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FORM 10-K/A-1
United States Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 1997
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
250 N. Shadeland Avenue, Indianapolis, IN 46219
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 317-231-6400
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Class A Common
Stock, without par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of the 3,974,413 shares of the issuer's Class A
Common Stock held by non-affiliates, as of August 28, 1997, was $38,998,928.
There is no trading market for the issuer's Class B Common Stock.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
The number of shares of Class A Common Stock of the Registrant, without par
value, outstanding as of August 28, 1997, was 4,016,788 shares. The number of
shares of Class B Common Stock of the Registrant, without par value, as of such
date was 9,200,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders are
incorporated into Part III.
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<PAGE>
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX
PART II Page
Item 6. Selected Consolidated Financial Data..................... 3
Item 7. Management's Discussion and Analysis of 5
Financial Condition and Results of Operations............
Item 8. Financial Statements and Supplementary Data.............. 19
PART IV
Item 14. Exhibits, Restated Financial Statement Schedules, and
Reports on Form 8-K...................................... 41
SIGNATURES ......................................................... 42
Registrant is amending this report to give effect to previously announced
restatement of its results of operations for the period covered by this report.
<PAGE>
PART II
Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected financial information reflecting
the operations and financial condition of the Company for each year in the five
year period ended June 30, 1997. This data should be read in conjunction with
the Company's consolidated financial statements and related notes thereto and
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition" included herein.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
(Dollars in thousands)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income ............................................ $ 40,299 $ 34,160 $ 18,638 $ 14,260 $ 11,378
Interest expense(1) ........................................ 25,688 22,275 12,961 7,769 7,177
---------------------------------------------------------------------
Net interest margin ...................................... 14,611 11,885 5,677 6,491 4,201
Provision for credit losses ................................ 4,188 2,875 1,074 484 436
---------------------------------------------------------------------
Net interest margin after provision ...................... 10,423 9,010 4,603 6,007 3,765
Gain on sales of loans, net ................................ 963 30,357 8,684 4,643 5,502
Servicing fees, net ........................................ 25,344 16,926 14,628 11,570 7,149
Other revenue .............................................. 3,820 3,096 2,783 2,735 1,995
---------------------------------------------------------------------
Total revenues ........................................ 40,550 59,389 30,698 24,955 18,411
Operating expenses ......................................... 30,502 23,841 14,913 8,995 7,055
---------------------------------------------------------------------
Earnings before provision for income taxes ............... 10,048 35,548 15,785 15,960 11,356
Provision for income taxes ............................... 4,166 14,406 6,396 6,384 4,542
---------------------------------------------------------------------
Net earnings .......................................... $ 5,882 $ 21,142 $ 9,389 $ 9,576 $ 6,814
=====================================================================
Operating Data:
Prime auto receivables acquired ............................ $1,076,064 $ 994,834 $ 766,972 $ 614,627 $ 435,227
Non-prime auto receivables acquired ........................ 39,610 36,030 21,511 -- --
Marine receivables acquired ................................ 6,590 50 -- -- --
---------------------------------------------------------------------
Total receivables acquired (dollars) .................. $1,122,264 $1,030,914 $ 788,483 $ 614,627 $ 435,227
Prime auto receivables acquired ............................ $ 75,844 $ 71,070 $ 58,409 $ 49,307 $ 38,360
Non-prime auto receivables acquired ........................ 3,050 2,870 1,770 -- --
Marine receivables acquired ................................ 496 6 -- -- --
---------------------------------------------------------------------
Total receivables acquired (number of loans) .......... $ 79,390 $ 73,946 $ 60,179 $ 49,307 $ 38,360
Prime auto loans securitized .............................. $1,183,190 $ 890,110 $ 658,703 $ 617,103 $ 368,638
Non-prime auto loans securitized ........................... 31,108 34,488 -- -- --
---------------------------------------------------------------------
Total auto loans securitized .......................... $1,214,298 $ 924,598 $ 658,703 $ 617,103 $ 368,638
Ratio of operating expenses as a % of
average servicing portfolio ............................. 1.67% 1.73% 1.49% 1.21% 1.42%
Servicing fees, net, as a % of operating expenses .......... 83.1% 71.0% 98.1% 128.6% 101.3%
Prime credit losses as a % of avg. servicing portfolio ..... 2.40% 1.58% 1.36% 0.69% 0.64%
Non-prime credit losses as a % of avg. servicing portfolio . 5.18% 2.37% 2.97% N/A N/A
Marine credit losses as a % of avg. servicing portfolio..... 0.25% N/A N/A N/A N/A
Prime delinquencies of 30 days or more as a
% of servicing portfolio .............................. 2.96% 1.84% 1.40% 1.40% 0.93%
Non-prime delinquencies of 30 days or more as a
% of servicing portfolio .............................. 6.18% 3.35% 1.25% N/A N/A
Marine deliquencies of 30 days or more as a
% of servicing portfolio .............................. 0.10% N/A N/A N/A N/A
</TABLE>
<PAGE>
Item 6. Selected Consolidated Financial Data (Continued)
<TABLE>
<CAPTION>
At June 30, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Balance Sheet Data(2):
<S> <C> <C> <C> <C> <C>
Loans, net ............................................ $ 121,156 $ 259,290 $ 201,022 $ 96,101 $ 134,678
Excess servicing ...................................... 99,047 83,434 60,662 41,265 31,575
Spread accounts ....................................... 71,744 63,590 57,414 37,333 24,052
Total assets .......................................... 391,268 451,195 349,283 181,516 196,242
Due to Union Federal .................................. -- -- 338,958 177,577 171,896
Amounts due under warehouse facilities ................ 44,455 187,756 -- -- --
Long-term debt ........................................ 221,000 156,000 -- -- --
Total shareholders' equity(3) ........................ 86,848 78,624 2 2 --
Other Data:
Prime auto servicing portfolio ........................ $1,860,272 $1,548,538 $1,159,349 $ 843,245 $ 581,858
Non-prime auto servicing portfolio .................... 68,289 47,062 19,858 -- --
Marine servicing portfolio ............................ 6,227 50 -- -- --
Other receivables serviced ............................ 2,488 3,420 5,203 -- --
------------------------------------------------------------------
Total servicing portfolio ........................ $1,937,276 $1,599,070 $1,184,410 $ 843,245 $ 581,858
Average Prime auto servicing portfolio ................ $1,759,666 $1,343,770 $ 982,875 $ 744,149 $ 496,758
Average Non-prime auto servicing portfolio ............ 63,305 33,124 9,448 -- --
Average Marine servicing portfolio .................... 2,357 NM -- -- --
Other receivables average servicing portfolio ......... 2,799 4,222 6,643 -- --
------------------------------------------------------------------
Total average servicing portfolio ................ $1,828,127 $1,381,116 $ 998,966 $ 744,149 $ 496,758
Number of Prime auto loans serviced (at period end) ... 173,693 147,722 117,837 91,837 71,301
Number of Non-prime auto loans serviced (at period end) 6,056 4,067 1,687 -- --
Number of Marine loans serviced (at period end) ....... 472 6 -- -- --
Number of Other loans serviced (at period end) ........ 402 537 836 -- --
------------------------------------------------------------------
Total number of loans serviced (at period end) ... 180,623 152,332 120,360 91,837 71,301
Number of dealers ..................................... 3,204 2,523 1,604 884 831
Number of employees (full-time equivalents) ........... 387 313 215 142 115
</TABLE>
- --------------------------------------------------------------------------------
(1) Interest expense for the years ended June 30, 1993, 1994 and 1995, was
based upon the average monthly balance "Due to Union Federal" at Union
Federal's all-inclusive cost of funds.
(2) All balance sheet amounts, except the amounts "Due to Union Federal",
represent actual recorded assets and liabilities of the Company's business.
The amount Due to Union Federal includes division funding by Union Federal
as well as inter-company funding.
(3) The consolidated financial statements reflect no allocation of Union
Federal's historical equity. Earnings of the Company are transferred to
Union Federal through the Due to Union Federal account at June 30, 1993,
1994, and 1995.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Note: Certain capitalized terms used but not otherwise defined in this
report are defined in the "Glossary" set forth at the conclusion of "Item 1.
Business."
General
As more fully described in Note 14 to Consolidated Financial
Statements, this report contains financial information which has been restated.
The Company derives substantially all of its earnings from the
purchase, securitization and servicing of automobile loans originated by
dealerships affiliated with major domestic and foreign manufacturers. To fund
the purchase of loans prior to securitization, the Company utilizes revolving
warehouse credit facilities, discussed in "Liquidity and Capital Resources."
Through securitizations, the Company periodically pools and sells loans to a
trust which issues Certificates to investors representing interests in the loans
sold. When the Company sells loans in a securitization, it records a gain (or
loss) on the sale of loans and establishes excess servicing as an asset. Excess
servicing cash flows are received over the life of the related securitization.
See the "Glossary" under "Item 1. Business" for definitions of accounting terms
pertaining to securitizations.
The following table illustrates changes in the Company's total loan
acquisition volume and information with respect to Gain on Sales of Loans and
Securitizations during the past eight quarters. More complete quarterly
statements of earnings information is set forth in Note 15 of the Consolidated
Financial Statements.
<TABLE>
<CAPTION>
Selected Quarterly Financial Information
For Quarters in the Fiscal Years Ended June 30,
------------------------------------------------------------------------------------
1997
------------------------------------------------------------------------------------
First Second (3) Third Fourth
----- ---------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans acquired $ 296,601 $ 307,420 $ 279,847 $ 238,396
Gain on Sales of Loans 6,875 7,790 9,783 7,693 (5)
Impairment - - (15,951) (4) (15,227)
------------- ---------------- ------------------- ----------------------
Gain (Loss) on Sales of Loans, net 6,875 7,790 (6,168) (7,534)
Servicing portfolio
at period end 1,709,917 1,835,662 1,910,455 1,937,276
Selected
Securitization Data: 1996-C 1996-D/1996-2 1997-A 1997-B
Original amount 310,099 283,085/31,108 293,348 295,758
Weighted avg. loan rate 13.26% 13.53%/19.65% 13.29% 13.21%
Weighted avg.
remaining maturity (mos.) 67.41 67.75/62.70 71.35 69.18
Certificate rate 6.44% 6.14%/6.40% 6.33% 6.57%
Gross spread (1) 6.82% 7.39%/13.25% 6.96% 6.64%
Net spread (2) 5.11% 5.37%/9.00% 5.43% 5.15%
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------------------------------
First Second Third (3) Fourth
----- ------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans acquired $ 239,794 $ 205,686 $ 256,510 $ 328,924
Gain on Sales of Loans 6,724 8,483 7,760 7,390
Impairment - - - -
--------------- ---------------------- -------------------- -------------------------
Gain (Loss) on Sales of Loans, net 6,724 8,483 7,760 7,390
Servicing portfolio
at period end 1,278,805 1,344,914 1,445,517 1,599,070
Selected
Securitization Data: 1995-C 1995-D 1996-A/1996-1 1996-B
Original amount 236,410 205,550 203,048/34,488 245,102
Weighted avg. loan rate 14.08% 13.74% 13.13%/19.87% 12.96%
Weighted avg.
remaining maturity (mos.) 64.82 67.62 66.01/56.90 69.15
Certificate rate 6.42% 5.97% 5.40%/6.87% 6.45%
Gross spread (1) 7.65% 7.77% 7.73%/13.00% 6.51%
Net spread (2) 6.12% 6.04% 5.68%/8.79% 5.58%
</TABLE>
- --------------------------------------------------------------------------
(1) Difference between weighted average loan rate and Certificate Rate.
(2) Difference between weighted average loan rate and Certificate Rate, net
of upfront costs, servicing fees, ongoing surety bond and trustee fees,
and hedging gains or losses.
(3) Two securitizations were effected during the presented quarters -- one
public securitization (prime securitization) and one private placement
(non-prime securitization)
(4) Impairment was reduced by reserves taken during the first two quarters
of fiscal 1997 of $3.6 million and by existing reserves at June 30,
1996 of $2.2 million.
