<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
-------------------------------------------------
Date of Report February 26, 1999
First Merchants Acceptance Corporation
-----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-24686 36-3759045
-------- ------- ----------
(State of incorporation (Commission (IRS Employer of
or other jurisdiction) File Number) Identification No.)
303 West Erie St. Suite 410 Chicago, Illinois 60610
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(312) 397-3100
--------------
(Registrants telephone number)
<PAGE> 2
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF DEFICIENCY IN NET ASSETS AVAILABLE IN LIQUIDATION
(LIQUIDATION BASIS)
Dollars in thousands
<TABLE>
<CAPTION>
REORGANIZED DEBTOR-IN-POSSESSION
JUNE 30, 1998 DECEMBER 31, 1997
------------- --------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash $ 289 $ 284
Finance receivables, net of allowance
for credit losses of $7,740 and $12,289, respectively 45,566 68,106
Residuals in finance receivables sold 15,247 16,440
Investments held in trust 24,689 20,550
Due from trusts 789 2,279
Income taxes receivable 3,192 12,170
Repossessed collateral 456 1,288
Property and equipment, held for sale -- 625
Other assets 787 434
-------- --------
Total assets $ 91,015 $122,176
======== ========
LIABILITIES
Debtor-in-possession financing 9,802 $ 10,318
Secured borrowings under working capital line of credit -- 554
Notes payable - securitized pools 36,138 60,291
New debt of reorganized company 44,000 44,000
Obligation due under secured claim recovery amount 9,410 9,410
Obligations due under Excess Collections Split Agreement
and Modified UDC Fee 9,553 9,553
Accounts payable - pre petition 241 1,046
Accounts payable and accrued expenses - post petition 1,919 3,935
-------- --------
Total liabilities 111,063 139,107
-------- --------
Deficiency in net assets available in liquidation $(20,048) $(16,931)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN DEFICIENCY IN NET ASSETS
AVAILABLE IN LIQUIDATION
(LIQUIDATION BASIS)
Dollars in thousands
<TABLE>
<CAPTION>
<S> <C>
Stockholders' deficit ( Debtor-in-Possession) $(46,114)
At December 31, 1997 (Date Liquidation Basis of
Accounting was Adopted)
Effect of adoption of liquidation net loss basis of
accounting, debt discharged upon confirmation
of the Plan of Reorganization 29,183
--------
Deficiency in net assets available in liquidation (16,931)
At December 31, 1997 (Debtor-in-Possession)
Net loss (3,117)
--------
Deficiency in net assets available in liquidation at June 30, 1998 $(20,048)
(Reorganized) (Unaudited) ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(LIQUIDATION BASIS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
Dollars and amounts in thousands except per share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------ ----------------
<S> <C> <C>
Revenues
Interest income - finance receivables $2,710 $6,294
Other portfolio income 253 483
Servicing fees and other interest income 95 3,413
------ -------
Total revenues 3,058 10,190
Expenses
Interest expense 1,112 2,600
Operating expenses:
Employee compensation and related costs 194 2,969
Other operating expenses 2,625 7,738
------ -------
Total expenses 3,931 13,307
------ -------
Net loss $ (873) $(3,117)
====== =======
Basic (loss) per share $ (.15) $ (.50)
Diluted (loss) per share (.15) (.50)
Weighted average number of common
shares outstanding 6,000 6,224
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(GOING CONCERN BASIS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
Dollars and amounts in thousands except per share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------ ----------------
<S> <C> <C>
Revenues
Interest income - finance receivables $ 9,351 $ 21,005
Other portfolio income 147 728
(Loss) on sale of finance receivables (4,074) (5,356)
Servicing fees and other interest income 3,305 7,047
-------- --------
Total revenues 8,729 23,424
Expenses
Interest expense 6,704 12,274
Provision for credit losses 4,314 10,511
Operating expenses:
Employee compensation and related costs 7,806 15,761
Other operating expenses 7,844 14,087
-------- --------
Total expenses 26,668 52,633
-------- --------
Net (loss) $(17,939) $(29,209)
======== ========
Basic (loss) per share $ (2.78) $ (4.52)
Diluted (loss) per share (2.78) (4.52)
Weighted average number of common
shares outstanding 6,448 6,448
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
FIRST MERCHANTS ACCEPTANCE CORPORATION
(REORGANIZED)
CONSOLIDATED STATEMENT OF CASH FLOWS
(LIQUIDATION BASIS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
Dollars in thousands
