This report is not deemed to be soliciting material or deemed "filed" with the
Securities and Exchange Commission.
General Acceptance Corporation
1996 Annual Report
Corporate Profile
General Acceptance Corporation is a specialized consumer finance company which
services installment sale contracts secured by used automobiles. These
contracts are both purchased from third-party dealers and originated at
Company-owned used car dealerships. The Company also generates revenue from
the sale of purchased and trade vehicles at its Company-owned used vehicle
dealerships.
Nineteen ninety-six was a difficult year for General Acceptance Corporation.
The Company sustained a loss of $9.1 million, and spent most of the year in
default of certain financial covenants on its line of credit with its
principal lender. Throughout 1996 and into 1997, the Company focused on
improving its operations, which included reducing their scope and selling
approximately $54.9 million of installment sale contracts. On April 11, 1997,
the company's principal lender granted a new $70.0 million line of credit and
waived all defaults under the prior agreement. Simultaneously, an affiliate of
Conseco, Inc., an Indianapolis-based Fortune 500 insurance company, purchased
a $10.0 million convertible subordinated note issued by the Company. With new
financing in place to meet the company's anticipated requirements through 1997
and with its operations more sharply focused, General Acceptance Corporation
looks forward to 1997 being a significantly better year.
On April 6, 1995, the Company completed an initial public offering of its
common stock. The offering represented approximately 32% ownership of the
Company and raised net proceed of approximately $29.7 million. Its common
stock is traded on the Nasdaq National Market tier of the Nasdaq Stock Market
under the symbol GACC.
Caption:
General Acceptance Corporation serves the non-prime used car market with a
two-pronged approach. It offers vehicles for sale and also finances them.
This dual strategy is unusual in the industry and provides the company with
enhanced revenue potential.
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Financial Highlights 1
Report to Shareholders 2
The Year in Review 4
Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Financial Statements 18
Notes to Financial Statements 22
Independent Auditors' Report 31
Investor Information 32
Officers and Directors 33
</TABLE>
<PAGE>
Financial Highlights General Acceptance Corporation 1996 Annual Report
<TABLE>
<CAPTION>
(in millions of dollars)
<S> <C> <C> <C>
Millions 1996 1995(1) 1994(1)
------ -------- --------
Revenues $30.9 $ 25.6 $ 10.5
Expenses 38.1 24.4 6.3
------ -------- --------
Pretax income (loss) (7.2) 1.2 4.2
Income tax 1.9 0.5 1.7
------ -------- --------
Net income (loss) $(9.1) $ 0.7 $ 2.5
====== ======== ========
<FN>
(1) Gives pro forma effect to income taxes as if the Company's S
Corporation status had terminated January 1, 1994.
</TABLE>
<TABLE>
<CAPTION>
At Year End
(in millions of dollars)
<S> <C> <C> <C>
Millions 1996 1995 1994
------ ------ -----
Total assets $123.6 $124.4 $57.2
Total debt 99.5 94.2 51.3
Stockholders' equity 17.7 26.7 3.7
</TABLE>
<TABLE>
<CAPTION>
Per Share Data
<S> <C> <C> <C>
1996 1995(1) 1994(1)
------- -------- --------
Net income (loss) $(1.51) $ 0.13 $ 0.57
Book value 2.93 4.44 0.92
<FN>
(1) Gives pro forma effect to income taxes as if the Company's S
Corporation status had terminated January 1, 1994.
</TABLE>
<PAGE>
Report to Shareholders
Nineteen ninety-six was a difficult year for General Acceptance Corporation.
We reported a loss of $(9.1 million), or $(1.51) per share, compared with 1995
pro forma net income of $717,000, or $0.13 per share. The loss for 1996 was
due primarily to three factors:
1. an increase in our provision for credit losses in 1996 due to higher
net charge-offs experienced during the year;
2. higher operating expenses incident to our efforts to strengthen our
management team and further develop our infrastructure; and
3. our establishment of a non-cash valuation reserve of approximately $4.7
million against deferred tax assets.
While the 1996 loss was disheartening, we did make important progress during
1996. The Company tightened its underwriting and implemented additional
internal controls, which resulted in our 60-day contractual delinquency rate
being cut in half from 3.6% at year end 1995 to 1.8% at year end 1996.
Significant improvements were made by upgrading our management information
systems to benefit future operations with more timely and detailed
information. Internal Audit, Human Resources and Operations Support
departments were developed to give us the controls needed to effectively and
efficiently manage the Company.
During 1996, we expanded the number of Company dealerships from seven to 14.
These dealerships were initially designed to sell primarily repossessed
vehicles. In early 1997, the Company made the strategic decision to operate
the dealerships as profit centers selling primarily purchased and trade
vehicles. The name "Drive Home USA Auto Company " was selected for the
dealerships. Our research indicated this easily-remembered name creates a very
positive image. A significant marketing effort introducing the new name is
planned for the summer of 1997. We believe these moves will lead to increased
retail sales and improved operating results at the Company dealerships.
<PAGE>
During all of 1996, the Company operated under significant funding restraints.
In late 1996, management determined that it could best allocate its limited
resources by focusing on the Indiana, Ohio and Florida markets where we have
had good experience and have established relationships with auto dealers. We
decided to close offices in six states, and to sell nearly all of the
contracts we wrote in those areas. By mid-May 1997, we expect to have sold
substantially all of the $54.9 million in contracts receivable held for sale
as of December 31, 1996, thereby significantly reducing borrowings under our
revolving line of credit. No material gain or loss was recorded in connection
with these sales.
On April 11, 1997, the Company issued $13.3 million of convertible
subordinated debt, of which an affiliate of Conseco, Inc., a Fortune 500
Indianapolis-based insurance company, purchased $10.0 million. In conjunction
with this investment, we entered into a new $70.0 million loan agreement with
our principal lender which took us out of default for the first time in over a
year. Conseco's investment creates a whole new outlook and opportunity for the
Company.
Management believes that the internal steps it has taken over the past year to
strengthen its operations, and its materially strengthened financial posture,
will enable the Company to fully implement its corporate vision.
Finally, on a personal note we wish to thank all our shareholders and
employees for their support during the difficult times. We look forward to
sharing better days with each of you in the future.
Malvin L. Algood
Chairman and Chief Executive Officer
Russell E. Algood
President and Chief Operating Officer
Bloomington, Indiana, April 22, 1997
<TABLE>
<CAPTION>
Number of Company Owned and Operated Dealerships
<S> <C> <C> <C> <C>
93 94 95 96 97*
0 2 7 14 20
<FN>
*-Projected
</TABLE>
<TABLE>
<CAPTION>
Contracts Receivable Held for Investment (in millions of dollars)
Five Years Ended December 31, 1996
<S> <C> <C> <C> <C>
92 93 94 95 96
9.1 22.1 62.1 129.9 62.2
</TABLE>
<PAGE>
The Year in Review
In early 1996, as a result of increased delinquencies and charge-offs during
late 1995, GAC's principal lender notified the Company it was in technical
default of certain financial covenants, thus threatening the Company's
revolving line of credit. However, the lender agreed not to foreclose, thus
giving GAC the opportunity to work itself out of default. Throughout 1996, GAC
instituted various measures to control future losses, including tightening
underwriting standards and controls, but it could not change the quality of
the business already underwritten. As a result, GAC increased its provision
for credit losses by $4.6 million in 1996, along with a $3.7 million increase
in employee costs. These factors, in addition to the establishment of a $4.7
million non-cash valuation allowance against deferred tax assets, were the
principal reasons for the Company's loss in 1996.
Notwithstanding this loss, the Company's actual day-to-day operations that
year improved over those of 1995. Solid reporting systems were in place,
delinquencies fell by half to 1.82% at year-end 1996 from 3.60% at year-end
1995, and National Operations Support, Human Resources and Internal Audit
departments were established.
<TABLE>
<CAPTION>
Total Net Revenues (in millions of dollars)
Five Years Ended December 31, 1996
<S> <C> <C> <C> <C>
92 93 94 95 96
1.7 4.0 10.6 25.6 30.9
</TABLE>
In April 1997, the Company's financial uncertainties were alleviated when the
Company entered into a new revolving credit agreement with its primary lender.
The terms of the new agreement provide for a $70.0 million revolving line of
credit subject to a maximum advance rate of 78 percent of eligible contracts
receivable.
The agreement expires January 1, 1998, and has an interest rate of one-month
LIBOR plus 4.5 percent. In conjunction with obtaining a new line of credit,
GAC also added to its financial strength when it issued $13.3 million of 12
percent convertible subordinated notes
<PAGE>
- $10.0 million to an affiliate of Conseco, Inc. and $3.3 million to certain
management stockholders and relatives. Conseco is an Indiana-based Fortune 500
insurance company that is traded on the New York Stock Exchange.
The subordinated notes require only the payment of interest, are unsecured,
and mature in three years from the date of issue. Subject to approval by GAC
shareholders at the Company's 1997 annual meeting, the notes would be
convertible at any time into common stock of the Company at $3.00 per share.
Conseco has the right to nominate two of the Company's six directors.
With its immediate liquidity and funding needs addressed, GAC management
refocused its energies on its three principal better performing markets,
Indiana, Ohio and Florida, and effectively withdrew from writing contracts in
certain states in which it did business in 1996. In this regard, GAC began
selling off its contracts receivable generated primarily in those states from
which it withdrew. By mid-May, GAC expects to have divested itself of
substantially all of the $54.9 million of contracts receivable held for sale
at December 31, 1996. Since these contracts have been and are expected to be
sold essentially for their carrying value, no material gain or loss has been
or is expected to be recorded.
GAC has adopted a five-pronged business strategy to enhance its future
prospects. The five elements are: [1] to rebuild its portfolio of contracts
under strict underwriting guidelines subject to the availability of capital.
These contracts will be primarily generated from within its three-state
operating area through Company-owned dealerships and from third-party dealers;
[2] to build revenues by selling additional used vehicles at its Company-owned
dealerships; [3] to
<PAGE>
increase and diversify revenues generated from the sale of ancillary products;
[4] to reduce its operating costs to reflect its reduced portfolio of
contracts receivable, and [5] to discontinue maintenance of an auto
repossession inventory for subsequent sale at its Company-owned dealerships
and instead immediately wholesale those autos at auto auctions. Management
believes this policy will accelerate the conversion of repossessions to cash
and earning assets.
GAC intends to materially expand its operation of Company-owned dealerships as
a way to increase revenues and profit, both from the sale of cars and from
their financing. At year-end 1996, GAC had 14 Company-owned dealerships, and
opened a 15th in March 1997. By year-end 1997, the Company expects to have 20
Company-owned dealerships in operation.
