ITEM 1. BUSINESS
GENERAL
ACC Consumer Finance Corporation ("ACC") and its wholly owned subsidiaries OFL-A Receivables Corp. ("OFL-A") and ACC Receivables Corp. ("Receivables") (collectively the "Company") specialize in the indirect financing of installment contracts for automobile purchases ("Contracts"). These Contracts are originated primarily by franchised automobile dealers ("Dealers") on late-model used vehicles, as well as some new vehicles, for borrowers who might not be able to qualify for traditional automobile loans or leases ("Non-Prime Borrowers"). The Company's business strategy currently calls for the sale of virtually all Contracts through asset securitizations, rather than holding Contracts to maturity. To this end, the Company periodically securitizes pools of its Contracts in order to redeploy its capital, reduce interest rate risk and realize a gain on the sale of these Contracts. The Company believes that its competitive advantages include its national presence, risk-based pricing, financial resources, nationwide consistency of credit decisions and quality Dealer service.
NON-PRIME AUTOMOBILE FINANCE INDUSTRY
Automobile financing is one of the largest consumer finance markets in the United States, with $356 billion in automobile-related credit outstanding as of September 1996. In general, the automobile finance industry can be divided into two principal segments: a prime credit market and a non-prime credit market. Traditional automobile finance companies, such as commercial banks, savings and loans, thrift and loans, credit unions and captive finance companies of automobile manufacturers, generally provide credit to the most creditworthy borrowers, or so-called "prime borrowers."
The so-called "non-prime" credit market, in which the Company operates, provides financing to Non-Prime Borrowers, who are those borrowers who have had past credit problems (including bankruptcy), have limited or no credit histories and/or have low incomes. Historically, traditional automobile financing sources have not serviced the non-prime market or have done so only through programs that were not consistently available. An industry group of independent finance companies specializing in non-prime automobile financing has emerged, but the industry remains highly fragmented, with no company having a significant share of this non-prime market.
The Company estimates that the size of the non-prime automobile market may be as large as $70 billion in outstanding installment debt. The Company believes that the number of Non-Prime Borrowers is increasing due to, among other factors, declining real wages, the greater willingness on the part of consumers to seek bankruptcy protection, the high cost of new automobiles relative to consumer incomes and the greater availability of late-model used vehicles coming off short-term lease programs. The Company's program is designed to provide financing to this market segment.
PURCHASE OF CONTRACTS
Sales and Marketing
The Company markets its financing program primarily to franchised Dealers and to a limited number of independent used automobile Dealers. Before purchasing Contracts from a Dealer, ACC and the Dealer enter into an agreement ("Dealer Agreement") that provides the Company with recourse to the Dealer in cases of Dealer fraud or a breach of the Dealer's representations and warranties. As of December 31, 1996, the Company had 1,377 active Dealers, defined as Dealers from which the Company had purchased at least one Contract in the last six months, compared to 547 active Dealers as of December 31, 1995.
The Company typically solicits business from Dealers through its regional sales managers ("RSMs"), each of whom is assigned an exclusive territory. The Company typically hires RSMs who have experience with the purchase of non-prime Contracts and who have pre-existing, established relationships with Dealers in a particular major metropolitan area.
RSMs meet regularly with Dealers to provide information about the Company's program, train Dealer personnel as to the Company's program requirements and assist Dealers in identifying consumers who qualify for the Company's program. As of December 31, 1996, the Company marketed its program to Dealers in 31 states: Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and West Virginia. The Company targets major metropolitan areas because it believes they provide concentrations of high volume Dealers, which can be effectively serviced by its RSMs. The Company purchased $500,000 or more of Contracts from 26 states during the year ended December 31, 1996, compared to 18 states during the year ended December 31, 1995.
RSMs typically target the late-model used vehicle business of franchised Dealers. The Company believes that late-model used vehicles represent the largest segment of the used vehicle market, while posing less risk of default due to mechanical problems than do older used vehicles. The Company targets franchised Dealers because the financial requirements and customer service standards imposed on these dealers by automobile manufacturers generally result in a high level of financial stability and customer satisfaction. As a result, the Company believes that, in general, Contracts from these Dealers expose the Company to less risk of Dealer misrepresentation and lower levels of borrower default.
Dealer Reviews
Each month, senior management reviews Dealer performance reports that track, by Dealer, the number of applications submitted, the number of applications approved, the number of applications funded, the ratio of applications funded to applications received ("efficiency ratio"), delinquency ratios and default rates. Senior management maintains a Dealer "watch list" to track the performance of Dealers with low efficiency ratios, high delinquency ratios or high default levels relative to the overall portfolio.
Regional Credit Centers
The Company serves its Dealers on a regional basis through its regional credit centers. The Company believes that these regional centers provide a sufficient local market presence to meet the needs of its Dealers, without incurring the reduction in operating controls and economies of scale that can result from operating a large number of small branches. The Company currently has regional credit centers in Atlanta, Georgia; Dallas, Texas; Miami, Florida; Newark, Delaware; and San Diego, California.
Application Processing and Purchase Criteria
Dealers submit credit applications to one of the Company's regional credit centers, typically by facsimile. Upon the Company's receipt of a credit application, a credit processor uses an automated system to obtain credit histories, determine the wholesale value of the vehicle and calculate the credit score of the application. The Company's credit officers use the credit score as a guide to evaluate applications, but the approval/declination decision is not based solely on the credit score. Individual credit officers have limited approval authority. The approval of a more senior credit manager is required when the credit score or the amount financed exceeds the individual credit officer's approval limits. The Company's regional credit centers then notify Dealers by facsimile of a credit decision, usually within three hours of receipt of the application.
During the year ended December 31, 1996, the Company approved approximately 20% of the applications it received and funded approximately 66% of the applications that were approved. The Company believes Dealers select among finance companies based upon price, term, advance, down payment requirements, stipulations, timeliness of the finance company's approval and the historic reliability of the finance company's funding of purchases.
The Non-Prime Borrowers under Contracts of the type typically purchased by the Company generally have credit histories which include past bankruptcies, significant charged-off accounts and/or multiple collection accounts. Further, other Contracts may be purchased by the Company for borrowers with limited or no credit histories. In light of the deficiencies in the borrowers' credit histories, the Company's credit officers evaluate other
potential offsetting factors such as the borrowers' residence stability, employment stability, income level relative to expenses and past performance on other automobile-related debt. If, in the credit officers' judgment, there are enough mitigating positive factors, such Contracts may be approved for purchase by the Company.
To be eligible for purchase, a Contract must be fully amortizing and provide for level payments over the term of the Contract, must grant a first priority security interest in the financed vehicle to OFL-A, must prohibit the sale or transfer of the financed vehicle without the Company's consent and must allow for acceleration of the maturity of the Contract if the vehicle is sold or transferred without this consent. The portions of payments on Contracts allocable to principal and interest are, for payoff and deficiency purposes, determined in accordance with the law of the state in which the Contract was originated.
Each Contract includes a requirement that the borrower maintain fire, theft and collision insurance on the financed vehicle and name the Company as a loss payee. As part of the funding process, the Company verifies by telephone that insurance is in place on the financed vehicle; however, as of December 31, 1996, approximately 12% of borrowers had canceled their insurance or allowed their insurance policies to lapse, compared to 20% as of December 31, 1995. Although the Contracts permit the Company to force-place insurance, the Company, as a matter of policy, generally does not force-place insurance due to the added collection and litigation risk.
Funding Package Completion, Verification and Funding
After receiving an approval from one of the Company's regional credit centers and compiling a set of documents the Dealers believe to be consistent with the Company's documentation requirements, the Dealers send these funding packages to the Company's central funding group in San Diego. The Company generally requires that funding packages include proof of the borrower's residency, income, insurance and title.
The Company's funding department reviews each Contract and verifies the application data and Contract documentation. The funding department also confirms or reconfirms the borrower's employment and the insurance on the vehicle. The Company believes one of the most important verifications is a direct telephone interview of the borrower to confirm the terms of the Contract, the source of the down payment and the equipment on the vehicle. The Company typically will not fund a Contract without a prior telephone interview of the borrower. The Company believes this process reduces the risk of misrepresentation by Dealers and/or borrowers and provides a basis for future borrower contact.
A funding package may be returned if it does not comply with the terms of the initial approval or if the Company discovers facts that were not disclosed during the approval process. The Company returns unfunded approximately 10% of all completed funding packages for these reasons, a portion of which are later resubmitted in approvable form. As an additional quality control check, the Company's data processing systems perform an automated review of the Contracts and identify any characteristics not in compliance with the Company's minimum underwriting standards.
Post-Funding Quality Reviews
The Company uses its automated systems to continue to monitor Contracts after funding. In addition, the Company's quality control manager completes a full quality control review of a random sample of 5% of the newly-originated Contracts. This review focuses on compliance with underwriting standards, the quality of the credit decision and the completeness of Contract documentation. On a periodic basis, the Company's quality control manager issues a report to the Company's senior management summarizing (by credit officer) policy exceptions, processing errors, documentation deficiencies and credit decisions which the quality control manager considered overly aggressive. The bonuses of the Company's credit officers are, in part, dependent upon results of these quality control reviews.
Risk-Based Pricing
The Company uses statistical information and its automated Contract purchasing systems to establish different pricing programs by geographic region, by borrower credit characteristics or, in some cases, by Dealer; all tied to the expected economic value of each program to the Company.
The Company maintains a database which tracks key underwriting parameters for each Contract purchased since the formation of the Company. This database is updated periodically to reflect the payment performance of each Contract. The Company uses this information to identify and aggregate a pool of Contracts that have failed to perform as anticipated. Each Contract in this pool is then matched against a performing Contract with the same date of purchase. By statistically comparing the characteristics of these two pools over time, the Company is able to refine periodically its credit evaluation processes and believes it is better able to price each of its programs based upon the expected risk of each program.
CONTRACT PORTFOLIO
The following table sets forth certain data for the Contracts purchased by the Company for the periods indicated.
The Company expects from time to time to make changes to its underwriting guidelines and program requirements to respond to competitive conditions in the non-prime automobile financing market. These changes are likely to affect the characteristics of the portfolio, may increase portfolio risk and/or reduce the Company's discounts and interest margins. In the quarter ended September 30, 1996, the Company instituted several programs that provided its Dealers with greater pricing options than were previously available, introduced certain new programs and provided more attractive pricing on certain existing programs. As expected, this had the effect of lowering the average discount and acquisition fees on Contracts purchased.
CONCENTRATIONS OF CONTRACT PURCHASES
The following table sets forth information by state concerning Contract purchases and servicing portfolio amounts (including Contracts owned and Contracts sold in asset-backed securities) outstanding for the period and at the date indicated.
The Company attempts to develop a broad base of Dealers to avoid dependence on a limited number of Dealers. As of December 31, 1996, no one Dealer accounted for more than 3% of the Company's Contract portfolio and the ten Dealers from which the Company purchased the most Contracts accounted for approximately 10% of total Contracts purchased. The Company's financing program concentrates on purchases of Contracts for late-model used vehicles that are originated by franchised Dealers. As of December 31, 1996, 88% of Contracts serviced by the Company financed used late-model vehicles and 97% were acquired from franchised Dealers.
CONTRACT SERVICING
General
ACC services all of the Contracts the Company originates, whether owned by the Company or sold in an asset-backed security. ACC's servicing generally consists of payment and pay-off processing, collecting, insurance tracking, title tracking, responding to borrower inquiries, investigating delinquencies, repossessing and reselling collateral, collection reporting and credit performance monitoring.
Billing and Collection Process
The Company sends each borrower a monthly bill, rather than using payment coupon books. All payments are directed to the Company's lock-box account at a regional commercial bank. On a daily basis, the lock-box bank retrieves and processes payments received, and then deposits the entire amount into the lock-box account. A simultaneous electronic data transfer of borrower payment data is made to the Company for posting to the Company's computerized records.
The Company's collection process is based on a strategy of closely monitoring Contracts and maintaining frequent contact with borrowers. As part of this process, the Company makes early, frequent contact with delinquent borrowers and attempts to educate borrowers on how to manage monthly budgets. The Company attempts to identify the underlying causes of a borrower's delinquency and to make an early collection risk assessment. The Company believes that its proactive collection process, including the early identification of payment problems, reduces its repossession rates and loss levels.
In support of its collection efforts, the Company maintains collection software with customized features designed for high-intensity collection operations, which includes a high-penetration autodialer. With the aid of the autodialer, the Company initially attempts to contact any borrower whose account becomes six days past due.
Although the Company emphasizes telephonic contact, the Company also typically sends past due notices to borrowers when an account becomes ten days past due. In some cases, the Company uses the Western Union
Quick Collection Service to collect borrowers' payments and to reduce the incidence of bad checks. When necessary, the Company uses a network of independent agencies to make field visits to borrowers.
Extensions and Modifications
If a borrower has current financial difficulties, but has previously demonstrated a positive history of payment on the Contract, the Company will permit a payment extension of not more than two months during the term of a Contract. Senior management of the Company must approve each extension and less than 2% of the Contracts in the Company's servicing portfolio had been extended as of December 31, 1996. Further, the Company typically permits only one extension over the term of a Contract and the Company neither restructures Contracts nor forbears any payments on Contracts.
Repossession
The Company repossesses a vehicle when resolution of a delinquency is not likely or when the Company believes that its collateral is at risk. The Company makes these judgments based upon its collectors' discussions with borrowers, the ability or inability to locate the borrowers and/or the vehicles, the receipt of notices of liens and other information. The Company uses independent, licensed and bonded repossession agencies to repossess vehicles as well as the services of an agency that traces skips (where neither the borrower nor the vehicle can be located) to supplement its own efforts in locating vehicles. When a vehicle is repossessed, it generally is sold through a public auction within 60 days of the repossession. The Company uses its own staff to pursue recoveries of deficiency balances and also uses outside collection agencies which share in any recoveries. If the Company has reason to believe that a Dealer violated any representations or warranties made to the Company on a defaulted Contract, the Company may pursue its remedies against the Dealer under the Dealer Agreement.
The Company employs the same policies for charging-off Contracts on both Contracts it owns and on Contracts sold in asset-backed securities. The Company expects to incur a loss whenever it repossesses a vehicle. When the Company sells a repossessed vehicle, it records a net loss equal to the outstanding principal balance of the Contract, less the proceeds from the sale of the vehicle.
If an account becomes 120 days delinquent (other than accounts in bankruptcy) and the Company has repossessed the vehicle, but not yet received the sale proceeds, the Company will record a loss equal to the outstanding principal balance of the Contract, less the estimated auction value of the vehicle (which is based upon wholesale used car values published by nationally recognized firms) and any expected recoveries under its VSI insurance. This VSI insurance protects the Company's interest in the collateral against uninsured physical damage (including total loss). If an account becomes 120 days delinquent and the Company has not repossessed the vehicle, then the Company records a loss equal to the outstanding principal balance of the Contract. Any recoveries received subsequent to the Contract being charged-off, including amounts (i) from the borrower's insurance policies or service contracts, (ii) from Dealers under a breach of the Dealer Agreements or (iii) from deficiency balances recovered from borrowers, are treated as loss adjustments in the period when these recoveries are received. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" for a discussion of VSI insurance.
