-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AJmEhuEQ5MxkOIaxhtUkH1bhLor7lzK0nbIOAPLyinSWLUDgb3s0XAO7SJYhYLFs F26Gn2ZvM9f78VzRadmGqA== 0000908834-99-000002.txt : 19990106 0000908834-99-000002.hdr.sgml : 19990106 ACCESSION NUMBER: 0000908834-99-000002 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19990105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION ACCEPTANCE CORP CENTRAL INDEX KEY: 0000927790 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 351908796 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-26412 FILM NUMBER: 99500562 BUSINESS ADDRESS: STREET 1: 250 NORTH SHADELAND AVENUE CITY: INDIANAPOLIS STATE: IN ZIP: 46219 BUSINESS PHONE: 3172316400 MAIL ADDRESS: STREET 1: 45 NORTH PENNSYLVANIA CITY: INDIANAPOLIS STATE: IN ZIP: 46204 10-K/A 1 AMENDED UAC FORM 10-K FOR YEAR ENDED 6/30/97 ================================================================================ FORM 10-K/A-1 United States Securities and Exchange Commission Washington, D.C. 20549 (Mark One) (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1997 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from _____ to _____ Commission File Number: 0-26412 UNION ACCEPTANCE CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1908796 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 250 N. Shadeland Avenue, Indianapolis, IN 46219 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 317-231-6400 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Class A Common Stock, without par value Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405, Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the 3,974,413 shares of the issuer's Class A Common Stock held by non-affiliates, as of August 28, 1997, was $38,998,928. There is no trading market for the issuer's Class B Common Stock. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: The number of shares of Class A Common Stock of the Registrant, without par value, outstanding as of August 28, 1997, was 4,016,788 shares. The number of shares of Class B Common Stock of the Registrant, without par value, as of such date was 9,200,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders are incorporated into Part III. ================================================================================ UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES FORM 10-K INDEX PART II Page Item 6. Selected Consolidated Financial Data..................... 3 Item 7. Management's Discussion and Analysis of 5 Financial Condition and Results of Operations............ Item 8. Financial Statements and Supplementary Data.............. 19 PART IV Item 14. Exhibits, Restated Financial Statement Schedules, and Reports on Form 8-K...................................... 41 SIGNATURES ......................................................... 42 Registrant is amending this report to give effect to previously announced restatement of its results of operations for the period covered by this report. PART II Item 6. Selected Consolidated Financial Data The following table sets forth certain selected financial information reflecting the operations and financial condition of the Company for each year in the five year period ended June 30, 1997. This data should be read in conjunction with the Company's consolidated financial statements and related notes thereto and "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" included herein.
Year Ended June 30, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 (Dollars in thousands) Income Statement Data: Interest income ............................................ $ 40,299 $ 34,160 $ 18,638 $ 14,260 $ 11,378 Interest expense(1) ........................................ 25,688 22,275 12,961 7,769 7,177 --------------------------------------------------------------------- Net interest margin ...................................... 14,611 11,885 5,677 6,491 4,201 Provision for credit losses ................................ 4,188 2,875 1,074 484 436 --------------------------------------------------------------------- Net interest margin after provision ...................... 10,423 9,010 4,603 6,007 3,765 Gain on sales of loans, net ................................ 963 30,357 8,684 4,643 5,502 Servicing fees, net ........................................ 25,344 16,926 14,628 11,570 7,149 Other revenue .............................................. 3,820 3,096 2,783 2,735 1,995 --------------------------------------------------------------------- Total revenues ........................................ 40,550 59,389 30,698 24,955 18,411 Operating expenses ......................................... 30,502 23,841 14,913 8,995 7,055 --------------------------------------------------------------------- Earnings before provision for income taxes ............... 10,048 35,548 15,785 15,960 11,356 Provision for income taxes ............................... 4,166 14,406 6,396 6,384 4,542 --------------------------------------------------------------------- Net earnings .......................................... $ 5,882 $ 21,142 $ 9,389 $ 9,576 $ 6,814 ===================================================================== Operating Data: Prime auto receivables acquired ............................ $1,076,064 $ 994,834 $ 766,972 $ 614,627 $ 435,227 Non-prime auto receivables acquired ........................ 39,610 36,030 21,511 -- -- Marine receivables acquired ................................ 6,590 50 -- -- -- --------------------------------------------------------------------- Total receivables acquired (dollars) .................. $1,122,264 $1,030,914 $ 788,483 $ 614,627 $ 435,227 Prime auto receivables acquired ............................ $ 75,844 $ 71,070 $ 58,409 $ 49,307 $ 38,360 Non-prime auto receivables acquired ........................ 3,050 2,870 1,770 -- -- Marine receivables acquired ................................ 496 6 -- -- -- --------------------------------------------------------------------- Total receivables acquired (number of loans) .......... $ 79,390 $ 73,946 $ 60,179 $ 49,307 $ 38,360 Prime auto loans securitized .............................. $1,183,190 $ 890,110 $ 658,703 $ 617,103 $ 368,638 Non-prime auto loans securitized ........................... 31,108 34,488 -- -- -- --------------------------------------------------------------------- Total auto loans securitized .......................... $1,214,298 $ 924,598 $ 658,703 $ 617,103 $ 368,638 Ratio of operating expenses as a % of average servicing portfolio ............................. 1.67% 1.73% 1.49% 1.21% 1.42% Servicing fees, net, as a % of operating expenses .......... 83.1% 71.0% 98.1% 128.6% 101.3% Prime credit losses as a % of avg. servicing portfolio ..... 2.40% 1.58% 1.36% 0.69% 0.64% Non-prime credit losses as a % of avg. servicing portfolio . 5.18% 2.37% 2.97% N/A N/A Marine credit losses as a % of avg. servicing portfolio..... 0.25% N/A N/A N/A N/A Prime delinquencies of 30 days or more as a % of servicing portfolio .............................. 2.96% 1.84% 1.40% 1.40% 0.93% Non-prime delinquencies of 30 days or more as a % of servicing portfolio .............................. 6.18% 3.35% 1.25% N/A N/A Marine deliquencies of 30 days or more as a % of servicing portfolio .............................. 0.10% N/A N/A N/A N/A
Item 6. Selected Consolidated Financial Data (Continued)
At June 30, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) Balance Sheet Data(2): Loans, net ............................................ $ 121,156 $ 259,290 $ 201,022 $ 96,101 $ 134,678 Excess servicing ...................................... 99,047 83,434 60,662 41,265 31,575 Spread accounts ....................................... 71,744 63,590 57,414 37,333 24,052 Total assets .......................................... 391,268 451,195 349,283 181,516 196,242 Due to Union Federal .................................. -- -- 338,958 177,577 171,896 Amounts due under warehouse facilities ................ 44,455 187,756 -- -- -- Long-term debt ........................................ 221,000 156,000 -- -- -- Total shareholders' equity(3) ........................ 86,848 78,624 2 2 -- Other Data: Prime auto servicing portfolio ........................ $1,860,272 $1,548,538 $1,159,349 $ 843,245 $ 581,858 Non-prime auto servicing portfolio .................... 68,289 47,062 19,858 -- -- Marine servicing portfolio ............................ 6,227 50 -- -- -- Other receivables serviced ............................ 2,488 3,420 5,203 -- -- ------------------------------------------------------------------ Total servicing portfolio ........................ $1,937,276 $1,599,070 $1,184,410 $ 843,245 $ 581,858 Average Prime auto servicing portfolio ................ $1,759,666 $1,343,770 $ 982,875 $ 744,149 $ 496,758 Average Non-prime auto servicing portfolio ............ 63,305 33,124 9,448 -- -- Average Marine servicing portfolio .................... 2,357 NM -- -- -- Other receivables average servicing portfolio ......... 2,799 4,222 6,643 -- -- ------------------------------------------------------------------ Total average servicing portfolio ................ $1,828,127 $1,381,116 $ 998,966 $ 744,149 $ 496,758 Number of Prime auto loans serviced (at period end) ... 173,693 147,722 117,837 91,837 71,301 Number of Non-prime auto loans serviced (at period end) 6,056 4,067 1,687 -- -- Number of Marine loans serviced (at period end) ....... 472 6 -- -- -- Number of Other loans serviced (at period end) ........ 402 537 836 -- -- ------------------------------------------------------------------ Total number of loans serviced (at period end) ... 180,623 152,332 120,360 91,837 71,301 Number of dealers ..................................... 3,204 2,523 1,604 884 831 Number of employees (full-time equivalents) ........... 387 313 215 142 115
- -------------------------------------------------------------------------------- (1) Interest expense for the years ended June 30, 1993, 1994 and 1995, was based upon the average monthly balance "Due to Union Federal" at Union Federal's all-inclusive cost of funds. (2) All balance sheet amounts, except the amounts "Due to Union Federal", represent actual recorded assets and liabilities of the Company's business. The amount Due to Union Federal includes division funding by Union Federal as well as inter-company funding. (3) The consolidated financial statements reflect no allocation of Union Federal's historical equity. Earnings of the Company are transferred to Union Federal through the Due to Union Federal account at June 30, 1993, 1994, and 1995. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Note: Certain capitalized terms used but not otherwise defined in this report are defined in the "Glossary" set forth at the conclusion of "Item 1. Business." General As more fully described in Note 14 to Consolidated Financial Statements, this report contains financial information which has been restated. The Company derives substantially all of its earnings from the purchase, securitization and servicing of automobile loans originated by dealerships affiliated with major domestic and foreign manufacturers. To fund the purchase of loans prior to securitization, the Company utilizes revolving warehouse credit facilities, discussed in "Liquidity and Capital Resources." Through securitizations, the Company periodically pools and sells loans to a trust which issues Certificates to investors representing interests in the loans sold. When the Company sells loans in a securitization, it records a gain (or loss) on the sale of loans and establishes excess servicing as an asset. Excess servicing cash flows are received over the life of the related securitization. See the "Glossary" under "Item 1. Business" for definitions of accounting terms pertaining to securitizations. The following table illustrates changes in the Company's total loan acquisition volume and information with respect to Gain on Sales of Loans and Securitizations during the past eight quarters. More complete quarterly statements of earnings information is set forth in Note 15 of the Consolidated Financial Statements.
