FORM 10-K
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, 2000
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)
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. ( X )
The aggregate market value of the 3,454,309 shares of the issuer's Class A
Common Stock held by non-affiliates, as of September 8, 2000, was $19,862,277.
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 September 8, 2000, was 5,816,024 shares. The number of
shares of Class B Common Stock of the Registrant, without par value, as of such
date was 7,461,608.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are
incorporated into Part III.
================================================================================
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX
PART I Page
Item 1. Business...................................................
Item 2. Properties.................................................
Item 3. Legal Proceedings..........................................
Item 4. Submission of Matters to a Vote of Security Holders........
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................
Item 6. Selected Consolidated Financial Data.......................
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............
Item 7a. Quantitative and Qualitative Disclosures...................
Item 8. Financial Statements and Supplementary Data................
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.....................
PART III
Item 10. Directors and Executive Officers of the Registrant.........
Item 11. Executive Compensation.....................................
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................
Item 13. Certain Relationships and Related Transactions.............
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................
SIGNATURES ...........................................................
PART I
Item 1. Business
Note: Certain capitalized terms used but not otherwise defined in this
report are defined in the "Glossary" set forth at the conclusion of "Item I,
Business." Unless otherwise indicated, references to the "Company" through
fiscal 1995 and before the Spin-off refer to the conduct of the business by the
Union Division and Union Acceptance Corporation ("UAC") and Subsidiaries as a
combined business. References to the "Company" following consummation of the
Spin-off of the Company by Union Federal Bank of Indianapolis, previously Union
Federal Savings Bank of Indianapolis ("Union Federal"), refer to UAC and
Subsidiaries.
OVERVIEW
The Company is a specialized finance company engaged in acquiring and
servicing automobile retail installment sales contracts and installment loan
agreements. The retail installment contracts are originated by dealerships
affiliated with major domestic and foreign manufacturers, and the loan
agreements are originated by the Company as a result of referrals by the
dealerships. The Company focuses its efforts on acquiring receivables on late
model used and, to a lesser extent, new automobiles made to purchasers who
exhibit a favorable credit profile ("Tier I"). The Company currently acquires
receivables in 39 states from or through referrals by approximately 5,000
manufacturer-franchised auto dealerships.
The Company was incorporated in Indiana in December 1993, as a
subsidiary of Union Federal, which is a federally-chartered savings bank. Union
Federal entered the indirect automobile finance business in 1986. On August 7,
1995, the Spin-off of the Company by Union Federal was consummated concurrent
with the Company's initial public offering of 4,000,000 shares of its Class A
Common Stock.
The Company's headquarters are located at 250 North Shadeland Avenue,
Indianapolis, Indiana, 46219, and the telephone number is (317) 231-6400. See
"Item 2, Properties."
MARKET AND COMPETITION
Based on the Company's research with respect to the automobile finance
industry, total retail new and used automobile sales in the United States during
calendar 1999 were approximately $656.0 billion of which $507.0 billion were
financed. Of the amount financed, approximately $398.0 billion was believed to
be financed at manufacturer-franchised dealerships, and approximately $272.0
billion was believed to be of the credit type that the Company would consider
acquiring. The Company's total receivable acquisitions of $1.4 billion for
fiscal 2000 were less than 1.0% of this market.
Competition in the field of financing retail automobile sales is
intense. The auto finance market is highly fragmented and historically has been
serviced by a variety of financial entities including the captive finance
affiliates of major automotive manufacturers, banks, savings associations,
independent finance companies, credit unions and leasing companies. Providers of
retail automobile financing have traditionally competed on the basis of interest
rates charged, the quality of credit accepted, the flexibility of contract terms
offered and the quality of service provided to the dealers and customers. In
seeking to establish itself as one of the principal financing sources at the
dealerships it serves, the Company competes predominantly on the basis of
providing a high level of dealer service (including evening and weekend hours
and quick application response time), accepting flexible contract terms and
developing strong relationships with dealerships. While the Company seeks to
accept or offer rates that are competitive in each of its geographic markets,
the Company does not currently seek to compete by accepting or offering the
lowest rates or by accepting lower quality credit.
The Company's competition varies among its geographic markets. The
Company has experienced its most intense competition in the Midwest and the West
Coast. The Company's primary competitors are regional banks and the captive
finance affiliates of major automotive manufacturers.
The Company experiences minor seasonal declines in receivable
acquisitions in the winter months. Retail automobile sales can vary during this
time due to weather and/or increased holiday expenses. Additionally, the Company
generally expects small increases in delinquency and net credit losses during
these months before stabilizing in the spring.
RECEIVABLE LIFE CYCLE
The process for the acquisition and servicing of automobile retail
installment sales contracts and installment loan agreements has three major
processes and several subprocesses. These processes are:
1. Originations
o Dealer Marketing and Dealer Service
o Underwriting and Purchasing
2. Funding
o Short-term
o Long-term
3. Servicing
o Servicing
o Collection and Remarketing
o Final Payoff and Title Transfer
The following section describes each of these processes.
Originations
Dealer Marketing and Dealer Service
The Company has entered into dealer agreements with approximately 5,000
retail automobile dealers in 39 states. The Company's objective is to enter into
dealer agreements with a broad spectrum of large domestic and foreign automotive
manufacturer-franchised dealerships in targeted major metropolitan areas. The
Company believes that manufacturer-franchised dealerships are most likely to
provide the Company with receivables that meet the Company's underwriting
standards. No individual dealer nor group of affiliated dealers accounted for
more than 2.1% of the Company's receivable purchases during the fiscal year
ended June 30, 2000.
The Company currently divides its credit analysts into three focus
areas:
o Dealer development
o Regional areas
o Nights and weekends
The dealer development area focuses on re-establishing or improving
relationships with dealers who did little or no business with the Company over
the preceding months. The regional areas focus on the Company's existing dealers
who consistently refer receivables to the Company and is divided geographically
into seven areas. Performance goals for the dealer marketing and dealer service
areas are based on:
o acquisition volume
o applications
o active dealers and dealers cashing multiple contracts
o cash ratios (ratio of receivables purchased versus applications
approved)
o yield spreads
o credit scores
o underwriting quality control scores
The Company's ability to acquire receivables depends to a large extent
on its ability to establish and maintain relationships with dealerships and to
induce finance managers to offer customer applications to the Company. The
Company's marketing and receivable acquisition staff emphasizes dealer service
and conveniently accommodating dealers' needs for customer financing.
The Company believes that by expanding application processing times
during the evenings and weekends and by employing a lower analyst to account
ratio, it is more likely to be the first financing source to indicate credit
approval and therefore is more likely to acquire the receivable. The Company
also provides full phone and support service during the standard evening and
weekend hours. With that in mind, the Company has developed the capacity to
quickly process a large volume of applications. Although the Company's
receivable acquisition process is highly automated, the Company maintains a
strong commitment to personalized dealer service. Sales representatives and
credit analysts are in frequent contact with dealership personnel. Management
believes that this personal contact and follow-through on the part of the
Company's employees builds strong relations and maximizes receivable acquisition
volume from individual dealerships. The Company's Credit Scoring models and
centralized purchasing assure dealers that the Company applies consistent
purchasing standards and is a reliable financing source. The Company's
flexibility in offering longer contract terms and an advance over the vehicle's
book value to qualified customers enhances the dealers' ability to offer desired
financing terms to customers. The Company believes its receivable acquisition
operations are structured to be more responsive to these needs than the
operations of its competitors.
The Company has field sales representatives who give the Company a
presence in local markets. Company sales representatives generally have auto
dealer finance or sales backgrounds and are generally recruited from within the
geographic markets they serve. The Company believes this helps to establish
rapport and credibility with dealership personnel. The sales representatives are
in frequent contact with the Company's dealers and are available to receive and
respond to comments and complaints and to explain new programs and forms.
However, the sales representatives have no authority to approve credit
applications. Additionally, the Company created a department that specifically
handles dealer customer service issues in order to allow the outside sales
representatives and the credit analysts to focus strictly on marketing and
acquiring receivables.
When approaching a new dealer, the Company sales representatives
explain the Company's program and describe the ways the dealer can expect more
timely and reliable service from the Company than that provided by other
financing sources. Dealers who decide to establish a relationship with the
Company are provided with a dealer agreement and supplied with copies of the
Company's forms for all receivable documentation. The dealer agreement provides
the standard terms upon which the Company purchases receivables from dealers,
contains representations and warranties of the dealer and prescribes the
calculation of the Dealer Premium. Also, most dealer agreements include
provisions for Automated Clearing House ("ACH") fund transfers. ACH agreements
provide for the electronic transfer of funds to individual dealer accounts for
the purchase amount of receivables originated by the dealers and purchased by
the Company or fund the direct loans made by the Company in Ohio. Because of
business considerations and regulatory limitations, the Company enters into a
direct loan contract directly with the customer in Ohio. The Company encourages
the use of ACH payments instead of drafts (which authorized dealer personnel
submit for payment of the amount of each purchase) with all of its dealers.
Approximately 88% of the number of receivables acquired in fiscal 2000 were paid
by ACH payments which is approximately the same as in fiscal 1999. The Company's
representatives assist dealer personnel in the proper completion and use of the
Company's documentation.
<PAGE>
Underwriting and Purchasing
Retail automobile buyers are customarily directed to a dealer's finance
and insurance department to finalize their purchase agreements and to review
potential financing sources and rates available from the dealer. If the customer
elects to pursue financing at the dealership, an application is taken for
submission to the dealer's financing sources. Typically, a dealer submits the
purchaser's application to more than one financing source for review. The
dealership finance manager decides which source will ultimately finance the
automobile purchase based upon the rates being offered, the Dealer Premium, the
terms for approval and other factors. The Company believes that its rapid
response to an application coupled with its commitment to dealer service and
flexibility in terms enhances the likelihood that the dealership will direct the
receivable to the Company even though the Company may not offer the lowest
interest rate available. See "Item 1. Business -- Market and Competition."
Over 70% of the Company's origination department, including sales and
credit employees, have prior business experience with auto dealerships, many as
dealership finance managers. The Company believes this common experience tends
to strengthen their relationships with dealers and enhances dealers' respect for
their credit decisions. The Company also frequently arranges for its credit
analysts to visit dealers and their finance managers to develop dealer rapport,
to maintain awareness of local economic trends and to assess that the Company is
meeting the dealers' needs and expectations.
On a monthly basis, the Company quotes rates at which it will buy
receivables (the "Buy Rate") from dealers or, in Ohio, originate loans. Buy
Rates are generally based on several factors including the age of the car and
the term of the receivable. The Company sets rates generally with a view to
maintaining a predetermined spread above the relevant treasury security based on
the weighted average expected life of the receivables being acquired. The
Company publishes different Buy Rates in different geographic markets depending
on its assessment of competitive conditions. During June 2000, the Company began
migrating to a risk based pricing model which attempts to price the acquisitions
based on perceived risks such as credit risk, age of the car, length of terms
and advance over the vehicle's book value. The risk based pricing model rewards
those customers with better credit quality with lower rates, which in turn could
potentially lower the Company's net spread. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition."
Dealers quote contract interest rates to customers at an average of
approximately 1.00% over the Buy Rate. In most states, this difference
represents compensation to the dealership in the form of a Dealer Premium and is
paid by the Company in addition to the amount financed. The Dealer Premium is
paid to the dealer each month for all receivables acquired from the dealer
during the preceding month. The Company has multiple Dealer Premium programs
which generally fall into two categories. Under one category, the dealer, in
most instances, receives the entire benefit of the spread between the interest
rate charged to the customer and the Buy Rate. However, if the receivable is
prepaid or defaults at any time prior to its scheduled maturity date, the amount
of the premium is prorated, and the portion allocated to the remaining scheduled
term is reimbursable to the Company as an offset against the premiums to be paid
with respect to subsequent receivables through the dealer's account. If the
balance in the dealer account is insufficient to cover the charge-back, the
Company invoices the dealer for the difference. This Dealer Premium category was
applicable to approximately 31% of the total number of receivables acquisitions
in 2000 compared to 40% in 1999. Under the Company's other Dealer Premium
program category, the dealer receives only a portion of the benefit of the
spread between the interest rate charged to the customer and the Buy Rate, with
a charge-back to offset against the dealer only if the receivable is prepaid or
defaults within a limited period of time regardless of the length of the term.
In Ohio, because the Company enters into installment loan contracts directly
with dealers' customers, it generally pays the dealer a referral fee based on a
percentage of the note amount. From time to time, the Company may adjust its
Dealer Premium payment methods based on management's assessment of the market.
See "Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources."
Centralization of receivable acquisitions at the Company's Indianapolis
headquarters enables the Company to ensure uniform application of underwriting
criteria. It also enables the Company to respond quickly and efficiently to a
large volume of applications. Upon receiving applications by facsimile
transmission, certain data is entered into the Company's computer system, and
the application is assigned to a credit analyst. The Company's computer system
obtains a credit bureau report, applies its Credit Scoring model and generates
summary credit analysis for the credit analyst. In April 1998, the Company
automated the calculation of its income and debt ratios and incorporated these
automated calculations as well as credit score into a quality control
underwriting screen. The Company evaluates applications based on four key income
or debt to income ratios as well as credit score and judgment of the credit
analyst. Approval authority and advance amounts are determined by the
combination of the five key underwriting criteria. The credit analyst analyzes
the application data, the quality control data and the credit bureau report and
sends a response by facsimile transmission to the dealer.
The Company utilizes a computerized Credit Scoring system to evaluate
an applicant's credit profile. The Company continually evaluates its scoring
methodologies and makes adjustments based on its experience. While the Company
is pleased with the performance of the existing scorecard, the Company has been
developing a new customized scorecard. Due to an extended validation process,
the Company is currently in the testing phase with implementation to follow.
The Company's purchasing philosophy generally focuses on acquiring high
quality credit at profitable spreads. The quality of the Company's receivable
acquisitions is due in large part to the experience, training and judgment of
the credit analysts. Based on underwriting guidelines, credit analysts must
review the criteria mentioned above in the approval process. An application that
does not meet the minimum underwriting guidelines for any of the underwriting
criteria requires the approval of a Regional Credit Manager. Credit analysts may
approve applications that meet all of these guidelines with limits on advance
amounts based on the combination of the criteria. Regardless of the key
underwriting ratios, the application characteristics and credit history must
support the credit decision. The prior auto dealership business experience of a
majority of the Company's credit employees is valuable, not only in assuring
sound credit analysis, but also in protecting the Company from attempts by
dealers or their customers to obtain approval of unacceptable credit. Management
monitors and regularly audits credit analysts' decisions, and the Company
utilizes a quality control department that primarily focuses on reviewing
acquisition decisions.
Of the receivable applications received from dealerships for the year
ended June 30, 2000, the Company approved approximately 20.8% unconditionally
and approximately 14.9% with conditions. Of the approved receivables,
approximately 62.2% were ultimately acquired. In other words, the Company
ultimately booked approximately 13% of the applications received during fiscal
2000. During fiscal 2000, the Company acquired approximately $1.4 billion in
receivables.
If the Company approves a receivable and is selected to provide the
financing, the automobile buyer enters into a simple-interest retail installment
sales contract with the dealer or a simple-interest installment loan and
security interest contract with the Company in the state of Ohio. The Company
also acquires some precomputed interest installment sale contracts in
California. The retail sales contract includes an assignment of the contract to
the Company. Because of business considerations and regulatory limitations, the
Company enters into a direct loan contract directly with the customer in Ohio.
In certain states, where allowed, the Company charges the customer an
origination fee in connection with the receivable acquisition and the
preparation of Company forms. Dealerships in some geographic markets use a
standard form of contract that is accepted by most finance companies (as opposed
to the Company's contract form). Most of these generic forms do not include
provisions for origination fees. The use of generic contract forms became more
prevalent during fiscal 1997 and continues to increase as the Company enters new
geographic markets where the use of generic contracts is prevalent.
When a receivable is submitted under the ACH program, the original
receivable documents are received by the Company and processed into the
Company's servicing system. The receivable is processed only after all proper
documentation has been received. Once the receivable has been recorded on the
Company's system, the Company's computer system triggers an ACH payment to the
dealer. The use of ACH payments greatly reduces the Company's risk of fraudulent
drafts. In addition, since the receivables are not funded until they are booked
by the Company, ACH payments also present a cash flow benefit.
For non-ACH dealers, when the dealer has completed and mailed the
documents and taken actions required to perfect the security interest on the
vehicle, authorized dealer personnel may complete and remit a Company-supplied
draft for payment of the amount financed. Because the Company provides forms of
drafts to dealers in advance of particular receivable acquisitions, it assumes
the risk that such drafts may be used fraudulently, which may result in a
corresponding loss to the Company. Historically, the Company has not sustained
any material losses due to such uses, but there is no assurance that such losses
will not occur. The receivables are then entered into the Company's servicing
system. The Company's operations computer network interfaces with its receivable
approval system to retrieve the information entered when the customer's
application was received, saving time on data entry with respect to receivable
processing. The system transmits new receivables daily to the Company's outside
data processing servicer. Twice a week, this servicer sends data on all new
accounts to the Company's document service agency which generates payment coupon
books and sends them directly to the customer. Customer payments are sent
directly to a lockbox.
The Company has a separate remote outsourcing agreement with a data
processing servicer. Under the agreement, the data processing service conducts a
wide array of software applications in both batch and on-line modes, and it
provides interfacing with a number of Company developed systems. The service
also provides off-site data storage at its data centers. The Company provides
much of the hardware to facilitate the on-line transmission of data which is
routed through different data centers to provide redundancy in the event of a
power failure.
<PAGE>
Geographic Concentration: The following table sets forth certain
information for Tier I receivables in the states the Company is operating its
business:
<TABLE>
<CAPTION>
Receivables Acquired for the
Twelve Months Ended
June 30, At June 30, 2000
------------------------------------------------------------ -----------------------------
Date Servicing Number Of
State Established 2000 1999 1998 Portfolio Dealers
------------------- ----------------- --------------- ----------------- ----------- -----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Arizona Jun-91 $29,214 $53,862 $27,231 $82,950 102
California Nov-94 150,929 114,843 111,501 278,470 605
Colorado Dec-91 28,623 27,323 18,712 51,162 107
Connecticut Jun-99 9,925 423 - 9,095 53
Delaware May-99 7,467 866 - 7,135 29
Florida Apr-93 82,469 101,235 76,883 189,645 302
Georgia Apr-94 63,480 66,444 36,244 125,005 156
Idaho Sep-97 5,020 2,759 1,013 6,279 25
Illinois Sep-94 104,896 109,557 69,599 207,132 324
Indiana Jan-86 49,466 46,675 25,464 96,994 199
Iowa Aug-94 26,906 41,030 23,939 59,267 119
Kansas Jan-92 9,157 16,663 10,249 22,929 43
Kentucky Jan-90 6,908 10,980 7,383 16,650 44
Maine Feb-00 10,755 - - 9,860 30
Maryland Nov-95 12,107 19,701 20,279 37,560 110
Massachusetts Jun-98 32,435 33,681 990 50,563 137
Michigan May-96 28,112 34,504 24,460 61,735 135
Minnesota Aug-92 26,613 28,058 13,325 43,166 102
Missouri Jan-92 36,654 32,804 18,986 64,513 119
Nebraska Nov-94 6,698 9,219 4,210 13,784 30
Nevada Jan-97 9,470 7,687 3,757 14,384 43
New Hampshire Feb-00 5,364 - - 4,998 47
New Jersey Apr-99 5,520 1,581 - 6,040 17
New Mexico Dec-94 4,268 4,500 3,383 10,275 27
New York Apr-00 7,130 - - 7,053 129
North Carolina Jul-93 152,214 160,680 85,515 308,195 283
Ohio Apr-88 74,732 72,221 52,699 153,677 257
Oklahoma Oct-92 48,791 44,673 33,682 97,567 83
Oregon Jun-95 11,378 5,188 2,331 14,312 50
Pennsylvania May-96 25,679 14,076 7,712 35,795 121
South Carolina Jul-94 54,445 54,035 35,711 103,500 138
South Dakota Jun-98 546 593 267 840 7
Tennessee Feb-96 47,350 47,822 26,898 87,148 121
Texas Jun-92 157,388 169,094 115,143 350,320 366
Utah Sep-92 19,367 10,762 7,121 24,693 62
Vermont Mar-00 1,139 - - 1,125 17
Virginia May-94 47,238 67,820 63,110 128,568 212
Washington Jun-95 18,811 8,530 7,062 25,706 69
Wisconsin Apr-95 21,239 24,472 9,866 40,060 126
-------------- --------------------- ------------------- --------------- ----------------
TOTAL $ 1,439,903 $ 1,444,361 $944,725 $ 2,848,150 4,946
============== ===================== =================== =============== ================
</TABLE>
During fiscal 2000, the Company was able to expand into the
northeastern portion of the country. For fiscal 2001, the Company intends to
focus primarily on expanding its dealer base within its existing geographic
markets. In considering potential for expansion, the Company carefully reviews
the regulatory and competitive environment and economic and demographic factors,
such as the number of auto registrations and dealerships in the metropolitan
area. See "Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition - Discussion of Forward-Looking Statements."