In addition, as a way to increase its collection efforts and decrease its
collection costs, GAC plans to invest approximately $200,000 this year to
install a predictive telephone dialing system to automate a portion of its
outgoing telephone collection activities.
GAC management believes that a return to profitability in 1997 will depend
largely on its ability to implement its business strategy outlined above,
adhering to more stringent underwriting standards, providing quality service
to third-party dealerships as well as to customers at its Company-owned
dealerships, maintaining strict cost control measures and using technology to
maximize operational efficiency.
Conclusion
With financing in place to meet its liquidity needs and growth plans for the
remainder of 1997, and much improved collection and reporting procedures in
place, management believes it will return the Company to profitability in the
near future.
Captions:
We spent much of 1996 upgrading our management information systems and
improving our credit collections. Further, we plan to invest approximately
$200,000 this year to install a predictive telephone dialing system to
automate a portion of the outgoing telephone collection activities.
Daily reporting from the remote locations throughout the GAC network are now
possible because of the extensive investment in telecommunication systems last
year.
The Company's financial strength and future operational prospects were
materially bolstered in April, 1997 when it obtained a $70 million revolving
line of credit from its major lender and also sold $10 million of 12 percent
subordinated notes to an affiliate of Conseco, Inc., a Fortune 500 insurance
company that is listed on the New York Stock Exchange.
Management believes the issuance of the notes to an affiliate of Conseco and
its new revolving credit agreement will provide the company with sufficient
liquidity to execute its operational strategy for 1997.
We took steps in 199 to tighten our underwriting standards.
The Company's new trade name under which it plans to operate its Company-owned
dealerships.
The size of the used car business is roughly $300 billion annually. GAC
believes it has a competitive advantage in this market because it can generate
a profit on the cars it sells as well as a profit on the financing it
provides. Few competitors can do both.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
AS OF AND FOR YEARS ENDED DECEMBER 31
---------------------------------------
1996 1995 (2) 1994 (2) 1993 1992
--------------------------------------- --------- --------- ------- ------
Results of Operations:
Total net revenues $ 30,968 $ 25,639 $ 10,555 $ 3,989 $1,749
Net income (loss) (1) (9,081) 2,684 4,240 2,172 955
Net (loss) per share (1.51)
Pro forma net income 717 2,544
Pro forma net income
per share .13 .57
Financial Condition:
Total debt 99,477 94,165 51,345 18,043 7,471
Total assets 123,646 124,380 57,188 21,880 9,407
<FN>
(1) Prior to its initial public offering in April 1995, the Company was an S Corporation and therefore
not subject to income taxes. In conjunction with its initial public offering the Company terminated its S
Corporation status and from April 10, 1995 forward was subject to federal and state income taxes.
Accordingly, the data presented for net (loss) for 1996 is not comparable to net income for 1995 and prior
years.
(2) Pro forma net income and pro forma net income per share assume a 40% combined income tax rate.
Pro forma net income per share represents pro forma net income divided by actual weighted average shares
outstanding, increased by the number of shares whose proceeds were used to fund undistibuted S Corporation
earnings.
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
In late 1995, the Company experienced sharply higher charge-offs and
delinquencies associated with its portfolio of Contracts Receivable. The
higher charge-offs and delinquencies were due to a number of factors,
including: (i) the rapid growth of the Company during 1995; (ii) the decision
by some of the Company's branch managers to purchase Contracts which did not
meet the Company's stringent credit criteria; (iii) the Company's delay in
detecting non-compliance with its credit guidelines due largely to the ongoing
computer system conversion and the resulting lack of reliable and timely
delinquency and charge-off information available to management; and (iv) an
industry-wide increase in delinquencies and charge-offs.
On January 17, 1996, as a result of the higher charge-offs and
delinquencies, the Company was notified by GE Capital, its primary lender, of
an event of default under the terms of its loan and security agreement (the
"Agreement") for the Company's revolving line of credit. On March 20, 1996,
the Company and GE Capital signed a letter agreement (the "Forbearance
Agreement") whereby GE Capital agreed to forbear from exercising its rights
under the Agreement. The Forbearance Agreement, as amended, remained in
effect until April 11, 1997, when it was superseded as described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
During 1996, the Company took a number of steps designed to reduce
charge-offs and delinquencies and to expedite development of the Company's
infrastructure, including: (i) hiring of a number of additional management
personnel including a Vice President of Management Information Systems, a
Director of Internal Audit and a Director of Human Resources, (ii) upgrading
its management information systems capabilities to better enable the Company
to monitor and control its portfolio of Contracts Receivable as well as its
branch and Company Dealership operations, (iii) upgrading its internal credit
underwriting controls and exception reporting, and (iv) forming a National
Operations Support department to increase efficiency and quality by
centralizing a number of functions previously handled at individual locations.
These steps, as expected, significantly increased the Company's operating
expenses in 1996 as compared to 1995.
In 1996, despite the measures described above, the Company continued to
experience higher than anticipated charge-offs, although delinquency was
reduced to significantly lower levels. The higher than anticipated
charge-offs in 1996 were due primarily to the continuing effects of Contracts
acquired by the Company during 1995, as well as to continuing adverse
charge-off trends in the industry.
During December 1996, as a result of financial and liquidity problems
experienced by the Company, the Company decided to close operations in certain
geographic markets and to refocus the majority of its resources on three of
its principal markets: Indiana, Ohio and Florida. The Company has a
significant presence, has had good experience with credit quality and has
long-standing relationships with Third-Party Dealers in each of these states.
Management believes that operating on a more centralized basis, with fewer
branch offices, will increase efficiency and reduce costs.
The Company has sold or plans to sell substantially all of the Contracts
in those markets where it has decided to close operations, and to transfer
servicing of any retained Contracts to its remaining branch offices. In
February 1997, the sale of substantially all of the Company's Illinois
Contracts was completed. In April 1997, the sale of substantially all of the
Contracts from the Michigan, Missouri, Virginia and Arizona branch offices was
completed. No material gain or loss was recorded in connection with the
sales.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
items to total net revenues for the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For years ended December 31
----------------------------
Percentage of Total Net Revenues 1996 1995 1994
- ------------------------------------------ ---------------------------- ------ ------
Finance revenues:
Interest and discount 87.1% 92.2% 90.9%
Ancillary products 5.0 4.0 5.9
Other 1.7 2.2 3.2
---------------------------- ------ ------
Total finance revenues 93.8 98.4 100.0
Net dealership revenues:
Sale of purchased and trade vehicles 26.0 12.0 ---
Cost of sales (21.6) (11.3) ---
Other 1.8 0.9 ---
---------------------------- ------ ------
Total net dealership revenues 6.2 1.6 ---
---------------------------- ------ ------
Total net revenues 100.0 100.0 100.0
Expenses:
Interest 29.3 24.9 26.3
Salaries and employee benefits 28.4 20.1 16.9
Marketing 5.0 2.0 1.7
Provision for credit losses 37.2 26.9 1.0
System conversion loss --- 6.0 ---
Other 23.2 15.4 13.9
---------------------------- ------ ------
Total expenses 123.1 95.3 59.8
---------------------------- ------ ------
Income (loss) before income taxes (23.1) 4.7 40.2
Income tax (benefit) (1) 6.2 (5.8) ---
---------------------------- ------ ------
Net income (loss) (29.3)% 10.5% 40.2%
============================ ====== ======
<FN>
(1) The Company was an S Corporation until April 10, 1995, and as such, was not
subject to income taxes.
</TABLE>
The following table sets forth for the periods indicated, the percentage
increase (decrease) of each statement of operations item over the prior year.
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31
- ------------------------------------------
<S> <C> <C> <C>
GROWTH RATES 1996 1995 1994
-------- -------- --------
Finance revenues:
Interest and discount 14.2% 146.3% 151.1%
Ancillary products 50.4 64.7 349.1
Other (12.1) 70.5 1,167.4
-------- -------- --------
Total finance revenues 15.1 139.0 164.6
Net dealership revenues:
Sale of purchased and trade vehicles 161.8 NM ---
Cost of sales 130.6 NM ---
Other 147.2 NM ---
-------- -------- --------
Total net dealership revenues 375.7 NM ---
-------- -------- --------
Total net revenues 20.8 142.9 164.6
Expenses:
Interest 42.3 129.5 170.8
Salaries and employee benefits 70.6 188.9 323.5
Marketing 201.8 179.3 424.8
Provision for credit losses 67.1 6,532.5 NM
System conversion loss NM NM ---
Other 81.6 170.6 337.8
-------- -------- --------
Total expenses 56.0 287.1 247.5
-------- -------- --------
Income (loss) before income taxes (699.9) (71.8) 95.2
Income tax (benefit) (1) (228.5) --- ---
-------- -------- --------
Net income (loss) (438.3)% (36.7)% 95.2%
======== ======== ========
<FN>
(1) The Company was an S Corporation until April 10, 1995, and as such,
was not subject to income taxes.
NM - Not Meaningful
</TABLE>
<PAGE>
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total Net Revenues
Total finance revenues increased from $25.2 million in 1995 to $29.0
million in 1996, an increase of $3.8 million, or 15.1%. The increase was due
primarily to an increase in interest and discount revenue as a result of an
increase in the volume of Contracts purchased from Third-Party Dealers as well
as the volume of Contracts originated by Company Dealerships. Total finance
revenues are expected to be lower in 1997 than in 1996 due to the Company's
decision to close operations and to sell substantially all of its Contracts
Receivable in certain geographic areas. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
Interest and discount revenues were $23.6 million in 1995 compared to
$27.0 million in 1996, an increase of $3.4 million, or 14.2%. The increase
was primarily due to a higher average level of Contracts Receivable in 1996
than in 1995, partially offset by a lower average yield on Contracts accepted
by the Company in 1996 compared to 1995. Average Contracts Receivable for
1995 was $100.1 million as compared to $123.5 million for 1996, an increase of
23.4%. The higher average level of Contracts Receivable in 1996 compared to
1995 was the result of Contracts Receivable growing rapidly during 1995 while
remaining relatively level during 1996 due to funding constraints experienced
by the Company.
The average yield on Contracts Receivable in 1995 was 23.4% compared to 21.8%
in 1996. The decrease was due primarily to the Company's decision during 1995
to enter into agreements with its Third-Party Dealers to apply the difference,
if any, between the Contract interest rate and the rate determined by the
Company as necessary to produce a satisfactory return on the Contract, to a
dealer participation reserve against which losses can be charged.
Ancillary products revenues were $1.0 million in 1995, compared to $1.6
million in 1996, an increase of $520,000, or 50.4%. The increase was due
primarily to increased sales of a warranty program and the introduction in
1996 of a Visa credit card which was marketed in conjunction with a motor club
program on a stand-alone basis as well as in connection with the acquisition
and origination of Contracts, partially offset by decreases in revenues from
both the Gap product and credit life and disability insurance.