(5) Includes $444,000 of previously accrued loan sale expenses which were
reversed in the current period
Acquisition Volume. The Company currently acquires loans in 51
metropolitan areas in 29 states from over 3,200 manufacturer-franchised auto
dealerships. The Company primarily acquires loans on automobiles made to
borrowers who exhibit a favorable credit profile ("Prime lending"). The Company
also offers a Non-prime lending program to borrowers with adequate credit
quality, but who would not qualify for a loan under the Company's Prime lending
program ("Non-prime lending"). Over the past year, the Company has also
developed a Marine lending program to fund loans to borrowers for boats and
personal watercraft. The Company's focus is on the prime automobile lending
market; only 4.1% of total loan acquisitions represented loans made to borrowers
under the Non-prime and Marine programs. The Company continued its geographic
expansion during the year by entering several new areas in Arizona, Colorado,
Florida, Georgia, Illinois, Ohio, North Carolina, South Carolina, and Texas, and
also extended operations into the state of Nevada. Additionally, the Company
re-entered markets in Kentucky, Minnesota and Utah.
The Company's total loan acquisitions increased 8.9% to $1,122.3
million for the year ended June 30, 1997, from $1,030.9 million in fiscal 1996.
The increase resulted primarily from the expansion into and the development of
new markets that were established in fiscal 1996 and 1997. Additionally, growth
in the Marine and Non-prime programs contributed to overall loan acquisition
growth. Marine loan acquisitions totaled $6.6 million for the year ended June
30, 1997, compared to $50,000 for fiscal 1996. Non-prime loan acquisitions
totaled $39.6 million for the year ended June 30, 1997, compared to $36.0
million in fiscal 1996. The Company made some strategic decisions with regard to
pricing and underwriting with a view to improving the overall credit quality of
the portfolio over the long-term. These changes coupled with intense competition
in the consumer-finance markets resulted in lower loan acquisition volume in the
third and fourth quarters of fiscal 1997. Because of the competitive environment
and tightened credit standards, the Company's loan acquisition growth in the
first quarter of fiscal 1998 was not substantial. The Company's servicing
portfolio increased 21.2% to nearly $2.0 billion at June 30, 1997, compared to
approximately $1.6 billion at June 30, 1996. Serviced loans increased as a
result of increased loan acquisition volume in excess of loan repayments and
gross charge-offs. The volume of loans sold in securitizations increased to $1.2
billion for the year ended June 30, 1997, from $924.6 million for the prior
year. The increased volume of loans securitized is a combination of the
increased volume in Prime loan acquisitions, and the timing of the fiscal 1997
fourth quarter securitization which included four months of loan volume compared
to only three months in the fourth quarter of fiscal 1996. Management continues
to focus on controlled growth, recognizing that the underlying credit quality of
the portfolio is one of the most important factors associated with long-term
profitability.
Delinquency and Credit Loss Experience
There has been a general deterioration in the consumer credit markets
over the past year despite relatively good economic conditions. Management
believes that this decline comes as a result of higher consumer debt levels and
the consumer's increased readiness to declare bankruptcy. The Company has
experienced increased delinquency as well as increased credit losses. UAC's
prime servicing portfolio has continued to suffer deterioration since June 30,
1997, in delinquency and credit losses, especially among loans originated in
1995. Management is making improvements in both the underwriting and collection
processes to address credit quality. The Company has tightened its credit
standards and is utilizing new computerized scoring tools to re-score existing
portfolios which enhance the Company's ability to identify areas for improvement
on the underwriting side. The collection staff increased by nearly 60% since
June 30, 1996. The new scoring tools also allow the collection efforts to be
focused in the most effective manner.
Set forth below is certain information concerning the experience of UAC
pertaining to delinquencies, and credit losses on the Prime fixed rate retail
automobile, light truck and van receivables serviced by the Company. There can
be no assurance that future delinquency and credit loss experience on the
receivables will be comparable to that set forth below. See "Discussion of
Forward-Looking Statements".
<TABLE>
<CAPTION>
Prime Delinquency Experience
At June 30,
----------------------------------------------------
1997 1996
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
<S> <C> <C> <C> <C>
Servicing portfolio .......... 173,693 $1,860,272 147,722 $1,548,538
Delinquencies
30-59 days .............. 2,487 27,373 1,602 17,030
60-89 days .............. 1,646 18,931 694 7,629
90 days or more ......... 723 8,826 333 3,811
Total delinquencies .......... 4,856 55,130 2,629 28,470
Total delinquencies
as a percent of
servicing portfolio....... 2.80% 2.96% 1.78% 1.84%
</TABLE>
As indicated in the above table, delinquency rates based upon
outstanding loan balances of accounts 30 days past due and over increased to
2.96% at June 30, 1997, from 1.84% at June 30, 1996, for the Prime lending
portfolio. The increased delinquency from a year ago is a product of changes in
consumer credit trends as discussed above, and, to a lesser extent, the
tightening of the Company's deferral policy (effective in February 1997) which
applied more stringent standards for the deferment of delinquent accounts. This
tightening served to increase delinquency and accelerate credit losses in the
third and fourth quarters of fiscal 1997.
<TABLE>
<CAPTION>
Prime Credit Loss Experience
For the Years Ended June 30,
------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- -----------------------
Number Number Number
of Loans Amount of Loans Amount of Loan Amount
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Avg. servicing
portfolio ............. 164,858 $1,759,666 132,363 $1,343,770 104,455 $ 982,875
Gross charge-offs ........ 6,280 70,830 3,663 40,815 3,493 28,628
Recoveries ............... 28,511 19,543 15,258
------ ---------- ----------
Net credit losses ....... $ 42,319 $ 21,272 $ 13,370
====== ========== ==========
Gross charge-offs
as a % of avg
servicing portfolio ... 3.81% 4.03% 2.77% 3.04% 3.34% 2.91%
Recoveries as a %
of gross charge-offs.. 40.25% 47.88% 53.30%
Net credit losses as a %
of avg. servicing
portfolio ............ 2.40% 1.58% 1.36%
</TABLE>
As indicated in the table above, credit losses on the prime auto portfolio
totaled $42.3 million for the fiscal year ended June 30, 1997, or 2.40% as a
percentage of the average servicing portfolio, compared to $21.3 million or
1.58% for the fiscal year ended June 30, 1996. Increased credit losses are a
result of higher gross charge-off rates, as well as a decline in recovery rates.
Although recovery rates are down compared to last fiscal year, there was a
slight improvement in the fourth quarter of fiscal 1997 over the third quarter.
The allowance for estimated credit losses inherent in loans sold is
included as an element of the fair market value of excess servicing cash flows
used to allocate the carrying amount of loans sold During the quarter ended June
30, 1997, the Company recorded a pre-tax charge of $15.2 million primarily to
increase the allowance for estimated credit losses on those pools which were
deemed to have other than temporary impairment. Total additional provisions to
the allowance for estimated credit losses for the year ended June 30, 1997 were
$34.9 million. The allowance for estimated credit loss as a percentage of
outstanding securitized loans was 4.40% and 3.22% at June 30, 1997 and 1996,
respectively.
<PAGE>
Set forth below is information pertaining to delinquency and credit loss
information on the Company's Non-prime portfolio. There can be no assurance that
future delinquency and credit loss experience on the receivables will be
comparable to that set forth below. See "Discussion of Forward-Looking
Statements".
Non-prime Delinquency Experience
At June 30,
----------------------------------------
1997 1996
------------------ ------------------
(Dollars in thousands)
Number of Number of
Loans Amount Loans Amount
----- ------ ----- ------
Servicing portfolio ....... 6,056 $68,289 4,067 $47,062
Delinquencies
30-59 days ........... 236 2,807 94 1,120
60-89 days ........... 123 1,412 40 455
90 days or more ...... -- -- -- --
Total delinquencies ....... 359 $ 4,219 134 $ 1,575
Total delinquencies
as a percent of
servicing portfolio.... 5.93% 6.18% 3.29% 3.35%
<TABLE>
<CAPTION>
Non-prime Credit Loss Experience
For the Years Ended June 30,
--------------------------------------------------------------------
1997 1996 1995
----------------- --------------------- ----------------------
Number Number Number
of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Avg. servicing
portfolio ............ 5,491 $63,305 2,869 $33,124 797 $ 9,448
Gross charge-offs ....... 379 $ 4,698 136 1,455 27 333
Recoveries .............. 1,420 670 146
------- ------- -------
Net credit losses ....... 3,278 785 187
======= ======= =======
Gross charge-offs
as a % of avg
servicing portfolio .. 6.90% 7.42% 4.74% 4.39% 5.08% 5.29%(1)
Recoveries as a %
of gross charge-offs. 30.23% 46.07% 43.87%
Net credit losses as a %
of avg. servicing
portfolio ........... 5.18% 2.37% 2.97%(1)
</TABLE>
- --------------------------------------------------------------------------------
(1) Non-prime loans were only outstanding for eight (8) months during fiscal
1995. Therefore, the percentages reflect an annualized calculation.
Non-prime portfolio delinquency was 6.18% based on outstanding loan
balances of accounts 30 days past due and over at June 30, 1997, compared to
3.35% at June 30, 1996. Credit losses during fiscal 1997 totaled $3.3 million or
5.18% as a percentage of the average Non-prime servicing portfolio compared to
2.37% in fiscal 1996. The Company began acquiring Non-prime loans in October
1994. Management expects fluctuations in delinquency and credit loss rates on
the Non-prime portfolio as it becomes more seasoned. The Non-prime delinquency
and credit loss statistics are in line with management's expectations, and the
somewhat greater credit risk associated with a non-prime product. Additional
credit risk associated with the Non-prime product is considered in pricing and
underwriting.
<PAGE>
Marine Delinquency and Credit Loss
Delinquency related to the newer Marine portfolio was minimal (.10%) as
the portfolio has not matured. The Company began acquiring the Marine (prime)
loans in June 1996. The credit loss is .25% of the average marine servicing
portfolio. Management expects increases in marine delinquency and credit losses
as the portfolio becomes seasoned.
Results of Operations
The following table illustrates the Company's financial results for the
past eight fiscal quarters. More complete earnings information can be found in
the Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- ------------------------------------------
First Second Third Fourth First Second Third Fourth
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest on loans ...... $ 9,233 $ 9,096 $ 7,543 $ 8,042 $ 6,946 $ 7,232 $ 6,732 $ 7,802
Interest on spread
accounts and
restricted cash .. 1,510 1,545 1,618 1,712 1,370 1,386 1,317 1,375
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income 10,743 10,641 9,161 9,754 8,316 8,618 8,049 9,177
Interest expense ....... 6,410 6,265 6,118 6,895 5,289 5,556 5,359 6,071
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin ..... 4,333 4,376 3,043 2,859 3,027 3,062 2,690 3,106
Provision for
credit losses .... 855 993 1,180 1,160 1,150 300 600 825
-------- -------- -------- -------- -------- -------- -------- --------
Net interest margin . 3,478 3,383 1,863 1,699 1,877 2,762 2,090 2,281
Gain (loss) on sales
of loans, net .... 6,875 7,790 (6,168) ( 7,534) 6,724 8,483 7,760 7,390
Servicing fees, net .... 5,826 6,258 6,854 6,406 3,966 2,584 4,796 5,580
Other revenues ......... 934 910 1,011 965 750 724 798 824
Operating expenses ..... 7,146 7,832 7,545 7,979 4,719 5,602 6,658 6,862
Net earnings/(loss) .... $ 5,918 $ 6,193 $ (2,398) $( 3,831) $ 5,116 $ 5,246 $ 5,313 $ 5,467
</TABLE>
Years Ended June 30, 1997 and 1996
Net earnings decreased to $5.9 million or $0.45 per share for the year
ended June 30, 1997, compared to $21.1 million or $1.60 per share for the year
ended June 30, 1996. The decrease in net earnings is primarily a result of third
and fourth quarter after-tax charges of $9.5 and $9.0 million, respectively,
($16.0 and $15.2 million pre-tax, respectively,) for the impairment of Excess
Servicing related primarily to an increase in the allowance for estimated credit
losses on the securitized portfolio. The charge was taken based on current
trends with respect to credit loss and delinquency and their effects on the
valuation of Excess Servicing on a pool by pool basis. Exclusive of the pool by
pool impairment charges, net earnings would have been $24.4 million or $1.85 per
share.
Net interest margin after provision increased 15.7% to $10.4 million
for the year ended June 30, 1997, compared to $9.0 million for fiscal 1996. The
increased interest margin as compared to prior year is a result of a combination
of factors but is primarily due to an increase in the average loans held for
sale balance and a decrease in the cost of funds on the average outstanding
borrowings.