Because the Company is highly centralized, the incremental cost of
entering new geographic markets is relatively low, and the Company can quickly
enter new markets. Alternatively, the Company's centralized operations give it
the ability to vacate a market quickly and without great expense if competitive
or other factors arise in the market that make it no longer suitable for the
Company's operations. The Company's level of receivable acquisitions in each
state may fluctuate significantly over time depending on competitive conditions
and other factors in those areas.
Funding
Short-term
The Company relies upon external sources to provide financing for its
receivable acquisitions, Dealer Premiums and other ongoing cash requirements.
For receivable acquisitions, the Company normally utilizes various Revolving
Warehouse Credit Facilities ("Credit Facilities") with a total capacity of
$550.0 million at June 30, 2000. The $350.0 million Credit Facility ($450.0
million at June 30, 1999) is insured by a surety bond provider while the $200.0
million facility is not. During August 2000, an additional Credit Facility was
added bringing the total borrowing capacity to $750.0 million. During fiscal
2000, receivable acquisitions were funded utilizing a Credit Facility through
UAFC Corporation (formally known as Union Acceptance Funding Corporation)
("UAFCC"), a wholly-owned Company subsidiary. During the first quarter of fiscal
2001, receivable acquisitions may also be funded utilizing Credit Facilities
through UAFC-1 Corporation ("UAFC-1") and UAFC-2 Corporation ("UAFC-2"),
wholly-owned Company subsidiaries. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources."
Derivative Financial Instruments. The Company's sources for short-term
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 between the setting of the Buy Rate for the acquisition of
receivables and their sale in a securitization transaction. The Company employs
a hedging strategy to mitigate this risk. The Company uses a hedging strategy
that primarily consists of forward interest rate swaps having a maturity
approximating the average maturity of the receivable production during the
relevant period. At such time as a Securitization is committed, the interest
rate swaps are terminated. The Company's hedging strategy is an integral part of
its practice of periodically securitizing receivables discussed below. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition" for a discussion of hedging risks and related issues. Prior to March
1999, the Company used a hedging vehicle that included the execution of short
sales of U.S. Treasury Notes having a maturity approximating the average
maturity of the receivable production during the relevant period. At such time
as a Securitization was committed, the hedge was covered by the purchase of a
like volume of U.S. Treasury Notes.
Long-term
The Company sells its receivables in securitization transactions to
increase the Company's liquidity, to provide for redeployment of capital and to
reduce risks associated with interest rate fluctuations. The Company applies the
net proceeds from securitization transactions to the repayment of amounts owed
to short-term financing sources, thereby making such sources available for
future receivable acquisitions. The Company currently plans to continue
securitizing pools of receivables in public offerings, generally on a quarterly
basis. Management continually evaluates alternative financing sources and, in
the future, will consider funding its receivable acquisitions through a
permanent commercial paper facility or some other source or combination of
sources. In August 1999, the Company established a Securitization arrangement
with a commercial paper conduit. At June 30, 2000 such facility had a capacity
of $375.0 million, all of which was available. During August 2000, the capacity
for this facility was increased to $500.0 million. In September 2000, the
Company sold $500 million of receivables into this facility, in lieu of
effecting a public Securitization. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources." Since 1988 (excluding the September 2000 Securitization) the
Company has securitized approximately $8.2 billion in auto receivables in 37
public offerings and completed three private placements of Asset-backed
Securities summarized below. In each of the public offerings, the senior
Asset-backed Securities have been rated "AAA" or its equivalent by one or more
rating agencies including Standard & Poor's Corporation, Moody's Investors
Service and Fitch. Such ratings are not recommendations of the rating agencies
to invest in the securities and may be modified or withdrawn by them at any
time.
In public securitization transactions, the Company transfers automobile
receivables to a newly formed trust which issues one or more classes of
fixed-rate certificates or notes to investors (the "Securityholders"). In the
September 2000 Securitization the trust issues a floating rate note hedged by an
interest rate swap which effectively results in a fixed interest rate. The
Company has employed the use of subordinated classes of certificates as a credit
enhancement device in its public transactions. Surety bonds have been utilized
as additional credit enhancements in the Company's Securitizations. These credit
enhancement features allow the offered certificates or notes to achieve the
desired investment grade rating. In certain transactions, the Company chooses to
"turbo" excess cash prior to bringing the Spread Account to required levels. The
"turbo" feature provides for initial use of excess cash to reduce the principal
balance of the Asset-backed Securities to a specified level. In future
Securitizations, the Company may employ alternative credit enhancement devices.
<PAGE>
Selected information regarding active Securitizations as of June 30, 2000 are
shown below:
<TABLE>
<CAPTION>
Remaining Weighted Weighted
Balance Average Average Net Loss
Original at June 30, Receivable Certificate Gross Net to Original
Securitization Amount 2000 Rate Rate Spread Spread Balance
------------- ---------------- --------------- --------------- --------------------------------------
(1) (2) (3)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
UACSC2000-B Auto Trust $ 534,294 $ 519,889 13.97% 7.38% 6.59% 5.26% 0.00%
UACSC2000-A Auto Trust $ 282,721 $ 244,549 13.08% 7.20% 5.88% 4.94% 0.20%
UACSC1999-D Auto Trust $ 302,693 $ 243,969 13.62% 6.56% 7.06% 5.66% 0.71%
UACSC1999-C Auto Trust $ 364,792 $ 271,581 13.31% 6.22% 7.09% 6.20% 0.93%
UACSC1999-B Auto Trust $ 340,233 $ 229,294 13.36% 5.51% 7.85% 6.75% 1.47%
UACSC1999-A Auto Trust $ 320,545 $ 196,082 12.99% 5.80% 7.19% 6.16% 1.98%
UACSC1998-D Auto Trust $ 275,914 $ 147,888 12.74% 5.85% 6.89% 5.25% 2.05%
UACSC1998-C Auto Trust $ 351,379 $ 175,153 12.81% 5.55% 7.26% 5.15% 2.20%
UACSC1998-B Auto Trust $ 267,980 $ 114,054 12.51% 6.01% 6.50% 5.06% 2.30%
UACSC1998-A Auto Trust $ 228,938 $ 90,145 12.92% 6.11% 6.81% 5.27% 2.44%
UACSC1997-D Auto Trust $ 204,147 $ 65,784 13.02% 6.30% 6.72% 5.07% 2.52%
UACSC1997-C Auto Trust $ 218,390 $ 68,489 13.48% 6.45% 7.03% 5.38% 3.27%
UACSC 1997-BAuto Trust $ 295,758 $ 78,685 13.21% 6.57% 6.64% 5.15% 3.33%
UACSC 1997-A Auto Trust $ 293,348 $ 67,668 13.29% 6.33% 6.96% 5.43% 5.01%
UACSC 1996-D Auto Trust $ 283,085 $ 51,693 13.53% 6.14% 7.39% 5.37% 5.61%
UACSC 1996-C Auto Trust $ 310,999 $ 47,564 13.26% 6.44% 6.82% 5.11% 5.99%
UACSC 1996-B Auto Trust $ 245,102 $ 29,988 12.96% 6.45% 6.51% 5.58% 5.28%
UACSC 1996-A Auto Trust (4) $ 203,048 $ 18,263 13.13% 5.40% 7.73% 5.68% 5.95%
------------- ----------------
Total Tier I
Securitized Trusts $ 5,323,366 $ 2,660,738
PSC 1998-1 Grantor Trust $ 28,659 $ 12,290 18.69% 6.29% 12.40% 8.04% 9.00%
PSC 1996-1 Grantor Trust (5) $ 34,488 $3,627 19.87% 6.87% 13.00% 8.79% 14.30%
------------- ----------------
Total Tier II
Securitized Trusts $ 63,147 $ 15,917
------------- ----------------
Grand Total $ 5,386,513 $ 2,676,655
============= ================
</TABLE>
--------------------------------------------------------------------------------
(1) Difference between weighted average receivable rate and weighted
average certificate rate.
(2) Gross spread, net of upfront costs, servicing fees, ongoing credit
enhancement fees, trustee fees and the hedging gains or losses.
(3) Net loss to original balance at June 30, 2000.
(4) Pool was paid in full in July 2000.
(5) Pool was paid in full in September 2000.
--------------------------------------------------------------------------------
<PAGE>
Selected information regarding Securitizations paid in full as of June 30, 2000
are shown below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average Net Loss
Original Receivable Certificate Gross Net to Original
Securitization Amount Rate Rate Spread (1) Spread (2) Balance (3)
------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
UACSC 1995-D Auto Trust $205,550 13.74% 5.97% 7.77% 6.04% 6.49%
UACSC 1995-C Auto Trust $236,410 14.08% 6.42% 7.66% 6.11% 6.60%
UACSC 1995-B Grantor Trust $220,426 13.91% 6.61% 7.30% 4.88% 6.19%
UACSC 1995-A Grantor Trust $173,482 13.22% 7.77% 5.45% 3.88% 5.64%
UFSB 1994-D Grantor Trust $114,070 12.51% 7.69% 4.82% 3.91% 4.37%
UFSB 1994-C Grantor Trust $150,725 12.05% 6.77% 5.28% 4.04% 3.34%
UFSB 1994-B Grantor Trust $142,613 10.74% 6.46% 4.28% 3.54% 3.00%
UFSB 1994-A Grantor Trust $119,960 9.98% 5.08% 4.90% 3.60% 2.54%
UFSB 1993-C Auto Trust $141,811 11.00% 4.88% 6.12% 4.82% 2.60%
UFSB 1993-B Auto Trust $212,719 11.50% 4.45% 7.05% 5.31% 2.51%
UFSB 1993-A Grantor Trust $133,091 11.49% 4.53% 6.96% 4.96% 1.84%
UFSB 1992-C Grantor Trust $119,280 11.64% 5.80% 5.84% 4.48% 1.71%
UFSB 1992-B Grantor Trust $116,266 12.39% 4.90% 7.49% 5.49% 1.59%
UFSB 1992-A Grantor Trust $103,619 13.66% 6.70% 6.96% 5.80% 1.94%
UFSB 1991-B Grantor Trust $106,612 13.64% 7.15% 6.49% 4.94% 1.72%
UFSB 1991-A Grantor Trust $150,436 12.52% 8.40% 4.12% 2.25% 0.79%
UFSB 1989-B Grantor Trust $66,469 14.09% Variable - 2.82% 3.15%
UFSB 1989-A Grantor Trust $113,080 13.24% 8.75% 4.49% 1.97% 1.94%
UFSB 1988 Grantor Trust $105,179 12.73% 9.50% 3.23% 1.71% 2.74%
-------------
Total Tier I Securitized Trusts $2,731,798
PSC 1996-2 Grantor Trust $31,108 19.65% 6.40% 13.25% 9.00% 14.01%
-------------
Grand Total $2,762,906
=============
</TABLE>
--------------------------------------------------------------------------------
(1) Difference between weighted average receivable rate and weighted
average certificate rate.
(2) Gross spread, net of upfront costs, servicing fees, ongoing credit
enhancement fees, trustee fees and the hedging gains or losses.
(3) Net loss to original balance at time of repurchase.
--------------------------------------------------------------------------------
Gains from the sale of receivables in securitization transactions have
historically provided a significant portion of the net earnings of the Company
and are likely to continue to represent a significant portion of the Company's
net earnings. If the Company were unable or elected not to securitize
receivables in a financial reporting period, net earnings in that period would
likely be lower relative to periods in which Securitizations occurred. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition -- General."
Commencing with the 1995-A Grantor Trust, the Company has effected
Securitizations through a wholly-owned special-purpose subsidiary, UAC
Securitization Corporation ("UACSC"). Prior to fiscal 1999, its Tier II
Securitizations have been effected through Performance Securitization
Corporation ("PSC"), also a wholly-owned special purpose subsidiary. Beginning
in the first quarter of fiscal 1999, the Company began securitizing Tier I and
Tier II receivable acquisitions together through its wholly-owned subsidiary
UACSC. In the fourth quarter of fiscal 1999, the Company created an owners'
trust structure in which the Securitization trust issued both certificates and
debt securities. The Company will continue to assess other structured financing
alternatives which may enable it to fund receivables and/or deploy its capital
with greater efficiency at a lower cost. See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources."
<PAGE>
Servicing
Servicing
Under the terms of its Credit Facilities and securitization
transactions, the Company acts as servicer with respect to the related
automobile receivables. The Company services the receivable pools by collecting
payments due from customers and remitting payments to the respective trustee in
accordance with the terms of the servicing agreements. The Company maintains
computerized records with respect to each receivable to record all receipts and
disbursements and prepares related reports. As servicer, the Company is
obligated to monitor collections and collect delinquent accounts and use
diligence to obtain current payment of accounts. The Company receives monthly
servicing fees. The contractual fee, typically one percent per annum on the
outstanding principal balance of the securitized receivables, is paid to the
Company through the securitized trusts.
The following table describes the composition of the Company's
servicing portfolio at June 30, 2000:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Percent of Weighted
Aggregate Aggregate Aggregate Average Average Weighted
Number of Principal Principal Receivable Remaining Average
Receivables Balance (1) Balance Balance Term (2) Rate
----------- ----------- ------- ------- -------- ----
(dollars in thousands, except average balances)
<S> <C> <C> <C> <C> <C> <C>
New auto 47,711 $ 769,442 27.0% $ 16,127 61.2 12.39%
Used auto 188,021 2,078,708 73.0% $ 11,056 56.2 13.64%
------------- ------------------ -------------
Total 235,732 $ 2,848,150 100.0% $ 12,082 57.6 13.30%
============= ================== =============
Receivables held for sale 15,355 $ 202,167 7.1% $ 13,166 67.4 13.48%
Other receivables serviced 220,377 2,645,983 92.9% $ 12,007 56.9 13.29%
------------- ------------------ -------------
Total 235,732 $ 2,848,150 100.0% $ 12,082 57.6 13.30%
============= ================== =============
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Balance excludes the Company's Tier II servicing portfolio of $32.3 million.
(2)Terms are shown in months.
In addition to servicing securitized receivables, the Company also
services a portfolio of Union Federal fixed and variable rate receivables on
mobile homes, boats and autos, of approximately $555,000 at June 30, 2000.
At June 30, 2000, the Tier I servicing portfolio, including the
principal balance of auto receivables held for sale and securitized auto
receivables, was approximately $2.8 billion in aggregate principal balance.
Approximately 72.6% of the Tier I servicing portfolio, as of June 30, 2000,
represented financing of used vehicles; the remainder represented financing of
new vehicles. The Company's receivables consist primarily of simple-interest
contracts which provide for equal monthly payments (as well as precomputed
receivables acquired in California). As payments are received under a simple
interest contract, the interest accrued to date is paid first, and the remaining
payment is applied to reduce the unpaid principal balance. In the case of a
liquidation or repossession, amounts recovered are applied first to certain
expenses of repossession and then to unpaid principal.
The Customer Service Department utilizes an automated voice response
unit ("VRU") which allows customers to access standard account information as
well as general information 24 hours a day, seven days a week. In September
1999, the Company implemented a new, enhanced VRU that is capable of handling a
larger call volume and also offers additional menu options for the customers.
The new VRU is also used for the dealer service calls. The Collection and
Origination departments are using this system to improve the efficiency of the
respective departments. The VRU received an average of 158,000 calls per month
in fiscal 2000, up from 87,000 calls per month in fiscal 1999. The fiscal 2000
average includes approximately 5,400 calls per month related to dealer service
calls. The increase in the number of calls is due to an increased servicing
portfolio and the addition of collection and dealer service calls. Approximately
32% of the total calls are handled entirely by the VRU; the other 68% are
transferred to live collection employees. Lower percentages of dealer service
and collection calls are handled entirely by the VRU due to the complexity of
this area. The VRU provides many efficiencies for the Company and is
user-friendly and convenient for customers.
Collection and Remarketing
The Company seeks to maintain low levels of delinquency and net
charge-offs by ensuring and monitoring the integrity of its credit approval. The
Company tracks the delinquency rate of all receivables approved by each credit
analyst. The Company also seeks to limit delinquency and charge-offs through
highly automated and efficient collection and repossession procedures.
The collections area is supported by a separate computerized collection
system provided by the Company's data processing servicer and an automatic
telephone dialing system. Delinquent customers are contacted by phone, mail,
telegram, and in special circumstances, personal visits. Notices to delinquent
customers are dispatched automatically by computer when receivables are ten days
delinquent in most states, but as early as seven days delinquent for other
states. The collections area operates during regular business hours, weekday
evenings and on Saturdays.
The Company utilizes a computer-controlled "power dialer" which dials
phone numbers of delinquent customers from a file of records extracted from the
Company's database. The system typically generates between 1,200 and 1,500 calls
per hour and allows the Company to prioritize calls based on a wide variety of
factors. Once a call has been placed, the system monitors the call and transfers
the call to a collector if it has reached a live human voice. Collectors handle
approximately 240 of these system generated calls per day.
After delinquent customers fail to respond to the Company or to fulfill
oral commitments made to bring their receivables current, the Company
repossesses the automobile securing the receivable. The decision to repossess
and charge-off is generally made after a receivable is at least 90 days but no
more than 120 days delinquent, absent extraordinary circumstances, such as
refusal to pay, which requires earlier action. Repossessions are effected for
the Company by contracted repossession agents. During fiscal 2000, repossession
agents transferred approximately 80% of the autos to independent auto auction
companies that recondition the repossessed autos and sell them for the Company
while the other 20% were transferred to the Company's new car franchised
dealership in Indianapolis for resale. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Delinquency and
Credit Loss Experience."
Final Payoff and Title Transfer
The majority of the receivables acquired are ultimately paid off by the
customer or the dealership receiving the vehicle as a trade-in. The customer or
dealership will call the Company and receive a final payoff amount. This payoff
amount is calculated based on the outstanding principal, interest and any unpaid
fees. If a personal check is submitted for payment, the title is held for
approximately 10 days to ensure the availability of the funds. When the payment
is received from a dealership, the title is then transferred to the dealership
and the cancelled contracts are forwarded to the customer. In the event of a
customer payoff, both the title and cancelled contracts are forwarded to the
customer. The company is currently processing 300 to 500 payoffs on a daily
basis.
RISK MANAGEMENT
The Company's Risk Management department strives to develop a better
standard for measuring risk throughout the Company, provides automation to
ensure a more consistent decision matrix in originations, analyzes and controls
origination and collection risk at multiple levels and provides the ability to
quickly implement new standards for immediate results.
During fiscal 1998, the Company created a quality control department
within risk management that primarily focuses on monitoring the receivable
acquisition process by reviewing individual receivable files and credit
analysts' decisions. In fiscal 2000, the department reviewed approximately 40%
of cashed files based on predetermined high risk characteristics including high
advance rates and approvals of receivables that were below the minimum
underwriting criteria. The Company tracks the delinquency and charge-off rates
of all receivables purchased by each individual credit analyst. The review
process has created additional management controls, more immediate feedback on
underwriting trends and an additional source for capturing valuable receivable
data that can be analyzed and used as origination or collection tools. The
quality control department is also used in the training process for new credit
analysts.
