UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Commission File Number: 0-25760
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period
ended June 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)
<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)
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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 August 4, 1997.
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
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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
7
Finance Revenues 8
Net Dealership Revenues 9
Expenses 10
Income Taxes 11
Liquidity and Capital Resources 12
Forward-Looking Statements 14
PART II. Other Information 15
Item 1. Legal Proceedings 15
Item 2. Changes In Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
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<CAPTION>
General Acceptance Corporation
Consolidated Balance Sheets
<S> <C> <C>
JUNE 30, 1997 DECEMBER 31, 1996
--------------- -------------------
(UNAUDITED) (NOTE 1)
ASSETS
Contracts receivable:
Held for investment $ 71,812,973 $ 62,263,129
Held for sale --- 54,868,173
--------------- -------------------
71,812,973 117,131,302
Allowance and discount available for credit losses (7,299,049) (10,611,268)
--------------- -------------------
Contracts receivable, net 64,513,924 106,520,034
Cash and cash equivalents 1,160,546 1,683,429
Repossessions 1,339,644 7,534,045
Purchased and trade automobile inventory 7,196,796 2,518,069
Property and equipment, net 2,571,634 2,539,135
Taxes receivable 833,978 568,908
Other assets 2,265,193 2,282,654
-------------- -------------------
Total assets $ 79,881,715 $ 123,646,274
=============== ===================
LIABILITIES
Debt:
Revolving line of credit $ 49,861,130 $ 93,977,001
Bank line of credit 1,500,000 4,500,000
Subordinated notes 13,250,000 1,000,000
--------------- -------------------
Total debt 64,611,130 99,477,001
Accounts payable and accrued expenses 4,906,088 4,650,695
Dealer participation reserves available
for credit losses 1,045,935 1,855,223
--------------- -------------------
Total liabilities 70,563,153 105,982,919
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
Retained earnings (deficit) (20,474,011) (12,129,218)
--------------- -------------------
Total stockholders' equity 9,318,562 17,663,355
--------------- -------------------
Total liabilities and stockholders' equity $ 79,881,715 $ 123,646,274
=============== ===================
<FN>
See accompanying notes.
</TABLE>
<PAGE>
General Acceptance Corporation
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<CAPTION>
Consolidated Statements of Operations
(Unaudited)
THREE MONTH ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- ------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1997 1996
------------ ----------- ------------- ------------
Finance revenues:
Interest and discount $ 4,012,486 $6,754,684 $ 9,304,355 $13,491,693
Ancillary products 30,865 839,723 118,256 973,862
Other 300,061 105,452 389,416 304,414
------------ ----------- ------------- ------------
Total finance revenues 4,343,412 7,699,859 9,812,027 14,769,969
Net dealership revenues:
Sale of purchased and trade vehicles 8,008,565 1,035,087 13,425,987 1,895,203
Cost of sales (6,656,711) (857,201) (11,763,746) (1,512,443)
Other 320,277 220,265 524,309 459,878
------------ ----------- ------------- ------------
Total net dealership revenues 1,672,131 398,151 2,186,550 842,638
------------ ----------- ------------- ------------
Total net revenues 6,015,543 8,098,010 11,998,577 15,612,607
Expenses:
Interest 1,886,555 2,328,262 4,089,909 4,476,692
Salaries and employee benefits 1,793,343 2,018,069 3,879,761 4,300,281
Marketing 822,067 336,199 1,411,875 513,413
Provision for credit losses 648,970 892,631 7,012,778 2,126,134
Other 1,465,274 1,717,586 3,949,047 3,018,415
------------ ----------- ------------ ------------
Total expenses 6,616,209 7,292,747 20,343,370 14,434,935
------------ ----------- ------------- ------------
Income (loss) before income taxes (600,666) 805,263 (8,344,793) 1,177,672
Income tax --- (322,036) --- (471,000)
------------- ----------- ------------- ------------
Net income (loss) $ (600,666) $ 483,227 $ (8,344,793) $ 706,672
============= =========== ============= ============
Net income (loss) per share $ (0.10) $ 0.08 $ (1.38) $ 0.12
============= =========== ============= ============
Weighted average shares outstanding 6,031,557 6,022,000 6,037,228 6,022,000
============ =========== ============= ============
<FN>
See accompanying notes.
