18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period
ended September 30, 1997.
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period
From ______ to _____.
GENERAL ACCEPTANCE CORPORATION
(Exact name of Registrant as specified in its charter)
Commission File Number: 0-25760
<TABLE>
<CAPTION>
<S> <C>
Indiana 35-1739977
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1025 Acuff Road
Bloomington, Indiana 47404
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number: (812) 337-6000
Indicate by check mark whether the Registrant (1) has filed all reports
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 such 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.
Common Stock, no par value, 25,000,000 shares authorized, 6,022,000
shares issued and outstanding as of November 11, 1997.
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Page
----
PART I Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
9
Finance Revenues 10
Expenses 11
Income Taxes 13
Discontinued Operations 14
Liquidity and Capital Resources 15
Forward-Looking Statements 17
PART II. Other Information 18
Item 1. Legal Proceedings 18
Item 2. Changes In Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
General Acceptance Corporation
Consolidated Balance Sheets
<S> <C> <C>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------- -------------------
(UNAUDITED) (NOTE 1)
ASSETS
Contracts receivable:
Held for investment $ 76,562,726 $ 62,263,129
Held for sale --- 54,868,173
-------------------- -------------------
76,562,726 117,131,302
Allowance and discount available for credit losses (7,484,491) (10,611,268)
-------------------- -------------------
Contracts receivable, net 69,078,235 106,520,034
Cash and cash equivalents 1,127,174 1,683,429
Repossessions 938,618 7,534,045
Purchased and trade automobile inventory 5,904,543 2,518,069
Property and equipment, net 2,587,988 2,539,135
Taxes receivable 807,238 568,908
Prepaid guarantee fee 23,286,290 ---
Other assets 2,800,801 2,282,654
-------------------- -------------------
Total assets $ 106,530,887 $ 123,646,274
==================== ===================
LIABILITIES
Debt:
Revolving line of credit $ 55,201,695 $ 93,977,001
Bank line of credit --- 4,500,000
Subordinated notes 14,750,000 1,000,000
-------------------- -------------------
Total debt 69,951,695 99,477,001
Accounts payable and accrued expenses 4,229,817 4,650,695
Accrual for discontinued operations 2,600,000 ---
Dealer participation reserves available
for credit losses 1,177,256 1,855,223
-------------------- -------------------
Total liabilities 77,958,768 105,982,919
STOCKHOLDERS' EQUITY
Preferred stock; no par value; authorized
shares - 5,000,000; no shares issued or outstanding --- ---
Common stock; no par value;
authorized shares - 25,000,000;
issued and outstanding shares - 6,022,000 29,792,573 29,792,573
Additional paid-in capital 24,062,500 ---
Retained earnings (deficit) (25,282,954) (12,129,218)
-------------------- -------------------
Total stockholders' equity 28,572,119 17,663,355
-------------------- -------------------
Total liabilities and stockholders' equity $ 106,530,887 $ 123,646,274
==================== ===================
<FN>
See accompanying notes.
</TABLE>
<PAGE>
General Acceptance Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ---------------------------------
<S> <C> <C> <C>
1997 1996 1997
---------------------------------- --------------------------------- -------------
Finance revenues:
Interest and discount $ 3,731,261 $ 7,021,734 $ 13,026,544
Ancillary products 64,091 618,804 161,604
Other 55,319 11,557 444,735
---------------------------------- --------------------------------- -------------
Total finance revenues 3,850,671 7,652,095 13,632,883
Expenses:
Interest 1,726,081 2,184,597 5,375,353
Salaries and employee benefits 914,924 1,554,147 3,254,561
Marketing 29,829 66,506 122,370
Provision for credit losses 200,000 4,700,000 5,884,000
Guarantee fee 776,210 --- 776,210
Other 833,542 1,519,636 2,491,820
---------------------------------- --------------------------------- -------------
Total expenses 4,480,586 10,024,886 17,904,314
---------------------------------- --------------------------------- -------------
Income (loss) from continuing
operations before taxes (629,915) (2,372,791) (4,271,431)
Provision for income taxes --- (949,116) ---
---------------------------------- --------------------------------- -------------
Income (loss) from continuing
operations (629,915) (1,423,675) (4,271,431)
---------------------------------- --------------------------------- -------------
Discontinued operations:
Loss from operations of
discontinued company-owned
dealership business (1,579,028) (934,282) (6,282,305)
Loss on abandonment and sale of
company-owned dealership
business, including provision of
$700,000 for operating losses
during phase-out period (2,600,000) --- (2,600,000)
---------------------------------- --------------------------------- -------------
(4,179,028) (934,282) (8,882,305)
---------------------------------- --------------------------------- -------------
Net loss $ (4,808,943) $ (2,357,957) $(13,153,736)
================================== ================================= =============
Net income (loss) from continuing
operations per share $ (0.10) $ (0.24) $ (0.71)
================================== ================================= =============
Net loss per share $ (0.80) $ (0.39) $ (2.18)
================================== ================================= =============
Weighted average shares outstanding 6,022,885 6,022,000 6,024,916
================================== ================================= =============
<S> <C>
1996
------------
Finance revenues:
Interest and discount $20,510,553
Ancillary products 1,781,102
Other 316,198
------------
Total finance revenues 22,607,853
Expenses:
Interest 6,661,289
Salaries and employee benefits 5,241,188
Marketing 262,051
Provision for credit losses 5,925,000
Guarantee fee ---
Other 3,971,756
------------
Total expenses 22,061,284
------------
Income (loss) from continuing
operations before taxes 546,569
Provision for income taxes 218,628
------------
Income (loss) from continuing
operations 327,941
------------
Discontinued operations:
Loss from operations of
discontinued company-owned
dealership business (1,979,226)
Loss on abandonment and sale of
company-owned dealership
business, including provision of
$700,000 for operating losses
during phase-out period ---
------------
(1,979,226)
------------
Net loss $(1,651,285)
============
Net income (loss) from continuing
operations per share $ 0.05
============
Net loss per share $ (0.27)
============
Weighted average shares outstanding 6,022,000
============
<FN>
See accompanying notes.
