reserves are comprised of three components:
nonrefundable acquisition discount; an allowance for credit losses; and, for
non-Installment Contracts finance receivables, refundable dealer reserves.
The total of allowance for credit losses, nonrefundable acquisition discount
and dealer reserves equaled 14.64% and 14.22% of net owned finance
receivables at December 31, 1997 and 1996, respectively. At
12
<PAGE>
December 31, 1997, the Company maintained credit loss reserves equal to
14.13% of the net amount of the 1997 GECC Transactions to offset potential
losses on the 1997 GECC Transactions. The following discussion reflects the
Company's increased emphasis on the allowance for credit losses and its
reduced emphasis on nonrefundable acquisition discount in establishing credit
loss reserves for the Company's owned portfolio of Installment Contracts.
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 discounts with
dealers based upon various criteria, including the credit risk associated
with the contracts being purchased and market pricing factors. The discount
is nonrefundable, is equal to the difference between (a) the total principal
amount to be repaid under the Installment Contract and (b) net funds paid to
the dealer, and is allocated to the nonrefundable acquisition discount
account. As part of the Company's financing of retail installment sales
contracts (other than Installment Contracts), refundable dealer reserves may
be established to protect the Company from losses associated with such
contracts, and are shown as a liability of the Company.
The following table presents a reconciliation of the changes in
nonrefundable acquisition discount and dealer reserves on its owned
receivables for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,730 $ 9,721 $ 8,745
Additions applicable to new volume . . . . . . . . . . . . . . . . . . . . . . . . . 5,152 11,547 30,319
Payments to dealers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (833) (2,077)
Reductions applicable to accounts sold . . . . . . . . . . . . . . . . . . . . . . . (5,175) (8,439) (5,524)
Losses charged, net of recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . (527) (10,266) (21,742)
-------- -------- --------
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,180 $ 1,730 $ 9,721
-------- -------- --------
-------- -------- --------
Nonrefundable acquisition discount as a percentage of
net owned finance receivables at year-end . . . . . . . . . . . . . . . . . . . . 4.15% 3.16% 6.67%
</TABLE>
The substantial decrease in "additions applicable to new volume" from
1996 to 1997 and 1996 to 1995 reflects the fact that purchases of Installment
Contracts declined and that, unlike 1995, nonrefundable acquisition discount
was not increased during 1996 or 1997 by allocations of contract interest
that otherwise would have been recorded as unearned finance charges. SEE
"--Accounting Matters."
ALLOWANCE AND PROVISION FOR CREDIT LOSSES/CHARGE-OFFS. The Company
maintains an allowance for credit losses at a level that management believes
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 has experienced higher charge-off
rates during 1996 than during 1995. SEE "-- Results of Operations for the
Years Ended December 31, 1997, 1996 and 1995 -- Comparison of 1997 to 1996"
The following table reflects the Company's allowance for credit losses
and provision for credit losses on its owned receivables for each of the
years ended December 31, 1997, 1996 and 1995:
13
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,046 $ 10,808 $ 1,249
Provision charged to expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,251 13,184 9,538
Finance receivables charged off, net of recoveries. . . . . . . . . . . . . . . . . (9,311) (17,946) (21)
-------- --------- --------
Balance at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,986 $ 6,046 $ 10,808
-------- --------- --------
-------- --------- --------
Allowance as a percentage of
net owned finance receivables at year-end . . . . . . . . . . . . . . . . . . . . 10.49% 11.06% 7.42%
</TABLE>
The provision charged to expense as a percentage of average finance
receivables (owned) was 13.3%, 11.3% and 7.9% for the years 1997, 1996 and
1995, respectively. The substantial increases in the provision for credit
losses was due to higher credit losses and the Company not allocating during
1996 or 1997 any contract interest to non-refundable acquisition discount.
SEE "-- Results of Operations for the Years Ended December 31, 1997, 1996 and
1995 -- Comparison of 1997 to 1996" and "--Accounting Matters."
DELINQUENCIES. The Company monitors delinquencies in the managed
finance receivables portfolio to gauge overall credit trends. Managed
finance receivables (net of unearned finance charges) that were contractually
delinquent by 30 days or longer were $14.0 million, $16.6 million and $15.2
million, representing 14.1%, 11.0% and 8.2% of net managed finance
receivables, as of December 31, 1997, 1996 and 1995, respectively. The
Company attributes the increase in delinquencies in 1997 to (i) the
suspension of Installment Contract purchases, thereby eliminating the
Company's ability to improve the credit quality of the portfolio by
replenishing current accounts; (ii) the sale of Installment Contracts to
third parties, including competitors, which accounts are disproportionately
comprised of current accounts; and (iii) the adverse impact of consolidating
Company operations with respect to collection activities. SEE "Business --
Servicing and Collection."
The following table reflects delinquencies experienced by the Company in
its managed finance receivables portfolio as of December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net amount outstanding(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,961 $151,630 $184,882
--------- -------- --------
Delinquencies
30-59 days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,935 $ 13,256 $ 11,701
60-89 days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,868 2,965 3,507
90+ days (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 396 1
--------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,967 $ 16,617 $ 15,209
--------- -------- --------
--------- -------- --------
Total delinquencies as a percentage of net managed
finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.11% 10.96% 8.18%
</TABLE>
________________________
(1) Includes Installment Contracts sold or securitized, with servicing
retained, by the Company and Other Loans, in each case net of unearned
finance charges.
(2) The Company charges off all Installment Contracts and Other Loans greater
than 89 days delinquent. The Company charges off all securitized
Installment Contracts greater than 120 days delinquent.
REPOSSESSIONS ON HAND AND CHARGE-OFF EXPERIENCE. Repossessed collateral
consists primarily of automobiles and is valued at the lower of cost or
market. Repossessions on hand (including titled assets) were valued at $2.1
million (2.3% of net managed Installment Contracts), $4.2 million (2.8% of
net managed Installment Contracts), and $4.4 million (2.4% of net managed
Installment Contracts) at December 31, 1997, 1996 and 1995, respectively.
Titled assets included repossessed assets pending recovery (I.E., in respect
of a charged-off account, but not yet in the Company's possession) which,
effective December 31, 1995, are carried at
14
<PAGE>
their estimated fair value, less the estimated costs of disposition.
Additionally, accounts charged off as a result of bankruptcy filings are
carried as a titled asset at a value based on the terms of the resolution of
the bankruptcy. At December 31, 1997 and 1996, the value of titled assets
was approximately $1.2 million and $1.6 million, respectively.
The following table reflects charge-offs in the managed finance
receivables portfolio as of and for the years ended December 31, 1997, 1996
and 1995:
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net average managed principal amount outstanding(1). . . . . . . . . . . . . . . . . . $ 133,664 $ 172,838 $ 153,955
Number of accounts charged-off during period . . . . . . . . . . . . . . . . . . . . . 5,423 6,768 4,990
Net charge-offs during period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,169 $ 33,878 $ 23,978
Net charge-offs as a percentage of average net managed principal amount outstanding. . 17.33% 19.60% 15.57%
</TABLE>
_______________________
(1) Includes Installment Contracts sold or securitized, with servicing
retained, by the Company and Other Loans, in each case net of unearned
finance charges.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company financed its operations through cash flow from
operations, borrowings under the Revolving Credit Agreement (until terminated in
March 1998), and periodic sales of Installment Contracts and other finance
receivables. At December 31, 1997, the Company's funding was effectively limited
to internal cash generation. The Company, among other actions, has restructured
operations to reduce overhead. During 1997, the Company modified credit
underwriting criteria and reduced the volume of Installment Contracts purchased
from dealers. The Company is exploring opportunities for a merger, sale or
recapitalization. There is no assurance that the Company will be successful in
these efforts and the failure of such efforts would have a material adverse
effect on the Company's financial condition.
Net cash provided by (used in) operating activities totaled ($8.3) million,
($23.7) million and $3.3 million during the years ended December 31, 1997, 1996
and 1995, respectively.
Net cash provided by (used in) investing activities totaled $3.0 million,
$91.0 million and ($67.4) million during the years ended December 31, 1997, 1996
and 1995, respectively.
Net cash provided by (used in) financing activities, primarily as a result
of borrowings and repayments under the Revolving Credit Agreement, totaled $5.9
million, ($68.1) million and $65.3 million during the years ended December 31,
1997, 1996 and 1995, respectively. SEE the Statements of Cash Flows in the
Company's Financial Statements.
During October 1997, the Company entered into an amendment to the Revolving
Credit Agreement that, among other things: immediately reduced the maximum
availability under the facility to $30 million; reduced availability to $20
million effective December 19, 1997 and $15 million effective January 20, 1998;
accelerated maturity to January 31, 1998 (the debt under the Revolving Credit
Agreement was retired on March 23, 1998); and modified certain other terms of
the revolving credit facility, including the cost of borrowings (which was
increased to prime plus 3% from prime and eliminated the availability of LIBOR
borrowings). These changes were motivated by, among other things, the Company's
breach of financial covenants under the Revolving Credit Agreement and general
economic conditions in the sub-prime automobile finance industry.
The Company must comply with customary financial and other covenants under
the Indenture. At December 31, 1997, the Company was in breach of the interest
coverage ratio and delinquency trigger covenant
15
<PAGE>
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 December 31, 1997, the Company had total debt of $32.6 million as
compared to $50.8 million at December 31, 1996 and $118.7 million at December
31, 1995. At December 31, 1997, $5.0 million was available under the
Revolving Credit Agreement. SEE Note 8 to the Company's Financial
Statements. The following table presents the Company's debt instruments and
the weighted average interest rates on such instruments at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
BALANCE RATE BALANCE RATE BALANCE RATE
------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
SENIOR
Revolving Credit Agreement. . . . . $ 14,997 12.83% $ 31,763 8.05% $ 99,650 7.89%
Loan from affiliated company. . . . 37 6.75% 1,065 6.75% 1,002 6.75%
SUBORDINATED
Notes payable . . . . . . . . . . . 17,543 12.21% 17,978 12.15% 18,045 12.14%
-------- -------- --------
Total debt. . . . . . . . . . . . . $ 32,577 12.08% $ 50,806 9.47% $118,697 8.52%
-------- -------- --------
-------- -------- --------
</TABLE>
In May, 1995, through a public offering underwritten by Kemper
Securities, Inc. (now EVEREN Securities, Inc.), The Chicago Corporation and
Piper Jaffray Inc., the Company issued $17 million of subordinated notes,
with a maturity date of May 2005. Interest on the notes accrues at the rate
of 10% from the date of their original issuance, and is payable monthly. The
rate at which interest accrues under the notes will increase, generally by 25
basis points, each year beginning June 1, 1996. The notes are redeemable by
the Company, in whole or in part, beginning on their second anniversary date,
with a 1% premium imposed if the notes are redeemed prior to their third
anniversary. The Company is required to redeem $750,000 (subject to certain
adjustments) of aggregate principal amount of notes (or make corresponding
contributions to a sinking fund) on each of the fourth through ninth
anniversaries of the notes. The notes were issued under the Indenture, which
contains financial and operating covenants that restrict, among other things,
the Company's ability to pay dividends, to incur additional indebtedness and
to engage in certain extraordinary transactions. At December 31, 1997, the
Company was in violation of the leverage covenants set forth in the indenture
governing the notes. The Company expects to remain in violation of that
covenant for the near term. No assurance can be given that the Company's
subordinated lenders will not take adverse action in response to the ongoing
breach of such covenant.
The following table sets forth information with respect to maturities of
senior and subordinated debt at December 31, 1997:
<TABLE>
<CAPTION>
LOAN FROM
SENIOR BANK AFFILIATED SUBORDINATED
YEAR LINES OF CREDIT COMPANY NOTES PAYABLE TOTAL
------ ----------------- ---------- ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1998 . . . . . . . . . . . . . . . $14,997 $ 37 $ 10 $ 15,044
1999 . . . . . . . . . . . . . . . -- -- 813 813
2000 . . . . . . . . . . . . . . . -- -- 809 809
2001 . . . . . . . . . . . . . . . -- -- 875 875
2002 . . . . . . . . . . . . . . . -- -- 812 812
Thereafter . . . . . . . . . . . . -- -- 14,224 14,224
----------------- ---------- ------------- ----------
Total. . . . . . . . . . . . . $ 14,997 $ 37 $ 17,543 $ 32,577
----------------- ---------- ------------- ----------
----------------- ---------- ------------- ----------
</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
16
<PAGE>
protects the Company against increases in the interest rate of a portion of
its revolving debt if the three-month LIBOR rate exceeds 10.5%. The interest
rate cap expires in July 1998.
The interest rate collars, in an aggregate notional amount of $20
million, protect the Company against increases in the interest rate of its
revolving debt when the three-month LIBOR rate exceeds 8%. The Company must
make payments to the counterparties to the interest rate collars if
three-month LIBOR falls below 5%. The interest rate collar expires in
September 2000.
In order to meet funding needs, in 1997 the Company sold approximately
$36.9 million of net Installment Contracts to GECC under the GECC Agreement.
SEE Note 1 to the Company's Financial Statements.
The GECC Agreement provides for the purchase by GECC of Installment
Contracts from the Company on a revolving basis of up to a maximum principal
amount of $80 million outstanding at any time through June 25, 1998; however,
GECC has verbally indicated to the Company that it would not make additional
Installment Contract purchases until an adequate replacement is found for the
Revolving Credit Agreement. There is no assurance that a replacement will be
found. The Company also sold $14.4 million of net Installment Contracts to
competitors in order to reduce indebtedness.
