United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
250 N. Shadeland Avenue, Indianapolis, IN 46219
(Address of principal executive office) (Zip Code)
(317) 231-6400
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 12, 1999
Class A Common Stock, without par value 4,459,224 Shares
- --------------------------------------- ----------------
Class B Common Stock, without par value 8,790,036 Shares
- --------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (unaudited):
Consolidated Condensed Balance Sheets as of
December 31, 1998 and June 30, 1998 3
Consolidated Condensed Statements of Earnings (Loss) and
Comprehensive Earnings (Loss) for the Three Months
and Six Months Ended December 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended December 31, 1998 and 1997 5
Consolidated Condensed Statement of Shareholders' Equity for
Six Months Ended December 31, 1998 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures 21
Part II. OTHER INFORMATION 22
Signatures 23
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
Dollars in thousands, except share data
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1998 1998
- ------
----------------------------
<S> <C> <C>
Cash $ 7,690 $ 75,612
Restricted cash 12,535 17,823
Receivables, net 249,483 118,259
Accrued interest receivable 2,086 1,045
Property, equipment, and leasehold improvements, net 8,519 7,921
Retained interest in securitized assets 198,146 171,593
Other assets 20,207 19,280
----------------------------
Total Assets $ 498,666 $ 411,533
============================
Liabilities
Amounts due under warehouse facilities $ 174,831 $ 73,123
Long-term debt 199,000 221,000
Accrued interest payable 5,275 6,280
Amounts due to trusts 12,854 15,510
Dealer premiums payable 3,412 1,374
Deferred income tax payable 12,781 9,573
Other payables and accrued expenses 2,835 2,200
----------------------------
Total Liabilities 410,988 329,060
----------------------------
Shareholders' Equity
Preferred Stock, without par value, authorized
10,000,000 shares; none issued and outstanding - -
Class A Common Stock, without par value,
authorized 30,000,000 shares; 4,459,224 and 4,376,446 shares
issued and outstanding at December 31, 1998 and
June 30, 1998, respectively 58,450 58,360
Class B Common Stock, without par value,
authorized 20,000,000 shares; 8,790,036 and 8,855,036 shares
issued and outstanding at December 31, 1998 and
June 30, 1998, respectively - -
Net unrealized gain on retained interest in securitized assets 7,744 7,609
Retained earnings 21,484 16,504
----------------------------
Total Shareholders' Equity 87,678 82,473
----------------------------
Total Liabilities and Shareholders' Equity $ 498,666 $ 411,533
============================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings (Loss) and
Comprehensive Earnings (Loss)
Dollars in thousands, except share data
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest on receivables $ 6,938 $ 6,473 $ 15,189 $ 13,100
Other interest 5,037 3,191 10,516 6,304
------------ ------------ ------------ ------------
Total interest income 11,975 9,664 25,705 19,404
Interest expense 6,338 6,167 13,290 12,220
------------ ------------ ------------ ------------
Net interest margin 5,637 3,497 12,415 7,184
Provisions for estimated credit losses 1,275 1,770 3,600 3,275
------------ ------------ ------------ ------------
Net interest margin after provision 4,362 1,727 8,815 3,909
Gain (loss) on sales of receivables, net 4,087 2,020 6,793 (8,827)
Servicing fees, net 5,469 4,803 10,422 9,548
Other revenues 1,173 985 2,379 2,005
------------ ------------ ------------ ------------
Total revenues 15,091 9,535 28,409 6,635
------------ ------------ ------------ ------------
Salaries and benefits 5,453 4,871 11,123 9,481
Other expenses 4,856 4,165 9,177 8,178
------------ ------------ ------------ ------------
Total operating expenses 10,309 9,036 20,300 17,659
------------ ------------ ------------ ------------
Earnings (loss) before provision (benefit)
for income taxes 4,782 499 8,109 (11,024)
Provision (benefit) for income taxes 1,859 (711) 3,129 (5,367)
------------ ------------ ------------ ------------
Net earnings (loss) $ 2,923 $ 1,210 $ 4,980 $ (5,657)
============ ============ ============ ============
Other comprehensive earnings (loss) before provision
(benefit) for income taxes:
Net change in unrealized gain on retained
interest in securitized assets (4,847) 2,315 219 6,627
Provision (benefit) for income taxes related to
items of other comprehensive earnings (1,852) 870 84 2,492
------------ ------------ ------------ ------------
Other comprehensive earnings (loss) (2,995) 1,445 135 4,135
------------ ------------ ------------ ------------
Comprehensive earnings (loss) $ (72) $ 2,655 $ 5,115 $ (1,522)
============ ============ ============ ============
Net earnings (loss) per share (diluted & basic) $ 0.22 $ 0.09 $ 0.38 $ (0.43)
============ ============ ============ ============
Weighted average number of
common shares outstanding 13,236,313 13,227,010 13,233,897 13,221,899
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
Dollars in thousands
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss) $ 4,980 $ (5,657)
Adjustments to reconcile net earnings (loss) to net cash
used by operating activities:
Receivable acquisitions in excess of liquidations (756,893) (476,782)
Dealer premiums paid in excess of dealer premium
rebates received on receivables held for sale (28,456) (21,175)
Securitization of receivables held for sale 627,293 422,537
Gain on sales of receivables (20,912) (12,512)
Proceeds on sale of interest-only strip -- 7,137
Return of excess and servicing asset cash flows,
net of present value effect 16,676 10,270
Impairment of retained interest in securitized assets 5,172 17,549
Provision for estimated credit losses 3,600 3,275
Amortization and depreciation 2,430 2,093
Spread accounts (2,633) 4,320
Restricted cash 5,288 (1,737)
Other assets and accrued interest receivable (3,120) (2,478)
Amounts due to trusts (2,656) (3,288)
Other payables and accrued expenses 2,928 (1,754)
--------- ---------
Net cash used by operating activities (146,303) (58,202)
--------- ---------
Cash flows from investing activities:
Purchase of property, equipment, and leasehold improvements (1,225) (3,256)
--------- ---------
Cash flows from financing activities:
Principal payment on long-term debt (22,000) --
Payment of borrowing fees (102) --
Net change in warehouse credit facilities 101,708 58,157
--------- ---------
Net cash provided from financing activities 79,606 58,157
Change in cash (67,922) (3,301)
Cash, beginning of period 75,612 58,801
--------- ---------
Cash, end of period $ 7,690 $ 55,500
========= =========
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Income taxes paid $ 6 $ 20
========= =========
Interest paid $ 15,406 $ 12,768
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statement of Shareholders' Equity
For the Six Months Ended December 31, 1998
Dollars in thousands, except per share data
(Unaudited)
<TABLE>
<CAPTION>
Number of Common Stock Net Unrealized
Shares Outstanding Gain on Retained Total
------------------------- Common Interest in Retained Shareholders'
Class A Class B Stock Securitized Assets Earnings Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 4,376,446 8,855,036 $ 58,360 $7,609 $ 16,504 $ 82,473
Grants of Common Stock 17,778 - 90 - - 90
Conversion of Class B
Common Stock into
Class A Common Stock 65,000 (65,000) - - - -
Net earnings - - - - 4,980 4,980
Net change in unrealized
gain on retained interest
in securitized assets - - - 135 - 135
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 4,459,224 8,790,036 $ 58,450 $7,744 $ 21,484 $ 87,678
=========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Six Months Ended December 31, 1998 and 1997
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The forgoing consolidated condensed financial statements are unaudited.