</TABLE>
<PAGE>
General Acceptance Corporation
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Unaudited)
<S> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1996
--------------------------------- -------------
OPERATING ACTIVITIES
Net loss $ (13,153,736) $ (1,651,285)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation of property and equipment 558,651 488,699
Amortization of deferred origination costs and
revenues, net (65,715) 122,932
Amortization of prepaid guarantee fee 776,210 ---
Provision for credit losses:
Company dealership originated contracts 2,650,298 1,694,558
Third party originated contracts 5,884,000 5,925,000
Changes in operating assets and liabilities:
Increase in other assets and taxes
receivable (756,477) (1,359,682)
Increase (decrease) in accounts payable
and accrued expenses (420,878) 3,724,286
Increase in accrual for loss on discontinued
operations 2,600,000 ---
(Increase) decrease in purchased and trade
inventory (3,386,474) 1,505,522
--------------------------------- -------------
Net cash (used in) provided by operating activities (5,314,121) 10,450,030
INVESTING ACTIVITIES
Cost of acquiring or originating contracts receivable (32,947,490) (62,796,121)
Principal collected on contracts receivable 25,957,661 47,074,546
Proceeds from sales of contracts receivable 41,880,505 ---
Purchases of property and equipment (607,504) (1,307,752)
--------------------------------- -------------
Net cash (used in) provided by investing activities 34,283,172 (17,029,327)
FINANCING ACTIVITIES
Borrowings on revolving line of credit 52,195,762 79,477,381
Repayments of revolving line of credit (90,971,068) (75,950,158)
Borrowings on bank line 1,000,000 4,300,000
Repayments of bank line (5,500,000) ---
Issuance of subordinated notes 13,750,000 ---
--------------------------------- -------------
Net cash (used in) provided by financing activities (29,525,306) 7,827,223
--------------------------------- -------------
Net increase (decrease) in cash and cash equivalents (556,255) 1,247,926
Cash and cash equivalents at beginning of period 1,683,429 557,206
--------------------------------- -------------
Cash and cash equivalents at end of period $ 1,127,174 $ 1,805,132
================================= =============
<FN>
See accompanying notes.
</TABLE>
<PAGE>
General Acceptance Corporation
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1997
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. The
balance sheet as of December 31, 1996 has been derived from the audited
financial statements as of that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 1996.
Note 2. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share". SFAS 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997. The impact of
SFAS 128 on the calculation of primary and fully diluted earnings per share
for the three and nine months ended September 30, 1997 is not material.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosure About Segments of an Enterprise and Related
Information." This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that these enterprises report selected
information about operating segments in interim financial reports to
shareholders. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997.
<PAGE>
Note 3. Issuance of Convertible Subordinated Debt and Warrants
On September 16, 1997, Conseco, Inc. guaranteed $10.0 million of the
Company's indebtedness under its revolving line of credit. As a condition for
the issuance of the guarantee, the Company agreed, subject to shareholder
approval, to issue to Conseco, Inc. warrants to purchase 500,000 shares of
common stock at an exercise price of $1.00 per share. As a result of the
issuance of the warrants, the conversion price of $13.25 million in previously
issued subordinated notes, $10.0 million of which are held by Capitol American
Life Insurance Company, an affiliate of Conseco, Inc., is reduced from $3.00
to $1.00. In addition, the Company paid to Conseco, Inc. a fee of $300,000
for issuing the guarantee. Amounts funded under the guarantee, if any, would
trigger the issuance by the Company of a like amount of 12% convertible
subordinated notes to Conseco, Inc. The notes would be convertible into
common stock of the Company at a conversion price of the then current book
value per share, but not less than $0.25.
As a further condition for the issuance of the guarantee, the Company
exchanged existing unsecured indebtedness of $1.5 million from certain
principal stockholders for a like amount of 12% convertible subordinated notes
which mature June 30, 1999. These notes have terms identical to the notes
issuable to Conseco, Inc. in connection with any amounts funded under the
guarantee, except that, subject to shareholder approval, they may only be
converted on a pro rata basis concurrently with or following the conversion of
the notes issuable to Conseco, Inc.
Note 4. Discontinued Operations
As of the end of the third quarter of 1997, the Company adopted plans for
closure and sale by the end of January 1998 of its company-owned dealerships,
and accordingly, has classified the results of those operations as
discontinued. A charge of $2.6 million was recorded in the third quarter of
1997 which consisted of $1.9 million in estimated losses on the closing and
sale of the company-owned dealerships, and $700,000 in estimated operating
losses during the phase-out period. No tax benefit was recorded in connection
with this charge. The $2.6 million charge is based on estimates of future
events, including the loss on disposal of purchased and trade vehicle
inventory at auctions and operating results of the company-owned dealerships
during the phase-out period. It is reasonably possible that a material change
to this estimate could occur in the near term due to changes in the economy or
other conditions that influence the amount realized on purchased and trade
inventory or the operating results of the company-owned dealerships.
