Item 1: Business General
The Aegis Consumer Funding Group, Inc. is a specialty consumer finance company engaged in acquiring, securitizing and servicing automobile retail installment contracts ("finance contracts") originated by factory authorized new car dealers ("Dealers") in connection with the sale of late- model used and to a lesser extent, new cars to consumers with sub-prime credit. The Company acquires finance contracts primarily on used cars that, on average, are 1.7 years old with an original finance contract amount of $12,400 and a term of 55 months as of June 30, 1997. In January 1997, the Company began focusing its efforts to target a higher quality segment of the sub-prime market as a means of improving delinquency and default experience by tightening its underwriting guidelines. The Company, through the implemenation of its strategic business plan (discussed below) will be making additional changes to its automobile finance contract acquisition program, including, but not limited to, the introduction of new marketing programs and the implementation of credit scoring. The Company has acquired $1.25 billion of automobile finance contracts through June 30, 1997, $1.03 billion of which have been securitized in twenty-one offerings of asset-backed securities.
The Company was organized in 1989 to participate in the growing market for securitization of various consumer and other receivables. Following a quasi-reorganization in March 1992, the Company focused its business on the acquisition and securitization of high-yield consumer-based receivables. Upon acquiring The Clearing House Corporation (renamed "Aegis Auto Finance, Inc.") in June 1993, the Company began funding sub-prime automobile finance contracts. Since its inception, the Company has completed over thirty private placement securitizations of consumer and other receivables, including sub- prime automobile finance contracts as well as medical equipment leases, loans originated under the federal Department of Housing and Urban Development's home improvement loans program ("HUD Title I Loans") and mutual fund fee receivables. In July 1996, the Company began designing its loan servicing platform through its wholly owned subsidiary, Systems & Services, Technologies, Inc. ("SST") and began servicing its loan acquisitions in January 1997.
During the fiscal year ended june 30, 1997, the Company had a net loss of approximately $44.5 million and its financial condition is currently critical. The Company has adopted a new business plan described below which if successful, might enable the Company to continue ts operations. The Company believes that its business plan can be achieved with the credit facilities available to it. However, there can be no assurance the Company will be successful in implementing its business plan. If it is unable to do so, the Company will require additional financing and there can be no assurance that sufficient financing will be available to the Company on satisfactory terms, or at all. If the Company is unable to obtain any needed financing, it will not be able to continue in operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operation".
Beginning in 1994, the Company focused its business exclusively on the automobile finance business and achieved significant growth until its third quarter of the fiscal year ended June 30, 1997. During the quarter ended March 31, 1997, the Company's finance contracts acquisitions volume decreased substantially to $110.6 million from a quarterly high of $190.8 million in September 1996, and this trend continued into the quarter ended September 30, 1997. during this time, the Company experienced a significant increase in delinquencies and losses from the disposition of the collateral securing defaulted loans. The decrease in loan acquisitions reflects the Company's change in underwriting guidelines to its primary program to attempt to decrease delinquency and loss performance. The Company anticipates its acquisition levels to be approximately $10.5 million to $15.0 million per month while it continues to focus on decreasing its loss ratios, operating costs and modifying existing and developing new loan products to attract better quality credits and improved portfolio performance. Following the pursuit of new programs, management believes the volume of loan acquisition should gradually increase to a monthly average of between $20 million to $30 million by the quarter ending June 30, 1998.
During its growth phase, the Company expanded to three regional processing centers, a collections facility, a systems development group and a sales force in excess of 50 people, not including its three independent broker relationships, doing business in 32 states. During this time period, the Company's dealer network exceeded 4,000 automobile dealerships, with approximately 2,200 active Dealers and 1,100 funding dealers. As of September 30, 1997, the Company had 4,000 approved Dealers, 2,000 active Dealers and 825 funding Dealers. (Approved Dealers are dealers that the Company will accept Finance contract applications from, Active Dealers are approved Dealers that have sent applications to the Company within the past 90 days and Funding Dealers are approved Dealers from which the Company has acquired finance contracts). As of September 30, 1997, the Company has one processing center located in Marietta, Georgia, and as of October 20, 1997, 16 sales people and two independent broker relationships.
During the fiscal year ended June 30, 1997, the percentage of the Company's delinquent receivables dramtically increased to 20.5% at June 30, 1997, including finance contracts in repossesion or bankruptcy. This increase coupled with decreased recovery rates or liquidated collateral resulted in the Company recording a $49.0 million write down on its retained interests in securitized receivables which caused its $44.5 million net loss for the fiscal year ended June 30, 1997. As a result of the delays in the filing of this annual 10-K with the Securities and Exchange Commission, the Company, in evaluating its retained interests in securitized receivables for the quarter ended September 30, 1997, discovered that the estimates used at June 30, 1997 in its evaluation process, were understated and resulted in an additional $3.0 million write down in the quarter ended June 30, 1997, from its initial write down of $10.6 million, increasing the write down for the quarter to $13.6 million. At June 30, 1997, the Company had a deficit net worth of $10.6 million.
Strategic Business Plan
The Company's new executive management team (see Executive Management below) has developed and is implementing its strategis business plan (the "Plan") to: rebuild the Company's equity; reduce debt burden as well as the related expense; enhance operating capital; restructure operations and administrative functions to achieve efficiencies and reduce operating expenses; introduce new products and services and restructure existing products to achieve proditability and credit performance in a highly competitive market; and enhance credit management processes. The Company's Plan is in its initial phases and if the Company is not successful in implementing such Plan, the Company may no longer be able to continue operations. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations").
Executive Management. As of October 17, 1997, the Company has either accepted the resignations or terminated certain executive officers. These officers included Gary Peiffer, Joseph Battiato, Angelo Appierto and Jorge Rios, the Company's general counsel, President, Chief Executive Officer and National Sales Manager, respectively. Since the departure of these executives, the Company has assembled a new management team comprised of Matthew Burns as the Chief Executive Officer, William Henle and Dina Penepent remain respectively as the Company's Chief Operating Officer and Chief Financial Officer. The role of National Sales Manager has been filled by one of the Company's district managers and the role of general counsel has been filled by interanal corporate cousel with support from various to a New York based law firms.
Net Worth. In accordance with the Plan, On October 16, 1997 III Finance Ltd. ("III Finance") and the High Risk Opportunities Fund Ltd. ("HUB") converted $21.3 million of the Company's 12% Convertible Subordianted Debenture (the "Debenture") into $21.1 million of 12.75% Cumulative Preferred Stock (the "Preferred Stock"). The Preferred Stock is convertible into common stock at $1.26 per share. Additionally, on November 10, 1997, the remaining debt holder converted its $4.0 million of subordinated debt into $4.0 million of preferred stock with substantially the same terms as the conversion of the Debenture, except that $2.0 million of the preferred stock is convertible into common stock at $2.00 per share. Had these conversions of debt to equity occured prior to the Company's fiscal year ended June 30, 1997, the Company's positive net worth would have been approximately $13.4 million. The Company expects to report a loss for the quarter ended September 30, 1997, of approximately $3.6 million. The conversion of debt to equity reduces the Company's annual debt service requirements by approximately $3.0 million. Payment of Preferred Stock dividends, if any, are subject to the approval of the Board of Directors.
Operating Capital. On November 10, 1997, the Company agreed in principle, subject to certain creditor and shareholder approval, to sell all of its stock in its wholly owned subsidiary, SST for $7.0 million to a related entity of III Finance. The Company received a down payment aggregating $2.0 million, $800,000 on November 10, 1997 and $1.2 million on November 14, 1997, and will receive the remaining $5.0 million upon the transaction closing. With this sale, the Company has retained an option, to be exercised at the Company's discretion, to repurchase the stock of SST for the sale price, plus accretion at the annual rate of 5%, on or before December 31, 1998. Upon approval and closing, the $5.0 million balance of proceeds of this sale will enhance the Company's liquidity and operating capital position. To further enhance operating funds, the Company intends on enter into discussions to restructure the repayment terms of its existing debt to enhance its cash flow. The Company is requesting its lender to allow the Company to service its remaining debt (excluding warehouse lines) through the cash flows arising from the underlying collateral thus relieving the Company of approximately $3.8 million in annual payments and allowing the funds to be utilized to support operations and the restructuring. There can be no assurance, that the Company will be successful in renegotiating its repayment terms or that with the additional operating capital, that the Company will be successful in its efforts to to implement its Plan.
Operations and Administration. A key element of the Company's Plan is the restructuring of the Company. To this end the Company, in September 1997, comleted the consolidation of all loan processing centers to its facility in Marietta, Georgia. Further, the Company has annouced the relocation of its New Jersey based Headquarters Group to the cost efficient production center in Georgia. The relocation from New Jersey to Georgia is expected to be completed by January 1998. Additionally, the Company has restructured and reduced its sales force. The Company intends to continue to eliminate redundant functions, streamline processes as well as reduce management in order to reduce variable and fixed operating expenses. As a result of operations and administrative restructuring activities, the Company believes it can
reduce its other operating expenses by approximately $20.0 million from that experienced in the prior period ended June 30, 1997. The Company expects to incur a restructuring charge in the quarter ending December 31, 1997.
Product and Services. Under the Plan, the Company has initiated a full review of its products as well as the development of new products and services designed to achieve cash flow efficiency and improved credit performance in a highly competive market.
Distincitve Financing Programs. The Company believes that financing flexibility is a significant competive advantage. New programs, that should be in the market place by January 1, 1998, will focus on increasing the Company's net spread value and credit performance. The Company will continue to approve credit applications by determining monthly payment amounts that consumers can afford, rather than limiting its approval to a specific automobile, providing Dealers the flexibility to offer their customers a wide range of automobiles. The Compoany's financing programs will enable the customer to purchase the vehicle with a variety of financial choices. One program will allow a reduced payment stream through a balloon note that can be refinanced at the end of the contract. This allows the customer who has had credit problems to purchase a higher quality auto with a reduced payment which will have a lower impact on the customer's total fixed obligations. Other programs involve providing the finance and insurance professionals, of the Company's Dealer base, assistance and support capabilities in the front end process of the Dealer supplying the initial application to the Company, thereby protecting the Company from adverse selection.
Superior Dealer Service. By providing prompt serivce, consistent credit decisions and a reliable source of finaancing for subub-prime consumers, the Company believes this should increase the volume of quality finance contracts acquired from each Dealer. The Company typically responds to credit applications within three hours, and generally pays the Dealer within 24 hours of receipt of completed finance contract documentation.
Nationwide Diversification and Centralized Operations. The Company currently acquires finance contracts in 28 states and operates in one regional processing center. In May 1997 and September 1997, the Company closed its processing centers in Irvine, California and Jersey City, New Jersey, respectively, in an effort to further centralize its operations and reduce costs. The Company belives that its centralized operations are a more efficient method of processing finance contracts than operating numerous local facilities. The Company seeks to mitigate risk of loss due to regional economic downturns and to reduce dependency on a limited number of local markets by maintaining a geographically diverse finance contract portfolio. While the Company establishes and maintains relationships with Dealers through sales representatives located in the geographic markets served by the Company, all of the Company's day-to-day operatons are centralized at the Company's processing center in Marietta, Georgia. This structure allows the Company to closely monitor its underwriting operations and eliminates the expenses associated with full-service branch or mulitple regional offices.
Credit Management. The Company's strategy is to actively manage credit risk while maintaining the volume of finance contracts acquired, sold and serviced at manageable levels. Key elements of the Company's strategy are:
Active Credit Risk Management. The Company will focus its credit risk management on all aspects of the Company's underwriting, sales and servicing, with emphasis on correct origination of finance contracts. The Company has a credit committee chaired by its Chief Operating Officer that
evaluates the underwriting process, Dealer performance, servicer efficiency and portfolio performance. The Company's quality control department will review, on a live sample basis, finance contracts, supporting documentation and compliance with underwriting standards. The Company believes that effective credit risk management will build institutional investor demand for the Company's finance contracts.
Consistent Underwriting Standards. Through training, proprietary technology and intensive management review, the Company will strive to maintain consistent underwriting standards. These standards are designed to meet the criteria required by the Company's risk default insurance policies and to qualify the Company's finance contracts for securitization, and/or whole loan sales. The Company's credit approval system monitors multiple evaluation criteria, and performs in excess of 100 internal data integrity checks before the Company approves a finance contract for acquisition. The Company is in the process of developing and implementing a customized credit scorecard. Full implementation of this scorecard is not expected until the third quarter of the fiscal year ending June 30, 1998; however, elements of the customized scorecard program including tighter credit standards, have been incorporated in recent modifications to the Company's underwriting criteria. Through heightened training, credit assurance has been greatly enhanced at the production level.
Limited Loss Exposure. To reduce its potential losses on defaulted finance contracts, the Company insures each finance contract it acquires against damage to the financed vehicle through a vender's comprehensive single interest physical damage insurance policy (the "VSI Policy"). In addition, the Company purchases credit default insurance with respect to most of the finance contracts it acquires. After a claim approval process and the depletion of the policy deductible, credit default insurance pays the differnce between the loan balance due on default and all other recoveries, subject to certain other adjustments thereby mitigating loss exposure on such receivables. Moreover, the Company limits loan-to-value ratios and applies a purchase price discount to the finance contracts it acquires.
Servicing. In January 1997, Systems & Services Technologies, Inc. ("SST") began its operations as a loan servicing company, servicing loans acquired by the Company. The Company believes that performing all the servicing functions within SST will improve the overall performance of automobile receivables acquired by the Company. After the sale of SST, SST will continue to perform all of the servicing functions for the Company's finance contract acquisitions.
State-of-the-Art Technology. The combined knowledge and eperience of the Company's management has enabled it to develop and implement enhancements to proprietary computer systems and databases, AUTOMATE (finance contract acquisition) and PRIM (Product Reporting and Information Management) to effectively manage each stage in the financing cycle. The management team then leveraged its experience to develop and implement the loan processing and servicing systems and other operations. The inherent synergy between producer and servicer provides the Company's management with critical information by utilizing comparable micro-based systems and optics, eliminating time delays involved with paper retrieval systems.
Funding and Liquidity through Securitization. The Company uses warehouse facilities to provide funds for the acquisition of automobile finance contracts and securitization transactions, to reduce the impact of interest rate fluctuations and to reduce its cost of capital relative to traditional sources of corporate debt financing. Through June 30, 1997, the Company had securitized $1.03 billion of automobile finance contracts in twenty- one offerings of asset-backed securities. In March 1997, the Company secured a $1.0 billion purchase facility (the "Purchase Facility") which was one of the components of a multi-structured finance facility (the "Facility). The Purchase Facility contains a commitment from III Finance and III Limited Partnership for the purchase of $350.0 million of trust certificates. The Purchase Facility is supported by a $75.0 million warehouse line. As of June 30, 1997, the Company sold $252.9 million of Class A trust certificates and $136.2 of Class B trust certificates for an aggregate amount of $389.0 million under the Purchase Facility. The securitizations under the Purchase Facility are not rated. Seven of the Company's prior securitizations were rated by Duff & Phelps Credit Rating Co. ("Duff & Phelps") and three were rated by both Duff & Phelps and Fitch
Investors Service, L.P. ("Fitch"). The Company securitized $148.4 million of its automobile finance contracts through Aegis Auto Receivables Owners Trust (the "Owner Trust Facility") which were rated by Standard's & Poor's Rating Services ("Standard & Poors") and Moody's Investor Services, Inc. ("Moody's"). The Company also has approximately $226.0 million remaining on its $533.0 million commitment from Greenwich Capital Markets, Inc. ("Greenwich") to purchase and securitize automobile finance contracts (the "Securitization Facility"). The fulfillment of the remaining commitment is subject to customary conditions. Currently, the Company has not met these customary conditions and has not securitized under the Securitization Facility since September 1996. Under the Company's Plan, the Company intends to utilize multiple exit strategies including, but not limited to, whole loan sales and securitizations.
Industry Background/Competition
The sub-prime credit market is comprised of consumers who are deemed to be relatively high credit risks due to various factors, including, among other things, previous credit problems, the absence or limited extent of their prior credit history or limited financial resources. The sub-prime consumer automobile finance market is highly fragmented, consisting of many national, regional and local competitors. Historically, traditional financing sources (commercial banks, savings and loan associations, credit unions, captive finance companies and consumer lenders), many of which have significantly greater resources than the Company and may be able to offer more attractive finance contract acquisition prices to Dealers, have not consistently served this market. The Company believes that increased regulatory oversight and capital requirements imposed by market conditions and governmental agencies have limited the activities of many banks and savings and loan associations in the sub-prime credit market. As a result, the sub-prime credit market is primarily serviced by smaller finance organizations that solicit business when and as their capital resources permit. However, such traditional financing sources have been increasing their presence in this market. The Company believes no one of its competitors or group of competitors has a dominant presence in the market. The Company's strategy is still designed to capitalize on the market's lack of a major national financing source.
The Company's cash flows and results of operations may be affected adversely by rising interest rates. The Company's warehouse credit facilities are at floating rates of interest and increases in rates cannot immediately be passed on to consumers, whose finance contracts are at fixed rates of interest. In addition, rising interest rates result in a decrease in the Company's net spreads on securitization transactions, thereby decreasing future projected cash flows from retained interests in securitized receivables. Furthermore, the Company's discount rate utilized in determining its borrowing base may also rise, decreasing the amount available to borrow. Moreover, interest rates charged by the Company may be more significnatly affected by factors other than prevailing interest rates, most notably geographic distribution and varying state interest rate limitiations.
Since the quarter ended December 31, 1996, the sub-prime consumer finance industry has experienced tremendous turmoil and many companies financing consumers in the sub-prime credit market have experienced higher than expected credit losses on their loan portfolios. Some of the Company's competitors have filed for protection under federal bankruptcy laws while others have been acquired by or merged with other finance companies.
The Company believes that a portion of the increased delinquency rates can be attrituable to macroeconomic factor wich affected the sub-prime market generally. The Company also believes that the decline in the quality of its owned and managed portfolio of loans was, in part, attributable to increased competition in the sub-prime market. The Company believes that its high discount rate caused the Company's financing program to be adversely selected
by Dealers.
Management currently believes that the Plan can be achieved with the credit facilities available to it. However, there can be assurance the Company will be successful in implementing its Plan. If it is unable to do so, the Company will require additional financing and there can be no assuance that sufficient financing will be available to the Company on satisfactory terms or at all. If the Company is unable to obtain any needed financing, it will not be able to continue inopeation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Finance Contract Profile
The following tables provide information regarding the automobile finance contracts acquired and leases originated by the Company during the periods indicated. The Company commenced lease originations in April 1994 and ceased originations in the first quarter of its 1996 fiscal year.
Credit Evaluation and Procedures
Underwriting. The Company's automobile finance contract acquisition program is designed to acquire automobile finance contracts originated through factory-authorized new car Dealers, while offering them an opportunity to increase vehicle sales to consumers who typically do not qualify for traditional financing. As of June 30, 1997, the Company had entered into agreements with approximately 4,200 Dealers, located in 31 States, from which the Company accepts finance contract applications. (See Business - General).
The Company is striving to improve upon the effectiveness of its evaluation of credit risk, consistency in its credit decisions, the timely communication of credit decisions and its reliability as a funding source. The Company has developed, and is refining, the "in house" processing systems and controls specifically designed to support its evaluation process. The Company utilizes these systems and controls to assess each applicant's ability to repay the amounts due on the finance contract and the adequacy of the financed vehicle as collateral. In addition, the Company utilizes these systems to achieve consistent credit decisions and to reduce the elapsed time between receipt of a credit application from a Dealer and the Company's response to the Dealer. The Company requires each Dealer submitting a finance contract for acquisition to provide certain information to the Company, including a completed signed finance contract application that lists the applicant's assets, liabilities, income, credit and employment history as well as other personal information. The Company is currently developing a customized credit scorecard based on its historical data base. The Company expects to test its scorecard in the second quarter of its fiscal year ending June 30, 1998 with full implementation scheduled to occur in the third quarter ending March 31, 1998. The Company evaluates an applicant's ability to pay by verifying residence, employment and income and by considering the relationship of monthly income to monthly auto payment and monthly income to monthly debt burden, including expenses relating to the finance contract under consideration and expenses relating to automobile insurance. The Company also engages in a comprehensive evaluation of at least one credit bureau report from an independent credit bureau. The credit report typically contains information on matters such as historical payment experience, credit history with merchants and lenders, installment debt payments, defaults and bankruptcies, if any. The purpose of this credit review is to eliminate individuals whose credit quality is deteriorating or suggests too great a probability of default or whose credit experience is too limited for the Company to assess the probability of performance.
Based upon its review of information extracted from the credit bureau reports and the credit application, the Company may either (i) approve the credit application; (ii) approve the credit application with conditions; or (iii) decline the application. The credit analyst documents the decision and the Dealer is notified by facsimile transmission, typically within three hours of receipt by the Company of the credit application. In the fiscal years ended June 30, 1995, 1996 and 1997, the Company approved 41.8%, 41.3% and 36.9%, respectively, and funded 12.8%, 10.6% and 9.8%, respectively, of the credit applications received by it from Dealers.
Upon submission by the Dealer of the finance contract and related documentation, the Company undertakes a series of processes and procedures that are designed to: (i) substantiate the accuracy of information critical to the Company's original credit decision; (ii) verify that the finance contract submitted by the Dealer complies with both the conditions under which the credit approval was granted and the Company's transaction structure criteria, including any requirements for obtaining credit default insurance and (iii) confirm that the documentation complies with the Company's loss management requirements. These processes and procedures include the verification of collateral, borrower references and insurance prior to funding the finance contract. This verification process in many instances requires submission of supporting documentation and is performed solely by Company personnel.
The Company has designed its finance programs to limit the loss exposure on each transaction. The Company seeks to mitigate loss exposure by: (i) determining whether the applicant meets the Company's underwriting criteria, particularly whether the applicant has sufficient disposable income to meet such applicant's existing obligations and the obligations resulting from the proposed trans- action; (ii) limiting the credit it is willing to extend based upon its assess- ment of the applicant's ability to meet payment obligations and the value of the underlying collateral; (iii) requiring that physical damage insurance naming the Company as loss payee be maintained at all times by the obligor to protect the Company's financial interest (if such insurance lapses, the Company is nonetheless covered under the Company's vehicle single interest insurance policy); (iv) acquiring a security interest in the vehicle financed; and (v) obtaining credit default insurance with respect to most of its finance contracts. The degree of exposure in any transaction is a function of: (a) the creditworthiness of the applicant; (b) the extent of credit granted compared to the value of the underlying collateral; (c) the possibility of physical damage to, or the loss of the collateral; and (d) the potential for any legal impediment to the collection of the obligation or the repossession of the collateral. The Company determines the value of collateral based upon the MSRP, if new, or the Kelley Blue Book, if used. The Company has a general policy of not extending credit exceeding 100% (exclusive of Company approved service contracts, not to exceed an additional $1,500 and taxes, title, licensing and up to an additional $200 for Dealer documentation fees) of either the MSRP or the Kelley Blue Book retail value for a finance contract. While the Company does not require a down payment for finance contracts it acquires, a significant percentage of consumers elect to make a down payment. In the fiscal year ended June 30, 1997, 4.0% of the finance contracts acquired by the Company were new car finance contracts and 96.0% were used car finance contracts. (See Business - General).
Upon acquiring a finance contract, the Company acquires a security interest in the vehicle financed. The finance contracts acquired by the Company during the fiscal year ended June 30, 1995 averaged approximately $12,143 and had a weighted average annual interest rate of approximately 20.2%. Finance contracts acquired during the fiscal year ended June 30, 1996 averaged approximately $12,290 and had a weighted average annual interest rate of approximately 20.1%. Finance contracts acquired during the fiscal year ended June 30, 1997 averaged approximately $12,402 and had a weighted average annual interest rate of approximately 20.4%. All finance contracts acquired by the Company are fully amortizing (on the simple interest method) and provide for equal payments over the term of the contract (averaging 54 months). The portions of such payments allocable to principal and interest are, for payoff and deficiency purposes, determined in accordance with the law of the state in which the finance contract was acquired.
Dealers typically send credit applications to several financing sources. After reviewing the credit application, each financing source will notify the Dealer whether it is willing to acquire the finance contract and, if so, under what conditions. If more than one finance source has offered to acquire the finance contract, the Dealer typically will select the source based on an analysis of the "buy rate," or the interest rate, discount fees, finance contract amounts and other terms and conditions stipulated by the financing source. The Company believes that it's new programs together with building solid relationships with the Dealers should provide a more secure credit base than has existed in the past. The ability to process finance contract applications and respond to Dealers quickly and efficiently increase its chances of being selected by Dealers to acquire auto finance contracts as long as the Company's rates, discount and terms are competitive. The Company currently acquires finance contracts at a discount of 10% from Dealers. Upon acquiring a finance contract, the Company issues a check to the Dealer, and instructs their servicer to issue a "welcome" letter to the obligor, which advises the obligor of certain payment procedures.
When the Company was funding leases, the Company acquired title to the leased vehicle. Leases originated during the fiscal year ended June 30, 1995 averaged approximately $15,624, had a weighted average annual interest rate of approximately 16.6% and an average term of 55 months. During the year ended
June 30, 1996, the Company originated $436,000 of leases. Leases originated during the year ended June 30, 1996 averaged approximately $17,436, had a weighted average annual interest rate of approximately 17.1% and an average term of 57 months. All leases originated by the Company are amortized to the estimated wholesale residual value using the direct financing method and provide for equal payment over the term of the contract. In the quarter ended September 30, 1995, the Company ceased funding leases and has redirected all its efforts to acquiring finance contracts.
Auditing. The Company has dramatically changed its audit and quality assurance process to make them more timely and applicable to live loan processing. As a result, loans are audited for quality at teh time the laons are underwritten and prior to funding. Combined with the new credit underwriting guidelines, this is intended to provide a profitable net interest rate spread and acceptable credit performance on the loan portfolio. The Company's quality assurance department seeks to minimize errors and varianes in underwriting procedures by internally auditing or "re-underwriting" approximately 10% of all funded finance contracts. The quality assurance staff performs all of the underwriting and auditing functions on such finance contracts that were performed prior to the finance contracts being approved and funded. The results of such audits are then communicated to senior management, underwriting and sales personnel and used as a training tool.
Dealer Network
The Company is developing a marketing group that will be paid on the basis of loan quality as well as quantity. This new approach starts the quest for quality at the front at the front of the loan acquisition process to better ensure the ultimate performance of the loans acquired. Sales representatives are assigned to designated territories and are paid based on the quality of a loan's performance as well as on the basis of the volume of loans acquired.
The Company has also engaged four independent exclusive marketing brokers who earn flat fees per finance contract acquired in their designated territories which include Alabama, Florida, Louisiana, Massachusetts, Mississippi, Pennsylvania and South Carolina. All of the Company's business generated in such territories is the result of introductions by the independent marketing brokers. In the fiscal year ended June 30, 1997, approximately $142.4 million of finance contracts (approximately 24.1% of all finance contracts acquired during such period), were acquired from Dealers in Florida, Alabama and South Carolina (since January 1997), approximately $35.7 million of all finance contracts acquired in such period (approximately 6.0%) were acquired from Dealers in Louisiana and Mississippi and were introduced by such independent marketing brokers. In the fiscal year ended June 30, 1996, approximately $97.0 million of finance contracts and $300,000 of leases (approximately 21.5% and 68.8%, respectively, of all finance contracts acquired and leases originated during such period) were acquired or originated from Dealers in Florida and Alabama and approximately $37.6 million of all finance contracts acquired in such period (approximately 8.3%) were acquired from Dealers in Louisiana and Mississippi and were introduced by such independent marketing brokers. In the fiscal year ended June 30, 1995, approximately $32.1 million of finance contracts and leases (approximately 20.7%, of all finance contracts acquired and leases originated during such period) were originated by Dealers in Florida and approximately $25.4 million of all finance contracts acquired in the fiscal year ended June 30, 1995 (approximately 16.4%) were originated by Dealers in Louisiana and were introduced by such independent marketing brokers. As of October 20, 1997, the Company terminated or issued a notice of termination to its independent marketing brokers doing business in Louisiana, Mississippi and Pennsylvania. As a result, the number of broker relationships has been reduced from four to two. (See Business - General).
The Company continues to explore new marketing strategies in an effort to expand and enhance its Dealer base and finance contract acquisition volume. The Company will offer three finance contract programs to Dealers: (i) a new straight pay program; (ii) a military program; and (iii) a proprietary dealer lender assistance program. Recently, the Company implemented an extended warranty program with approved warranty service contract carriers. The warranty program allows the cost of an extended warranty to be funded above the Company's typical 100% of MSRP (within certain limits). In return for each extended warranty purchased, the Company receives a fee. Should the extended warranty be cancelled or the finance conract not go to term, the Company will receive a rebate of the unused premium financed. The Company markets its programs solely to factory authorized new car delaers, typically with used vehicle sales operations.
The Company targets factory authorized new car dealers for a number of reasons. The Company believes that factory authorized new car dealers generally have higher quality inventory than independent dealers and tend to attract customers with more desirable credit performance characteristics. Management of the Company also believes that factory authorized dealers are generally backed by greater capital levels as compared to independent dealers and are generally subject to periodic audits by their respective manufacturers.
The Company's field sales representatives identify and target Dealers that have established, or are considering establishing, customer solicitation programs designed to attract sub-prime credit consumers. Each field sales representative typically is responsible for pursuing and maintaining relation- ships with 50 to 100 Dealers. The Company's field sales representatives train the Dealer's personnel in the Company's finance programs. This training is continuous since dealerships generally experience a relatively high degree of personnel turnover. The training provided by the Company is designed to: (i) to identify consumers who will qualify for financing by the Company; (ii) assist the Dealer in obtianing the necessary documentation from consumers to meet underwriting requirements; and (iii) structure transactions that meet the Company's requirements. Approved Dealers enter into a non-exclusive written Dealer agreement with the Company (a "Dealer Agreement"). The Dealer Agreements generally provide that finance contracts are sold by the Dealer to the Company "without recourse" to the Dealer, except in limited circumstances including, among others, that: (i) the financed vehicle is not properly registered or titled showing the Company as first lienholder; (ii) the full down payment specified in the contract, if any, was not received by the Dealer; (iii) certain representations and warranties by the Dealer regarding the finance contract, the financed vehicle, the finance contract process and manner of sale are breached or untrue; or (iv) the Dealer has failed to comply with applicable federal and state consumer laws. The Company currently acquires finance contracts at a discount of 10% from Dealers.
