<PAGE> 1
PROSPECTUS
$45,000,000
FIRST MERCHANTS
ACCEPTANCE CORPORATION
First Merchants Logo
SUBORDINATED RESET NOTES DUE 2006
The Subordinated Reset Notes due December 15, 2006 (the "1996 Notes")
offered hereby (the "Offering") are unsecured debt obligations of First
Merchants Acceptance Corporation (the "Company"). Interest on the 1996 Notes is
payable quarterly, on March 15, June 15, September 15, and December 15 of each
year, commencing December 15, 1996, at an interest rate of 9.5% per annum until
December 15, 2001. The interest rate will reset, at the Company's option, on
December 15, 2001 to a rate and for a period (an "Interest Rate Period") of one,
two, three or five years determined by the Company and will reset thereafter, at
the Company's option, upon the date of expiration of each such new Interest Rate
Period prior to maturity (each such date, including December 15, 2001, an
"Interest Reset Date"). Any new interest rate determined by the Company with
respect to an Interest Reset Date shall not be less than 105% of the Effective
Interest Rate on Comparable Maturity U.S. Treasury Obligations (as defined
herein). In the event that the Company decides not to reset the interest rate on
an Interest Reset Date, the interest rate for the prior Interest Rate Period
shall continue to be the interest rate in effect for the next year and each year
thereafter, unless and until the Company shall reset the interest rate on a
subsequent Interest Reset Date. Until the interest rate is reset for a
subsequent period, each December 15 shall be deemed to be an Interest Reset
Date. See "Description of the 1996 Notes."
The 1996 Notes are redeemable, in whole, at the option of the holder, at
100% of the principal amount plus accrued interest to the date of redemption, on
each Interest Reset Date and, in whole or in part, upon the occurrence of
certain "Special Redemption Events" referred to herein. The Company will redeem,
in whole or in part, at any time, at 100% of the principal amount plus accrued
interest to the date of redemption, 1996 Notes tendered by the personal
representative or surviving joint tenant, tenant by the entirety or tenant in
common of a deceased holder, within 60 days of presentation of the necessary
documents, up to an annual maximum of $25,000 per holder and an annual maximum
for all holders of 5% of the original aggregate principal amount of the 1996
Notes. The 1996 Notes are redeemable at the option of the Company, in whole, on
any Interest Reset Date, at 100% of the principal amount plus accrued interest
to the date of redemption. See "Description of the 1996 Notes."
The 1996 Notes will be issued in integral multiples of $1,000 and will be in
fully registered form. No sinking fund will be established for the 1996 Notes.
The minimum principal amount of 1996 Notes which may be purchased is $1,000. The
Company has been advised by the four Underwriters that each of them intends to
make a market in the 1996 Notes; however, the 1996 Notes will not be authorized
for quotation on The Nasdaq Stock Market's National Market or any other
quotation system or listed on any securities exchange and no assurance can be
given that an active trading market for the 1996 Notes will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 1996 NOTES OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
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Per 1996 Note.......................... 100% 4% 96%
- ------------------------------------------------------------------------------------------------------
Total(3)............................... $45,000,000 $1,800,000 $43,200,000
- ------------------------------------------------------------------------------------------------------
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $300,000 payable by the Company.
(3) The Company has granted the Underwriters an over-allotment option
exercisable within 30 days from the date of this Prospectus to purchase up
to $6,750,000 aggregate principal amount of additional 1996 Notes on the
same terms and conditions as set forth above. If all such 1996 Notes are
purchased by the Underwriters, the total Price to Public will be
$51,750,000, the total Underwriting Discount will be $2,070,000 and the
total Proceeds to Company will be $49,680,000. See "Underwriting."
------------------------
The 1996 Notes are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject orders in
whole or in part and to withdraw, cancel or modify the offer without notice. The
1996 Notes will bear interest from the date of delivery to the Underwriters. It
is expected that the 1996 Notes will be available for delivery on or about
November 1, 1996.
------------------------
J.C. BRADFORD & CO.
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
October 29, 1996
<PAGE> 2
SERVICE CENTER MAP
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 1996 NOTES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
First Merchants Acceptance Corporation is a specialty finance company
primarily engaged in financing the purchase of used automobiles by acquiring
dealer-originated retail installment contracts ("finance contracts"). Since the
Company's incorporation in March 1991, it has targeted its marketing efforts on
dealers (the "dealers") which sell automobiles to consumers who have limited
access to traditional sources of credit ("non-prime borrowers"). The Company
serves two customers, the dealer and, indirectly, the dealer's customer, the
non-prime borrower. As of September 30, 1996, the Company serviced approximately
3,000 dealers in 37 states. The Company's total finance contract portfolio,
which includes receivables owned and sold with servicing retained, increased
from approximately $94.1 million at December 31, 1994 and $284.2 million at
December 31, 1995 to approximately $479.2 million at June 30, 1996. The Company
generated net earnings before extraordinary item in 1993, 1994 and 1995 of
approximately $0.9 million, $2.8 million and $6.7 million, respectively. For the
six months ended June 30, 1995 and June 30, 1996, the Company generated net
earnings of approximately $2.5 million and $6.2 million, respectively.
During 1993, 1994 and 1995, the Company purchased finance contracts with
aggregate initial principal balances of approximately $33.9 million, $91.4
million and $257.9 million, respectively. For the six months ended June 30, 1995
and June 30, 1996, the Company purchased finance contracts with aggregate
initial principal balances of approximately $99.0 million and $265.3 million,
respectively. Finance contracts purchased during the six months ended June 30,
1996 had an average initial principal balance of $11,075, a weighted average
annual percentage rate ("APR") of 20.3%, a weighted average purchase discount of
4.3% and a weighted average initial contract term of 54 months. Based on the
Company's historical experience, its finance contracts have an average life of
approximately 34 months. During the six months ended June 30, 1996, the
Company's owned finance contract portfolio generated a net portfolio yield of
16.7%. During such period, accounts with payments 31 days or more past due
averaged less than 4.0% of the Company's total finance contract portfolio.
The Company has historically funded the purchase of its finance contracts
with borrowings from banks and other lenders. Beginning in November 1995, the
Company began securitizing portions of its portfolio of finance contract
receivables to increase the Company's liquidity, provide for the redeployment of
capital, reduce risks associated with interest rate fluctuations and provide the
Company with access to a cost-effective, diversified source of financing. The
Company has structured its securitization transactions both as debt financings
and as off-balance sheet financings that result in gains on the sale of finance
contract receivables. The Company plans to continue to employ its securitization
program as an integral component of its funding strategy and anticipates that it
will generally complete securitization transactions, primarily off-balance
sheet, on a quarterly basis.
The Company's growth strategy is to utilize its national sales force,
together with its Dealer Service Center managers, to increase the volume of
finance contracts purchased per automobile dealer relationship, increase its
presence and geographic scope within existing markets and penetrate new markets.
The Company has established relationships with certain national used car
superstores, such as CarMax(R), and certain large, regional franchised dealers
and intends to develop relationships with additional national used car
superstores and additional large, regional franchised dealers. The Company is
also in the process of developing referral programs with financial institutions,
which enable the Company to finance non-prime borrowers whose credit
applications are turned down by such financial institutions. In addition, the
Company is considering bulk purchases of non-automobile consumer receivables and
various other strategic business alternatives, including diversification into
other areas of consumer financial services. However, the Company anticipates
that its primary business strategy will continue to be to focus its resources on
purchasing finance contracts from dealers that sell automobiles to non-prime
borrowers. During the six months ended June 30, 1996,
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approximately 80% (by aggregate principal balance) of the finance contracts
purchased by the Company were originated by franchised dealers and the remainder
were originated by quality independent dealers. The key elements of the
Company's business strategy are:
- Efficient Operational Structure -- The Company's operational structure is
designed to maximize dealer service and finance contract originations,
while maintaining consistent portfolio performance and controlling
operating expenses. The Company's sales, credit and collection functions
are organized as follows: (i) a national sales force, which is dedicated
to developing new dealer relationships and expanding the geographic scope
of regional dealer service centers; (ii) regional dealer service centers
("Dealer Service Centers"), which coordinate with the sales force to
build and nurture dealer relationships, process and underwrite credit
applications and disburse funds to dealers; (iii) account service centers
("Account Service Centers"), which perform all account servicing
functions, such as finance contract verification, payment processing,
delinquency follow-ups and cost-effective recoveries of charged-off
account balances; and (iv) the asset disposition group ("Asset
Disposition Group"), which arranges the disposition of repossessed
collateral.
- Experienced Management Personnel -- The Company has recruited experienced
management personnel at the executive, supervisory and managerial levels.
The Company believes that the retention of such experienced management
personnel is important in maintaining credit quality, supervising its
operations and maintaining flexible strategies for growth in a changing
business environment. The Company's executive officers, senior managerial
personnel and Dealer Service Center and Account Service Center managers
have an average of over 15 years of experience in the consumer or
automobile finance industries.
- Sophisticated Risk Management Techniques -- To mitigate the higher risks
often associated with non-prime borrowers, the Company has developed
sophisticated risk management techniques for evaluating credit
applications based in part upon the Company's ongoing analysis and review
of existing portfolio characteristics. The Company utilizes a credit
scoring system developed by a leading credit evaluation company as an
objective guideline for evaluating a non-prime borrower's
creditworthiness. The Company also employs a tiered pricing system that
provides guidance for the determination of the APR, discount and other
terms of a finance contract commensurate with the credit characteristics
of such contract. The Company has assigned each Dealer Service Center
manager a maximum credit authority per finance contract based on various
factors, including such manager's experience level. Within the guidelines
and procedures established by the Company, each Dealer Service Center
manager is authorized to approve or reject credit applications and to
supplement objective credit criteria with subjective judgment.
- Proactive Collection Management -- The Company pursues a policy of
proactive collection management through its Account Service Centers with
respect to both current and delinquent accounts, including activities
related to monthly billing and collections, borrower inquiries and
repossessions. The Company utilizes predictive dialing technology to
complement its calling efforts and enhance the productivity of its
collection personnel. Any finance contract for which a payment is one day
overdue is treated as a past due account for collection purposes, and the
Company typically contacts a borrower within two days after such
borrower's account becomes past due. The Company generally commences
repossession procedures before an account is more than two payments past
due. Management believes that proactive collection management is critical
in maintaining a low level of delinquencies and charge-offs.
- Monitoring and Supervising the Operational Structure -- The Company
maintains departments reporting directly to senior management that
perform independent control functions to monitor and review the
operations of the Company. The Company's Risk Management group performs
ongoing analyses of new finance contracts purchased by the Company to
ensure that such finance contracts meet the Company's credit guidelines
and were purchased in compliance with the Company's operational
procedures. In addition, the Risk Management group analyzes trends in the
finance contract portfolio and performs back-end reviews of the finance
contract portfolio's performance. The
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Company's Internal Audit department and Managing Directors of Dealer
Services review the operations of each Dealer Service Center in order to
evaluate compliance with the Company's policies and procedures and
maintenance of the Company's credit quality standards. Each control
function actively utilizes the Company's management information system
that provides real time, on-line review and audit capabilities. In
addition, management conducts daily reviews of the volume of finance
contracts purchased, aging of accounts, repossession activities and other
operating data.
- Providing Superior Service to Quality Dealers -- By providing prompt,
flexible service and a reliable source of financing for non-prime
borrowers, the Company helps to expand the dealers' customer base,
thereby increasing the efficiency and effectiveness of their used car
sales operations. The Company typically responds to credit applications
on the date received, in many cases within 2 to 3 hours, and generally
pays the dealer for finance contracts purchased within 24 hours after the
Company has received required documentation from the dealer. As of August
31, 1996, the Company operated a nationwide network of 33 Dealer Service
Centers servicing dealers in 37 states. In the first half of 1996, the
Company consolidated 13 smaller Dealer Service Centers to improve
operating efficiencies in accordance with its nationwide hub and spoke
strategy, and the Company intends to continuously review the operating
efficiencies of its remaining Dealer Service Center network. The Company
has strengthened its national sales force to support the efforts of its
Dealer Service Centers in providing consistent, reliable service to
dealers. The Company has further focused its operations by centralizing
collections into two Account Service Centers, thus allowing Dealer
Service Centers to concentrate on developing and nurturing dealer
relationships and maintaining credit quality with respect to new
purchases of finance contracts.
The Company is a Delaware corporation. The Company's principal executive
office and mailing address is 570 Lake Cook Road, Suite 126, Deerfield, Illinois
60015 and its telephone number is (847) 948-9300.
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THE OFFERING
NOTES OFFERED.................... $45,000,000 principal amount of
Subordinated Reset Notes due 2006, assuming
no exercise of the Underwriters' over-
allotment option to purchase up to an
additional $6,750,000 principal amount of
1996 Notes. See "Description of the 1996
Notes" for a more detailed description of
the 1996 Notes offered hereby.
DENOMINATION..................... $1,000 and any integral multiple thereof.
MATURITY DATE.................... December 15, 2006.
INTEREST RATE.................... 9.5% per annum until December 15, 2001. The
Company will reset the interest rate for
the 1996 Notes, at its option, effective
December 15, 2001, to a rate and for an
Interest Rate Period of one, two, three or
five years determined by the Company and
will reset the interest rate thereafter, at
its option, effective as of each Interest
Reset Date prior to maturity. Any such new
interest rate shall not be less than 105%
of the Effective Interest Rate on
Comparable Maturity U.S. Treasury
Obligations (as defined herein). In the
event that the Company decides not to reset
the interest rate on the Interest Reset
Date, the interest rate for the prior
Interest Rate Period shall continue to be
the interest rate in effect for the next
year and each year thereafter, unless and
until the Company shall reset the interest
rate on a subsequent Interest Reset Date.
Until the interest rate is reset for a
subsequent period, each December 15 shall
be deemed to be an Interest Reset Date.
INTEREST PAYMENT DATES........... Interest is payable quarterly, on March 15,
June 15, September 15 and December 15 of
each year, commencing December 15, 1996.
The first interest payment will represent
interest from the date of original issuance
through December 14, 1996.
REDEMPTION AT THE OPTION OF THE
HOLDER........................... 1996 Notes tendered on or before the fifth
business day prior to December 15, 2001 or
any subsequent Interest Reset Date will be
redeemable, in whole, at 100% of the
principal amount plus accrued interest to
the date of redemption.
REDEMPTION OPTION UPON DEATH OF
HOLDER........................... 1996 Notes tendered by the personal
representative or surviving joint tenant,
tenant by entirety or tenant in common of a
deceased beneficial owner will be
redeemable, in whole or in part, within 60
days of tender, at 100% of the principal
amount plus accrued interest to the date of
redemption, subject to an annual maximum of
$25,000 per holder and an annual maximum
for all holders of 5% of the original
aggregate principal amount of the 1996
Notes.
REDEMPTION AT COMPANY'S OPTION... The 1996 Notes may not be redeemed prior to
December 15, 2001. The 1996 Notes may be
redeemed, in whole, at the Company's option
on December 15, 2001 or on any subsequent
Interest Reset Date at 100% of the
principal amount plus accrued interest to
the date of redemption.
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REDEMPTION UPON OCCURRENCE OF
CERTAIN EVENTS................... In the event of a Special Redemption Event
(as defined herein), each holder of 1996
Notes will have the right, at the holder's
option, to require the Company to purchase
the holder's 1996 Notes, in whole or in
part, at 100% of the principal amount plus
accrued interest to the date of redemption.
The term Special Redemption Event is
limited to certain transactions involving a
change in control of the Company.
SUBORDINATION.................... The 1996 Notes are unsecured and
subordinated in right of payment to all
senior indebtedness of the Company,
including amounts outstanding under the
Company's Senior Revolving Credit Facility,
as defined herein. The 1996 Notes are equal
in rank to the 1995 Notes (as defined
herein).
CERTAIN COVENANTS OF THE
COMPANY.......................... In the 1996 Indenture (as defined herein),
the Company agrees to certain limitations
on dividends and additional indebtedness
and to certain restrictions on
consolidation, merger or transfer of all or
substantially all of it assets.
SINKING FUND..................... None.
USE OF PROCEEDS.................. The net proceeds from the sale of the 1996
Notes will be used to fund future purchases
of finance contracts. Pending such use, the
Company will use such net proceeds to repay
a portion of the indebtedness under the
Senior Revolving Credit Facility. See "Use
of Proceeds."
TRUSTEE.......................... LaSalle National Bank, Chicago, Illinois.
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SUMMARY FINANCIAL DATA
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1991(1) 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA, (UNAUDITED)
PORTFOLIO DATA AND OPERATING DATA)
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STATEMENT OF EARNINGS DATA:
Interest income -- finance contracts................. $ 132 $ 1,960 $ 6,354 $15,324 $ 38,210 $ 14,487 $ 35,480
Other portfolio income............................... 23 78 401 699 1,338 479 965
Gain on sale of finance receivables.................. -- -- -- -- -- -- 8,092
Servicing fee and other income....................... -- -- -- -- -- -- 868
Earnings (loss) before income taxes and extraordinary
item............................................... (331) 327 1,565 4,499 10,804 4,086 10,184
Net earnings (loss)(2)............................... (331) 327 939 1,621 6,701 2,533 6,212
Per share data:
Net earnings (loss) before extraordinary item...... (0.19) 0.17 0.32 0.85 1.35 0.57 0.92
Net earnings (loss)(2)............................. (0.19) 0.17 0.32 0.49 1.35 0.57 0.92
Weighted average number of common and common
equivalent shares outstanding...................... 1,765 1,921 2,922 3,297 4,980 4,463 6,754
PORTFOLIO DATA:
Number of contracts acquired during period........... 277 2,371 5,263 10,154 25,336 9,879 23,958
Dollar value of contracts acquired during period (in
thousands)......................................... $1,545 $13,127 $33,895 $91,430 $257,946 $ 98,964 $265,334
Average initial finance contract amount.............. 5,577 5,536 6,440 9,004 10,181 10,018 11,075
Weighted average initial finance contract term (in
months)............................................ N/A(3) N/A(3) N/A(3) N/A(3) 50 48 54
Weighted average discount of contracts acquired
during period...................................... 10.4% 9.0% 9.0% 8.0% 6.2% 7.1% 4.3%
Net finance receivables -- owned -- end of period (in
thousands)(4)...................................... $1,400 $11,418 $33,563 $94,090 $284,173 $166,059 $339,826
Number of finance contracts outstanding -- owned --
end of period(4)................................... 261 2,330 6,194 12,670 31,082 19,597 36,167
Average net finance receivables -- owned (in
thousands)(4)...................................... $ 554 $ 6,314 $22,005 $62,898 $171,737 $128,000 $319,948
Net finance receivables -- serviced -- end of period
(in thousands)..................................... 1,400 11,418 33,563 94,090 284,173 166,059 479,243
Number of finance contracts outstanding -- serviced
-- end of period................................... 261 2,330 6,194 12,670 31,082 19,597 49,287
Average net finance receivables -- serviced (in
thousands)......................................... $ 554 $ 6,314 $22,005 $62,898 $171,737 $128,000 $384,497
OPERATING DATA:
Gross portfolio yield(5)............................. 28.1% 32.3% 30.7% 25.5% 23.0% 23.4% 22.8%
Net interest spread(5)............................... 13.1 23.2 21.1 16.2 13.9 13.8 14.8
Net portfolio yield(5)............................... 21.5 25.3 24.4 19.1 16.8 16.6 16.7
Allowance for credit losses as a percentage of net
finance receivables -- owned -- excluding
receivables held-for-sale.......................... 5.9 5.6 4.6 4.8 5.7 5.9 6.0
Allowance for credit losses as a percentage of net
finance receivables -- serviced(4)................. 5.9 5.6 4.6 4.8 5.2 5.9 7.0
Net charge-offs as a percentage of average net
finance receivables -- serviced (annualized)....... 5.0 3.0 4.6 4.5 5.2 4.8 5.8
Operating expenses as a percentage of average net
finance receivables -- serviced.................... 72.2 20.1 15.4 11.9 9.5 10.0 9.3
Ratio of earnings to fixed charges:(6)
Historical......................................... (2.69) 1.70 2.51 2.48 2.35 2.26 2.43
Pro forma.......................................... -- -- -- -- 2.07 -- 2.21
Number of states served.............................. 1 4 10 16 30 21 35
Number of dealers.................................... N/A(3) N/A(3) N/A(3) 1,004 1,983 1,714 2,884
</TABLE>
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AT DECEMBER 31, AT JUNE 30, 1996
---------------------------------------------------- --------------------------
1991(1) 1992 1993 1994 1995 ACTUAL AS ADJUSTED(7)
------- ------- ------- ------- -------- -------- --------------
(UNAUDITED)
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BALANCE SHEET DATA:
Net finance receivables................ $1,400 $11,418 $33,563 $94,090 $251,908 $313,606 $313,606
Total assets........................... 2,496 12,820 33,781 92,108 282,274 362,105 362,105
Total senior debt...................... -- 7,440 22,255 61,975 174,378 242,691 199,791
Total subordinated debt................ 1,000 1,000 163 -- 14,375 14,375 59,375
Total stockholders' equity............. 1,380 4,017 7,507 25,704 84,279 90,467 90,467
</TABLE>
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(1) The Company commenced operations on June 1, 1991.
(2) In the third quarter of 1994, the Company recorded a one-time, non-cash
extraordinary charge of $1,168, net of a $716 income tax benefit, as a
result of the early termination of the Company's $6.5 million subordinated
credit facility (the "Subordinated Credit Facility").
(3) The information is not available.
(4) Includes receivables held-for-sale.
(5) Gross portfolio yield represents income from the owned finance contract
portfolio as a percentage of average net finance receivables-owned. Net
interest spread represents the gross portfolio yield less the average cost
of borrowed funds. Net portfolio yield represents net interest income from
the owned finance contract portfolio as a percentage of average net finance
receivables-owned.
(6) For purposes of calculating the historical ratio of earnings to fixed
charges, earnings consist of income before income taxes and extraordinary
losses, warrant accretion and fixed charges. Fixed charges consist of
interest charges and one-third of rentals. Earnings were inadequate to cover
fixed charges in the amount of $331 for 1991. For purposes of calculating
the pro forma ratio of earnings to fixed charges, the historical results of
operations of the Company have been adjusted as if the Offering had been
completed effective at the beginning of the fiscal period applying the
estimated net proceeds thereof to repay a portion of the borrowings under
the Senior Revolving Credit Facility. The pro forma ratio of earnings to
fixed charges reflects the decrease in earnings which results from the
interest expense from the 1996 Notes, net of income taxes, which is
partially offset by the increase in earnings which results from the
reduction in borrowings under the Senior Revolving Credit Facility and
related interest expense, net of income taxes.
(7) Adjusted to give effect to the sale by the Company of the 1996 Notes offered
hereby and the application of the estimated net proceeds from the Offering.
The Company intends to use the net proceeds from the Offering to fund future
purchases of finance contracts. See "Use of Proceeds."
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the 1996 Notes offered hereby.
AVAILABILITY OF FUNDS. The Company's operations require substantial
external financing to fund the purchase of finance contracts. Such purchases are
funded primarily by money borrowed by the Company from banks and other lenders
and by funds generated from securitizations of portions of the Company's
portfolio of finance contract receivables. The principal source of borrowings by
the Company has historically been the Senior Revolving Credit Facility, as
defined in "Use of Proceeds." The Senior Revolving Credit Facility expires on
June 30, 1997. There can be no assurance that the Senior Revolving Credit
Facility will be renewed or that a new credit facility will be established after
June 30, 1997. In addition, the Company employs its securitization program as an
integral component of its funding strategy. The Company has historically applied
the net proceeds from securitization transactions to repay indebtedness under
the Senior Revolving Credit Facility, thereby increasing the amounts available
under such facility to fund future purchases of finance contracts. Any failure
by the Company to effect additional securitizations of finance contract
receivables on terms acceptable to the Company would restrict the Company's
financing capabilities, could require the Company to curtail the purchase of
finance contracts and could have a material adverse effect on the Company.
Furthermore, the timing of any securitization transaction is affected by a
number of factors beyond the Company's control, including, among others,
conditions in the asset-backed securities markets, interest rates and approvals
from third parties. Some or all of these factors may cause delays in closing a
securitization or may prevent such transactions entirely. Gains from the sale of
finance contract receivables in securitization transactions constituted a
significant portion of the net earnings of the Company during the six months
ended June 30, 1996 and are likely to continue to represent a significant
portion of the Company's net earnings. If the Company were unable to securitize
finance contract receivables in a financial reporting period, the Company would
incur a significant decline in total revenues and net earnings for such period.
In addition, in order for the Company to continue to fund the purchase of
finance contracts in accordance with its growth strategy, the Company will
require financing in excess of that provided by its cash flow from operations,
the net proceeds from the Offering and the Senior Revolving Credit Facility (or
any successor bank facility). No assurance can be given that additional
financing sources, including securitization transactions, will be available on
terms acceptable to the Company. See "Business -- Financing."