MANAGEMENT INFORMATION SYSTEM
The Company relies on automated information management and data processing systems to maximize productivity, minimize credit losses and maintain data integrity. The Company operates its information management, accounting and data processing systems on a Model 300, IBM AS400 ("AS400").
The Company uses its own proprietary Application Processing System and Contract Management System, both of which operate on the AS400. The Application Processing System tracks applications through the approval process and provides status reports to sales and credit administration personnel on approved and declined Contracts. This system is also used for credit scoring and credit review. The Application Processing System electronically transmits all data to the Contract Management System. The Contract Management System analyzes Contracts for
compliance with the Company's underwriting standards, tracks key underwriting characteristics for all funded Contracts, tracks approval trends, analyzes charge-offs, monitors delinquencies and measures pool performance.
The Company uses the Universal Loan Accounting package resident on the AS400 for all aspects of its loan accounting and payment processing. The Company's general ledger is maintained on the MAS-90 General Ledger package. The Company uses collection software that operates on the AS400. The Company also has installed IBM's ImagePlus(TM) imaging system on the AS400 to make Contract documents available on-screen, decrease data entry costs and aid disaster recovery. Further, the Company has installed video teleconference and document sharing systems, which facilitate interaction between the Company's headquarters and its regional credit centers. In its collection efforts, the Company uses a Telerelations, Inc. high-penetration autodialer, which is a PC-LAN-based system interfaced to the AS400.
The Company backs up its systems on a daily basis and stores the backup tapes off-site. The Company also has implemented a disaster recovery plan that is intended to restore critical business operations within 48 hours of a disaster. In an emergency, IBM will deliver replacement parts for the AS400 within 24 hours. Additionally, the Company has the contractual right to access SunGard's nationwide recovery facilities, which are fully equipped and permit access to hardware, software and telephones. The Company has made a significant investment in its hardware and software systems and intends to continue to upgrade these systems as its needs dictate.
SECURITIZATION OF CONTRACTS
In June 1995, the Company began selling its portfolio of Contracts to investors through the issuance of asset-backed securities. The periodic securitization of Contracts is an integral part of the Company's business plan. The issuance of these securities enables the Company to redeploy capital, reduce its interest rate risk and recognize gains from the sale of the Contracts. Through December 31, 1996, the Company had completed six securitizations, involving Contracts aggregating approximately $292 million.
These asset-backed securities are treated as sales of the Contracts and Contracts sold in a security are removed from the consolidated balance sheet of the Company. The asset-backed securities are generally structured as follows: ACC repurchases a pool of Contracts from its interim financing facility and simultaneously sells the pool to Receivables, which then sells the pool to a trust in exchange for interest-bearing certificates of an amount equal to the aggregate principal balance of the Contracts. The certificates are then sold to one or more institutional investors. The principal and interest due on these certificates are guaranteed by Financial Securities Assurance, Inc. ("FSA") and, as a result, are rated "AAA" by Standard & Poor's Ratings Group and "Aaa" by Moody's Investors Service. The certificates sold to investors have fixed pass-through interest rates, which through December 31, 1996, have ranged from 5.95% to 6.90%.
The Company retains the right to service the Contracts sold to the trusts and receives monthly base servicing fees of approximately 3% per annum on the outstanding balance of Contracts sold in asset-backed securities. In addition, Receivables (or OFL-A, if Receivables' rights are assigned to OFL-A for pledge under the NIM Facility (as defined herein)) is entitled to receive excess interest arising from collections, to the extent that these collections exceed payments to investors, contributions to the credit enhancement cash reserves, base servicing fees and certain other fees. Generally, certificates are sold to investors without recourse, except that the representations and warranties provided by Dealers to the Company are similarly provided by the Company to the investors and to FSA, along with certain indemnities. These indemnities are secured by a pledge of all of the stock of Receivables. Receivables is obligated to repurchase a Contract from the trust if the Contract fails to conform to normal representations and warranties relating to the collateral. Receivables bears the risk of loss on Contracts it repurchases.
Each issuance of securities results in the recognition of a "net gain on sale of Contracts" on the Company's consolidated statement of operations for the period in which the sale was made. The discounted present value of the excess cash flow expected from the security is recognized as an increase in the Excess Servicing Receivables ("ESRs") on the Company's consolidated balance sheet. Because the interest rate on the Contracts is relatively high in comparison to the pass-through interest rate paid to investors, the net gain on sale can be significant. In calculating this net gain on sale, the Company must estimate the future rates of prepayments, delinquencies, defaults
and loss severity as they impact the amount and timing of the cash flows used in the gain on sale calculation. The cash flows expected to be received by Receivables, before expected losses, are then discounted at a market interest rate that the Company believes an unaffiliated third-party purchaser would require as a rate of return on such a financial instrument. Expected losses are discounted using a risk-free rate which is equivalent to the rate earned on securities rated AAA or Aaa or better, with a duration similar to the estimated duration for the underlying Contracts. (See Footnote 1(i) of the Notes to the Consolidated Financial Statements.)
In future periods, the Company will recognize additional revenue if the actual performance of the Contracts is better than that originally estimated. If the actual performance of the Contracts is worse than originally estimated, then the Company will be required to recognize a write-down against the ESRs, which would result in a reduction in net income during the period in which the write-down occurred.
Under the servicing agreement for each security, the Company is obligated to service all Contracts sold to the trusts in accordance with the Company's standard procedures. The servicing agreements generally provide that the Company will bear all costs and expenses incurred in connection with the management, administration and collection of the Contracts serviced. The servicing agreements can be terminated by the investor in the event of certain defaults by the Company and under certain other circumstances.
COMPETITION
The automobile financing business is highly competitive. The Company competes with a growing number of publicly and privately held national, regional and local automobile finance companies that specialize in non-prime automobile finance, many of which compete directly with the Company for Contracts. These competitors include AmeriCredit Corp., AutoFinance Group (a subsidiary of KeyCorp), Consumer Portfolio Services, Inc. and First Merchants Acceptance Corp. The Company does not believe that any of the finance companies specializing in Non-Prime Borrowers currently has more than a 2% market share.
In addition, the Company competes, or may compete in the future, for business with more traditional automobile financing sources, such as commercial banks, savings and loans, thrift and loans, credit unions and captive finance companies of automobile manufacturers such as General Motors Acceptance Corporation, Ford Motor Credit Corporation, Chrysler Financial Corporation, Toyota Motor Credit Corporation, Nissan Motors Acceptance Corporation and American Honda Finance. These traditional automobile finance companies may lower credit standards or introduce programs for Non-Prime Borrowers to attract more financing business or, in the case of the captive finance companies, to stimulate new vehicle sales.
Many of the Company's competitors and potential competitors have substantially greater financial, marketing and other resources than the Company and may be more successful in expanding into new geographic markets, building Dealer networks and increasing market share through internal growth or acquisition. The larger, more established companies have access to unsecured commercial paper, investment-grade corporate debt and to other funding sources that may provide them with an advantageous cost of capital relative to the Company's cost of capital.
The captive finance companies and many of the other traditional automobile finance companies have long-standing relationships with Dealers that may give them a competitive advantage in establishing dealer networks for the purchase of Contracts. Many of these companies provide other types of financing, including inventory financing, which is not offered by the Company.
The Company believes that the industry competes for Dealers on the basis of the price charged to the Dealer for the purchase of Contracts (which is a function of the Contract purchase discount to the face value of a Contract and any applicable fees), advance limitations, down payment requirements, stipulations, the timeliness of the finance company's response to an application, the approved Contract terms, documentation requirements for purchase of the Contract and the historic reliability of the finance company's funding of purchases. The Company believes that its competitive advantages include geographic diversification, risk-based pricing, financial resources, nationwide consistency of credit decisions and quality Dealer service.
GOVERNMENT REGULATION
The Company has obtained and maintains licenses and registrations required by certain states' sales finance company laws and/or laws regulating purchases of installment or conditional sales contracts. The Company intends to obtain and maintain any and all additional qualifications, registrations and licenses necessary for the lawful conduct of its business and operations.
Numerous federal and state consumer protection laws, including the Federal Truth-In-Lending Act, the Federal Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Federal Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Federal Reserve Board's Regulations B and Z, and state motor vehicle retail installment sales acts, retail installment sales acts and other similar laws regulate the origination and collection of consumer receivables and impact the Company's business. The relevant laws, among other things, (A) require the Company to (i) obtain and maintain certain licenses and qualifications, (ii) limit the finance charges, fees and other charges on the Contracts purchased and (iii) provide specified disclosures to consumers; (B) limit the terms of the Contracts; (C) regulate the credit application and evaluation process; (D) regulate certain servicing and collection practices; and (E) regulate the repossession and sale of collateral. These laws impose specific statutory liabilities upon creditors who fail to comply with their provisions and may give rise to defense to payment of the consumer's obligation. In addition, certain of the laws make the assignee of a consumer installment contract liable for the violations of the assignor.
The Dealer Agreement contains representations and warranties by the Dealer that, as of the date of assignment, the Dealer has complied with all applicable laws and regulations with respect to each Contract. The Dealer is obligated to indemnify the Company for any breach of any of the representations and warranties and to repurchase any non-conforming Contracts. The Company generally verifies Dealer compliance with usury laws, but does not audit a Dealer's full compliance with applicable laws. There is no assurance the Company will detect all Dealer violations or that individual Dealers will have the financial ability and resources either to repurchase Contracts or indemnify the Company against losses. Accordingly, failure by Dealers to comply with applicable laws, or with their representations and warranties, could have a material adverse effect on the Company.
The Company believes it is currently in compliance in all material respects with applicable laws, but there can be no assurance that the Company will be able to maintain such compliance. The failure to comply with such laws, or a determination by a court that the Company's interpretation of law was erroneous, could have a material adverse effect upon the Company. Furthermore, the adoption of additional laws, changes in the interpretation and enforcement of current laws or the expansion of the Company's business into jurisdictions that have adopted more stringent regulatory requirements than those in which the Company currently conducts business, could have a material adverse effect upon the Company.
If a borrower defaults on a Contract, the Company as the servicer of the Contract is entitled to exercise the remedies of a secured party under the Uniform Commercial Code ("UCC"), which typically includes the right to repossession by self-help means unless such means would constitute a breach of peace. The UCC and other state laws regulate repossession and sales of collateral (A) by requiring reasonable notice to the borrower of (i) the date, time and place of any public sale of the collateral, (ii) the date after which any private sale of the collateral may be held and (iii) the borrower's right to redeem the financed vehicle prior to any such sale; and (B) by providing that any such sale must be conducted in a commercially reasonable manner. Financed vehicles repossessed generally are resold by the Company through unaffiliated wholesale automobile networks or auctions which are attended principally by used automobile Dealers.
Under the UCC and other laws applicable in most states, a creditor is entitled, subject to possible prohibitions or limitations, to obtain a deficiency judgment from a borrower for any deficiency on repossession and resale of the vehicle securing the unpaid balance of the borrower's installment contract. Since a deficiency judgment against a borrower would be a personal judgment for the shortfall, and the defaulting borrower may have very little capital or few sources of income, in many cases it is not prudent to seek a deficiency judgment against a borrower or, if one is obtained, it may be settled at a significant discount.
FORWARD LOOKING INFORMATION AND RISK FACTORS
The "Business" section, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as other sections of this Form 10-K contain forward looking information under the Securities Litigation Reform Act of 1995. These forward looking statements include statements relating to the Company's underwriting, purchasing, pricing and collection strategies, the seasonality of delinquency rates, the relationship of delinquency rates to charge offs, the factors affecting charge-off levels, the adequacy of estimates used to determine credit loss allowances, the adequacy of projections used to calculate gain on sale of Contracts and valuation of ESRs and other financial instruments, the Company's liquidity and cash requirements, expectations as to the timing of the release of funds from credit enhancement cash reserves, the Company's hedging strategies and implicit statements that historical trends will continue unless otherwise stated. Each of such statements is subject to risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward looking statements. Factors that might cause such a difference include, without limitation, the following risk factors:
Credit Risk
The Company specializes in the indirect financing of Contracts for consumers who typically have had past credit problems (including bankruptcy), have limited or no credit histories and/or have low incomes. Consequently, a high credit risk is inherent in the Contracts purchased by the Company. The performance of Contracts serviced by the Company or purchased in the future may be directly affected by unemployment trends and other economic factors beyond the Company's control. These factors could impair the Company's ability to predict or manage effectively the default rates of its Contracts and could cause the Company to incur increased operating expenses associated with the servicing of these Contracts. An increase in delinquencies, default rates or charge-offs in its Contract portfolio could trigger defaults under the Company's secured financing facilities and asset securitizations or constitute triggering events in the asset securitizations. Any such default or triggering event would increase the restrictions on the Company's access to cash from credit enhancement cash reserves and adversely affect the Company's cash flow. There is no assurance that the Company's credit evaluation and collection processes will prevent excessive defaults or be adequate to maintain existing delinquency or charge-off rates as the servicing portfolio grows or that the Company will be able to purchase Contracts with yields commensurate with the portfolio credit risk.
Interest Rate Risk
Two primary components of the Company's earnings are: (i) net yield on Contracts, which is the spread between the interest earned on the Contracts in the Company's portfolio and the interest paid by the Company on the Repurchase Facility (as defined in Management's Discussion and Analysis of Financial Condition and Results of Operations) and (ii) gain on sale, which is based upon the spread between the interest earned on the Contracts included in asset-backed securities and the pass-through rate paid to the investors in these securities. The Company's net interest income and future gains on sale could be adversely affected by rising interest rates, because while the interest rates on the Contracts in the Company's portfolio are fixed, a portion of the Company's cost of funds is variable. There is no assurance that the Company's cost of funds will not have an adverse effect on the Company's ability to maintain profitability.
The Company has adopted a hedging program to mitigate the risk of reduced income from changes in interest rates during the period after a Contract is purchased and prior to the time it is sold in an asset-backed security. There is no assurance that this hedging program will benefit the Company or offset entirely corresponding losses with respect to Contracts affected by an interest rate fluctuation; or that the hedging program itself will not cause the Company to incur losses.