Total stockholders' equity (deficit) at December 31, 1997 was ($2.3)
million as compared to $10.3 million at December 31, 1996.
YEAR 2000 COMPLIANCE
Company operations are dependent on a proprietary information management
system. As a result of initiatives undertaken over a decade ago, all systems
development has been formatted with a full, four-digit year code in the
database. Based on a comprehensive assessment of the year 2000 on its
business, the Company believes that all critical financial and operational
information is currently year 2000 compliant.
The Company has a formalized program for testing communication
equipment, vendor software, and non-critical ancillary programs for year 2000
compliance. As of December 31, 1997, the Company's compliance efforts are
substantially complete. The Company does not expect the cost of ensuring
year 2000 compliance to be material.
ACCOUNTING MATTERS
Historically, the Company recorded, at the time it purchased Installment
Contracts, a portion of contract interest (which would otherwise have been
recorded as unearned finance charges) as nonrefundable acquisition discount
when the credit risk and potential for future losses warranted such an
allocation. For 1997 and 1996, however, the Company did not allocate any
portion of contract interest from Installment Contracts purchased during the
period to nonrefundable acquisition discount. Instead, the Company
established additional reserves for credit losses on its portfolio of
Installment Contracts through the recognition of a provision for credit
losses that supplemented the balance of nonrefundable acquisition discount.
SEE "Credit Loss Experience."
During 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 125 establishes accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on the application of a financial
components approach which focuses on control of the assets and liabilities
that exist after the transfer. SFAS 125 prescribes the methodology for
recognition of gain or loss upon the transfer of assets as well as the
valuation of finance income receivable. SFAS 125 is effective for
transactions occurring after December 31, 1996, and is to be applied
prospectively. Retroactive application is not permitted. The Company
adopted SFAS 125 on January 1, 1997.
17
<PAGE>
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
per Share." This statement replaces the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
diluted effects of options. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. All earnings per
share amounts have been restated to conform to the SFAS 128 requirements.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997 with earlier application permitted.
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 on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 December
31, 1997 and 1996, 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%. At 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%. SEE "-- Note 9 to the Company's Financial Statements."
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
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DESCRIPTION: PAGE
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . 17
Balance Sheets as of December 31, 1997 and 1996. . . . . . . . . . . 18
Statements of Income for the Years Ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 19
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . 20
Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 21
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 22
18
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Eagle Finance Corp.:
We have audited the accompanying balance sheets of Eagle Finance Corp. (the
Company) as of December 31, 1997 and 1996, and the related statements of income,
changes in stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eagle Finance Corp. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant operating losses, has failed to
comply with various debt covenants and is presently seeking to merge, sell or
recapitalize the Company all of which raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Effective January 1, 1997 the Company adopted the Statement of Financial
Accounting Standard No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities".
KPMG PEAT MARWICK LLP
Chicago, Illinois
April 15, 1998
19
<PAGE>
EAGLE FINANCE CORP.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Finance receivables, owned (note 2). . . . . . . . $ 28,455,232 $ 54,663,926
Nonrefundable acquisition discount (note 3). . . . (1,179,708) (1,443,164)
Allowance for credit losses (note 3) . . . . . . . (2,986,419) (6,045,514)
------------ ------------
Finance receivables, net owned . . . . . . . . . . 24,289,105 47,175,248
------------ ------------
Finance receivables, Installment Contract sales. . 27,060,820 --
Allowance for credit losses related to
Installment Contract sales . . . . . . . . . (3,353,808) --
Additional allowance represented on title assets,
Installment Contract sales . . . . . . . . . (470,113) --
------------ ------------
Finance receivables, net Installment Contract sales 23,236,899 --
------------ ------------
Cash . . . . . . . . . . . . . . . . . . . . . . . 1,809,248 1,271,594
Money market investments . . . . . . . . . . . . . 552,521 552,651
Prepaid expenses and debt issuance costs . . . . . 1,029,970 1,554,082
Repossessed or titled assets . . . . . . . . . . . 2,091,011 4,249,443
Income tax receivable. . . . . . . . . . . . . . . 1,268,152 4,732,346
Deferred income tax benefit (note 7) . . . . . . . -- 1,004,912
Excess servicing receivable (note 6) . . . . . . . -- 1,050,590
Other assets . . . . . . . . . . . . . . . . . . . 548,913 2,176,696
----------- -----------
$ 54,825,819 $ 63,767,562
----------- -----------
----------- -----------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
<S> <C> <C>
Notes payable, Installment Contract sales. . . . . . $ 23,707,012 $ --
Senior debt (note 8) . . . . . . . . . . . . . . . . 15,034,111 32,827,893
Subordinated debt (note 8) . . . . . . . . . . . . . 17,543,768 17,977,720
Accrued interest payable . . . . . . . . . . . . . . 162,370 468,533
Accounts payable and accrued liabilities . . . . . . 694,577 1,893,737
Unearned insurance commissions . . . . . . . . . . . -- 5,158
Dealer reserves (note 3) . . . . . . . . . . . . . . -- 286,783
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . 57,141,838 53,459,824
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 and 4,189,100 shares in
1997 and 1996, respectively . . . . . . . . . . . 42,287 41,891
Additional paid-in capital . . . . . . . . . . . . . 13,593,206 13,514,422
Retained earnings (deficit). . . . . . . . . . . . . (15,951,512) (3,248,575)
----------- -----------
Total stockholders' equity (deficit) . . . . . . . . (2,316,019) 10,307,738
----------- -----------
$ 54,825,819 $ 63,767,562
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Interest income, owned:
Interest and fee income, owned receivables. . . . $ 11,751,876 $ 26,653,260 $ 27,100,358
Interest expense, owned receivables (senior and
subordinated debt) . . . . . . . . . . . . . . (5,475,730) (9,059,458) (8,092,984)
------------ ------------ ------------
Net interest income, owned receivables . . . . . . . 6,276,146 17,593,802 19,007,374
Provision for credit losses (note 3),
owned receivables . . . . . . . . . . . . . . (6,251,206) (13,184,278) (9,537,949)
------------ ------------ ------------
Net interest income after provision for
credit losses . . . . . . . . . . . . . . . . 24,940 4,409,524 9,469,425
------------ ------------ ------------
Interest income, Installment Contract Sales:
Interest income, Installment Contract sales . . . 4,722,811 -- --
Interest expense, Installment Contract sales
(notes payable) . . . . . . . . . . . . . . . (1,597,319) -- --
Provision for credit losses, Installment
Contract sales . . . . . . . . . . . . . . . (2,883,038) -- --
------------ ------------ ------------
Net interest income after provision for credit losses,
Installment Contract sales . . . . . . . . . . 242,454 -- --
------------ ------------ ------------
Other income:
Service fee income (note 5) . . . . . . . . . . . . 3,309,660 5,107,585 2,119,374
Gain on sale of finance receivables, net (note 4) . -- 611,796 --
Losses related to securitization. . . . . . . . . . (1,681,317) -- --
Commissions and other . . . . . . . . . . . . . . . 6,412 65,811 254,853
------------ ------------ ------------
Total other income . . . . . . . . . . . . . . . . . . 1,634,755 5,785,192 2,374,227
------------ ------------ ------------
Income before operating expenses . . . . . . . . . . . 1,902,149 10,194,716 11,843,652
Operating expenses:
Salaries and related costs. . . . . . . . . . . . . 7,433,803 8,011,223 5,744,920
Collection expenses . . . . . . . . . . . . . . . . 1,423,845 1,774,186 --
Other operating expenses. . . . . . . . . . . . . . 5,626,762 6,416,781 5,576,100
------------ ------------ ------------
Total operating expenses . . . . . . . . . . . . . . . 14,484,410 16,202,190 11,321,020
------------ ------------ ------------
Income (loss) before income taxes. . . . . . . . . . . (12,582,261) (6,007,474) 522,632
Applicable income taxes (note 7) . . . . . . . . . . . 120,676 (658,875) 197,187
------------ ------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . . $ (12,702,937) $ (5,348,599) $ 325,445
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . 4,204,394 4,189,100 4,183,490
Diluted . . . . . . . . . . . . . . . . . . . . . . 4,204,394 4,189,100 4,309,612
Per share net income (loss) attributable to common
shares:
Basic . . . . . . . . . . . . . . . . . . . . . . . $(3.02) $(1.28) $0.08
Diluted . . . . . . . . . . . . . . . . . . . . . . $(3.02) $(1.28) $0.08
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN CAPITAL EARNINGS (DEFICIT) TOTAL
------------ --------------- ------------------ ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 . . . . . . . . . 41,800 13,392,437 1,774,579 15,208,816
Stock options exercised. . . . . . . . . . . 91 81,809 -- 81,900
Tax benefit from stock option
exercised. . . . . . . . . . . . . . . . . -- 40,176 -- 40,176
Net income. . . . . . . . . . . . . . . . . -- -- 325,445 325,445
------------ ------------- -------------- ------------
Balance at December 31, 1995. . . . . . . . 41,891 13,514,422 2,100,024 15,656,337
Net loss. . . . . . . . . . . . . . . . . . -- -- (5,348,599) (5,348,599)
------------ ------------- -------------- ------------
Balance at December 31, 1996 . . . . . . . . 41,891 $ 13,514,422 $ (3,248,575) $ 10,307,738
Stock grants. . . . . . . . . . . . . . . . 396 78,784 -- 79,180
Net loss. . . . . . . . . . . . . . . . . . -- -- (12,702,937) (12,702,937)
------------ ------------- -------------- ------------
Balance at December 31, 1997 . . . . . . . . 42,287 $ 13,593,206 $ (15,951,512) $ (2,316,019)
------------ ------------- -------------- ------------
------------ ------------- -------------- ------------
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
EAGLE FINANCE CORP.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . $ (12,702,937) $ (5,348,599) $ 325,445
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses . . . . . . . . . . . 6,251,206 13,184,278 9,537,949
Net finance receivables (charge-offs)
recoveries against allowance . . . . . . . . . (9,310,301) (17,946,599) 21,086
Decrease (increase) in:
Prepaid expenses . . . . . . . . . . . . . . . 177,893 (200,451) (77,175)
Repossessed or titled assets. . . . . . . . . . 2,158,432 179,697 (3,762,715)
Excess servicing receivable . . . . . . . . . . 2,731,907 (1,050,590) --
Other assets. . . . . . . . . . . . . . . . . . (53,534) (923,650) (953,062)
Income tax receivable . . . . . . . . . . . . . 3,464,194 (4,732,346) --
Deferred tax benefit. . . . . . . . . . . . . . 1,004,912 3,131,358 (3,777,229)
Increase (decrease) in:
Accrued interest. . . . . . . . . . . . . . . . (306,163) (34,301) 383,405
Accrued income tax. . . . . . . . . . . . . . . -- (683,144) 442,839
Accounts payable and accrued liabilities. . . . (1,199,160) (1,286,591) 209,724
Unearned insurance commissions. . . . . . . . . (5,158) (40,957) (57,782)
Dealer reserves . . . . . . . . . . . . . . . . (286,783) (6,081) 218,936
Nonrefundable acquisition discount. . . . . . . (263,456) (7,984,988) 757,032
----------- ----------- ----------
Net cash provided by operating activities . . . . . . (8,338,948) (23,742,964) 3,268,453
----------- ----------- ----------
Cash flows from investing activities:
Purchase of Investments . . . . . . . . . . . . . . 130 (7,651) (545,000)
Proceeds from bulk sale/securitization of
vehicle retail installment notes . . . . . . . . 14,385,397 109,329,697 39,869,544
Principal collected on finance receivables, owned. . 27,583,158 44,570,359 37,299,405
Finance receivables originated or acquired
(net of write-offs) . . . . . . . . . . . . . . . (52,753,097) (62,845,116) (144,023,772)
Finance receivables, Installment Contract sales. . . 36,993,236 -- --
Finance receivables, principal collected
(net of write-offs), Installment
Contract sales . . . . . . . . . . . . . . . . . (23,236,899) -- --
----------- ----------- ----------
Net cash provided by (used in) investing activities 2,971,925 91,047,289 (67,399,823)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from draws on bank lines,
Installment Contract sales . . . . . . . . . . . 36,993,236 -- --
Repayments of borrowings, Installment
Contract sales . . . . . . . . . . . . . . . . . (13,286,224)
Proceeds from draws on bank lines. . . . . . . . . 56,059,348 48,471,793 602,004,545
Repayments of borrowings . . . . . . . . . . . . . (72,824,567) (116,359,075) (553,144,545)
Debt to affiliate. . . . . . . . . . . . . . . . . (1,028,563) 63,618 555,745
Proceeds from issuance of other debt . . . . . . . -- 103,731 17,140,482
Repayment of other debt. . . . . . . . . . . . . . (433,952) (171,309) (387,790)
Debt issuance costs. . . . . . . . . . . . . . . . 346,219 (210,706) (945,311)
Paid in capital. . . . . . . . . . . . . . . . . . 78,784 -- --
Stock grants . . . . . . . . . . . . . . . . . . . 396 -- 81,900
Tax benefit from stock options exercised . . . . . -- -- 40,176
----------- ----------- ----------
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . . . 5,904,677 (68,101,948) 65,345,202
----------- ----------- ----------
Cash, net change . . . . . . . . . . . . . . . . . . 537,654 (797,623) 1,213,832
Cash at beginning of period . . . . . . . . . . . . 1,271,594 2,069,217 855,385
----------- ----------- ----------
Cash at end of period . . . . . . . . . . . . . . . $ 1,809,248 $ 1,271,594 $ 2,069,217
----------- ----------- ----------
----------- ----------- ----------
Supplemental disclosures of cash flow information -
cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . $ 5,781,893 $ 9,093,759 $ 7,712,731
Income taxes and Illinois replacement tax . . . $ 1,960 $ 1,625,282 $ 3,260,500
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
EAGLE FINANCE CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Eagle Finance Corp. (the Company) provides consumer finance services
under the name "Eagle Finance." Since 1988 the Company has focused its
activities on the business of purchasing installment contracts originated by
franchised and independent car dealers, generally referred to as indirect
consumer lending. Indirect auto financing currently represents approximately
99% of the Company's receivables base.