However, in the opinion of management, all adjustments necessary for a fair
presentation of the results of the interim period presented have been included.
All adjustments are of a normal and recurring nature. Results for any interim
period are not necessarily indicative of results to be expected for the year.
The consolidated condensed financial statements include the accounts of Union
Acceptance Corporation and its subsidiaries.
During fiscal 1995, Union Acceptance Funding Corporation, UAC
Securitization Corporation, Performance Funding Corporation and Performance
Securitization Corporation were formed as wholly-owned subsidiaries of UAC.
During fiscal 1996, UAC Boat Funding Corp. was formed as a wholly- owned
subsidiary of UAC. In fiscal 1997, UAC Finance Corporation was formed as a
wholly-owned subsidiary of UAC. Circle City Car Company and Union Acceptance
Receivables Corporation were formed as wholly-owned subsidiaries of UAC during
the first and second quarters, respectively, of fiscal 1998.
The consolidated condensed interim financial statements have been
prepared in accordance with Form 10-Q specifications, and, therefore, do not
include all information and footnotes normally shown in full annual financial
statements. A summary of the Company's significant accounting policies is set
forth in "Note 1" of the "Notes to Consolidated Financial Statements" in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
Note 2 - Reclassification
- -------------------------
Certain amounts for the prior period have been reclassified to conform
to the current period presentation.
Note 3 - Other Interest Income
- ------------------------------
Other interest income includes interest earned on cash collection
accounts on all securitization transactions before January 1, 1997, the discount
accretion recognized on retained interest in securitized assets, and the
discount accretion related to the servicing asset which was established for
securitization transactions after December 31, 1996. Cash collection accounts
represent customer payments held in trust until disbursement by the trustee.
Interest is earned by the Company on these funds prior to distribution of such
funds to investors and the servicer. Beginning with the implementation of
Statement of Financial Accounting Standards No. 125 on January 1, 1997, the
Company established a servicing asset for the expected collection account
interest.
Note 4 - Earnings Per Share
- ---------------------------
The Company has implemented Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (EPS) which is effective for interim and annual
periods ending after December 15, 1997, and requires the presentation of basic
and dilutive earnings per share. EPS have been computed on the basis of the
weighted average number of common shares outstanding. The effect of stock
options not exercised during the periods presented are anti-dilutive and
therefore not included in diluted earnings per share. The weighted average
number of shares used in the basic and diluted EPS computations for the three
months ended December 31, 1998 and 1997 were 13,236,313 and 13,227,010,
respectively. The weighted average number of shares used in the basic and
dilutive EPS computations for the six months ended December 31, 1998 and 1997
were 13,233,897 and 13,221,899, respectively.
Note 5 - Current Accounting Pronouncements
- ------------------------------------------
In June, 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which introduces new guidance on
segment reporting. The Statement is effective for fiscal years beginning
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
Note 5 - Current Accounting Pronouncements (continued)
- ------------------------------------------------------
after December 15, 1997, with earlier application encouraged. The Statement is
not expected to have a material impact on the financial condition or results of
operations of the Company.
In February 1998, Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits." The Statement does not alter the
measurement and recognition provisions currently outlined in generally accepted
accounting principles but merely standardizes the disclosure requirements. The
Statement is effective for fiscal years beginning after December 15, 1997, with
earlier application encouraged. The Statement is not expected to have a material
impact on the financial condition or results of operations of the Company when
adopted.
In June 1998, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement is effective for fiscal years beginning
after June 15, 1999, with earlier application allowed. Management is currently
assessing the impact of this Statement on the financial condition of operations
of the Company upon adoption.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." This Statement is effective for fiscal years beginning after
December 15, 1998, with earlier application allowed. This Statement is not
expected to have a material impact on the financial condition or results of
operations of the Company when adopted.
Note 6 - Retained Interest in Securitized Assets
- ------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------- -----------
<S> <C> <C>
Estimated fair value of excess servicing receivable,
net of estimated prepayments $ 205,466 $ 175,164
Allowance for estimated credit losses on securitized (96,513) (90,203)
receivables
Estimated dealer premium rebates 25,526 25,718
Discount to present value (34,883) (33,117)
----------- -----------
99,596 77,562
Spread accounts 70,746 68,113
Accrued interest on securitized receivables 15,273 13,606
Unrealized gain 12,531 12,312
----------- -----------
Retained interest in securitized assets $ 198,146 $ 171,593
=========== ===========
Outstanding balance of receivables serviced
through securitized trusts $ 2,101,706 $ 1,929,981
Allowance for estimated credit losses as
a percentage of securitized receivables serviced 4.59% 4.67%
</TABLE>
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
Note 7- Conversion of Common Stock
- ----------------------------------
The Company's charter provides that shares of Class B Common Stock
convert automatically to shares of Class A Common Stock on a share-for-share
basis upon transfer outside a prescribed group of holders. Pursuant to such
provision, 65,000 shares of Class B Common Stock were converted to shares of
Class A Common Stock in the fiscal quarter ended December 31, 1998.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
General
The Company derives substantially all of its earnings from the
acquisition, securitization and servicing of retail installment sales contracts
originated by dealerships affiliated with major domestic and foreign
manufacturers. To fund the acquisition of receivables prior to securitization,
the Company utilizes a revolving warehouse facility, discussed in "Liquidity and
Capital Resources." Through securitizations, the Company periodically pools and
sells receivables to a trust which issues Certificates to investors representing
pro-rata interests in the receivables sold. When the Company sells receivables
in a securitization, it records a gain (or loss) on sale of receivables and
establishes Retained Interest in Securitized Assets ("Retained Interest") as an
asset. Excess cash flows are recorded against Retained Interest as received over
the life of the related securitization.