Summary results of the company-owned dealerships are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
------------------- ------------------ ---------- ----------
Total net dealership revenues $ 2,315,330 $ 382,893 $4,501,880 $1,403,135
Net loss 1,579,028 934,282 6,282,305 1,979,226
</TABLE>
Interest expense of $267,000 and $709,000, respectively, was allocated to
discontinued operations for the third quarter and first nine months of 1997
based on the monthly ratio of net assets discontinued to total net assets of
the Company. Interest expense allocated to discontinued operations for both
the third quarter and first nine months of 1996, as well as to estimated
operating losses during the phase-out period, was not material.
The net assets of the company-owned dealerships included in the
consolidated balance sheet are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
SEPTEMBER 30,
1997
--------------
Purchased and trade automobile inventory $ 5,904,543
Property and equipment, net 742,844
Other assets 882,401
--------------
Net assets $ 7,529,788
==============
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
Information regarding the components of contracts receivable, net is presented
below.
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
Contractually scheduled payments $ 98,894,683 $ 146,744,916
Add (deduct):
Unearned interest income (22,474,697) (30,006,489)
Accrued interest income 125,517 354,333
Net deferred acquisition costs 17,223 38,542
--------------- --------------
Contracts receivable 76,562,726 117,131,302
Allowance and discount available
for credit losses (7,484,491) (10,611,268)
--------------- --------------
Contracts receivable, net $ 69,078,235 $ 106,520,034
=============== ==============
</TABLE>
Changes in the components of amounts available for credit losses during the
nine and three month periods ended September 30, 1997 are presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ALLOWANCE DEALER PARTICIPATION
AND RESERVES
----------------------
DISCOUNT TOTAL
------------- -------------
Balance December 31, 1996 $ 10,611,268 $ 1,855,223 $ 12,466,491
Additions 11,080,090 2,044,724 13,124,814
Charge-offs, net (11,183,396) (2,094,614) (13,278,010)
Allocated to contracts receivable sold (3,023,471) (628,077) (3,651,548)
------------- ---------------------- -------------
Balance September 30, 1997 $ 7,484,491 $ 1,177,256 $ 8,661,747
============= ====================== =============
Balance June 30, 1997 $ 7,299,049 $ 1,045,935 $ 8,344,984
Additions 2,316,272 645,825 2,962,097
Charge-offs, net (2,130,830) (514,504) (2,645,334)
------------- ---------------------- -------------
Balance September 30, 1997 $ 7,484,491 $ 1,177,256 $ 8,661,747
============= ====================== =============
</TABLE>
Information on the Company's charge-off rate, total available for credit
losses and delinquency ratio is presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- ------------------
Net charge-offs to monthly average contracts
receivable (1) 21.00% 24.73%
Delinquency ratio (2) 2.66% 1.82%
Allocated portion of total available for credit losses
as a percentage of contracts receivable (3):
Held for sale --- 7.69%
Held for investment 11.31% 13.25%
<FN>
(1) Ratio of net charge-offs to average contracts receivable for the nine months ended
September 30, 1997 and the year ended December 31, 1996, is stated on an annualized basis.
(2) Contracts receivable, gross relating to contracts which were contractually past due 60
days or more, as a percentage of total contracts receivable, gross as of the end of the period
indicated.
(3) Total available for credit losses is defined as the sum of allowance and discount
available for credit losses and dealer participation reserves.
</TABLE>
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997, COMPARED TO THREE AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996
Finance Revenues
Total finance revenues decreased from $7.7 million for the third quarter
of 1996 to $3.9 million for the same period of 1997, or 49.7% and from $22.6
million for the first nine months of 1996 to $13.6 million for the same period
of 1997, or 39.7%. The decrease in both periods over the comparable 1996
periods was due primarily to a lower level of contracts receivable. The
Company sold $45.0 million of contracts originated in certain markets
consistent with its business strategy of focusing on its better performing
markets. The sales of contracts receivable took place during the period from
November 1996 to April 1997.
Interest and discount revenues decreased from $7.0 million for the third
quarter of 1996 to $3.7 million for the same period of 1997, or 46.9% and from
$20.5 million for the first nine months of 1996 to $13.0 million for the same
period of 1997, or 36.5%. The decrease in both periods was due primarily to a
decrease in average contracts receivable from $123.4 million for the third
quarter 1996 to $74.5 million for the same period of 1997, or 39.6%, and from
$123.6 million for the first nine months of 1996 to $84.5 million for the same
period of 1997, or 31.6%. The decrease in average contracts receivable was
primarily due to the decision to sell substantially all of the contracts
originated in the markets the Company had decided to exit. The average yield
on contracts receivable during the third quarter of 1996 was 22.4% compared to
19.6% for the same period of 1997 and was 21.9% for the first nine months of
1996 as compared to 19.8% for the same period of 1997. The decrease in both
periods was due primarily to an increase in the portion of the contract
interest rate related to dealer participation reserves against which losses
can be charged.