CASH FLOWS ASSOCIATED WITH SECURITIZATIONS. Under the financial structures
the Company has used to date in its off-balance sheet securitizations, certain
excess servicing cash flows generated by the finance contracts are retained in a
"spread account" within the securitization structure to provide liquidity and
credit enhancement. While the specific terms and mechanics of the spread account
can vary slightly depending on each transaction, the Company's agreements with
Financial Security Assurance, Inc. ("FSA"), the financial guaranty insurer that
has provided credit enhancements in connection with the Company's
securitizations, generally provide that the Company is not entitled to receive
any excess servicing cash flows unless certain spread account balances have been
attained and/or the delinquency or losses related to the finance contracts in
the pool are below certain predetermined levels. In the event delinquencies and
losses on the finance contracts exceed such levels, the terms of securitization
may require increased spread account balances to be accumulated for the
particular pool; may restrict the distribution to the Company of excess cash
flows associated with other pools in which pass-through certificates are insured
by FSA; or, in certain circumstances, may require the transfer of servicing on
some or all of the finance contracts in FSA insured pools to another servicer.
The imposition by FSA of any of these conditions could materially adversely
affect the Company's liquidity and financial condition. As of August 31, 1996,
all FSA insured pools were performing within the guidelines required by their
related insurance policies.
PREPAYMENT RISK. Gains from the sale of finance contract receivables in
securitization transactions constituted a significant portion of the net
earnings of the Company during the six months ended June 30, 1996 and are likely
to continue to represent a significant portion of the Company's net earnings.
The gains are recorded in the Company's revenues and are based in part on
management's estimates of future prepayment rates and other considerations in
light of then-current conditions. If actual prepayments with respect to finance
contracts occur more quickly than was projected at the time such contracts were
sold, as can occur when
9
<PAGE> 10
interest rates decline, a charge to earnings will be taken in the period of
adjustment. If actual prepayments with respect to finance contracts sold occur
more slowly than estimated, total revenue would exceed previously estimated
amounts.
COMPETITION. The automobile finance business is highly competitive. The
Company believes that there are numerous competitors providing, or capable of
providing, financing through dealers to non-prime borrowers. The Company
competes with a number of national, local and regional finance companies with
operations similar to the Company. Competitors or potential competitors include
other types of financial services companies, such as commercial banks, savings
and loan associations, credit unions, finance companies affiliated with
automobile manufacturers and other consumer lenders (many of which are larger
than the Company, have significantly greater financial resources than the
Company or have relationships with established captive networks). If additional
competitors were to enter the Company's market, the Company could be materially
adversely affected. In addition, the Company has experienced increased
competition, which has resulted in a reduction in the interest rate charged to
borrowers, a reduction in (and in some cases the elimination of) the discount
from the principal amount of a finance contract (the "discount") which the
Company is able to charge to dealers and an increase in the frequency and amount
of other consideration that is paid by the Company to dealers. Further
competition may result in additional reductions in such interest rate,
reductions in or elimination of the discount and increases in the frequency and
amount of other consideration that is paid by the Company to dealers, which
could materially adversely affect the Company's profitability. See "Business --
Competition" and "Business -- Contract Acquisition Process."
DEFAULTS ON INSTALLMENT CONTRACTS. The Company is engaged in purchasing
automobile finance contracts entered into by dealers with borrowers who have
limited access to traditional sources of consumer credit. The inability of a
borrower to finance an automobile purchase by means of traditional credit
sources is generally due to various factors including such individual's impaired
credit history or the absence or limited extent of such individual's credit
history. As a result, finance contracts purchased by the Company are generally
entered into by purchasers of automobiles who are considered to have a higher
risk of default on a finance contract than most automobile purchasers. Such risk
of default may increase in times of economic downturn in the areas in which such
borrowers reside. A significant increase in charge-offs or delinquencies
relating to the finance contracts purchased by the Company could have a material
adverse effect on the Company's profitability and operations.
INCREASES IN INTEREST RATES. While the finance contracts purchased by the
Company in most cases bear interest at a fixed rate (which, in jurisdictions
that regulate the interest rate that may be charged, is in many cases equal to
the maximum rate permitted by law), the Company finances its purchase of a
substantial portion of such contracts by incurring indebtedness with floating
interest rates. As a result, the Company's interest costs could increase during
periods of rising interest rates, which may decrease net interest margins and
thereby adversely affect the Company's profitability. In addition, rising
interest rates could decrease gains realized on the sale of the Company's
finance contract receivables and thereby adversely affect the Company's
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of Inflation."
MANAGEMENT OF RAPID GROWTH. The Company has experienced rapid growth and
expansion of its business. The Company's ability to support, manage and control
continued growth is dependent upon, among other things, its ability to train,
supervise and manage increased personnel. The success of the Company's growth
strategy is also dependent upon the Company's ability to maintain credit quality
as its finance contract portfolio grows, which requires, among other things, the
maintenance of efficient collection procedures and adequate collection staffing,
internal controls and automated systems. There can be no assurance that the
Company will be successful in maintaining credit quality as its finance contract
portfolio grows or that the Company's personnel, procedures, staff, internal
controls or systems will be adequate to support such growth.
RELATIONSHIPS WITH DEALERS. The Company's business depends in large part
upon its ability to establish and maintain relationships with automobile
dealers. While the Company believes that it has been successful in developing
and maintaining relationships with dealers, these relationships are not
long-standing, and there can be no assurance that the Company will be successful
in maintaining such relationships or increasing the
10
<PAGE> 11
number of dealers with which it does business, or that its existing dealer base
will continue to generate a volume of finance contracts comparable to the volume
of such contracts historically generated by such dealers. See "Business -- The
Industry" and "Business -- Strategy."
REGULATION. The Company's business is subject to various state and federal
laws which require licensing and qualification and regulate, among other things,
the maximum interest rate that may be charged to borrowers and the Company's
rights to repossess and sell collateral. An adverse change in these laws could
have a material adverse effect on the Company's business by limiting the
interest and fee income the Company may generate on existing and additional
purchased finance contracts, limiting the states in which the Company may
operate or restricting the Company's ability to realize the value of the
collateral securing its finance contracts. An adverse change in the maximum
permissible interest rate that may be charged to borrowers in any particular
market could also reduce the attractiveness of such market, thereby limiting the
expansion opportunities of the Company. See "Business -- Regulation."
LITIGATION. Because of the consumer-oriented nature of the industry in
which the Company operates and the application of certain laws and regulations,
industry participants are regularly named as defendants in litigation involving
alleged violations of federal and state laws and regulations and consumer law
torts, including fraud. Many of these actions involve alleged violations of
consumer protection laws. A significant judgment against the Company or within
the industry in connection with any such litigation could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business -- Regulation."
MARKET CONDITIONS. The Company's business is affected by certain trends in
the automobile and finance industries. The Company believes that purchasers of
automobiles are more frequently considering used automobiles and that dealers
are focusing on the sale of used automobiles to generate additional revenue.
Historically, traditional sources of consumer credit have tightened lending
criteria on used automobile financing, making financing from such sources
available to fewer persons. A change in any of these trends, whether resulting
from changes in general economic conditions or otherwise, may lead to a
reduction in the number of purchasers of used automobiles, less emphasis on
selling used automobiles or an increase in the number of used automobile
purchasers who qualify for traditional financing. Any of such events could have
a material adverse effect on the Company. See "Business -- General."
COVENANTS IN THE SENIOR REVOLVING CREDIT FACILITY, THE INDENTURE RELATING
TO THE 1995 NOTES AND THE INDENTURE RELATING TO THE 1996 NOTES. The Senior
Revolving Credit Facility, the indenture (the "1995 Indenture") pursuant to
which the Company issued the Subordinated Reset Notes due 2005 (the "1995
Notes") and the indenture pursuant to which the 1996 Notes will be issued (the
"1996 Indenture") contain financial and operating covenants, including, among
others, certain limitations on the ability of the Company to pay dividends and
incur additional indebtedness and certain restrictions on consolidation, merger
or transfer of all or substantially all of its assets. See "Description of the
1996 Notes." The Company's leverage and the restrictive covenants contained in
its loan documents could limit the Company's ability to withstand competitive
pressures or adverse economic conditions, make acquisitions or take advantage of
business opportunities that may arise. Failure to comply with the obligations
contained in the Senior Revolving Credit Facility, the 1995 Indenture or the
1996 Indenture could result in an event of default under any or all of such
documents which could permit acceleration of the indebtedness under the Senior
Revolving Credit Facility and acceleration of the indebtedness under the 1995
Notes and the 1996 Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
SUBORDINATION OF THE 1996 NOTES AND ASSET ENCUMBRANCES. The 1996 Notes are
equal in rank with the 1995 Notes and are subordinated in right of payment to
all senior indebtedness of the Company, which includes all indebtedness under
the Senior Revolving Credit Facility. Therefore, in the event of the
liquidation, dissolution, reorganization or any similar proceedings regarding
the Company, the assets of the Company will be available to pay obligations on
the 1995 Notes and the 1996 Notes only after all senior indebtedness has been
paid in full, and there may not be sufficient assets to pay all amounts due on
the 1995 Notes and the 1996 Notes. The 1995 Notes are not, and the 1996 Notes
will not be, secured by any of the Company's assets, and
11
<PAGE> 12
the obligations of the Company under the Senior Revolving Credit Facility are
secured by a first priority security interest in a substantial portion of the
Company's assets. If the Company becomes insolvent or is liquidated, or if
payment under the Senior Revolving Credit Facility is accelerated, the lenders
under the Senior Revolving Credit Facility would be entitled to exercise the
remedies available to a secured lender under applicable law and pursuant to the
Senior Revolving Credit Facility. Accordingly, such lenders will have a claim
prior in right to that of the holders of the 1995 Notes and the 1996 Notes with
respect to the Company's assets in which such lenders have a security interest.
LIMITED MARKET FOR 1996 NOTES. The Company has no present intention to have
the 1996 Notes authorized for quotation on The Nasdaq Stock Market's National
Market or any other quotation system or listed on any securities exchange.
Although the Company has been advised that J.C. Bradford & Co., Piper Jaffray
Inc., Keefe, Bruyette & Woods, Inc. and Stifel, Nicolaus & Company,
Incorporated. (the "Underwriters") currently intend to make a market in the 1996
Notes, the Underwriters are under no obligation to do so or to continue any
market making activities if commenced. No assurance can be given that an active
trading market in the 1996 Notes will develop.
12
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1996 Notes offered
hereby are estimated to be approximately $42.9 million ($49.4 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company intends to use the net proceeds to fund future purchases of finance
contracts. Pending such use, the Company will use such net proceeds to repay
approximately $42.9 million of indebtedness incurred under the Company's $205.0
million senior revolving credit facility with a group of nine banks which bears
interest at the Company's option at either (i) the reference prime rate or (ii)
LIBOR plus 1.60% for maturities of one, two, three or six months, and expires on
June 30, 1997 (the "Senior Revolving Credit Facility"). The Company estimates
that the outstanding principal balance under the Senior Revolving Credit
Facility will be approximately $130.0 million immediately prior to the closing
of the Offering. The actual amounts outstanding on that date will vary depending
upon the Company's results from operations and cash flows through that date. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 5 of the Notes to
Consolidated Financial Statements.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
at June 30, 1996 and (ii) the capitalization of the Company at June 30, 1996, as
adjusted to reflect the effects of the sale by the Company of the 1996 Notes
offered hereby, and, after deducting the underwriting discount and estimated
offering expenses payable by the Company, the application of the estimated net
proceeds of the Offering as described in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
INDEBTEDNESS:
Senior Revolving Credit Facility....................... $ 69,825 $ 26,925
Subordinated Reset Notes (the 1995 Notes and the 1996
Notes).............................................. 14,375 59,375
Notes Payable -- Securitized Pools..................... 172,866 172,866
STOCKHOLDERS' EQUITY:
Preferred stock, par value $100 per share; 500,000
shares authorized; no shares issued and
outstanding......................................... -- --
Common stock, par value $0.01 per share; 20,000,000
shares authorized; 6,525,519 shares issued and
outstanding......................................... 65 65
Non-voting common stock, par value $0.01 per share;
300,000 shares authorized; no shares issued and
outstanding......................................... -- --
Additional paid-in capital............................. 75,078 75,078
Retained earnings...................................... 15,324 15,324
-------
Total stockholders' equity.......................... 90,467 90,467
-------
Total capitalization................................ $347,533 $ 349,633
=======
</TABLE>
14
<PAGE> 15
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial data for the Company for
the periods and at the dates indicated. The selected statement of earnings and
balance sheet data for or at the end of each of the full years presented below
were derived from the Consolidated Financial Statements of the Company, which
were audited by Deloitte & Touche LLP, independent auditors. The unaudited
financial data as of and for the six months ended June 30, 1995 and 1996 have
been prepared in conformity with generally accepted accounting principles and
include all adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature.
Results of operations for the six months ended June 30, 1996 are not necessarily
indicative of results to be expected for the year. The table should be read in
conjunction with the Consolidated Financial Statements, related Notes and other
financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1991(1) 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA, (UNAUDITED)
PORTFOLIO DATA AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Interest income -- finance contracts................ $ 132 $ 1,960 $ 6,354 $15,324 $ 38,210 $ 14,487 $ 35,480
Other portfolio income.............................. 23 78 401 699 1,338 479 965
Gain on sale of finance receivables................. -- -- -- -- -- -- 8,092
Servicing fee and other income...................... -- -- -- -- -- -- 868
Earnings (loss) before income taxes and
extraordinary item................................ (331) 327 1,565 4,499 10,804 4,086 10,184
Net earnings (loss)(2).............................. (331) 327 939 1,621 6,701 2,533 6,212
Per share data:
Net earnings (loss) before extraordinary item..... (0.19) 0.17 0.32 0.85 1.35 0.57 0.92
Net earnings (loss)(2)............................ (0.19) 0.17 0.32 0.49 1.35 0.57 0.92
Weighted average number of common and common
equivalent shares outstanding..................... 1,765 1,921 2,922 3,297 4,980 4,463 6,754
PORTFOLIO DATA:
Number of contracts acquired during period.......... 277 2,371 5,263 10,154 25,336 9,879 23,958
Dollar value of contracts acquired during period
(in thousands).................................... $1,545 $13,127 $33,895 $91,430 $257,946 $ 98,964 $265,334
Average initial finance contract amount............. 5,577 5,536 6,440 9,004 10,181 10,018 11,075
Weighted average initial finance contract term
(in months)....................................... N/A(3) N/A(3) N/A(3) N/A(3) 50 48 54
Weighted average discount of contracts acquired
during period..................................... 10.4% 9.0% 9.0% 8.0% 6.2% 7.1% 4.3%
Net finance receivables -- owned -- end of period
(in thousands)(4)................................. $1,400 $11,418 $33,563 $94,090 $284,173 $166,059 $339,826
Number of finance contracts outstanding -- end of
period -- owned(4)................................ 261 2,330 6,194 12,670 31,082 19,597 36,167
Average net finance receivables -- owned
(in thousands)(4)................................. $ 554 $ 6,314 $22,005 $62,898 $171,737 $128,000 $319,948
Net finance receivables -- serviced -- end of period
(in thousands).................................... 1,400 11,418 33,563 94,090 284,173 166,059 479,243
Number of finance contracts outstanding -- serviced
-- end of period.................................. 261 2,330 6,194 12,670 31,082 19,597 49,287
Average net finance receivables -- serviced (in
thousands)........................................ $ 554 $ 6,314 $22,005 $62,898 $171,737 $128,000 $384,497
OPERATING DATA:
Gross portfolio yield(5)............................ 28.1% 32.3% 30.7% 25.5% 23.0% 23.4% 22.8%
Net interest spread(5).............................. 13.1 23.2 21.1 16.2 13.9 13.8 14.8
Net portfolio yield(5).............................. 21.5 25.3 24.4 19.1 16.8 16.6 16.7
Allowance for credit losses as a percentage of net
finance receivables -- owned -- excluding
receivables held-for-sale......................... 5.9 5.6 4.6 4.8 5.7 5.9 6.0
Allowance for credit losses as a percentage of net
finance receivables -- serviced -- including
receivables held-for-sale......................... 5.9 5.6 4.6 4.8 5.2 5.9 7.0
Net charge-offs as a percentage of average net
finance receivables -- serviced -- (annualized)... 5.0 3.0 4.6 4.5 5.2 4.8 5.8
Operating expenses as a percentage of average net
finance receivables -- serviced................... 72.2 20.1 15.4 11.9 9.5 10.0 9.3
Ratio of earnings to fixed charges:(6)
Historical........................................ (2.69) 1.70 2.51 2.48 2.35 2.26 2.43
Pro forma......................................... -- -- -- -- 2.07 -- 2.21
Number of states served............................. 1 4 10 16 30 21 35
Number of dealers................................... N/A(3) N/A(3) N/A(3) 1,004 1,983 1,714 2,884
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1996
--------------------------------------------------- --------------------------
1991(1) 1992 1993 1994 1995 ACTUAL AS ADJUSTED(7)
------ ------- ------- ------- -------- -------- --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net finance receivables................. $1,400 $11,418 $33,563 $94,090 $251,908 $313,606 $313,606
Total assets............................ 2,496 12,820 33,781 92,108 282,274 362,105 362,105
Total senior debt....................... -- 7,440 22,255 61,975 174,378 242,691 199,791
Total subordinated debt................. 1,000 1,000 163 -- 14,375 14,375 59,375
Total stockholders' equity.............. 1,380 4,017 7,507 25,704 84,279 90,467 90,467
</TABLE>
- -------------------------
(1) The Company commenced operations on June 1, 1991.
(2) In the third quarter of 1994, the Company recorded a one-time, non-cash
extraordinary charge of $1,168, net of a $716 income tax benefit, as a
result of the early termination of the Subordinated Credit Facility.
(3) The information is not available.
(4) Includes receivables held-for-sale.
(5) Gross portfolio yield represents income from the owned finance contract
portfolio as a percentage of average net finance receivables-owned. Net
interest spread represents the gross portfolio yield less the average cost
of borrowed funds. Net portfolio yield represents net interest income from
the owned finance contract portfolio as a percentage of average net finance
receivables-owned.
(6) For purposes of calculating the historical ratio of earnings to fixed
charges, earnings consist of income before income taxes and extraordinary
losses, warrant accretion and fixed charges. Fixed charges consist of
interest charges and one-third of rentals. Earnings were inadequate to cover
fixed charges in the amount of $331 for 1991. For purposes of calculating
the pro forma ratio of earnings to fixed charges, the historical results of
operations of the Company have been adjusted as if the Offering had been
completed effective at the beginning of the fiscal period applying the
estimated net proceeds thereof to repay a portion of the borrowings under
the Senior Revolving Credit Facility. The pro forma ratio of earnings to
fixed charges reflects the decrease in earnings which results from the
interest expense from the 1996 Notes, net of income taxes, which is
partially offset by the increase in earnings which results from the
reduction in borrowings under the Senior Revolving Credit Facility and
related income expense, net of income taxes.
(7) Adjusted to give effect to the sale by the Company of the 1996 Notes offered
hereby and the application of the estimated net proceeds from the Offering.
The Company intends to use the net proceeds from the Offering to fund future
purchases of finance contracts. See "Use of Proceeds."
16
<PAGE> 17
SUPPLEMENTAL FINANCIAL INFORMATION
The following table sets forth certain unaudited operating results for the
first two quarters of 1996 and for each of the quarters in the two years ended
December 31, 1995. This information has been prepared on the same basis as the
audited financial statements and includes all adjustments (which consist solely
of normal recurring adjustments) necessary to present fairly the financial
information of such periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Total revenues......................................... $20,825 $24,580 $ -- $ --
Net interest income.................................... 13,091 13,682 -- --
Earnings before income taxes........................... 4,954 5,230 -- --
Net earnings........................................... 3,022 3,190 -- --
Earnings per share..................................... 0.45 0.47 -- --
Weighted average common and common equivalent shares
outstanding.......................................... 6,733 6,780 -- --
1995
Total revenues......................................... $ 6,428 $ 8,538 $10,593 $13,988
Net interest income.................................... 4,645 5,954 7,501 10,694
Earnings before income taxes........................... 1,884 2,202 2,703 4,015
Net earnings........................................... 1,168 1,365 1,677 2,491
Net earnings per share................................. 0.26 0.31 0.37 0.38
Weighted average common and common equivalent shares
outstanding.......................................... 4,453 4,470 4,489 6,496
1994
Total revenues......................................... $ 2,926 $ 3,612 $ 4,397 $ 5,087
Net interest income.................................... 2,368 2,625 3,122 3,873
Earnings before income taxes and extraordinary item.... 819 953 1,163 1,563
Net earnings before extraordinary item................. 508 591 721 968
Net earnings (loss).................................... 508 591 (447)(1) 968
Net earnings (loss) available to stockholders.......... 442 531 (447) 968
Net earnings (loss) per share.......................... 0.17 0.20 (0.15)(1) 0.22
Net earnings (loss) available to stockholders per
share................................................ 0.15 0.18 (0.15) 0.22
Weighted average common and common equivalent shares
outstanding.......................................... 2,922 2,922 2,937 4,393
</TABLE>
- -------------------------
(1) In the third quarter of 1994, the Company recorded a one-time, non-cash
extraordinary charge of $1,168, net of a $716 income tax benefit, as a
result of the early termination of the Subordinated Credit Facility.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the preceding "Selected
Financial and Operating Data" and the Company's Consolidated Financial
Statements and Notes thereto and other financial data included herein. 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 Consolidated Financial
Statements, the Notes thereto and the financial data included elsewhere in this
Prospectus. In December 1995, the Company changed its fiscal year end to
December 31 from May 31 and restated all prior periods.
GENERAL
The Company is a specialty finance company primarily engaged in financing
the purchase of used automobiles by acquiring dealer-originated finance
contracts. The Company has experienced significant annual growth in its finance
contract portfolio since it commenced operations in June 1991. The Company
derives its revenues from its finance contract portfolio and from the gains and
servicing fees associated with the securitization of finance contract
receivables.
In order to adjust for credit risks and achieve an acceptable rate of
return, the Company typically purchases finance contracts from dealers at a
discount from the principal amounts of such contracts. This discount is
non-refundable to the dealer. The discount is allocated to the allowance for
credit losses. Prior to 1995, a portion of the discount was being amortized into
interest income. Beginning in 1995, the remaining unamortized contract
acquisition discounts were used to absorb credit losses.
RESULTS OF OPERATIONS
The following table sets forth certain financial data relating to the
Company:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average net finance receivables-owned(1).... $22,005 $62,898 $171,737 $128,000 $319,948
Average net finance
receivables-serviced(1)................... 22,005 62,898 171,737 128,000 384,497
Average indebtedness(2)..................... 14,385 43,481 118,173 90,621 241,258
Income from finance contract portfolio...... 6,755 16,023 39,548 14,966 36,445
Interest expense............................ 1,378 4,034 10,754 4,367 9,671
------- ------- -------- -------- --------
Net interest income......................... $ 5,377 $11,989 $ 28,794 $ 10,599 $ 26,774
======= ======= ======== ======== ========
Gross portfolio yield(3).................... 30.7% 25.5% 23.0% 23.4% 22.8%
Average cost of borrowed funds(2)........... 9.6 9.3 9.1 9.6 8.0
Net interest spread(4)...................... 21.1 16.2 13.9 13.8 14.8
Net portfolio yield(3)...................... 24.4 19.1 16.8 16.6 16.7
Total states served......................... 10 16 30 21 35
</TABLE>
- -------------------------
(1) Net finance receivables-owned represents those net finance receivables that
have been retained by the Company. Net finance receivables-serviced
represents net finance receivables-sold and net finance receivables-owned.
Net finance receivables-owned and serviced represents the total contractual
payments due under finance contracts less the related unearned finance
charges on those contracts. Net finance receivables-owned and serviced have
not been reduced by unamortized contract acquisition discounts, unearned
ancillary income, unamortized contract acquisition costs and the allowance
for credit losses. Average net finance receivables-owned and serviced are
calculated based on month-end balances.
(2) Indebtedness includes borrowings outstanding under the Senior Revolving
Credit Facility, notes payable-securitized pools and the 1995 Notes. The
average indebtedness is based on daily balances. Average cost of borrowed
funds represents interest expense, including the amortization of fees, as a
percentage of average indebtedness.
(3) Gross portfolio yield represents income from the owned finance contract
portfolio as a percentage of average finance receivables-owned. Net
portfolio yield represents net interest income from the owned finance
contract portfolio as a percentage of average finance receivables-owned.
(4) Net interest spread represents the gross portfolio yield less the average
cost of borrowed funds.
18
<PAGE> 19
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Revenues
The Company purchased 23,958 finance contracts having an aggregate initial
principal amount of $265.3 million in the six months ended June 30, 1996, an
increase of 142.5% and 168.1%, respectively, from the 9,879 finance contracts
having an aggregate initial principal amount of $99.0 million purchased in the
six months ended June 30, 1995.
Interest and other income from the owned finance contract portfolio
increased $21.5 million, or 143.5%, from $14.9 million in the six months ended
June 30, 1995 to $36.4 million in the six months ended June 30, 1996. The growth
in income from the owned finance contract portfolio resulted from an increase in
the number of finance contracts purchased by Dealer Service Centers in operation
at June 30, 1995 as well as the purchase of finance contracts by new Dealer
Service Centers opened after June 30, 1995.