Acquisition Volume. The Company currently acquires receivables in 32
states from over 3,800 manufacturer-franchised auto dealerships. The Company
primarily acquires receivables on automobiles made to borrowers who exhibit a
favorable credit profile ("Tier I") and since October 1994, to borrowers with
adequate credit quality who would not qualify for acquisition under the
Company's Tier I quality criteria ("Tier II"). Effective January 1, 1999, the
Company no longer acquires Tier II receivables. The decision to stop acquiring
Tier II receivables will not significantly impact operations and will allow the
Company to focus on Tier I acquisitions.
Total receivable acquisitions decreased to $361.9 million for the
quarter ended December 31, 1998, from $404.5 million for the quarter ended
September 30, 1998, but increased from $227.4 million for the quarter ended
December 31, 1997. Tier I receivable acquisitions were $357.3 million for the
quarter ended December 31, 1998, compared to $221.1 million for the same quarter
of last year. Tier II receivable acquisitions were $4.6 million for the quarter
ended December 31, 1998, compared to $5.8 million for the quarter ended December
31, 1997. As a result of the decision to stop acquiring Tier II receivables and
our continued effort to improve the credit quality of our portfolio, receivable
acquisitions are currently expected to decrease to approximately $290.0 million
for the quarter ended March 31, 1999. The decrease in receivable acquisitions
should be offset by the Company's ability to achieve higher gross and net
spreads. See - "Discussion of Forward-Looking Statements".
Gross and Net Spreads. The gross and net spreads on the second quarter
securitization of fiscal 1999 were 6.89% and 5.25% compared to 6.71% and 5.07%,
respectively, over the same quarter of last year. Gross spread is defined as the
difference between the weighted average receivable rate and the certificate
rate. Net spread is defined as gross spread less servicing fees, upfront costs,
ongoing credit enhancement and trustee fees, and hedging gains or losses.
To offset projected lower acquisition volume, management increased the
targeted gross and net spreads by approximately 50 basis points. Net spreads are
currently targeted at 5.50% to 6.00% on securitizations (assuming a pricing
spread for asset-backed certificates over the two-year treasury note of 100
basis points) for the remaining six months of fiscal 1999. Management believes
that by targeting a spread of 8.00% to 8.50% between receivable rates and the
two-year treasury rate that these net spreads can be achieved. Although
management believes these spreads can be achieved, material factors affecting
the net spreads are difficult to predict and could cause management's
projections to be materially inaccurate. These include current market conditions
with respect to interest rates and demand for asset-backed securities generally
and for Certificates representing interests in securitizations sponsored by the
Company. See - "Discussion of Forward-Looking Statements".
Gain (loss) on Sales of Receivables, Net and Interest Rate Risk. Gain
(loss) on sales of receivables continues to be a significant element of the
Company's net earnings. The gain (loss) on sales of receivables is affected by
several factors but is primarily affected by the amount of receivables
securitized, the net spread, and the level of estimation for net credit losses.
Prior to the quarter ended June 30, 1998, the Company estimated the future
servicing cash flows recognized as a component of the gain on sale by
discounting the projected future servicing cash flows from the time they are
received by the respective trust. However, management implemented the "cash out"
method during the fourth quarter of fiscal 1998 which discounts the expected
future servicing cash flows from the time they are released from the spread
account to the Company.
<PAGE>
The Company's sources for funds generally have variable rates of
interest, and its receivable portfolio bears interest at fixed rates. The
Company therefore bears interest rate risk on receivables until they are
securitized and employs a hedging strategy to mitigate this risk. As a part of
the hedging strategy, the Company executes short sales of U.S. Treasury
securities having a maturity approximating the average maturity of receivables
to be acquired during the relevant period. There is no assurance that this
strategy will completely offset changes in interest rates. In particular, such
strategy depends on management's estimates of receivable acquisition volume and
timing of its securitizations. The Company realizes a gain on its hedging
transactions during periods of increasing interest rates and realizes a loss on
such transactions during periods of decreasing interest rates. The hedging gain
or loss will in part offset changes in interest rates as reflected by a lower or
higher reported gain on sales of receivables, respectively. Recognition of
unrealized gains or losses is deferred until the sale of receivables during the
securitization. On the date of the sale, deferred hedging gains and losses are
recognized as a component of gain (loss) on sales of receivables. The Company
plans to change its hedging strategy to the execution of forward interest rate
swaps during the third quarter of fiscal 1999.
Portfolio Performance. Since September 30, 1997, the Company has
experienced steady improvement in both delinquency and net credit losses. The
Company attributes the improvement to the implementation of tighter credit
standards in March 1997 and strategic changes made in its origination and
collection departments. Recoveries as a percentage of gross charge-offs on the
Tier I portfolio dropped slightly to 37.79% for the quarter ended December 31,
1998, compared to 38.67% for the quarter ended September 30, 1998, and 38.11%
for the same quarter of last year. In response to declining recovery rates, the
Company opened a new car franchised dealership in Indianapolis in July 1998 and
is retailing a portion of its repossessed automobiles through the dealership.
The Company anticipates that this method of disposing of repossessions along
with stricter monitoring of the repossession and resale process should increase
the recovery rate over time. Although the overall recovery percentage remains
below management's expectations, recovery rates for repossessed automobiles sold
by the Company's retail operation are significantly higher than recovery rates
on vehicles sold at auction. Approximately 10.0% of repossessed automobiles were
sold at the Company's retail operation during the six months ended December 31,
1999. The recovery rate on automobiles retailed by the Company was approximately
60.00% as a percentage of gross charge-offs, compared to our total Tier I
reported recoveries as a percentage of gross charge-offs of 37.79%. See -
"Discussion of Forward-Looking Statements".
Provisions are made for estimated net credit losses in conjunction with
each receivable sale. Current assumptions utilized in the gain (loss) on sale of
receivables calculation for estimated net credit losses during the second
quarter securitization was 4.40% over the life of the pool based on a combined
sale of Tier I, Tier II and modified receivables. Allowance related to net
credit losses on securitized receivables (inherent in Retained Interest)
declined to 4.59% at December 31, 1998, compared to 4.64% and 5.06% at September
30, 1998, and December 31, 1997, respectively.