As a result of the Company's decision to exit from the business of
operating company-owned dealerships, as discussed under "Discontinued
Operations", contract volume originated by the company-owned dealerships is
expected to decline during the fourth quarter and stop altogether upon
completion of the sale of the remaining company-owned dealerships in January
1998. The Company is beginning to increase its marketing efforts directed
toward third-party dealers and anticipates that over time it will be
successful in replacing contract volume currently generated by company-owned
dealerships. However, no assurances can be made that the Company's efforts to
do so will be successful. Following is a summary of the Company's contract
originations:
<TABLE>
<CAPTION>
<S> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------
1997
---------------------------------
Company-owned dealerships $ 6,538,596 $ 17,300,340
Third party dealers 8,211,970 23,654,588
--------------------------------- -------------------------------------
$ 14,750,566 $ 40,954,928
================================= =====================================
</TABLE>
Ancillary products revenue decreased from $619,000 in the third quarter
of 1996 to $64,000 for the same period of 1997, or 89.6% and from $1.8 million
for the first nine months of 1996 to $162,000 for the same period of 1997, or
90.9%. The decrease in both 1997 periods over the comparable 1996 periods was
due primarily to the suspension of both a secured Visa credit card program
offered by the Company as co-brander and a related motor club program. The
Company continues to pursue an alternate Visa card issuer, but expects that
any such program will be significantly less profitable than the Company's
prior program.
Other revenues increased from $12,000 in the third quarter of 1996 to
$55,000 for the same period of 1997, or 378.7% and from $316,000 for the first
nine months of 1996 to $445,000 for the same period of 1997, or 40.7%. The
increase in both 1997 periods over the comparable 1996 periods was due
primarily to an increase in earned premiums associated with credit life and
disability policies produced and reinsured by the Company.
Expenses
Interest expense decreased from $2.2 million for the third quarter of
1996 to $1.7 million for the same period of 1997, or 21.0% and from $6.7
million for the first nine months of 1996 to $5.4 million for the same period
of 1997, or 19.3%. The decrease in both 1997 periods from the comparable 1996
periods was due primarily to a decrease in the average level of borrowings
from $97.2 million for the third quarter of 1996 to $67.6 million for the same
period of 1997, or 30.5%, and from $97.1 million for the first nine months of
1996 to $74.2 million for the same period of 1997, or 23.6%. The decrease in
average borrowings in both 1997 periods as compared to the 1996 periods was
due primarily to the application of proceeds from the sale of contracts
receivable to reduce borrowings under the Company's revolving line of credit.
The effect of lower average borrowings under the revolving line of credit was
partially offset by higher interest rates in both 1997 periods, as compared to
the 1996 periods. The Company's average borrowing cost for the third quarter
of 1996 was 8.6% compared to 10.6% for the same period of 1997 and 8.9% for
the first nine months of 1996 compared to 10.2% for the same period of 1997.
Higher borrowing costs for both 1997 periods over the comparable 1996 periods
were due primarily to an increase in the spread over LIBOR on the Company's
revolving line of credit. The spread over LIBOR was 3.0% as of September 30,
1996 and 3.25% as of September 30, 1997, although for most of the second and
third quarters of 1997 the spread was 4.5%. In addition, for the first nine
months of 1997, the Company's borrowings under the bank line of credit and
convertible subordinated notes increased borrowing costs as compared to the
first nine months of 1996 as the only borrowings during the same period of
1996 were under the revolving line of credit and the bank line of credit. The
bank line of credit was fully repaid during the third quarter of 1997. The
interest rate on the convertible subordinated notes is 12.0%.
Salaries and employee benefits decreased from $1.6 million for the third
quarter of 1996 to $915,000 for the same period of 1997, or 41.1% and from
$5.2 million for the first nine months of 1996 to $3.3 million for the same
period of 1997, or 37.9%. The decrease for both periods of 1997 over the
comparable periods of 1996 was due primarily to a decrease in full-time
equivalent employees at the Company's branch offices, from 183 as of September
30, 1996 to 80 as of September 30, 1997. The decrease in full-time equivalent
employees was due primarily to the closing of nine branch offices during the
period from March 1996 to June 1997.
Marketing costs decreased from $66,000 for the third quarter of 1996 to
$30,000 for the same period of 1997, or 55.1%, and from $262,000 for the first
nine months of 1996 to $122,000 for the same period of 1997, or 53.3%. The
decrease in both periods was due primarily to decreased advertising and
marketing activity associated with operating a smaller branch network in 1997
as compared to 1996.
The provision for credit losses decreased from $4.7 million for the third
quarter of 1996 to $200,000 for the same period of 1997, and was $5.9 million
for the first nine months of both 1996 and 1997. The decrease for the third
quarter of 1997 from the comparable 1996 period was due primarily to an
additional provision required in the third quarter of 1996 related to the
Company's decision to accelerate the disposal, primarily through auto
auctions, of a significant portion of its repossession inventory. The
provision for the first nine months of 1997 was due primarily to losses
experienced in liquidating the Company's repossession inventory at auctions at
lower than expected prices during the first quarter of 1997, and the Company's
decision during the first quarter of 1997 to further strengthen credit loss
reserves.