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------ ----------------
<S> <C> <C>
Cash Flows From Operating Activities
Net (loss) $ (873) $ (3,117)
Amortization of securitization discount 131 295
(Increase) decrease in:
Accrued interest income and deferred revenue 17 58
Due from trusts 1,046 1,490
Other assets 103 (353)
Income taxes receivable/payable 8,296 8,979
Other, net (633) (1,195)
(Decrease) in accounts payable and accrued expenses (1,563) (2,822)
Proceeds from property and equipment sold ----- 626
-------- --------
Net cash flows provided by operating activities 6,524 3,961
Principal payments on finance receivables, net 10,944 24,214
(Increase) in investments held in trust, net (2,162) (4,141)
Residuals in finance receivables sold, net 670 1,194
-------- --------
Net cash flows provided by investing activities 9,452 21,267
Repayment of notes payable - securitized pools (10,518) (24,153)
Increase in debtor-in-process financing, net (5,898) (516)
Increase in secured borrowings under working capital line of
credit, net (191) (554)
-------- --------
Net cash flows (used in) financing activities (16,607) (25,223)
Net increase (decrease) in cash (631) 5
Cash balance beginning of period 920 284
-------- --------
Cash balance end of period $ 289 $ 289
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
FIRST MERCHANTS ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(GOING CONCERN BASIS)
FOR THE THREE MONTHS AND SIX MONTHS JUNE 30, 1997 (UNAUDITED)
Dollars in thousands
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------ ----------------
<S> <C> <C>
Cash Flows From Operating Activities
Net (loss) $(17,938) $(29,208)
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities:
Provision for credit losses 4,314 10,511
Loss on sale of finance receivables 4,838 6,119
Depreciation 375 1,158
Amortization of debt issuance costs 163 326
Amortization of securitization discount 6 11
(Increase) decrease in:
Accrued interest income and deferred revenue 2,397 2,507
Due from trusts (2,762) (530)
Other assets 982 (2,275)
Income taxes receivable/payable (692) (1,307)
Decrease in accounts payable and accrued expenses (2,668) (5,007)
Purchases of finance receivables held for sale (101,575) (231,444)
Proceeds from sales of finance receivables
held for sale 70,282 194,482
-------- --------
Net cash flows (used in) operating activities (42,278) (54,657)
Principal payments on finance receivables, net 15,769 42,083
Decrease in investments held in trust, net 1,699 966
Residuals in finance receivables sold, net 1,128 (10,872)
Purchases of property and equipment (1,364) (2,778)
Proceeds from sales of property and equipment 813 813
-------- --------
Net cash flows provided by investing activities 18,045 30,212
Purchase of treasury stock (79) (1,830)
Repayments of notes payable-securitized pools (21,854) (40,561)
Increase in secured borrowings under working capital
line of credit, net 1,677 1,677
Net borrowings under senior revolving credit facility 44,277 64,177
-------- --------
Net cash flows provided by financing activities 24,021 23,463
-------- --------
Net (decrease) in cash (212) (982)
Cash balance beginning of period 214 984
-------- --------
Cash balance end of period $ 2 $ 2
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
FIRST MERCHANTS ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The accompanying unaudited consolidated financial statements of First Merchants
Acceptance Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of management, such unaudited interim information
reflects all adjustments, necessary to present the Company's financial situation
and results of operations for the periods presented under the indicated basis of
accounting. The consolidated Statement of Deficiency in the Net Assets available
in Liquidation as of December 31, 1997 was derived from the audited consolidated
statements as of that date but does not include all the information and
footnotes required by generally accepted accounting principles. It is suggested
that these consolidated financial statements be read in conjunction with the
Company's audited consolidated financial statements included in the Company's
Form 8-K dated December 9, 1998.
Note 2 -- Chapter 11 Plan
The Company, Ugly Ducking Corporation ("UDC") and the Official Committee of
Unsecured Creditors (the "Committee") developed a consensual Chapter 11 plan
(the "Plan") which was filed with the United States District Court for the
District of Delaware ("Bankruptcy Court") on December 12, 1997. Various
amendments were made to the Plan and on March 16, 1998 the Bankruptcy Court
entered an order confirming the Plan, which became effective on June 30, 1998.