Other revenue decreased from $561,000 in 1995 to $493,000 in 1996, a
decrease of $68,000, or 12.1%. The decrease was primarily due to a reduction
in training fees charged to Third-Party Dealers in 1996 compared to 1995,
partially offset by the reversal in 1996 of a special reserve for losses on
receivables from a Third-Party Dealer as a result of the reduction of amounts
owed to the Company by that Third-Party Dealer. Effective December 31, 1995,
the training fee was discontinued. Beginning January 1, 1996, a $35 per
contract processing fee was instituted, which is deferred and amortized into
income over the estimated average life of the Contracts. The previous
training fee, charged for new dealers in a $2,500 lump sum or $100 per
contract for the first 35 contracts, was recognized as income upon receipt.
Sales of purchased and trade vehicles increased from $3.1 million in 1995
to $8.1 million in 1996, an increase of $5.0 million, or 161.8%. The increase
was due to an increase in the number of purchased and trade vehicles sold as a
result of an increase in the number of Company Dealerships from seven as of
December 31, 1995 to 14 as of December 31, 1996.
Cost of sales of purchased and trade vehicles increased from $2.9 million
in 1995 to $6.7 million in 1996, an increase of $3.8 million, or 130.6%. The
gross margin percentage (defined as the difference between sales and cost of
sales, divided by sales) increased from 5.8% in 1995 to 17.0% in 1996, due to
a number of factors, including the decision to actively market purchased and
trade inventory at the Company Dealerships in 1996 and the increased number of
purchased and trade vehicles available for sale at each Company Dealership.
Other revenue generated by the Company Dealerships increased from
$229,000 in 1995 to $567,000 in 1996, an increase of $338,000, or 147.2%.
This increase was due primarily to the introduction of the motor club program
at the Company Dealerships during 1996.
As a result of the foregoing, total net revenues increased from $25.6
million in 1995 to $31.0 million in 1996, an increase of $5.3 million, or
20.8%.
Expenses
Interest expense increased from $6.4 million in 1995 to $9.1 million in
1996, an increase of $2.7 million or 42.3%. The increase was due to higher
average borrowings in 1996 under the Company's revolving line of credit
necessary to fund higher average Contracts Receivable, as well as higher
average borrowings in 1996 under the bank line of credit necessary to fund
higher average repossessions and purchased and trade inventory. Total average
borrowings were $67.2 million in 1995, compared to $98.9 million in 1996, an
increase of $31.7 million, or 47.2%. The Company's total average interest
rate was 9.0% for both 1995 and 1996. Although the spread over one-month
LIBOR rate on the Company's revolving line of credit increased from 3.00% as
of December 31, 1995 to 3.75% as of December 31, 1996, the average one-month
LIBOR rate decreased from 5.83% as of December 31, 1995 to 5.40% as of
December 31, 1996. The interest rate on the bank line of credit was 8.25%
(the bank's prime rate) from the date the loan was made through December 31,
1996.
Salaries and employee benefits increased from $5.2 million in 1995 to
$8.8 million in 1996, an increase of $3.6 million, or 70.6%. This increase
was due to: (i) an increase in the number of employees associated with the
Company Dealerships as a result of an increase in the number of Company
Dealerships in operation from seven as of December 31, 1995 to 14 as of
December 31, 1996, and (ii) additional management personnel added during 1996
as part of the Company's stated objective of building infrastructure to
support future growth, partially offset by a reduction in the number of branch
offices operated by the Company from 13 as of December 31, 1995 to 10 as of
December 31, 1996. The number of full time equivalent employees increased
from 300 as of December 31, 1995 to 360 as of December 31, 1996.
Marketing costs increased from $507,000 in 1995 to $1.5 million in 1996,
an increase of $1.0 million, or 201.8%. The increase was due primarily to
increased advertising associated with the higher number of Company
Dealerships.
The provision for credit losses increased from $6.9 million in 1995, to
$11.5 million in 1996, an increase of $4.6 million, or 67.1%. The increase
was due to (i) higher than anticipated net charge-offs in 1996 compared to
1995; (ii) an increase in amounts provided for Contracts originated by the
Company Dealerships in 1996 compared to 1995, and (iii) amounts provided in
1996 related to the Company's fourth quarter initiative to dispose of
approximately 30% of its repossession inventory through wholesale channels.
The higher than anticipated net charge-offs were due to an industry-wide
increase in delinquencies and charge-offs as well as to the lingering effects
in 1996 of problems encountered by the Company in 1995 related to: (i) a
difficult computer conversion; (ii) exceptions made by certain personnel to
the Company's credit guidelines, and (iii) the Company's delay in detecting
non-compliance with the guidelines as a result of the conversion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" for further discussion.
The portion of the provision for credit losses related to Contracts
originated by the Company Dealerships was $856,000 in 1995 compared to $2.3
million in 1996. As there is no discount associated with the origination of
Contracts by the Company Dealerships, in order to develop a reserve for
possible future credit losses, a charge directly to earnings is required. The
increase in 1996 compared to 1995 was due to an increase in the volume of
Contracts originated by the Company Dealerships from $4.9 million in 1995 to
$14.8 million in 1996.
Until the third quarter of 1996, it had been the Company's policy to
maximize recoveries from its repossessed vehicles by selling the majority of
the vehicles at retail through the Company Dealerships. It became apparent in
the third quarter of 1996 that the Company Dealerships would not be able to
quickly dispose of the vehicles repossessed earlier in 1996. In order to more
quickly realize the value of that inventory and use the funds to purchase new
Contracts, an initiative was undertaken to dispose of approximately 30% of the
vehicle inventory through wholesale channels before the end of 1996. While
this method achieved a more rapid disposition of the inventory, it reduced
proceeds from sale. A loss provision was recorded which reflected the reduced
amount recovered from repossession inventory that was disposed of through
wholesale channels. Commencing in early 1997, the Company decided to begin
selling substantially all of the vehicles it repossesses in connection with
delinquent Contracts at auctions.
System conversion loss was $1.5 million in 1995 compared to nil in 1996.
In 1995, the Company recorded this one-time loss in connection with its
inability to reconcile loan balances per its Contracts Receivable subsidiary
ledger to the accounting records. The Company has experienced no further
problems with reconciling these balances since completion of the conversion in
late 1995.
Other expense increased from $3.9 million in 1995, to $7.2 million in
1996, an increase of $3.2 million, or 81.6%. This increase was due to a
number of factors, including: (i) increased rent and depreciation expense
associated with the new corporate headquarters building and the opening of
seven new Company Dealerships during 1996; (ii) the increased monthly charges
for the computer system used by the Company to track its Contracts Receivable,
and (iii) increased telephone, supply and insurance expenses related to the
Company's new headquarters facility and the new Company Dealerships.
As a result of the foregoing factors, the Company's income (loss) before
taxes decreased from $1.2 million in 1995 to $(7.2) million in 1996.
Income Taxes
Income tax (benefit) was $(1.5) million for 1995 compared to $1.9 million
for 1996. In conjunction with the initial public offering of its shares, the
Company terminated its S Corporation status, and as a result, became subject
to federal and state corporate income taxation from April 10, 1995, forward.
The 1995 tax benefit was the result of recording a $2.3 million deferred tax
asset, consisting of differences in the timing of recognition of Contract
Receivable losses and other temporary differences, offset by a $770,000
current tax provision. Included in the $2.3 million deferred tax asset
recorded in 1995 is $1.3 million which represents the net deferred tax assets
for the cumulative temporary differences between financial reporting and tax
reporting as of April 10, 1995, the date the Company terminated its S
Corporation election.
The income tax expense of $1.9 million in 1996 was the result of
recording a $2.4 million deferred tax asset and a $345,000 current tax
benefit, the total of which was more than offset by a $4.7 million valuation
allowance for net deferred tax assets. The $2.4 million deferred tax asset
consisted primarily of the Company's net operating loss carry forward.
The valuation allowance recorded for the deferred tax asset in 1996 was
based on management's assessment of the realizability of the deferred tax
asset. Based on that assessment, the Company decided to fully reserve for the
deferred tax asset in 1996. 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 reduce the valuation reserve, it would have the effect of reducing
recorded tax expense.
The 1996 income tax expense represents an effective tax rate of 26.7%,
which differs from the statutory federal income tax rate of (34.0)%. The
difference is due to a 65.0% effect of the change in the valuation allowance
for net deferred tax assets, offset in part by a (4.3)% effect relating to
state taxes and other items.
YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total Net Revenues
Total net revenues increased from $10.6 million in 1994 to $25.6 million
in 1995, an increase of $15.0 million, or 142.9%. The increase was due
primarily to an increase in interest and discount revenues resulting from an
increase in the volume of Contracts purchased from Third-Party Dealers as well
as the volume of Contracts originated by Company Dealerships, partially
offset by lower average yields on the Contracts accepted by the Company. The
higher volume of Contracts accepted by the Company was due to entry by the
Company into new geographic markets, as well as increasing its presence in
existing markets. As of December 31, 1995, the Company had Contracts
Receivable of $129.9 million, a 109.0% increase over Contracts Receivable of
$62.1 million as of December 31, 1994.
The average yield on Contracts Receivable in 1994 was 24.5% compared to
23.4% for 1995. The decrease was due primarily to the Company's decision to
enter into agreements with its Third-Party Dealers to apply the difference, if
any, between the Contract interest rate and the rate determined by the Company
as necessary to produce a satisfactory return on the Contract, to a dealer
participation reserve against which losses can be charged.
Ancillary products revenues were $627,000 in 1994, compared to $1.0
million in 1995, an increase of $406,000, or 64.7%. The increase was due
primarily to the wide acceptance by Third-Party Dealers of a warranty program
introduced late in 1994.
Other revenues increased from $329,000 in 1994 to $561,000 in 1995, an
increase of $232,000, or 70.5%. The increase was due primarily to an increase
in the training fees charged to Dealers during 1995.
Sales of purchased and trade vehicles was $3.1 million in 1995 and nil
for 1994, as the Company Dealerships sold only vehicles which had been
repossessed in connection with delinquent Contracts in 1994. Cost of sales of
purchased and trade vehicles was $2.9 million in 1995 and nil for 1994 as the
Company Dealerships did not sell purchased and trade vehicles until 1995. The
gross margin percentage (defined as the difference between sales and cost of
sales, divided by sales) was 5.8% in 1995. Other revenue generated by the
Company Dealerships was $229,000 in 1995, which consisted primarily of sales
of a warranty program introduced at the Company Dealerships in 1995.
