United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number: 0-26412
UNION ACCEPTANCE CORPORATION
----------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1908796
------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
250 N. Shadeland Avenue, Indianapolis, IN 46219
- ----------------------------------------- -----
(Address of principal executive office) (Zip Code)
(317) 231-6400
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 4, 2000
Class A Common Stock, without par value 5,816,024 Shares
- --------------------------------------- ----------------
Class B Common Stock, without par value 7,461,608 Shares
- --------------------------------------- ----------------
<PAGE>
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (unaudited):
Consolidated Condensed Balance Sheets as of
December 31, 1999 and June 30, 1999 3
Consolidated Condensed Statements of Earnings
for the Three and Six Months Ended December 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended December 31, 1999 and 1998 5
Consolidated Condensed Statement of Shareholders' Equity for the
Six Months Ended December 31, 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Part II. OTHER INFORMATION 23
Signatures 24
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1999 1999
-------------------------
<S> <C> <C>
Cash and cash equivalents $ 10,876 $ 8,088
Restricted cash 12,430 12,379
Receivables held for sale, net 174,998 267,316
Retained interest in securitized assets 198,619 190,865
Accrued interest receivable 1,425 2,035
Property, equipment, and leasehold improvements, net 9,727 8,375
Other assets 22,460 25,868
-------- --------
Total Assets $430,535 $514,926
======== ========
Liabilities and Shareholders' Equity
Liabilities
- -----------
Amounts due under warehouse facilities $127,359 $185,500
Long-term debt 177,000 199,000
Accrued interest payable 4,506 5,287
Amounts due to trusts 14,018 13,152
Dealer premiums payable 1,122 2,564
Current and deferred income taxes payable 3,326 16,022
Other payables and accrued expenses 4,020 3,922
-------- --------
Total Liabilities 331,351 425,447
-------- --------
Commitment and Contingencies -- --
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 December 31, 1999 and June 30, 1999, respectively 58,620 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 December 31, 1999 and June 30, 1999, respectively -- --
Accumulated other comprehensive earnings, net of income taxes 2,169 199
Retained earnings 38,395 30,828
-------- --------
Total Shareholders' Equity 99,184 89,479
-------- --------
Total Liabilities and Shareholders' Equity $430,535 $514,926
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on receivables held for sale $ 6,684 $ 6,938 $ 14,829 $ 15,189
Retained interest and other 6,442 5,195 12,170 10,827
----------- ----------- ----------- -----------
Total interest income 13,126 12,133 26,999 26,016
Interest expense 6,179 6,496 12,743 13,601
----------- ----------- ----------- -----------
Net interest margin 6,947 5,637 14,256 12,415
Provision for estimated credit losses 665 1,275 1,415 3,600
----------- ----------- ----------- -----------
Net interest margin after provision
for estimated credit losses 6,282 4,362 12,841 8,815
----------- ----------- ----------- -----------
Gain on sales of receivables, net 1,261 4,087 7,791 6,793
Servicing fees 6,188 5,469 12,256 10,422
Late charges and other fees 1,508 1,173 3,013 2,379
----------- ----------- ----------- -----------
Other revenues 8,957 10,729 23,060 19,594
----------- ----------- ----------- -----------
Salaries and benefits 6,737 5,453 13,664 11,123
Other general and administrative expenses 4,993 4,856 9,907 9,177
----------- ----------- ----------- -----------
Total operating expenses 11,730 10,309 23,571 20,300
----------- ----------- ----------- -----------
Earnings before provision for income taxes 3,509 4,782 12,330 8,109
Provision for income taxes 1,361 1,859 4,763 3,129
----------- ----------- ----------- -----------
Net earnings $ 2,148 $ 2,923 $ 7,567 $ 4,980
=========== =========== =========== ===========
Net earnings per common share (basic & diluted) $ 0.16 $ 0.22 $ 0.57 $ 0.38
=========== =========== =========== ===========
Basic weighted average number of common
shares outstanding 13,264,379 13,236,313 13,257,519 13,233,897
=========== =========== =========== ===========
Diluted weighted average number of common
shares outstanding 13,308,923 13,236,313 13,302,220 13,236,038
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 7,567 $ 4,980
Adjustments to reconcile net earnings to net cash
from operating activities:
Increase in receivables held for sale, net of liquidations (580,250) (756,893)
Dealer premiums paid, net on receivables held for sale (16,324) (28,456)
Proceeds from securitization of receivables held for sale 667,484 627,293
Gain on sales of receivables (11,347) (20,912)
Impairment of retained interest in securitized assets 4,243 5,172
Accretion of discount on retained interest in securitized assets (11,412) (9,640)
Provision for estimated credit losses 1,415 3,600
Amortization and depreciation 1,742 2,430
Restricted cash (50) 5,288
Other assets and accrued interest receivable 2,926 (701)
Amounts due to trusts 866 (2,656)
Other payables and accrued expenses (13,287) 2,928
--------- ---------
Net cash from operating activities 53,574 (167,567)
--------- ---------
Cash flows from investing activities:
Collections on retained interest in securitized assets
and change in spread accounts 31,768 21,264
Capital expenditures (2,060) (1,225)
--------- ---------
Net cash from investing activities 29,708 20,039
Cash flows from financing activities:
Principal payment on long-term debt (22,000) (22,000)
Stock options exercised 93 --
Net change in warehouse credit facilities (58,141) 101,708
Payment of borrowing fees (446) (102)
--------- ---------
Net cash from financing activities (80,494) 79,606
--------- ---------
Change in cash and cash equivalents 2,788 (67,922)
Cash and cash equivalents, beginning of period 8,088 75,612
--------- ---------
Cash and cash equivalents, end of period $ 10,876 $ 7,690
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid $ 18,987 $ 6
Interest paid $ 13,253 $ 14,366
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Consolidated Condensed Statement of Shareholders' Equity
For the Six Months Ended December 31, 1999
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Number of Common Stock Accumulated
Shares Outstanding Other Total
-------------------------------- Common Comprehensive Retained Shareholders'
Class A Class B Stock Earnings Earnings Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 5,099,344 8,150,266 $ 58,452 $ 199 $ 30,828 $ 89,479
Comprehensive earnings:
Net earnings - - - - 7,567 7,567
Net unrealized gain on retained
interest in securitized assets - - - 3,159 - 3,159
Income taxes related to unrealized
gain in securitized assets - - - (1,189) - (1,189)
--------------
Total comprehensive earnings 9,537
Grants of common stock 10,550 75 75
Stock options exercised 17,472 - 93 - - 93
Conversion of Class B
Common Stock into
Class A Common Stock 688,658 (688,658) - - - -
---------------------------------------------------------------------------------------------
Balance at December 31, 1999 5,816,024 7,461,608 $ 58,620 $ 2,169 $ 38,395 $ 99,184
=============================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Six Months Ended December 31, 1999 and 1998
(Unaudited)
Note 1 - Basis of Presentation
The foregoing consolidated condensed financial statements are
unaudited. However, in the opinion of management, all adjustments necessary for
a fair presentation of the results of the interim period presented have been
included. All adjustments are of a normal and recurring nature. Results for any
interim period are not necessarily indicative of results to be expected for the
year. The consolidated condensed financial statements include the accounts of
Union Acceptance Corporation ("UAC") and its subsidiaries.