Tier I Portfolio. Set forth below is certain information concerning the
Company's experience pertaining to delinquencies and net credit losses on the
Tier I fixed rate retail automobile, light truck and van receivables serviced by
the Company. There can be no assurance that future delinquency and net credit
loss experience on receivables will be comparable to that set forth below.
See "Discussion of Forward-Looking Statements".
<PAGE>
<TABLE>
<CAPTION>
Tier I Delinquency Experience
---------------------------------------------------------------------------------
At December 31, 1998 At September 30, 1998 At December 31, 1997
------------------------ ----------------------- -------------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
-------- -------------- -------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 202,890 $ 2,277,112 194,882 $ 2,151,695 179,962 $ 1,920,930
Delinquencies:
30-59 days 4,379 $ 44,626 3,741 $ 38,040 3,954 $ 41,778
60-89 days 1,682 17,475 1,873 19,652 2,274 25,933
90 days or more 694 7,161 793 7,966 688 8,048
-------- -------------- -------- ------------- ---------- ------------
Total delinquencies 6,755 $ 69,262 6,407 $ 65,658 6,916 $ 75,759
======== ============== ======== ============= ========== ============
Delinquency as a percentage
of servicing portfolio 3.33% 3.04% 3.29% 3.05% 3.84% 3.94%
</TABLE>
As indicated by the above table, delinquency rates based upon
outstanding receivable balances of accounts 30 days past due and over were 3.04%
at December 31, 1998, compared to 3.05% at September 30, 1998, and 3.94% at
December 31, 1997, for UAC's Tier I servicing portfolio.
<TABLE>
<CAPTION>
Tier I Credit Loss Experience
For the Three Months Ended
----------------------------------------------------------------------------------
December 31, 1998 September 30, 1998 December 31, 1997
-------------------------- ------------------------ ------------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 200,164 $ 2,234,753 190,877 $ 2,088,163 179,334 $1,916,778
Gross charge-offs 1,886 19,339 2,196 23,651 1,977 22,373
Recoveries 7,309 9,146 8,527
---------------- ------------- -----------
Net charge-offs $ 12,030 $ 14,505 $ 13,846
================ ============= ===========
Gross charge-offs as a percentage
of average servicing portfolio (1) 3.77% 3.46% 4.60% 4.53% 4.41% 4.67%
Recoveries as a percentage of
gross charge-offs 37.79% 38.67% 38.11%
Net charge-offs as a percentage
of average servicing portfolio (1) 2.15% 2.78% 2.89%
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
-------------------------------------------------------
December 31, 1998 December 31, 1997
-------------------------- -------------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
----- ------ ----- ------
<S> <C> <C> <C> <C>
Average servicing portfolio 195,521 $ 2,161,458 177,627 $ 1,899,190
Gross charge-offs 4,082 42,990 4,031 45,429
Recoveries 16,455 16,661
-------------- ------------
Net charge-offs $ 26,535 $ 28,768
============== ============
Gross charge-offs as a percentage
of average servicing portfolio (1) 4.18% 3.98% 4.54% 4.78%
Recoveries as a percentage
of gross charge-offs 38.28% 36.68%
Net charge-offs as a percentage
of average servicing portfolio (1) 2.46% 3.03%
</TABLE>
(1) Annualized
<PAGE>
As indicated in the above table, net credit losses on the Tier I auto
portfolio totaled $12.0 million for the quarter ended December 31, 1998, or
2.15% (annualized) as a percentage of the average servicing portfolio compared
to 2.78% and 2.89% for the quarters ended September 30, 1998, and December 31,
1997, respectively.
Tier II Portfolio. Set forth below is certain information concerning
the Company's experience pertaining to delinquencies and net credit losses on
the Tier II portfolio. There can be no assurance that future delinquency and net
credit loss experience on receivables will be comparable to that set forth
below. See "Discussion of Forward-Looking Statements".
<TABLE>
<CAPTION>
Tier II Delinquency Experience
--------------------------------------------------------------------------------
At December 31, 1998 At September 30, 1998 At December 31, 1997
--------------------------- ------------------------ ------------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
----------- ------------ -------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 6,327 $ 66,363 6,376 $ 67,685 6,367 $ 70,439
Delinquencies:
30-59 days 421 $ 4,492 359 $ 3,758 400 $ 4,647
60-89 days 183 1,871 158 1,683 150 1,728
90 days or more 5 48 9 65 - -
----------- ------------ -------- ------------- ----------- ------------
Total delinquencies 609 $ 6,411 526 $ 5,506 550 $ 6,375
=========== ============ ======== ============= =========== ============
Delinquency as a percentage
of servicing portfolio 9.63% 9.66% 8.25% 8.14% 8.64% 9.05%
</TABLE>
As indicated in the above table, Tier II portfolio delinquency was
9.66% based on outstanding receivable balances of accounts 30 days past due and
over at December 31, 1998, compared to 8.14% at September 30, 1998, and 9.05% at
December 31, 1997. Delinquency as a percentage of servicing portfolio on the
Tier II portfolio is expected to increase, while not actually deteriorating, as
a result of a declining Tier II average servicing portfolio and the
determination to eliminate Tier II receivable acquisitions effective January 1,
1999. See "Discussion of Forward-Looking Statements".
<TABLE>
<CAPTION>
Tier II Credit Loss Experience
For the Three Months Ended
-------------------------------------------------------------------------------
December 31, 1998 September 30, 1998 December 31, 1997
------------------------- ------------------------ ---------------------
(Dollars in thousands)
Number of Number of Number of
Loans Amount Loans Amount Loans Amount
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 6,370 $ 67,145 6,342 $ 67,319 6,340 $ 70,547
Gross charge-offs 168 1,663 215 2,118 195 2,163
Recoveries 580 741 708
------------ ---------- ----------
Net charge-offs $ 1,083 $ 1,377 $ 1,455
============ ========== ==========
Gross charge-offs as a percentage
of average servicing portfolio (1) 10.55% 9.91% 13.56% 12.58% 12.30% 12.26%
Recoveries as a percentage
of gross charge-offs 34.87% 34.99% 32.75%
Net charge-offs as a percentage
of average servicing portfolio (1) 6.45% 8.18% 8.25%
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
----------------------------------------------------
December 31, 1998 December 31, 1997
------------------------ -----------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
----- ------ ----- ------
<S> <C> <C> <C> <C>
Average servicing portfolio 6,356 $ 67,232 6,271 $ 70,186
Gross charge-offs 383 3,780 424 4,637
Recoveries 1,321 1,641
----------- -----------
Net charge-offs $ 2,459 $ 2,996
=========== ===========
Gross charge-offs as a percentage
of average servicing portfolio (1) 12.05% 11.25% 13.52% 13.21%
Recoveries as a percentage
of gross charge-offs 34.94% 35.39%
Net charge-offs as a percentage
of average servicing portfolio (1) 7.32% 8.54%
</TABLE>
(1) Annualized
As indicated in the above table, net credit losses for the quarter
ended December 31, 1998, totaled $1.1 million or 6.45% (annualized) as a
percentage of the average Tier II servicing portfolio compared to 8.18% and
8.25% for the quarters ended September 30, 1998, and December 31, 1997,
respectively.