The following table indicates, for the states in which the Company acquired finance contracts in the fiscal years ended June 30, 1993, 1994, 1995, 1996 and 1997, the total number of factory-authorized Dealers in such states, the number of Dealers from which the Company has acquired finance contracts and the finance contract acquisition volume of the Company in dollars for such periods.
During the fiscal year ended June 30, 1997, no single dealer accounted for more than 1.0% of the finance contracts acquired by the Company, and no group of Dealers under common control accounted for more than 2.3% of the finance contracts acquired by the Company. During the fiscal year ended June 30, 1996, no single Dealer accounted for more than 1.5% of the finance contracts acquired by the Company, and no group of Dealers under common control accounted for more than 6.0%, although one accounted for 5.1% of the finance contracts acquired by the Company. During the fiscal years ended June 30, 1994 and 1995, City Chevrolet Automotive Company, in Charlotte, North Carolina, accounted 12.6% and 4.5%, respectively, of the finance contracts acquired and leases originated by the Company during such periods, and Dealers in the Hendrick Automotive Group, including City Chevrolet Automotive Company, accounted for approximately 16.5% and 12.5%, respectively, of the finance contracts and leases acquired or originated by the Company during those periods. No other Dealer accounted for more than 5.0% and 3.0% of the finance contracts acquired by the Company in the fiscal years ended June 30, 1994 and 1995, respectively.
Warehouse Credit Facilities
The Company currently operates primarily under a $75.0 million warehouse facility for financing new acquisitions of automobile finance contract receivables which is provided by III Finance and III Global LTD. In addition to the above facility, the Company's leases are financed under a warehouse facility that no longer provides for new financing since the Company has not originated leases since August 1995. At June 30, 1997, the Company had $65.1 million available under its finance contract warehouse facility and had $7.6 million outstanding under its lease facility. To the extent the Company would be unable to secure alternative sources of funding, the loss of these facilities would have an adverse impact on the Company's finance contract acquisition activities. (See Managements Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources).
Securitization Program
The periodic securitization of finance contractshas been an integral part of the
Company's automobile finance program. Securitizations enable the Company to reliquify and redeploy its capital resources and warehouse credit facilities for the purchase of additional finance contracts. Through June 30, 1997, the Company completed twenty-one privately placed automobile finance contract securitizations totalling approximately $1.03 billion of automobile finance contracts. Nine of such securitizations were rated A+ by Duff & Phelps. In March 1997, the Company secured a $1.0 billion Purchase Facility which was one of the components of the Facility. The Purchase Facility contains a commitment from III Finance and III Limited Partnership for the purchase of $350.0 million of trust certificates. The Purchase Facility is supported by a $75.0 million warehouse credit facility described above. As of June 30, 1997, the Company sold $252.9 million of Class A trust certificates and $136.2 of Class B trust certificates for an aggregate amount of $389.0 million under the Purchase Facility. Future securitizations under the Purchase Facility ($611.0 million as of June 30, 1997) are subject to customary conditions and are uncommitted. In December 1995, the Company entered into a commitment to sell $175 million of sub-prime automobile finance contracts to be resold as asset-backed securities (the "Owner Trust Agreement"), which was rated AAA by Standard & Poor's and Aaa by Moody's. As of June 30, 1997, the Company sold approximately $148.4 million of automobile finance contracts to this facility. In October 1996, it was determined that the finance contracts underlying the securities were not performing in accordance with levels required under the Owner Trust Agreement. This event terminated the Company's remaining commitment of $26.6 million. In May 1996, the Company obtained a firm commitment from Greenwich to purchase and securitize up to $533.0 million of the Company's finance contract acquisitions until the commitment is filled, subject to customary conditions. Three securitizations aggregating $307.0 million which were rated A+ by Duff & Phelps were completed pursuant to this commitment . The Company has not met these customary customary conditions and has not securitized receivables under the Securitization Facility since September 1996.
In its securitization transactions, the Company sells pools of finance contracts to a special purpose subsidiary, which then sells the receivables to a trust in exchange for certificates ("Certificates") representing either a 100% undivided interest in, or secured obligation of, the trust. The Certificates are then sold to investors who receive principal and a stated pass-through rate of interest on the Certificate amount outstanding. The Company may also retain or sell an indirect interest in the transferred receivables that is subordinate to the interest of the Certificate holders. The retained interest entitles the holder to receive the residual cash flows from the trust after payment to investors, absorption of losses, if any, that arise in respect of the securitized finance contracts and payment of the other expenses and obligations of the trust. The Company is continually exploring other structures of securitization which can meet the changing needs of the financial and capital markets.
Upon each securitization, the Company recognizes the sale of finance contracts and records a gain or loss in an amount which takes into account the amounts expected to be received as a result of its retained interest, net of acquisition discounts and other deferred origination costs. The Company values each retained interest by calculating the net present value of its expected residual cash distributions from the trust. The calculation of the gain or loss and of the retained interest arising from the securitizations embody prepayment, delinquency, default, recovery and interest rate assumptions that the Company believes are reasonable and consistent with assumptions that other market participants would use for similar financial instruments, and are discounted assuming an interest rate that the Company believes a third party purchaser of such financial instrument would demand. If actual experience differs from these assumptions, additional gains or losses to the Company would result. During the fiscal year ended June 30, 1997, the Company's actual experience significantly differed from its original assumptions utilized in recognizing the initial gain on securitization transactions. These differences resulted in additional losses of approximately $49.0 million. The Company also recognized losses of approximately $7.5 million in the year ended June 30, 1996. At June 30, 1997, the Company held retained interests from the securitization of receivables which were carried at an aggregate value of $33.3 million which are pledged to secure borrowings of $34.8 million.
The Company relies significantly on its ability to securitize its finance contract portfolio in order to finance acquisitions of additional finance contracts. The securitization proceeds are utilized to repay borrowings under the Company's warehouse credit facility, thereby making the facility available to finance the acquisition of additional finance contracts. The ability to complete a securitization transaction is affected by a number of factors, some of which are beyond the Company's control, including conditions in the securities market in general, demand for the Company's asset-backed securities, conditions generally in the asset backed securitization market and approval by all parties to the terms of the transaction.
If the Company were unable to securitize or otherwise sell its finance contracts in a financial reporting period, the Company would incur a significant decline in total revenues and net income or report a loss for such period. If the Company were unable to securitize its receivables and did not have sufficient credit available, either under its warehouse credit facilities or from other sources, the Company would have to sell portions of its portfolio directly to investors or curtail its finance contract acquisition activities. As discussed in "Business-General", the Company is in the process of implementing its business plan which does not rely soley on securitization. There can be no assurance that the Company will be successful in implementing its business plan.
Servicing
In January 1997, the Company's wholly owned subsidiary, SST, began servicing the Company's finance contracts. While SST was in its start up phase, the Company gradually assigned the servicing of its finance contracts acquired to SST from January 1997 through March 1997. In May 1997, the Company transferred the servicing rights of an additional $469.7 million of finance contracts to SST. SST is now servicing approximately $710.6 million or 76.9% of the Company's total remaining finance contracts acquired. The balance of the Company's finance contracts and lease portfolio is serviced by its initial servicer, American Lenders Facilities, Inc. ("ALFI") (a wholly owned subsidiary of CIGNA Corporation). The Company paid a fee of $5.00 per contract (approximately $220,000) to transfer the servicing to SST. The Company is currently in dispute with ALFI. (See Item 3: Legal Proceedings).
SST has a low-cost, technologically efficient loan servicing platform located in St. Joseph, Missouri. Housed in a 50,000 square foot facility and currently employing more than 200 people, it represents, what management believes to be, the future of mult-asset servicing utilizing optics and micro based systems.
This facility is also capable of creating custom origination platforms for financial entities desiring marginal loan production, without the overhead and inefficiency of a small volume origination center. SST has structured its systems to provide "beginning to end" servicing. Initiating the process from sales and marketing through origination and servicing for banks, investors and other consumer finance companies.
On November 10, 1997, the Company agreed in principle to sell, subject to shareholder and creditor approval, its interest in SST for $7.0 million. The agreement porvides that the Company retains an option, exercisable at any time through December 31, 1998, to repurchae SST for $7.0 million plus an accretion at a 5% rate. The transaction is expected to close in the first calendar quarter of 1998. (See Startegic Buisness Plan - Operating Capital).
The servicer accounts for and posts all payments received and provides certain financial reporting with respect to the Company's automobile finance receivables. The servicer's computer system provides its personnel with daily access to all information contained in the customer's contract and application, including the amount of the contract, maturity, interest rate, vehicle and reference information and payment history. Furthermore, the Company is provided with daily access to the servicer's data through downloading to the
Company's PRIM computer system, described below.
In April 1996, the Company renewed its sub-servicing agreement with its third-party servicer, providing for the transfer of specific collection functions to the Company. Through this arrangement, the Company assumed responsibility for all consumer contact with respect to all leases and finance contracts acquired that were included in the Company's December 1994 securiti- zation transaction and all finance contracts acquired thereafter. In addition, the Company assumed responsibility for liquidation activities on its entire finance contract purchase program at such time. The Company receives a fee from the third-party servicer for performing these functions. Due to the transfer of servicing to SST, the Company is currently the sub-servicer of approximately $202.1 million or 22.5%, including its lease portfolio, of its outstanding automobile finance receivables. The Company, as sub-servicer, monitors the payment of the receivables, investigates delinquencies, communi- cates with the consumer to obtain timely payments, when necessary (through sub- contractors) repossesses and disposes of the financed vehicle and generally polices the receivable and its related collateral. If payment is not received after five days its due date, the Company takes action by either mailing a written notice to the consumer or contacting the consumer by telephone. It is the Company's policy generally to work with the consumer to permit the consumer to keep the vehicle and continue payments. The Company believes that this policy is in the best interest of the Company, the participating Dealer and the consumer, as it builds goodwill and long term customer relationships and increases the possibility of the ongoing collectibility of the amount due. If a consumer misses a second monthly payment and is delinquent in his or her payment by more than 35 days and the Company has satisfactory reason to believe the consumer will not pay, the Company will initiate the necessary steps to repossess the vehicle. If the value received as a result of repossession and subsequent sale is materially less than the remaining balance on the receivable, the Company will seek to hold the consumer liable for the deficiency. The Company utilizes third party collection agencies to pursue such deficiency balances.
Delinquency Control And Collection Strategy
The Company (including SST) and, with respect to a limited number of accounts, ALFI, reviews any account that reaches 31 days of delinquency to assess the collection efforts to date and to refine, if appropriate, the collection strategy. The Company does not allow finance contracts to be re-written but allows finance contracts to be extended in certain limited circumstances. The servicer and the Company generally will design a collection strategy that includes a specific deadline within which the obligation must be collected. Accounts that have not been collected during such period are again reviewed, and, unless there are specific circumstances which warrant further collection efforts, the account is assigned to independent bonded agencies for repossession. Repossessed vehicles are generally resold by the servicer or the Company in its capacity as sub-servicer through wholesale auctions which are attended principally by Dealers. Such auctions typically result in an average recovery of 57.1% of the outstanding finance contract balance or approximately 78.4% of the Kelley Blue Book wholesale value. This compares to prior years average recovery of 57.4% of the outstanding finance contract balance or approximately 85.7% of Kelley Blue Book wholesale value.
For financial reporting purposes, the Company recognizes losses based on the aging profile of delinquent finance contracts. For purposes of reporting charge-off ratios, the Company reports both gross and net losses when all potential recoveries on a defaulted receivable have been realized. For the fiscal years ended June 30, 1995, 1996 and 1997, the Company's net loss ratio, based on the average outstanding finance contracts, including those finance contracts sold in securitization transactions, was 0.8%, 1.2% and 4.7%, respectively. Net losses reflect all recoveries including proceeds for the sale of the repossessed vehicles, risk default and other insurance proceeds, net of related repossession and disposition costs.
As of June 30, 1997, the Company had 2,212 vehicles in repossession inventory with an outstanding finance contract balance of $25.5 million (3.5% of the average outstanding finance contract balance) and 4,879 finance contracts with an outstanding finance contract balance of $33.3 million (4.5% of the average outstanding finance contract balance) which were liquidated at auction and awaiting other recoveries. In accordance with the Company's reporting policy, the losses relating to these finance contracts will be reflected in the charge off ratios reported in future reporting periods.
Because of the Company's limited operating history in the fiscal years ended June 30, 1995 and 1996, its finance contract portfolio was unseasoned. Accordingly, delinquency and charge-off rates in the portfolio may not have fully reflected the rates that would apply when the average holding period for finance contracts in the portfolio is longer. In the fiscal year ended June 30, 1997, the Company's repossession ratio (i.e. default rate) increased to 18.8% from 13.0% in the fiscal year ended June 30, 1996. Additionaly, the Company's net charge-offs as a percentage of liquidations in the fiscal year ended June 30, 1997 increase to 40.5% from 24.3% in the fiscal year ended June 30, 1996. The primary cause for this increase is due to the deterioration in the Company's recovery rates from the disposition of repossessed vehicles. Increases in the delinquency and/or charge-off rates in the portfolio would further adversely affect the Company's ability to obtain credit or securitize its finance contracts and would continue to have an adverse effect on the Company's results of operations and financial condition.
A majority of the Company's portfolio of finance contracts are insured for credit default (see Insurance below) ("RDI"). The Company, since its inception, has insured its portfolio under this type of insurance; however, the structure of the policy has differed over this time frame. Its initial policy provided for a cash reserve deposit thereby decreasing the Company's net loss experience. Over time, in an effort to preserve cash, the Company structured its RDI policy to incorporate a self insured retention ("SIR"). This structure remains in force today. The SIR results in increased net losses due to the Company's responsibility increasing from the first six percent of losses to the first eight or ten percent of losses, depending upon the policy under which the respective contract is insured. RDI claims have substantially increaed due to rising default rates. This in turn created a backlog in the claims processing resulting in a portion of those claims being put at risk for non payment. The Company is also experiencing higher than expected rejection rates on claims submitted which is currently under management reveiw. As a result, the Company has reported an increase in its net loss experience. Upon receipt of all anticipated recoveries, the Company charges off any remaining balance on a receivable-by-receivable review.
Management Information Systems
The Company believes that high levels of automation are essential both for its efficient operations and to maintain its competitive position. The Company has spent in excess of $4.0 million developing and maintaining the AUTOMATE, LeaseMate and PRIM (Product Reporting and Information Management) computer systems and databases and more recently developing SST'S servicing platform, REMOTE. AUTOMATE is the acquisition software for finance contracts and LeaseMate is the origination software for leases. They are on-line, real-time systems employing advanced database management techniques. In addition to accumulating all relevant borrower and asset information, AUTOMATE and LeaseMate automatically request and receive credit reports from credit bureaus, create and merge all Dealer, borrower or lessee and internal documentation, automatically fax the appropriate documents to their destinations and prompt underwriting personnel through verification phone calls. An electronic copy of all docu- mentation is kept on-line for an extended period of time and off-line inde- finitely. Prior to funding, AUTOMATE and LeaseMate perform over 100 data integrity, underwriting guideline and numerical accuracy checks. REMOTE provides the Company's collectors with critical on-line information by utilizing micro-based systems and optics, eliminating time delays involved with paper retrieval systems.
Insurance
Each finance contract requires the borrower to obtain comprehensive and collision insurance with respect to the related financed vehicle with the Company named as a loss payee. The Company relies on a written representation from the selling Dealer and independently verifies that a borrower in fact has such insurance in effect when it purchases contracts. Each finance contract acquired by the Company is covered from the time of purchase by the VSI Policy. The VSI Policy has been issued to the Company by Guaranty National Insurance ("Guaranty National").
Physical Damage and Loss Coverage. The Company initially relies on the requirement, set in its underwriting criteria, that each consumer maintain adequate levels of physical damage loss coverage on the financed vehicle. The servicers engaged by the Company track the physical damage insurance of consumers and contact consumers in the event of a lapse in coverage or inadequate documentation. Moreover, the servicers are obligated, subject to certain conditions and exclusions, to assist the processing of claims under the VSI Policy. Guaranty National will insure each financed vehicle securing a contract against: (i) all risk of physical loss or damage from any external cause to financed vehicles which the Company holds as collateral; (ii) any direct loss which the Company may sustain by unintentionally failing to record or file the instrument evidencing each contract with the proper public officer or public office, or by failing to cause the proper public officer or public office to show the Company's encumbrance thereon, if such instrument is a certificate of title; (iii) any direct loss sustained during the term of the VSI Policy by reason of the inability of the Company to locate the consumer or the related financed vehicle, or by reason of confiscation of the financed vehicle by a public officer or public office; and (iv) all risk of physical loss or damage from any external cause to a repossessed financed vehicle for a period of 60 days while such financed vehicle is (subject to certain exceptions) held by or being repossessed by the Company.
The physical damage provisions of the VSI Policy generally provide coverage for losses sustained on the value of the financed vehicle securing a finance contract, but in no event is the coverage to exceed: (i) the cost to repair or replace the financed vehicle with material of like kind and quality; (ii) the actual cash value of the financed vehicle at the date of loss, less its salvage value; (iii) the unpaid balance of the contract; (iv) $50,000 per financed vehicle; or (v) the lesser of the amounts due the Company under clauses (i) through (iv) above, less any amounts due under all other valid insurance on the damaged financed vehicle less its salvage value. No assurance can be given that the insurance will cover the amount financed with respect to a financed vehicle.
There is no aggregate limitation or other form of cap on the number of claims under the VSI Policy. Coverage on a financed vehicle is for the term of the related contract and is noncancellable. The VSI Policy requires that, prior to filing a claim, a reasonable attempt be made to repossess the financed vehicle and, in the case of claims on skip losses, every professional effort be made to locate the financed vehicle and the related borrower.
Credit Default Insurance. In addition to physical damage and loss coverage, the Company obtains credit default insurance policies for substantially all of the receivables it acquires. Generally, these policies are obtained for each securitized pool of receivables and as a result, benefit that pool's trustee and certificate holders. The insurance provides indemnification for certain losses incurred due to a deficiency balance following the repossession and resale of financed vehicles securing defaulted finance contracts eligible for coverage. Coverage under these credit default policies are conditioned upon the Company's maintaining and adhering to the credit underwriting criteria set forth in each policy. THe Company has experienced some claim denials under these policies, which is contesting. If it is not successful in its efforts, the Company may experience an adverse financial impact. Under these policies, losses on eligible contracts are calculated in an amount equal to the Net Payoff Balance (as defined below) less
the sum of (i) the Actual Cash Value (as defined below) of the financed vehicle plus (ii) the total amount recoverable from all other applicable insurance, including refunds from cancelable add-on products. The maximum coverage under these policies is $40,000 per contract.
From the time it commenced purchasing finance contracts until August 31, 1995, the Company relied upon a series of credit default insurance policies purchased through Agricultural Excess and Surplus Insurance Company ("AESIC") which were guaranteed by AESIC's parent, Great American Insurance Company. Each of these policies required that the Company make a deposit of certain moneys to segregated accounts from which losses incurred under a policy would be paid. Once the funds in an account have been depleted by losses incurred under a policy, AESIC would directly reimburse the insured.
Since August 1995, the Company has relied upon a series of credit default insurance policies purchased through The Connecticut Indemnity Company ("Connecticut Indemnity"), a subsidiary of Orion Capital Corporation or Empire Fire and Marine a subsidiary of the Zurich Insurance Group ("Empire"). Unlike the insurance provided by AESIC, these policies do not require the Company to deposit moneys to segregated accounts to pay losses. Instead, each of the Connecticut Indemnity and Empire policies provide that the Company bear losses until such loss exceeds 8% or 10% (depending on the policy) of the aggregate amount insured under that policy. Connecticut Indemnity or Empire is obligated to pay all losses in excess of this amount to the insured.
Credit default insurance was purchased for each of the finance contracts sold to a securitization trust with the exception of Aegis Auto Receivables Trust 1995-3 for which credit default insurance was purchased for only $31.8 million of the $60.0 million of finance contracts sold to that trust. Furthermore, none of the $148.4 million finance contracts contributed to Aegis Auto Owners Trust 1995 have the benefit of credit default insurance. The Aegis Auto Owners Trust 1995 did not require this type of insurance since the principal balance owed to the certificate holders is insured by MBIA.
"Actual Cash Value," for the purposes of credit default insurance, means gross proceeds from the sale of the repossessed automobile securing the finance contract. Under certain circumstances, this amount could be modified to reflect the greater of (i) gross proceeds from sale and (ii) the wholesale market value at the time of the loss as determined by an automobile guide provided by the insurer applicable to the region in which the financed vehicle is sold.
"Net Payoff Balance," for the purposes of credit default insurance, means the outstanding principal balance as of the default date plus late fees and corresponding interest no more than 90 days after the date of default. Net Payoff Balance does not include non-approved fees, taxes, penalties or assess- ments included in the original instrument, or repossession, disposition, collection, remarketing expenses and fees or taxes incurred.
Regulation
The Company acts as a sales finance company in 37 states and is licensed and/or registered in each state. The Company is subject to varying degrees of regulation and periodic examination in such states. In addition, numerous federal and state consumer protection laws impose requirements upon the origination and collection of consumer receivables. The laws of some states impose finance charge ceilings and other restrictions on consumer transactions and may require certain contract disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. In addition, certain of these laws make an assignee of such finance contract liable to the obligor thereon for any violations by the assignor. The Company, as an assignee of
finance contracts, may be unable to enforce some of its finance contracts or may be subject to liability to the obligor under some of its finance contracts if such finance contracts do not comply with such laws.
The Company is subject to numerous federal laws, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the rules and regulations promulgated thereunder, and certain rules of the Federal Trade Commission. These laws require the Company to provide certain disclosures to applicants, prohibit misleading advertising and protect against discrimina- tory financing or unfair credit practices. The Truth in Lending Act and Re- gulation Z promulgated thereunder require disclosure of, among other things, the terms of repayment, the amount financed, the total finance charge and the annual percentage rate charged on each automobile finance contract. The Equal Credit Opportunity Act prohibits creditors from discriminating against finance contract applicants (including finance contract obligor) on the basis of race, color, religion, national origin, sex, age or marital status or on the basis that income is derived from public assistance. Under the Equal Credit Oppor- tunity Act and Regulation B promulgated thereunder, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. The Fair Credit Reporting Act requires the Company to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. The rules of the Federal Trade Commission limit the types of property a creditor may accept as collateral to secure a consumer finance contract and its holder in due course rules provide for the preservation of the consumer's claims and defenses when a consumer obligation is assigned to a subject holder. With respect to used vehicles specifically, the Federal Trade Commission's Rule on Sale of Used Vehicles requires that all sellers of used vehicles prepare, complete and display a Buyer's Guide which explains any applicable warranty coverage for such vehicles. In addition to limiting the types of property which may be taken as collateral, the Credit Practices Rule of the Federal Trade Commission imposes additional restrictions on finance contract provisions and credit practices.
Certain of the states in which the Company operates prohibit Dealers from charging a finance charge in excess of statutory maximum rates. Finance charges include interest and any cash sale differential. The Company's agreements and other communications with Dealers stress the importance of Dealers' compliance with all applicable laws. The Company's contractual agreements with Dealers obligate Dealers to comply with all applicable laws and provide that each Dealer must indemnify the Company for any violation of law relating to a finance contract acquired from the Dealer. Every obligor (as part of the standard financing documentation) currently acknowledges by signing the retail installment contract that the obligor is aware, and approves, of the Dealer's intended sale of the finance contract at a discount to the Company. To the best of the Company's knowledge, the obligor was not quoted a lower price for a cash purchase. Further, it is the Company's policy to terminate its relationship with any Dealer where the Company becomes aware of such incidents perpetrated either with the knowledge or tacit assent of the Dealer or by more than one salesperson at a particular Dealer. As of June 30, 1997, no Dealer had been so terminated. To the knowledge of the Company, no action has been brought or is currently threatened or contemplated against the Company alleging that Dealers regularly charge cash sale differentials. Nevertheless, if it were determined that a material number of finance contracts acquired by the Company involved violations by Dealers of applicable laws and regulations, the Company's financial position could be materially adversely affected and a widespread pattern of violation by Dealers could have a material adverse effect on the Company's future prospects.
In the event of default by an obligor on a finance contract, the Company is entitled to exercise the remedies of a secured party under the Uniform Commercial Code ("UCC"). The UCC remedies of a secured party include the right to repossession by self-help means, unless such means would constitute a breach of the peace. Unless the obligor voluntarily surrenders a vehicle, self-help repossession is accomplished through the engagement of an independent reposses- sion specialist. Self-help repossession is accomplished through by retaking
possession of the vehicle. If a breach of the peace is likely to occur, or if applicable state law so requires, the Company must obtain a court order from the appropriate state court and repossess the vehicle in accordance with that order. None of the states in which the Company presently does business, except for Louisiana, has any law that would require the Company, in the absence of a probable breach of the peace, to obtain a court order before it attempts to repossess a vehicle. However, in instances where the vehicle is located on an Indian Reservation or a military base, self-help repossession is not available. In these cases, the Company enlists the assistance of the highest ranking official of the reservation or the base, as the case may be, to resolve the matter in accordance with applicable laws.
In most jurisdictions, the UCC and other state laws require the secured party to provide the obligor with reasonable notice of the date, time, and place of any public sale or the date after which any private sale of the collateral may be held. Unless the obligor waives his or her rights after default, the obligor in most circumstances would have the right to redeem the collateral prior to actual sale by paying the secured party all unpaid installments of the receivable (less any required discount for prepayment) plus reasonable expenses for repossessing, holding, and preparing the collateral for disposition and arranging for its sale, plus in some jurisdictions, reasonable attorneys' fees, or, in some states, by payment of past-due installments. Repossessed vehicles are generally resold by the Company through wholesale auctions which are attended principally by dealers.
The Company, through one of its operating subsidiaries, is licensed by the Federal Housing Administration ("FHA") of the U.S. Department of Housing and Urban Development as an issuer of securities collateralized by HUD Title I Loans. As such, the Company is subject to certain regulations, including requirements for the maintenance of certain minimum levels of capitalization, and is subject to periodic examination by the FHA.
The Company believes it is in compliance in all material respects with regulations applicable to it, except for its late filing of its annual 10-K filing with the SEC and the Nasdaq.
Employees
As of October 20, 1997, the Company and its subsidiaries employed approximately 525 persons, including three in senior management and 194 in finance contract acquisition and administrative support and 265 persons in finance contract servicing, including one in senior management. None of the Company's employees is covered by a collective bargaining agreement.
Item 2:
Item 2: Properties.
Properties and Facilities
The Company's headquarters are located in approximately 30,000 square feet of leased space at 525 Washington Boulevard, Jersey City, New Jersey. The lease for such facility expires in August 2005. The Company's headquarters contain the Company's executive offices as well as those related to automobile finance contract acquisitions. On October 17, 1997, the Company announced the closing of its New Jersey facility and will be relocating to its Marietta, Georgia facility. The Company also leases office space in Irvine, California (expiring April 1999); Marietta, Georgia (expiring June 2005); and Merriam, Kansas (expiring December 1999) aggregating approximately 77,905 square feet. Such facilities are used for finance contract acquisitions, systems technology, sub-servicing and sales support. The Company, through its subsidiary SST, owns a 52,228 square foot building in St. Joseph,
Missouri. Such facility is used for its servicing operations. The building and land was purchased for $2.1 million and has outstanding mortgages of approximately $2.0 million.
Item 3:
Item 3: Legal Proceedings.
Litigation
In connection with a complaint filed on April 28, 1996 by Star Holdings, Inc. d/b/a The Sloane Organization (the "Plaintiff") against the Company in the United States District Court for the Southern district of New York, captioned Star Holdings, Inc. d/b/a The Sloane Organization vs. Aegis Consumer Funding Group, Inc., alleging that the Plaintiff was entitled to certain fees under a finder's agreement entered into with the Company on January 2, 1996. On Jan- uary 8, 1997, the United States District Court for the Southern District of New York denied the Plaintiff's Attachment Motion and its cross motion for partial summary judgment. The Company's Motion to Dismiss has been granted with respect to certain claims for relief made by the Plaintiff. In accordance with the procedures set by the court, both parties submitted their direct cases in writing and the remainder of the trial was set for late May 1997. The case has been settled and dismissed. Judgment was entered against the Company in the amount of $650,000 which the court believed was a valid assessment of Plaintiff's services. This amount has been paid by the Company to Plaintiff. Subsequent to this judgment, the Company filed a motion to recoup certain legal fees in the amount of approximately $75,000, to challenge the court's calculation of pre-judgment interest and to oppose Plaintiff's attempt to obtain costs and expenses from the Company. As settlement of the foregoing, Plaintiff agreed to pay $50,000 to the Company (which amount has been paid), to concede the disputed amount of the interest charge and to drop the claim for costs.
On May 2, 1996, a purported class action lawsuit on behalf of Josephine Thornton and other individuals, captioned Josephine C. Thornton, et al., on behalf of themselves and all others similarly situated vs. Bennett Finance, Inc. et al., was filed in the New York Supreme Court for New York County against Bennett Finance Inc. and various other persons and entities alleged to have been affiliated with or employed by The Bennett Funding Group, Inc. ("Bennett Funding") and Bennett Management and Development Corp. ("Bennett Management"). Other entities, including the Company, were named as defendants because they were allegedly alter egos and agents for Patrick Bennett, Michael Bennett, their parents and certain other named individual defendants. It is further alleged that, as such alter egos and agents, the corporate defendants, including the Company, engaged in common law and securities fraud, negligent misrepresentations, deceptive acts or practices, sale of unregistered securities and breaches of fiduciary duty in connection with the financing activities of Bennett Funding and Bennett Management. Plaintiffs in this action seek an accounting, unspecified compensatory and punitive damages, injunctive relief, costs, attorneys' fees and such other relief as the court deems appropriate. On or about May 30, 1997, the Company moved to dismiss all claims asserted against it in the Bennett matter. The motion to dismiss has been submitted to the court. Discovery is stayed pending a decision on the motion to dismiss. The Company believes that its motion to dismiss the complaint is meritorious.
