United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number: 0-26412
UNION ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
250 N. Shadeland Avenue, Indianapolis, IN 46219
(Address of principal executive office) (Zip Code)
(317) 231-6400
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at May 14, 1999
Class A Common Stock, without par value 5,099,344 Shares
--------------------------------------- ----------------
Class B Common Stock, without par value 8,150,266 Shares
--------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (unaudited):
Consolidated Condensed Balance Sheets as of
March 31, 1999 and June 30, 1998 3
Consolidated Condensed Statements of Earnings (Loss) and
Comprehensive Earnings (Loss) for the Three
and Nine Months Ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended March 31, 1999 and 1998 5
Consolidated Condensed Statement of Shareholders' Equity for the
Nine Months Ended March 31, 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Part II. OTHER INFORMATION 23
Signatures 24
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
Assets 1999 1998
-------------------------------------------
<S> <C> <C>
Cash $ 9,237 $ 75,612
Restricted cash 12,384 17,823
Receivables, net 242,675 118,259
Accrued interest receivable 1,862 1,045
Property, equipment, and leasehold improvements, net 8,553 7,921
Retained interest in securitized assets 201,984 171,593
Other assets 26,706 19,280
-------------------------------------------
Total Assets $ 503,401 $ 411,533
===========================================
Liabilities
Amounts due under warehouse facilities $ 170,376 $ 73,123
Long-term debt 199,000 221,000
Accrued interest payable 2,069 6,280
Amounts due to trusts 13,123 15,510
Dealer premiums payable 2,115 1,374
Income taxes payable 3,834 -
Deferred income taxes payable 17,713 9,573
Other payables and accrued expenses 3,211 2,200
-------------------------------------------
Total Liabilities 411,441 329,060
-------------------------------------------
Shareholders' Equity
Preferred Stock, without par value, authorized
10,000,000 shares; none issued and outstanding
- -
Class A Common Stock, without par value,
authorized 30,000,000 shares; 5,098,994 and 4,376,446 shares
issued and outstanding at March 31, 1999 and
June 30, 1998, respectively 58,450 58,360
Class B Common Stock, without par value,
authorized 20,000,000 shares; 8,150,266 and 8,855,036 shares
issued and outstanding at March 31, 1999 and
June 30, 1998, respectively
- -
Accumulated other comprehensive income 7,762 7,609
Retained earnings 25,748 16,504
-------------------------------------------
Total Shareholders' Equity 91,960 82,473
-------------------------------------------
Total Liabilities and Shareholders' Equity $ 503,401 $ 411,533
===========================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings (Loss) and
Comprehensive Earnings (Loss)
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest on receivables $ 8,087 $ 7,133 $ 23,276 $ 20,233
Other interest 4,798 3,230 15,314 9,534
------------ ------------ ------------ ------------
Total interest income 12,885 10,363 38,590 29,767
Interest expense 6,919 6,990 20,209 19,210
------------ ------------ ------------ ------------
Net interest margin 5,966 3,373 18,381 10,557
Provision for estimated credit losses 1,225 1,900 4,825 5,175
------------ ------------ ------------ ------------
Net interest margin after provision 4,741 1,473 13,556 5,382
Gain (loss) on sales of receivables, net 6,386 3,113 13,179 (5,714)
Servicing fees, net 5,601 4,742 16,023 14,290
Other revenues 1,442 1,065 3,821 3,070
------------ ------------ ------------ ------------
Total revenues 18,170 10,393 46,579 17,028
------------ ------------ ------------ ------------
Salaries and benefits 6,328 4,815 17,451 14,296
Other expenses 4,913 4,007 14,090 12,185
------------ ------------ ------------ ------------
Total operating expenses 11,241 8,822 31,541 26,481
------------ ------------ ------------ ------------
Earnings (loss) before provision (benefit)
for income taxes 6,929 1,571 15,038 (9,453)
Provision (benefit) for income taxes 2,665 654 5,794 (4,713)
------------ ------------ ------------ ------------
Net earnings (loss) $ 4,264 $ 917 $ 9,244 $ (4,740)
============ ============ ============ ============
Other comprehensive earnings (loss) before
provision (benefit) for income taxes:
Net change in unrealized gain on retained
interest in securitized assets 29 519 248 7,146
Provision for income taxes related to
items of other comprehensive earnings 11 198 95 2,816
------------ ------------ ------------ ------------
Other comprehensive earnings 18 321 153 4,330
------------ ------------ ------------ ------------
Comprehensive earnings (loss) $ 4,282 $ 1,238 $ 9,397 $ (410)
============ ============ ============ ============
Net earnings (loss) per share (diluted & basic) $ 0.32 $ 0.07 $ 0.70 $ (0.36)
============ ============ ============ ============
Weighted average number of
common shares outstanding (basic) 13,249,260 13,231,482 13,238,944 13,225,047
============ ============ ============ ============
Weighted average number of
common shares outstanding (diluted) 13,227,130 13,231,482 13,246,246 13,225,047
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 9,244 $ (4,740)
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Receivable acquisitions in excess of liquidations (1,073,788) (688,342)
Dealer premiums paid in excess of dealer premium
rebates received on receivables held for sale (40,178) (30,199)
Securitization of receivables held for sale 947,838 651,475
Gain on sales of receivables (30,772) (19,660)
Proceeds on sale of interest-only strip 2,847 11,050
Return of excess and servicing asset cash flows,
net of present value effect 29,777 16,311
Impairment of retained interest in securitized assets 9,464 20,187
Provision for estimated credit losses 4,825 5,175
Amortization and depreciation 3,576 3,325
Spread accounts (4,656) 1,202
Restricted cash 5,439 (1,674)
Other assets and accrued interest receivable (10,029) (32)
Amounts due to trusts (2,387) 1,865
Other payables and accrued expenses 8,864 (4,225)
----------- -----------
Net cash used by operating activities (139,936) (38,282)
----------- -----------
Cash flows from investing activities:
Purchase of property, equipment, and leasehold improvements (1,590) (5,109)
----------- -----------
Cash flows from financing activites:
Principal payment on long-term debt (22,000) --
Payment of borrowing fees (102) --
Net change in warehouse credit facilities 97,253 12,615
----------- -----------
Net cash provided from financing activities 75,151 12,615
----------- -----------
Change in cash (66,375) (30,776)
Cash, beginning of period 75,612 58,801
----------- -----------
Cash, end of period $ 9,237 $ 28,025
=========== ===========
Supplemental disclosures of cash flow information:
Income taxes paid $ 171 $ 20
=========== ===========
Interest paid $ 25,863 $ 23,255
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statement of Shareholders' Equity
For the Nine Months Ended March 31, 1999
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Number of Common Stock Accumulated
Shares Outstanding Other Total
---------------------------- Common Comprehensive Retained Shareholders'
Class A Class B Stock Income Earnings Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 4,376,446 8,855,036 $ 58,360 $ 7,609 $ 16,504 $82,473
Grants of Common Stock 17,778 - 90 - - 90
Conversion of Class B
Common Stock into
Class A Common Stock 704,770 (704,770) - - - -
Net earnings - - - - 9,244 9,244
Other Comprehensive Income:
Net change in unrealized
gain on retained interest
in securitized assets, net of tax - - - 153 - 153
-------------------------------------------------------------------------------------------
Balance at March 31, 1999 5,098,994 8,150,266 $ 58,450 $ 7,762 $ 25,748 $91,960
===========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Nine Months Ended March 31, 1999 and 1998
(Unaudited)
Note 1 - Basis of Presentation
The forgoing consolidated condensed financial statements are unaudited.