Liquidity and Capital Resources
NEGATIVE OPERATING CASH FLOWS. The Company's business requires substantial cash to support the funding of credit enhancement cash reserves and issuance costs for its asset securitizations, operating expenses, tax payments due in recognition of gain on sales of Contracts (for which no cash is received by the Company at the time of the sale), debt service and other cash requirements, including, potentially, a portion of the purchase price of the Contracts. These cash requirements increase as the volume of Contracts purchased and serviced by the Company increase. Historically, the Company has operated on negative cash flow and, depending upon the Company's growth of Contract purchase volumes, the structure of its interim financing facility and its Contract securitization program, its negative cash flow may continue into the foreseeable future. The Company has funded its negative operating cash flows principally through borrowings under the NIM Facility (and the bridge facility retired by the NIM Facility) and proceeds from the sale of debt and equity securities. In order to execute its business strategy, the Company is dependent upon the Repurchase Facility (and the replacement of the Repurchase Facility in 1997 if the Company elects to exercise its option to terminate), its asset securitization program, its ongoing ability to access capital markets to obtain long term debt and equity capital and, possibly, the sale of Subordinated Securities. Factors that affect the Company's access to capital markets or the cost of capital include, among others, interest rates, general economic conditions and the Company's results of operations, financial condition, business prospects (including competitive conditions), leverage and the performance of its asset securitizations. In addition, covenants in the subordinated notes and in future debt securities and financing facilities may significantly restrict the Company's ability to incur additional indebtedness or issue new equity securities.
DEPENDENCE UPON FINANCING FACILITIES. To date, the Company has financed its acquisition of Contracts primarily through the Repurchase Facility. Cargill Financial Services Corp. ("Cargill") finances 100% of the purchase price of the Contracts under the Repurchase Facility. In January 1997, the Company entered into an agreement with Cargill modifying the existing repurchase facility between the Company and Cargill. Under the terms of the agreement, the Company will have the right, at its option, to terminate the Repurchase Facility at any time through May 31, 1997, by providing Cargill with 14 days written notice. The Company intends to exercise this option if a facility with a lower cost of funds can be found to replace the Repurchase Facility. The Company anticipates that a replacement facility would limit financing to approximately 93% of the purchase price of the Contracts. This would require the Company to use cash resources for a portion of Contract purchases. The Company has also used the proceeds of the NIM Facility with Cargill to finance credit enhancement and securitization expenses arising from the issuance of asset-backed securities and for working capital. A breach under either the Repurchase Facility or the NIM Facility could prohibit the Company from obtaining financing under both of the facilities.
DEPENDENCE UPON ASSET SECURITIZATIONS. The Company recently has relied and expects to continue to rely on the issuance of asset-backed securities as a means of providing long-term, fixed rate financing of Contracts and generating servicing revenues. Gains from the issuance of these securities are expected to generate a significant portion of the Company's revenues. The gain on sale, however, does not generate any cash in the short term and, under its current structure, is subject to taxation, and thus, contributes to negative cash flow. The timing of the issuance of any asset-backed security is affected by a number of factors, some of which are beyond the Company's control, including, among others, conditions in the asset-backed securities market, interest rates and approvals from third parties. Some or all of these factors may cause delays in closing a securitization or may even prevent such transactions entirely. Further, the Company's asset securitization program could be adversely affected by the performance of its existing securitizations, any significant changes in its credit enhancement requirements and/or the loss of its guaranty relationship with FSA.
Competition and Consolidation of Industry
The automobile financing business, and the non-prime credit segment in which the Company operates, are highly competitive. The Company competes with a growing number of publicly and privately held national, regional and local companies that specialize in non-prime automobile finance. In addition, the Company competes, or may compete in the future, for business with more traditional automobile financing sources, such as commercial banks and automobile manufacturers' captive finance companies. Many of the Company's competitors and
potential competitors have substantially greater financial, marketing and other resources than the Company, and may be more successful in expanding into new geographic markets, building dealer networks and increasing market share through internal growth or acquisition. The larger, more established companies have access to capital markets for unsecured commercial paper, investment-grade corporate debt instruments and to other funding sources that may provide them with an advantageous cost of capital relative to the Company's cost of capital. The non-prime finance segment of the automobile financing industry, which is currently highly fragmented, may be subject to significant future consolidation.
Geographic Concentration
The Company's Contract purchases currently are concentrated in California, Texas, Florida and Pennsylvania. As of December 31, 1996, 61% of the Contracts serviced by ACC were purchased from Dealers in these states. An economic slowdown or recession, or a change in the regulatory or legal environment, in one or more of these states could have a material adverse effect on the performance of the Company's existing Contract portfolio and on its Contract purchases.
Impact of Government Regulation and Litigation
The Company's business is subject to numerous federal and state consumer protection laws and regulations which are subject to change. An adverse change in or interpretation of existing laws or regulations, the promulgation of any new laws or regulations, or the failure to comply with any of such laws and regulations could have an adverse effect on the Company's business and its financial condition.
Given the consumer-oriented nature of the industry, industry participants are from time to time named as defendants in litigation involving alleged violations of federal and state consumer protection or other similar laws and regulations. A judgment against the Company in connection with any litigation could have a material adverse effect on the Company's financial condition and its results of operations. In addition, if it were determined that a Dealer failed to comply with applicable laws or a number of Contracts purchased by the Company involved violations of applicable laws, the Company's financial condition and results of operations could be materially adversely affected. Further, an adverse judgment against a competitor relating to a standard business practice in the industry could have a material adverse effect on the non-prime automobile finance industry and on the Company.
Dependence on Key Personnel
The Company is dependent upon its founding executive officers, Rocco J. Fabiano, Gary S. Burdick and Rellen M. Stewart (the "Founders"). The loss of the services of one or more of the Founders could have a material adverse effect on the Company's business and there is no assurance that the Company would be able to replace any of the Founders without incurring additional costs or without disruptions to the Company. The Company maintains key man life insurance in the amount of $500,000 on each of the Founders.
The Company's ability to implement its business strategy depends upon its ability to attract and retain a sufficient number of qualified employees to maintain its underwriting standards and collection procedures and to support its expansion into new geographic markets. There is no assurance that the Company will be able to recruit and retain such personnel.
Dependence on Dealer Relationships
The Company's ability to expand into new geographic markets and to maintain or increase its volume of Contract purchases is dependent upon maintaining and expanding the network of Dealers from which it purchases Contracts. The Company's loss of any of its RSMs could adversely affect the Company's relationships with participating Dealers and future purchases of Contracts. Increased competition, including without limitation, competition from captive finance companies and other factors, could have an adverse effect on the Company's ability to maintain or expand its Dealer network.
Changes In Market Conditions
The Company's business of financing automobile sales is directly related to the automobile industry's sales of new and used automobiles. Automobile sales are cyclical in nature and are affected by general economic conditions, including employment rates, interest rates, real wages and other economic conditions. An increase in interest rates, economic slowdown or recession could adversely affect automobile sales and, in turn, reduce the number of Contracts available for purchase by automobile finance companies such as the Company. A change in general economic conditions also could affect adversely the performance of the portfolio of Contracts owned and serviced by the Company, including Contracts sold in asset-backed securities.
Reliance on Systems and Controls
The Company depends heavily upon its systems and controls, many of which are designed specifically for its business. These systems and controls support the evaluation, acquisition, monitoring, collecting and administering of the Company's portfolio as well as support general accounting and other management functions of the Company. There is no assurance that these systems and controls, including those specially designed and built for the Company, are adequate or will continue to be adequate to support the Company's growth. A failure of the automated systems, including a failure of data integrity or accuracy, could have a material adverse effect upon the Company's business and financial condition.
EMPLOYEES
As of December 31, 1996, the Company had 225 full-time employees. The Company believes that its relations with its employees are good. The Company is not a party to any collective bargaining agreement.
ITEM 2.
ITEM 2. PROPERTY
The Company's headquarters are located in San Diego, California, where it leases approximately 25,000 rentable square feet of general office space from unaffiliated lessors. The headquarters leases expire at various times between January 1998 and March 2002. The base monthly rent for all San Diego properties leased by the Company is $37,000. The Company has an option to extend most of the headquarters lease for an additional three years upon terms substantially similar to those of the existing lease. The Company also leases from unaffiliated lessors four offices that it uses as regional credit centers, located in Dallas, Texas; Atlanta, Georgia; Miami, Florida; and Newark, Delaware. The office in Dallas consists of approximately 2,075 rentable square feet for which the lease expires January 1, 1998. The base monthly rent is $2,334. The Company has an option to renew the lease for an additional three years, on substantially similar terms. The office in Atlanta consists of approximately 2,100 rentable square feet for which the lease expires January 31, 1998. The monthly rent is $2,481. The office in Miami consists of approximately 1,662 rentable square feet for which the lease expires June 10, 2001. The base monthly rent is $2,100. The office in Newark consists of approximately 3,414 rentable square feet for which the lease expires April 15, 1999. The base monthly rent is $5,050.
The Company plans to enter into an agreement to lease new corporate headquarters space in San Diego, California from an unaffiliated lesser. The building is currently under construction and the Company is expected to move and begin paying rent in October 1997. The new office space consists of approximately 37,000 rentable square feet. The base monthly rent is approximately $61,000, subject to annual increases. The lease would expire in October 2005. The Company plans to sublease its existing headquarters office space which it has outgrown.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Form 10-K, the Company is involved as a defendant in certain litigation and threatened litigation arising in the normal course of business. While the outcome of the pending and threatened litigation cannot be predicted with certainty, the Company's management believes that all pending and threatened claims will be resolved on terms and for amounts that will not have a material effect on the Company's business or consolidated financial condition.
The Company regularly initiates and intends to continue initiating legal proceedings as a plaintiff in connection with its routine collection activities.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's common stock is traded on the Nasdaq National Market under the symbol ACCI. The high, low and daily average bid prices of the common stock for the year ended December 31, 1996 are listed below.
(1) Began trading as a public company on May 17, 1996.
As of March 14, 1997, there were approximately 34 stockholders of record of the Company's common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth certain summary consolidated financial information for the Company. The following information as of December 31, 1996, and 1995, and for the years ended December 31, 1996, and 1995, the six-month transition period ended December 31, 1994, and for the period from July 15, 1993 (inception), through June 30, 1994, has been derived from the Company's Consolidated Financial Statements which have been audited by KPMG Peat Marwick LLP, independent auditors, whose report with respect thereto appears elsewhere in this Form 10-K. The information as of December 31, 1994, and June 30, 1994, has been derived from audited Consolidated Financial Statements of the Company which are not presented herein. The consolidated financial data should be read in conjunction with the Consolidated Financial Statements and related notes thereto and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
(1) As of January 1, 1995, the Company changed its fiscal year end from June 30 to December 31. Each of the periods ended June 30, 1994, December 31, 1994, and December 31, 1995, is an audited period.
(2) Due to the significant changes in the capital structure of the Company upon the closing of the initial public offering, historical net income (loss) per share prior to the year ended December 31, 1995, is not presented.
(3) For the six-month transition period ended December 31, 1994 and the period from July 15, 1993 (inception) through June 30, 1994, earnings were not sufficient to cover fixed charges as the Company recognized a net loss in both periods.
(4) The calculation of return on average equity for December 31, 1995, includes redeemable Preferred Stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From the inception of the Company on July 15, 1993, through April 30, 1995, the primary source of revenue for the Company was net interest income on the Contracts owned by the Company. In May 1995, the Company initiated an asset-backed securitization program by which the Company sells its Contracts and retains subordinate asset-backed securities ("Subordinated Securities") or performing Contracts pledged as credit enhancements ("Spread Receivables"), excess servicing receivables ("ESRs") and credit enhancement cash reserves. Through December 31, 1996, the Company has sold $292 million of Contracts through asset securitizations. Since initiation of the asset-backed securitization program, the Company's earnings have been increasingly attributable to the gains recognized on the sale of the Contracts and servicing revenues generated in conjunction with servicing those sold Contracts. In contrast, interest income is expected to be a declining portion of total revenues.
Until such time as the Contracts are sold in asset-backed securities, Contracts are pledged as collateral to, and are financed under, a financing facility ("Repurchase Facility"). Unless terminated prior to May 31, 1997, (See Footnotes 9 and 19 to the notes to consolidated financial statements) at the option of the Company, the Repurchase Facility extends through July 15, 1998. The Company also has the option of pledging the Subordinated Securities, ESRs and credit enhancement cash reserves for borrowings under a separate financing facility ("NIM Facility"), which expires in May 1998.
On May 16, 1996, the Company sold, in an initial public offering, 2,000,000 shares of its Common Stock which generated net proceeds of approximately $12.5 million. The proceeds were used to partially pay-down the NIM Facility (included in Other Borrowings on the Company's Consolidated Balance Sheet), temporarily reduce advances on the Repurchase Facility and for other general corporate purposes. In addition, each share of the Company's redeemable Preferred Stock automatically converted into 23 shares of Common Stock upon consummation of the offering. Total cumulative dividends of $574,454 were paid to the holders of the redeemable Preferred Stock subsequent to the conversion. On November 18, 1996, the Company issued $20 million of 10.25% subordinated notes due 2003 (the "Notes") in a public offering which generated net proceeds of approximately
$19.0 million after deducting the underwriting discount and issuance costs. The proceeds were used to pay-off the outstanding balance of the NIM Facility, temporarily reduce advances on the Repurchase Facility and for other general corporate purposes.
RESULTS OF OPERATIONS
The Year Ended December 31, 1996, Compared to the Year ended December 31, 1995
During the year ended December 31, 1996, income before taxes increased 139% to $8.8 million. This increase is primarily due to increases in the gain on sale of Contracts and servicing and ancillary fees totaling $10.3 million which resulted from an increase in the sale of Contracts and an increase in the average balance of sold Contracts ("Servicing Portfolio"). During the year ended December 31, 1996, Contracts sold were $191 million and the average Servicing Portfolio was $142 million, compared to $101 million sold and an average Servicing Portfolio of $45 million during the same period in 1995. Partially offsetting these increases was an increase in operating expenses of $6.1 million as a result of the Company's expanded purchasing and servicing operations. The Company reported net income after taxes of $5.1 million during the year ended December 31, 1996, compared to $3.5 million for the year ended December 31, 1995. Primary net income per common share and common share equivalent was $0.68 per share for the year ended December 31, 1996, based upon a weighted average of 7,542,371 primary shares outstanding, compared to $0.61 per share for the year ended December 31, 1995, based upon a weighted average of 5,661,046 primary shares outstanding.
NET INTEREST INCOME. The Company earned approximately $4.7 million of net interest income during the year ended December 31, 1996, compared to $3.3 million during the year ended December 31, 1995. The principal source of the Company's net interest income was the net yield on Contracts (yield on Contracts less the cost of the Repurchase Facility) which amounted to $3.9 million during the year ended December 31, 1996, compared to $2.9 million during the year ended December 31, 1995. This increase resulted primarily from a higher yield on Contracts and a lower rate paid on the Repurchase Facility during the year ended December 31, 1996, compared to the same period in 1995. The yield on Contracts increased to 21.4% and the average rate on the Repurchase Facility decreased to 9.2% during the year ended December 31, 1996, compared to 19.3% and 9.7%, respectively, during the year ended December 31, 1995.