Interest on loans increased 18.1% to $33.9 million for the year ended
June 30, 1997, compared to $28.7 million for last year. The increase in interest
income resulted from an increase in the average outstanding balance of loans
held for sale to $228.3 million for the year ended June 30, 1997, from $186.6
million for fiscal 1996, which was a result of increased loan acquisitions
during the year and the timing of the fourth quarter securitization. The 1997
fourth quarter securitization was effected in June instead of May (as compared
to previous years); therefore, an additional one month of interest was earned by
the Company. Interest earned on the Non prime and Marine portfolios were
approximately $3.8 million and $255,000, respectively.
Interest earned on spread accounts and restricted cash increased 17.2%
to $6.4 million for the year ended June 30, 1997, compared to $5.4 million for
the year ended June 30, 1996. The increase is a result of increased average
balances on cash collection and Spread Accounts. The average balance of these
accounts was $127.4 million in fiscal 1997, compared to $110.3 million in fiscal
1996. The increased restricted cash balances result from the increased size of
the securitized servicing portfolio. Average securitized loan balances were
$1,445.4 million during the current fiscal year, compared to $1,179.4 million in
fiscal 1996. The average interest yield on the Spread Accounts and restricted
cash accounts improved approximately 15 basis points which contributed to the
increase as well. Spread Account balances represent credit enhancement on the
securitized pools; the Spread Account requirements are affected by the size of
the securitized servicing portfolio as well as loss and delinquency trends which
may trigger higher spread requirements. 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 Servicer. As a result of the implementation of SFAS 125, the
Company established a Servicing Asset related to the 1997A and 1997B
securitization transactions of $743,000 and $750,000, respectively. Such amounts
equal the discounted projected cash flow of the interest earned on the
collection account and are deemed to be additional servicing compensation. Such
amounts were recognized as a component of the gain on sale with the discount
being accretive to income in the future. Establishment of the Servicing Asset
will have the effect of reducing interest earned on restricted cash in future
periods, however, accretion of the discount on the Servicing Asset will somewhat
offset this decrease.
Interest expense increased 15.3% to $25.7 million for the year ended
June 30, 1997, from $22.3 million for the year ended June 30, 1996. The increase
was primarily a result of an increase in the average outstanding borrowings to
$347.7 million for the year ended June 30, 1997, from $288.4 million for the
year ended June 30, 1996, offset by a decline in the average cost of funds to
7.39% for the year ended June 30, 1997, from 7.72% for the year ended June 30,
1996. Cost of funds in the prior year included interest expense in the form of
amortization of upfront borrowing fees paid in conjunction with the
establishment of the Prime and Non-prime Warehouse Facilities. The agreements
provided for an initial term of one year to be renewed annually; therefore, the
total upfront fees paid to establish the Facilities were amortized during fiscal
1996. Upfront fees paid in fiscal 1996 related to the Prime and Non-prime
Warehouse Facilities totaled approximately $1.5 million. The renewal of the
Prime and Non-Prime Warehouse Facilities do not require payment of additional
fees. Interest rates on the Prime and Non-prime Warehouse Facilities are
variable in nature and are affected by changes in market rates of interest.
Provision for estimated credit losses increased to $4.2 million for the
year ended June 30, 1997, compared to $2.9 million for the year ended June 30,
1996. Increased provisions were made in response to, and in anticipation of,
increased losses and delinquency trends being experienced by the Company and the
industry in general.
Gain (loss) on sales of loans, net and interest rate risk. Gain (Loss)
on Sales of Loans continues to be a significant element of the Company's net
earnings. The Gain (Loss) on Sales of Loans is affected by several factors, but
is primarily affected by the amount of loans securitized and the net spread. The
Company adjusts its pricing frequently and employs a hedging strategy to help
ensure an adequate net spread in the ensuing securitization, while mitigating
the risks of increasing interest rates and the volatility in net spreads. Gain
(Loss) on Sales of Loans decreased to $963,000 for the year ended June 30, 1997,
from $30.4 million for the year ended June 30, 1996. The decrease in gains
recognized by the Company in the current fiscal year is due to pre-tax charges
of $31.2 million for the impairment of Excess Servicing primarily related to the
increase in allowance for estimated credit losses related to its securitized
portfolio. Exclusive of the charges, gains recorded in conjunction with the
fiscal 1997 securitization transactions were $31.7 million compared to $30.4
million in fiscal 1996 and included $1.5 million in servicing asset income.
Although the volume of loans securitized increased 31.3% to $1,214.3 million for
the year ending June 30, 1997, compared to $924.6 million in fiscal 1996, the
weighted average net spread on the securitization transactions decreased to
5.36% in fiscal 1997, compared to 5.96% in fiscal 1996. Additionally, the
allowance for estimated credit losses established at the time of the sale was
3.87% (excluding the charge) as a percentage of total loans securitized in
fiscal 1997, compared to 3.57% in fiscal 1996. Credit loss assumptions on the
Tier I transactions were 3.25% throughout most of fiscal 1997; however, the
Company began providing for losses at 3.50% on Tier I securitizations in the
fourth quarter of fiscal 1997. Allowance for estimated credit losses were
established at 3.00% for the majority of fiscal 1996. Allowance for estimated
credit losses have historically been made at 10.00% on the Non prime
securitizations.
Gross and net spreads. Market interest rates were higher in fiscal 1997
as compared to the corresponding periods of fiscal 1996. Market rates
experienced an upward trend beginning in the fourth quarter of fiscal 1996, but
demonstrated relatively small fluctuations throughout fiscal 1997. Because
changes in loan rates on automobile loans tend to lag behind fluctuations in
market rates of interest, spreads are adversely affected in a rising rate
environment. The increased market rates in fiscal 1997 had the effect of
reducing gross and net spreads on Tier I securitizations compared to fiscal
1996. Gross spread is defined as the difference between the weighted average
loan rate and the Certificate rate. Net spread is defined as gross spread less
servicing fees, upfront costs, ongoing credit enhancement fees and trustee fees,
and hedging gains or losses.
Management is currently targeting net spreads of 5.00% to 5.50% on Tier
I securitizations (assuming a pricing spread for Asset-backed Certificates over
the two-year Treasury Note of 50 basis points) for fiscal 1998. Management
believes that by targeting a spread of 7.00% to 7.50% between loan rates and the
two-year treasury rate that the net spread targets 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 market 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."
Servicing fees, net is comprised of fees earned by the Company as
Servicer of the securitized loan portfolio (typically 1% per annum), the
scheduled accretion of discount established on Excess Servicing at the time of
securitization, and rebates received in excess of original estimates recorded in
the gain calculation. Servicing fees, net increased 49.7% to $25.3 million for
the year ended June 30, 1997, compared to $16.9 million for the year ended June
30, 1996. Servicing fees, net as a percentage of the average securitized
servicing portfolio increased to 1.75% for fiscal 1997, from 1.42% in fiscal
1996. The increase in servicing fees, net is primarily a result of a 22.6%
increase in the average securitized loan balances in fiscal 1997 to $1.4
billion, compared to $1.2 billion in fiscal 1996. Servicing fees are also
impacted by the timing of Future Servicing Cash Flows and excess rebates. Excess
rebates received during fiscal 1997 were $2.3 million, compared to $2.8 million
in fiscal 1996. The Company's rebate receivable was marked to market as a
component of Excess Servicing in accordance with SFAS 125 during the third
quarter of fiscal 1997.
Other revenues increased 23.4% to $3.8 million for the year ended June
30, 1997, from $3.1 million for the year ended June 30, 1996. The increase in
the current year resulted primarily from increases in late charge fee income to
$2.6 million from $1.9 million in the prior year.
Salaries and benefits expense increased 30.8% to $15.7 million for the
year ended June 30, 1997, from $12.0 million for the year ended June 30, 1996.
This increase resulted primarily from an increase in full-time equivalent
("FTE") employees. Average FTE's for the year ended June 30, 1997, were 333
compared to 270 for the year ended June 30, 1996. The Company has experienced
growth in credit, sales and operations, collections, and support. These
increases are in response to, and in anticipation of, continued expansion and
loan acquisition growth as well as a growing servicing portfolio. Additional
levels of management and support staff have been added to ensure efficiency in
operations as the Company's acquisition volume and servicing portfolio continues
to grow. Increases in salary and benefit expense were also due to annual merit
increases for the Company's existing employees.
Other operating expenses includes occupancy and equipment costs,
outside and professional services, loan expenses, promotional expenses, travel,
office supplies and other. Other operating expenses increased 25.1% to $14.8
million for the year ended June 30, 1997, from $11.9 million for the year ended
June 30, 1996. Many of these expenses vary directly with increased loan
acquisition volume and the increased size of the servicing portfolio. Both loan
acquisition volume and the servicing portfolio were increased during the year
ended June 30, 1997, compared to the year ended June 30, 1996. Occupancy expense
increased reflecting a full twelve months of rent expense in fiscal 1997 at the
Company's new headquarters, compared to only six months in fiscal 1996.
Equipment expense was also impacted by a full year of expense from its
collections and telephone systems implemented at the Company's new headquarters
in January 1996.
Years Ended June 30, 1996 and 1995
Net earnings more than doubled to $21.1 million or $1.60 per share for
the year ended June 30, 1996, compared to $9.4 million for the year ended June
30, 1995.
Net Interest Margin After Provision increased 95.7% to $9.0 million for
the year ended June 30, 1996, compared to $4.6 million for fiscal 1995.
Increased Prime loan volume, growth in the Non-prime portfolio, and modification
of the securitization structure during fiscal 1996 contributed to increased net
interest margin.
Interest on loans increased 95.3% to $28.7 million for the year ended
June 30, 1996, compared to $14.7 million for last year. The increase in interest
income resulted, in part, from an increase in the average monthly balance of
loans held for sale to $186.6 million for the year ended June 30, 1996, from
$127.1 million for fiscal 1995, which was a result of increased loan
acquisitions during the year. The Non-prime portfolio also contributed to the
increase in interest income. The Company carried an average of over $22.2
million in Non-prime receivables held for sale during the year which produced
over $4.4 million in interest income. Further, the current method with respect
to securitization structure implemented in fiscal 1996 increased the amount of
interest income recognized relative to prior periods. The change in the
securitization structure significantly impacted both interest income and
servicing fees, net. All of the fiscal 1996 Prime securitizations were
structured such that the Company continued to earn interest income from the
cutoff date through the closing date (approximately 13-22 days), and therefore,
earned servicing fees only after the closing date. In all previous
securitizations, the Company began earning servicing fees beginning on the
cutoff date. As a result, the Company reports more interest income and less
servicing fee income, and records a lower gain on sale. An estimated additional
$6.1 million in interest on loans was recognized during fiscal 1996 due to the
new securitization structure. The structure was altered in accordance with
provisions of the Warehouse Facility Agreements which require that the Company
collect and remit interest on loans from cutoff date to closing of a
securitization transaction to the warehouse provider. The Company continues to
pay interest on the amount financed with respect to warehoused loans until
closing.
Interest earned on Spread Accounts and Restricted Cash increased 38.4%
to $5.4 million for the year ended June 30, 1996, compared to $3.9 million for
the year ended June 30, 1995. The increase is a result of increased average
balances due to additional securitizations during the year. The average balance
of these accounts was $108.8 million in fiscal 1996, compared to $68.2 million
in fiscal 1995. Earnings on spread accounts relative to the growth in the
securitized servicing portfolio were somewhat decreased as a result of the
structuring of the fiscal 1996 securitizations whereby additional credit
enhancements were utilized in lieu of initial spread account deposits.
Additionally interest earned on these accounts were somewhat lower in fiscal
1996 compared to fiscal 1995 as market rates of interest declined throughout the
latter half of fiscal 1995 and the first half of fiscal 1996.
Interest expense increased 71.9% to $22.3 million for the year ended
June 30, 1996, from $13.0 million for the year ended June 30, 1995. The increase
was a result of both an increased average cost of funds and increased average
outstanding borrowings. The average cost of funds increased to 7.72% for the
year ended June 30, 1996, from 5.60% for the year ended June 30, 1995. The
increase in cost of funds was a result of the Company obtaining alternative
financing sources after its Spin-off from its parent in August of 1995. Included
in fiscal 1996 interest expense is the amortization of upfront borrowing fees
paid in conjunction with the establishment of the Prime and Non-prime Warehouse
Facilities. The agreements provided for an initial term of one year and must be
renewed annually; therefore, the total upfront fees paid to establish the
Facilities were amortized during fiscal 1996. Upfront fees paid in fiscal 1996
related to the Warehouse Facilities totaled approximately $1.5 million. The fees
paid to secure the Warehouse Facilities are non-recurring in nature; the renewal
of such agreements does not require the payment of additional fees. Average
outstanding borrowings increased to $288.4 million for the year ended June 30,
1996, from $231.4 million for the year ended June 30, 1995.