<PAGE>
Results of Operations
Net earnings increased 141.6% to $2.9 million or $0.22 per diluted
share for the quarter ended December 31, 1998, compared to $1.2 million or $0.09
per diluted share for the quarter ended December 31, 1997. Net earnings
increased 188.0% to $5.0 million or $0.38 per diluted share for the six months
ended December 31, 1998, compared to a net loss of $5.7 million or $0.43 per
diluted share for the six months ended December 31, 1997. The increase in net
earnings was primarily related to a higher gain on sale of receivables, net, and
an increase in other interest income.
Net interest margin after provision increased 152.6% to $4.4 million
and 125.5% to $8.8 million for the quarter and six months ended December 31,
1998, respectively, compared to $1.7 million and $3.9 million for the
corresponding periods ended December 31, 1997.
Interest on receivables increased 7.2% to $6.9 million and 16.0% to
$15.2 million for the quarter and six months ended December 31, 1998,
respectively, compared to $6.5 million and $13.1 million for the corresponding
periods ended December 31, 1997. The increase in interest on receivables was
primarily a result of an increase in the average outstanding balance of
receivables held for sale for the quarter and six months ended December 31,
1998, to $204.3 million and $220.2 million, respectively, compared to $161.2
million and $171.4 million for the corresponding periods ended December 31,
1997.
Other interest income increased 57.9% to $5.0 million and 66.8% to
$10.5 million for the quarter and six months ended December 31, 1998,
respectively, compared to $3.2 million and $6.3 million for the corresponding
periods ended December 31, 1997. The increase in other interest income relates
primarily to the implementation of the "cash out" method of valuing Retained
Interest at June 30, 1998, which increased the discount resulting in a
subsequent increase in discount accretion but was offset by lower collection and
spread account interest. Other interest income related to discount accretion was
$4.7 million and $9.8 million for the quarter and six months ended December 31,
1998, respectively, compared to $1.8 million and $3.4 million for the quarter
and six months ended December 31, 1997. Other interest income related to the
restricted cash accounts (collection and spread accounts) for the quarter and
six months ended December 31, 1998, was $326,000 and $1.4 million, respectively,
compared to $695,000 and $2.9 million for the quarter and six months ended
December 31, 1997.
Interest expense increased 2.8% to $6.3 million and 8.8% to $13.3
million for the quarter and six months ended December 31, 1998, compared to $6.2
million and $12.2 million for the corresponding periods ended December 31, 1997.
The increase was primarily related to higher average borrowing needs due to
higher receivable acquisitions but was offset by lower interest on long-term
debt as a result of a required principal payment of $22.0 million made in August
1998.
Provision for estimated credit losses decreased 28.0% to $1.3 million
for the quarter ended December 31, 1998, compared to $1.8 million for the
quarter ended December 31, 1997, and increased 9.9% to $3.6 million for the six
months ended December 31, 1998, from $3.3 million for the six months ended
December 31, 1997. The decrease during the current quarter is primarily related
to improvement in the quality of the held for sale portfolio.
Gain on sales of receivables, net totaled $4.1 million and $2.0 for the
quarters ended December 31, 1998, and 1997, respectively. Gain on sales of
receivables, net totaled $6.8 million for the six months ended December 31,
1998, compared to a loss on sales of receivables, net of $8.8 million for the
six months ended December 31, 1997. The gain for the quarters ended December 31,
1998, and 1997, consisted of gains on securitization transactions of $5.8
million and $3.4 million and charges for other than temporary impairments of
Retained Interest of $1.6 million and $1.2 million, respectively. The gain for
the six months ended December 31, 1998 and 1997 consisted of gains on
securitization transactions of $12.0 million and $9.0 million, respectively, and
charges for other than temporary impairments of Retained Interest of $5.2
million and $17.5 million, respectively. Unrealized gains on Retained Interest
are not charged to income. (See - Financial Condition - "Retained interest in
securitized assets," below). The increase in the securitization transaction gain
relates to a higher volume of receivables securitized, and a higher net spread,
but was offset by a higher credit loss assumption of 4.40% for the fiscal 1999
second quarter securitization compared to 4.00% for the fiscal 1998 second
quarter securitization. The increase was also offset by an increase in the
discount of the estimated Retained Interest related to the implementation of the
"cash out" method of valuing Retained Interest. The receivables sold in the
securitization for the quarter ended December 31, 1998, were $275.9 million
compared to $204.1 million for the same quarter of last year. The receivables
sold in the securitizations for the six months ended December 31, 1998, and
1997, were $627.3 million and $422.5 million, respectively. The increase in the
credit loss assumption from 4.00% to 4.40% was related to the combined
securitization of Tier I, Tier II and modified receivables in fiscal 1999
securitizations compared to the securitization of only Tier I receivables in
fiscal 1998. The annual prepayment estimate and discount rate assumptions used
for the fiscal 1999 and fiscal 1998 second quarter securitizations were 25.00%
and 9.76%, and 28.60% and 10.67%, respectively.
Servicing fees, net increased 13.9% to $5.5 million and 9.2% to $10.4
million for the quarter ended and six months ended December 31, 1998,
respectively, compared to $4.8 million and $9.5 million for the corresponding
periods ended December 31, 1997. The increase in servicing fees, net is a result
of the increase in average securitized receivables by approximately 14.1% to
$2.1 billion for the second quarter of fiscal 1999, compared to $1.8 billion for
the second quarter of fiscal 1998. Servicing fees consist primarily of
contractual servicing fees of 1.0% on Tier I securitizations. Beginning with the
quarter ended September 30, 1998, the scheduled accretion of discount on excess
servicing cash flows, previously a component of servicing fees, net, was
reclassified to other interest income.