During the year ended December 31, 1996, the Company earned interest income of $2.0 million on asset-backed securities, cash balances held in restricted accounts and as credit enhancement cash reserves, compared to $927,000 during the year ended December 31, 1995. This increase is primarily due to significant expansion of the asset-backed security program during the year ended December 31, 1996, as compared to the year earlier.
The Company recognized interest expense on long term borrowings (total amounts owed in connection with the Notes, the NIM Facility and the lease liability) of $1.2 million during the year ended December 31, 1996, compared to $490,000 in the prior year. This increase is primarily due to a higher average outstanding NIM Facility balance during the year ended December 31, 1996, as compared to the year ended December 31, 1995. The average balance of the NIM Facility was $5.3 million and $2.1 million during the years ended December 31, 1996, and 1995, respectively. The average NIM Facility balance increased due to the Company's growth and cash needs. During the year ended December 31, 1996, the Company recognized $842,000 of interest expense in connection with the NIM Facility as compared to $319,000 of interest expense during 1995. Additionally, during the year ended December 31, 1996, the Company recognized $252,000 of interest expense in connection with the Notes issued on November 18, 1996.
CONTRACT LOSS PROVISION. The Company recorded a provision for Contract losses of $1.1 million for the year ended December 31, 1996, compared to $674,000 for the year ended December 31, 1995. The allowance for Contract losses is maintained at a level deemed by management to be adequate to provide for losses in the held-for-investment portfolio. The provision for 1996 included a $440,000 loss allowance for Contracts that are ineligible for sale due to delinquency status as well as a $125,000 allowance for losses for the Spread Receivables, which, although performing, are deemed held-for investment. The 1995 provision related only to delinquent Contracts and included a provision of $1.1 million and a one-time recapture of $440,000 from the allowance for Contract losses provided for in a prior period on Contracts sold in conjunction with the 1995-A Transaction.
SERVICING REVENUES. The Company recorded $4.9 million of servicing and ancillary fees for the year ended December 31, 1996, compared to $1.8 million for the year ended December 31, 1995. This substantial increase in servicing revenues arose from an increase in the average size of the Servicing Portfolio to $142 million during the year ended December 31, 1996, as compared to $45 million during the same period in 1995. Until the completion of the 1995-A Transaction in May 1995, the Company did not service Contracts for others and recognized no servicing revenue other than ancillary fees. Future servicing revenues could be adversely affected if the level of charge-offs and prepayments in any pool of Contracts sold exceeds the Company's estimate of such levels at the time of the sale of such Contracts in asset-backed securities.
GAIN ON THE SALE OF CONTRACTS. The Company recognized a gain on sale of Contracts of $15.2 million during the year ended December 31, 1996, representing approximately 8% of the $191 million of Contracts sold in connection with the 1996-A Transaction, 1996-B Transaction, 1996-C Transaction and 1996-D Transaction, compared to $8.1 million, or approximately 8% of the $101 million of Contracts sold in connection with the 1995-A Transaction and 1995-B Transaction in the year ended December 31, 1995. (See Footnote 1(i) of the notes to consolidated financial statements for the methodology used to calculate the gain on sale.)
OPERATING EXPENSES. The Company reported operating expenses of $14.9 million during the year ended December 31, 1996, compared to $8.8 million for the year ended December 31, 1995. The increase in expenses reflected the growth in the amount of Contracts purchased and serviced by the Company. The operating expense ratio (annualized operating expenses as a percentage of average Contracts owned and serviced) improved to 8.4% for the year ended December 31, 1996, from 10.7% during the year ended December 31, 1995.
Personnel expenses for the year ended December 31, 1996, were $8.3 million, compared to $5.3 million during the year ended December 31, 1995. Personnel expenses consisted primarily of salaries and wages, performance incentives, employee benefits and payroll taxes. The overall increase in personnel expenses reflected the growth of the Company's full-time employees from 139 as of December 31, 1995, to 225 as of December 31, 1996. The Company expects that its number of full-time employees will continue to increase commensurate with the growth of the Company's servicing portfolio.
The Company's general and administrative expenses increased to $3.8 million for the year ended December 31, 1996, from $2.4 million for the year ended December 31, 1995. These expenses consisted primarily of telecommunications expenses, travel expenses, marketing expenses, professional fees, insurance expenses, credit bureau expenses and management information systems expenses. The increase in general and administrative expenses reflected the substantial expansion of the Company's operations.
Servicing expenses increased to $1.8 million for the year ended December 31, 1996, compared to $408,000 for the year ended December 31, 1995, due to the substantial growth of the total Contracts owned and serviced. These expenses consisted primarily of out-of-pocket collection, repossession and liquidation expenses.
Occupancy and equipment expenses increased to $521,000 for the year ended December 31, 1996, from $372,000 for the year ended December 31, 1995. The increase in occupancy and equipment expenses reflected the expansion of the Company's headquarters office space and its regional operations since December 31, 1995. The Company expects its occupancy expenses to continue to increase as the Company expands its headquarters facility to accommodate the expansion of the Company's operations.
INCOME TAXES. For the year ended December 31, 1996, the effective tax rate was 42%, compared to 5.7% for the year ended December 31, 1995. The low effective tax rate for the year ended December 31, 1995, was due to the reversal of the valuation allowance on gross deferred tax assets of $1.4 million during the year ended.
The Year Ended December 31, 1995, Compared to the Six-Month Transition Period Ended December 31, 1994, and the Period from July 15, 1993, (inception) through June 30, 1994
At the inception of the Company on July 15, 1993, the Company adopted a fiscal year end of June 30. The Company's initial fiscal year ended June 30, 1994 ("Initial Fiscal Year"). On January 23, 1996, the Company elected to change its fiscal year end to December 31, with the change effective as of January 1, 1995. The purpose
of this change was to conform the Company's fiscal year to the fiscal year adopted by its primary competitors. As a result of the change in fiscal year end, the transition period from July 1, 1994, through December 31, 1994, ("Transition Period") constitutes an audited period. Neither the actual results of the Transition Period nor the annualized results of the Transition Period are indicative of the results that would have been achieved in a 12-month fiscal year.
The Company reported net income of $3.5 million during the year ended December 31, 1995, compared to net losses of $992,000 for the Transition Period and $2.6 million for the Initial Fiscal Year. The Company's purchasing and servicing operations expanded significantly during the year ended December 31, 1995, compared to the Transition Period and the Initial Fiscal Year. During the year ended December 31, 1995, the Company sold $101 million of Contracts in asset-backed securities and recognized an $8.1 million gain on the sale of such Contracts. The Company did not sell Contracts during the Transition Period or the Initial Fiscal Year.
NET INTEREST INCOME. The Company generated approximately $3.3 million of net interest income during the year ended December 31, 1995, compared to $2.2 million in the Transition Period and $606,000 in the Initial Fiscal Year. The principal source of the Company's net interest income was the net yield on Contracts, which amounted to $2.9 million during the year ended December 31, 1995 compared to $2.2 million during the Transition Period and $557,000 during the Initial Fiscal Year.
During the year ended December 31, 1995, the Company recognized interest income of $114,000 from discount amortization, compared to $424,000 during the Transition Period and $96,000 during the Initial Fiscal Year. As of January 1, 1995, the Company deemed all of its Contracts to be held-for-sale, except Contracts which were 31 days or more delinquent. Thereafter, the Company discontinued the amortization of the purchase discounts, except in the case of Contract payoffs.
In addition, during the year ended December 31, 1995, the Company earned interest income of $927,000 on asset-backed securities and cash balances held in restricted accounts, and paid interest of $490,000 on other borrowings.
CONTRACT LOSS PROVISION. The Company recorded a provision for Contract losses of $674,000 for the year ended December 31, 1995, compared to $902,000 for the Transition Period and $592,000 for the Initial Fiscal Year. The allowance for Contract losses is maintained at a level deemed by management to be adequate to provide for losses in the held-for-investment portfolio.
SERVICING REVENUES. The Company recorded $1.8 million of servicing and ancillary fees during the year ended December 31, 1995, compared to $28,000 for the Transition Period and $7,000 for the Initial Fiscal Year. The substantial increase in servicing revenues in the year ended December 31, 1995, arose from eight months of servicing on the 1995-A Transaction and four months of servicing on the 1995-B Transaction. Since the Company had not yet sold any Contracts in asset-backed securities in the Transition Period or the Initial Fiscal Year, the Company's servicing revenues were limited to ancillary fees during those periods.
GAIN ON THE SALE OF CONTRACTS. The Company recognized a gain on sale of $8.1 million in the year ended December 31, 1995, representing 8.0% of the principal amount of $101 million in Contracts sold in the 1995-A Transaction and the 1995-B Transaction. There were no such transactions in the Transition Period or in the Initial Fiscal Year. (See Footnote 1(i) of the Notes to Consolidated Financial Statements for the methodology used to calculate the gain on sale.)
LITIGATION SETTLEMENT INCOME. During the Transition Period, the Company received a payment of $325,000 in connection with the settlement of litigation. Management does not expect this source of income to be recurring.
OPERATING EXPENSES. The Company reported operating expenses of $8.8 million during the year ended December 31, 1995, compared to $2.6 million for the Transition Period and $2.6 million for the Initial Fiscal Year. The increase in expenses reflected the growth in the amount of Contracts purchased and serviced by the Company.
The operating expense ratio improved to 10.7% for the year ended December 31, 1995, from 16.4% for the Transition Period and 82.6% for the Initial Fiscal Year.
Personnel expenses for the year ended December 31, 1995, were $5.3 million, compared to $1.7 million for the Transition Period and $1.9 million for the Initial Fiscal Year. The increase in personnel expenses reflected the growth of the Company's full-time employees from 64 as of June 30, 1994, to 82 as of December 31, 1994, and 139 as of December 31, 1995.
The Company's general and administrative expenses increased to $2.4 million for the year ended December 31, 1995, from $701,000 for the Transition Period and $493,000 for the Initial Fiscal Year. These expenses consisted primarily of telecommunications expenses, travel expenses, marketing expenses, professional fees, insurance expenses, credit bureau expenses and management information systems expenses. The increase in general and administrative expenses reflected the substantial growth of the Company.
Servicing expenses increased to $408,000 for the year ended December 31, 1995, as compared to $56,000 for the Transition Period. The increase in servicing expenses is due to the substantial growth of the portfolio of owned and sold Contracts. Due to the low collection and repossession activity experienced by the Company during the Initial Fiscal Year, the Company incurred no servicing expenses.
Occupancy and equipment expenses increased to $372,000 for the year ended December 31, 1995, from $101,000 for the Transition Period and $101,000 for the Initial Fiscal Year. The increase in occupancy and equipment expenses generally reflected growth in the activity of the Company. More specifically, the Company significantly expanded its headquarters office space and its regional operations since December 31, 1994.
INCOME TAXES. For the year ended December 31, 1995, representing the Company's first year of earnings, the effective tax rate was 5.7% compared to zero for the Transition Period and the Initial Fiscal Year. This low effective tax rate for the year ended December 31, 1995, was due to the reversal of the valuation allowance on gross deferred tax assets of $1.4 million during the year.
CREDIT PERFORMANCE
The tables below provide the Company's historic delinquency experience and net charge-off experience with respect to its entire contract portfolio, which includes Contracts owned by the Company and Contracts sold in asset-backed securities, at the dates, and for the periods, indicated. All amounts and percentages are based on the full amount remaining to be repaid on each Contract, net of any unearned finance charges.
(1) The Company considers a Contract delinquent when an obligor fails to make at least 90% of the contractual payment by the stated due date. The period of delinquency is based upon the number of days payments are contractually past due. Contracts not yet 31 days past due are not considered to be delinquent. As of December 31, 1996, the Company had granted payment extensions of 30 days or more for Contracts representing 1.45% of the outstanding balance of the entire contract portfolio, and these contracts were not considered delinquent.
(2) Amount in repossession represents the outstanding principal on Contracts for which vehicles have been repossessed, but not yet liquidated.
(3) For the three-month period ended December 31, 1996, average of receivables outstanding as of the beginning and the end of each month during the period. For prior periods, average of receivables outstanding as of the beginning and the end of the period presented.
(4) Charge-off amounts exclude the effect of accrued interest, discounts paid by the dealers and potential recoveries from legal proceedings against borrowers.
(5) Net charge-offs are net of recoveries and include the remaining Contract balance at time of charge-off. In the case of repossession, net charge-offs include the remaining Contract balance at the time of repossession less liquidation proceeds (for disposed vehicles), NADA wholesale value (for vehicles repossessed but not sold) or claims receivable under the Company's VSI insurance. Net charge-offs do not include repossessions that are less than 120 days delinquent and are not yet charged-off.
The management of the Company believes that the payment practices of its borrowers are partially a function of the time of year. Since these borrowers typically have low disposable incomes, they tend with more frequency to become late in payments on their Contracts during the fall and early winter months, when the holiday season generates competing demands for their limited disposable income and when these borrowers encounter weather-related work slow-downs. As a result, if all other factors are equal, management expects delinquencies to be highest in the fourth calendar quarter. Due to the 60-120 day lag between initial delinquency and charge-off, management expects these seasonal factors to cause charge-offs to be highest in the fourth and first calendar quarters. The increase in charge-offs during the three-month period ended December 31, 1996, as compared to the three-month period ended December 31, 1995, is primarily due to the seasoning of the total Contract portfolio.
Since January 1, 1995, the Company has maintained, at its own expense, vendor single interest ("VSI") insurance that protects the Company's interest in the collateral against uninsured physical damaged (including total loss) and skips. For the year ended December 31, 1996, the Company's recoveries on its VSI insurance reduced its net charge-offs (including Contracts owned and sold) by $923,000 and the total premiums paid by the Company were $766,000. For the year ended December 31, 1995, the Company's recoveries on its VSI insurance reduced its net charge-offs by $410,000 and the total premiums paid by the Company were $198,000. Commencing January 1, 1997, VSI insurance will be provided by a new carrier. The terms of this new policy are almost identical in nature except that losses due to skips will no longer be covered. Historically, most skips have been located either by the Company or by the VSI insurance provider, and the Company believes that it can internally manage skips more efficiently.
ALLOWANCE FOR CONTRACT LOSSES
The Company maintains an allowance for losses on Contracts that are held-for-investment. The Company determines an allowance for Contract losses based on an estimate of the losses inherent in the held-for-investment portfolio, including estimates of the frequency of defaults for various delinquency ranges and the expected average severity of losses on these defaults. As of December 31, 1996, in addition to delinquent Contracts, Contracts held-
for-investment included approximately $2.9 million of Spread Receivables pledged as additional credit enhancement in connection with the 1996-D Transaction. The allowance for Contract losses as of December 31, 1996, for both delinquent Contracts and the Spread Receivables was $565,000, or 14% of the Contracts held-for-investment. As of December 31, 1996, the allowance for Contract losses as a percentage of delinquent Contracts was 46%. As of December 31, 1995, Contracts held-for-investment was entirely composed of Contracts that were ineligible for sale due to delinquency status and the allowance for Contract losses was $477,000, or 46% of delinquent Contracts.