In addition, to monitoring the quality of originations, Risk Management
is currently focusing on enhancements of the Company's risk based pricing model,
loss and recovery analysis including internally developed loss curves,
development of a collection behavioral scorecard and enhancements of its
collection strategies.
EMPLOYEES
The Company employs personnel experienced in all areas of receivable
acquisition, documentation, collection and administration. None of the employees
are covered by a collective bargaining agreement. Throughout fiscal 2000, all
employees including management and executive officers of the Company have
participated in a formalized professional development, supervisory and
leadership training program. The feedback has been very positive from all areas
of the Company. The following table shows a summary of all the full and
part-time employees from all areas of the Company.
Full Time Part Time
------------------------ ------------------------
For the year ended June 30, 2000 1999 2000 1999
------------ -------- ------------ --------
Sales Representatives 43 37 - -
Originations 95 75 15 -
Servicing 105 102 8 13
Collections 202 184 27 34
Remarketing 57 47 6 -
Support 90 66 8 2
------------ -------- ------------ --------
Total 592 511 64 49
============ ======== ============ ========
REGULATION
The Company's operations are subject to regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. The states where the Company primarily operates are listed in the
Underwritng and Purchasing section and the Geographic Concentration chart. The
Company has either filed the necessary notifications or registered with each
state prior to commencing operations. As the Company expands its operations into
additional states, it will be required to comply with the laws of those states.
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon sellers, holders and servicers
involved in consumer finance. These laws include the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Reporting Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's
Regulations B and Z, state adaptations of the National Consumer Act and of the
Uniform Consumer Credit Code, state "lemon" laws, state motor vehicle retail
installment sales acts, state retail installment sales acts, State Unfair and
Deceptive Trade Practices Act, State Fair Debt Collection Practices Act and
other similar laws. Also, state laws impose finance charge ceilings and other
restrictions on consumer transactions and require contract disclosures in
addition to those required under federal law. These statutes and regulations may
impose specific statutory penalties, punitive damages and recovery of attorney's
fees and costs upon creditors who fail to comply with their provisions. In some
cases, this liability could affect the Company's ability to enforce the
installment sale contracts it purchases and, in Ohio, the loans it makes.
The "Holder-in-Due-Course" Rule of the Federal Trade Commission (the
"FTC Rule"), the provisions of which are generally duplicated by the Uniform
Consumer Credit Code, other state statutes, or the common laws in certain
states, has the effect of subjecting purchasers of installment sales contracts
and even some direct lenders in consumer credit transactions to all claims and
defenses which the obligor in the transaction could assert against the seller of
the goods. The installment sale contracts purchased by the Company and direct
loans made by it are generally subject to the provisions of the FTC Rule.
Accordingly, the Company (or the trust to which a contract is assigned in a
Securitization), as holder of the contracts or as the direct lender, will be
subject to any claims or defenses that the purchaser of the related financed
vehicle may assert against the seller of the vehicle. Liability under the FTC
Rule is limited to the amounts paid by the obligor under the contract, but the
holder of the contract may also be unable to collect any balance remaining due
thereunder from the obligor.
Through the dealer agreement and the contract executed by the consumer,
a dealer makes certain representations and warranties to the Company about the
transaction between the dealer and the consumer including that the sale of the
vehicle and the completion of the contract comply with all federal and state
laws and regulations. Accordingly, if a customer has a claim against the dealer
for the violation of any such laws or regulations, and the Company is named in
the claim or materially impacted by the claim, such violation often constitutes
a breach of the dealer's representations and warranties and would allow the
Company to demand repurchase of the contract by the dealer.
All states in which the Company operates have adopted a version of the
Uniform Commercial Code ("UCC"). Except where limited by other state laws, the
UCC governs the Company's rights upon the obligor's default. Generally, the UCC
allows the secured party to conduct a self-help repossession, then sell the
collateral and collect any deficiency if the proceeds of sale are insufficient
to pay off the outstanding obligation. The UCC requires the secured party to
provide the obligor with reasonable notice of any sale of the collateral, as
well as an opportunity to redeem the collateral prior to sale. Other state laws
may expand an obligor's rights, for example by providing the obligor an
opportunity to cure default prior to repossession, or by eliminating the secured
party's right to collect a deficiency balance. In addition, federal bankruptcy
laws and related state laws may interfere with or affect the ability of a
secured party to realize upon collateral or enforce a deficiency judgment.
<PAGE>
GLOSSARY
Asset-backed Securities - A general reference to securities, such as
certificates or notes, that are backed by financial assets, such as automobile
receivables or leases, credit card or trade receivables, home equity receivables
or equipment. Such securities are generally fixed-rate securities payable solely
from cash flows from the pooled receivables.
Credit Scoring - The process of utilizing standard models in the receivable
acquisition process to evaluate an applicant's credit profile to arrive at an
estimate of the associated credit risk based on statistical evaluation of
several common characteristics that bear on credit worthiness and their
correlation with credit risk.
Dealer Premium - The amount paid to the dealer for the purchase of a receivable
above the principal amount financed. In states other than Ohio, the Dealer
Premium is based upon the finance charge that would be paid on the receivable if
it earned interest at a rate equal to the difference between the contract rate
and the Company's periodically published Buy Rate. The difference in rates
averages approximately 1.00%. Dealer Premiums paid to Ohio dealers are generally
in the form of referral fees and are calculated as the product of the principal
amount of the receivable and a periodically adjusted referral rate set forth on
the Company's rate sheets for receivables with similar terms, note rate and age
of collateral. All or a portion of a Dealer Premium may be paid in advance at
the time the receivable is acquired, subject to being charged back against the
dealer if that receivable prepays or defaults. The Dealer Premium is generally
advanced to the dealer in the month following purchase of the receivable,
creating the Dealer Premium asset. The unamortized portion of such advance,
depending on the dealer agreement, may be recoverable from the dealer if the
receivable is prepaid or defaults. Dealer premiums are included in the carrying
amount of receivables prior to Securitization.
Future Servicing Cash Flows - Future Servicing Cash Flows are the projected cash
flows resulting from the difference between the weighted average coupon rate of
the receivables sold and the weighted average certificate rate paid to investors
in the securitized trusts, less an allowance for estimated credit losses, the
Company's contractual servicing fee of 1.00% (on Tier I) and ongoing trust and
credit enhancement fees.
Gain (Loss) on Sales of Receivables - Gain (Loss) on Sales of Receivables
represents the difference between the sales proceeds and the carrying amount of
receivables after reduction for amounts allocated to Retained Interest, less
expenses of the sale and hedging gains or losses.
Revolving Warehouse Credit Facilities ("Credit Facilities" or "Credit Facility")
- External financing arrangements negotiated by the Company with independent
financial institutions having an aggregate borrowing capacity of $550.0 million
at June 30, 2000 (and revised to $750.0 million during August 2000). Such
facilities are generally established for one year terms and are used to fund
Tier I receivable acquisitions.
Retained Interest in Securitized Assets ("Retained Interest") - Retained
Interest represents the Company's retained interest in receivables sold. At the
closing of each Securitization, the Company allocates its basis in the
receivables between the portion of the receivables sold to asset-backed
securityholders and the portion of the receivables which is retained from the
Securitizations ("Retained Interest" and "Servicing Assets") based on the
relative fair values of those portions at the date of the sale. The fair value
is based upon the cash proceeds received for the receivables sold and the
estimated fair value of the Retained Interest and Servicing Assets. Retained
Interest consists of the discounted cash flows to be received by the Company.
Servicing Assets represent the present value benefit derived from retaining the
right to service receivables securitized in excess of adequate servicer
compensation. The excess of the cash received over the basis allocated to the
receivables sold, less transaction costs and hedging gains and losses, equals
the net gain on sale of receivables recorded by the Company. The fair value of
the Retained Interest is determined by discounting the expected cash flows
released from the Spread Account (the cash out method) using a discount rate
which the Company believes is commensurate with the risks involved. An allowance
for estimated credit losses is established using information from scoring models
and available historical loss data for comparable receivables and the specific
characteristics of the receivables purchased by the Company. Discount rates
utilized are based on current market conditions, and prepayment assumptions are
based on historical performance experience of comparable receivables and the
impact of trends in the economy. Retained Interest is reduced by actual
servicing cash flows as received over the life of the Securitization. Retained
Interest is classified as "available-for-sale" and is carried at fair value
based upon the application of current assumptions to the remaining expected cash
flows. Unrealized gains and losses attributable to the change in the fair value
of the Retained Interest, which are recorded as "available-for-sale" securities,
net of related income taxes are excluded from earnings and are recorded as
"Accumulated other comprehensive income", in shareholders' equity. Retained
Interest is reviewed quarterly for other than temporary impairment, with other
than temporary impairment, if any, recorded as a component of gain on sales of
receivables, net.
Securitization - The process through which receivables are pooled and sold to a
trust which issues asset-backed securities to investors. Generally, such term
includes the sale of a pool of receivables funded by a commercial paper conduit.
Senior Notes - Unsecured Senior Notes of the Company of $110.0 million and $65.0
million issued August 1995 and March 1997 respectively.
Senior Subordinated Notes- Unsecured Senior Subordinated Notes of the Company in
the aggregate principal amount of $46.0 million issued April 1996.
Servicing Asset - The present value benefit derived from retaining the right to
service receivables securitized in excess of adequate servicer compensation.
Servicing Assets are carried at their lower of cost or market.
Spin-off - The pro rata distribution of the 9,200,000 shares of Class B Common
Stock formerly held by Union Federal to the shareholders of its holding company,
immediately prior to consummation of the Company's initial public offering in
August 1995.
Spread Account (a component of Retained Interest in Securitized Assets) - A cash
collateral account or specific cash account maintained by the trustee of a
Securitization trust into which Future Servicing Cash Flows are deposited
initially to protect Certificateholders (and any provider of third-party credit
enhancement) against credit losses. The terms of the account, which vary with
each Securitization, state a maximum balance, generally expressed as a
percentage of the current principal balance. Generally, the initial cash
deposit, if required, is funded by the Company from the Securitization proceeds
and is expressed as a percentage of the original principal balance. The initial
deposit amount is typically less than the minimum balance ("floor"). The floor
amount required is determined based on the original principal balance. The
Company receives cash flows from Retained Interest that represent collections on
the receivables in excess of the amounts required to pay the Certificate
principal and interest, the base servicing fees and certain other fees such as
credit enhancement fees. If the amount of cash required for the allocations
exceeds the amount collected during the collection period, the shortfall is
drawn from the Spread Account. If the cash collected during the period exceeds
the amount necessary for the allocations, and the related Spread Account is not
at the required level, the excess cash collected is retained in the Spread
Account until the specified level or maximum level is achieved. The cash in the
Spread Accounts is restricted from use by the Company with such amounts included
as a component of the Retained Interest. In certain transactions, the Company
chooses to "turbo" excess cash prior to bringing the Spread Account to required
levels. The "turbo" feature provides for initial use of excess cash to reduce
the principal balance of the Asset-backed Securities to a specified level. Once
the required or maximum Spread Account level is achieved, the excess is released
to the Company. Any remaining Spread Account balance is released to the Company
upon termination of the Securitization. There is no recourse to the Company for
receivable losses beyond the balance in the Spread Account and Future Servicing
Cash Flows from the trust.
Tier I - The Company's practice of acquiring receivables made to customers,
generally with high quality credit, through an automotive dealer under a dealer
agreement that provides for the acquisition of receivables at par plus the
payment of a Dealer Premium to the dealer. A Tier I customer has a credit
history with no or few minor defaults and can finance a new car purchase through
a bank, a captive finance subsidiary of an automobile manufacturer or an
independent finance company that focuses on Tier I credit.
Tier II - The Company's prior practice of acquiring receivables made to
customers who generally would not be eligible for credit under Tier I.
Receivables were acquired from automotive dealers under a dealer agreement that
provided for the acquisition of receivables at par without provision for payment
of any Dealer Premium. A Tier II customer is characterized as a customer with
some credit problems in his or her past which have subsequently been resolved
and who has reestablished an acceptable payment history. To finance a new or
late-model used car, the Tier II customer may not qualify for a receivable from
a captive finance subsidiary but may access credit through non-traditional
finance sources.
Union Division - The indirect automobile receivable acquisition business
conducted as a division of Union Federal through fiscal 1994.
Warehouse - A method whereby receivables are financed by financial institutions
on a short-term basis. In a Warehouse arrangement, receivables are accumulated
or pooled on a daily or less frequent basis and assigned or pledged as
collateral for short-term borrowings until they are sold in a Securitization.
<PAGE>
Item 2. Properties
The Company's operations are centered in a commercial office building
owned by Shadeland Properties, LP ("Shadeland," a Company affiliate) in
Indianapolis, Indiana. The Company occupies office space of approximately
116,000 square feet under a lease with Shadeland which expires in April 2003.
The Company sublets a portion of the building to Union Federal.
The Company owns a 60,000 square foot facility located on approximately
9 acres near its headquarters in Indianapolis. This facility is used for its new
car franchised dealership, the reconditioning and remarketing operations and the
retailing of a portion of its repossessed autos. The facility contains a
showroom, service area and office area.
The Company leases a garage of 5,000 square feet for minor vehicle
reconditioning to prepare repossessed autos for auction, an office of 500 square
feet and an adjacent car lot located in Beech Grove, Indiana, from an
independent party. The Company currently leases the property on a month to month
basis. This facility serves as a holding area for the autos repossessed from
across the country before they are transferred to the new car franchised
dealership or a local auction.
Item 3. Legal Proceedings
UAC is subject to litigation arising from time to time in the ordinary
course of business and of a type and scope common for participants in the
consumer finance industry. UAC has been named a defendant in a number of civil
suits. The majority of these cases have involved circumstances in which a
vehicle buyer has alleged a problem with the vehicle that secures the buyer's
obligations under the retail installment sales contract acquired by the Company.
Although UAC does not make any representation or warranty respecting the vehicle
nor is it deemed to have made any implied warranties as a result of it being the
holder of the contract, it is, under applicable FTC rules and most state laws,
subject to all claims and defenses which the debtor could assert against the
seller of the vehicle. Therefore, the buyer typically names the dealer and UAC
in such actions.
UAC has also, on occasion, been sued by a buyer for UAC's own alleged
wrongful conduct or its alleged participation in the wrongful conduct of a
dealer. The majority of these cases have involved allegations of wrongful
conduct in connection with a repossession, participation in some fraud or other
wrongful conduct of a dealer or a technical violation of Regulation Z or an
applicable state statute. (For a further discussion of Regulation Z, see "Item
1, Business - Regulation.") Most of these suits are individual actions and would
not result in any material liability even if the buyer was successful. However,
buyers occasionally purport to bring an action on behalf of a class of buyers.
No such actions are currently pending.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Shares of Class A Common Stock are quoted on the Nasdaq Stock Market's
National Market under the symbol "UACA." The following table sets forth the high
and low sales price per share of Class A Common Stock for each quarter in fiscal
2000 and 1999:
Year Ended June 30,
2000 1999
------------------------------- --------------------------
High Low High Low
------------- -------------- --------------- --------
First Quarter 8 6 1/2 8 4 3/4
Second Quarter 8 1/2 6 3/8 6 5/8 3 7/8
Third Quarter 8 7/8 3 8 1/2 4
Fourth Quarter 5 1/2 4 1/4 8 3/8 6 1/4
As of September 8, 2000, there were 87 holders of record of the
Company's Class A Common Stock and 6 holders of record of Class B Common Stock.
The Company estimates that its Class A Common Stock is owned beneficially by
approximately 1,215 persons. There is no market for Class B Common Stock, and
management has no plans to list the Class B Common Stock on Nasdaq or any
exchange.
The Company currently intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate paying
cash dividends on Class A Common Stock or Class B Common Stock in the
foreseeable future. The payment of dividends is within the discretion of the
Board of Directors and will depend, among other things, upon earnings, capital
requirements, any financing agreement covenants and the financial condition of
the Company. In addition, provisions of the Senior and Senior Subordinated Notes
limit distributions to shareholders.
<PAGE>
Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected consolidated financial
information reflecting the consolidated operations and financial condition of
the Company for each year in the five year period ended June 30, 2000. 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.
Certain amounts for prior periods have been reclassified to conform to current
year presentation.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest on receivables held for sale $ 37,461 $ 33,015 $ 27,871 $ 33,914 $ 28,712
Retained interest and other 24,963 20,463 13,993 14,989 10,129
---------------------------------------------------------------------------
Total interest income 62,424 53,478 41,864 48,903 38,841
Interest expense 29,663 27,906 27,178 25,867 22,332
---------------------------------------------------------------------------
Net interest margin 32,761 25,572 14,686 23,036 16,509
Provision for estimated credit losses 3,000 5,879 8,050 4,188 2,875
---------------------------------------------------------------------------
Net interest margin after provision for
estimated credit losses 29,761 19,693 6,636 18,848 13,634
---------------------------------------------------------------------------
Gain (loss) on sales of receivables, net 16,883 19,133 (11,926) 963 30,357
Servicing fees 24,612 21,716 19,071 16,919 12,302
Late charges and other fees 6,337 5,349 4,087 3,820 3,096
---------------------------------------------------------------------------
Other revenues 47,832 46,198 11,232 21,702 45,755
---------------------------------------------------------------------------
Total operating expenses 49,913 42,588 35,546 30,502 23,841
---------------------------------------------------------------------------
Earnings (loss) before provision for income taxes 27,680 23,303 (17,678) 10,048 35,548
Provision (benefit) for income taxes 10,675 8,979 (7,856) 4,166 14,406
---------------------------------------------------------------------------
Net earnings (loss) $ 17,005 $ 14,324 $ (9,822) $ 5,882 $ 21,142
===========================================================================
Net earnings (loss) per common share
(basic and diluted) $1.28 $1.08 $(0.74) $0.45 $1.60
===========================================================================
-----------------------------------------------------------------------------------------------------------------------------------
Operating Data:
Receivables acquired (dollars):
Tier I $ 1,439,903 $ 1,444,361 $944,725 $ 1,076,064 $994,834
Tier II - 12,592 24,027 39,610 36,030
Marine - - 2,515 6,590 50
---------------------------------------------------------------------------
Total receivables acquired (dollars) $ 1,439,903 $ 1,456,953 $971,267 $ 1,122,264 $ 1,030,914
===========================================================================
Receivables acquired (number of receivables):
Tier I 87,608 90,268 64,152 75,844 71,070
Tier II - 876 1,746 3,050 2,870
Marine - - 200 496 6
---------------------------------------------------------------------------
Total receivables acquired (number of receivables) 87,608 91,144 66,098 79,390 73,946
===========================================================================
Receivables securitized (dollars):
Tier I $ 1,479,207 $ 1,288,071 $919,455 $ 1,183,190 $890,110
Tier II 5,293 - 28,659 31,108 34,488
---------------------------------------------------------------------------
Total receivables securitized (dollars) $ 1,484,500 $ 1,288,071 $948,114 $ 1,214,298 $924,598
===========================================================================
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses as a percent of
average servicing portfolio 1.88% 1.82% 1.78% 1.67% 1.73%
-----------------------------------------------------------------------------------------------------------------------------------
Credit losses as a percent of average servicing portfoli
Tier I 2.18% 2.20% 2.80% 2.40% 1.58%
Tier II 8.62% 7.04% 7.67% 5.18% 2.37%
Marine - - 1.12% 0.25% -
---------------------------------------------------------------------------
Total credit losses as a percent of average
servicing portfolio 2.28% 2.33% 2.96% 2.50% 1.60%
===========================================================================
Delinquencies of 30 days or more as a percent of
servicing portfolio:
Tier I 2.82% 2.63% 3.07% 2.96% 1.84%
Tier II 11.26% 9.42% 8.29% 6.18% 3.35%
Marine - - - 0.10% -
---------------------------------------------------------------------------
Total delinquencies of 30 days or more as a
percent of servicing portfolio 2.92% 2.78% 3.24% 3.07% 1.88%
===========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Consolidated Financial Data (Continued)
At June 30, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------
(Dollars in tusands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Receivables held for sale, net $206,701 $267,316 $118,259 $121,156 $259,290
Retained interest in securitized assets 208,431 190,865 171,593 170,791 147,024
Total assets 478,138 514,926 411,533 391,268 451,195
Amounts due under warehouse facilities 152,235 185,500 73,123 44,455 187,756
Long-term debt 177,000 199,000 221,000 221,000 156,000
Total shareholder's equity 110,029 89,479 82,473 86,848 78,624
-----------------------------------------------------------------------------------------------------------------------------------
Other Data:
Servicing portfolio:
Tier I $ 2,848,150 $ 2,464,366 $ 1,978,920 $ 1,860,272 $ 1,548,538
Tier II 32,328 53,792 66,855 68,289 47,062
Marine - - - 6,227 50
Serviced for others 637 912 1,642 2,488 3,420
---------------------------------------------------------------------------
Total servicing portfolio $ 2,881,115 $ 2,519,070 $ 2,047,417 $ 1,937,276 $ 1,599,070
===========================================================================
Average servicing portfolio:
Tier I $ 2,610,803 $ 2,269,177 $ 1,922,977 $ 1,759,666 $ 1,343,770
Tier II 41,545 63,275 69,622 63,305 33,124
Marine - - 6,920 2,357 -
Serviced for others 751 1,138 1,941 2,799 4,222
---------------------------------------------------------------------------
Total average servicing portfolio $ 2,653,099 $ 2,333,590 $ 2,001,460 $ 1,828,127 $ 1,381,116
===========================================================================
Number of receivables serviced:
Tier I 235,732 213,746 184,003 173,693 147,722
Tier II 3,879 5,517 6,285 6,056 4,067
Marine - - - 472 6
Serviced for others 88 139 256 402 537
---------------------------------------------------------------------------
Total number of receivables serviced 239,699 219,402 190,544 180,623 152,332
===========================================================================
Number of dealers 4,946 4,076 3,628 3,204 2,523
Number of employees (full-time equivalents) 648 540 529 387 313
</TABLE>
On January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinquishments of Liabilities (SFAS 125). The adoption of
SFAS 125 had the effect of reducing fiscal 1997 net earnings by $1.3 million or
$0.10 per share (basic and diluted) and increasing total shareholders' equity by
$941,000.