However, in the opinion of management, all adjustments necessary for a fair
presentation of the results of the interim period presented have been included.
All adjustments are of a normal and recurring nature. Results for any interim
period are not necessarily indicative of results to be expected for the year.
The consolidated condensed financial statements include the accounts of Union
Acceptance Corporation and its subsidiaries.
During fiscal 1995, Union Acceptance Funding Corporation, UAC
Securitization Corporation, Performance Funding Corporation and Performance
Securitization Corporation were formed as wholly-owned subsidiaries of UAC.
During fiscal 1996, UAC Boat Funding Corp. was formed as a wholly- owned
subsidiary of UAC. In fiscal 1997, UAC Finance Corporation was formed as a
wholly-owned subsidiary of UAC. Circle City Car Company and Union Acceptance
Receivables Corporation were formed as wholly-owned subsidiaries of UAC during
the first and second quarters, respectively, of fiscal 1998.
The consolidated condensed interim financial statements have been
prepared in accordance with Form 10-Q specifications, and, therefore, do not
include all information and footnotes normally shown in full annual financial
statements. A summary of the Company's significant accounting policies is set
forth in "Note 1" of the "Notes to Consolidated Financial Statements" in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
In determining the fair value of the Retained Interest in Securitized
Assets, the Company must estimate the future rates of prepayments,
delinquencies, defaults and default loss severity as they impact the amount and
timing of the estimated cash flows. The Company estimates prepayments by
evaluating historical prepayment performance of comparable receivables and the
impact of trends in the economy. The Company has used annual prepayment
estimates ranging from 21.99% to 28.0% and 17.35% to 19.38% on Tier I and Tier
II receivables, respectively. The Company estimates defaults and default loss
severity using available historical loss data for comparable receivables and the
specific characteristics of the receivables purchased by the Company. The
Company used default losses of 4.00% to 6.41% and 12.00% to 14.49% on Tier I and
Tier II receivables, respectively, as a percentage of the original principal
balance over the life of the receivables. The Company determines the estimated
fair value of its Retained Interest in Securitized Assets by discounting the
expected cash flows using a discount rate based on the comparable treasury rate
plus a spread which the Company believes is commensurate with the risks
involved. The Company used discount rates of 8.63% to 8.97% and 10.72% to 10.92%
on Tier I and Tier II receivables, respectively.
Note 2 - Reclassification
Certain amounts for the prior period have been reclassified to conform
to the current period presentation.
Note 3 - Other Interest Income
Other interest income includes interest earned on cash collection
accounts on all securitization transactions before January 1, 1997, the discount
accretion recognized on retained interest in securitized assets, and the
discount accretion related to the servicing asset which was established for
securitization transactions between January 1, 1997 and December 31, 1998. Cash
collection accounts represent customer payments held in trust until disbursement
by the trustee. Interest is earned by the Company on these funds prior to
distribution of such funds to investors and the servicer. Beginning with the
implementation of Statement of Financial Accounting Standards No. 125 on January
1, 1997, the Company established a servicing asset for the expected collection
account interest. The structure of the 1999-A securitization was changed to
include the collection account interest as part of the securitization trust cash
flows resulting in the capitalization of the collection account interest as part
of Retained Interest and not as a separate servicing asset. The change in the
structure of the 1999-A securitization resulted in an increase in Retained
Interest; however, there was no effect on other interest income.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Nine Months Ended
March 31, 1999 and 1998
(Unaudited)
Note 4 - Conversion of Common Stock
The Company's charter provides that shares of Class B Common Stock
convert automatically to shares of Class A Common Stock on a share-for-share
basis upon transfer outside a prescribed group of holders. Pursuant to such
provision, 639,770 and 65,000 shares of Class B Common Stock were converted to
shares of Class A Common Stock in the fiscal quarters ended March 31, 1999 and
December 31, 1998, respectively.
Note 5 - Earnings Per Share
EPS have been computed on the basis of the weighted average number of
common shares outstanding in accordance with Statement of Financial Standards
No. 128 "Earnings per Share" (EPS). The following is a reconciliation of the
weighted average common shares for the basic and diluted earnings per share
computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------------------------ ------------------------------
Basic EPS:
<S> <C> <C> <C> <C>
Weighted average common shares 13,249,260 13,231,482 13,238,944 13,225,047
============== ============== ============== ==============
Diluted EPS:
Weighted average common shares 13,249,260 13,231,482 13,238,944 13,225,047
Dilutive effect of stock options 27,870 - 7,302 -
-------------- -------------- -------------- --------------
Weighted average common and
incremental shares 13,277,130 13,231,482 13,246,246 13,225,047
============== ============== ============== ==============
</TABLE>
The effect of stock options not exercised during the three and nine
months ended March 31, 1999 are dilutive although the effect on earnings per
share is less than $.01. The effect of stock options not exercised during the
three and nine months ended March 31, 1998 are anti-dilutive and therefore not
included in weighted average common shares.
Note 6 - Current Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which introduces new guidance on segment
reporting. The Statement is effective for fiscal years beginning after December
15, 1997, with earlier application encouraged. The Company will include the
appropriate segment information beginning in the annual financial statements for
the year ended June 30, 1999 and all quarterly statements thereafter. The
Statement is not expected to have a material impact on the financial condition
or results of operations of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement is effective for fiscal years
beginning after June 15, 1999, with earlier application allowed. Management is
currently assessing the impact of this Statement on the financial condition and
operations of the Company upon adoption.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." This Statement is effective for fiscal years beginning after
December 15, 1998, with earlier application allowed. This Statement is not
expected to have a material impact on the financial condition or results of
operations of the Company when adopted.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Nine Months Ended March 31, 1999 and 1998
(Unaudited)
Note 7 - Retained Interest in Securitized Assets
The Retained Interest in Securitized Assets is recorded as an
"available for sale" security and is recorded at fair value with unrealized
gains and losses attributable to change in fair value, net of related income
taxes, as a separate component of shareholders' equity ("accumulated other
comprehensive income"). Other than temporary impairment charges are recorded
through earnings as a component of gain on sale of receivables, net.