Under the terms of the Plan and various Bankruptcy Court orders, UDC acquired
the Company's property and equipment related to the Company's loan servicing
operations and replaced the Company as the servicer of the Owned Contracts and
Securitization Contracts. UDC has since transferred the loan servicing to
Cygnet Financial Services, an affiliate of UDC.
As a result of the Plan, the reorganized Company is issuing $44 million of debt
(the "New Debt"), with interest accruing at a rate of 5.47% per annum,
compounded quarterly, which is being allocated among the Company's subordinated
debt holders plus all other unsecured and trade creditors, in satisfaction of
their allowed claims. The notes reflecting the New Debt will be issued in early
1999. According to the Plan, the New Debt will be allocated among the various
participants as shown in the table below. The Company will rely upon its
portion of the collections on its remaining interest in various loan portfolios
and net proceeds from certain causes of action to meet Plan obligations. There
can be no assurance that the New Debt will be paid in full. The New Debt shall
mature on February 28, 2003. Under the Plan, the New Debt will receive payment
after certain secured and administrative expense obligations have been
satisfied. Likewise, the Company is not entitled to receive cash flow from its
residual interests in various securitizations until the senior certificates for
the applicable securitization has been satisfied. The information attached
hereto outlines the various sources of cash and senior debt at the
securitization level and Company level which need to be satisfied in order for
payments on the New Debt to begin. Based on estimated cash flow projections the
Company believes there will not be sufficient funds to pay interest on the
notes. Therefore, no interest has been accrued since issuance of the notes.
New Debt Allocation by Principal Amount (in thousands)
<TABLE>
<CAPTION>
<S> <C>
Subordinated debt issued May 1995 $ 8,118
Subordinated debt issued November 1996 32,096
Trade and other unsecured creditors 3,786
-------
Total $44,000
</TABLE>
<PAGE> 9
DIP Facility
UDC agreed to provide up to $21.5 million of "debtor-in possession" financing
(the "DIP Facility"). The interest rate on borrowings outstanding under the DIP
Facility is 10% per annum from and after the effective date of the plan with a
maturity date of December 31, 2000.
The first $10 million of Tax Refunds are being used to pay down the DIP Facility
and will permanently reduce the amount of the DIP Facility. The IRS is in the
process of an audit for 1996 and will also audit 1997 tax returns. It is too
early to determine the outcome of any estimated outstanding tax refunds. After
the first $10 million in tax refunds, the DIP Facility is being paid down from
the Company's retained rights in the excess cash flow (the "B Pieces") which are
included as investments held in trust and residuals in finance receivables sold
and finance receivables on the financial statements after the securitization
debt and related obligations are paid, and after payment of the Secured Claim
Recovery Amount (defined below). Payments made from other sources will not
permanently reduce the amount of the DIP Facility. As of February 26, 1999, the
Company has received sufficient tax refunds to permanently reduce the amount of
the DIP Facility in the amount of $10 million. See the subsequent event
footnote for a discussion of the Notice of Default.
Secured Claim Recovery Amount
UDC purchased from the Bank Group the debt outstanding under the Company's
Senior Revolving Facility, which was secured in part by Owned Contracts. The
Owned Contracts were then sold (via "the Agent") to a third party purchaser (the
"Contract Purchaser"). Concurrently with the transfer the Agent released the
lien of the Bank Group on the Collateral.
In consideration for the Bank Group's release of its liens on the Retained
Assets, the Company subsequently (a) guaranteed on a nonrecourse basis full and
timely payment to the Agent and UDC of any shortfall between (i) the Credit Bid
Purchase Price of the Owned Contracts plus interest thereon at the rate of 11%
per annum from December 15, 1997, plus an additional charge for servicing the
Owned Contracts (the "Owned Contracts Servicing Fee"), and (ii) collections and
proceeds of the Owned Contracts (collectively, the "Secured Claim Recovery
Amount"), and (b) granted a lien on the stock of First Merchants Auto
Receivables Corporation ("FMARC") and First Merchants Auto Receivables
Corporation II ("FMARC II") to secure that guarantee. In the event that the
Owned Contracts are not being serviced by UDC, (or an affiliate or assignee of
UDC) (an "Owned Loan Servicing Change"), the Secured Claim Recovery Amount will
be limited to $10 million. For the year ended December 31, 1997, the Company
established a liability for the Secured Claim Recovery Amount of approximately
$9.4 million. Based on analysis the actual results of the Owned Contracts for
the nine months ended September 30, 1998 indicates that defaults are
approximately $3.1 million less than projected. Based on this information no
adjustment to the Secured Claim Recovery at June 30, 1998 appears to be
necessary since the results to date are positive and it is too early in the life
of the contracts to make a positive adjustment to the reserve. Any recovery on
the Owned Contracts in excess of the Secured Claim Recovery Amount will be
shared with UDC on the same basis as the Excess Collections Split (defined
below).