Average net finance receivables-owned increased $191.9 million, or 150.0%,
from $128.0 million in the six months ended June 30, 1995 to $319.9 million in
the six months ended June 30, 1996. Income from the owned finance contract
portfolio as a percentage of average net finance receivables-owned ("gross
portfolio yield") decreased from 23.4% in the six months ended June 30, 1995 to
22.8% in the six months ended June 30, 1996. The decrease in the gross portfolio
yield was primarily attributable to general competition in the marketplace and
the purchase of a higher percentage of finance contracts covering later model
automobiles, which generally have a lower interest rate.
The Company may experience further reductions in its gross portfolio yield
and decreases in interest income from finance contracts. However, increases in
the Company's total revenues attributable to increases in the volume of finance
contracts purchased, securitizations and sales of finance receivables and
related servicing activities are expected to offset any decreases in interest
income attributable to decreases in the Company's gross portfolio yield.
For the six months ended June 30, 1996, the Company recognized $8.1 million
in gains on sales of finance receivables, resulting from the sale of finance
receivables to the First Merchants Grantor Trust 1996-1 (the "Trust 1996-1") and
the First Merchants Grantor Trust 1996-2 (the "Trust 1996-2") (the Trust 1996-1
and the Trust 1996-2 are referred to herein as the "Trusts") in March 1996 and
June 1996, respectively, and the issuance to investors of $55.8 million and
$90.4 million, respectively, of automobile receivable-backed certificates of the
Trusts. The gains represent the difference between the sales proceeds, net of
transaction costs, and the Company's carrying value of the receivables sold,
plus the present value of the excess servicing cash flows. Excess servicing cash
flows are equal to estimated future collections and recoveries on the finance
receivables sold to the Trusts, less required principal and interest payments to
the investors, base servicing fees payable to the Company at an annual rate of
2.5% of finance receivables serviced and certain other fees.
Because the Company may choose to structure future issuances of automobile
receivable-backed securities in a manner which will result in the recognition of
gains on the sale of receivables in some securitization transactions and the
issuance of debt in others, the amount and timing of such future transactions
could impact the Company's net earnings in any given financial reporting period.
No gain on sale of finance receivables was recorded for the six months ended
June 30, 1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Servicing fee income represents the Company's base servicing fee on the
finance receivables sold to the Trusts and amortization of the excess servicing
receivable. Servicing fee income totaled $868,000 for the six months ended June
30, 1996. No servicing fee income was recorded for the six months ended June 30,
1995.
Expenses
Interest expense increased $5.3 million, or 121.5%, from $4.4 million in
the six months ended June 30, 1995 to $9.7 million in the six months ended June
30, 1996. The increase in interest expense resulted primarily from an increase
in borrowings under the Senior Revolving Credit Facility and the issuance of
notes payable - securitized pools. Such increased borrowings were used to fund
the growth of the Company's finance contract
19
<PAGE> 20
portfolio. Average indebtedness, including borrowings under the Senior Revolving
Credit Facility, notes payable-securitized pools and the 1995 Notes, increased
$150.7 million, or 166.2%, from $90.6 million in the six months ended June 30,
1995 to $241.3 million in the six months ended June 30, 1996. Interest expense,
including the amortization of fees, as a percentage of average indebtedness
("average cost of borrowed funds") was 9.64% in the six months ended June 30,
1995 compared to 8.02% in the six months ended June 30, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The provision for credit losses increased $7.6 million from $0.1 million
charged against earnings in the six months ended June 30, 1995 to $7.7 million
charged against earnings in the six months ended June 30, 1996. For the six
months ended June 30, 1995 and 1996, discounts as a percentage of the principal
amount financed were 7.1% and 4.3%, respectively. Non-refundable discounts
collected from dealers are supplemented by the provision for credit losses and
are used to absorb future credit losses. The declining discounts combined with a
168.1% increase in the aggregate initial principal amount financed during the
six months ended June 30, 1996 were factors in determining the increase in the
provision for credit losses. The Company expects to continue recording
provisions for credit losses in light of these declining discounts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience."
Operating expenses increased $11.5 million, or 179.4%, from $6.4 million in
the six months ended June 30, 1995 to $17.9 million in the six months ended June
30, 1996. Operating expenses in the six months ended June 30, 1996 include a
$600,000 charge for costs associated with consolidating thirteen of the smaller
Dealer Service Centers to improve operating efficiencies. Although operating
expenses increased during the six months ended June 30, 1996, the Company's
finance contract portfolio grew at a faster rate than the rate of increase in
operating expenses. As a result, operating expenses as a percentage of average
net finance receivables-serviced decreased from 10.0% in the six months ended
June 30, 1995 to 9.3% in the six months ended June 30, 1996.
Employee compensation and related costs, such as group insurance and
payroll taxes, represented 62.7% and 60.3% of total operating expenses in the
six months ended June 30, 1995 and 1996, respectively. Employee compensation
expense increased $6.8 million, or 168.8%, from $4.0 million in the six months
ended June 30, 1995 to $10.8 million in the six months ended June 30, 1996. Both
employee compensation and total operating expenses increased due to expanding
operations and growth in the serviced finance contract portfolio.
Income Taxes
Income taxes were recorded at an effective rate of 38.0% and 39.0% in the
six months ended June 30, 1995 and 1996, respectively.
Net Earnings
Net earnings increased $3.7 million, or 145.2%, from $2.5 million in the
six months ended June 30, 1995 to $6.2 million in the six months ended June 30,
1996. The increase in net earnings is directly attributable to the growth in the
finance contract portfolio and related factors discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
The Company purchased 25,336 finance contracts having an aggregate initial
principal amount of $257.9 million in 1995, an increase of 149.5% and 182.1%,
respectively, from the 10,154 finance contracts having an aggregate initial
principal amount of $91.4 million purchased in 1994.
Interest and other income from the owned finance contract portfolio
increased $23.5 million, or 146.8%, from $16.0 million in 1994 to $39.5 million
in 1995. The growth in income from the owned finance contract portfolio resulted
from an increase in the Company's finance contract portfolio due to an increase
in the number of finance contracts purchased by regional Dealer Service Centers
in operation at the beginning of 1995 as well as the purchase of finance
contracts by new regional Dealer Service Centers opened during 1995.
20
<PAGE> 21
The Company opened 13 regional Dealer Service Centers in 1995, increasing its
Dealer Service Center network to 36 at December 31, 1995.
Average net finance receivables-owned increased $108.8 million, or 173.0%,
from $62.9 million in 1994 to $171.7 million in 1995. Gross portfolio yield
decreased from 25.5% in 1994 to 23.0% in 1995. The decrease in gross portfolio
yield was primarily attributable to a combination of a greater concentration of
finance contracts in states with lending regulations that limited the maximum
rate of interest which may be charged, the purchase of a higher percentage of
finance contracts covering later model automobiles, which generally have a lower
interest rate, and the elimination of discount amortization into interest
income.
Expenses
Interest expense increased $6.8 million, or 166.6%, from $4.0 million in
1994 to $10.8 million in 1995. The increase in interest expense resulted from an
increase in borrowings under the Senior Revolving Credit Facility and the
issuance of notes payable-securitized pool and the 1995 Notes. Such increased
borrowings were used to fund the growth to the Company's finance contract
portfolio. Average indebtedness increased $74.7 million, or 171.8%, from $43.5
million in 1994 to $118.2 million in 1995. Average cost of borrowed funds was
9.3% in 1994 compared to 9.1% in 1995.
In 1995, the Company negotiated two interest rate reductions in conjunction
with its Senior Revolving Credit Facility. In 1995, the interest rate charged on
borrowings under the Senior Revolving Credit Facility averaged 8.24% compared to
8.00% in 1994. At December 31, 1995, the referenced prime rate was 8.50%;
however, because of the LIBOR pricing option, the weighted average interest rate
under the Senior Revolving Credit Facility was 7.39%. At December 31, 1994, the
reference prime rate was 8.50% and the interest rate charged on the Senior
Revolving Credit Facility was 8.73%.
A provision for credit losses of $1.7 million was charged against earnings
in 1995. No such provision was recorded in 1994. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Credit Loss
Experience."
Operating expenses increased $8.8 million, or 117.5%, from $7.5 million in
1994 to $16.3 million in 1995. Although operating expenses increased during
1995, the Company's finance contract portfolio grew at a faster rate than the
rate of increase in operating expenses. As a result, operating expenses as a
percentage of average net finance receivables-serviced decreased from 11.9% in
1994 to 9.5% in 1995.
Employee compensation and related costs, such as group insurance and
payroll taxes, represented 66.0% and 63.0% of total operating expenses in 1994
and 1995, respectively. Employee compensation expenses increased $5.4 million,
or 107.7%, from $4.9 million in 1994 to $10.3 million in 1995. Both employee
compensation and other operating expenses increased due to expanding operations
and growth in the serviced finance contract portfolio.
Income Taxes
Income taxes were recorded at an effective rate of 38.0% for both 1994 and
1995.
Net Earnings, Extraordinary Item and Accretion of Common Stock Warrants
Net earnings before extraordinary item increased $3.9 million, or 140.3%,
from $2.8 million in 1994 to $6.7 million in 1995. The increase in net earnings
before extraordinary item is directly attributable to the growth in the finance
contract portfolio and related factors discussed above. In 1994, the Company
recorded a one-time, non cash extraordinary charge of $1.2 million resulting
from the early termination of its $6.5 million Subordinated Credit Facility. Net
earnings increased $5.1 million from $1.6 million in 1994 to $6.7 million in
1995. The difference between net earnings and net earnings available to
stockholders was attributable to warrant accretion during 1994.
21
<PAGE> 22
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues
The Company purchased 10,154 finance contracts having an aggregate initial
principal amount of $91.4 million in 1994, an increase of 92.9% and 169.7%,
respectively, from the 5,263 finance contracts having an aggregate initial
principal amount of $33.9 million purchased in 1993.
Interest and other income from the owned finance contract portfolio
increased $9.2 million, or 137.2%, from $6.8 million in 1993 to $16.0 million in
1994. The growth in income from the owned finance contract portfolio resulted
from an increase in the Company's finance contract portfolio due to an increase
in the number of finance contracts purchased by regional Dealer Service Centers
in operation at the beginning of 1994 as well as the purchase of finance
contracts by new regional Dealer Service Centers opened during 1994. The Company
opened eight regional Dealer Service Centers in 1994, increasing its Dealer
Service Center network to 23 at December 31, 1994.
Average net finance receivables-owned increased $40.9 million, or 185.8%,
from $22.0 million in 1993 to $62.9 million in 1994. Gross portfolio yield
decreased from 30.7% in 1993 to 25.5% in 1994. The decrease in the gross
portfolio yield was primarily attributable to a combination of a greater
concentration of finance contracts in states with lending regulations that limit
the maximum rate of interest which may be charged and the purchase of a higher
percentage of finance charges covering later model automobiles, which generally
have a lower interest rate.
Expenses
Interest expense increased $2.6 million from $1.4 million in 1993 to $4.0
million in 1994. The increase in interest expense resulted primarily from an
increase in borrowings under the Senior Revolving Credit Facility and the
Subordinated Credit Facility. Such increased borrowings were used to fund the
growth of the Company's finance contract portfolio. Average indebtedness
increased $29.1 million from $14.4 million in 1993 to $43.5 million in 1994.
Average cost of borrowed funds was 9.6% in 1993 compared to 9.3% in 1994.
The interest rate charged on borrowings under the Senior Revolving Credit
Facility for 1993 and 1994 averaged 7.35% and 8.00%, respectively. At December
31, 1994, the weighted average interest rate charged under the Senior Revolving
Credit Facility was 8.73%.
Operating expenses increased $4.1 million, or 121.7%, from $3.4 million in
1993 to $7.5 million in 1994. Although operating expenses increased during 1994,
the Company's finance contract portfolio grew at a faster rate than the rate of
increase in operating expenses. As a result, operating expenses as a percentage
of average net finance receivables-serviced decreased from 15.4% in 1993 to
11.9% in 1994.
Employee compensation and related costs, such as a group insurance and
payroll taxes, represented 67.1% and 66.0% of total operating expenses in 1993
and 1994, respectively. Employee compensation expenses increased $2.6 million,
or 117.9%, from $2.3 million in 1993 to $4.9 million in 1994. Both employee
compensation and total operating expenses increased due to expanding operations
and growth in the serviced finance contract portfolio.
Non-Recurring Charges
In 1993, the Company reported non-recurring charges of $434,000. These
charges included $366,000 in fees and expenses incurred in terminating a finance
advisory agreement and $68,000 of costs, including unamortized software license
fees, associated with terminating a data processing contract.
Income Taxes
Income taxes were recorded at an effective rate of 40% and 38.0% in 1993
and 1994, respectively.
22
<PAGE> 23
Net Earnings and Accretion of Common Stock Warrants
Net earnings increased $0.7 million, or 72.7%, from $0.9 million in 1993 to
$1.6 million in 1994. The increase in net earnings is directly attributable to
the growth in the finance contract portfolio and related factors discussed
above. Net earnings available to stockholders increased $0.6 million, or 62.4%,
from $0.9 million in 1993 to $1.5 million in 1994. The difference between net
earnings and net earnings available to stockholders is attributable to warrant
accretion.
CREDIT LOSS EXPERIENCE
The Company maintains an allowance for credit losses at a level that
management believes adequate to absorb potential losses in the owned finance
contract portfolio. Management evaluates the adequacy of the allowance for
credit losses by reviewing credit loss experience, delinquencies, the value of
the underlying collateral, the level of the finance contract portfolio and
general economic conditions and trends. An account is charged-off at the
earliest of the time the account's collateral is repossessed, the account is 91
or more days past due or the account is otherwise deemed to be uncollectible.
The allowance for credit losses is initially established through an
allocation of contract acquisition discounts based upon management's estimate of
credit losses. A provision for credit losses is charged against earnings in
addition to the contract acquisition discounts allocated to the allowance for
credit losses.
The following table summarizes data relating to the Company's charge-off
experience and allowance for credit losses. The charge-off experience includes
estimated losses to be incurred upon the sale of repossessed collateral.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average net finance receivables --
serviced................................... $22,005 $62,898 $171,737 $128,000 $384,497
Net charge-offs -- serviced.................. 1,016 2,820 8,969 3,051 11,204
Net charge-offs as a percentage of average
net finance receivables -- serviced
(annualized)............................... 4.6% 4.5% 5.2% 4.8% 5.8%
End of Period:
Net finance receivables -- owned............. $33,563 $94,090 $251,908 $166,059 $313,606
Allowance for credit losses -- owned......... 1,553 4,489 14,301 9,795 18,829
Allowance for credit losses as a percentage
of net finance receivables -- owned........ 4.6% 4.8% 5.7% 5.9% 6.0%
</TABLE>
Net finance receivables held-for-sale totaled $32.3 million and $26.2
million, net of contract acquisition discounts of $0.4 million and $0.6 million
at December 31, 1995 and June 30, 1996, respectively. Net finance receivables
held-for-sale are not included above as they are recorded at the lower of
aggregate cost or market value. There were no net finance receivables
held-for-sale at December 31, 1993, December 31, 1994 or June 30, 1995.
At June 30, 1996, the excess servicing receivable is reported net of $14.1
million allowance for estimated credit losses on finance receivables sold to the
Trusts. There was no excess servicing receivable at December 31, 1993, December
31, 1994, June 30, 1995 or December 31, 1995.
DELINQUENCY EXPERIENCE
A payment is considered past due if the borrower fails to make any full
payment on or before the due date as specified by the terms of the finance
contract. The Company typically contacts borrowers whose payments are not
received by the due date within two days after such due date. The following
table summarizes the Company's delinquency experience for accounts with payments
31 or more days past due on both a number
23
<PAGE> 24
and dollar basis for its finance contract portfolio as of the following dates.
The delinquency experience data exclude contracts where the collateral has been
repossessed.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
AS OF JUNE 30,
1994 1995 1996
-------------------- --------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF
DOLLARS CONTRACTS DOLLARS CONTRACTS DOLLARS CONTRACTS
------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net finance receivables --
serviced(1).......................... $94,090 12,670 $284,173 31,082 $479,243 49,287
Past due accounts:
31-60 days(2)........................ 446 85 5,163 595 11,171 1,253
61 days or more(3)................... 177 29 2,021 251 4,323 494
------- ------ -------- ------ -------- ------
Total.................................. $ 623 114 $ 7,184 846 $ 15,494 1,747
======= ====== ======== ====== ======== ======
Accounts with payments 31 or more days
past due as a percentage of net
finance receivables and number of
contracts -- serviced(4)............. 0.7% 0.9% 2.5% 2.7% 3.2% 3.5%
======= ====== ======== ====== ======== ======
</TABLE>
- -------------------------
(1) Includes net finance receivables owned, sold or held-for-sale.
(2) Customers in this category have missed two consecutive monthly payments.
(3) Customers in this category have missed three or more consecutive monthly
payments.
(4) Customers in this category have missed two or more consecutive monthly
payments.
REPOSSESSED COLLATERAL
The Company commences repossession procedures against the underlying
collateral when it determines that collection efforts are likely to be
unsuccessful. Repossession generally occurs before a borrower has missed more
than two consecutive monthly payments. In such cases, the net amount due under
the finance contract is reduced to the estimated fair value of the collateral,
less the cost of disposition, and this reduction is reported as a credit loss.
Repossessed collateral included 69, 150, 505 and 786 automobiles at December 31,
1993, 1994 and 1995, respectively, and at June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations, regional Dealer
Service Center openings and finance contract portfolio growth through the
following: funds provided from principal payments received under finance
contracts, borrowings under the Senior Revolving Credit Facility, proceeds from
the issuance of subordinated debt and securitization of finance receivables and
from the sale of shares of common stock, par value $.01 per share ("Common
Stock"), and cash flows from operating activities.
Net cash flows provided by operating activities were $6.7 million and $10.6
million in the six months ended June 30, 1995 and 1996, respectively, and $1.0
million, $3.8 million and $12.5 million in the years ended December 31, 1993,
1994 and 1995, respectively. The increased cash flows from operating activities
primarily resulted from annual increases in net earnings before extraordinary
item.
Net cash used in investing activities was $66.7 million and $77.4 million
in the six months ended June 30, 1995 and 1996, respectively, and $20.1 million,
$56.8 million and $189.6 million in the years ended December 31, 1993, 1994 and
1995, respectively. The increase in cash flows used in investing activities
during such periods was primarily attributable to the finance contract portfolio
growth.
24
<PAGE> 25
Net cash flows provided by financing activities are primarily used to
support finance contract portfolio growth. Financing activities for the six
months ended June 30, 1995 and 1996 and for the years ended December 31, 1993,
1994 and 1995 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proceeds from issuance of common stock,
net........................................ $ 1,440 $14,910 $ 51,588 $ -- $ --
Proceeds from issuance of notes
payable-securitized pools, net............. -- -- 74,486 -- 124,989
Repayment of notes payable-securitized
pools...................................... -- -- (4,748) -- (23,331)
Proceeds from issuance of subordinated debt,
net........................................ 2,599 4,500 13,530 13,530 --
Repayment of subordinated debt............... (1,000) (6,500) -- -- --
Net (decrease) increase in borrowings under
senior revolving credit facility........... 14,785 39,750 42,025 46,375 (34,175)
Other, net................................... 19 183 170 (26) (24)
------- ------- -------- ------- -------
Total........................................ $17,843 $52,843 $177,051 $59,879 $ 67,459
======= ======= ======== ======= =======
</TABLE>
The Company maintains a $205.0 million Senior Revolving Credit Facility
with a group of nine banks. The Senior Revolving Credit Facility expires June
30, 1997 and borrowings are secured by a substantial portion of the Company's
assets. The Company has the option to borrow at either (i) the reference prime
rate or (ii) LIBOR plus 1.60% per annum for maturities of one, two, three or six
months. On May 1, 1996, the Company amended the loan agreement relating to the
Senior Revolving Credit Facility to provide for an additional temporary credit
facility (the "Temporary Credit Facility") in the amount of $25.0 million which
expires on November 1, 1996 and bears interest at the reference prime rate. The
Company is also a party to an interest rate protection agreement aggregating a
notional amount of $15.0 million, which limits the Company's exposure to
increases in borrowing costs.
In June 1996, the Company completed a $90.4 million asset securitization
through the sale of 6.85% automobile receivable-backed Class A Certificates. The
Company recorded a $5.1 million gain on sale of net finance receivables in the
three months ended June 30, 1996. The certificates were issued by Trust 1996-2,
a trust formed specifically for purposes of the securitization transaction.
Principal and interest on the certificates are payable monthly commencing July
15, 1996 from collections and recoveries on the pool of finance receivables. FSA
issued a financial guaranty insurance policy for the benefit of the holders of
the certificates. Net proceeds from the sale and securitization of finance
receivables were used to repay indebtedness under the Senior Revolving Credit
Facility.
In May 1996, the Company completed a $125.9 million debt financing
consisting of automobile receivable-backed notes. Of these notes, $85.0 million
have a floating interest rate of 0.17% over one-month LIBOR and the remaining
$40.9 million have a fixed rate of 6.70%. In an effort to reduce the Company's
exposure to potential increases in interest rates, the Company entered into an
interest rate swap agreement on May 21, 1996 with an initial notional amount of
$85.0 million, whereby the Company pays a fixed rate of 5.98% and receives a
variable rate of one-month LIBOR. The notional amount declines, as specified in
the swap agreement, at each month-end during the term of the agreement, which
expires in May 1998. At June 30, 1996, the notional amount was $76.7 million and
one-month LIBOR was 5.50%. The notes were issued by First Merchants Auto Trust
1996-A, a trust formed specifically for purposes of the securitization
transaction. Principal and interest on the notes are payable monthly commencing
June 17, 1996 from collections and recoveries on the pool of finance
receivables. FSA issued a financial guaranty policy for the benefit of the
noteholders. The proceeds that the Company received from the securitization of
finance receivables were used to repay indebtedness under the Senior Revolving
Credit Facility and the Temporary Credit Facility.
25
<PAGE> 26
In March 1996, the Company completed a $55.8 million asset securitization
through the sale of 5.90% automobile receivable-backed Class A Certificates. The
Company recorded a $3.0 million gain on sale of net finance receivables in the
three months ended March 31, 1996. The certificates were issued by Trust 1996-1,
a trust formed specifically for purposes of the securitization transaction.
Principal and interest on the certificates are payable monthly commencing March
20, 1996 from collections and recoveries on the pool of finance receivables. FSA
issued a financial guaranty insurance policy for the benefit of the holders of
the certificates. Net proceeds from the sale and securitization of finance
receivables were used to repay indebtedness under the Senior Revolving Credit
Facility.
In November 1995, the Company completed a $75.0 million debt financing
consisting of 6.20% automobile receivable-backed notes, Series 1995-A. The notes
were issued by First Merchants Auto Receivable Corporation, a wholly-owned
special purpose subsidiary of the Company. Principal and interest on the notes
are payable monthly commencing December 15, 1995 from collections and recoveries
on the pool of finance receivables. FSA issued a financial guaranty policy for
the benefit of the noteholders. The proceeds that the Company received from the
securitization of finance receivables were used to repay indebtedness under the
Senior Revolving Credit Facility.
In October 1995, the Company completed a public offering of 2,250,000
shares of Common Stock at a price of $24.50 per share. The proceeds, which
approximated $51.6 million after deducting the underwriting discount and
offering expenses, were used to fund future purchases of finance contracts and,
prior to such use, the proceeds were used to reduce borrowings under the Senior
Revolving Credit Facility.
In February 1995, the Company received approximately $13.5 million for the
issuance of the 1995 Notes after deducting the underwriting discount and
offering expenses. The proceeds were used to repay indebtedness under the Senior
Revolving Credit Facility. Interest on the 1995 Notes is payable quarterly, on
March 15, June 15, September 15 and December 15 of each year commencing March
15, 1995, at an interest rate of 11% per annum until March 15, 2000. The
interest rate will reset, at the Company's option, on March 15, 2000 to a rate
and for a term of one, two, three, or five years determined by the Company and
will reset thereafter, at the Company's option, upon the date of expiration of
each such new interest rate period prior to maturity on March 15, 2005. Any such
subsequent interest rate shall not be less than 105% of the effective interest
rate on Comparable Maturity U.S. Treasury Obligations (as defined in the 1995
Indenture). Holders of the 1995 Notes have the option to redeem all or any
portion of the 1995 Notes on March 15, 2000 or any subsequent interest reset
date.
During the second half of 1994, the Company completed an initial public
offering of 1,530,000 shares of Common Stock at a price of $11.00 per share. The
proceeds, which approximated $14.9 million after deducting the underwriting
discount and offering expenses, were used to repay and terminate the
Subordinated Credit Facility and to repay indebtedness under the Senior
Revolving Credit Facility.