The Company has experienced a significant deterioration in its financial
condition primarily due to significant operating losses during 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 requirements of its Revolving Credit Agreement,
the GECC Agreement and subordinated notes. At December 31, 1997, the
Company's funding was effectively limited to internal cash generation. The
Company, among other actions, has restructured operations to reduce overhead.
During 1997, the Company modified credit underwriting criteria and reduced
the volume of Installment Contracts purchased from dealers. The Company is
exploring opportunities for a merger, sale or recapitalization. There is no
assurance that the Company will be successful in these efforts and the
failure of such efforts would have a material adverse effect on the Company's
financial condition.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern.
Accordingly, the accompanying consolidated financial statements do not
include any adjustments that might be necessary should the Company be unable
to continue as a going concern, such as adjustments to finance receivables,
repossessed or titled assets, prepaid expenses and debt issuance costs.
INCOME ON FINANCE RECEIVABLES
The Company recognizes finance charges on the interest (actuarial)
method for both owned receivables and 1997 Installment Contract sales. Under
this method, interest is earned over the lives of the finance receivables to
produce constant rates of interest (yields). The accrual of interest income
on finance receivables is suspended when no payments have been received for
90 days or more. Interest accrual on finance leases and retail installment
notes is suspended when they become 90 days or more contractually delinquent.
SALE, SECURITIZATION AND SERVICING OF FINANCE RECEIVABLES
The Company conducts sales and securitizations of finance receivables
from time to time with and without recourse and with and without servicing
retained.
Under an existing agreement with GECC (the "GECC Agreement"), the
Company periodically sells to GECC pools of finance receivables. GECC in
turn earns a fixed spread over the two-year U.S. Treasury Bill rate at the
time of the individual pool sale while initially retaining 10% of the
purchase price at the time of sale as a reserve for credit losses. The
Company receives an annual servicing fee equal to 3% of the receivables
serviced and is eligible to receive additional bonus servicing fee income
based upon favorable charge-off experience.
For 1995 and 1996, Installment Contract sales pursuant to the GECC
Agreement were accounted for as off-balance sheet sales transactions pursuant
to SFAS No. 77 "Reporting by Transferors for Transfers of Receivables with
Recourse," with servicing and bonus servicing fee income recognized as
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
24
<PAGE>
recognized on the installment Contract balances under the interest method.
Interest expense is recognized at GECC's fixed spread, and charge-off and
related provisions for credit losses are reflected as transactions impacting
the allowance for credit losses, Installment Contract sales.
During 1996, the Company completed the securitization of Installment
Contracts through a transaction agented by Greenwich Capital Markets, Inc.
(the "Securitization"). The transaction was structured to create three
classes of certificates, which were rated by Duff & Phelps Credit Rating Co.
and Fitch Investors Service L.P. A 4% cash reserve was established at the
time of the sale as a reserve for losses. The reserve builds to 9% as excess
cash is available.
The Company capitalized the excess servicing rights on the Installment
Contracts securitized. Servicing fees are reported as income when earned,
net of related amortization of retained servicing rights. The Company
maintains servicing of the portfolios and receives an annualized base
servicing fee equal to 3% of net outstandings from the seller. The Company
is eligible to receive additional excess servicing fees based on portfolio
performance.
At the closing of the Securitization, the Company removed from its
balance sheet Installment Contracts sold and added to its balance sheet (i)
the cash received and (ii) excess servicing receivable ("ESR"). The excess
of the cash received and the assets retained by the Company over the carrying
value of the Installment Contracts sold, less transaction costs, equals the
net gain on securitization recorded by the Company.
The Company periodically determines the estimated fair value of the ESR
by discounting the expected cash flows using a discount rate which the
Company believes is commensurate with the risks involved.
The Annual Percentage Rate ("APR") on the Installment Contracts in the
Securitization is relatively high in comparison to the pass-through rate on
the certificates or notes, accordingly, the ESR described above is a
significant asset of the Company. In determining the value of the ESR
described above, the Company must estimate the future rates of prepayments,
delinquencies, default loss severity as they impact the amount and timing of
the estimated cash flows. The Company estimates prepayments by evaluating
historical prepayment performance of comparable contracts and the impact of
trends in the industry. The Company has used a constant 5% monthly
liquidation rate. The Company estimates defaults and default loss severity
using available historical loss data for comparable contracts and the
specific characteristics of the contracts purchased by the Company. The
Company used default losses of 19.0% as a percentage of principal balance
over the life of the Installment Contracts.
In future periods, the Company will recognize additional revenue from
the ESR if the actual performance of the Installment Contracts is higher than
the original estimate or the Company may increase the estimated fair value of
the ESR. If the actual performance of the contracts is lower than the
original estimate, then an adjustment to the carrying value of the ESR may be
required if the estimated fair value of the ESR is less than its carrying
value.
The Company periodically sells to third party purchasers finance
receivables without recourse and generally without servicing retained.
NONREFUNDABLE ACQUISITION DISCOUNT
As part of the Company's financing of vehicle secured retail installment
notes, the difference between (i) the total principal amount to be repaid
under the notes and (ii) the net funds advanced to the dealer is recorded as
a nonrefundable acquisition discount and is available to the Company to
absorb charges related to repossession and reconditioning expenses and other
losses of principal that may arise in connection with defaulted retail
installment notes. Prior to 1996, the Company, based on its credit loss
analysis, allocated to nonrefundable acquisition discount, at the time it
purchased vehicle secured retail installment notes, amounts that would
otherwise have been recorded as unearned finance charges.
DEALER RESERVES
As part of the Company's financing of secured retail installment notes,
refundable dealer reserves are established to protect the Company from
potential losses associated with such notes. A portion of the proceeds from
these retail installment notes are retained by the Company and are available
to the Company to charge losses on
25
<PAGE>
related receivables against. The amount of reserves is based upon various
criteria, one of which is the credit risk associated with the secured retail
installment notes.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained by direct charges to
operations in amounts that are intended to provide adequate reserves on the
Company's finance receivables portfolio to absorb possible credit losses in
the foreseeable future in excess of the nonrefundable acquisition discount
and refundable dealer reserves with respect to the Company's finance
receivables.
In connection with its periodic review of credit loss experience and
delinquency trends using static pool analysis, management evaluates the
adequacy of the allowance for credit losses. If nonrefundable acquisition
discount and refundable dealer reserves associated with an individual pool of
installment contracts are deemed insufficient in comparison to the amount
management believes necessary to absorb projected losses on that pool's
vehicle secured installment notes that are expected to become impaired in the
foreseeable future, a provision for credit losses would be charged against
earnings.
The Company's general policy is to charge-off delinquent finance
receivables, retail or direct, and finance leases (net of unearned finance
charges) when they are deemed uncollectible and, in any event, to charge-off
monthly accounts prior to their becoming 90 days contractually delinquent.
REPOSSESSED OR TITLED ASSETS
Repossessed collateral and titled assets are valued at the lower of cost
or estimated net realizable value.
INSURANCE COMMISSIONS
Commissions on credit life and credit accident and health insurance are
taken into income over the average terms of the related policies on the sum
of the digits method. Property insurance, auto club, vehicle warranties, and
other insurance commissions are taken into income when written.
TAXES
The Company accounts for income taxes under the asset and liability
method in which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The areas which are subject to estimation
techniques most significantly include the allocation of unearned finance
charges to nonrefundable acquisition discount (which allocations did not
occur at all in 1997 or 1996), the computation of the gain on sale of
Installment Contracts, the valuation of the impairment of excess servicing
rights and the determination of the level of the allowance for credit losses.
Actual results could differ from these estimates.
(LOSS) EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. All earnings per
share amounts for prior periods have been restated to conform to the new
requirements.
26
<PAGE>
Basic (loss) earnings per share is based on net (loss) income divided by
the weighted average number of common shares outstanding. Common stock
equivalents outstanding were antidilutive for the years ended December 31,
1997 and 1996.
(2) FINANCE RECEIVABLES
Finance receivables owned as of December 31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Retail installment notes:
Vehicle . . . . . . . . . . . . . . . . $ 37,591,580 $ 73,038,666
Other . . . . . . . . . . . . . . . . . 16,035 43,620
Direct installment loans:
Interest-bearing. . . . . . . . . . . . 227,562 317,218
Discount-basis. . . . . . . . . . . . . 42,300 131,793
Finance leases. . . . . . . . . . . . . . . 11,830 25,582
------------ -------------
Total . . . . . . . . . . . . . . . . . . . 37,889,307 73,556,879
------------ -------------
Unearned finance charges. . . . . . . . . . (9,434,075) (18,892,954)
------------ -------------
Finance receivables, net. . . . . . . . . . $ 28,455,232 $ 54,663,926
------------ -------------
------------ -------------
</TABLE>
Finance receivables, Installment Contract sales reflected on the
accompanying balance sheet at December 31, 1997 as part of a financing
transaction (see Note 1) aggregated $27,060,820. These Installment
Contracts, for purposes of delinquency and servicing disclosures which
follow, are treated as being serviced by the Company with actual title to the
assets having been transferred to GECC.
Finance receivables managed (owned or serviced) as of December 31, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
------------ ------------
Total owned, net. . . . . . . . . . . . . . $ 28,455,232 $ 54,663,926
------------ ------------
Serviced:
GECC Installment Contract sales (1997). . 27,060,820 --
GECC Installment Contract sales
(1996 and prior) 28,798,501 66,717,919
Securitization . . . . . . . . . . . . . 14,646,770 30,247,885
------------ -------------
Total serviced, net . . . . . . . . . . . 70,506,091 96,965,804
------------ -------------
Total managed, net. . . . . . . . . . . . $ 98,961,323 $ 151,629,730
------------ -------------
------------ -------------
</TABLE>
Direct installment loans are originated by the Company. Retail vehicle
secured installment notes are purchased without recourse. Certain retail
secured installment notes are purchased on a recourse basis to the extent of
available dealer reserve balances. As a result of the Company's policy to
charge-off accounts prior to their becoming 90 days (120 days in the case of
the Securitization) past-due, no accounts were on nonaccrual status at
December 31, 1997 or 1996.
Direct installment loans are generally collateralized by household
goods, vehicles, or real estate, with maximum terms of 60 months for
interest-bearing loans and 84 months for discount-basis loans. Finance
leases, all discount basis, are generally collateralized by office and
industrial equipment with maximum terms of 60 months. Retail installment
notes, discount basis and interest bearing, arise principally from the sale
of new and used vehicles, and generally have a maximum term of 60 months.
The following table reflects delinquencies experienced by the Company in
its owned finance receivables portfolio as of December 31, 1997, 1996 and
1995:
27
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net amount outstanding . . . . . . . . . . $28,455,232 $54,663,926 $145,718,866
----------- ----------- ------------
Delinquencies
30-59 days. . . . . . . . . . . . . . . $ 3,236,358 $ 5,900,287 $ 10,073,834
60-89 days. . . . . . . . . . . . . . . 1,377,442 885,178 3,000,299
----------- ----------- ------------
Total . . . . . . . . . . . . . . . . $ 4,613,800 $ 6,785,465 $ 13,074,133
----------- ----------- ------------
----------- ----------- ------------
Total delinquencies as a percentage
of net finance receivables, owned. . . . . 16.21% 12.41% 8.97%
</TABLE>
The following table reflects delinquencies experienced by the Company in
its serviced finance receivables portfolio as of December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net amount outstanding . . . . . . . . . . $70,506,091 $96,965,804 $40,096,243
----------- ----------- -----------
Delinquencies
30-59 days. . . . . . . . . . . . . . . $ 6,698,884 $ 7,355,517 $ 1,626,672
60+ days. . . . . . . . . . . . . . . . 2,654,616 2,475,144 507,409
----------- ----------- -----------
Total . . . . . . . . . . . . . . . . $ 9,353,500 $ 9,830,661 $ 2,134,081
----------- ----------- -----------
----------- ----------- -----------
Total delinquencies as a percentage
of net finance receivables, serviced . . 13.27% 10.14% 5.32%
</TABLE>
The following table reflects delinquencies experienced by the Company in
its managed (owned or serviced) finance receivables portfolio as of December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net amount outstanding . . . . . . . . . . $98,961,323 $151,629,730 $185,815,109
----------- ----------- -----------
Delinquencies
30-59 days. . . . . . . . . . . . . . . $ 9,935,242 $ 13,255,803 $ 11,700,506
60+ days. . . . . . . . . . . . . . . . 4,032,058 3,360,321 3,507,708
----------- ------------ ------------
Total . . . . . . . . . . . . . . . . $13,967,300 $ 16,616,124 $ 15,208,214
----------- ------------ ------------
----------- ------------ ------------
Total delinquencies as a percentage
of net finance receivables,
managed (owned or serviced) . . . . . . . 14.11% 10.96% 8.18%
</TABLE>
Contractual maturities of retail and direct installment finance
receivables by year are not readily available. The Company's experience has
shown that the average life of the Company's finance receivables is
substantially less than the average original contract term of such
receivables due to the amount of payoffs and repossessions that occur prior
to contract maturity.