Retained Interest in Securitized Assets is as follows (in thousands) at:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------------- --------------------
<S> <C> <C>
Estimated fair value of excess servicing receivable,
net of estimated prepayments $ 214,972 $ 175,164
Allowance for estimated credit losses on securitized receivables (100,208) (90,203)
Estimated dealer premium rebates 24,367 25,718
Discount to present value (37,877) (33,117)
-----------------------------------------
101,254 77,562
Spread accounts 72,769 68,113
Accrued interest on securitized receivables 15,400 13,606
Unrealized gain 12,561 12,312
-----------------------------------------
Retained interest in securitized assets $ 201,984 $ 171,593
=========================================
Outstanding balance of receivables serviced
through securitized trusts $ 2,178,751 $ 1,929,981
Allowance for estimated credit losses as
a percentage of securitized receivables serviced 4.60% 4.67%
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company derives substantially all of its earnings from the
acquisition, securitization and servicing of retail installment sales contracts
originated by dealerships affiliated with major domestic and foreign
manufacturers. To fund the acquisition of receivables prior to securitization,
the Company utilizes a revolving warehouse facility, discussed in "Liquidity and
Capital Resources." Through securitizations, the Company periodically pools and
sells receivables to a trust which issues Certificates to investors representing
pro-rata interests in the receivables sold or notes representing the
indebtedness of the trust secured by the receivables sold. When the Company
sells receivables in a securitization, it records a gain (or loss) on sale of
receivables and establishes Retained Interest in Securitized Assets ("Retained
Interest") as an asset. Excess cash flows are recorded against Retained Interest
as received over the life of the related securitization.
Acquisition Volume. The Company currently acquires receivables in 32
states from over 3,900 manufacturer-franchised auto dealerships. The Company
primarily acquires receivables on automobiles made to borrowers who exhibit a
favorable credit profile ("Tier I") and since October 1994, to borrowers with
adequate credit quality who would not qualify for acquisition under the
Company's Tier I quality criteria ("Tier II"). Effective January 1, 1999, the
Company discontinued the acquisition of Tier II receivables. The decision to
stop acquiring Tier II receivables should not significantly impact operations as
Tier II receivable acquisitions have historically been less than 5% of total
receivable acquisitions and represent less than 3.00% of the total servicing
portfolio at March 31, 1999.
Total receivable acquisitions decreased to $321.9 million for the
quarter ended March 31, 1999, from $361.9 million for the quarter ended December
31, 1998, but increased from $220.3 million for the quarter ended March 31,
1998. Tier I receivable acquisitions were $321.4 million for the quarter ended
March 31, 1999, compared to $214.4 million for the same quarter of last year.
The increase in receivable acquisitions over the comparable quarter of last year
is a result of a strategic decision to increase acquisition volume due to
consistent improvement in the credit quality of receivable acquisitions and the
servicing portfolio as a whole. In order to achieve the higher acquisition
volume during this fiscal year, organizational changes were made in the latter
part of fiscal 1998 which focused on strengthening dealer relations in order to
increase the number of contracts per dealer and activate those dealers who were
not consistently using the Company. Tier II receivable acquisitions were
$450,000 for the quarter ended March 31, 1999, compared to $5.6 million for the
quarter ended March 31, 1998. This decrease is attributed to the decision to
discontinue acquiring Tier II receivables and our continued effort to improve
the credit quality of our portfolio. See - "Discussion of Forward-Looking
Statements".
Gross and Net Spreads. The gross and net spreads on the third quarter
securitization of fiscal 1999 were 7.19% and 6.16% compared to 6.81% and 5.27%,
respectively, over the same quarter of last year. Gross spread is defined as the
difference between the weighted average receivable rate and the rate born by the
related asset-backed securities. Net spread is defined as gross spread less
servicing fees, upfront costs, ongoing credit enhancement and trustee fees, and
hedging gains or losses.
Net spreads are currently targeted at 5.50% to 6.00% on securitizations
(assuming a pricing spread for asset-backed securities over the two-year
treasury note of 100 basis points) for the remaining three months of fiscal
1999. Management believes that by targeting a spread of 8.00% to 8.50% between
receivable rates and the two-year treasury rate that these net spreads can be
achieved. Although management believes these spreads can be achieved, material
factors affecting the net spreads are difficult to predict and could cause
management's projections to be materially inaccurate. These include current
market conditions with respect to interest rates and demand for asset-backed
securities generally and for securities issued in securitizations sponsored by
the Company. See - "Discussion of Forward-Looking Statements".
Gain (loss) on Sales of Receivables, Net and Interest Rate Risk. Gain
(loss) on sales of receivables continues to be a significant element of the
Company's net earnings. The gain (loss) on sales of receivables is affected by
several factors but is primarily affected by the amount of receivables
securitized, the net spread, and the level of estimation for net credit losses.
Prior to the quarter ended June 30, 1998, the Company estimated the future
servicing cash flows recognized as a component of the gain on sale by
discounting the projected future servicing cash flows from the time they are
received by the respective trust. However, management implemented the "cash out"
method during the fourth quarter of fiscal 1998 which discounts the expected
future servicing cash flows from the time they are released from the spread
account to the Company.
The Company's sources for funds generally have variable rates of
interest, and its receivable portfolio bears interest at fixed rates. The
Company therefore bears interest rate risk on receivables until they are
securitized and employs a hedging strategy to mitigate this risk. As a part of
the hedging strategy, the Company executes short sales of U.S. Treasury
securities having a maturity approximating the average maturity of receivables
to be acquired during the relevant period. Beginning in March 1999, the Company
began using a hedging strategy that primarily consists of the execution of
forward interest rate swaps. There is no assurance that these strategies will
completely offset changes in interest rates. In particular, such strategies
depend on management's estimates of receivable acquisition volume and timing of
its securitizations. The Company realizes a gain on its hedging transactions
during periods of increasing interest rates and realizes a loss on such
transactions during periods of decreasing interest rates. The hedging gain or
loss will in part offset changes in interest rates as reflected by a lower or
higher reported gain on sales of receivables, respectively. Recognition of
unrealized gains or losses is deferred until the sale of receivables during the
securitization. On the date of the sale, deferred hedging gains and losses are
recognized as a component of the gain (loss) on sales of receivables.