During fiscal 1995, Union Acceptance Funding Corporation, UAC
Securitization Corporation, Performance Funding Corporation and Performance
Securitization Corporation were formed as wholly-owned subsidiaries of UAC.
During fiscal 1996, UAC Boat Funding Corp. was formed as a wholly- owned
subsidiary of UAC. In fiscal 1997, UAC Finance Corporation was formed as a
wholly-owned subsidiary of UAC. Circle City Car Company and Union Acceptance
Receivables Corporation were formed as wholly-owned subsidiaries of UAC during
the first and second quarters, respectively, of fiscal 1998.
The consolidated condensed interim financial statements have been
prepared in accordance with Form 10-Q specifications, and, therefore, do not
include all information and footnotes normally shown in annual financial
statements. A summary of the Company's significant accounting policies is set
forth in "Note 1" of the "Notes to Consolidated Financial Statements" in the
Company's Annual Report on Form 10-K for the year ended June 30, 1999.
In determining the fair value of the Retained Interest in Securitized
Assets ("Retained Interest"), the Company must estimate the future rates of
gross 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 21.31% to 28.00% and 14.16% to
20.73% on Tier I and Tier II receivables, respectively, at December 31, 1999.
The Company estimates gross 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
estimated net credit losses ranging from 4.00% to 6.63% and 12.00% to 16.00% on
Tier I and Tier II receivables, respectively, as a percentage of the original
principal balance over the life of the receivables to value Retained Interest at
December 31, 1999. The Company determines the estimated fair value of its
Retained Interest by discounting the expected cash flows released from the Trust
(the cash out method) using a discount rate which the Company believes is
commensurate with the risks involved. The Company used tiered discount rates
based on a pool's specific risk factors up to 900 basis points over the
applicable U.S. Treasury Rate ranging from 8.90% to 15.24% and 12.40% to 16.11%
on Tier I and Tier II receivables, respectively, at December 31, 1999. The
weighted average discount rate used to value Retained Interest at December 31,
1999 was 13.55% compared to 12.83% at June 30, 1999.
Note 2 - Reclassification
Certain amounts for the prior period have been reclassified to conform
to the current period presentation.
Note 3 - Retained Interest and Other Interest Income
Retained interest and other interest income primarily includes the
discount accretion recognized on Retained Interest, the discount accretion
related to the servicing asset, interest earned on cash collection accounts on
all securitization transactions before January 1, 1997, and interest earned on
cash and cash equivalents.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Six Months Ended December 31, 1999 and 1998
(Unaudited)
Note 4 - Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information ("SFAS
131") effective June 30, 1999. SFAS 131 provided new guidance on segment
reporting. 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 financial information.
Note 5 - Earnings Per Share
Earnings per Share have been computed on the basis of the weighted
average number of common shares outstanding in accordance with Statement of
Financial Standards No. 128 "Earnings per Share" (EPS). The following is a
reconciliation of the weighted average common shares for the basic and diluted
earnings per share computations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ------------------------
1999 1998 1999 1998
----------------------- ------------------------
<S> <C> <C> <C> <C>
Basic EPS:
Weighted average common shares 13,264,379 13,236,313 13,257,519 13,233,897
========== ========== ========== ==========
Diluted EPS:
Weighted average common shares 13,264,379 13,236,313 13,257,519 13,233,897
Dilutive effect of stock options 44,544 - 44,701 2,141
---------- ---------- ---------- ----------
Weighted average common and
incremental shares 13,308,923 13,236,313 13,302,220 13,236,038
========== ========== ========== ==========
</TABLE>
The effect of stock options not exercised during the three and six
months ended December 31, 1999 are dilutive although the effect on earnings per
share is less than $.01. The effect of stock options not exercised during the
six months ended December 31, 1998 are dilutive although the effect on earnings
per share is less than $.01. The effect of stock options not exercised during
the three months ended December 31, 1998 are anti-dilutive and therefore not
included in weighted average common shares.
Note 6 - Current Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement, as amended, is effective for
fiscal years beginning after June 15, 2000, with earlier application allowed.
Management is currently assessing the impact, if any, of this Statement on the
financial condition and operations of the Company upon adoption.
<PAGE>
Union Acceptance Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
For the Six Months Ended December 31, 1999 and 1998
(Unaudited)
Note 7 - Retained Interest in Securitized Assets
Retained Interest in Securitized Assets is recorded as an "available
for sale" security and is recorded at fair value with unrealized gains and
losses attributable to changes in fair value, net of income taxes, recorded as a
separate component of shareholders' equity ("accumulated other comprehensive
earnings"). Other than temporary impairment charges are recorded through
earnings as a component of gain on sale of receivables, net.