Selected Quarterly Financial Information For Quarters in the Fiscal Years Ended June 30, ------------------------------------------------------------------------------------ 1997 ------------------------------------------------------------------------------------ First Second (3) Third Fourth ----- ---------- ------ ------ (Dollars in thousands) Loans acquired $ 296,601 $ 307,420 $ 279,847 $ 238,396 Gain on Sales of Loans 6,875 7,790 9,783 7,693 (5) Impairment - - (15,951) (4) (15,227) ------------- ---------------- ------------------- ---------------------- Gain (Loss) on Sales of Loans, net 6,875 7,790 (6,168) (7,534) Servicing portfolio at period end 1,709,917 1,835,662 1,910,455 1,937,276 Selected Securitization Data: 1996-C 1996-D/1996-2 1997-A 1997-B Original amount 310,099 283,085/31,108 293,348 295,758 Weighted avg. loan rate 13.26% 13.53%/19.65% 13.29% 13.21% Weighted avg. remaining maturity (mos.) 67.41 67.75/62.70 71.35 69.18 Certificate rate 6.44% 6.14%/6.40% 6.33% 6.57% Gross spread (1) 6.82% 7.39%/13.25% 6.96% 6.64% Net spread (2) 5.11% 5.37%/9.00% 5.43% 5.15%
1996 -------------------------------------------------------------------------------------- First Second Third (3) Fourth ----- ------ --------- ------ (Dollars in thousands) Loans acquired $ 239,794 $ 205,686 $ 256,510 $ 328,924 Gain on Sales of Loans 6,724 8,483 7,760 7,390 Impairment - - - - --------------- ---------------------- -------------------- ------------------------- Gain (Loss) on Sales of Loans, net 6,724 8,483 7,760 7,390 Servicing portfolio at period end 1,278,805 1,344,914 1,445,517 1,599,070 Selected Securitization Data: 1995-C 1995-D 1996-A/1996-1 1996-B Original amount 236,410 205,550 203,048/34,488 245,102 Weighted avg. loan rate 14.08% 13.74% 13.13%/19.87% 12.96% Weighted avg. remaining maturity (mos.) 64.82 67.62 66.01/56.90 69.15 Certificate rate 6.42% 5.97% 5.40%/6.87% 6.45% Gross spread (1) 7.65% 7.77% 7.73%/13.00% 6.51% Net spread (2) 6.12% 6.04% 5.68%/8.79% 5.58%
- -------------------------------------------------------------------------- (1) Difference between weighted average loan rate and Certificate Rate. (2) Difference between weighted average loan rate and Certificate Rate, net of upfront costs, servicing fees, ongoing surety bond and trustee fees, and hedging gains or losses. (3) Two securitizations were effected during the presented quarters -- one public securitization (prime securitization) and one private placement (non-prime securitization) (4) Impairment was reduced by reserves taken during the first two quarters of fiscal 1997 of $3.6 million and by existing reserves at June 30, 1996 of $2.2 million. (5) Includes $444,000 of previously accrued loan sale expenses which were reversed in the current period Acquisition Volume. The Company currently acquires loans in 51 metropolitan areas in 29 states from over 3,200 manufacturer-franchised auto dealerships. The Company primarily acquires loans on automobiles made to borrowers who exhibit a favorable credit profile ("Prime lending"). The Company also offers a Non-prime lending program to borrowers with adequate credit quality, but who would not qualify for a loan under the Company's Prime lending program ("Non-prime lending"). Over the past year, the Company has also developed a Marine lending program to fund loans to borrowers for boats and personal watercraft. The Company's focus is on the prime automobile lending market; only 4.1% of total loan acquisitions represented loans made to borrowers under the Non-prime and Marine programs. The Company continued its geographic expansion during the year by entering several new areas in Arizona, Colorado, Florida, Georgia, Illinois, Ohio, North Carolina, South Carolina, and Texas, and also extended operations into the state of Nevada. Additionally, the Company re-entered markets in Kentucky, Minnesota and Utah. The Company's total loan acquisitions increased 8.9% to $1,122.3 million for the year ended June 30, 1997, from $1,030.9 million in fiscal 1996. The increase resulted primarily from the expansion into and the development of new markets that were established in fiscal 1996 and 1997. Additionally, growth in the Marine and Non-prime programs contributed to overall loan acquisition growth. Marine loan acquisitions totaled $6.6 million for the year ended June 30, 1997, compared to $50,000 for fiscal 1996. Non-prime loan acquisitions totaled $39.6 million for the year ended June 30, 1997, compared to $36.0 million in fiscal 1996. The Company made some strategic decisions with regard to pricing and underwriting with a view to improving the overall credit quality of the portfolio over the long-term. These changes coupled with intense competition in the consumer-finance markets resulted in lower loan acquisition volume in the third and fourth quarters of fiscal 1997. Because of the competitive environment and tightened credit standards, the Company's loan acquisition growth in the first quarter of fiscal 1998 was not substantial. The Company's servicing portfolio increased 21.2% to nearly $2.0 billion at June 30, 1997, compared to approximately $1.6 billion at June 30, 1996. Serviced loans increased as a result of increased loan acquisition volume in excess of loan repayments and gross charge-offs. The volume of loans sold in securitizations increased to $1.2 billion for the year ended June 30, 1997, from $924.6 million for the prior year. The increased volume of loans securitized is a combination of the increased volume in Prime loan acquisitions, and the timing of the fiscal 1997 fourth quarter securitization which included four months of loan volume compared to only three months in the fourth quarter of fiscal 1996. Management continues to focus on controlled growth, recognizing that the underlying credit quality of the portfolio is one of the most important factors associated with long-term profitability. Delinquency and Credit Loss Experience There has been a general deterioration in the consumer credit markets over the past year despite relatively good economic conditions. Management believes that this decline comes as a result of higher consumer debt levels and the consumer's increased readiness to declare bankruptcy. The Company has experienced increased delinquency as well as increased credit losses. UAC's prime servicing portfolio has continued to suffer deterioration since June 30, 1997, in delinquency and credit losses, especially among loans originated in 1995. Management is making improvements in both the underwriting and collection processes to address credit quality. The Company has tightened its credit standards and is utilizing new computerized scoring tools to re-score existing portfolios which enhance the Company's ability to identify areas for improvement on the underwriting side. The collection staff increased by nearly 60% since June 30, 1996. The new scoring tools also allow the collection efforts to be focused in the most effective manner. Set forth below is certain information concerning the experience of UAC pertaining to delinquencies, and credit losses on the Prime fixed rate retail automobile, light truck and van receivables serviced by the Company. There can be no assurance that future delinquency and credit loss experience on the receivables will be comparable to that set forth below. See "Discussion of Forward-Looking Statements".
Prime Delinquency Experience At June 30, ---------------------------------------------------- 1997 1996 (Dollars in thousands) Number of Number of Loans Amount Loans Amount Servicing portfolio .......... 173,693 $1,860,272 147,722 $1,548,538 Delinquencies 30-59 days .............. 2,487 27,373 1,602 17,030 60-89 days .............. 1,646 18,931 694 7,629 90 days or more ......... 723 8,826 333 3,811 Total delinquencies .......... 4,856 55,130 2,629 28,470 Total delinquencies as a percent of servicing portfolio....... 2.80% 2.96% 1.78% 1.84%
As indicated in the above table, delinquency rates based upon outstanding loan balances of accounts 30 days past due and over increased to 2.96% at June 30, 1997, from 1.84% at June 30, 1996, for the Prime lending portfolio. The increased delinquency from a year ago is a product of changes in consumer credit trends as discussed above, and, to a lesser extent, the tightening of the Company's deferral policy (effective in February 1997) which applied more stringent standards for the deferment of delinquent accounts. This tightening served to increase delinquency and accelerate credit losses in the third and fourth quarters of fiscal 1997.
Prime Credit Loss Experience For the Years Ended June 30, ------------------------------------------------------------------------------ 1997 1996 1995 ---------------------- ---------------------- ----------------------- Number Number Number of Loans Amount of Loans Amount of Loan Amount (Dollars in thousands) Avg. servicing portfolio ............. 164,858 $1,759,666 132,363 $1,343,770 104,455 $ 982,875 Gross charge-offs ........ 6,280 70,830 3,663 40,815 3,493 28,628 Recoveries ............... 28,511 19,543 15,258 ------ ---------- ---------- Net credit losses ....... $ 42,319 $ 21,272 $ 13,370 ====== ========== ========== Gross charge-offs as a % of avg servicing portfolio ... 3.81% 4.03% 2.77% 3.04% 3.34% 2.91% Recoveries as a % of gross charge-offs.. 40.25% 47.88% 53.30% Net credit losses as a % of avg. servicing portfolio ............ 2.40% 1.58% 1.36%
As indicated in the table above, credit losses on the prime auto portfolio totaled $42.3 million for the fiscal year ended June 30, 1997, or 2.40% as a percentage of the average servicing portfolio, compared to $21.3 million or 1.58% for the fiscal year ended June 30, 1996. Increased credit losses are a result of higher gross charge-off rates, as well as a decline in recovery rates. Although recovery rates are down compared to last fiscal year, there was a slight improvement in the fourth quarter of fiscal 1997 over the third quarter. The allowance for estimated credit losses inherent in loans sold is included as an element of the fair market value of excess servicing cash flows used to allocate the carrying amount of loans sold During the quarter ended June 30, 1997, the Company recorded a pre-tax charge of $15.2 million primarily to increase the allowance for estimated credit losses on those pools which were deemed to have other than temporary impairment. Total additional provisions to the allowance for estimated credit losses for the year ended June 30, 1997 were $34.9 million. The allowance for estimated credit loss as a percentage of outstanding securitized loans was 4.40% and 3.22% at June 30, 1997 and 1996, respectively. Set forth below is information pertaining to delinquency and credit loss information on the Company's Non-prime portfolio. There can be no assurance that future delinquency and credit loss experience on the receivables will be comparable to that set forth below. See "Discussion of Forward-Looking Statements". Non-prime Delinquency Experience At June 30, ---------------------------------------- 1997 1996 ------------------ ------------------ (Dollars in thousands) Number of Number of Loans Amount Loans Amount ----- ------ ----- ------ Servicing portfolio ....... 6,056 $68,289 4,067 $47,062 Delinquencies 30-59 days ........... 236 2,807 94 1,120 60-89 days ........... 123 1,412 40 455 90 days or more ...... -- -- -- -- Total delinquencies ....... 359 $ 4,219 134 $ 1,575 Total delinquencies as a percent of servicing portfolio.... 5.93% 6.18% 3.29% 3.35%
Non-prime Credit Loss Experience For the Years Ended June 30, -------------------------------------------------------------------- 1997 1996 1995 ----------------- --------------------- ---------------------- Number Number Number of Loans Amount of Loans Amount of Loans Amount -------- ------ -------- ------ -------- ------ (Dollars in thousands) Avg. servicing portfolio ............ 5,491 $63,305 2,869 $33,124 797 $ 9,448 Gross charge-offs ....... 379 $ 4,698 136 1,455 27 333 Recoveries .............. 1,420 670 146 ------- ------- ------- Net credit losses ....... 3,278 785 187 ======= ======= ======= Gross charge-offs as a % of avg servicing portfolio .. 6.90% 7.42% 4.74% 4.39% 5.08% 5.29%(1) Recoveries as a % of gross charge-offs. 30.23% 46.07% 43.87% Net credit losses as a % of avg. servicing portfolio ........... 5.18% 2.37% 2.97%(1)
- -------------------------------------------------------------------------------- (1) Non-prime loans were only outstanding for eight (8) months during fiscal 1995. Therefore, the percentages reflect an annualized calculation. Non-prime portfolio delinquency was 6.18% based on outstanding loan balances of accounts 30 days past due and over at June 30, 1997, compared to 3.35% at June 30, 1996. Credit losses during fiscal 1997 totaled $3.3 million or 5.18% as a percentage of the average Non-prime servicing portfolio compared to 2.37% in fiscal 1996. The Company began acquiring Non-prime loans in October 1994. Management expects fluctuations in delinquency and credit loss rates on the Non-prime portfolio as it becomes more seasoned. The Non-prime delinquency and credit loss statistics are in line with management's expectations, and the somewhat greater credit risk associated with a non-prime product. Additional credit risk associated with the Non-prime product is considered in pricing and underwriting. Marine Delinquency and Credit Loss Delinquency related to the newer Marine portfolio was minimal (.10%) as the portfolio has not matured. The Company began acquiring the Marine (prime) loans in June 1996. The credit loss is .25% of the average marine servicing portfolio. Management expects increases in marine delinquency and credit losses as the portfolio becomes seasoned. Results of Operations The following table illustrates the Company's financial results for the past eight fiscal quarters. More complete earnings information can be found in the Consolidated Financial Statements and the Notes thereto.