Portfolio Performance. Since September 30, 1997, the Company has
experienced steady improvement in both delinquency and net credit losses. The
Company attributes the improvement to the implementation of tighter credit
standards in March 1997 and strategic changes made in its origination and
collection departments. Recoveries as a percentage of gross charge-offs on the
Tier I portfolio increased slightly to 39.93% for the quarter ended March 31,
1999, compared to 37.79% for the quarter ended December 31, 1998, and 39.42% for
the same quarter of last year. This increase is primarily due to the Company
opening a new car franchised dealership in Indianapolis and retailing a portion
of its repossessed automobiles through the dealership. This method of disposing
of repossessions along with stricter monitoring of the repossession and resale
process should increase the recovery rate over time. Recovery rates for
repossessed automobiles sold by the Company's retail operation are significantly
higher than recovery rates on vehicles sold at auction. Approximately 10.0% of
repossessed automobiles were sold at the Company's retail operation during the
nine months ended March 31, 1999. The recovery rate on automobiles retailed by
the Company was approximately 60.00% as a percentage of gross charge-offs,
compared to total Tier I reported recoveries as a percentage of gross
charge-offs of 39.93%. See - "Discussion of Forward-Looking Statements".
Provisions are made for estimated net credit losses in conjunction with
each receivable sale. Current assumptions utilized in the gain (loss) on sale of
receivables calculation for estimated net credit losses during the third quarter
securitization was 4.50% over the life of the pool based on a combined sale of
Tier I, Tier II and modified receivables. Allowance related to net credit losses
on securitized receivables (inherent in Retained Interest) was 4.60% at March
31, 1999, compared to 4.59% and 4.86% at December 31, and March 31, 1998,
respectively.
Tier I Portfolio. Set forth below is certain information concerning the
Company's experience pertaining to delinquencies and net credit losses on the
Tier I fixed rate retail automobile, light truck and van receivables serviced by
the Company. There can be no assurance that future delinquency and net credit
loss experience on receivables will be comparable to that set forth below.
See "Discussion of Forward-Looking Statements".
<TABLE>
<CAPTION>
Tier I Delinquency Experience
-----------------------------------------------------------------------------------------------------
At March 31, 1999 At December 31, 1998 At March 31, 1998
---------------------------- ----------------------------- ------------------------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 207,705 $ 2,355,418 202,890 $ 2,277,112 181,026 $ 1,929,151
Delinquencies:
30-59 days 3,650 $ 37,890 4,379 $ 44,626 3,426 $ 35,449
60-89 days 1,633 17,279 1,682 17,475 1,923 21,818
90 days or more 646 6,818 694 7,161 623 7,088
=========== =============== ============ ================ ========== ==============
Total delinquencies 5,929 $ 61,987 6,755 $ 69,262 5,972 $ 64,355
=========== =============== ============ ================ ========== ==============
Delinquency as a percentage
of servicing portfolio 2.85% 2.63% 3.33% 3.04% 3.30% 3.34%
</TABLE>
As indicated by the above table, delinquency rates based upon
outstanding receivable balances of accounts 30 days past due and over were 2.63%
at March 31, 1999, compared to 3.04% at December 31, 1998, and 3.34% at March
31, 1998, for the Company's Tier I servicing portfolio.
<TABLE>
<CAPTION>
Tier I Credit Loss Experience
For the Three Months Ended
--------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998 March 31, 1998
--------------------------- ----------------------------- ------------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 206,174 $ 2,329,127 200,164 $ 2,234,753 180,631 $1,924,930
Gross charge-offs 1,841 19,139 1,886 19,339 1,886 20,767
Recoveries 7,643 7,309 8,186
--------------- ------------------ -------------
Net charge-offs $ 11,496 $ 12,030 $ 12,581
=============== ================== =============
Gross charge-offs as a percentage
of average servicing portfolio (1) 3.57% 3.29% 3.77% 3.46% 4.18% 4.32%
Recoveries as a percentage of
gross charge-offs 39.93% 37.79% 39.42%
Net charge-offs as a percentage
of average servicing portfolio (1) 1.97% 2.15% 2.61%
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
------------------------------------------------------------------------------
March 31, 1999 March 31, 1998
---------------------------------- ---------------------------------
(Dollars in thousands)
Number of Number of
Receivables Amount Receivables Amount
<S> <C> <C> <C> <C>
Average servicing portfolio 199,072 $ 2,217,348 178,628 $ 1,907,770
Gross charge-offs 5,923 62,129 5,917 66,197
Recoveries 24,098 24,848
------------------ --------------
Net charge-offs $ 38,031 $ 41,349
================== ==============
Gross charge-offs as a percentage
of average servicing portfolio (1) 3.97% 3.74% 4.42% 4.63%
Recoveries as a percentage
of gross charge-offs 38.79% 37.54%
Net charge-offs as a percentage
of average servicing portfolio (1) 2.29% 2.89%
</TABLE>
(1) Annualized
<PAGE>
As indicated in the above table, net credit losses on the Tier I auto
portfolio totaled $11.5 million for the quarter ended March 31, 1999, or 1.97%
(annualized) as a percentage of the average servicing portfolio compared to
2.15% and 2.61% for the quarters ended December 31, and March 31, 1998,
respectively.
Tier II Portfolio. Set forth below is certain information concerning
the Company's experience pertaining to delinquencies and net credit losses on
the Tier II portfolio. There can be no assurance that future delinquency and net
credit loss experience on receivables will be comparable to that set forth
below. See "Discussion of Forward-Looking Statements".
<PAGE>
<TABLE>
<CAPTION>
Tier II Delinquency Experience
------------------------------------------------------------------------------------
At March 31, 1999 At December 31, 1998 At March 31, 1998
--------------------------- ----------------------- ---------------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
--------- -------------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 5,965 $ 60,284 6,327 $ 66,363 6,414 $ 69,850
Delinquencies:
30-59 days 336 $ 3,545 421 $ 4,492 371 $ 4,186
60-89 days 134 1,401 183 1,871 114 1,369
90 days or more 4 48 5 48 - -
--------- ---------------- --------- ---------- --------- -------------
Total delinquencies 474 $ 4,994 609 $ 6,411 485 $ 5,555
========= ================ ========= ========== ========= =============
Delinquency as a percentage
of servicing portfolio 7.95% 8.28% 9.63% 9.66% 7.56% 7.95%
As indicated in the above table, Tier II portfolio delinquency was
8.28% based on outstanding receivable balances of accounts 30 days past due and
over at March 31, 1999, compared to 9.66% at December 31, 1998, and 7.95% at
March 31, 1998. The decrease in delinquency over last quarter is a result of
enhanced collection strategies, however, delinquency as a percentage of
servicing portfolio on the Tier II portfolio is expected to increase, while not
actually deteriorating, as a result of a declining Tier II average servicing
portfolio and the determination to eliminate Tier II receivable acquisitions
effective January 1, 1999. See "Discussion of Forward-Looking Statements".