On or about May 15, 1997, Aegis Capital Market, Inc. filed a proof of claim for approximately $668,000 in the United States Bankruptcy Court for the Northern District of New York in a case entitled In re Bennett Management and Development Corp. The proof of claim is based on a $600,000 note receivable (the "Note") issued by Bennett Management in connection with a transaction in August 1993, whereby the Company sold to Bennett Management an investment in securitized HUD Title I Loans and certain retained interests in the Company's securitizations of automobile finance contracts. The Note bears interest at 8.5% per annum and matures in August 2000. To date, such proof of claim has not been adjudicated by the court.
By letter dated August 1, 1997, counsel for ALFI contacted the Company concerning disputes under a Master Servicing Agreement dated April 6, 1996 and a letter agreement dated June 10, 1997, between the Company and ALFI (respectively, the "Master Servicing Agreement" and the "Letter Agreement"). Pursuant to the Master Servicing Agreement, ALFI had been the sub-servicer of certain securitized loan portfolios serviced by the Company. ALFI's counsel contends that: (a) the Company owes ALFI about $457,000 in unpaid servicing fees; (b) the Company owes ALFI an unstated amount in late charges; (c) the Company owes ALFI about $31,000 in other expenses; (d) the Company owes ALFI about $247,000 for reimbursement of funds paid by ALFI to certain "NSF Accounts"; and (e) the Company sent to Norwest Bank Minnesota, N.A. ("Norwest"), the Trustee of the loan portfolios, and to others, a letter that is purportedly "defamatory and actionable" in that it "places blame" for late filings of ultimately rejected RDI claims upon ALFI. The Company believes it does not owe ALFI any servicing fees and that the Company is entitled to reimbursement of about $195,000 in servicing fees it caused to be paid to ALFI but to which ALFI was not entitled. The Company also disputes that it owes ALFI any of the late charges and that it is entitled to reimbursement for late charge payments that it has made. The Company has caused to be paid the expenses sought by ALFI and $232,000 to the NSF Account. ALFI has not supplied supporting documentation for the remaining $15,000 for which it sought reimbursement for payment to the NSF Account.
In addition, ALFI has withheld $191,000 which it owes the Company under a Subcontracting Agreement between the Company and ALFI dated April 6, 1996, apparently as a means of securing its purported claims under the Master Servicing Agreement. In response, the Company has withheld $37,000 from ALFI under the Letter Agreement.
By letters dated May 28, 1997, Norwest informed the Company that, to the extent the rejection of untimely filed RDI claims ultimately exceed the deductibles on the applicable insurance policies, there would be an event of default under the Company's agreements with Norwest. An aggregate amount of $1,579,000 in RDI claims have been denied due to untimely filings. The Company believes approximately $450,000 of additional similar claims exist. While the Company denies liability for the untimely filings and contends that ALFI had the responsibility to timely file all such claims pursuant to the Master Servicing Agreement, the Company, by letter dated June 19, 1997, notified Reliance Insurance Company ("Reliance"), its errors and omission insurance policy carrier, of the potential claim against it by Norwest. By letter dated July 10, 1997, Reliance acknowledged the Company's $3,000,000 insurance policy (containing a $350,000 deductible) and reserved its right to deny coverage on several grounds. Should the Company be found liable for some or all of the losses caused by the untimely filing of the RDI claims, it does not believe that Reliance's reservation of rights will not preclude coverage.
On or about July 11, 1997, an action was brought in the Superior Court of the State of California for the County of Orange, by James Osborn, an employee of a temporary placement agency whose services were utilized by the Company, alleging wrongful termination and sexual harassment against the Company and one of its employees. His wife, Susan Osborn, has filed a complaint against the Company for loss of consortium (collectively, the "Plaintiffs"). The Plaintiffs assert claims against the Company and its employee for special damages in an aggregate amount of $6,000,000, general damages in an aggregate amount of $6,000,000, punitive damages in an aggregate of amount $6,000,000, for a civil penalty in the amount of $75,000 under the California Civil Code, for attorneys fees and costs and for prejudgment interest at the legal rate of ten percent. The Company received an offer to settle this matter for a total amount of $399,996. The Company has refused this settlement offer and on September 30, 1997 filed responsive pleadings. The case is currently in the discovery stage. The Company believes it has meritorious defenses to these allegations and intends to defend this matter vigorously.
On or about September 3, 1996, an action was brought in the United States District Court for the Middle District of the State of Louisiana on behalf of a putative class defined as persons who hold installment contracts originated by and/or negotiated to Chase Bank, N.A. ("Chase") and Aegis Auto Finance, Inc. ("Aegis") and their Louisiana affiliates with respect to vehicle purchases made from a specific Louisiana dealer. Plaintiffs assert claims for compensatory and punitive damages under the Federal Truth-in-Lending Act ("TILA") and Louisiana state law based on the allegation that certain taxes and state fees were improperly included in the "amount financed" section of the contract thus causing the disclosed "annual percentage rate" under the relevant contracts to be misstated by a small but actionable amount. Chase and Aegis have moved to dismiss the complaint for failure to state a claim. The motion was briefed and submitted to the court this summer. On or about August 19, 1997, the court granted the Company's motion for summary judgment dismissing all claims against the Company. To date, final judgement has not been entered. Plaintiffs have thirty days from the date of the entry of final judgment to file a notice of appeal. It is likely that a notice of appeal will be filed.
The Company is also subject to various legal proceedings and claims that arise in the ordinary course of business. The Company believes that the amount of any ultimate liability with respect to these actions, not including the actions described above, in the aggregate or individually will not materially affect the results of operations, cash flows or financial position of the Company.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders.
There were no submissions of matters to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1997.
PART II
Item 5:
Item 5: Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is quoted on the Nasdaq National Market ("NNM") under the symbol "ACARE". The following table sets forth, for the periods indicated, the high and low per share sales prices for the Common Stock as reported on the NNM. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
On August 25, 1997, the Nasdag Stock Market announced new listing requirements to further strengthen both the quantitative and qualitative requirements for issuers listing on Nasdaq. As of October 20, 1997, the Company does not meet all of the new requirements for continued listing. The Company has until February 23, 1998 to meet all the new requirements. Under new listing requirements, the Company's minimum bid price must be at least $1; as of October 23, 1997, the Company's bid price was $ 9/32. Furthermore, on October 17, 1997, the Company received notification from Nasdaq of a potential delisting due to certain events including the non timely filing of the Company's annual report on Form 10-K for the fiscal year ended June 30, 1997. The Company has received a stay from Nasdaq pending the outcome of a hearing scheduled for December 4, 1997.
As of October 31, 1997, there were approximately 4,200 holders of record of the Company's Common Stock.
The Company's capital stock consists of 30,000,000 authorized shares of common stock, par value $.01 per share, of which, as of October 31, 1997, 17,677,217 shares were issued and outstanding; and 2,000,000 authorized shares of preferred stock, par value $.10 per share, of which, as of November 12, 1997, 1,100 shares were designated as Series C with 306 shares outstanding and 21,350 shares were designated as Series D, 2,100 shares were designated as Series E and 2,100 shares were designated as Series F.
On October 16, 1997, the Company's holders of its Debenture converted the Debenture into Cumulative Convertible Preferred Stock, Series D ("Series D Preferred Shares"). The Debenture, with a face value of $21.3 million and an interest rate of 12% were converted into 21,107 Series D Preferred Shares with a 12.75% dividend and a redemption value of approximately $21.1 million. The Series D Prefered Shares are convertible into common stock at $1.26 per share.
On November 10, 1997, the Company's holders of the remaining subordinated debt converted its debt into Cumulative Preferred Stock ("Series E and F Preferred Shares"). The debt, with a face value of $4.0 million and an interest rate of 12% was converted into 2,000 shares each of Series E and F Preferred Shares with a 12.0% dividend and a redemption value of $4.0 million. The Series E Preferred Shares are convertible into common stock at $1.26 per share and the Series F Preferred Shares are convertible into common stock at $2.00 per share.
The Company has not paid any dividends on its common stock. The payment of dividends, if any, in the future is within the discretion of the Board of Directors and will depend on the Company's earnings, its capital requirements and financial condition. It is the current intention of the Board of Directors to retain all earnings, if any, for use in the Company's business operations, and accordingly, the Board of Directors does not expect to declare or pay any dividends in the foreseeable future.
The transfer agent and registrar for the Company's Common Stock is FCTC Transfer Services, 505 Thornall Street, Suite 303, Edison, NJ 08837.
Item 6:
Item 6: Selected Financial Data.
QUARTERLY FINANCIAL DATA: Summarized financial data is as follows (dollars in thousands, except for per share amounts):
The quarters ended December 31, 1995, March 31, 1996, June 30, 1996, September 30, 1996, December 31, 1996, March 31, 1997 and June 30, 1997 included write downs on retained interests in securitized receivables of $1.5 million, $2.5 million, $3.5 million, $2.0 million, $29.0 million, $4.4 million and $13.6 million, respectively. The quarter ended March 31, 1997 has been restated to reflect a $4.4 million write down on retained interests in securitized receivables resulting from a correction of an error in the Company's valuation model discovered during the valuation process for the quarter ended June 30, 1997.
The quarter ended June 30, 1996, included a non-cash charge of $807,000 from the release of escrowed shares which was offset by an increase in paid-in- capital. There was no impact on total stockholders' equity as a result of the escrow share release and the resultant non-cash charge.
Item 7:
Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of the Company relates to fiscal years ended June 30, 1995, 1996 and 1997, and should be read in conjunction with the preceding Selected Financial Data and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this annual report. All references to full years are to the applicable fiscal year of the Company.
Overview
The Company is a specialty consumer finance company engaged in acquiring, securitizing and servicing finance contracts originated by Dealers in connection with the sale of late-model used and, to a lesser extent, new cars to consumers with sub-prime credit. Since commencing the acquisition of finance contracts in May 1992, through June 30, 1997, the Company has acquired approximately $1.25 billion of finance contracts, of which $1.03 billion have been securitized in twenty-one offerings of asset-backed securities.
The following table illustrates the Company's finance contract acquisition volume, total revenue, securitization activity and servicing portfolio during the past nine fiscal quarters.
Revenues
The Company's primary sources of revenues consist of two components: gains from securitization transactions and interest income.
Gains (Losses) from Securitization Transactions. The Company warehouses the finance contracts it acquires and periodically sells them to a trust, which in turn sells asset-backed securities to investors. By securitizing its finance contracts, the Company is able to lock in the difference (gross spread) between the annual rate of interest paid by the consumer (APR) on the finance contracts acquired and the interest rate on the asset-backed securities sold (certificate rate). When the Company securitizes its finance contracts, it records a gain from securitization transactions and establishes an asset referred to as retained interest in securitized receivables. Gains from securitization transactions are equal to the retained interest on the securitized receivables plus the difference between the net proceeds from the securitization and the cost (including the cost of VSI Policy and credit default premiums) to the Company of the finance contracts sold. The retained interest on securitized receivables represents the estimated present value of the estimated future cash flows to be received by the Company, discounted at a market-based rate, taking into consideration (i) contractual obligations of the obligor, (ii) amounts due to the investors in asset-backed securities, (iii) various costs of the securitizations, including the effects of hedging transactions, if any, and (iv) adjustments to the cash flows to reflect estimated prepayments of finance contracts and losses incurred in connection with defaults. Subsequent to securitization, the Company continues to service the securitized finance contracts, for which it recognizes servicing fees over the life of the securitization. Retained interest in securitized receivables represents the difference between the weighted average finance contract rate earned and the rate paid on certificates issued to the investors in the securitization, less servicing fees and other costs over the life of the securitization. Retained interest in securitized receivables is computed by taking into account certain assumptions regarding prepayments, defaults, servicing and other costs. The Company reviews on a quarterly basis the retained interest in securitized receivables. If actual experience differs from the Company's assumptions or to the extent that market and economic changes occur that adversely impact the assumptions utilized in determining the retained interest in securitized receivables, the Company records a charge against gains from securitization transactions (See "Results of Operations"). The discount rate utilized in determining the retained interest in securitized receivables and gain from securitization transactions is based on the Company's estimate of the yield required by a third party purchaser of such instrument. The Company also bases these assumptions on the performance characteristics of the Company's finance contract portfolio to date. The Company's default assumptions are based on estimated repossession rates, proceeds from the liquidation of repossessed vehicles, proceeds from VSI Policy coverage and recoveries from the Company's credit default insurance.
Interest Income. Interest income consists of: (i) interest income earned on finance contracts (ii) interest income earned on leases (the Company ceased funding leases in the quarter ended September 30, 1995), (iii) servicing fees net of expenses, (iv) the accretion of finance contract acquisition discounts net of related capitalized costs and (v) the amortization of capitalized costs net of origination discounts for leases. Other factors influencing interest income during a given fiscal period include (a) the annual percentage rate of the finance contracts acquired, (b) the aggregate principal balance of finance contracts acquired and funded through the Company's warehouse credit facilities prior to securitization, and (c) the length of time such finance contracts are funded by the warehouse credit facilities prior to securitization. Finance contract acquisition growth has a significant impact on the amount of interest income earned by the Company.
The following table provides information for each of the Company s rated securitizations:
The following table provides information for each of the Company's securitizations under its $1.0 billion Purchase Facility:
Results of Operations
Fiscal year ended June 30, 1997 Compared To Fiscal year ended June 30, 1996
Revenues Revenues decreased to a negative $9,000 (net of a write down of $49.0 million on retained interests in securitized receivables) for the fiscal year ended June 30, 1997 from $46.3 million (net of a write down of $7.5 million on retained interests in securitized receivables) for the fiscal year ended June 30, 1996, a decrease of $49.0 million or 100.0%.
Gains or Losses from Securitization Transactions. Gains or losses from securitization transactions decreased to a loss of $27.4 million for the fiscal year ended June 30, 1997 from a gain of $32.4 million for the fiscal year ended June 30, 1996, a decrease of $59.8 million. The decrease in gains or losses from securitization transactions includes write downs of $49.0 million (described below) taken on the retained interests in securitized receivables from earlier securitizations. During the fiscal year ended June 30, 1997 and 1996, the Company incurred $49.0 million and $7.5 million, respectively, of what management believes to be permanent impairment losses on its retained interests in securitized receivables portfolio. The most significant causes of the permanent impairment were higher than expected default rates on the underlying finance contracts and a significant deterioration in the Company's recovery rates from the disposition of repossed vehicles. As a result of these differences and other observations on portfolio performance, current assumptions utilized in current valuations have been adjusted to reflect the higher default rates and lower recovery rates actually experienced. The decrease in gains or losses from securitization transactions is also a result of the Company's current assumptions utilized in evaluating its retained interest in securitized receivables, which reflect higher than expected defalut rates and higher losses on the balances outstanding at the time of default, over the life of the securitization trust compared to the levels used in the comparable period a year agao and a decrease in the net spread available. The decrease is also partially attributable to the lack of a material securitization transaction in the three months ended December 31, 1996 and the lower gain obtained on securitization transactions completed in the fiscal year ended June 30, 1997 compared to the gains obtained in the fiscal year ended June 30, 1996. The securitizations completed in the six months ended June 30, 1997 under the Company's Purchase Facility are not rated. The adjusted assumptions utilized in valuing its newly created retained interests in securitized receivables resulted in significantly lower unrealized gains on such transactions. Quarterly, the Company revalues its retained interests in securitized receivables using actual experience on the respective underlying securitization trust's finance contract performance. When the actual experience differs from the original assumptions utilized in the initial valuation in a detrimental direction, the Company can incur permanent impairment losses on the carrying value of these assets. During the fiscal year ended June 30, 1996, the Company also recorded a valuation allowance of $0.6 million on a note receivable from a related party with no such charge in the comparable 1997 period.
Interest Income. Interest income increased to $21.9 million for the fiscal year ended June 30, 1997 from $13.6 million for the fiscal year ended June 30, 1996, an increase of $8.3 million or 61.0% primarily as a result of the Company's increased finance contract volume. The Company's monthly average outstanding balance of finance contracts owned increased to $112.0 million at June 30, 1997 from $50.3 million at June 30, 1996, an increase of $61.7 million or 122.7%. This significant increase in the average outstanding balance is attributed to the Company not securitizing or otherwise disposing
of its finance contracts acquired in the quarter ended December 31, 1996 until March 1997. The Company also recorded income of $875,000 representing the accretion of its dealer discount, net of direct costs, of loans held for investment for the fiscal year ended June 30, 1997. There was no accretion from the corresponding period of the comparable period a year ago as balances held for investment were not material. (Interest income is net of servicing fees paid).
Servicing Fee Income. For the fiscal year ended June 30, 1997, the Company recognized servicing fee income of $4.0 million which includes $1.8 million relating to its new servicing operations there was no comparable income for the fiscal year ended June 30, 1996. The Company also recognized income of $2.2 million for the fiscal year ended June 30, 1997, from the sub-servicing agreements with ALFI compared to approximately $237,000 in the comparable 1996 period.
Fees and Commissions Earned. For the fiscal year ended June 30, 1997, the Company recognized $870,000 in warranty fees earned. There was no such income recognized for the fiscal year ended June 30, 1996.
Operating Expenses Operating expenses increased to $53.0 million for the fiscal year ended June 30, 1997 from $29.6 million for the fiscal year ended June 30, 1996, an increase of $23.4 million or 79.1%.
Interest Expense. Interest expense increased to $16.6 million for the fiscal year ended June 30, 1997 from $10.1 million for the fiscal year ended June 30, 1996, an increase of $6.5 million or 64.4%, as a result of the increased financing requirements for the increased finance contract balances. The increase in interest expense represents 27.8% of the total increase in operating expenses. The Company's monthly average outstanding balance on its warehouse credit facility increased to $126.8 million for the fiscal year ended June 30, 1997 from $74.4 million for the fiscal year ended June 30, 1996. The Company's warehouse credit facilities accrue interest at fluctuating interest rates that ranged from 8.125% to 9.6875% for the fiscal year ended June 30, 1997 compared to a low of 9.0625% and a high of 10.125% for the fiscal year ended June 30, 1996. The significant increase in the average outstanding balance is attributed to the Company not securitizing or otherwise disposing of the finance contracts acquired in the second quarter ended December 31, 1996 until March 1997. The Company also incurred interest on notes payable at a 12% interest rate on a monthly average outstanding balance of $35.6 million for the fiscal year ended June 30, 1997, compared to a monthly outstanding average balance of $20.2 million for the fiscal year ended June 30, 1996.
Salaries and Other Employee Costs. Salaries and other employee costs increased to $13.9 million for the fiscal year ended June 30, 1997 from $9.1 million for the fiscal year ended June 30, 1996, an increase of $5.6 million or 52.9%, due to an increase in the number of employees to approximately 520 (including 130 SST employees) at June 30, 1997 from approximately 340 employees at June 30, 1996. In addition temporary help charges incurred increased to approximately $2.7 million for the fiscal year ended June 30, 1997 from approximately $405,000 for the fiscal year ended June 30, 1996, an increase of $2.3 million. Temporary employment agencies, specializing in providing collectors, are utilized in the Company's Irvine, California collections unit as a screening process for hiring new collectors. The collections unit expanded its operations in an effort to maintain the number of finance contracts per collector at levels acceptable to the Company. The Company expects continued increases in the number of permanent employees, as well as total salary costs, as it expands its servicing operations of SST. In addition, salaries and other employee costs for the fiscal year ended June 30, 1997 were reduced by an adjustment of $611,000 relating to the forfeitures of the deferred portion of contractual bonuses of certain executive officers earned for the year ended June 30, 1996.
Provision for Credit Losses. The provision for credit losses increased to $9.4 million for the fiscal year ended June 30, 1997 from $3.5 million for the fiscal year ended June 30, 1996, an increase of $5.9 million or 169.0%. The Company's provision for credit losses is affected by: (i) the Company's increased acquisition volume of finance contracts; (ii) the Company's decision to discontinue purchasing credit default insurance on its lease originations effective January 1995; (iii) the Company's decision, effective August 1995, to insure on a discretionary basis its finance contract acquisitions (to the extent finance contracts remain uninsured for default, the Company's loss ratio is higher); (iv) the increase in delinquent automobile finance receivables (as discussed below); (v) the change in the Company's historical loss ratios; and (vi) the ratio of current finance contracts to total finance contracts at June 30, 1997 (50.1%) compared to June 30, 1996 (72.4%). These changes resulted in an increase in the Company's reserve rate as a percentage of total automobile finance receivables held on the Company's balance sheet (i.e., original balance net of receivables repaid, sold or charged off) to 16.6% at June 30, 1997 from 7.1% at June 30, 1996. The provision for credit losses for the fiscal year ended June 30, 1997 includes an adjustment for $500,000 of estimated recoveries of sales taxes paid on automobile finance contracts which became delinquent and/or defaulted. Exclusive of this adjustment, the provision for credit losses increased to $9.9 million, an increase of $6.4 million from the fiscal year ended June 30, 1996. The Company maintains residual value insurance relating to its entire lease portfolio.
Rent and Electricity, Office Expenses and Communicatins. Rent and electricity charges increased to $2.0 million for the fiscal year ended June 30, 1997 from $1.2 million for the fiscal year ended June 30, 1996 an increase of $769,000 or 61.6% due to processing centers being expanded or the servicing subsidiary, SST being opened. In addition, in the second quarter of fiscal 1996, the Company expanded its Jersey City Headquarters and in the third quarter of fiscal 1996 the Company relocated and expanded its collections department located in Irvine, California and in fiscal 1997 opened its servicing subsidiary, SST, in St. Joseph, Missouri. Correspondingly, office expenses increased to $2.1 million for the fiscal year ended June 30, 1997 from $400,000 for the fiscal year ended June 30, 1996, an increase of $1.2 million or 133.3% and communication expenses increased to $2.5 million for the fiscal year ended June 30, 1997 from $975,000 for the fiscal year ended June 30, 1996, an increase of $1.5 million or 156.4%. Communication expenses include expenses relating to receiving and sending electronic data including expenses relating to obtaining credit reports and other data services, telephone charges, faxes, the linking of the collections department to ALFI and SST and the linking of all offices including SST to systems development located in the Merrian, Kansas facility.
Professional fees. Professional fees, including those paid to related parties, increased to $2.6 million for the fiscal year ended June 30, 1997 from $1.3 million for the fiscal year ended June 30, 1996, and increase of $1.3 million or 100.0% due to the follwing: (i) an increase in legal fees of approximately $916,000 primarily as a result of defending lawsuits entered into against the Company, as previously discussed, and other general corporate matters (ii) an increase in accounting and auditing fees of approximately $153,000 (iii) an increase directors fees of 117,000.
Equipment Rental. Equipment rental increased to $1.2 million for the fiscal year ended June 30, 1997 from, $687,00 for the fiscal year ended June 30, 1996, an increase of $497,000 or 72.3% due to the increase in the number of employees to 520 (including 130 SST employees) at June 30, 1997 from 340 employees at June 30, 1996, the majority of whom require computers, the most significant component of equipment rental costs.
All Other Operating Expenses. Other operating expenses increased to $3.0 million for the fiscal year ended June 30, 1997 from $2.4 million for the fiscal year ended June 30, 1996, and increase of $1.3 million or 53.6%. This increase is the result of the following: (i) an increase in travel and entertainment expense of $183,000 due to the Company's expansion into new territories and new business, (ii) an increase in
amortization and depreciation of $529,000 due to increased purchases of fixed assets, including leasehold improvements to expanded office space and (iii) an increase of $555,000 in other expenses such as insurance, advertising and promotional expenses, other taxes, such as state privelege taxes and other miscellaneous taxes and miscellaneous expenses.
Income Tax (Benefit) Expense. A net tax benefit of $8.4 million was recorded by the Company for the fiscal year ended June 30, 1997 which is net of a valuation adjustment of $12.9 million which represents an adjustment to the income tax benefit relating to losses incurred in excess of previously earned income. Exclusive of the valuation adjustment, the Company's tax benefit would have been $21.3 million (an effective tax rate of 42%). A tax expense of $7.5 million was recorded by the Company for the fiscal year ended June 30, 1996 (an effective tax rate of 44%). The change in effective tax rates is attributed to decreased state and local taxes.
Net (Loss) Income. The Company recognized a net loss of $44.5 million for the fiscal year ended June 30, 1997. The net loss resulted from several factors including: (1) a write down of $28.4 million, net of taxes, in retained interests in securitized receivables; (2) the decrease in gains or losses from securitization transactions because the Company's current assumptions utilized in evaluating its retained interest in securitized receivables reflect higher than expected default rates and lower recovery rates over the life of the securitization trust than those assumed in the comparable period a year ago, and (3) a deferred tax asset valuation adjustment of $13.8 million taken on losses incurred in excess of previously earned income.
Fiscal Year Ended June 30, 1996 Compared To Fiscal Year Ended June 30, 1995
Revenues Revenues increased to $46.3 million for the fiscal year ended June 30, 1996 from $17.8 million for the fiscal ended June 30, 1995, an increase of $28.5 million or 160.1%.
Gains from Securitization Transactions. Gains from securitization transactions increased to $32.4 million for the fiscal year ended June 30, 1996 from $9.5 million for the fiscal year ended June 30, 1995, an increase of $22.9 million or 240.5%. The increase in securitized gains was offset by write downs of $7.5 million taken on the retained interests in securitized receivables from earlier securitizations and a $600,000 valuation allowance on a note receivable from a then-related party created in a prior sale of a retained interest. Additionally, the Company's securitization costs increased by approximately $326,000 as a result of the inherent costs associated with issuing warrants to Greenwich in connection with the Securitization Facility. Quarterly, the Company revalues its retained interests in securitized receivables using actual experience on the respective underlying securitization trust's finance contract performance. When the actual experience differs from the original assumptions utilized in the initial valuation in a detrimental direction, the Company can incur permanent losses in the carrying value of these assets. During the year ended June 30, 1996, the Company incurred $7.5 million of, what management believes to be, permanent losses on its retained interests in securitized receivables portfolio. The cause of the permanent impairment was higher than expected default rates on the underlying finance contracts. As a result of these increases, current assumptions utilized in current valuations have been adjusted to reflect the higher default rates.
Interest Income. Interest income increased to $13.3 million for the fiscal year ended June 30, 1996 from $6.9 million for the fiscal year ended June 30, 1995, an increase of $6.4 million or 92.8%, primarily as a result of the Company's increased finance contract volume. The Company's weighted monthly average outstanding balance of finance contracts owned increased to $50.3 million in the fiscal year ended June 30, 1996 from $18.3 million for the fiscal year ended June 30, 1995, an increase of $32.0 million or 174.9%. Since the
Company s weighted average coupon has remained at approximately 20.5%, the increase in interest income is partially attributable to the increase in the weighted average outstanding balance of $32.0 million during the fiscal year ended June 30, 1996 or approximately $6.6 million. (Interest income is net of servicing fees paid).
Operating Expenses. Operating expenses increased to $29.6 million for the fiscal year ended June 30, 1996 from $14.8 million for the fiscal year ended June 30, 1995, an increase of $14.8 million or 100.2%.
Interest Expense. Interest expense increased to $10.1 million for the fiscal year ended June 30, 1996 from $4.8 million for the fiscal year ended June 30, 1995, an increase of $5.3 million or 110.5%, as a result of the increased financing requirements caused by the Company's increased finance contract acquisition activity. The increase in interest expense represents 51.1% of the total increase in operating expenses and is partially attributable to the Company's warehouse credit facilities, which are at fluctuating interest rates that ranged from as low as 9.0625% to as high as 10.125% for the fiscal year ended June 30, 1996 compared to a low of 8.5% and a high of 10.1875% for the fiscal year ended June 30, 1995. In addition, the Company's monthly average outstanding balance on its warehouse credit facility increased to $74.4 million for the fiscal year ended June 30, 1996 from $37.6 million for the fiscal year ended June 30, 1995. The Company also incurred interest on notes payable at a 12% interest rate on a monthly average outstanding balance of $20.2 million for the fiscal year ended June 30, 1996 compared to a monthly outstanding average balance of $8.2 million for the fiscal year ended June 30, 1995.
Salaries and Other Employee Costs. Salaries and other employee costs increased to $8.3 million for the fiscal year ended June 30, 1996 from $3.9 million for the fiscal year ended June 30, 1995, an increase of $4.4 million or 112.2%, due to an increase in the number of employees to approximately 340 at June 30, 1996 from approximately 140 employees at June 30, 1995 and approximately $2.0 million of bonus expense based on the Company's pre-tax net income for the fiscal year ended June 30, 1996. For the fiscal year ended June 30, 1995, certain members of senior management elected to forgo bonuses that would have aggregated approximately $200,000.
Provision for Credit Losses. The provision for credit losses increased to $3.5 million for the fiscal year ended June 30, 1996 from $941,000 for the fiscal year ended June 30, 1995, an increase of $2.3 million due to: (i) the Company's increased acquisition volume of finance contracts; (ii) the Company's decision to discontinue purchasing credit default insurance on its lease origination effective January 1995; (iii) the Company's decision, effective August 1995, to insure on a discretionary basis its finance contract acquisitions (to the extent finance contracts remain uninsured for default, the Company's loss ratio is higher); (iv) the increase in delinquent automobile finance receivables (as discussed below); and (v) the higher amount of finance contracts and leases owned by the Company at June 30, 1996 ($41.1 million) as compared to June 30, 1995 ($39.8 million). These changes also resulted in an increase in the Company's reserve rate as a percentage of total automobile finance receivables held on the Company's balance sheet (i.e., original balance net of receivables repaid, sold or charged off) to 7.1% in 1996 from 2.9% in 1995. The Company maintains residual value insurance relating to its entire lease portfolio.
Charge for Release of Escrowed Shares. Charge for release of escrowed shares decreased to $809,000 for the fiscal year ended June 30, 1996 from $879,000 for the fiscal year ended June 30, 1995, a decrease of $72,000 or 8.2%. The decrease is a result of the decrease in the Company's quoted market price of $5 3/8 at June 30, 1996 from $7 3/4 at June 30, 1995; the market price is one of the components for computing the charge. The other component is the number of shares released. In fiscal 1996, 150,118 shares of the 1,078,308 remaining escrowed shares were subject to the charge compared to 113,386 shares of the 814,455 released in fiscal 1995. All escrowed shares owned by the executive officers were subject to this charge. As of June
30, 1996, all escrowed shares are being released, thus the Company will not incur this expense in future years.