Other revenues totaled $1.2 million and $2.4 million for the quarter
and six months ended December 31, 1998, respectively, compared to $1.0 million
and $2.0 million for the corresponding periods ended December 31, 1997. Other
revenues consist primarily of late charge and origination fee income.
Salaries and benefits expense increased 11.9% to $5.5 million and 17.3%
to $11.1 million for the quarter and six months ended December 31, 1998,
respectively, from $4.9 million and $9.5 million for the quarter and six months
ended December 31, 1997. The increase resulted primarily from increased
full-time equivalent ("FTE") employees. Average FTE's for the quarter and six
months ended December 31, 1998, were 528 and 534, respectively, compared to 441
and 431 for the quarter and six months ended December 31, 1997. Since December
31, 1997, the Company has experienced growth primarily in collections, systems,
reconditioning and remarketing, but modestly in other areas. The increase in
collections is primarily in response to a growing servicing portfolio. The
systems area increased because of the Company's commitment to improve internal
analysis and reporting of corporate financial, acquisition and collection data
that will be used to improve operations. The increase in the number of
reconditioning and remarketing operations employees was due to the opening of a
new automotive dealership in July 1998 to facilitate reconditioning and
remarketing of repossessed vehicles.
Other operating expense increased 16.6% to $4.9 million and 12.2% to
$9.2 million for the quarter and six months ended December 31, 1998,
respectively, from $4.2 million and $8.2 million for the corresponding periods
ended December 31, 1997. Other operating expense includes occupancy and
equipment costs, outside and professional services, receivable expenses,
promotional expenses, travel, office supplies and other. Total operating expense
as a percentage of the average servicing portfolio was 1.79% and 1.81% for the
quarter ended December 31, 1998, and 1997, respectively.
Financial Condition
Receivables, net and servicing portfolio. Receivables, net includes the
principal balance of receivables held for sale, net of unearned discount and
allowance for estimated net credit losses, receivables in process, and prepaid
dealer premiums. The Company's portfolio of receivables, net increased to $249.5
million at December 31, 1998, from $118.3 million at June 30, 1998. The increase
was primarily due to a higher volume of Tier I receivables acquired compared to
Tier I receivables securitized in the two fiscal 1999 securitizations of
approximately $147.5 million. The increase was offset by the sale of Tier II and
modified receivables in the first and second quarter securitizations. The Tier
II receivables held for sale decreased approximately $3.5 million as more
receivables were securitized than acquired during the six months ended December
31, 1998. The modified receivable portfolio, included in receivables held for
sale, decreased approximately $10.0 million as a portion of the modified
receivables were included in the first and second quarter securitizations.
Allowance for net credit losses on receivables held for sale was $2.2 million at
December 31, 1998, compared to $1.9 million at June 30, 1998. The Company
serviced $2.1 billion and $1.9 billion in securitized receivables, and the total
servicing portfolio was $2.3 billion and $2.0 billion as of December 31, 1998,
and June 30, 1998, respectively.
Retained interest in securitized assets ("Retained Interest"). Retained
Interest increased to $198.1 million at December 31, 1998, from $171.6 million
at June 30, 1998. The Retained Interest balance increased by the amounts
capitalized upon consummation of the UACSC 1998-C and 1998-D Auto Trusts
("1998-C" and "1998-D") securitizations including estimated dealer premium
rebates. Total amounts capitalized for the six months ended December 31, 1998,
were $43.1 million. Retained Interest also increased by an additional pre-tax
unrealized gain of $219,000, a $1.7 million increase in accrued interest, and a
net increase in spread accounts of $2.6 million. Additions to Retained Interest
were offset by the return of excess cash flows over the six months ended
December 31, 1998, related to all securitizations of $15.9 million and by the
effect of the $5.2 million impairment of Retained Interest taken during the
first and second quarters of fiscal 1999. Withdrawals of spread account funds
are made when the balance of the account is in excess of the requirements
stipulated in the servicing agreement (the Company's servicing agreements are
collectively referred to as the "Pooling and Servicing Agreements"). Allowance
for net credit losses on securitized receivables is included as a component of
Retained Interest. At December 31, 1998, the allowance related to both Tier I
and Tier II securitized receivables totaled $96.5 million or 4.59% of the total
securitized receivable portfolio compared to $90.2 million or 4.67% at June 30,
1998. The Company's assumptions for valuing Retained Interest on a "cash out"
basis at December 31, 1998, include estimates for net credit losses of 4.00% to
6.39% on Tier I receivables and 12.00% to 15.49% on Tier II receivables as a
percentage of original principal balance over the life of receivables, annual
prepayment estimates ranging from 15.81% to 25.98% and discount rates ranging
from 8.48% and 10.55% in the valuation of Retained Interest at December 31,
1998. Impairment of Retained Interest, an available-for-sale security, is
measured on a disaggregate basis (pool by pool) in accordance with SFAS 115. See
- - "Discussion of Forward-Looking Statements".
Amounts due under revolving warehouse credit facility and long-term
debt. The balance of the revolving warehouse credit facility and the Senior and
Senior Subordinated Notes was $373.8 million at December 31, 1998, compared to
$294.1 million at June 30, 1998. The increase in borrowings was primarily
related to the timing of the securitization in the current quarter but was
offset by a required principal payment on the Company's Senior Note in August
1998 of $22.0 million. The December 1998 quarter securitization was effected
during the second month of the quarter while the fiscal 1998 fourth quarter
securitization was effected during the third month of the quarter. The timing
difference resulted in the Company borrowing for more days after the closing of
the securitization transaction in the quarter ended December 31, 1998, compared
to the quarter ended June 30, 1998.
Net deferred income taxes. The net deferred income taxes payable
totaled $12.8 million at December 31, 1998, compared to $9.6 million at June 30,
1998. This increase is a result of the deferral of a portion of the gain on the
sale of receivables for the securitizations effected during the first two
quarters of fiscal 1999 in excess of previously deferred income recognized
currently for tax purposes.