1997 1996 ----------------------------------------- ------------------------------------------ First Second Third Fourth First Second Third Fourth -------- -------- -------- -------- -------- -------- -------- -------- Interest on loans ...... $ 9,233 $ 9,096 $ 7,543 $ 8,042 $ 6,946 $ 7,232 $ 6,732 $ 7,802 Interest on spread accounts and restricted cash .. 1,510 1,545 1,618 1,712 1,370 1,386 1,317 1,375 -------- -------- -------- -------- -------- -------- -------- -------- Total interest income 10,743 10,641 9,161 9,754 8,316 8,618 8,049 9,177 Interest expense ....... 6,410 6,265 6,118 6,895 5,289 5,556 5,359 6,071 -------- -------- -------- -------- -------- -------- -------- -------- Interest margin ..... 4,333 4,376 3,043 2,859 3,027 3,062 2,690 3,106 Provision for credit losses .... 855 993 1,180 1,160 1,150 300 600 825 -------- -------- -------- -------- -------- -------- -------- -------- Net interest margin . 3,478 3,383 1,863 1,699 1,877 2,762 2,090 2,281 Gain (loss) on sales of loans, net .... 6,875 7,790 (6,168) ( 7,534) 6,724 8,483 7,760 7,390 Servicing fees, net .... 5,826 6,258 6,854 6,406 3,966 2,584 4,796 5,580 Other revenues ......... 934 910 1,011 965 750 724 798 824 Operating expenses ..... 7,146 7,832 7,545 7,979 4,719 5,602 6,658 6,862 Net earnings/(loss) .... $ 5,918 $ 6,193 $ (2,398) $( 3,831) $ 5,116 $ 5,246 $ 5,313 $ 5,467
Years Ended June 30, 1997 and 1996 Net earnings decreased to $5.9 million or $0.45 per share for the year ended June 30, 1997, compared to $21.1 million or $1.60 per share for the year ended June 30, 1996. The decrease in net earnings is primarily a result of third and fourth quarter after-tax charges of $9.5 and $9.0 million, respectively, ($16.0 and $15.2 million pre-tax, respectively,) for the impairment of Excess Servicing related primarily to an increase in the allowance for estimated credit losses on the securitized portfolio. The charge was taken based on current trends with respect to credit loss and delinquency and their effects on the valuation of Excess Servicing on a pool by pool basis. Exclusive of the pool by pool impairment charges, net earnings would have been $24.4 million or $1.85 per share. Net interest margin after provision increased 15.7% to $10.4 million for the year ended June 30, 1997, compared to $9.0 million for fiscal 1996. The increased interest margin as compared to prior year is a result of a combination of factors but is primarily due to an increase in the average loans held for sale balance and a decrease in the cost of funds on the average outstanding borrowings. Interest on loans increased 18.1% to $33.9 million for the year ended June 30, 1997, compared to $28.7 million for last year. The increase in interest income resulted from an increase in the average outstanding balance of loans held for sale to $228.3 million for the year ended June 30, 1997, from $186.6 million for fiscal 1996, which was a result of increased loan acquisitions during the year and the timing of the fourth quarter securitization. The 1997 fourth quarter securitization was effected in June instead of May (as compared to previous years); therefore, an additional one month of interest was earned by the Company. Interest earned on the Non prime and Marine portfolios were approximately $3.8 million and $255,000, respectively. Interest earned on spread accounts and restricted cash increased 17.2% to $6.4 million for the year ended June 30, 1997, compared to $5.4 million for the year ended June 30, 1996. The increase is a result of increased average balances on cash collection and Spread Accounts. The average balance of these accounts was $127.4 million in fiscal 1997, compared to $110.3 million in fiscal 1996. The increased restricted cash balances result from the increased size of the securitized servicing portfolio. Average securitized loan balances were $1,445.4 million during the current fiscal year, compared to $1,179.4 million in fiscal 1996. The average interest yield on the Spread Accounts and restricted cash accounts improved approximately 15 basis points which contributed to the increase as well. Spread Account balances represent credit enhancement on the securitized pools; the Spread Account requirements are affected by the size of the securitized servicing portfolio as well as loss and delinquency trends which may trigger higher spread requirements. Cash collection accounts represent customer payments held in trust until disbursement by the trustee. Interest is earned by the Company on these funds prior to distribution of such funds to investors and Servicer. As a result of the implementation of SFAS 125, the Company established a Servicing Asset related to the 1997A and 1997B securitization transactions of $743,000 and $750,000, respectively. Such amounts equal the discounted projected cash flow of the interest earned on the collection account and are deemed to be additional servicing compensation. Such amounts were recognized as a component of the gain on sale with the discount being accretive to income in the future. Establishment of the Servicing Asset will have the effect of reducing interest earned on restricted cash in future periods, however, accretion of the discount on the Servicing Asset will somewhat offset this decrease. Interest expense increased 15.3% to $25.7 million for the year ended June 30, 1997, from $22.3 million for the year ended June 30, 1996. The increase was primarily a result of an increase in the average outstanding borrowings to $347.7 million for the year ended June 30, 1997, from $288.4 million for the year ended June 30, 1996, offset by a decline in the average cost of funds to 7.39% for the year ended June 30, 1997, from 7.72% for the year ended June 30, 1996. Cost of funds in the prior year included interest expense in the form of amortization of upfront borrowing fees paid in conjunction with the establishment of the Prime and Non-prime Warehouse Facilities. The agreements provided for an initial term of one year to be renewed annually; therefore, the total upfront fees paid to establish the Facilities were amortized during fiscal 1996. Upfront fees paid in fiscal 1996 related to the Prime and Non-prime Warehouse Facilities totaled approximately $1.5 million. The renewal of the Prime and Non-Prime Warehouse Facilities do not require payment of additional fees. Interest rates on the Prime and Non-prime Warehouse Facilities are variable in nature and are affected by changes in market rates of interest. Provision for estimated credit losses increased to $4.2 million for the year ended June 30, 1997, compared to $2.9 million for the year ended June 30, 1996. Increased provisions were made in response to, and in anticipation of, increased losses and delinquency trends being experienced by the Company and the industry in general. Gain (loss) on sales of loans, net and interest rate risk. Gain (Loss) on Sales of Loans continues to be a significant element of the Company's net earnings. The Gain (Loss) on Sales of Loans is affected by several factors, but is primarily affected by the amount of loans securitized and the net spread. The Company adjusts its pricing frequently and employs a hedging strategy to help ensure an adequate net spread in the ensuing securitization, while mitigating the risks of increasing interest rates and the volatility in net spreads. Gain (Loss) on Sales of Loans decreased to $963,000 for the year ended June 30, 1997, from $30.4 million for the year ended June 30, 1996. The decrease in gains recognized by the Company in the current fiscal year is due to pre-tax charges of $31.2 million for the impairment of Excess Servicing primarily related to the increase in allowance for estimated credit losses related to its securitized portfolio. Exclusive of the charges, gains recorded in conjunction with the fiscal 1997 securitization transactions were $31.7 million compared to $30.4 million in fiscal 1996 and included $1.5 million in servicing asset income. Although the volume of loans securitized increased 31.3% to $1,214.3 million for the year ending June 30, 1997, compared to $924.6 million in fiscal 1996, the weighted average net spread on the securitization transactions decreased to 5.36% in fiscal 1997, compared to 5.96% in fiscal 1996. Additionally, the allowance for estimated credit losses established at the time of the sale was 3.87% (excluding the charge) as a percentage of total loans securitized in fiscal 1997, compared to 3.57% in fiscal 1996. Credit loss assumptions on the Tier I transactions were 3.25% throughout most of fiscal 1997; however, the Company began providing for losses at 3.50% on Tier I securitizations in the fourth quarter of fiscal 1997. Allowance for estimated credit losses were established at 3.00% for the majority of fiscal 1996. Allowance for estimated credit losses have historically been made at 10.00% on the Non prime securitizations. Gross and net spreads. Market interest rates were higher in fiscal 1997 as compared to the corresponding periods of fiscal 1996. Market rates experienced an upward trend beginning in the fourth quarter of fiscal 1996, but demonstrated relatively small fluctuations throughout fiscal 1997. Because changes in loan rates on automobile loans tend to lag behind fluctuations in market rates of interest, spreads are adversely affected in a rising rate environment. The increased market rates in fiscal 1997 had the effect of reducing gross and net spreads on Tier I securitizations compared to fiscal 1996. Gross spread is defined as the difference between the weighted average loan rate and the Certificate rate. Net spread is defined as gross spread less servicing fees, upfront costs, ongoing credit enhancement fees and trustee fees, and hedging gains or losses. Management is currently targeting net spreads of 5.00% to 5.50% on Tier I securitizations (assuming a pricing spread for Asset-backed Certificates over the two-year Treasury Note of 50 basis points) for fiscal 1998. Management believes that by targeting a spread of 7.00% to 7.50% between loan rates and the two-year treasury rate that the net spread targets can be achieved. Although management believes these spreads can be achieved, material factors affecting the net spreads are difficult to predict and could cause management's projections to be materially inaccurate. These include current market conditions with respect to market interest rates and demand for Asset-backed Securities generally, and for Certificates representing interests in Securitizations sponsored by the Company. See "Discussion of Forward-Looking Statements." Servicing fees, net is comprised of fees earned by the Company as Servicer of the securitized loan portfolio (typically 1% per annum), the scheduled accretion of discount established on Excess Servicing at the time of securitization, and rebates received in excess of original estimates recorded in the gain calculation. Servicing fees, net increased 49.7% to $25.3 million for the year ended June 30, 1997, compared to $16.9 million for the year ended June 30, 1996. Servicing fees, net as a percentage of the average securitized servicing portfolio increased to 1.75% for fiscal 1997, from 1.42% in fiscal 1996. The increase in servicing fees, net is primarily a result of a 22.6% increase in the average securitized loan balances in fiscal 1997 to $1.4 billion, compared to $1.2 billion in fiscal 1996. Servicing fees are also impacted by the timing of Future Servicing Cash Flows and excess rebates. Excess rebates received during fiscal 1997 were $2.3 million, compared to $2.8 million in fiscal 1996. The Company's rebate receivable was marked to market as a component of Excess Servicing in accordance with SFAS 125 during the third quarter of fiscal 1997. Other revenues increased 23.4% to $3.8 million for the year ended June 30, 1997, from $3.1 million for the year ended June 30, 1996. The increase in the current year resulted primarily from increases in late charge fee income to $2.6 million from $1.9 million in the prior year. Salaries and benefits expense increased 30.8% to $15.7 million for the year ended June 30, 1997, from $12.0 million for the year ended June 30, 1996. This increase resulted primarily from an increase in full-time equivalent ("FTE") employees. Average FTE's for the year ended June 30, 1997, were 333 compared to 270 for the year ended June 30, 1996. The Company has experienced growth in credit, sales and operations, collections, and support. These increases are in response to, and in anticipation of, continued expansion and loan acquisition growth as well as a growing servicing portfolio. Additional levels of management and support staff have been added to ensure efficiency in operations as the Company's acquisition volume and servicing portfolio continues to grow. Increases in salary and benefit expense were also due to annual merit increases for the Company's existing employees. Other operating expenses includes occupancy and equipment costs, outside and professional services, loan expenses, promotional expenses, travel, office supplies and other. Other operating expenses increased 25.1% to $14.8 million for the year ended June 30, 1997, from $11.9 million for the year ended June 30, 1996. Many of these expenses vary directly with increased loan acquisition volume and the increased size of the servicing portfolio. Both loan acquisition volume and the servicing portfolio were increased during the year ended June 30, 1997, compared to the year ended June 30, 1996. Occupancy expense increased reflecting a full twelve months of rent expense in fiscal 1997 at the Company's new headquarters, compared to only six months in fiscal 1996. Equipment expense was also impacted by a full year of expense from its collections and telephone systems implemented at the Company's new headquarters in January 1996. Years Ended June 30, 1996 and 1995 Net earnings more than doubled to $21.1 million or $1.60 per share for the year ended June 30, 1996, compared to $9.4 million for the year ended June 30, 1995. Net Interest Margin After Provision increased 95.7% to $9.0 million for the year ended June 30, 1996, compared to $4.6 million for fiscal 1995. Increased Prime loan volume, growth in the Non-prime portfolio, and modification of the securitization structure during fiscal 1996 contributed to increased net interest margin. Interest on loans increased 95.3% to $28.7 million for the year ended June 30, 1996, compared to $14.7 million for last year. The increase in interest income resulted, in part, from an increase in the average monthly balance of loans held for sale to $186.6 million for the year ended June 30, 1996, from $127.1 million for fiscal 1995, which was a result of increased loan acquisitions during the year. The Non-prime portfolio also contributed to the increase in interest income. The Company carried an average of over $22.2 million in Non-prime receivables held for sale during the year which produced over $4.4 million in interest income. Further, the current method with respect to securitization structure implemented in fiscal 1996 increased the amount of interest income recognized relative to prior periods. The change in the securitization structure significantly impacted both interest income and servicing fees, net. All of the fiscal 1996 Prime securitizations were structured such that the Company continued to earn interest income from the cutoff date through the closing date (approximately 13-22 days), and therefore, earned servicing fees only after the closing date. In all previous securitizations, the Company began earning servicing fees beginning on the cutoff date. As a result, the Company reports more interest income and less servicing fee income, and records a lower gain on sale. An estimated additional $6.1 million in interest on loans was recognized during fiscal 1996 due to the new securitization structure. The structure was altered in accordance with provisions of the Warehouse Facility Agreements which require that the Company collect and remit interest on loans from cutoff date to closing of a securitization transaction to the warehouse provider. The Company continues to pay interest on the amount financed with respect to warehoused loans until closing. Interest earned on Spread Accounts and Restricted Cash increased 38.4% to $5.4 million for the year ended June 30, 1996, compared to $3.9 million for the year ended June 30, 1995. The increase is a result of increased average balances due to additional securitizations during the year. The average balance of these accounts was $108.8 million in fiscal 1996, compared to $68.2 million in fiscal 1995. Earnings on spread accounts relative to the growth in the securitized servicing portfolio were somewhat decreased as a result of the structuring of the fiscal 1996 securitizations whereby additional credit enhancements were utilized in lieu of initial spread account deposits. Additionally