The total available for credit losses was $8.7 million as of September
30, 1997. The total available for credit losses as a percentage of contracts
receivable was 11.3% as of September 30, 1997 compared to 10.6% as of December
31, 1996. The Company's 60-day contractual delinquency rate was 2.7% as of
September 30, 1997 as compared to 1.8% as of December 31, 1996. The Company
attributes the increase in the delinquency rate during the third quarter of
1997 to general conditions in the sub-prime auto finance industry and to the
transitional effects of the installation in September 1997 of a predictive
dialing system which is expected to ultimately enhance the Company's
collection capabilities. Management has, in response to the adverse trend in
delinquency, moved aggressively to: (i) further increase the size of the
collections staff, (ii) implement an incentive pay plan for the collections
staff which rewards delinquency reduction with additional compensation, and
(iii) reorganize the staff at the Company's primary collections facility into
teams to increase accountability.
Other expenses decreased from $1.5 million for the third quarter of 1996
to $834,000 for the same period of 1997, or 45.1% and from $4.0 million during
the first nine months of 1996 to $2.5 million for the same period of 1997, or
37.3%. The decrease for the third quarter of 1997 as compared to the same
period of 1996 was due to a number of factors, including: (i) a decrease in
the loss provision related to the Visa credit card program that was offered in
the third quarter of 1996 but not in 1997; (ii) a decrease in various state
taxes as a result of the net operating loss carry-back, and (iii) lower
telephone, supply, maintenance and processing expenses related to operating a
smaller network of branches in 1997 as compared to 1996. The decrease in
other expenses for the first nine months of 1997 as compared to the same
period of 1996 was due to a number of factors including: (i) decreased
telephone, supply, maintenance and processing expenses associated with
operating a smaller network of branches in 1997; (ii) a decrease in the loss
provision related to the Visa credit card program; (iii) the reduction of
various state taxes as a result of the net operating loss carry-back, and (iv)
reduced repossession expense in 1997 compared to 1996. The decrease for the
first nine months of 1997 as compared to the same period of 1996 was partially
offset by an increase in credit life claims and commission expense associated
with insurance policies produced and reinsured by the Company and an increase
in legal and accounting fees.
As a result of the foregoing factors, the Company's net loss from
continuing operations before income taxes decreased from $(2.4 million) for
the third quarter of 1996 to $(630,000) for the same period of 1997. The loss
from continuing operations for the third quarter of 1997 includes a $776,000
non-cash guarantee fee, which is discussed further under "Liquidity and
Capital Resources". Without the guarantee fee, income from continuing
operations for the third quarter of 1997 would have been $146,000. For the
first nine months of 1996, income from continuing operations before income
taxes was $547,000 compared to a loss from continuing operations before income
taxes for the first nine months of 1997 of $(4.3 million). The loss from
continuing operations for the first nine months of 1997 includes a $776,000
non-cash guarantee fee, which is discussed further under "Liquidity and
Capital Resources". Without the guarantee fee, the loss from continuing
operations for the first nine months of 1997 would have been $(3.5 million).
Furthermore, the results of operations for the first nine months of 1997 were
significantly negatively impacted by the $5.9 million provision for credit
losses recorded for that period. This provision was primarily attributable to
losses experienced in liquidating repossession inventory at auctions at lower
than expected prices during the first quarter of 1997. As a result of the
decline in the level of repossession inventory from $7.5 million as of
December 31, 1996 to $939,000 as of September 30, 1997, the Company does not
anticipate recording further provisions related to the disposition of
repossession inventory.
Income Taxes
For the third quarter and first nine months of 1996, an income tax
benefit was recorded of $1.6 million and $1.1 million, respectively. For the
third quarter of 1996, $949,000 of the income tax benefit was allocated to
continuing operations, and $623,000 was allocated to discontinued operations.
For the first nine months of 1996, a $219,000 income tax expense was allocated
to continuing operations and a $1.3 million benefit was allocated to
discontinued operations. The income tax expense and benefit amounts represent
a combined federal and state income tax rate of 40.0% for each period. For
the third quarter and first nine months of 1997, the income tax benefit was
$1.7 million and $5.3 million, respectively, both of which were fully offset
by an increase of a like amount in the valuation allowance against deferred
tax assets. In the fourth quarter of 1996, management assessed the
realizability of the deferred tax assets, and based on that assessment,
decided to fully reserve for them. That assessment remains unchanged as of
the end of the third quarter of 1997. In future periods, management will
review the valuation allowance in light of the then current situation. To the
extent the Company generates taxable income in such future periods, and the
decision is made to reverse the valuation allowance, it would have the effect
of reducing recorded tax expense. As of September 30, 1997, deferred tax
assets and the corresponding valuation allowance each amounted to $9.9
million.
<PAGE>
Discontinued Operations
As of the end of the third quarter of 1997, the Company adopted plans for
the closure and sale by the end of January 1998 of its company-owned
dealerships, operated under the name Drive Home USA, and accordingly, has
classified the results of those operations as discontinued. This decision
will allow management to focus on its core business of sub-prime auto
financing.
All of the company-owned dealerships are scheduled to be closed with the
exception of four locations in Indiana which are planned to be sold to a
company controlled by Russell E. Algood, President of the Company, and B.
Wayne Garland, Vice President of the Company responsible for the company-owned
dealerships. Upon the completion of the sale, scheduled for January 1998, Mr.
Garland will resign his position with the Company to devote his efforts to the
development of the independent dealership company. Mr. Algood will continue
to devote his full-time efforts to the Company and will not be active in the
day-to-day operations of the independent dealership company.