<PAGE>
Item 7. Management's Discussion and Analysis if 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
The Company derives substantially all of its earnings from the
acquisition, Securitization and servicing of automobile receivables originated
or referred by dealerships affiliated with major domestic and foreign
manufacturers. To fund the acquisition of receivables prior to Securitization,
the Company utilizes Credit Facilities, discussed in "Liquidity and Capital
Resources." Through Securitizations, the Company periodically pools and sells
receivables to a trust which issues asset-backed securities to investors
representing interests in the receivables sold. When the Company sells
receivables in a Securitization, it records a gain or loss on the sale of
receivables and establishes Retained Interest as an asset. Future Servicing Cash
Flows are received over the life of the related Securitization. See the
"Glossary" under "Item 1. Business" for definitions of terms pertaining to
Securitizations.
The following table illustrates changes in the Company's total
receivable acquisition volume and information with respect to Gain (Loss) on
Sales of Receivables, net and Securitizations during the past eight quarters.
More complete quarterly statements of earnings information is set forth in Note
13 of the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Selected Quarterly Financial Information
For Quarters in the Fiscal Year Ended June 30, 2000
--------------------------------------------------------------------------------
First Second Third Fourth
------------------- -------------------- ------------------ --------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Receivables acquired $ 330,282 $ 263,821 $ 395,594 $ 450,206
Gain on Sales of Receivables $ 6,770 $ 5,264 $ 2,754 $ 7,379
Less:Other than temporary impairment (240) (4,003) - (1,041)
--------------- -------------------- ------------------ --------------------
Gain on Sales of Receivables, net $ 6,530 $ 1,261 $ 2,754 $ 6,338
=============== ==================== ================== ====================
Servicing portfolio at end of period $2,579,304 $2,583,298 $2,710,105 $2,881,115
-----------------------------------------------------------------------------------------------------------------------------
Selected Securitization Data: 1999-C 1999-D 2000-A 2000-B
Original amount $ 364,792 $ 302,693 $ 282,721 $ 534,294
Weighted avg. receivable rate 13.31% 13.62% 13.08% 13.97%
Weighted average remaining maturity (months) 71.1 69.9 68.9 71.6
Weighted average certificate rate 6.22% 6.56% 7.20% 7.38%
Gross spread (1) 7.09% 7.06% 5.88% 6.59%
Net spread (2) 6.20% 5.66% 4.94% 5.26%
Cumulative credit loss assumption 4.50% 4.50% 4.50% 4.75%
-----------------------------------------------------------------------------------------------------------------------------
For Quarters in the Fiscal Year Ended June 30, 1999
--------------------------------------------------------------------------------
First Second Third Fourth
------------------- -------------------- ------------------ --------------------
Receivables acquired $ 404,494 $ 361,891 $ 321,856 $ 368,712
Gain on Sales of Receivables $ 6,248 $ 5,717 $ 10,679 $ 8,406
Less:Other than temporary impairment (3,542) (1,630) (4,293) (2,452)
--------------- -------------------- ------------------ --------------------
Gain on Sales of Receivables, net $ 2,706 $ 4,087 $ 6,386 $ 5,954
=============== ==================== ================== ====================
Servicing portfolio at end of period $2,220,657 $2,344,621 $2,416,724 $2,519,070
-----------------------------------------------------------------------------------------------------------------------------
Selected Securitization Data: 1998-C 1998-D 1999-A 1999-B
Original amount $ 351,379 $ 275,914 $ 320,545 $ 340,233
Weighted avg. receivable rate 12.81% 12.74% 12.99% 13.36%
Weighted average remaining maturity (months) 68.8 69.1 71.5 71.7
Weighted average certificate rate 5.55% 5.85% 5.80% 5.51%
Gross spread (1) 7.26% 6.89% 7.19% 7.85%
Net spread (2) 5.15% 5.25% 6.16% 6.75%
Cumulative credit loss assumption 4.40% 4.40% 4.50% 4.50%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Difference between weighted average receivable rate and weighted average
certificate rate.
(2) Gross spread, net of upfront costs, servicing fees, ongoing credit
enhancement fees, trustee fees and the hedging gains or losses.
Acquisition Volume. The Company currently acquires receivables in 39
states from approximately 5,000 manufacturer-franchised auto dealerships. The
Company acquires receivables on automobiles made to customers who exhibit a
favorable credit profile ("Tier I"). The Company previously offered a second
level of receivable quality for customers with adequate credit quality but who
would not qualify for a receivable under the Company's Tier I quality criteria
("Tier II"). To focus on the higher credit quality and more profitable Tier I
receivables, the Company ceased acquiring Tier II receivables in January 1999.
During fiscal 2000, the Company extended operations into several of the
northeastern states.
The Company's total receivable acquisitions decreased .1% to $1.4
billion for the year ended June 30, 2000, from $1.5 billion in fiscal 1999. The
decrease is due to the lower than expected volume in the first and second
quarters of fiscal 2000 as the result of pricing pressures related to increasing
interest rates.
The Company's servicing portfolio increased 14.4% to approximately $2.9
billion at June 30, 2000, compared to approximately $2.5 billion at June 30,
1999. Total serviced receivables increased as a result of receivable acquisition
volume in excess of receivable repayments and gross charge-offs. The volume of
receivables sold in Securitizations increased to $1.5 billion for the year ended
June 30, 2000, from $1.3 billion for the prior year. The increased volume of
receivables securitized is primarily the result of an additional month of
receivable acquisitions included in the fourth quarter of fiscal 2000
Securitization. This fourth quarter Securitization included the receivables
acquisitions for the months of February, March, April and May 2000. 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
During fiscal 2000, the Company experienced the lowest annual credit
loss ratio since the year ended June 30, 1996. Recoveries as a percentage of
gross charge-offs, on the Tier I portfolio, for the year ended June 30, 2000,
improved slightly over the year ended June 30, 1999. This percentage, however,
remains below management's expectations, and the Company continues to look for
ways to improve. The Company's new car franchised dealership in Indianapolis
retails a portion of its repossessed autos. This method of repossession disposal
along with stricter monitoring of the repossession and resale process should
continue to increase the recovery percentage to within management's
expectations. The net recovery rate recognized by the dealership during fiscal
2000 averaged 53.2%. The net recovery rate utilized by the dealership is
computed on a car by car basis which is a different basis than the net recovery
rate utilized to measure the Company's net credit losses discussed below.
Approximately 20% of repossessed autos were transferred to the dealership during
fiscal 2000. See "Discussion of Forward-Looking Statements".
The credit loss assumptions used in fiscal 2000 were higher than those
used on the Securitizations in fiscal 1999. The credit loss assumptions used in
the fiscal 2000 Securitizations ranged from 4.50% to 4.75% compared to 4.40% to
4.50% used in the fiscal 1999 Securitizations. The allowance for estimated
credit losses on securitized receivables (inherent in Retained Interest) was
4.45% at June 30, 2000, compared to 4.63% at June 30, 1999. The Company recorded
a pre-tax charge of $5.3 million and $11.9 million during the years ended June
30, 2000 and 1999, respectively, on those pools which were deemed to have other
than temporary impairment primarily due to the increase in the initial estimated
credit loss assumptions.
Tier I Portfolio. Set forth below is certain information concerning the
delinquency experience 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 the
receivables will be comparable to that set forth below. See "Discussion of
Forward-Looking Statements."
<TABLE>
<CAPTION>
Tier I Delinquency Experience
At June 30,
2000 1999
----------------------------------- -----------------------------------
(Dollars in thousands)
Number of Number of
Receivables Amount Receivables Amount
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Servicing portfolio 235,732 $2,848,150 213,746 $2,464,371
Delinquencies
30-59 days 4,204 45,442 3,962 41,475
60-89 days 2,176 25,250 1,614 16,654
90 days or more 886 9,710 670 6,754
----- ---------- ----- ----------
Total delinquencies 7,266 $ 80,402 6,246 $ 64,883
===== ========== ===== ==========
Total delinquencies
as a % of servicing portfolio 3.08% 2.82% 2.92% 2.63%
</TABLE>
As indicated in the above table, delinquency rates based upon
outstanding receivable balances of accounts 30 days past due and over increased
to 2.82% at June 30, 2000, from 2.63% at June 30, 1999, for the Tier I
portfolio. Although the delinquency rate at June 30, 2000 increased slightly
compared to the rate at June 30, 1999, these two fiscal years are the lowest
delinquency rates since June 30, 1996. The steady improvement is a direct result
of the Company's continued focus on refining its collection practices and
consistent application of conservative underwriting guidelines.
Tier II portfolio delinquency was 11.26% based on outstanding
receivable balances of accounts 30 days past due and over at June 30, 2000,
compared to 9.42% at June 30, 1999. Credit losses during fiscal 2000 totaled
$3.6 million, or 8.62% as a percentage of the average Tier II servicing
portfolio, compared to $4.5 million, or 7.04%, in fiscal 1999 and $5.3 million
or 7.67% in fiscal 1998. Tier II delinquency as a percentage of the Tier II
servicing portfolio may increase in the future, while not actually deteriorating
since the overall Tier II servicing portfolio is decreasing. This is the result
of a declining Tier II servicing portfolio since the Company determined to
discontinue Tier II receivable acquisitions effective January 1, 1999. See
"Discussion of Forward-Looking Statements."
<PAGE>
<TABLE>
<CAPTION>
Tier I Credit Loss Experience
For the Years Ended June 30,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------ ---------------------------- ----------------------------
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average servicing
portfolio 221,948 $2,610,803 202,187 $2,269,177 179,822 $1,922,977
Gross charge-offs 7,890 95,815 7,752 82,436 7,909 87,325
Recoveries 38,863 32,525 33,545
-------------- ------------- --------------
Net credit losses $ 56,952 $ 49,911 $ 53,780
============== ============= ==============
Gross charge-offs
as a % of average
servicing portfolio 3.55% 3.67% 3.83% 3.63% 4.40% 4.54%
Recoveries as a %
of gross charge-offs 40.56% 39.45% 38.41%
Net credit losses as a %
of average servicing
portfolio 2.18% 2.20% 2.80%
</TABLE>
<PAGE>
Results of Operations
Years Ended June 30, 2000 and 1999
Net earnings are summarized in the table below. Net earnings increased
18.7% for the year ended June 30, 2000, compared to the year ended June 30,
1999. The increase over the prior year is primarily due to an increase in net
interest margin after provision for estimated credit losses.
Fiscal Year
Ended June 30,
2000 1999
------------ ------------
(Dollars in thousands, except per
share amounts)
Net Earnings $ 17,005 $ 14,324
Net Earnings Per Share
(basic and diluted) $ 1.28 $ 1.08
Net interest margin after provision for estimated credit losses
increased 51.1% to $29.8 million for the year ended June 30, 2000, compared to
$19.7 million for fiscal 1999. The increase in the net interest margin after
provision for estimated credit losses as compared to the prior year is primarily
the result of increases in interest on receivables held for sale and retained
interest and other interest income.
Interest on receivables held for sale increased 13.5% to $37.5 million
for the year ended June 30, 2000, compared to $33.0 million for the year ended
June 30, 1999. The increase in interest on receivables held for sale resulted
from an increase in the average outstanding balance of receivables held for sale
to $265.9 million for the year ended June 30, 2000, from $236.3 million for
fiscal 1999 and an increase in interest rates. The higher average outstanding
balance of receivables held for sale is primarily the result of the delay in the
timing of the fourth quarter 2000 Securitization.
Retained interest and other interest income increased 22.0% to $25.0
million for the year ended June 30, 2000, compared to $20.5 million for the year
ended June 30, 1999. The discount component of Retained Interest increased at
June 30, 1999 by increasing the discount rate used to record the gain on sale of
receivables during the fourth quarter of fiscal 1999. The resulting effect
during the current period was an increase in the amount of the discount accreted
into income. The individual components of Retained interest and other interest
income are shown in the following table.
Fiscal Year
Ended June 30,
2000 1999
----------------------- -----------------
(In thousands)
Discount accretion $ 23,789 $ 18,700
Other interest income 1,174 1,763
---------- ----------
$ 24,963 $ 20,463
Interest expense increased 6.3% to $29.7 million for the year ended
June 30, 2000, from $27.9 million for the year ended June 30, 1999. The increase
primarily related to higher borrowing needs resulting from the higher average
balance of receivables held for sale for the year ended June 30, 2000 compared
to 1999 and an increase in interest rates but was offset by lower interest on
long-term debt as a result of a principal payment of $22 million in August 1999.
Interest expense related to long-term debt was $16.1 million and $17.8 million
for the years ended June 30, 2000 and 1999, respectively. The average
outstanding warehouse borrowings (excluding the prefunded amount) was $195.2
million for the year ended June 30, 2000, compared to $170.4 million for the
year ended June 30, 1999. The average cost of funds on the combined long-term
debt and warehouse borrowings (excluding the prefunded amount), net of income
earned, increased to 7.97% for the year ended June 30, 2000, from 7.39% for the
year ended June 30, 1999. The weighted average cost of funds on the Warehouse
Credit Facilities, including the prefunded amount, net of income earned, was
5.77% and 5.09% for the years ended June 30, 2000 and 1999, respectively.
Interest rates on the Credit Facilities are variable in nature and are affected
by changes in market rates of interest.
Provision for estimated credit losses decreased to $3.0 million for the
year ended June 30, 2000, compared to $5.9 million for the year ended June 30,
1999. The decrease is primarily related to improvement in the quality of the
held for sale portfolio.
Gain on sales of receivables, net decreased 11.8% for the year ended
June 30, 2000. The gain on sales of receivables is a significant element of the
Company's net earnings. The gain 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. The components of
the gain on sales of receivable, net are:
Fiscal Year
Ended June 30,
--------------------------
2000 1999
------------ -----------
(In thousands)
Gain on sales of receivables $ 22,167 $ 31,050
Other than temporary impairments
(5,284) (11,917)
------------ -----------
Gain on sales of receivables, net $ 16,883 $ 19,133
============ ===========
The receivables sold in the Securitizations were $1.5 billion for the
year ended June 30, 2000, compared to $1.3 billion for the year ended June 30,
1999. The decrease in the securitization transaction gains primarily relates to
a lower weighted average net spread for fiscal 2000 gain on sales compared to
the gain on sales recorded in the prior fiscal year. Also contributing to lower
transaction gains was the increase in the discount rate assumption for the
fiscal year 2000 Securitizations. The discount rate was increased beginning with
the fourth quarter 1999 Securitization. The amount of receivables sold in the
Securitization for the quarter ended June 30, 2000 was higher than the other
quarters primarily because it included receivable acquisitions for the months of
February, March, April and May 2000. In general, the Securitizations include
three months of receivable acquisitions. Selected information regarding the
Securitizations for the fiscal years 2000 and 1999 is summarized in the
following table:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 2000 Securitizations 1999 - C 1999 - D 2000 - A 2000 - B
Credit loss assumption 4.50% 4.50% 4.50% 4.75%
Annual prepayment speed assumption 28.00% 28.00% 28.00% 28.00%
Discount rate assumption 14.66% 14.81% 15.61% 15.57%
Weighted average remaining maturity (in months) 71.1 69.9 68.9 71.6
Fiscal 1999 Securitizations 1998 - C 1998 - D 1999 - A 1999 - B
Credit loss assumption 4.40% 4.40% 4.50% 4.50%
Annual prepayment speed assumption 25.00% 25.00% 28.00% 28.00%
Discount rate assumption 9.58% 9.76% 9.84% 14.28%
Weighted average remaining maturity (in months) 68.8 69.1 71.5 71.7
</TABLE>
Gross and net spreads. Market interest rates were higher in fiscal 2000
as compared to fiscal 1999. Gross spread is defined as the difference between
the weighted average receivable rate and the weighted average certificate rate.
Net spread is defined as gross spread less upfront costs, servicing fees,
ongoing credit enhancement fees, trustee fees and hedging gains or losses. The
weighted average net spreads were 5.46% and 5.85% for the years ended June 30,
2000 and 1999 respectively.
Management is currently targeting net spreads of approximately 5.00% on
Securitizations (assuming a pricing spread for Asset-backed Securities over the
two-year treasury note of 100 basis points). This target is based on historical
credit quality. However, management believes that the net spread in the first
quarter of 2001 Securitization may be closer to 4.50% based on the current
upward trend of average credit scores. Management believes that by targeting a
gross spread of 7.00% to 7.50% between receivable rates and the two-year
treasury rate, these net spreads can be achieved. Although management believes
these net 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."
Servicing fees include the contractual fee, typically one percent of
receivables serviced, earned from each trust. Servicing fees increased 13.3% to
$24.6 million for the year ended June 30, 2000, compared to $21.7 million for
the year ended June 30, 1999 as a result of a higher average securitized
receivable portfolio. The average securitized receivable portfolio increased
13.9% to $2.4 billion for the year ended June 30, 2000, from $2.1 billion for
the year ended June 30, 1999.
Late charges and other fees increased 18.5% to $6.3 million for the
year ended June 30, 2000, from $5.3 million for the year ended June 30, 1999.
Other fees consist primarily of late charges, gross profit from the dealership
sales and other fee income. The increase in the current year resulted primarily
from increased late charges. The increase in late charges is due to the increase
in the servicing portfolio over fiscal 1999.
Salaries and benefits expense increased 22.7% to $28.9 million for the
year ended June 30, 2000, from $23.6 million for the year ended June 30, 1999.
This increase is primarily the result of an increase in full-time equivalent
("FTE") employees and annual merit increases for the Company's existing
employees. Average FTE's for the year ended June 30, 2000, were 585 compared to
528 for the year ended June 30, 1999. The Company has experienced growth
primarily in originations, collections and support staff.