In connection with the valuation of the ESRs, the Company projects losses in the pool of Contracts which effectively represents the estimated undiscounted recourse loss allowance contained within the valuation of the ESRs. As of December 31, 1996, the estimated undiscounted recourse loss allowance embedded in the ESRs (excluding accrued interest) was $19.2 million. The combined allowance for losses on Contracts held-for-investment and the recourse loss allowance embedded in the ESRs was 7.9% of the Contracts owned and serviced as of December 31, 1996, as compared to 6.4% at December 31, 1995.
FINANCIAL CONDITION AND LIQUIDITY
To date, the Company's financing needs have been primarily driven by two factors. First, the Company requires working capital to fund its operating expenses because the net interest income earned on the Contracts owned by the Company is restricted and not available for general operating purposes. Second, the securitization program is capital intensive as the Company must fund credit enhancement and securitization expenses. The Company expects to have an ongoing need for cash to support operations, Contract purchases and the securitization program. ACC's only substantial source of cash comes from fees generated from servicing Contracts pledged to Cargill in conjunction with the Repurchase Facility and Contracts sold in asset-backed securities. Because ACC is responsible for virtually all operating expenses, ACC regularly requires cash infusions from its subsidiaries to fund operating expenses and to service ACC's indebtedness. These cash infusions are recognized as intercompany loans and are eliminated during consolidation of the financial statements of the Company.
To date, the Company has financed its acquisition of Contracts primarily through the Repurchase Facility. Cargill finances 100% of the purchase price of the Contracts under the Repurchase Facility. In January 1997, the Company entered into an agreement with Cargill granting the Company the option to terminate the Repurchase Facility at any time through May 31, 1997, by providing Cargill with 14 days' written notice and retiring the outstanding balance of the facility. In exchange for the option, the Company issued to Cargill 174,500 shares of unregistered Common Stock with a fair value of $10.88 per share as of the date of issuance. If the Company does not exercise the option, then the fair value of the shares will be credited against future repurchase fees that became payable under the Repurchase Facility. The Company intends to exercise this option if a commercial paper or other facility with a lower cost of funds can be found to replace the Repurchase Facility. The Company anticipates that a replacement commercial paper facility would limit financing to approximately 93% of the purchase price of the Contracts. This would require the Company to use cash resources to fund a portion of Contract purchases. The Company has also used the proceeds of the NIM Facility (a collateralized facility with a maximum borrowing base of $10 million, with interest at LIBOR plus 7%) and the proceeds from the sale of the equity and debt securities to finance credit enhancement and securitization expenses arising from the issuance of asset-backed securities and for working capital. A breach under either the Repurchase Facility (or a replacement facility) or the NIM Facility could prohibit the Company from obtaining financing under both of the facilities.
The Company's business requires substantial cash to support the funding of credit enhancement cash reserves and issuance costs for its asset securitizations, operating expenses, tax payments due under the asset securitization structure used for the six securitizations completed through December 31, 1996, in recognition of gain on sales of Contracts (for which no cash is received by the Company at the time of the sale), debt service and other cash requirements, including, potentially, a portion of the purchase price of the Contracts. These cash requirements increase as the volume of Contracts purchased and serviced by the Company increase. Historically, the Company has operated on negative cash flow and, depending upon the Company's growth of Contract purchase volumes and its Contract securitization program, its negative cash flow may continue into the foreseeable future. The Company has funded its negative operating cash flows principally through borrowings under the NIM Facility (and the bridge facility retired by the NIM Facility), proceeds from the Notes and from the sale of equity securities. In order to
execute its business strategy, the Company is dependent upon the Repurchase Facility (and the replacement of the Repurchase Facility in 1997 if the Company elects to exercise its option to terminate), its asset securitization program, its ongoing ability to access capital markets to obtain long term debt and equity capital and, possibly, the sale of Subordinated Securities (reclassified as available-for-sale as of December 31, 1996). Factors that affect the Company's access to capital markets or the cost of capital include, among others, interest rates, general economic conditions and the Company's results of operations, financial condition, business prospects (including competitive conditions), leverage and the performance of its asset securitizations. In addition, covenants in the indenture for the Notes and in future debt securities and financing facilities may significantly restrict the Company's ability to incur additional indebtedness or issue new equity securities.
During the years ended December 31, 1996, and 1995, cash generated from payments received on Contracts financed under the Repurchase Facility was used to reduce indebtedness under, or was deposited into restricted accounts as additional collateral for, the Repurchase Facility. Proceeds from the securitization of Contracts were also used by the Company to reduce indebtedness under the Repurchase Facility. Following each of the asset securitization transactions, excess servicing cash flows were deposited into restricted accounts to build credit enhancements. Once the amounts in these credit enhancement cash reserves reach required levels, any additional excess servicing revenues are distributed to the Company. Under normal circumstances, the Company expects to meet required levels eight to 12 months following the effective date of a securitization. However, there is no assurance that this expectation will be met and the occurrence of any triggering event would delay release of excess cash by increasing credit enhancement cash reserve requirements on those transactions. As of the date of this document, a trigger event has occurred in both the 1995-B Transaction and the 1996-A Transaction and the triggers have not been waived.
During the year ended December 31, 1996, the Company used net cash from operations of $8.8 million, compared to net cash provided by operations of $771,000 during the year ended December 31, 1995. The decrease in cash provided by operations was primarily due to a net decrease in cash from the acquisition and sale of Contracts held-for-sale of $8.4 million. The Company owned Contracts of $26 million as of December 31, 1996, compared to $29 million as of December 31, 1995. The Company sold $191 million of Contracts and acquired $194 million of Contracts in the year ended December 31, 1996, compared to the sale of $101 million of Contracts and the acquisition of $99 million of Contracts in the year ended December 31, 1995. Additionally, the Company deposited $4.8 million into restricted cash accounts and in credit enhancement cash reserves during the year ended December 31, 1996, as compared to $3.2 million during the same period in 1995. The net cash used by operations in the Transition Period and the Initial Fiscal Year was $1.7 million and $3.4 million, respectively. The increase in net cash provided by operations in the year ending December 31, 1995, as compared to the Transition Period and the Initial Fiscal Year was primarily due to the income associated with the sale and servicing of Contracts in the 1995-A Transaction and 1995-B Transaction. Prior to 1995 the Company's sole source of servicing income was ancillary fees and, as the Company had made no loan sales, there was no excess servicing income.
The net cash provided by investing activities was $2.6 million during the year ended December 31, 1996, compared net cash used of $808,000 in the year ended December 31, 1995. This increase in cash provided was primarily due to income associated with a larger portfolio of asset-backed securities, as well as a smaller balance of Contracts held-for-investment during the year ended December 31, 1996, as compared to the year ended December 31, 1995. The cash used in investing activities was $24.5 million and $16.1 million during the Transition Period and the Initial Fiscal Year, respectively. The decrease in cash used by investing activities during the year ending December 31, 1995, compared to the Transition Period and the Initial Fiscal Year, was the result of the classification of the Contracts to a held-for-sale status during the quarter ended March 31, 1995.
The net cash provided by financing activities was $7.1 million for the year ended December 31, 1996, compared to net cash provided of $14,000 during the year ended December 31, 1995. Increases in cash provided by financing activities were primarily the result of the following 1996 transactions: $12.5 million raised in the Company's initial public equity offering, $19.0 million raised in the Company's Notes offering and $1.0 million from the issuance of redeemable Preferred Stock. Significantly offsetting these increases were increases in total amounts paid to reduce the Repurchase Facility and NIM Facility (included in other borrowings on the consolidated balance sheets) in the year ended December 31, 1996, compared to the year ended December 31, 1995. The
Company used net cash to reduce the total outstanding balance of these facilities of $26.4 million in 1996, compared $3.5 million in 1995. The net cash provided by financing activities for the Transition Period and the Initial Fiscal Year was $26.2 million and $19.6 million, respectively, essentially all of which was due to increases in the Repurchase Facility.
The Company anticipates that funds available under the Repurchase Facility (or the replacement facility), proceeds from the sale of Subordinated Securities and borrowings under the NIM Facility will be sufficient to satisfy the Company's estimated cash requirements for the next 12 months. If these funds are not available for any reason or if the Company's cash requirements increase, the Company may be required to seek additional funding.
The Company does not anticipate any need for significant capital expenditures in connection with its new corporate headquarters facility (due to the inclusion of tenant improvements in base rent) or in connection with its management information systems in the next 12 months.
INTEREST RATE RISK MANAGEMENT
The Company maintains an ongoing hedging program for the purpose of mitigating the potential impact of changing interest rates on the gain on the sale of Contracts. The hedging strategy is implemented through the forward sale of two-year Treasury notes or futures Contracts on two-year Treasury instruments, with Cargill acting as the counterparty to these hedging transactions. Gains and losses on the hedging program are recorded as an adjustment to the accounting basis of the Contracts until such time that the Contracts are sold. At the time of sale, the previously unrealized gains or losses are recognized as an adjustment to the gain on the sale of the Contracts.
The market value of these futures contracts responds inversely to changes in the value of the Contracts. The Company recognized net gains on the hedging program of $206,000 during the year ended December 31, 1996, as compared to net losses of $927,000 during the year ended December 31, 1995. As of December 31, 1996, and December 31, 1995, the Company had unrealized losses under the hedging program of $30,000 and $225,000, respectively.
The Company began actively using the hedging program in January 1995 and the extent to which the Contracts held by the Company are hedged has varied and will continue to vary from time to time, depending upon prevailing interest rates and other economic factors. The Company may choose not to maintain the hedging program based on management's assessment of interest rate risk and the costs associated with the hedging program.
At any point in time, the portfolio may be partially or fully hedged. As of December 31, 1996, the Company owned $22 million of Contracts (excluding approximately $3 million of performing Contracts pledged as credit enhancements) and maintained a $15 million hedge position.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders ACC Consumer Finance Corporation:
We have audited the accompanying consolidated balance sheets of ACC Consumer Finance Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1996 and 1995, the six-month transition period ended December 31, 1994 and the period from July 15, 1993 (inception) through June 30, 1994. 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 ACC Consumer Finance Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995, the six-month transition period ended December 31, 1994 and the period from July 15, 1993 (inception) through June 30, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California January 26, 1997
ACC CONSUMER FINANCE CORPORATION CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
ACC CONSUMER FINANCE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
ACC CONSUMER FINANCE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
ACC CONSUMER FINANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
ACC CONSUMER FINANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
See accompanying notes to consolidated financial statements.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995, THE SIX-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1994, AND THE PERIOD FROM JULY 15, 1993, (INCEPTION) THROUGH JUNE 30, 1994
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
ACC Consumer Finance Corporation (ACC) initiated business in California on July 15, 1993, under the name American Credit Corporation. The Company changed its name in October 1995 and was reincorporated in Delaware in November 1995. ACC and its wholly-owned subsidiaries, OFL-A Receivables Corp. (OFL-A) and ACC Receivables Corp. (Receivables) (collectively, the Company), engage primarily in the business of purchasing, selling and servicing automobile installment sale contracts (Contracts). The Company specializes in Contracts with borrowers who generally would not qualify for traditional financing, such as that provided by commercial banks or captive finance companies of automobile manufacturers. The Company purchases Contracts directly from automobile dealers, with the intent to resell them to institutional investors in the form of securities backed by the Contracts (the Securitization Transactions).
The Company conducts its activities through three legal entities. The Company's operations (underwriting and Contract servicing) are conducted by ACC. The Contracts are purchased and held until sale by OFL-A, which is a special purpose financing corporation. Upon sale, the Contracts are concurrently transferred from OFL-A to ACC, from ACC to Receivables, and then from Receivables to a trust (Securitization Trusts). Receivables retains excess servicing receivables (ESRs) in the Securitization Transactions. Receivables will also retain subordinated asset-backed securities (Subordinated Securities), if created, or Contracts pledged as additional credit enhancement in the Securitization Transactions (Spread Receivables).
Until such time as the Contracts are sold in asset-backed securities, these Contracts are pledged as collateral to, and are financed under, a financing facility (Repurchase Facility). Unless terminated prior to May 31, 1997, at the option of the Company, the Repurchase Facility extends through July 15, 1998. The Company also has the option of pledging the Subordinated Securities, ESRs and credit enhancement cash reserves for borrowings under a separate financing facility (NIM Facility), which expires in May 1998.
In May 1996, the Company sold, in an initial public offering, 2,000,000 shares of its Common Stock which generated net proceeds of approximately $12.5 million. The proceeds were used to partially pay-down the NIM Facility (included in Other Borrowings on the Consolidated Balance Sheet), temporarily reduce advances on the Repurchase Facility and for other working capital purposes. In addition, each share of the Company's redeemable Preferred Stock automatically converted into 23 shares of Common Stock upon consummation of the offering. Total cumulative dividends of $574,454 were paid to the holders of the redeemable Preferred Stock subsequent to the conversion. In November 1996, the Company issued, in a debt offering, $20 million of 10.25% subordinated notes due 2003 (Notes) in a public debt offering which generated net proceeds of approximately $19.0 million after deducting the underwriting discount and issuance costs. The proceeds were used to pay-off the outstanding balance of the NIM Facility, temporarily reduce advances on the Repurchase Facility and for other general corporate purposes.
(b) Basis of Presentation
The consolidated financial statements include the accounts of ACC, OFL-A and Receivables. All significant intercompany accounts and transactions have been eliminated in consolidation.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principals. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include allowances for credit losses, valuation of ESRs and estimated gain on sale of Contracts calculation. While management believes that these estimates are currently adequate, future additions may be necessary based on changes in economic conditions. Additionally, certain amounts in the prior periods have been reclassified to conform to the 1996 presentation.
At the inception of the Company on July 15, 1993, the Company adopted a fiscal year end of June 30. The Company's Initial Fiscal Year ended June 30, 1994 (the Initial Fiscal Year). On January 23, 1996, the Company elected to change its fiscal year end to December 31, with the change effective as of January 1, 1995. The purpose of this change was to conform the Company's fiscal year to the fiscal year adopted by its primary competitors. As a result of the change in fiscal year end, the Transition Period from July 1, 1994, through December 31, 1994, (the Transition Period) constitutes an audited period. Neither the actual results of the Transition Period nor the annualized results of the Transition Period are indicative of the results that would have been achieved in a 12-month fiscal year.