Expenses
Interest expense increased from $2.8 million in 1994 to $6.4 million in
1995, an increase of $3.6 million, or 129.5%. The increase was due to higher
average borrowings in 1995 under the Company's revolving line of credit to
fund the higher volume of Contracts purchased. The average borrowings under
the line were $34.8 million in 1994, compared to $67.2 million in 1995. Also
contributing to the increase in interest expense was the higher interest rate
environment in 1995, partially offset by a reduction on July 1, 1994, in the
margin over 30 day average LIBOR paid by the Company from 5.0% to 3.0%. The
Company's average borrowing cost was 8.0% in 1994, compared to 9.0% in 1995.
Salaries and employee benefits increased from $1.8 million in 1994 to
$5.2 million in 1995, an increase of $3.4 million, or 188.9%. This increase
was primarily due to an increase in full time equivalent employees from 119 as
of December 31, 1994, to 300 as of December 31, 1995. The increase in
employees was primarily attributable to the development and staffing of the
Company's network of branch offices and Company Dealerships.
Marketing costs increased from $182,000 in 1994 to $507,000 in 1995,
representing 1.7% of total revenue in 1994 compared to 2.0% in 1995, as the
Company sought to establish itself in its new markets. The increase was due
primarily to increased advertising for the Company Dealerships and to a lesser
extent, to an increase in the number of salespeople employed by the Company
from 18 as of December 31, 1994, to 20 as of December 31, 1995.
The provision for credit losses increased from $104,000 in 1994, to $6.9
million in 1995, an increase of $6.8 million. In 1994, the provision for
credit losses consisted entirely of amounts provided for Contracts originated
at the Company Dealerships. As there is no discount associated with these
contracts, in order to develop a reserve for possible future credit losses, a
charge directly to earnings was required. In 1995, however, $6.0 million of
the provision was to restore the allowance and discount available for credit
losses on Contracts acquired from third Party Dealers to a level deemed
appropriate by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview."
The one-time system conversion loss of $1.5 million in 1995 arose in
connection with the systems conversion described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview."
Upon completion of the conversion late in the fourth quarter of 1995, the
Company was unable to reconcile the loan balance per the Contracts Receivable
computer system to its accounting records, and, accordingly, recorded an
adjustment to reduce the balance of Contracts Receivable by $1.5 million to
bring it into agreement with the Contracts Receivable subsidiary ledger.
Since completion of the conversion, the Company has reconciled Contracts
Receivable monthly.
Other expense increased from $1.5 million in 1994, to $4.0 million in
1995, an increase of $2.5 million, or 170.6%. The increase was due to a
number of factors, including: (i) increased repossession costs associated with
the Company's higher Contracts Receivable in 1995 compared to 1994, and with
the higher incidence of repossessions in 1995 as compared to prior years, as
previously discussed; (ii) increased costs to obtain credit bureau reports on
applicants associated with the Company's higher volume of Contracts purchased
in 1995; (iii) increased rent and depreciation expense due to opening and
equipping eight branch offices and five Company Dealerships in 1995 and (iv)
monthly usage charges incurred in 1995 for the new computer system used by the
Company to track its Contracts Receivable.
As a result of the foregoing factors, pre-tax net income in 1995 was $1.2
million, a decrease of $3.0 million, or 71.8%, from $4.2 million in 1994.
Income Taxes
Income tax expense was nil in 1994, because, since its inception, the
Company had been an S Corporation. In conjunction with the initial public
offering of its shares, the Company terminated its S Corporation status, and
as a result, became subject to federal and state corporate income taxation
from April 10, 1995, forward. For the year ended December 31, 1995, an income
tax benefit of $1.5 million was recorded. This tax benefit was the result of
recording a $2.3 million deferred tax asset, consisting of differences in the
timing of recognition of Contract Receivable losses and other temporary
differences, offset by a $770,000 current tax provision. Included in the $2.3
million deferred tax asset recorded in 1995 is $1.3 million which represents
the net deferred tax assets for the cumulative temporary differences between
financial reporting and tax reporting as of April 10, 1995, the date the
Company terminated its S Corporation election.
CREDIT LOSSES AND DELINQUENCIES
Information on the Company's charge-off rate, total available for credit
losses and delinquency ratio is presented below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Net charge-offs to monthly average
Contracts Receivable 24.73% 14.19% 8.58%
Delinquency ratio (1) 1.82% 3.60% 1.03%
Allocated portion of total available for credit losses
as a percentage of Contracts Receivable (2):
Held for sale 7.69% --- ---
Held for investment 13.25% 16.46% 14.20%
<FN>
(1) 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.
(2) Total available for credit losses is defined as the sum of allowance
and discount available for credit losses and dealer participation reserves.
</TABLE>
The increase in the Company's net charge-off rate from 14.19% in 1995 to
24.73% in 1996 is attributable to an industry-wide increase in delinquencies
and charge-offs as well as to the lingering effects in 1996 of problems
encountered by the Company in 1995 related to: (i) a difficult computer
conversion; (ii) exceptions made by certain personnel to the Company's credit
guidelines, and (iii) the Company's delay in detecting non-compliance with the
guidelines as a result of the conversion. In addition, the Company
experienced an expected increase in charge-offs associated with its decision
to dispose of approximately 30% of its repossession inventory through
wholesale channels during the fourth quarter of 1996.
The delinquency ratio was 3.60% as of year end 1995, compared to 1.82% as
of year end 1996. The ratio was particularly high at year end 1995 due to
difficulties experienced in properly collecting accounts as a result of the
computer conversion completed in the fourth quarter of 1995.
The allocated portion of total available for credit losses as a
percentage of Contracts Receivable held for sale was 7.69% as of year end
1996. In connection with the planned sale of a portion of the Company's
portfolio of Contracts in 1997, the total available for credit losses has been
allocated to Contracts Receivable held for sale based on completed sales and
bids received. It is reasonably possible that a material change to this
estimate could occur in the near term due to changes in the economy and other
conditions beyond the Company's control that influence the amount realized on
the anticipated sales. See "Management's Discussion and Analysis - Liquidity
and Capital Resources".
The allocated portion of total available for credit losses as a
percentage of Contracts Receivable held for investment declined from 16.46% as
of year end 1995 to 13.22% as of year end 1996. The 1996 allowance level,
which reflects management's estimates of inherent credit losses, is based on
historical loss experience, current economic conditions, operating policies
and practices and other appropriate considerations. The decline in the
allowance level in 1996 compared to 1995 is based on a number of factors taken
into consideration by management, including: (i) the increase in the median
number of months which Contracts have been on the books from 8.9 as of year
end 1995 to 14.3 as of year end 1996; (ii) the reduction in the delinquency
rate during 1996 from higher levels at year end 1995, and (iii) the completed
and planned sales of portions of the Company's portfolio of Contracts
primarily in outlying areas not considered to be the Company's core
operations. The Company has historically experienced significantly higher
delinquency and charge-off rates at certain of these branch offices.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for capital is to fund Contract acquisitions
from Third-Party Dealers. Cash used for this purpose decreased from $95.3
million in 1995 to $76.7 million in 1996. The primary reason for the decrease
was the Company's inability to obtain access to additional lines of credit.
In 1996, 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. The Line permitted the Company to borrow up to the
lesser of $100.0 million or 84% of the principal balance of Contracts
Receivable, subject to certain limitations. Borrowings under the Line were
$94.2 million as of year end 1995 and $94.0 million as of year end 1996. As
discussed below, the terms of the Line in effect as of year end 1996 were
amended and restated on April 11, 1997.
The Company's secondary need for capital is to fund Repossession
Inventory and Purchased and Trade Inventory (together, "Inventory"). As of
year end 1995, Inventory was $6.0 million compared to $10.1 million as of year
end 1996. During 1996, the Company obtained a $4.5 million bank line of
credit. In 1996, the Company funded Inventory with borrowings under the bank
line of credit, cash generated by the sale of Inventory which was not financed
by the Company and cash generated from operations.
During the fourth quarter of 1996, as a result of higher than anticipated
charge-offs, the Company began to experience tightening liquidity.
Charge-offs have the effect of reducing Contracts Receivable, and therefore
reducing permitted borrowings under the Line, without generating cash to repay
borrowings under the Line. As a result of tightening liquidity and the
Company's unprofitable operating results in the third and fourth quarter of
1996, GE Capital, the Company's primary lender, began to exert pressure on the
Company to reduce borrowings under the line. As a result of such concerns,
the Company took a number of actions during the fourth quarter of 1996 and
through April 1997 to deal with this situation as outlined below.
The Company reduced the volume of Contracts acquired from Third-Party
Dealers. This reduction limited the need for cash to make advances to
Third-Party Dealers and was accomplished by a further tightening of the
Company's credit guidelines.
The Company sold Contracts Receivable in a manner consistent with its
business strategy of exiting certain markets. Substantially all of the
Company's Contracts Receivable in Missouri, Michigan, Virginia, Illinois and
Arizona have been sold. Of the $54.9 million in Contracts Receivable
classified as of year end 1996 as held for sale, 75.0% have been sold to date.
On December 2, 1996, the Company sold Contracts Receivable for 100.0% of
contract balance of $2.6 million. On January 7, 1997, the Company sold
Contracts Receivable for 102.0% of contract balance of $1.6 million. On
February 19, 1997, the Company sold Contracts Receivable for 90.8% of contract
balance of $14.5 million. On April 8, 1997, the Company sold Contracts
Receivable for 92.7% of contract balance of $24.7 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. The Company is exploring
alternatives with several prospective buyers regarding the 25.0% of Contracts
Receivable classified as held for sale as of year end 1996 which to date have
not been sold.
The Company borrowed money from certain principal stockholders and their
relatives in the form of unsecured demand notes bearing interest at 12.00%.
As of year end 1996, $1.0 million was outstanding under these notes. An
additional $2.3 million was subsequently borrowed, bringing the total to $3.3
million to date. Proceeds were used by the Company to repay borrowings under
the Line and to fund the acquisition of purchased and trade inventory.
On April 11, 1997, the Company issued $10.0 million of 12.00% 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 stockholders of the Company and their relatives in
exchange for a like amount of 12.00% unsecured demand notes held by them. The
two issues of notes have identical terms. The notes require payments of
interest only at 12.00%, mature on the third anniversary of issuance, and are
unsecured. The conversion feature is subject to approval by shareholders at
the Company's 1997 annual meeting. Subject to such approval, the notes are
convertible at any time while they are outstanding into common stock of the
Company at a conversion price of $3.00 per share. In conjunction with the
issuance of the convertible subordinated debt, the Company, Conseco and
certain of the Company's principal stockholders entered into an agreement
whereby the principal stockholders will vote in favor of the election of two
of Conseco's director nominees and Conseco will vote all of its voting shares
in favor of the election of one of the principal shareholders' Director
nominees. 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 acceptance of 25% of the issued and outstanding
shares of Common Stock not held by the principal shareholders and a minimum
tender offer price, 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 shall appoint one person to act in an operations
capacity for the Company. Cash proceeds from issuance of the notes of $10
million were used to repay borrowings under the Line.