interest earned on these accounts were somewhat lower in fiscal 1996 compared to fiscal 1995 as market rates of interest declined throughout the latter half of fiscal 1995 and the first half of fiscal 1996. Interest expense increased 71.9% to $22.3 million for the year ended June 30, 1996, from $13.0 million for the year ended June 30, 1995. The increase was a result of both an increased average cost of funds and increased average outstanding borrowings. The average cost of funds increased to 7.72% for the year ended June 30, 1996, from 5.60% for the year ended June 30, 1995. The increase in cost of funds was a result of the Company obtaining alternative financing sources after its Spin-off from its parent in August of 1995. Included in fiscal 1996 interest expense is the amortization of upfront borrowing fees paid in conjunction with the establishment of the Prime and Non-prime Warehouse Facilities. The agreements provided for an initial term of one year and must be renewed annually; therefore, the total upfront fees paid to establish the Facilities were amortized during fiscal 1996. Upfront fees paid in fiscal 1996 related to the Warehouse Facilities totaled approximately $1.5 million. The fees paid to secure the Warehouse Facilities are non-recurring in nature; the renewal of such agreements does not require the payment of additional fees. Average outstanding borrowings increased to $288.4 million for the year ended June 30, 1996, from $231.4 million for the year ended June 30, 1995. Provision for estimated credit losses increased to $2.9 million for the year ended June 30, 1996, compared to $1.1 million for the year ended June 30, 1995. A large portion, $1.1 million, of that provision was related to the newer Non-prime portfolio. The additional provision related to the Non-prime portfolio was a result of both the time period the Non-prime portfolio was held prior to securitization, as well as the increased level of credit risk associated with the Non-prime loans as compared to the Prime loans. Gain on Sales of Loans increased 249.6% to $30.4 million for the year ended June 30, 1996, from $8.7 million for fiscal 1995. The increase in gain was mainly due to improved net spreads as well as increased volume of Prime loans securitized. The weighted average loan rate on the Prime securitized loans was 13.48% while the weighted average certificate rate was 6.09% The weighted average gross and net spreads on the fiscal 1996 loan sales were 7.38% and 5.85%, respectively, compared to 5.92% and 4.26% in fiscal 1995. These spreads earned the Company a $29.5 million gain in 1996 after net hedging losses of approximately $2.6 million. The Company securitized $890.1 million in Prime loans and $34.5 million in Non-prime loans in fiscal 1996, compared to $658.7 million in Prime loans in fiscal 1995. Additionally, the Company completed its first Non-prime securitization during the third quarter of 1996. Approximately $34.5 million in Non-prime automobile receivables were securitized in a private placement that earned the Company nearly $850,000 after a $112,000 hedging loss. The weighted average loan rate on the Non-prime portfolio securitized was 19.87% while the weighted average certificate rate was 6.87%. The gross and net spreads on the sale were 13.00% and 8.79%, respectively. Servicing Fees, Net increased 15.7% to $16.9 million for the year ended June 30, 1996, compared to $14.6 million for the year ended June 30, 1995. Although the average securitized portfolio increased significantly, servicing fees have not. Servicing fees, net as a percentage of the average securitized servicing portfolio decreased to 1.42% for fiscal 1996, from 1.71% in fiscal 1995. The decrease in servicing fees relative to the average securitized portfolio resulted primarily from the modified securitization structure, as discussed above. Servicing fees on all fiscal 1996 Prime securitizations were not earned until after the closing date of the securitization transaction. The net effect is that interest on loans was earned for an additional 13-22 days, and servicing fee income was not earned for 13-22 days for each of the fiscal 1996 Prime securitizations. Additionally, the Company recognized somewhat smaller gains under this structure. Because additional interest income was earned on the loans to be securitized, those loans generate lower Future Excess Servicing Cashflows after the securitization. The net present value of these future cash flows is recorded as an Excess Servicing asset as a component of the gain calculation. The Company's ratio of servicing fees, net to operating expenses was 71.0% and 98.1% for the years ending June 30, 1996, and 1995, respectively. Although the securitization structure discussed above impacted this ratio, the growth of the Non-prime program also impacted this ratio. Because the Non-prime receivables had not been securitized until March 1996, the Company earned no servicing fees on this portfolio. The impact of the additional costs to acquire and service these loans were offset by increased interest spreads earned on the Non-prime portfolio. Increased salaries and benefits also affected this ratio. The Company has added significantly to its collections staff over the past several quarters in response to, and in anticipation of, continued growth in the servicing portfolio. Additional support staff in systems and accounting have also been added, as well as additional levels of management needed to support the Company's growth. Other Revenues increased 11.2% to $3.1 million for the year ended June 30, 1996, from $2.8 million for the year ended June 30, 1995. The increase for the year resulted primarily from increases in late charge fee income. Salaries and Benefits Expense increased 81.0% to $12.0 million for the year ended June 30, 1996, from $6.6 million for the year ended June 30, 1995. This increase resulted primarily from increased full-time equivalent ("FTE") employees. Average FTE's for the year ended June 30, 1996, were 270 compared to 169 for the year ended June 30, 1995. The Company experienced growth in credit, sales and operations, collections, and support. These increases were in response to, and in anticipation of continued expansion and loan acquisition growth as well as a growing servicing portfolio. Additional levels of management and support staff were added to ensure efficiency in operations as the Company's acquisition volume and servicing portfolio continues to grow. Increases in salary and benefit expense were also due to increased profitability-based incentives during the year ended June 30, 1996. Other Operating Expense increased 43.0% to $11.9 million for the year ended June 30, 1996, from $8.3 million for the year ended June 30, 1995. Other operating expenses include occupancy and equipment costs, outside and professional services, loan expenses, promotional expenses, travel, office supplies and other. Many of these expenses vary directly with increased loan acquisition volume and the increased size of the servicing portfolio. Both loan acquisition volume and the servicing portfolio were increased during the year ended June 30, 1996, compared to the year ended June 30, 1995. Occupancy and equipment costs were increased as a result of the Company's move to its new headquarters in fiscal 1996. The employee growth experienced by the Company required both additional square footage and furniture and equipment. The Company also updated its phone system in conjunction with the move to its new headquarters. The Company obtained new equipment through an operating lease and implemented a voice messaging system. The Company also replaced its collections system, incurring a loss on the disposal of the former system. Additionally, increased telephone usage resulting from an increase in collections staff and collection hours contributed to increased office expense. Financial Condition Loans, Net and Servicing Portfolio. Loans, net includes the principal balance of loans held for sale, net of unearned discount and allowance for credit losses, loans in process, and prepaid dealer premiums. Loans, net decreased to $121.2 million at June 30, 1997, from $259.3 million at June 30, 1996. This decrease was due primarily to the decrease in loan acquisitions in the fourth quarter of fiscal 1997, compared to the fourth quarter of fiscal 1996, and the timing of the securitization of loans in June 1997, as compared to May 1996. Loan acquisitions were $238.4 million during the fourth quarter of fiscal 1997, compared to $328.9 million in the fourth quarter of fiscal 1996. Allowance for credit losses on loans held for sale decreased $319,000 from June 30, 1996. The Company serviced $1.8 billion and $1.4 billion in securitized loans and the total servicing portfolio was $1.9 billion and $1.6 billion as of June 30, 1997, and June 30, 1996, respectively. Excess Servicing increased to $99.0 million at June 30, 1997, from $83.4 million at June 30, 1996. This balance increased by the amounts capitalized upon consummation of the various Prime and Non-prime securitizations (including estimated dealer premium rebates). Total amounts capitalized during the year ended June 30, 1997 were $68.9 million. The Excess Servicing balance also increased by a pre-tax unrealized gain of $3.8 million in accordance with SFAS 125. Excess Servicing also increased by the change in accrued interest of $2.3 million. The additions to Excess Servicing were offset by actual Excess Servicing cash flows received during the year ended June 30, 1997, of $24.6 million and by the effect of the $34.8 million adjustments for other than temporary impairment recorded during fiscal 1997. Allowance for estimated credit losses on securitized loans is included as a component of the Excess Servicing asset. At June 30, 1997, the allowances related to both Prime and Non-prime securitized loans totaled $79.9 million or 4.40% of the total securitized loan portfolio, compared to $43.5 million or 3.22% at June 30, 1996. Accrued interest due the Company at the cutoff date on securitized loan pools is also included as a component of Excess Servicing. Spread Accounts increased to $71.7 million at June 30, 1997, from $63.6 million at June 30, 1996. These balances were increased by the deposits of Excess Servicing cash flows and have been reduced by any withdrawal of funds from the Spread Accounts. Withdrawals of spread account funds are made when the balance of the Spread Accounts are in excess of the requirements stipulated in the servicing agreement. No initial spread account deposits were made in connection with the Prime securitizations as a result of the structuring which utilized alternative credit enhancements in lieu of initial spread account deposits. Amounts due under Warehouse Facilities and Long-term Debt. Beginning in August 1995, after the Spin-off from its parent, the Revolving Warehouse Credit Facilities and Senior Notes constituted the Company's primary funding sources. The Company issued in a private placement $46.0 million in Senior Subordinated Notes in April 1996 and $65.0 million in Senior Notes in March 1997. The balance of the Revolving Warehouse Credit Facilities and the Senior and Senior Subordinated Notes was $265.5 million at June 30, 1997, compared to $343.8 million at June 30, 1996. Liquidity and Capital Resources Sources and Uses of Cash in Operations. The Company's business requires significant amounts of cash to support operations. Its primary uses of cash include: (i) purchases and financing of loans; (ii) payment of Dealer Premiums; (iii) securitization costs including cash held in Spread Accounts and similar cash collateral accounts under revolving Warehouse Credit Facilities; (iv) servicer advances of payments on securitized loans pursuant to securitization trusts; (v) losses on hedging transactions realized in connection with the closing of securitization transactions where interest rates have declined during the period covered by the hedge; (vi) operating expenses; (vii) payment of income taxes; and (viii) interest expense. The Company's sources of cash from operations include: (i) standard servicing fees; generally 1.0% per annum of the Prime securitized portfolio; (ii) Excess Servicing Cash flows; (iii) Dealer Premium Rebates; (iv) gains on hedging transactions realized in connection with the closing of securitization transactions where interest rates have increased during the periods covered by the hedge; (v) interest income; (vi) sales of loans in securitization transactions; and (vii) proceeds from sale of interest-only strips in conjunction with securitization transactions. Net cash provided by operating activities increased to $126.0 million for the year ended June 30, 1997, from a use of $55.8 million for the year ended June 30, 1996, which was primarily attributable to an increase in loans securitized relative to loans acquired and an increase in proceeds from the sale of interest-only strips. Proceeds from the sale of interest-only strips generated $31.8 million in cash for the period ended June 30, 1997, compared to $26.7 million for the period ended June 30, 1996. The Company realized a $11.1 million cash benefit by doing so during fiscal 1997. Additionally, the Company continues to defer a portion of the Gain on Sales of Loans for tax purposes. Hedging transactions may represent a source or a use of cash during a given period depending on changes in interest rates. During fiscal 1997, hedging transactions have required a net use of cash of $6.3 million, compared to $2.8 million used during fiscal 1996. Financing Activities and Credit Facilities. Net cash used by financing activities for fiscal 1997 was $79.7 million, compared to a source of $61.1 million in the prior year. The decrease was a result of the Company's ability to pay down its revolving credit facilities due to increased cash from operations. The Company's sources of liquidity are currently funds from operations, securitizations and external financing sources. Historically, the Company has used the securitization of loan pools as its primary source of long-term funding, and intends to continue to do so, although management regularly considers alternative funding mechanisms with a view to optimizing profitability and cash flows. Securitization transactions enable the Company to improve its liquidity, to recognize gains from the sales of the loan pools while maintaining the servicing rights to the loans, and to control interest rate risk by matching the repayment of amounts due to investors in the securitizations with the actual cash flows from the securitized assets. The Company has borrowing arrangements with an independent financial institution for the Prime Warehouse Facility of up to $350.0 million and a similar Non-prime Warehouse Facility of up to $50.0 million. Additionally, the Company has a Marine Warehouse Facility of up to $50.0 million that was established in April 1997. The Prime Warehouse Facility provides funding for loan acquisitions at a purchase price of up to 100.0% of the outstanding principal balance of eligible loans at the time of purchase to the extent allocable to loans which, upon acquisition, provided for 72 monthly payments or less. Additional funding is provided for eligible loans with greater than 72 monthly payments at a purchase price of 92.0% of the outstanding principal balance. The advance rate is adjusted monthly based upon actual loss statistics in order to maintain the necessary enhancement level. The Non-prime Warehouse Facility provides funding for loan acquisitions at a purchase price of 87.0% of the outstanding principal balance of eligible loans at the time of purchase. The Marine Warehouse Facility provides funding for loan acquisitions at a purchase price of 85.0% for any boat loan and 65.0% for personal watercraft loans with 49 - - 60 scheduled monthly payments. Additionally funding is provided for eligible loans with less than 49 monthly payments at a purchase price of 80.0%. The Company also issued $110.0 million in Senior Notes in connection with the Spin-off of the Company by Union Federal and the Company's initial public offering and completed a private placement of $46.0 million in Senior Subordinated Notes in April 1996 and $65 million in Senior Notes in March 1997, as discussed below. Between securitization transactions, the Company relies primarily on the revolving Warehouse Credit Facilities to fund ongoing loan acquisitions (not including Dealer Premiums). In addition to loan acquisition funding, the Company also requires substantial capital on an ongoing basis to fund the advances of Dealer Premiums, securitization costs, servicing obligations and other cash requirements described above. The Company's ability to borrow under the Credit Facilities is dependent upon its compliance with the terms and conditions thereof. The Company's ability to obtain successor facilities or similar