</TABLE>
<PAGE>
General Acceptance Corporation
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<CAPTION>
Consolidated Statements of Cash Flows
(Unaudited)
<S> <C> <C>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1996
------------- ---------------------------
OPERATING ACTIVITIES
Net income (loss) $ (8,344,793) $ 706,672
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation of property and equipment 368,900 308,166
Amortization of deferred costs and revenues,
net 45,256 73,286
Provision for credit losses 7,012,778 2,126,134
Changes in operating assets and liabilities:
(Increase) decrease in other assets and
taxes receivable (247,609) 827,094
Increase (decrease) in accounts payable
and accrued expenses 255,393 (213,414)
Increase in purchased and trade inventory (4,678,727) (214,228)
------------- ---------------------------
Net cash (used in) provided by operating activities (5,588,802) 3,613,710
INVESTING ACTIVITIES
Cost of acquiring or originating contracts receivable (30,536,849) (37,405,424)
Principal collected on contracts receivable 28,989,533 30,289,642
Proceeds from sales of contracts receivable 41,880,505 ---
Purchases of property and equipment (401,399) (878,456)
------------ -----------
Net cash provided by (used in) investing activities 39,931,790 (7,994,238)
FINANCING ACTIVITIES
Borrowings on revolving line of credit 36,099,398 48,213,844
Repayments of revolving line of credit (80,215,269) (44,034,351)
Borrowings on bank line 1,000,000 ---
Repayments of bank line (4,000,000) ---
Issuance of subordinated notes 12,250,000 ---
------------ ------------
Net cash (used in) provided by financing activities (34,865,871) 4,179,493
------------- ---------------------------
Net increase in cash and cash equivalents (522,883) (201,035)
Cash and cash equivalents at beginning of period 1,683,429 557,206
------------- ---------------------------
Cash and cash equivalents at end of period $ 1,160,546 $ 356,171
============= ===========================
<FN>
See accompanying notes.
</TABLE>
<PAGE>
General Acceptance Corporation
Notes to Consolidated Financial Statements
(Unaudited)
June 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 six
month periods ended June 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. Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of primary and fully diluted earnings per
share for the three and six month periods ending June 30, 1997 and June 30,
1996 is not material.
Note 3. Issuance of Convertible Subordinated Debt
On April 11, 1997, the Company issued $13.3 million of 12.0% convertible
subordinated notes in exchange for $10.0 million cash and the surrender of
$3.3 million of previously issued 12.0% unsecured notes. The newly issued
notes require the payment of interest only, mature on the third anniversary of
issuance, and are unsecured. The notes are convertible at any time while they
are outstanding into common stock of the Company at a conversion rate of $3.00
per share. Cash proceeds from the issuance of the notes were used to repay
borrowings under the Company's revolving line of credit.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
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Information regarding the components of contracts receivable, net is
presented below.