<PAGE> 10
Modified UDC Fee
The Company will pay UDC on a nonrecourse basis a fee of $450,000 payable prior
to any payments pursuant to the Excess Collections Split (defined below) solely
from collections of the B Pieces and secured by a pledge of the stock of FMARC
and FMARC II, subordinate only to the DIP Facility, the Secured Claim Recovery
Amount and prior pledges of the FMARC II stock (the "Modified UDC Fee").
Excess Collections Split
Under the Plan, the reorganized Company is overseeing the liquidation, sale
and/or collection of all remaining assets of the reorganized Company and is
overseeing the disbursements to claimants contemplated by the Plan. All cash
received by the reorganized Company (from B Piece collections and other sources)
will be disbursed to the various classes of claimants set forth in the Plan as
described in the Company's Disclosure Statement (subject to certain potential
reserves to pay administrative claims). After payment in full of the Secured
Claim Recovery Amount, the DIP Facility, the Modified UDC Fee, and certain other
amounts, any further distributions from the B Pieces will be shared between the
Company on the basis of 82 1/2% for the benefit of the Company, for distribution
to its claimants in accordance with the Plan, and 17 1/2% for the benefit of UDC
(the "Excess Collections Split").
In the event that an Owned Loan Servicing Change occurs, the Excess Collections
Split will change to 85% for the benefit of the Company and 15% to UDC with
respect to the B Pieces and, subject to certain adjustments, 100% for the
benefit of the Company and 0% to UDC with respect to the Owned Contracts. UDC
will not be entitled to receive any share of the Excess Collections Split
relating to a Securitized Pool for any period during which it is not acting as
servicer for such securitization. At December 31, 1997, the Company had
recorded obligations due under the Excess Collections Split of approximately
$9.1 million. Based on analysis of actual cash receipts versus projections
through September 30, 1998, the $9.1 million liability appears to be fairly
stated at June 30, 1998.
Additional Matters
At its option, UDC may distribute up to 5,000,000 shares of Common Stock of UDC
(the "Stock Option Shares") to the Company or directly to the unsecured
creditors of the Company, in lieu of the Company's right to receive all or a
portion of distributions under the Excess Collections Split in cash (the "Stock
Option"). If UDC decides to exercise this one time Stock Option, UDC must give
the Company at least 15 days advance written notice (the "Option Notice") of the
date on which UDC will exercise the Stock Option (the "Exercise Date") and the
number of Stock Option Shares that UDC will issue on the Exercise Date.
On the Exercise Date, the aggregate value of the distribution shall be
determined by multiplying the Stock Option Shares by 98% of the average of the
closing prices for the previous 10 trading days of UDC Common Stock (the "Stock
Option Value"). After issuance and delivery of the Stock Option Shares, UDC
will be entitled to receive the Company's share of cash distributions under the
Excess Collections Split from and after the Exercise Date until UDC has received
distributions equal to the Stock Option Value. This would be in addition to
UDC's right to receive its share under the Excess Collections Split. Once UDC
has received cash distributions equal to the Stock Option Value, the Company
will retain the remaining portion of its share of cash distributions under the
Excess Collections Split, if any, in excess of the Stock Option Value. UDC will
not be entitled to exercise the Stock Option unless (i) the value of its Common
Stock on the Exercise Date and the closing price for its Common Stock on each
day during the previous ten trading days shall be at least $8.00 per share, (ii)
UDC shall have caused the Stock Option Shares to be registered under the
Securities Act of 1933;
<PAGE> 11
and (iii) UDC shall not have purchased any of its Common Stock or announced any
stock repurchase programs from and after the delivery of the Option Notice
through the Exercise Date. UDC has registered the Stock Option Shares under the
Securities Act of 1933, and will be required to maintain such registration in
order to meet the above condition.