Provision for estimated credit losses increased to $2.9 million for the
year ended June 30, 1996, compared to $1.1 million for the year ended June 30,
1995. A large portion, $1.1 million, of that provision was related to the newer
Non-prime portfolio. The additional provision related to the Non-prime portfolio
was a result of both the time period the Non-prime portfolio was held prior to
securitization, as well as the increased level of credit risk associated with
the Non-prime loans as compared to the Prime loans.
Gain on Sales of Loans increased 249.6% to $30.4 million for the year
ended June 30, 1996, from $8.7 million for fiscal 1995. The increase in gain was
mainly due to improved net spreads as well as increased volume of Prime loans
securitized. The weighted average loan rate on the Prime securitized loans was
13.48% while the weighted average certificate rate was 6.09% The weighted
average gross and net spreads on the fiscal 1996 loan sales were 7.38% and
5.85%, respectively, compared to 5.92% and 4.26% in fiscal 1995. These spreads
earned the Company a $29.5 million gain in 1996 after net hedging losses of
approximately $2.6 million. The Company securitized $890.1 million in Prime
loans and $34.5 million in Non-prime loans in fiscal 1996, compared to $658.7
million in Prime loans in fiscal 1995. Additionally, the Company completed its
first Non-prime securitization during the third quarter of 1996. Approximately
$34.5 million in Non-prime automobile receivables were securitized in a private
placement that earned the Company nearly $850,000 after a $112,000 hedging loss.
The weighted average loan rate on the Non-prime portfolio securitized was 19.87%
while the weighted average certificate rate was 6.87%. The gross and net spreads
on the sale were 13.00% and 8.79%, respectively.
Servicing Fees, Net increased 15.7% to $16.9 million for the year ended
June 30, 1996, compared to $14.6 million for the year ended June 30, 1995.
Although the average securitized portfolio increased significantly, servicing
fees have not. Servicing fees, net as a percentage of the average securitized
servicing portfolio decreased to 1.42% for fiscal 1996, from 1.71% in fiscal
1995. The decrease in servicing fees relative to the average securitized
portfolio resulted primarily from the modified securitization structure, as
discussed above. Servicing fees on all fiscal 1996 Prime securitizations were
not earned until after the closing date of the securitization transaction. The
net effect is that interest on loans was earned for an additional 13-22 days,
and servicing fee income was not earned for 13-22 days for each of the fiscal
1996 Prime securitizations. Additionally, the Company recognized somewhat
smaller gains under this structure. Because additional interest income was
earned on the loans to be securitized, those loans generate lower Future Excess
Servicing Cashflows after the securitization. The net present value of these
future cash flows is recorded as an Excess Servicing asset as a component of the
gain calculation.
The Company's ratio of servicing fees, net to operating expenses was
71.0% and 98.1% for the years ending June 30, 1996, and 1995, respectively.
Although the securitization structure discussed above impacted this ratio, the
growth of the Non-prime program also impacted this ratio. Because the Non-prime
receivables had not been securitized until March 1996, the Company earned no
servicing fees on this portfolio. The impact of the additional costs to acquire
and service these loans were offset by increased interest spreads earned on the
Non-prime portfolio. Increased salaries and benefits also affected this ratio.
The Company has added significantly to its collections staff over the past
several quarters in response to, and in anticipation of, continued growth in the
servicing portfolio. Additional support staff in systems and accounting have
also been added, as well as additional levels of management needed to support
the Company's growth.
Other Revenues increased 11.2% to $3.1 million for the year ended June
30, 1996, from $2.8 million for the year ended June 30, 1995. The increase for
the year resulted primarily from increases in late charge fee income.
Salaries and Benefits Expense increased 81.0% to $12.0 million for the
year ended June 30, 1996, from $6.6 million for the year ended June 30, 1995.
This increase resulted primarily from increased full-time equivalent ("FTE")
employees. Average FTE's for the year ended June 30, 1996, were 270 compared to
169 for the year ended June 30, 1995. The Company experienced growth in credit,
sales and operations, collections, and support. These increases were in response
to, and in anticipation of continued expansion and loan acquisition growth as
well as a growing servicing portfolio. Additional levels of management and
support staff were added to ensure efficiency in operations as the Company's
acquisition volume and servicing portfolio continues to grow. Increases in
salary and benefit expense were also due to increased profitability-based
incentives during the year ended June 30, 1996.
Other Operating Expense increased 43.0% to $11.9 million for the year
ended June 30, 1996, from $8.3 million for the year ended June 30, 1995. Other
operating expenses include occupancy and equipment costs, outside and
professional services, loan expenses, promotional expenses, travel, office
supplies and other. Many of these expenses vary directly with increased loan
acquisition volume and the increased size of the servicing portfolio. Both loan
acquisition volume and the servicing portfolio were increased during the year
ended June 30, 1996, compared to the year ended June 30, 1995. Occupancy and
equipment costs were increased as a result of the Company's move to its new
headquarters in fiscal 1996. The employee growth experienced by the Company
required both additional square footage and furniture and equipment. The Company
also updated its phone system in conjunction with the move to its new
headquarters. The Company obtained new equipment through an operating lease and
implemented a voice messaging system. The Company also replaced its collections
system, incurring a loss on the disposal of the former system. Additionally,
increased telephone usage resulting from an increase in collections staff and
collection hours contributed to increased office expense.
Financial Condition
Loans, Net and Servicing Portfolio. Loans, net includes the principal
balance of loans held for sale, net of unearned discount and allowance for
credit losses, loans in process, and prepaid dealer premiums. Loans, net
decreased to $121.2 million at June 30, 1997, from $259.3 million at June 30,
1996. This decrease was due primarily to the decrease in loan acquisitions in
the fourth quarter of fiscal 1997, compared to the fourth quarter of fiscal
1996, and the timing of the securitization of loans in June 1997, as compared to
May 1996. Loan acquisitions were $238.4 million during the fourth quarter of
fiscal 1997, compared to $328.9 million in the fourth quarter of fiscal 1996.
Allowance for credit losses on loans held for sale decreased $319,000 from June
30, 1996. The Company serviced $1.8 billion and $1.4 billion in securitized
loans and the total servicing portfolio was $1.9 billion and $1.6 billion as of
June 30, 1997, and June 30, 1996, respectively.
Excess Servicing increased to $99.0 million at June 30, 1997, from
$83.4 million at June 30, 1996. This balance increased by the amounts
capitalized upon consummation of the various Prime and Non-prime securitizations
(including estimated dealer premium rebates). Total amounts capitalized during
the year ended June 30, 1997 were $68.9 million. The Excess Servicing balance
also increased by a pre-tax unrealized gain of $3.8 million in accordance with
SFAS 125. Excess Servicing also increased by the change in accrued interest of
$2.3 million. The additions to Excess Servicing were offset by actual Excess
Servicing cash flows received during the year ended June 30, 1997, of $24.6
million and by the effect of the $34.8 million adjustments for other than
temporary impairment recorded during fiscal 1997. Allowance for estimated credit
losses on securitized loans is included as a component of the Excess Servicing
asset. At June 30, 1997, the allowances related to both Prime and Non-prime
securitized loans totaled $79.9 million or 4.40% of the total securitized loan
portfolio, compared to $43.5 million or 3.22% at June 30, 1996. Accrued interest
due the Company at the cutoff date on securitized loan pools is also included as
a component of Excess Servicing.
Spread Accounts increased to $71.7 million at June 30, 1997, from $63.6
million at June 30, 1996. These balances were increased by the deposits of
Excess Servicing cash flows and have been reduced by any withdrawal of funds
from the Spread Accounts. Withdrawals of spread account funds are made when the
balance of the Spread Accounts are in excess of the requirements stipulated in
the servicing agreement. No initial spread account deposits were made in
connection with the Prime securitizations as a result of the structuring which
utilized alternative credit enhancements in lieu of initial spread account
deposits.
Amounts due under Warehouse Facilities and Long-term Debt. Beginning in
August 1995, after the Spin-off from its parent, the Revolving Warehouse Credit
Facilities and Senior Notes constituted the Company's primary funding sources.
The Company issued in a private placement $46.0 million in Senior Subordinated
Notes in April 1996 and $65.0 million in Senior Notes in March 1997. The balance
of the Revolving Warehouse Credit Facilities and the Senior and Senior
Subordinated Notes was $265.5 million at June 30, 1997, compared to $343.8
million at June 30, 1996.
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) purchases and financing of loans; (ii) payment of Dealer Premiums;
(iii) securitization costs including cash held in Spread Accounts and similar
cash collateral accounts under revolving Warehouse Credit Facilities; (iv)
servicer advances of payments on securitized loans 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
Prime securitized portfolio; (ii) Excess 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; (vi) sales of
loans in securitization transactions; and (vii) proceeds from sale of
interest-only strips in conjunction with securitization transactions. Net cash
provided by operating activities increased to $126.0 million for the year ended
June 30, 1997, from a use of $55.8 million for the year ended June 30, 1996,
which was primarily attributable to an increase in loans securitized relative to
loans acquired and an increase in proceeds from the sale of interest-only
strips. Proceeds from the sale of interest-only strips generated $31.8 million
in cash for the period ended June 30, 1997, compared to $26.7 million for the
period ended June 30, 1996. The Company realized a $11.1 million cash benefit by
doing so during fiscal 1997. Additionally, the Company continues to defer a
portion of the Gain on Sales of Loans for tax purposes.
Hedging transactions may represent a source or a use of cash during a
given period depending on changes in interest rates. During fiscal 1997, hedging
transactions have required a net use of cash of $6.3 million, compared to $2.8
million used during fiscal 1996.
Financing Activities and Credit Facilities. Net cash used by financing
activities for fiscal 1997 was $79.7 million, compared to a source of $61.1
million in the prior year. The decrease was a result of the Company's ability to
pay down its revolving credit facilities due to increased cash from operations.
The Company's sources of liquidity are currently funds from operations,
securitizations and external financing sources. Historically, the Company has
used the securitization of loan pools as its primary source of long-term
funding, and intends to continue to do so, although management regularly
considers alternative funding mechanisms with a view to optimizing profitability
and cash flows. Securitization transactions enable the Company to improve its
liquidity, to recognize gains from the sales of the loan pools while maintaining
the servicing rights to the loans, 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.
The Company has borrowing arrangements with an independent financial
institution for the Prime Warehouse Facility of up to $350.0 million and a
similar Non-prime Warehouse Facility of up to $50.0 million. Additionally, the
Company has a Marine Warehouse Facility of up to $50.0 million that was
established in April 1997. The Prime Warehouse Facility provides funding for
loan acquisitions at a purchase price of up to 100.0% of the outstanding
principal balance of eligible loans at the time of purchase to the extent
allocable to loans which, upon acquisition, provided for 72 monthly payments or
less. Additional funding is provided for eligible loans with greater than 72
monthly payments at a purchase price of 92.0% of the outstanding principal
balance. The advance rate is adjusted monthly based upon actual loss statistics
in order to maintain the necessary enhancement level. The Non-prime Warehouse
Facility provides funding for loan acquisitions at a purchase price of 87.0% of
the outstanding principal balance of eligible loans at the time of purchase. The
Marine Warehouse Facility provides funding for loan acquisitions at a purchase
price of 85.0% for any boat loan and 65.0% for personal watercraft loans with 49
- - 60 scheduled monthly payments. Additionally funding is provided for eligible
loans with less than 49 monthly payments at a purchase price of 80.0%. The
Company also issued $110.0 million in Senior Notes in connection with the
Spin-off of the Company by Union Federal and the Company's initial public
offering and completed a private placement of $46.0 million in Senior
Subordinated Notes in April 1996 and $65 million in Senior Notes in March 1997,
as discussed below. Between securitization transactions, the Company relies
primarily on the revolving Warehouse Credit Facilities to fund ongoing loan
acquisitions (not including Dealer Premiums). In addition to loan 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 described above. The Company's ability
to borrow under the Credit Facilities 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 businesses 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 for
borrowing under the Credit Facilities.
To accommodate its anticipated cash and liquidity requirements for the
near term, the Company determined during the third quarter to seek additional
capital. The Company completed a private placement of $65.0 million of Senior
Notes with an effective rate of 7.80% in March 1997. The securities have a 5 1/2
year average life and are due in December 2002. The securities were rated BBB by
Fitch Investors Service L.P. The additional debt will affect the Company's
weighted average cost of funds as well as the interest expense recognized in
future periods. The proceeds of the sale of the securities will be used to
enhance liquidity and fund the Company's continued nationwide expansion.