The Senior Revolving Credit Facility, the 1995 Indenture and the indentures
relating to the Company's securitizations contain several financial and other
covenants, including interest coverage requirements, leverage tests, delinquency
and credit loss tests, a dividend restriction and minimum net worth
requirements. The Company believes these covenants will not materially limit its
business or expansion strategy. The Company was in compliance with all such
covenants at June 30, 1996.
The Company intends to continue increasing its finance contract portfolio.
In order to meet its funding needs for the remainder of 1996 and 1997, the
Company will require additional capital resources to supplement its expected
cash flows from operations, the principal payments on finance contracts, the
proceeds from the Offering and the anticipated borrowings under its Senior
Revolving Credit Facility. The Company is expecting to complete additional
securitizations of finance receivables in 1996 and 1997 and is exploring other
sources of liquidity in order to satisfy its needs for additional capital
resources.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company does not believe that inflation directly has a
material adverse affect on its financial condition or results of operations,
increases in the inflation rate generally are associated with
26
<PAGE> 27
increased interest rates. Because the Company borrows a portion of its funds on
a floating rate basis and purchases finance contracts bearing a fixed rate of
interest, increased costs of borrowed funds could have a material adverse impact
on the Company's profitability. In addition, rising interest rates could
decrease gains realized on the sale of the Company's finance contract
receivables and thereby adversely affect the Company's profitability. Inflation
also can affect the Company's operating expenses.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), effective for the Company in 1996,
provides an alternative method for accounting for stock-based compensation and
requires certain disclosures regarding the fair value of stock-based
compensation. The Company does not expect to adopt the alternative method of
accounting for stock-based compensation and, accordingly, the adoption of SFAS
123 will not have any effect on the Company's financial position or results of
operations. The Company expects to expand its disclosure of stock-based
compensation plans to include pro forma fair value information in its 1996
Annual Report to Stockholders.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"), effective for the Company in 1997, provides new methods of
accounting and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. The Company will apply SFAS 125 to
securitization transactions occurring on or after January 1, 1997. The effect of
adopting SFAS 125 is not expected to have a material effect on the Company's
financial position or results of operations.
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BUSINESS
GENERAL
The Company is a specialty finance company primarily engaged in financing
the purchase of used automobiles by acquiring dealer-originated finance
contracts. Since the Company's incorporation in March 1991, it has targeted its
marketing efforts to dealers which sell automobiles to consumers who have
limited access to traditional sources of credit. The Company serves two
customers, the dealer and, indirectly, the dealer's customer, the non-prime
borrower. As of September 30, 1996, the Company serviced approximately 3,000
dealers in 37 states. The Company's total finance contract portfolio, which
includes receivables owned and sold with servicing retained, increased from
approximately $94.1 million at December 31, 1994 and $284.2 million at December
31, 1995 to approximately $479.2 million at June 30, 1996, while maintaining net
charge-offs as a percentage of average net finance receivables of under 6.0% for
such periods. The Company generated net earnings before extraordinary item in
1993, 1994, and 1995 of approximately $0.9 million, $2.8 million and $6.7
million, respectively. For the six months ended June 30, 1995 and June 30, 1996,
the Company generated net earnings of approximately $2.5 million and $6.2
million, respectively.
The automobile dealer business is highly fragmented and includes businesses
selling principally new automobiles, but also operating a used automobile
business, that are franchised by an automobile manufacturer ("franchised
dealers") and businesses selling exclusively used automobiles that are not
affiliated with an automobile manufacturer ("independent dealers"). During the
six months ended June 30, 1996, approximately 80% (by aggregate principal
balance) of the finance contracts purchased by the Company were originated by
franchised dealers and the remainder were originated by quality independent
dealers.
The finance contracts purchased by the Company are primarily with non-prime
borrowers who are generally relatively higher credit risks due to various
factors, including their impaired credit history or the absence or limited
extent of their credit history. Typical non-prime borrowers include young
borrowers (18 to 25 years old) who are trying to establish an initial credit
rating, previously bankrupt borrowers who are re-establishing their credit
rating, slow payers of credit cards and department store accounts and borrowers
who desire payment terms slightly longer than the maximum term permitted by
traditional sources of automobile financing, such as commercial banks, savings
and loan associations, credit unions, finance companies affiliated with
automobile manufacturers and other consumer lenders.
THE INDUSTRY
Automobile financing is one of the two largest categories, by dollar
amount, of consumer installment debt in the United States. Most traditional
sources of automobile financing generally provide automobile financing for the
most creditworthy, or so-called "prime" borrowers. The Company believes that the
strong credit performance and large size of the market have led to intense price
competition in the financing market for prime borrowers, and, in turn, low
profit margins, effectively limiting this market to only the largest
participants. In addition, special low-rate financing programs offered by
automobile manufacturers' captive finance companies to promote the sale of
specific automobiles have added to the competition within the prime borrower
market.
Although prime borrowers represent the largest segment of the automobile
financing market, there are many potential purchasers of automobiles who do not
qualify as prime borrowers. Purchasers considered by the Company to be non-prime
borrowers are generally unable to obtain credit from traditional sources of
automobile financing. The Company believes that, because these potential
purchasers represent a substantial market, there is a demand by automobile
dealers with respect to financing for non-prime borrowers that has not been
effectively served by traditional automobile financing sources.
At December 31, 1995, there were approximately 22,750 franchised dealers
and approximately 63,750 independent dealers in the United States. According to
the Federal Reserve Board, as of March 31, 1996, there was approximately $359.0
billion in automobile related installment credit outstanding. The Company is
unaware of any authoritative estimates of the "non-prime" portion of this
market, although various sources have estimated that the potential loan base in
this portion of the market is between $50 billion and $70 billion.
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The Company believes that demographic and economic trends favor increased growth
in the non-prime segment of the automobile finance industry. The average
American family must spend a significantly higher percentage of its income to
purchase an automobile than it did several years ago. According to industry
data, the average price of a new automobile in 1994 represented approximately
59.3% of the U.S. median family income for that year, an increase from
approximately 51.5% in 1986. This increase, combined with increases in the
average useful life of automobiles and the number of late-model used automobiles
available for sale (including rental cars and cars that were formerly leased),
have led industry analysts to believe that the market for retail sales of used
automobiles will continue to grow.
The Company believes that the largest competitor in the non-prime
automobile financing market has a finance contract portfolio that represents
less than 3% of such market and that no other competitor in such market has a
portfolio representing more than 2% of such market. The Company estimates that
its finance contract portfolio represents less than 1% of the non-prime
automobile financing market.
STRATEGY
The Company's growth strategy is to utilize its national sales force,
together with its Dealer Service Center managers, to increase the volume of
contracts purchased per automobile dealer relationship, increase its presence
and geographic scope within existing markets and penetrate new markets. The
Company has established relationships with certain national used car
superstores, such as CarMax(R), and certain large, regional franchised dealers
and intends to develop relationships with additional national used car
superstores and additional large, regional franchised dealers. The Company is
also in the process of developing referral programs with financial institutions,
which enable the Company to finance non-prime borrowers whose credit
applications have been turned down by such financial institutions. In addition,
the Company is considering bulk purchases of non-automobile consumer receivables
and various other strategic business alternatives, including diversification
into other areas of consumer financial services. However, the Company
anticipates that its primary business strategy will continue to be to focus its
resources on purchasing finance contracts from dealers that sell automobiles to
non-prime borrowers. The key elements of the Company's business strategy are as
follows:
Efficient Operational Structure. The Company's operational structure is
designed to maximize dealer service and finance contract originations, while
maintaining consistent portfolio performance and controlling operating expenses.
The Company's sales, credit and collection functions are organized as follows:
(i) a national sales force, which is dedicated to developing new dealer
relationships and expanding the geographic scope of Dealer Service Centers; (ii)
regional Dealer Service Centers, which coordinate with the sales force to build
and nurture dealer relationships, process and underwrite credit applications and
disburse funds to dealers; (iii) Account Service Centers, which perform all
account servicing functions, such as finance contract verification, payment
processing, delinquency follow-ups and cost-effective recoveries of charged-off
account balances; and (iv) the Asset Disposition Group, which arranges the
disposition of repossessed collateral.
Experienced Management Personnel. The Company has recruited experienced
management personnel at the executive, supervisory, and managerial levels. The
Company believes that the retention of such experienced management personnel is
important in maintaining credit quality, supervising its operations and
maintaining flexible strategies for growth in a changing business environment.
The Company's executive officers, senior managerial personnel and Dealer Service
Center and Account Service Center managers have an average of over 15 years of
experience in the consumer or automobile finance industries. In addition to
recruiting experienced management personnel, the Company places an emphasis on
retaining such personnel through competitive compensation, equity incentives and
professional development programs, such as sales training and counseling and
credit underwriting certification programs.
Sophisticated Risk Management Techniques. To mitigate the higher risks
often associated with non-prime borrowers, the Company has developed
sophisticated risk management techniques for evaluating credit applications
based in part upon the Company's ongoing analysis and review of existing
portfolio characteristics. The Company utilizes a credit scoring system
developed by a leading credit evaluation company as an objective guideline for
evaluating a non-prime borrower's creditworthiness. The Company employs a tiered
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pricing system that provides guidance for the determination of the APR, discount
and other terms of a finance contract commensurate with the credit
characteristics of such contract. The Company has also established uniform
guidelines and procedures for evaluating credit applications relating to such
matters as the borrower's stability of residence, employment history, credit
history, capacity to pay, income, discretionary income, debt ratio and credit
bureau score, as well as the value of the collateral. In addition, the Company
has assigned each Dealer Service Center manager a maximum credit authority per
finance contract based on various factors, including such manager's experience
level. Within the guidelines and procedures established by the Company, each
Dealer Service Center manager is authorized to approve or reject credit
applications within such manager's maximum credit authority and to supplement
objective credit criteria with subjective judgment in making credit decisions.
If the proposed financing amount exceeds the Dealer Service Center manager's
maximum credit authority or does not meet the Company's guidelines, the Dealer
Service Center manager must obtain the approval of the Assistant Vice President
- - Operations Risk Management.
Proactive Collection Management. The Company pursues a policy of proactive
collection management through its Account Service Centers with respect to both
current and delinquent accounts, including activities related to monthly billing
and collections, borrower inquiries and repossessions. Shortly after the Company
purchases a finance contract, personnel at an Account Service Center typically
contact the borrower by telephone to verify the terms of the sale. The Company
also sends the borrower a letter which describes the procedures and schedule for
repaying the finance contract and explains the Company's delinquency and
repossession policies. The Company utilizes predictive dialing technology to
complement its calling efforts and enhance the productivity of its collection
personnel. Any finance contract for which a payment is one day overdue is
treated as a past due account for collection purposes, and the Company typically
contacts a borrower within two days after such borrower's account becomes past
due. The Company generally commences repossession procedures before an account
is more than two payments past due. Management believes that proactive
collection management is critical in maintaining a low level of delinquencies
and charge-offs.
Monitoring and Supervising the Operational Structure. The Company maintains
the following three departments reporting directly to senior management that
perform independent control functions to monitor and review the operations of
the Company: (i) Risk Management, which performs ongoing analyses of new finance
contracts purchased by the Company to ensure that such finance contracts meet
the Company's credit guidelines and were purchased in compliance with the
Company's operational procedures, analyzes trends in the finance contract
portfolio and performs back-end reviews of the finance contract portfolio's
performance; (ii) Internal Audit, which performs on-site audits of each Dealer
Service Center and Account Service Center at least annually to ensure compliance
with the Company's guidelines and procedures and maintenance of the Company's
credit quality standards; and (iii) Managing Directors of Dealer Services, who
typically visit and review the operations of each Dealer Service Center
throughout the year in order to evaluate compliance with the Company's policies
and procedures, measure the effectiveness of business development efforts, and
review general portfolio credit and performance quality and office
profitability. Each control function actively utilizes the Company's management
information system that provides real time, on-line reports on a daily basis
which contain operational information from each of the Company's Dealer Service
Centers, Account Service Centers and the Asset Disposition Group. In addition,
management conducts daily reviews of the volume of finance contracts purchased,
aging of accounts, repossession activities and other operating data. See
"Business -- Management Information Systems."
Providing Superior Service to Quality Dealers. By providing prompt,
flexible service and a reliable source of financing for non-prime borrowers, the
Company helps to expand the dealers' customer base, thereby increasing the
efficiency and effectiveness of their used car sales operations. The Company
believes that its guidelines and procedures allow it to respond quickly to
dealers. The Company typically responds to credit applications on the date
received, in many cases within 2 to 3 hours, and generally pays the dealer for
finance contracts purchased within 24 hours after the Company has received
required documentation from the dealer. Management believes that because of its
prompt and reliable response to dealers, many dealers conduct business with the
Company. As of August 31, 1996, the Company operated a nationwide network of 33
Dealer Service Centers servicing dealers in 37 states. In the first half of
1996, the Company consolidated 13 smaller Dealer Service Centers to improve
operating efficiencies in accordance with its nationwide hub and spoke
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strategy, and the Company intends to continuously review the operating
efficiencies of its remaining Dealer Service Center network. The Company has
strengthened its national sales force to support the efforts of its Dealer
Service Centers in providing consistent, reliable service to dealers. The
Company has further focused its operations by centralizing collections into two
Account Service Centers, thus allowing Dealer Service Centers to concentrate on
developing and nurturing dealer relationships and maintaining credit quality
with respect to new purchases of finance contracts.
OFFICES
As of September 30, 1996, the Company operated 33 Dealer Service Centers,
two Account Service Centers and the Asset Disposition Group. The Company
establishes Dealer Service Centers in locations that allow Company personnel to
provide personal service to dealers, while covering a wide geographical area. By
utilizing a hub and spoke strategy, the Company's Dealer Service Center managers
and sales professionals are able to meet individually with local dealers to
negotiate dealer agreements, quickly resolve problems as they develop and
respond to the competitive conditions of a particular market. Management
believes that this structure significantly enhances the Company's operations and
competitive advantage. See "Business -- Contract Acquisition Process-Dealer
Relations." Dealer Service Center managers are evaluated and compensated based
upon objective financial and operational criteria relating to the performance of
their respective Dealer Service Centers.
The Company considers each Dealer Service Center as its own profit center,
having primary responsibility for business development and contract acquisition.
Each Dealer Service Center functions independently of the other centers and is
operated by a full-time Dealer Service Center manager who reports to a Managing
Director of Dealer Services. The Account Service Centers are primarily
responsible for collections, including recoveries of charged-off account
balances, and payment processing. Each Account Service Center is operated by an
Account Service Center manager who reports to a Managing Director of Account
Services. The Asset Disposition Group arranges for dispositions of repossessed
collateral and is supervised by a Managing Director of Asset Disposition. The
Company's four Managing Directors of Dealer Services are responsible for
reviewing compliance with the Company's guidelines and procedures and conducting
periodic on-site reviews of the Dealer Service Centers. In addition, Managing
Directors of Dealer Services provide day-to-day guidance to Dealer Service
Center managers in making credit decisions. The Managing Directors of Dealer
Services report directly to the Vice President - Automotive Financial Services.
The Managing Directors of Account Services and the Managing Director of Asset
Disposition report to the Vice President - Account Services.
CONTRACT PROFILE
During 1993, 1994 and 1995, the Company purchased 5,263, 10,154 and 25,336
finance contracts, respectively, with aggregate initial principal balances of
approximately $33.9 million, $91.4 million and $257.9 million, respectively. For
the six months ended June 30, 1995 and June 30, 1996, the Company purchased
9,879 and 23,958 finance contracts, respectively, with aggregate initial
principal balances of approximately $99.0 million and $265.3 million,
respectively. Finance contracts purchased during the six months ended June 30,
1996 had an average initial principal balance of $11,075, a weighted average APR
of 20.3%, a weighted average purchase discount of 4.3% and a weighted average
initial contract term of 54 months. Based on the Company's historical
experience, its finance contracts have an average life of approximately 34
months. The Company's interest and other portfolio income as a percentage of
average net finance receivables-owned was 22.8% in the six months ended June 30,
1996 which, based on an average cost of borrowed funds of 8.0%, represents a net
interest spread of 14.8%. During the six months ended June 30, 1996, the
Company's owned finance contract portfolio generated a net portfolio yield of
16.7%. During such period, accounts with payments 31 days or more past due
averaged less than 4.0% of the Company's total finance contract portfolio.
CONTRACT ACQUISITION PROCESS
The following is a summary of the process that the Company typically
follows in connection with its acquisition of an automobile finance contract.
Dealer Relations. Using a hub and spoke strategy, the Company solicits
business from automobile dealers through the business development efforts of its
sales force and Dealer Service Centers. The Company evaluates each dealer with
which it establishes a financing relationship to endeavor to ensure that the
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Company purchases finance contracts from only reputable automobile dealers
carrying an inventory of high quality used automobiles. The Company assesses the
length of service and reputation of prospective dealers through the local Better
Business Bureau and state regulatory authorities. The Company inspects each
dealer's physical premises and automobile inventory to determine whether such
dealer appears to be operating its business satisfactorily and maintaining
consistently high quality inventory. The Company's management information
systems track the monthly performance of borrowers' accounts by dealer, allowing
the Company to review and evaluate the quality of finance contracts purchased
from each dealer.
Each dealer with which the Company establishes a financing relationship
enters into a non-exclusive written dealer agreement (a "Dealer Agreement") with
the Company governing the Company's finance contract purchases from the dealer.
A Dealer Agreement generally provides that the dealer shall indemnify the
Company against any damages or liabilities, including reasonable attorneys'
fees, arising out of (i) any breach of a representation or warranty of the
dealer set forth in the Dealer Agreement or (ii) any claim or defense that a
borrower may have against a dealer relating to a finance contract.
Representations and warranties in a Dealer Agreement generally relate to such
matters as whether (i) the financed automobile is free of all liens, claims and
encumbrances except the Company's lien, (ii) the down payment specified in the
finance contract has been paid in full in cash and/or trade in and no part of
the down payment was loaned to the borrower by the dealer and (iii) the dealer
has complied with applicable law. If the dealer violates the terms of the Dealer
Agreement with respect to any finance contract, the dealer must repurchase such
contract on demand for the unpaid balance and all other indebtedness due to the
Company from the borrower.
Credit Evaluation Procedures. If a non-prime borrower elects to finance the
purchase of an automobile through a dealer, the dealer will submit the
borrower's credit application to the Company for review of the borrower's
creditworthiness and proposed transaction terms. Dealer Service Center personnel
conduct such review in accordance with the Company's guidelines and procedures,
which take into account, among other things, the individual's stability of
residence, employment history, credit history, ability to pay, income,
discretionary income and credit bureau score, as well as the value of the
collateral. In addition, Dealer Service Center personnel evaluate a credit
bureau report in order to determine if (i) the individual's credit quality is
deteriorating, (ii) the individual's credit history suggests a high probability
of default or (iii) the individual's credit experience is too limited for the
Company to assess the probability of performance. The Company also utilizes a
credit scoring system developed by a leading credit evaluation company that is
used as an additional objective guideline for evaluating a non-prime borrower's
creditworthiness and employs a tiered pricing system that provides guidance for
the determination of the APR, discount and other terms of a finance contract
commensurate with the credit characteristics of such contract. Dealer Service
Center personnel may also require verification of certain applicant or dealer
provided information prior to making the credit decision. Such verification
typically requires submission of supporting documentation, such as a paycheck
stub or other substantiation of income, and is performed solely by the Company's
personnel. The Company has assigned each Dealer Service Center manager a maximum
credit authority per finance contract based on various factors, including such
manager's experience level. Within the guidelines and procedures established by
the Company, the Dealer Service Center manager is authorized to approve or
reject credit applications within such manager's maximum credit authority and to
supplement objective credit criteria with subjective judgment in making credit
decisions. If the proposed financing exceeds the Dealer Service Center manager's
maximum credit authority or does not meet the Company's guidelines, the Dealer
Service Center manager must obtain the approval of the Assistant Vice President
- - Operations Risk Management.
After reviewing the credit application and the terms of the sale, the
Dealer Service Center notifies the dealer whether or not the Company would be
willing to purchase the finance contract upon sale of the automobile to the
applicant. The Company typically responds to submitted dealer applications on
the date received, in many cases within 2 to 3 hours. The Company is selective
in its approval process. The Company historically has approved approximately 25%
of all submitted credit applications, and approximately 52% of those approved
finance contracts have been purchased by the Company. The difference between the
number of applications approved and the number of finance contracts entered into
is due primarily to industry practice whereby the dealer typically submits the
credit application to more than one finance company and then selects the finance
company that is willing to provide the most favorable terms. In cases where the
Company is unwilling to purchase a finance contract from a dealer under the
proposed terms but believes the applicant has
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the capacity to meet other repayment obligations, Dealer Service Center
personnel will work with the dealer to restructure the terms of the financing or
suggest the sale of an alternative automobile with a price more suited to the
applicant's financial means.
Approval Process. When the Company approves the purchase of a finance
contract, the Dealer Service Center notifies the dealer by facsimile or
telephone. Such notice specifies all pertinent information relating to the terms
of the approval, including the interest rate, the term, information about the
automobile to be sold, the amount of discount that the Company will take from
the principal amount of the finance contract and other consideration, if any,
paid by the Company to the dealer. Generally, a borrower is required to make a
down payment of at least 10% of the purchase price. The Company's guidelines and
procedures require that the advance to the dealers on the underlying collateral
cannot exceed 110% of the wholesale value of such collateral, excluding the cost
of ancillary products sold by the dealer to the borrower, such as warranties or
insurance, which may be financed by the Company. Generally, advances to dealers
have not exceeded 100% of the collateral's wholesale value, excluding the cost
of ancillary products financed by the Company.
Contract Purchase. Upon final confirmation of the terms by the borrower,
the dealer completes the sale of the automobile to the borrower. After the
dealer delivers all required documentation to the Company, the Company remits
funds to the dealer, generally within 24 hours. Upon purchase of the finance
contract, the Company acquires a perfected security interest in the financed
automobile. Each finance contract requires that the automobile be properly
insured and that the Company be named as a loss payee, and compliance with these
requirements is verified prior to the remittance of funds to the dealer.
Additionally, the Company maintains a blanket insurance policy covering physical
property damages in the event that the borrower does not maintain insurance.
CONTRACT SERVICING AND ADMINISTRATION
The Company's contract servicing and administration activities have been
specifically tailored to the unique challenges of servicing loans made to
non-prime borrowers. Each Account Service Center (i) collects payments, (ii)
accounts for and posts all payments received, (iii) responds to borrower
inquiries, (iv) takes all necessary action to maintain the security interest
granted in the financed automobile, (v) investigates delinquencies and
communicates with the borrower to obtain timely payments and (vi) monitors the
finance contract and its related collateral. When necessary, the Asset
Disposition Group contracts with third parties to repossess and dispose of
financed automobiles.
The Company's activities incorporate proactive procedures and systems. For
example, the Company has established a process through which it attempts to
educate borrowers, both in writing and by telephone, upon the Company's purchase
of their finance contracts. This process is designed to ensure that borrowers
clearly understand their obligations and includes a review of the terms of the
finance contract with particular emphasis on the amount and due date of each
payment obligation, the Company's expectations as to the timely receipt of
payments and maintenance of insurance coverage and the Company's delinquency and
repossession policies.
The Company utilizes a monthly billing statement system (rather than
payment coupon books) to remind borrowers of their monthly payment obligations.
This system also serves as an early warning mechanism in the event that a
borrower has failed to notify the Company of an address change. The Company
typically contacts borrowers whose payments are not received by the due date
earlier than it believes is customary in the industry, commencing within two
days after a borrower's due date and continuing until payment has been received.
The Company believes that early and frequent contact with the borrower
reinforces the borrower's recognition of his or her obligations and the
Company's expectation of timely payment.
DELINQUENCY CONTROL AND COLLECTION
Personnel at each Account Service Center review accounts that are past due
to assess collection efforts to date and to define the collection strategy, if
appropriate. Each Account Service Center designs a collection strategy that
includes a specific deadline before which each delinquent obligation should be
collected. Each Account Service Center employs predictive dialing technology
that automates the collection process with
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respect to accounts that are from one to 30 days past due. Accounts that are
over 30 days past due are turned over to personnel at the Account Service Center
for more intensive collection efforts. Accounts that have not been collected
prior to the deadline established by the Account Service Center are again
reviewed and, unless there are specific circumstances which warrant further
collection efforts, such accounts are assigned to an outside agency for
repossession. Repossessed automobiles are generally resold through wholesale
auctions. The elapsed time between repossession and resale is generally 30 to 45
days, including passage of the period during which the law of the applicable
jurisdiction permits the borrower to redeem the automobile. Since its inception,
the Company has, on average, recovered approximately 52% of the principal amount
of the finance contracts relating to its repossessed automobiles. Typically,
after repossession, recovery specialists based in the Account Service Centers
seek to recover any deficiency from the borrower, subject to applicable legal
limitations.
MANAGEMENT INFORMATION SYSTEMS
Overall, management believes that it is essential to pursue a strategy of
continuous improvement in information systems in order to maintain the Company's
competitive position. The Company's current systems have been developed to
provide for complete processing of the Company's finance contracts and
associated activities.