Other general and administrative expense includes occupancy and
equipment costs, outside and professional services, receivable expenses,
promotional expenses, travel, office supplies and other. Other general and
administrative expense increased 10.4% to $21.0 million for the year ended June
30, 2000, from $19.0 million for the year ended June 30, 1999. The increase in
other general and administrative expenses is partially attributed to increased
promotional expenses for the dealership and new dealer incentive programs. The
Company also experienced higher expenses related to outside services and
professional fees during fiscal 2000 compared to fiscal 1999.
Years Ended June 30, 1999 and 1998
Net earnings (loss) increased to $14.3 million, or $1.08 per share
(basic and diluted), for the year ended June 30, 1999, compared to ($9.8)
million, or ($.74) per share (basic and diluted), for the year ended June 30,
1998. The increase in net earnings is primarily a result of higher gains
recognized on the fiscal 1999 securitization transactions of $31.0 million
pre-tax ($19.2 million net of tax) compared to the fiscal 1998 securitization
transactions of $19.6 million pre-tax ($12.0 million net of tax). Gains on the
Securitizations were offset by charges taken for pool by pool other than
temporary impairments of Retained Interest of $11.9 million pre-tax ($7.4
million net of tax) and $23.6 million pre-tax ($14.2 million net of tax) for the
years ended June 30, 1999 and 1998, respectively.
Net interest margin after provision for estimated credit losses
increased 196.8% to $19.7 million for the year ended June 30, 1999, compared to
$6.6 million for fiscal 1998. The increase in the net interest margin after
provision for estimated credit losses as compared to fiscal 1998 is primarily a
result of an increase in retained interest and other interest income.
Interest on receivables held for sale increased 18.5% to $33.0 million
for the year ended June 30, 1999, compared to $27.9 million for year ended June
30, 1998. The increase in interest on receivables held for sale resulted from an
increase in the average outstanding balance of receivables held for sale to
$236.3 million for the year ended June 30, 1999, from $206.2 million for fiscal
1998, which was a result of increased receivable acquisitions. Interest earned
on the Tier II portfolio was approximately $795,000 for fiscal 1999 compared to
approximately $5.2 million in fiscal 1998.
Retained interest and other interest income increased 54.8% to $20.5
million for the year ended June 30, 1999, compared to $12.9 million for the year
ended June 30, 1998. The increase in retained interest and other interest income
relates primarily to the implementation of the "cash out" method of valuing
Retained Interest at June 30, 1998, which increased the initial discount
recorded from the sale of receivables resulting in a subsequent increase in
discount accretion, but was offset by lower collection and spread account
interest. Retained interest and other interest income related to discount
accretion was $18.7 million and $7.3 million for the years ended June 30, 1999
and 1998, respectively. Retained interest and other interest income related to
restricted cash accounts (collection and spread accounts) was $1.3 million for
the year ended June 30, 1999, compared to $5.6 million for the year ended June
30, 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 servicer. 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.
Interest expense increased 5.2% to $27.9 million for the year ended
June 30, 1999, from $26.1 million for the year ended June 30, 1998. The increase
primarily related to higher average borrowing needs due to higher receivable
acquisitions for the year ended June 30, 1999 compared to 1998, but was offset
by lower interest on long-term debt as a result of a principal payment in August
1998. Interest expense related to long-term debt was $17.8 million and $19.5
million for the years ended June 30, 1999 and 1998, respectively. The average
outstanding warehouse borrowings (excluding the prefunded amount) was $170.4
million for the year ended June 30, 1999, compared to $111.2 million for the
year ended June 30, 1998. The average cost of funds on the combined long-term
debt and warehouse borrowings (excluding the prefunded amount), net of income
earned, decreased to 7.39% for the year ended June 30, 1999, from 7.86% for the
year ended June 30, 1998. The weighted average cost of funds on the Warehouse
Credit Facility, including the prefunded amount, net of income earned, was 5.09%
and 5.88% for the years ended June 30, 1999 and 1998, respectively. Interest
rates on the Credit Facility are variable in nature and are affected by changes
in market rates of interest.
Provision for estimated credit losses decreased to $5.9 million for the
year ended June 30, 1999, compared to $8.1 million for the year ended June 30,
1998. The decrease is primarily related to improvement in the quality of the
held for sale portfolio and a decrease in the amount of modified receivables.
Gain (Loss) on Sales of Receivables, net and interest rate risk. During
the fourth quarter of fiscal 1999, the Company refined its methodology of
determining discount rates used to calculate the gain on sales of receivables
and value Retained Interest. See - "Financial Condition - Retained Interest in
Securitized Assets below". This change had the effect of reducing gain on sale
of receivables by $3.1 million, pretax ($1.9 million net of taxes) or $0.15 per
share (basic and diluted). Gain on sales of receivables totaled $19.1 million
for the year ended June 30, 1999, compared to a loss of $11.9 million for the
year ended June 30, 1998. The increase in Gain (Loss) on Sales of Receivables is
primarily a result of higher gains recognized on fiscal 1999 securitization
transactions compared to fiscal 1998. The gain for the year ended June 30, 1999
and 1998, consisted of gains on new securitization transactions of $31.0 million
and $19.6 million, offset by charges for other than temporary impairments of
Retained Interest of $11.9 million and $23.6 million, respectively. The net gain
for the year ended June 30, 1999, was also higher than the year ended June 30,
1998 due to a $7.9 million charge in fiscal 1998 related to the implementation
of the "cash out" method of valuing Retained Interest. The increase in the Gain
(Loss) on Sales of Receivables is also attributed to a 35.9% increase in the
volume of receivables securitized to $1.3 billion for fiscal 1999 compared to
$948.1 million for fiscal 1998. Additionally, the weighted average net spread
increased to 5.85% for the year ended June 30, 1999, compared to 5.28% for the
year ended June 30, 1998. The weighted average net spread included four Tier I
Securitizations for the year ended June 30, 1999, and four Tier I and one Tier
II securitizations for the year ended June 30, 1998. As indicated below, credit
loss assumptions on the fiscal 1999 securitization transactions were 4.40% on
1998-C and 1998-D and 4.50% on 1999-A and 1999-B compared to 4.00% on the Tier I
transactions throughout fiscal 1998. The credit loss assumptions on the fiscal
1999 Securitizations were based on combined Securitizations of Tier I, Tier II
and modified receivables. The allowance for credit losses was 12.00% for the
Tier II fiscal 1998 Securitization. Indicated in the table below are the
assumptions related to the Tier I quarterly Securitizations for fiscal 1999 and
1998:
<TABLE>
<CAPTION>
Fiscal 1999 Securitizations 1998 - C 1998 - D 1999 - A 1999 - B
<S> <C> <C> <C> <C>
Credit loss assumption 4.40% 4.40% 4.50% 4.50%
Annual prepayment speed assumption 25.00% 25.00% 28.00% 28.00%
Discount rate assumption 9.58% 9.76% 9.84% 14.28%
Weighted average remaining maturity (in months) 68.8 69.1 71.5 71.7
Fiscal 1998 Securitizations 1997 - C 1997 - D 1998 - A 1998 - B
Credit loss assumption 4.00% 4.00% 4.00% 4.00%
Annual prepayment speed assumption 28.46% 28.60% 28.04% 25.00%
Discount rate assumption 10.96% 10.67% 10.61% 10.46%
Weighted average remaining maturity (in months) 70.7 67.1 70.8 67.5
</TABLE>
Gross and net spreads. Market interest rates were lower in fiscal 1999
as compared to the corresponding periods of fiscal 1998. Gross spread is defined
as the difference between the weighted average receivable rate and the weighted
average 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. Net spreads increased steadily over the year and
reached record amounts in the third and fourth quarter Securitizations of 6.16%
and 6.75%, respectively.
Servicing fees include the contractual fee, typically one percent of
receivables serviced, earned from each trust. Servicing fees increased 13.9% to
$21.7 million for the year ended June 30, 1999, compared to $19.1 million for
the year ended June 30, 1998 as a result of a higher average securitized
receivable portfolio. The average securitized receivable portfolio increased
16.9% to $2.1 billion for the year ended June 30, 1999, from $1.8 billion for
the year ended June 30, 1998.
Late charges and other fees increased 30.9% to $5.3 million for the
year ended June 30, 1999, from $4.1 million for the year ended June 30, 1998.
Other fees consist primarily of late charges, other fee income and the gross
profit from the dealership sales. The increase in fiscal 1999 resulted primarily
from the dealership gross profit on sales of $751,000 for fiscal 1999.
Additionally, late charges and other fee income increased for the year ended
June 30, 1999, compared to 1998. The increase in late charges and other fee
income is due to the increase in receivable acquisitions and servicing portfolio
over fiscal 1998.
Salaries and benefits expense increased 21.3% to $23.6 million for the
year ended June 30, 1999, from $19.4 million for the year ended June 30, 1998.
This increase resulted primarily from an increase in full-time equivalent
("FTE") employees. Average FTE's for the year ended June 30, 1999, were 528
compared to 466 for the year ended June 30, 1998. The Company has experienced
growth primarily in accounting, operations and retail operations, and the
Company has experienced a decrease in the number of collection employees. The
increase in the operations area is in response to a growing servicing portfolio.
The increase in retail operations is a result of growing the new car franchised
dealership business that was opened in July 1998. The decrease in the
collections area resulted from improved collection strategies and internal
efficiencies. Other increases in salary and benefit expense were due to annual
merit increases for the Company's existing employees and performance based
annual incentive bonuses.
Other general and administrative expense includes occupancy and
equipment costs, outside and professional services, receivable expenses,
promotional expenses, travel, office supplies and other. Other general and
administrative expense increased 18.0% to $19.0 million for the year ended June
30, 1999, from $16.1 million for the year ended June 30, 1998. The increase in
other general and administrative expenses is partially attributed to the opening
of the new car franchised dealership. Additionally, receivable expenses
increased as receivable acquisitions were higher in fiscal 1999 compared to
fiscal 1998. Total operating expenses (including salaries and benefits) as a
percentage of the average servicing portfolio increased to 1.82% from 1.78% for
the year ended June 30, 1999 and 1998, respectively.
Financial Condition
Receivables held for sale, net and servicing portfolio. Receivables
held for sale, net includes:
o the principal balance of receivables held for sale, net of unearned
discount
o allowance for estimated credit losses
o receivables in process
o Dealer Premiums
The principal balance for receivables held for sale is lower at June
30, 2000 than at June 30, 1999 primarily because of the timing of the
Securitization in the fourth quarter of fiscal 2000 compared to the fourth
quarter of fiscal 1999. Selected information regarding the receivables held for
sale, net and servicing portfolio at June 30, 2000 and 1999 is summarized in the
following table.
June 30,
2000 1999
-------------- --------------
(In thousands)
Receivables held for sale, net $206,701 $267,316
Allowance for credit losses $(2,978) $(2,754)
Securitized assets serviced $ 2,676,655 $ 2,256,415
Total servicing portfolio $ 2,881,115 $ 2,519,070
Retained interest in securitized assets ("Retained Interest"). Retained
Interest increased $17.4 million to $208.4 million at June 30, 2000, from $191.0
million at June 30, 1999. The Company's collections are the receipt of the net
interest spread, including dealer rebates. Some of the receipts related to the
net interest spread may remain in the spread account. The following table
illustrates, in thousands, the components of the increase in Retained Interest:
Balance at June 30, 1999 $191,029
Amounts capitalized (including estimated dealer rebates) 69,266
Collections (87,529)
Accretion of discount 23,594
Change in accelerated principal 23,197
Change in spread accounts (11,258)
Other than temporary impairment (5,284)
Net change in unrealized gain 5,416
-------------
Balance at June 30, 2000 $208,431
=============
Allowance for net credit losses on securitized receivables is included
as a component of Retained Interest. At June 30, 2000, the allowance relating to
both Tier I and Tier II securitized receivables totaled $119.0 million, or 4.45%
of the total securitized receivable portfolio, compared to $104.4 million, or
4.63%, at June 30, 1999. The Company's assumptions for valuing Retained Interest
at June 30, 2000, include the Company's latest estimates for net credit losses
of 4.00% to 6.24% on Tier I receivables and 12.00% to 16.32% on Tier II
receivables as a percentage of original principal balance over the life of
receivables, annual prepayment estimates ranging from 22.11% to 28.00% on Tier I
receivables and 4.23% to 21.06% on Tier II receivables, and discount rates
ranging from 9.11% to 15.38% on Tier I receivables and 11.16% to 14.18% on Tier
II receivables. The weighted average discount rate used to value Retained
Interest at June 30, 2000 was 13.78% compared to 12.83% at June 30, 1999.
Impairment of Retained Interest, an available-for-sale security, is measured on
a disaggregate (pool by pool) basis in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. See - "Discussion of Forward-Looking Statements" and "Impact
of Current Accounting Prouncements."
Amounts due under revolving warehouse credit facility were $152.2
million at June 30, 2000, compared to $185.5 million at June 30, 1999. The
decrease is primarily the result of the timing of the 2000-B Securitization in
June 2000 compared to the 1999-B Securitization in May 1999 but was partially
offset by increased receivable acquisitions in the month of June 2000 compared
to June 1999.
Long-term debt was $177.0 million at June 30, 2000, compared to $199.0
million at June 30, 1999. The decrease in long-term debt was a result of a
required principal payment on the Company's Senior Notes in August 1999 of $22.0
million.
Current and deferred income taxes payable. The current and deferred
income taxes payable totaled $9.7 million at June 30, 2000, compared to $16.0
million at June 30, 1999. The decrease is primarily the result of tax payments
made during the year, which are partially offset by an increase in the tax
liability associated with current year earnings.
<PAGE>
Liquidity and Capital Resources
Sources and uses of cash in operations. The Company's business requires
significant amounts of cash. Its primary uses of cash include:
o acquisition and financing of receivables
o payment of Dealer Premiums
o securitization costs including cash held in Spread Accounts and similar
cash collateral accounts under the Credit Facilities
o servicer advances of payments on securitized receivables pursuant to
securitization trust agreements
o 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
o operating expenses
o payment of income taxes
o principal payments on long-term debt
o interest expense
o capital expenditures
The Company's sources of cash include:
o standard servicing fees; generally 1.00% per annum of the securitized
portfolio;
o receipt of Future Servicing Cash Flows
o Dealer Premium rebates
o 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
o interest income
o sales of receivables in securitization transactions
o proceeds from sale of interest-only strips in conjunction with
securitization transactions
Operating Activities. Net cash used in operating activities decreased
to $10.0 million for the year ended June 30, 2000, from net cash used in
operating activities of $221.0 million for the year ended June 30, 1999. The
decrease was primarily attributable to an increase in receivables securitized
relative to receivables acquired.
Investing activities. Net cash provided by investing activities was
$72.7 million and $63.2 million for the years ended June 30, 2000 and 1999,
respectively. The increase over the prior year relates to higher collection on
Retained Interest due to lower net credit losses.
Financing activities. Net cash used in financing activities for fiscal
2000 was $56.1 million compared to net cash provided by financing activities of
$90.3 million in the prior year. The change was primarily a result of decreased
warehouse borrowings at June 30, 2000, relative to the balance at June 30, 1999.
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,
securitization transactions and external financing including long-term debt and
Credit Facilities. Historically, the Company has used the securitization of
receivable pools as its primary source of long-term funding. In August 1999, the
Company established an additional source of liquidity through a Securitization
arrangement with a commercial paper conduit which should be available for future
use as management deems appropriate, subject to the agreement of the conduit
participants to increase available funding. At June 30, 2000 such facility had a
capacity of $375.0 million, all of which was available. During August 2000, the
capacity for this facility was increased to $500.0 million. In September 2000,
the Company sold $500 million of receivables into this facility, in lieu of a
public Securitization. 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 securitization
transaction with the actual cash flows from the securitized assets. Between
securitization transactions, the Company relies primarily on the Credit
Facilities 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 transaction 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 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 Credit Facilities. The Company
consistently assesses its long-term receivable funding arrangements with a view
to optimizing cash flows and reducing costs.
Derivative financial instruments. Derivative financial instrument
transactions may represent a source or a use of cash during a given period
depending on changes in interest rates. During fiscal 2000, derivative financial
instrument transactions have provided cash of $5.3 million compared to $3.2
million used during fiscal 1999.
Warehouse facilities. At June 30, 2000 the Company had two Credit
Facility borrowing arrangements with an independent financial institution for a
total of $550.0 million The $350.0 million Credit Facility is insured by a
surety bond provider to fund receivable acquisitions while the $200.0 million
Credit Facility is not insured. The Credit Facilities provides funding for
receivable acquisitions at a purchase price of up to 100% of the outstanding
principal balance of eligible receivables at the time of purchase, and the
advance rate may be adjusted based on an actual net yield percentage that is
measured monthly on all receivables in the Warehouses. At June 30, 2000 and
1999, $152.2 million and $185.5 million was utilized, and an additional $47.1
million and $67.2 million was available to borrow based on the outstanding
principal balance of eligible receivables, respectively. During August 2000, an
additional Credit Facility with another independent financial institution was
added bringing the total borrowing capacity to $750.0 million.
The Credit Facilities generally have a term of one year. Selected
summary information about the Credit Facilities is shown below:
Credit Facility Outstanding Expiration
Capacity at June 30, 2000 Date
-------- ---------------- ---------------
(in millions)
$350 $152.2 September 2000
$200 None March 2001
$200 N/A August 2001
The $350 million Credit Facility was renewed on September 7, 2000 and
expires in September 2001.
Working capital line. In June 2000, the Company established a working
capital line of credit for $15.0 million. This line of credit is unsecured and
is available to fund short-term cash flow needs of the Company. The facility has
a one year term, and the entire amount was available for use at June 30, 2000.
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 of $22
million began on August 1, 1998 and are due on August 1. 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.
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 Credit Facilities and working capital
line 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 Statements
This report contains forward-looking statements made by the Company
regarding its results of operations, cash flow needs and liquidity, receivable
origination volume, target spreads, changes in competitive environment , market
expansion and other aspects of its business. Similar forward-looking statements
may be made by the Company , orally, or in writing, 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 receivables 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 receivable 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
asset-backed securities 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 Credit 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 operations may be adversely affected, 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.
Receivable acquisition volume, spread and growth. Many factors affect
the Company's receivable 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 customers' applications to the Company, as well
as the number of qualified customers whose credit is approved and whose
receivables are ultimately acquired by the Company. Competition can impact
significantly both acquisition volume and the interest rate at which receivables
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 receivable.
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 geographic 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 for short-term 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. The Company uses a hedging strategy that primarily consists
of forward interest rate swaps having a maturity approximating the average
maturity of the acquisition volume during the relevant period. At such time as a
Securitization is committed, the interest rate swaps are terminated. Prior to
March 1999, as a part of the hedging strategy, the Company used a hedging
vehicle that included the execution of short sales of U.S. Treasury Notes having
a maturity approximating the average maturity of the receivable acquisition
volume during the relevant period. In addition, the commercial paper conduit
pursuant to which the Company Securitized $500.0 million in receivables in
September 2000, may from time to time in the future, provide for issuance of a
note bearing interest at a floating rate with the resulting interest rate risk
covered by a related interest rate swap arrangement. 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 should substantially offset changes in interest
rates as seen by reporting a lower or higher 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. Effective July 1, 2000, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 133 "Accounting for
Derivatives Instruments and Hedging Activities" ("SFAS No. 133"). The impact on
the accounting for the Company hedging transactions is described below in the
"Impact of Current Accounting Pronouncements" section.
Receivable 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 customers' 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 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 net credit losses and prepayments. The carrying value of Retained
Interest 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 receivables substantially exceed the estimated levels. In
addition, declines in demand for used cars in the economy generally can
adversely affect the amounts the Company is able to recover upon liquidation of
repossessed vehicles securing defaulted receivables.
Regulation. The Company's business is subject to numerous federal and
state consumer protection laws and regulations which, among other things:
o require the Company to obtain and maintain certain licenses and
qualifications;
o limit the interest rates, fees and other charges the Company is allowed
to charge;
o limit or prescribe certain other terms of the Company's contracts;
o require specified disclosures; and
o define the Company's rights to repossess and sell collateral.
Such laws are complex and vary widely from state to state and the
Company could incur significant liability for even inadvertent violation of such
laws. 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.