financing will depend on, among other things, the willingness of financial institutions to participate in funding automobile financing businesses and the Company's financial condition and results of operations. Moreover, the Company's growth may be inhibited, at least temporarily, if the Company is not able to obtain additional funding through these or other facilities or if it is unable to satisfy the conditions for borrowing under the Credit Facilities. To accommodate its anticipated cash and liquidity requirements for the near term, the Company determined during the third quarter to seek additional capital. The Company completed a private placement of $65.0 million of Senior Notes with an effective rate of 7.80% in March 1997. The securities have a 5 1/2 year average life and are due in December 2002. The securities were rated BBB by Fitch Investors Service L.P. The additional debt will affect the Company's weighted average cost of funds as well as the interest expense recognized in future periods. The proceeds of the sale of the securities will be used to enhance liquidity and fund the Company's continued nationwide expansion. Management believes that the proceeds from the Company's initial public offering, the Senior Notes, the Senior Subordinated Notes, the other Credit Facilities described above, future earnings, and periodic securitization of loans should provide the necessary capital and liquidity for its operations during the remainder of fiscal 1998. The period during which its existing capital resources will continue to be sufficient will, however, be affected by the factors described above affecting the Company's cash requirements. A number of these factors are difficult to predict, particularly including the cash-effect of hedging transactions, the availability of outside credit enhancement in securitizations or other financing transactions and other factors affecting the net cash provided by securitizations. Depending on the Company's ongoing cash and liquidity requirements, market conditions and investor interest, the Company may seek to issue additional debt or equity securities in the near term. The sale of additional equity, including Class A Common Stock or preferred stock, would dilute the interests of current shareholders. Discussion of Forward-Looking Statements The above discussions contain forward-looking statements made by the Company regarding its results of operations, cash flow needs and liquidity, loan origination volume, target spreads and other aspects of its business. Similar forward-looking statements may be made by the Company from time to time. Such forward-looking statements are subject to a number of important factors that cannot be predicted with certainty and which could cause such forward-looking statements to be materially inaccurate. Among these factors are the following: Capital Requirements and Availability. The Company requires substantial amounts of cash to support its business and growth as described above. Its cash requirements can vary depending on the cash-effect of hedging transactions, the availability of external credit enhancement in securitizations or other financing transactions and the other factors that affect the net cash provided by securitizations (at closing and over time) as well as the percentage of principal amount of loans acquired for which the Company can obtain Warehouse financing. The Company's ability to meet these ongoing cash and liquidity requirements depends on several factors. First is the Company's ability to effect periodic securitizations of its loan portfolio and the terms of such securitizations which are dependent on market factors generally, changes in interest rates, demand for asset-backed securities and the Certificates offered in the Company's securitizations particularly. Another important factor is the Company's ability to continue to comply with the terms of its Senior and Senior Subordinated Notes and Warehouse facilities and/or its ability to obtain funding to replace and/or supplement such facilities should it become necessary to do so. The Company's ability to obtain successor facilities or similar financing will depend on, among other things, the willingness of financial institutions to participate in funding automobile financing businesses and the Company's financial condition and results of operations. Moreover, the Company's growth may be inhibited, at least temporarily, if the Company is not able to obtain additional funding through these or other facilities or if it is unable to satisfy the conditions to borrow under the Credit Facilities. Loan Acquisition Volume, Spread and Growth. Many factors affect the Company's loan acquisition volume and spread, which have significant impact on the Company's net earnings. Volume is affected by overall demand for new and used automobiles in the economy generally, the willingness of automobile dealers to forward prospective borrowers' loan applications to the Company, as well as the number of qualified borrowers whose loans are approved and whose loans are ultimately acquired by the Company. Competition can impact significantly both acquisition volume and the note rate at which loans are originated. Generally, competition in the Company's business is intense. The Buy Rate offered by the Company is a significant competitive factor. A competitor offering a lower Buy Rate may be more likely to acquire a loan. The continued growth of the Company's servicing portfolio will depend significantly on the receptivity to the Company's program of new dealers in existing markets as well as new markets and the continued stability of the Company's relationships with its existing dealer network. Interest Rate Risk. The Company's sources of funds generally have variable rates of interest and its loan portfolio bears interest at fixed rates. It therefore bears interest rate risk on loans until they are securitized and employs a hedging strategy to mitigate this risk. There is no assurance that its strategy will completely offset changes in interest rates. In particular, such strategy depends on management's estimates of loan acquisition volume. Loan Losses and Prepayment Rates. The Company bears the primary risk of loss due to defaults in its servicing portfolio. Default and credit loss rates are impacted by general economic factors that affect borrowers' ability to continue to make timely payments on their indebtedness. Prepayments on loans in the servicing portfolio reduce the size of the portfolio and reduce the Company's servicing income. The Gain on Sales of Loans in connection with each securitization transaction and the amount of Excess Servicing recognized in each transaction reflect deductions for estimates of future defaults and prepayments. The carrying value of Excess Servicing may be adjusted periodically to reflect differences between estimated and actual credit losses and prepayments on past securitizations. The Company's results of operations could be adversely affected if default or prepayment rates on securitized loans substantially exceed the estimated levels. Regulation. The Company's business is subject to numerous federal and state consumer protection laws and regulations which, among other things: (i) require the Company to obtain and maintain certain licenses and qualifications; (ii) limit the interest rates, fees and other charges the Company is allowed to charge; (iii) limit or prescribe certain other terms of the Company's contracts; (iv) require specified disclosures; and (v) define the Company's rights to repossess and sell collateral. Changes in existing laws or regulations, or in the interpretation thereof, or the promulgation of any additional laws or regulation could have an adverse effect on the Company's business. Other Matters As a part of the ongoing development of its business plan, the Company is researching the possibilities of engaging in other finance-related businesses such as leasing and other non-auto consumer lending. Additionally, the Company is researching the possibility of expanding its dealer base to include nationally recognized used rental car outlets which are not manufacturer-franchised dealerships. Based on this research, the Company may expand its current operations to include some or all of the above finance-related businesses. It is management's philosophy to continually search for new products and markets to grow and expand the Company in order to maximize profits and shareholder value. Impact of Current Accounting Pronouncements In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 provides computation, presentation, and disclosure requirements for earnings per share. The current presentation of primary and fully diluted earnings per share will be replaced with basic and diluted earnings per share. The Statement is effective for financial statements for both interim and annual periods ending after December 15, 1997, and earlier application is not permitted. Basic earnings per share under SFAS 128 excludes dilutive securities. Because unexercised stock options do not have a dilutive effect on the Company's earnings per share calculation, management expects that the new basic earnings per share will not be significantly different than primary earnings per share. In connection with SFAS 128, the FASB also issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). While SFAS 128 applies only to public companies, SFAS 129 is applicable to both public and nonpublic companies. This statement is not expected to have a material impact on disclosures made by the Company. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all nonowner changes in shareholders' equity. This Statement is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Statement will require new disclosures by the Company, but is not expected to have a material impact on the financial statements or the results of operations. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), which introduces new guidance on segment reporting. The Statement is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. The Statement is not expected to have a material impact on the financial condition or results of operations of the Company. Item 8. Financial Statements and Supplementary Data Independent Auditors' Report - ---------------------------- The Board of Directors Union Acceptance Corporation: We have audited the accompanying consolidated balance sheets of the Union Acceptance Corporation and Subsidiaries as of June 30, 1997 and 1996, the related consolidated statements of earnings and cash flows for each of the years in the three-year period ended June 30, 1997 and the related consolidated statement of shareholders' equity for the years ended June 30, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Union Acceptance Corporation and Subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997 in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, on January 1, 1997. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP July 30, 1997 Indianapolis, IN UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 30, 1997 and 1996 (in thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------------------- Assets June 30, 1997 June 30, 1996 - ------------------------------------------------------------------------------------------------------------------------------- Cash $ 58,801 $ 13,459 Restricted cash 16,657 14,789 Loans, net 121,156 259,290 Accrued interest receivable 1,232 2,127 Furniture and equipement, net 2,150 2,026 Excess servicing 99,047 83,434 Spread accounts 71,744 63,590 Other assets 20,481 12,480 - ------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 391,268 $ 451,195 =============================================================================================================================== Liabilities - ------------------------------------------------------------------------------------------------------------------------------- Amounts due under warehouse facilities $ 44,455 $ 187,756 Long term debt 221,000 156,000 Accrued interest payable 5,793 5,820 Amounts due to trusts 16,067 7,931 Dealer premiums payable 1,372 3,381 Other payables and accrued expenses 1,874 3,326 Deferred income tax payable 13,859 8,357 - ------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 304,420 372,571 - ------------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity - ------------------------------------------------------------------------------------------------------------------------------- Preferred Stock, without par value, authorized 10,000,000 shares; none issued and outstanding - - Class A Common Stock, without par value, authorized 30,000,000 shares; 4,016,788 and 4,011,358 shares issued and outstanding at June 30, 1997 and June 30, 1996, respectively 58,270 58,180 Class B Common Stock, without par value, authorized 20,000,000 shares; 9,200,000 shares issued and outstanding at June 30, 1997 and June 30, 1996, respectively - - Net unrealized gain on excess servicing 2,252 - Retained earnings 26,326 20,444 - ------------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 86,848 78,624 - ------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 391,268 $ 451,195 ===============================================================================================================================
See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years ended June 30, 1997, 1996 and 1995 (in thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Interest on loans $ 33,914 $ 28,712 $ 14,702 Interest on spread accounts and restricted cash 6,385 5,448 3,936 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 40,299 34,160 18,638 Interest expense 25,688 22,275 12,961 - ------------------------------------------------------------------------------------------------------------------------------ Net interest margin 14,611 11,885 5,677 Provisions for losses 4,188 2,875 1,074 - ------------------------------------------------------------------------------------------------------------------------------ Net interest margin after provision 10,423 9,010 4,603 Gain on sales of loans 963 30,357 8,684 Servicing fees, net 25,344 16,926 14,628 Other 3,820 3,096 2,783 - ------------------------------------------------------------------------------------------------------------------------------ Total revenues 40,550 59,389 30,698 - ------------------------------------------------------------------------------------------------------------------------------ Salaries and benefits 15,673 11,985 6,622 Other 14,829 11,856 8,291 - ------------------------------------------------------------------------------------------------------------------------------ Total operating expenses 30,502 23,841 14,913 - ------------------------------------------------------------------------------------------------------------------------------ Earnings before provision for income taxes 10,048 35,548 15,785 Provision for income taxes 4,166 14,406 6,396 - ------------------------------------------------------------------------------------------------------------------------------ Net earnings $ 5,882 $ 21,142 $ 9,389 ============================================================================================================================== Net earnings per common share $ 0.45 $ 1.60 NM ============================================================================================================================== Weighted average number of common shares outstanding 13,215,112 13,209,378 NM ==============================================================================================================================