Taking advantage of the continuing developments in personal computing
platforms, the Company has furthered its ability to use data warehousing
approaches to perform detailed monthly analyses of portfolio performance and
customized reporting for management purposes. In addition, the Company is
currently working with several information and processing technology providers
in the development and implementation of customized third party systems. The
Company has entered into contracts for these developmental services which will
require a significant investment. The Company anticipates that customized third
party systems will assist it in becoming more adaptable to future business needs
in an efficient and cost effective manner.
RISK MANAGEMENT
The Company maintains a Risk Management group comprised of the following
three subgroups which monitor and review the Company's finance contract
portfolio to reduce risk: (i) Underwriting and Analysis, which performs ongoing
analyses of new finance contracts purchased by the Company to ensure that such
finance contracts meet the Company's credit guidelines and were purchased in
compliance with the Company's operational procedures; (ii) Portfolio Analysis,
which performs statistical analyses of the finance contract portfolio to
identify trends in the portfolio; and (iii) Portfolio Performance, which
performs back-end reviews of the finance contract portfolio's performance to
identify the factors contributing to delinquent accounts. The Risk Management
subgroups work together to effectively track the life cycle of a finance
contract in an effort to identify those characteristics that are correlated with
finance contract repayment or delinquency. The Company utilizes the information
generated by the Risk Management group to refine its guidelines and procedures
for evaluating credit applications and its tiered pricing system for the
determination of the APR, discount and other terms of a finance contract
commensurate with the credit characteristics of such contract.
COMPETITION
The automobile finance business is highly competitive. The Company believes
that there are numerous competitors providing, or capable of providing,
financing through dealers to non-prime borrowers. The Company competes with a
number of national, local and regional finance companies with operations similar
to the Company. Competitors or potential competitors include other types of
financial services companies, such as commercial banks, savings and loan
associations, credit unions, finance companies affiliated with automobile
manufacturers and other consumer lenders (many of which are larger than the
Company, have significantly greater financial resources than the Company or have
relationships with captive networks). If additional competitors were to enter
the Company's market, the Company could be materially adversely affected. In
addition, the Company has experienced increased competition, which has resulted
in a reduction in the interest rate charged the borrower, a reduction in (and in
some cases the elimination of) the discount which the Company is able to charge
to dealers and an increase in the frequency and amount of other
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consideration that is paid by the Company to dealers Further competition may
result in additional reductions in such interest rate, additional reductions in
or the elimination of the discount and increases in the frequency and amount of
other consideration that is paid by the Company to dealers, which could
adversely affect the Company's profitability. The Company believes that it
competes principally on the basis of service to participating dealers.
FINANCING
Integral to the Company's business and growth strategy is the maintenance
of sufficient capital resources to support its operations. The Company's
external funding presently consists of the Senior Revolving Credit Facility, the
Temporary Credit Facility, the 1995 Notes and funds generated from
securitizations of portions of the Company's portfolio of finance contract
receivables.
Senior Revolving Credit Facility and Temporary Credit Facility. The Senior
Revolving Credit Facility currently provides for a $205.0 million facility
during the term thereof. The interest rate for borrowings is, at the Company's
option, either (i) the reference prime rate or (ii) LIBOR plus 1.60% for
maturities of one, two, three or six months. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." On May 1, 1996, the Company amended the loan agreement relating to
the Senior Revolving Credit Facility to provide for an additional Temporary
Credit Facility in the amount of $25.0 million which bears interest at the
reference prime rate. The Senior Revolving Credit Facility and the Temporary
Credit Facility are secured by a substantial portion of the Company's assets.
The term of the Temporary Credit Facility expires on November 1, 1996 and the
term of the Senior Revolving Credit Facility expires on June 30, 1997. Amounts
borrowed under the Senior Revolving Credit Facility and the Temporary Credit
Facility are subject to principal repayment on their respective expiration
dates. No amounts were outstanding under the Temporary Credit Facility as of the
date of this Prospectus.
1995 Subordinated Reset Notes. On February 14, 1995, the Company received
approximately $13.5 million, after deducting the underwriting discount and
offering expenses, from the sale of $14.4 million principal amount of 1995
Notes. The 1995 Notes are unsecured, subordinated obligations of the Company.
Interest on the 1995 Notes is payable quarterly, on March 15, June 15, September
15 and December 15 of each year commencing March 15, 1995, at an interest rate
of 11% per annum until March 15, 2000. The interest rate will reset, at the
Company's option, on March 15, 2000 to a rate and for a term of one, two, three,
or five years determined by the Company and will reset thereafter, at the
Company's option, upon the date of expiration of each such new interest rate
period prior to maturity on March 15, 2005. Each holder of the 1995 Notes has
the option to require the Company to redeem all of such holder's 1995 Notes on
March 15, 2000 or any subsequent interest reset date.
Securitizations. The Company securitizes portions of its portfolio of
finance contract receivables in securitization transactions to increase the
Company's liquidity, provide for redeployment of capital, reduce risks
associated with interest rate fluctuations and provide the Company with access
to a cost-effective, diversified source of financing. The Company has
historically applied the net proceeds from securitization transactions to repay
indebtedness under the Senior Revolving Credit Facility, thereby increasing the
amounts available under such facility to fund future purchases of finance
contracts. The Company has structured its securitization transactions both as
debt financings and as off-balance sheet financings that result in gains on the
sale of finance contract receivables. Gains from the sale of finance contract
receivables in securitization transactions constituted a significant portion of
the net earnings of the Company during the six months ended June 30, 1996 and
are likely to continue to represent a significant portion of the Company's net
earnings. The timing of any securitization transaction is affected by a number
of factors beyond the Company's control, including, among others, conditions in
the asset-backed securities markets, interest rates and approvals from third
parties. Some or all of these factors may cause delays in closing a
securitization or may prevent such transactions entirely. If the Company were
unable to securitize finance contract receivables in a financial reporting
period, the Company could incur a significant decline in total revenues and net
earnings for such period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, if the loss or prepayment
experience with respect to finance contracts collateralizing asset-backed
securities is greater than estimated at the time of sale, the Company may be
required to write down its excess
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<PAGE> 36
servicing receivable and, to a lesser extent, its asset-backed securities. A
write-down would reduce the Company's net earnings in the period in which the
write-down occurred. The Company plans to continue to employ its securitization
program as an integral component of its funding strategy and anticipates that it
will generally complete securitization transactions, primarily off-balance
sheet, on a quarterly basis. The Company currently has an effective Registration
Statement on Form S-3 on file with the Securities and Exchange Commission (the
"Commission") pursuant to which the Company intends to effect public offerings
of securitized finance contract receivables from time to time. On September 26,
1996, the Company completed an offering to the public under such Registration
Statement aggregating approximately $117.5 million.
REGULATION
The Company's business is subject to regulation and licensing under various
federal, state and local statutes and regulations. As of August 31, 1996, the
Company's business operations were conducted with dealers located in 37 states,
and, accordingly, the laws and regulations of such states govern the Company's
operations. Most states where the Company operates (i) limit the interest rate,
fees and other charges that may be imposed by, or prescribe certain other terms
of, the finance contracts that the Company purchases, and (ii) define the
Company's rights to repossess and sell collateral. In addition, the Company is
required to be licensed or registered to conduct its finance operations in
certain states in which the Company purchases finance contracts.
Numerous federal and state consumer protection laws and related regulations
impose substantive disclosure requirements upon lenders and servicers involved
in automobile financing. Some of the federal laws and regulations include the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Credit Report Act, the Fair Credit Billing Act, the
Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z and the Soldiers' and Sailors' Civil Relief
Act.
In addition, the Federal Trade Commission ("FTC") has adopted a
holder-in-due-course rule which has the effect of subjecting persons that
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the purchaser could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide which explains
the warranty coverage for such automobiles. The Credit Practices Rules of the
FTC impose additional restrictions on sales contract provisions and credit
practices.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. In
addition, due to the consumer-oriented nature of the industry in which the
Company operates and the application of certain laws and regulations, industry
participants are regularly named as defendants in litigation involving alleged
violations of federal and state laws and regulations and consumer law torts,
including fraud. Many of these actions involve alleged violations of consumer
protection laws. A significant judgment against the Company or within the
industry in connection with any such litigation could have a material adverse
effect on the Company's financial condition and results of operations.
LEGAL PROCEEDINGS
On August 27, 1996, a purported class action entitled Mercedes Hoffman v.
Grossinger Motor Corp. and First Merchants Acceptance Corporation was filed in
the United States District Court for the Northern District of Illinois. The
complaint, as amended on September 27, 1996 (the "Complaint"), alleges
violations of certain Federal and Illinois consumer protection statutes and RICO
and seeks unspecified damages. The Company believes that certain material
allegations in the Complaint are incorrect and that it has meritorious defenses
to the claims made in the Complaint. The Company intends to vigorously defend
this action. The Company is also involved from time to time in other litigation
incidental to its business.
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<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their present
positions with the Company are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---------------------------------- --- -------------------------------------
<S> <C> <C>
Mitchell C. Kahn.................. 43 President and Chief Executive
Officer, Director
Alan J. Appelman.................. 39 Vice President -- Risk Management
Thomas R. Ehmann.................. 44 Vice President and Chief Financial
Officer, Assistant Secretary
S. Mark Floyd..................... 43 Vice President -- Portfolio
Acquisitions
Peter J. Gorman................... 38 Vice President -- Account Services
Brian W. Hausmann................. 41 Vice President -- Automotive
Financial Services
Allen D. Rice..................... 40 Vice President -- Sales & Marketing
Paul M. Van Eyl................... 31 Vice President -- Strategic
Development
Richard P. Vogelman............... 54 Vice President, General Counsel and
Secretary
</TABLE>
Mr. Kahn has served as President, Chief Executive Officer and a director
since the Company was founded in March 1991. From April 1989 to March 1991, Mr.
Kahn served as President and Chief Executive Officer of First Credit
Corporation, a consumer finance company specializing in the purchase of home
improvement sales finance receivables. In December 1983, Mr. Kahn co-founded
Mercury Finance Company, a specialty consumer finance company, and served as a
Vice President of such company from December 1983 to February 1987 and a Senior
Vice President of such company from February 1987 to April 1989.
Mr. Appelman joined the Company in August 1995 as Vice President -
Operations Development and was named Vice President - Risk Management in August
1996. From October 1990 to August 1995, Mr. Appelman held various operation
analysis positions, including Manager - Operations and Portfolio Analysis, at
Hyundai Motor Finance Company.
Mr. Ehmann joined the Company in November 1992 as Vice President - Finance
and Controller and Assistant Secretary and was named Vice President and Chief
Financial Officer in June 1995. From May 1988 to November 1992, Mr. Ehmann was
Vice President, Finance and Controller for The LINC Group, Inc. and its
subsidiary LINC Scientific Leasing, both of which are equipment leasing
companies. Mr. Ehmann is a Certified Public Accountant.
Mr. Floyd joined the Company in June 1996 as Vice President - Portfolio
Acquisitions. From April 1990 to June 1996, Mr. Floyd was President and a
principal of National Asset Placement Corporation, a private company engaged in
purchasing and servicing loan portfolios. From April 1979 to April 1990, he was
employed in various management positions with several banks located in Texas.
Mr. Gorman joined the Company in January 1996 as Vice President - Account
Services. From July 1979 to January 1996, Mr. Gorman held various loan
acquisition and servicing positions at Key Bank of New York, including Vice
President from August 1990 to January 1996.
Mr. Hausmann joined the Company in June 1991 as Vice President - Operations
and was named Vice President - Automotive Financial Services in August 1996.
From March 1989 to March 1991, Mr. Hausmann served as Vice President and Chief
Operating Officer of First Credit Corporation, a consumer finance company
specializing in the purchase of home improvement sales finance receivables.
Mr. Rice joined the Company in March 1995 as Vice President - Sales &
Marketing. From January 1990 to March 1995, Mr. Rice was founder and President
of Aegis International, an international consulting firm specializing in
marketing and sales.
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<PAGE> 38
Mr. Van Eyl joined the Company in July 1993 as Director of Planning and
Analysis, was named Vice President - Risk Management in March 1995 and was named
Vice President - Strategic Development in August 1996. From October 1988 to July
1993, Mr. Van Eyl was employed in various managerial positions at LINC
Scientific Leasing, an equipment leasing company.
Mr. Vogelman has served as Vice President, General Counsel and Secretary of
the Company since July 1995. From June 1969 to March 1995, Mr. Vogelman held
various positions in the Investment Law Division of Allstate Insurance Company,
including Assistant Vice President and Assistant General Counsel during the
period from January 1987 to March 1995.
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<PAGE> 39
DESCRIPTION OF THE 1996 NOTES
GENERAL
The 1996 Notes are to be issued under the 1996 Indenture, dated as of
October 15, 1996, between the Company and LaSalle National Bank, as Trustee (the
"Trustee"), the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following statements, unless
the context otherwise requires, are summaries of the substance or general effect
of certain provisions of the 1996 Indenture, do not purport to be complete and
are qualified in their entirety by reference to the 1996 Indenture. Unless
otherwise defined herein, capitalized terms used in this Prospectus have the
same meanings as defined in the 1996 Indenture.
The 1996 Notes will be limited to $51,750,000 aggregate principal amount
(including $6,750,000 which may be sold only to cover over-allotments). The 1996
Notes will be issued in denominations of $1,000 or any integral multiple of
$1,000 and will be issued in fully registered form only, without coupons.
Interest on the 1996 Notes will be payable from their original date of issuance,
quarterly, on March 15, June 15, September 15 and December 15 of each year (the
"Interest Payment Date"), commencing December 15, 1996. The 1996 Notes will bear
interest as described below, payable to the person in whose name the 1996 Note
is registered at the close of business on the seventh day of the month (whether
or not a business day) immediately preceding an Interest Payment Date. The 1996
Notes will mature on December 15, 2006, unless redeemed earlier at the option of
the 1996 Noteholders or unless redeemed earlier at the option of the Company.
See "Description of the 1996 Notes -- Redemption at Option of 1996 Noteholder,"
"Description of the 1996 Notes -- 1996 Noteholders' Right to Redemption After
Special Redemption Event" and "Description of the 1996 Notes -- Optional
Redemption by the Company." The 1996 Notes will be direct, unsecured obligations
of the Company, will be equal in rank to the 1995 Notes and will be subordinated
in right of payment of principal and interest to Senior Indebtedness of the
Company. See "Description of the 1996 Notes -- Subordination." The 1996 Notes
will not be subject to any sinking fund.
The 1996 Notes will mature on December 15, 2006. The 1996 Notes will be
exchangeable and transferable at the principal corporate trust office of the
Trustee in Chicago, Illinois, without charge therefor, except for any tax or
other governmental charge connected therewith.
The Company intends to apply for a rating from Duff and Phelps Credit
Rating Co. with respect to the 1996 Notes.
ADJUSTABLE INTEREST RATE
The 1996 Notes shall bear interest from the date of original issuance until
December 15, 2001 at the rate of 9.5% per annum. Thereafter, the 1996 Notes
shall bear interest in accordance with the following procedures: On or before 30
days prior to December 15, 2001, or the expiration date of any subsequent
Interest Rate Period, the Company shall establish, at its option, the interest
rate per annum (rounded to the nearest five hundredths of a percentage point;
each such rate, a "Subsequent Interest Rate") for an Interest Rate Period of
one, two, three or five years (but never extending beyond December 15, 2006),
commencing with such Interest Reset Date and ending on, but not including, the
December 15 of such first, second, third or fifth year, as the case may be. Any
such Subsequent Interest Rate shall not be less than 105% of the Effective
Interest Rate on Comparable Maturity U.S. Treasury Obligations (as defined
herein) established prior to the commencement of each such subsequent Interest
Rate Period. In the event that the Company determines on the November 15
preceding such Interest Reset Date that, during the ten calendar days preceding
such November 15, no Weekly Comparable Maturity Treasury Rate (as defined
herein) has been published and the Alternate Comparable Maturity Treasury Rate
(as defined herein) could not be determined, the Company shall establish such
Subsequent Interest Rate in its discretion without limitation.
In the event that the Company establishes a Subsequent Interest Rate for a
subsequent Interest Rate Period, the Company will notify the Trustee of each
Subsequent Interest Rate and Interest Rate Period on or before 30 days prior to
an Interest Reset Date. Not later than the second business day after
notification to the
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<PAGE> 40
Trustee by the Company of each Subsequent Interest Rate and Interest Rate
Period, the Trustee will mail such notice to each 1996 Noteholder.
If the Company decides not to establish a Subsequent Interest Rate for a
subsequent Interest Rate Period as provided above, the interest rate for the
prior Interest Rate Period shall continue to be the interest rate in effect for
the next year and each year thereafter, unless and until the Company shall
establish a Subsequent Interest Rate on or before November 15 of a subsequent
year in which an Interest Reset Date occurs for a subsequent Interest Rate
Period as provided above, commencing with December 15 of such year. Until
establishment of such a Subsequent Interest Rate for a subsequent Interest Rate
Period, each December 15 shall be deemed to be an Interest Reset Date.
In the event that the Company decides not to establish a Subsequent
Interest Rate for a subsequent Interest Rate Period, the Company shall so notify
the Trustee on or before 30 days prior to the Interest Reset Date. Not later
than the second business day after such notification to the Trustee by the
Company, the Trustee will mail such notice to each 1996 Noteholder.
As used herein, the following capitalized terms shall have the following
definitions:
"Alternate Comparable Maturity Treasury Rate" means the average yields
to maturity of the daily closing bids (or less frequently if daily
quotations shall not be available), quoted by at least three recognized
U.S. Government securities dealers selected by the Company, for all
marketable U.S. Treasury securities with a maturity of not less than three
months shorter nor more than three months longer than the applicable
Comparable Maturity from the November 15 preceding an Interest Reset Date
(other than securities which can, at the option of the 1996 Noteholder, be
surrendered at face value in payment of any Federal estate tax) for the
most recent five consecutive business days during which there had been at
least three days on which daily closing bids were quoted within the 25
calendar day period preceding such November 15.
"Comparable Maturity" means, with respect to an Interest Rate Period
of one, two, three or five years, one, two, three or five years,
respectively.
"Effective Interest Rate on Comparable Maturity U.S. Treasury
Obligations" means as of the November 15 preceding an Interest Reset Date
(i) if available, the most recent Weekly Comparable Maturity Treasury Rate
published during the 25 calendar day period preceding such November 15 or
(ii) if such Weekly Comparable Treasury Rate is not available, the
Alternate Comparable Maturity Treasury Rate as of such November 15.
"Weekly Comparable Maturity Treasury Rate" means the weekly average
yield to maturity values adjusted to a constant maturity of the Comparable
Maturity as read from the yield curves of the most actively traded
marketable U.S. Treasury fixed interest rate securities constructed daily
by the U.S. Treasury Department as published by the Federal Reserve Board,
any Federal Reserve Bank or any United States Government department or
agency.
REDEMPTION AT OPTION OF 1996 NOTEHOLDER
If requested by the personal representative or surviving tenant of a
deceased 1996 Noteholder, the Company will redeem, in whole or in part, during
the period from the date of original issuance through December 15, 1997, and
thereafter in any subsequent twelve-month period ending December 15 (each a
"Redemption Period") an aggregate maximum per Redemption Period of 5% of the
original aggregate principal amount of the 1996 Notes issued under the 1996
Indenture, subject to certain limitations. Any such redemption shall be at a
price of 100% of the principal amount plus accrued interest to the date of
redemption. Such redemption will take place within 60 days following the
Trustee's receipt of a redemption request and certain other documents from the
personal representative or surviving tenant of any such deceased 1996 Noteholder
or beneficial owner.
The Company is not obligated to redeem more than $25,000 of the 1996 Notes
tendered by any single personal representative or surviving tenant of a deceased
1996 Noteholder in any Redemption Period, except
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<PAGE> 41
that in the case of 1996 Notes registered in the name of banks, trust companies
or broker-dealers who are members of a national securities exchange or the
National Association of Securities Dealers, Inc. ("Qualified Institutions"), the
$25,000 limitation applies to each beneficial owner of 1996 Notes held by a
Qualified Institution. Such Qualified Institution in its request for redemption
on behalf of such a representative or tenant must submit evidence, satisfactory
to the Trustee, that it holds 1996 Notes on behalf of such representative or
tenant and must certify that the aggregate requests for redemption tendered by
such Qualified Institution on behalf of such representative or tenant per
Redemption Period does not exceed $25,000.
A 1996 Note held in tenancy by the entirety, joint tenancy or tenancy in
common will be deemed to be held by a single holder, and the death of a tenant
by the entirety, joint tenant or tenant in common will be deemed the death of a
holder. The death of a person who, during such person's lifetime, was entitled
to substantially all of the beneficial ownership interests of a 1996 Note will
be deemed the death of the holder, regardless of the registered holder, if such
beneficial interest can be established to the satisfaction of the Trustee. Such
beneficial interest will be deemed to exist in cases of street name or nominee
ownership, ownership by a custodian for the benefit of a minor under the Uniform
Gifts to Minors Act, community property or other joint ownership arrangements
between spouses (including individual retirement accounts or Keogh plans
maintained solely by or for the decedent, or by or for the decedent and the
decedent's spouse) and trusts and certain other arrangements whereby a person
has substantially all of the beneficial ownership interests in a 1996 Note
during such person's lifetime. Beneficial interests include the power to sell,
transfer or otherwise dispose of a 1996 Note and the right to receive the
proceeds therefrom, as well as interest and principal payable with respect
thereto.
Further, the 1996 Notes may be redeemable, in whole, on December 15, 2001
or at any subsequent Interest Reset Date at the option of the holder thereof, at
100% of the principal amount plus accrued interest to the date of redemption. To
be redeemed, a 1996 Note must be presented to the Trustee at its principal
corporate trust office in Chicago, Illinois. The Trustee shall notify 1996
Noteholders of any Interest Reset Date not later than two business days after
receipt of notice from the Company. Such notice from the Trustee shall, among
other things, set forth the Subsequent Interest Rate and the Interest Rate
Period (or that the Company has decided not to reset the interest rate, as the
case may be) and that the 1996 Noteholder must exercise his option to have his
1996 Notes redeemed not later than the fifth business day before the Interest
Reset Date and that if a 1996 Noteholder elects to revoke his exercise of such
option prior to the redemption of the 1996 Notes, he must do so not later than
the fifth business day before the Interest Reset Date.
No particular form of request for redemption or authority to request
repayment is necessary. However, in order for 1996 Notes to be validly tendered
for redemption, the Trustee must have received: (1) a written request for
redemption, (2) the 1996 Notes to be redeemed free of any liens or encumbrances
and (3) in the case of a surviving tenant or personal representative of a
deceased 1996 Noteholder or beneficial owner, appropriate evidence of death and
such other additional documents as the Trustee shall require, including, but not
limited to, inheritance or estate tax waivers and evidence of authority of the
personal representative. Any 1996 Notes tendered or any request for redemption
may be withdrawn by written request received by the Trustee on or prior to (1)
the fifth business day before an Interest Reset Date in the case of a redemption
on an Interest Reset Date, (2) on the date that is 75 days after the occurrence
of the Special Redemption Event in the case of a Special Redemption Event (as
defined herein) or (3) the issuance of a check in payment thereof in the case of
1996 Notes presented by reason of death of a 1996 Noteholder or beneficial
owner. Requests for redemption covering 1996 Notes not paid will remain in
effect unless withdrawn. A 1996 Noteholder who has tendered a 1996 Note for
redemption shall continue to receive all monthly interest payments prior to the
date of redemption.
The Company's obligation to redeem 1996 Notes properly tendered for
redemption is not cumulative. Although the Company is obligated to redeem from
any personal representative or surviving tenant of a deceased 1996 Noteholder in
any Redemption Period up to 5% of the original aggregate principal amount of the
1996 Notes issued under the 1996 Indenture, it is not required to establish a
sinking fund or otherwise set aside funds for that purpose, and the Company has
no present intention of setting aside funds for the redemption of 1996 Notes
prior to maturity. The Company intends to redeem 1996 Notes tendered out of its
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<PAGE> 42
internally-generated funds or, if necessary, short-term or other long-term
borrowings. The obligation to redeem the 1996 Notes, however, is an unsecured
obligation of the Company.
Nothing in the 1996 Indenture prohibits the Company from purchasing any
1996 Notes on the open market. However, the Company may not use any 1996 Notes
purchased on the open market as a credit against amounts the Company is
otherwise obligated under the 1996 Indenture to redeem.
1996 NOTEHOLDERS' RIGHT TO REDEMPTION AFTER SPECIAL REDEMPTION EVENT
In the event of any Special Redemption Event (as defined below), each 1996
Noteholder will have the right, at such holder's option and subject to the terms
and conditions of the 1996 Indenture, to require the Company to redeem such
holder's 1996 Notes, in whole or in part (provided the principal amount of such
part is $1,000 or an integral multiple thereof), on the date that is 75 days
after the occurrence of the Special Redemption Event at a price equal to 100% of
the principal amount plus accrued interest to the date of redemption. Neither
the Board of Directors of the Company nor the Trustee has the ability to waive
the Company's obligation to redeem a holder's 1996 Notes upon request in the
event of a Special Redemption Event.