Finally, 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 provided cash during the fourth quarter of 1996 and in 1997
to help provide additional liquidity.
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 $3.3 million borrowed from certain principal
stockholders, the issuance of the $10.0 million convertible subordinated debt
and the wholesaling of repossession inventory, all as described above,
borrowings under the Line were reduced from $94.0 million as of year end 1996
to approximately $43.0 million as of April 14, 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 4.50%.
A $350,000 line fee was paid to GE Capital in connection with the New Line.
The Restated Agreement waived all defaults which had existed under the
previous agreement between the Company and GE Capital.
Maximum permitted borrowings under the New Line of $70.0 million are in
excess of actual borrowings as of April 14, 1997 of approximately $43.0
million. The Company believes that the difference of approximately $27.0
million gives the Company 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. Under the New Line, and based on its
portfolio of Contracts Receivable, the Company has approximately $9.5 million
of borrowing availability as of April 14, 1997.
The bank line of credit permits the Company to borrow up to the lesser of
$4.5 million or 50% of the value, as defined, of eligible Inventory, and has
an interest rate equal to the bank's prime rate. Borrowings under the bank
line of credit, whose term expires April 30, 1997, were $4.5 million as of
year end 1996.
The Company has begun exploring alternatives for replacing the $4.5 million
bank line of credit whose term expires April 30, 1997. No assurances can be
given that the Company will be successful in this effort. If the bank line of
credit is not renewed by the lender, and assuming no other arrangements have
been put in place, borrowings under the bank line of credit could be repaid
from borrowing availability under the New Line described above. The Company's
strategy is to acquire and originate Contracts consistent with maximum
permitted indebtedness under the New Line. 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 this effort.
The Company expects approximately $500,000 of capital spending in 1997
which consists of (i) a predictive dialing computer system to increase
collection efficiency, (ii) new signs for the Company Dealerships and (iii)
other equipment needs associated with the Company's plans to expand its
network of Company Dealerships.
IMPACT OF INFLATION
Increases in the inflation rate generally result in increased interest
rates and increases in the Company's operating expenses. As the Company
borrows funds at a variable rate and generally purchases Contracts bearing
interest at the maximum rates permitted by law, increased interest rates will
increase the borrowing costs of the Company, and such increased borrowing
costs may not be offset by increases in the rates with respect to Contracts
purchased in most states in which the Company operates.
During 1996, the Company entered into an interest rate protection
agreement ("Cap") which limits the Company's exposure to increases in the
LIBOR rate. The Cap is for a notional principal amount of $50.0 million and
effectively limits the interest rate on $50.0 million of the Company's
revolving line of credit to a maximum of 11.25% as of December 31, 1996.
FORWARD LOOKING INFORMATION
This report includes a number of forward-looking statements which reflect
the Company's current views 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 factors 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>
<TABLE>
<CAPTION>
General Acceptance Corporation
Balance Sheets
<S> <C> <C>
DECEMBER 31
-------------
1996 1995
------------- -------------
ASSETS
Contracts receivable (Notes 2, 4 and 10):
Held for investment $ 62,263,129 $129,867,380
Held for sale 54,868,173 ---
------------- -------------
117,131,302 129,867,380
Allowance and discount available for credit losses
(10,611,268) (19,512,815)
------------- -------------
Contracts receivable, net 106,520,034 110,354,565
Cash and cash equivalents 1,683,429 557,206
Repossessions (Note 4) 7,534,045 5,223,623
Purchased and trade automobile inventory (Note 4) 2,518,069 811,820
Property and equipment, net (Notes 3 and 4) 2,539,135 1,672,475
Other assets 2,282,654 1,200,137
Taxes receivable 568,908 2,300,475
Deferred tax asset (Note 6) --- 2,260,000
------------- -------------
Total assets $123,646,274 $124,380,301
============= =============
LIABILITIES
Debt (Notes 4, 8 and 10):
Revolving line of credit $ 93,977,001 $ 94,165,243
Bank line of credit 4,500,000 ---
Note payable to related party 1,000,000 ---
------------- -------------
Total debt 99,477,001 94,165,243
Accounts payable and accrued expenses 4,650,695 1,605,484
Dealer participation reserves available for credit losses (Note 2) 1,855,223 1,865,681
------------- -------------
Total liabilities 105,982,919 97,636,408
STOCKHOLDERS' EQUITY (NOTE 5)
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 - 29,792,573 29,792,573
6,022,000
Retained earnings (deficit) (Note 4) (12,129,218) (3,048,680)
------------- -------------
Total stockholders' equity 17,663,355 26,743,893
------------- -------------
Total liabilities and stockholders' equity $123,646,274 $124,380,301
============= =============
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
General Acceptance Corporation
Statements of Operations
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
-------------------------
1996 1995 1994
------------------------- ------------ -----------
Finance revenues:
Interest and discount $ 26,986,564 $23,637,854 $ 9,598,816
Ancillary products 1,553,152 1,033,017 627,343
Other 493,386 561,121 329,054
------------------------- ------------ -----------
Total finance revenues 29,033,102 25,231,992 10,555,213
Net dealership revenues:
Sale of purchased and trade
vehicles 8,054,515 3,077,035 ---
Cost of sales (6,686,692) (2,899,703) ---
Other 567,361 229,471 ---
------------------------- ------------ -----------
Total net dealership revenues 1,935,184 406,803 ---
------------------------- ------------ -----------
Total net revenues 30,968,286 25,638,795 10,555,213
Expenses:
Interest 9,083,824 6,381,909 2,780,975
Salaries and employee benefits 8,804,958 5,160,223 1,785,973
Marketing 1,529,646 506,875 181,511
Provision for credit losses 11,525,252 6,897,843 104,000
System conversion loss --- 1,539,219 ---
Other 7,190,144 3,958,298 1,462,642
------------------------- ------------ -----------
Total expenses 38,133,824 24,444,367 6,315,101
------------------------- ------------ -----------
Income (loss) before income tax (7,165,538) 1,194,428 4,240,112
Income tax (benefit) (Note 6) 1,915,000 (1,490,000) ---
------------------------- ------------ -----------
Net income (loss) $ (9,080,538) $ 2,684,428 $ 4,240,112
========================= ============ ===========
UNAUDITED
-------------------------
HISTORICAL PRO FORMA PRO FORMA
------------------------- ------------ -----------
Income (loss) before income tax $ (7,165,538) $ 1,194,428 $ 4,240,112
Income tax 1,915,000 477,771 1,696,045
------------------------- ------------ -----------
Net income (loss) $ (9,080,538) $ 716,657 $ 2,544,067
========================= ============ ===========
Net income (loss) per share $ (1.51) $ .13 $ .57
========================= ============ ===========
Weighted average shares outstanding 6,022,000 5,638,966 4,461,961
========================= ============ ===========
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
General Acceptance Corporation
Statements of Changes in Stockholders' Equity
<S> <C> <C> <C>
RETAINED EARNINGS (DEFICIT)
----------------------------
COMMON SHARES COMMON
-------------
STOCK
-----------
Balance, January 1, 1994 4,064,000 $ 2,000 $ 1,806,446
S Corporation distributions --- --- (2,320,000)
Net income --- --- 4,240,112
------------- ----------- ----------------------------
Balance, December 31, 1994 4,064,000 2,000 3,726,558
S Corporation distributions --- --- (9,459,666)
Issuance of common stock 1,955,000 29,739,573 ---
Value of stock issued as director compensation 3,000 51,000 ---
Net income --- --- 2,684,428
------------- ----------- ----------------------------
Balance, December 31, 1995 6,022,000 29,792,573 (3,048,680)
Net loss --- --- (9,080,538)
------------- ----------- ----------------------------
Balance, December 31, 1996 6,022,000 $29,792,573 $ (12,129,218)
============= =========== ============================
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
General Acceptance Corporation
Statements of Cash Flows
<S> <C> <C>
YEARS ENDED DECEMBER 31
-------------------------
1996 1995
------------------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ (9,080,538) $ 2,684,428
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and 664,436 332,396
equipment
Amortization of deferred discount 190,439 (560,099)
and acquisition costs
Provision for credit losses 11,525,252 6,897,843
Deferred taxes 2,260,000 (2,260,000)
Changes in operating assets and
liabilities:
Increase in other assets and
taxes receivable 649,050 (2,833,792)
Increase in accounts payable 3,045,211 198,110
and accrued expenses
Net cash provided by operating activities 9,253,850 4,458,886
INVESTING ACTIVITIES
Cost of acquiring or originating contracts receivable (76,652,991) (95,321,449)
Principal collected on contracts receivable
64,744,702 29,421,227
Notes receivable from affiliates --- ---
Purchases of property and equipment (1,531,096) (1,406,288)
Net cash used in investing activities (13,439,385) (67,306,510)
FINANCING ACTIVITIES
Borrowing on revolving line of credit 100,000,711 121,935,938
Repayments of revolving line of credit (100,188,953) (76,158,202)
Borrowing on bank line of credit 4,500,000 ---
Borrowings on notes payable to related parties 1,500,000 ---
Repayment of notes payable to related parties (500,000) (2,956,998)
Proceeds from issuance of Common Stock --- 29,739,573
Dividends paid --- (9,459,666)
Net cash provided by financing activities 5,311,758
63,100,645
-------------
Net increase in cash and cash equivalents 1,126,223 253,021
Cash and cash equivalents at beginning of year 557,206 304,185
Cash and cash equivalents at end of year
$ 1,683,429 $ 557,206
------------------------- -------------
<S> <C>
1994
-------------
OPERATING ACTIVITIES
Net income (loss) $ 4,240,112
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and 125,070
equipment
Amortization of deferred discount (629,136)
and acquisition costs
Provision for credit losses 104,000
Deferred taxes ---
Changes in operating assets and
liabilities:
Increase in other assets and
taxes receivable (714,888)
Increase in accounts payable 1,302,284
and accrued expenses
Net cash provided by operating activities 4,427,442
INVESTING ACTIVITIES
Cost of acquiring or originating contracts receivable (50,347,393)
Principal collected on contracts receivable
15,447,119
Notes receivable from affiliates 300,000
Purchases of property and equipment (548,331)
Net cash used in investing activities (35,148,605)
FINANCING ACTIVITIES
Borrowing on revolving line of credit 56,649,676
Repayments of revolving line of credit (24,418,304)
Borrowing on bank line of credit ---
Borrowings on notes payable to related parties 1,131,161
Repayment of notes payable to related parties (27,000)
Proceeds from issuance of Common Stock ---
Dividends paid (2,320,000)
Net cash provided by financing activities
31,015,533
-------------
Net increase in cash and cash equivalents 294,370
Cash and cash equivalents at beginning of year 9,815
Cash and cash equivalents at end of year
$ 304,185
-------------
<FN>
See accompanying notes.