Note 3 -- Net Finance Receivables and Allowance for
Credit Losses
<TABLE>
<CAPTION>
Net finance receivables consisted of the following for the months ended June 30,
1998 and December 31, 1997 (in thousands):
JUNE 30, 1998 DECEMBER 31, 1997
(UNAUDITED)
<S> <C> <C>
Total finance receivables $53,306 $80,395
Allowance for credit losses (7,740) (12,289)
------- -------
Net finance receivables $45,566 $68,106
======= =======
</TABLE>
Net finance receivables are either owned by the Company or are held in
bankruptcy remote subsidiaries. Finance receivables held in bankruptcy remote
subsidiaries result from several securitization transactions accounted for as
financing transactions for which actual title to the assets have been
transferred to FMARC and FMARC II. These finance receivables are restricted to
provide credit enhancement as required under the terms of the Company's sales
and securitizations of finance receivables. In two of the securitization
transactions, finance receivables along with a cash deposit, were pledged as
additional collateral as part of the spread account. As of June 30, 1998 and
December 31, 1997 these excess spread account finance receivables are included
in net finance receivables held in bankruptcy remote subsidiaries and totaled
$8,026,000 and $10,706,000, respectively. Net finance receivables owned and
held in bankruptcy remote subsidiaries consisted of the following at June 30,
1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
(UNAUDITED)
<S> <C> <C>
Finance receivables - owned $1,591 $2,487
Allowance for credit losses (891) (1,379)
------ -------
Net finance receivables, owned 700 1,108
------ -------
Finance receivables - held in bankruptcy
remote subsidiaries 51,715 77,908
Allowance for credit losses (6,849) (10,910)
------ -------
Net finance receivables, held in bankruptcy
remote subsidiaries 44,866 66,998
------ -------
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
(UNAUDITED)
<S> <C> <C>
Net finance receivables $45,566 $68,106
======= =======
</TABLE>
Activity in the allowance for credit losses consisted of the following for
months ended June 30, 1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
(UNAUDITED)
<S> <C> <C>
Balance, beginning of year $12,289 $60,583
Discounts allocated to the
allowance for credit losses -- 2,698
Provision for credit losses -- 11,452
Charge-offs, net (4,549) (36,587)
Allowance relating to loans sold -- (25,857)
------- -------
Balance, end of year $ 7,740 $12,289
======= =======
</TABLE>
<PAGE> 13
Note 4 -- Residuals in Finance Receivables Sold and Investments Held in Trust
Residuals in Finance Receivables Sold
Residuals in finance receivables sold consisted of the following at June 30,
1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
(UNAUDITED)
<S> <C> <C>
Interest-only strips $ 211 $ 196
Retained asset-backed securities (B certificates) 15,064 16,244
------- -------
Total residuals in finance receivables sold $15,275 $16,440
======= =======
</TABLE>
The residuals in finance receivables sold were calculated at June 30, 1998 and
December 31, 1997 (in thousands) as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
(UNAUDITED)
<S> <C> <C>
Estimated future net cash flows before estimated
credit losses $52,359 $73,884
Allowance for estimated credit losses (33,992) (53,734)
------- -------
Estimated future net cash flows 18,367 20,150
Discount to present value (3,092) (3,710)
------- -------
Total residuals in finance receivables sold $15,275 $16,440
======= =======
</TABLE>
The residual in finance receivables sold represents the present value of the
Company's interest in anticipated future cash flows of the underlying portfolio.
During the first three-quarters of 1996, the Company completed three
securitizations for which the estimated future cash flows out of the trusts were
discounted at 10.0% to 10.5%. For the same securitization transactions, net
losses were originally estimated using total expected cumulative net credit
losses at loan origination of 9.76% to 10.0%, (adjusted for actual cumulative
net credit losses prior to securitization). For the securitization in the
fourth quarter of 1996 and the two securitizations in 1997, net credit losses
were estimated using total expected cumulative net credit losses at loan
origination of 16.0% to 21.6%. The Company also increased the discount rate
used in determining the present value of the estimated cash flows out of the
trusts to 16% at December 31, 1996. Prepayment rates were estimated to be .83%
per month of the beginning of the month balance.