Liquidity and Capital Resources
Sources and Uses of Cash in Operations. The Company's business requires
significant amounts of cash to support operations. Its primary uses of cash
include (i) acquisitions and financing of receivables, (ii) payment of dealer
premiums, (iii) securitization costs including cash held in spread accounts and
similar cash collateral accounts under the revolving warehouse credit facility,
(iv) servicer advances of payments on securitized receivables pursuant to
securitization trusts, (v) losses on hedging transactions realized in connection
with the closing of securitization transactions where interest rates have
declined during the period covered by the hedge, (vi) operating expenses, (vii)
payment of income taxes, and (viii) interest expense. The Company's sources of
cash from operations include (i) standard servicing fees, generally 1.0% per
annum of the Tier I securitized portfolio, (ii) future servicing cash flows,
(iii) dealer premium rebates, (iv) gains on hedging transactions realized in
connection with the closing of securitization transactions where interest rates
have increased during the periods covered by the hedge, (v) interest income and
(vi) sales of receivables in securitization transactions and (vii) proceeds from
sale of interest-only strips in conjunction with securitization transactions.
Net cash used by operating activities increased to $146.3 million for the six
months ended December 31, 1998, from net cash used by operating activities of
$58.2 million for the six months ended December 31, 1997. The increase was
primarily attributable to a decrease in receivables securitized relative to
receivables acquired.
Hedging. Hedging transactions may represent a source or a use of cash
during a given period depending on the change in interest rates. In the first
and second quarters of fiscal 1999, hedging transactions required a use of cash
of $6.6 million, compared to $1.7 million during the first and second quarters
of fiscal 1998.
Financing Activities. Net cash provided by financing activities for the
six months ended December 31, 1998, was $79.6 million compared to net cash
provided by financing activities of $58.2 million for the six months ended
December 31, 1997. The increase was a result of higher borrowings related to
higher receivable acquisitions for the period after the second quarter
securitization through December 31, 1998, compared to the same period ended
December 31, 1997, but was offset by a required principal payment on long-term
debt of $22.0 million in August 1998. The Company has substantial capital
requirements to support its ongoing operations and anticipated growth. The
Company's sources of liquidity are currently funds from operations,
securitizations and external financing including long-term debt and the
revolving warehouse credit facility. Historically, the Company has used the
securitization of receivable pools as its primary source of long-term funding.
Securitization transactions enable the Company to improve its liquidity, to
recognize gains from the sales of the receivable pools while maintaining the
servicing rights to the receivables, and to control interest rate risk by
matching the repayment of amounts due to investors in the securitizations with
the actual cash flows from the securitized assets. Between securitization
transactions, the Company relies primarily on the revolving warehouse credit
facility to fund ongoing receivable acquisitions (not including dealer
premiums). In addition to receivable acquisition funding, the Company also
requires substantial capital on an ongoing basis to fund the advances of dealer
premiums, securitization costs, servicing obligations and other cash
requirements previously described. The Company's ability to borrow under the
revolving warehouse credit facility is dependent upon its compliance with the
terms and conditions thereof. The Company's ability to obtain successor
facilities or similar financing will depend on, among other things, the
willingness of financial institutions to participate in funding automobile
financing business and the Company's financial condition and results of
operations. Moreover, the Company's growth may be inhibited, at least
temporarily, if the Company is not able to obtain additional funding through
these or other facilities, or if it is unable to satisfy the conditions to
borrowing under the revolving warehouse credit facility. The Company
consistently assesses its long-term receivable funding arrangements with a view
to optimizing cash flows and reducing costs.
Warehouse Facility. The Company has borrowing arrangements with an
independent financial institution for a $450.0 million revolving warehouse
credit facility that is insured by a surety bond provider to fund the purchase
of Tier I and Tier II receivable acquisitions. At December 31, 1998, $174.8
million of the capacity was utilized, and an additional $51.9 million was
available to borrow based on the outstanding principal balance of eligible
receivables. At September 30, 1998, June 30, 1998 and December 31, 1997, $84.8
million, $73.1 million and $102.6 million of the capacity was utilized, and an
additional $62.6 million, $4.7 million and $20.6 million was available to borrow
based on the outstanding principal balance of eligible receivables,
respectively.
Long-term debt. The Company issued $110.0 million of 8.53% Senior Notes
due August 1, 2002, in connection with the Company's initial public offering.
Interest on the Notes is payable semiannually, and principal payments began
August 1, 1998, and are due on each subsequent August 1, in the amount equal to
approximately 20% of the stated original principal balance. A required principal
payment was made on the Senior Notes in August 1998 of $22.0 million. In April
1996, the Company completed a private placement of $46.0 million of 9.99% Senior
Subordinated Notes due March 30, 2003, with interest payable quarterly and
principal due at maturity. In March 1997, the Company issued $65.0 million of
Senior Notes due December 27, 2002. The Notes were issued as "Series A" in the
principal amount of $50.0 million at 7.75% interest and "Series B" in the
principal amount of $15.0 million at 7.97% interest. Interest on the Notes is
payable semiannually and principal payments are due March 15, 2002, in the
amount equal to approximately 33 1/3% of the stated original balance, with the
remaining principal due at maturity.
The Company's credit agreements, among other things, require compliance
with monthly and quarterly financial maintenance tests as well as restrict the
Company's ability to create liens, incur additional indebtedness, sell or merge
assets and make investments. The Company is in compliance with all covenants and
restrictions imposed by the terms of indebtedness.
Based on current cash flow projections, Management believes that the
Company's existing capital resources, the revolving warehouse credit facility
described above, future earnings, expected growth in receivable acquisitions,
and periodic securitization of receivables should provide the necessary capital
and liquidity for its operations through at least the next twelve months. The
period during which its existing capital resources will continue to be
sufficient will, however, be affected by the factors described above affecting
the Company's cash requirements. A number of these factors are difficult to
predict, particularly including the cash effect of hedging transactions, the
availability of outside credit enhancement in securitizations or other financing
transactions and other factors affecting the net cash provided by
securitizations. Depending on the Company's ongoing cash and liquidity
requirements, market conditions and investor interest, the Company may seek to
issue additional debt or equity securities in the near term. The sale of
additional equity, including Class A Common Stock or preferred stock, would
dilute the interests of current shareholders.
Discussion of Forward-Looking Information
The above discussions and notes to consolidated condensed financial
statements contain forward-looking statements made by the Company regarding its
results of operations, effects of changes in accounting policies, cash flow
needs and liquidity, receivable acquisition volume, target spreads, potential
credit losses, recovery rates, prepayment rates, servicing income, Year 2000
compliance, and other aspects of its business. Similar forward-looking
statements may be made by the Company from time to time. Such forward-looking
statements are subject to a number of important factors that cannot be predicted
with certainty and which could cause such forward-looking statements to be
materially inaccurate. Such factors include, for example, demand for new and
used autos, competition, and consumer credit and delinquency trends. See the
"Discussion of Forward-Looking Information" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for fiscal 1998 which is incorporated herein by this
reference.