(c) Cash and Cash Equivalents
For purposes of the consolidated financial statements, cash and cash equivalents include highly liquid debt and investment instruments with an original maturity of three months or less. Additionally, the Company is subject to covenants within the indenture under which the Notes were issued (See Footnote 10.) that require that an amount equal to six months of interest payments on the Notes be held in a segregated account for the ten calendar days proceeding a monthly interest payment due date. As of December 31, 1996, approximately $1 million was held in such an account.
(d) Installment Contracts Held-For-Sale
The Contracts are acquired from automobile dealers, usually at a discount, and are recorded net of discount and provide for interest of approximately 20%. The Company also recognizes the interest accrued on Contracts through the date of purchase as an addition to the discount. Non-refundable fees and related direct costs are deferred and netted against the Contract balances. Each Contract provides for full amortization, equal monthly payments and can be fully prepaid by the borrower at any time. The Company has purchased the Contracts with the intent to resell them in the future. Contracts held-for-sale are stated at the lower of aggregate cost or market value.
The Contracts are financed under the terms of the Repurchase Facility with Cargill Financial Services Corporation (Cargill) and are accounted for as a financing of the Contracts. Under the terms of the agreement, the Company maintains the essential elements of ownership of the Contracts, particularly credit risk and interest rate risk.
The Company enters into forward contracts as hedges relating to the Contract portfolio. These financial instruments are designed to minimize exposure and reduce risk from interest rate fluctuations. Gains and losses on forward contracts are deferred and recognized as adjustments to the basis of the Contracts until such time that the Contracts are sold. Such amounts are realized upon the sale of Contracts that are hedged.
(e) Installment Contracts Held-for-Investment
Since January 1, 1995, all Contracts have been purchased with the intent to be sold in asset-backed securities. Contracts that are identified as ineligible for the securitization process (primarily due to their payment history) are transferred to Contracts held-for-investment until such time that the deficiency has been resolved. Also included in Contracts held-for-investment are Spread Receivables. The Spread Receivables are included in the Consolidated Balance Sheets of the Company, but all cash collections pertaining to them must be deposited into a credit enhancement cash reserve until certain requirements are met. These Contracts are transferred at the lower of cost or market value and are accounted for net of an allowance for Contract losses, as determined by historical loss experience and current delinquency levels.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) Allowance for Contract Losses
The allowance for Contract losses is maintained at a level deemed by management to be adequate to provide for the inherent risks in the Contracts held-for-investment. Management considers past loss experience and delinquency levels in determining the adequacy of the allowance for Contract losses.
The Company's policy is to charge-off the principal balance of all Contracts which are 120 or more days delinquent, except Contracts which are involved in bankruptcies which are charged-off at 210 or more days delinquent. In addition, the Company charges off Contracts prior to becoming 120 or 210 days delinquent if management has knowledge of specific circumstances that impair the collectibility of the outstanding balances.
(g) Excess Servicing Receivables
The Company has created ESRs as a result of the sale of Contracts in the Securitization Transactions. ESRs are determined by computing the present value of the excess of the weighted average coupon on the Contracts sold (ranging from 19.77% to 20.62%) over the sum of: (i) the coupon on the asset-backed securities (ranging from 5.95% to 6.90%), (ii) a base servicing fee paid to the Company (ranging from 3.00% to 3.15%) and (iii) the net charge-offs expected to be incurred on the portfolio of Contracts sold. For purposes of the projection of the excess servicing cash flows, the Company assumes that net charge-offs (including accrued interest) will approximate 11% of the original principal of the Contracts sold, over the life of the portfolio. Further, the Company uses an estimated average Contract life of 1.5 to 1.8 years. The cash flows expected to be received by the Company, before expected losses, are then discounted at a market interest rate that the Company believes an unaffiliated third-party purchaser would require as a rate of return on such a financial instrument. Expected losses are discounted using a risk-free rate equivalent to the rate earned on securities rated AAA/Aaa or better with a duration similar to the duration estimated for the underlying Contracts. This results in an effective overall discount rate of approximately 15% on an annualized basis. The excess servicing cash flows are only available to the Company to the extent that there is no impairment of the credit enhancements established at the time the Contracts are sold. ESRs are amortized using the interest method and are offset against servicing and ancillary fees. To the extent that the actual future performance results are different from the estimated excess cash flows, the ESRs will be adjusted on a quarterly basis with corresponding adjustments made to income.
The carrying value of the ESRs is subject to the provisions of the Emerging Issues Task Force (EITF) 88-11 pronouncement which states that an enterprise that sells the right to receive the interest payments, the principal payments, or a portion of either or both, relating to a loan should allocate the recorded investment in that loan between the portion of the loan sold and the portion retained based on the relative fair values of those portions.
(h) Asset-Backed Securities
Securities held-to-maturity are reported at amortized cost (subject to the provisions of the EITF 88-11 as discussed in the preceding Footnote). Securities available-for-sale are reported at fair value. If management has the intent and ability at time of purchase to hold securities until maturity, they are classified as held to maturity. Securities to be held for indefinite periods of time, but not necessarily to be held to maturity, or on a long-term basis are classified as available-for-sale. Unrealized holding gains and losses on available-for-sale securities are reported as a separate component of equity, net of tax.
(i) Gain on Sale of Contracts
Each Securitization Transaction results in the recognition of a gain on sale of Contracts on the Company's consolidated statement of operations for the period in which the sale was made. These gains are recognized to the extent that the net proceeds from the sale are greater than the allocated basis of that portion of the Contracts sold. This gain is subject to the provisions of the EITF 88-11.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) Repossessed Vehicles
Vehicles acquired for non-payment of indebtedness are recorded at the lower of the estimated fair market value or the outstanding Contract balance. Such assets are generally sold within 60 days of repossession and any difference between the sales price, net of expenses, and the carrying amount is treated as a charge-off or recovery. In addition, the Company recognizes claims submitted pursuant to a vendor single interest policy as accounts receivables.
(k) Fixed Assets
Furniture, fixtures and equipment are initially recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (six months to five years).
(l) Organizational Expenses
The Company incurred expenses in connection with the organization of the business. These expenses were capitalized and are amortized on a straight-line basis over a five-year period.
(m) Deferred Financing Fees
The Company incurred fees in connection with the creation of the Repurchase Facility. These fees reflected cash payments made and the estimated value of Preferred Stock warrants issued in conjunction with the creation of the Repurchase Facility. The Repurchase Facility costs have been deferred and are amortized over the five-year term of the Repurchase Facility as an adjustment to interest expense. The carrying amount of these deferred fees would be written-off if the Company elects to exercise the option to terminate the Repurchase Facility (as described in Footnote 19). The Company has incurred fees in connection with the issuance of Notes. These fees reflected the underwriting discount and issuance costs. These costs have been deferred and are amortized over the seven-year term of the Notes as an adjustment to interest expense.
(n) Servicing and Ancillary Fees
Servicing fees are reported as income when earned, net of related amortization of capitalized excess servicing fees receivable. Additionally, the Company has the right to collect late payment fees and non-sufficient funds fees from borrowers, as well as collection costs incurred in connection with delinquent accounts. Ancillary fees are accounted for on a cash basis. Collection expenditures are recorded as expenses in the period incurred. Any reimbursements of collection costs are recognized as an expense recovery in the period that the proceeds are received.
(o) Income Taxes
The Company filed consolidated federal income and combined state franchise tax returns on a fiscal year basis through December 31, 1995, and has filed on a calendar basis thereafter. The Company accounts for income taxes under the asset and liability method, whereby deferred income taxes are recognized based on future tax consequences due to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using 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 taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
(p) Net Income (Loss) Per Share
Due to the significant changes in the capital structure of the Company upon the closing of the initial public offering as discussed at Footnote 1(a), historical net income (loss) per share prior to the year ended December 31, 1995, is not presented. Net income per share is computed using the weighted average number of shares of Common Stock outstanding and common equivalent shares, unless the effect of common stock equivalents are anti-dilutive. However, pursuant to Securities and Exchange Commission Staff Accounting Bulletins, Common Stock and common equivalent shares issued during the 12-month period prior to the filing of the offering document have been
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
included in the calculation as if they were outstanding for all periods presented, even if anti-dilutive. In addition, net income per share reflects the 23 for 1 stock split which occurred in connection with the Company's initial public offering.
(q) Accounting for Stock-Based Compensation
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting standards for stock-based employee compensation plans. SFAS No. 123 permits the Company to choose either a fair value-based method or the intrinsic value-based method that is contained in APB Opinion 25. SFAS No. 123 requires pro forma disclosures of net income and earnings per share computed as if the fair value based method has been applied in financial statements of companies that continue to follow current practice in accounting for such arrangements under Opinion 25. SFAS No. 123 applies to all stock-based employee compensation plans in which an employer grants shares of its stock or other equity instruments to employees except for employee stock ownership plans. SFAS No. 123 also applies to plans in which the employer incurs liabilities to employees in amounts based on the price of the employer's stock (i.e., stock option plans, stock purchase plans, restricted stock plans and stock appreciation rights). The statement also specifies the accounting for transactions in which a company issues stock options or other equity instruments for services provided by non-employees or to acquire goods or services from outside suppliers or vendors. The recognition provisions of SFAS No. 123 for companies choosing to adopt the new fair value based method of accounting for stock-based compensation arrangements may be adopted immediately and will apply to all transactions entered into fiscal years that begin after December 15, 1995. The disclosure provisions of SFAS No. 123 are effective for fiscal years beginning after December 15, 1995; however, disclosure of the pro forma net income and earnings per share, as if the fair value method of accounting for stock-based compensation had been elected, is required for all awards granted in fiscal years beginning after December 31, 1994. The Company has elected to continue to account for stock-based compensation under APB Opinion 25 and, as a result, pro forma disclosures have been provided. (See Footnote 17.)
(r) New Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinquishment of Liabilities". This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS No. 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS No. 125 requires that the selling entity continue to carry retained interests relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. Under SFAS No. 125, certain collateralized borrowings may result in assets no longer being recognized if the assets are provided as collateral and the secured party takes control of the collateral. This determination is based upon whether: (1) the secured party is permitted to repledge or sell the collateral and (2) the debtor does not have the right to redeem the collateral on short notice. Extinguishments of liabilities are recognized only when the debtor pays the creditor and is relieved of its obligation for the liability, or when the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. SFAS No. 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset is to be amortized in proportion to, and over the period of, net servicing income. Servicing assets and liabilities are to be assessed for impairment based on their fair value. SFAS No. 125 modifies the accounting for interest-only strips or retained interests in securitizations, such as capitalized servicing fees receivable, that can be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment. In this case, it requires that they be classified as available-for-sale or as trading securities. Interest-only strips and retained interests are to be recorded at fair value. Changes in fair value are included in operations, if classified as trading securities, or in shareholders' equity as unrealized holding gains or losses, net of the related tax effect, if classified
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
as available for sale. Beginning January 1, 1997, the Company adopted SFAS No. 125 and recorded its ESRs at fair value. The adjustment to carrying value was included in shareholders' equity as unrealized gains at that time.
(2) RESTRICTED CASH AND CREDIT ENHANCEMENT CASH RESERVES
With regard to Contracts owned, the Company is required to deposit all borrower payments, Contract liquidation proceeds and certain other receipts into restricted bank accounts under the control of a custodian. These accounts are owned by the Company, but funds may only be released by the custodian under the terms of the Repurchase Facility. Generally, the funds will be released only upon the repurchase and sale of the Contracts.
The Company is a party to certain agreements in connection with the sale of Contracts in asset-backed securities. The terms of some of these agreements have provided that simultaneous with the sale of bonds to investors, the Company must make a cash contribution, as a credit enhancement, to a credit enhancement cash reserve under the control of a trustee. Subsequent to the sale, all cash received from the ESRs, Subordinated Securities and the Spread Receivables, is deposited into credit enhancement cash reserves. The credit enhancement cash reserve is owned by the Company, but funds will only be released by the trustee when certain credit enhancement requirements are met. The agreement provides that the amount of cash to be maintained in the credit enhancement cash reserve shall be at a specified percentage of the principal balance of the senior bonds. Additionally, there are provisions within the agreements that state that if the performance of any Securitization Trust is not sufficient to meet the cash requirements of the senior bondholders and the credit enhancement reserves of that pool have been depleted, the shortfall can be drawn from credit enhancement cash reserves relating to other Securitization Trusts. As principal payments are made to the bondholders, and if the pledged cash is in excess of the specified percentage of the principal balance of the bonds, the trustee will release the excess amount to the Company.
(3) INSTALLMENT CONTRACTS HELD-FOR-SALE
Installment Contracts held-for-sale are summarized as follows:
As of December 31, 1996, and 1995, respectively, approximately $22 million and $31 million of the Contracts, including certain Contracts held-for-investment, have been pledged to Cargill subject to the terms of the Repurchase Facility. These Contracts are held by a custodian until such time that they are repurchased. (See Footnotes 4 and 9.)
The Company maintains an ongoing hedging program to minimize the impact of changing interest rates on the value of the Contracts. The hedging strategy is implemented through the forward sale of two-year Treasury notes or futures Contracts of two-year Treasury instruments with remaining terms of approximately 1.5 years to 2 years, with Cargill acting as a counterparty to these hedging transactions. As of December 31, 1996, the Company had two-year Treasury futures Contracts with a notional amount of $15 million for sale in March 1997. As of December 31, 1995, the Company had sold forward $25 million of Treasury notes for delivery in January 1996.
Unrealized gains and losses on the hedging transactions are reflected as an adjustment to the basis of the Contracts. Gains and losses are recognized upon sale of the Contracts. The Company recognized $206,000 of net gains on the hedging program during the year ended December 31, 1996. The Company recognized $927,000 of net losses on the hedging program during the year ended December 31, 1995. Prior to the year ended December 31, 1995, there were no hedging transactions.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to the Contracts owned by the Company, the Company serviced $225 million and $87 million of Contracts for others as of December 31, 1996, and 1995, respectively. The Company services Contracts for borrowers residing in approximately 40 states, with the largest concentrations of Contracts in California, Texas, Florida and Pennsylvania. An economic slowdown or recession or a change in the regulatory or legal environment in one or more of these states could have a material adverse effect on the performance of the Company's existing servicing portfolio and on its Contract purchases.
During the year ended December 31, 1996, and 1995, the Company sold $191 million and $101 million, respectively, of Contracts in connection with the securitization transactions. For the same periods, the Company recognized gains associated with these securitizations of $15.2 million and $8.1 million, respectively. No Contracts were sold prior to the year ended December 31, 1995.
Contract packages are submitted to the Company for funding by automobile dealers. The Company evaluates each borrower's creditworthiness on a case-by-case basis. Contract packages representing $4.5 million and $2.1 million, were approved and submitted to the Company for funding as of December 31, 1996, and 1995, respectively.