Under the terms of the planned sale, purchased and trade vehicle inventory on
hand at the closing date will be sold for an amount approximating wholesale
market value. Certain furniture, equipment and leasehold improvements
associated with the four locations will be sold for between zero and 20% of
its depreciated cost, also approximating market value, and the Company's
obligations under the facilities leases will be assumed by the buyer. The
Company's trademark, Drive Home USA Auto Company, will be assigned to the
buyers, and restrictions on the sale of stock in the open market by members of
the Algood family will be relaxed. The terms of the planned sale, which were
approved by the independent members of the Company's Board of Directors, are
more favorable to the Company than the alternative of closing the four Indiana
locations.
The loss from operations of the discontinued company-owned dealership business
increased from $(934,000) for the third quarter of 1996 to $(1.6 million) for
the same period of 1997, and from $(2.0 million) for the first nine months of
1996 to $(6.3 million) for the same period of 1997. The increased losses in
both 1997 periods over the comparable 1996 periods was due to a number of
factors, including: (i) increased facilities expenses associated with a larger
number of company-owned dealership locations; (ii) higher advertising expenses
due to the larger number of geographic markets in which the dealerships are
located, and (iii) higher wholesale losses experienced when purchased and
trade vehicle inventory was disposed of at auto auctions.
A charge of $2.6 million was recorded in the third quarter of 1997 which
consisted of $1.9 million in estimated losses on the closing and sale of the
company-owned dealerships, and $700,000 in estimated operating losses during
the phase-out period. No tax benefit was recorded in connection with this
charge. The $2.6 million charge is based on estimates of future events,
including the loss on disposal of purchased and trade vehicle inventory at
auctions, and operating results of the company-owned dealerships during the
phase-out period. It is reasonably possible that a material change to this
estimate could occur in the near term due to changes in the economy or other
conditions that influence the amount realized on purchased and trade inventory
or the operating results of the company-owned dealerships.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for cash has been to fund contract
acquisitions from third-party dealers and used vehicle dealerships operated by
the Company. Cash used for this purpose decreased from $62.8 million for the
first nine months of 1996 to $32.9 million for the same period of 1997. The
primary reason for the decrease was the Company's decision, consistent with
its business strategy, to exit certain markets. In 1996 and 1997, the Company
funded its contract purchases with borrowings under a revolving line of credit
(the "Line of Credit") with General Electric Capital Corporation ("GE
Capital"), cash payments received from obligors and cash generated from
operations. Borrowings under the Line of Credit were $94.0 million as of
December 31, 1996 and $55.2 million as of September 30, 1997.
The Company's secondary need for capital has been to fund the acquisition of
purchased and trade inventory. Purchased and trade inventory increased from
$2.5 million as of December 31, 1996 to $5.9 million as of September 30, 1997.
Until mid-September 1997, the acquisition of purchased and trade inventory
was funded from borrowings under a bank line of credit, cash received on the
sale of purchased and trade inventory and cash generated from operations. On
September 16, 1997, as discussed further below, the Company repaid the bank
line of credit in full.
As of the end of the third quarter of 1997, the Company decided to exit
from the business of operating company-owned dealerships. The majority of the
company-owned dealerships are scheduled to be closed, and four are scheduled
to be sold in January 1998. As a result of this decision, the Company has
begun to sell portions of its purchased and trade vehicles at auctions for
cash. The liquidation of the Company's purchased and trade vehicle inventory,
net of repayment of amounts owed, as discussed below, will provide the Company
with additional liquidity.
On September 16, 1997, the Company amended its Line of Credit to increase
the credit limit from $70.0 million to $100.0 million beginning January 1,
1998, to extend the expiration date from January 1, 1998 to January 1, 1999
and to lower the interest rate by 1.25% from LIBOR plus 4.5% to LIBOR plus
3.25% (the "Amended Line of Credit"). Under the Amended Line of Credit, the
Company is permitted to borrow up to the lesser of 78% of the sum of contracts
receivable and 50% of purchased and trade vehicle inventory, or $70.0 million
($100.0 million beginning January 1, 1998), subject to certain limitations.
The Amended Line of Credit includes a number of financial and operating
covenants including a prohibition on the payment of dividends and the
requirement that any new branch offices to be opened by the Company be
approved in advance by GE Capital. A $100,000 restructure fee was paid to GE
Capital in connection with the amendment to the Line of Credit. An additional
advance under the Amended Line of Credit was used to repay all borrowings
under the bank line of credit.
As a condition of amending the Company's Line of Credit, GE Capital
required Conseco, Inc. to guarantee up to $10.0 million of the Company's
indebtedness under the Line of Credit. In consideration of the guarantee
provided by Conseco, Inc., the Company agreed, subject to shareholder
approval, to issue to Conseco, Inc. warrants to purchase 500,000 shares of
common stock of the Company for $1.00 per share. As a result of the issuance
of the warrants, the conversion price on $13.25 million of previously issued
12% convertible subordinated notes, $10.0 million of which are held by Capitol
American Life Insurance Company, an affiliate of Conseco, Inc., was reduced
from $3.00 to $1.00. In addition, the Company paid to Conseco, Inc. a fee of
$300,000 for issuing the guarantee. Amounts funded under the guarantee, if
any, would trigger the issuance by the Company of a like amount of 12%
convertible subordinated notes to Conseco, Inc. The notes would be
convertible at the then current book value per share, but not less than $0.25.