Rent and Electricity, Office Expenses and Communications. Rent and electricity charges increased to $1.3 million for the fiscal year ended June 30, 1996 from $616,000 for the fiscal year ended June 30, 1995, an increase of $634,000 or 102.9% due to all processing centers being opened or expanded for the full fiscal year of 1996, whereas in the fiscal year 1995 two of the Company's processing centers were newly leased in the latter part of the third quarter. In addition, in the second quarter of fiscal 1996, the Company expanded its Jersey City Headquarters and in the third quarter of fiscal 1996 the Company relocated and expanded its collections department located in Irvine, California. Correspondingly, office expenses increased to $900,000 for the fiscal year ended June 30, 1996 from $744,000 for the fiscal year ended June 30, 1995, an increase of $156,000 or 20.9% and communication expenses increased to $975,000 for the fiscal year ended June 30, 1996 from $607,000 for the fiscal year ended June 30, 1995, an increase of $368,000 or 60.8%. Communication expenses include expenses relating to receiving and sending electronic data including expenses relating to obtaining credit reports and other data services, telephone charges, faxes, the linking of the collections department to the third party servicer and the linking of all the offices to systems development location in the Merriam, Kansas facility.
Professional fees. Professional fees, including those paid to related parties, increased to $1.3 million for the fiscal year ended June 30, 1996 from $722,000 for the fiscal year ended June 30, 1995, an increase of $534,000 or 74.0% due to the following: (i) an increase in accounting and auditing fees of approx- imately $100,000 primarily as a result of the new reporting requirements of the Company as a public company for the fiscal year ended June 30, 1996; (ii) an increase in legal fees of approximately $200,000 primarily as a result of the new reporting requirements of the Company as a public company for the fiscal year ended June 30, 1996 and as a result of defending primarily two lawsuits entered into against the Company as previously discussed; (iii) an increase of approximately $110,000 in directors fees; and (iv) an increase of approximately $124,000 in consulting fees (offset by a decrease in related party consulting fees of $225,000). During the fiscal year ended June 30, 1996, the Company engaged public relation firms to assist it in developing its marketing strategies in both the sub-prime automobile finance industry and in the investor community; whereas, these expenses were not incurred for the fiscal year ended June 30, 1995.
Equipment Rental. Equipment rental increased to $687,000 for the fiscal year ended June 30, 1996 from $448,000 for the fiscal year ended June 30, 1995, an increase of $239,000 or 53.2% due to the increase in the number of employees to 340 at June 30, 1996 from 140 employees at June 30, 1995, the majority of the new employees require computers, the most significant component of equipment rental costs.
All Other Operating Expenses. Other operating expenses increased to $1.8 million for the fiscal year ended June 30, 1996 from $1.2 million for the fiscal year ended June 30, 1995, an increase of $709,000 or 63.2%. This increase is the result of the following: (i) an increase in travel and entertainment expense of $173,000 due to the Company's expansion into new territories including seven new states; (ii) an increase in amortization and depreciation of $158,000 due to increased purchases of fixed assets, including leasehold improvements to expanded office space and (iii) an increase of $378,000 in other expenses such as insurance, advertising and promotional expenses, other taxes, such as state privilege taxes and other miscellaneous taxes and miscellaneous expenses.
Income Taxes. Income taxes increased to $7.5 million (an effective tax rate of 44.6%) for the fiscal year ended June 30, 1996 from $1.8 million (an effective tax rate of 58.2%) for the fiscal year ended June 30, 1995, an increase of $5.7 million. The decrease in the Company's effective tax rate of 13.5% is a result of the decrease in the impact of permanent differences (primarily from the charge for the release of escrowed shares discussed above that is not tax deductible) between book and taxable income. For the fiscal year ended June
30, 1996, the impact of the charge for the release of escrowed shares decreased to 1.7% from 10.0% for the fiscal year ended June 30, 1995, a decrease of 8.3%, the other significant component is the state and local tax benefit which decreased to 7.1% for the fiscal year ended June 30, 1996 from 12.0% for the fiscal year ended June 30, 1995, a decrease of 4.9%.
Net Income. Net income increased to $9.3 million for the fiscal year ended June 30, 1996 from $1.3 million for the fiscal year ended June 30, 1995, an increase of $8.0 million or 629.3%. This increase resulted primarily from the increase in the size of automobile securitization transactions to $364.0 million for the fiscal year ended June 30, 1996 from $119.3 million for the fiscal year ended June 31, 1995.
Financial Condition
Automobile Finance Receivables, Net. Automobile finance receivables consists of finance contracts held for sale, finance contracts held for investment (including vehicles held in the repossession process) and the Company's lease portfolio. The Company suspended originating leases in the first quarter of its 1996 fiscal year.
Automobile finance receivables, net of allowance for credit losses, decreased to $34.7 million at June 30, 1997 from $41.1 million at June 30, 1996, a decrease of $6.4 million or 15.6%. Finance contracts held for sale decreased to $11.0 million at June 30, 1997 from $12.9 million at June 30, 1996, a decrease of $2.2 million or 20.0%. Finance contracts held for investment increased to $12.8 million at June 30, 1997 from $11.4 million at June 30, 1996, an increase of $1.4 million or 12.3%. As of June 30, 1997, approximately $11.0 million of finance contracts held for investment were in the repossession process. The increase in the finance contracts held for investment was due primarily to the lack of a securitization in the December 1996 quarter end and an increase in default rates resulting in a higher number of vehicles in the repossession process. The allowance for credit losses increased to $6.9 million in 1997 from $3.1 million in 1996. Automobile leases held for investment decreased to $11.2 million at June 30, 1997 from $19.8 million at June 30, 1996, a decrease of $8.6 million or 43.4% primarily due to write offs, pay offs and normal amortization.
The number and principal balance of finance contracts held are largely dependent upon the timing and size of the Company's securitizations. The Company plans to securitize finance contracts on a regular monthly basis under its Purchase Facility.
Retained Interests in Securitized Receivables. The following table provides historical data regarding the retained interests in securitized receivables for the periods shown:
Delinquency Experience
The following tables reflect the delinquency experience of all finance contracts acquired or leases originated, including those sold in whole finance contract sales or securitizations, by the Company at the dates shown:
[CAPTION]
Credit Loss Experience
An allowance for credit losses is maintained for all finance contracts held for sale and for all finance contracts held for investment. Management evaluates the reasonableness of the assumptions employed by reviewing credit loss experience, delinquencies, repossession trends, the size of the finance contract portfolio and general economic conditions and trends. If necessary, assumptions are changed to reflect historical experience to the extent it deviates materially from that which was assumed.
If a delinquency exists and a default is deemed inevitable or the collateral is in jeopardy, and in no event later than the 35th day of delinquency, the Company's collections department will initiate the repossession of the financed vehicle. Bonded, insured outside repossession agencies are used to secure involuntary repossessions. In most jurisdictions, notice to the borrower of the Company's intention to sell the repossessed automobile is required, whereupon the borrower may exercise certain rights to cure his or her default or redeem the automobile. Following the expiration of the legally required notice period, the repossessed vehicle is sold at a wholesale auto auction, usually within 150 days of the repossession. The Company monitors vehicles set for auction, and procures an appraisal under the VSI Policy prior to sale. Liquidation proceeds are applied
to the borrower's outstanding obligation under the finance contract and loss deficiency claims under the VSI Policy and credit default insurance policy are then filed. The Company reports the remaining deficiency as a net charge- off against the allowance for credit losses for automobile finance contracts owned by the Company. For finance contracts held in securitization trusts, charge-offs are accounted for in accordance with the underlying pooling and servicing agreements.
Because of the Company's limited operating history in the fiscal years ended June 30, 1995 and 1996, its finance contract portfolio was unseasoned. Accordingly, delinquency and charge-off rates in the portfolio may not have fully reflected the rates that would apply when the average holding period for finance contracts in the portfolio is longer. In the fiscal year ended June 30, 1997, the Company's repossession ratio (i.e. default rate) increased to 18.8% from 13.0% in the fiscal year ended June 30, 1996. Additionally, the Company's net charge-offs as a percentage of liquidations in the fiscal year ended June 30, 1997 increased to 40.5% from 24.3% in the fiscal year ended June 30, 1996. The primary cause for this increase is due to the deterioration in the Company's recovery rates from the disposition of repossessed vehicles. Furthermore, a portion of the approved RDI claims are being applied to the Company's self insured retention balance ("SIR"). Since the Company has not yet reached its SIR limit, the insurance company is not required to pay the approved claims. Had the Company categorized claims applied toward the SIR as an offset to losses, net charge-off as a percentage of liquidations for the fiscal year year ended June 30, 1997 would be significantly lower. Without decreasing the delinquency and/or charge-off rates in the portfolio, the Company's ability to obtain or securitized its finance contracts would continue to have an adverse effect on the Company's results of operations and financial condition.
The following table shows the Company's repossession and loss experience for its managed finance contract portfolio for the periods indicated:
The Company has prepared analyses, based on its own credit experience and available industry data, to identify the relationship between finance contract delinquency and default rates at the various stages of a finance contract repayment term. The results of these analyses, which have been incorporated into the
Company's methodology of determining gains from securitization transactions, suggest that the probability of a finance contract becoming delinquent or going into default is highest during the "seasoning period" that occurs between the sixth to the eighteenth month payment period from the acquisition date.
A greater portion of the Company's finance contract portfolio is expected to fall into the "seasoning period" described above, which may cause a rise in the overall finance contract portfolio delinquency and default rates, without regard to underwriting performance. Assuming no changes in any other factors that may affect delinquency and default rates, the Company believes this trend should stabilize or reverse when the volume of mature finance contracts (with lower delinquency and default rates) is sufficient to offset the total finance contract portfolio delinquency and default rates. In the fiscal year ended June 30, 1997, the Company's rate of finance contract acquisition volume decreased and therefore a portion of its increased delinquency and default rates can be attributed to the finance contracts falling into the "seasoning period".
The Company believes delinquencies and losses can be partially mitigated by introducing stricter credit standards together with an in-house servicing and collection program. Accordingly, the Company dedicated approximately $3.0 million of its limited working capital to the development and ultimate implementation of its own servicing company through its wholly owned subsidiary, SST. While SST was developing, the Company contracted for certain collection functions through a sub-servicing agreement with its third party servicer, ALFI. Through this arrangement the Company contracted for responsibility for all customer contact with respect to all existing leases and with respect to finance contracts that were included in the Company's December 1994 securitization transaction and all finance contracts acquired thereafter. In addition, the Company assumed responsibility for liquidation activities on its entire finance contract portfolio (including securitized finance contracts) at such time. In January 1997, SST began servicing a portion of the Company's finance contracts from the time of acquisition. As of March 1997, SST was awarded the servicing on all of the Company's finance contracts simultaneously with their acquisition. By the end of May 1997, SST was servicing approximately 76.9% of the Company's managed finance contract portfolio. SST does not perform any servicing on the Company's lease portfolio. The Company continues to perform collection functions under its sub-servicing vagreement with ALFI on 22.5% of the remaining finance contracts serviced by ALFI. There can be no assurance that the performance of the Company's portfolio will be maintained, or that the rate of future defaults and/or losses will be consistent with prior experience or at levels that will not adversely affect the Company's profitability.
Repossession Experience - Static Pool Analysis
The Company does not record its provision for credit losses based on a percentage of the Company's finance contract portfolio outstanding because percentages can be favorably affected by large balances of recently acquired finance contracts. The Company utilizes actual dollar levels of delinquencies and charge-offs and analyzes the data on a "static pool" basis. The Company's goal is to complete the liquidation process as quickly as possible. The Company has experienced delays in liquidating its repossessed vehicles caused by events at its servicers, custodians and trustees in providing a perfected title to the Company's liquidating agents. It is currently working with these parties to improve the title tracking processes. Upon receipt of the perfected title, the Company's remarketing group can schedule the vehicle to be liquidated, typically within five business days. All repossessed vehicles are sold at wholesale auction. The Company is responsible for the costs of repossession, transportation and storage. The Company's net charge-off per repossession equals the unpaid balance less the auction proceeds (net of associated costs) and less proceeds from insurance claims.
The following table provides static pool analysis of the Company's portfolio as of June 30, 1997 for the periods shown. In this table, all finance contracts have been segregated by month of acquisition. All repossessions have been segregated by the month in which the repossessed finance contract was originally
acquired by the Company. Cumulative repossessions equals the ratio of repossessions as a percentage of finance contracts acquired for each segregated month. Annualized repossessions equals an annual equivalent of the cumulative repossession ratio for each segregated month. This table provides information regarding the Company's repossession experience over time. For example, recently acquired finance contracts result in very few repossessions. After approximately six to eighteen months of seasoning, frequency of repossessions appear to reach a plateau. Based on industry statistics and the performance experience of the securitizations, the Company believes that finance contracts seasoned in excess of approximately 18 months will start to demonstrate declining repossession frequency.
The following table provides the aggregate static pool information regarding the Company's rated securitization transactions as of June 30, 1997:
Liquidity and Capital Resources
The Company's business requires substantial cash to support its operating activities. The principal cash requirements include (i) amounts necessary to acquire automobile finance contracts pending disposition, primarily through securitization and (ii) cash held from time to time in restricted spread accounts to support securitizations and other securitization expenses. The Company also uses material amounts of cash for operating expenses and debt service. The Company has operated on a negative cash flow basis and experienced a substantial loss in the fiscal year ended June 30, 1997. The Company has funded these negative operating cash flows principally through borrowings from financial institutions and sales of equity securities. There can be no assurance that the Company will have access to capital markets in the future or that financing will be available to satisfy the Company's operating and debt service requirements or to implement its Plan and to reach break even. If these resources are not available on terms acceptable to the Company, the Company may have to further curtail operations which may result in a new restructuring plan or discontinuing its operations.
The Company's external capital resources primarily consist of its $75.0 million warehouse credit facility line and the Company's $1.0 billion Purchase Facility. When the Company securitizes finance contracts through its Purchase Facility, it repays a portion of its outstanding warehouse indebtedness with the proceeds from such securitization, making such portion available for future borrowing. The terms under the Purchase Facility provide the Company with a monthly securitization strategy. In the fiscal year ended June 30, 1997, the
Company completed four securitizations under the terms of the Purchase Facility since closing the agreement in March 1997 in the aggregate amount of $389.3 million, and expects to securitize at least monthly thereafter. There can be no assurances that transactions under the Purchase Facility will be successfully completed. The Company also continues to seek additional arrangements with financial institutions with respect to the disposition of its portfolio assets through securitizations, whole loan sale or other exit strategies. In addition, the Company has been able to borrow against its retained interests in securitized receivables to provide liquidity. To further enhance the Company's liquidity, its wholly owned subsidiary, SST began its servicing operations. As a servicer of the Company's finance contracts sold in the securitization process, SST receives its fee for services rendered to the respective trusts directly from those trusts prior to any other distributions. As servicer for the finance contracts held for sale and held for investment, the Company has reduced its overall cost to service these finance contracts thus enhancing its liquidity. As of November 10, 1997, the company entered into a letter of intent to sell SST. (See "Business-Strategic Business Plan - Operating Caital").
The following table sets forth the major components of the increase (decrease) in cash and cash equivalents for the periods shown:
Net cash used in operating activities primarily represents cash flows utilized to support the Company's acquisition of automobile finance contracts, including amounts representing capitalized acquisition costs, net of cash proceeds of sales, including through securitizations, and repayments from automobile finance receivables. The cash used to acquire automobile finance contracts is generated primarily by financing activities under the Company's warehouse credit facilities, discussed below.
A further significant source of cash used in operating activities is net income offset by non-cash revenue items, most notably unrealized gains on securitization transactions, which is expected to generate cash in future periods. The unrealized gains principally represent the discounted present value of the amount of anticipated collections from securitized receivables over the amounts due to investors in the securitizations. These amounts were $21.4 million, $54.0 million and $11.3 million for the fiscal years ended June 30, 1995, 1996 and 1997, respectively. During the years ended June 30, 1995, 1996 and 1997, the Company received cash proceeds of $1.8 million, $3.0 million and $1.6 million, respectively, from its retained interests in securitized receivables which were utilized in meeting its debt repayment requirements under the related financing agreements.
Other non-cash adjustments include depreciation and amortization, which amounted to $454,000 for the fiscal year ended June 30, 1995, $612,000 for the fiscal year ended June 30, 1996 and $1.1 million for the fiscal year ended June 30, 1997; provision for credit losses, which amounted to $942,000 for the fiscal year ended June 30, 1995, $3.5 million for the fiscal year ended June 30, 1996 and $9.4 million for fiscal year ended June 30, 1997; and provision for deferred income taxes of $1.5 million for the fiscal year ended June 30, 1995, $5.9
million for the fiscal year ended June 30, 1996 and none for the fiscal year ended June 30, 1997. In addition, as of June 30, 1995 and 1996, the Company released 814,455 shares and 1,078,308 shares respectively, of the Escrowed Shares (of which 113,386 shares were released to the executive officers of the Company in 1995 and 150,118 shares were released to the executive officers of the Company in 1996) and consequently incurred non-cash charges of $879,000 and $807,000, respectively. The charges did not affect the Company's total stockholders' equity or working capital. The Company incurred non-cash charges for write downs on retained interests in securitized receivables of none, $7.5 million and $49.0 million for the fiscal years ended June 30, 1995, 1996 and 1997, respectively. Additionally, in the fiscal year ended June 30, 1996, the Company incurred a non-cash charge of $600,000 for a valuation allowance on a note receivable with no such charges in the other periods presented.
To the extent that the foregoing activities were net users of cash, such cash was provided primarily by borrowings under notes payable of $16.0 million for the fiscal year ended June 30, 1995, $39.4 million for the fiscal year ended June 30, 1996 and $84.0 million for the fiscal year ended June 30, 1997. The notes payable (excluding $2.0 million secured by SST's building and certain of its machinery and equipment with a fair value of $2.4 million) are secured by retained interests in securitized receivables (created in the Company's automobile finance contract securitizations), finance contracts acquired prior to March 1, 1997 and all assets of the Company not otherwise encumbered. A portion of the principal payments were made from the Company's proceeds received from pay downs on such assets which amounted to $1.8 million, $3.0 million and $4.6 million, respectively, in the years ended June 30, 1995, 1996 and 1997. The remaining principal payments of $1.2 million, $19.5 million and $71.2 million in the years ended June 30, 1995, 1996 and 1997, respectively, were made either from borrowings under other similar available lines or from the Company's then available operating cash.
The Company's cash flows and results of operations may be affected adversely by rising interest rates. The Company's warehouse credit facilities are at floating rates of interest, and increases in rates cannot immediately be passed on to consumers, whose finance contracts are at fixed rates of interest. In addition, rising interest rates result in a decrease in the Company's net spreads on securitization transactions thereby decreasing future projected cash flows from retained interests in securitized receivables. Furthermore, the Company's discount rate utilized in determining its borrowing base may also rise, decreasing the amount available to borrow. Moreover, interest rates charged by the Company may be more significantly affected by factors other than prevailing interest rates, most notably geographic distribution and varying state interest rate limitations.
In connection with its securitization transactions, the Company enters into pooling and servicing agreements (the "Agreements") pursuant to which its finance contracts are sold to a Trust which, in turn, sells securities to investors. Generally, the Company is required to make an initial cash deposit to the Trust as a form of credit enhancement for the securitization. The terms of the Agreements generally require that the excess servicing cash flows of the finance contracts be retained in a bank account under the control of the Trustee (the "Reserve Fund") until the Reserve Fund meets predetermined deposit requirements. Any cash flows in excess of Reserve Fund requirements are released to the Company on a monthly basis. For the fiscal years ended June 30, 1995, 1996 and 1997, the Company received $1.8 million, $3.0 million and $1.6 million, respectively, in excess servicing cash flows from Reserve Funds. In the event that the finance contracts owned by the Trusts fail to meet predetermined delinquency and loss performance measures, the Agreements require that the Trustee retain excess servicing cash flows until the Reserve Fund attains pre-set incrementally higher levels of credit enhancement. The predetermined performance measures are not always maintained on a consistent monthly basis, thus deferring the release of the cash flows to the Company from the Reserve Fund of the applicable Trust. In addition, certain of the Agreements required the Company to deposit additional cash into the Trust's Reserve Fund if its initial minimum required levels were not met within a predetermined time frame. For the fiscal years ended June 30, 1996 and 1997, the Company paid additional cash contributions to
certain Reserve Funds of $2.3 million and $2.4 million, respectively.
In March 1997, the Company reached an agreement with a group of funds and financial institutions, including its existing warehouse lender, for the multi-structured Purchase Facility. The Purchase Facility includes a commitment from III Finance for the purchase of $350.0 million of trust certificates. The Certificates are backed by the Company's finance contracts and are unrated. The Purchase Facility is supported by the $75.0 million warehouse line. As of September 15, 1997, the Company securitized an aggregate amount of $476.4 million in six securitization transactions. The Purchase Facility provides for initial financing through the warehouse line as the finance contracts are acquired and subsequently sold, generally on a monthly basis, into the Purchase Facility.
The Company's $75.0 million warehouse line supporting the Purchase Facility replaced the Company's amended $300.0 million warehouse facility which augmented the Company's quarterly securitizations in its fiscal years ended June 30, 1995 and 1996 and the first nine months of its fiscal year ended June 30, 1997. The $75.0 million warehouse line was increased in May 1997 from the initial $50.0 million limit in March 1997. This increase was required to reduce the frequency of securitizations under the Purchase Facility. The $75.0 million warehouse line provides the Company with a two year (expiring the sooner of March 13, 1999 or an event of default as defined thereunder) warehouse line bearing interest at LIBOR plus 3% from the date the loan is made with borrowing limits of the lesser of $75.0 million or the sum of (A) 100% of the outstanding principal amount of finance contracts and (B) the lesser of 90% of the outstanding principal amount of non-conforming finance contracts (which percentages are reduced to 80% and 70%, respectively, if the Company's automobile insurer fails to maintain an A.M. Best Company rating of "A" or better (defined by A.M. Best Company as an "excellent" rating regarding the insurer's financial strength and ability to meet its obligations to policyholders)) and $1.0 million plus 92% (declining 1% per month for each month the receivable is outstanding past 180 days) of the outstanding principal amount of uninsured automobile finance contracts. Proceeds from borrowings under this Warehouse line may be used for the purpose of acquiring automobile finance contracts in accordance with the Company's underwriting guidelines. Concurrent with the closing of the Facility in March 1997, the Company's $50.0 million warehouse credit facility for originating lease transactions was amended to reduce it to the then outstanding balance and no additional borrowings allowed under the facility. The lease line expires in November 1997. As of November 12, 1997, the Company owed approximately $5.9 million under the lease line and is negotiating extending the term for up to an additional two years. All other terms under the lease line remain the same. Under the Company's prior warehouse credit facilities, principal payments were made monthly to the extent principal payments were received on the underlying collateral, and interest payments were made quarterly in arrears and on the date of any prepayment of principal on the underlying collateral. The Company was able to continue to borrow under these warehouse credit facilities so long as it complied with the terms thereof, including the maintenance by the Company of certain minimum capital levels. Under each warehouse credit facility, the Company was required to prepay 5% of the outstanding principal balance of finance contracts held by the Company for more than 180 days. In addition, the Company has a $50.0 million warehouse credit facility, expiring in November 1997, with III Finance dedicated to the purchase of HUD Title I Loans which the Company does not anticipate utilizing at this time.
In the fiscal year ended June 30, 1997, the Company borrowed $5.0 million under its subordinated debt agreement with Greenwich. The Company also has approximately $226.0 million available under its $533.0 million Securitization Facility. The fulfillment of the remaining commitment is subject to customary conditions. Currently, the Company does not meet these customary conditions and has not securitized under the Securitization Facility since September 1996. In October 1996, as a result of credit deterioration in the Company's finance contract portfolio, the Company experienced a "Portfolio Event" under the subordinated debt agreement. The Company and Greenwich agreed to restructure the $5.0 million the subordinated debt
agreement under which, the Company used $1.0 million of the proceeds from the sale of the Debenture, as described, to pay down the $5.0 million balance to $4.0 million. The Company will repay $2.0 million of the remaining balance under the revolving credit facility proportionately (pari passu) with principal payments made on the balances of the Debentures and certain notes payable aggregating $41.3 million. The pari passu payments will begin when the Company's outstanding balance under its retained yield financing note amortizes to $20.0 million. As of September 22, 1997, the Company has an outstanding balance of approximately $32.3 million under this note. The term of the loan was extended for four years from the date of closing of the Debenture and the interest rate decreased to 12.0% per annum, payable monthly. Early repayment for the other $2.0 million under the revolving credit facility is permitted if Greenwich provides auto loan servicing to the Company as defined thereunder. Additional terms of the agreement provide for lowering the strike price on warrants issued from $6.50 to as low as $4.00, contingent on achieving certain levels of auto loan servicing placed by Greenwich with the Company. On November 10, 1997, the remaining debt holder converted its $4.0 million of subordinated debt into $4.0 million of equity with substantially the same terms as the conversion of the Debenture except that $2.0 million of preferred stock is convertible into common stock at $2.00 per share. Had these conversions of debt to equity occurred prior to the Company's fiscal year ended June 30, 1996, the Company's net worth would have been approximately $13.4 million.
For the fiscal years ended June 30, 1995, 1996 and 1997, the Company securitized approximately $119.3 million, $432.4 million and $565.3 million, respectively, of finance contracts and used the net proceeds to pay down borrowings under its warehouse credit facilities. In some securitizations, the Company has utilized a "pre-funding account" that enabled the Company to fund certain finance contract acquisitions without committing its warehouse credit facility for an extended period of time. Additionally, the Company directly sold, in the form of whole finance contract sales, approximately $35.1 million of automobile finance contracts as of June 30, 1997 and used part of the proceeds to pay down borrowings under its warehouse credit facilities.
In December 1995, the Company entered into a commitment to sell $175.0 million of sub-prime automobile finance contracts to be resold as asset-backed securities through Rothschild, Inc. Through June 30, 1997, the Company sold approximately $148.4 million of automobile receivables into this facility. This facility required the Company to directly sell between $8.0 million and $15.0 million of finance contracts per month for a fifteen-month funding period subsequent to the initial funding date. In October 1996, the Company experienced the occurrence of certain performance-related events within this facility. As a result, under the terms of the facility (i) the Company was required to cease future funding to this facility and (ii) the amount of the required reserve has been increased and the facility will capture all payments otherwise due to the Company with respect to its retained interest in excess spread cash flows until the required reserve is filled. As a result, the Company will not receive any excess spread cash flows from this facility for some time. Additionally, MBIA Insurance Corporation ("MBIA"), a guarantor of principal and interest to the Class A note holders under this facility, retains the right at any time to require early amortization of the Class A notes from cash flows generated by the collateral sold into the facility. If MBIA chooses to require early amortization, the event could have an additional material adverse affect on cash flows available to the Company and on the valuation of the retained interest in securitized receivables carried on the books of the Company relating to this facility.
In February 1996, the Company issued for $9.2 million 920 shares of Series C Convertible Preferred Stock (the "Preferred Stock") under Regulation S of the Securities Act. The Class C Preferred Stock is convertible into Common Stock at the lower of $6.425 per share of Common Stock or 85% of the fair market value of the Common Stock at the time of conversion. The Company can redeem the Class C Preferred Stock upon conversion at the fair market value of the Common Stock into which such Class C Preferred Stock is convertible. The Class C Preferred Stock has an 8.0% annual dividend payable in Common Stock at the time
of conversion. Any outstanding shares of Class C Preferred Stock will automatically convert into Common Stock on the third anniversary of its issuance. As of June 30, 1997, the Company redeemed 88 shares of Class C Preferred Stock for $1.1 million, 726 shares of Class C Preferred Stock were converted into 1,602,009 shares of Common Stock and 106 shares of Class C Preferred Shares were outstanding.
In May 1997, the Company sold $21.3 million of subordinated debentures (the "Debenture"). The Debenture was purchased for $20.0 million and is convertible into 8% non-voting preferred stock (the "Preferred Shares") of the Company on a common share equivalent basis equal to $2.0 per common share. The Debenture has a term of seven years and carries a coupon rate of twelve percent (12%) per annum. Approximately $16.1 million of the proceeds of the Debenture were utilized to repay existing debt. The Debenture and the Preferred Shares, into which the Debenture is convertible, are redeemable at anytime by the Company for cash. The holder of the Debenture may require the Company to redeem the debenture, however, the Company at its election may pay the redemption price in the form of common stock. In the event the Debenture is redeemed for any reason, in addition to the redemption price, warrants for that number of Preferred Shares into which the redeemed Debenture are convertible shall be issued to the holder. The warrants will have an exercise price equal to the cash paid by the Company upon such redemption. All warrants will expire at the original stated maturity date of the Debenture.
On October 16, 1997, the holders of the Debenture converted the Debenture into non-voting Cumulative Convertible Preferred Stock, Series D ("Series D Preferred Shares"). The Series D Preferred Shares has a 12.75% dividend and a redemption value of approximately $21.1 million, and is convertible into common stock at $1.26 per share (a total of 16,751,412 shares of common stock. On November 10, 1997 the Company's holders of the remaining subordinated debt converted the debt into Cumulative Preferred Stock ("Series E and F Preferred Shares").
The debt, with a face value of $4.0 million and an interest rate of 12% was was converted into 2,000 shares each of Series E and F Preferred Shares with a 12.0% dividend and a redemption value of approximately $4.0 million. The Series E Preferred Shares are convertible into common stock at $1.26 per share and the Series F Preferred Shares are convertible into common stock at $2.00 per share.
With the implementation of the Company's strategic business plan which includes rebuilding the Company's equity; reducing debt burden as well as the related expense; enhance operating capital, restructure operations and administrative functions to achieve efficiencies, reduce operating expenses, introduce new products and services and restructure exisitng products to achieve profitability and credit performance in a highly competitive market and enhance credit management processes.