See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1997, 1996 and 1995 (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 5,882 $ 21,142 $ 9,389 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Loan acquisitions in excess of liquidations (1,087,065) (982,800) (760,091) Dealer premiums paid in excess of dealer premium rebates received on loans held for sale (53,461) (50,059) (35,245) Securitization of loans held for sale 1,214,298 924,598 658,703 Gain on sales of loans (46,713) (37,900) (16,935) Proceeds on sale of interest-only strip 31,773 26,686 - Return of excess servicing cash flows, net of present value effect 24,738 37,871 30,049 Impairment of Excess Servicing 34,828 - - Provision for estimated credit losses 4,188 2,875 1,074 Amortization and depreciation 3,979 4,395 2,049 Spread accounts (8,154) (6,176) (20,081) Restricted cash (1,868) (5,934) (7,734) Other assets and accrued interest receivable (10,296) (6,788) (6,745) Amounts due to trusts 8,136 2,030 3,761 Other payables and accrued expenses 5,697 14,281 939 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 125,962 (55,779) (140,867) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of fixed assets (967) (1,347) (995) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activites: Net change in warehouse credit facilities (143,301) 187,756 - Proceeds from issuance of senior notes 65,000 110,000 - Proceeds from issuance of senior subordinated notes - 46,000 - Payment of borrowing fees (1,352) (3,231) (647) Net proceeds from issuance of common stock - 58,000 - Net change in Due to Union Federal, including regulatory equity distribution - (337,423) 151,992 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (79,653) 61,102 151,345 - ----------------------------------------------------------------------------------------------------------------------------- Change in cash 45,342 3,976 9,483 Cash, beginning of period 13,459 9,483 - - ----------------------------------------------------------------------------------------------------------------------------- Cash, end of period $ 58,801 $ 13,459 $ 9,483 ============================================================================================================================ Supplemental disclosures of cash flow information: Income taxes paid $ 4,288 $ 10,680 $ 6,396 ============================================================================================================================ Interest paid $ 26,475 $ 15,648 $ 12,961 ============================================================================================================================
See accompanying notes to consolidated financial statements. UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the years ended June 30, 1997 and 1996 (in thousands, except share data)
============================================================================================================================== Net Number of Unrealized Common Stock Gain on Total Shares Outstanding Common Excess Retained Shareholders' Class A Class B Stock Servicing Earnings Equity - ------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1995 1 1 $ 2 $ - - 2 Issuance of common stock through initial public offering 4,000,000 9,200,000 58,000 - - 58,000 Regulatory equity distributions related to spin-off (1) (1) (2) - (698) (700) Grants of common stock 11,358 - 180 - - 180 Net earnings - - - - 21,142 21,142 - ------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1996 4,011,358 9,200,000 58,180 - 20,444 78,624 Grants of common stock 5,430 - 90 - - 90 Net earnings - - - - 5,882 5,882 Net unrealized gain on excess servicing - - - 2,252 - 2,252 - ------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1997 4,016,788 9,200,000 $ 58,270 $2,252 26,326 86,848 ==============================================================================================================================
UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ (1) Summary of Significant Accounting Policies Basis of Presentation Union Acceptance Corporation and Subsidiaries ("UAC" or the "Company"), formerly a division of Union Federal Savings Bank of Indianapolis (the "Union Division"), specializes in the acquisition, sale and servicing of prime retail installment loans (primarily automobile loans) acquired from a network of over 3,200 manufacturer-franchised dealerships in 29 states from whom such loans are regularly purchased. Loans acquired are subsequently sold to investors through asset-backed securitization transactions. In contemplation of a public offering to sell common stock, UAC was formed as a wholly-owned subsidiary of Union Federal Savings Bank of Indianapolis ("Union Federal") in December 1993. During fiscal 1995, Union Acceptance Funding Corporation, UAC Securitization Corporation, Performance Funding Corporation and Performance Securitization Corporation were formed as wholly-owned subsidiaries of UAC and selected assets and operations of the Union Division were transferred to UAC. In August of 1995, the Company completed an initial public offering simultaneously with a tax free spin-off from its parent, Union Federal. During fiscal 1996, UAC Boat Funding Corp. was formed as a wholly-owned subsidiary of UAC. In fiscal 1997, UAC Finance Corporation was formed as a wholly-owned subsidiary of UAC. The accompanying consolidated financial statements include the accounts of UAC and the Union Division prior to the transfer and spin-off. All significant intercompany accounts and transactions have been eliminated in the consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with those in the general practice of the consumer finance industry. The consolidated financial statements reflect no allocation of Union Federal's historical equity. Earnings of the Company were transferred to Union Federal through the Due to Union Federal account prior to the spin-off. Cash The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. Restricted Cash Restricted cash primarily consists of funds held in reserve accounts in compliance with the terms of the Warehouse Facility Agreements. (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ Loans, Net All loans in the Company's prime and non-prime portfolios are held for sale and include automobile, light-truck, van, and marine loans including dealer premiums (on prime loans). Such loans are packaged and sold through asset-backed securitization transactions and are carried at their principal amount outstanding (amortized cost) which approximates the lower of cost or market, net of unearned discount. Interest on these loans is accrued and credited to interest income based upon the daily principal amount outstanding. The Company provides an allowance for credit losses from the date of origination to the date of securitization. The allowance is shown as a reduction to loans. Loans, net includes dealer premiums which are incentives paid to dealers in connection with the acquisition of loans. Dealer premiums are deferred in accordance with Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. A portion of the dealer premiums are refundable to the Company in the event of loan prepayment or default. Accrued Interest Receivable Accrued interest receivable represents interest earned but not collected on loans held for sale. Furniture and Equipment, Net Furniture and equipment are recorded at cost. Depreciation is determined on accelerated methods over the estimated useful lives of the respective assets. Excess Servicing In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 125"). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. The financial components approach focuses on the assets and liabilities that exist after the transfer. The pronouncement prescribes the methodology for recognition of gain or loss upon the sales of loans as well as the valuation of excess servicing. SFAS 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. Retroactive application is not permitted. The Company adopted SFAS 125 on January 1, 1997. The adoption of SFAS 125 had the effect of reducing fiscal 1997 net earnings by $1,311,000 or $0.10 per share and increasing retained earnings by $941,000. (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ Excess servicing is the Company's retained interest in loans sold. Excess servicing is determined by allocating the carrying amount of loans sold based on the relative fair market value of loans sold and the expected future cash flows discounted at current market rates. The expected discounted future servicing cash flows is the projected difference between the weighted average coupon rate of the loans sold and the certificate rate to investors less the Company's contractual servicing fee (typically 1%), an allowance for estimated credit losses and other trust and credit enhancement fees, plus dealer premium rebates. Allowance for estimated credit losses is based on current scoring models, historical loss rates and the loan composition of the securitization. Allowance for estimated credit losses is deemed adequate for credit losses over the life of the respective securitizations. Market discount rates are based on current market conditions and prepayment assumptions are based on historical experience. The Company's contractual servicing fee approximates adequate compensation. Accrued interest through the date of securitization, which will be returned to the Company through the securitization trust is also classified as excess servicing. Excess servicing is reduced by excess cash flows as received over the life of the securitization. Excess servicing is classified as an available-for-sale security and is carried at its market value based on the application of current assumptions to the remaining cash flows. Unrealized gains and losses are reported net of related income taxes as a separate component of shareholders' equity until realized. Excess servicing is reviewed periodically for other than temporary impairment on a disaggregate basis (the pool by pool method), with impairment, if any, charged to operations through gain on sales of loans, net. Gain on Sales of Loans, Net Gain on sales of loans, net represents the difference between the sales proceeds and the carrying amount of loans after reduction for amounts allocated to excess servicing, less expenses of the sale and hedging gains and losses. Gains are credited to operations at the closing of each securitization. The Company retains the servicing rights on the loans sold. Other than temporary impairment adjustments are recorded as a component of Gain on Sales of Loans, net. Spread Accounts Spread accounts are intended to protect the securitization investors and any letter of credit provider or credit enhancer against credit losses. The initial deposit, if required, and net excess servicing cash flows earned are retained for each securitization until the spread account balance increases to a specified percentage of the pool balance. Spread account requirements vary with each securitization's delinquency and loss experience. Funds in excess of specified percentages are remitted to the Company over the remaining life of the securitization. Should the spread account be insufficient to cover losses, each trust is further supported by additional credit enhancements. Selected trusts are secured by either a letter of credit or surety bond provided by a financial institution. Other trusts have been formed with a subordinated class of certificates whereby the senior certificateholders are protected against losses by having their interests senior to the subordinate certificateholders' interests. Subordinated certificateholders assume a (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ higher risk of loss, but earn a higher yield on their certificates. For each trust, there is no recourse against the Company beyond the balance in the spread account and the trust's future earnings. Common Stock In election of directors, the holders of Class B Common Stock are entitled to five votes per share and Class A Common Stock are entitled to one vote per share. On all matters other than the election of directors, holders of Class B and A have one vote per share and vote as a single class. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Tax expense has been computed assuming the Company was a stand-alone entity (prior to spin-off). Amounts Due to Trusts Amounts due to trusts represent monies collected but not paid to the trustee for principal and interest remittances as well as recovery payments in respect of securitized loans. All amounts collected by the Company are remitted to the trustee within two business days, and subsequently distributed by the trustee to the investors, servicer, and credit enhancers on a monthly basis. Servicing Fees, Net Servicing fees, net include the contractual fee, typically 1% per annum, earned from each trust plus the accretion of discounted excess servicing, plus excess dealer premium rebates. Hedging Loan production is hedged periodically to such time as the next securitization is estimated to occur. Securitizations of the prime portfolio occur approximately every three months. The primary hedging vehicle is a short sale of Treasury Notes having a maturity approximating the average maturity of the loan production during the relevant period. At such time as a securitization is committed, the hedge is covered by the purchase of a like volume of Treasury Notes. Gains or losses on the hedge are recognized concurrently with the gain or loss at securitization. Earnings Per Share The initial public offering was completed on August 7, 1995. Earnings per share for the year ended June 30, 1997 and 1996, were computed by dividing net earnings by the average common shares outstanding during the period. Shares outstanding from August 7, 1995, through September 30, 1995, were assumed to be outstanding for the entire three months ended September 30, 1995. The (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ effect of unexercised stock options on earnings per share has not been included in the calculation because they are not dilutive. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) Loans, Net Loans, net are as follows (in thousands, except average loan balance) at:
June 30, 1997 1996 - ---------------------------------------------------------------------------------- Principal balance of prime loans held for sale, net of unearned discount $ 90,331 228,391 Principal balance of non-prime loans held for sale, net of unearned discount 19,829 15,512 Principal balance of marine loans held for sale 6,227 50 Loans in process 1,189 5,363 Dealer premiums 4,360 11,073 Allowance for credit losses (780) (1,099) - ---------------------------------------------------------------------------------- $ 121,156 259,290 ================================================================================== Weighted average interest rate (prime) 13.18% 13.24% Weighted average interest rate (non-prime) 19.62 19.70 Weighted average interest rate (marine) 11.36 14.68 Average loan balance (prime) $ 10,710 14,049 Average loan balance (non-prime) 11,276 12,479 Average loan balance (marine) 13,192 8,304
Allowance for estimated credit losses on loans held for sale (in thousands):
Year ended June 30, 1997 1996 1995 - ------------------------------------------------------------------------------- Balance at the beginning of the period $ 1,099 453 171 Charge-offs (7,361) (4,556) (2,605) Recoveries 2,854 2,327 1,813 Provision for estimated credit losses 4,188 2,875 1,074 ----- ----- ----- Balance at the end of the period $ 780 1,099 453 ================================================================================
(Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ The geographic concentration of loans serviced are as follows: Percent of Total June 30, State 1997 1996 --------------------------------------------------------------------------- Texas 16.4% 18.2% North Carolina 11.0 11.2 California 10.5 8.8 Ohio 7.2 8.0 Illinois 7.1 6.7 Florida 7.0 6.1 Virginia 6.2 5.5 Oklahoma 5.7 7.2 Arizona 5.1 6.9 Indiana 4.7 5.8 Georgia 2.5 2.2 Missouri 2.5 3.0 Colorado 2.2 3.2 South Carolina 2.2 1.2 Iowa 1.5 0.9 Maryland 1.4 0.4 Tennessee 1.2 0.4 Wisconsin 1.2 1.0 Michigan 1.1 0.2 Kansas 0.8 0.9 New Mexico 0.8 0.8 Washington 0.6 0.5 Oregon 0.4 0.5 Kentucky 0.2 0.1 Pennsylvania 0.2 - Minnesota 0.1 0.2 Nebraska 0.1 0.1 Nevada 0.1 - --------------------------------------------------------------------------- 100.0% 100.0% =========================================================================== (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ Loans serviced are as follows (in thousands) at:
June 30, 1997 1996 - ----------------------------------------------------------------------------------------- Loans held for sale Prime (net of unearned discount) $ 90,331 228,391 Non-prime (net of unearned discount) 19,829 15,512 Marine 6,227 50 - ----------------------------------------------------------------------------------------- 116,387 243,953 Securitized loans Prime 1,769,903 1,319,930 Non-prime 48,460 31,550 - ----------------------------------------------------------------------------------------- 1,818,363 1,351,480 Other loans serviced 2,526 3,637 - ----------------------------------------------------------------------------------------- $ 1,937,276 1,599,070 =========================================================================================
Notional amounts and unrealized losses related to outstanding hedges follow (in thousands) at: June 30, 1997 1996 - ------------------------------------------------------------------------------- Notional amounts outstanding $ 204,000 415,000 Unrealized losses on hedging transactions 909 711 ================================================================================ Notional amounts of $180 million, $18 million and $6 million were expected to be closed in September 1997, December 1997 and March 1998, respectively, for the amounts outstanding at June 30, 1997, and $340 million, $55 million and $20 million were closed in August 1996, November 1996 and December 1996, respectively, for amounts outstanding at June 30, 1996. Hedging realized losses were approximately $6,293,000, $2,733,000 and $5,515,000 during fiscal 1997, 1996 and 1995, respectively. (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ (3) Furniture and Equipment, Net Furniture and equipment, net are as follows (in thousands) at:
June 30, 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Furniture, equipment and leasehold improvements $ 4,724 3,858 Accumulated depreciation (2,574) (1,832) - -------------------------------------------------------------------------------------------------------------------- $ 2,150 2,026 =====================================================================================================================
(4) Excess Servicing The carrying amount of excess servicing is as follows (in thousands) at:
June 30, 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Estimated value of excess servicing cash flows, net of estimated prepayments $ 145,872 112,564 Estimated dealer premium rebates 26,447 13,467 Allowance for estimated credit losses on securitized loans (79,923) (43,516) Discount to present value (9,941) (9,535) - ------------------------------------------------------------------------------------------------------------------- 82,455 72,980 Accrued interest on securitized loans 12,807 10,454 - ------------------------------------------------------------------------------------------------------------------- Unrealized gains on excess servicing 3,785 - $ 99,047 83,434 =================================================================================================================== Outstanding balance of loans serviced through securitized trusts $ 1,818,363 1,351,480 Allowance for estimated credit losses as a percentage of securitized loans serviced 4.40% 3.22%
(Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ Excess servicing activity is as follows (in thousands):
Year ended June 30, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 83,434 60,622 41,265 Amounts capitalized (including estimated dealer rebates) 68,922 56,436 47,693 Change in accrued interest on securitized loans 2,353 4,247 1,713 Return of excess cash flows, net of present value effect (24,619) (37,871) (30,049) Impairment of excess servicing asset (34,828) - - Unrealized gain attributable to the change in fair value 3,785 - - - --------------------------------------------------------------------------------------------------------- Balance at end of period $ 99,047 83,434 60,622 =========================================================================================================
Because of current trends with respect to credit loss and delinquency, and their effects on the valuation of the excess servicing asset, the Company recorded pre-tax charges of approximately $35.0 million for the impairment of the excess servicing asset in accordance with the provisions of SFAS 125 during fiscal 1997. (5) Spread Accounts The weighted average yield on spread accounts was 4.97% and 5.32% at June 30, 1997 and 1996, respectively. (6) Other Assets Other assets are as follows (in thousands) at: June 30, 1997 1996 - ---------------------------------------------------------------------- Income tax receivable $ 5,735 1,584 Repossessed assets 5,048 1,716 Deferred borrowing fees 3,078 2,173 Accrued servicing fees 2,511 5,131 Advances of delinquent interest 1,056 506 Other 3,053 1,370 - --------------------------------------------------------------------- $ 20,481 12,480 ===================================================================== (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 ================================================================================ (7) Amounts Due Under Warehouse Facilities At June 30, 1997, the Company, through its wholly-owned special-purpose subsidiaries, had borrowing arrangements with a financial institution which provided for three revolving Warehouse Facilities (the "Facilities") with an aggregate borrowing capacity of $450 million. Borrowings under these facilities are collateralized by certain loans held for sale. There are separate Facilities for the funding of prime auto, non-prime auto, and marine loan acquisitions. Outstanding borrowings of the Facilities at June 30, 1997 and 1996 were approximately $44,455,000 and $187,756,000, respectively. The weighted average cost of funds of the Facilities for the years ended June 30, 1997 and 1996 was 5.42% and 6.19%, respectively. The cost of funds includes a variable interest rate on the outstanding commercial paper, fees on the used and unused portions of the Facilities, and the amortization of prepaid warehouse fees. The largest portion of the cost of funds related to the Facilities is the variable rate interest on the commercial paper issued by the financing conduit. The weighted average commercial paper rate on outstanding issues at June 30, 1997 and 1996 was 5.66% and 5.40%, respectively. Upfront warehouse fees are non-recurring costs related to the initial set-up of the Facilities. The Facilities agreements specify a term of one year and are renewable annually. Both the prime auto and non-prime auto Facilities have been renewed for an additional year, and expire in June and July 1998, respectively. The marine Facility expires April 1998. (8) Long-term Debt In connection with the Company's initial public offering, the Company issued, in a private placement, $110 million principal amount of 8.53% Senior Notes due 2002. Interest on the Senior Notes is payable semi-annually on February 1 and August 1 of each year, and commenced on February 1, 1996, with annual principal reductions commencing on August 1, 1998. The Senior Notes are redeemable, in whole or in part, at the option of the Company, in a principal amount not less than $1 million, together with accrued and unpaid interest to the date of redemption and a yield-maintenance premium as defined in the note agreement. In April 1996, the Company issued $46 million in a private placement of 9.99% Senior Subordinated Notes due 2003. Interest on the Senior Subordinated Notes is payable quarterly on March 30, June 30, September 30 and December 30 of each year, and commenced on June 30, 1996. The Senior Subordinated Notes are redeemable, in whole or in part, at the option of the Company, in a principal amount not less than $1 million, together with accrued and unpaid interest to the date of redemption and a yield-maintenance premium as defined in the note agreement. (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- In March 1997, the Company issued, in a private placement, $50 million Series A 7.75% Senior Notes due 2002 and $15 million Series B 7.97% Senior Notes due 2002. Interest on the Senior Notes is payable semi-annually on March 15 and September 15 of each year, commencing September 15, 1997, with a principal reduction occurring on March 15, 2002. The Senior Notes are redeemable, in whole or in part, at the option of the Company, in a principal amount not less than $1 million, together with accrued and unpaid interest to the date of redemption and a yield-maintenance premium as defined in the note agreement. Scheduled contractual maturities of long-term debt at June 30, 1997 follows (in thousands): 1998 $ - 1999 22,000 2000 22,000 2001 22,000 2002 43,667 2003 111,333 - -------------------------------------------------------------------------------- $ 221,000 ================================================================================ (9) Other Revenue and Expenses Other revenue and expenses follow (in thousands):
Year ended June 30, 1997 1996 1995 - -------------------------------------------------------------------------------------------- Other revenues: Late charges $ 2,618 1,922 1,447 Origination fees 1,019 1,072 1,210 Other 183 102 126 - -------------------------------------------------------------------------------------------- $ 3,820 3,096 2,783 ============================================================================================ Other expenses: Loan expenses 2,948 2,202 1,841 Outside services 2,767 2,515 1,492 Office, telephone and postage 2,626 2,207 1,158 Occupancy 1,433 891 396 Equipment 1,013 839 511 Other 4,042 3,202 2,893 - -------------------------------------------------------------------------------------------- $ 14,829 11,856 8,291 ============================================================================================
(Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- (10) Income Taxes The composition of income taxes follows (in thousands): Year ended June 30, 1997 1996 1995 - -------------------------------------------------------------------------------- Current expense (benefit) $(1,644) 9,096 6,458 Deferred expense (benefit) 5,810 5,310 (62) - -------------------------------------------------------------------------------- $ 4,166 14,406 6,396 - -------------------------------------------------------------------------------- The effective income tax rate for the year ended June 30, 1997, is 40.5%. Income taxes were allocated using statutory federal and state rates which resulted in effective income tax rate of approximately 40.5% for the years ended June 30, 1996 and 1995. Year ended June 30, (Dollars in thousands) 1997 1996 - -------------------------------------------------------------------------------- Deferred tax assets: Net operating losses carryforward $ 1,841 - Allowance for estimated credit losses 316 445 Mark to market and allowance for credit losses 2,073 912 - -------------------------------------------------------------------------------- 4,230 1,357 - -------------------------------------------------------------------------------- Deferred tax liabilities: Excess servicing 16,556 5,349 Unrealized gain on excess servicing 1,533 - Mark to market - excess servicing - 4,365 - -------------------------------------------------------------------------------- 18,089 9,714 - -------------------------------------------------------------------------------- Deferred income tax payable $ 13,859 8,357 ================================================================================ (11) Estimated Fair Value of Financial Instruments Loans held for sale - Cost approximates fair value as loans are sold shortly after origination. Accrued interest receivable - Cost approximates fair value. Excess servicing - In 1997, amount carried at fair value in accordance with SFAS 125. During 1996, cost approximated fair value determined based upon discounting future cash flows at market rates using historical prepayment speeds and loss provisions. (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- Spread accounts - Cost approximates fair value as the interest rate earned is at a variable rate. Repossessed assets - Cost approximates fair market value. All liabilities, except long-term debt - Cost approximates fair value. Long-term debt - Carrying amount of $221,000,000 and $156,000,000 at June 30, 1997 and 1996, respectively, has been calculated to have a fair value of approximately $221,000,000 and $152,000,000, respectively, by discounting the scheduled loan payments to maturity using rates that are believed to be currently available for debt of similar terms and maturities. (12) Commitments and Contingencies Future minimum payments under noncancelable operating leases on premises and equipment with terms of one year or more as of June 30, 1997 are as follows (in thousands): 1998 $ 1,236 1999 1,150 2000 985 2001 911 2002 911 Thereafter 759 - ------------------------------------------------------ Total $ 5,952 ====================================================== These agreements include, in certain cases, various renewal options and contingent rental agreements. Rental expense for premises and equipment amounted to approximately $1,640,000 and $645,000 for the years ended June 30, 1997 and 1996, respectively. A majority of the rental expense relates to the lease of the Company's principal offices with a company owned by the majority shareholders of UAC. The Company is also involved as a party to certain immaterial legal proceedings incidental to its business. Management of the Company, based on the advice of outside counsel, believes that the outcome of such proceedings will not have a material effect upon its business or financial condition. (13) Stock-Based Compensation The Company has one stock-based compensation plan, which is described below. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations in accounting for these plans. Had compensation cost been determined based on the fair value at the grant date for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except share data): (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- June 30, For the Years Ended: 1997 1996 - -------------------------------------------------------------------------------- Net income: As reported $5,882 21,142 Pro forma 4,543 19,449 Earnings per share: As reported 0.45 1.60 Pro forma 0.34 1.47 ================================================================================ The effects of applying SFAS 123 in this Pro Forma disclosure are not indicative of future amounts. The Statement does not apply to awards prior to fiscal 1996, and additional awards in the future are expected. The Union Acceptance Corporation 1994 Incentive Stock Plan ("Incentive Stock Plan") is the Company's long-term incentive plan for directors, executive officers and other key employees. The Incentive Stock Plan authorizes the Company's Compensation Committee to award executive officers and other key employees incentive and non-qualified stock options and restricted shares of Class A Common Stock. A total of 500,000 shares of Class A Common Stock have been reserved for issuance under the Incentive Stock Plan, of which options for 271,875 shares of Class A Common Stock were granted at an issue price of $16 per share to senior officers upon consummation of the Company's initial public offering of the Class A Common Stock. Options or other grants to be received by executive officers or other employees in the future are within the discretion of the Company's Compensation Committee and are not determinable. Stock options granted under the Incentive Stock Plan are exercisable at such times (not after ten years and one day from the date of the grant) and at such exercise prices (not less than 85% of the fair market value of the Class A Common Stock at date of grant) as the Committee determines and will, except in limited circumstances, terminate if the grantee's employment terminates prior to exercise. The outstanding options' maximum term is ten years. Such options vest over a period of five years, with one-fifth becoming exercisable on each anniversary of the option grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions used for grants in 1997 and 1996; dividend yield of 0.0% for both years; expected volatility of 100% for both years; weighted average risk-free interest rates of 6.55% and 6.41% for 1997 and 1996 grants, respectively; and expected lives of ten years for both years. (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- A summary of the status of the Company's stock option plans as of June 30, 1997 and 1996 changes during the years ended on those dates is presented below:
1997 1996 --------------------------- ---------------------- Weighted Weighted average average exercise exercise Shares price Shares price - ----------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of year 276,915 $ 16.03 - $ 0.00 Options granted 39,750 16.00 280,600 16.04 Options exercised - 0.00 - 0.00 Options canceled 2,180 17.48 3,685 16.31 - ----------------------------------------------------------------------------------------------------------------- Options outstanding at end of year 314,485 $ 16.02 276,915 $ 16.03 ================================================================================================================= Weighted average fair value of options granted during the year $ 14.71 $ 14.79 =================================================================================================================
The following table summarizes information about fixed stock options outstanding at June 30, 1997:
Options Outstanding Options Exercisable Weighted average Weighted Weighted Range of number remaining Average Number average exercise outstanding contractual exercise exercisable exercise prices at 6/30/97 date price at 6/30/97 price - ------------------------------------------------------------------------------------------------------------------- $16.00 - 16.00 311,125 8.25 $ 16.00 54,375 $ 16.00 $17.88 - 17.88 3,360 8.25 17.88 672 17.88 - ------------------------------------------------------------------------------------------------------------------- 314,485 8.25 $ 16.02 55,047 $ 16.03 ===================================================================================================================