Retained Interest in Securitized Assets is as follows (in thousands) at:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- -----------
<S> <C> <C>
Estimated gross interest spread from receivables,
net of estimated prepayments and fees $ 278,568 $ 248,687
Estimated dealer premium rebates refundable 19,943 22,923
Estimated credit losses on securitized receivables (107,625) (104,448)
Spread accounts 61,424 69,757
Discount to present value (53,691) (46,054)
----------- -----------
Total Retained Interest in Securitized Assets $ 198,619 $ 190,865
=========== ===========
Outstanding balance of securitized receivables $ 2,408,857 $ 2,256,415
=========== ===========
Estimated credit losses as a percentage of
securitized receivables serviced 4.47% 4.63%
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
General
The Company derives substantially all of its earnings from the
acquisition, securitization and servicing of retail installment sales contracts
and installment loan agreements. The retail installment sales 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. To fund the acquisition of these receivables
prior to securitization, the Company utilizes a revolving warehouse credit
facility, discussed in "Liquidity and Capital Resources." Through
securitizations, the Company periodically pools and sells receivables to a trust
which issues Securities to investors representing pro-rata interests in the
receivables sold or notes representing the indebtedness of the trust secured by
the receivables sold. When the Company sells receivables in a securitization, it
records a gain (or loss) on sale of receivables and establishes Retained
Interest in Securitized Assets ("Retained Interest") as an asset. Excess cash
flows are recorded against Retained Interest as received over the life of the
related securitization.
Acquisition Volume. The Company currently acquires receivables in 35
states from over 4,300 manufacturer-franchised auto 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"). Total receivable acquisitions were $263.8 million for the
quarter ended December 31, 1999, compared to $330.3 million for the quarter
ended September 30, 1999, and $361.9 million for the same quarter of last fiscal
year. The Company's primary focus is on acquiring high quality, profitable
receivables. The Company operated in a lower, more stable interest rate
environment during the prior fiscal year which contributed to higher acquisition
volume. During the first and second quarters of fiscal 2000, the Company
experienced pricing pressures due to increasing treasury rates and as a result
experienced lower receivable acquisitions. The Company also believes the
decrease in receivable acquisitions is due to the seasonality of the industry in
which it operates and its commitment to maintaining a high credit quality
obligor. Although receivable acquisitions were lower, the Company succeeded in
its effort to improve credit quality by increasing the weighted average credit
score on receivables acquired during the second quarter ended December 31, 1999,
over the fiscal 2000 first quarter and any fiscal 1999 quarter. The Company had
receivable acquisitions of $106.0 million for the month of January and is
targeting higher receivables acquisitions for the third and fourth quarters of
fiscal 2000 compared to the quarter ended December 31, 1999. The Company plans
to continue its expansion into the northeastern states during the latter half of
the third quarter and into the fourth quarter. The Company believes that its
increased emphasis on growing existing markets and its planned expansion will
result in increased acquisition volume. See - "Discussion of Forward-Looking
Statements".
Gross and Net Spreads. The gross and net spreads on the second quarter
securitization of fiscal 2000 were 7.06% and 5.66% compared to 6.89% and 5.25%,
respectively, over the same quarter of last fiscal year. Gross spread is defined
as the difference between the weighted average receivable rate and the rate born
by the related asset-backed securities. Net spread is defined as gross spread
less servicing fees, upfront costs, ongoing credit enhancement and trustee fees,
and hedging gains or losses.
Net spreads are currently targeted at 5.00% to 5.50% on securitizations
for the quarter ended March 31, 2000 and 5.25% to 5.75% for the quarter ended
June 30, 2000. Management believes that by targeting a spread of 7.00% to 7.50%
between receivable rates and the two-year treasury rate that these net spreads
can be achieved. Although management believes these spreads can be achieved,
material factors affecting the net spreads are difficult to predict and could
cause management's projections to be materially inaccurate. These include
current market conditions with respect to interest rates and demand for
asset-backed securities generally and for securities issued in securitizations
sponsored by the Company. See - "Discussion of Forward-Looking Statements".
Gain on Sales of Receivables, Net and Interest Rate Risk. Gain on sales
of receivables continues to be 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 Company's sources for funds generally have variable rates of
interest, and its receivable portfolio bears interest at fixed rates. The
Company therefore bears interest rate risk on receivables until they are
securitized and employs a hedging strategy to mitigate this risk. The Company
uses a hedging strategy that primarily consists of the execution of forward
interest rate swaps having a maturity approximating the average maturity of the
receivable production during the relevant period. There is no assurance that
this strategy will completely offset changes in interest rates. In particular,
such strategy depends on management's estimates of receivable acquisition volume
and timing of its securitizations. The Company realizes a gain on its hedging
transactions during periods of increasing interest rates and widening swap
spreads and realizes a loss on such transactions during periods of decreasing
interest rates and tightening swap spreads. The hedging gain or loss will in
part offset changes in interest rates as reflected by a lower or higher reported
gain on sales of receivables, respectively. Recognition of unrealized gains or
losses is deferred until the sale of receivables during the securitization. On
the date of the sale, deferred hedging gains and losses are recognized as a
component of the gain on sales of receivables, net.
Portfolio Performance. The Company saw a stabilization of net credit
losses during the previous three quarters but experienced an increase for the
quarter ended December 31, 1999. Tier I net credit losses totaled 2.40% for the
quarter ended December 31, 1999, compared to 1.97% and 2.15% for the quarters
ended September 30, 1999 and December 31, 1998, respectively. Tier I net credit
losses for the six months ended December 31, 1999 were 2.19% which was lower
than 2.46% for the six months ended December 31, 1998. Delinquency on the Tier I
automobile portfolio was 3.33% at December 31, 1999, compared to 3.18% and 3.04%
at September 30, 1999 and December 31, 1998, respectively. Management believes
that the increase in net credit losses and delinquency is a result of several
factors, including a continued deterioration in credit quality of the older
pools including 1997A and before and general seasonality experienced in the
portfolio. The Company expects Tier I net credit losses and delinquencies to
stabilize in the third quarter. Recoveries as a percentage of gross charge-offs
on the Tier I portfolio decreased to 38.87% for the quarter ended December 31,
1999, compared to 41.12% for the quarter ended September 30, 1999, and increased
from 37.79% for the same quarter of last year. This increase over the prior year
is primarily due to an increase in the retail sale of repossessed vehicles at
the Company's new car franchised dealership in Indianapolis for the quarter
ended December 31, 1999, compared to the quarter ended December 31, 1998. This
method of disposing of repossessions along with stricter monitoring of the
repossession and resale process should increase the recovery rate over time.
Recovery rates for repossessed automobiles sold by the Company's retail
operation are significantly higher than recovery rates on vehicles sold at
auction. Approximately 20% of repossessed automobiles were sold at the Company's
retail operation during the three months ended December 31, 1999, compared to
approximately 18% for the three months ended December 31, 1998. For those
automobiles sold at retail during the quarter ended December 31, 1999, the net
proceeds received were approximately 56% of the percentage of the gross
charge-off amount. See - "Discussion of Forward-Looking Statements".