Managmement believes that cash flows from operations, the sale of SST, the Purchase Facility and its warehouse credit facility along with the conversion of the Company's Debenture and the $4.0 million subordinated debt into equity, should assist the Company in meeting its near-term funding and operational needs. The Company was successful in raising operating capital of approximately $7.0 million with the ultimate sale of SST ($2.0 million received as of November 14, 1997 with the balance of $5.0 million to be received upon colsing of the sale) and believes it needs at lease another $3.0 million in order to implement its strategic buisiness plan. The Company is requesting its lender to allow the Company to service the debt through the cash flows arising from the underlying collateral thus relieving the Company of approximately $3.8 million in annual payments and allowing the funds to be utilized to support operations and the restructuring. Management believes that if the Company is successful in implementing the Company's Plan, the Company will have the ability to repurchase the stock of SST. In the event the Company does not elect to repurchase SST, the cash flows generated from operations are most likely to be utilzied to support its operations, which may include accelerated paydowns in its then outstanding debt. Additionally, the Company operates in a capital intensive industry and on a negative cash flow basis. Any inability to access its lines of credit as a result of changes in its financial condition, or otherwise, could have a material adverse effect on the
Company's financial condition and results of operations. There can be no assurances that the Company will be successful in raising the necessary capital, alleviate its liquidity problems and restore its operations. If the Company is unsuccessful in its efforts, it will be unable to meet its obligations, and will not be able to continue as a going concern.
Inflation
While inflation has not had a material impact upon the Company's results of operations, there can be no assurance that the Company's business will not be affected by inflation in the future. Increases in the inflation rate generally result in increased interest rates and can be expected to result in increases in the Company's operating expenses. As the Company borrows funds at variable rates and generally acquires finance contracts at an average interest rate of approximately 20.2%, increased interest rates will increase the borrowing costs of the Company, and such increased borrowing costs may not be offset by increases in the interest rates with respect to finance contracts acquired.
Seasonality
The Company's operations are affected to some extent by seasonal fluctuations. Finance contract acquisitions tend to increase in March through June and September and October, while finance contract acquisitions are lowest in December and January. Delinquencies also tend to be higher during certain holiday periods, particularly at calendar year end.
Item 8:
Item 8: Financial Statements and Supplementary Data.
The information required under this item is indexed on page herein and is contained on the pages following said page.
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
PART III
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
As of Octoberr 17, 1997, the Company has either accepted the resignations or terminated certain executive officers. These officers included Gary Peiffer, Joseph Battiato, Angelo Appierto and Jorge Rios, the Company's general counsel, President, Chief Executive Officer and National Sales Manager, respectively. Since the departure of these executives, the Company has assembled a new management team comprised of Matthew Burns as the Chief Executive Officer, William Henle and Dina Penepent remain respectively, the Company's Chief Operating Officer and Chief Financial Officer. The role of National Sales Manager has been filled by one of the Company's district sales managers and the role of general counsel has been filled with internal corporate counsel with support from various New York based law firms. In addition, Angelo Appierto's term as Director will expire at the 1998 Annual Meeting of Stockholders. In addition, Angelo Appierto's term as Director will expire at the 1998 Annual Meeting of Stockholders.
The Directors and executive officers of the Company and their respective ages and positions with the Company as of November 10, 1997 are set forth in the following table:
Name Age Position
Matthew B. Burns ........... 55 Chief Executive Officer William F. Henle............ 47 Executive Vice President and Chief Operating Officer Dina L. Penepent............ 36 Executive Vice President, Chief Financial Officer and Secretary Felice R. Cutler............. 60 Director (Class 1) Carl Frischling.............. 60 Director (Class 3) Paul D. Fitzpatrick.......... 44 Director (Class 1) Angelo R. Appierto .......... 45 Director (Class 3)
Mr. Burns has served as Chief Executive Office of the Company since October 15, 1997. From July 1996 to September 1997, Mr. Burns served as Chief Executive Officer of Systems & Services Technologies, Inc., a wholly owned subsidiary of the Company. From November 1993 to June 1996, he served as an Executive Vice President of the Company in systems development. Prior to joining the Company, Mr. Burns was Chairman and Chief Executive Officer of Franklin Pacific, a subsidiary of Franklin Savings Association from 1988 to 1991. From 1985 through 1987, Mr. Burns was the Chief Operating Officer and Founder of Merrill Lynch Mortgage Capital Corporation. In 1984, he was the principal manager for all trading and hedging activities related to mortgage products for Shearson Lehman Mortgage Corporation and from 1981 through 1983 he was involved in trading and hedging for Shearson Lehman Brothers.
Mr. Henle has served as Chief Operating Officer and Executive Vice President of the Company since July 1, 1997. Prior to joining the Company and from May 1996 through June 1997, Mr. Henle was an independent consultant. From July 1986 through April 1996, he served as a Senior Vice President at First Interstate Bancorp with responsibilities such as indirect automobile lending, consumer loan processing, servicing and collections. From November 1972 through July 1986, he was employed by Bank of America NT & S.A. where he served various management positions including, Vice President, Credit Risk Manager, BankAmerica Acceptance Group and Vice President, Statewide Head of Consumer Credit.
Ms. Penepent has served as Chief Financial Officer and Executive Vice President of the Company since March 1994, and as Secretary of the Company since October 1993. From July 1992 through February 1994, she was Controller and Vice President of the Company. Before joining the Company, Ms. Penepent, a certified public accountant, was a Manager in the audit and accounting practice at BDO Seidman, certified public accountants, from January 1989 through July 1992.
Ms. Cutler has served as a Director of the Company since February 1996. Ms. Cutler has served as the Managing Partner of the law firm of Cutler and Cutler since 1966. From 1960 through 1966, Ms. Cutler was a Deputy Attorney General of the State of California. Ms. Cutler serves as a Trustee of Astra Institutional Trust and Astra Institutional Securities Trust. Ms. Cutler was initially appointed as a Director in February 1996 in connection with a change in control in the Company, and was elected to serve a three year term at the 1996 Annual Meeting of Stockholders in June 1996.
Mr. Frischling has served as a Director of the Company since February 1996. Mr. Frischling has been a partner of the law firm of Kramer, Levin, Naftalis & Frankel since September 1994. From September 1992 to August 1994, Mr. Frischling was a senior partner of the law firm of Reid & Priest. From 1979 to August 1992, Mr. Frischling was a senior partner of the law firm of Spengler Carlson Gubar Brodsky & Frischling. He also serves as a Director on eleven fund boards of the AIM Funds, ERD Waste Corp. and on two fund boards of the Lazard Funds. Mr. Frischling was initially appointed as a Director in February 1996 in connection with a change in control in the Company, to serve a two year term and is up for election at the 1998 Annual Meeting of Stockholders.
Mr. Fitzpatrick has served as a Director of the Company since June 1996. Mr. Fitzpatrick has served in various capacities at Deutsche Bank AG New York Branch since 1979, including as Vice President/Credit Risk Review from July 1997 to present; as Vice President/Credit Risk Manager from October 1995 to July 1997; as Vice President/Senior Credit Officer, Private Banking from July 1994 to September 1995; and as Vice President/Credit Administration from January 1992 to June 1994. Mr. Fitzpatrick was nominated in connection with a change in control in the Company, which occurred in February 1996, and elected as a Director to serve a three year term at the 1996 Annual Meeting of Stockholders in June 1996.
Mr. Appierto has served as a Director of the Company since March 1994. He joined the Company in 1992 and served as Chairman of the Board and Chief Executive Officer from March 1994 until October 1997. He served as President of the Company from July 1993 until May 1995. He previously served as Chief Financial Officer of the Company from May 1992 through February 1994. Prior to joining the Company, Mr. Appierto was a trader and Senior Vice President at CS First Boston, an investment bank, from December 1991 through May 1992, and a partner and Chief Financial Officer at FB Tech Joint Venture, an affiliate of CS First Boston and ofTech Partners, a proprietary securities trading firm, from April 1990 through November 1991.
No family relationship exists between any directors, nominees or executive officers of the Company; however, Mr. Philip Fitzpatrick, Mr. Paul Fitzpatrick's brother, is a director of Systems & Services Technologies, Inc., a material operating subsidiary of the Company.
Item 11:
Item 11: EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company, as well as certain other compensation paid or accrued, for the fiscal years ended June 30, 1995, 1996 and 1997 to Angelo R. Appierto,the Company's then Chairman of the Board of Directors and Chief Executive Officer, and the other four most highly compensated executive officers of the Company who were serving as executive officers at the end of the last completed fiscal year (the "Named Executive Officers"):
Option Grants in Fiscal Year 1997
The following options were granted to the Named Executive Officers during fiscal year 1997 under the Plans.
Aggregated Option Exercises in Fiscal Year 1997 and 1997 Fiscal Year-End Option Values
The table below sets forth information relating to the exercise of options during fiscal year 1997 by each Named Executive Officer and the fiscal year-end value of unexercised options.
Employment Agreements
The Company renegotiated it's prior employment agreements with each of the Named Executive Officers (other than Mr. Burns and Mr. Chappell) with such changes being effective April 1, 1997. Mr. Appierto's, Mr.Peiffer's and Mr. Battiato's prior agreements were each for a term of five years commencing March 1, 1994 and Mr. Rios' prior agreement was for a term of three years commencing July 16, 1994. Mr. Appierto's and Mr. Peiffer's prior agreements provided for a base salary of $250,000 in the first year, $275,000 in the second year, $300,000 in the third year and $350,000 in the fourth and fifth years. Mr. Battiato's prior agreement provided for a base salary of $175,000 during the first year and $200,000 per year thereafter. Mr. Rios' prior agreement provided for a base salary of $100,000 for each year of the term, which was amended to $150,000 effective July 1, 1996. Mr. Rios was entitled to a bonus, based on production volumes, of $25 per finance contract acquired or lease originated less finance contracts or leases which have defaulted. Each of the prior agreements (other than Mr. Rios' prior agreement) provided for an annual bonus based on the net pretax income (as defined therein) of the Company. Mr. Appierto was entitled to a bonus ranging from 1% of net pretax income, if such net pretax income is less than $1 million, to 5% of net pretax income if such net pretax income is in excess of $10 million. Mr. Peiffer was entitled to a bonus ranging from 2% of net pretax income, if such net pretax income is at least $5 million, but less than $10 million, and 3% of net pretax income if such net pretax income is at least $10 million. Mr. Battiato was entitled to a bonus ranging from 4% of the first $1 million of net pretax income down to $280,000 plus 1% of net pretax income in excess of $10 million. Notwithstanding the foregoing, for the fiscal year ended June 30, 1996, Mr. Appierto, Mr. Peiffer, Mr. Battiato and Mr. Rios each deferred and subsequently agreed to relinquish a portion of the bonuses due them in the amounts of $300,000, $180,000, $81,000 and $50,000, respectively ($611,000 in the aggregate), pursuant to, their respective prior employment agreements.
These employment agreements were terminated, and amended and restated employment agreements (collectively, the "Restated Agreements") were executed, effective April 1, 1997. The term of each Restated Agreement commenced on April 1, 1997 and terminates on April 1, 1999 and each provides for an annual
base salary of $300,000. Mr. Battiato's Restated Agreement provided that the $125,000 loan made by the Company to Mr. Battiato in 1996 shall be used to offset the bonus to which he may have become entitled thereunder (See "Certain Relationships and Related Transactions"). Mr. Peiffer's Restated Agreement provided that in order to repay $80,000 advanced by the Company on his behalf, his annual salary would be reduced from $300,000 to $260,000 until such advance has been repaid in full. (See "Certain Relationships and Related Transactions"). Mr. Rios' Restated Agreement provided that for the period ended March 31, 1997, he would be compensated under the terms of his employment agreement dated July 16, 1994. Mr. Rios received $50,000 of the $216,125 amount to which he was entitled based on the bonus structure of his July 16, 1994 employment agreement for the fiscal quarter ended March 31, 1997. Amounts in excess of $50,000, shall be offset against the bonus amounts to which he may become entitled pursuant to his Restated Agreement. (See "Certain Relationships and Related Transactions.")
As of October 17, 1997, the Company has either accepted the resignations of or terminated certain executive officers. These officers included Gary Peiffer, Joseph Battiato, Angelo Appierto and Jorge Rios, the Company's general counsel, President, Chief Executive Officer and National Sales Manager, respectively. Since the departure of these executives, the Company has assembled a new management team comprised of Matthew Burns as the Chief Executive Officer, William Henle as Chief Operating Officer and Dina Penepent remains the Company's Chief Financial Officer. The role of National Sales Manager has been filled by one of the Company's district sales managers and the role of general counsel has been filled by internal corporate counsel with support from various New York based law firms.
Each of the Restated Agreements provided for the determination of a bonus pool to be based on an amount equal to a percentage of Consolidated Net After Tax Income ("CNATI") and the achievement of certain targets related to Return on Assets ("ROA") for the period commencing on July 1, 1997 and ending on June 30, 2000 (the "Bonus Period"). ROA is determined by dividing the CNATI for the Bonus Period by Total Assets (hereinafter defined) for the Bonus Period and dividing that amount by three. CNATI means, with respect to any fiscal year, the net after tax income of the Company from operations currently conducted by the Company (including the servicing and origination of automobile loans or mortgages) before extraordinary items as reported on the audited financial statements of the Company with respect to such period and adjusted as follows: CNATI shall be increased to eliminate bonuses paid or payable under the Restated Agreements; reduced to eliminate any gain accrued on sales in such fiscal year with respect to securitization, whether or not any such securitization was effected in such fiscal year; increased or reduced without duplication, to give effect to net cash received or disbursed in connection with securitizations; adjusted to eliminate any income attributable to securitization of assets by the Company prior to the securitization designated as "971"; and adjusted to provide for applicable taxes (current or deferred) on such adjustments. Total Assets is determined by aggregating the total weighted average of assets owned by the Company during the Bonus Period, whether such assets are owned by the Company (including its subsidiaries) or by a special purpose vehicle (an entity created for the purpose of effecting securitizations in which the Company has a retained interest or which have recourse to the Company and which are not otherwise reflected as consolidated subsidiaries on the Company's financial statements), excluding for this purpose assets owned by the Company prior to the securitization designated as"97-1". The bonus pool is allocated by the then most senior executive among Messrs. Appierto, Battiato, Peiffer and Rios, in such person's discretion among (i) such persons and (ii) the Chief Financial Officer, any Executive Vice President and such other employees of the Company as the Chairman shall designate.
Each Restated Agreement provided that the executive would be entitled to the salary, bonus and benefits at the levels in effect immediately prior to termination for the remainder of the term of the Restated Agreement (the "Severance Period") in the event his employment is terminated by the Company other than for cause, death or disability, or because his Restated Agreement has not been renewed or extended, or by such
executive for good reason (as each term is defined under the Restated Agreements). Any benefits receivable by the executive during the Severance Period shall be reduced to the extent benefits of the same type are received by or made available to the executive during the Severance Period. In the event the executive's employment is terminated as a result of death or disability or by the Company for cause, or by the executive without good reason, or in the event his Restated Agreement is not renewed or extended, then the Company shall have no further obligations or liabilities to the executive such that all benefits and salary (excluding bonus and any death or disability benefits that would otherwise continue past the date of termination) shall terminate simultaneously with the termination of the executive's employ- ment other than benefits and salary accrued through the date of termination. If the employment of the executive is terminated by the Company without cause or by the executive with good reason (as each term is defined under the Restated Agreements), he shall be entitled to receive 100% of his bonus at such time as the bonus otherwise becomes payable. If the employment of the executive is terminated by the Company for cause or by the executive without good reason (as each term is defined under the Restated Agreements) (a) during the first year of the term of his Restated Agreement, the executive's right to receive any portion of the bonus shall be forfeited or (b) during the second year of the term of his Restated Agreement, he shall be entitled to receive, at such time as the bonus otherwise becomes payable, an amount equal to one half (1/2) of the bonus otherwise attributable to him. In the event that, prior to February 1, 1999, the Company offers to the executive an extension of his employment for at least one (1) year following the end of the term of his Restated Agreement on terms substantially similar to those provided therein and the executive does not accept such offer, the executive shall be entitled to receive, at the time such bonus otherwise becomes payable, a bonus equal to two thirds (2/3) of the bonus otherwise attributable to him. In the event that, prior to February 1, 1999, the Company does not offer to the executive an extension of his employment for at least one (1) year following the end of the term of his Restated Agreement on terms substantially similar to those provided therein, the executive shall be entitled to receive, at the time such bonus otherwise becomes payable, an amount equal to five sixths (5/6) of the bonus otherwise attributable to him. Any portion of the bonus not paid to the executive by operation of his Restated Agreement shall be allocated in such amounts and to such employees as the Board of Directors may in its discretion determine. All Restated Agreements contained provisions protecting the confidentiality of information concerning the Company's business, and do not limit the ability of such officers to compete with the Company after such officers no longer receive a salary from the Company. In addition, each Restated Agreement provides for certain insurance and other benefits for the executive.
Effective June 18, 1997, Mr. Peiffer resigned his positions with the Company as Vice Chairman of the Board and General Counsel. Mr. Peiffer's Restated Agreement was terminated in all respects and he agreed to release and waive any and all claims which he may have against the Company arising under or pursuant to the Restated Agreement or any prior agreement relating to his employment with the Company, including but not limited to claims to receive severance or bonus payments or to exercise options to purchase shares of the Company's stock. Upon Mr. Peiffer's resignation, the Company cancelled and declared to be no longer due and owing by him to the Company, $80,000 advanced by the Company on Mr. Peiffer's behalf. (See "Certain Relationships and Related Transactions").
Effective September 18, 1997, Mr. Battiato resigned his positions with the Company as President and Director. Mr. Battiato's Restated Agreement was terminated in all respects including his rights to any bonus payments. Mr. Battiato's seperation terms are currently pending, including the possible repayment of a note in the amount of $125,000. Further, all stock options granted to him, to the extent not previously exercised, were forfeited. (See "Certain Relationships and Related Transactions").
Effective October 14, 1997, Mr. Appierto was terminated as Chairman of the Board and Chief Executive Officer. His term as Director of the Company will expire at the Company's, 1997 Annual Meeting of Stockholders. Mr. Appierto's Restated Agreement was terminated in all respects including his right to any
bonus payments. Further, all stock options granted to him, to the extent not previously exercised, were forfeited.
Effective October 17, 1997, Mr. Rios was terminated as Executive Vice President and National Sales Manager. His Restated Agreement was terminated in all respects including his right to any bonus payments. Further, all stock options granted to him, to the extent not previously exercised, were forfeited. Mr. Rios owes the Company $18,387 under an original note in the amount of $22,184. Due to the fact that Mr. Rios will not receive any future bonuses from the Company, the amount outstanding under a $300,000 note will not be repaid to the Company. (See "Certain Relationships and Related Transactions").
Under the terms of each Restated Agreement, stock options previously granted to such executives under the Plans were cancelled. In consideration of such cancellation, a reduced number of options in the case of Mr. Appierto, Mr. Peiffer and Mr. Battiato and an increased number of options in the case of Mr. Rios were granted. Mr. Appierto's Restated Agreement provided that options to purchase an aggregate of 150,000 and 25,000 shares of Common Stock of the Company granted to him pursuant to the 1994 Plan and the 1996 Plan, have been reduced to 111,423 and 18,577 shares, respectively. Mr. Rios's Restated Agreement provided that options to purchase 130,000 and 50,000 shares of Common Stock of the Company granted to him pursuant to the 1994 Plan and the 1996 Plan have been increased to 133,607 and 51,393 shares, respectively. The terms of the grants remain as set forth in the Plans, except that the option exercise price per share has been reduced to $2.50, the term of the option is 10 years from the date of grant (April 1, 1997) and, in the event of a termination of employment by the Company other than for cause (as defined under the Restated Agreements) or by the executive for good reason (as defined under the Restated Agreements), the option shall remain exercisable, to the extent exercisable as of the effective date of termination, for a period of the lesser of one year following the effective date of termination and the original term of such option.
Notwithstanding the foregoing, the agreements entered into on April 26, 1996 by Mr. Appierto, Mr. Peiffer and Mr. Battiato with the Company with respect to a change of control that occurred in February 1996 remain in full force and effect for the remainder of the term of the agreements.
The Company entered into an employment agreement with Mr. Burns in October 1995 to serve as Executive Vice President -- Systems and Systems Development. Pursuant to the agreement, Mr. Burns gave up the right to any bonuses he might be entitled to under a previous employment agreement with the Company for finance contracts acquired or leases originated by the Company after July 1, 1995 in exchange for payment by the Company of $110,000. Under this agreement, Mr. Burns was entitled to a salary of $150,000 for each year of the term. On September 18, 1996, Mr. Burns' employment with the Company terminated and Mr. Burns entered into an employment agreement to serve as Chairman and Chief Executive Officer of Systems & Services Technologies, Inc. ("SST"), a newly formed wholly owned subsidiary of the Company, for a term of five years, subject to extension or reduction in accordance with the terms of the agreement. Mr. Burns' agreement provides for an annual base salary of $150,000, subject to adjustment after June 30, 1997 based upon certain performance targets, and a bonus (i) for the first two years, of the greater of $50,000 and 3.33% of SST's Net Pre-Tax Income (as defined therein) in each year it equals or exceeds Performance Targets (as defined therein) and (ii) thereafter, of 3.33% of Net Pre-Tax Income in each year Net PreTax Income equals or exceeds performance targets. Mr. Burns' agreement contains provisions protecting the confidentiality of information concerning SST's business, but does not limit the ability of Mr. Burns to compete with SST after the conclusion of its term.
The Company entered into an employment agreement with Mr. Chappell on September 18, 1996 to serve as President of SST for a term of five years, subject to extension or reduction in accordance with the terms of the agreement. Mr. Chappell's agreement provides for an annual base salary of $125,000, subject to
adjustment after June 30, 1997 based upon certain performance targets, and a bonus (i) for the first two years, of the greater of $50,000 and 3.33% of SST's Net PreTax Income (as defined therein) and (ii) thereafter, of 3.33% of SST's Net PreTax Income in each fiscal year in which the Net PreTax Income equals or exceeds the performance targets for that fiscal year. Mr. Chappell's agreement contains provisions protecting the confidentiality of information concerning SST's business, but does not limit the ability of Mr. Chappell to compete with SST after the conclusion of its term.
Compensation of Directors
Directors who are employees of the Company or its subsidiaries are not compensated for their services rendered to the Company in their capacity as Director. Independent Directors receive a $25,000 per year retainer, $3,000 plus expenses for attendance at Board meetings ($1,500 for telephonic meetings of less than an hour, with discretion to reduce such fee for teleponic meetings of less than one-half hour) and $1,500 plus expenses for attendance at Committee meetings held on days other than those which Board meetings are scheduled.
In addition, each independent director who is or becomes a member of the Board of Directors on or after June 30, 1996, shall automatically be granted a non-qualified stock option to purchase that number of shares of Common Stock obtained by multiplying the number of months measured from the commencement of such director's then term to the expiration of such term, by 833 shares. The number of months remaining in a director's then term shall be measured from the first day of the calendar month in which the director's term commenced to the last day of the calendar month in which the director's term is scheduled to expire. Options in the amount determined above were granted on July 1, 1996 to each independent director serving in such capacity on such date. All options granted in such manner shall (a) have an exercise price per share equal to 100% of the fair value of a share on the date of the grant; (b) have a term of ten years; (c) vest at the rate of 833 shares for each calendar month, counted in the same manner as the calculation of the amount of shares underlying the option, during which a director has served in such capacity for the full calendar month or any portion therof; (d) terminate (i) 12 months after termination of an independent director's service as a director of the Company due to the death of such independent director; or (ii) three months after the independent director ceases to serve as a director of the Company for any other reason; and (e) be otherwise on the same terms and condition as all other options granted pursuant to the Company's 1996 Stock Option Plan, as amended. Any options which do not vest in accordance with the above provisions shall be forfeited.
The Company has a Compensation Committee and an Audit Committee. The Compensation Commitee, which currently consists of Felice Cutler, Carl Frischling and Paul Fitzpatrick, is responsible for reviewing all compensation agreements and arrangements for officers of the Company, including annual incentive awards, and is responsible for administering the Company's stock options plans. The Audit Commitee, which currently consists of Felice Cutler, Carl Frischling and Paul Fitzpatrick, is responsible for recommending to the Board of Directors the engagement of the independent auditors of the Company and reviewing with the independent auditors the scope and results of the audit, the internal accounting controls of the Company, audit practice and the professional services furnished by the independent auditors.
During the fiscal year ended June 30, 1997, the Board of Directors held seventeen (17) meetings, eleven of which were telephonic. In addition, the Compensation Committee held nine (9) meetings and the Audit Commitee held four (4) meetings. Each of the then current Directors of the Company attended all of the meetings of the Board of Directors and each Director serving on a committee attended all the meetings of such committee upon which each Director served.
Item 12:
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND OF MANAGEMENT
The following table sets forth certain information as of November 10, 1997, based on information obtained from the persons named below or from Schedule 13D's filed with the Securities and Exchange Commission, with respect to the beneficial ownership of shares of Common Stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each Director, nominee for Director and Named Executive Officer of the Company and (iii) all of the Company's executive officers and Directors as a group.
NUMBER OF SHARES PERCENTAGE OF BENEFICIALLY OUTSTANDING OWNED COMMON STOCK
High Risk Opportunity Hub Fund Ltd.(2) 12,712,198 43.1% c/o Admiral Administration P.O. Box 32021SMB Grand Cayman Islands BWI
III Finance Ltd. (3) 12,825,300 42.0 250 Australian South West Palm Beach, FL 33401
Gary Winnick (4) 3,015,341 17.1 c/o PCG Management, Inc. 150 El Camino Drive, Suite 204 Beverly Hills, CA 90212
Greenwich Capital Financial Products, Inc. (5) 3,346,792 15.9 600 Steamboat Road Greenwich, CT 06830
Robert I. Weingarten (6) 1,732,618 9.8 1999 Avenue of the Stars, Suite 2350 Los Angeles, CA 90067
Palomba Weingarten (6)(7) 1,678,577 9.5 c/o Atlas Holdings Group, Inc. 9595 Wilshire Boulevard Beverly Hills, CA 90212
Angelo R. Appierto (8) 513,437 3.6 Joseph F. Battiato 345,000 3.4 Gary D. Peiffer (9) 279,314 1.6 Matthew B. Burns 20,000 * John J. Chappell(10) 33,667 Jorge G. Rios -- -- Felice R. Cutler (11) 17,493 * Carl Frischling (12) 40,493 * Paul D. Fitzpatrick (13) 15,827 * All executive officers and Directors as a group (7 persons)(14) 737,250 4.1
*Less than 1%
[FN]
(1) Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. Each beneficial owner's percentage ownership is determined by assuming that convertible securities, options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days of the Record Date have been exercised.
(2) Shares which may be owned by High Risk Opportunity Hub Fund Ltd. if 4,946,901 Series D Preferred is exchanged for common stock of the Company on a common share equivalent basis equal to $1.26 per share. (See "Change in Control"). Also includes 7,895,382 shares (estimated on the basis of conversion at a 15% discount from the 5 days prior average Nasdaq closing bid price) convertible from 106 shares of Convertible Preferred Series C stock held by III Global Ltd.
(3) Shares which may be owned by III Finance Ltd. if 16,159,878 Series D Preferred Stock is exchanged for common stock of the Company on a common share equivalent basis equal to $1.26 per share. (See "Change in Control").
(4) Such shares are owned by PCG Management, Inc., an entity of which Gary Winnick is the Chairman of the Board, Chief Executive Officer and sole stockholder.
(5) Includes 1,374,874 common stock equivalents.
(6) Robert I. Weingarten and Palomba Weingarten are married to each other. Shareholdings for Mr.Weingarten and Mrs. Weingarten each reflect individual ownership and each disclaims beneficial ownership of stock held by the other.
(7) Such shares are owned by Atlas Holdings Group, Inc., an entity of which Palomba Weingarten is the Chief Executive Officer, sole Director and principal stockholder.
(8) Includes (i) 50,000 shares held by the Appierto Irrevocable Family Trust as to which shares Mr. Appierto disclaims beneficial ownership.
(9) Includes 279,314 shares directly held by Suzanne C. Peiffer, Mr. Peiffer's wife. Mr. Peiffer disclaims beneficial ownership of such shares.
(10)Includes 33,667 shares subject to stock options which are immediately exercisable. In addition, Mr. Chappell has nonvested options to purchase 21,333 shares which will vest over time.
(11)Includes 17,493 shares subject to stock options. In addition, Ms. Cutler has been granted options to purchase 833 shares per month for the remainder of her term as Director. Such shares are immediately exercisable upon vesting.
(12)Includes 17,493 shares subject to stock options. In addition, Mr. Frischling has been granted options to purchase 833 shares per month for the remainder of his term as a Director. Such shares are immediately exercisable upon vesting.
(13)Includes 15,827 shares subject to stock options. In addition, Mr. Fitzpatrick has been granted options to purchase 833 shares per month for the remainder of his term as Director. Such shares are immediately exercisable upon vesting.
(14)See footnotes (8),(11), (12) and 13. In addition, includes 50,000 shares and 75,000 subject to stock options held by William Henle and Dina Penepent, respectively. Additionally, non vested options of 150,000 and 75,000 are held by Mr. Henle and Ms. Penepent, respectively. Also includes 5,000 shares of common stock held by Ms. Penepent.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Officers and Directors of the Company
As of October 14, the date of Mr. Appierto's termination, Mr. Appierto owed the Company $68,754 under an advance of $150,000 of a bonus amount that was forfeited during the fiscal year 1997 from bonuses earned in the fiscal year ended June 30, 1996. Repayment terms are currently under pending. See "Employment Agreements".
Upon Mr. Peiffer's resignation, the Company cancelled and declared to be no longer due and owing by him to the Company, certain expenses totaling $80,000 advanced by the Company on Mr. Peiffer's behalf. See "Employment Agreements".
Mr. Battiato owes the $125,000, which was advanced by the Company on Mr. Battiato's behalf, in relation to the modification of his employment agreement in connection with a change of control that occurred in February 1996. This amount remains due and owing, repayment terms are currently under negotiation with Mr. Battiato. See "Employment Agreements".
declare to be no longer due and owing by him to the Company, certain amounts totaling $125,000 advanced by the Company on Mr. Battiato's behalf in relation to the modification of his employment agreement in connection with the Whitehall Transfer discussed under "Change in Control". The Company has also agreed, in principle, to pay Mr. Battiato an additional $125,000 as severance. As of November 7, 1997, definitive agreements have not been agreed upon. See "Employee Agreements".