(4) INSTALLMENT CONTRACTS HELD-FOR-INVESTMENT
Contracts held-for-investment represent Contracts that are ineligible for sale (primarily due to their delinquent status) or represent Contracts which management had no present intention to sell. These Contracts are subject to the terms of the Repurchase Facility or the Spread Receivables pledge agreement and are held by a custodian. Included are performing Contracts with a principal balance of $2.9 million, which are pledged in connection with the 1996-D Transaction. The Contracts held-for-investment are comprised of the following:
The Company maintains an allowance for Contract losses based on the outstanding principal balance of Contracts held-for-investment. A summary of the activity in the allowance for Contract losses is as follows:
(5) ASSET-BACKED SECURITIES
In connection with securitizations, the Company has retained Subordinated Securities representing 5% of the principal balance of the Contracts sold. These have pass-through rates from 5.95% to 6.90%. At time of purchase and as of December 31, 1995, these securities were deemed to be held-to-maturity and had been valued at a discount to yield approximately 13%. During the year ended December 31, 1996, the Company reclassified these securities as available-for-sale and the carrying amount approximates the fair value based on market rates as of December 31, 1996.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(a) Asset-Backed Securities Available-for-Sale.
A summary of the activity in asset-backed securities available-for-sale is as follows:
There were no asset-backed securities available-for-sale prior to the year ended December 31, 1996.
(b) Asset-Backed Securities Held-to-Maturity
A summary of the activity in asset-backed securities held-to-maturity is as follows:
There were no asset-backed securities held-to-maturity prior to the year ended December 31, 1995. The transfers of asset-backed securities to available-for-sale status during 1996 were the result of a revised cash management strategy of the Company.
(6) EXCESS SERVICING RECEIVABLES
A summary of the activity in ESRs is as follows:
In connection with the valuation of ESRs, the Company projects losses in the pool of Contracts which effectively represents the estimated undiscounted recourse loss allowance offset against the ESRs. As of December 31, 1996, and 1995, the estimated undiscounted recourse loss allowance embedded in the ESRs, excluding accrued interest, was $19.2 million and $7.1 million, respectively. This recourse loss allowance represents 8.8% and 8.1% of the Contracts serviced for others as of December 31, 1996, and 1995, respectively.
There were no ESRs prior to the year ended December 31, 1995.
(7) ACCOUNTS RECEIVABLE
As of December 31, 1996, and 1995, the Company had approximately $1.5 million and $626,000, respectively, due from Cargill for Contracts funded by the Company which were delivered to a custodian, but not yet funded through the Repurchase Facility. Additionally, the Company had $1.7 million and $616,000, as of
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996, and 1995, respectively, of servicing fees, excess servicing fees and principal and interest payments on the subordinated securities, due from the Securitization Trusts.
(8) FIXED ASSETS, NET
Furniture, fixtures and equipment consisted of the following:
The Company has entered into lease arrangements with Cargill Leasing Corporation, an affiliate of Cargill, for the sale and leaseback of certain of its furniture and equipment. These leases are accounted for as capital leases. The original cost of the equipment subject to the capital leases is $731,000. (See Footnote 14.)
(9) REPURCHASE FACILITY, NET
The Company has entered into a financing arrangement, the object of which is to provide interim financing for the Contracts purchased. Contractually, the Repurchase Facility expires in July 1998; however, in January 1997, the Company entered into an agreement with Cargill that gives the Company the option to terminate the Repurchase Facility through May 31, 1997. (See Footnote 19.)
Under the terms of the Repurchase Facility, the Company will sell Contracts to Cargill with an agreement to repurchase the Contracts. The repurchase is intended to occur concurrent with the sale of the Contracts. The Repurchase Facility requires Contracts to be held by a custodian and requires the Company to deposit borrower payments into restricted bank accounts. When the Contracts are repurchased from Cargill, the Company is obligated to pay Cargill a repurchase fee that is calculated as a percentage of the Contracts ranging from 2% to 0.5%, depending upon the cumulative amount of Contract dispositions. The Company is obligated to repurchase Contracts in the event that: (i) the Contracts do not conform to the terms of the Repurchase Facility, (ii) a breach of a representation or warranty has occurred or (iii) the Company has defaulted under the terms of the Repurchase Facility. In addition, the Repurchase Facility contains certain restrictive covenants that include, without limitation, achieving specific Contract purchase volumes. If these covenants are not met, a termination of the facility could occur. As of December 31, 1996, and 1995, management believes the Company was in compliance with such covenants. The parent company has guaranteed $5.0 million of the amount outstanding under the Repurchase Facility and the NIM Facility (included in Other Borrowings on the Consolidated Balance Sheet (See Footnote 11.) in the event of a default under either facility.
The Repurchase Facility balance is net of deferred costs of $186,000, and $310,000 as of December 31, 1996, and 1995, respectively. The interest rate on the Repurchase Facility is the one-month LIBOR, plus 3.25%. The relevant LIBOR was 5.5% as of December 31, 1996, and 5.7% as of December 31, 1995. In addition to amounts in the restricted cash accounts, advances on the Repurchase Facility were secured by Contracts aggregating approximately $23 million and $31 million as of December 31, 1996, and 1995, respectively. These amounts include $1.5 million and $642,000 of Contracts which were delivered, but not yet funded by Cargill, as of December 31, 1996, and 1995, respectively.
(10) SUBORDINATED NOTES, NET
On November 18, 1996, the Company received net cash proceeds of $19.0 million from the issuance of the Notes in an underwritten public offering, after deducting the underwriting discount and issuance costs. The proceeds were used to repay borrowings under the NIM Facility (included in other borrowing on the consolidated balance sheets), partially repay borrowings under the Repurchase Facility and as other general working capital.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest on the Notes is payable monthly commencing January 1, 1997, at an interest rate of 10.25% per annum, until December 1, 2003, when the entire $20 million principal is due in full. Interest expense, including amortization of underwriting discount and issuance costs, was $252,000 for the year ended December 31, 1996. The Company recognizes interest and amortization expenses related to the Notes using a method which approximates the effective interest method over the expected redemption period. The Notes are redeemable at the option of the Company after December 1, 1999. If the Company redeems the Notes prior to maturity, it will pay in cash a redemption price equal to the following percentages of the principal amount of the Notes redeemed, plus interest to the date fixed for redemption:
The Notes are redeemable at the option of the holders in the event of the death of a holder (subject to certain individual and aggregate annual limitations) and in the event of a fundamental structural change in the Company or fundamental change of business as defined in the indenture pursuant to which the Notes were issued. The Notes are subordinated to certain existing and future indebtedness of the Company as defined in the indenture. The indenture requires the Company to comply with their covenants. Management believes that the Company was in compliance with these covenants at December 31, 1996.
As of December 31, 1996, the $20 million outstanding principal balance of the Notes is reported net of unamortized underwriting discount and issuance costs of approximately $1.0 million.
(11) OTHER BORROWINGS
In September 1995, the Company entered into the NIM Facility with Cargill, which is collateralized by the Subordinated Securities and the ESRs. (See Footnote 19.) The NIM Facility and the Repurchase Facility have cross-default and cross-collateralization clauses which state that the Company must be in compliance with all covenants relating to both agreements at all times. In November of 1996, the Company paid-off the entire outstanding balance with proceeds from the issuance of the Notes, but may draw on the facility as required to pay securitization costs and expenses. As of December 31, 1995, the Company had drawn $7.4 million under this facility. The interest rate on the NIM Facility is the one-month LIBOR, plus 7%. The Company also pays an annual commitment fee payable in four quarterly installments. The NIM Facility has a contractual maturity date of May 22, 1998. The NIM Facility is subject to certain restrictive covenants. If these covenants are not met, a termination of the facility could occur. As of December 31, 1996, and 1995, management believes the Company was in compliance with its covenants. In January 1997 (unaudited), the Company entered into an agreement changing certain terms of the NIM Facility and reducing the commitment amount to $10 million and reducing the annual fee to $100,000.
The Company retired a bridge financing facility of $2.5 million with proceeds of the NIM Facility. The Bridge Financing Facility had an interest rate of 12%.
(12) PREFERRED STOCK
(a) Redeemable Preferred Stock
Each outstanding share of redeemable Preferred Stock was converted into 23 shares of Common Stock in May 1996 when the Company completed the initial public offering of its Common Stock. In June 1996, $574,454 of dividends were paid to the holders of the redeemable Preferred Stock.
The holders of the Series A, Series B and Series C Preferred Stock were entitled to receive cumulative dividends of 4%, 6% and 4%, respectively, of the stated value of the shares when and as declared by the Board of Directors. No dividends were to be paid prior to the earlier of: (i) July 15, 1998, (ii) 30 days following the
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's initial public offering or (iii) a liquidation of the Company. Upon liquidation, holders of the Preferred Stock were entitled to receive, in preference to any payment on the Common Stock, an amount equal to the stated value of the shares, plus any accrued and unpaid dividends. The Preferred Stock was redeemable, at the option of the holder, five years (for the Series A and Series C) or two years (for the Series B) from the date of issue at the stated value, plus accumulated dividends. Each share of redeemable Preferred Stock automatically converted into 23 shares of Common Stock upon the closing of the Company's initial public offering of its Common Stock.
The changes in redeemable Preferred Stock are as follows:
(b) Blank Check Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of 1,817,718 shares of Preferred Stock that have not been designated or issued (blank check preferred) and may be subject, without shareholder approval, to being issued in one or more series with such preferences, limitations and relative rights as are determined by the Board of Directors of the Company at the time of the issuance.
(c) Warrants
In July 1993, the Company issued to Cargill a warrant in connection with the Repurchase Facility for 35,294 shares of the Company's Series A redeemable Preferred Stock. The warrant entitled Cargill to acquire a like number of shares of Series A redeemable Preferred Stock for an exercise price in the range of $33.17 per share to $66.17 per share based upon the net book value per share of the Common Stock. The warrant was to expire on the earlier of: (i) July 15, 1999, (ii) the closing of an initial public offering or (iii) the termination of the Repurchase Facility by Cargill due to a material breach by Cargill. The warrant was fully exercised by Cargill in September 1995, at an exercise price of $33.17 per share.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses estimated fair values for its financial instruments, as well as the methods and significant assumptions used to estimate fair values. The following information does not purport to represent the aggregate net fair value of the Company.
Installment Contracts Held-for-Sale
The carrying value of Contracts held-for-sale represents the Company's cost basis in the Contracts. Also, since the Company intends to hold the Contracts for a relatively short period of time and then sell them through a securitization, typically at par, fair values of Contracts held-for-sale is estimated to be par value.
Installment Contracts Held-for-Investment
Estimates have been made, based on historical experience, of the value of the Contracts within the held-for-investment portfolio. The carrying value is reported net of an allowance for the probable losses on these Contracts and is a reasonable estimate of what management believes to be the fair value of the Contracts in this portfolio.
Asset-Backed Securities Held-to-Maturity and Excess Servicing Receivables
The fair values of the asset-backed securities held-to-maturity (elsewhere referred to as Subordinated Securities) and the ESRs are estimated by discounting future cash flows using credit and discount rates that the Company believes reflect the current market conditions and estimated credit, interest rate and prepayment risks associated with similar types of instruments.
Asset-Backed Securities Available-for-Sale
Asset-backed securities available-for-sale are valued based on current market conditions and estimated credit, interest rate and prepayment risks associated with similar types of instruments and, thus, the carrying value approximates fair value.
Subordinated Notes Payable
As the Notes were issued in November 1996, the carrying value approximates the market value, given market prices and rates for similar debt with similar remaining terms as of December 31, 1996.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Repurchase Facility and Other Borrowings
The carrying value approximates fair value as these facilities reprice frequently at market interest rates.
Lease Liability
The fair value of the lease liabilities is estimated by discounting the future cash obligations using a rate that the Company believes reflects the market interest rate for similar types of instruments.
Hedge Liability
The carrying value approximates fair value as this position refixes frequently at market rates. The fair value of the hedge position is based upon quoted market prices.
(14) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases office space, computers and other equipment under various operating leases. Future minimum rental payments on these operating leases are as follows:
Total lease expense for the years ended December 31, 1996, and 1995, the Transition Period, and the Initial Fiscal Year was $696,000, $445,000, $134,000 and $103,000, respectively.
The Company also leases furniture and equipment under various capital leases with a related party. The future minimum lease payments on these capital leases are as follows:
(b) Litigation
The Company is subject to lawsuits which arise in the ordinary course of business. Management is of the opinion, based in part upon consultation with its counsel, that the liability to the Company, if any, arising from existing and threatened lawsuits would have no material adverse effect on the Company's financial position and results of operations.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) INCOME TAXES
The components of income tax expense for the year ended December 31, 1996, and 1995, the Transition Period and the Initial Fiscal Year are as follows:
A reconciliation of expected income taxes computed using the federal income tax rate of 34% to taxes actually provided is set forth as follows:
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes result from the temporary differences between the tax basis of an asset or a liability and its reported amount in the consolidated balance sheets. The significant components that comprise deferred tax assets and liabilities at December 31, 1996, and 1995, are as follows:
Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize deferred tax assets existing at December 31, 1996, and 1995.
(16) 401(K) PLAN
The Company adopted a defined contribution plan, pursuant to Internal Revenue Code Section 401(k), effective February 1, 1994. Eligible employees, generally those who have completed more than 90 days of service, may elect to contribute from 2% to 20% of their pre-tax compensation. Voluntary Company contributions to the plan are allocated based on 50% of the employee contributions up to $1,000 per calendar year. The plan may be terminated by the Company at any time. Employer contributions to the plan were approximately $58,000, $37,000, $25,000 and $14,000 for the year ended December 31, 1996, and 1995, the Transition Period and the Initial Fiscal Year.
(17) STOCK OPTION PLANS
The Company's 1995 stock option plan (Employee Plan) covers 450,000 shares of Common Stock. The Employee Plan permits the grant of incentive stock options or non-qualified options to any employees of the Company. Incentive stock options may not have an exercise price of less than the fair market value of the Common Stock on the date of grant, except options granted to holders of more than 10% of the Company's Common Stock may not have an exercise price of less than 110% of the fair market value of the Common Stock on the date of the grant. The Compensation Committee of the Board of Directors administers the Employee Plan and determines the employees who may participate, the amount of timing of each option grant and the vesting schedule for options. As of December 31, 1996, and 1995, stock options representing 511,338 and 442,500 shares of common stock, respectively, were outstanding.
The Company's separate stock option plan for its non-employee Directors (Director Plan) covers 100,000 shares of Common Stock. The Director Plan provides for the award of non-qualified options, which expire five years from the date of grant, covering 20,000 shares of Common Stock to each non-employee director on the date of the plan's adoption and to any future elected or appointed non-employee director. Each of the options granted to the four current non-employee directors is at an exercise price of $7.25 per share. One-fourth of the option shares were vested on the date of grant and the balance will vest over the subsequent three years at a rate of one-third per year. Any future option grant will be at an exercise price equal to the fair market value of the Common Stock on the date
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the grant. At December 31, 1996, stock options representing 80,000 shares of Common Stock were outstanding and 40,000 were vested.