As a further condition for the issuance of the guarantee, the Company
exchanged $1.5 million of 12% convertible subordinated notes which mature June
30, 1999 for a like amount of existing unsecured indebtedness from certain
principal stockholders. These notes have terms identical to the notes
issuable to Conseco, Inc. in connection with any amounts funded under the
guarantee, except that, subject to shareholder approval, they may be converted
only on a pro rata basis concurrently with or following the conversion of the
notes issuable to Conseco, Inc.
As a result of the issuance, subject to shareholder approval, of the
warrants to purchase 500,000 shares of the Company's common stock for $1.00
per share to Conseco, Inc., the conversion price of $13.25 million of
previously issued convertible subordinated notes was reduced from $3.00 to
$1.00. Accordingly, as prescribed by generally accepted accounting
principles, the Company recorded in the third quarter of 1997 a $24.1 million
prepaid guarantee fee, with an offsetting increase to additional paid-in
capital. This amount represents the number of shares issuable at a conversion
or exercise price of $1.00 per share times the per share discount from market
value of the Company's common stock. The amortization of the prepaid
guarantee fee will result in a non-cash charge to operations over the term of
the guarantee, which runs from September 16, 1997 to January 1, 1999. For the
third quarter and first nine months of 1997, the amount of this non-cash
charge was $776,000.
During the fourth quarter of 1996 and the first and second quarters of
1997, the Company sold a total of $45.0 million of contracts receivable
consistent with its business strategy of exiting certain geographic markets.
As a result, contracts receivable declined form $125.2 million as of September
30, 1996 to $76.6 million as of September 30, 1997. In addition, the Company
decided at the end of the third quarter of 1996 to dispose of a significant
portion of its repossession inventory through wholesale channels.
Repossession inventory declined from $11.4 million as of September 30, 1996 to
$939,000 as of September 30, 1997. Principally as a result of these factors,
borrowings under the Line of Credit decreased from $97.7 million as of
September 30, 1996 to $55.2 million as of September 30, 1997.
In connection with the Company's decision to exit from the business of
operating company-owned dealerships, a $2.6 million charge was recorded in the
third quarter of 1997. This charge consists of $1.9 million in estimated
losses on the closing and sale of the company-owned dealerships and $700,000
in estimated operating losses during the phase-out period. Principally as a
result of the losses incurred by the company-owned dealership business during
the third quarter of 1997, the Company failed to comply with an interest
coverage covenant under the Amended Line of Credit. The Company is in
discussion with GE Capital to resolve this issue. No assurances can be given
that the Company will be successful in negotiating a mutually acceptable
solution to this issue.
The Company's borrowings under the Amended Line of Credit as of September
30, 1997, were $55.2 million, well below the maximum permitted borrowings of
$70.0 million ($100.0 million as of January 1, 1998). Based on the unused
portion of the Amended Line of Credit as of September 30, 1997 of $14.8
million ($44.8 million as of January 1, 1998) and the planned liquidation of
purchased and trade inventory, the Company believes it has sufficient
liquidity to acquire contracts and meet its daily operating requirements
through the first quarter of 1998.
The Company's strategy is to acquire and originate contracts consistent
with maximum permitted indebtedness under the Amended Line of Credit. The
Company is evaluating various alternative funding strategies including
additional lines of credit and securitization which would permit additional
growth in the Company's portfolio of contracts receivable. However, no
assurance can be given that the Company will be successful in its efforts to
implement any of the various funding strategies currently being explored.
FORWARD-LOOKING STATEMENTS
This report includes a number of forward-looking statements which reflect
the Company's current view with respect to future events and financial
performance. Such forward-looking statements include statements about the
level of contract volume originated by company-owned dealerships, the
Company's ability to replace lost contract volume from company-owned
dealerships with volume from third-party dealers, the future profitability of
any Visa credit card program, the Company's ability to enhance its collection
capabilities, the need for any future provisions for credit losses related to
the disposition of repossession inventory and other statements indicated by
the words "believes", "plans", "expects" or similar expressions. These
forward-looking statements are subject to certain risks and uncertainties,
including risks and uncertainties outside the Company's control, that could
cause actual results to differ materially from historical or anticipated
results. Some of these risks include, but are not limited to, general
economic conditions, actions taken by competitors and the Company's ability to
maintain its underwriting policies and guidelines and collection standards.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any litigation that is expected to have a
material adverse effect on the Company. The Company regularly initiates legal
proceedings as a plaintiff in connection with its routine collection
activities.
ITEM 2. CHANGES IN SECURITIES
On September 16, 1997, Conseco, Inc. guaranteed $10.0 million of the
Company's indebtedness to its primary lender. As a condition for the issuance
of the guarantee, the Company agreed, subject to shareholder approval, to
reduce the conversion price of $13.25 million in previously issued
subordinated notes, $10.0 million of which are held by Capitol American Life
Insurance Company, an affiliate of Conseco, Inc., from $3.00 to $1.00, and to
issue to Conseco, Inc. warrants to purchase 500,000 shares of common stock at
an exercise price of $1.00 per share. Amounts funded under the guarantee, if
any, would trigger the issuance by the Company of a like amount of 12%
convertible subordinated debt to Conseco, Inc. Any newly issued 12%
convertible subordinated debt would be convertible into common stock of the
Company at a conversion price of the then current book value per share, but
not less than $0.25.