Management believes that the proceeds from the Company's initial public
offering, the Senior Notes, the Senior Subordinated Notes, the other Credit
Facilities described above, future earnings, and periodic securitization of
loans should provide the necessary capital and liquidity for its operations
during the remainder of fiscal 1998.
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 Statements
The above discussions contain forward-looking statements made by the
Company regarding its results of operations, cash flow needs and liquidity, loan
origination volume, target spreads 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. Among these factors are the following:
Capital Requirements and Availability. The Company requires substantial
amounts of cash to support its business and growth as described above. Its cash
requirements can vary depending on the cash-effect of hedging transactions, the
availability of external credit enhancement in securitizations or other
financing transactions and the other factors that affect the net cash provided
by securitizations (at closing and over time) as well as the percentage of
principal amount of loans acquired for which the Company can obtain Warehouse
financing. The Company's ability to meet these ongoing cash and liquidity
requirements depends on several factors. First is the Company's ability to
effect periodic securitizations of its loan portfolio and the terms of such
securitizations which are dependent on market factors generally, changes in
interest rates, demand for asset-backed securities and the Certificates offered
in the Company's securitizations particularly. Another important factor is the
Company's ability to continue to comply with the terms of its Senior and Senior
Subordinated Notes and Warehouse facilities and/or its ability to obtain funding
to replace and/or supplement such facilities should it become necessary to do
so. 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 businesses 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 borrow under the Credit Facilities.
Loan Acquisition Volume, Spread and Growth. Many factors affect the
Company's loan acquisition volume and spread, which have significant impact on
the Company's net earnings. Volume is affected by overall demand for new and
used automobiles in the economy generally, the willingness of automobile dealers
to forward prospective borrowers' loan applications to the Company, as well as
the number of qualified borrowers whose loans are approved and whose loans are
ultimately acquired by the Company. Competition can impact significantly both
acquisition volume and the note rate at which loans are originated. Generally,
competition in the Company's business is intense. The Buy Rate offered by the
Company is a significant competitive factor. A competitor offering a lower Buy
Rate may be more likely to acquire a loan. The continued growth of the Company's
servicing portfolio will depend significantly on the receptivity to the
Company's program of new dealers in existing markets as well as new markets and
the continued stability of the Company's relationships with its existing dealer
network.
Interest Rate Risk. The Company's sources of funds generally have
variable rates of interest and its loan portfolio bears interest at fixed rates.
It therefore bears interest rate risk on loans until they are securitized and
employs a hedging strategy to mitigate this risk. There is no assurance that its
strategy will completely offset changes in interest rates. In particular, such
strategy depends on management's estimates of loan acquisition volume.
Loan Losses and Prepayment Rates. 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 loans in
the servicing portfolio reduce the size of the portfolio and reduce the
Company's servicing income. The Gain on Sales of Loans in connection with each
securitization transaction and the amount of Excess Servicing recognized in each
transaction reflect deductions for estimates of future defaults and prepayments.
The carrying value of Excess Servicing may be adjusted periodically to reflect
differences between estimated and actual credit losses and prepayments on past
securitizations. The Company's results of operations could be adversely affected
if default or prepayment rates on securitized loans substantially exceed the
estimated levels.
Regulation. The Company's business is subject to numerous federal and
state consumer protection laws and regulations which, among other things: (i)
require the Company to obtain and maintain certain licenses and qualifications;
(ii) limit the interest rates, fees and other charges the Company is allowed to
charge; (iii) limit or prescribe certain other terms of the Company's contracts;
(iv) require specified disclosures; and (v) define the Company's rights to
repossess and sell collateral. Changes in existing laws or regulations, or in
the interpretation thereof, or the promulgation of any additional laws or
regulation could have an adverse effect on the Company's business.
Other Matters
As a part of the ongoing development of its business plan, the Company
is researching the possibilities of engaging in other finance-related businesses
such as leasing and other non-auto consumer lending. Additionally, the Company
is researching the possibility of expanding its dealer base to include
nationally recognized used rental car outlets which are not
manufacturer-franchised dealerships. Based on this research, the Company may
expand its current operations to include some or all of the above
finance-related businesses. It is management's philosophy to continually search
for new products and markets to grow and expand the Company in order to maximize
profits and shareholder value.
Impact of Current Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 provides computation, presentation, and disclosure
requirements for earnings per share. The current presentation of primary and
fully diluted earnings per share will be replaced with basic and diluted
earnings per share. The Statement is effective for financial statements for both
interim and annual periods ending after December 15, 1997, and earlier
application is not permitted. Basic earnings per share under SFAS 128 excludes
dilutive securities. Because unexercised stock options do not have a dilutive
effect on the Company's earnings per share calculation, management expects that
the new basic earnings per share will not be significantly different than
primary earnings per share.
In connection with SFAS 128, the FASB also issued SFAS No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129"). While SFAS 128
applies only to public companies, SFAS 129 is applicable to both public and
nonpublic companies. This statement is not expected to have a material impact on
disclosures made by the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
Comprehensive income is the total of net income and all nonowner changes in
shareholders' equity. This Statement is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Statement will
require new disclosures by the Company, but is not expected to have a material
impact on the financial statements or the results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), which introduces new
guidance on segment reporting. 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.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
- ----------------------------
The Board of Directors
Union Acceptance Corporation:
We have audited the accompanying consolidated balance sheets of the Union
Acceptance Corporation and Subsidiaries as of June 30, 1997 and 1996, the
related consolidated statements of earnings and cash flows for each of the years
in the three-year period ended June 30, 1997 and the related consolidated
statement of shareholders' equity for the years ended June 30, 1997 and 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Union Acceptance
Corporation and Subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standard No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, on January 1, 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
July 30, 1997
Indianapolis, IN
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Assets June 30, 1997 June 30, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 58,801 $ 13,459
Restricted cash 16,657 14,789
Loans, net 121,156 259,290
Accrued interest receivable 1,232 2,127
Furniture and equipement, net 2,150 2,026
Excess servicing 99,047 83,434
Spread accounts 71,744 63,590
Other assets 20,481 12,480
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 391,268 $ 451,195
===============================================================================================================================
Liabilities
- -------------------------------------------------------------------------------------------------------------------------------
Amounts due under warehouse facilities $ 44,455 $ 187,756
Long term debt 221,000 156,000
Accrued interest payable 5,793 5,820
Amounts due to trusts 16,067 7,931
Dealer premiums payable 1,372 3,381
Other payables and accrued expenses 1,874 3,326
Deferred income tax payable 13,859 8,357
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 304,420 372,571
- -------------------------------------------------------------------------------------------------------------------------------
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; 4,016,788
and 4,011,358 shares issued and outstanding at June 30, 1997
and June 30, 1996, respectively 58,270 58,180
Class B Common Stock, without par value, authorized 20,000,000 shares; 9,200,000
shares issued and outstanding at June 30, 1997 and June 30, 1996, respectively
- -
Net unrealized gain on excess servicing 2,252
-
Retained earnings 26,326 20,444
- -------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 86,848 78,624
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 391,268 $ 451,195
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended June 30, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on loans $ 33,914 $ 28,712 $ 14,702
Interest on spread accounts and restricted cash 6,385 5,448 3,936
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 40,299 34,160 18,638
Interest expense 25,688 22,275 12,961
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin 14,611 11,885 5,677
Provisions for losses 4,188 2,875 1,074
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision 10,423 9,010 4,603
Gain on sales of loans 963 30,357 8,684
Servicing fees, net 25,344 16,926 14,628
Other 3,820 3,096 2,783
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues 40,550 59,389 30,698
- ------------------------------------------------------------------------------------------------------------------------------
Salaries and benefits 15,673 11,985 6,622
Other 14,829 11,856 8,291
- ------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 30,502 23,841 14,913
- ------------------------------------------------------------------------------------------------------------------------------
Earnings before provision for income taxes 10,048 35,548 15,785
Provision for income taxes 4,166 14,406 6,396
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,882 $ 21,142 $ 9,389
==============================================================================================================================
Net earnings per common share $ 0.45 $ 1.60 NM
==============================================================================================================================
Weighted average number of common shares outstanding 13,215,112 13,209,378 NM
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 5,882 $ 21,142 $ 9,389
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Loan acquisitions in excess of liquidations (1,087,065) (982,800) (760,091)
Dealer premiums paid in excess of dealer premium
rebates received on loans held for sale (53,461) (50,059) (35,245)
Securitization of loans held for sale 1,214,298 924,598 658,703
Gain on sales of loans (46,713) (37,900) (16,935)
Proceeds on sale of interest-only strip 31,773 26,686 -
Return of excess servicing cash flows,
net of present value effect 24,738 37,871 30,049
Impairment of Excess Servicing 34,828 - -
Provision for estimated credit losses 4,188 2,875 1,074
Amortization and depreciation 3,979 4,395 2,049
Spread accounts (8,154) (6,176) (20,081)
Restricted cash (1,868) (5,934) (7,734)
Other assets and accrued interest receivable (10,296) (6,788) (6,745)
Amounts due to trusts 8,136 2,030 3,761
Other payables and accrued expenses 5,697 14,281 939
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 125,962 (55,779) (140,867)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (967) (1,347) (995)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activites:
Net change in warehouse credit facilities (143,301) 187,756 -
Proceeds from issuance of senior notes 65,000 110,000 -
Proceeds from issuance of senior subordinated notes - 46,000 -
Payment of borrowing fees (1,352) (3,231) (647)
Net proceeds from issuance of common stock - 58,000 -
Net change in Due to Union Federal, including
regulatory equity distribution - (337,423) 151,992
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (79,653) 61,102 151,345
- -----------------------------------------------------------------------------------------------------------------------------
Change in cash 45,342 3,976 9,483
Cash, beginning of period 13,459 9,483 -
- -----------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 58,801 $ 13,459 $ 9,483
============================================================================================================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 4,288 $ 10,680 $ 6,396
============================================================================================================================
Interest paid $ 26,475 $ 15,648 $ 12,961
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended June 30, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
==============================================================================================================================
Net
Number of Unrealized
Common Stock Gain on Total
Shares Outstanding Common Excess Retained Shareholders'
Class A Class B Stock Servicing Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 1 1 $ 2 $ - - 2
Issuance of common stock
through initial public offering 4,000,000 9,200,000 58,000 - - 58,000
Regulatory equity distributions
related to spin-off (1) (1) (2) - (698) (700)
Grants of common stock 11,358 - 180 - - 180
Net earnings - - - - 21,142 21,142
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 4,011,358 9,200,000 58,180 - 20,444 78,624
Grants of common stock 5,430 - 90 - - 90
Net earnings - - - - 5,882 5,882
Net unrealized gain on excess
servicing - - - 2,252 - 2,252
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 4,016,788 9,200,000 $ 58,270 $2,252 26,326 86,848
==============================================================================================================================
</TABLE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
(1) Summary of Significant Accounting Policies
Basis of Presentation
Union Acceptance Corporation and Subsidiaries ("UAC" or the "Company"),
formerly a division of Union Federal Savings Bank of Indianapolis (the
"Union Division"), specializes in the acquisition, sale and servicing of
prime retail installment loans (primarily automobile loans) acquired from
a network of over 3,200 manufacturer-franchised dealerships in 29 states
from whom such loans are regularly purchased. Loans acquired are
subsequently sold to investors through asset-backed securitization
transactions.
In contemplation of a public offering to sell common stock, UAC was
formed as a wholly-owned subsidiary of Union Federal Savings Bank of
Indianapolis ("Union Federal") in December 1993. 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 and selected
assets and operations of the Union Division were transferred to UAC. In
August of 1995, the Company completed an initial public offering
simultaneously with a tax free spin-off from its parent, Union Federal.
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.
The accompanying consolidated financial statements include the accounts
of UAC and the Union Division prior to the transfer and spin-off. All
significant intercompany accounts and transactions have been eliminated
in the consolidation. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and
with those in the general practice of the consumer finance industry.
The consolidated financial statements reflect no allocation of Union
Federal's historical equity. Earnings of the Company were transferred to
Union Federal through the Due to Union Federal account prior to the
spin-off.
Cash
The Company considers all investments with a maturity of three months or
less when purchased to be cash equivalents.
Restricted Cash
Restricted cash primarily consists of funds held in reserve accounts in
compliance with the terms of the Warehouse Facility Agreements.