Provisions are made for estimated net credit losses in conjunction with
each receivable sale. The current assumption utilized in the gain on sale of
receivables calculation for estimated net credit losses on the fiscal 2000
second quarter securitization was 4.50% over the life of the pool based on a
combined sale of Tier I, Tier II and modified receivables. Estimated net credit
losses as a percentage of securitized receivables serviced (inherent in Retained
Interest) was 4.47% at December 31, 1999, compared to 4.57% and 4.59% at
September 30, 1999, and December 31, 1998, respectively.
<PAGE>
Tier I Portfolio. Set forth below is certain information concerning the
Company's experience pertaining to delinquencies and net credit losses on the
Tier I fixed rate retail automobile, light truck and van receivables serviced by
the Company. There can be no assurance that future delinquency and net credit
loss experience on receivables will be comparable to that set forth below. See
"Discussion of Forward-Looking Statements".
<TABLE>
<CAPTION>
Tier I Delinquency Experience
-----------------------------------------------------------------------------------------------------
At December 31, 1999 At September 30, 1999 At December 31, 1998
--------------------------------- ---------------------------------- -------------------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio 217,904 $2,540,391 217,296 $ 2,530,654 202,890 $2,277,112
Delinquencies:
30-59 days 4,636 $ 49,988 4,714 $50,734 4,379 $ 44,626
60-89 days 2,202 24,505 1,955 20,439 1,682 17,475
90 days or more 944 10,151 875 9,291 694 7,161
---------- ----------- -------- ------------ -------- -----------
Total delinquencies 7,782 $ 84,644 7,544 $80,464 6,755 $ 69,262
========== =========== ======== ============ ======== ===========
Delinquency as a percentage
of servicing portfolio 3.57% 3.33% 3.47% 3.18% 3.33% 3.04%
</TABLE>
As indicated by the above table, delinquency rates based upon
outstanding receivable balances of accounts 30 days past due and over were 3.33%
at December 31, 1999, compared to 3.18% at September 30, 1999, and 3.04% at
December 31, 1998, for the Company's Tier I servicing portfolio.
<PAGE>
<TABLE>
<CAPTION>
Tier I Credit Loss Experience
For the Three Months Ended
-----------------------------------------------------------------------------------------
December 31, 1999 September 30, 1999 December 31, 1998
------------------------- -------------------------- ----------------------------
(Dollars in thousands)
Number of Number of Number of
Receivables Amount Receivables Amount Receivables Amount
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Average servicing portfolio 217,695 $2,537,094 216,508 $2,515,461 200,164 $2,234,753
Gross charge-offs 2,232 $ 24,948 2,003 $ 21,088 1,886 $ 19,339
Recoveries 9,698 8,671 7,309
---------- ---------- ----------
Net charge-offs $ 15,250 $ 12,417 $ 12,030
========== ========== ==========
Gross charge-offs as a percentage
of average servicing portfolio (1) 4.10% 3.93% 3.70% 3.35% 3.77% 3.46%
Recoveries as a percentage of
gross charge-offs 38.87% 41.12% 37.79%
Net charge-offs as a percentage
of average servicing portfolio (1) 2.40% 1.97% 2.15%
</TABLE>
(1) Annualized
<TABLE>
<CAPTION>
For the Six Months Ended
---------------------------------------------------------------
December 31, 1999 December 31, 1998
----------------------------- -------------------------
(Dollars in thousands)
Number of Number of
Receivables Amount Receivables Amount
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Average servicing portfolio 217,102 $ 2,526,278 195,521 $2,161,458
Gross charge-offs 4,235 46,037 4,082 42,990
Recoveries 18,370 16,455
----------- -----------
Net charge-offs $ 27,667 $ 26,535
=========== ===========
Gross charge-offs as a percentage
of average servicing portfolio (1) 3.90% 3.64% 4.18% 3.98%
Recoveries as a percentage
of gross charge-offs 39.90% 38.28%
Net charge-offs as a percentage
of average servicing portfolio (1) 2.19% 2.46%
</TABLE>
(1) Annualized
As indicated in the above table, net credit losses on the Tier I auto
portfolio totaled $15.3 million for the quarter ended December 31, 1999, or
2.40% (annualized) as a percentage of the average servicing portfolio, compared
to 1.97% and 2.15% for the quarters ended September 30, 1999, and December 31,
1998, respectively.
Results of Operations
Net earnings decreased 26.5% to $2.1 million, or $.16 per diluted
share, for the quarter ended December 31, 1999, compared to $2.9 million, or
$0.22 per diluted share, for the quarter ended December 31, 1998. Net earnings
increased 52.0% to $7.6 million, or $.57 per diluted share, for the six months
ended December 31, 1999, compared to $5.0 million, or $.38 per diluted share,
for the six months ended December 31, 1998. The decrease in net earnings for the
quarter ended December 31, 1999 was primarily related to other than temporary
impairments taken during the quarter. The increase in net earnings for the six
months ended December 31, 1999 was primarily related to an increase in the net
interest margin after provision for estimated credit losses and an increase in
servicing fees over the same period of the prior fiscal year.
Net interest margin after provision for estimated credit losses
increased 44.0% to $6.3 million and 45.7% to $12.8 million for the quarter and
six months ended December 31, 1999, respectively, compared to $4.4 million and
$8.8 million for the corresponding periods ended December 31, 1998. The increase
in the net interest margin after provision for estimated credit losses was
primarily due to a decrease in the provision for estimated credit losses and an
increase in discount accretion included in retained interest and other interest
income.
Interest on receivables held for sale decreased 3.7% to $6.7 million
and 2.4% to $14.8 million for the quarter and six months ended December 31,
1999, respectively, compared to $6.9 million and $15.2 million for the same
periods of fiscal 1999. The decrease in interest on receivables held for sale
was primarily a result of a decrease in the average outstanding balance of
receivables held for sale to $190.0 million and $214.5 million for the quarter
and six months ended December 31, 1999, respectively, compared to $218.9 million
and $237.5 million for the same periods ended December 31, 1998.