<PAGE>
Tier II Credit Loss Experience
For the Three Months Ended
------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998 March 31, 1998
------------------------------- ------------------------- -----------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 6,104 $ 62,614 6,370 $ 67,145 6,414 $ 70,345
Gross charge-offs 163 1,410 168 1,663 159 1,781
Recoveries 471 580 602
----------------- -------------- ---------------
Net charge-offs $ 939 $ 1,083 $ 1,179
================= ============== ===============
Gross charge-offs as a percentage
of average servicing portfolio(1) 10.68% 9.01% 10.55% 9.91% 9.92% 10.13%
Recoveries as a percentage
of gross charge-offs 33.40% 34.87% 33.81%
Net charge-offs as a percentage
of average servicing portfolio (1) 6.00% 6.45% 6.70%
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
----------------------------------------------------------
March 31, 1999 March 31, 1998
------------------------- -----------------------------
(Dollars in thousands)
Number of Number of
Receivables Amount Receivables Amount
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Average servicing portfolio 6,272 $65,692 6,319 $ 70,239
Gross charge-offs 546 5,190 583 6,418
Recoveries 1,791 2,243
----------- ------------
Net charge-offs $ 3,399 $ 4,175
=========== ============
Gross charge-offs as a percentage
of average servicing portfolio (1) 11.61% 10.53% 12.30% 12.18%
Recoveries as a percentage
of gross charge-offs 34.51% 34.95%
Net charge-offs as a percentage
of average servicing portfolio (1) 6.90% 7.92%
</TABLE>
(1) Annualized
As indicated in the above table, net credit losses for the quarter
ended March 31, 1999, totaled $939,000 or 6.00% (annualized) as a percentage of
the average Tier II servicing portfolio compared to 6.45% and 6.70% for the
quarters ended December 31, and March 31, 1998, respectively.
<PAGE>
Results of Operations
Net earnings increased 364.8% to $4.3 million or $0.32 per diluted
share for the quarter ended March 31, 1999, compared to $917,000 or $0.07 per
diluted share for the quarter ended March 31, 1998. Net earnings increased
295.0% to $9.2 million or $0.70 per diluted share for the nine months ended
March 31, 1999, compared to a net loss of $4.7 million or $0.36 per diluted
share for the nine months ended March 31, 1998. The increase in net earnings for
the quarter and nine months ended March 31, 1999 was primarily related to a
higher gain on sale of receivables, net, and an increase in other interest
income.
Net interest margin after provision increased 221.9% to $4.7 million
and 151.9% to $13.6 million for the quarter and nine months ended March 31,
1999, respectively, compared to $1.5 million and $5.4 million for the
corresponding periods ended March 31, 1998.
Interest on receivables increased 13.4% to $8.1 million and 15.0% to
$23.3 million for the quarter and nine months ended March 31, 1999,
respectively, compared to $7.1 million and $20.2 million for the corresponding
periods ended March 31, 1998. The increase in interest on receivables was
primarily a result of an increase in the average outstanding balance of
receivables held for sale for the quarter and nine months ended March 31, 1999,
to $231.0 million and $222.3 million, respectively, compared to $211.5 million
and $189.6 million for the corresponding periods ended March 31, 1998.
Other interest income increased 48.5% to $4.8 million and 60.6% to
$15.3 million for the quarter and nine months ended March 31, 1999,
respectively, compared to $3.2 million and $9.5 million for the corresponding
periods ended March 31, 1998. The increase in other interest income relates
primarily to the implementation of the "cash out" method of valuing Retained
Interest at June 30, 1998, which increased the discount resulting in a
subsequent increase in discount accretion but was offset by lower collection and
spread account interest. Other interest income related to discount accretion was
$4.4 million and $14.3 million for the quarter and nine months ended March 31,
1999, respectively, compared to $1.8 million and $5.2 million for the quarter
and nine months ended March 31, 1998. Other interest income related to the
restricted cash accounts (collection and spread accounts) for the quarter and
nine months ended March 31, 1999, was $353,000 and $1.0 million, respectively,
compared to $1.4 million and $4.3 million for the quarter and nine months ended
March 31, 1998.
Interest expense decreased 1.0% to $6.9 million and increased 5.2% to
$20.2 million for the quarter and nine months ended March 31, 1999, compared to
$7.0 million and $19.2 million for the corresponding periods ended March 31,
1998. The increase for the nine months ended March 31, 1999 was primarily
related to higher average borrowing needs due to higher receivable acquisitions
but was offset by lower interest on long-term debt as a result of a required
principal payment of $22.0 million made in August 1998.
Provision for estimated credit losses decreased 35.5% to $1.2 million
and 6.8% to $4.8 million for the quarter and nine months ended March 31, 1999,
compared to $1.9 million and $5.2 million for the quarter and nine months ended
March 31, 1998. The decrease for the quarter and nine months ended is primarily
related to improvement in the quality of the held for sale portfolio.
Gain on sales of receivables, net totaled $6.4 million and $3.1 for the
quarters ended March 31, 1999, and 1998, respectively. Gain on sales of
receivables, net totaled $13.2 million for the nine months ended March 31, 1999,
compared to a loss on sales of receivables, net of $5.7 million for the nine
months ended March 31, 1998. The gain for the quarters ended March 31, 1999, and
1998, consisted of gains on securitization transactions of $10.8 million and
$5.7 million and charges for other than temporary impairments of Retained
Interest of $4.3 million and $2.6 million, respectively. The gain for the nine
months ended March 31, 1999 and 1998 consisted of gains on securitization
transactions of $22.9 million and $14.7 million, respectively, and charges for
other than temporary impairments of Retained Interest of $9.5 million and $20.2
million, respectively. Unrealized gains on Retained Interest are not charged to
income. (See - Financial Condition - "Retained interest in securitized assets,"
below). The increase in the securitization transaction gain relates to a higher
volume of receivables securitized and a higher net spread but was offset by a
higher credit loss assumption of 4.50% for the fiscal 1999 third quarter
securitization compared to 4.00% for the fiscal 1998 third quarter
securitization. The increase was also offset by an increase in the discount of
the estimated Retained Interest related to the implementation of the "cash out"
method of valuing Retained Interest. The receivables sold in the securitization
for the quarter ended March 31, 1999, were $320.5 million compared to $228.9
million for the same quarter of last year. The receivables sold in the
securitizations for the nine months ended March 31, 1999, and 1998, were $947.8
million and $651.5 million, respectively. The increase in the credit loss
assumption from 4.00% to 4.50% was related to the combined securitization of
Tier I, Tier II and modified receivables in fiscal 1999 securitizations compared
to the securitization of only Tier I receivables in fiscal 1998. The annual
prepayment estimate and discount rate assumptions used for the fiscal 1999 and
fiscal 1998 third quarter securitizations were 28.00% and 9.84%, and 28.04% and
10.61%, respectively.