<PAGE> 14
Investments Held in Trust
In connection with its securitization transactions, the Company has been
required to provide a credit enhancement to the investor. The Company made an
initial cash deposit, ranging from 1.0% to 3.8% of the initial underlying
finance receivables principal balance, of cash into an account held by the
trustee (spread account) and pledged this cash to the trust to which the finance
receivables were sold. Additional deposits are made from the residual cash flow
(through the trustee) to the spread account as necessary to attain and maintain
the spread account at a specified percentage, ranging from a minimum of 1.5% to
a maximum of 6.25%, of the underlying finance receivables principal balance.
In the event that the cash flows generated by the finance receivables sold to
the trust are insufficient to pay obligations of the trust, including principal
or interest due to certificate holders or expenses of the trust, the trustee
will draw funds from the spread account as necessary to pay the obligations of
the trust.
The spread account must be maintained at a specified percentage of the principal
balances of the finance receivables held by the trust, which can be increased in
the event delinquencies or losses exceed specified levels. During the fourth
quarter of 1996, the delinquency and net loss performance triggers were exceeded
on various securitized pools which increased the required spread amounts to 11%
of the underlying finance receivables principal balance. If the spread account
exceeds the specified percentage, the trustee will release the excess cash to
the Company from the pledged spread account. Except for releases in this
manner, the cash in the spread account is restricted from use by the Company.
A financial guaranty insurance company ("Insurer") has provided a financial
guaranty insurance policy for the benefit of investors in each series of
asset-backed securities issued by the trusts or special purpose financial
subsidiaries of the Company. Certain agreements with the Insurer provide that
if delinquency, default and net loss ratios in the pools of finance receivables
supporting the asset-backed securities exceed certain amounts, the specified
level of enhancement would be increased and in certain instances the Company
could be removed as servicer of the finance receivables.
Because the Company was not in compliance with certain provisions of its
securitization agreements, certain of the required spread account balances were
either uncapped or set at the discretion of the Insurer. As part of the Plan,
the Insurer agreed to amend the required spread account amounts. The modified
spread account agreements provide for distributions of cash held in the spread
accounts to the Company to the extent that the aggregate cash in the spread
accounts plus the remaining unpaid principal balance on all contracts on which
obligors are current or less than 30 days past due (the "Aggregate Collateral"),
exceeds 150% of all obligations due on the Insurer-backed indebtedness. The
agreement also requires that at all times the Aggregate Collateral must exceed
the Insurer-backed indebtedness by $15 million.
At June 30, 1998 and December 31, 1997, investments held in trust consist of
principal and interest payments on Class B certificates not released to the
Company and principal and collections on finance receivables pledged as
additional collateral on certain securitizations.
Note 5 - Notes Payable - Securitized Pools
On May 21, 1996, the Company completed a $125.9 million debt financing
consisting of automobile receivable-backed notes, Series 1996-A. Of these notes,
$85.0 million have a floating interest rate of 0.17% over the one-month LIBOR
rate and the remaining $40.9 million have a fixed interest rate of 6.70%. The
Series 1996-A notes were issued by First Merchants Auto Trust 1996-A ("1996-A
Trust"), a trust formed specifically for purposes of the securitization
structure. As the Company retained all of the ownership interests in the 1996-A
Trust, the sale of the 1996-A notes is treated as a financing and the notes are
included in the Company's consolidated financial statements. The balance of the
notes outstanding as of June 30, 1998 and December 31, 1997 was approximately
$26.5 million and $43.3 million, respectively.
<PAGE> 15
On November 17, 1995, the Company completed a $75.1 million debt financing
consisting of 6.20% automobile receivable-backed notes, Series 1995-A. The
Series 1995-A notes were issued by FMARC, a wholly-owned special purpose
subsidiary of the Company. The balance of the notes outstanding at June 30, 1998
and December 31, 1997 was approximately $8.9 million and $17.0 million,
respectively.