</TABLE>
<PAGE>
General Acceptance Corporation
Notes to Financial Statements
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
General Acceptance Corporation ("Company"), was incorporated in 1988,
under laws of the State of Indiana. Until April 10, 1995, it operated as a
closely held corporation subject to taxation under Subchapter S of the
Internal Revenue Code of 1986, as amended ("S Corporation"). The Company is
principally engaged in servicing high credit risk installment sales contracts
(primarily collateralized by used automobiles) purchased from automobile
dealers and originated by the Company in connection with the sale of
automobiles. During 1994, the Company commenced operating automobile
dealerships for the purpose of selling automobiles repossessed from customers
and, in 1995, began also selling automobiles acquired at auctions.
In 1995, the Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission for an offering of 1,955,000 shares of
Common Stock. This offering represented approximately 32% ownership of the
Company. Net proceeds of the offering of $29,739,573 were used for the
distribution of S Corporation earnings to existing stockholders (including
amounts to repay indebtedness incurred for this purpose), repayment of notes
payable to related parties and repayment of a portion of the revolving line of
credit.
REVENUE RECOGNITION
Interest income from contracts receivable is recognized using the
interest method. A portion of the discount arising from purchases of
contracts receivable is intended to absorb anticipated credit losses (see
discussion below). The remainder (deferred discount), if any, is accreted to
income using a method approximating the interest method over 24 months, which
is estimated by management to be the average life of the related contracts
based upon prepayment and early termination experience. Late charges are
recognized as income when received.
Accrual of interest income continues until contracts are collected in
full, become 90 days contractually delinquent, or are charged off (as
discussed below) consistent with practices generally applied by consumer
finance companies.
The Company defers certain costs associated with the origination or
acquisition of contracts receivable. Deferred origination/acquisition costs
are amortized to interest and discount income using a method approximating the
interest method over 24 months which is estimated by management to be the
average life of the related receivables based upon prepayment and early
termination experience.
Insurance commissions from the sale of credit life and credit disability
insurance are recognized as revenue using the interest method over 24 months,
the estimated average life of the related contracts receivable as discussed
above.
Revenue from the sale of purchased and trade vehicles is recognized upon
delivery and signing of sales contracts.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CREDIT LOSSES
The Company purchases contracts receivable from dealers at a significant
discount pursuant to a financing program that bases the discount on, among
other things, the credit risk of the borrower and the amount to be financed in
relation to the automobile's wholesale value. To a significantly lesser
extent, the Company originates contracts receivable, primarily as a result of
sales from its sales lots. For contracts purchased, any discount anticipated
as necessary to absorb credit losses is allocated to discount available for
credit losses, against which future credit losses will be charged. The
remaining portion of the discount, if any, is deferred and accreted to income
as discussed above. Also, for contracts purchased, an allowance is
established by charging a provision for credit losses against earnings to the
extent discount thereon and dealer participation reserves are not adequate to
absorb anticipated losses. For contracts receivable that the Company
originates, an allowance for credit losses is established by charging a
provision for credit losses against earnings. The dealer participation
reserves (see discussion below) are also available to absorb credit losses for
certain contracts. The combined allowance, discount and dealer participation
reserves available for credit losses are maintained at an amount considered by
management adequate to absorb estimated credited losses inherent in the
contracts receivables portfolio. Management's estimate of inherent credit
losses is based on historical loss experience, current economic conditions,
operating policies and practices and other appropriate considerations.
It is the Company's policy to initially charge credit losses on purchased
contracts receivable and related repossessions against the dealer
participation reserves, to the extent available, then against discount
available for credit losses and then against the allowance for credit losses.
Credit losses on originated contracts receivable are charged to the allowance
for credit losses. For contracts collateralized by automobiles, the
automobile is generally repossessed prior to the contract becoming 90 days
contractually delinquent. At the time of repossession, the automobile is
recorded as an asset at estimated wholesale market value and any contract
amount in excess of wholesale market value is charged off. The initial charge
off is then adjusted for actual loss based on sales proceeds, net of the costs
incurred in taking, storing, and disposing of the automobile. Any subsequent
recovery of amounts charged off is restored to the discount available for
credit losses or allowance for credit losses, as applicable. It is the
Company's policy to charge off contracts no later than the last day of the
month in which they become 120 days contractually past due. Exceptions are
made to the 120-day charge-off policy when, in the opinion of management, such
treatment is warranted.
CONTRACTS RECEIVABLE HELD FOR SALE
Contracts receivable are classified on the balance sheets in accordance
with the Company's intention to sell certain contracts receivable in 1997, and
to hold others for investment. Contracts held for sale net of related
allowance and discount available for credit losses are carried at the lower of
cost or fair value.
PURCHASED AND TRADE AUTOMOBILE INVENTORY
Purchased and trade automobile inventory is recorded at the lower of cost
or market value. The cost of sales of purchased and trade automobiles is
determined by the specific identification method.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, net of depreciation.
Depreciation expense is computed using the straight-line method over each
asset's estimated useful life, generally three to seven years.
DEALER PARTICIPATION RESERVES AVAILABLE FOR CREDIT LOSSES
As part of the Company's financing of contracts receivable, commencing in
mid-1995, agreements were entered into with dealers whereby dealer
participation reserves were established to protect the Company from potential
losses associated with such contracts. Pursuant to the agreements, a
liability is recorded for the difference, if any, between the contract
interest rate and the rate determined by the Company as necessary to produce a
satisfactory return on the Contract. Losses incurred by the Company are
charged first against the dealer participation reserves, to the extent
available, for the applicable dealer. Unused dealer participation reserves,
as defined in the agreement, are remitted to the respective dealers. Prior to
1995, the Company had agreements to establish holdbacks from dealers. Like
dealer participation reserves, these dealer holdbacks are available to charge
losses against, and if unused, are refundable to dealers.
CASH EQUIVALENTS
The Company considers all short-term investments with a maturity at date
of purchase of three months or less to be cash equivalents.
INTEREST RATE PROTECTION AGREEMENTS
The Company has entered into an interest rate cap agreement to limit its
exposure to rising interest rates on its revolving line of credit. The strike
price exceeded the current market level at the time it was entered into and
its net cost is included in interest expense ratably during the life of the
agreement. Payments to be received as a result of the cap agreement are
accrued as a decrease to interest expense. The total of fees and interest
differential received as a result of entering into this agreement was not
significant.
The fair value of interest rate protection agreements is not recognized
in the balance sheet.
SHARE AND PER SHARE INFORMATION
On July 1, 1994, the Company increased its authorized shares of Common
Stock to 25 million, authorized five million shares of Preferred Stock and
authorized a stock split of 4,500 to 1. During the first quarter of 1995, the
Company effected two reverse stock splits resulting in 4,064,000 shares
outstanding. All share and per share amounts have been adjusted to reflect
these splits. Because the Company previously operated as a closely held S
Corporation, historical net income per share data is not meaningful for 1995
and 1994 and therefore is not presented.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code, beginning June 1, 1988, to be treated as an S
Corporation for federal income tax purposes until April 9, 1995. In lieu of
corporation income taxes, the stockholders of the S Corporation were taxed on
their proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal or state income taxes has been included in
the financial statements prior to 1995.
The Company was required to adopt the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", on April 10, 1995, upon termination of its S Corporation
election. This Statement requires the recognition of deferred tax assets and
liabilities based on differences between financial reporting and tax basis of
assets and liabilities measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The cumulative
effect of adopting the Statement on April 10, 1995, was to increase 1995 net
income by $1,300,000.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for the stock option grants.
ADVERTISING EXPENSES
Advertising and promotion expenses are charged to operations as incurred.
The Company incurred advertising expenses of $1,162,000, $131,000 and $23,000
during 1996, 1995 and 1994, respectively.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA DISCLOSURES
The pro forma adjustment for income taxes for 1994 and 1995 was computed
at an effective combined federal and state tax rate of 40% to recognize income
taxes as if the Company had not been an S Corporation. The pro forma weighted
average shares for these periods represent actual weighted average shares of
common stock and dilutive common stock equivalent shares outstanding during
each period increased by the number of shares whose proceeds were used to fund
undistributed S Corporation earnings. Common stock equivalents represents
outstanding stock options.
Supplemental pro forma net income per share is computed by dividing
supplemental net income by the sum of pro forma weighted average shares and
the number of shares that would have been sold at the beginning of the period
to cover the costs of the initial public offering, repay notes payable to
related parties and repay borrowings under the Company's revolving line of
credit. Supplemental net income represents pro forma net income increased by
an assumed reduction in interest expense, net of the related tax benefit, as
though common stock proceeds had been available at the beginning of the period
to reduce debt. Supplemental pro forma net income per share for 1995 is $.17.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform to the 1996 presentation.
<PAGE>
2. CONTRACTS RECEIVABLE
Contracts receivable generally have terms of 24 to 48 months and do not
exceed 60 months. At December 31, 1996, substantially all of the contracts
receivable balances outstanding were collateralized by automobiles. In late
1996, the Company determined that it would exit certain markets in which it
had previously acquired contracts receivable, and sell the contracts
receivable in those markets during 1997. Accordingly, the majority of the
contracts receivable in Missouri, Illinois, Arizona and Virginia, along with
contracts receivable in several other states, are classified as "held for
sale". The Company intends to remain active in a number of states, with
concentrations in Indiana, Ohio and Florida. These contracts receivable are
classified as "held for investment". The following is a summary of the
Company's total contracts receivable.
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31,
--------------
1996 1995
-------------- -------------
Contractually scheduled payments $ 146,744,916 $166,340,561
Add (deduct):
Unearned interest income (30,006,489) (36,920,628)
Accrued interest income 354,333 298,059
Unearned insurance commissions (29,820) (128,718)
Deferred acquisition costs 68,362 278,106
-------------- -------------
Contracts receivable 117,131,302 129,867,380
Allowance and discount available for credit losses (10,611,268) (19,512,815)
-------------- -------------
Contracts receivable, net $ 106,520,034 $110,354,565
============== =============
</TABLE>
As of December 31, 1996, contractual maturities of contracts receivable were
as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 58,437,956
1998 47,067,786
1999 27,136,140
2000 11,625,010
2001 and thereafter 2,478,024
------------
$146,744,916
============
</TABLE>
It is the Company's experience that a substantial portion of the
portfolio generally is prepaid before contractual maturity dates. The above
tabulation, therefore, is not to be regarded as a forecast of future cash
collections.