28
<PAGE>
A summary of principal cash collections is provided below:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Retail installment notes:
Interest bearing loans:
Principal cash collections. . . . . . . . . . . . . . $ 2,243,105 $ 2,160,046
Principal cash collections as a percentage of
average net outstanding balances. . . . . . . . . . 60% 46%
Discount basis loans:
Principal cash collections other. . . . . . . . . . . $14,544,138 $42,022,211
Principal cash collections other as a percentage of
average net outstanding balances . . . . . . . . . 34% 38%
Direct installment loans:
Principal cash collections . . . . . . . . . . . . . $ 241,904 $ 339,931
Principal cash collections as a percentage of
average net outstanding balances. . . . . . . . . . 66% 98%
Finance leases:
Principal cash collections . . . . . . . . . . . . . $ 19,975 $ 48,171
Principal cash collections as a percentage of
average net outstanding balances . . . . . . . . . 129% 111%
</TABLE>
No dealer accounted for more than 9% of vehicle retail installment notes
purchases during 1997.
29
<PAGE>
(3) ALLOWANCE FOR CREDIT LOSSES, NONREFUNDABLE ACQUISITION DISCOUNT, AND DEALER
RESERVES
Changes in the allowance for credit losses, in the Company's owned
finance receivables portfolio, for the years ended December 31, 1997, 1996,
and 1995 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1995. . . . . . . . . . . . . . . . . . . $ 1,248,800
Provision for credit losses . . . . . . . . . . . . . . . . . 9,537,949
Losses charged off . . . . . . . . . . . . . . . . . . . . . (174,841)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . 195,927
----------
Balance at December 31, 1995. . . . . . . . . . . . . . . . . . $10,807,835
Provision for credit losses . . . . . . . . . . . . . . . . . 13,184,278
Losses charged off . . . . . . . . . . . . . . . . . . . . . (18,028,677)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . 82,078
----------
Balance at December 31, 1996 . . . . . . . . . . . . . . . . . $ 6,045,514
Provision for credit losses . . . . . . . . . . . . . . . . . 6,251,206
Losses charged off . . . . . . . . . . . . . . . . . . . . . (9,368,475)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . 58,174
----------
Balance at December 31, 1997. . . . . . . . . . . . . . . . . . $ 2,986,419
----------
----------
</TABLE>
Changes in nonrefundable acquisition discount and dealer reserves, in
the Company's owned finance receivable portfolio, for the years ended
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
NONREFUNDABLE REFUNDABLE
ACQUISITION DEALER
DISCOUNT RESERVES
------------- -----------
<S> <C> <C>
Balance at January 1, 1995. . . . . . . . . . . . . $ 8,671,120 $ 73,928
Additions applicable to new volume . . . . . . . 28,023,470 2,295,776
Payments to dealers . . . . . . . . . . . . . . . -- (2,076,840)
Accounts sold . . . . . . . . . . . . . . . . . . (5,524,932) --
Losses charged, net of recoveries . . . . . . . . (21,741,506) --
------------- -----------
Balance at December 31, 1995. . . . . . . . . . . . $ 9,428,152 $ 292,864
Additions applicable to new volume . . . . . . . 10,720,447 826,220
Payments to dealers . . . . . . . . . . . . . . . -- (832,301)
Accounts sold . . . . . . . . . . . . . . . . . . (8,439,100) --
Losses charged, net of recoveries . . . . . . . . (10,266,335) --
------------- -----------
Balance at December 31, 1996. . . . . . . . . . . . $ 1,443,164 $ 286,783
------------- -----------
Additions applicable to new volume . . . . . . . 5,151,659 --
Payments to dealers . . . . . . . . . . . . . . . 286,783 (286,783)
Accounts sold . . . . . . . . . . . . . . . . . . (5,175,487) --
Losses charged, net of recoveries . . . . . . . . (526,411) --
------------- -----------
Balance at December 31, 1997. . . . . . . . . . . . $ 1,179,708 $ --
------------- -----------
------------- -----------
</TABLE>
Additions applicable to new volume include allocations, at the time of
Installment Contract purchases, of contract interest that would otherwise
have been recorded as unearned finance charges of $9,815,829 for 1995. No
such allocations were made in either 1997 or 1996.
Total net charge-offs as a percentage of average net owned finance
receivables were 17.08%, 24.16% and 17.98% for 1997, 1996 and 1995,
respectively.
30
<PAGE>
Changes in the allowance for credit losses, in the Company's Installment
Contract sales portfolio, for the year ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . $ --
Allowance for credit losses attributable to reserve holdback . . . . . 3,853,029
Charge-offs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,382,259)
Recoveries less expenses . . . . . . . . . . . . . . . . . . . . . . . 2,883,038
-----------
Balance at December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . $3,353,808
-----------
-----------
</TABLE>
Total charge-offs as a percentage of average net Installment Contract
sales (annualized) was 15.51% for 1997.
(4) SALE OF RECEIVABLES
During 1997, the Company sold portfolios of vehicle retail installment
notes aggregating approximately $37.0 million (net) to GECC pursuant to the
GECC Agreement in three transactions all accounted for as financing
transactions (See Note 1). Additionally, during the fourth quarter 1997, the
Company sold, servicing released, approximately $14.4 million (net) of
vehicle retail installment notes to competitors in three separate
transactions. There was no significant gain or loss on the sales to
competitors.
During 1996 the Company sold portfolios of vehicle retail installment
notes aggregating $64.9 million (net) to GECC pursuant to the GECC Agreement
in six Installment Contract sale transactions. These transactions were
reflected off-balance sheet. On October 25, 1996, the Company completed the
securitization of approximately $35.2 million (net) of Installment Contracts.
The Company recognized a gain on the transaction of $611,796, net of related
transactions costs of $749,487. The Company capitalized the excess servicing
rights on the Installment Contracts securitized. Servicing fees are reported
as income when earned, net of related amortization of retained servicing
rights.
On September 27, 1996, the Company sold approximately $9.6 million (net)
of Texas-originated Installment Contracts to a competitor. No gain was
recorded as the sales price approximated book value.
During 1995, the Company sold portfolios of net vehicle retail
installment notes aggregating $34.3 million to GECC pursuant to the GECC
Agreement in two transactions.
(5) SERVICING
Servicing fees are reported as income when earned, net of related
amortization of excess servicing and valuation of present value and losses.
Servicing costs are charged to expense as incurred. Servicing fees for the
periods shown included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Base servicing fees. . . . . . . . . . . . . . . . . $2,108,397 $1,712,437 $1,009,560
Bonus/excess servicing fees. . . . . . . . . . . . . 2,251,853 3,705,841 1,109,814
Amortization of ESR. . . . . . . . . . . . . . . . . (1,050,590) (310,693) --
Adjustment to ESR. . . . . . . . . . . . . . . . . . (1,681,317) -- --
---------- ---------- ----------
Net servicing fees . . . . . . . . . . . . . . . . . $1,628,343 $5,107,585 $2,119,374
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
During 1997, the Company reduced the carrying value of ESR and
restricted cash in connection with the Securitization to zero as a result of
actual and anticipated losses. The Company assumes receipt of only 3% base
servicing fee in future periods. Losses and the reduction in carrying value
on the Securitization totaled $1,681,317.
At December 31, 1997, the Company was in violation of certain covenants
relating pursuant to the GECC Agreement. The Company obtained waivers for
the covenant breaches through November 30, 1997. Should the Company remain
in violation of these covenants beyond November 30, 1997, GECC, at its
option, could terminate the agreement, which would result in a loss of future
servicing and bonus servicing income.
31
<PAGE>
(6) EXCESS SERVICING RECEIVABLE (ESR)
The following table summarizes ESR activity related to the
Securitization for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . $ 1,050,590 $ -- $ --
Additions to ESR . . . . . . . . . . . . . . . . . . . . . -- 1,361,283 --
Amortization and write-off of ESR. . . . . . . . . . . . . (1,050,590) (310,693) --
----------- ---------- ---------
Balance, end of period . . . . . . . . . . . . . . . . . . $ -- $1,050,590 $ --
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
(7) INCOME TAXES
Total income tax expense (benefit) reported in the statements of income
for the years ended December 31, 1997, 1996 and 1995 included the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . $ (784,857) $(3,368,177) $ 3,466,929
State . . . . . . . . . . . . . . . . . . . . . . (99,379) (422,056) 507,487
---------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . (884,236) (3,790,233) 3,974,416
---------- ----------- -----------
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . 878,781 2,624,758 (3,303,132)
State . . . . . . . . . . . . . . . . . . . . . . 126,131 506,600 (474,097)
---------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . 1,004,912 3,131,358 (3,777,229)
---------- ----------- -----------
Total income tax expense (benefit) . . . . . . . . . $ 120,676 $ (658,875) $ 197,187
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Temporary differences, which represent the difference between the
amounts reported in the financial statements and the tax bases of assets and
liabilities, result in deferred taxes. Deferred tax assets and liabilities
at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Gross deferred tax assets:
Allowances for credit losses . . . . . . . . . . . . . $ 2,647,860 $ 2,350,496
Alternative minimum tax credit . . . . . . . . . . . . 252,113 --
Deferred income. . . . . . . . . . . . . . . . . . . . -- 2,005
Net operating loss . . . . . . . . . . . . . . . . . . 3,657,077 129,870
Other. . . . . . . . . . . . . . . . . . . . . . . . . 90,344 148,023
------------ -----------
Gross deferred tax assets . . . . . . . . . . . . . . . 6,647,394 2,630,394
Valuation allowance. . . . . . . . . . . . . . . . . . . (6,647,394) (1,563,826)
------------ -----------
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . -- 1,066,568
------------ -----------
Gross deferred tax liabilities:
Accrued finance charges. . . . . . . . . . . . . . . . -- 61,184
Other. . . . . . . . . . . . . . . . . . . . . . . . . -- 472
------------ -----------
Gross deferred tax liabilities . . . . . . . . . . . . . -- 61,656
------------ -----------
Net deferred tax assets . . . . . . . . . . . . . . . . $ -- $ 1,004,912
------------ -----------
------------ -----------
</TABLE>
A valuation allowance of ($6.6) million has been established at December
31, 1997 against the deferred tax assets because of the uncertainty
surrounding the realization of these tax assets.
The differences between the statutory federal income tax rate of 34% and
the effective tax rate for the year ended December 31, 1997, 1996 and 1995
are as follows:
32
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate. . . . . . . . . . . . . . (34.0%) (34.0%) 34.0%
Change in valuation allowance for deferred tax assets . . . 40.4% 26.0% --
State income taxes, less benefit of federal
income tax deduction . . . . . . . . . . . . . . . . . . . (3.9%) (2.4%) 4.2%
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (1.5%) (0.6%) (0.5%)
------ ------ -----
Effective tax rate . . . . . . . . . . . . . . . . . . . . . 1.0% (11.0%) 37.7%
------ ------ -----
------ ------ -----
</TABLE>
At December 31, 1997, the Company has a net operating loss carryforward
of $9,109,475 which expires December 31, 2012. The Company also has a
minimum tax credit carryforward of $252,113.
(8) DEBT
Debt on December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Notes payable, Installment Contract sales. . . . . . . . . . . $23,707,012 $ --
----------- -----------
Senior debt:
Revolving credit facility, expiring January 31, 1998 . . . . 14,997,499 31,762,718
Debt to affiliate. . . . . . . . . . . . . . . . . . . . . . 36,612 1,065,175
----------- -----------
Total senior debt . . . . . . . . . . . . . . . . . . . 15,034,111 32,827,893
----------- -----------
Subordinated debt:
10.25%, "RISRS" due June 1, 2005 (0.25% increase
per year through maturity) . . . . . . . . . . . . . . 16,955,000 16,990,000
8.00% to 10.75% Private Placement Notes with various
maturities through August 1, 2004. . . . . . . . . . . 457,405 781,159
10.50% to 11.00% Long Term Notes with various maturities
through August 1, 2006 . . . . . . . . . . . . . . . . 131,363 206,561
----------- -----------
Total subordinated debt . . . . . . . . . . . . . . . . . 17,543,768 17,977,720
----------- -----------
Total debt. . . . . . . . . . . . . . . . . . . . . . . $56,284,891 $50,805,613
----------- -----------
----------- -----------
</TABLE>
Notes payable to GECC under the Installment Contract sale transactions
occurring during 1997 bear fixed rates of interest. The weighted average
interest rate paid on outstanding borrowing to GECC was 8.99% at December 31,
1997. These notes are reduced in proportion to the liquidation of the
related finance receivables.
The senior and subordinated debt agreements contain provisions relating
to the maintenance of consolidated net worth, as defined in such agreements,
limitations on borrowings, the payment of cash dividends, and acquisitions of
the Company's capital stock. At December 31, 1997, consolidated net worth
was ($2,316,019). Additionally, the Company was in violation of other
covenants, including interest coverage and subordinated debt limitations.
The Company expects to remain in violation of the consolidated net worth and
subordinated debt limitation covenants for the near term.
The revolving credit agreement ("Credit Agreement") is an agented
facility with nine banks. The total available under the revolving credit
agreement was $20,000,000 (which amount declines to $0, unless amended, on
January 31, 1998) of which $14,997,499 was outstanding at December 31, 1997.
The credit facility provides for interest at floating rates, at the reference
bank's prime rate plus 3%. The weighted average interest rate paid on
outstanding borrowings were 12.08% and 8.05% at December 31, 1997 and 1996,
respectively. Substantially all of the Company's finance receivables have
been pledged to secure debt outstanding under the revolving credit agreement.