Upon Mr. Rios' termination, the remaining balance of $18,387 of an original balance of $22,184 advanced by the Company on his behalf remains due and payable by him. Further, an advance, which was due and payable upon the receipt of future bonuses, in the amount of $300,000 was no longer due and payable. See "Employment Agreements".
Relationships and Related Transactions with Principal Stockholders of the Company On March 31, 1996, the Company entered into an agreement with Whitehall Financial Group, Inc. (the "Consulting Agreement"), whereby Whitehall was engaged to provide consulting services to the Company relating to operations, management, financing and marketing. Since neither party has elected to terminate the Consulting Agreement, it was, in accordance with its terms, automatically extended for a period of one year commencing February 6, 1997. The Consulting Agreement provides for an annual fee to Whitehall of $300,000 (subject to adjustment in certain circumstances) plus reasonable and necessary expenses. Under the terms of the agreement, as of November 7, 1997, the Company has paid $527,800, including out of pocket expenses of $27,800. Whitehall recommended that Carl Frischling, Felice Cutler and Paul Fitzpatrick be named to the Company's Board of Directors as of February 1996 as to Mr. Frischling and Ms. Cuter and as of June 1996 as to Mr. Fitzpatrick. (See "Directors and Executive Officers of the Company").
The Company has engaged Kramer, Levin, Naftalis & Frankel as its primary legal counsel. Mr. Frischling, one of the Company's Directors, is a member of such firm. No material payments have been made to legal cousel as of November 14, 1997.
PART IV
Item 14:
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this Report: (1) The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page are filed as part of the Annual Report on Form 10K. (2) Exhibits. See Exhibit Index beginning on page 62.
(b) No Current Reports on Form 8-K were filed by the Company during the fourth quarter ended June 30, 1997.
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.
THE AEGIS CONSUMER FUNDING GROUP, INC.
By: s/Matthew B. Burns ---------------------------- Matthew B. Burns
Date: November 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
s/Matthew B. Burns - ---------------------- Chief Executive Officer November 19, 1997 Matthew B. Burns
s/Dina L. Penepent - --------------------- Chief Financial Officer, November 19, 1997 Dina L. Penepent Executive Vice President, Secretary, Principal Financial and Accounting Officer
s/Felice Cutler - -------------------- Director November 19, 1997 Felice Cutler
s/Carl Frischling - ------------------- Director November 19, 1997 Carl Frischling
s/Paul Fitzpatrick - ------------------- Director November 19, 1997 Paul Fitzpatrick
s/Angelo R. Appierto ____________________ Director November 19, 1997 Angelo R. Appierto
INDEX OF EXHIBITS
Listed below are all Exhibits filed as part of this report. Certain Exhibits are incorporated herein by reference to (1) the Company's Registration Statement on Form SB-2 originally filed on April 6, 1995 (File No. 33-85836); (2) documents previously filed with the Company's Quarterly Report on Form 10-QSB for the period ended March 31, 1995; (3) documents previously filed with the Company's Annual Report filed for the period ended June 30, 1995; (4) documents previously filed with the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1995; (5) documents previously filed with the Company's Quarterly Report on Form 10-QSB for the period ended December 31, 1995; (6) documents previously filed with the Company's Quarterly Report on Form 10-QSB for the period ended March 31, 1996; (7) documents previously filed with the Company's Annual Report on Form 10-K for the period ended June 30, 1996; (8) documents previously filed with the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996; (9) documents previously filed with the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1996; (10) documents previously filed with the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997 or, (11) filed herewith.
Exhibit No. Description Page No.
3.1 Certificate of Incorporation(1) 3.2 By-laws(1) 3.3 Form of Amended and Restated Certificate of Incorporation(1) 3.4 Form of Amended and Restated By-laws(1) 3.5 Certificate of Designation of Series C Preferred Stock(4) 4.1 Specimen Common Stock Certificate(1) 4.2 Warrant issued to Drew Schaefer(1) 4.3 Underwriters' Warrant Agreement(1) 4.4 Form of Escrow Agreement(1) 4.5 Voting Agreement dated February 15, 1996(1) 4.6 Irrevocable Proxy dated February 15, 1995(1) 4.7 Warrants to purchase 114,553 shares of Common Stock (4) 4.8 Warrant issued to Chaneil Associates(6) 4.9 Warrant issued to Beckett Reserve Fund, L.L.C(6) 4.10 Warrant issued to Bjorn Ahlstrom.(6) 5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP(1) 10.1 Revolving Credit Facility Agreement, dated July 23, 1993, between The Bennett Funding Group, Inc. and the Company(1) 10.2 Loan and Security Agreement, dated as of February 28, 1994, among Aegis Acceptance Corp., Aegis Consumer Finance, Inc. and III Finance Ltd(1) 10.2.1 Form of Promissory Note relating to Exhibit 10.2(1) 10.2.2 Aging Receivables Report relating to Exhibit 10.2(1) 10.2.3 Form of Dealer Agreement relating to Exhibit 10.2(1) 10.2.4 GAP Auto Protection Insurance Policy relating to Exhibit 10.2.(1) 10.2.5 Form of Lease relating to Exhibit 10.2(1) 10.2.6 Liability Insurance Policy relating to Exhibit 10.2(1) 10.2.7 Risk Default Policy relating to Exhibit 10.2(1) 10.2.8 Residual Value Insurance Policy relating to Exhibit 10.2(1) 10.2.9 Underwriting Criteria relating to Exhibit 10.2(1) 10.2.10 Vendor Single Interest Physical Damage Insurance Policy relating to Exhibit 10.2(1) 10.2.11 Form of Custodian Confirmation relating to Exhibit 10.2(1) 10.2.12 List of Closing Documents relating to Exhibit 10.2(1) 10.3 Loan and Security Agreement, dated as of November 8, 1993, between Aegis Capital Markets, Inc., Aegis Acceptance Corp., Aegis Auto Finance, Inc. and III Finance Ltd.(1)
10.3.1 Form of Promissory Note relating to Exhibit 10.3(1) 10.3.2 Aging Receivables Report relating to Exhibit 10.3(1) 10.3.3 Form of Dealer Agreement relating to Exhibit 10.3(1) 10.3.4 Form of RDI Policy relating to Exhibit 10.3(1) 10.3.5 Underwriting Criteria relating to Exhibit 10.3(1) 10.3.6 Form of VSI Policy relating to Exhibit 10.3(1) 10.3.7 Form of Servicer's Confirmation relating to Exhibit 10.3(1) 10.3.8 List of Closing Documents relating to Exhibit 10.3(1) 10.4 Loan and Security Agreement, dated as of July 1, 1993, between Aegis Securitized Assets, Inc. and III Finance Ltd.(1) 10.4.1 Underwriting Criteria relating to Exhibit 10.4(1) 10.5 1994 Stock Option Plan of the Company(1) 10.5.1 1994 Stock Option Plan of the Company, as amended(7) 10.5.2 1996 Stock Option Plan of the Company(7) 10.6 Employment Agreement with Angelo R. Appierto(1) 10.6.1 Amendment to Employment Agreement with Angelo R. Appierto(2). 10.6.2 Form of Amendment to Employment Agreement with Angelo R. Appierto(6) 10.6.3 Form of Amendment to Employment Agreement with Angelo R. Appierto.(7) 10.6.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of April 1, 1997, by and between THE AEGIS CONSUMER FUNDING GROUP, INC. and Mr. Angelo R. Appierto.(11) 10.7 Employment Agreement with Gary D. Peiffer(1) 10.7.1 Amendment to Employment Agreement with Gary D. Peiffer.(2) 10.7.2 Form of Amendment to Employment Agreement with Gary D. Peiffer.(6) 10.7.3 Form of Amendment to Employment Agreement with Gary D. Peiffer.(7) 10.7.4 TERMINATION AGREEMENT dated as of June 18, 1997, between THE AEGIS CONSUMER FUNDING GROUP, INC. and Mr. Gary D. Peiffer.(11) 10.8 Employment Agreement with Joseph F. Battiato(1) 10.8.1 Amendment to Employment Agreement with Joseph F. Battiato(2) 10.8.2 Form of Amendment to Employment Agreement with Joseph F. Battiato(6) 10.8.3 Form of Amendment to Employment Agreement with Joseph F. Battiato(7) 10.8.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of April 1, 1997, by and between THE AEGIS CONSUMER FUNDING GROUP,INC. and Mr. Joseph F. Battiato(11) 10.9 Employment Agreement with Matthew B. Burns(1) 10.9.1 Amendment to Employment Agreement with Matthew B.Burns(2) 10.9.2 Amendment to Employment Agreement of Matthew B. Burns, dated as of October 11, 1995.(5) 10.9.3 Termination of Employment Agreement with Matthew B. Burns.(8) 10.10 Employment Agreement with Jorge G. Rios.(1) 10.10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of April 1, 1997, by and between THE AEGIS CONSUMER FUNDING GROUP, INC. and Mr. Jorge Rios.(11) 10.11 Employment Agreement with Robert G. Nelson.(1) 10.12 Consulting Agreement with Drew E. Schaefer and Nustar Financial Corp.(1) 10.13 Termination of Consulting Agreement with Drew E. Schaefer Nustar Finnacial Corp (1) 10.14 Lease, dated June 29, 1992, by and between the Company and First Pac Limited, with respect to 33 Whitehall St., New York, New York(1) 10.15 Additional Space Agreement, dated September 30, 1993, by and between the Company and First Pac Limited(1) 10.16 Sublease, dated September 27, 1993, by and between the Company as subtenant and Centre Reinsurance Company and International Insurance Advisors, Inc., as sublessors(1)
10.17 Sublease, dated as of October 1, 1993, by and between the Company as sublessor and Americorp Financial Services, Inc. as subtenant(1) 10.18 Master Servicing Agreement, dated as of February 28, 1994, between American Lenders Facilities, Inc. and Aegis Consumer Finance, Inc.(1) 10.19 Program Management Agreement, dated as of November 16, 1992, by and between Aegis Financial Advisers, Inc., and The Bennett Funding Group, Inc(1) 10.20 Program Management Agreement Amendment No. 1, dated as of July 1, 1993 by and between Aegis Financial Advisers, Inc. and The Bennett Funding Group, Inc.(1), 10.21 Loan and Security Agreement, dated as of August 11, 1994, between Aegis Consumer Finance, Inc. and III Finance Ltd.(1) 10.21.1 Form of Promissory Note relating to Exhibit 10.21(1) 10.21.2 Form of Cash Flow Valuation Report relating to Exhibit 10.21(1) 10.21.3 Aegis Auto Receivables 1994-A, L.P., Agreement of Limited Partnership relating to Exhibit 10.21(1) 10.21.4 Pooling and Servicing Agreement relating to Exhibit 10.21.(1) 10.21.5 List of Closing Documents relating to Exhibit 10.21.(1) 10.21.6 See Exhibit 10.3.4.(1) 10.21.7 See Exhibit 10.3.6.(1) 10.22 Loan and Security Agreement, dated as of September 28, 1994, between Aegis Consumer Finance, Inc. and III Finance Ltd.(1) 10.22.1 Form of Promissory Note relating to Exhibit 10.22(1) 10.22.2 See Exhibit 10.21.2(1) 10.22.3 See Exhibit 10.21.3(1) 10.22.4 See Exhibit 10.21.4(1) 10.22.5 See Exhibit 10.21.5(1) 10.22.6 See Exhibit 10.3.4(1) 10.22.7 See Exhibit 10.3.6.(1) 10.23 Form of Dealer Agreement(1) 10.24 Form of Customer Credit Application(1) 10.25 Partnership Agreement of Aegis Investment Partners(1) 10.26 Employment Termination Agreement, dated as of February 22, 1995, between the Company and Robert Nelson(1) 10.27 Servicing Agreement with American Lenders Facility, Inc.(2) 10.28 Loan and Security Agreement, dated as of December 22, 1994 between Aegis Consumer Finance, Inc. and III Finance Ltd.(2). 10.28.1 Form of Promissory Note relating to Exhibit 10.28(2) 10.28.2 Exhibit 10.21.2 Form of Cash Flow Valuation Report relating to Exhibit 10.21(1) 10.28.3 Exhibit 10.21.3 Aegis Auto Receivables 1994-A, L.P., Agreement of Limited Partnership relating to Exhibit 10.21(1) 10.28.4 Exhibit 10.21.4 Pooling and Servicing Agreement relating to Exhibit 10.21(1) 10.28.5 Exhibit 10.21.5 List of Closing Documents relating to Exhibit 10.21(1) 10.28.6 Exhibit 10.3.4 Form of RDI policy relating to Exhibit 10.3(1) 10.28.7 Exhibit 10.3.6 Form of VSI Policy relating to Exhibit 10.3(1) 10.29 Loan and Security Agreement dated as of March 22, 1995, between Aegis Consumer Finance, Inc. and III Finance LTD.(2) 10.29.1 Form of Promissory Note relating to Exhibit 10.29(2) 10.29.2 Exhibit 10.21.2 Form of Cash Flow Valuation Report relating to Exhibit 10.21(1) 10.29.3 Exhibit 10.21.3 Aegis Auto Receivables 1994-A, L.P., Agreement of Limited Partnership relating to Exhibit 10.21(1)
10.29.4 Exhibit 10.21.4 Pooling and Servicing Agreement relating to Exhibit 10.21(1) 10.29.5 Exhibit 10.21.5 List of Closing Documents relating to Exhibit 10.21(1) 10.29.6 Exhibit 10.3.4 Form of RDI Policy relating to Exhibit 10.3(1) 10.29.7 Exhibit 10.3.6 Form of VSI Policy relating to Exhibit 10.3(1) 10.30 Loan and Security Agreement, dated as of June 20, 1995 between Aegis Auto Finance, Inc. as Borrower and III Finance Ltd. as Lender (3) 10.30.1 Promissory Note relating to Exhibit 10.30(3) 10.30.2 Exhibit 10.29.2 Form of Cash Flow Valuation Report relating to Exhibit 10.21.3, relating to Exhibit 10.21(1) 10.30.3 Exhibit 10.29.4 Form of Cash Flow Valuation Report relating to Exhibit 10.21.4, relating to Exhibit 10.21(1) 10.30.4 Exhibit 10.29.5 List of Closing Documents relating to Exhibit 10.21.5 relating to Exhibit 10.21(1) 10.30.5 Exhibit 10.29.6 Form of RDI Policy relating to Exhibit 10.3.4, relating to Exhibit 10.3(1) 10.30.6 Exhibit 10.29.7 Form of VSI Policy relating to Exhibit 10.3.6, relating to Exhibit 10.3(1) 10.31 Purchase Agreement dated as of 3/31/95 by and between Aegis Auto Finance, Inc. as Seller and III Limited Partnership as Purchaser (3) 10.31.1 Promissory Note dated as of 3/31/95 by and between III Limited Partnership, Ltd. and Aegis Consumer Finance, Inc. (3) 10.31.2 Note Modification dated as 5/1/95 to the Promissory Note dated 3/31/95 by and between III Limited Partnership Ltd. and Aegis Consumer Finance, Inc. (3) 10.32 Subcontracting Agreement dated as of 4/6/95 by and between American Lenders Facilities, Inc. and Aegis Consumer Finance, Inc. (3) 10.32.1 Amendment to Subcontracting Agreement between American Lenders Facilities, Inc. and Aegis Consumer Finance, Inc., dated 6/19/95 (3) 10.33 Form of Servicing Agreement between American Lenders Facilities, Inc., and Norwest Bank Minnesota, National Association. (3) 10.34 Marketing Agreement dated as of 6/15/95 by and between Financial Access, Inc. and Aegis Consumer Finance, Inc.(3) 10.35 Purchase Agreement dated as of 6/1/95 between Aegis Auto Finance, Inc. as Seller and Aegis Auto Funding Corp. as Buyer(3) 10.36 Form of Purchase Agreement dated as of 6/23/95 by and between Aegis Auto Finance, Inc. as Seller and Liberty Bank and Trust Company as Purchaser (3) 10.37 Marketing Agreement dated as of 8/24/95 by and between WG Warranty and Insurance Services and Aegis Consumer Finance, Inc. (3) 10.38 Purchase Agreement dated as of 9/22/95 by and between Aegis Auto Finance, Inc. as Seller and Cameron State Bank as Purchaser (3) 10.39 Employment Agreement with Dina L. Penepent (4) 10.40 Master Amendment to Loan and Security Agreements, dated as of August 24, 1995 between Aegis Auto Finance, Inc. and III Finance Ltd(4). 10.41 Amendment No. 4 to Loan and Security Agreement, dated as of September 12, 1995 between Aegis Acceptance Corp., Aegis Consumer Finance, Inc. and III Finance Ltd.(4) 10.42 Amendment No. 5 to Loan and Security Agreement, dated as of October 18, 1995 between Aegis Acceptance Corp., Aegis Consumer Finance, Inc. and III Finance Ltd.(4) 10.43 Amendment No.5 to Loan and Security Agreement, dated as of September 13, 1995, between Aegis Auto Finance, Inc. and III Finance Ltd.(4) 10.44 Amendment No. 6 to Loan and Security Agreement, dated as of October 18, 1995, between Aegis Auto Finance, Inc. and III Finance Ltd.(4) 10.45 Purchase Agreement dated as of 611/95 by and between Aegis Auto Finance, Inc. as Seller and Aegis Auto Funding Corp. as Purchaser(4). 10.46 Purchase Agreement dated as of 6/20/95 by and between Aegis Auto Funding Corp. as Seller and Smith Barney Inc. as Purchaser.(4) 10.47 Loan and Security Agreement, dated as of June 20, 1995 between Aegis Auto Finance, Inc. as Borrower and III Finance Ltd. as Lender.(4) 10.47.1 Promissory Note relating to Exhibit 10.45.(4) 10.48. Exhibit 10.30.2 Form of Cash Flow Valuation Report relating to Exhibit 10.29.2, relating to Exhibit 10.21.3, relating to Exhibit 10.21(1). 10.48.1 Exhibit 10.30.3 Pooling and Servicing Agreement relating to Exhibit 10.29.4, relating to Exhibit 10.21.4, relating to Exhibit 10.21(1). 10.48.2 Exhibit 10.30.4 List of Closing Documents relating to Exhibit 10.29.5, relating to Exhibit 10.21.5, relating to Exhibit 10.21(1). 10.48.3 Exhibit 10.30.5 Form of RDI Policy relating to Exhibit 10.29.6, relating to Exhibit 10.3.4, relating to Exhibit 10.3(1). 10.48.4 Exhibit 10.30.6 Form of VSI Policy relating to Exhibit 10.29.7, relating to Exhibit 10.3.6, relating to Exhibit 10.3 (1). 10.49 Purchase Agreement dated as of 9/1/95 by and between Aegis Auto Finance, Inc. as Seller and Aegis Auto Funding Corp. as Purchaser.(4) 10.50 Purchase Agreement dated as of 9/20/95 by and between Aegis Auto Funding Corp. as Seller and Smith Barney Inc. as Purchaser.(4) 10.51 Loan and Security Agreement, dated as of September 25, 1995 between Aegis Auto Finance, Inc. as Borrower and III Finance Ltd. as Lender.(4) 10.51.1 Promissory Note relating to Exhibit 10.49.(4)
10.52 Exhibit 10.46 Form of Cash Flow Valuation Report relating to Exhibit 10.30.2, relating to Exhibit 10.29.2, relating to Exhibit 10.21.3, relating to Exhibit 10.21(1). 10.52.1 Exhibit 10.46.1 Pooling and Servicing Agreement relating to Exhibit 10.30.3, relating to Exhibit 10.29.4, relating to Exhibit 10.21.4, relating to Exhibit 10.21(1). 10.52.2 Exhibit 10.46.2 List of Closing Documents relating to Exhibit 10.30.4, relating to Exhibit 10.29.5, relating to Exhibit 10.21.5, relating to Exhibit 10.21(1). 10.52.3 Exhibit 10.46.3 Form of RDI Policy relating to Exhibit 10.3.5, relating to Exhibit 10.29.6, relating to Exhibit 10.3.4, relating to Exhibit 10.3 (1). 10.52.4 Exhibit 10.46.4 Form of VSI Policy relating to Exhibit 10.3.6, relating to Exhibit 10.29.7, relating to Exhibit 10.3.6, relating to Exhibit 10.3 (1). 10.53 Purchase Agreement dated as of 11/7/95 by and between Aegis Auto Finance, Inc. as Seller and Cameron State Bank as Purchaser.(4) 10.54 Purchase Agreement dated as of 11/7/95 by and between Aegis Auto Finance, Inc. as Seller and City Savings Bank and Trust as Purchaser.(4) 10.55 Amendment No. 1 to 6/20/95 Loan and Security Agreement, dated as of October 27, 1995 between Aegis Auto Finance, Inc. and III Finance LTD.(4) 10.56 Amendment No. 1 to 9/25/95 Loan and Security Agreement, dated as of October 27, 1995 between Aegis Auto Finance, Inc. and III Finance LTD.(4) 10.57 Form of Regulation S Subscription Agreement (5) 10.57.1 Registration Rights Agreement relating to Exhibit 10.57(5) 10.58 Loan and Security Agreement, dated as of 11/7/95 between The Aegis Consumer Funding Group, Inc., as Borrower, and both Aegis Consumer Finance, Inc., and Aegis Auto Funding Corp.,as Guarantors, and Beckett Reserve Fund, L.L.C., as Lender. (5) 10.58.1 Promissory Note relating to Exhibit 10.58.(5) 10.59 Purchase Agreement dated as of 11/7/95 between Aegis Auto Finance, Inc., as Seller, and City Savings Bank and Trust as Purchaser.(5) 10.60 Purchase Agreement dated as of 11/7/95 between Aegis Auto Finance, Inc., as Seller, and Cameron State Bank as Purchaser.(5) 10.61 Agreement of Sublease dated as of 11/10/95 between Aegis Consumer Funding Group, Inc., and Peterson & Ross.(5) 10.62 Purchase Agreement dated as of 12/12/95 between Aegis Auto Finance, Inc. as Seller and Calcasieu Marine National Bank as Purchaser.(5) 10.63 Funding Agreement dated as of 4/4/95 between U.S. Investment Group, Inc., and The Aegis Consumer Funding Group, Inc.(5) 10.63.1 Amendment dated as of 8/4/95 relating to Exhibit 10.63.(5) 10.64 Fee Agreement dated as of 12/20/95 with Chaneil Associates.(5) 10.65 Loan Purchase Agreement dated as of 12/1/95 between Aegis Auto Finance, Inc.and Aegis Auto Funding Corp. II, as Purchaser.(5) 10.65.1 Trust Purchase Agreement dated as of 12/1/95 between Aegis Auto Owner Trust 1995 as Issuer, and Aegis Auto Funding Corp. II, as Seller.(5) 10.65.2 Trust Agreement dated as of 12/1/95 among Aegis Auto Funding Corp. II, as Depositor, and Bankers Trust as Owner Trustee.(5) 10.65.3 Indenture dated as of 12/1/95 between Aegis Auto Owner Trust 1995, as Issuer, and Norwest Bank Minnesota, National Association, as Indenture Trustee.(5) 10.65.4 Insurance Agreement dated as of 12/1/95 by and between MBIA Insurance Corporation, as Insurer, Aegis Auto Funding Corp. II, as Seller, Aegis Auto finance, Inc., as Servicer, Aegis Auto Owner Trust 1995, as Issuer, Norwest Bank Minnesota, National association, as Indenture Trustee, and Norwest Bank Minnesota, National Association, as Back-up Servicer.(5) 10.65.5 Servicing Agreement dated as of 12/1/95 among Aegis Auto Finance, Inc., as Servicer, Aegis Auto Funding Corp. II, as Seller, Aegis Auto Owner Trust 1995, as Issuer, and Norwest Bank Minnesota, National Association, as Back- up Servicer.(5) 10.65.6 Addendum to Servicing Agreement, relating to Exhibit 10.65.5.(5) 10.65.7 Placement agency Agreement dated as of 12/13/95, relating to Exhibit 10.65.2.(5) 10.65.8 Note Purchase Agreement dated as of 12/20/95, by and between Aegis Auto Owner Trust 1995, Issuer, Aegis Auto Finance, Inc, as Servicer, Aegis Auto Funding Corp., as Seller, Market Street Capital Corporation, as Purchaser.(5) 10.65.9 Administration Agreement dated as of 12/20/95 between Aegis Auto Finance, Inc., as Servicer, and Rothschild Inc., as Administrator.(5) 10.70 Lease Agreement dated as of 11/14/94, between Newport L.G.-I, Inc., as Landlord, and The Aegis Consumer Funding Group, Inc., as Tenant.(5) 10.70.1 Amendment to Lease, dated as of 12/23/94 between Newport L.G.-I, Inc., as Landlord, and The Aegis Consumer Funding Group, Inc., as Tenant, relating to Exhibit 10.70.(5) 10.70.2 Second Amendment to Lease, dated as of 12/29/95 between Newport L.G.-I, Inc., as Landlord, and The Aegis Consumer Funding Group, Inc.,as Tenant, relating to Exhibit 10.70 (5) 10.71 Fee Agreement dated as of 12/20/95 with U.S. Investment Group, Inc., relating to Exhibit 10.63.(5) 10.72 Purchase Agreement dated as of 12/1/95 by and between Aegis Auto Finance, Inc. as Seller and Aegis Auto Funding Corp., as Purchaser.(5) 10.73 Purchase Agreement dated as of 12/20/95 by and between Aegis Auto Funding Corp. as Seller and Smith Barney Inc., as Purchaser.(5)
10.74 Loan and Security Agreement dated as of 12/20/95 between Aegis Auto Finance, Inc. as Borrower and III Finance Ltd., as Lender.(5) 10.74.1 Form of Promissory Note relating to Exhibit 10.60.(5) 10.75 Exhibit 10.48 Form of Cash Flow Valuation Report, relating to Exhibit 10.30.2, relating to Exhibit 10.29.2, relating to Exhibit 10.21.3, relating to Exhibit 10.21(1). 10.75.1 Exhibit 10.48.1 Pooling and Servicing Agreement, relating to Exhibit 10.30.3, relating Exhibit 10.29.4, relating to Exhibit 10.21.4, relating to Exhibit 10.21(1). 10.75.2 Exhibit 1048.2 List of Closing Documents, relating to Exhibit 10.30.4, relating to Exhibit 10.29.5, relating to Exhibit 10.21.5, relating to Exhibit 10.21(1). 10.75.3 Exhibit 10.48.3 Form of RDI Policy, relating to Exhibit 10.30.5, relating to Exhibit 10.29.6 relating to Exhibit 10.3.4, relating to Exhibit 10.3(1). 10.75.4 Exhibit 10.48.4 Form of VSI Policy, relating to Exhibit 10.30.6, relating to Exhibit 10.29.7, relating to Exhibit 10.3.6, relating to Exhibit 10.3(1). 10.76 Form of Servicing Agreement dated as of 12/1/95 by and between Aegis Auto Finance, Inc. as Seller and Aegis Auto Funding Corp. as Purchaser.(5) 10.77 Consultant/Advisor Agreement dated as of 1/2/96, between The Sloane Organization, as Consultant, and The Aegis Consumer Funding Group, Inc., as the Consultee.(5) 10.77.1 Sloane Letter Agreement dated as of 1/3/96, relating to Exhibit 10.77.(5) 10.78 Purchase Agreement dated as of 1/19/96 between Aegis Auto Finance, Inc. as Seller and United Bank and Trust Company as Purchaser.(5) 10.79 Purchase Agreement dated as of 1/24/96 between Aegis Auto Finance, Inc. as Seller and Gulf Coast Bank as Purchaser.(5) 10.79.1 Reserve Account Agreement, relating to Exhibit 10.79.(5) 10.80 Notice of Annual Meeting of Stockholders and Proxy Statement.(5) 10.80.1 Proxy Card, relating to 10.80.(5) 10.81 Purchase Agreement dated as of 2/29/96 between Aegis Auto Finance, Inc. as Seller and First Bank of Eunice as Purchaser.(6) 10.82 Purchase Agreement dated as of 3/21/96 between Aegis Auto Finance, Inc. as Seller and United Bank and Trust Company as Purchaser.(2) 10.83 Purchase Agreement dated as of 3/1/96 by and between Aegis Auto Finance, Inc. as Seller and Aegis Auto Funding Corp., as Purchaser.(6) 10.84 Purchase Agreement dated as of 3/22/96 by and between Aegis Auto Funding Corp. as Seller and Greenwich Capitol Markets, Inc., as Purchaser.(6) 10.85 Loan and Security Agreement dated as of 3/22/96 between Aegis Auto Finance, Inc. as Borrower and III Finance Ltd., as Lender.(6) 10.85.1 Form of Promissory Note relating to Exhibit 10.85(5) 10.86 Exhibit 10.75 Form of Cash Flow Valuation Report, relating to Exhibit 10.48 relating to Exhibit 10.30.2, relating to Exhibit 10.29.2, relating to Exhibit 10.21.3, relating to Exhibit 10.21(1). 10.86.1 Exhibit 10.75.1 Pooling and Servicing Agreement, relating to Exhibit 10.48.1, relating to Exhibit 10.30.3, relating to Exhibit 10.29.4, relating to Exhibit 10.21.4, relating to Exhibit 10.21(1). 10.86.2 Exhibit 10.75.2 List of Closing Documents, relating to Exhibit 10.48.2, relating to Exhibit 10.30.4, relating to Exhibit 10.29.5, relating to Exhibit 10.21.5, relating to Exhibit 10.21(1). 10.86.3 Exhibit 10.75.3 Form of RDI Policy, relating to Exhibit 10.48.3, relating to Exhibit 10.30.5, relating to Exhibit 10.29.6, relating to Exhibit 10.3.4, relating to Exhibit 10.3(1). 10.86.4 Exhibit 10.75.4 Form of VSI Policy, relating to Exhibit 10.48.4, relating to Exhibit 10.30.6, relating to Exhibit 10.29.7, relating to Exhibit 10.3.6, relating to Exhibit 10.3(1).