<PAGE>
2. CONTRACTS RECEIVABLE (CONTINUED)
Changes in the components of amounts available for credit losses were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DEALER PARTICIPATION RESERVES
-------------------------------
ALLOWANCE AND DISCOUNT
------------------------
TOTAL
-------------
Balance at January 1, 1994 $ 1,098,491 $ 1,957,693 $ 3,056,184
Additions 8,956,071 173,913 9,129,984
Charge-offs, net (1,942,296) (1,423,609) (3,365,905)
------------------------ ------------------------------- -------------
Balance at December 31, 1994 8,112,266 707,997 8,820,263
Additions 22,172,739 4,582,165 26,754,904
Charge-offs, net (10,772,190) (3,424,481) (14,196,671)
------------------------ ------------------------------- -------------
Balance at December 31, 1995 19,512,815 1,865,681 21,378,496
Additions 17,422,011 4,211,284 21,633,295
Charge-offs, net (26,323,558) (4,221,742) (30,545,300)
------------------------ ------------------------------- -------------
Balance at December 31, 1996 $ 10,611,268 $ 1,855,223 $ 12,466,491
======================== =============================== =============
</TABLE>
At December 31, 1996, the amounts available for credit losses included
$4,218,000 allocated to contracts receivable held for sale. This allocation
was based on completed sales and on bids received and was intended to reduce
the carrying amount of these contracts receivable to fair value. To the
extent that the allocation was based on bids received, it is reasonably
possible that a material change to this estimate could occur in the near term
due to changes in the economy and other conditions that influence the amount
realized on the anticipated sales.
3. PROPERTY AND EQUIPMENT
The following is a summary of the Company's property and equipment:
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31
-------------
1996 1995
------------- -----------
Automobiles $ 559,695 $ 674,671
Furniture, fixtures and leasehold improvements 743,077 394,288
Office and computer equipment 1,920,053 919,793
Shop equipment 278,412 181,032
------------- -----------
3,501,237 2,169,784
Accumulated depreciation (962,102) (497,309)
------------- -----------
$ 2,539,135 $1,672,475
============= ===========
</TABLE>
<PAGE>
The Company leases its corporate office building from the Company's
president and leases its branch facilities and sales lots from related parties
(i.e. three sales lots) and third parties pursuant to non-cancelable operating
leases expiring from 1997 through 2016. Future minimum lease payments
pursuant to these leases total approximately: 1997, $1,381,000; 1998,
$1,178,000; 1999, $783,000; 2000, $508,000; 2001, $437,000; 2002 and
thereafter, $8,388,000.
4. DEBT
REVOLVING LINE OF CREDIT (SEE NOTE 10)
On April 11, 1997, the Company entered into a modification of its
revolving line of credit agreement ("Agreement"). The modified Agreement
provides for an extension of the maturity of the line to January 1, 1998, and
for a reduction in the maximum permitted indebtedness under the line from $100
million to $70 million. Borrowings are further limited to no more than 78% of
eligible contracts receivable. The Agreement includes certain restrictive
covenants and prohibits the Company's payment of dividends. The revolving
line of credit is collateralized by substantially all of the assets of the
Company. The Company is required to remit all cash receipts from contracts
receivable to the lender. These cash receipts are first applied to accrued
interest and the remainder to principal. Interest is accrued daily at the
average 30-day London Interbank Offered Rate (LIBOR) for the previous month
plus a stated percentage. The rate was LIBOR plus 3.75% at December 31, 1996,
and increased to LIBOR plus 4.00% effective January 16, 1997, and to LIBOR
plus 4.50% effective April 11, 1997. The revolving line of credit has an
annual commitment fee of .53%. The interest rate on the revolving line of
credit was 9.15% and 8.83% as of December 31, 1996 and 1995, respectively.
BANK LINE OF CREDIT
The Company's bank line of credit debt as of December 31, 1996 is
pursuant to an agreement that permits the Company to borrow up to the lesser
of $4.5 million or 50% of the value, as defined, of eligible repossessions and
purchased and trade automobile inventory. The term of the line expires April
30, 1997. Interest is charged monthly at the bank's prime rate, which at
December 31, 1996, was 8.25%.
NOTE PAYABLE TO RELATED PARTY
The Company borrowed $1.0 million from a stockholder during 1996 on an
unsecured basis. This note was exchanged for convertible subordinated debt on
April 11, 1997, as further explained in Note 10. The interest rate on the
note was 12.00%.
INTEREST RATE PROTECTION AGREEMENTS
The Company entered into an interest rate protection agreement ("Cap"),
which limits the Company's exposure on its revolving line of credit to
increases in the LIBOR rate. The strike price of this agreement exceeded the
current market levels at the time it was entered into. The Cap is for a
notional principal amount of $50 million and effectively limits the interest
rate on $50 million of the Company's revolving line of credit to a maximum of
11.25%. The Cap expires in October 1997.
<PAGE>
4. DEBT (CONTINUED)
The Cap subjects the Company to the risk that the counter-party may fail
to perform under the terms of the agreement. The Company does not expect the
counter-party to fail to meet its obligation; however, non-performance would
not have a material impact on the results of operations or financial position.
INTEREST PAID
Interest paid under all debt arrangements was approximately $9,113,000,
$6,312,000 and $2,781,000 in 1996, 1995 and 1994, respectively.
5. STOCK OPTION PLANS
On July 1, 1994, the Company adopted the General Acceptance Corporation
Employee Stock Option Plan ("Employee Plan") and the General Acceptance
Corporation Outside Director Stock Option Plan ("Outside Director Plan," and
collectively with the Employee Plan, the "Plans"). The Plans were amended and
restated in their entirety on February 9, 1995.
A total of 600,000 shares of Common Stock are reserved for issuance upon
exercise of options to be granted under the Plans. The total number of shares
of Common Stock with respect to which options may be granted is 500,000 and
100,000 under the Employee Plan and the Outside Director Plan, respectively.
Options granted pursuant to the Employee Plan may be incentive stock
options ("ISOs') that meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") or nonqualified stock options
("NQSOs") that do not meet the requirements of Section 422 of the Code. The
exercise price of an ISO or an NQSO will not be less than the fair market
value per share of the Common Stock on the date of the grant in all cases
other than for ISOs granted to holders of 10% or more of the Company's
outstanding Common Stock ("10% Stockholders"). The exercise price of ISOs
granted to 10% Stockholders will not be less than 110% of fair market value.
The aggregate fair market value of the Common Stock for which any participant
may be granted ISOs first exercisable in any year may not exceed $100,000.
ISOs and NQSOs granted under the Employee Plan will become exercisable in
increments of from one-half at each of the first two anniversaries of the date
of grant to one-fifth at each of the first five anniversaries of the date of
grant, and will remain exercisable for a term of not more than ten years (five
years, in the case of ISOs issued to 10% Stockholders), as determined by a
committee of the Board of Directors.
Pursuant to the Outside Director Plan, each non-employee director was
automatically granted options to purchase 5,000 shares of Common Stock, upon
completion of the offering. On each anniversary of the effective date of the
plan in February 1995, each non-employee director will be automatically
granted options to purchase 5,000 additional shares. However, no director may
receive any option if, upon exercise of such option, such individual would own
10% or more of the shares of Common Stock outstanding. The exercise price for
shares issuable pursuant to options granted after 1995 will be the fair market
value (as determined under the terms of the plan) at the effective date of the
grant. Options granted under the Outside Director Plan are exercisable in
one-third increments on the date of grant and the first and second anniversary
thereof and expire ten years after grant.
<PAGE>
5. STOCK OPTION PLANS (CONTINUED)
Both plans provide for the automatic acceleration of the exercisability
of option grants upon a "change in control." A "change in control" includes:
(i) a change in ownership of a least 50% of the Company's outstanding voting
stock; (ii) a change in the composition of a majority of the Board; or (iii)
entering into an agreement for sale of all or substantially all of the
Company's assets.
Other terms, including when and how long an option under the Employee
Plan is exercisable, are determined by a committee of the Board of Directors,
in the case of the Employee Plan, or the employee directors of the Company, in
the case of the Outside Director Plan.
Information on stock options is shown in the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
WEIGHTED AVERAGE EXERCISE PRICE
--------------------------------
SHARES OUTSTANDING SHARES EXERCISABLE
------------------- -------------------
Balance at December 31, 1994 --- --- $ ---
Granted 156,250 --- 18.92
Became exercisable --- 5,001 17.00
Canceled (18,250) --- 17.00
------------------- ------------------- --------------------------------
Balance at December 31, 1995 138,000 5,001 19.17
Granted 291,750 --- 10.77
Became exercisable --- 41,735 17.30
Canceled (150,000) (1,967) 14.31
------------------- ------------------- --------------------------------
Balance at December 31, 1996 279,750 44,769 $ 13.04
=================== =================== ================================
</TABLE>
The weighted-average fair value of options granted was $5.95 and $12.12
for 1996 and 1995, respectively. Exercise prices for options outstanding as
of December 31, 1996, ranged from $7.25 to $27.00. The weighted average
remaining contractual life of those options was 8.8 years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of the
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest rates of 6.7% in both years, a dividend yield of nil, volatility
factors of the expected market price of the Company's common stock of .7 and
1.1, and a weighted-average expected life of the option of 5 years.
<PAGE>
5. STOCK OPTION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
------------ --------
Pro forma net income (loss) $(9,677,850) $430,885
Pro forma net income (loss) per share (1.61) .08
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, pro forma net income and net income per share for 1995 and
1996 are not representative of the effects on reported amounts for future
years.
6. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
<S> <C> <C>
1996 1995
------------ ------------
Current:
Federal $ (569,000) $ 620,000
State 224,000 150,000
------------ ------------
(345,000) 770,000
Deferred:
Federal (1,920,000) (1,910,000)
State (480,000) (350,000)
Change in valuation
allowance 4,660,000 ---
------------ ------------
2,260,000 (2,260,000)
------------ ------------
Income tax (benefit) $ 1,915,000 $(1,490,000)
============ ============
</TABLE>
Included in the 1995 deferred income tax credit of $2,260,000 is a
deferred tax credit of $1,300,000 which represents the net deferred tax assets
for the cumulative temporary differences between financial reporting and tax
reporting as of April 10, 1995, the date the Company terminated its S
Corporation election.
<PAGE>
6. INCOME TAXES (CONTINUED)
The provision for income taxes as shown on the statement of operations
differs from amounts computed by applying the statutory federal income tax
rate of 34% to income before taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
<S> <C> <C>
1996 1995
------- --------
Federal income tax expense (benefit) computed at statutory rate (34.0)% 34.0%
Change in valuation allowance 65.0 ---
S Corporation earnings --- (48.4)
Net deferred tax assets recorded upon termination of S Corporation --- (108.9)
State taxes, net of federal tax effect (2.4) (1.5)
Other (1.9) ---
------- --------
Income tax (benefit) 26.7% (124.8)%
======= ========
</TABLE>
The components of the Company's net deferred tax asset as of December 31
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
------------ ----------
Recognition of contracts receivable losses $ 1,253,000 $2,110,000
Net operating loss carryforward 3,353,000 ---
Other 54,000 150,000
------------ ----------
Total deferred tax assets 4,660,000 2,260,000
Valuation allowance (4,660,000) ---
------------ ----------
Net deferred tax asset $ --- $2,260,000
============ ==========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $8,383,000 for income tax purposes that expire in 2011.