Impact of Current Accounting Pronouncements
In June 1998, Financial Accounting Standards Board issued SFAS No. 133.
The Statement as amended, is effective July 1, 2000. On July 1, 2000, the
Company recorded a liability in "Other payables and accrued expenses" of
approximately $1.3 million and a net of tax charge of approximately $400,000 to
"Accumulated other comprehensive earnings" which was reported as a "Cumulated
effect of a change in accounting principle" in the consolidated statement of
shareholders' equity. The adoption of SFAS No. 133 did not have any impact on
the income statement on July 1, 2000.
In July 2000, the Emerging Issues Task Force ("EITF") finalized the
provisions of EITF Issue No. 99-20, "Recognition of Interest Income and
Impairment of Purchased and Retained Beneficial Interests in Securitized
Financial Assets", ("EITF 99-20"). EITF 99-20 sets forth rules for recognizing
interest income and determining when securities must be written down to fair
value because of other than temporary impairments. EITF 99-20 will require the
"prospective method" of adjusting the recognition of interest income when the
anticipated cash flows have either increased or decreased. Anticipated cash
flows can change as the result of factors such as prepayment rates and credit
losses. Under the provisions of EITF 99-20, an other than temporary impairment
must be recorded when the anticipated cash flows have decreased since the last
estimate and the fair value of the Retained Interest is less than the carrying
value.
The Company currently applies certain provisions of EITF Issue No.
93-18 "Recognition of Impairment for an Investment in a Collateralized Mortgage
Obligation Instrument or in a Mortgage-Backed Interest-Only Certificate" ("EITF
93-18") regarding impairment. EITF 99-20 will no longer allow for temporary
impairments which are based on fair values discounted at risk free rates.
The effective date for EITF 99-20 is January 1, 2001, with earlier
adoption permitted. In the event of a write-down, the write-down associated with
the implementation of EITF 99-20 will be reported as a "cumulative effect of a
change in accounting principle" and will be reported on a prospective basis. The
Company anticipates adopting the provision of EITF 99-20 as of January 1, 2001.
The Company has not evaluated the impact of this change.
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company's sources for short-term 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. The Company
uses a hedging strategy that primarily consists of forward interest rate swaps
having a maturity approximating the average maturity of the acquisition volume
during the relevant period. At such time as a Securitization is committed, the
interest rate swaps are terminated. The Company's hedging strategy is an
integral part of its practice of periodically securitizing receivables. Prior to
March 1999, as part of the hedging strategy, the Company used a hedging vehicle
that included the execution of short sales of U.S. Treasury Notes having a
maturity approximating the average maturity of the receivable acquisition volume
during the relevant period. In addition, the commercial paper conduit pursuant
to which the Company securitized $500 million in receivables in September 2000
may from time to time in the future, provide for issuance of a note bearing
interest at a floating rate with the resulting interest rate risk covered by a
related interest rate swap arrangement. 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 should substantially offset changes in interest rates as seen by
reporting a lower or higher 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. At June 30, 2000, the Company had an unrealized hedging loss on
forward interest rate swaps of $1.3 million based on notional amounts
outstanding of $426.5 million. The fair value of long-term debt increases or
decreases as market interest rates are reduced or increased, respectively.
Effective July 1, 2000, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133 "Accounting for Derivatives Instruments
and Hedging Activities" ("SFAS No. 133"). See "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition" and "Item 8.
Financial Statements and Supplementary Data - Notes 2 and 7."
The following table presents the principal cash repayments and related
weighted average interest rates by maturity date for warehouse current variable
rate and long-term fixed rate debt at June 30, 2000:
<TABLE>
<CAPTION>
2001 2002 2003 Total Fair Value
---- ---- ---- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Amounts due under warehouse facility $152,235 $ - $ - $152,235 $152,235
Weighted average variable rate 5.78% - - 5.78%
Long-term debt $22,000 $43,667 $111,333 $177,000 $167,046
Weighted average fixed rate 8.53% 8.14% 8.86% 7.69%
</TABLE>
Sensitivity analysis on Retained Interest
The Company bears the primary risk of loss due to credit losses in its
servicing portfolio. Credit loss rates are impacted by general economic factors
that affect customers' 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 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. The
Company does not believe fluctuations in interest rates materially affect the
rate of prepayments on receivables. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Item 8.
Financial Statements and Supplementary Data - Notes 1 and 5."
At June 30, 2000, key economic assumptions and the sensitivity of the
current fair value of Retained Interest to immediate 10% and 20% adverse changes
in assumed economics is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Amounts as of June 30, 2000 Tier I Tier II Total
--------------------------- ------ ------- -----
<S> <C> <C> <C>
Fair value of retained interest (1) $212,730,070 $3,426,990 $216,157,060
Prepayment speed assumption (annual rate) 22.11% - 28.00% 4.23% - 21.06%
Impact on fair value of 10% adverse change $206,310,601 $3,406,125 $209,716,726
Impact on fair value of 20% adverse change $200,239,324 $3,385,996 $203,625,320
Net loss rate assumption (pool life rate) 4.00% - 6.24% 12.00% - 16.32%
Impact on fair value of 10% adverse change $189,706,190 $2,562,992 $192,269,182
Impact on fair value of 20% adverse change $166,479,432 $1,717,534 $168,196,966
Discount rate assumption (annual rate) 9.11% - 15.38% 11.16% - 14.18%
Impact on fair value of 10% adverse change $207,225,384 $3,364,519 $210,589,903
Impact on fair value of 20% adverse change $201,995,290 $3,303,893 $205,299,183
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Retained Interest on the balance sheet is lower than the total fair value
included in this analysis. The difference primarily relates to the
inventory value of repossessed autos that have not been sold. This amount
is included in Retained Interest as part of the allowance for estimated
credit losses on securitized receivables but not included in the total fair
value.
These sensitivities are hypothetical and should be used with caution.
As the figures indicate, any change in fair value based on a 10% variation in
assumptions cannot be extrapolated because the relationship of the change in
fair value is not linear. Also, in this table, the effect of a variation in a
particular assumption on the fair value of the Retained Interest is calculated
independent from any change in another assumption; in reality, changes in one
factor may result in changes in another, which might magnify or counteract the
sensitivities. The forgoing is further presented based on the assumption that
any increase in the discount rate would cause a corresponding increase in the
interest rate earned on the spread and collection accounts. See - "Discussion of
Forward-Looking Statements".
<PAGE>
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Reports
Board of Directors
Union Acceptance Corporation
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of Union Acceptance
Corporation and Subsidiaries (the "Company") as of June 30, 2000 and 1999, and
the related consolidated statements of earnings, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Union Acceptance Corporation and
Subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
July 21, 2000
<PAGE>
The Board of Directors
Union Acceptance Corporation:
We have audited the accompanying consolidated statements of earnings (loss),
shareholders' equity, and cash flows of Union Acceptance Corporation and
Subsidiaries for the year ended June 30, 1998. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Union Acceptance Corporation and Subsidiaries for the year ended June 30, 1998
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Indianapolis, IN
August 27, 1998
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2000 1999
(Dollars in thousands, except share data)
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 14,792 $ 8,088
Restricted cash 13,010 12,215
Receivables held for sale, net 206,701 267,316
Retained interest in securitized assets 208,431 191,029
Accrued interest receivable 1,727 2,035
Property,equipment, and leasehold improvements, net 9,494 8,375
Other assets 23,983 25,868
------------- --------------
Total Assets $ 478,138 $ 514,926
============= ==============
Liabilities and Shareholders' Equity
Liabilities
Amounts due under warehouse facilities $ 152,235 $ 185,500
Long-term debt 177,000 199,000
Accrued interest payable 5,408 5,287
Amounts due to trusts 14,487 13,152
Dealer premiums payable 3,663 2,564
Current and deferred income taxes payable 9,740 16,022
Other payables and accrued expenses 5,576 3,922
------------- --------------
Total Liabilities 368,109 425,447
------------- --------------
Commitment and Contingencies (Note 11) - -
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; 5,816,024 and 5,099,344 shares
issued and outstanding at June 30, 2000 and
June 30, 1999, respectively 58,632 58,452
Class B Common Stock, without par value,
authorized 20,000,000 shares; 7,461,608 and 8,150,266 shares
issued and outstanding at June 30, 2000 and
June 30, 1999, respectively - -
Accumulated other comprehensive earnings, net of income taxes 3,564 199
Retained earnings 47,833 30,828
------------- --------------
Total Shareholders' Equity 110,029 89,479
------------- --------------
Total Liabilities and Shareholders' Equity $ 478,138 $ 514,926
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
FOR THE YEARS ENDED JUND 30, 2000 1999 1998
(Dollars in thousands, except share data)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on receivables held for sale $37,461 $33,015 27,871
Retained interest and other 24,963 20,463 13,993
----------- -------------- --------------
Total interest income 62,424 53,478 41,864
Interest expense 29,663 27,906 27,178
----------- -------------- --------------
Net interest margin 32,761 25,572 14,686
Provision for estimated credit losses 3,000 5,879 8,050
----------- -------------- --------------
Net interest margin after provision
for estimated credit losses 29,761 19,693 6,636
Gain (loss) on sales of receivables, net 16,883 19,133 (11,926)
Servicing fees 24,612 21,716 19,071
Late charges and other fees 6,337 5,349 4,087
----------- -------------- --------------
Other revenues 47,832 46,198 11,232
----------- -------------- --------------
Salaries and benefits 28,915 23,572 19,427
Other expenses 20,998 19,016 16,119
----------- -------------- --------------
Total operating expenses 49,913 42,588 35,546
----------- -------------- --------------
Earnings (loss) before provision (benefit)
for income taxes 27,680 23,303 (17,678)
Provision (benefit) for income taxes 10,675 8,979 (7,856)
----------- -------------- --------------
Net earnings (loss) $17,005 $14,324 (9,822)
=========== ============== ==============
Net earnings (loss) per common share (basic and diluted) $ 1.28 $ 1.08 $ (0.74)
=========== ============== ==============
Basic weighted average number of common shares
outstanding 13,267,493 13,241,593 13,226,651
Dilutive effect of common stock options 25,777 12,053 -
----------- -------------- --------------
Diluted weighted average number of common shares
outstanding 13,293,270 13,253,646 13,226,651
=========== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000 1999 1998
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings (loss) $ 17,005 $ 14,324 $ (9,822)
Adjustments to reconcile net earnings to net cash
from operating activities:
Acquisition of receivables held for sale, net of liquidations (1,429,726) (1,439,172) (953,252)
Dealer premiums paid, net on receivables held for sale (34,807) (51,122) (40,526)
Proceeds from securitization of receivables held for sale 1,484,500 1,288,071 948,114
Gain on sales of receivables (32,060) (48,622) (26,263)
Proceeds on sale of interest-only strip - 2,847 13,869
Impairment of retained interest in securitized assets 5,284 11,917 23,636
Accretion of discount on retained interest in securitized assets (23,594) (18,337) (7,269)
Provision for estimated credit losses 3,000 5,879 8,050
Amortization and depreciation 4,050 4,688 4,689
Restricted cash (794) 5,551 (1,111)
Other assets and accrued interest receivable 236 (1,983) (736)
Amounts due to trusts 1,335 (2,358) (557)
Other payables and accrued expenses (4,403) 7,276 (3,383)
------------- --------------- ---------------
Net cash used in operating activities (9,974) (221,041) (44,561)
------------- --------------- ---------------
Cash flows from investing activities:
Collections on retained interest in securitized assets
and changes in spread accounts 75,590 65,034 39,513
Capital expenditures (2,816) (1,794) (6,809)
------------- --------------- ---------------
Net cash provided by investing 72,774 63,240 32,704
activities
------------- --------------- ---------------
Cash flows from financing activites:
Principal payment on long-term debt (22,000) (22,000) -
Stock options excercised 93 2 -
Net change in warehouse credit facilities (33,265) 112,377 28,668
Payment of borrowing fees (924) (102) -
------------- --------------- ---------------
Net cash provided by (used in) financing activities (56,096) 90,277 28,668
------------- --------------- ---------------
Change in cash and cash equivalents 6,704 (67,524) 16,811
Cash and cash equivalents, beginning of period 8,088 75,612 58,801
------------- --------------- ---------------
Cash and cash equivalents, end of period $ 14,792 $ 8,088 $ 75,612
============= =============== ===============
Supplemental disclosures of cash flow information:
Income taxes paid $ 19,338 $ 2,661 $ 22
============= =============== ===============
Interest paid $ 28,545 $ 28,276 $ 24,332
============= =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Number of Common Stock Accumulated
Shares Outstanding Other Total
------------------------------- Common Comprehensive Retained Shareholders'
Class A Class B Stock Income Earnings Equity
-----------------------------------------------------------------------------------------------
Balance at July 1, 1997 4,016,788 9,200,000 $58,270 $ 2,252 $26,326 $86,848
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive loss:
Net loss - - - - (9,822) (9,822)
Net unrealized gain on retained
interest in securitized - - - 8,527 - 8,527
assets
Incomes taxes related to unrealized
gain in securitized assets - - - (3,170) - (3,170)
---------------
Total comprehensive loss (4,465)
Grants of common stock 14,694 - 90 - - 90
Conversion of Class B Common Stock
into Class A Common Stock 344,964 (344,964) - - - -
---------------- -------------------------- ---------------- ------------------------------
Balance at June 30, 1998 4,376,446 8,855,036 58,360 7,609 16,504 82,473
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings:
Net earnings - - - - 14,324 14,324
Net unrealized loss on retained
interest in securitized - - - (11,961) - (11,961)
assets
Incomes taxes related to unrealized
loss in securitized assets - - - 4,551 - 4,551
---------------
Total comprehensive earnings 6,914
Grants of common stock 17,778 - 90 - - 90
Stock options exercised 350 - 2 - - 2
Conversion of Class B Common Stock
into Class A Common Stock 704,770 (704,770) - - - -
---------------- -------------------------- ---------------- ------------------------------
Balance at June 30, 1999 5,099,344 8,150,266 58,452 199 30,828 89,479
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive earnings:
Net earnings - - - - 17,005 17,005
Net unrealized gain on retained
interest in securitized - - - 5,416 - 5,416
assets
Incomes taxes related to unrealized
gain in securitized assets - - - (2,051) - (2,051)
---------------
Total comprehensive earnings 20,370
Grants of common stock 10,550 - 75 - - 75
Stock options exercised 17,472 - 93 - - 93
Other - - 12 - - 12
Conversion of Class B Common Stock
into Class A Common Stock 688,658 (688,658) - - - -
---------------- -------------------------- ---------------- ------------------------------
Balance at June 30, 2000 5,816,024 7,461,608 $58,632 $ 3,564 $47,833 $110,029
================ ========================== ================ ==============================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 2000, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Union Acceptance Corporation ("UAC") and its
subsidiaries (collectively, the "Company") is an Indiana corporation engaged
primarily in the business of acquiring, securitizing, and servicing retail
automobile installment sales contracts originated by dealerships affiliated with
major domestic and foreign automobile manufacturers. The Company currently
acquires receivables from a network of approximately 5,000
manufacturer-franchised automobile dealerships in 39 states.
The Company's indirect auto program focuses on acquiring one level of receivable
quality. The Company acquires receivables from customers who exhibit a favorable
credit profile ("Tier I") purchasing late model used and, to a lesser extent,
new automobiles. The Company also acquired receivables from customers with
adequate credit quality who would not qualify for the Company's Tier I credit
quality criteria ("Tier II") until January 1, 1999 when the Company discontinued
the acquisition of Tier II receivables. Tier II receivable acquisitions
accounted for less than 1.0% of the receivable servicing portfolio during fiscal
1999, and 1.1% and 2.1% of the receivable servicing portfolio at June 30, 2000
and 1999, respectively.
Basis of Financial Statement Presentation - The consolidated financial
statements include the accounts of UAC and its wholly-owned subsidiaries:
o Circle City Car Company
o Performance Funding Corporation
o Performance Securitization Corporation
o UAC Boat Funding Corp.
o UAC Finance Corporation
o UAC Securitization Corporation
o UAFC Corporation (formerly known as Union Acceptance Funding
Corporation)
o UAFC-1 Corporation
o UAFC-2 Corporation
o Union Acceptance Funding Corporation
o Union Acceptance Receivables Corporation
All significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and with the general practices of those in the consumer finance industry. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate to
the valuation of Retained Interest in Securitized Assets, gain (loss) on sales
of receivables and the allowance for credit losses.
Cash and Cash Equivalents - The Company considers all investments with a
maturity of three months or less when purchased to be cash equivalents.
Restricted Cash - Restricted cash consists of funds held in reserve accounts in
compliance with the terms of the Credit Facilities' agreements and
securitization payahead accounts.
Receivables Held for Sale, Net - All receivables are held for sale and include
automobile, light-truck, van, and other receivables including Dealer Premiums.
Such receivables are packaged and sold through asset-backed securitization
transactions and are carried at their principal amount outstanding plus Dealer
Premiums (amortized cost) which approximates the lower of cost or market, net of
unearned discount and the allowance for credit losses. Interest on these
receivables 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 Company
accrues interest on receivables until the earlier of an account being
charged-off or becoming 120 days delinquent.
Receivables held for sale, net includes Dealer Premiums which are incentives
paid to dealers in connection with the acquisition of receivables. Dealer
Premiums are capitalized and included as basis in the receivables and are
charged to gain on sale of receivables, net at the time of sale. A portion of
the Dealer Premiums is refundable by the dealer to the Company in the event of
receivable prepayment or default.
Accrued Interest Receivable - Accrued interest receivable represents interest
earned but not collected on receivables held for sale.
Property, Equipment, and Leasehold Improvements, Net - Property, equipment, and
leasehold improvements are recorded at cost. Depreciation is determined
primarily on accelerated methods over the estimated useful lives of the
respective assets.
Retained Interest in Securitized Assets and Gain on Sale of Receivables - The
Company acquires receivables with the intention of reselling them through
securitizations. In the securitization transactions, the Company sells a
portfolio of receivables to a wholly owned special purpose subsidiary ("SPS")
which has been established for the limited purpose of buying and reselling the
Company's receivables. The SPS transfers the same receivables to a trust vehicle
(the "Trust"), which issues interest-bearing Asset-backed Securities. The
securities are generally sold to investors in the public market. The Company
provides credit enhancement for the benefit of the investors in various forms.
The Credit enhancements utilized in recent securitizations has been in the form
of a specific cash account ("Spread Account") held by the Trust and over
collateralization. The Spread Account is required by the applicable servicing
agreement to be maintained at specified levels and over collateralization.
At the closing of each Securitization, the Company allocates its basis in the
receivables between the portion of the receivables sold through the certificates
and the portion of the receivables retained from the Securitizations ("Retained
Interest" and "Servicing Assets") based on the relative fair values of those
portions at the date of the sale. The fair value is based upon the cash proceeds
received for the receivables sold and the estimated fair value of the Retained
Interest and if applicable, the Servicing Assets. Retained Interest consists of
the discounted estimated cash flows to be received by the Company. Servicing
Assets represent the present value benefit derived from retaining the right to
service receivables securitized in excess of adequate servicer compensation. The
excess of the cash received over the basis allocated to the receivables sold,
less transaction costs, and hedging gains and losses, equals the net gain on
sale of receivables recorded by the Company.
The Company receives base servicing fees for the servicing and collection of the
receivables. The Company is entitled to the residual cash flows from the trust
(Retained Interest) that represent collections on the receivables in excess of
the amounts required to pay the principal and interest on the securities issued
in the Securitization, the base servicing fees and certain other fees such as
credit enhancement fees. In general, at the end of each collection period, the
aggregate cash collections from the receivables are allocated first to the base
servicing fees, then to the security holders for interest at the interest rate
on the securities plus principal as defined in the applicable servicing
agreement, and finally to the credit enhancement fees. If the amount of cash
required for the above allocations exceeds the amount collected during the
collection period, the shortfall is drawn from the Spread Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and the related Spread Account is not at the required level, the
excess cash collected is retained in the Spread Account until the specified
level is achieved. The cash in the Spread Accounts is restricted from use by the
Company with such amounts included as a component of the Retained Interest. In
certain transactions, the Company chooses to "turbo" excess cash prior to
bringing the Spread Account to required levels. The "turbo" feature provides for
initial use of excess cash to reduce the principal balance of the Asset-backed
Securities to a specified level. Once the required Spread Account level is
achieved, the excess is released from the Trust to the Company. Cash held in the
various Spread Accounts is invested in high quality liquid investment
securities, as specified in the applicable servicing agreement. The specified
credit enhancement levels are defined in the applicable servicing agreement as
the Spread Account balance and turbo requirements expressed generally as a
percentage of the original collateral principal balance.