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JUNE 30, DECEMBER 31,
1997 1996
------------- --------------
Contractually scheduled payments $ 91,769,699 $ 146,744,916
Add (deduct):
Unearned interest income (20,077,299) (30,006,489)
Accrued interest income 145,021 354,333
Unearned insurance commissions (44,272) (29,820)
Net deferred acquisition costs 19,824 68,362
------------- --------------
Contracts receivable 71,812,973 117,131,302
Allowance and discount available
for credit losses (7,299,049) (10,611,268)
------------- --------------
Contracts receivable, net $ 64,513,924 $ 106,520,034
============= ==============
</TABLE>
Changes in the components of amounts available for credit losses during the
six and three month periods ended June 30, 1997 are presented below:
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ALLOWANCE DEALER PARTICIPATION
AND RESERVES
DISCOUNT TOTAL
------------ ---------------------- -------------
Balance December 31, 1996 $10,611,268 $ 1,855,223 $ 12,466,491
Additions 8,763,818 1,398,899 10,162,717
Charge-offs, net (9,052,566) (1,580,110) (10,632,676)
Allocated to contracts receivable sold (3,023,471) (628,077) (3,651,548)
------------ ---------------------- -------------
Balance June 30, 1997 $ 7,299,049 $ 1,045,935 $ 8,344,984
============ ====================== =============
Balance March 31, 1997 $ 9,877,766 $ 1,495,420 $ 11,373,186
Additions 1,745,167 733,526 2,478,693
Charge-offs, net (2,553,895) (601,648) (3,155,543)
Allocated to contracts receivable sold (1,769,989) (581,363) (2,351,352)
------------ ---------------------- -------------
Balance June 30, 1997 $ 7,299,049 $ 1,045,935 $ 8,344,984
============ ====================== =============
</TABLE>
Information on the Company's charge-off rate, total available for credit
losses and delinquency ratio is presented below:
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<CAPTION>
<S> <C> <C>
JUNE 30, 1997 DECEMBER 31, 1996
-------------- ------------------
Net charge-offs to monthly average contracts
receivable (1) 23.75% 24.73%
Delinquency ratio (2) 1.49% 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 11.62% 13.25%
<FN>
(1) Ratio of net charge-offs to average contracts receivable for the six months ended
June 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 SIX MONTH PERIODS ENDED JUNE 30, 1997, COMPARED TO THREE AND SIX
MONTH PERIODS ENDED JUNE 30, 1996
Finance Revenues
Total finance revenues decreased from $7.7 million for the second quarter
of 1996 to $4.3 million for the same period of 1997, or 43.6% and from $14.8
million for the first six months of 1996 to $9.8 million for the same period
of 1997, or 33.6%. The decrease in both periods over the comparable 1996
periods was due to a lower level of contracts receivable. The Company sold
$45.0 million of contracts receivable 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 through
April 1997.
Interest and discount revenues decreased from $6.8 million for the second
quarter of 1996 to $4.0 million for the same period of 1997, or 40.6% and from
$13.5 million for the first six months of 1996 to $9.3 million for the same
period of 1997, or 31.0%. The decrease in both periods was due primarily to a
decrease in average contracts receivable from $122.7 million for the second
quarter 1996 to $74.3 million for the same period of 1997, or 39.4% and from
$123.7 million for the first six months of 1996 to $89.5 million for the same
period of 1997, or 27.6%. The decrease in average contracts receivable was
primarily due to the decision to sell substantially all of the contracts
receivable originated in the markets the Company had decided to exit. The
average yield on contracts receivable during the second quarter of 1996 was
22.0% compared to 20.0% for the same period of 1997 and was 21.7% for the
first six months of 1996 as compared to 19.9% 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.
Ancillary products revenue decreased from $840,000 in the second quarter
of 1996 to $31,000 for the same period of 1997, or 96.3% and from $974,000 for
the first six months of 1996 to $118,000 for the same period of 1997, or
87.9%. The decrease in both 1997 periods over the comparable 1996 periods was
due primarily to the suspension of both a secured Visa credit card offered by
the Company as co-brander and a related motor club program. The Company is
currently looking for 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 $105,000 in the second quarter of 1996 to
$300,000 for the same period of 1997, or 184.5% and from $304,000 for the
first six months of 1996 to $389,000 for the same period of 1997, or 27.9%.
The increase in the second quarter of 1997 compared to the same period of 1996
was due primarily to an increase in earned premiums associated with credit
life and disability policies produced and reinsured by the Company.
<PAGE>
Net Dealership Revenues
Sales of purchased and trade vehicles increased from $1.0 million in the
second quarter of 1996 to $8.0 million in the same period of 1997, or 673.7%
and from $1.9 million for the first six months of 1996 to $13.4 million for
the same period of 1997, or 608.4%. The increase in both 1997 periods over
the comparable 1996 periods was due primarily to the increase in the number of
purchased and trade vehicles sold as a result of (i) the Company's decision in
early 1997 not to maintain an auto repossession inventory at the Company
dealerships, thereby allowing the Company dealerships to concentrate on the
sale of purchased and trade vehicles, and (ii) an increase in the number of
Company dealerships from nine as of June 30, 1996 to 16 as of June 30, 1997.