The Company received net income tax refunds of approximately $2,077,000
during 1996 and made income tax payments of approximately $3,093,000 during
1995.
The unaudited pro forma provisions for income taxes of $477,771 and
$1,696,045 for 1995 and 1994, respectively, represent income taxes on the
Company's income as if it had been taxed each period at an effective tax rate
of 40%.
<PAGE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values disclosed below are based on estimates when quoted market
prices are not available. These fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. The fair value amounts presented
can be misinterpreted, and care should be exercised in drawing conclusions
from such data. The carrying amounts and estimated fair values of the
Company's financial instruments as of December 31 are as follows.
<TABLE>
<CAPTION>
1996 1995
- ------------------------------ ----
<S> <C> <C> <C> <C> <C>
CARRYING AMOUNT CARRYING AMOUNT
---------------- ----------------
FAIR VALUE FAIR VALUE
------------ ------------
ASSETS
Contracts receivable, net $ 106,520,034 $106,520,034 $ 110,354,565 $110,354,565
Cash and cash equivalents 1,683,429 1,683,429 557,206 557,206
LIABILITIES
Revolving line of credit 93,977,001 93,977,001 94,165,243 94,165,243
Bank line of credit 4,500,000 4,500,000 --- ---
Note payable to related 1,000,000 1,000,000 --- ---
party
Accounts payable and 4,650,695 4,650,695 1,605,484 1,605,484
accrued expenses
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS
Interest rate cap 12,000 --- --- ---
</TABLE>
VALUATION METHODOLOGIES AND ASSUMPTIONS
The following methods and assumptions were used in estimating the fair
value of the Company's financial instruments.
Contracts Receivable
The fair value of net contracts receivable is estimated to approximate
carrying amount less allowance and discount available for credit losses, since
the contracts are of relatively short average remaining life and are at
approximately current market rates of interest.
Cash and Cash Equivalents
The carrying amount reported in the balance sheet for cash and cash
equivalents approximate their fair values.
<PAGE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Revolving Line of Credit and Bank Line of Credit
Because the interest rate on the Company's revolving line of credit and
bank line of credit are tied to floating market rates, the carrying amounts
reported in the balance sheet approximate fair value.
Note Payable to Related Party
Because the note payable to related party is payable upon demand, the
carrying amount reported in the balance sheet approximates the fair value.
Accounts Payable and Accrued Expenses
The carrying amount of accounts payable and accrued expenses approximates
the fair value.
Interest Rate Cap
Fair value for the interest rate cap is based on estimates obtained from
the individual counter-party of the cost or benefit of terminating the cap at
the balance sheet date.
8. RELATED PARTY TRANSACTIONS
The Company, in the ordinary course of business, purchases contracts
receivable from automobile dealerships controlled by certain of the Company's
management stockholders. Total cash disbursed to these dealerships for the
purchase of contracts receivable was approximately $788,000, $576,000 and
$1,079,000 in 1996, 1995 and 1994, respectively. The Company has also
purchased automobiles from these automobile dealerships. These purchases
totaled approximately $115,000, $272,000 and $323,000 for 1996, 1995 and 1994,
respectively.
Certain stockholders and relatives have made working capital loans to the
Company (see Note 4). Interest paid to these stockholders and relatives
pursuant to these notes payable amounted to approximately $34,000, $80,000 and
$223,000 during 1996, 1995 and 1994, respectively.
Dealer participation reserves of approximately $0 and $146,000 as of
December 31, 1996, and 1995, respectively, were the result of contracts
purchased by the Company from dealerships owned by certain management
stockholders of the Company. It is possible that some or all of these
participation reserves may eventually be paid to these dealerships, depending
upon the loss experience of the contracts receivable purchased.
The Company has made payments to a management stockholder or entities
owned in part by certain management stockholders for leases of real estate,
automobile storage and automobile body work. Payments made for these services
were approximately $622,000, $151,000 and $158,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
<PAGE>
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company is obligated under non-cancelable leases with related
parties, expiring through 2016, to make future minimum lease payments as
follows: 1997, $484,000; 1998, $488,000; 1999, $478,000; 2000, $395,000; 2001,
$380,000; 2002 and thereafter, $8,388,000. Rent expense incurred pursuant to
these leases was $340,000, $74,000 and $24,000 in 1996, 1995 and 1994,
respectively.
Prior to March 1995, certain management stockholders of the Company were
also stockholders of an insurance company for which the Company acts as agent
when selling credit related insurance products.
9. CONTINGENT LIABILITIES
The Company is a party to various lawsuits and proceedings arising in the
ordinary course of business. Based upon information presently available, the
Company believes that the total amounts that will ultimately be paid, if any,
arising from these lawsuits and proceedings will have no material adverse
effect on the Company's consolidated results of operations and financial
position.
10. SUBSEQUENT EVENTS
As of December 31, 1996, the Company continued to operate pursuant to the
terms of a forbearance agreement that temporarily waived certain covenant
violations of its $100 million revolving line of credit agreement. Also, at
that date renewal or extension of the line of credit agreement was uncertain
and that uncertainty presented a potential liquidity and funding problem for
the Company. After December 31, 1996, the Company completed the actions
described below to address its liquidity and funding needs for 1997.
As discussed in Note 2, in late 1996 the Company decided to exit certain
markets and focus on its better performing markets. Accordingly, in 1997 it
commenced selling the contracts receivable that had been acquired in the
certain markets and also commenced closing operations in those markets. On
January 7, 1997, the Company sold contracts receivable for 102.0% of contract
balance of $1,569,000. On February 19, 1997, the Company sold contracts
receivable for 90.8% of contract balance of $14,504,000. On April 8, 1997,
the Company sold contracts receivable for 92.7% of contracts balance of
$24,669,000. No material gain or loss was recorded by the Company in
connection with these sales.
On April 11, 1997, the Company issued $13.3 million of convertible
subordinated debt. Of this amount, $10.0 million was issued to an affiliate
of Conseco in exchange for cash. The remaining $3.3 million was issued to
certain stockholders and relatives in exchange for a like amount of unsecured
debt of the Company ($2.3 million of which was issued between January 1, 1997
and April 11, 1997) held by them. The debt is convertible at any time into
approximately 4,417,000 shares of stock, has an interest rate of 12.00%, and
matures in April 2000.
The Company entered into a modification of its revolving line of credit
agreement on April 11, 1997, concurrently with the issuance of the convertible
subordinated debt described above. (See Note 4).
<PAGE>
10. SUBSEQUENT EVENTS (CONTINUED)
In early 1997 the Company decided to discontinue maintaining an auto
repossession inventory for sale at its sales lots. Instead it began disposing
of all repossessions more quickly primarily at auto auctions. This change is
intended to accelerate the conversion of repossessions to cash and earning
assets.
INDEPENDENT AUDITORS REPORT
Shareholders and Board of Directors
General Acceptance Corporation
We have audited the accompanying balance sheets of General Acceptance
Corporation as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of General Acceptance
Corporation at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
April 11, 1997
<PAGE>
Investor Information
Form 10-K
A copy of the Form 10-K, which is filed with the Securities and Exchange
Commission, will be sent to any shareholder without charge upon written
request. Please address your inquiries to:
Mr. Martin C. Bozarth, Chief Financial Officer
General Acceptance Corporation
1025 Acuff Road
Bloomington, IN 47404
Registrar & Transfer Agent
Fifth Third Bank
Corporate Trust Services
38 Fountain Square Plaza
Mail Drop 1090F5
Cincinnati, OH 45263
(800) 837-2755 or (513) 579-5320
Communications concerning shareholder records, including address changes,
stock transfers or other service needs should be directed to the above.
Analyst Contacts
Security analyst inquiries are welcomed. Please call:
Martin C. Bozarth, Chief Financial Officer
(812) 337-6000
Independent Auditors
Ernst & Young LLP
One Indiana Square
Indianapolis, IN 46204
(317) 681-7000
Annual Meeting
Tuesday, July 8, 1997
1:00 p.m. local time
Holiday Inn
Bloomington, Indiana
The meeting notice and proxy materials will be mailed to shareholders on or
about June 15, 1997. Management urges all shareholders to vote their proxies
and thus participate in the decisions that will be made at the annual meeting.
Stock Trading
The Company's common stock is traded on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol GACC. At March 24, 1997 there were
approximately 47 shareholders of record and 1,400 beneficial owners of the
Company's stock.
Common Stock Prices
The following table sets forth the high and low closing sale prices of the
Company's common stock since the Company's initial public offering on April 6,
1995, through December 31, 1996, as reported by Nasdaq.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
Quarter ended High Low High Low
------ ----- ------ ------
First quarter ended March 31 $15.50 $4.75 n/a n/a
Second quarter ended June 30 9.75 5.75 $27.50 $23.00
Third quarter ended September 30 8.88 5.13 37.00 26.50
Fourth quarter ended December 31 7.75 2.75 35.75 14.00
<FN>
Other than S Corporation distributions paid related to periods prior to the
date the Company completed its initial public offering of common stock, the
Company has not paid any dividends and does not anticipate paying any
dividends in the foreseeable future. Dividend payment are not permitted under
the lending agreement related to the Company's line of credit as described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources. "
</TABLE>
<PAGE>
Officers and Directors
Officers
Malvin L. Algood
Chairman of the Board, Chief Executive Officer and Director
Russell E. Algood
President, Chief Operating Officer and Director
Martin C. Bozarth
Chief Financial Officer
Richard J. Corey
Corporate Secretary
B. Wayne Garland
Vice President of Retail Operations
Michael J. Harter
Vice President of Finance Operations
James G. Kuhn
Vice President of Management Information Systems
Directors
Malvin L. Algood
Chairman of the Board, Chief Executive Officer,
General Acceptance Corporation
Russell E. Algood
President and Chief Operating Officer,
General Acceptance Corporation
Donald E. Brown
President,
Interactive Intelligence, Inc.
Rollin M. Dick
Chief Financial Officer,
Conseco, Inc.
Eugene L. Henderson
Senior Partner,
Henderson Daily Withrow & DeVoe
James G. Larkin
Vice President,
Conseco Services, LLC
<PAGE>
General Acceptance Corporation
1025 Acuff Road
Bloomington, IN 47404
812 337-6000