As a further condition for the issuance of the guarantee, the Company
exchanged existing unsecured indebtedness of $1.5 million from certain
principal stockholders for a like amount of 12% convertible subordinated notes
which mature June 30, 1999. These notes have terms identical to the notes
issuable to Conseco, Inc. in connection with any amounts funded under the
guarantee, except that, subject to shareholder approval, they may only be
converted on a pro rata basis concurrently with or following the conversion of
the notes issuable to Conseco, Inc.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders, held July 8, 1997, shareholders of
the Company considered and approved recommendations by the Board of Directors
to: (i) elect Malvin L. Algood and Donald E. Brown as Directors for terms of
three years each; (ii) ratify the selection of Ernst & Young LLP as certified
public accountants for the Company for the fiscal year ended December 31,
1997; and (iii) grant conversion rights to the holders of $13.25 million of
convertible subordinated notes issued by the Company.
<PAGE>
The tabulation of votes was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
--------- ------- -------
Election of Directors:
Malvin L. Algood 5,885,342 22,018
Donald E. Brown 5,890,142 17,218
Ratification of Auditors 5,899,142 5,218 3,000
Granting of Conversion Rights 4,891,641 34,813 9,800
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
<TABLE>
<CAPTION>
<C> <S>
11.1 Statement Re: Computation of Per Share Earnings.
27.0 Financial Data Schedule.
</TABLE>
b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1997.
<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.
<TABLE>
<CAPTION>
<S> <C> <C>
GENERAL ACCEPTANCE CORPORATION
Date November 14, 1997 /s/ Russell E. Algood
----------------- ------------------------------
Russell. E. Algood
President
Date November 14, 1997 /s/ Martin C. Bozarth
----------------- ------------------------------
Martin C. Bozarth
Chief Financial Officer
</TABLE>
Exhibit 11.1
GENERAL ACCEPTANCE CORPORATION
Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
<S> <C> <C> <C>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1997* 1996 1997*
--------------------- --------------------- -------------
Primary:
Weighted average shares outstanding 6,022,000 6,022,000 6,022,000
Net effect of dilutive stock options - based on the
treasury stock method using the average
market price 885 --- 2,916
--------------------- --------------------- -------------
Total weighted average shares 6,022,885 6,022,000 6,024,916
===================== ===================== =============
Net income (loss) from continuing operations $ (629,915) $ (1,423,675) $ (4,271,431)
===================== ===================== =============
Net loss $ (4,808,943) $ (2,357,957) $(13,153,736)
===================== ===================== =============
Net income (loss) from continuing operations per
share $ (0.10) $ (0.24) $ (0.71)
===================== ===================== =============
Net loss per share $ (0.80) $ (0.39) $ (2.18)
===================== ===================== =============
Fully diluted:
Weighted average shares outstanding 6,022,000 6,022,000 6,022,000
Net effect of dilutive stock options - based on the
treasury stock method using the period-end
market price, if greater than average market
price 13,804 --- 12,261
--------------------- --------------------- -------------
Total weighted average shares outstanding 6,035,804 6,022,000 6,034,261
===================== ===================== =============
Net income (loss) from continuing operations $ (629,915) $ (1,423,675) $ (4,271,431)
===================== ===================== =============
Net loss $ (4,808,943) $ (2,357,957) $(13,153,736)
===================== ===================== =============
Net income (loss) from continuing operations per
share $ (0.10) $ (0.24) $ (0.71)
===================== ===================== =============
Net loss per share $ (0.80) $ (0.39) $ (2.18)
===================== ===================== =============
<S> <C>
1996
------------
Primary:
Weighted average shares outstanding 6,022,000
Net effect of dilutive stock options - based on the
treasury stock method using the average
market price ---
------------
Total weighted average shares 6,022,000
============
Net income (loss) from continuing operations $ 327,941
============
Net loss $(1,651,285)
============
Net income (loss) from continuing operations per
share $ 0.05
============
Net loss per share $ (0.27)
============
Fully diluted:
Weighted average shares outstanding 6,022,000
Net effect of dilutive stock options - based on the
treasury stock method using the period-end
market price, if greater than average market
price ---
------------
Total weighted average shares outstanding 6,022,000
============
Net income (loss) from continuing operations $ 327,941
============
Net loss $(1,651,285)
============
Net income (loss) from continuing operations per
share $ 0.05
============
Net loss per share $ (0.27)
============
<FN>
* Conversion of the 12% subordinated notes and exercise of the warrants is not assumed in the computation
because their effect is
antidilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the company's
unaudited financial statements as of and for the three months ended
September 30, 1997, and is qualified in its entirety by reference to such
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,127,174
<SECURITIES> 0
<RECEIVABLES> 76,562,726
<ALLOWANCES> (7,484,491)
<INVENTORY> 6,843,161
<CURRENT-ASSETS> 0
<PP&E> 2,587,988
<DEPRECIATION> 0
<TOTAL-ASSETS> 106,530,887
<CURRENT-LIABILITIES> 0
<BONDS> 69,951,695
0
0
<COMMON> 29,792,573
<OTHER-SE> (1,220,454)
<TOTAL-LIABILITY-AND-EQUITY> 106,530,887
<SALES> 0
<TOTAL-REVENUES> 3,850,671
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,554,505
<LOSS-PROVISION> 200,000
<INTEREST-EXPENSE> 1,726,081
<INCOME-PRETAX> (629,915)
<INCOME-TAX> 0
<INCOME-CONTINUING> (629,915)
<DISCONTINUED> (4,179,028)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,808,943)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