The Credit Agreement was terminated as of March, 1998. See Note 16 to the
Company's Financial Statements. The Company has pledged its $552,521 money
market investments as cash collateral at December 31, 1997 in accordance with
the requirements of the revolving credit agreement.
The unsecured debt to affiliate is due on demand and bore a 6.75%
interest rate on December 31, 1997.
33
<PAGE>
On May 5, 1995, the Company completed a public offering of $17,000,000
of its Subordinated Notes due 2005 (the "Notes"). The Notes were priced at
par and the net proceeds to the Company were approximately $16.3 million.
The Notes, known as Rising Interest Subordinated Redeemable Securities
("RISRS"), bear an interest rate, payable monthly, of 10% per annum, which
rate increased 0.25% on June 1, 1996 and will increase 0.25% each June 1
thereafter through June 1, 2003. During the last year of their term,
following a 0.50% increase in the interest rate on June 1, 2004, the Notes
will bear an interest rate of 12.50% per annum. The Company may at its
option redeem the RISRS, in whole or in part, on or after June 1, 1997. From
June 1, 1997 through May 31, 1998 the redemption price would be 101% of the
principal amount, and on or after June 1, 1998, the redemption price would be
100% of the principal amount. Annual interest on the notes is expensed using
the level yield method. In 1997, the effective rate on the notes was 12.21%.
At December 31, 1997, the Company was in violation of the leverage covenants
set forth in the indenture governing the notes. The Company expects to
remain in violation of that covenant for the near term. No assurance can be
given that the Company's subordinated lenders will not take adverse reaction
in response to the ongoing breach of such covenant.
The Company has periodically offered subordinated debt pursuant to a
private placement which was intended to qualify as a non-public offering
under Regulation D promulgated by the SEC under the Securities Act of 1933.
The total subordinated notes issued pursuant to the private placement and
outstanding on December 31, 1997 was $457,405; these notes have interest
rates from 8.00% to 10.75% with various maturities through August 1, 2004.
The Company has other subordinated long term notes outstanding at December
31, 1997 totaling $131,363; these notes have interest rates from 10.50% to
11.00% with various maturities through August 1, 2006.
The subordinated notes are subordinate to the Company's senior debt and
rank equally with "RISRS" issued during 1995.
The aggregate minimum annual maturities of subordinated debt at December
31, 1997 are:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1998. . . . . . . . . . . . . . . . . . . $ 10,000
1999. . . . . . . . . . . . . . . . . . . 812,841
2000. . . . . . . . . . . . . . . . . . . 809,484
2001. . . . . . . . . . . . . . . . . . . 875,034
2002. . . . . . . . . . . . . . . . . . . 812,444
2003 and beyond . . . . . . . . . . . . . 14,223,965
-----------
Total . . . . . . . . . . . . . . . . $17,543,768
-----------
-----------
</TABLE>
(9) DERIVATIVE FINANCIAL INSTRUMENTS
In connection with its asset/liability management program and in the
normal cause of business, the Company enters into transactions involving
derivative financial instruments. These instruments are used to manage the
Company's exposure to fluctuations in interest rates. 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.
Interest rate cap and collar agreements are used to reduce the potential
impact of increases in interest rates on floating-rate, short-term debt. At
December 31, 1997 and 1996, 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%. At 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.
34
<PAGE>
Interest expense will be reduced (increased) on a current basis if payments
are received (paid) under these instruments.
(10) DIVIDEND RESTRICTIONS
Payment of dividends by the Company are subject to certain limitations
in the various debt agreements and the revolving credit facility. Under the
most restrictive provisions of these agreements, no amount of retained
earnings of the Company were available for distribution at December 31, 1997.
(11) STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, in the manner that allows the
Company to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants as if the fair-value-based method defined in
SFAS No. 123 had been applied.
Under the terms of the Company's 1994 Stock Incentive Plan, as amended,
600,000 shares of Common Stock were reserved for future granting of options
to key individuals providing services to the Company as well as non-employee
directors. The plan generally provides for options to be granted, become
exercisable, and terminate upon terms established by a committee of the Board
of Directors. Options granted to non-employee directors have ten year terms
and vest and became fully exercisable at the end of two years of service.
Options granted to personnel with beneficial ownership of more than 5% of the
Company's common stock have five year terms and vest and become fully
exercisable at the end of three to four years of service. Options granted to
remaining personnel have ten year terms and vest and become fully exercisable
at the end of three to five years of service. Options are issued at fair
value on the date of grant and, accordingly, no compensation cost is
recognized for stock options in the accompanying financial statements.
At December 31, 1997, there were 218,975 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock
options granted during 1997 and 1996 was $2.37 and $2.92, respectively, on
the date of the grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 - expected dividend yield 0%,
risk-free interest rate of 6.35%, a volatility factor of the expected market
price of the Company's common stock of .463 and an expected life of 4.0
years; 1996 - expected dividend yield 0%, risk-free interest rate of 6.29%, a
volatility factor of the expected market price of the Company's common stock
of .463 and an expected life of 4.6 years; 1995 - expected dividend yield 0%,
risk-free interest rate of 6.52%, a volatility factor of the expected market
price of the Company's common stock of .463 and an expected life of 4.5 years.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income (loss) would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C> <C>
Net loss As reported $(12,702,937) $(5,348,599)
Pro forma $(12,702,937) $(5,367,766)
Loss per share As reported $(3.02) $(1.28)
Pro forma $(3.02) $(1.28)
</TABLE>
Pro forma net income reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting periods detailed above and compensation cost for options
granted prior to January 1, 1995 is not considered.
35
<PAGE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Shares Weighted-Average Exercise Price
<S> <C> <C>
Balance at July 1, 1994. . . . . -- --
Granted . . . . . . . . . . 233,000 $9.49
Balance at December 31, 1994 . . 233,000 9.49
Granted . . . . . . . . . . 215,000 14.94
Exercised . . . . . . . . . (9,100) 9.00
Forfeited / Surrendered . . (2,000) 14.25
Expired . . . . . . . . . . -- --
-------- ------
Balance at December 31, 1995 . . 436,900 12.16
Granted . . . . . . . . . . 248,000 6.63
Exercised . . . . . . . . . -- --
Forfeited / Surrendered . . (207,000) 14.64
Expired . . . . . . . . . . -- --
-------- ------
Balance at December 31, 1996 . . 479,900 $8.25
Granted . . . . . . . . . . 311,925 2.37
Exercised . . . . . . . . . -- --
Forfeited / Surrendered . . (399,900) 7.74
Expired . . . . . . . . . . -- --
-------- ------
Balance at December 31, 1997 . . 391,925 $4.08
-------- ------
-------- ------
</TABLE>
At December 31, 1997, the range of exercise prices and the
weighted-average remaining contractual life of outstanding options was $2.00
to $14.50 and 7.45 years, respectively.
At December 31, 1997 and 1996, the number of options exercisable was
86,900 and 157,162, respectively, and the weighted-average exercise price of
those options was $9.93 and $10.12, respectively.
(12) EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Numerator:
Net income (loss). . . . . . . . . . . . . . $ (12,703) $ (5,349) $ 325
Denominator:
Denominator for basic earnings (loss) per
share-weighted-average shares . . . . . . 4,204,394 4,189,100 4,183,490
Effect of dilutive securities:
Employee stock options . . . . . . . . . . . -- -- 126,122
--------- --------- ---------
Dilutive potential common shares . . . . -- -- 126,122
--------- --------- ---------
Denominator for diluted earnings (loss)
per share-adjusted weighted-average
shares and assumed conversions . . . . . 4,204,394 4,189,100 4,309,612
--------- --------- ---------
--------- --------- ---------
Basic earnings (loss) per share. . . . . . . $ (3.02) $ (1.28) $ 0.08
--------- --------- ---------
--------- --------- ---------
Diluted earnings (loss) per share. . . . . . $ (3.02) $ (1.28) $ 0.08
--------- --------- ---------
--------- --------- ---------
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
Future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1997, are as follows:
36
<PAGE>
<TABLE>
<CAPTION>
EQUIPMENT AND
LEASEHOLD
IMPROVEMENTS OFFICE LEASES TOTAL
<S> <C> <C> <C>
1998. . . . . . . . . . . . . . . . . . . . $ 655,832 $ 431,811 $1,087,643
1999. . . . . . . . . . . . . . . . . . . . 65,510 428,336 493,846
2000. . . . . . . . . . . . . . . . . . . . -- 428,336 428,336
2001. . . . . . . . . . . . . . . . . . . . -- 263,609 263,609
2002. . . . . . . . . . . . . . . . . . . . -- -- --
2003 and beyond . . . . . . . . . . . . . . -- -- --
---------- ---------- ----------
$ 721,342 $1,552,092 $2,273,434
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
It is expected that, in the normal course of business, leases that
expire will be renewed or replaced by leases on other properties; therefore,
it is believed that future minimum annual rental commitments will not be less
than the amount of rental expense incurred. Office space and equipment
rental expenses for the years ended December 31, 1997, 1996, and 1995 were
$1,549,771, $1,495,471 and $1,199,046, respectively.
The Company is involved in litigation in the normal course of business.
The Company believes that the resolution of such 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.
(14) EMPLOYEE BENEFITS
The Company offers no post-retirement or post-employment benefits to its
employees other than those available under its Section 401(k) Profit Sharing
Plan. The Company's 401(k) Plan was terminated effective June 30, 1997. The
total expense for the plans for the years ended December 31, 1997, 1996 and
1995 was $0, $95,395 and $94,476, respectively.
(15) RELATED-PARTY TRANSACTIONS
Effective January 1, 1994, the Company and certain affiliates entered
into an Intercompany Services Agreement, as amended. The agreement provides
for the Company to render specified accounting and administrative services to
the affiliates for a monthly fee which approximates the Company's cost of
rendering such services. For the year ended December 31, 1997, 1996 and
1995, fees totaling $82,600, $137,588 and $157,252, respectively, are
included in interest and fee income in the statement of income.
The Company terminated the lease agreement without penalty on October 6,
1995, for space in an office building owned by Upland Farms, a general
partnership (an affiliate). The total rent paid by the Company to Upland
Farms during each of the years 1997, 1996 and 1995 was $0, $0 and $55,758,
respectively, for 9,733 total square feet of space (average $10 per square
foot).
The Company had outstanding senior debt in the amount of $36,612 and
$1,065,175 at December 31, 1997 and 1996, respectively, held by Prominent
Mortgage (an affiliate) as discussed in footnote (8), Debt.
The Company leases furniture and computer equipment from Wonderlic
Personnel Test, Inc. (an affiliate), pursuant to a Master Lease Agreement.
Payments under that agreement (and any related predecessor agreements) were
$1,106,939, $1,075,340 and $850,293 for the years ending December 31, 1997,
1996 and 1995, respectively.
The Company paid a total of $56,750 and $77,015 during 1997 and 1996,
respectively, to Wonderlic Personnel Test, Inc. (an affiliate) to develop a
proprietary credit scoring model.
The Company's Chief Executive Officer and Vice Chairman, members of
their families and certain of the Company's affiliates have outstanding
principal amounts of subordinated notes at December 31, 1997, approximating,
for the Chief Executive Officer and Vice Chairman or members of their
families, $641,715 (including $550,000 of publicly offered subordinated notes
known as RISRS). Such subordinated notes currently bear interest at various
rates between 10.5% and 11% and mature at various times through June 2005,
although they are callable.
37
<PAGE>
(16) SUBSEQUENT EVENTS
SALES OF FINANCE RECEIVABLES/DEBT RETIREMENT
On February 23, 1998 and March 23, 1998 the Company sold net retail
installment contracts ("Installment Contracts") to competitors for $12.5
million and $471,000 in cash net of non-refundable acquisition discount and
allowances for credit losses, respectively. Proceeds were applied to payoff
all outstanding amounts under the Company's Revolving Credit Agreement. As a
result, the Revolving Credit Agreement was terminated shortly after the March
23, 1998 sale. Any resulting gain or loss on this transaction was not
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 on May 13, 1998.
Trading, if any, in the Company's Common Stock may now be conducted in the
over-the-counter market through 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 consequence of the delisting
from the NASDAQ National Market, a shareholder will find it more difficult or
impossible to sell, or to obtain quotations as to prices of, the Company's
Common Stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Company and their ages and positions are as follows:
NAME AGE PRESENT POSITION WITH THE COMPANY
Charles F. Wonderlic 59 Chairman, Chief Executive Officer and
Director
Ronald B. Clonts 65 Vice Chairman and Director
E. Bruce Fredrikson 60 Director
Robert H. Arnold 54 Director
Walter J. O'Brien 63 Director
Robert L. Jooss 58 Director
Richard E. Wonderlic 32 Executive Vice President and Director
DIRECTOR BIOGRAPHICAL DATA
The principal occupation of each director, other directorships, his or
her employment history and other relevant information are set forth below.
CHARLES F. WONDERLIC has been the Chief Executive Officer of the Company
since 1980 and Chairman since 1984. He has served the Company in various
capacities since 1962, including President, Chief Financial Officer, Vice
President and Treasurer. He was named a Director in 1962. Prior to joining
the Company, he was employed by General Finance Loan Company. Mr. Wonderlic
currently is a member of the Executive Committee of the American Financial
Services Association and Chairman of its Auto Finance Division. Mr.
Wonderlic received his M.B.A. degree from Northwestern University, Evanston,
Illinois.
RONALD B. CLONTS was named Vice Chairman of the Company in July 1996 and
has served in various capacities since 1962 including President, Executive
Vice President and Vice President. He has been a Director of the Company
since 1994. He was previously employed by General Finance Loan Company. Mr.