Cost of sales of purchased and trade vehicles increased from $857,000 in
the second quarter of 1996 to $6.7 million in the same period of 1997 and from
$1.5 million for the first six months of 1996 to $11.8 million for the same
period of 1997. The gross margin percentage (defined as the difference
between sales and cost of sales, divided by sales) decreased from 17.2% in the
second quarter of 1996 to 16.9% in the same period of 1997 and from 20.2% for
the first six months of 1996 to 12.4% for the same period of 1997. The
decrease for the first six months of 1997 over the comparable period of 1996
was due primarily to the higher volume of purchased and trade vehicles which
were sold wholesale at auctions during the first quarter of 1997.
Other revenue generated by the Company dealerships increased from
$220,000 in the second quarter of 1996 to $320,000 in the same period of 1997,
or 45.4% and from $460,000 for the first six months of 1996 to $524,000 for
the same period of 1997, or 14.0%. The increase for both periods of 1997 over
the comparable periods of 1996 was due primarily to the reintroduction of a
Gap protection product in October 1996. This product was discontinued in
March 1995 due to regulatory uncertainties surrounding the product which have
since been clarified.
As a result of the foregoing, total net dealership revenues increased
from $398,000 for the second quarter of 1996 to $1.7 million for the same
period of 1997, or 320.0% and from $843,000 for the first six months of 1996
to $2.2 million for the same period of 1997, or 159.5%.
<PAGE>
Expenses
Interest expense decreased from $2.3 million for the second quarter of
1996 to $1.9 million for the same period of 1997, or 19.0% and from $4.5
million for the first six months of 1996 to $4.1 million for the same period
of 1997, or 8.6%. The decrease in both 1997 periods from the comparable 1996
periods was due primarily to a decrease in the average level of borrowings
from $97.7 million for the second quarter of 1996 to $65.1 million for the
same period of 1997 and from $96.7 million for the first six months of 1996 to
$77.6 million for the same period of 1997. The decrease in average borrowings
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.
This was partially offset by higher borrowing costs for the comparable periods
of 1996 and 1997. The Company's average borrowing cost for the second quarter
of 1996 was 9.4% compared to 10.8% for the same period of 1997 and 9.1% for
the first six months of 1996 compared to 10.0% 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 4.0% as of June 30, 1996
and 6.5% as of June 30, 1997, although for most of the second quarter of 1997
the spread was 4.5%. In addition, for the first six months of 1997, the
Company's borrowings under the bank line of credit and subordinated debt
agreements increased borrowing costs as compared to the first six months of
1996 as the only borrowings during the same period of 1996 were under the
revolving line of credit. As of June 30, 1997, the interest rates on the bank
line of credit and the subordinated notes were 10.0% and 12.0%, respectively.
Salaries and employee benefit expenses decreased from $2.0 million for
the second quarter of 1996 to $1.8 million for the same period of 1997, or
11.1% and from $4.3 million for the first six months of 1996 to $3.9 million
for the same period of 1997, or 9.8%. The decrease for the first six months
of 1997 over the comparable period of 1996 was due primarily to a decrease in
full-time equivalent employees from 339 as of June 30, 1996 to 248 as of June
30, 1997. The decrease in full-time equivalent employees was due primarily to
headcount reductions associated with the closing of nine branch offices during
the period from March 1996 to June 1997 and reductions in staff at Company
headquarters partially offset by higher employment due to a net increase of
eight Company dealerships during the same period.
Marketing costs increased from $336,000 for the second quarter of 1996 to
$822,000 for the same period of 1997, or 144.5%, and from $513,000 for the
first six months of 1996 to $1.4 million for the same period of 1997, or
175.0%. The increase in both periods was due primarily to increased
advertising expenses associated with a higher number of Company dealerships as
well as advertising expenses associated with the introduction of Drive Home
USA Auto Company as the new name for the Company dealerships in Indiana.