If a Special Redemption Event occurs, 40 days thereafter, the Company is
obligated to promptly provide, but in any event within three business days after
expiration of such 40-day period, notice to the Trustee, who shall promptly (and
in all events within five days after receipt of notice from the Company) notify
all 1996 Noteholders of the Special Redemption Event, which notice shall state,
among other things, (i) the availability of the redemption option, (ii) the date
before which a holder must notify the Trustee of such 1996 Noteholder's
intention to exercise the redemption option (which date shall be no more than
three business days prior to the date of redemption), and (iii) the procedure
such holder must follow to exercise such right. To exercise this right, the 1996
Noteholder must deliver to the Trustee on or before the close of business on the
date of redemption, written notice of such 1996 Noteholder's redemption election
and the 1996 Note or 1996 Notes to be redeemed free of liens or encumbrances.
Under the 1996 Indenture, a "Special Redemption Event" means the occurrence
of any one or more of the following: (A) the Company shall consolidate with or
merge into any other corporation or partnership (except in a transaction in
which the Company is the surviving entity and is not itself the subsidiary of
another entity), or convey, transfer or lease all or substantially all of its
assets to any person, other than as part of a loan securitization or sale
entered into in the ordinary course of its business; or (B) any person or group
of persons acting in concert who was or were not holders of Common Stock of the
Company immediately prior to the transaction (or the first of a series of
transactions) shall purchase or otherwise acquire in one or more transactions
beneficial ownership of 50% or more of the Common Stock of the Company
outstanding on the date immediately prior to the last such purchase or other
acquisition; provided, however, that a change of 50% or more of the beneficial
ownership of the Common Stock of the Company resulting directly from an
underwritten public offering of Common Stock, duly approved by the Company's
Board of Directors, shall not constitute a Special Redemption Event.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a 1996 Noteholder to require
the Company to redeem such 1996 Notes as a result of conveyance, transfer or
lease of less than all of the assets of the Company to another person may be
uncertain.
Except as described above with respect to a Special Redemption Event, the
1996 Indenture does not contain any other provisions that permit the 1996
Noteholders to require that the Company redeem the 1996 Notes in the event of a
takeover or similar transaction. Moreover, a recapitalization of the Company or
a transaction entered into by the Company with management or their affiliates
would not necessarily be included within the definition of a "Special Redemption
Event." Accordingly, while such definition covers a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
1996 Indenture does not afford the 1996 Noteholders protection in all
circumstances from highly leveraged transactions, reorganizations,
restructurings, mergers or similar transactions involving the Company that may
adversely affect 1996 Noteholders.
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<PAGE> 43
The Special Redemption Event redemption feature of the 1996 Notes may, in
certain circumstances, make more difficult or discourage a takeover of the
Company and thus removal of incumbent management. The Special Redemption Event
redemption feature, however, is not the result of management's knowledge of any
specific effort to obtain control of the Company or part of a plan by management
to adopt a series of anti-takeover provisions. Rather, the terms of the Special
Redemption Event redemption feature are a result of negotiations between the
Company and the Underwriters.
To the extent that the right of redemption by a 1996 Noteholder in the
event of a Special Redemption Event constitutes a tender offer under Section
14(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules thereunder, the Company intends to comply with all applicable
tender offer rules.
OPTIONAL REDEMPTION BY THE COMPANY
The 1996 Notes may not be redeemed by the Company prior to December 15,
2001. On December 15, 2001, or at any subsequent Interest Reset Date, the
Company may, at its option, redeem the 1996 Notes, in whole, upon not less than
30 days' nor more than 60 days' written notice, at 100% of the principal amount
plus accrued interest to the date of redemption. The 1996 Notes will not be
subject to any sinking fund for such purpose.
SUBORDINATION
Payment of the principal of and interest on the 1996 Notes is subordinated
in right of payment to payments due under Senior Indebtedness. Senior
Indebtedness is defined to include the principal of (and premium, if any) and
interest on all indebtedness of the Company, other than the 1995 Notes and the
1996 Notes, incurred in connection with the borrowing of money from banks, trust
companies, insurance companies, investment companies, real estate investment
trusts, pension and profit sharing trusts or other financial institutions or
institutional investors, whether outstanding at the date of execution of the
1996 Indenture or thereafter incurred or created, and such Indebtedness of
others that the Company has assumed, guaranteed or otherwise assured payment of,
directly or indirectly, and renewals, extensions and refunding of any of the
foregoing. Senior Indebtedness does not include indebtedness incurred, created
or assumed after the date of execution of the 1996 Indenture that provides by
its terms that such indebtedness is not prior in right of payment to the 1996
Notes or secured indebtedness with respect to which the sole recourse of the
lender in the event of nonpayment or other default is to the collateral. At
September 30, 1996, Senior Indebtedness aggregated approximately $73.1 million.
The amount of Senior Indebtedness may change in the future.
The 1996 Notes are equal in rank with the 1995 Notes. The 1996 Notes are
senior to the Company's authorized Common Stock and preferred stock and will be
senior to any other class of capital stock that may be authorized.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The following will be Events of Default: (i) default in the payment of
principal, when due, which continues for five days; (ii) default in the payment
of any interest when due, which continues for 10 days; (iii) default in the
performance, or any breach, of any other covenant of the Company, which
continues for 30 days; (iv) any default by the Company under any Senior
Indebtedness pursuant to which all or any portion of such Senior Indebtedness is
accelerated or all or any portion of the collateral securing such Senior
Indebtedness is foreclosed upon or, if such default creates the right of
acceleration or foreclosure, if acceleration or foreclosure do not occur but
such default continues for 180 days; (v) the entry of a final non-appealable
judgment for the payment of money against the Company or any Subsidiary by a
court having jurisdiction which results in a liability (after provision for the
proceeds of any policy of insurance with respect to such liability) in excess of
$15,000,000; or (vi) certain events of bankruptcy, insolvency or reorganization.
If any Event of Default shall occur and be continuing, the Trustee or the
holders of not less than 25% in principal amount of outstanding 1996 Notes may
declare the 1996 Notes immediately due and payable. In the case of certain
Events of Default, including defaults in the payment of the principal of the
1996 Notes at maturity, on
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<PAGE> 44
an Interest Reset Date or resulting from the occurrence of a Special Redemption
Event, such action may be taken only if such period of continuance shall be at
least 180 days. However, such action may be taken after expiration of the five
day grace period described in (i) above in the event of a default in the payment
of principal of the 1996 Notes related to the death of a 1996 Noteholder and
after expiration of the 10 day grace period described in (ii) above in the event
of a default in the payment of interest on the 1996 Notes.
The Company is required to deliver quarterly to the Trustee an officers'
certificate as to the absence or existence of any default in the performance of
any covenant contained in the 1996 Indenture during the preceding quarter.
The 1996 Indenture provides that the Trustee will, within 60 days after
obtaining notice of the occurrence of a default, give the 1996 Noteholders
notice of all uncured defaults known to it; but, except in the case of a default
in the payment of principal of or interest on any of the 1996 Notes, the Trustee
shall be protected in withholding such notice if it in good faith determines
that the withholding of such notice is in the interest of such 1996 Noteholders.
The holders of not less than a majority of the aggregate principal amount
of outstanding 1996 Notes may on behalf of all of the 1996 Noteholders waive
certain past defaults, not including a default in payment of principal, or
premium, if any, or interest on any 1996 Note.
RESTRICTIONS ON ADDITIONAL INDEBTEDNESS
The Company is prohibited by the 1996 Indenture from permitting its total
indebtedness (excluding secured indebtedness with respect to which the sole
recourse of the lender in the event of nonpayment or other default is to the
collateral), including the 1996 Notes, to exceed six (6.0) times the Company's
Consolidated Net Worth (as defined in the 1996 Indenture) at any time. At August
31, 1996, assuming that the 1996 Notes were then outstanding, such indebtedness
was approximately 1.8 times the Company's Consolidated Net Worth.
LIMITATION ON DIVIDENDS AND OTHER PAYMENTS
The Company has agreed pursuant to the 1996 Indenture that it will not
make, pay or declare any of the following (each a "Restricted Payment"): (i) any
dividend or other distribution of property or assets other than dividends paid
solely in the Company's capital stock or (ii) any stock repurchase (other than a
repurchase from a subsidiary or an employee of the Company in connection with
the termination of the employee's employment), unless such Restricted Payment
when aggregated with all other Restricted Payments made by the Company after
September 30, 1996, is less than the sum of (A) $3 million plus (B) 50% of the
cumulative consolidated net income of the Company and its subsidiaries earned
during the period commencing January 1, 1996 and ending on the date of such
Restricted Payment, plus (C) the cumulative cash and non-cash proceeds to the
Company of all public or private offerings of the Company's capital stock during
the period between September 30, 1996 and the date of such Restricted Payment.
In addition, the Company is prohibited by the 1996 Indenture from making any
Restricted Payment if, by so doing, the Company will be in violation of any
other provision of the 1996 Indenture or the Senior Indebtedness.
MERGER, CONSOLIDATION OR SALE OF ASSETS; SUCCESSOR CORPORATION
The Company has covenanted that it will not merge or consolidate with, or,
other than as part of a loan securitization or sale entered into in the ordinary
course of business, sell or convey all or substantially all of its assets to,
any person, firm or corporation unless the Company is the continuing corporation
in such transaction and is not in default under the 1996 Indenture or, if it is
not the continuing corporation, the successor corporation is a corporation
organized under the laws of the United States of America, expressly assumes the
Company's obligations under the 1996 Indenture and, immediately after such
transaction, the successor corporation is not in default under the 1996
Indenture. Any successor corporation shall succeed to and be substituted for the
Company as if such successor corporation has been named as the Company in the
1996 Indenture.
44
<PAGE> 45
MODIFICATION OF THE 1996 INDENTURE
Modifications of and amendments to the 1996 Indenture may be made by the
Company and the Trustee with the consent of the holders of a majority of the
aggregate principal amount of outstanding 1996 Notes, provided that no such
modification or amendment may (i) reduce the principal amount of or interest on
any 1996 Note or change the stated maturity of the principal or the interest
payment dates or change the currency in which the 1996 Notes are to be paid,
without the consent of each holder of any 1996 Note affected thereby, or (ii)
reduce the percentage of holders of 1996 Notes necessary to modify or alter the
1996 Indenture, without the consent of the holders of all 1996 Notes then
outstanding.
THE TRUSTEE
LaSalle National Bank is the Trustee under the 1996 Indenture. Its
principal corporate trust office is located at 135 South LaSalle Street,
Chicago, Illinois 60603. LaSalle National Bank performs banking services for the
Company and is a lender and the agent bank for the lenders under the Senior
Revolving Credit Facility and the Temporary Credit Facility.
The 1996 Indenture contains a provision pursuant to which the Company will
indemnify the Trustee against any and all losses, liabilities or expenses
incurred by the Trustee in connection with its execution and performance of the
1996 Indenture; provided, however, that such indemnification will not extend to
losses resulting from the negligence or bad faith of the Trustee. The 1996
Indenture provides that the holders of not less than a majority in principal
amount of the outstanding 1996 Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred upon the Trustee, subject to certain limitations
set forth in the 1996 Indenture. The Trustee is not required to take any action
at the direction of the 1996 Noteholders unless the 1996 Noteholders have
provided the Trustee with a reasonable indemnity.
45
<PAGE> 46
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters named below have agreed, severally, to
purchase from the Company the principal amount of 1996 Notes set forth below
opposite their respective names.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER AMOUNT OF 1996 NOTES
- -------------------------------------------------------------------------- --------------------
<S> <C>
J.C. Bradford & Co. ...................................................... $ 11,250,000
Piper Jaffray Inc. ....................................................... 11,250,000
Keefe, Bruyette & Woods, Inc. ............................................ 11,250,000
Stifel, Nicolaus & Company, Incorporated.................................. 11,250,000
-----------
Total................................................................ $ 45,000,000
===========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all the principal amount of
1996 Notes offered hereby if any of such 1996 Notes are purchased.
The Underwriters have advised the Company that they propose initially to
offer the 1996 Notes to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of 2.4% of the principal amount. The Underwriters may
allow and such dealers may reallow a concession not in excess of 0.5% of the
principal amount to certain other dealers. After the Offering, the public
offering price and such concessions may be changed.
The offering of the 1996 Notes is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the 1996 Notes.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days from the date of this Prospectus, to purchase up to an
additional $6,750,000 aggregate principal amount of 1996 Notes at the Price to
Public set forth on the cover page of this Prospectus less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the 1996 Notes offered hereby.
There is no public market for the 1996 Notes, and the Company does not
intend to apply for quotation of the 1996 Notes on The Nasdaq Stock Market's
National Market or any other quotation system or listing of the 1996 Notes on
any securities exchange. The Company has been advised by the Underwriters that,
following the public offering of the 1996 Notes, the Underwriters presently
intend to make a market in the 1996 Notes; however, the Underwriters are not
obligated to do so, and any market-making activity with respect to the 1996
Notes may be discontinued at any time without notice. There can be no assurances
as to the liquidity of the public market for the 1996 Notes or that an active
public market for the 1996 Notes will develop. If an active market does not
develop, the market price and liquidity of the 1996 Notes may be adversely
affected.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"), or will contribute to payments which the Underwriters or any
such controlling persons may be required to make in respect thereof.
LEGAL MATTERS
The validity of the 1996 Notes offered hereby will be passed upon for the
Company by Sonnenschein Nath & Rosenthal, Chicago, Illinois. Certain legal
matters with respect to the Offering will be passed upon for the Underwriters by
Bass, Berry & Sims PLC, Nashville, Tennessee.
46
<PAGE> 47
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement with the Commission on Form
S-3 under the Securities Act with respect to the 1996 Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by rules of the Commission. For further information with
respect to the Company and the 1996 Notes offered hereby, reference is made to
such Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete. With respect to each such
contract or any other document filed as an exhibit to the Registration
Statement, or incorporated by reference to exhibits previously filed, reference
is made to the exhibit for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. The Registration Statement, including exhibits
and schedules thereto, filed by the Company with the Commission, as well as
reports, proxy statements and other information filed by the Company with the
Commission, may be inspected and copied at the offices of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048; and Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 upon the payment of fees prescribed by the
Commission. The Commission also maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission at http://www.sec.gov.
47
<PAGE> 48
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1995, the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 and the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, as amended, each of which has been filed by the Company with the
Commission, are incorporated herein by reference, except for the financial
statements included therein. The Company's Current Reports on Form 8-K filed
with the Commission on March 27, 1996, July 11, 1996, September 17, 1996,
October 11, 1996 and October 25, 1996, respectively, are incorporated herein by
reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Offering of the 1996 Notes shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained herein or in a document incorporated
or deemed to be incorporated by reference in this Prospectus shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
incorporated by reference in this Prospectus, other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
such documents. Requests for such copies should be directed to Secretary, First
Merchants Acceptance Corporation, 570 Lake Cook Road, Suite 126, Deerfield,
Illinois 60015 (telephone (847) 948-9300).
48
<PAGE> 49
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Earnings................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
First Merchants Acceptance Corporation:
We have audited the accompanying consolidated balance sheets of First
Merchants Acceptance Corporation and subsidiary (the "Company") as of December
31, 1994 and 1995, and the related consolidated statements of earnings, changes
in stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 the 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, such consolidated financial statements present fairly, in
all material respects, the financial position of First Merchant Acceptance
Corporation and subsidiary as of December 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Chicago, Illinois
January 25, 1996 (October 10, 1996 as to Notes 16 and 17)
F-2
<PAGE> 51
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND (UNAUDITED) JUNE 30, 1996
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1994 1995
----------- ------------ AS OF JUNE 30,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Net finance receivables............................. $94,089,938 $251,908,318 $ 313,605,511
Allowance for credit losses......................... (4,488,995) (14,300,661) (18,829,115)
----------- ------------ ------------
Net receivables........................... 89,600,943 237,607,657 294,776,396
Finance receivables held-for-sale, net.............. -- 32,264,734 26,220,800
Excess servicing receivable......................... -- -- 13,002,213
Cash................................................ 135,240 112,040 711,603
Restricted cash..................................... -- 6,807,842 17,773,660
Repossessed collateral.............................. 749,278 2,304,509 3,335,818
Property and equipment, net......................... 857,923 1,623,679 3,618,092
Other assets........................................ 764,549 1,553,367 2,666,099
----------- ------------ ------------
Total assets.............................. $92,107,933 $282,273,828 $ 362,104,681
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings under senior revolving credit
facility....................................... $61,975,000 $104,000,000 $ 69,825,000
Notes payable -- securitized pools, net........... -- 70,378,298 172,866,135
Accounts payable and accrued expenses............. 2,846,267 5,765,322 10,371,071
Interest payable.................................. 148,056 471,085 965,937
Dealer reserves................................... 133,813 552,548 415,281
Income taxes payable.............................. -- 722,776 1,428,187
Deferred income taxes............................. 1,301,000 2,209,000 1,813,000
----------- ------------ ------------
66,404,136 184,099,029 257,684,611
Subordinated reset notes, net..................... -- 13,895,833 13,953,333
----------- ------------ ------------
Total liabilities......................... $66,404,136 $197,994,862 $ 271,637,944
----------- ------------ ------------
Stockholders' equity:
Preferred stock -- $100 par value, 500,000 shares
authorized, no shares issued and outstanding... -- -- --
Common stock -- $.01 par value:
Non-voting, 300,000 shares authorized, 161,758
shares issued and outstanding in 1994........ 1,618 -- --
Voting -- 20,000,000 shares authorized,
3,980,066 and 6,525,519 shares issued and
outstanding in 1994 and 1995, respectively... 39,800 65,255 65,255
Additional paid-in-capital........................ 23,468,302 75,101,401 75,077,317
Unearned compensation attributable to stock
options........................................ (178,767) -- --
Notes receivable from stockholders................ (38,824) -- --
Retained earnings................................. 2,411,668 9,112,310 15,324,165
----------- ------------ ------------
Total stockholders' equity................ 25,703,797 84,278,966 90,466,737
----------- ------------ ------------
Total liabilities and stockholders' equity.......... $92,107,933 $282,273,828 $ 362,104,681
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 52
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income -- finance
contracts.................. $6,353,886 $15,324,093 $38,209,587 $14,487,363 $35,479,311
Other portfolio income........ 401,213 698,980 1,338,273 478,761 965,264
Gain on sale of finance
receivables................ -- -- -- -- 8,092,363
Servicing fee and other
income..................... -- -- -- -- 868,446
---------- ----------- ----------- ----------- -----------
Total revenues........ 6,755,099 16,023,073 39,547,860 14,966,124 45,405,384
---------- ----------- ----------- ----------- -----------
Expenses:
Interest expense.............. 1,377,689 4,034,368 10,754,083 4,367,227 9,670,942
Provision for credit losses... -- -- 1,700,000 125,000 7,700,000
Non-recurring charges......... 434,612 -- -- -- --
---------- ----------- ----------- ----------- -----------
Operating expenses:
Employee compensation and
related costs............ 2,267,664 4,940,457 10,263,043 4,007,111 10,768,610
Other operating expenses... 1,110,531 2,549,616 6,027,092 2,380,454 7,081,977
---------- ----------- ----------- ----------- -----------
Total expenses........ 5,190,496 11,524,441 28,744,218 10,879,792 35,221,529
---------- ----------- ----------- ----------- -----------
Earnings before income taxes and
extraordinary item............ 1,564,603 4,498,632 10,803,642 4,086,332 10,183,855
Income taxes.................... 626,000 1,710,000 4,103,000 1,553,000 3,972,000
---------- ----------- ----------- ----------- -----------
Net earnings before
extraordinary item............ 938,603 2,788,632 6,700,642 2,533,332 6,211,855
Extraordinary item from early
extinguishment of debt, net of
income taxes.................. -- (1,167,886) -- -- --
---------- ----------- ----------- ----------- -----------
Net earnings.................... 938,603 1,620,746 6,700,642 2,533,332 6,211,855
Warrant accretion............... (18,269) (126,291) -- -- --
---------- ----------- ----------- ----------- -----------
Net earnings available to
stockholders.................. $ 920,334 $ 1,494,455 $ 6,700,642 $ 2,533,332 $ 6,211,855
========== =========== =========== =========== ===========
Per share data:
Net earnings before
extraordinary item......... $ 0.32 $ 0.85 $1.35 $0.57 $0.92
Extraordinary item............ -- (0.36) -- -- --
---------- ----------- ----------- ----------- -----------
Net earnings.................. 0.32 0.49 1.35 0.57 0.92
Warrant accretion............. (0.01) (0.04) -- -- --
---------- ----------- ----------- ----------- -----------
Net earnings available to
stockholders............... $ 0.31 $ 0.45 $1.35 $0.57 $0.92
========== =========== =========== =========== ===========
Weighted average common and
common equivalent shares
outstanding................... 2,922,423 3,296,747 4,979,958 4,462,848 6,753,960
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 53
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
UNEARNED
COMPENSATION NOTES
ADDITIONAL ATTRIBUTABLE RECEIVABLE RETAINED TOTAL
COMMON PAID-IN TO STOCK FROM EARNINGS STOCKHOLDERS'
STOCK CAPITAL OPTIONS STOCKHOLDERS (DEFICIT) EQUITY
------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992..................... $19,715 $ 4,640,941 $ (399,426) $ (241,250) $ (3,121) $ 4,016,859
Issuance of 289,800 shares of common stock
for cash, net.............................. 2,898 1,437,102 -- -- -- 1,440,000
Issuance of 193,216 shares of common stock in
exchange for subordinated notes payable to
stockholders............................... 1,932 998,068 -- -- -- 1,000,000
Exercise of common stock warrants for 16,858
warrant shares............................. 169 87,071 -- -- -- 87,240
Repayment of notes receivable from
stockholders............................... -- -- -- 19,751 -- 19,751
Termination of 47,384 stock options.......... -- (100,156) 100,156 -- -- --
Amortization of unearned compensation........ -- -- 22,991 -- -- 22,991
Warrant accretion............................ -- -- -- -- (18,269) (18,269)
Net earnings................................. -- -- -- -- 938,603 938,603
------- ----------- -------- -------- ---------- ----------
Balance, December 31, 1993..................... 24,714 7,063,026 (276,279) (221,499) 917,213 7,507,175
Issuance of 1,530,000 shares of common stock
for cash................................... 15,300 14,895,200 -- -- -- 14,910,500
Exercise of common stock warrants for 140,472
warrant shares and transfer 123,616 common
stock warrants to additional paid-in
capital.................................... 1,404 1,510,076 -- -- -- 1,511,480
Repayment of notes receivable from
stockholders............................... -- -- -- 182,675 -- 182,675
Amortization of unearned compensation........ -- -- 97,512 -- -- 97,512
Warrant accretion............................ -- -- -- -- (126,291) (126,291)
Net earnings................................. -- -- -- -- 1,620,746 1,620,746
------- ----------- -------- -------- ---------- ----------
Balance, December 31, 1994..................... 41,418 23,468,302 (178,767) (38,824) 2,411,668 25,703,797
Purchase of employee stock options for
cash....................................... -- (25,873) -- -- -- (25,873)
Repayment of notes receivable from
stockholders............................... -- -- -- 38,824 -- 38,824
Issuance of 2,250,000 shares of common stock
for cash................................... 22,500 51,565,000 -- -- -- 51,587,500
Exercise 123,616 warrant shares for common
shares..................................... 1,236 (1,236) -- -- -- --
Issuance of 10,079 shares of common stock
under 1994 Employee Stock Purchase Plan.... 101 95,208 -- -- -- 95,309
Amortization of unearned compensation........ -- -- 178,767 -- -- 178,767
Net earnings................................. -- -- -- -- 6,700,642 6,700,642
------- ----------- -------- -------- ---------- ----------
Balance, December 31, 1995..................... 65,255 75,101,401 -- -- 9,112,310 84,278,966
Purchase of employee stock options for cash
(unaudited)................................ -- (24,084) -- -- -- (24,084)
Net earnings (unaudited)..................... -- -- -- -- 6,211,855 6,211,855
------- ----------- -------- -------- ---------- ----------
Balance, June 30, 1996 (unaudited)............. $65,255 $75,077,317 $ -- $ -- $15,324,165 $ 90,466,737
======= =========== ======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 54
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Interest income received -- finance contracts.... $ 5,906,994 $ 14,796,843 $ 38,932,636 $ 14,802,189 $ 35,885,096
Servicing fees received.......................... -- -- -- -- 735,151
Ancillary and other operating receipts........... 379,681 688,256 1,381,989 467,289 1,088,421
Purchases of finance receivables held-for-sale,
net............................................ -- -- -- -- (140,130,332)
Proceeds from sale of finance receivables
held-for-sale, net............................. -- -- -- -- 141,397,711
Payments for operating expenses.................. (3,198,233) (7,349,496) (15,344,370) (5,505,311) (16,121,975)
Payments for interest and borrowing fees......... (1,439,266) (4,217,944) (10,071,484) (2,834,016) (8,615,156)
Income taxes paid................................ (184,405) (125,100) (2,417,836) (198,962) (3,662,589)
Payments related to non-recurring charges........ (434,612) -- -- -- --
------------ ------------ ------------- ------------ -------------
Net cash flows from operating activities... 1,030,159 3,792,559 12,480,935 6,731,189 10,576,327
Cash flows from investing activities:
Purchases of finance contracts, net.............. $(30,574,661) $(87,044,137) $(241,697,374) $(93,632,264) $(124,360,247)
Principal payments received on finance contracts,
net............................................ 10,852,481 30,715,235 60,074,429 28,015,213 60,203,772
Purchases of property and equipment.............. (425,373) (499,700) (1,124,009) (559,624) (2,313,610)
Increase in restricted cash...................... -- -- (6,317,779) (490,168) (10,965,819)
Other............................................ -- -- (490,168) -- --
------------ ------------ ------------- ------------ -------------
Net cash flows from investing activities... (20,147,553) (56,828,602) (189,554,901) (66,666,843) (77,435,904)
Cash flows from financing activities:
Proceeds from issuance of common stock, net...... $ 1,440,000 $ 14,910,500 $ 51,587,500 $ -- $ --
Proceeds from issuance of notes payable --
securitized pools, net......................... -- -- 74,486,350 -- 124,989,000
Proceeds from issuance of subordinated debt,
net............................................ 2,598,629 4,500,000 13,530,000 13,530,000 --
Repayment of notes payable -- securitized
pools.......................................... -- -- (4,747,672) -- (23,330,777)
Repayment of subordinated debt................... (1,000,000) (6,500,000) -- -- --
Net (decrease) increase in borrowings under
senior revolving credit facility............... 14,785,000 39,750,000 42,025,000 46,375,000 (34,175,000)
Other............................................ 19,751 182,675 169,588 (25,873) (24,083)
------------ ------------ ------------- ------------ -------------
Net cash flows from financing activities... 17,843,380 52,843,175 177,050,766 59,879,127 67,459,140
------------ ------------ ------------- ------------ -------------
Net increase (decrease) in cash................... (1,274,014) (192,868) (23,200) (56,527) 599,563
Cash balance beginning of period.................. 1,602,122 328,108 135,240 135,240 112,040
------------ ------------ ------------- ------------ -------------
Cash balance at end of period..................... $ 328,108 $ 135,240 $ 112,040 $ 78,713 $ 711,603
============ ============ ============= ============ =============
Reconciliation of net earnings to net cash flows
from operating activities:
Net earnings..................................... $ 938,603 $ 1,620,746 $ 6,700,642 $ 2,533,332 $ 6,211,853
Extraordinary item, net of income taxes.......... -- 1,167,886 -- -- --
Amortization of contract acquisition costs and
discounts, net................................. (446,892) (527,250) 723,049 353,160 528,942
Provision for credit losses...................... -- -- 1,700,000 125,000 7,700,000
Depreciation and other amortization.............. 104,010 483,933 1,181,775 541,510 1,076,233
Provision for deferred income taxes.............. 418,000 883,000 908,000 229,000 786,000
Increase in other assets......................... (496,268) (423,979) (633,329) (151,869) (964,573)
Decrease in finance receivables held-for-sale,
net............................................ -- -- -- -- 6,043,934
Gain on sale of finance receivables and other
increase in excess servicing receivable........ -- -- -- -- (13,002,213)
Increase in accounts payable and accrued
expenses....................................... 404,124 575,354 854,993 757,163 2,177,888
Increase in interest payable..................... 108,582 12,869 323,029 1,218,855 494,852
Increase (decrease) in income taxes payable...... -- -- 722,776 1,125,038 (476,589)
------------ ------------ ------------- ------------ -------------
Net cash flows from operating activities... $ 1,030,159 $ 3,792,559 $ 12,480,935 $ 6,731,189 $ 10,576,327
============ ============ ============= ============ =============
Supplemental schedule of significant noncash
financing activities:
Common stock warrants exercised for shares of
common stock and transfer common stock warrants
to additional paid-in capital.................. $ 87,240 $ 1,511,480 $ 1,236 $ -- $ --
============ ============ ============= ============ =============
Transfer of net finance receivables
held-for-sale, net............................. $ -- $ -- $ 32,264,734 $ -- $ --
============ ============ ============= ============ =============
Common stock warrants issued to lenders of
subordinated credit facility recorded as
original issue discount and common stock
warrants....................................... $ 1,454,160 $ -- $ -- $ -- $ --
============ ============ ============= ============ =============
Subordinated notes payable to stockholders
exchanged for common stock..................... $ 1,000,000 $ -- $ -- $ -- $ --
============ ============ ============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 55
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
1. BUSINESS DESCRIPTION
First Merchants Acceptance Corporation, including its wholly-owned
subsidiary, First Merchants Auto Receivable Corporation (the "Company"), is a
specialty finance company primarily engaged in financing the purchase of used
automobiles by acquiring dealer-originated retail installment contracts
("finance contracts"). The Company was incorporated on March 22, 1991 in
Delaware and commenced operations on June 1, 1991. In December 1995, the Company
changed its fiscal year end to December 31 from May 31 and restated all prior
periods. At December 31, 1995, the Company operated 36 regional dealer service
centers servicing automobile dealers located in 30 states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include accounts of
First Merchants Acceptance Corporation and its wholly-owned subsidiary, First
Merchants Auto Receivable Corporation. All significant intercompany accounts
have been eliminated in consolidation.