Clonts received his degree from Northwestern University, Evanston, Illinois.
Mr. Clonts is the brother-in-law of Charles F. Wonderlic.
38
<PAGE>
RICHARD E. WONDERLIC formally joined the Company in May 1988 following
graduation from the University of Iowa and was named as a Director of the
Company in 1994. The son of Charles F. Wonderlic, he became the Executive
Vice President of the Company in April 1994. Mr. Wonderlic supervises the
Company's operations serviced from its Gurnee, Illinois location. Mr.
Wonderlic has served in various Company locations as Assistant Supervisor,
Manager and Vice President and was instrumental in the development of the
Company's automobile finance program.
ROBERT JOOSS became a physician in 1967, and served in the United States
Navy for six years as a general medical officer and anesthesiologist.
Following his honorable discharge as a Lieutenant Commander in 1974, he
became a partner in Suburban Anesthesiologists, SC of LaGrange, Illinois.
Dr. Jooss is a member of several professional medical societies, including
the American Medical Association, American Society of Anesthesiologists and
the Illinois Medical Society. Throughout his career he has been active in
several civic and professional organizations, including service on the Audit
Committee for LaGrange Memorial Hospital. Mr. Jooss received his M.D. from
the University of Wisconsin, Madison, Wisconsin.
ROBERT H. ARNOLD was named as a Director of the Company in 1994. Mr.
Arnold is President of R.H. Arnold & Co., Inc. ("Arnold & Co."), a New York
investment banking firm he founded in 1989, and the brother-in-law of Charles
F. Wonderlic. Arnold & Co. specializes in providing financial advisory
services on corporate mergers, acquisitions, divestitures and restructuring,
and in assisting emerging and medium-sized companies in the private placement
of equity and debt securities. Prior to forming Arnold & Co., Mr. Arnold was
Executive Vice President of Cambrian Capital Corporation, an investment
banking firm he co-founded in 1987. Before establishing Cambrian Capital,
Mr. Arnold held various positions at Merrill Lynch & Co. in its Capital
Markets Group, in both the investment banking and the institutional sales
areas, and at the senior corporate level, including Treasurer of Merrill
Lynch & Co. Mr. Arnold received his B.S., M.S. and Ph.D. degrees from
Northwestern University, Evanston, Illinois, with majors in finance and
accounting. Mr. Arnold serves as a trustee of the Kiewit Mutual Funds and is
a director of the Phoenix Four Inc. investment fund. Mr. Arnold is also an
independent general partner of Fiduciary Capital Partners, L.P. and Fiduciary
Capital Pension Partners, L.P.
WALTER J. O'BRIEN was named a Director of the Company in 1994. Mr.
O'Brien has been President of the National Advertising Review Council, Inc.,
an organization established for the voluntary self regulation of national
advertising since 1995. He previously served (1994-1995) as Chief Operating
Officer of OO Management Partners, Inc., a management consulting firm focused
on brand development. Previously he served as Executive Client Service
Director for Ogilvy & Mather Advertising (1992-1994) and has held executive
positions involving advertising management and strategic consulting with The
Promotion Network, Inc. (1990-1991), Hill Holiday Advertising (1988-1989) and
O'Reilly O'Brien Clow/RSCG (1987-1988). Prior to that, he served as Vice
Chairman of the Board of Directors of J. Walter Thompson, where he was a
member of the Worldwide Operating Committee following service as President
and Chief Operating Officer of J. Walter Thompson/USA. Mr. O'Brien is a
graduate of Marquette University, Milwaukee, Wisconsin.
E. BRUCE FREDRIKSON was appointed as Director of the Company on March 4,
1997. Dr. Fredrikson is a Professor of Finance at Syracuse University's
School of Management. He has taught finance at Syracuse since 1966 and has
previously served as chairman of the Finance Department. Dr. Fredrikson
earned an A.B. in economics degree from Princeton University and MBA and
Ph.D. degrees from Columbia University. He is an Independent General Partner
of both Fiduciary Capital Partners, L.P. and Fiduciary Capital Pension
Partners, L.P. He is a director of Innodata Corporation, a global electronic
publishing services company; and of Track Data Corp., which provides
real-time financial market data and analytic services.
BOARD COMMITTEES AND MEETINGS
The Board of Directors of the Company has established an Executive and
Strategic Planning Committee. The members of the Executive and Strategic
Planning Committee are Charles F. Wonderlic, Walter J. O'Brien, E. Bruce
Fredrikson and Robert H. Arnold. The Executive and Strategic Planning
Committee did not meet in 1997 as all actions were taken at Board meetings.
The Executive and Strategic Planning Committee is authorized, except as
otherwise set forth in the authorizing Board resolutions, to exercise all of
the authority of the Board of Directors that may be delegated to a committee
of the Board under the General Corporation Law of the State of Delaware (the
39
<PAGE>
"DGCL"). Pursuant to the DGCL, committees of a board of directors are denied
the authority to authorize dividends and other distributions (unless the
Board of Directors expressly provides otherwise), to amend, adopt or repeal
charter or bylaw provisions, to adopt an agreement of merger or consolidation
or to recommend to stockholders (i) the sale, lease or exchange of all or
substantially all of the corporation's assets or (ii) a dissolution of the
corporation. The term "all or substantially all of the corporation's assets"
has not been interpreted under Sections 141(c) and 271 of the DGCL to
represent a specific quantitative test. As a consequence, there can be no
assurance as to how a court would interpret the phrase under Delaware law.
The purpose of the Executive and Strategic Planning Committee is to
facilitate management decisions between regular Board meetings that would
otherwise require action by the full Board.
The Board of Directors also has established a Compensation Committee.
The members of the Compensation Committee are Walter J. O'Brien, Robert H.
Arnold and Robert J. Jooss. The Compensation Committee met twice in 1997.
The Compensation Committee is responsible, to the extent provided in the
authorizing Board resolutions or in the Company's bylaws, for establishing
the compensation, benefits and perquisites for the executive officers,
directors and other employees of the Company. The members of the
Compensation Committee also administer the Eagle Finance Corp. 1994 Stock
Incentive Plan (the "Stock Incentive Plan") and the 1996 Director Stock
Incentive Plan (the "1996 Director Plan")
The Board of Directors also has established an Audit Committee. The
members of the Audit Committee are E. Bruce Fredrikson, Robert H. Arnold and
Robert J. Jooss. The Audit Committee held four meetings in 1997. The Audit
Committee is responsible, to the extent provided in the authorizing Board
resolutions or in the Company's bylaws, for retaining the independent auditor
for the Company and for reviewing with such auditor the Company's financial
statements, audit reports, internal financial controls and internal audit
procedures, and for making recommendations with respect to those matters to
the Board of Directors.
The Board of Directors of the Company held five meetings during 1997.
During their terms of office in 1997, all of the directors attended at least
75% of the Board of Directors meetings and meetings for committees on which
they served.
COMPENSATION OF DIRECTORS
The Company pays its non-employee directors an annual fee in the form of
an award of options to purchase 2,500 shares of Common Stock under the Stock
Incentive Plan. Subject to certain conditions, the awards vest over a
three-year period or upon termination of service as a director. In addition,
the non-employee directors receive compensation for services performed in the
amount of $1,000 per Board or Committee meeting attended. The Company
reimburses each Director for out-of-pocket expenses incurred in attending
meetings of the Board of Directors or any of its committee meetings are
reimbursed.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages and positions are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
-------------------- --- -------------------------
<S> <C> <C>
Charles F. Wonderlic 59 Chairman, Chief Executive Officer and
Director
Ronald B. Clonts 65 Vice Chairman and Director
Robert J. Braasch 51 President and Chief Financial Officer
Samuel M. Keith 51 Chief Operating Officer
Richard E. Wonderlic 32 Exec. Vice President and Director
</TABLE>
ROBERT J. BRAASCH joined the Company in January 1994 as Chief Financial
Officer and Treasurer and was named Senior Vice President in April 1994. He
was elected President of the Corporation in 1996. Prior to joining the
Company, Mr. Braasch spent seven years with USA Financial Services, Inc. as
Chief Financial Officer and subsequently Chief Executive Officer. In the
preceding twelve years he held various positions with Household Finance
Corporation including six years as Treasurer. Mr. Braasch graduated from
DePaul University, Chicago, Illinois.
40
<PAGE>
SAMUEL M. KEITH joined the Company in September 1996 as Chief Operating
Officer. Prior to joining the Company, Mr. Keith spent 24 years with General
Electric Credit Corporation. Mr. Keith held management positions in the sales
and marketing, credit administration, customer service, operations and
collection functions. Mr. Keith graduated from the University of Mississippi,
Oxford, Mississippi.
Biographies for Messrs. Charles F. Wonderlic, Ronald B. Clonts and Richard
E. Wonderlic are located above under "Director Biographical Data."
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or granted to the Company's Chairman and Chief Executive Officer and to each of
the other executive officers of the Company during 1997, 1996 and 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- - ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
AWARDS
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g)
SECURITIES ALL OTHER
NAME AND OTHER ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#) ($)
- - ----------------------------------------------------------------------------------------------------------------------------------
Charles F. Wonderlic, Chairman 1997 $ 165,006 $ --- $ --- 60,000 ---
and Chief Executive Officer 1996 $ 161,830 --- $ 4,500 40,000 ---
1995 $ 154,214 --- $ 5,250 40,000
- - ----------------------------------------------------------------------------------------------------------------------------------
Ronald B. Clonts, Vice Chairman 1997 $ 77,409 $ --- $ --- 45,000 ---
1996 $ 134,860(2) --- $ 4,046 30,000 ---
1995 $ 128,512 --- $ 6,369 30,000
- - ----------------------------------------------------------------------------------------------------------------------------------
Robert J. Braasch, President, 1997 $ 150,010 $ --- $ --- 45,000 ---
Chief Financial Officer and 1996 $ 130,966(3) --- $ 3,929 30,000 ---
Treasurer 1995 $ 102,810 --- $ 4,485 30,000
- - ----------------------------------------------------------------------------------------------------------------------------------
Richard E. Wonderlic, Executive 1997 $ 90,002 $ --- $ --- 24,000 ---
Vice President 1996 $ 81,545 --- $ 2,446 16,000 ---
1995 $ 61,547 --- $ 4,495 16,000
- - ----------------------------------------------------------------------------------------------------------------------------------
Samuel M. Keith, Chief Operating 1997 $ 121,723 $ --- $ --- 15,000 ---
Officer 1996 $ 45,244(4) --- --- 20,000 ---
</TABLE>
- - --------------------------------
(1) Represents contributions made by its Company to the qualified, tax-exempt
retirement plan it had adopted (the "401(k) Plan") that qualified under
Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"). The 401(k) Plan was terminated as of June 30, 1997. Does not
include the cost to the Company of certain benefits, the aggregate of which
did not exceed, for each executive officer, 10% of his annual salary and
bonus.
(2) Mr. Clonts was named Vice Chairman, effective July 1, 1996, having
previously served as President.
(3) Mr. Braasch was named to the additional position of President, effective
July 1, 1996.
(4) Mr. Keith joined the Company on August 19, 1996 and was named Chief
Operating Officer effective September 1, 1996.
The following tables set forth certain information concerning the number
and value of stock options at December 31, 1997 held by the executive officers
reflected in the Summary Compensation
41
<PAGE>
Table. Although the Stock Incentive Plan
also provides for the grant of stock appreciation rights and restricted stock,
as of December 31, 1997, only stock options had been granted under the Stock
Incentive Plan.
<TABLE>
<CAPTION>
AGGREGATED OPTION GRANTS IN LAST FISCAL YEAR
- - ----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
FOR OPTION TERM(f)
----------------------------------
PERCENT OF TOTAL
OPTIONS OPTIONS GRANTED EXERCISE
GRANTED TO EMPLOYEES PRICE EXPIRATION
NAME (#) IN FISCAL YEAR ($/SHARE) DATE
(a) (b) (c) (d) (e) 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------------
Charles F. Wonderlic 60,000 19.23% $2.20 August 18, 2002 $36,469 $80,587
- - ----------------------------------------------------------------------------------------------------------------------------------
Ronald B. Clonts 45,000 14.43% $2.20 August 18, 2002 $27,352 $60,440
- - ----------------------------------------------------------------------------------------------------------------------------------
Robert J. Braasch 45,000 14.43% $2.00 August 18, 2006 $56,268 $141,508
- - ----------------------------------------------------------------------------------------------------------------------------------
Richard E. Wonderlic 24,000 7.69% $2.20 August 18, 2002 $14,588 $32,235
- - ----------------------------------------------------------------------------------------------------------------------------------
Samuel M. Keith 15,000 4.81% $2.00 August 18, 2007 $18,756 $47,169
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- - ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
(d) (e)
-------------------------------------------------------------------
SHARES
ACQUIRED ON VALUE
EXERCISE REALIZED
NAME (#) ($)
(a) (b) (c) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles F. Wonderlic --- --- -- 60,000 --- ---
- - ----------------------------------------------------------------------------------------------------------------------------------
Ronald B. Clonts --- --- -- 45,000 --- ---
- - ----------------------------------------------------------------------------------------------------------------------------------
Robert J. Braasch --- --- -- 45,000 --- ---
- - ----------------------------------------------------------------------------------------------------------------------------------
Richard E. Wonderlic --- --- -- 24,000 --- ---
- - ----------------------------------------------------------------------------------------------------------------------------------
Samuel M. Keith --- --- -- 15,000 --- ---
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Charles F. Wonderlic,
Ronald B. Clonts and Robert J. Braasch (the "Executives"). The agreements are
intended to secure the continuing employment of the Executives. The employment
agreements generally are identical except for differences in the cash
compensation and incentive payments of the Executives and the fact that Messrs.