Servicing fees, net increased 18.1% to $5.6 million and 12.1% to $16.0
million for the quarter and nine months ended March 31, 1999, respectively,
compared to $4.7 million and $14.3 million for the corresponding periods ended
March 31, 1998. The increase in servicing fees, net is a result of the increase
in average securitized receivables by approximately 21.8% to $2.2 billion for
the third quarter of fiscal 1999, compared to $1.8 billion for the third quarter
of fiscal 1998. Servicing fees consist primarily of contractual servicing fees
of 1.0% on Tier I securitizations. Beginning with the quarter ended September
30, 1998, the scheduled accretion of discount on excess servicing cash flows,
previously a component of servicing fees, net, was reclassified to other
interest income.
Other revenues totaled $1.4 million and $3.8 million for the quarter
and nine months ended March 31, 1999, respectively, compared to $1.1 million and
$3.1 million for the corresponding periods ended March 31, 1998. Other revenues
consist primarily of late charge and origination fee income.
Salaries and benefits expense increased 31.4% to $6.3 million from $4.8
million for the quarters ended March 31, 1999 and 1998, respectively and was
related to increased full-time equivalent ("FTE") employees and increased
performance related incentives. Salaries and benefits expense increased 22.1% to
$17.5 million from $14.3 million for the nine months ended March 31, 1999 and
1998, respectively and resulted primarily from increased FTE employees. Average
FTE's for the quarter and nine months ended March 31, 1999, were 522 and 530,
respectively, compared to 492 and 451 for the quarter and nine months ended
March 31, 1998. Since March 31, 1998, the Company has experienced growth
primarily in reconditioning and remarketing but modestly in other areas. The
increase in the number of reconditioning and remarketing operations employees
was due to the opening of a new automotive dealership in July 1998 to facilitate
reconditioning and remarketing of repossessed vehicles.
Other operating expense increased 22.6% to $4.9 million and 15.6% to
$14.1 million for the quarter and nine months ended March 31, 1999,
respectively, from $4.0 million and $12.2 million for the corresponding periods
ended March 31, 1998. Other operating expense includes occupancy and equipment
costs, outside and professional services, receivable expenses, promotional
expenses, travel, office supplies and other. Total operating expenses (including
salaries and benefits) as a percentage of the average servicing portfolio
increased to 1.88% and 1.84% for the quarter and nine months ended March 31,
1999, respectively, compared to 1.76% and 1.78% for the corresponding periods
ended March 31, 1998.
Financial Condition
Receivables, net and servicing portfolio. Receivables, net includes the
principal balance of receivables held for sale, net of unearned discount and
allowance for estimated net credit losses, receivables in process, and prepaid
dealer premiums. The Company's portfolio of receivables, net increased to $242.7
million at March 31, 1999, from $118.3 million at June 30, 1998. The increase
was primarily due to a higher volume of Tier I receivables acquired compared to
Tier I receivables securitized in the three fiscal 1999 securitizations of
approximately $154.5 million resulting from the timing of the securitization in
the second month of the quarter. The increase was offset by the sale of Tier II
and modified receivables in the three fiscal 1999 securitizations. The Tier II
receivables held for sale decreased approximately $5.4 million as more
receivables were securitized than acquired during the nine months ended March
31, 1999. The modified receivable portfolio, included in receivables held for
sale, decreased approximately $13.6 million as a portion of the modified
receivables were included in the three fiscal 1999 securitizations. Allowance
for net credit losses on receivables held for sale was $2.5 million at March 31,
1999, compared to $1.9 million at June 30, 1998. The Company serviced $2.2
billion and $1.9 billion in securitized receivables, and the total servicing
portfolio was $2.4 billion and $2.0 billion as of March 31, 1999, and June 30,
1998, respectively.
Retained interest in securitized assets ("Retained Interest"). Retained
Interest increased to $202.0 million at March 31, 1999, from $171.6 million at
June 30, 1998. The Retained Interest balance increased by the amounts
capitalized upon consummation of the UACSC 1998-C, 1998-D and 1999-A Auto Trusts
("1998-C", "1998-D" and "1999-A") securitizations including estimated dealer
premium rebates. Total amounts capitalized for the nine months ended March 31,
1999, were $61.8 million. Retained Interest also increased by an additional
pre-tax unrealized gain of $249,000, a $1.8 million increase in accrued
interest, and a net increase in spread accounts of $4.7 million. Additions to
Retained Interest were offset by the return of excess cash flows over the nine
months ended March 31, 1999, related to all securitizations of $28.6 million and
by the effect of the $9.5 million impairment of Retained Interest taken during
the first, second and third quarters of fiscal 1999. Withdrawals of spread
account funds are made when the balance of the account is in excess of the
requirements stipulated in the servicing agreement (the Company's servicing
agreements are collectively referred to as the "Pooling and Servicing
Agreements"). Allowance for net credit losses on securitized receivables is
included as a component of Retained Interest. At March 31, 1999, the allowance
related to both Tier I and Tier II securitized receivables totaled $100.2
million or 4.60% of the total securitized receivable portfolio compared to $90.2
million or 4.67% at June 30, 1998. The Company's assumptions for valuing
Retained Interest on a "cash out" basis at March 31, 1999, include the Company's
latest estimates for net credit losses of 4.00% to 6.41% on Tier I receivables
and 12.00% to 14.49% on Tier II receivables as a percentage of original
principal balance over the life of receivables, annual prepayment estimates
ranging from 21.99% to 28.00% on Tier I receivables and 17.35% to 19.83% on Tier
II receivables and discount rates ranging from 8.63% to 8.97% on Tier I
receivables and 10.72% to 10.92% on Tier II receivables. Impairment of Retained
Interest, an available-for-sale security, is measured on a disaggregate basis
(pool by pool) in accordance with SFAS 115. See - "Discussion of Forward-Looking
Statements".
Amounts due under revolving warehouse credit facility and long-term
debt. The balance of the revolving warehouse credit facility and the Senior and
Senior Subordinated Notes was $369.4 million at March 31, 1999, compared to
$294.1 million at June 30, 1998. The increase in borrowings was primarily
related to the timing of the securitization in the current quarter but was
offset by a required principal payment on the Company's Senior Note in August
1998 of $22.0 million. The March 1999 quarter securitization was effected during
the second month of the quarter while the fiscal 1998 fourth quarter
securitization was effected during the third month of the quarter. The timing
difference resulted in the Company borrowing for more days after the closing of
the securitization transaction in the quarter ended March 31, 1999, compared to
the quarter ended June 30, 1998.
Income tax payable. The income tax payable totaled $3.8 million at
March 31, 1999, compared to no income tax payable at June 30, 1998. The increase
in the income tax payable is a result of current year-to-date net earnings
compared to a net loss for the year ended June 30, 1998.