The average of the interest rates received on the receivables exceeds the
interest rates paid on the securities issued in the Securitization. Accordingly,
the Retained Interest described above is a significant asset of the Company. In
determining the fair value of the Retained Interest, the Company must estimate
the future rates of net credit losses and credit loss severity, delinquencies
and prepayments, 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 22.11% to 28.00%
at June 30, 2000 on Tier I receivables. The Company estimates net credit losses
and credit loss severity using available historical loss data for comparable
receivables and the specific characteristics of the receivables purchased by the
Company. The Company used net credit losses of 4.00% to 6.24% for Tier I
receivables and 12.00% to 16.32% for Tier II receivables as a percentage of the
original principal balance over the life of the receivables to value Retained
Interest at June 30, 2000.
The Company records unrealized gains or losses attributable to the change in the
fair value of the Retained Interest in each Securitization, which are recorded
as "available-for-sale" securities, net of related income taxes, until realized.
The unrealized gains or losses are recorded as "Accumulated other comprehensive
income", in shareholders' equity. The Company is not aware of an active market
for the purchase or sale of Retained Interest, and accordingly, the Company
determines the estimated fair value of the Retained Interest by discounting the
expected cash flows to be released from the Trust (the cash out method) using a
discount rate which the Company believes is commensurate with the risks
involved. Beginning in the fourth quarter of fiscal 1999, tiered discount rates
were used based on a pool's specific risk factors up to 900 basis points over
the applicable U.S. Treasury Rate. The Company utilized discount rates ranging
from 9.11% to 15.38% on the estimated cash flows to be released from the Spread
Account to value the Retained Interest at June 30, 2000. The weighted average
discount rate used to value Retained Interest at June 30, 2000 and 1999 was
13.78% and 12.83% respectively.
An other than temporary impairment adjustment to the carrying value of the
Retained Interest may be required if the present value of an individual Retained
Interest (the pool by pool method), discounted at a risk free rate, is less than
its carrying value. In addition, management evaluates and adjusts accordingly,
if determined necessary, Retained Interest using a pool by pool method by
reviewing current economic trends and trends in the assumptions to determine if
the Retained Interest is other than temporarily impaired. Other than temporary
impairment adjustments are recorded as a component of gain on sales of
receivables, net.
In July 2000, the Emerging Issues Task Force ("EITF") finalized the provisions
of EITF Issue No. 99-20, "Recognition of Interest Income and Impairment of
Purchased and Retained Beneficial Interests in Securitized Financial Assets",
("EITF 99-20"). EITF 99-20 sets forth rules for recognizing interest income and
determining when securities must be written down to fair value because of other
than temporary impairments. EITF 99-20 will require the "prospective method" of
adjusting the recognition of interest income when the anticipated cash flows
have either increased or decreased. Anticipated cash flows can change as the
result of factors such as prepayment rates and credit losses. Under the
provisions of EITF 99-20, an other than temporary impairment must be recorded
when the anticipated cash flows have decreased since the last estimate and the
fair value of the Retained Interest is less than the carrying value.
The Company currently applies certain provisions of EITF Issue No. 93-18
"Recognition of Impairment for an Investment in a Collateralized Mortgage
Obligation Instrument or in a Mortgage-Backed Interest-Only Certificate" ("EITF
93-18") regarding impairment. EITF 99-20 will no longer allow for temporary
impairments which are based on fair values discounted at risk free rates.
The effective date for EITF 99-20 is January 1, 2001, with earlier adoption
permitted. The write-down associated with the implementation of EITF 99-20 will
be reported as a "cumulative effect of a change in accounting principle" and
will be reported on a prospective basis. The Company anticipates adopting the
provision of EITF 99-20 as of January 1, 2001. The Company has not evaluated the
impact of this change.
Inventory - Inventories consist primarily of pre-owned vehicles valued at the
lower of cost or market. Market is considered to be the current wholesale market
value.
Servicing Assets - The Company receives base servicing fees, typically one
percent of receivables serviced, for the servicing and collection of the
receivables which is considered to be adequate servicer compensation. Servicing
Assets are the Company's present value benefit derived from retaining the right
to service receivables securitized in excess of adequate servicer compensation.
When this occurs, the Company has recorded Servicing Assets at the time of the
sale of receivables and has allocated the total cost of the receivables to the
Servicing Asset retained and the receivables sold based on their relative fair
values. Servicing assets are recognized as a component of gain on sale of
receivables, net. Accretion of related discount to present value is recognized
as a component of interest income.
Servicing Assets are carried at the lower of cost or fair value and are included
in other assets. Other than temporary impairment is measured using the relative
fair value of the individual Servicing Assets and recognized through a valuation
allowance.
Servicing Fees - Servicing fees include the contractual fee, typically one
percent of receivables serviced, earned from each trust.
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.
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 initial holders and certain affiliates.
Pursuant to such provision, 688,658; 704,770 and 344,964 shares of Class B
Common Stock were converted to shares of Class A Common Stock during fiscal
2000, 1999 and 1998, respectively.
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 rates is recognized in income in the
period that includes the enactment date.
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 receivables. 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.
Derivative Financial Instruments - The Company uses derivative financial
instruments as a means of managing the interest rate exposure of its fixed-rate
receivables held for sale and forecasted receivable production through the
estimated date of sale of such receivables in a Securitization and does not use
them for trading purposes. Historically, Securitizations have occurred once a
quarter. The derivative financial instruments are accounted for under the
accrual method. Under this method the differential to be paid or received on
instruments is recognized over the life of the agreements in interest expense.
Changes in fair value of the interest rate swaps accounted for under the accrual
method are not reflected in the accompanying consolidated financial statements.
Since March 1999, the Company utilizes a hedging strategy that primarily
consists of forward interest rate swaps having a maturity approximating the
average maturity of the receivable production during the relevant period. At
such time as a Securitization is committed, the interest rate swaps are
terminated. Prior to March 1999, the Company used a hedging vehicle that
included the execution of short sales of U.S. Treasury Notes having a maturity
approximating the average maturity of the receivable production during the
relevant period. Associated gains or losses on the terminated interest rate
swaps are included in income at the time the designated receivables are sold and
as such are included in the determination of the gain on sales of receivables.
To qualify for such accounting, the interest rate swaps are designated to the
receivables and alter the receivables' interest rate characteristics.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), was issued in June 1998.
The Statement as amended, is effective July 1, 2000. On July 1, 2000, the
Company recorded a liability in "Other payables and accrued expenses" of
approximately $1.3 million and a net of tax charge of approximately $400,000 to
"Accumulated other comprehensive earnings" which was reported as a "Cumulated
effect of a change in accounting principle" in the consolidated statement of
shareholders' equity. The adoption of SFAS No. 133 did not have any impact on
the income statement on July 1, 2000.
Earnings Per Share - Options to purchase shares of common stock are excluded
from the calculation of Earnings Per Share ("EPS") assuming dilution when the
exercise prices of these options are greater than the average market price of
the common share during the period. The following chart indicates the numbers of
options to purchase shares which were excluded from the calculation of EPS
assuming dilution for the periods indicated:
For the years ended
2000 1999 1998
----------- ------------ ----------
429,323 324,666 377,139
Segment Information - The Company determined it has a single reportable segment
which is acquiring, securitizing and servicing retail automobile installment
sales contracts originated by dealerships affiliated with major domestic and
foreign automobile manufacturers. The single segment was determined based on
management's approach to operating decisions, assessing performance and
reporting of financial information.
Reclassification - Certain amounts for the prior periods have been reclassified
to conform to the current presentation.
<PAGE>
2. RECEIVABLES HELD FOR SALE, NET
Receivables held for sale, net are as follows (in thousands) at:
June 30,
2000 1999
----------- -------------
Principal balance of Tier I receivables $ 202,167 $ 260,857
Principal balance of Tier II receivables 1,656 886
Dealer Premiums 5,369 8,209
Allowance for credit losses (2,978) (2,754)
Other 487 118
---------- ---------
$ 206,701 $ 267,316
========== =========
Activity in the allowance for credit losses on receivables held for sale (in
thousands):
Year ended June 30,
2000 1999 1998
---------- ------------ -----------
Balance at the beginning of the period $ 2,754 $ 1,916 $780
Charge-offs (5,638) (7,708) (10,635)
Recoveries 2,862 2,667 3,721
Provision for estimated credit losses 3,000 5,879 8,050
---------- ------------ -----------
Balance at the end of the period $ 2,978 $ 2,754 $ 1,916
========== ============ ===========
Notional amounts and unrealized gain (losses) related to outstanding hedges are
as follows (in thousands) at:
June 30,
2000 1999
------------ -----------
Notional amounts outstanding $426,477 $438,250
Unrealized gains (losses) on hedging transactions $ (1,320) $1,127
The Company had four interest rate swap agreements outstanding at June 30, 2000
with notional amounts totaling $426.5 million with maturity dates ranging from
February to September 2006. With these interest rate swap agreements, the
Company is paying a weighted average fixed rate of 6.93% and receiving a
weighted average variable receivable rate of 6.54%. The agreements outstanding
at June 30, 2000 were for existing receivables outstanding of $206.7 million and
projected future acquisitions of $219.8 million.
The net realized gain/(loss) on derivative financial instruments were
approximately $5.3 million, ($3.2 million), and ($2.7 million) during fiscal
2000, 1999, and 1998, respectively, and are recorded as a component of the gain
on sale of receivables, net.
<PAGE>
3. SERVICED RECEIVABLES
The principal balance of receivables serviced are as follows (in thousands) at:
June 30,
2000 1999
-------------- ---------------
Receivables held for sale:
Tier I (net of unearned discount) $202,167 $ 260,857
Tier II (net of unearned discount) 1,656 886
Other 82 91
-------------- ---------------
203,905 261,834
Securitized receivables:
Tier I 2,645,983 2,203,509
Tier II 30,672 52,906
Other receivables serviced 555 821
-------------- ---------------
$ 2,881,115 $2,519,070
============== ===============
Certain characteristics of receivables serviced are as follows (in thousands)
at:
June 30,
2000 1999
----------- ------------
Weighted averaged interest rate (Tier I) 13.30% 13.08%
Weighted average interest rate (Tier II) 18.52% 18.75%
Average receivable balance (Tier I) $12,082 $11,529
Average receivable balance (Tier II) $8,334 $9,750
Weighted Average term remaining (Tier I) (months) 57.6 57.2
Weighted Average term remaining (Tier II) (months) 34.3 42.9
During fiscal 2000, receivable acquisitions relating to customers who reside in
Texas, North Carolina, and California totaled 10.9%, 10.6% and 10.5%,
respectively, of all receivables acquired. At June 30, 2000, customers who
reside in Texas, North Carolina and California totaled 12.5%, 10.9% and 9.7%,
respectively, of the receivable servicing portfolio. A significant adverse
change in the economic climate in Texas, North Carolina, California or other
states could potentially result in fewer receivables acquired as well as impact
the recoverability of Retained Interest. No individual dealer or group of
affiliated dealers accounted for more than 2.1% of the Company's receivable
acquisitions during the year ended June 30, 2000.
<PAGE>
4. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment, and leasehold improvements, net are as follows (in
thousands) at:
June 30,
2000 1999
------------ ------------
Building $4,376 $4,372
Leasehold improvements 1,487 553
Land 416 367
Equipment 9,067 7,447
Accumulated depreciation (5,852) (4,364)
------ ------
$9,494 $8,375
====== ======
5. RETAINED INTEREST IN SECURITIZED ASSETS
The carrying amount of retained interest in securitized assets is as follows (in
thousands) at:
June 30,
2000 1999
---------- -----------
Estimated gross interest spread from receivables,
net of estimated prepayments and fees $ 287,661 $ 247,802
Estimated dealer premium rebates refundable 18,133 22,923
Estimated credit losses on securitized receivables (119,003) (104,448)
Accelerated principal (1) 24,082 885
Spread accounts 58,663 69,921
Discount to present value (61,105) (46,054)
---------- -----------
$ 208,431 $ 191,029
========== ===========
Outstanding balance of securitized receivables serviced $2,676,655 $2,256,415
========== ===========
Estimated credit losses as a percentage of
securitized receivables serviced 4.45% 4.63%
(1) Also referred to as "turbo", see Note 1 for further discussion.
<PAGE>
Retained interest in securitized assets activity is as follows (in thousands):
Year ended June 30,
2000 1999 1998
--------- --------- ----------
Balance at beginning of period $191,029 $171,649 $170,791
Amounts capitalized (including estimated
dealer rebates) 69,266 89,955 56,082
Collections (87,529) (67,671) (35,938)
Accretion of discount 23,594 18,337 7,269
Change in accelerated principal 23,197 885 -
Change in spread accounts (11,258) 1,752 (3,575)
Other than temporary impairments (5,284) (11,917) (23,636)
Change from cash-in to cash-out - - (7,871)
Net change in unrealized gain (loss) 5,416 (11,961) 8,527
-------- -------- --------
Balance at end of period $208,431 $191,029 $171,649
======== ======== ========
Spread account activity is as follows (in thousands):
Year ended June 30,
2000 1999
----------- ------------
Balance at beginning of period $69,921 $68,169
Excess cash flows deposited to spread accounts 48,851 50,788
Initial spread account deposits 5,125 2,011
Interest earned on spread accounts 3,372 3,313
Less: excess cash flows released to the Company (68,606) (54,360)
----------- ------------
Balance at end of period $58,663 $69,921
=========== ============
The weighted average yield on spread accounts was 5.69% and 4.75% for the years
ended June 30, 2000 and 1999, respectively. The weighted average yield at June
30, 2000 and 1999 was 6.46% and 4.79%, respectively.
Because of trends with respect to credit loss and delinquency and their effects
on the valuation of the retained interest in securitized assets, the Company
recorded pre-tax charges of $5.3 million, $11.9 million and $23.6 million for
the other than temporary impairment of the retained interest in securitized
assets during fiscal 2000, 1999 and 1998, respectively. During the fourth
quarter of fiscal 1999, the Company refined its methodology of determining
discount rates used to calculate the gain on sale of receivables and value
Retained Interest. This change in estimate reduced the fair value of retained
interest in securitized assets by $11.8 million as of June 30, 1999, and had the
effect of reducing fiscal 1999 net earnings by $3.1 million pre-tax ($1.9
million net of taxes) or $0.15 per share (basic and diluted).
<PAGE>
6. OTHER ASSETS
Other assets are as follows (in thousands) at:
June 30,
2000 1999
-------------- -----------
Repossessed assets $ 7,808 $ 5,086
Accrued servicing fees 7,717 6,243
Servicing assets 1,201 2,719
Deferred borrowing fees 1,845 1,596
Income taxes refundable 1,265 5,000
Advance of delinquent interest 1,389 1,117
Other 2,758 4,107
------------ -----------
$ 23,983 $ 25,868
============ ===========
7. AMOUNTS DUE UNDER WAREHOUSE FACILITIES AND WORKING CAPITAL LINE
At June 30, 2000 and 1999, the Company, through its wholly owned special-purpose
subsidiaries, had borrowing arrangements with a financial institution which
provided for two and one, respectively, revolving Credit Facilities with an
aggregate borrowing capacity of $550.0 million at June 30, 2000 and $450.0
million at June 30, 1999. The second Credit Facility was added during the
quarter ended June 30, 2000 and the existing facility was modified. During
August 2000, an additional Credit Facility through a different financial
institution was added bringing the total borrowing capacity to $750.0 million.
Borrowings under the current Credit Facilities are collateralized by certain
receivables held for sale. Outstanding borrowings of the Credit Facilities were
$152.2 and $185.5 million at June 30, 2000 and 1999, respectively. At June 30,
2000 and 1999, an additional $47.1 million and $67.2 million, respectively, was
available to borrow based on the outstanding principal balance of eligible
receivables, respectively. The weighted average cost of funds including the
prefunded amount, net of income earned, of the Facility(s) for the years ended
June 30, 2000 and 1999, was 5.78% and 5.09%, respectively.
The cost of funds includes a variable interest rate on the outstanding
commercial paper, fees on the used and unused portions of the Facility(s), and
the amortization of prepaid warehouse fees. The largest portion of the cost of
funds related to the Facility(s) is the variable rate interest on the commercial
paper issued by the financing conduit. Upfront warehouse fees are non-recurring
costs related to the initial set-up of the Facility.
The Credit Facilities generally have terms of one year. Selected information
about the Credit Facilities is shown below:
Credit Facility Outstanding Expiration
Capacity at June 30, 2000 Date
--------------------------- ------------------------- ------------------
(in millions)
$ 350 $ 152.2 September 2000
$ 200 None March 2001
$ 200 N/A August 2001
In June 2000, the Company established a working capital line of credit for $15.0
million. This line of credit is unsecured and is available to fund short-term
cash flow needs of the Company. The facility has a one year term and the entire
amount was available for use at June 30, 2000.
8. LONG-TERM DEBT
In connection with the Company's initial public offering in August 1995, the
Company issued, in a private placement, $110.0 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 with annual principal payments of $22.0
million on August 1.
In April 1996, the Company issued, in a private placement, $46.0 million 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.
In March 1997, the Company issued, in a private placement, $50.0 million Series
A 7.75% Senior Notes due 2002 and $15.0 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, with a principal reduction of $21.7 million on March
15, 2002.
All of the above mentioned Senior Notes and Senior Subordinated Notes are
redeemable, in whole or in part, at the option of the Company, in a principal
amount not less than $1.0 million, together with accrued and unpaid interest to
the date of redemption and a yield-maintenance premium as defined in the
respective note agreements.
The following chart shows interest expense related to long-term debt.
For the year ended June 30,
2000 1999 1998
------------- ------------ ------------
(in thousands)
$16,147 $17,817 $19,485
Scheduled contractual maturities of long-term debt at June 30, 2000 follows:
2001 $22,000
2002 43,667
2003 111,333
-----------------
Total $177,000
=================
9. INCOME TAXES
Amounts currently payable/(refundable) at June 30, 2000 and 1999 were $(.5)
million and $6.3, respectively.
The composition of income tax expense (benefit) is as follows (in thousands):
Year ended June 30,
2000 1999 1998
------------ ----------- -----------
Current tax expense (benefit) $ 12,421 $ (922) $(9,863)
Deferred tax expense (benefit) (1,746) 9,901 2,007
------------ ----------- -----------
$ 10,675 $8,979 $(7,856)
The effective income tax rate differs from the statutory federal corporate rate
as follows:
Year ended June 30,
2000 1999 1998
------------ ----------- -----------
Statutory rate 35.0% 35.0% 35.0%
State income taxes 3.2% 3.2% 3.2%
Change in commercial domicile 0.0% 0.0% 4.9%
Other 0.4% 0.3% 1.3%
------------ ----------- -----------
Effective rate 38.6% 38.5% 44.4%
The composition of deferred income taxes payable is as follows (in thousands):
June 30,
2000 1999
----------- -----------
Deferred tax assets:
Allowance for estimated credit losses $1,156 $1,052
Mark to market and allowance for
credit losses 3,833 2,450
----------- -----------
4,989 3,502
Deferred tax liabilities:
Retained interest in securitized 1,153 10,875
assets
Gain on securitizations 11,989 2,528
Depreciation and Amortization 2 -
Unrealized gain (loss) on retained interest
in securitized assets 2,102 (204)
----------- -----------
15,246 13,199
----------- -----------
Deferred income taxes payable $10,257 $9,697
=========== ===========
The Company believes the deferred tax assets will more likely than not be
realized due to the reversal of deferred tax liabilities and expected future
taxable income. Accordingly, no deferred tax asset valuation allowance has been
established.