Wonderlic's and Clonts' agreements permit them to be employed by, and to devote
an unspecified amount of time to, certain Commonly Controlled Companies (as
defined below). Messrs. Wonderlic and Clonts have each indicated, however, that
they regard their duties to the Company as primary and expect to devote as much
time as is required to fulfill the obligations of their respective offices with
the Company.
The employment agreements provide for: (i) an initial annual base salary
for 1994 equal to $150,000, $125,000 and $100,000 for Messrs. Wonderlic, Clonts
and Braasch, respectively (which salaries were prorated during 1994), which may
be increased but not decreased unless amended; and (ii) eligibility for Company
sponsored employee benefits. Mr. Clonts and the Company mutually agreed to
amend his employment agreement to provide an annual base salary of $50,000 in
1998. Messrs. Wonderlic and Clonts are entitled to an additional bonus amount
provided the Company reaches specific after-tax goals. No bonuses were paid
during 1997 or 1996. The employment agreements have an initial one-year term,
with one-year extensions thereafter unless any employment agreement is
terminated, amended, or the Company or an Executive has provided a notice of
non-renewal at least 180 days prior to the anniversary thereof. Each employment
agreement will terminate upon the Executive's death or disability. The Company
is obligated to pay or provide to the Executive continued salary and benefits
until the earlier of the expiration of the term of the agreement or the
Executive's termination for "cause," which is defined to include, without
limitation, the death or permanent disability of the Executive, a material
violation by the Executive of any applicable material law or regulation with
respect to the Company's business, the conviction of the Executive of a felony,
and the willful or negligent failure of the Executive to perform his duties
under the employment agreement.
In the event of termination of an Executive's employment following a
"change in control" of the Company, as defined under the employment agreement,
either by the Company, or its successor, during the remaining term of the
employment agreement or by the Executive within one year following the change in
control, the Company, or its successor, is obligated to make a lump sum payment
equal to three times the sum of: (i) his current annual base salary; (ii) the
value of bonus or incentive payments that the Executive would have received had
he remained employed; and (iii) the value of the contributions that would have
been made or credited by the Company under all retirement plans for the benefit
of the Executive. The lump sum payment is subject to reduction in order to
avoid such payment being treated as a nondeductible, taxable "golden parachute"
payment under Section 280G of the Code. In addition, the Company successor must
continue insurance benefits for the Executive for three years following such
termination.
The employment agreements include a covenant which will limit the ability
of each Executive to compete with the Company, except for services performed for
affiliates, for a period of one year following the termination of such
individual's employment with the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock at April 1, 1998 by each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, by each director or nominee, by each executive officer
named in the Summary Compensation Table, and by all directors and executive
officers of the Company as a group.
43
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED(1)(2) OF CLASS(3)
<S> <C> <C>
Charles F. Wonderlic(4) 884,584 20.919%
2029 E. Lake Shore Drive
Twin Lakes, WI 53181
Ronald B. Clonts(5) 674,582 15.953%
2014 West Burr Oak Drive
Glenview, IL 60025
Charles F. Wonderlic, Jr.(6) 323,708 7.655%
34241 Horse Shoe Lane
Gurnee, IL 60031
Richard E. Wonderlic(7) 315,708 7.466%
4750 North Kingsway
Gurnee, IL 60031
Robert J. Braasch(8) 10,900 *
Robert H. Arnold(9) 19,400 *
Walter J. O'Brien(10) 18,500 *
E. Bruce Fredrikson 1,700 *
Robert L. Jooss(11) 2,700 *
Samuel M. Keith 1,100 *
All directors and executive officers 2,252,882 52.774%
as a group (ten persons) (12)
</TABLE>
______________________
* Less than 1%
(1) The nature of beneficial ownership for shares shown in this column is sole
voting and investment power, except as set forth in the footnotes below.
Inclusion of shares shall not constitute an admission of beneficial
ownership or voting and investment power over such shares.
(2) Includes shares held directly and shares which beneficial owners may
acquire on or before March 31, 1998 pursuant to the exercise of stock
options; as well as shares held in retirement accounts in a fiduciary
capacity or by certain family members.
(3) Based upon 4,228,690 shares outstanding plus, with respect to each
beneficial owner, the shares which such beneficial owner has the right to
acquire on or before March 31, 1998 pursuant to the exercise of stock
options.
(4) Includes 265,417 shares held of record by The Charles F. Wonderlic
Declaration of Trust dated May 10, 1991, 100,000 shares held in Mr.
Wonderlic's IRA and 519,167 shares held of record by The Mary Lyn Wonderlic
Declaration of Trust dated May 10, 1991. Mary Lyn Wonderlic is the wife of
Charles F. Wonderlic.
(5) All such shares are held of record by The Ronald B. and Sally A. Clonts
Trust dated October 11, 1997, with respect to which shares Ronald B.
Clonts, as Co-Trustee, shares voting and investment power with his wife and
Co-Trustee, Sally Clonts.
44
<PAGE>
(6) Includes 307,708 shares held of record by The Charles F. Wonderlic, Jr.
Declaration of Trust dated May 10, 1991, 13,000 shares held in a 401(k)
Plan and 3,000 shares held as custodian for his children. Mr. Wonderlic
disclaims beneficial interest in shares held as custodian for his children.
(7) Includes 307,708 shares held of record by The Richard E. Wonderlic
Declaration of Trust dated May 10, 1991, 6,000 shares held through Mr.
Wonderlic's IRA and 2,000 shares held as custodian for his son. Mr.
Wonderlic disclaims beneficial interest in shares held as custodian for his
son.
(8) Includes 9,100 shares held of record by Mr. Braasch's IRA, and 1,500 shares
held jointly with Mr. Braasch's wife, of which Mr. Braasch has shared
voting and investment power. Also includes 200 shares held as custodian
for his son and 100 shares held by Mr. Braasch's wife. Mr. Braasch
disclaims beneficial interest in shares held as custodian for his son and
by his wife.
(9) Includes 1,000 shares held of record by Robert H. Arnold's wife. Mr.
Arnold disclaims beneficial interest in such shares.
(10) Includes 100 shares held of record by Walter J. O'Brien's wife. Walter J.
O'Brien disclaims beneficial interest in such shares.
(11) Includes 1,000 shares of record held by Mr. Jooss's IRA.
(12) Includes 40,200 shares which may be acquired on or before May 31, 1998
pursuant to the exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL
The Company has entered into a number of transactions with certain
companies and partnerships in which Charles F. Wonderlic or Ronald B. Clonts or
members of their immediate families own a direct or indirect controlling
interest (any or all of such companies and partnerships are referred to herein
as the "Commonly Controlled Companies"). The Company has generally sought to
treat each transaction with a Commonly Controlled Company as an arms-length
transaction. The Company has adopted a formal policy requiring all transactions
with its principal stockholders, executive officers and directors, or their
affiliates (including the Commonly Controlled Companies), to be on terms no less
favorable to the Company than could be obtained from unrelated parties, and any
material transactions with its affiliates (including the Commonly Controlled
Companies) that are outside the ordinary course of business to be presented for
the approval of the Company's disinterested directors.
The Company leases furniture and computer equipment from a Commonly
Controlled Company, Wonderlic Personnel Test, Inc. ("WPT"), pursuant to a Master
Lease Agreement. Payments under that agreement (and any related predecessor
agreements) were approximately $1.1 million during 1997, and are believed by the
Company to be no less favorable than could have been obtained from unrelated
parties in comparable transactions. The primary reason for these transactions
is that leased assets, as opposed to owned assets, do not reduce the borrowing
base under the Company's revolving credit facility. In 1997, the Company paid
approximately $57,000 to WPT for the development of a proprietary credit scoring
model. Management believes that the cost to the Company of these services was
no less favorable than the Company could have obtained from unrelated parties in
comparable transactions.
SUBORDINATED DEBENTURES AND OTHER DEBT
Charles F. Wonderlic and Ronald B. Clonts, members of their families and
certain of the Commonly Controlled Companies have from time to time made loans
to the Company evidenced by subordinated notes. At December 31, 1997, the
approximate outstanding principal amount of such subordinated notes in which
such persons or members of their families had a direct or indirect pecuniary
interest was $682,560. Such subordinated notes
45
<PAGE>
currently bear interest at various rates between 10% and 11% and mature at
various times through June 2005, although they are callable.
The Company had an outstanding debt obligation to Prominent Mortgage
Corp., a Commonly Controlled Company, in the amount of $36,612 on at
December 31, 1997. This debt is governed by a Master Note Agreement, as
amended, between Prominent Mortgage Corp. and the Company (the "Master Note
Agreement"). The Master Note Agreement provides that advances made from time
to time by Prominent Mortgage Corp. to the Company are to be evidenced by a
promissory note with a term not to exceed nine months. Borrowed amounts are
generally payable on demand and may be prepaid without penalty. Interest is
generally set at slightly below the prime rate prevailing at the time of
advances thereunder.
INTERCOMPANY SERVICES AGREEMENT
The Company and certain Commonly Controlled Companies (the "Services
Agreement Companies") are parties to an Intercompany Services Agreement, as
amended (the "Services Agreement"), which provides that the Company will render
specified services to the Services Agreement Companies, including services
relating to accounting, information systems, technical support, insurance
management, payroll and tax return preparation. The Services Agreement
Companies pay a monthly fee to the Company which is approximately equivalent to
the Company's cost of rendering such services and is calculated based on: (i) a
percentage of the monthly salary of certain Company employees; (ii) a fee for
any tax return prepared and filed by the Company on behalf of the Services
Agreement Companies during the preceding month; and (iii) an additional amount
equal to the allocable share of fees for professional services and insurance
premiums and deductibles paid by the Company during the preceding month, less
the Company's share of any such fees paid by the Services Agreement Companies
during the preceding month. The Services Agreement continues until terminated
by the Company or the Services Agreement Companies upon 30 days prior written
notice. For the year ended December 31, 1997, the Company was paid
approximately $82,600 under the Services Agreement.
The following Commonly Controlled Companies are parties to the Services
Agreement and comprise the Services Agreement Companies: Upland Farms; WPT;
Wonderlic Companies, Inc.; Richmond Bancorp, Inc.: Richmond Financial Services,
Inc.; Richmond Bank; Richmond Hunt Club, Inc. and Prominent Mortgage Corp.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE
(a) 1. Financial Statements:
Report of Independent Public Accountants 18
Balance Sheets- 19
As of December 31, 1997 and 1996
Statements of Income- 20
For the Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Stockholders' Equity- 21
For the Years Ended December 31, 1997, 1996 and 1995
Statements of Cash Flows- 22
For the Years Ended December 31, 1997, 1996 and 1995
Notes to the Financial Statements 23
46
<PAGE>
2. The following financial schedules for the years 1997, 1996 and 1995
are submitted herewith:
None.
3. Exhibits.
The following list sets forth the exhibits to this Form 10-K as required by
Item 601 of Regulation S-K. Certain exhibits are filed herewith, while the
remaining exhibits are hereby incorporated by reference to documents previously
filed with the Securities and Exchange Commission. Exhibits hereto incorporated
by reference to such other filed documents are indicated by an asterisk (*).
EXHIBIT
NO. DESCRIPTION
3.1* Restated Certificate of Incorporation of the Company
3.2* Restated Bylaws of the Company
4.1* Form of certificate evidencing Common Stock of the Company
4.2* Indenture dated as of April 15, 1995 between the Company and
LaSalle National Bank, as Trustee
4.3* First Supplemental Indenture dated as of April 28, 1995 between
the Company and LaSalle National Bank, as Trustee, including form
of note
10.1* Lease Agreements dated June 1, 1993 between Upland Farms and
Wonderlic & Associates, Inc.
10.2* Intercompany Services Agreement dated as of January 1, 1994
10.3* Tax Indemnification Agreement
10.4* Servicing Agreement dated February 26, 1993 between Wonderlic &
Associates, Inc. and General Electric Capital Corporation
10.5* Amendment No. 1 to Servicing Agreement dated March 22, 1993
between Wonderlic & Associates, Inc. and General Electric Capital
Corporation
10.6* Interest Rate Protection Agreement dated July 1, 1992 between the
Company and Harris Trust and Savings Bank
10.7* Eagle Finance Corp. 1994 Stock Incentive Plan
10.8* Form of Stock Option Agreement
10.9* Form of Employment Agreement of Charles F. Wonderlic
10.10* Form of Employment Agreement of Ronald B. Clonts
10.10(a)* Amendment to Employment Agreement of Ronald B. Clonts, dated
January 1, 1997.
10.11* Form of Employment Agreement of Robert J. Braasch
10.12* Form of Indemnification Agreement
10.13* Computer System Lease dated July 31, 1993 between Wonderlic
Personnel Test, Inc. and Wonderlic & Associates, Inc.
10.14* Master Note Agreement dated as of January 1, 1994 between
Wonderlic & Associates, Inc. and Prominent Mortgage Corp.
47
<PAGE>
EXHIBIT
NO. DESCRIPTION
10.15* First Amendment to Master Note Agreement dated as of August 1,
1994 between Eagle Finance Corp. and Prominent Mortgage Corp.
10.16* Form of Debenture Agreement
10.17* Form of Subordinated Debentures
10.18* Form of Subordinated Notes
10.19* Form of Dealer Agreement
10.20* Form of Company Credit Application
10.21* Asset Purchase Agreement dated as of September 27, 1994 between
General Electric Capital Corporation and Eagle Finance Corp.