10.87 Servicing Agreement dated as of 3/1/96 by and between Aegis Auto Finance, Inc. as Servicer and Norwest Bank Minnesota, National Association in its capacity as Backup Servicer and Norwest Bank Minnesota, National Association in its capacity as Trustee.(6) 10.88 Master Servicing Agreement dated as of 4/6/96 by and between American Lenders Facilities, Inc. as Servicer and Aegis Consumer Finance, Inc. as Company.(6) 10.89 Subcontracting Agreement dated as of 4/6/96 by and between American Lenders Facilities, Inc. as Servicer and Aegis Consumer Finance, Inc. as Subcontractor.(6) 10.90 Form of Greenwich Capital Markets, Inc. Warrant ("Greenwich Warrant") to purchase Common Stock of The Aegis Consumer Funding Group, Inc.(6) 10.90.1 Form of Escrow letter concerning Greenwich Warrant, relating to Exhibit 10.90.(6) 10.90.2 Form of Acknowledgement letter concerning the adequacy of the Greenwich Warrant, relating to Exhibit 10.90.(6) 10.91 Exhibit 10.86 Form of Cash Flow Valuation Report, relating to Exhibit 10.75, relating to Exhibit 10.48, relating to Exhibit 10.30.2, relating to Exhibit 10.29.2, relating to Exhibit 10.21.3, relating to Exhibit 10.21(1). 10.91.1 Exhibit 10.86.1 Pooling and Servicing Agreement, relating to Exhibit 10.75.1, relating to Exhibit 10.48.1, relating to Exhibit 10.30.3, relating to Exhibit 10.29.4, relating to Exhibit 10.21.4, relating to Exhibit 10.21(1). 10.91.2 Exhibit 10.86.2 List of Closing Documents, relating to Exhibit 10.75.2, relating to Exhibit 10.48.2, relating to Exhibit 10.30.4, relating to Exhibit 10.29.5, relating to Exhibit 10.21.5, relating to Exhibit 10.21(1). 10.91.3 Exhibit 10.86.3 Form of RDI Policy, relating to Exhibit 10.75.3, relating to Exhibit 10.48.3, relating to Exhibit 10.30.5, relating to Exhibit 10.29.6, relating to Exhibit 10.3.4, relating to Exhibit 10.3(1). 10.91.4 Exhibit 10.86.4 Form of VSI Policy, relating to Exhibit 10.75.4, relating to Exhibit 10.48.4, relating to Exhibit 10.30.6, relating to Exhibit 10.29.7, relating to Exhibit 10.3.6, relating to Exhibit 10.3(1). 10.91.5 Form of Purchase Agreement dated as of 6/01/96 by and between Aegis Auto Finance, Inc. as Seller and Aegis Auto Funding Corp., as Purchaser.(7) 10.91.6 Form of Purchase Agreement dated as of 6/01/96 by and between Aegis Auto Funding Corp. III, as seller and Aegis Auto Finance, Inc., as Purchaser.(7) 10.91.7 Form of Servicing Agreement dated as of 6/1/96 by and between Aegis Auto Finance, Inc. as Servicer and Norwest Bank Minnesota, National Association in its capacity as Backup Servicer and Norwest Bank Minnesota, National Association in its capacity as Trustee.(7) 10.91.8 Form of Purchase Agreement as of May 17, 1996, by and between Aegis Auto Finance,Inc. as Seller and Aegis Auto Funding Corp. III as Purchaser.(7) 10.92 Form of Rothschild Placement Agency Agreement Letter(6) 10.93 Greenwich Capital Commitment Letter(7) 10.93.1 Amendment to Greenwich Capital Commitment Letter (7) 10.94 Warehouse Lending Agreement dated as of May 17, 1996 by and between The Aegis Consumer Funding Group, Inc. as Guarantor, Aegis Auto Funding Corp. III and Greenwich Capital Financial Products, Inc., as Lender(7) 10.94.1 Form of Note relating to Exhibit 10.94(7) 10.94.2 Form of Security Agreement relating to Exhibit 10.94(7) 10.94.3 Form of Servicing Agreement relating to Exhibit 10.94(7) 10.95 Credit Agreement Dated as of May 17, 1996, Among The Aegis Consumer Funding Group, Inc. as borrower, Aegis Consumer Finance, Inc., as Guarantor, Aegis Auto Finance, Inc., as Guarantor, and Greenwich Capital Financial Products, Inc., as Lender(7)
10.95.1 Form of Note relating to Exhibit 10.95(7) 10.95.2 Form of Aegis Consumer Finance, Inc. Security and Pledge Agreement relating to Exhibit 10.95(7) 10.95.3 Form of Aegis Auto Finance, Inc. Security and Pledge Agreement relating to Exhibit 10.95(7) 10.95.4 AMENDED AND RESTATED CREDIT AGREEMENT dated as of June 23, 1997 to the Credit Agreement dated as of May 17, 1996 among THE AEGIS CONSUMER FUNDING GROUP, INC., as Borrower and AEGIS CONSUMER FINANCE, INC and AEGIS AUTO FINANCE, INC. as Guarantors and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.(11) 10.96 Loan and Security Agreement dated June 25, 1996, between Aegis Consumer Finance, Inc. and III Finance, Inc. LTD.(7) 10.96.1 Form of Promissory Note relating to Exhibit 10.96(7) 10.97 PURCHASE AGREEMENT dated as of September 1, 1996 by and between AEGIS AUTO FINANCE, INC. as Seller and AEGIS AUTO FUNDING CORP. as Purchaser.(8) 10.97.1 SERVICING AGREEMENT dated as of September 1, 1996 among AEGIS AUTO FINANCE, INC., as Servicer NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION in its capacity as Backup Servicer and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION in its capacity as Trustee.(8) 10.97.2 POOLING AND SERVICING AGREEMENT Dated as of September 1, 1996 by and between AEGIS AUTO FUNDING CORP., as Seller and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Trustee and Backup Servicer.(8) 10.98 LOAN AND SECURITY AGREEMENT dated as of September 12, 1996 by and between AEGIS AUTO FINANCE, INC. as Borrower and III FINANCE, INC. as Lender(8). 10.98.1 NOTE relating to 10.98.(8) 10.99 POOLING AND SERVICING AGREEMENT dated as of September 1, 1996 by and between AEGIS AUTO FUNDING CORP., as Seller and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee and Backup Servicer.(8) 10.99.1 PURCHASE AGREEMENT dated as of September 1, 1996 by and between AEGIS AUTO FINANCE, INC. as Seller and AEGIS AUTO FUNDING CORP. as Purchaser.(9) 10.99.2 CERTIFICATE PURCHASE AGREEMENT dated as of September 27, 1996 by and between AEGIS AUTO FUNDING CORP. and GREENWICH CAPITAL MARKETS, INC.(9) 10.99.3 FIRST AMENDMENT TO POOLING AND SERVICING AGREEMENT dated as of June 27, 1997, by and between AEGIS AUTO FUNDING CORP., as Seller and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee and Backup Servicer relating to Aegis Auto Receivables Trust 1996-A.(11) 10.100 SERVICING AGREEMENT dated as of September 1, 1996 among AEGIS AUTO FINANCE, INC., as Servicer, NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION in its capacity as Backup Servicer and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION in its capacity as Trustee.(8) 10.101 Employment Agreement by and between SYSTEMS AND SERVICES TECHNOLOGIES,INC. and Matthew B. Burns.(8)
10.102 Employment Agreement by and between SYSTEMS AND SERVICES TECHNOLOGIES, INC. and John Chappell(8) 10.103 PURCHASE AGREEMENT dated as of December 9, 1996 by and between AEGIS AUTO FINANCE, INC. as Seller and ENTERPRISE NATIONAL BANK OF PALM BEACH as Purchaser.(9) 10.103.A FIRST MODIFICATION OF PURCHASE AGREEMENT dated as of March 20, 1997, by and between AEGIS AUTO FINANCE, INC. as Seller and ENTERPRISE NATIONAL BANK OF PALM BEACH as Purchaser.(10) 10.103.1 ADDENDUM TO MASTER SERVICING AGREEMENT dated as of December 9, 1996 by and among AMERICAN LENDERS FACILITIES,INC. as Servicer, AEGIS CONSUMER FINANCE, INC., AEGIS AUTO FINANCE INC. as Seller and ENTERPRISE NATIONAL BANK OF PALM BEACH(9) 10.103.1A MODIFICATION OF ADDENDUM TO MASTER SERVICING AGREEMENT dated as of March 20, 1997, by and among AMERICAN LENDERS FACILITIES, INC. as Servicer, AEGIS CONSUMER FINANCE, INC., AEGIS AUTO FINANCE, INC. as Seller and ENTERPRISE NATIONAL BANK OF PALM BEACH as Purchaser.(10) 10.103.2 REPURCHASE AGREEMENT dated as of August 29, 1997, by and between AEGIS AUTO FINANCE, INC. and ENTERPRISE NATIONAL BANK OF PALM BEACH(11) 10.104 MASTER TRUST AGREEMENT dated as of March 1, 1997, by and among AEGIS AUTO FUNDING CORP. IV, NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Backup Servicer, and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Trustee with respect to the Aegis Auto Receivables Trusts.(10) 10.104.1 MASTER PURCHASE AGREEMENT dated as of March 1, 1997, by and between AEGIS AUTO FINANCE, INC. as Borrower and AEGIS AUTO FUNDING CORP. IV.(10) 10.104.2 MASTER SERVICING AGREEMENT dated as of March 1, 1997, by and among AEGIS AUTO FUNDING CORP. IV, NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Backup Servicer and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Trustee.(10) 10.104.3 POOLING AND SERVICING AGREEMENT dated as of March 1, 1997, by and among AEGIS AUTO FUNDING CORP.IV., NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Trustee and Backup Servicer.(10) 10.104.4 MASTER CERTIFICATE PURCHASE AGREEMENT dated as of March 14, 1997, by and among AEGIS AUTO FUNDING CORP. IV, THE AEGIS CONSUMER FUNDING GROUP, INC., and III FINANCE LTD., III GLOBAL LTD. and III LIMITED PARTNERSHIP, collectively, as Purchasers.(10) 10.104.5 POOLING AND SERVICING AGREEMENT dated as of April 1, 1997, by and between AEGIS AUTO FUNDING CORP. IV, as Seller and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee and Backup Servicer.(10) 10.104.6 SUPPLEMENTAL CONVEYANCE dated as of April 16, 1997, by AEGIS AUTO FINANCE, INC. to AEGIS AUTO FUNDING CORP. IV, as Purchaser.(10) 10.104.7 PROMISSORY NOTE dated as of Apr 16, 1997, executed by THE AEGIS CONSUMER FUNDING GROUP, INC. in favor of AEGIS AUTO FUNDING CORP. IV.(10) 10.104.8 POOLING AND SERVICING dated as of May 1, 1997, by and between AEGIS AUTO FUNDING CORP. IV, as Seller and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee and Backup Servicer.(10)
10.104.9 PROMISSORY NOTE dated as of May 12, 1997, executed by THE AEGIS CONSUMER FUNDING GROUP, INC. in favor of AEGIS AUTO FUNDING CORP. IV. (10) 10.104.10 SUPPLEMENTAL CONVEYANCE dated as of May 12, 1997, executed by AEGIS AUTO FINANCE, INC. to AEGIS AUTO FUNDING CORP. IV, as Purchaser.(10) 10.104.11 AMENDED AND RESTATED MASTER TRUST AGREEMENT dated as of May 1, 1997, by and between AEGIS AUTO FUNDING CORP. IV, as Seller and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee.(11) 10.104.12 AMENDED AND RESTATED MASTER SERVICING AGREEMENT dated as of May 1, 1997, by and between AEGIS AUTO FINANCE, INC., as Servicer and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee and Backup Servicer.(11) 10.104.13 AMENDED AND RESTATED MASTER PURCHASE AGREEMENT dated as of May 1, 1997, by and between AEGIS AUTO FINANCE, INC., as Seller and AEGIS AUTO FUNDING CORP. IV, as Purchaser.(11) 10.104.14 POOLING AND SERVICING AGREEMENT dated as of June 1, 1997, by and between AEGIS AUTO FUNDING CORP. IV, as Seller and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee and Backup Servicer.(11) 10.104.15 SUPPLEMENTAL CONVEYANCE dated as of June 27, 1997 by AEGIS AUTO FINANCE, INC. to AEGIS AUTO FUNDING CORP. IV, as Purchaser.(11) 10.104.16 POOLING AND SERVICING AGREEMENT dated as of August 1, 1997, by and between AEGIS AUTO FUNDING CORP. IV, as Seller and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee and Backup Servicer.(11) 10.104.17 SUPPLEMENTAL CONVEYANCE dated as of August 1, 1997 by AEGIS AUTO FINANCE, INC. to AEGIS AUTO FUNDING CORP. IV, as Purchaser.(11) 10.105 LOAN AND SECURITY AGREEMENT dated as of March 14, 1997, by and among AEGIS AUTO FINANCE, INC.as Borrower, III FINANCE LTD. and III GLOBAL LTD., collectively as Lenders.(10) 10.105.1 PROMISSORY NOTE dated as of March 14, 1997, executed by AEGIS AUTO FINANCE, INC. in favor of III FINANCE LTD.(10) 10.105.2 PROMISSORY NOTE dated as of March 14, 1997, executed by AEGIS AUTO FINANCE, INC. in favor of III GLOBAL LTD.(10) 10.105.3 GUARANTY dated as of March 14, 1997, executed by THE AEGIS CONSUMER FUNDING GROUP, INC. in favor of III FINANCE LTD. and III GLOBAL LTD.(10) 10.105.4 PLEDGE AGREEMENT dated as of March 14,1997, executed by THE AEGIS CONSUMER FUNDING GROUP, INC. in favor of III FINANCE LTD. and III GLOBAL LTD.(10) 10.105.5 PLEDGE AGREEMENT dated as of March 14, 1997, executed by AEGIS CONSUMER FINANCE, INC. in favor of III FINANCE LTD. and III GLOBAL LTD.(10) 10.105.6 PLEDGE AGREEMENT dated as of March 14, 1997, executed by AEGIS CAPITAL MARKET, INC. (d/b/a MARKETS) in favor of III FINANCE LTD. AND III GLOBAL LTD.(10) 10.105.7 RETAINED YIELD PLEDGE AGREEMENT dated as of March 14, 1997, executed by AEGIS AUTO FINANCE, INC. in favor of III FINANCE LTD.(10) 10.105.8 AMENDMENT NO. 6 dated as of March 12, 1997, by and among AEGIS ACCEPTANCE CORP., AEGIS CONSUMER FINANCE, INC. and III FINANCE LTD. to the LOAN AND SECURITY AGREEMENT dated as of February 28, 1994.(10)
10.105.9 SECURITY AGREEMENT dated as of March 14, 1997, by and between AEGIS ACCEPTANCE CORP. and AEGIS CONSUMER FINANCE, INC., as grantors and III FINANCE LTD.and III GLOBAL LTD., as Secured Parties.(10) 10.105.10 MASTER AMENDMENT TO LOAN AND SECURITY AGREEMENT dated as of March 19, 1997 by and between AEGIS CONSUMER FINANCE, INC. and AEGIS AUTO FINANCE, INC., as Borrowers and III FINANCE LTD., as Lender and an ASSIGNMENT AGREEMENT dated as of March 19, 1997 by and among AEGIS CAPITAL MARKETS, AEGIS ACCEPTANCE CORP. AND AEGIS AUTO FINANCE, INC.(11) 10.105.11 AMENDMENT dated May 21, 1997, to LOAN and SECURITY AGREEMENT dated March 14, 1997, by and between AEGIS AUTO FINANCE, INC. and III FINANCE LTD.(11) 10.106 SERVICING AGREEMENT dated as of January 3, 1997, by and between SYSTEMS & SERVICES TECHNOLOGIES, INC. and AEGIS CONSUMER FINANCE, INC.(10) 10.107 INDENTURE dated as of April 30, 1997, among AEGIS AUTO FINANCE, INC., as Borrower, THE AEGIS CONSUMER FUNDING GROUP and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Indenture Trustee as to the Subordinated Debentures.(11) 10.107.1 12% EXCHANGEABLE SUBORDINATED NOTES due 2004 (i) the first payable to THE HIGH RISK OPPORTUNITIES HUB FUND LTD. in the principal amount of $5,000,000; and (ii) the second payable to III FINANCE LTD. in the principal amount of $16,333,333.(11) 10.107.2 NOTE PURCHASE AGREEMENT dated as of April 30, 1997, among AEGIS AUTO FINANCE, INC., THE AEGIS CONSUMER FUNDING GROUP, INC., III FINANCE LTD. AND THE HIGH RISK OPPORTUNITIES HUB FUND LTD.(11) 10.107.3 REGISTRATION RIGHTS AGREEMENT dated as of April 30, 1997, among THE AEGIS CONSUMER FUNDING GROUP, INC., THE HIGH RISK OPPORTUNITIES HUB FUND LTD., AND III FINANCE LTD.(11) 10.107.4 GUARANTY AGREEMENT dated as of April 30, 1997, executed by THE AEGIS CONSUMER FUNDING GROUP, INC. in favor of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Indenture Trustee.(11) 10.107.5 PLEDGE AGREEMENT dated as of April 30, 1997, from THE AEGIS CONSUMER FUNDING GROUP, INC. to NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Indenture Trustee.(11) 10.107.6 PLEDGE AGREEMENT dated as of April 30, 1997, from AEGIS CONSUMER FINANCE, INC. to NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION.(11) 10.107.7 PLEDGE AGREEMENT dated as of April 30, 1997, from AEGIS CAPITAL MARKETS, INC. to NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION.(11) 10.107.8 PLEDGE AGREEMENT dated as of April 30, 1997, from AEGIS AUTO FINANCE, INC. to NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION.(11) 10.107.9 PLEDGE AGREEMENT dated as of April 30, 1997, from AEGIS CONSUMER FINANCE, INC. to NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION.(11) 10.107.10 SECURITY AGREEMENT dated as of April 30, 1997, from AEGIS AUTO FINANCE, INC. to NORWEST BANK MINNESOTA,NATIONAL ASSOCIATION.(11) 10.107.11 SECURITY AGREEMENT dated as of April 30, 1997, from AEGIS ACCEPTANCE CORP. and AEGIS CONSUMER FINANCE, INC. to NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION.(11)
10.107.12 LIEN SUBORDINATION AGREEMENT dated as of April 30, 1997, by NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION in favor of III FINANCE LTD.(11) 10.107.13 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF CLASS D REDEEMABLE PREFERRED STOCK OF THE AEGIS CONSUMER FUNDING GROUP, INC. dated as of May 15, 1997.(11) 10.108 AMENDED AND RESTATED MASTER LOAN AGREEMENT dated as of April 30, 1997, among AEGIS AUTO FINANCE, INC.,AEGIS CONSUMER FINANCE, INC. AND III FINANCE LTD.(11) 10.108.1 AMENDED AND RESTATED NOTE dated as of May 21, 1997.(11) 10.108.2 PLEDGE AGREEMENT dated as of April 30, 1997, from AEGIS AUTO FINANCE, INC. to III FINANCE LTD.(11) 10.108.3 PLEDGE AGREEMENT dated as April 30, 1997, from AEGIS CONSUMER FINANCE, INC. to III FINANCE LTD.(11) 10.108.4 MASTER SECURITY AGREEMENT dated as of April 30, 1997, from each of THE AEGIS CONSUMER FUNDING GROUP, INC., AEGIS CONSUMER FINANCE, INC., AEGIS CAPITAL MARKETS, INC.and AEGIS AUTO FINANCE, INC. to III FINANCE LTD.(11) 10.108.5 GUARANTY dated as of April 30, 1997, from THE AEGIS CONSUMER FUNDING GROUP, INC. to III FINANCE LTD.(11) 10.109 EMPLOYMENT AGREEMENT dated as of July 1, 1997, by and between THE AEGIS CONSUMER FUNDING GROUP, INC. and Mr. William F. Henle.(11) 21 Subsidiaries of the Company(1) 23 Consent of Independent Accountants 27 Financial Data Schedule(11)
THE AEGIS CONSUMER FUNDING GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Auditors .................................. Consolidated Statements of Financial Condition at June 30, 1996 and 1997.................................................. Consolidated Statements of Operations for the fiscal years ended June 30, 1995, 1996 and 1997......................................... Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended June 30, 1995, 1996 and 1997................ Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1995, 1996 and 1997.................................. Notes to Consolidated Financial Statements.......................
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders The Aegis Consumer Funding Group, Inc.
We have audited the accompanying consolidated statements of financial condition of The Aegis Consumer Funding Group, Inc. and subsidiaries (the "Company") as of June 30, 1997 and 1996 and the related consolidated statements of Operations, changes in stockholders' equity, and cash flows for the three years in the period ended June 30, 1997. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of the Company as of June 30, 1997 and 1996 and the consolidated results of its operations and its cash flows for the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company experienced in 1997 material increases in delinquencies and losses on owned and serviced installment contracts, and a substantial net loss. As a reslut, the Company is facing severe liquidity problems due to the lack of committed operating capital and the delay of expected cash payments from retained interests in securitized receivables. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
s/ERNST & YOUNG LLP
October 20, 1997 except for Note 2 and Note 17 which are of November 14, 1997 New York, New York
The Aegis Consumer Funding Group, Inc.
Consolidated Statements of Financial Condition
Assets
See notes to these consolidated financial statements.
The Aegis Consumer Funding Group, Inc.
Consolidated Statements of Operations
See notes to these consolidated financial statements.
The Aegis Consumer Funding Group, Inc.
Consolidated Statements of Changes in Stockholders' Equity Years Ended June 30, 1995 , 1996 and 1997
See notes to these consolidated financial statements.
The Aegis Consumer Funding Group, Inc.
Consolidated Statements of Cash Flows
Years Ended June 30, ----------------------------------------- 1995 1996 1997 ----------- ----------- -------------
Cash flows from operating activities: Net income (loss) $1,273,621 $9,288,616 ($44,495,110) Adjustments to reconcile net income (loss) to net cash used in operating activities: Amortization and depreciation 453,821 611,833 1,140,478 Provision for credit losses 941,354 3,504,622 9,426,802 Valuation allowance on note receivable - 600,000 - Provision (benefit) for deferred income taxes 1,546,540 5,918,034 (8,577,030) Release of escrowed shares 878,739 806,886 - Unrealized gains on securitization transactions (21,439,207) (53,950,552) (11,288,092) Write down of retained interests in securitized receivables - 7,500,000 49,000,000 Automobile finance receivables portfolio: Purchases of automobile finance receivables (162,154,536) (451,972,152) (606,882,687) Sales of automobile finance receivables 123,899,778 432,582,175 580,335,969 Repayments of automobile finance receivables 6,515,100 15,930,459 24,341,440 Increase in prepaid insurance and direct costs of acquisition net of deferred acquisition fees (757,582) (33,179) (46,755) Decrease in note receivable - 7,651,985 - (Increase) decrease in interest and other receivables (4,182,398) 3,047,448 (2,323,401) (Increase) decrease in other assets (217,500) (2,551,691) 2,537,153 Increase (decrease) in accounts payable and accrued expenses 5,017,747 9,503,652 (2,633,168) (Decrease) increase in income taxes payable (983,063) 1,464,933 153,486 ------------ --------- ----------- Net cash used in operating activities (49,207,586) (10,096,931) (9,310,915) ------------ ------------ -----------
Cash flows from investing activities: Additional payments to securitized receivable trusts - (2,335,562) (2,421,284) Distributions from retained interests in securitized receivables 1,796,173 2,991,063 1,622,203 Purchases of fixed assets (802,419) (1,045,553) (6,239,621) Purchase of sales territory (248,490) - - ----------- ----------- ----------- Net cash provided by (used in) investing activities 745,264 (390,052) (7,038,702) ---------- ----------- -----------
Cash flows from financing activities: Proceeds from borrowings under warehouse credit facilities 161,641,043 468,882,721 626,283,300
Repayment of borrowings under warehouse credit facilities (128,738,913) (479,842,650) (646,078,639) Proceeds from borrowings under notes payable 16,044,277 39,416,908 83,966,513 Repayment of borrowings under notes payable (3,088,154) (22,524,171) (75,764,941) Proceeds from borrowings under revolving credit facility 5,273,006 - - Repayment of borrowings under revolving credit facility (7,116,673) - - Proceeds from borrowing under subordinated debt agreements - - 25,000,000 Repayment of borrowing under subordinated debt agreement - - (1,000,000) Proceeds from initial public offering, net 11,846,857 - - Exercise of warrants to purchase common stock 27,000 - - Proceeds from preferred stock issue, Series C - 8,464,000 - Preferred stock, Series B dividends paid (194,198) - - Proceeds from repayment of stockholder receivable 210,000 - - Redemption of preferred stock, Series B in 1995, Series C in 1996 (2,452,678) (1,104,421) - Purchase of treasury stock - - (340,000) ------------ ----------- ------------ Net cash provided by financing activities 53,451,567 13,292,387 12,066,233 ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents 4,989,245 2,805,404 (4,283,384)
Cash and cash equivalents, beginning of year 981,326 5,970,571 8,775,975 ---------- --------- --------- Cash and cash equivalents, end of year $5,970,571 $8,775,975 $4,492,591 ========== ========== ==========
See notes to these consolidated financial statements.
The Aegis Consumer Funding Group, Inc.
Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The consolidated financial statements include the accounts of The Aegis Consumer Funding Group, Inc. (ACFG), and its wholly owned subsidiaries (collectively, the "Company"). Such subsidiaries are engaged primarily in automobile finance (acquiring automobile retail installment contracts and from April 1994 through August 1995 originated automobile leases), the capital markets business (structuring the securitizations of the Company) and loan servicing (as of January 1, 1997). All material intercompany balances and transactions have been eliminated.
ACFG was formed for the purpose of providing management and operational services to its subsidiaries. Its principal subsidiaries, Aegis Consumer Finance, Inc. (ACF) and Systems and Services Technologies, Inc. (SST), were formed for the purposes of providing operational services, warehouse facility arrangements, marketing support for its subsidiaries and to service loans acquired by the Company as well as other marginal originations of third parties, respectively.
On March 1, 1992, the Company underwent a significant recapitalization; at that time, the approximately $3,000,000 deficit from the operations of the Company since the date of formation (October 4, 1989) was transferred to paid in capital. The carrying amount of the Company's assets and liabilities approximated their fair values at that time.
Certain prior year financial statement line items have been reclassified to conform to current year presentation.
Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and short-term investments with an original maturity of less than ninety days.
Automobile Finance Receivables Automobile finance receivables held for sale (through the securitization process) are carried at the lower of cost or market value. Market value is estimated based on the characteristics of the finance contracts held for sale and the terms of recent securitizations of similar finance contracts completed by the Company and others. Automobile finance receivables held as investments are receivables the Company believes it can not currently securitize and are carried at their amortized cost.
The Company's evaluation of its allowance for credit losses is based upon the Company's historical and expected future default rates, the liquidation value of the underlying collateral in the existing portfolio, estimates of repossession expenses and any recoveries expected from insurance proceeds. The Company's charge off policy is based on a receivable-by-receivable review. Interest on automobile finance receivables is accrued and credited to interest income based upon the daily principal amount outstanding using the simple interest method. If an automobile receivable becomes more than 60 days delinquent in its payment of interest and principal, the Company no longer accrues interest revenue and reverses all interest previously accrued and uncollected.
Finance contract acquisition fees received, insurance premiums (including self insured retentions) accrued and direct costs incurred for the underwriting and acquisition of automobile finance receivables held for sale are deferred until the related automobile finance receivables are securitized and sold. Origination fees received, insurance premiums paid at origination, and direct costs incurred for the underwriting and origination of automobile finance receivables held for investment are deferred and amortized to interest income over their contractual lives using the interest method. Unamortized amounts are recognized in income at the time that automobile finance receivables are sold, charged-off or paid in full.
Retained Interests in Securitized Receivables Retained interests in securitized receivables represent the discounted amount of expected collections from securitized receivables in excess of the amounts due to investors in the securitizations. Amortization of the carrying value amount is based on the declines during the period in the present value of the currently projected collections using the same discount rate as was
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
appropriate at the time of securitization. Gains (losses) from the revaluation in retained interests in securitized receivables are included in gains (losses) on securitized transactions.
Property, Plant and Equipment Property, plant and equipment includes land and building and other fixed assets. The Company depreciates the building on a straight line basis over its estimated useful life of 30 years. The Company depreciates all other fixed assets on a straight-line basis over their estimated useful lives which range from three to seven years. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the remaining life of the lease.
Servicing Fee Income The Company recognizes servicing fee income in the period it is earned. The Company records the accompanying receivable in accounts receivable. An allowance account is not deemed necessary.
Fees and Commissions Fees and commissions earned are recorded as income at the closing date of the related transaction or as they are earned in accordance with the terms of the underlying agreements.
Income Taxes Deferred income taxes are determined by recognizing deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The realization of deferred tax assets is assessed and a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Use of Estimates and Judgements The Company's consolidated financial statements include amounts determined using estimates and assumptions. For example, estimates and assumptions are used in determining asset valuations and allowances for retained interests in securitized receivables, automobile finance receivables and interest receivable. While these estimates are based on the best judgement of management, actual results could differ from these estimates.
2. LIQUIDITY
As reflected in the accompanying 1997 consolidated financial statements, the Company has suffered substantial losses and, accordingly substantial reductions in stockholders' equity. These negative financial trends have resulted from material increases in delinquencies and losses on owned and managed finance contracts. As a result, the Company is facing sever liquidity porblems due to the lack of commited operating capital and the delay of expected cash payments from the Company's retained interests in securitized receivables.
To address the liquidity problems, the Company requested its related party consulting firm, Whitehall Financial Group, Inc. ("Whitehall") (See Note 13), to advise the Company on alternatives and to raise additonal capital. With the assistance of Whitehall, the Company successfully negotiated the conversion of its 12% subordianted debentures with a face value of $21.3 million and accrued interest of approximately $1.0 million to equity of approximately $21.1 million in October 1997 and the conversion of the remaining $4.0 million of subordinated debt into preferred stock in November 1994 (See Note 17). The June 30, 1997, pro-forma consolidated statement of financial condition gives effect to these conversions as if they occurred on June 30, 1997. Also with the assistance of Whitehall, in November 1997, the Company negotiated the sale of its servicing subsidiary, SST for $7.0 milliion (See Note 17). Additionally, the Company reduced the number of its employees, scaled back the extent of its operations, including the consolidation of three processing centers to one and moving its corporate offices to Marietta, Georgia, these steps coupled with the cash proceeds from the sale of SST should assist the Company in meeting its funding requirements.