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
Loans, Net
All loans in the Company's prime and non-prime portfolios are held for
sale and include automobile, light-truck, van, and marine loans including
dealer premiums (on prime loans). Such loans are packaged and sold
through asset-backed securitization transactions and are carried at their
principal amount outstanding (amortized cost) which approximates the
lower of cost or market, net of unearned discount. Interest on these
loans is accrued and credited to interest income based upon the daily
principal amount outstanding. The Company provides an allowance for
credit losses from the date of origination to the date of securitization.
The allowance is shown as a reduction to loans.
Loans, net includes dealer premiums which are incentives paid to dealers
in connection with the acquisition of loans. Dealer premiums are deferred
in accordance with Statement of Financial Accounting Standards No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases. A portion of the
dealer premiums are refundable to the Company in the event of loan
prepayment or default.
Accrued Interest Receivable
Accrued interest receivable represents interest earned but not collected
on loans held for sale.
Furniture and Equipment, Net
Furniture and equipment are recorded at cost. Depreciation is determined
on accelerated methods over the estimated useful lives of the respective
assets.
Excess Servicing
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 125"). SFAS 125 provides accounting
and reporting standards for transfers and servicing of financial assets
and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are
secured borrowings. The financial components approach focuses on the
assets and liabilities that exist after the transfer. The pronouncement
prescribes the methodology for recognition of gain or loss upon the sales
of loans as well as the valuation of excess servicing. SFAS 125 is
effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Retroactive application is not permitted.
The Company adopted SFAS 125 on January 1, 1997. The adoption of SFAS 125
had the effect of reducing fiscal 1997 net earnings by $1,311,000 or
$0.10 per share and increasing retained earnings by $941,000.
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
Excess servicing is the Company's retained interest in loans sold. Excess
servicing is determined by allocating the carrying amount of loans sold
based on the relative fair market value of loans sold and the expected
future cash flows discounted at current market rates. The expected
discounted future servicing cash flows is the projected difference
between the weighted average coupon rate of the loans sold and the
certificate rate to investors less the Company's contractual servicing
fee (typically 1%), an allowance for estimated credit losses and other
trust and credit enhancement fees, plus dealer premium rebates. Allowance
for estimated credit losses is based on current scoring models,
historical loss rates and the loan composition of the securitization.
Allowance for estimated credit losses is deemed adequate for credit
losses over the life of the respective securitizations. Market discount
rates are based on current market conditions and prepayment assumptions
are based on historical experience. The Company's contractual servicing
fee approximates adequate compensation. Accrued interest through the date
of securitization, which will be returned to the Company through the
securitization trust is also classified as excess servicing. Excess
servicing is reduced by excess cash flows as received over the life of
the securitization.
Excess servicing is classified as an available-for-sale security and is
carried at its market value based on the application of current
assumptions to the remaining cash flows. Unrealized gains and losses are
reported net of related income taxes as a separate component of
shareholders' equity until realized. Excess servicing is reviewed
periodically for other than temporary impairment on a disaggregate basis
(the pool by pool method), with impairment, if any, charged to operations
through gain on sales of loans, net.
Gain on Sales of Loans, Net
Gain on sales of loans, net represents the difference between the sales
proceeds and the carrying amount of loans after reduction for amounts
allocated to excess servicing, less expenses of the sale and hedging
gains and losses. Gains are credited to operations at the closing of each
securitization. The Company retains the servicing rights on the loans
sold. Other than temporary impairment adjustments are recorded as a
component of Gain on Sales of Loans, net.
Spread Accounts
Spread accounts are intended to protect the securitization investors and
any letter of credit provider or credit enhancer against credit losses.
The initial deposit, if required, and net excess servicing cash flows
earned are retained for each securitization until the spread account
balance increases to a specified percentage of the pool balance. Spread
account requirements vary with each securitization's delinquency and loss
experience. Funds in excess of specified percentages are remitted to the
Company over the remaining life of the securitization. Should the spread
account be insufficient to cover losses, each trust is further supported
by additional credit enhancements. Selected trusts are secured by either
a letter of credit or surety bond provided by a financial institution.
Other trusts have been formed with a subordinated class of certificates
whereby the senior certificateholders are protected against losses by
having their interests senior to the subordinate certificateholders'
interests. Subordinated certificateholders assume a
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
higher risk of loss, but earn a higher yield on their certificates. For
each trust, there is no recourse against the Company beyond the balance
in the spread account and the trust's future earnings.
Common Stock
In election of directors, the holders of Class B Common Stock are
entitled to five votes per share and Class A Common Stock are entitled to
one vote per share. On all matters other than the election of directors,
holders of Class B and A have one vote per share and vote as a single
class.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date. Tax
expense has been computed assuming the Company was a stand-alone entity
(prior to spin-off).
Amounts Due to Trusts
Amounts due to trusts represent monies collected but not paid to the
trustee for principal and interest remittances as well as recovery
payments in respect of securitized loans. All amounts collected by the
Company are remitted to the trustee within two business days, and
subsequently distributed by the trustee to the investors, servicer, and
credit enhancers on a monthly basis.
Servicing Fees, Net
Servicing fees, net include the contractual fee, typically 1% per annum,
earned from each trust plus the accretion of discounted excess servicing,
plus excess dealer premium rebates.
Hedging
Loan production is hedged periodically to such time as the next
securitization is estimated to occur. Securitizations of the prime
portfolio occur approximately every three months. The primary hedging
vehicle is a short sale of Treasury Notes having a maturity approximating
the average maturity of the loan production during the relevant period.
At such time as a securitization is committed, the hedge is covered by
the purchase of a like volume of Treasury Notes. Gains or losses on the
hedge are recognized concurrently with the gain or loss at
securitization.
Earnings Per Share
The initial public offering was completed on August 7, 1995. Earnings per
share for the year ended June 30, 1997 and 1996, were computed by
dividing net earnings by the average common shares outstanding during the
period. Shares outstanding from August 7, 1995, through September 30,
1995, were assumed to be outstanding for the entire three months ended
September 30, 1995. The
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
effect of unexercised stock options on earnings per share has not been
included in the calculation because they are not dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Loans, Net
Loans, net are as follows (in thousands, except average loan balance) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Principal balance of prime loans held for sale,
net of unearned discount $ 90,331 228,391
Principal balance of non-prime loans held for sale,
net of unearned discount 19,829 15,512
Principal balance of marine loans held for sale 6,227 50
Loans in process 1,189 5,363
Dealer premiums 4,360 11,073
Allowance for credit losses (780) (1,099)
- ----------------------------------------------------------------------------------
$ 121,156 259,290
==================================================================================
Weighted average interest rate (prime) 13.18% 13.24%
Weighted average interest rate (non-prime) 19.62 19.70
Weighted average interest rate (marine) 11.36 14.68
Average loan balance (prime) $ 10,710 14,049
Average loan balance (non-prime) 11,276 12,479
Average loan balance (marine) 13,192 8,304
</TABLE>
Allowance for estimated credit losses on loans held for sale (in
thousands):
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at the beginning of the period $ 1,099 453 171
Charge-offs (7,361) (4,556) (2,605)
Recoveries 2,854 2,327 1,813
Provision for estimated credit losses 4,188 2,875 1,074
----- ----- -----
Balance at the end of the period $ 780 1,099 453
================================================================================
</TABLE>
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
The geographic concentration of loans serviced are as follows:
Percent of Total
June 30,
State 1997 1996
---------------------------------------------------------------------------
Texas 16.4% 18.2%
North Carolina 11.0 11.2
California 10.5 8.8
Ohio 7.2 8.0
Illinois 7.1 6.7
Florida 7.0 6.1
Virginia 6.2 5.5
Oklahoma 5.7 7.2
Arizona 5.1 6.9
Indiana 4.7 5.8
Georgia 2.5 2.2
Missouri 2.5 3.0
Colorado 2.2 3.2
South Carolina 2.2 1.2
Iowa 1.5 0.9
Maryland 1.4 0.4
Tennessee 1.2 0.4
Wisconsin 1.2 1.0
Michigan 1.1 0.2
Kansas 0.8 0.9
New Mexico 0.8 0.8
Washington 0.6 0.5
Oregon 0.4 0.5
Kentucky 0.2 0.1
Pennsylvania 0.2 -
Minnesota 0.1 0.2
Nebraska 0.1 0.1
Nevada 0.1 -
---------------------------------------------------------------------------
100.0% 100.0%
===========================================================================
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
Loans serviced are as follows (in thousands) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Loans held for sale
Prime (net of unearned discount) $ 90,331 228,391
Non-prime (net of unearned discount) 19,829 15,512
Marine 6,227 50
- -----------------------------------------------------------------------------------------
116,387 243,953
Securitized loans
Prime 1,769,903 1,319,930
Non-prime 48,460 31,550
- -----------------------------------------------------------------------------------------
1,818,363 1,351,480
Other loans serviced 2,526 3,637
- -----------------------------------------------------------------------------------------
$ 1,937,276 1,599,070
=========================================================================================
</TABLE>
Notional amounts and unrealized losses related to outstanding hedges
follow (in thousands) at:
June 30,
1997 1996
- -------------------------------------------------------------------------------
Notional amounts outstanding $ 204,000 415,000
Unrealized losses on hedging transactions 909 711
================================================================================
Notional amounts of $180 million, $18 million and $6 million were
expected to be closed in September 1997, December 1997 and March 1998,
respectively, for the amounts outstanding at June 30, 1997, and $340
million, $55 million and $20 million were closed in August 1996, November
1996 and December 1996, respectively, for amounts outstanding at June 30,
1996.
Hedging realized losses were approximately $6,293,000, $2,733,000 and
$5,515,000 during fiscal 1997, 1996 and 1995, respectively.
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
(3) Furniture and Equipment, Net
Furniture and equipment, net are as follows (in thousands) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture, equipment and leasehold improvements $ 4,724 3,858
Accumulated depreciation (2,574) (1,832)
- --------------------------------------------------------------------------------------------------------------------
$ 2,150 2,026
=====================================================================================================================
</TABLE>
(4) Excess Servicing
The carrying amount of excess servicing is as follows (in thousands) at:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Estimated value of excess servicing cash flows,
<S> <C> <C>
net of estimated prepayments $ 145,872 112,564
Estimated dealer premium rebates 26,447 13,467
Allowance for estimated credit losses on securitized loans (79,923) (43,516)
Discount to present value (9,941) (9,535)
- -------------------------------------------------------------------------------------------------------------------
82,455 72,980
Accrued interest on securitized loans 12,807 10,454
- -------------------------------------------------------------------------------------------------------------------
Unrealized gains on excess servicing 3,785 -
$ 99,047 83,434
===================================================================================================================
Outstanding balance of loans serviced
through securitized trusts $ 1,818,363 1,351,480
Allowance for estimated credit losses as a
percentage of securitized loans serviced 4.40% 3.22%
</TABLE>
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
Excess servicing activity is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 83,434 60,622 41,265
Amounts capitalized (including estimated
dealer rebates) 68,922 56,436 47,693
Change in accrued interest on securitized loans 2,353 4,247 1,713
Return of excess cash flows, net of present value effect (24,619) (37,871) (30,049)
Impairment of excess servicing asset (34,828) - -
Unrealized gain attributable to the change in fair value 3,785 - -
- ---------------------------------------------------------------------------------------------------------
Balance at end of period $ 99,047 83,434 60,622
=========================================================================================================
</TABLE>
Because of current trends with respect to credit loss and delinquency,
and their effects on the valuation of the excess servicing asset, the
Company recorded pre-tax charges of approximately $35.0 million for the
impairment of the excess servicing asset in accordance with the
provisions of SFAS 125 during fiscal 1997.
(5) Spread Accounts
The weighted average yield on spread accounts was 4.97% and 5.32% at June
30, 1997 and 1996, respectively.
(6) Other Assets
Other assets are as follows (in thousands) at:
June 30,
1997 1996
- ----------------------------------------------------------------------
Income tax receivable $ 5,735 1,584
Repossessed assets 5,048 1,716
Deferred borrowing fees 3,078 2,173
Accrued servicing fees 2,511 5,131
Advances of delinquent interest 1,056 506
Other 3,053 1,370
- ---------------------------------------------------------------------
$ 20,481 12,480
=====================================================================
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
================================================================================
(7) Amounts Due Under Warehouse Facilities
At June 30, 1997, the Company, through its wholly-owned special-purpose
subsidiaries, had borrowing arrangements with a financial institution
which provided for three revolving Warehouse Facilities (the
"Facilities") with an aggregate borrowing capacity of $450 million.