10.22* Amendment No. 1 to Asset Purchase Agreement, dated as of March
31, 1995, between General Electric Capital Corporation and Eagle
Finance Corp.
10.23* Form of Master Lease Agreement
10.24* Assignment and Assumption Agreement dated as of August 1, 1994
between Wonderlic Personnel Test, Inc. and Eagle Finance Corp.
10.25* Asset Purchase Agreement dated as of June 25, 1996 between
General Electric Capital Corporation and Eagle Finance Corp.
10.26* Amended and Restated Servicing Agreement dated as of June 25,
1996 between General Electric Capital Corporation and Eagle
Finance Corp.
10.27* Pooling and Servicing Agreement dated as of September 1, 1996
among Eagle Auto Funding Corp., Eagle Finance Corp. and Harris
Trust and Savings Bank
10.28* Loan Sale and Contribution Agreement dated as of September 1,
1996 between Eagle Finance Corp. and Eagle Auto Funding Corp.
10.29* Waiver Letter from General Electric Capital Corporation dated
March 26, 1997
10.30* Waiver Letter from General Electric Capital Corporation dated
January 29, 1998
11 Statement Regarding Computation of Net Earnings Per Share.
12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
(b) The Company did not file any Current Report on Form 8-K during the fourth
quarter of 1997.
(c) Exhibits - those exhibits listed above without an asterisk are filed
herewith.
(d) There are no financial statement schedules required by Regulation S-X that
are excluded from the Financial Statements included under Item 8 or this
report.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on June 16, 1998.
EAGLE FINANCE CORP.
By: CHARLES F. WONDERLIC
-------------------------------------
Charles F. Wonderlic
Chairman and Chief Executive Officer
49
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
3.1 Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit No. 3.1 to Registration Statement on Form S-
1, File No. 33-77828)
3.2 Restated Bylaws of the Company (incorporated by reference to Exhibit
No. 3.2 to Registration Statement on Form S-1, File No. 33-77828)
4.1 Form of certificate evidencing Common Stock of the Company
(incorporated by reference to Exhibit No. 4.1 to Registration
Statement on Form S-1, File No. 33-77828)
4.2 Indenture dated as of April 15, 1995 between the Company and LaSalle
National Bank, as Trustee (incorporated by reference to Exhibit No.
2 to Current Report on Form 8-K, dated May 5, 1995)
4.3 First Supplemental Indenture dated as of April 28, 1995 between the
Company and LaSalle National Bank, as Trustee, including form of
note (incorporated by reference to Exhibit No. 3 to Current Report
on Form 8-K, dated May 5, 1995)
10.1 Lease Agreements dated June 1, 1993 between Upland Farms and
Wonderlic & Associates, Inc. (incorporated by reference to Exhibit
No. 10.1 to Registration Statement on Form S-1, File No. 33-77828)
10.2 Intercompany Services Agreement dated as of January 1, 1994
(incorporated by reference to Exhibit No. 10.2 to Registration
Statement on Form S-1, File No. 33-77828)
10.3 Tax Indemnification Agreement (incorporated by reference to Exhibit
No. 10.3 to Registration Statement on Form S-1, File No. 33-77828)
10.4 Servicing Agreement dated February 26, 1993 between Wonderlic &
Associates, Inc. and General Electric Capital Corporation
(incorporated by reference to Exhibit No. 10.4 to Registration
Statement on Form S-1, File No. 33-77828)
10.5 Amendment No. 1 to Servicing Agreement dated March 22, 1993 between
Wonderlic & Associates, Inc. and General Electric Capital
Corporation (incorporated by reference to Exhibit No. 10.5 to
Registration Statement on Form S-1, File No. 33-77828)
10.6 Interest Rate Protection Agreement dated July 1, 1992 between the
Company and Harris Trust and Savings Bank (incorporated by reference
to Exhibit No. 10.11 to Registration Statement on Form S-1, File No.
33-77828)
10.7 Eagle Finance Corp. 1994 Stock Incentive Plan (incorporated by
reference to Exhibit No. 10.12 to Registration Statement on Form S-
1, File No. 33-77828)
10.8 Form of Stock Option Agreement (incorporated by reference to Exhibit
No. 4.4 to Registration Statement on Form S-8, File No. 33-89132)
10.9 Form of Employment Agreement of Charles F. Wonderlic (incorporated
by reference to Exhibit No. 10.13 to Registration Statement on Form
S-1, File No. 33-77828)
10.10 Form of Employment Agreement of Ronald B. Clonts (incorporated by
reference to Exhibit No. 10.14 to Registration Statement on Form S-
1, File No. 33-77828)
10.10(a) Amendment to Employment Agreement of Ronald B. Clonts, dated January
1, 1997 (incorporated by reference to Exhibit No. 10.11(a) to Form
10-K for the
50
<PAGE>
Year Ended December 31, 1996)
10.11 Form of Employment Agreement of Robert J. Braasch (incorporated by
reference to Exhibit No. 10.15 to Registration Statement on Form S-
1, File No. 33-77828)
10.12 Form of Indemnification Agreement (incorporated by reference to
Exhibit No. 10.16 to Registration Statement on Form S-1, File No.
33-77828)
10.13 Computer System Lease dated July 31, 1993 between Wonderlic
Personnel Test, Inc. and Wonderlic & Associates, Inc. (incorporated
by reference to Exhibit No. 10.17 to Registration Statement on Form
S-1, File No. 33-77828)
10.14 Master Note Agreement dated as of January 1, 1994 between Wonderlic
& Associates, Inc. and Prominent Mortgage Corp. (incorporated by
reference to Exhibit No. 10.18 to Registration Statement on Form S-
1, File No. 33-77828)
10.15 First Amendment to Master Note Agreement dated as of August 1, 1994
between Eagle Finance Corp. and Prominent Mortgage Corp.
(incorporated by reference to Exhibit No. 10.18(a) to the Quarterly
Report on Form 10-Q for the Quarterly Period Ended September 30,
1994)
10.16 Form of Debenture Agreement (incorporated by reference to Exhibit
No. 10.19 to Registration Statement on Form S-1, File No. 33-77828)
10.17 Form of Subordinated Debentures (incorporated by reference to
Exhibit No. 10.20 to Registration Statement on Form S-1, File No.
33-77828)
10.18 Form of Subordinated Notes (incorporated by reference to Exhibit No.
10.21 to Registration Statement on Form S-1, File No. 33-77828)
10.19 Form of Dealer Agreement (incorporated by reference to Exhibit No.
10.22 to Registration Statement on Form S-1, File No. 33-77828)
10.20 Form of Company Credit Application (incorporated by reference to
Exhibit No. 10.23 to Registration Statement on Form S-1, File No.
33-77828)
10.21 Asset Purchase Agreement dated as of September 27, 1994 between
General Electric Capital Corporation and Eagle Finance Corp.
(incorporated by reference to Exhibit No. 10.26 to the Quarterly
Report on Form 10-Q for the Quarterly Period ending September 30,
1994)
10.22 Amendment No. 1 to the Asset Purchase Agreement, dated as of March
31, 1995, between General Electric Capital Corporation and Eagle
Finance Corp. (incorporated by reference to Exhibit No. 10.25(a) to
Registration Statement on Form S-1, File No. 33-90754)
10.23 Form of Master Lease Agreement (incorporated by reference to Exhibit
No. 10.26 to the Annual Report on Form 10-K for the Year ended
December 31, 1994)
10.24 Assignment and Assumption Agreement dated as of August 1, 1994
between Wonderlic Personnel Test, Inc. and Eagle Finance Corp.
(incorporated by reference to Exhibit No. 10.27 to the Annual Report
on Form 10-K for the Year Ended December 31, 1994)
10.25 Asset Purchase Agreement dated as of June 25, 1996 between General
Electric Capital Corporation and Eagle Finance Corp. (incorporated
by reference to Exhibit No. 10.3 to the Quarterly Report on Form 10-
Q for the Quarterly
51
<PAGE>
Period Ended June 30, 1996)
10.26 Amended and Restated Servicing Agreement dated as of June 25, 1996
between General Electric Capital Corporation and Eagle Finance Corp.
(incorporated by reference to Exhibit No. 10.4 to the Quarterly
Report on Form 10-Q for the Quarterly Period Ended June 30, 1996)
10.27 Pooling and Servicing Agreement dated as of September 1, 1996 among
Eagle Auto Funding Corp., Eagle Finance Corp. and Harris Trust and
Savings Bank (incorporated by reference to Exhibit No. 10.32 to Form
10-K for the Year Ended December 31, 1996)
10.28 Loan Sale and Contribution Agreement dated as of September 1, 1996
between Eagle Finance Corp. and Eagle Auto Funding Corp.
(incorporated by reference to Exhibit No. 10.33 to Form 10-K for the
Year Ended December 31, 1996)
10.29 Waiver Letter from General Electric Capital Corporation dated March
26, 1997 (incorporated by reference to Exhibit No. 10.34 to Form 10-
K for the Year Ended December 31, 1996)
10.30 Waiver Letter from General Electric Capital Corporation dated
January 29, 1998 (incorporated by reference to Exhibit No. 10.30 to
the Initial Form 10-K)
11 Statement Regarding Computation of Net Earnings Per Share.
12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
52
<PAGE>
EXHIBIT 11
EAGLE FINANCE CORP.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
-------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INCOME DATA:
1. Net income (loss) as reported $ (12,703) $ (5,349) $ 325
2. Pro forma income taxes -- -- --
-------------- ------------- -------------
3. Pro forma net income (loss) $ (12,703) $ (5,349) $ 325
-------------- ------------- -------------
-------------- ------------- -------------
NUMBER OF OUTSTANDING SHARES:
4. Weighted average common shares
outstanding 4,204 4,189 4,183
5. Weighted average shares of treasury
stock outstanding -- -- --
6. Weighted average shares reserved for
stock options (utilizing the treasury
stock method) -- -- 127
7. Common shares outstanding
(Line 4-5+6) 4,204 4,189 4,310
NET INCOME PER SHARE:
8. Net income (loss) per common shares
(Line 3 DIVIDED BY 4) $ (3.02) $ (1.28) $ .08
9. Fully diluted net income (loss) per common share
(Line 3 DIVIDED BY 7) $ (3.02) $ (1.28) $ .08
</TABLE>
<PAGE>
EXHIBIT 12
EAGLE FINANCE CORP.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
--------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss) $(12,703) $ (5,349) $ 325 $ 3,951 $ 1,686
Added fixed charges:
Cost of borrowing 7,073 9,059 8,093 2,712 1,232
One-third rental 517 499 400 115 146
--------- ---------- -------- ---------- ---------
Total fixed charges $ 7,590 $ 9,558 $ 8,493 $ 2,827 $ 1,378
--------- ---------- -------- ---------- ---------
--------- ---------- -------- ---------- ---------
Provision for income taxes $ 121 $ (659) $ 197 $ 1,167 --
--------- ---------- -------- ---------- ---------
--------- ---------- -------- ---------- ---------
Total "earnings" (net income (loss), fixed
charges, and income taxes) $ (4,992) $ 4,868 $ 9,015 $ 7,945 $ 3,064
--------- ---------- -------- ---------- ---------
--------- ---------- -------- ---------- ---------
Ratio of "earnings" to fixed charges (Note 1) -- -- 1.06 2.81 2.22
--------- ---------- -------- ---------- ---------
--------- ---------- -------- ---------- ---------
Deficiency of fixed charges coverage (Note 1) (0.66) 0.51 -- -- --
--------- ---------- -------- ---------- ---------
--------- ---------- -------- ---------- ---------
</TABLE>
Note 1. SEC Regulations S-K requires the disclosure of the ratio of earnings to
fixed charges except where the ratio falls below 1, then the deficiency shall be
disclosed in dollar terms.
<PAGE>
KPMG CONSENT
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Eagle Finance Corp.
RE: Registration Statement on Form S-8
Registration No. 33-89132; 1994 Stock Incentive Plan
We consent to incorporation by reference in the subject Registration Statement
on Form S-8 of Eagle Finance Corp. of our report dated April 15, 1998, relating
to the balance sheets of Eagle Finance Corp. as of December 31, 1997 and 1996,
and the related statements of income, changes in stockholders' equity (deficit)
and cash flows for each of the years in the three-year period ended December 31,
1997, which report appears in the December 31, 1997 annual report on Form 10-K
of Eagle Finance Corp.
KPMG PEAT MARWICK LLP
Chicago, Illinois
June 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,809,248
<SECURITIES> 552,521
<RECEIVABLES> 55,516,052
<ALLOWANCES> 7,990,048
<INVENTORY> 0
<CURRENT-ASSETS> 49,887,773
<PP&E> 4,938,046<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,825,819
<CURRENT-LIABILITIES> 39,598,070
<BONDS> 17,543,768
0
0
<COMMON> 42,287
<OTHER-SE> (2,358,306)
<TOTAL-LIABILITY-AND-EQUITY> 54,825,819
<SALES> 0
<TOTAL-REVENUES> 18,109,442
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,484,410
<LOSS-PROVISION> 9,134,244
<INTEREST-EXPENSE> 7,073,049
<INCOME-PRETAX> (12,582,261)
<INCOME-TAX> 120,676
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,702,937)
<EPS-PRIMARY> (3.02)
<EPS-DILUTED> (3.02)
<FN>
<F1>PP&E DOES NOT APPLY - FIGURE REPRESENTS OTHER ASSETS
</FN>
</TABLE>