Year 2000 Compliance
During the year ended June 30, 1997, the Company began a risk
evaluation of potential Year 2000 issues. The outcome of this evaluation was the
formation of a Year 2000 Committee that consists of directors, officers and
employees of the Company. The purpose of this committee is to assess all risks,
analyze current systems, coordinate upgrades and replacements, and report
current and projected status of all known Year 2000 compliance issues.
During the assessment phase, over thirty service bureaus and system
vendors were identified that performed or supplied potential Year 2000
compliance issues. The list included eight service bureaus, seven software
vendors, seven hardware vendors, one electric company, six maintenance and
supplies companies and four telecommunications companies. Once the systems were
identified, an immediate correspondence was established for the purpose of
educating the Company on known Year 2000 issues or Year 2000 compliance
certification.
The systems identified were put through one of two possible phases. If
the vendor provided proof that the system in question had proper Year 2000
compliance certification and a testing cycle was possible, an appropriate
testing cycle was performed. If the testing cycle failed or the system had known
Year 2000 issues, a mission critical evaluation and replacement recommendations
were performed.
The Company had two known mission critical systems at December 31, 1998
that were not Year 2000 compliant. As of February 1, 1999, certified replacement
products for one of the mission critical systems was implemented, and the other
system is scheduled for implementation during March 1999. Following the
implementation of the Year 2000 replacement products on the final mission
critical system, the Company plans to repeat a company wide internal test of all
systems in the quarter ended June 30, 1999, and again in the quarter ended
September 30, 1999.
The replacement or remediation costs for year 2000 compliance issues
with the Company is estimated to be less than $100,000, which the Company
recognizes as incurred. This estimated cost is mostly due to software upgrades
that include new features which are combined with Year 2000 corrections.
The Company estimates that the worst case Year 2000 issue scenario
would be discontinuance of electrical power. Although the Company has numerous
power backup devices, a long-term power outage would have a material adverse
effect on the Company's operations. Although the discontinuance of electrical
power is possible, the Company believes the likeliness of such an outage to be
remote. See - "Discussion of Forward-Looking Statements".
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company bears the primary risk of loss due to defaults in its
servicing portfolio. Default and credit loss rates are impacted by general
economic factors that affect borrowers' ability to continue to make timely
payments on their indebtedness. Prepayments on receivables in the servicing
portfolio reduce the size of the portfolio and reduce the Company's servicing
income. The gain (loss) on sales of receivables in connection with each
securitization transaction and the amount of Retained Interest recognized in
each transaction reflect deductions for estimates of future defaults and
prepayments. The carrying value of Retained Interest may be adjusted
periodically to reflect differences between estimated and actual net credit
losses and prepayments on past securitizations. For example, if net credit
losses increased or decreased by 100 basis points on a $300.0 million
securitization, the gain on sale would result in a reduction or an increase of
the gain (loss) on sales of receivables by approximately $3.0 million pre-tax.
The same 100 basis points increase or decrease would result in a reduction or an
increase of the Retained Interest of approximately $21.0 million based on a
securitized receivable portfolio of $2.1 billion at December 31, 1998. The
Company does not believe fluctuations in interest rates materially affect the
rate of prepayments on receivables.
The Company's sources of funds generally have variable rates of
interest, and its receivable portfolio bears interest at fixed rates. The
Company therefore bears interest rate risk on receivables until they are
securitized and employs a hedging strategy to mitigate this risk. As a part of
the hedging strategy, the Company executes short sales of U.S. Treasury
securities having a maturity approximating the average maturity of receivables
to be acquired during the relevant period. There is no assurance that this
strategy will completely offset changes in interest rates. In particular, such
strategy depends on management's estimates of receivable acquisition volume and
timing of its securitizations. The Company realizes a gain on its hedging
transactions during periods of increasing interest rates and realizes a loss on
such transactions during periods of decreasing interest rates. The hedging gain
or loss will substantially offset changes in interest rates as seen by a lower
or higher reported gain on sales of receivables, respectively. Recognition of
unrealized gains or losses is deferred until the sale of receivables during the
securitization. On the date of the sale, deferred hedging gains and losses are
recognized as a component of gain (loss) on sales of receivables. Increases or
decreases in interest rates reduce or increase the fair value of long-term debt,
respectively. The Company plans to change its hedging strategy to the execution
of forward interest rate swaps during the third quarter of fiscal 1999. The
unrealized hedging gain at December 31, 1998 was $624,000 based on notional
amounts outstanding of $339.0 million.
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders, on December 7, 1998,
the following nominees were elected to the Board of Directors.
Affirmative Votes
Votes Withheld
---------- --------
Howard L. Chapman 47,564,442 173,649
John M. Davis 47,564,442 173,649
Fred M. Fehsenfeld 47,564,842 173,249
Donald A. Sherman 47,564,442 173,649
John M. Stainbrook 47,561,442 176,649
Jerry D. Von Deylen 47,561,442 176,649
Richard D. Waterfield 47,561,542 176,549
Thomas M. West 47,564,442 173,649
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Acceptance Corporation
February 16, 1999 By: /S/ John M. Stainbrook
------------------------
John M. Stainbrook
President and Chief Executive Officer
February 16, 1999 By: /S/ Rick A. Brown
------------------------
Rick A. Brown
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927790
<NAME> Union Acceptance Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 20,225
<SECURITIES> 0
<RECEIVABLES> 253,783
<ALLOWANCES> (2,214)
<INVENTORY> 0
<CURRENT-ASSETS> 271,794
<PP&E> 12,436
<DEPRECIATION> (3,917)
<TOTAL-ASSETS> 498,666
<CURRENT-LIABILITIES> 24,376
<BONDS> 386,612
<COMMON> 58,450
0
0
<OTHER-SE> 29,228
<TOTAL-LIABILITY-AND-EQUITY> 498,666
<SALES> 0
<TOTAL-REVENUES> 45,299
<CGS> 0
<TOTAL-COSTS> 20,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,600
<INTEREST-EXPENSE> 13,290
<INCOME-PRETAX> 8,109
<INCOME-TAX> 3,129
<INCOME-CONTINUING> 4,980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,980
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