Borrowings under these facilities are collateralized by certain loans
held for sale. There are separate Facilities for the funding of prime
auto, non-prime auto, and marine loan acquisitions. Outstanding
borrowings of the Facilities at June 30, 1997 and 1996 were
approximately $44,455,000 and $187,756,000, respectively. The weighted
average cost of funds of the Facilities for the years ended June 30,
1997 and 1996 was 5.42% and 6.19%, respectively.
The cost of funds includes a variable interest rate on the outstanding
commercial paper, fees on the used and unused portions of the
Facilities, and the amortization of prepaid warehouse fees. The largest
portion of the cost of funds related to the Facilities is the variable
rate interest on the commercial paper issued by the financing conduit.
The weighted average commercial paper rate on outstanding issues at June
30, 1997 and 1996 was 5.66% and 5.40%, respectively. Upfront warehouse
fees are non-recurring costs related to the initial set-up of the
Facilities. The Facilities agreements specify a term of one year and are
renewable annually. Both the prime auto and non-prime auto Facilities
have been renewed for an additional year, and expire in June and July
1998, respectively. The marine Facility expires April 1998.
(8) Long-term Debt
In connection with the Company's initial public offering, the Company
issued, in a private placement, $110 million principal amount of 8.53%
Senior Notes due 2002. Interest on the Senior Notes is payable
semi-annually on February 1 and August 1 of each year, and commenced on
February 1, 1996, with annual principal reductions commencing on August
1, 1998. The Senior Notes are redeemable, in whole or in part, at the
option of the Company, in a principal amount not less than $1 million,
together with accrued and unpaid interest to the date of redemption and
a yield-maintenance premium as defined in the note agreement.
In April 1996, the Company issued $46 million in a private placement of
9.99% Senior Subordinated Notes due 2003. Interest on the Senior
Subordinated Notes is payable quarterly on March 30, June 30, September
30 and December 30 of each year, and commenced on June 30, 1996. The
Senior Subordinated Notes are redeemable, in whole or in part, at the
option of the Company, in a principal amount not less than $1 million,
together with accrued and unpaid interest to the date of redemption and
a yield-maintenance premium as defined in the note agreement.
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
In March 1997, the Company issued, in a private placement, $50 million
Series A 7.75% Senior Notes due 2002 and $15 million Series B 7.97%
Senior Notes due 2002. Interest on the Senior Notes is payable
semi-annually on March 15 and September 15 of each year, commencing
September 15, 1997, with a principal reduction occurring on March 15,
2002. The Senior Notes are redeemable, in whole or in part, at the
option of the Company, in a principal amount not less than $1 million,
together with accrued and unpaid interest to the date of redemption and
a yield-maintenance premium as defined in the note agreement.
Scheduled contractual maturities of long-term debt at June 30, 1997
follows (in thousands):
1998 $ -
1999 22,000
2000 22,000
2001 22,000
2002 43,667
2003 111,333
- --------------------------------------------------------------------------------
$ 221,000
================================================================================
(9) Other Revenue and Expenses
Other revenue and expenses follow (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
- --------------------------------------------------------------------------------------------
Other revenues:
<S> <C> <C> <C>
Late charges $ 2,618 1,922 1,447
Origination fees 1,019 1,072 1,210
Other 183 102 126
- --------------------------------------------------------------------------------------------
$ 3,820 3,096 2,783
============================================================================================
Other expenses:
Loan expenses 2,948 2,202 1,841
Outside services 2,767 2,515 1,492
Office, telephone and postage 2,626 2,207 1,158
Occupancy 1,433 891 396
Equipment 1,013 839 511
Other 4,042 3,202 2,893
- --------------------------------------------------------------------------------------------
$ 14,829 11,856 8,291
============================================================================================
</TABLE>
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(10) Income Taxes
The composition of income taxes follows (in thousands):
Year ended June 30,
1997 1996 1995
- --------------------------------------------------------------------------------
Current expense (benefit) $(1,644) 9,096 6,458
Deferred expense (benefit) 5,810 5,310 (62)
- --------------------------------------------------------------------------------
$ 4,166 14,406 6,396
- --------------------------------------------------------------------------------
The effective income tax rate for the year ended June 30, 1997, is 40.5%.
Income taxes were allocated using statutory federal and state rates which
resulted in effective income tax rate of approximately 40.5% for the
years ended June 30, 1996 and 1995.
Year ended June 30,
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating losses carryforward $ 1,841 -
Allowance for estimated credit losses 316 445
Mark to market and allowance for
credit losses 2,073 912
- --------------------------------------------------------------------------------
4,230 1,357
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Excess servicing 16,556 5,349
Unrealized gain on excess servicing 1,533 -
Mark to market - excess servicing - 4,365
- --------------------------------------------------------------------------------
18,089 9,714
- --------------------------------------------------------------------------------
Deferred income tax payable $ 13,859 8,357
================================================================================
(11) Estimated Fair Value of Financial Instruments
Loans held for sale - Cost approximates fair value as loans are sold
shortly after origination.
Accrued interest receivable - Cost approximates fair value.
Excess servicing - In 1997, amount carried at fair value in accordance
with SFAS 125. During 1996, cost approximated fair value determined based
upon discounting future cash flows at market rates using historical
prepayment speeds and loss provisions.
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Spread accounts - Cost approximates fair value as the interest rate
earned is at a variable rate.
Repossessed assets - Cost approximates fair market value.
All liabilities, except long-term debt - Cost approximates fair value.
Long-term debt - Carrying amount of $221,000,000 and $156,000,000 at June
30, 1997 and 1996, respectively, has been calculated to have a fair value
of approximately $221,000,000 and $152,000,000, respectively, by
discounting the scheduled loan payments to maturity using rates that are
believed to be currently available for debt of similar terms and
maturities.
(12) Commitments and Contingencies
Future minimum payments under noncancelable operating leases on premises
and equipment with terms of one year or more as of June 30, 1997 are as
follows (in thousands):
1998 $ 1,236
1999 1,150
2000 985
2001 911
2002 911
Thereafter 759
- ------------------------------------------------------
Total $ 5,952
======================================================
These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense for premises and equipment
amounted to approximately $1,640,000 and $645,000 for the years ended
June 30, 1997 and 1996, respectively. A majority of the rental expense
relates to the lease of the Company's principal offices with a company
owned by the majority shareholders of UAC.
The Company is also involved as a party to certain immaterial legal
proceedings incidental to its business. Management of the Company, based
on the advice of outside counsel, believes that the outcome of such
proceedings will not have a material effect upon its business or
financial condition.
(13) Stock-Based Compensation
The Company has one stock-based compensation plan, which is described
below. The Company applies APB Opinion No. 25, Accounting for Stock
Issued to Employees and related Interpretations in accounting for these
plans. Had compensation cost been determined based on the fair value at
the grant date for awards under those plans consistent with the method of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except share data):
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
June 30,
For the Years Ended: 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $5,882 21,142
Pro forma 4,543 19,449
Earnings per share:
As reported 0.45 1.60
Pro forma 0.34 1.47
================================================================================
The effects of applying SFAS 123 in this Pro Forma disclosure are not
indicative of future amounts. The Statement does not apply to awards
prior to fiscal 1996, and additional awards in the future are expected.
The Union Acceptance Corporation 1994 Incentive Stock Plan ("Incentive
Stock Plan") is the Company's long-term incentive plan for directors,
executive officers and other key employees. The Incentive Stock Plan
authorizes the Company's Compensation Committee to award executive
officers and other key employees incentive and non-qualified stock
options and restricted shares of Class A Common Stock. A total of 500,000
shares of Class A Common Stock have been reserved for issuance under the
Incentive Stock Plan, of which options for 271,875 shares of Class A
Common Stock were granted at an issue price of $16 per share to senior
officers upon consummation of the Company's initial public offering of
the Class A Common Stock.
Options or other grants to be received by executive officers or other
employees in the future are within the discretion of the Company's
Compensation Committee and are not determinable. Stock options granted
under the Incentive Stock Plan are exercisable at such times (not after
ten years and one day from the date of the grant) and at such exercise
prices (not less than 85% of the fair market value of the Class A Common
Stock at date of grant) as the Committee determines and will, except in
limited circumstances, terminate if the grantee's employment terminates
prior to exercise. The outstanding options' maximum term is ten years.
Such options vest over a period of five years, with one-fifth becoming
exercisable on each anniversary of the option grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options pricing model with the following weighted
average assumptions used for grants in 1997 and 1996; dividend yield of
0.0% for both years; expected volatility of 100% for both years; weighted
average risk-free interest rates of 6.55% and 6.41% for 1997 and 1996
grants, respectively; and expected lives of ten years for both years.
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock option plans as of June
30, 1997 and 1996 changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
year 276,915 $ 16.03 - $ 0.00
Options granted 39,750 16.00 280,600 16.04
Options exercised - 0.00 - 0.00
Options canceled 2,180 17.48 3,685 16.31
- -----------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 314,485 $ 16.02 276,915 $ 16.03
=================================================================================================================
Weighted average fair value of
options granted during the year $ 14.71 $ 14.79
=================================================================================================================
</TABLE>
The following table summarizes information about fixed stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted average Weighted Weighted
Range of number remaining Average Number average
exercise outstanding contractual exercise exercisable exercise
prices at 6/30/97 date price at 6/30/97 price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16.00 - 16.00 311,125 8.25 $ 16.00 54,375 $ 16.00
$17.88 - 17.88 3,360 8.25 17.88 672 17.88
- -------------------------------------------------------------------------------------------------------------------
314,485 8.25 $ 16.02 55,047 $ 16.03
===================================================================================================================
</TABLE>
In addition to the options outstanding at June 30, 1997, there were
168,727 shares of Class A Common Stock available for future grants or
awards.
The Incentive Stock Plan also provides that each director of the Company
who is not also an executive officer is automatically granted shares of
Class A Common Stock with a fair market value of $15,000 following each
annual meeting of shareholders. Shares so granted have a six-month period
of restriction during which they may not be transferred. Shares granted
under this section of the Incentive Stock Plan totaled 5,430 and 11,358
in fiscal 1997 and 1996, respectively, and compensation cost charged
against income was $90,000 and $180,000 in 1997 and 1996, respectively.
(Continued)
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(14) Restatement of Consolidated Financial Statements
The Company determined in August 1998 that it should measure other
than temporary impairment of Excess Servicing on a disaggregate basis
(pool by pool). The adjustments resulting from the measurement of other
than temporary impairment on a disaggregate basis were of sufficient
significance to require restatement of the consolidated financial
statements since the implementation of SFAS 125. This restatement had
the effect of reducing fiscal 1997 earnings by $1,890,000 (net of income
taxes of $1,288,000) or $0.14 per share. The restatement had no effect
on shareholders' equity at June 30, 1997. In conjunction with the
restatement, the Company made other adjustments, which were not
individually significant, that increased fiscal 1997 net earnings by
$372,000 (net of income taxes of $259,000) or $0.03 per share and
increased shareholders' equity at June 30, 1997 by $733,000.