Revenue Recognition -- Finance contracts consist of both precomputed and
simple interest finance contracts, which require payment of a fixed monthly
amount over a specific term. For precomputed finance contracts, the difference
between the total amount of contractual payments and the principal amount
financed represents unearned finance charges. Unearned finance charges are
amortized and recorded as interest income using the interest method over the
terms and at the interest rates stated in the underlying finance contracts.
Simple interest loan contracts are written at the principal amount advanced to
the borrower and bear interest computed on the unpaid balance. When an account
becomes 61 or more days past due, income recognition is suspended until the
contractual aging is restored to a current status.
The Company receives commissions from the sale of credit insurance
contracts. These commissions are deferred, recorded as unearned ancillary income
and amortized to income using the sum-of-the-digits method over the terms of the
underlying insurance contracts. The use of the sum-of-the-digits method
approximates the results under the interest method.
Other portfolio income, which includes borrower late charges and extension
fees, is recognized when collected.
Deferred Contract Acquisition Costs -- The Company defers costs directly
associated with the acquisition of finance contracts and amortizes such costs
using the interest method as a reduction of interest income over the term of the
finance contracts.
Non-refundable Contract Acquisition Discounts -- Finance contracts are
generally purchased from dealers at a discount from the principal amounts
financed by the borrower. This discount, which primarily represents a credit
enhancement, is negotiated between the Company and the dealers and is
non-refundable to the dealers. The contract acquisition discount necessary to
absorb estimated credit losses is allocated to the allowance for credit losses.
Any remaining contract acquisition discount is amortized to interest income
using the interest method over the term of the finance contracts. Beginning in
1995, the full discount is allocated to the allowance for credit losses and the
discount is no longer being amortized to interest income.
Allowance for Credit Losses -- The allowance for credit losses is initially
established through an allocation of the non-refundable contract acquisition
discount based upon management's estimate of credit losses. If necessary, a
provision for credit losses is charged against earnings to maintain the
allowance for credit losses at an amount management believes necessary to absorb
potential losses in the finance contract portfolio. Beginning in the second
quarter of 1995, management commenced recording provisions for credit losses to
supplement the discount that is allocated to the allowance for credit losses.
F-7
<PAGE> 56
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
The allowance for credit losses is maintained at a level management
believes adequate to absorb potential losses in the finance contract portfolio.
Management evaluates the adequacy of the allowance for credit losses by
reviewing credit loss experience, delinquencies, the value of the underlying
collateral, the level of the finance contract portfolio, and general economic
conditions and trends.
An account is charged off at the earliest of the time the account's
collateral is repossessed, the account is 91 or more days past due or the
account is otherwise deemed to be uncollectible.
Finance Receivables Held-For-Sale, Net -- Finance contracts designated for
future sale and securitization during the first quarter of 1996 are classified
as held-for-sale. Finance contracts held-for-sale, net are carried at the lower
of aggregate cost or market value. Market value is determined by current
investor yield requirements.
Restricted Cash -- The Company is required to establish and maintain cash
reserve and collection accounts with a trustee with respect to the securitized
pool of finance receivables. These balances are reported as restricted cash on
the Company's consolidated balance sheets.
Repossessed Collateral -- The Company commences repossession procedures
against the underlying collateral when it determines that collection efforts are
likely to be unsuccessful. Repossession generally occurs before a borrower has
failed to make more than two consecutive monthly payments. In such cases, the
net amount due under the finance contract is reduced to the estimated fair value
of the collateral, less the cost of disposition, and the amount of reduction is
recorded as a credit loss.
Dealer Reserves -- Dealer reserves consist of (1) amounts withheld from
funds paid to dealers to purchase finance contracts, commonly referred to as
deferred certificates, and such amounts are refundable to the dealer when the
finance contracts are fully paid and (2) a portion of the finance charges on
finance contracts which is payable pursuant to agreements with certain dealers
and may be retained by the Company in the event of an early repayment or default
under the finance contract.
Property and Equipment -- Property, equipment and leasehold improvements
are stated at original cost less accumulated depreciation and amortization.
Depreciation and amortization are computed on the straight-line method over the
estimated useful lives of the related assets. Maintenance and repairs are
expensed as incurred.
Senior Revolving Credit Facility -- Commitment and agency fees are paid to
banks in accordance with the provisions of the Company's senior revolving credit
facility ("Senior Revolving Credit Facility"). These fees and the related legal
expenses are deferred and amortized over the term of this facility. These
deferred costs are included in other assets and amortization of these fees is
recorded as interest expense.
Interest Rate Protection Agreements -- The Company enters into interest
rate protection agreements to hedge against interest rate increases. Amounts to
be paid or received under the agreements are recorded using the settlement
method and are treated as an adjustment to interest expense.
Income Taxes -- The Company recognizes deferred tax assets and liabilities
based on differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in the period in which the
enactment is effective.
Earnings per share -- Earnings per share amounts are calculated based on
net earnings divided by the weighted average number of shares of common stock
outstanding during the period after consideration of the dilutive effect of
common stock equivalents. Shares of common stock and options and warrants to
purchase
F-8
<PAGE> 57
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
shares of common stock issued during the twelve months prior to the Company's
initial public offering are treated as outstanding since the inception of the
Company for purposes of this calculation.
Uses of Estimates in Preparation of Financial Statements -- The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements, as well as the
reported amounts of income and expenses during the reported periods. Actual
results could differ from those estimates.
3. FINANCE RECEIVABLES
Finance contracts generally have terms of 18 to 60 months. Net finance
receivable balances consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- ------------
1994 1995 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Precomputed interest contracts, net... $90,297,274 $222,931,347 $259,461,577
Simple interest contracts............. 5,193,977 28,976,971 54,143,934
Unamortized contract acquisition
discount............................ (1,401,313) -- --
----------- ------------ ------------
Net finance receivables............. $94,089,938 $251,908,318 $313,605,511
========== =========== ===========
</TABLE>
Precomputed interest contracts are shown net of unearned finance charges of
$32,842,654, $89,318,743 and $101,218,395 at December 31, 1994 and 1995,
respectively, and at June 30, 1996 (unaudited).
The Company's experience has shown that a portion of the payments will be
received prior to contractual due dates. Therefore, the table below is not a
forecast of future cash collections.
At December 31, 1995, contractual payments, including principal and
interest, due under finance contracts are scheduled to be received as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C> <C>
1996.......................................................... $112,346,148
1997.......................................................... 91,895,369
1998.......................................................... 76,630,160
1999.......................................................... 51,856,567
2000.......................................................... 18,812,321
------------
Total contractual payments due................................ $351,540,565
===========
</TABLE>
Borrowers under the finance contracts are not concentrated in any specific
geographic region. At December 31, 1995, one regional dealer service center
accounted for approximately 10% of the finance contract portfolio. However, the
primary concentration of credit risk relates to lending to borrowers who cannot
obtain traditional financing and a substantial portion of the borrowers' ability
to honor their contracts may be dependent upon the economic conditions in a
particular geographic region.
F-9
<PAGE> 58
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Activity in the allowance for credit losses and contract acquisition
discount was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- ---------------------------
ALLOWANCE FOR CREDIT LOSSES 1993 1994 1995 1995 1996
- ----------------------------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance -- beginning of
period..................... $ 634,205 $ 1,552,950 $ 4,488,995 $ 4,488,995 $ 14,300,661
Discounts allocated to
the allowance for credit
losses, net................ 1,934,521 5,756,428 15,723,930 6,934,801 7,456,581
Provision for credit
losses..................... -- -- 1,700,000 125,000 7,700,000
Charge-offs, net............. (1,015,776) (2,820,383) (7,612,264) 1,753,557 (10,628,127)
----------- ----------- ----------- ----------- ------------
Balance -- end of period..... $ 1,552,950 $ 4,488,995 $14,300,661 $ 9,795,239 $ 18,829,115
=========== =========== =========== =========== ============
<CAPTION>
CONTRACT ACQUISITION DISCOUNT
<S> <C> <C> <C> <C> <C>
Balance -- beginning of
period..................... $ 339,108 $ 888,122 $ 1,401,313 $ 1,401,313 $ --
Discounts negotiated in
excess of amount allocated
to allowance for credit
losses..................... 1,115,681 1,574,195 -- -- --
Amortization to interest
income..................... (516,596) (934,992) (12,766) (12,766) --
Charge-offs.................. -- -- (1,356,344) (1,297,600) --
Other........................ (50,071) (126,012) (32,203) (32,203) --
----------- ----------- ----------- ----------- ------------
Balance -- end of period..... $ 888,122 $ 1,401,313 $ -- $ 58,744 $ --
=========== =========== =========== =========== ============
</TABLE>
The components of net charge-offs were as stated in the table below.
Beginning in 1995, the entire contract acquisition discount is allocated to the
allowance for credit losses and the remaining discount is no longer being
amortized to interest income.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ---------------------------
SUMMARY OF NET CHARGE-OFFS 1993 1994 1995 1995 1996
- ----------------------------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Charge-offs -- allowance for
credit losses.............. $ 1,286,586 $ 2,982,664 $ 8,204,840 $ 1,963,968 $ 11,448,832
Recoveries -- allowance for
credit losses.............. (270,810) (162,281) (592,576) (210,411) (820,705)
---------- ---------- ---------- ---------- -----------
Charge-offs, net............. 1,015,776 2,820,383 7,612,264 1,753,557 10,628,127
Charge-offs -- contract
acquisition discount....... -- -- 1,356,344 1,297,600 --
---------- ---------- ---------- ---------- -----------
Total net
charge-offs...... $ 1,015,776 $ 2,820,383 $ 8,968,608 $ 3,051,157 $ 10,628,127
========== ========== ========== ========== ===========
</TABLE>
F-10
<PAGE> 59
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
4. PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment were $47,786,
$141,402, and $358,253 for 1993, 1994 and 1995, respectively. Property and
equipment consisted of the following as of December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Computer equipment.................................... $ 655,120 $1,223,589
Furniture and other equipment......................... 402,540 951,688
Leasehold improvements................................ 9,801 16,193
---------- ----------
Total cost.................................. 1,067,461 2,191,470
Accumulated depreciation and amortization............. (209,538) (567,791)
---------- ----------
Total....................................... $ 857,923 $1,623,679
========== ==========
</TABLE>
5. SENIOR REVOLVING CREDIT FACILITY
At December 31, 1995, the Company had a $175.0 million Senior Revolving
Credit Facility with a group of eight banks. The Senior Revolving Credit
Facility expires on June 30, 1997 and borrowings are secured by a substantial
portion of the assets of the Company. Through a series of negotiations the
Company has increased its Senior Revolving Credit Facility from $15.0 million at
January 1, 1993 and reduced its borrowing costs relative to the underlying prime
rate and London Interbank Offering Rate ("LIBOR") references. The Company had
the option of borrowing at the reference prime rate plus 1.25% at December 31,
1993, LIBOR plus 2.75% or the reference prime rate plus 0.25% at December 31,
1994 and LIBOR plus 1.60% or the reference prime rate at December 31, 1995. The
Senior Revolving Credit Facility requires the Company to maintain specified
financial ratios and to comply with other covenants. The Company was in
compliance with these ratios and covenants at December 31, 1995.
Interest rate and borrowing information as of and for 1993, 1994 and 1995
were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
As of December 31:
Borrowings..................................... $22,225,000 $61,975,000 $104,000,000
Weighted average contractual interest rate..... 7.25% 8.73% 7.39%
Years ended December 31:
Interest expense............................... $ 1,180,400 $ 3,692,466 $ 8,572,045
Highest month end borrowings................... 22,225,000 61,975,000 149,575,000
Average outstanding borrowings................. 13,527,781 41,311,781 97,339,543
Weighted average interest rates:
Contractual................................. 7.35% 8.00% 8.24%
Effective................................... 8.73% 8.94% 8.81%
</TABLE>
6. NOTES PAYABLE -- SECURITIZED POOL OF FINANCE CONTRACTS
On November 17, 1995, the Company completed a $75,140,000 debt financing
consisting of 6.20% automobile receivable-backed notes, Series 1995-A. The notes
were issued by First Merchants Auto Receivable Corporation, a wholly-owned
special purpose subsidiary of First Merchants Acceptance Corporation. The
proceeds that the Company received were used to repay indebtedness under the
Senior Revolving Credit Facility. Principal and interest on the notes are
payable monthly commencing December 15, 1995 from collections and recoveries on
the pool of finance receivables. Financial Security Assurance Inc. ("FSA")
F-11
<PAGE> 60
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
issued a financial guaranty insurance policy for the benefit of the noteholders.
Interest expense, including the amortization of debt issuance costs, was
$672,748 for 1995.
The Company is required to establish and maintain cash reserve and
collection accounts with a trustee with respect to the securitized pool of
finance receivables. The amounts set aside would be used to supplement certain
shortfalls in payments, if any, to investors. These balances are subject to an
increase up to a maximum amount as specified in the securitization indenture and
are invested in certain instruments as permitted by the trust agreement. To the
extent balances on deposit exceed specified levels, distributions are made to
the Company and, at the termination of the transaction, any remaining amounts on
deposit are distributed to the Company. The indenture requires the Company to
maintain delinquency and credit loss covenants. The Company was in compliance
with these covenants at December 31, 1995.
7. SUBORDINATED DEBT
Subordinated Reset Notes -- On February 14, 1995, the Company received
$13,530,000 from the issuance of $14,375,000 of subordinated reset notes (the
"1995 Notes"), in an underwritten public offering, including $1,875,000 from the
exercise of the underwriters' over-allotment option and after deducting the
underwriting discount and offering expenses. The proceeds were used to repay
borrowings under the Senior Revolving Credit Facility. Interest on the 1995
Notes is payable quarterly, on March 15, June 15, September 15 and December 15
of each year commencing March 15, 1995, at an interest rate of 11% per annum
until March 15, 2000. The interest rate will reset, at the Company's option, on
March 15, 2000 to a rate and for a term of one, two, three, or five years
determined by the Company and will reset thereafter, at the Company's option,
upon the date of expiration of each such new interest rate period prior to
maturity on March 15, 2005. Holders of the 1995 Notes have the option to redeem
all or any portion of the 1995 Notes on March 15, 2000 or any subsequent
interest reset date. Interest expense, including amortization of underwriting
discount and issuance costs, was $1,509,290 for the year ended December 31,
1995. The indenture relating to the 1995 Notes requires the Company to maintain
specified financial ratios and to comply with other covenants. The Company was
in compliance with these ratios and covenants at December 31, 1995.
As of December 31, 1995, the $14,375,000 outstanding principal balance of
the 1995 Notes is reported net of the unamortized underwriting discount of
$479,167.
Subordinated Credit Facility -- On October 29, 1993, the Company entered
into a $6.5 million subordinated credit facility (the "Subordinated Credit
Facility") with Bank of America Illinois ("BA Illinois"), formerly Continental
Bank, and RFE Investment Partners IV, L.P. ("RFE"). Simultaneously, the Company
sold shares of common stock and issued warrants ("1993 Warrants") to acquire
shares of common stock to such lenders and certain affiliates of BA Illinois
("BA Illinois Affiliates").
Upon issuance, the $1,454,160 fair value of the 1993 Warrants was recorded
as original issue discount. The Company incurred costs totaling $401,371 in
connection with the Subordinated Credit Facility. These costs and the original
issue discount were amortized as interest expense over the term of the
Subordinated Credit Facility using the interest method. On September 30, 1994,
using the proceeds from the initial public offering of common stock, the Company
repaid and terminated the $6.5 million Subordinated Credit Facility and recorded
a one-time, non-cash extraordinary charge of $1,167,886, net of $716,000 income
tax benefit, as a result of the early termination of the Subordinated Credit
Facility. Interest expense was $50,824 and $341,902 for 1993 and 1994,
respectively.
Subordinated Notes Payable to Stockholders -- On June 6, 1991, the Company
issued 15% subordinated notes to Middlewest Ventures II, L.P. ("MW") and Chicago
Holdings, Inc. ("CHI") in the aggregate
F-12
<PAGE> 61
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
amount of $1,000,000. On October 29, 1993, the notes were exchanged for 193,216
shares of the Company' s common stock. Interest expense was $146,465 for 1993.
8. INTEREST RATE PROTECTION AGREEMENTS
The Company is a party to two interest rate protection agreements
aggregating a notional amount of $30.0 million, which limits the Company's
exposure to increases in its borrowing costs relating to both the reference
prime and LIBOR interest rates. The first agreement is dated January 12, 1994,
expires in January 1996, provides protection on a notional amount of $15.0
million against increases in the reference prime rate above 7.75% per annum and
requires the Company to make payments if the reference prime rate drops below
6.00% per annum. The Company entered into a second agreement dated December 12,
1994. This agreement expires in January 1998 and provides protection on a
notional amount of $15.0 million against increases in the 90-day LIBOR rate, as
determined on each quarterly anniversary date, above 6.50% per annum. If the
90-day LIBOR rate equals or exceeds 8.50% per annum on any such quarterly
anniversary date, the cap rate resets to 8.50% per annum for such quarter.
The first interest rate protection agreement involved no cost to the
Company. The second interest protection agreement requires the Company to make
payments totaling $517,173 which are being treated as an adjustment to interest
expense over the term of the agreement. These agreements expose the Company to
potential credit risk through counterparty nonperformance. This credit risk is
mitigated by the counterparty's financial condition. As a result, the Company
has not required collateral or other security from its counterparties to support
financial instruments with off-balance sheet credit risk.
9. STOCKHOLDERS' EQUITY AND COMMON STOCK WARRANTS
General -- On October 10, 1995, the Company completed a public offering of
2,250,000 shares of its common stock at a price of $24.50 per share pursuant to
a Form S-1 Registration Statement under the Securities Act of 1933, as
originally filed on August 29, 1995 and subsequently amended (the "1995 Common
Stock Offering"). The Company received $51,587,500 from the 1995 Common Stock
Offering, after deducting the underwriting discount and offering expenses. The
proceeds were used to fund purchases of finance contracts and, prior to such
use, the proceeds were used to reduce borrowings under the Senior Revolving
Credit Facility.
Upon completion of the 1995 Common Stock Offering, warrants held by BA
Illinois were exercised to acquire 123,616 shares of common stock.
On September 30, 1994, the Company completed an initial public offering of
1,350,000 shares of its common stock at a price of $11.00 per share (the "1994
Common Stock Offering") pursuant to a Form S-1 Registration Statement under the
Securities Act of 1933, as originally filed on July 1, 1994, and subsequently
amended. Such Registration Statement became effective on September 23, 1994. On
September 30, 1994, the Company received $13,100,500 from the 1994 Common Stock
Offering, after deducting the underwriting discount and offering expenses. The
proceeds were used to repay and terminate the $6.5 million Subordinated Credit
Facility and to reduce borrowings under the Senior Revolving Credit Facility.
The underwriters for the 1994 Common Stock Offering exercised their
over-allotment option and purchased an additional 180,000 shares of common stock
at a price of $11.00 per share on October 31, 1994. The Company received
$1,810,000, after deducting the underwriting discount and offering expenses,
from the exercise of this over-allotment option. These additional proceeds were
used to reduce borrowings under the Senior Revolving Credit Facility.
F-13
<PAGE> 62
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
In conjunction with the 1994 Common Stock Offering, the Company increased
the authorized shares of common stock and non-voting common stock from 150,000
shares and 15,000 shares, respectively, to 20,000,000 shares and 300,000 shares,
respectively, reduced the par value per common share from $1.00 to $.01 and
effected a 23.184-for-1 stock split. The Company also authorized 500,000 shares
of preferred stock, par value $100 per share. All share and per share data for
all periods and dates have been adjusted to retroactively reflect the stock
split.