Retained interest and other interest income increased 24.0% to $6.4
million and 12.4% to $12.2 million for the quarter and six months ended December
31, 1999, respectively, compared to $5.2 million and $10.8 million for the
corresponding periods ended December 31, 1998. Other interest income related to
discount accretion was $6.1 million and $11.5 million for the quarter and six
months ended December 31, 1999, respectively, compared to $4.7 million and $9.8
million for the quarter and six months ended December 31, 1998. The discount
component of Retained Interest increased at June 30, 1998 by implementing the
"cash out" method and again at June 30, 1999 by increasing the discount rate
used to record the gain on sale of receivables. (A more detailed discussion can
be found in the Company's Annual Report on Form 10-K for fiscal 1999). The
resulting effect during the current period was an increase in the amount of the
discount accreted into income. This increase in accretion was somewhat offset by
slower accretion of the discount into income on some pools that were determined
to be at risk for other than temporary impairment. Other interest income related
to the restricted cash accounts (collection and spread accounts) for the quarter
and six months ended December 31, 1999, was $330,000 and $686,000, respectively,
compared to $484,000 and $1.0 million, respectively, for the quarter and six
months ended December 31, 1998.
Interest expense decreased 4.9% to $6.2 million and 6.3% to $12.7
million for the quarter and six months ended December 31, 1999, respectively,
compared to $6.5 million and $13.6 million for the corresponding periods ended
December 31, 1998. The decrease was a result of lower long-term debt interest
expense as a result of a lower principal balance on long-term debt due to the
required second principal payment of $22.0 million on Senior Debt during August
1999 as well as lower average warehouse borrowing needs due to lower receivable
acquisitions.
Provision for estimated credit losses decreased 47.8% to $665,000 and
60.1% to $1.4 million for the quarter and six months ended December 31, 1999,
respectively, compared to $1.3 million and $3.6 million, respectively, for the
same periods of the fiscal 1999. The decrease is primarily due to lower
receivable acquisitions and a smaller portfolio of Tier II and modified
receivables held on balance sheet. Additionally, the allowance as a percentage
of the Tier II and modified portfolios has been increasing as these portfolios
have been experiencing fewer losses. The allowance for estimated credit losses
related to the held for sale portfolio serviced was 1.67% at December 31, 1999,
compared to 1.28% at September 30, 1999 and .92% at December 31, 1998.
Gain on sales of receivables, net decreased 69.2% to $1.3 million and
increased 14.7% to $7.8 million for the quarter and six months ended December
31, 1999, respectively, compared to $4.1 million and $6.8 million for the
quarter and six months ended December 31, 1998, respectively. The gain for the
quarters ended December 31, 1999 and 1998, consisted of gains on securitization
transactions of $5.3 million and $5.7 million offset by charges for other than
temporary impairments of Retained Interest of $4.0 million and $1.6 million,
respectively. The gain for the six months ended December 31, 1999 and 1998,
consisted of gains on securitization transactions of $12.1 million and $12.0
million and charges for other than temporary impairments of Retained Interest of
$4.3 million and $5.2 million, respectively. Unrealized gains or losses on
Retained Interest are not charged to income. (See - Financial Condition -
"Retained interest in securitized assets," below). The decrease in the
securitization transaction gain primarily relates to a higher discount
assumption and a higher credit loss assumption used in the calculation of the
second quarter of fiscal 2000 gain on sale compared to the gain on sale recorded
in the same period of the prior fiscal year. Offsetting the increase in
assumptions was an increase in the volume of receivables sold in the fiscal 2000
second quarter securitization compared to the fiscal 1999 second quarter
securitization. The receivables sold in the securitization for the quarters
ended December 31, 1999 and 1998, of $302.7 million and $275.9 million,
respectively, primarily included receivable acquisitions for the months of
September, October and November of 1999 and 1998, respectively.
Set forth below is certain information relating to the second quarter
fiscal 2000 and 1999 securitizations.
Second Quarter Securitizations Fiscal
------------------------
2000 1999
-------- --------
1999 - D 1998 - D
Amount securitized (in millions) $302.7 $275.9
Weighted average receivable rate 13.62% 12.74%
Certificate rate 6.56% 5.85%
Gross spread (1) 7.06% 6.89%
Net spread (2) 5.66% 5.25%
Weighted average life (in years) 1.95 2.01
Credit loss assumption 4.50% 4.40%
Annual prepayment speed assumption 28.00% 25.00%
Discount rate assumption 14.81% 9.76%
Weighted average remaining maturity (in months) 69.9 69.1
Gain as a percentage of amount securitized 1.73% 2.10%
(1) Gross spread - difference between the weighted average receivable rate and
rate born by the related asset-backed securities.
(2) Net spread - gross spread less servicing fees, upfront costs, ongoing
credit enhancement and trustee fees, and hedging gain or losses.
Servicing fees increased 13.1% to $6.2 million and 17.6% to $12.3
million for the quarter and six months ended December 31, 1999, respectively,
compared to $5.5 million and $10.4 million for the quarter and six months ended
December 31, 1998, respectively. The increase in servicing fees is a result of
the increase in average securitized receivables by 14.8% to $2.4 billion for the
second quarter of fiscal 2000 compared to $2.1 billion for the second quarter of
fiscal 1999. Servicing fees consist primarily of contractual servicing fees of
1.0% on Tier I securitizations.
Late charges and other fees increased 28.6% to $1.5 million and 26.6%
to $3.0 million for the quarter and six months ended December 31, 1999, compared
to $1.2 million and $2.4 million for the corresponding periods of fiscal 1999.
Other fees consist primarily of late charges and other fee income and the gross
profit from the dealership sales. The increase in the current quarter resulted
primarily from the dealership gross profit on sales of $235,000 and $559,000 for
the three and six months ended December 31, 1999, respectively, compared to
$65,000 and $105,000 for the comparable periods of the prior fiscal year.
Salaries and benefits expense increased 23.5% to $6.7 million and 22.8%
to $13.7 million for the quarter and six months ended December 31, 1999,
respectively, from $5.5 million and $11.1 million for the corresponding periods
ended December 31, 1998. The increase was primarily related to an increase in
full-time equivalent employees and the accrual of annual performance based
incentives. The average full-time equivalents for the quarter and six months
ended December 31, 1999 were 574 and 556, respectively, compared to 528 and 534
for the same periods of fiscal 1999.