In addition to the options outstanding at June 30, 1997, there were 168,727 shares of Class A Common Stock available for future grants or awards. The Incentive Stock Plan also provides that each director of the Company who is not also an executive officer is automatically granted shares of Class A Common Stock with a fair market value of $15,000 following each annual meeting of shareholders. Shares so granted have a six-month period of restriction during which they may not be transferred. Shares granted under this section of the Incentive Stock Plan totaled 5,430 and 11,358 in fiscal 1997 and 1996, respectively, and compensation cost charged against income was $90,000 and $180,000 in 1997 and 1996, respectively. (Continued) UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- (14) Restatement of Consolidated Financial Statements The Company determined in August 1998 that it should measure other than temporary impairment of Excess Servicing on a disaggregate basis (pool by pool). The adjustments resulting from the measurement of other than temporary impairment on a disaggregate basis were of sufficient significance to require restatement of the consolidated financial statements since the implementation of SFAS 125. This restatement had the effect of reducing fiscal 1997 earnings by $1,890,000 (net of income taxes of $1,288,000) or $0.14 per share. The restatement had no effect on shareholders' equity at June 30, 1997. In conjunction with the restatement, the Company made other adjustments, which were not individually significant, that increased fiscal 1997 net earnings by $372,000 (net of income taxes of $259,000) or $0.03 per share and increased shareholders' equity at June 30, 1997 by $733,000. (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------ UNION ACCEPTANCE CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------------------------ Notes to Consolidated Financial Statements June 30, 1997, 1996 and 1995 - ------------------------------------------------------------------------------------------------------------------------------------ (15) Quarterly Financial Information (unaudited) Quarterly financial information is as follows (in thousands, except share data): - ------------------------------------------------------------------------------------------------------------------------------------ First Second Third Fourth Total - ------------------------------------------------------------------------------------------------------------------------------------ Year ended June 30, 1997 Interest on loans $ 9,233 9,096 7,543 8,042 33,914 Interest on spread accounts and restricted cash 1,510 1,545 1,618 1,712 6,385 Interest expense (6,410) (6,265) (6,118) (6,895) (25,688) Provision for estimated credit losses on loans held for sale (855) (993) (1,180) (1,160) (4,188) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin after provision 3,478 3,383 1,863 1,699 10,423 Gain (loss) on sales of loans 6,875 7,790 (6,168) (7,534) 963 Servicing fees, net 5,826 6,258 6,854 6,406 25,344 Other revenues 934 910 1,011 965 3,820 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 17,113 18,341 3,560 1,536 40,550 - ------------------------------------------------------------------------------------------------------------------------------------ Salaries and benefits 3,632 3,900 4,065 4,076 15,673 Other expenses 3,514 3,932 3,480 3,903 14,829 - ------------------------------------------------------------------------------------------------------------------------------------ Operating expenses 7,146 7,832 7,545 7,979 30,502 - ------------------------------------------------------------------------------------------------------------------------------------ Provision for income taxes 4,049 4,316 (1,587) (2,612) 4,166 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) $ 5,918 6,193 (2,398) (3,831) 5,882 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) per common share $ 0.45 0.47 (0.18) (0.29) 0.45 ==================================================================================================================================== Weighted average common shares outstanding 13,211,358 13,215,515 13,216,788 13,216,788 13,215,112 ==================================================================================================================================== Year ended June 30, 1996 Interest on loans $ 6,946 7,232 6,732 7,802 28,712 Interest on spread accounts and restricted cash 1,370 1,386 1,317 1,375 5,448 Interest expense (5,289) (5,556) (5,359) (6,071) (22,275) Provision for estimated credit losses on loans held for sale (1,150) (300) (600) (825) (2,875) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin after provision 1,877 2,762 2,090 2,281 9,010 Gain on sales of loans 6,724 8,483 7,760 7,390 30,357 Servicing fees, net 3,966 2,584 4,796 5,580 16,926 Other revenues 750 724 798 824 3,096 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 13,317 14,553 15,444 16,075 59,389 - ------------------------------------------------------------------------------------------------------------------------------------ Salaries and benefits 2,321 3,059 3,232 3,373 11,985 Other expenses 2,398 2,543 3,426 3,489 11,856 - ------------------------------------------------------------------------------------------------------------------------------------ Operating expenses 4,719 5,602 6,658 6,862 23,841 - ------------------------------------------------------------------------------------------------------------------------------------ Provision for income taxes 3,482 3,705 3,473 3,746 14,406 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings $ 5,116 5,246 5,313 5,467 21,142 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings per common share $ 0.39 0.40 0.40 0.41 1.60 ==================================================================================================================================== Weighted average common shares outstanding 13,205,622 13,209,173 13,211,358 13,211,358 13,209,378 - ------------------------------------------------------------------------------------------------------------------------------------
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) List the following documents filed as part of the report: Financial Statements -- Included Under Item 8: Report of KPMG Peat Marwick LLP, Independent Auditors Consolidated Balance Sheets as of June 30, 1997 and 1996 Consolidated Statements of Earnings (Loss) for the Years Ended June 30, 1997, 1996, 1995 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996, 1995 Consolidated Statement of Shareholders' Equity for the Years Ended June 30, 1997 and 1996 (b) Reports on Form 8-K Registrant filed no reports on Form 8-K during the quarter ended June 30, 1997 (c) The exhibits filed herewith or incorporated by reference herein are set forth following the signature page which appears on page 56. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNION ACCEPTANCE CORPORATION January 4, 1999 By: /S/ Rick A. Brown -------------------- Rick A. Brown Treasurer and Chief Financial Officer EXHIBIT INDEX Exhibit No. Description Page (Ex. No. Cross Reference)(1) - ------------------------------------------------------------------------------- 3.1 Registrant's Articles of Incorporation, as amended S-1, 3.1 and restated. 3.2 Registrant's Code of By-Laws, as amended and S-1, 3.2 restated. 3.3 Form of Share Certificate for Class A Common Stock. S-1, 3.3 4.1 Articles V and VI of the Registrant's Articles of S-1, 4.1 Incorporation respecting the terms * of shares of Common Stock, are incorporated by reference to the Registrant's Articles of Incorporation filed hereunder as Exhibit 3.1 4.2 Article III - "Shareholder Meetings," Article VI - S-1, 4.2 "Certificates for Shares," Article VII - "Corporate Books and Records - Section 3" and Article X - "Control Share Acquisitions Statute" of the Registrant's Code of By-Laws are incorporated by reference to the Registrant's Restated Code of By-Laws filed herewith as Exhibit 3.2. 4.3 Transfer and Administration Agreement among S-1, 4.3 Enterprise Funding Corporation, Union Acceptance Funding Corporation and Union Acceptance Corporation, dated as of June 27, 1995. 4.3(a) Amendment No. 1 to Transfer and Administration 10Q 9/95 Agreement dated September 8, 1995 4.3(a) 4.3(b) Amendment No. 2 to Transfer and Administration 10Q 9/95 Agreement dated September 29, 1995 4.3(b) 4.3(c) Letter Agreement regarding Transfer and 10K 1996 Administration Agreement dated November 13, 1995 4.3(c) 4.3(d) Amendment No. 3 to Transfer and Administration 10K 1996 Agreement dated March 1, 1996 4.3(d) 4.3(e) Letter Agreement regarding Transfer and 10K 1996 Administration Agreement dated May 30, 1996 4.3(e) 4.3(f) Amendment No. 4 to Transfer and Administration 10K 1996 Agreement dated September 5, 1996 4.3(f) 4.3(g) Amendment No. 5 to Transfer and Administration Agreement dated October 31, 1996* 4.3(i) Amendment No. 6 to Transfer and Administration 10Q 12/96 Agreement dated December 23, 1996 4.1 4.3(h) Amendment No. 7 to Transfer and Administration Agreement dated March 31, 1997 * 4.3(j) Letter Agreement No. 3 with respect to Transfer and Administration Agreement, dated April 28, 1997 * 4.4 Note Purchase Agreement between Union Acceptance 10K 1995 Corporation and certain lenders dated as of August 7, 4.4 1995. 4.4(a) Amendment No. 1 to Note Purchase Agreement dated 10Q 12/95 November 22, 1995 4.4(a) 4.5 Transfer and Administration Agreement among S-1, 4.5 Enterprise Funding Corporation, Performance Funding Corporation and Union Acceptance Corporation, dated as of July 24, 1995. 57 4.5(a) Amendment No. 1 to Transfer and Administration 10Q 12/95 Agreement dated September 8, 1995 4.5(a) 4.5(b) Letter Agreement regarding Transfer and 10K 1996 Administration Agreement dated October 12, 1995 4.5(b) 4.5(c) Amendment No. 2 to Transfer and Administration 10K 1996 Agreement dated May 10, 1996 4.5(c) 4.5(d) Letter Agreement regarding Transfer and 10K 1996 Administration Agreement dated July 11, 1996 4.5(d) 4.5(e) Letter Agreement regarding Transfer and 10K 1996 Administration Agreement dated August 20, 1996 4.5(e) 4.5(f) Amendment No. 3 to Transfer and Administration 10Q 12/96 Agreement, dated December 23, 1996 4.2 4.5(g) Letter Agreement No. 4 to Transfer and Administration Agreement dated April 25, 1997 * 4.5(h) Amendment No. 5 to Transfer and Administration Agreement dated June 6, 1997 * 4.5(i) Letter Agreement with regard to Transfer and Administration Agreement dated June 24, 1997 * 4.5(j) Amendment No. 6 to Transfer and Administration Agreement dated as of July 29, 1997 * 4.6 Note Purchase Agreement dated as of April 3, 1996 10Q 3/96 among Union Acceptance Corporation and several 4.1 purchasers of Senior Subordinated Notes due 2003 4.7 Note Purchase Agreement, dated March 24, 1997, among 10Q 3/97 Union Acceptance Corporation and certain purchasers 10.1 of Senior Notes, due 2002. 4.8(a) Note Purchase Agreement, dated April 3, 1997 among UAC Boat Funding Corp., Enterpirse Funding Corporation and NationsBank, N.A. * 4.8(b) Security Agreement, dated April 3, 1997, among UAC Boat Funding Corp., Enterpirse Funding Corp., et. al. * 9(a) Voting Trust Agreement among Richard D. Waterfield, S-1, 9(a) as trustee, and certain existing shareholders of Union Holding Company, Inc., dated June 10, 1994. 9(b) First Amendment to Voting Trust Agreement dated June S-1, 9(b) 1, 1995. 10.1 Remittance Processing Agreement by and between Union S-1, 10.5 Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.2 Mail and Printing Services Agreement by and between S-1, 10.6 Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.3 Telephone Equipment Lease Agreement by and between S-1, 10.7 Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.4 Telecommunications Agreement by and between Union S-1, 10.8 Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.5 Communications Equipment and Software License by and S-1, 10.9 between Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 58 10.6 Software License and Maintenance Agreement by and S-1, 10.10 between Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.7 Loan Servicing Agreement by and between Union Federal S-1, 10.11 Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.8 General Subservicing Agreement by and between Union S-1, 10.12 Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated as of January 1, 1995. 10.9 Loan Collection Agreement by and between Union S-1, 10.13 Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.10 Letter respecting Terms of Bank Accounts from Union S-1, 10.14 Federal Savings Bank of Indianapolis to Union Acceptance Corporation dated May 25, 1994. 10.11 Supplement to Account Agreement Re: Drafts by and S-1, 10.15 between Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated June 29, 1994. 10.12 Tax Allocation Agreement by and between Union Holding S-1, 10.16 Company, Inc. and its subsidiaries dated February 1, 1991, as amended. 10.13 Form of Remote Outsourcing Agreement by and between S-1, 10.18 Systematics Financial Services, Inc. and Union Acceptance Corporation. 10.13(a) Letter Agreement by and among Systematics Financial S-1, 10.18(a) Services, Inc., Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated July 13, 1994 respecting Provision of Data Processing Services. 10.13(b) Memorandum respecting Billing Procedure in connection S-1, 10.18(b) with Remote Outsourcing Agreement from Systematics System Financial Services, Inc. to Union Federal Savings Bank of Indianapolis and Union Acceptance Corporation dated October 25, 1994. 10.14 Union Acceptance Corporation Annual Bonus Plan For S-1, 10.23 Senior Officers. 59 10.15 Union Acceptance Corporation Incentive Stock Plan. S-1, 10.24 10.16 Letter respecting Access to Records from Union S-1, 10.25 Acceptance Corporation to Union Federal Savings Bank of Indianapolis dated September 13, 1994. 10.17 Letter Agreement by and between Union Federal S-1, 10.26 Savings Bank of Indianapolis and Union Acceptance Corporation dated December 14, 1994 amending and initiating terms of certain Inter-Company Agreements. 10.18 Letter respecting terms and conditions of bank S-1, 10.27 accounts from Union Federal Savings Bank of Indianapolis to Union Acceptance Corporation dated December 16, 1994. 10.19 Lease Agreement between Waterfield Mortgage Company, 10Q 12/95 Incorporated, and Union Acceptance Corporation dated 10.19 as of November 1, 1995 10.20 Purchase Agreement among Union Acceptance Funding 10Q 3/96 Corporation, Union Acceptance Corporation and Union 10.1 Federal Savings Bank of Indianapolis dated as of January 18, 1996 10.21 Sublease Agreement between Union Acceptance 10K 1996 Corporation and Union Federal Savings Bank of 10.26 Indianapolis dated as of August 1, 1996 21 Subsidiaries of the Registrant * 23 Consent of KPMG Peat Marwick LLP. (Updated) _____ 27 Financial Data Schedule (Restated) _____ - -------------------- (1) Exhibits set forth above that are not included with this filing are incorporated by reference to the Registrant's previously filed registration statement or reports (and the indicated exhibit number) as indicated in the right hand column above, as follows: S-1 -- Refers to Registrant's Registration Statement on Form S-1 (Reg. No. 33-82254 10K 1995 -- Refers to Registrant's Form 10-K for the year ended June 30, 1995 10K 1996 -- Refers to Registrant's Form 10-K for the year ended June 30, 1996 10Q (month/year) -- Refers to Registrant's Form 10-Q for the quarter ended at the end of such month in such calendar year * Previously filed EX-23 2 CONSENT OF KPMG PEAT MARWICK LLP [Letterhead] KPMG Peat Marwick LLP 2400 First Indiana Plaza 135 North Pennsylvania Street Indianapolis, IN 46204-2452 The Board of Directors Union Acceptance Corporation: We consent to incorporation by reference in the Registration Statement (No. 333-09717) on Form S-8 of Union Acceptance Corporation of our report dated July 30, 1997 relating to the consolidated balance sheets of the Union Acceptance Corporation and Subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of earnings and cash flows for each of the years in the three-year period ended June 30, 1997, and the related consolidated statement of shareholders' equity for the years ended June 30, 1997 and 1996, which report appears in the June 30, 1997 Annual Report on Form 10-K/A of Union Acceptance Corporation. /s/ KPMG Peat Marwick LLP Indianapolis, Indiana December 23, 1998 EX-27 3 RESTATED FDS FOR UNION ACCEPTANCE CORPORATION
5 This schedule contains summary restated financial information extracted from the Registrant's consolidated financial statements for the twelve month's ended June 30, 1997, and is qualified in its entirety by reference to such financial statements. 0000927790 Union Acceptance Corporation 1,000 U.S. Dollars 12-MOS JUN-30-1997 JUL-1-1996 JUN-30-1997 1.000 147,202 0 123,168 (780) 0 269,590 4,724 (2,574) 391,268 25,106 279,314 58,270 0 0 28,578 391,268 0 70,426 0 30,502 0 4,188 25,688 10,048 4,166 5,882 0 0 0 5,882 0.45 0.45
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