The provision for credit losses decreased from $893,000 for the second
quarter of 1996 to $649,000 for the same period of 1997, or 27.3% while
provision expense increased from $2.1 million for the first six months of 1996
to $7.0 million for the same period of 1997, or 229.8%. The decrease for the
second quarter of 1997 over the comparable 1996 period was due primarily to an
additional provision required in the second quarter of 1996 to restore the
allowance and discount available for credit losses to a level deemed
acceptable by management. Such a provision was not deemed necessary for the
second quarter of 1997. The increase for the first six months of 1997 as
compared to the same period of 1996 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 $8.3 million as of June 30,
1997. The total available for credit losses as a percentage of contracts
receivable was 11.6% as of June 30, 1997 compared to 12.1% as of June 30, 1996
and 10.6% as of December 31, 1996. The Company's 60 day contractual
delinquency rate was 1.5% as of June 30, 1997 as compared to 1.7% as of June
30, 1996, 1.8% as of December 31, 1996 and 1.8% as of March 31, 1997.
Other expenses decreased from $1.7 million for the second quarter of 1996
to $1.5 million for the same period of 1997, or 14.7% and increased from $3.0
million during the first six months of 1996 to $3.9 million for the same
period of 1997, or 30.8%. The decrease for the second 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 connected to the Visa credit card program
that was offered in the second quarter of 1996 but not in 1997; (ii) a
reduction in various state taxes as a result of the net operating loss
carry-back and (iii) reduced repossession expenses in 1997 as compared to
1996. These reductions in expense were partially offset by increased rent and
computer support fees due to the increase in Company dealerships and credit
life claims and commission expense associated with insurance policies produced
and reinsured by the Company. The increase in other expenses for the first
six months of 1997 as compared to the same period of 1996 was due to a number
of factors including: (i) increased rent, utility and depreciation expense
associated with operating the expanded network of Company dealerships and
occupancy of the new corporate offices in 1997; (ii) an increase in the loss
provision connected with the Visa credit card program; (iii) credit life
claims and commission expense associated with insurance policies produced and
reinsured by the Company, and (iv) increased computer support and maintenance
fees associated with the computer system used by the Company dealerships. The
increase was partially offset by the reduction of various state taxes as a
result of the net operating loss carry-back and reduced repossession expense
in 1997 compared to 1996.
As a result of the foregoing factors, the Company's net income before
income taxes decreased from $805,000 for the second quarter of 1996 to a net
loss of $(601,000) for the same period of 1997 and from $1.2 million for the
first six months of 1996 to a net loss of $(8.3 million) for the same period
of 1997.
Income Taxes
In the second quarter of 1996, income tax expense was $322,000 and for
the first six months of 1996 was $471,000, representing a combined federal and
state income tax rate of 40.0% for each period. For the second quarter and
first six months of 1997, the income tax benefit was $240,000 and $3.3
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 it.
That assessment remains unchanged as of the end of the second 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 June 30, 1997, deferred tax assets and the corresponding
valuation allowance each amounted to $8.0 million.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for cash is to fund contract acquisitions
from Company dealerships and third-party dealers. Cash used for this purpose
decreased from $37.4 million for the first six months of 1996 to $30.5 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") with General Electric
Capital Corporation ("GE Capital"), cash payments received from obligors and
cash generated from operations. Borrowings under the Line were $98.3 million
as of June 30, 1996 and $49.9 million as of June 30, 1997.
The Company's secondary need for capital is to fund the acquisition of
purchased and trade inventory. As of June 30, 1996, purchased and trade
inventory was $1.0 million compared to $7.2 million as of June 30, 1997. The
bank line of credit, which was previously used to fund purchased and trade
inventory, has been paid down to $1.5 million from availability under the
Line.
The Company sold contracts receivable during the second quarter of 1997
in a manner consistent with its business strategy of exiting certain markets.
On April 8, 1997, the Company sold contracts receivable for 92.7% of contract
balance of $24.7 million. On April 17, 1997 the Company sold contracts
receivable for 95.5% of contract balance of $4.3 million. No material gain or
loss was recorded in connection with these sales. Proceeds from the sales
were used to reduce borrowings under the Line. Because the sale proceeds were
in excess of the amounts borrowed against these contracts under the Line,
additional liquidity was created for the Company. As of June 30, 1997, the
Company had completed the sale of contracts receivable in accordance with its
plans to focus its financing operations on its core states of Indiana, Ohio
and Florida. The Company may make future sales of contracts receivable from
time to time as funding or other needs dictate.