Net deferred income taxes. The net deferred income taxes payable
totaled $17.7 million at March 31, 1999, compared to $9.6 million at June 30,
1998. This increase is a result of the deferral of a portion of the gain on the
sale of receivables for the securitizations effected during the first three
quarters of fiscal 1999 in excess of previously deferred income recognized
currently for tax purposes.
Liquidity and Capital Resources
Sources and Uses of Cash in Operations. The Company's business requires
significant amounts of cash to support operations. Its primary uses of cash
include (i) acquisitions and financing of receivables, (ii) payment of dealer
premiums, (iii) securitization costs including cash held in spread accounts and
similar cash collateral accounts under the revolving warehouse credit facility,
(iv) servicer advances of payments on securitized receivables pursuant to
securitization trusts, (v) losses on hedging transactions realized in connection
with the closing of securitization transactions where interest rates have
declined during the period covered by the hedge, (vi) operating expenses, (vii)
payment of income taxes, and (viii) interest expense. The Company's sources of
cash from operations include (i) standard servicing fees, generally 1.0% per
annum of the Tier I securitized portfolio, (ii) future servicing cash flows,
(iii) dealer premium rebates, (iv) gains on hedging transactions realized in
connection with the closing of securitization transactions where interest rates
have increased during the periods covered by the hedge, (v) interest income and
(vi) sales of receivables in securitization transactions and (vii) proceeds from
sale of interest-only strips in conjunction with securitization transactions.
Net cash used by operating activities increased to $140.0 million for the nine
months ended March 31, 1999, from net cash used by operating activities of $38.3
million for the nine months ended March 31, 1998. The increase was primarily
attributable to a decrease in receivables securitized relative to receivables
acquired resulting from the timing of the securitization in the second month of
the third quarter of fiscal 1999 compared to the third month of the third
quarter of fiscal 1998.
Hedging. Hedging transactions may represent a source or a use of cash
during a given period depending on the change in interest rates. In the first
three quarters of fiscal 1999, hedging transactions required a use of cash of
$4.5 million, compared to $2.2 million during the first three quarters of fiscal
1998.
Financing Activities. Net cash provided by financing activities for the
nine months ended March 31, 1999, was $75.2 million compared to net cash
provided by financing activities of $12.6 million for the nine months ended
March 31, 1998. The increase was a result of higher borrowings related to higher
receivable acquisitions for the period after the third quarter securitization
through March 31, 1999, compared to the same period ended March 31, 1998, but
was offset by a required principal payment on long-term debt of $22.0 million in
August 1998. The Company has substantial capital requirements to support its
ongoing operations and anticipated growth. The Company's sources of liquidity
are currently funds from operations, securitizations and external financing
including long-term debt and the revolving warehouse credit facility.
Historically, the Company has used the securitization of receivable pools as its
primary source of long-term funding. Securitization transactions enable the
Company to improve its liquidity, to recognize gains from the sales of the
receivable pools while maintaining the servicing rights to the receivables, and
to control interest rate risk by matching the repayment of amounts due to
investors in the securitizations with the actual cash flows from the securitized
assets. Between securitization transactions, the Company relies primarily on the
revolving warehouse credit facility to fund ongoing receivable acquisitions (not
including dealer premiums). In addition to receivable acquisition funding, the
Company also requires substantial capital on an ongoing basis to fund the
advances of dealer premiums, securitization costs, servicing obligations and
other cash requirements previously described. The Company's ability to borrow
under the revolving warehouse credit facility is dependent upon its compliance
with the terms and conditions thereof. The Company's ability to obtain successor
facilities or similar financing will depend on, among other things, the
willingness of financial institutions to participate in funding automobile
financing business and the Company's financial condition and results of
operations. Moreover, the Company's growth may be inhibited, at least
temporarily, if the Company is not able to obtain additional funding through
these or other facilities, or if it is unable to satisfy the conditions to
borrowing under the revolving warehouse credit facility. The Company
consistently assesses its long-term receivable funding arrangements with a view
to optimizing cash flows and reducing costs.
Warehouse Facility. The Company has borrowing arrangements with an
independent financial institution for a $450.0 million revolving warehouse
credit facility that is insured by a surety bond provider to fund the purchase
of Tier I receivable acquisitions. At March 31, 1999, $170.4 million of the
capacity was utilized, and an additional $54.5 million was available to borrow
based on the outstanding principal balance of eligible receivables. At December
31, June 30, and March 31, 1998, $174.8 million, $73.1 million and $57.1 million
of the capacity was utilized, and an additional $51.9 million, $4.7 million and
$45.6 million was available to borrow based on the outstanding principal balance
of eligible receivables, respectively.
Long-term debt. The Company issued $110.0 million of 8.53% Senior Notes
due August 1, 2002, in connection with the Company's initial public offering.
Interest on the Notes is payable semiannually, and principal payments began
August 1, 1998, and are due on each subsequent August 1, in the amount equal to
approximately 20% of the stated original principal balance. A required principal
payment was made on the Senior Notes in August 1998 of $22.0 million. In April
1996, the Company completed a private placement of $46.0 million of 9.99% Senior
Subordinated Notes due March 30, 2003, with interest payable quarterly and
principal due at maturity. In March 1997, the Company issued $65.0 million of
Senior Notes due December 27, 2002. The Notes were issued as "Series A" in the
principal amount of $50.0 million at 7.75% interest and "Series B" in the
principal amount of $15.0 million at 7.97% interest. Interest on the Notes is
payable semiannually and a principal payment is due March 15, 2002, in the
amount equal to approximately 33 1/3% of the stated original balance, with the
remaining principal due at maturity.
The Company's credit agreements, among other things, require compliance
with monthly and quarterly financial maintenance tests as well as restrict the
Company's ability to create liens, incur additional indebtedness, sell or merge
assets and make investments. The Company is in compliance with all covenants and
restrictions imposed by the terms of indebtedness.
Based on current cash flow projections, management believes that the
Company's existing capital resources, the revolving warehouse credit facility
described above, future earnings, expected growth in receivable acquisitions,
and periodic securitization of receivables should provide the necessary capital
and liquidity for its operations through at least the next twelve months. The
period during which its existing capital resources will continue to be
sufficient will, however, be affected by the factors described above affecting
the Company's cash requirements. A number of these factors are difficult to
predict, particularly including the cash effect of hedging transactions, the
availability of outside credit enhancement in securitizations or other financing
transactions and other factors affecting the net cash provided by
securitizations. Depending on the Company's ongoing cash and liquidity
requirements, market conditions and investor interest, the Company may seek to
issue additional debt or equity securities in the near term. The sale of
additional equity, including Class A Common Stock or preferred stock, would
dilute the interests of current shareholders.