Other general and administrative expense increased 2.8% to $5.0 million
and 8.0% to $9.9 million for the quarter and six months ended December 31, 1999,
respectively, compared to $4.9 million and $9.2 million for the same periods of
fiscal 1999. Other operating expense includes occupancy and equipment costs,
outside and professional services, receivable expenses, promotional expenses,
travel, office supplies and other. Total operating expenses (including salaries
and benefits) as a percentage of the average servicing portfolio was 1.82% and
1.83% for the quarter and six months ended December 31, 1999, respectively,
compared to 1.79% and 1.82% for the same periods of fiscal 1999 and continues to
be below the industry average.
Financial Condition
Receivables held for sale, net and servicing portfolio. Receivables
held for sale, net includes the principal balance of receivables held for sale,
net of unearned discount and allowance for estimated net credit losses,
receivables in process, and prepaid dealer premiums. The Company's portfolio of
receivables held for sale, net decreased to $175.0 million at December 31, 1999,
from $267.3 million at June 30, 1999. The decrease was primarily due to a higher
volume of Tier I receivables securitized compared to Tier I receivables acquired
in the current fiscal quarter resulting from lower receivable acquisitions in
the second quarter of fiscal 2000 compared to the fourth quarter of fiscal 1999.
Allowance for net credit losses on receivables held for sale was $2.9 million at
December 31, 1999, compared to $2.8 million at June 30, 1999. The Company
serviced $2.4 billion and $2.3 billion in securitized receivables, and the total
servicing portfolio was $2.6 billion and $2.5 billion as of December 31 and June
30, 1999, respectively.
Retained interest in securitized assets ("Retained Interest"). Retained
Interest increased $7.8 million to $198.6 million at December 31, 1999, from
$190.9 million at June 30, 1999. The Retained Interest balance increased or
decreased by the amounts capitalized upon consummation of the first and second
quarter securitizations including estimated dealer premium rebates, collections,
accretion of discount, change in spread accounts, impairment and net change in
unrealized gain. The Company's collections are the receipt of the net interest
spread.
The following table illustrates the activity of Retained Interest for the six
months ended December 31, 1999 (in thousands):
Balance at June 30, 1999 $190,865
Amounts capitalized (including estimated dealer rebates) 29,194
Collections (23,435)
Accretion of discount 11,412
Change in spread accounts (8,333)
Impairment (4,243)
Net change in unrealized gain (loss) 3,159
--------
Balance at December 31, 1999 $198,619
========
Allowance for net credit losses on securitized receivables is included
as a component of Retained Interest. At December 31, 1999, the allowance related
to both Tier I and Tier II securitized receivables totaled $107.6 million, or
4.47% 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 on a "cash out" basis at December 31, 1999, include the Company's
latest estimates for net credit losses of 4.00% to 6.63% on Tier I receivables
and 12.00% to 16.00% on Tier II receivables as a percentage of original
principal balance over the life of receivables, annual prepayment estimates
ranging from 21.31% to 28.00% on Tier I receivables and 14.16% to 20.73% on Tier
II receivables, and discount rates ranging from 8.90% to 15.24% on Tier I
receivables and 12.40% to 16.11% on Tier II receivables. The weighted average
discount rate used to value Retained Interest at December 31, 1999 was 13.55%
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 SFAS 115. See - "Discussion of Forward-Looking Statements".
Amounts due under revolving warehouse credit facility and long-term
debt. The balance of the revolving warehouse credit facility and the Senior and
Senior Subordinated Notes was $304.4 million at December 31, 1999, compared to
$384.5 million at June 30, 1999. The decrease in borrowings was a result of a
required principal payment on the Company's Senior Note in August 1999 of $22.0
million and a decrease in acquisition volume for the period after the second
quarter securitization through December 31, 1999, compared to the acquisition
volume for the period after the fourth quarter securitization through June 30,
1999.
Current and deferred income taxes payable. Current and deferred income
taxes payable was $3.3 million at December 31, 1999, compared to $16.0 million
at June 30, 1999. The decrease is a result of tax payments made during the first
and second quarters offset by an increase in 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 to support operations. Its primary uses of cash
include (i) acquisition of receivables, (ii) payment of dealer premiums, (iii)
securitization costs including cash held in spread accounts and similar cash
collateral accounts under the revolving warehouse credit facility, (iv) servicer
advances of payments on securitized receivables pursuant to securitization
trusts, (v) losses on hedging transactions realized in connection with the
closing of securitization transactions where interest rates have declined during
the period covered by the hedge, (vi) operating expenses, (vii) payment of
income taxes, and (viii) interest expense. The Company's sources of cash from
operations include (i) standard servicing fees, generally 1.0% per annum of the
Tier I securitized portfolio, (ii) cash flows from retained interest in
securitized receivables, (iii) dealer premium rebates, (iv) gains on hedging
transactions realized in connection with the closing of securitization
transactions where interest rates have increased during the periods covered by
the hedge, (v) interest income and (vi) sales of receivables in securitization
transactions and (vii) proceeds from sale of interest-only strips in conjunction
with securitization transactions. Net cash from operating activities increased
to $53.6 million for the six months ended December 31, 1999, from net cash used
in operating activities of $167.6 million for the six months ended December 31,
1998. The increase was primarily attributable to an increase in receivables
securitized relative to receivables acquired. Net cash from investing activities
was $29.7 million and $20.0 million for the six months ended December 31, 1999
and 1998, respectively. The increase over prior year relates to higher
collections on Retained Interest and change in spread accounts due to lower net
credit losses and the release of the 1995B spread account of approximately $7.0
million due to repurchasing the remaining receivables from this securitization.
Derivative financial instruments. Derivative financial instrument
transactions may represent a source or a use of cash during a given period
depending on the change in interest rates. In the first and second quarters of
fiscal 2000, derivative financial instrument transactions provided a source of
cash of $2.6 million compared to a use of cash of $6.6 million during the first
and second quarters of fiscal 1999.
Financing Activities. Net cash from financing activities for the six
months ended December 31, 1999 was ($80.5) million compared to net cash from
financing activities of $79.6 million for the six months ended December 31,
1998. The decrease was a result of a decrease in warehouse borrowings for the
period after the second quarter securitization through December 31, 1999
compared to the same period ended December 31, 1998.
The Company has substantial capital requirements to support its ongoing
operations and anticipated growth. The Company's sources of liquidity are
currently funds from operations, securitization transactions and external
financing including long-term debt and the revolving warehouse credit facility.