On April 11, 1997, the Company issued $10.0 million of 12.0% convertible
subordinated notes to an affiliate of Conseco, Inc. ("Conseco") in exchange
for cash. On the same date, the Company also issued $3.3 million of such
notes to certain principal shareholders of the Company and their relatives in
exchange for a like amount of 12.0% unsecured demand notes held by them. The
two issues of notes have identical terms. The notes require payments of
interest only, mature on the third anniversary of issuance, and are unsecured.
The notes are convertible at any time while they are outstanding into common
stock of the Company at a conversion rate of $3.00 per share. The conversion
feature was approved by shareholders at the Company's July 8, 1997 annual
meeting. In conjunction with the issuance of the convertible subordinated
notes, the Company, Conseco and certain of the Company's principal
shareholders entered into an agreement whereby the principal shareholders
agreed to vote in favor of the election of two of Conseco's director nominees
and Conseco agreed to vote all of its voting shares in favor of the election
of one of the principal shareholders' director nominees. In accordance with
this agreement, a second Conseco director was elected to join the Company's
board on April 10, 1997. In addition, in the event that Conseco makes a
tender offer to all of the Company's shareholders, the principal shareholders
shall, under certain circumstances including the tender and acceptance of 25%
of the issued and outstanding shares of Common Stock not held by the principal
shareholders and a minimum tender offer price of $4.00 per share, tender a
quantity of shares of common stock so that the principal shareholders'
ownership will be less than 20% of the issued and outstanding shares of common
stock, including shares to be issued under the convertible subordinated notes,
of the Company upon the completion of the tender offer. Conseco also has the
right to appoint one person to act in an operations capacity for the Company.
Cash proceeds from issuance of the notes of $10.0 million were used to repay
borrowings under the Line.
The Company's decision at the end of the third quarter of 1996 to dispose of a
significant portion of its repossession inventory through wholesale channels
also provided cash during the fourth quarter of 1996 and the first six months
of 1997.
As a result of the reduction in the volume of contracts acquired from
third-party dealers, the sale of a portion of the Company's portfolio of
contracts receivable, the issuance of the $10.0 million convertible
subordinated notes and the wholesaling of repossession inventory, all as
described above, borrowings under the Line were reduced from $94.0 million as
of December 31, 1996 to $49.9 million as of June 30, 1997.
Also on April 11, 1997, the Company entered into an Amended and Restated Motor
Vehicle Installment Contract Loan and Security Agreement ("Restated
Agreement") with GE Capital. Under the terms of the Restated Agreement, the
Company is permitted to borrow up to the lesser of $70.0 million or 78% of
contracts receivable (the "New Line"), subject to certain limitations. The
Restated Agreement 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. The interest rate on the New Line is one-month LIBOR plus 4.5%.
A $350,000 line fee was paid to GE Capital in connection with the New Line,
which expires on January 1, 1998.
As a result of the loss recorded in the first quarter of 1997 due to the
provision for credit losses and the increase in the valuation allowance
against deferred tax assets, the Company failed to comply with certain
financial covenants under the Restated Agreement. Accordingly, the interest
rate on the New Line was increased to LIBOR plus 6.5% on June 5, 1997. The
Company continues to negotiate with GE Capital in an effort to remedy the
out-of-compliance situation. While these negotiations continue, GE Capital
agreed to reduced the interest rate to the pre-default rate of LIBOR plus
4.5%.
Maximum permitted borrowings under the New Line of $70.0 million are in
excess of actual borrowings as of June 30, 1997 of $49.9 million. The Company
believes that the difference of $20.1 million provides the Company with
adequate available lines of credit to implement its business strategy through
the end of 1997. Furthermore, the Company believes that it has sufficient
liquidity to acquire contracts and purchased and trade automobile inventory,
as well as to meet its daily operating requirements both at present and
through the end of 1997.
As of April 30, 1997, the bank line of credit was renewed as a reducing
line of credit maturing August 31, 1997. As of June 30, 1997, outstandings
under the bank line of credit were $1.5 million. Required monthly principal
reductions under the bank line of credit will be made from availability under
the New Line.