On October 29, 1993, the Company sold 289,800 shares of common stock for
$1,500,000 to RFE and BA Illinois Affiliates. The Subordinated Credit Facility
required that warrants to acquire 280,946 shares of common stock be issued to
RFE and BA Illinois Affiliates and also required two founding stockholders, MW
and CHI, to exchange $1,000,000 of subordinated notes for 193,216 shares of
common stock. The shares of common stock issued in exchange for the CHI note
were issued to Finance Acquisition Corporation, a subsidiary of CHI.
Common Stock Warrants -- As of December 31, 1995, the 1993 Warrants, which
were originally scheduled to expire on October 29, 1998, had been exercised
without exchange of further consideration. Upon completion of the Company's 1994
Common Stock Offering, the put provision of the 1993 Warrants expired resulting
in the carrying value of such warrants being transferred to additional paid-in
capital. 1993 Warrants representing 16,858, 140,472 and 123,616 shares of common
stock were exercised in 1993, 1994 and 1995, respectively.
Common Stock Options -- On July 27, 1994, the Company adopted the First
Merchants Acceptance Corporation 1994 Equity Incentive Plan (the "Equity
Incentive Plan"). The Equity Incentive Plan became effective on September 30,
1994 and is administered by a committee of the Board of Directors, which is
authorized to award stock options, stock appreciation rights, limited stock
appreciation rights, restricted stock, performance shares, performance units and
bonus stock. All full-time employees of the Company are eligible to receive
awards. The Equity Incentive Plan has a 10-year-term. Subject to anti-dilution
adjustments, a maximum of 300,000 shares of Common Stock may be delivered
pursuant to awards under the Equity Incentive Plan. At December 31, 1995, 75,250
options had been granted and 67,000 options were outstanding under the Equity
Incentive Plan.
On July 27, 1994, the Company adopted the First Merchants Acceptance
Corporation 1994 Non-Employee Directors Stock Option Plan (the "Directors
Plan"). The Directors Plan became effective September 30, 1994. At December 31,
1995, options to acquire a total of 17,500 common shares had been granted to the
Company's six non-employee directors at exercise prices ranging from $11.00 to
$12.25 per share. Each option will become exercisable as to 1,000 shares each
year on the first to occur of the anniversary of the grant date of such option
or the annual meeting to stockholders. The Directors Plan has a 10-year term,
and a maximum of 60,000 shares of common stock will be available for awards,
subject to anti-dilution adjustments.
During June 1993, the Company adopted the First Merchants Acceptance
Corporation Incentive Stock Option Plan (the "Incentive Stock Option Plan").
Options to acquire 36,936 and 26,872 shares of common stock at $4.40 per share
were granted during 1993 and 1994, respectively. The options were granted to key
employees, vest over a four year period beginning on the option grant date, and,
with limited exceptions, must be exercised within 10 years of the date of grant.
The Incentive Stock Option Plan was terminated effective September 23, 1994 and
no additional grants were made after such date. At December 31, 1995, 53,930
options were outstanding.
During April 1994, the President and Chief Executive Officer was awarded
options to acquire up to 11,824 shares of common stock in each of the years
ending December 31, 1995 and 1996. The number of
F-14
<PAGE> 63
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
options to be earned is dependent upon the performance of the Company in such
years. The exercise price is $11.00 per share. As of December 31, 1995, 8,717
options were earned and outstanding. These options vest at various times and
expire five years from the applicable vesting date.
In connection with the October 1993 sale of common stock, the Company
granted options to a newly elected member of the Company's Board of Directors.
The options are immediately exercisable and entitle the director the right to
acquire 5,982 shares of common stock at a price of $5.18 per share.
Certain stock options granted in 1991 are exercisable at prices lower than
the estimated fair value of the common stock on the date such options were
granted. The excess of the estimated fair value of the options over the option
price is considered compensation earned during the vesting period.
The unearned compensation was recorded in stockholders' equity with an
offsetting increase to additional paid-in capital and was amortized to expense
over the period in which it was earned. On April 11, 1995, the then remaining
non-exercisable options became fully vested when the market value of the
Company's common stock exceeded $60.0 million. Compensation expense attributable
to such stock options was $22,991, $97,512 and $178,767 for 1993, 1994 and 1995,
respectively.
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE RANGE
OPTIONS OUTSTANDING OF SHARES PER SHARE
------------------------------------------------------- --------- ------------
<S> <C> <C>
Balance at December 31, 1992........................... 193,448 $ 0.04
Granted.............................................. 36,936 4.40
Canceled............................................. (47,384) 0.04
-------
Balance at December 31, 1993........................... 183,000 .04- 4.40
Granted.............................................. 71,502 4.40-11.00
-------
Balance at December 31, 1994........................... 254,502 .04-11.00
Granted.............................................. 77,750 12.25-19.00
Canceled or reacquired............................... (21,235) 4.40-18.75
-------
Balance at December 31, 1995........................... 311,017 $ .04-19.00
=======
Options exercisable.................................... 185,716 $ .04-12.25
=======
Options available for future grant..................... 275,500
=======
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company sponsors a discretionary contribution savings plan (the "Plan")
covering substantially all employees, under the Internal Revenue Code Section
401(k). Employees may elect to make a salary reduction contribution in any
percentage permitted by the Plan administrator up to a maximum of 15% of their
compensation or up to the maximum amount permitted by tax law per calendar year.
All participants are fully vested in their account balances and are able to
direct the investment of their savings into several investment options. In July
1995, the Company began matching a portion of each participant's contribution.
Company contributions vest over six years from the contribution date.
Contribution expense was $26,064 in 1995.
On July 27, 1994, the Company adopted the First Merchants Acceptance
Corporation 1994 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which
became effective September 30, 1994. On November 1, 1994 and November 1, 1995,
eligible employees were given the opportunity to purchase common stock at a
discount of not more than 15% based upon the fair market value of the common
stock at the
F-15
<PAGE> 64
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
beginning of the enrollment period or date of purchase, whichever is less. The
Stock Purchase Plan is administered by a committee of the Board of Directors and
is intended to qualify as an "Employee Stock Purchase Plan" under the Internal
Revenue Code Section 423. Subject to anti-dilution adjustments, a maximum of
100,000 shares of common stock are reserved for issuance under the Stock
Purchase Plan. At December 31, 1995, 10,079 shares have been issued under the
Stock Purchase Plan.
11. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................... $183,000 $ 709,000 $2,681,000
State...................................... 25,000 118,000 514,000
---------- ---------- --------
Total current......................... 208,000 827,000 3,195,000
---------- ---------- --------
Deferred:
Federal.................................... 357,000 754,000 816,000
State...................................... 61,000 129,000 92,000
---------- ---------- --------
Total deferred........................ 418,000 883,000 908,000
---------- ---------- --------
Total................................. $626,000 $1,710,000 $4,103,000
========== ========== ========
</TABLE>
The income tax provision differs from the provision computed at the Federal
statutory income tax rate primarily due to state income taxes. A reconciliation
of the Federal statutory income tax rate (34%) to the effective income tax rate
for 1993, 1994 and 1995 follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at Federal
statutory rate...... $532,000 34.0% $1,529,000 34.0% $3,673,000 34.0%
State income tax, net
of Federal tax
benefit............. 94,000 6.0% 181,000 4.0% 430,000 4.0%
---------- ----- ---------- ----- ---------- -----
Total income
tax
provision... $626,000 40.0% $1,710,000 38.0% $4,103,000 38.0%
========== ===== ========== ===== ========== =====
</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 income taxes. At December 31, 1994 and 1995, the
components of the Company' s net deferred tax liability were as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax asset-accrued compensation............... $ 50,000 $ 116,000
---------- ----------
Deferred tax liabilities:
Contract acquisition discounts...................... 772,000 1,792,000
Accumulated depreciation............................ 83,000 107,000
Other............................................... 496,000 426,000
---------- ----------
Total deferred tax liabilities................. 1,351,000 2,325,000
---------- ----------
Net deferred tax liability............................ $1,301,000 $2,209,000
========== ==========
</TABLE>
F-16
<PAGE> 65
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its corporate office and regional service centers under
noncancelable operating lease agreements with initial terms ranging from three
to five years. These leases generally require the Company to reimburse the
landlord for certain common area expenses, such as real estate taxes, utilities
and maintenance; such expenses are included in rent expense. Rental expense with
respect to all operating leases totaled $215,489, $447,510 and $775,758 for
1993, 1994 and 1995, respectively.
At December 31, 1995, future minimum lease payments for noncancelable
operating leases were as shown in the table below. Note that, in the normal
course of business, it is expected that office leases will expire and be renewed
or replaced with leases for other locations.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------------------------------------------------ ----------
<S> <C>
1996.................................................... $ 860,269
1997.................................................... 738,591
1998.................................................... 490,160
1999.................................................... 201,590
2000.................................................... 48,389
----------
Total minimum future rentals...................................... $2,338,999
==========
</TABLE>
Data Processing Agreement -- The Company entered into a five year contract
to receive data processing services. The contract, which expires in September
1998, requires minimum monthly services fees of $15,000.
13. NON-RECURRING CHARGES
During June 1993, the Company entered into a financial advisory services
agreement for the procurement of not less than $5.0 million in capital. This
agreement was terminated in October 1993. The fees and direct expenses
associated with this capital raising effort totaled $365,985 and are reported as
non-recurring charges.
In September 1993, the Company terminated a data processing services
contract. Costs totaling $68,627, including unamortized software license fees,
were expensed and reported as non-recurring charges.
14. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), effective for the Company in 1996,
provides an alternative method for accounting for stock-based compensation and
requires certain disclosures regarding the fair value of stock-based
compensation. The Company does not expect to adopt the alternative method of
accounting for stock-based compensation and, accordingly, the adoption of SFAS
123 will not have any effect on the Company's financial position or results of
operations. The Company expects to expand its disclosure of stock-based
compensation plans to include pro forma fair value information in its 1996
Annual Report to Stockholders.
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments. Fair value estimates are made at a specific
point in time, are subjective in nature, and involve uncertainties and matters
of significant judgment. Therefore, the fair value estimates cannot be
determined with precision and do not reflect the total value of the Company as a
going concern.
F-17
<PAGE> 66
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Cash and Restricted Cash -- The carrying amount of cash and restricted cash
approximates fair value because of its maturity characteristics and because it
does not present unanticipated credit concerns.
Finance Receivables, Net -- The fair value of finance receivables was
estimated by the present value of future cash flows, using current rates at
which similar finance contracts would be made to borrowers with comparable
credit ratings and the same remaining maturities.
Senior Revolving Credit Facility -- The carrying amount of the Company's
Senior Revolving Credit Facility approximates fair value because of its variable
rate pricing terms.
Subordinated Reset Notes and Notes Payable-Securitized Pool, Net -- The
fair value of the Company's subordinated reset notes and notes
payable-securitized pool, net is estimated based on the quoted market price of
similar issues.
Interest Rate Protection Agreements -- The fair value of interest rate
protection agreements is estimated using quoted market prices. The estimated
fair value of interest rate protection agreements as of December 31, 1994 and
1995 was $969,000 and $8,980, respectively.
A summary of the fair values of financial assets and liabilities at
December 31, 1994 and 1995 follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
-------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash.................................... $ 135,240 $ 135,240 $ 112,040 $ 112,040
Restricted cash......................... -- -- 6,317,779 6,317,779
Finance receivables held-for-sale,
net................................... -- -- 32,264,734 32,734,877
Net finance receivables................. 94,089,938 95,609,125 251,908,318 252,560,156
Allowance for credit losses............. (4,488,995) (4,488,995) (14,300,661) (14,300,661)
----------- ----------- ------------ ------------
Total................................... $89,736,183 $91,255,370 $276,302,210 $277,424,191
=========== =========== ============ ============
FINANCIAL LIABILITIES:
Senior revolving credit facility........ $61,975,000 $61,975,000 $104,000,000 $104,000,000
Notes payable -- securitized pool,
net................................... -- -- 70,378,298 70,609,119
Subordinated reset notes, net........... -- -- 13,895,833 14,980,740
----------- ----------- ------------ ------------
Total................................... $61,975,000 $61,975,000 $188,274,131 $189,589,859
=========== =========== ============ ============
</TABLE>
16. RECLASSIFICATIONS
Certain reclassifications have been made to the balance sheets as of
December 31, 1994 and 1995, and the related consolidated statements of earnings,
and cash flows for each of the three years in the period ended December 31, 1995
to conform to the reporting format adopted effective June 30, 1996.
17. LITIGATION
On August 27, 1996, a purported class action was filed against an
automobile dealer and the Company. The complaint, as amended on September 27,
1996 (the "Complaint"), alleges violations of certain Federal and Illinois
consumer protection statutes and RICO and seeks unspecified damages. The Company
believes that certain material allegations in the Complaint are incorrect and
that it has meritorious defenses to the claims made in the Complaint. The
Company intends to vigorously defend this action.
F-18
<PAGE> 67
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
18. QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain unaudited operating results for each
of the eight quarters in the period ended December 31, 1995. This information
has been prepared on the same basis as the audited consolidated financial
statements and includes all adjustments (which consist solely of normal
recurring adjustments) necessary to present fairly the financial information of
such periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
QUARTER QUARTER QUARTER QUARTER ENDED
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1995
Total revenues.................. $6,427,957 $8,538,167 $10,593,425 $13,988,311 $39,547,860
Net interest income............. 4,645,212 5,953,685 7,500,971 10,693,909 28,793,777
Earnings before income taxes.... 1,884,028 2,202,304 2,702,536 4,014,774 10,803,642
Net earnings.................... 1,168,028 1,365,304 1,676,536 2,490,774 6,700,642
Net earnings per share.......... 0.26 0.31 0.37 0.38 1.35
Stock price range of common
stock: (1)
High.......................... 13.00 19.50 27.00 27.25 27.25
Low........................... 10.00 12.25 17.00 17.00 10.00
Weighted average number of
common and common equivalent
shares outstanding............ 4,452,850 4,469,597 4,488,967 6,495,501 4,979,958
- --------------------------------------------------------------------------------------------------------
1994
Total revenues.................. $2,926,072 $3,612,473 $ 4,397,207 $ 5,087,321 $16,023,073
Net interest income............. 2,368,111 2,625,050 3,122,427 3,873,117 11,988,705
Earnings before income taxes and
extraordinary item............ 819,326 953,007 1,163,057 1,563,242 4,498,632
Net earnings before
extraordinary item............ 508,326 591,007 721,057 968,242 2,788,632
Net earnings (loss)............. 508,326 591,007 (446,829) 968,242 1,620,746
Net earnings (loss) available to
stockholders.................. 442,382 530,660 (446,829) 968,242 1,494,455
Earnings before extraordinary
item.......................... 0.17 0.20 0.25 0.22 0.85
Net earnings (loss) per share... 0.17 0.20 (0.15) 0.22 0.49
Net earnings (loss) per share
available to stockholder...... 0.15 0.18 (0.15) 0.22 0.45
Stock price range of common
stock: (1)
High.......................... N/A N/A 11.75 12.50 12.50
Low........................... N/A N/A 11.00 9.00 9.00
Weighted average number of
common and common equivalent
shares outstanding............ 2,922,423 2,922,423 2,937,097 4,392,813 3,296,747
</TABLE>
- -------------------------
(1) The above table sets forth the stock price range of high and low bid
quotations for the periods indicated for the common stock as reported by The
Nasdaq Stock Market's National Market. The Company completed an initial
public offering of common stock on September 23, 1994. Therefore, there is
no stock price prior to the third quarter of 1994. These quotations
represent prices between dealers and do not include retail markups,
markdowns, or commissions, and do not necessarily represent actual
transactions. As of December 31, 1995, the Company estimates that there were
more than 400 beneficial owners of its common stock. The Company's common
stock trades on The Nasdaq Stock Market's National Market under the symbol
"FMAC".
F-19
<PAGE> 68
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
19. UNAUDITED INTERIM FINANCIAL INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1995 AND 1996
The unaudited interim consolidated financial statements of the Company, in
the opinion of management, reflect all necessary adjustments, consisting only of
normal recurring adjustments, for a fair presentation of results as of the dates
and for the interim periods covered by the consolidated financial statements.
The results for the interim periods are not necessarily indicative of the
results of operations to be expected for the entire year.
20. 1996 DEVELOPMENTS (UNAUDITED)
Sale and Securitization of Finance Contracts -- On March 12, 1996, the
Company completed a sale of finance receivables to First Merchants Grantor Trust
1996-1 (the "Trust 1996-1") and the issuance of $55,761,186 of automobile
receivable-backed certificates of Trust 1996-1. The proceeds that the Company
received were used to repay borrowings under the Senior Revolving Credit
Facility. The Company retains a subordinated interest in Trust 1996-1. The
certificates have a pass-through interest rate of 5.90%. FSA issued a financial
guaranty insurance policy for the benefit of the investors. The Company
recognized a gain of $3,005,814 on the sale of finance receivables to Trust
1996-1. The gain represents the difference between the sales proceeds, net of
the transaction costs, and the Company's carrying value of the receivables sold,
plus the present value of the excess servicing rights.
On June 26, 1996, the Company completed a sale of finance receivables to
First Merchants Grantor Trust 1996-2 (the "Trust 1996-2") and the issuance of
$90,413,080 of automobile receivable-backed certificates of Trust 1996-2. The
proceeds that the Company received were used to repay borrowings under the
Senior Revolving Credit Facility. The Company retained a subordinated interest
in Trust 1996-2. The certificates have a pass-through interest rate of 6.85%.
FSA issued a financial guaranty insurance policy for the benefit of the
investors. The Company recognized a gain of $5,086,549 on the sale of finance
receivables to Trust 1996-2. The gain represents the difference between the
sales proceeds, net of the transaction costs, and the Company's carrying value
of the receivables sold, plus the present value of the excess servicing cash
flows.
Excess servicing receivable represents the Company's subordinated interest
in Trust 1996-1 and Trust 1996-2 (together known as the "Trusts"). The excess
servicing receivable is equal to the present value of estimated future
collections and recoveries on the finance receivables sold to the Trusts, less
the present value of required principal and interest payments to the investors,
base servicing fees payable to the Company at an annual rate of 2.5% of finance
receivables serviced and certain other fees. The calculation of excess servicing
receivable includes estimates of future credit losses and prepayment rates for
the remaining term of the finance receivables sold since these factors impact
the amount and timing of future collections and recoveries on the pool of
finance receivables. If future credit losses and prepayment rates exceed the
Company's estimates, the excess servicing receivable will be adjusted through a
charge to operations. Favorable credit loss and prepayment experience compared
to the Company's estimates would result in additional servicing fee income. The
excess servicing receivable is amortized using the interest method against
realized excess servicing fee income.
F-20
<PAGE> 69
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
At June 30, 1996, excess servicing receivable consists of the following:
<TABLE>
<S> <C>
Estimated future net cash flows before allowance for credit
losses........................................................ $ 30,635,435
Allowance for credit losses..................................... (14,140,629)
-----------
Estimated future net cash flows................................. 16,494,806
Unamortized discount............................................ (3,492,593)
-----------
Balance at June 30, 1996........................................ $ 13,002,213
===========
</TABLE>
On September 26, 1996, the Company completed a sale of $117,522,432
automobile receivable-backed certificates and notes, Series 1996-B. The
certificates and notes were issued by First Merchants Auto Receivables
Corporation II, a wholly-owned special purpose subsidiary of First Merchants
Acceptance Corporation. The proceeds that the Company received were used to
repay borrowings under the Senior Revolving Credit Facility. Of these
certificates and notes, $82,266,000 have a floating interest rate of 0.12% over
one-month LIBOR, $30,556,000 have a fixed interest rate of 6.80% and the
remaining $4,700,432 have a fixed interest rate of 7.00%. FSA issued a financial
guaranty insurance policy for the benefit of the investors. The Company
recognized a gain on the sale of finance receivables representing the difference
between sales proceeds, net of the transaction costs, and the Company's carrying
value of the receivables sold, plus the present value of the excess servicing
rights.
In an effort to reduce the Company's exposure to potential increases in
interest rates, the Company entered into an interest rate swap agreement on
September 26, 1996 with an initial notional amount of $82,266,000, whereby the
Company pays a fixed rate of 6.30% and receives a variable rate of one-month
LIBOR. The notional amount declines, as specified in the swap agreement, at each
month-end during the term of the agreement, which expires in March 1999.
Senior Revolving Credit Facility -- On February 28, 1996, the Senior
Revolving Credit Facility was increased to $205.0 million with a group of nine
banks. Borrowings under the Senior Revolving Credit Facility are secured by a
substantial portion of the assets of the Company. The Company has the option to
either borrow at LIBOR plus 1.60% or at the reference prime rate. On May 1,
1996, the Company amended the loan agreement relating to the Senior Revolving
Credit Facility to provide for an additional temporary credit facility (the
"Temporary Credit Facility") in the amount of $25.0 million which expires on
November 1, 1996 and bears interest at the reference prime rate. At June 30,
1996, there were no amounts outstanding under the Temporary Credit Facility. The
average interest rate on the Senior Revolving Credit Facility for the six months
ended June 30, 1996 and 1995 was 7.32% and 8.42%, respectively. At June 30,
1996, the interest rate on these borrowings was 7.14%. The Senior Revolving
Credit Facility expires on June 30, 1997.
Notes Payable -- Securitized Pool and Interest Rate Swap -- On May 21,
1996, the Company completed a $125,897,000 debt financing consisting of
automobile receivable-backed notes. Of these notes, $85,000,000 have a floating
interest rate of 0.17% over the one-month LIBOR and the remaining $40,897,000
have a fixed interest rate of 6.70%. The notes were issued by First Merchants
Auto Trust 1996-A, a trust formed specifically for purposes of the
securitization transaction.
In an effort to reduce the Company's exposure to potential increases in
interest rates, the Company entered into an interest rate swap agreement on May
21, 1996 with an initial notional amount of $85,000,000, whereby the Company
pays a fixed rate of 5.98% and receives a variable rate of one-month LIBOR. The
notional amount declines, as specified in the swap agreement, at each month-end
during the term of the agreement, which expires in May 1998. At June 30, 1996,
the notional amount was $76,700,000 and one-month LIBOR was 5.50%.
F-21
<PAGE> 70
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996
The proceeds that the Company received from the issuance of the notes were
used to repay indebtedness under the Senior Revolving Credit Facility and the
Temporary Credit Facility. Principal and interest on the notes are payable
monthly from collections and recoveries on the pool of finance receivables. FSA
issued a financial guaranty insurance policy for the benefit of the noteholders.
The Company is required to establish and maintain cash reserve and
collection accounts with a trustee with respect to the securitized pool of
finance receivables. The amounts set aside would be used to supplement certain
shortfalls in payments, if any, to investors. These balances are subject to an
increase up to a maximum amount as specified in the securitization indenture and
are invested in certain instruments as permitted by the trust agreement. To the
extent balances on deposit exceed specified levels, distributions are made to
the Company and, at the termination of the transaction, any remaining amounts on
deposit are distributed to the Company. The indenture requires the Company to
maintain delinquency and credit loss covenants. The Company was in compliance
with these covenants at June 30, 1996.
Common Stock Options -- During the six months ended June 30, 1996, the
Company granted options to acquire a total of 285,400 shares of common stock at
prices ranging from $19.00 to $24.25 per share. Options exercisable and options
available for future grant were 223,397 and 561,250, respectively, at June 30,
1996. At the Annual Meeting held on May 14, 1996, the Company's stockholders
voted to amend the 1994 Equity Incentive Plan (the "Plan") to increase the
aggregate number of shares of common stock available under the Plan from 300,000
to 750,000 and make certain other modifications.
Data Processing Agreement -- In May 1996, the Company entered into a six
year contract for a systems configuration and the receipt of data processing
services. The contract, which expires in May 2002, requires minimum service fees
as follows:
<TABLE>
<S> <C>
1996............................................................. $ 792,000
1997............................................................. 2,331,000
1998............................................................. 2,194,000
1999............................................................. 2,194,000
2000............................................................. 2,194,000
thereafter....................................................... 3,290,000
-----------
$12,995,000
===========
</TABLE>
Impact of New Accounting Pronouncements -- Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Liabilities" ("SFAS 125"), effective for the Company in
1997, provides new methods of accounting and reporting for transfers and
servicing of financial assets and extinguishments of liabilities. The Company
will apply SFAS 125 to securitization transactions occurring on or after January
1, 1997. The effect of adopting SFAS 125 is not expected to have a material
effect on the Company's financial position or results of operations.
F-22
<PAGE> 71
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS OR ANY
DEALER OR AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, ANY OF THE 1996 NOTES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 9
Use of Proceeds........................ 13
Capitalization......................... 14
Selected Financial and Operating
Data................................. 15
Supplemental Financial Information..... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 28
Management............................. 37
Description of the 1996 Notes.......... 39
Underwriting........................... 46
Legal Matters.......................... 46
Experts................................ 47
Available Information.................. 47
Incorporation of Certain Documents by
Reference............................ 48
Index to Financial Statements.......... F-1
</TABLE>
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$45,000,000
FIRST MERCHANTS
ACCEPTANCE CORPORATION
FIRST MERCHANTS LOGO
SUBORDINATED RESET
NOTES DUE 2006
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PROSPECTUS
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J.C. BRADFORD & CO.
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
October 29, 1996
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