(Continued)
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(15) Quarterly Financial Information (unaudited)
Quarterly financial information is as follows (in thousands, except share
data):
- ------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1997
<S> <C> <C> <C> <C> <C>
Interest on loans $ 9,233 9,096 7,543 8,042 33,914
Interest on spread accounts and restricted cash 1,510 1,545 1,618 1,712 6,385
Interest expense (6,410) (6,265) (6,118) (6,895) (25,688)
Provision for estimated credit losses on
loans held for sale (855) (993) (1,180) (1,160) (4,188)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision 3,478 3,383 1,863 1,699 10,423
Gain (loss) on sales of loans 6,875 7,790 (6,168) (7,534) 963
Servicing fees, net 5,826 6,258 6,854 6,406 25,344
Other revenues 934 910 1,011 965 3,820
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 17,113 18,341 3,560 1,536 40,550
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries and benefits 3,632 3,900 4,065 4,076 15,673
Other expenses 3,514 3,932 3,480 3,903 14,829
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses 7,146 7,832 7,545 7,979 30,502
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 4,049 4,316 (1,587) (2,612) 4,166
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 5,918 6,193 (2,398) (3,831) 5,882
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share $ 0.45 0.47 (0.18) (0.29) 0.45
====================================================================================================================================
Weighted average common shares outstanding 13,211,358 13,215,515 13,216,788 13,216,788 13,215,112
====================================================================================================================================
Year ended June 30, 1996
Interest on loans $ 6,946 7,232 6,732 7,802 28,712
Interest on spread accounts and restricted cash 1,370 1,386 1,317 1,375 5,448
Interest expense (5,289) (5,556) (5,359) (6,071) (22,275)
Provision for estimated credit losses on
loans held for sale (1,150) (300) (600) (825) (2,875)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin after provision 1,877 2,762 2,090 2,281 9,010
Gain on sales of loans 6,724 8,483 7,760 7,390 30,357
Servicing fees, net 3,966 2,584 4,796 5,580 16,926
Other revenues 750 724 798 824 3,096
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 13,317 14,553 15,444 16,075 59,389
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries and benefits 2,321 3,059 3,232 3,373 11,985
Other expenses 2,398 2,543 3,426 3,489 11,856
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses 4,719 5,602 6,658 6,862 23,841
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 3,482 3,705 3,473 3,746 14,406
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,116 5,246 5,313 5,467 21,142
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ 0.39 0.40 0.40 0.41 1.60
====================================================================================================================================
Weighted average common shares outstanding 13,205,622 13,209,173 13,211,358 13,211,358 13,209,378
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List the following documents filed as part of the report:
Financial Statements -- Included Under Item 8:
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets as of June 30, 1997 and 1996
Consolidated Statements of Earnings (Loss) for the Years Ended
June 30, 1997, 1996, 1995
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1996, 1995
Consolidated Statement of Shareholders' Equity for the Years
Ended June 30, 1997 and 1996
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter ended
June 30, 1997
(c) The exhibits filed herewith or incorporated by reference
herein are set forth following the signature page which
appears on page 56.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
UNION ACCEPTANCE CORPORATION
January 4, 1999 By: /S/ Rick A. Brown
--------------------
Rick A. Brown
Treasurer and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page (Ex. No.
Cross Reference)(1)
- -------------------------------------------------------------------------------
3.1 Registrant's Articles of Incorporation, as amended S-1, 3.1
and restated.
3.2 Registrant's Code of By-Laws, as amended and S-1, 3.2
restated.
3.3 Form of Share Certificate for Class A Common Stock. S-1, 3.3
4.1 Articles V and VI of the Registrant's Articles of S-1, 4.1
Incorporation respecting the terms * of shares of
Common Stock, are incorporated by reference to the
Registrant's Articles of Incorporation filed
hereunder as Exhibit 3.1
4.2 Article III - "Shareholder Meetings," Article VI - S-1, 4.2
"Certificates for Shares," Article VII - "Corporate
Books and Records - Section 3" and Article X -
"Control Share Acquisitions Statute" of the
Registrant's Code of By-Laws are incorporated by
reference to the Registrant's Restated Code of
By-Laws filed herewith as Exhibit 3.2.
4.3 Transfer and Administration Agreement among S-1, 4.3
Enterprise Funding Corporation, Union Acceptance
Funding Corporation and Union Acceptance Corporation,
dated as of June 27, 1995.
4.3(a) Amendment No. 1 to Transfer and Administration 10Q 9/95
Agreement dated September 8, 1995 4.3(a)
4.3(b) Amendment No. 2 to Transfer and Administration 10Q 9/95
Agreement dated September 29, 1995 4.3(b)
4.3(c) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated November 13, 1995 4.3(c)
4.3(d) Amendment No. 3 to Transfer and Administration 10K 1996
Agreement dated March 1, 1996 4.3(d)
4.3(e) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated May 30, 1996 4.3(e)
4.3(f) Amendment No. 4 to Transfer and Administration 10K 1996
Agreement dated September 5, 1996 4.3(f)
4.3(g) Amendment No. 5 to Transfer and Administration
Agreement dated October 31, 1996*
4.3(i) Amendment No. 6 to Transfer and Administration 10Q 12/96
Agreement dated December 23, 1996 4.1
4.3(h) Amendment No. 7 to Transfer and Administration
Agreement dated March 31, 1997 *
4.3(j) Letter Agreement No. 3 with respect to Transfer and
Administration Agreement, dated April 28, 1997 *
4.4 Note Purchase Agreement between Union Acceptance 10K 1995
Corporation and certain lenders dated as of August 7, 4.4
1995.
4.4(a) Amendment No. 1 to Note Purchase Agreement dated 10Q 12/95
November 22, 1995 4.4(a)
4.5 Transfer and Administration Agreement among S-1, 4.5
Enterprise Funding Corporation, Performance Funding
Corporation and Union Acceptance Corporation, dated
as of July 24, 1995.
57
<PAGE>
4.5(a) Amendment No. 1 to Transfer and Administration 10Q 12/95
Agreement dated September 8, 1995 4.5(a)
4.5(b) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated October 12, 1995 4.5(b)
4.5(c) Amendment No. 2 to Transfer and Administration 10K 1996
Agreement dated May 10, 1996 4.5(c)
4.5(d) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated July 11, 1996 4.5(d)
4.5(e) Letter Agreement regarding Transfer and 10K 1996
Administration Agreement dated August 20, 1996 4.5(e)
4.5(f) Amendment No. 3 to Transfer and Administration 10Q 12/96
Agreement, dated December 23, 1996 4.2
4.5(g) Letter Agreement No. 4 to Transfer and
Administration Agreement dated April 25, 1997 *
4.5(h) Amendment No. 5 to Transfer and Administration
Agreement dated June 6, 1997 *
4.5(i) Letter Agreement with regard to Transfer and
Administration Agreement dated June 24, 1997 *
4.5(j) Amendment No. 6 to Transfer and Administration Agreement
dated as of July 29, 1997 *
4.6 Note Purchase Agreement dated as of April 3, 1996 10Q 3/96
among Union Acceptance Corporation and several 4.1
purchasers of Senior Subordinated Notes due 2003
4.7 Note Purchase Agreement, dated March 24, 1997, among 10Q 3/97
Union Acceptance Corporation and certain purchasers 10.1
of Senior Notes, due 2002.
4.8(a) Note Purchase Agreement, dated April 3, 1997 among
UAC Boat Funding Corp., Enterpirse Funding
Corporation and NationsBank, N.A. *
4.8(b) Security Agreement, dated April 3, 1997, among UAC Boat
Funding Corp., Enterpirse Funding Corp., et. al. *
9(a) Voting Trust Agreement among Richard D. Waterfield, S-1, 9(a)
as trustee, and certain existing shareholders of
Union Holding Company, Inc., dated June 10, 1994.
9(b) First Amendment to Voting Trust Agreement dated June S-1, 9(b)
1, 1995.
10.1 Remittance Processing Agreement by and between Union S-1, 10.5
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.2 Mail and Printing Services Agreement by and between S-1, 10.6
Union Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.3 Telephone Equipment Lease Agreement by and between S-1, 10.7
Union Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.4 Telecommunications Agreement by and between Union S-1, 10.8
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.5 Communications Equipment and Software License by and S-1, 10.9
between Union Federal Savings Bank of Indianapolis
and Union Acceptance Corporation dated June 29, 1994.
58
<PAGE>
10.6 Software License and Maintenance Agreement by and S-1, 10.10
between Union Federal Savings Bank of Indianapolis
and Union Acceptance Corporation dated June 29, 1994.
10.7 Loan Servicing Agreement by and between Union Federal S-1, 10.11
Savings Bank of Indianapolis and Union Acceptance
Corporation dated June 29, 1994.
10.8 General Subservicing Agreement by and between Union S-1, 10.12
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated as of January 1, 1995.
10.9 Loan Collection Agreement by and between Union S-1, 10.13
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.10 Letter respecting Terms of Bank Accounts from Union S-1, 10.14
Federal Savings Bank of Indianapolis to Union
Acceptance Corporation dated May 25, 1994.
10.11 Supplement to Account Agreement Re: Drafts by and S-1, 10.15
between Union Federal Savings Bank of Indianapolis
and Union Acceptance Corporation dated June 29, 1994.
10.12 Tax Allocation Agreement by and between Union Holding S-1, 10.16
Company, Inc. and its subsidiaries dated February 1,
1991, as amended.
10.13 Form of Remote Outsourcing Agreement by and between S-1, 10.18
Systematics Financial Services, Inc. and Union
Acceptance Corporation.
10.13(a) Letter Agreement by and among Systematics Financial S-1, 10.18(a)
Services, Inc., Union Federal Savings Bank of
Indianapolis and Union Acceptance Corporation dated
July 13, 1994 respecting Provision of Data Processing
Services.
10.13(b) Memorandum respecting Billing Procedure in connection S-1, 10.18(b)
with Remote Outsourcing Agreement from Systematics
System Financial Services, Inc. to Union Federal
Savings Bank of Indianapolis and Union Acceptance
Corporation dated October 25, 1994.
10.14 Union Acceptance Corporation Annual Bonus Plan For S-1, 10.23
Senior Officers.
59
<PAGE>
10.15 Union Acceptance Corporation Incentive Stock Plan. S-1, 10.24
10.16 Letter respecting Access to Records from Union S-1, 10.25
Acceptance Corporation to Union Federal Savings Bank
of Indianapolis dated September 13, 1994.
10.17 Letter Agreement by and between Union Federal S-1, 10.26
Savings Bank of Indianapolis and Union Acceptance
Corporation dated December 14, 1994 amending and
initiating terms of certain Inter-Company
Agreements.
10.18 Letter respecting terms and conditions of bank S-1, 10.27
accounts from Union Federal Savings Bank of
Indianapolis to Union Acceptance Corporation dated
December 16, 1994.
10.19 Lease Agreement between Waterfield Mortgage Company, 10Q 12/95
Incorporated, and Union Acceptance Corporation dated 10.19
as of November 1, 1995
10.20 Purchase Agreement among Union Acceptance Funding 10Q 3/96
Corporation, Union Acceptance Corporation and Union 10.1
Federal Savings Bank of Indianapolis dated as of
January 18, 1996
10.21 Sublease Agreement between Union Acceptance 10K 1996
Corporation and Union Federal Savings Bank of 10.26
Indianapolis dated as of August 1, 1996
21 Subsidiaries of the Registrant *
23 Consent of KPMG Peat Marwick LLP. (Updated) _____
27 Financial Data Schedule (Restated) _____
- --------------------
(1) Exhibits set forth above that are not included with this filing are
incorporated by reference to the Registrant's previously filed registration
statement or reports (and the indicated exhibit number) as indicated in the
right hand column above, as follows:
S-1 -- Refers to Registrant's Registration Statement on Form S-1 (Reg. No.
33-82254
10K 1995 -- Refers to Registrant's Form 10-K for the year ended June 30,
1995
10K 1996 -- Refers to Registrant's Form 10-K for the year ended June 30,
1996
10Q (month/year) -- Refers to Registrant's Form 10-Q for the quarter ended
at the end of such month in such calendar year
* Previously filed
[Letterhead]
KPMG Peat Marwick LLP
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
The Board of Directors
Union Acceptance Corporation:
We consent to incorporation by reference in the Registration Statement (No.
333-09717) on Form S-8 of Union Acceptance Corporation of our report dated July
30, 1997 relating to the consolidated balance sheets of the Union Acceptance
Corporation and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of earnings and cash flows for each of the years in the
three-year period ended June 30, 1997, and the related consolidated statement of
shareholders' equity for the years ended June 30, 1997 and 1996, which report
appears in the June 30, 1997 Annual Report on Form 10-K/A of Union Acceptance
Corporation.
/s/ KPMG Peat Marwick LLP
Indianapolis, Indiana
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary restated financial information extracted
from the Registrant's consolidated financial statements for the twelve month's
ended June 30, 1997, 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> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 147,202
<SECURITIES> 0
<RECEIVABLES> 123,168
<ALLOWANCES> (780)
<INVENTORY> 0
<CURRENT-ASSETS> 269,590
<PP&E> 4,724
<DEPRECIATION> (2,574)
<TOTAL-ASSETS> 391,268
<CURRENT-LIABILITIES> 25,106
<BONDS> 279,314
<COMMON> 58,270
0
0
<OTHER-SE> 28,578
<TOTAL-LIABILITY-AND-EQUITY> 391,268
<SALES> 0
<TOTAL-REVENUES> 70,426
<CGS> 0
<TOTAL-COSTS> 30,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,188
<INTEREST-EXPENSE> 25,688
<INCOME-PRETAX> 10,048
<INCOME-TAX> 4,166
<INCOME-CONTINUING> 5,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,882
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