The Company's strategy is to acquire and originate contracts and acquire
purchased and trade inventory consistent with maximum permitted indebtedness
under the New Line and the bank line of credit. The Company continues to
explore alternatives for replacing the bank 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 replace the bank
line of credit or implementing any of the various funding strategies currently
being explored.
<PAGE>
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
borrowings under the Restated Agreement, the Company's ability to purchase
contracts in the future, the Company's financial ability to maintain or
replace its financing sources, the Company's continued expansion of Company
dealerships 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, the Company's
ability to maintain its underwriting policies and guidelines and the Company's
ability to open additional Company dealerships and to operate them on a
profitable basis.
<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 April 11, 1997, the Company issued $10.0 million of 12.0% convertible
subordinated notes to Capitol American Life Insurance Company, an affiliate of
Conseco, Inc. for cash. In addition, the Company issued $3.3 million of
identical notes to the Company's Chairman and Chief Executive Officer, the
President and Chief Operating Officer and members of their immediate families
in exchange for the surrender of $3.3 million of previously issued 12.0%
unsecured notes held by them. The newly issued notes require the payment of
interest only, mature on the third anniversary of issuance, and are unsecured.
The notes are convertible at any time while they are outstanding at the
option of the holder into common stock of the Company at a conversion rate of
$3.00 per share. Cash proceeds from the issuance of the notes were used to
repay borrowings under the Company's revolving line of credit. The notes were
issued in a privately negotiated transaction and in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
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
No matters were submitted to a vote of security holders during the second
quarter of 1997.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
a) Exhibits
<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 June 30, 1997.
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 August 7, 1997 /s/ Russell E. Algood
-------------- ------------------------------
Russell. E. Algood
President and
Chief Operating Officer
Date August 7, 1997 /s/ Martin C. Bozarth
-------------- ------------------------------
Martin C. Bozarth
Chief Financial Officer
</TABLE>
Exhibit 11.1
<TABLE>
<CAPTION>
GENERAL ACCEPTANCE CORPORATION
Statement Re: Computation of Per Share Earnings
Exhibit 11.1
<S> <C> <C> <C> <C> <C>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- ---------------------------------------------------------- --------------
1997* 1996 1997* 1996
----------- ---------- ------------ ----------
Primary:
Weighted average shares outstanding 6,022,000 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 9,557 --- 15,228 ---
----------- ---------- ------------ ----------
Total weighted average shares 6,031,557 6,022,000 6,037,228 6,022,000
=========== ========== ============ ==========
Net income (loss) $ (600,666) $ 483,227 $(8,344,793) $ 706,672
=========== ========== ============ ==========
Per share amount $ (0.10) $ 0.08 $ (1.38) $ 0.12
=========== ========== ============ ==========
Fully diluted:
Weighted average shares outstanding 6,022,000 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 9,557 --- 15,228 ---
----------- ---------- ------------ ----------
Total weighted average shares outstanding 6,031,557 6,022,000 6,037,228 6,022,000
=========== ========== ============ ==========
Net income (loss) $ (600,666) $ 483,227 $(8,344,793) $ 706,672
=========== ========== ============ ==========
Per share amount $ (0.10) $ 0.08 $ (1.38) $ 0.12
=========== ========== ============ ==========
<FN>
* - Conversion of the 12% subordinated notes is not assumed in the computation because its 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
June 30, 1997, and is qualified in its entirety by reference to such
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,160,546
<SECURITIES> 0
<RECEIVABLES> 71,812,973
<ALLOWANCES> (7,299,049)
<INVENTORY> 8,536,440
<CURRENT-ASSETS> 0
<PP&E> 2,571,634
<DEPRECIATION> 0
<TOTAL-ASSETS> 79,881,715
<CURRENT-LIABILITIES> 0
<BONDS> 64,611,130
0
0
<COMMON> 29,792,573
<OTHER-SE> (20,474,011)
<TOTAL-LIABILITY-AND-EQUITY> 79,881,715
<SALES> 0
<TOTAL-REVENUES> 6,015,543
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,080,684
<LOSS-PROVISION> 648,970
<INTEREST-EXPENSE> 1,886,555
<INCOME-PRETAX> (600,666)
<INCOME-TAX> 0
<INCOME-CONTINUING> (600,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (600,666)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