Historically, the Company has used the securitization of receivable pools as its
primary source of long-term funding. In August 1999, the Company established an
additional source of liquidity through a securitization arrangement with a
commercial paper conduit which will be available for future use as management
deems appropriate. Such facility has a capacity of $250.0 million, all of which
is currently available. Securitization transactions enable the Company to
improve its liquidity, to recognize gains from the sales of the receivable pools
while maintaining the servicing rights to the receivables, and to control
interest rate risk by matching the repayment of amounts due to investors in the
securitizations with the actual cash flows from the securitized assets. Between
securitization transactions, the Company relies primarily on the revolving
warehouse credit facility to fund ongoing receivable acquisitions not including
dealer premiums. In addition to receivable acquisition funding, the Company also
requires substantial capital on an ongoing basis to fund the advances of dealer
premiums, securitization costs, servicing obligations and other cash
requirements previously described. The Company's ability to borrow under the
revolving warehouse credit facility is dependent upon its compliance with the
terms and conditions thereof. The Company's ability to obtain successor
facilities or similar financing will depend on, among other things, the
willingness of financial institutions to participate in funding automobile
financing business and the Company's financial condition and results of
operations. Moreover, the Company's growth may be inhibited, at least
temporarily, if the Company is not able to obtain additional funding through
these or other facilities, or if it is unable to satisfy the conditions to
borrowing under the revolving warehouse credit facility. The Company
consistently assesses its long-term receivable funding arrangements with a view
to optimizing cash flows and reducing costs. The Company has several options for
funding including, but not limited to, a public asset backed securitization, a
sale into the commercial paper facility, a private sale, or temporarily holding
the receivables. The Company continues to evaluate market conditions and
available liquidity and could decide to alter the timing of its securitizations
in the future depending on the Company's cash position and available short-term
funding.
Warehouse facility. The Company has borrowing arrangements with an
independent financial institution for a $500.0 million revolving warehouse
credit facility that is insured by a surety bond provider to fund Tier I
receivable acquisitions. At December 31, 1999, $127.4 million of the capacity
was utilized, and an additional $43.3 million was available to borrow based on
<PAGE>
the outstanding principal balance of eligible receivables. At June 30, 1999, and
December 31, 1998, $185.5 million and $174.8 million of the capacity was
utilized, and an additional $67.2 million and $51.9 million was available to
borrow based on the outstanding principal balance of eligible receivables,
respectively.
Long-term debt. The Company issued $110.0 million of 8.53% Senior Notes
due August 1, 2002, in connection with the Company's initial public offering.
Interest on the Notes is payable semiannually, and principal payments began
August 1, 1998, and are due on each subsequent August 1st in the amount equal to
approximately 20% of the stated original principal balance. A required principal
payment was made on the Senior Notes in August 1998 and August 1999 of $22.0
million. In April 1996, the Company completed a private placement of $46.0
million of 9.99% Senior Subordinated Notes due March 30, 2003, with interest
payable quarterly and principal due at maturity. In March 1997, the Company
issued $65.0 million of Senior Notes due December 27, 2002. The Notes were
issued as "Series A" in the principal amount of $50.0 million at 7.75% interest
and "Series B" in the principal amount of $15.0 million at 7.97% interest.
Interest on the Notes is payable semiannually and a principal payment is due
March 15, 2002, in the amount equal to approximately 33 1/3% of the stated
original balance, with the remaining principal due at maturity.
The Company's credit agreements, among other things, require compliance
with monthly and quarterly financial maintenance tests and restrict the
Company's ability to create liens, incur additional indebtedness, sell or merge
assets and make investments. The Company is in compliance with all covenants and
restrictions imposed by the terms of indebtedness.
Based on current cash flow projections, management believes that the
Company's existing capital resources, the revolving warehouse credit facility
described above, future earnings, expected growth in receivable acquisitions,
and periodic securitization of receivables should provide the necessary capital
and liquidity for its operations through at least the next twelve months. The
period during which its existing capital resources will continue to be
sufficient will, however, be affected by the factors described above affecting
the Company's cash requirements. A number of these factors are difficult to
predict, particularly including the cash effect of hedging transactions, the
availability of outside credit enhancement in securitizations or other financing
transactions and other factors affecting the net cash provided by
securitizations. Depending on the Company's ongoing cash and liquidity
requirements, market conditions and investor interest, the Company may seek to
issue additional debt or equity securities in the near term. The sale of
additional equity, including Class A Common Stock or preferred stock, would
dilute the interests of current shareholders. See - "Discussion of
Forward-Looking Statements".
Discussion of Forward-Looking Statements
The above discussions and notes to consolidated condensed financial
statements contain forward-looking statements made by the Company regarding its
results of operations, effects of changes in accounting policies, cash flow
needs and liquidity, receivable acquisition volume, target spreads, potential
credit losses, recovery rates, prepayment rates, servicing income, and other
aspects of its business. Similar forward-looking statements may be made by the
Company from time to time. Such forward-looking statements are subject to a
number of important factors that cannot be predicted with certainty and which
could cause such forward-looking statements to be materially inaccurate. Such
factors include, for example, demand for new and used autos, competition, and
consumer credit and delinquency trends. See the "Discussion of Forward-Looking
Information" under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's Annual Report on Form 10-K for
fiscal 1999 which is incorporated herein by this reference.
Year 2000 Compliance
Pre-Century Rollover
- --------------------
All known mission critical systems were either replaced or upgraded
with Year 2000 compliant solutions. The last of these upgrades was performed in
March 1999 as scheduled. The Company had re-tested all systems by November 15,
1999. There was also a "quiet period" that was implemented from October 1, 1999
through December 31, 1999. The purpose of the "quiet period" was to eliminate
any new Year 2000 issues by blocking any new software or hardware installations
or upgrades unless to correct a Year 2000 bug.
Post-Century Rollover
- ---------------------
All mission critical systems were monitored and tested during the
December 31st through January 2nd weekend. There have been three known
non-mission critical issues that have arisen since the rollover weekend. The
first two were identified and corrected without any outages or service delays.
The third issue centered around custom code on two non-mission critical download
files that slipped through testing. Once the issue was identified and corrected,
normal operation was restored. There were two days of incomplete files with
limited impact.