Principal and interest on the notes are payable monthly from collections and
recoveries on the pools of finance receivables. Interest expense including the
amortization of debt issuance costs, is shown in the table below (in thousands,
unaudited):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
<S> <C> <C>
Three Months Ended $ 817 $2,183
Six Months Ended 1,834 4,390
</TABLE>
Note 6 - Litigation
The Company and certain of its former directors and officers have been party to
several lawsuits in federal court alleging that the Company published false
consolidated financial statements and other misleading information in violation
of the securities laws. This litigation has been consolidated into a single
class action amended complaint in the United States District Court for the
Northern District of Illinois. The complaint in the consolidated class action
alleges various purported causes of action under various securities and other
laws on behalf of persons who purchased subordinated reset notes and/or common
stock of the Company between September 23, 1994 and April 16, 1997, which class
encompasses nearly all of the existing noteholders and some of the existing
shareholders. The complaint names as defendants three former officers of the
Company who were terminated in April 1997 for cause by the former board of
directors of the Company, as well as the Company's former outside auditors and
former members of the Company's audit committee. The Company has been released
from any action. The Company and the class entered into a joint prosecution
agreement which allows the Company to participate in any recovery or settlement
received (net of the contingency fee paid to class counsel). The joint
prosecution agreement provides certain directors and officers the benefits of a
covenant not to attach their personal assets. None of the three officers
terminated for cause, the former outside auditors nor the providers of directors
and officer liability insurance were released.
The Company has received notices of various suits from customers from time to
time. The Company has generally asserted the administrative or pre-petition bar
date as to these suits and coordinated with Cygnet as servicer regarding the
same. The Company believes that any exposure on such suits is de minimis.
-- -------
<PAGE> 16
Causes of Action
The Company is in the process of documenting a settlement of claims against its
director and officer liability insurers and is examining other potential causes
of action including causes of action against its former auditor.
Note 7 - Use of Estimates
The preparation of financial statements requires management to use estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenue and expenses during the reported
period. Actual results could differ materially from these estimates.
Note 8 -- Bankruptcy Remote Entities
First Merchants Auto Receivables Corporation (FMARC) and First Merchants Auto
Receivables Corporation II (FMARC II) (collectively referred to as
"Securitization Subsidiaries"), are the Company's wholly owned special purpose
"bankruptcy remote entities." The Company's 1995-A and 1996-A securitizations
were accounted for as financing transactions. Their assets, included in Net
Finance Receivables, Residuals in Finance Receivables Sold, Investments Held in
Trust, Repossessed Collateral, in the amount of approximately $78.5 million and
$104.1 million, at June 30,1998 and December 31, 1997, respectively, as well as
the assets of FMARC and FMARC II would not be available to satisfy claims of
creditors of the Company on a consolidated basis, until the related
securitization obligations, and notes payable-securitized pools are paid in
full.
Note 9 - Subsequent Events
The Company was notified on January 11, 1999 by UDC of an occurrence of default
under certain provisions relating to the DIP facility. The Company had received
various tax refunds and "B" Piece distributions, some of which had not been
remitted to UDC at the time of the notice. Various extensions of the time to
cure have been granted by UDC with the latest one being an open extension of
time which is subject to a ten (10) day "call" by UDC. UDC has also made various
advances from time to time to allow FMAC to pay post-confirmation operating
expenses, while reserving UDC's rights as to the asserted default. FMAC has
sent UDC monies received from the 1997 tax refunds and certain other monies and
asserts that it has now fully cured the default. Currently, UDC and FMAC are
discussing various possibilities including a possible satisfaction in full of
the DIP Financing with additional liquidity for post-confirmation expenses. Each
party has reserved all of their legal rights in case a consensual solution
cannot be reached.
Note 10 - Year 2000 Compliance
The Year 2000 presents potential concerns for business computing due to
calculation problems from the use of a 2-digit year format as the year changes
from 1999 to 2000. As a result, businesses and governmental agencies are at
risk for potential disruption to their business from Business System
malfunctions or failures. This is commonly referred to as the Year 2000 ("Y2K")
issue. The Company could be impacted by failures of its own Business Systems as
well as those servicing the Company's loan portfolio ("Servicers"). The Company
has evaluated its information systems and to the best of its knowledge is Y2K
compliant. The Servicers have been identified and steps are being taken to
ascertain their Y2K readiness. Because of the vast number of Business Systems
used by Servicers and the varying levels of Y2K readiness, it is difficult to
assess the likelihood and impact of a malfunction due to this issue. The
Company is not currently aware of any business relationships with the Servicers
that it believes will likely result in a significant disruption of its
businesses. However, if a Y2K failure did occur there could be a material
adverse effect on the Company.
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST MERCHANTS ACCEPTANCE CORPORATION
/s/ Teresa McMahon
---------------------------------------
Teresa McMahon
Dated: February 26, 1999 President