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated carrying values, fair values and various methods and assumptions
used in valuing the Company's financial instruments as of June 30, 2000 and 1999
are set forth below:
<TABLE>
<CAPTION>
2000 1999
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
(Dollars in thousands)
Financial Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $14,792 $14,792 $8,088 $8,088
Restricted cash 13,010 13,010 12,215 12,215
Retained interest in securitized assets 208,431 208,431 191,029 191,029
Receivables held for sale, net 206,701 209,404 267,316 274,180
Accrued interest receivable 1,727 1,727 2,035 2,035
Financial Liabilities:
Amounts due under warehouse
facilities 152,235 152,235 185,500 185,500
Long-term debt 177,000 167,046 199,000 175,620
Accrued interest payable 5,408 5,408 5,287 5,287
Off-Balance Sheet Derivatives:
Interest rate swap n/a (1,320) n/a 1,127
</TABLE>
The carrying value approximates fair value due to the nature of these accounts
for the following accounts: cash and cash equivalents, restricted cash, accrued
interest receivable, amounts due under warehouse facilities and accrued interest
payable.
The fair value of receivables held for sale, net, is computed by assuming such
receivables had been securities as of year end and estimating the discounted
future net cash flows using historical prepayment, loss and discount rates.
The fair value of retained interest in securitized assets is determined by
discounting the expected cash flows released from the spread account using a
discount rate which the Company believes is commensurate with the risks
involved. An allowance for estimated credit losses is established using
information from scoring models and available historical loss data for
comparable receivables and the specific characteristics of the receivables
purchased by the Company. Discount rates utilized are based upon current market
conditions, and prepayment assumptions are based on historical performance
experience of comparable receivables and the impact of trends in the economy.
The fair value of long-term debt is determined by discounting the scheduled loan
payments to maturity using rates that are believed to be currently available for
debt of similar terms and maturities.
The fair value of the interest rate swap is the estimated amount the Company
would have to pay to enter into equivalent agreements at June 30, 2000 and 1999,
with the counterparty to the swap agreements. See Note 1 regarding changes in
the Company's accounting for derivative financial instruments effective July 1,
2000.
<PAGE>
11. 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, 2000 are as follows:
(In thousands)
2001 $984
2002 975
2003 973
2004 7
Thereafter -
-----------
Total $ 2,939
===========
These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense for premises and equipment amounted
to approximately $2.1 million, $2.1 million, and $1.9 million for the years
ended June 30, 2000, 1999 and 1998, respectively. A majority of the rental
expense relates to the lease of the Company's principal offices from an
affiliate.
The Company is subject to litigation arising from time to time in the ordinary
course of business and of a type and scope common for participants in the
consumer finance industry. The Company has been named a defendant in a number of
civil suits. The majority of these cases have involved circumstances in which a
vehicle buyer has alleged a problem with the vehicle that secures the buyer's
obligations under the retail installment sales contract acquired by the Company.
Although the Company does not make any representation or warranty respecting the
vehicle nor is it deemed to have made any implied warranties as a result of it
being the holder of the contract, it is, under applicable FTC rules and most
state laws, subject to all claims and defenses which the debtor could assert
against the seller of the vehicle. Therefore, the buyer typically names the
dealer and the Company in such actions.
The Company has also, on occasion, been sued by a buyer for the Company's own
alleged wrongful conduct or its alleged participation in the wrongful conduct of
a dealer. The majority of these cases have involved allegations of wrongful
conduct in connection with a repossession, participation in some fraud or other
wrongful conduct of a dealer or a technical violation of Regulation Z or an
applicable state statute. (For a further discussion of regulation Z, see "Item
1, Business - Regulation.") Most of these suits are individual actions and would
not result in any material liability even if the buyer was successful. However,
buyers occasionally purport to bring an action on behalf of a class of buyers.
No such actions are currently pending.
12. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans, which are described below.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees
and related Interpretations in accounting for the plan. 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
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except share data):
June 30,
2000 1999 1998
Net earnings (loss):
As reported $17,005 $ 14,324 $ (9,822)
Pro forma 16,424 13,546 (10,951)
Net earnings (loss) per common share
(basic and diluted):
As reported $ 1.28 $ 1.08 $ (0.74)
Pro forma 1.24 1.02 (0.83)
The Union Acceptance Corporation 1994 Incentive Stock Plan ("1994 Plan") and the
Union Acceptance Corporation 1999 Incentive Stock Plan ("1999 Plan") are the
Company's long-term incentive plans for directors, executive officers and other
key employees. The plans authorize 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 1994 Plan, of
which options for 271,875 shares of Class A Common Stock were granted at an
issue price of $16 per share (basic and diluted, a portion of which were
subsequently repriced as herein discussed) to senior officers upon consummation
of the Company's initial public offering of the Class A Common Stock. A total of
300,000 shares of Class A Common Stock have been reserved for issuance under the
1999 Plan.
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,
although options under the 1999 Plan may be granted by the full board of
directors. Stock options granted under the Plan are exercisable at such times
(up to ten years from the date of 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. The majority of 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 using the following weighted average
assumptions:
Year ended June 30,
2000 1999 1998
--------------- -------------- --------------
Dividend yield - - -
Expected volatility 56.14% 55.04% 100.00%
Risk-free interest rate 5.88% 4.85% 5.45%
Expected lives 10 years 10 years 10 years
In November 1998, the Company's Compensation Committee approved a repricing of
the outstanding option grants of all non-executive officers. There were no
changes to the number of options granted or the vesting schedule. A total of
116,425 option grants with a weighted average exercise price of $14.28 were
repriced.
<PAGE>
A summary of the status of the Company's stock option plans as of June 30, 2000,
1999 and 1998 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at beginning of year 414,665 $ 11.28 368,675 $ 14.86 314,485 $ 16.02
Options granted 59,500 7.00 48,700 5.31 74,000 9.69
Options reacquired - - (116,425) 14.28 - -
Options granted
(repriced) - - 116,425 5.31 - -
Options exercised (17,472) 5.31 (350) 5.31 - -
Options canceled (400) 5.31 (2,360) 5.31 (19,810) 14.63
----------- ------------ ------------ ------------ ----------- -----------
Options outstanding
at end of year 456,293 $ 10.96 414,665 $ 11.28 368,675 $ 14.86
Weighted average fair
value of options granted
during the year $ 5.10 $ 3.47 $ 8.86
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ----------------------------------------------------
Weighted Weighted
Average Average Remaining Average Average
Exercise Number Contractual Exercise Number Exercisable
Price Outstanding Life (in years) Price Exercisable Price
---------------- --------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$5.31 144,543 6.70 $5.31 71,930 $5.31
$7.00 59,500 9.10 $7.00 7,500 $7.00
$9.69 35,000 7.10 $9.69 10,000 $9.69
$16.00 217,250 5.20 $16.00 162,312 $16.00
--------------- ---------------- ------------ ------------- ----------
456,293 6.3 251,742 $12.43
--------------- ---------------- ------------- ----------
</TABLE>
In addition to the options outstanding at June 30, 2000, there were 400 shares
in the 1994 Plan and 265,675 shares in the 1999 Plan of Class A Common Stock
available for future grants or awards.
The 1994 Plan and 1999 Plan also provide that each director of the Company who
is not an executive officer is automatically granted shares of Class A Common
Stock with a fair value of $15,000 following each annual meeting of
shareholders. Shares so granted under the 1994 Plan have a six-month period of
restriction during which they may not be transferred; shares so granted under
the 1999 Plan are not subject to said restriction.
<PAGE>
Certain information regarding the plans are presented in the following table:
Year ended June 30,
2000 1999 1998
-------------- ------------ ---------------
1994 Plan shares granted 725 17,778 14,694
1999 Plan shares granted 9,825 - -
Compensation cost $75,000 $90,000 $90,000
In February 2000, the Company's directors approved the Union Acceptance
Corporation Employee Stock Purchase Plan ("Stock Purchase Plan"). The Stock
Purchase Plan provides a means for employees to purchase shares of Class A
Common Stock at market prices current at the time of purchase through regular
payroll deductions. As an additional benefit, the Company will contribute an
amount equal to 10% (subject to change at the discretion of the Company's
directors) of the employee's payroll deductions.
<PAGE>
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected Quarterly Financial Information
For Quarters in the Fiscal Year Ended June 30,
<TABLE>
<CAPTION>
Year ended June 30, 2000
First Second Third Fourth Total
--------------- -------------- --------------- -------------- ---------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest on receivables held for sale $ 8,145 $ 6,684 $ 8,221 $ 14,411 $ 37,461
Retained interest and other 5,728 6,442 6,704 6,089 24,963
--------------- -------------- --------------- -------------- ---------------
Total interest income 13,873 13,126 14,925 20,500 62,424
Interest expense 6,564 6,179 6,805 10,115 29,663
--------------- -------------- --------------- -------------- ---------------
Net interest margin 7,309 6,947 8,120 10,385 32,761
Provision for estimated credit losses 750 665 840 745 3,000
--------------- -------------- --------------- -------------- ---------------
Net interest margin after provision
for estimated credit losses 6,559 6,282 7,280 9,640 29,761
--------------- -------------- --------------- -------------- ---------------
Gain on sales of receivables, net 6,530 1,261 2,754 6,338 16,883
Servicing fees 6,068 6,188 6,217 6,139 24,612
Late charges and other fees 1,505 1,508 1,667 1,657 6,337
--------------- -------------- --------------- -------------- ---------------
Other revenues 14,103 8,957 10,638 14,134 47,832
--------------- -------------- --------------- -------------- ---------------
Salaries and benefits 6,927 6,737 7,354 7,897 28,915
Other general and administrative fees 4,914 4,993 5,215 5,876 20,998
--------------- -------------- --------------- -------------- ---------------
Total operating expenses 11,841 11,730 12,569 13,773 49,913
--------------- -------------- --------------- -------------- ---------------
Earnings before provision
for income taxes 8,821 3,509 5,349 10,001 27,680
Provision for income taxes 3,402 1,361 2,065 3,847 10,675
--------------- -------------- --------------- -------------- ---------------
Net earnings $ 5,419 $ 2,148 $ 3,284 $ 6,154 $ 17,005
=============== ============== =============== ============== ===============
Net earning per common
share (basic and diluted) $ 0.41 $ 0.16 $ 0.25 $ 0.46 $ 1.28
=============== ============== =============== ============== ===============
Basic weighted average common shares
outstanding 13,250,660 13,264,379 13,277,632 13,277,632 13,267,493
Diluted weighted average common
shares outstanding 13,295,546 13,308,923 13,294,314 13,277,632 13,293,270
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30, 1999
First Second Third Fourth Total
--------------- -------------- --------------- -------------- ---------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest on receivables held for sale $ 8,251 $ 6,938 $ 8,087 $ 9,739 $ 33,015
Retained interest and other 5,632 5,195 4,875 4,761 20,463
--------------- -------------- --------------- -------------- ---------------
Total interest income 13,883 12,133 12,962 14,500 53,478
Interest expense 7,105 6,496 6,996 7,309 27,906
--------------- -------------- --------------- -------------- ---------------
Net interest margin 6,778 5,637 5,966 7,191 25,572
Provision for estimated credit losses 2,325 1,275 1,225 1,054 5,879
--------------- -------------- --------------- -------------- ---------------
Net interest margin after provision
for estimated credit losses 4,453 4,362 4,741 6,137 19,693
--------------- -------------- --------------- -------------- ---------------
Gain on sales of receivables, net 2,706 4,087 6,386 5,954 19,133
Servicing fees 4,953 5,469 5,601 5,693 21,716
Late charges and other fees 1,206 1,173 1,442 1,528 5,349
--------------- -------------- --------------- -------------- ---------------
Other revenues 8,865 10,729 13,429 13,175 46,198
--------------- -------------- --------------- -------------- ---------------
Salaries and benefits 5,670 5,453 6,328 6,121 23,572
Other general and administrative fees 4,321 4,856 4,913 4,926 19,016
--------------- -------------- --------------- -------------- ---------------
Total operating expenses 9,991 10,309 11,241 11,047 42,588
--------------- -------------- --------------- -------------- ---------------
Earnings before provision
for income taxes 3,327 4,782 6,929 8,265 23,303
Provision for income taxes 1,270 1,859 2,665 3,185 8,979
--------------- -------------- --------------- -------------- ---------------
Net earnings $ 2,057 $ 2,923 $ 4,264 $ 5,080 $ 14,324
=============== ============== =============== ============== ===============
Net earning per common
share (basic and diluted) $ 0.16 $ 0.22 $ 0.32 $ 0.38 $ 1.08
=============== ============== =============== ============== ===============
Basic weighted average common shares
outstanding 13,231,482 13,236,313 13,249,260 13,249,571 13,241,593
Diluted weighted average common
shares outstanding 13,231,482 13,236,313 13,277,130 13,281,142 13,253,646
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Previously reported
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is
incorporated by reference to the information contained under the caption
"Election of Directors" in the Company's 2000 Proxy Statement for its 2000
Annual Shareholder Meeting (the "2000 Proxy Statement").
Item 11. Executive Compensation
Only the information required by this item to be included with this
report is incorporated by reference to the information contained under the
caption "Management Remuneration and Related Transactions" in the 2000 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
the information contained under the captions "Voting Securities and Principal
Holders Thereof" and "Election of Directors" in the 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
the information contained under the caption "Certain Transactions with Related
Persons" in the 2000 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Financial Statements -- Included Under Item 8:
Report of Deloitte & Touche LLP, Independent Auditors
Report of KPMG LLP, Independent Auditors
Consolidated Balance Sheets as of June 30, 2000 and 1999
Consolidated Statements of Earnings (Loss) for the Years Ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998
Consolidated Statement of Shareholders' Equity for the Years
Ended June 30, 2000, 1999 and 1998
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter ended
June 30, 2000
(c) The exhibits filed herewith or incorporated by reference
herein are set forth following the signature page which
appears on page 66.
<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.
4.4 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)
<PAGE>
4.5 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
4.6 Note Purchase Agreement, dated March 24, 1997, among 10Q 3/97
Union Acceptance Corporation and certain purchasers 10.1
of Senior Notes, due 2002.
4.7 Note Purchase Agreement among Union Acceptance Funding
Corporation, Enterprise Funding Corporation, Nationsbank, 10K 1998
N.A., Dated as of September 18, 1998 4.9(a)
4.7(a) Amendment No. 1 to Note Purchase Agreement, dated 10K 1999
September 9, 1999 4.8(a)
4.7(b) Amended and Restated Note Purchase Agreement among
UAFC, Enterprise Funding Corporation, and Bank of
America, N.A., dated as of May 12, 2000
4.7(c) Amendment No. 1 to Amended and Restated Note Purchase
Agreement dated June 30, 2000 [Diane]
4.8 Security Agreement among Enterprise Funding Corporation,
Union Acceptance Funding Corporation, Union Acceptance
Corporation, MBIA Insurance Corporation and Nationsbank, 10K 1998
N.A., dated as of September 18, 1998 4.9(b)
4.8(a) Amendment No. 1 to Security Agreement, dated as of 10K 1999
May 25, 1999 4.9(a)
4.8(b) Amendment No. 2 to Security Agreement, dated as of 10K 1999
September 9, 1999. 4.9(b)
4.8(c) Amended and Restated Security Agreement among
Enterprise Funding Corporation, UAFC Corporation,
Union Acceptance Funding Corporation, Union
Acceptance Corporation, MBIA Insurance Corporation
and Bank of America, N.A., dated as of May 12, 2000.
4.8(d) Amendment No. 1 to the Amended and Restated Security
Agreement dated June 30, 2000 [Diane]
4.8(e) Amendment No. 1 to Amended and Restated Security
Agreement dated as of August 31, 2000.
4.9 Note Purchase Agreement among UAFC-1 Corporation,
Enterprise Funding Corporation and Bank of America,
N.A. dated as of May 25, 2000.
4.10 Security Agreement among Union Acceptance Funding
Corporation, Enterprise Funding Corporation, UAFC-1
Corporation, Union Acceptance Corporation and Bank of
America, N.A. dated as of May 25, 2000.
4.10(b) Amendment No. 1 to Security Agreement dated as July 14,
2000.
4.11 Loan and Security Agreement among UAFC-2 Corporation,
Union Acceptance Corporation, Variable Funding
Capital Corporation, First Securities, Inc., Asset
Guaranty Insurance Company and First Union National
Bank dated as of August 1, 2000.
<PAGE>
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 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.
10.3 Loan Servicing Agreement by and between Union Federal S-1, 10.11
Savings Bank of Indianapolis and Union Acceptance
Corporation dated June 29, 1994.
10.4 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.
10.5 Loan Collection Agreement by and between Union S-1, 10.13
Federal Savings Bank of Indianapolis and Union
Acceptance Corporation dated June 29, 1994.
10.6 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.
10.7 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.
10.8 Tax Allocation Agreement by and between Union Holding S-1, 10.16
Company, Inc. and its subsidiaries dated February 1,
1991, as amended.
10.9 Form of Remote Outsourcing Agreement by and between S-1, 10.18
Alltel Information, Inc. and Union Acceptance
Corporation effective as of October 1, 1998.
10.10 Union Acceptance Corporation Incentive Stock Plan. S-1, 10.24
10.11 Letter respecting Access to Records from Union S-1, 10.25
Acceptance Corporation to Union Federal Savings Bank
of Indianapolis dated September 13, 1994.
10.12 Letter Agreement by and between Union Federal Savings S-1, 10.26
Bank of Indianapolis and Union Acceptance Corporation
dated December 14, 1994 amending and initiating terms
of certain Inter-Company Agreements.
10.13 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.
10.14 Lease Agreement between Waterfield Mortgage Company, 10Q 12/95
Incorporated, (which assigned its rights thereunder 10.19
to Shadeland Properties LP) and Union Acceptance
Corporation dated as of November 1, 1995
10.15 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
10.16 Sublease Agreement between Union Acceptance 10K 1996
Corporation and Union Federal Savings Bank of 10.26
Indianapolis dated as of August 1, 1996
10.17 Annual Bonus Plan for Management Employees, dated 10Q 12/97
July 1, 1997 10.1
10.18 Annual Bonus and Deferral Plan for Senior Officers, 10Q 12/97
dated July 1, 1997 10.2
10.19 Union Acceptance Corporation 1999 Stock Incentive 10K 1999
Plan effective as of July 1, 1999 10.19
21 Subsidiaries of the Registrant
<PAGE>
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of KPMG LLP.
27 Financial Data Schedule
--------------------
(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
10K 1997 -- Refers to Registrant's Form 10-K for the year ended June 30,
1997
10K 1998 -- Refers to Registrant's Form 10-K for the year ended June 30,
1998
10Q (month/year) -- Refers to Registrant's Form 10-Q for the quarter ended
at the end of such month in such calendar year
10K 1999 -- Refers to Registrant's Form 10-K for the year ended June 30,
1999
<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
September 28, 2000 By: /S/ John M. Stainbrook
-------------------------
John M. Stainbrook
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, as amended, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date
(1) Principal Executive Officer: )
)
/s/ John M. Stainbrook )
--------------------------- President and Chief )
John M. Stainbrook Executive Officer )
)
(2) Principal Financial/ )
Accounting Officer: )
)
/s/ Rick A. Brown )
--------------------------- Treasurer, and Chief)
Rick A. Brown Financial Officer )
)
)
(3) A Majority of the Board )
of Directors: )
)
/s/ John M. Davis Director )September 28, 2000
----------------- )
John M. Davis )
)
/s/ Fred M. Fehsenfeld Director )
---------------------- )
Fred M. Fehsenfeld )
)
/s/ Donald A. Sherman Director )
--------------------- )
Donald A. Sherman )
)
/s/ John M. Stainbrook Director )
---------------------- )
John M. Stainbrook )
)
/s/ Michael G. Stout Director )
-------------------- )
Michael G. Stout )
)
/s/ Jerry D. Von Deylen Director )
----------------------- )
Jerry D. Von Deylen )
)
/s/ Thomas M. West Director )
------------------ )
Thomas M. West )