Had compensation cost for the Company's stock-based compensation plan been determined consistent with FASB No. 123, the Company's net income and earnings per share (EPS) would have been reduced to the pro forma amounts indicated below:
Pro forma net income reflects only options granted in 1996 and 1995. The full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options vesting period and compensation cost for options granted prior to January 1, 1995, is not considered.
The per share weighed-average fair value of stock options granted during 1996 and 1995 was approximately $3.90. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: zero dividend yield, expected volatility of approximately 47%, risk-free interest rates of approximately 7% and an expected life of approximately six years.
A summary of the status of the Company's employee and director stock option plans as of December 31, 1996, and 1995, and changes during the years ended on those dates is presented below.
The following table summarizes information about employee stock options outstanding at December 31, 1996:
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) RELATED PARTY TRANSACTIONS
During the year ended December 31, 1995, the Company entered into employment agreements with its three senior executives, which supersede previous agreements and extend through December 31, 1998. Additionally, the Company has other borrowings with shareholders as discussed in Footnotes 9 and 11 and capital lease arrangements with a related party as discussed in Footnotes 8 and 14.
(19) SUBSEQUENT EVENTS (UNAUDITED)
In January 1997, the Company announced that it had entered into an agreement with Cargill modifying the existing Repurchase Facility between the Company and Cargill. Under the terms of the agreement, the Company will have the right, at its option, to terminate the Repurchase Facility at any time through May 31, 1997, by providing Cargill with 14 days written notice and repaying the outstanding balance of the facility. In exchange for this early termination option, the Company issued Cargill 174,500 shares of unregistered Common Stock with a fair value of $10.88 per share as of the date of issuance. After issuance of these shares, Cargill's ownership of the Company's Common Stock increased to 13.4% from its current 11.6%. If the Company does not elect to exercise its right to terminate the Repurchase Facility, the market value of these shares will be credited against future repurchase fees that become due under the Repurchase Facility. If the Company elects to terminate the Repurchase Facility, the market value of the Common Stock issued to Cargill, as well as approximately $155,000 of capitalized expenses incurred in connection with the creation of the Repurchase Facility, will be written-off. Also included in this agreement is a modification of the NIM Facility (included in Other Borrowings on the Consolidated Balance Sheet) that reduced maximum borrowings from $15 million to $10 million.
(20) QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly operating results for the years ended December 31, 1996, and 1995. This information has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments (which consist solely of normal recurring adjustments) necessary to present fairly the financial information of such periods.
ACC CONSUMER FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS. The information set forth below describes the directors and executive officers of the Company as of February 15, 1997.
ROCCO J. FABIANO, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. Mr. Fabiano is a Founder of ACC and is the Chairman of the Board and Chief Executive Officer. In 1991, Mr. Fabiano co-founded Consumer Portfolio Services, Inc. and acted as a consultant to that company until December 1992, at which time he began work on the formation of ACC. He also has been the Chairman of the Board of Far Western Bank, an Executive Vice President of Imperial Corporation of America, Chief Operating Officer of Ameristar Mortgage Corporation and Senior Consultant for KPMG Peat Marwick. Mr. Fabiano holds a BS in Genetics and an MS in Protein Chemistry from Colorado State University and an MBA in Finance from Cornell University.
GARY S. BURDICK, PRESIDENT. Mr. Burdick is a Founder of ACC and has been the President since September 1995. Mr. Burdick was Chairman of the Board and Chief Executive Officer of ACC from July 1993 to September 1995. Mr. Burdick worked from January through June of 1993 as an advisor to the Ministry of Privatization for the Czech Republic in Prague as part of a United States State Department Aid to Developing Nations program. From May 1991 to December 1992, Mr. Burdick was an independent consultant and contributed time to Rebuild LA Mr. Burdick was a Director of Prudential Securities from 1989 to April 1991. He also has specialized in mortgage finance and asset securitizations as a Vice President of Goldman Sachs and a Vice President of Lehman Brothers. Mr. Burdick holds a BA in Economics and a BS in Environmental Studies from the University of California at Santa Barbara.
RELLEN M. STEWART, CHIEF OPERATING OFFICER, CHIEF FINANCIAL OFFICER AND TREASURER. Mr. Stewart is a Founder of ACC and has been the Chief Operating Officer and Chief Financial Officer of ACC since July 1993. Mr. Stewart was also President of ACC from July 1993 to September 1995. From 1988 to July 1993, Mr. Stewart was an Executive Vice President of EurekaBank. From 1977 to 1988, Mr. Stewart was employed by KPMG Peat Marwick becoming a Partner in 1984 and later becoming the firm's National Practice Director for consulting to the mortgage industry. He also has been a Financial Analyst for Wells Fargo Bank. Mr. Stewart holds a BS in Business Administration and an MBA in Finance from the University of California at Berkeley.
JOHN J. CRUZ, SENIOR VICE PRESIDENT OF CONTRACT SERVICING. Mr. Cruz joined ACC in July 1993 as Vice President of Collections. In October 1996, Mr. Cruz became a Senior Vice President. From July 1991 to July 1993, Mr. Cruz was Collections Manager for Consumer Portfolio Services, Inc. Mr. Cruz was Vice President and Collections Manager of Far Western Bank from 1987 to April 1991. He also has held the position of General Manager of Pacific Coast Collections.
R. FRANK MERCER, SENIOR VICE PRESIDENT, CHIEF CREDIT OFFICER. Mr. Mercer joined ACC in July 1993 as Vice President of Credit Administration. He was promoted to Senior Vice President in May 1994 and was made Chief Credit Officer in September 1995. Mr. Mercer worked as an independent banking consultant and mortgage broker from December 1992 to July 1993. From 1990 to November 1992, Mr. Mercer was a Vice President of Financial Services of Olympian Bancorp. He also has held positions as Vice President of Consumer Loan Operations of Imperial Savings Association, Vice President of Landmark Thrift and Loan, Principal of RFM Financial Services and District Manager for Mellon Financial Services.
JACK R. COHEN, VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY. Mr. Cohen joined ACC as Vice President and Corporate Counsel in August 1995. He became Secretary of the Company in September 1995 and General Counsel in August 1996. Mr. Cohen was in private practice from November 1994 to July 1995. Mr. Cohen was Executive Vice President and General Counsel of Coast to Coast Marketing, Inc., from February 1992 to October 1994. From May 1991 to January 1992, Mr. Cohen was Vice President and Attorney for Republic Factors Corp. He also has been Vice President and Senior Counsel of Imperial Savings Association, Associate Attorney for Jennings, Engstrand and Henrikson and Law Clerk for the US Bankruptcy Court. Mr. Cohen holds a BA in Psychology from Clark University and a JD from University of San Diego School of Law.
ETHAN J. FALK, DIRECTOR. Mr. Falk has been a Director since February 1995. Mr. Falk has been a shareholder in the law firm of Falk & Sharp, Professional Corporation, since 1990. Prior to founding Falk & Sharp, Mr. Falk was a partner in the law firm of Lillick & McHose. Mr. Falk holds a BA in Mathematics from the State University of New York at Binghamton and a JD from the University of Michigan Law School.
JACK P. FITZPATRICK, DIRECTOR. Mr. Fitzpatrick has been a Director since February 1995. Mr. Fitzpatrick is the Chief Financial Officer of Multichannel Communications Sciences, Inc. and has held this position since July 1995. From July 1993 to May 1995, Mr. Fitzpatrick was the Chief Financial Officer of Diatek/Arkive Information Systems. From 1989 to July 1993, Mr. Fitzpatrick was the Chief Financial Officer and, later, Vice President of Sales for Pacific Data Products. He also has held positions as Chief Financial Officer of Syntro, Manager of Strategic Planning for Xerox and Senior Consultant for KPMG Peat Marwick. Mr. Fitzpatrick holds a BA in Applied Mathematics, an MS in Computer Science and an MBA from Harvard University.
JEFFREY S. LAMBERT, DIRECTOR. Mr. Lambert has been a Director since July 1993. Mr. Lambert is the Chief Financial Officer and a Director of the general partner of Strome Susskind Investment Management, LP, and Strome Susskind Securities, LP, a member firm of the National Association of Securities Dealers, and has held both positions since November 1993. Mr. Lambert is also the Chief Financial Officer and a Director of Strome Susskind & Co. and has held this position since July 1992. From 1987 to July 1992, Mr. Lambert was the Chief Financial Officer of Kayne Anderson & Co. He also has held the position of Senior Accountant for Oppenheim, Appell & Dixon. Mr. Lambert holds a BS in Accounting from California State University Northridge.
JEFFREY E. SUSSKIND, DIRECTOR. Mr. Susskind has been a Director since July 1993. Mr. Susskind is a Vice President and Director of the general partner of Strome Susskind Investment Management, LP, and Strome Susskind Securities, LP, and has held both positions since November 1993. Mr. Susskind is also a Vice President and Director of Strome Susskind & Co. and has held this position since February 1992. From 1987 to July 1992, Mr. Susskind was an Analyst with Kayne Anderson & Co. He also has held the position of Analyst with Goldman Sachs and with Donaldson, Lufkin & Jenrette. Mr. Susskind holds a BS in Economics from the University of Pennsylvania and a JD from the University of Michigan Law School.
KEY EMPLOYEES
The information set forth below describes key employees of the Company who are not executive officers as of February 15, 1997
BRETT L. BECKERMAN, VICE PRESIDENT OF INFORMATION TECHNOLOGY. Mr. Beckerman has been Vice President of Information Technology since August 1993. From 1989 to August 1993, Mr. Beckerman was Data Processing Supervisor for LSI Financial Group. He also has been an Operations Manager of Vision, Inc., and a Senior Computer Operator for Quintec Insulectro. Mr. Beckerman holds a BS in Management Information Systems from California State University at Long Beach.
DOUGLAS E. BROWN, VICE PRESIDENT OF COLLECTIONS. Mr. Brown joined ACC in October 1993 as Collections Manager. In October 1996, Mr. Brown became Vice President of Collections. From April 1991 to September 1993, Mr. Brown was Collections Manager at FB Collections, a collections agency. Mr. Brown has also been the Assistant Vice President of Collections of Far Western Bank.
ANTHONY N. FIDUK, VICE PRESIDENT OF NATIONAL ACCOUNTS. Mr. Fiduk has been ACC's Vice President of National Accounts since December 1993. From November 1992 to November 1993, Mr. Fiduk was Finance Manager for Huntington Beach Dodge, Inc. and from July 1992 to October 1992 was Regional Marketing Director for Bedford Financial Corp. Mr. Fiduk was a Loan Officer with Interstate Diversified Financial from September 1990 to June 1992. He also has held positions as Assistant Vice President of Loan Origination's for Far Western Bank, Credit Underwriter for Lloyd Anderson Companies and Branch Manager for Transamerica Financial Services, Inc. Mr. Fiduk holds a BA in Economics from University of California at San Diego.
ERNEST M. GARCIA, VICE PRESIDENT OF CREDIT ADMINISTRATION. Mr. Garcia has been with ACC since November 1993 and became the Company's Vice President of Credit Administration in May 1994. Mr. Garcia was an Assistant Vice President for First Fidelity Thrift and Loan from 1989 to September 1993. He also has held positions as Assistant Vice President for American Thrift and Loan, Branch Manager for California Thrift and Loan and Branch Manager for Household Finance.
SHAEMUS A. GARLAND, VICE PRESIDENT AND CONTROLLER. Mr. Garland has been the Controller of ACC since September 1995. In October 1996, Mr. Garland became a Vice President. From November 1993 to September 1995, Mr. Garland was the Company's Accounting Manager. Previously, Mr. Garland spent four years with the United States Marine Corps. He holds a BS in Accounting from San Diego State University.
MICHAEL D. LOPRESTI, VICE PRESIDENT AND NATIONAL SALES MANAGER. Mr. LoPresti has been Vice President and National Sales Manager of ACC since August 1993. From January 1992 to July 1993, Mr. LoPresti was Regional Vice President for Consumer Portfolio Services, Inc. Mr. LoPresti was New Car Manager for Long Beach Toyota from 1990 to January 1992. He also has held positions as Vice President of Loan Origination's of Far Western Bank, General Sales Manager for Auto Circus, Inc. and Finance Manager for Maurice J. Sopp and Son Chevrolet.
TAMMY S. RAMOS, VICE PRESIDENT OF FUNDING. Ms. Ramos has been with ACC since February 1994 and became Vice President of Funding in March 1996. From February 1994 to March 1996, she had been the Company's Manager of Funding. From 1987 until joining the Company in February 1994, Ms. Ramos had been an Operations Manager for First Fidelity Thrift and Loan. She also held the position of Operations Manager for the City of Margatte, Florida.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption "Executive Compensation" in the Company's definitive Proxy statement to be filed with the Securities and Exchange Commission on or before March 31, 1997, is incorporated herein by reference to this item 11.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy statement to be filed with the Securities and Exchange Commission on or before March 31, 1997, is incorporated herein by reference in response to this item 12.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Transactions" in the Company's definitive Proxy statement to be filed with the Securities and Exchange Commission on or before March 31, 1997, is incorporated herein by reference in response to this item 13.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
(c) Exhibits
(1) Incorporated by reference to exhibits filed with the Commission in the Company Registration Statement on Form S-1 (Registration No. 33-98626).
(2) Incorporated by reference to exhibits filed with the Commission in the Company Registration Statement on Form S-1 (Registration No. 333-12605).
(d) Financial Statement Schedules
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ACC CONSUMER FINANCE CORPORATION
By: /s/ Rocco J. Fabiano _______________________________ Rocco J. Fabiano Chief Executive Officer
Dated: March 26, 1997 ____________________________
In accordance with the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 26, 1997 By: /s/ Rocco Fabiano ____________________________ Rocco Fabiano Chairman of the Board
Date: March 26, 1997 By: /s/ Rellen M. Stewart ____________________________ Rellen M. Stewart Chief Financial Officer
Date: March 26, 1997 By: /s/ Shaemus A. Garland ____________________________ Shaemus A. Garland Vice President and Controller
Date: March 26, 1997 By: /s/ Jack P. Fitzpatrick ____________________________ Jack P. Fitzpatrick Director
Date: March 26, 1997 By: /s/ Ethan J. Falk ____________________________ Ethan J. Falk Director
Date: March 26, 1997 By: /s/ Jeffrey S. Lambert ____________________________ Jeffrey S. Lambert Director
Date: March 26, 1997 By: /s/ Jeffrey S. Susskind ____________________________ Jeffrey S. Susskind Director