Discussion of Forward-Looking Information
The above discussions and notes to consolidated condensed financial
statements contain forward-looking statements made by the Company regarding its
results of operations, effects of changes in accounting policies, cash flow
needs and liquidity, receivable acquisition volume, target spreads, potential
credit losses, recovery rates, prepayment rates, servicing income, Year 2000
compliance, and other aspects of its business. Similar forward-looking
statements may be made by the Company from time to time. Such forward-looking
statements are subject to a number of important factors that cannot be predicted
with certainty and which could cause such forward-looking statements to be
materially inaccurate. Such factors include, for example, demand for new and
used autos, competition, and consumer credit and delinquency trends. See the
"Discussion of Forward-Looking Information" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for fiscal 1998 which is incorporated herein by this
reference.
<PAGE>
Year 2000 Compliance
During the year ended June 30, 1997, the Company began a risk
evaluation of potential Year 2000 issues. The outcome of this evaluation was the
formation of a Year 2000 Committee that consists of directors, officers and
employees of the Company. The purpose of this committee is to assess all risks,
analyze current systems, coordinate upgrades and replacements, and report
current and projected status of all known Year 2000 compliance issues.
During the assessment phase, over thirty service bureaus and system
vendors were identified that performed or supplied potential Year 2000
compliance issues. The list included eight service bureaus, seven software
vendors, seven hardware vendors, one electric company, six maintenance and
supplies companies and four telecommunications companies. Once the systems were
identified, an immediate correspondence was established for the purpose of
educating the Company on known Year 2000 issues or Year 2000 compliance
certification.
The systems identified were put through one of two possible phases. If
the vendor provided proof that the system in question had proper Year 2000
compliance certification and a testing cycle was possible, an appropriate
testing cycle was performed. If the testing cycle failed or the system had known
Year 2000 issues, a mission critical evaluation and replacement recommendations
were performed.
At this time, all known mission critical systems have been either
replaced or upgraded with Year 2000 compliant solutions. The last of these
upgrades was performed in March 1999, as scheduled. The Company plans to repeat
a company wide internal test of all systems in the quarter ended June 30, 1999,
and again in the quarter ended September 30, 1999. Beginning October 1, 1999,
the Company will be entering a "quiet period" on in-house development and
implementations that will last through December 31, 1999. The purpose of the
"quiet period" is to prevent new system Year 2000 issues.
The replacement or remediation costs for Year 2000 compliance issues
with the Company is estimated to be less than $100,000, which the Company
recognizes as incurred. This estimated cost is mostly due to software upgrades
that include new features which are combined with Year 2000 corrections.
The Company estimates that the worst case Year 2000 issue scenario
would be discontinuance of electrical power. Although the Company has numerous
power backup devices, a long-term power outage would have a material adverse
effect on the Company's operations. Although the discontinuance of electrical
power is possible, the Company believes the likelihood of such an outage to be
remote. The Company continuously monitors the status of its Year 2000 plan and,
based on such information, will develop contingency plans as necessary. See -
"Discussion of Forward-Looking Statements".
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company bears the primary risk of loss due to defaults in its
servicing portfolio. Default and credit loss rates are impacted by general
economic factors that affect borrowers' ability to continue to make timely
payments on their indebtedness. Prepayments on receivables in the servicing
portfolio reduce the size of the portfolio and reduce the Company's servicing
income. The gain (loss) on sales of receivables in connection with each
securitization transaction and the amount of Retained Interest recognized in
each transaction reflect deductions for estimates of future defaults and
prepayments. The carrying value of Retained Interest may be adjusted
periodically to reflect differences between estimated and actual net credit
losses and prepayments on past securitizations. For example, if net credit
losses increased or decreased by 100 basis points on a $300.0 million
securitization, the gain on sale would result in a reduction or an increase of
the gain (loss) on sales of receivables by approximately $3.0 million pre-tax,
before consideration of any discounting. The same 100 basis points increase or
decrease would result in a reduction or an increase of the Retained Interest of
approximately $22.0 million, before consideration of any discounting, based on a
securitized receivable portfolio of $2.2 billion at March 31, 1999. The forgoing
examples are developed utilizing the cash flow model employed by management to
calculate the fair market value of Retained Interest by changing the credit loss
assumption as described. The Company does not believe fluctuations in interest
rates materially affect the rate of prepayments on receivables.
The Company's sources of funds generally have variable rates of
interest, and its receivable portfolio bears interest at fixed rates. The
Company therefore bears interest rate risk on receivables until they are
securitized and employs a hedging strategy to mitigate this risk. As a part of
the hedging strategy, the Company executes short sales of U.S. Treasury
securities having a maturity approximating the average maturity of receivables
to be acquired during the relevant period. Beginning in March 1999, the Company
began using a hedging strategy that primarily consists of the execution of
forward interest rate swaps. There is no assurance that these strategies will
completely offset changes in interest rates. In particular, such strategies
depend on management's estimates of receivable acquisition volume and timing of
its securitizations. The Company realizes a gain on its hedging transactions
during periods of increasing interest rates and realizes a loss on such
transactions during periods of decreasing interest rates. The hedging gain or
loss will substantially offset changes in interest rates as seen by a lower or
higher reported gain on sales of receivables, respectively. Recognition of
unrealized gains or losses is deferred until the sale of receivables during the
securitization. On the date of the sale, deferred hedging gains and losses are
recognized as a component of gain (loss) on sales of receivables. Increases or
decreases in interest rates reduce or increase the fair value of long-term debt,
respectively. The Company had an unrealized hedging gain at March 31, 1999 on
short sales of U.S. Treasury securities of $431,000 based on notional amounts
outstanding of $229.0 million and an unrealized hedging loss of $163,000 on
notional amounts outstanding of $132.0 million on forward interest rate swaps.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the
quarter ended March 31, 1999.
March 3, 1999 - Change in Registrant's Certifying Accountants-
Dismissal of KPMG LLP as independent auditors
as of such date.
March 8, 1999 - Change in Registrant's Certifying Accountants-
Amendment to report on Form 8-K dated March
3, 1999 extending interim period to February
25, 1999 from December 31, 1998 stating that
no disagreements took place with KPMG LLP on
any matters of accounting principles or
practice.
March 12, 1999 - Change in Registrant's Certifying Accountants-
Deloitte & Touche LLP engaged as new
independent accountants.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Acceptance Corporation
May 14, 1999 By: /S/ John M. Stainbrook
----------------------
John M. Stainbrook
President and Chief Executive Officer
May 14, 1999 By: /S/ Rick A. Brown
-----------------
Rick A. Brown
Treasurer and Chief Financial Officer
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<NAME> Union Acceptance Corporation
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<CURRENCY> U.S. Dollars
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 21,621
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<PP&E> 12,671
<DEPRECIATION> (4,118)
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<OTHER-SE> 33,510
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