<PAGE>
Costs
- -----
The replacement or remedial costs for year 2000 compliance issues with
the Company was approximately $100,000, which the Company recognized as
incurred. The cost was mostly due to software upgrades that include new features
which were combined with Year 2000 corrections. See - "Discussion of
Forward-Looking Statements".
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
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. For
example, if net credit losses increased or decreased by 100 basis points on a
$300.0 million securitization, the gain on sale would result in a reduction or
an increase of the Gain (Loss) on Sales of Receivables by approximately $3.0
million pre-tax, before consideration of discounting. The same 100 basis points
increase or decrease would result in a reduction or an increase of the Retained
Interest of approximately $24.0 million, before consideration of discounting,
based on a securitized receivable portfolio of $2.4 billion at December 31,
1999. The forgoing examples are developed utilizing the cash flow model employed
by management to calculate the fair value of Retained Interest by changing the
credit loss assumption as described. The Company does not believe fluctuations
in interest rates materially affect the rate of prepayments on receivables.
The Company's sources of funds generally have variable rates of
interest, and its receivable portfolio bears interest at fixed rates. The
Company therefore bears interest rate risk on receivables until they are
securitized and employs derivative financial instruments to mitigate this risk.
The Company uses a hedging strategy that primarily consists of the execution of
forward interest rate swaps having a maturity approximating the average maturity
of the receivable production during the relevant period. There is no assurance
that this strategy will completely offset changes in interest rates. In
particular, such strategy depends on management's estimates of receivable
acquisition volume and timing of its securitizations. The Company realizes a
gain on its hedging transactions during periods of increasing interest rates and
widening swap spreads and realizes a loss on such transactions during periods of
decreasing interest rates and tightening swap spreads. The hedging gain or loss
should substantially offset changes in interest rates as seen by a lower or
higher reported gain on sales of receivables, respectively. Recognition of
unrealized gains or losses is deferred until the sale of receivables during the
securitization. On the date of the sale, deferred hedging gains and losses are
recognized as a component of Gain (Loss) on Sales of Receivables. Increases or
decreases in interest rates reduce or increase the fair value of long-term debt,
respectively. At December 31, 1999, the Company had an unrealized hedging gain
on forward interest rate swaps of $1.1 million based on notional amounts
outstanding of $342.4 million.
<PAGE>
The following table presents the principal cash repayments and related
weighted average interest rates by maturity date for the current variable rate
and long-term debt at December 31, 1999.
<TABLE>
<CAPTION>
Six months
ended June
30, 2000 2001 2002 2003 Total Fair Value
-------- ---- ---- ---- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due under warehouse facility $ 127,400 $ - $ - $ - $ 127,400 $127,400
Weighted average variable rate 5.24%
Long-term debt $ - $22,000 $43,667 $111,333 $ 177,000 $157,911
Weighted average fixed rate 0.00% 8.53% 8.14% 8.86% 8.64%
</TABLE>
Sensitivity analysis on Retained Interest
At December 31, 1999, 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 December 31, 1999 Tier I Tier II Total
------------- ---------------- -------------
<S> <C> <C> <C>
Fair value of retained interest (1) $199,651,275 $6,684,463 $206,335,738
Prepayment speed assumption (annual rate) 21.31% - 28.00% 14.16% - 20.73%
Impact on fair value of 10% adverse change $193,755,881 $6,639,148 $200,395,029
Impact on fair value of 20% adverse change $188,163,503 $6,595,301 $194,758,804
Net loss rate assumption (pool life rate) 4.00% - 6.63% 12.00% - 16.00%
Impact on fair value of 10% adverse change $179,142,917 $5,459,441 $184,602,358
Impact on fair value of 20% adverse change $158,483,730 $4,222,674 $162,706,404
Discount rate assumption (annual rate) 8.90% - 15.24% 12.40% - 16.11%
Impact on fair value of 10% adverse change $194,869,223 $6,555,364 $201,424,587
Impact on fair value of 20% adverse change $190,302,624 $6,430,194 $196,732,818
</TABLE>
(1) Retained Interest on the balance sheet is lower than the total fair value
included in this analysis. The difference is 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. See "Discussion of Forward-Looking Statements."
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the Company's Annual Meeting of Shareholders, on November 16, 1999,
the following nominees were elected to the Board of Directors.
Affirmative Votes
Votes Withheld
----------------------------------------
John M. Davis 43,207,235 10,375
Fred M. Fehsenfeld, Jr. 43,206,835 10,775
Donald A. Sherman 43,207,135 10,475
John M. Stainbrook 43,206,835 10,775
Jerry D. Von Deylen 43,207,135 10,475
Richard D. Waterfield 43,207,235 10,375
Thomas M. West 43,207,135 10,475
The following proposals were approved at the Company's Annual Meeting on
November 16, 1999:
Ratification of appointment of auditors. Deloitte & Touche LLP was retained as
the Company's auditors for the fiscal year 2000. The votes were as follows:
12,575,727 Affirmative Votes; 17,351 Negative Votes; and 5,300 Votes Abstained.
Approval of the adoption of the Union Acceptance Corporation 1999 Incentive
Stock Plan reserving 300,000 shares of Class A Common Stock. The votes were as
follows: 10,340,707 Affirmative Votes; 221,161 Negative Votes; and 6,315 Votes
Abstained.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended December 31, 1999.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Acceptance Corporation
February 14, 2000 By: /S/ John M. Stainbrook
----------------------
John M. Stainbrook
President and Chief Executive Officer
February 14, 2000 By: /S/ Rick A. Brown
-----------------
Rick A. Brown
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927790
<NAME> Union Acceptance Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 23,306
<SECURITIES> 0
<RECEIVABLES> 179,319
<ALLOWANCES> (2,896)
<INVENTORY> 0
<CURRENT-ASSETS> 199,729
<PP&E> 14,664
<DEPRECIATION> (4,937)
<TOTAL-ASSETS> 430,535
<CURRENT-LIABILITIES> 24,742
<BONDS> 306,609
0
0
<COMMON> 58,620
<OTHER-SE> 40,564
<TOTAL-LIABILITY-AND-EQUITY> 430,535
<SALES> 0
<TOTAL-REVENUES> 50,059
<CGS> 0
<TOTAL-COSTS> 23,571
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,415
<INTEREST-EXPENSE> 12,743
<INCOME-PRETAX> 12,330
<INCOME-TAX> 4,763
<INCOME-CONTINUING> 7,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,567
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
</TABLE>