The Company expects to report a loss of approximately $3.6 million for the
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
quarter ended September 30, 1997 and to incur a structuring charge in the quarter ending December 31, 1997.
There can be no assurance that the Company's efforts to alleviate its liquidity problems and restore its operations will be successful. If the Company is unsuccessful in its efforts, it may be unable to meet its obligations, which raises substantial doubt about the Company's ability to continue as a going concern. If the Company is unable to continue as a going concern and is forced to liquidate assets to meet its obligations, the Company may not be able to recover the recorded amounts of such assets. The Company's consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
3. AUTOMOBILE FINANCE RECEIVABLES, NET
ACF, through its subsidiaries, acquires retail installment contracts ("finance contracts") and from April 1994 through August 1995 originated direct finance receivables ("leases") maturing within a range of three to five years. At June 30, 1996, 27%, 22%, and 15%, respectively of automobile finance receivables outstanding were acquired in Georgia, Louisiana and North Carolina, respectively, with the remaining 36% being originated in 29 other states. At June 30, 1997, 20%, 20% and 12% of automobile receivables outstanding were acquired in Florida, Georgia and North Carolina, respectively, with the remaining 48% being generated in 31 other states. Automobile finance receivables are acquired through the Company's established dealership base to individual consumers with sub-prime credit.
For the fiscal years ended June 30, 1995, 1996 and 1997, separate groups of Dealers with common ownership accounted for 12.5%, 8.4% and 5.1% respectively, of the finance contracts and leases acquired or originated by the Company. In addition; for the fiscal year ended June 30, 1995, approximately 20.3%, 19.1%, 16.3% and 15.1% of all automobile finance receivables were purchased in North Carolina, Florida, Louisiana and Georgia, respectively, for the fiscal year ended June 30, 1996, 20.7%, 15.2%, 14.4% and 12.8% of all automobile finance receivables were purchased in Florida, North Carolina, Georgia and Texas and for the fiscal year ended June 30, 1997, approximately 15.5%, 14.6%, 11.7% and 11.5% of all automobile finance receivables were acquired in Florida, Georgia, Texas and North Carolina, respectively. Independent marketing brokers are engaged by the Company to introduce Dealers in Florida, Louisiana and four other states.
ACF periodically packages and securitizes, as asset-backed securities, portions of its automobile finance receivables to sell to institutional investors. During the years ended June 30, 1995, 1996 and 1997, the Company securitized $119.3 million, $432.4 million and $565.3 million, respectively, of its automobile finance contracts. For the years ended June 30, 1995, 1996 and 1997, the Company also sold $12.3, $7.8 million and $15.0 million, respectively, of its finance contract receivables in whole loan sales.
In January 1997, SST began the servicing of the Company's finance contracts acquired. While SST was in its start up phase, the Company gradually assigned the servicing of its finance contracts acquired to SST from January 1997 through March 1997. In May 1997, the Company transferred the servicing rights of approximately $469.7 million of finance contracts to SST. As of August 31, 1997, SST is servicing approximately $710.6 million or 76.9% of the Company's total remaining finance contracts acquired. The balance of the Company's finance contracts and lease portfolio is serviced by its initial servicer, American Lenders Facilities, Inc. ("ALFI") (a wholly owned subsidiary of CIGNA Corporation). The Company paid a fee of $5.00 per contract (aggregating approximately $200,000) to ALFI to transfer the servicing to SST. The Company is also sub-servicing, under its sub-servicing agreement with ALFI on 22.5% of the remaining receivables serviced by ALFI. The Company, under the sub-servicing agreement performs certain collection functions on designated automobile receivables and receives a sub-servicing fee. The Company is currently involved in a dispute with ALFI. (See Note 9).
Automobile finance receivables consist of the following:
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
The Company's expected future minimum lease payments from performing leases to be received as of June 30, 1997 are as follows:
Year Ending June 30, Amount ---------- --------
1998 $3,841,000 1999 3,207,000 2000 1,048,000 ------ ---------- $8,096,000 ========== An analysis of the allowance for credit losses follows:
As of June 30, 1996 and 1997, substantially all automobile finance receivables are pledged as security under the Company's warehouse credit facilities.
As of June 30, 1996 and 1997, respectively, approximately $3.7 million and $11.0 million of finance contracts held for investment were in the pepossession process.
The Company obtains credit defualt insurance policies for substantially all of the finance contracts it acquires. The insurance provides indemnifications for certain losses incurred due to a deficiency balance following the repossession and resale of finance vehicles securing defaulted finance contracts. Since August 1995, the Company has relied upon a series of credit defualt insurance policies purchased through The Connecticut Indemnity Company ("Connecticut Indemnity") a subsidiary of Orion Capital Corporation or Empire Fire and Marine a subsidiary of the "Zurich Insurance Group"("Empire"). The Connecticut Indemnity and Empire policies provide that the Company bear losses until such loss exceeds 8% or 10% (depending on the policy) of the aggregate amount insured under that policy. Connecticut Indemnity or Empire is obligated to pay all losses in excess of this amount to the insured. The Company has an accrual for estimated losses of approximately $1,300,000 and $771,000 at June 30, 1996 and 1997, respectively. No such accrual was required at June 30, 1995. These amounts are included in accounts payable and accrued expenses. In addition, for the years ended June 30, 1996 and 1997 the Company made cash disbursements of
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
approximately $34,000 and $238,000, respectively, under these policies and recorded $706,000 in principal applications representing approved insurance claims under the policies for the year ended June 30, 1997. No applications were recorded for the year ended June 30, 1996.
At June 30, 1996 and 1997, the estimated fair value of the Company's automobile finance receivables held for sale approximated $13.5 million (which is $931,000 in excess of book value) and $11.0 million (which estimated its book value), respectively. [The fair values of the Company's automobile finance receivables held for investment at June 30, 1996 and 1997 approximated their book values of $28.6 million and $26.3 million, respectively.]
4. RETAINED INTERESTS IN SECURITIZED RECEIVABLES
Retained interests in securitized receivables are computed by taking into account certain assumptions regarding prepayments, defaults, servicing and other costs. The Company reviews on a quarterly basis the retained interests in securitized receivables. If actual experience differs from the Company's assumptions or to the extent that market and economic changes occur that adversely impact the assumptions utilized in determining the retained interests in securitized receivables, the Company records a charge against gains from securitization transactions. The discount rate utilized in determining the retained interest in securitized receivables and gain from securitization transactions is based on the Company's estimate of the yield required by a third party purchaser of such instrument. The Company also bases these assumptions on the performance on the performance characteristics of the Company's finance contract portfolio to date. The Company's default assumptions are based on estimated repossession rates, proceeds from the liquidation of repossessed vehicles, proceeds from VSI Policy coverage and recoveries from the Company s credit default insurance.
An analysis of the retained interests in securitized receivables follows (in thousands):
As of June 30, 1996 and 1997, substantially all of the Company's retained interests in securitized receivables are pledged as security under the Company's Promissory Notes Payable.
The estimated fair values of the Company retained interests in securitized receivables at June 30, 1996 and 1997 approximated their book values of $70.2 million and $33.3 million, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment consists of the following:
The Company capitalizes interest costs incurred in connection with building improvements. Interest capitalized during the fiscal year ended June 30, 1997 was immaterial. Other fixed assets include office furniture, equipment and leasehold improvements. As of June 30, 1997, the Company's
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
land and building and certain of its other fixed assets are pledged as security under certain of the Company's Notes Payable.
6. WAREHOUSE AND OTHER CREDIT FACILITIES
As of June 30, 1997, the Company has a $75.0 million warehouse credit facility with III Finance LTD and III Global Ltd. (individually and collectively, "III Finance"). This facility replaced the Company's warehouse facility for acquiring finance contracts with III Finance then in existence. The $75.0 million warehouse credit facility expires on March 13, 1999 or sooner upon an event of default, as defined thereunder, and bears interest at LIBOR plus 3% from the date the loan is made. As of June 30, 1997, the Company had $9.8 million outstanding and owed interest of approximately $95,000.
As of March 1, 1997, the Company's $50.0 million warehouse credit facility for originating its lease transactions was amended to the then outstanding balance with no additional borrowing allowed under the facility. The lease line expires in November 1997 and the Company is currently negotiating extending the term to the earlier of an additional two years or until paid in its entirety. As of June 30, 1997, the Company owed approximately $7.6 million under the lease line and approximately $190,000 in interest.
In March 1997, the Company reached an agreement with a group of funds and financial institutions its existing warehouse lender, for a multi-structured finance facility. The Purchase Facility includes a commitment from III Finance and III Limited Partnership for the purchase of $350.0 million of trust certificates. The Certificates are backed by the Company's finance contracts and are unrated. The Purchase Facility is supported by the above mentioned $75.0 million warehouse facility. As of June 30, 1997 the Company securitized an aggregate amount of $389.0 million in the four securitization transactions. Future securitizations under the Purchase Facility ($611.0 million as of June 30, 1997) are subject to customary conditions and are uncommitted. The Purchase Facility provides for initial financing through the warehouse line as the finance contracts are acquired and subsequently sold, generally on a monthly basis, into the Purchase Facility. In connection with such refinancing the Company has pledged all of the stock of its subsidiaries and all of its assets to III Finance.
The Company's $75.0 million warehouse line supporting the Purchase Facility replaced the Company's amended $300.0 million warehouse facility which augmented the Company's quarterly securitizations in its fiscal years ended June 30, 1995 and 1996 and the first nine months of its fiscal year ended June 30, 1997. The $75.0 million warehouse line was increased in May 1997 from the initial $50.0 million limit in March 1997. This increase was required to reduce the frequency of securitizations under the Purchase Facility. The $75.0 million warehouse line provides the Company with a two year (expiring the sooner of March 13, 1999 or the occurences of an event of default as defined thereunder) warehouse line bearing interest at LIBOR plus 3% from the date the loan is made with borrowing limits of the lesser of $75.0 million or the sum of (A) 100% of the outstanding principal amount of finance contracts and (B) the lesser of 90% of the outstanding principal amount of non-conforming finance contracts (which percentages are reduced to 80% and 70%, respectively, if the Company's automobile insurer fails to maintain an A.M. Best Company rating of "A" or better (defined by A.M. Best Company as an "excellent" rating regarding the insurer's financial strength and ability to meet its obligations to policyholders)) and $1.0 million plus 92% (declining 1% per month for each month the receivable is outstanding past 180 days) of the outstanding principal amount of uninsured automobile finance contracts. Proceeds from borrwoings under this warehouse facility may be used for the purpose of acquiring automobile finance contracts in accordance with the Company's underwriting guidelines. Concurrent with the closing of the facility in March 1997, the Company's $50.0 million warehouse credit facility for originating lease transactions was amended to reduce it to the then outstanding balance and no additional borrowing is allowed under the facility. The lease line expires in November 1997. As of September 17, 1997, the Company owed approximately $6.5 million under the lease line and is negotiating extending the term for up to an additional two years. All other terms under the lease line remain the same. The Company was able to continue to borrow under these warehouse credit facilities so long as it complied with the terms thereof, including the maintenance by the Company of certain minimum capital levels. Under each warehouse credit facility, the Company was required to prepay 5% of the outstanding principal balance of finance contracts held by the Company for more than 180 days.
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
As of June 30, 1996, the Company had a combined limit of $100.0 million for its automobile finance contracts and lease originations. This limit was subsequently amended to a maximum of $300.0 million. These facilities were secured primarily by the Company's finance contract receivables and had an interest rate of the one-month LIBOR plus 4.0%, adjusted monthly (9.4805% at June 30, 1996) and for any outstanding balance in excess of $50.0 million, at the rate of the one-month LIBOR plus 2.75%, adjusted monthly. Under these warehouse credit facilities, principal payments were made monthly to the extent of principal payments received on the underlying collateral, and interest payments were made quarterly in arrears and on the date of any prepayment of principal on the underlying collateral. As of June 30, 1996, the Company had $37.2 million outstanding (including $15.5 million under its lease line) and owed interest aggregating approximately $439,000. In March 1997, the Company paid down the then outstanding balance of $268.7 million under this warehouse credit facility with the proceeds from the initial securitization under its Purchase Facility amounting to $238.7 million, $23.4 million in the form of a promissory note and the remaining $6.7 million from proceeds received from the underlying collateral. (See Note 7).
Principal payments on the warehouse facility are made monthly in an amount equal to principal payments received from the underlying collateral. Prepayments of principal occurs when the Company securitizes and sells the underlying collateral. Interest payments are made quarterly in arrears and on the date of any principal prepayments on the unpaid principal amount of each finance contract or lease made in accordance with the respective warehouse credit facility.
The Company also has a Loan and Security agreement (the "Title I Agreement") whereby, as borrower, it may borrow the lesser of $50.0 million or the sum of the outstanding principal amount of mortgage loans and 90% of the then outstanding principal amount of deficient mortgage loans, as defined, for the purpose of purchasing or financing home improvement and mortgage loans from originators and servicers of HUD Title I Loans in connection with separate purchase agreements that are approved by the lender. Interest is charged at an annual rate of the one-month LIBOR plus 4.0%. As of June 30, 1996 and 1997, no amounts were outstanding under the Title I Agreement. The Title I Agreement expires in November 1997.
Under the warehouse credit facilities and the Title I Agreement, ACF and the Company may also borrow funds to sell 90-day Eurodollar futures contracts as a hedge against interest rate fluctuations. At June 30, 1996 and 1997, the Company had no futures contracts outstanding.
In May 1996, the Company secured an additional warehouse credit facility with Greenwich Financial Products, Inc. ("Greenwich Financial") for $100.0 million. The facility was secured primarily by the Company's finance contracts and had an interest rate of the one-month LIBOR plus 3.0% (8.4805% at June 30, 1996), adjusted monthly. Principal payments were made to the extent that principal was paid on the underlying collateral, and were required to be made if the underlying collateral did not meet certain specified conditions. Prepayment of principal was not permitted, except in connection with securitization transactions and whole loan sales. The Company's ability to continue to borrow under this facility was dependent on its compliance with the terms thereof, including the maintenance by the Company of certain minimum capital levels. This facility expired in May 1997.
7. NOTES PAYABLE
Notes payable at June 30, 1996 and 1997 consisted of the following:
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
The Promissory Notes Payable at June 30, 1996, aggregating $29.8 million, due through June 25, 1998 were under separate Loan and Security Agreements (the "Financing Agreements") with III Finance, whereby, it had borrowing limits of the lesser of an aggregate amount of $66.4 million or the maximum borrowing base, as defined, under the Financing Agreements. The notes under the Financing Agreements were secured by substantially all of the Company's retained interests in securitized receivables with carrying values aggregating approximately $70.0 million at June 30, 1996, which approximated their fair value. As of June 30, 1996, the Company had $30.5 million available under the Financing Agreements. In May 1997, the Company refinanced the then outstanding balance of $35.1 million under the Financing Agreements and $14.8 million of the remaining balance under the promissory note created in paying down the Company's warehouse credit facility in March 1997 with the $15.1 million of the proceeds received from the issuance of the Subordinated Debentures and a new promissory note of $34.8 million. In connection with such refinancing, the Company has pledged all of the stock of its subsidiaries and all of its assets to III Finance. (See Note 8).
The Promissory Note Payable at June 30, 1997, in the amount of $34.8 million is payable to III Finance and is secured by the Company's retained interest in securitized receivables aggregating approximately $36.3 million and its finance contracts held for investment with an aggregate net carrying value of approximately $12.8 million (the "RTY Financing "). Principal and interest payments under the RTY Financing are made from proceeds received from the underlying collateral.
The Note Payable at June 30, 1997 in the amount of approximately $1.9 million is secured by the building as well as security interests in specific furniture and equipment of SST. No additional borrowing by SST is allowed under the note. The note contains several covenants which, among other things, restrict changes in ownership of SST. The Company plans on entering into negotiations with this lender as it related to the proposed sale of SST. (See Notes 2 and 17).
The Note Payable at June 30, 1997 in the amount of $170,000 is secured by a second mortgage on the building. The note's interest is payable quarterly. The note contains several covenants which, among other things, restrict changes in ownership of SST and requires SST to create and maintain certain employment targets.
8. SUBORDINATED DEBENTURES
On May 23, 1997, the Company sold $21.3 million subordinated debentures (the "Debenture") to III Finance for $20.0 million. The Debenture is convertible into 8% non-voting preferred stock (the "Preferred Shares") of the Company on a common share equivalent basis equal to $2.00 per common share. The Debenture is for a term of seven years and carries a coupon rate of twelve percent (12%) (an effective rate of 12.8%) per annum. Approximately $16.1 million of the proceeds of the Debenture was utilized to repay existing debt. The Debenture and the Preferred Shares, into which the Debenture is convertible, are redeemable at any time by the Company for cash or by the holder for cash, however, if the redemption is requested by the holder, the Company at its election may pay the redemption price in the form of common stock. In the event the Debentures are redeemed for any reason, in addition to the redemption price, warrants shall be issued to the holder which are exercisable for that number of Preferred Shares into which the redeemed Debentures were convertible. If Preferred Shares are redeemed at the option of the Company, the Company must issue to the holder warrants to acquire an equivalent number of shares of common stock at an aggregate purchase price equal to the redemption price paid by the Company. All warrants will expire at the original stated maturity date of the Debenture. In connection with such refinancing the Company has pledged all of the stock of its subsidiaries and all of its assets to III Finance. In connection with the Credit Agreement, the Company has pledged its retained interest in securitized receivables. (See Note 17).
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
In May 1996, the Company entered into a one year $5.0 million revolving credit agreement with Greenwich Capital (the "Credit Agreement") at an annual interest rate of 15.0% or LIBOR plus 9.0% determined by the Company at the time of borrowing. As of June 30, 1996, the Company had no borrowing under the Credit Agreement. During the year ended June 30, 1997, the Company borrowed $5.0 million at LIBOR plus 9.0% (14.7% as of June 27, 1997). In June 1997, the Company paid down $1.0 million under the Credit Agreement and entered into a new agreement with Greenwich Capital for the remaining $4.0 million outstanding. The Company will repay $2.0 million of the adjusted balance proportionately (pari passu) with principal payments made on the balances of the Debentures and certain notes payable aggregating $41.3 million. The term of the loan was extended for four years from the date of closing of the Debenture and the interest rate decreased to 12.0% per annum, payable monthly. Early repayment of the other $2.0 million is permitted if Greenwich provides auto loan servicing to the Company as defined thereunder. Additional terms of the agreement provide for lowering the strike price on warrants issued to them by the Company from $6.50 to as low as $4.00, contingent on achieving certain levels of auto loan servicing placed by Greenwich with the Company. (See Note 17).
9. COMMITMENTS AND CONTINGENCIES
The Company leases its office space and certain of its office equipment under noncancelable operating leases. The Company also has subleased certain of its office space and offsets its rent expense by the amount collected under the subleases.
The Company's minimum rental payments as of June 30, 1997 are:
Year Ending Gross Sub-lease Net June 30, Amount Amount Amount ----------- -------- --------- ---------
1998 $3,028,000 ($172,000) $2,856,000 1999 2,512,000 (100,000) 2,412,000 2000 1,554,000 - 1,554,000 2001 1,198,000 - 1,198,000 2002 1,139,000 - 1,139,000 Thereafter 3,503,000 - 3,503,000 --------- ---------- ---------- $12,934,000 ($272,000) $12,662,000 =========== ========== ===========
The Company has employment agreements with several of its key employees and officers which expire at various times through July 1, 2001. Under the terms of these agreements, the Company is obligated to pay minimum annual payments of $1.5 million, $1.2 million, $400,000 and $400,000, respectively, during each of the years ending June 30, 1998 through June 30, 2001. In addition to the minimum payments, the Company is further obligated to pay incentive bonuses based on its earnings, as defined in the respective agreements.
In December 1995, the Company entered into a commitment to sell $175.0 million of sub-prime automobile finance contracts to be resold as asset-backed securities through an Owner Trust Agreement (the "Agreement"). During the years ended June 30, 1996 and 1997, the Company sold approximately $97.8 million and $50.6 million, respectively, of automobile receivables into this facility. In October 1996, it was determined that the finance contracts underlying the securities were not performing in accordance with the levels required under the Agreement. This event terminated the Company's remaining commitment of $26.6 million (as of that date, the Company had sold $148.4 million of finance contracts of the $175.0 million total commitment).
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
In May 1996, the Company obtained a commitment from Greenwich Capital to purchase and securitize up to $533.0 million of the Company's finance contract acquisitions until the commitment is filled, subject to customary conditions (the "Securitization Facility"). As of June 30, 1997, the Company did not meet these customary conditions and has not securitized receivables under the Securitization Facility since September 1996. As of June 30, 1997, three securitizations aggregating $307.0 million were completed pursuant to this commitment.
In March 1997, the Company entered into a demand note payable of $1.2 million between consolidating entities. This note was assigned to the Aegis Auto Receivables Trust 1997-3 as a credit enhancemant of the securitization. The note becomes due under certain conditions of default as degined therein.
In connection with securitization transactions, the Company enters into pooling and servicing agreements. The agreements require the Company to increase its cash contribution to the underlying trusts when the delinquencies and default rates increase to certain levels defined in certain agreements. As delinquencies and/or default rates increase or decrease, the Company's obligation varies. For the years ended June 30, 1996 and 1997, the Company paid additional contributions to the trusts of approximately $2.3 million and $2.4 million, respectively.
As of June 30, 1997, the Company has four seperate contingent notes payable aggregating $15.6 million that become obligations of the Company upon the occurence of a Bankruptcy event as defined in the underlying instruments. These notes were entered into in connection with the Company's securitization transactions completed under the Purchase Facility as a form of a credit enhancement in lieu of a cash deposit to such trusts. The notes are between consolidating entities of the Company and have been assigned to the respective securitization trusts.
By letter dated August 1, 1997, counsel for ALFI contacted the Company concerning disputes under a Master Servicing Agreement dated April 6, 1996 and a letter agreement dated June 10, 1997, between the Company and ALFI (respectively, the "Master Servicng Agreement" and the "Letter Agreement"). Pursuant to the Master Servicing Agreement, ALFI had been the sub-servicer of certain securitized loan portfolios serviced by the Company. ALFI's counsel contends that: (a) the Company owes ALFI about $457,000 in unpaid servicing fees; (b) the Company owes ALFI an unstated amount in late charges; (c) the Company owes ALFI about $31,000 in other expenses; (d) the Company owes ALFI about $247,000 for reimbursement of funds paid by ALFI to certain "NSF Accounts"; and (e) the Company sent to Norwest Bank Minnesota, N.A. ("Norwest"), the Trustee of the loan portfolios, and to others, a letter that is purportedly "defamatory and actionable" in that it "places blame" for late filings of ultimately rejected risk default insurance ("RDI") claims upon ALFI. The Company believes it does not owe ALFI any servicing fees an that the Company is entitled to reimbursement of about $195,000 in servicing fees it caused to be paid to ALFI but to which ALFI was not entitled. The Company also disputes that it owes ALFI any of the late charges and that it is entitled to reimbursement for late charge payments that it has made. The Company has caused to be paid the expenses sought by ALFI and $232,000 to the NSF Account. ALFI has not supplied supporting documentation for the remaining $15,000 for which it sought reimbursement for repayment to the NSF Account.
In addition, ALFI, to date has withheld $191,000 which it owes the Company under a Subcontracting Agreement between the Company and ALFI dated April 6, 1996, apparently as a means of securing its purported claims under the Master Servicing Agreement. In response, the Company, to date, has withheld $37,000 from ALFI under the Letter Agreement.
By letters dated May 28, 1997, Norwest informed the Company that, to the extent the rejection of untimely filed RDI claims ultimately exceed the deductibles on the applicable insurance policies, there would be an event of default under the Company's agreements with Norwest. An aggregate amount of $1,579,000 in RDI claims have been denied due to umtimely filings. The Company believes approximately $450,000 of additional similar claims exist. While the Company denies liability for the untimely filings and contends that ALFI had the responsibility to timely file all such claims pursuant to the Master Servicing Agreement, the Company, by letter dated June 19, 1997, notified Reliance Insurance Company ("Reliance"), its errors and ommission insurance policy carrier, of the potential claim against it by Norwest. By letter dated July 10, 1997, Reliance acknowledged the Company's $3,000,000 insurance policy (containing a $350,000 deductible) and reserved its right to deny coverage on several grounds. Should the Company be found liable for some or all of the losses caused by the untimely filing of the RDI claims, it does not believe that Reliance's reservation of rights will preclude coverage.
The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. In the opinion of management
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
of the Company, based in part on the advice of counsel, the amount of any ultimate liability with respect to these actions will not materially affect the results of operations, cash flows or financial position of the Company.
10. CAPITAL STOCK
On October 18, 1994, the Board of Directors and the Company's stockholders authorized a 47,654.4578 for 1 split of the common stock, the reclassification of the common stock from no par value to $.01 par value per share and an increase in the number of authorized shares of common stock to 30,000,000. All share and per share amounts presented in these financial statements have been adjusted to reflect the effect of such stock split and reclassification.
In July 1993, the Company issued 3,637,477 shares to an existing stockholder in consideration for extending it credit under a $10,000,000 revolving credit facility. The Company recorded a commitment fee of $150,000 in consideration for this credit facility. This fee was capitalized and amortized as additional issuance of common shares over the six year life of the revolving credit facility. In March, 1996 the revolving credit facility was cancelled, whereby the Company expended the then remaining balance.
The Series B preferred stock provided for the accrual of no dividends until the first anniversary date of its issuance. Dividends accrued at an annual rate of 10%, payable quarterly, which commenced October 1, 1994. The Series B preferred stock was cumulative, nonvoting and non redeemable; however, ACFG had the option, upon 30 days notice, to redeem all or part of the outstanding Series B preferred stock at its liquidation value of $10,000 per share. During the year ended June 30, 1995, the Company paid cash Series B preferred stock dividends of $194,198 and retired its Series B preferred stock at its redemption value of $2,452,678.
During the year ended June 30, 1995, the Company received $210,000 from one of its stockholders as the repayment of an outstanding receivable from a previous year's transaction.
On September 15, 1993, the Company granted a warrant in connection with consulting services received by the Company. Such warrant is exercisable for 2.68% of the Company's common stock (328,389 shares) outstanding at the time of grant at an aggregate exercise price equal to $27,000, which was estimated to be the fair market value on the date of grant. In April 1995, the warrant was exercised and the Company issued 328,389 shares of common stock at its exercise price of $27,000.
On April 6, 1995, the Company completed the issuance of 1,875,955 shares of common stock in an initial public offering (IPO). Net proceeds to the Company were approximately $9,997,000 after deducting expenses of the offering. Subsequently, on April 13, 1995, the Company completed the issuance of 316,250 shares of common stock pursuant to the exercise of the underwriters' IPO over-allotment option, resulting in additional net proceeds to the Company of approximately $1,850,000.
On April 6, 1995, the executive officers of the Company and Patrick and Michael Bennett placed 1,892,763 shares of common stock in escrow pending the Company's attainment of certain pre-determined earnings or market price targets. In the event the Company attains any of the pre-determined earnings or market price targets, the fair market value of the escrowed shares at the time they are released will be deemed additional compensation expense to the extent such shares are released from escrow to officers, directors or other employees of the Company. For the years ended June 30, 1995 and 1996, the Company incurred non-cash (non tax deductible) charges in the amount of $878,739 and $806,886, respectively from the release of 113,386 and 150,118 escrowed shares released to the executive officers of the Company (814,455 and 1,078,308 of the escrowed shares were released, respectively). As of June 30, 1996, all escrowed shares have been released. There was no impact on total stockholders equity on the Company's financial statements as a result of the release of the escrowed shares due to a corresponding increase in paid-in capital.
In February, 1996 the Company issued $9,200,000 of Series C convertible preferred stock under Regulation S of the Securities Act of 1933. The Series C preferred stock is convertible into common stock of the Company at the lower of $6.425 per share of common stock or 85% of the fair market value of the
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1996, 1996 and 1997
common stock at the time of conversion. The Company can redeem the Series C preferred stock upon conversion at the fair market value of the common stock into which such Series C preferred stock is convertible. The Series C preferred stock has an 8% annual dividend payable in common stock at the time of conversion. The Series C preferred stock is automatically converted into common stock on the third anniversary of its issuance. For purposes of computing earnings per share, the Series C preferred stock is deemed to be a common stock equivalent, and as such is included in the weighted average common and common equivalent shares outstanding. The Company also issued warrants to the placement agent to purchase 114,553 shares of common stock of the Company at a price of $6.425 per share, which expire five years from their issuance date. None of these warrants were exercised as of June 30, 1997. During the year ended June 30, 1996, the Company redeemed 88 Series C preferred shares for $1.1 million and converted 307 Series C preferred shares into 679,114 shares of common stock. During the year ended June 30, 1997, the Company converted 419 shares of Series C Preferred Stock into 2,221,259 shares of Common Stock.
In July 1996, the Company purchased 80,000 shares of common stock from an executive officer of the Company, for $340,000. These shares were re-issued in connection with the conversion of preferred stock to common stock.
In connection with the Greenwich Capital facilities, the Company granted warrants to Greenwich Capital to purchase 1,116,335 shares of common stock at an exercise price of $6.50 per share subject to adjustment to as low as $4.00 per share. The warrants vest at the occurrence of various events relating to the facilities. As of June 30, 1997, 759,490 warrants are exercisable and 133,578 of the remaining non-vested warrants vest over the remaining securitization commitment and 223,267 warrants will remain unvested.
In connection with the issuance of the Debenture, the Company has reserved 21,350 shares of Preferred Stock and designated them as Series D. As of June 30, 1997, no shares have been issued under the Series D. (See Note 17).
NOTE 11. STOCK OPTION PLAN AND 401K RETIREMENT PLAN
In September, 1994, the Company adopted the 1994 stock option plan (the "1994 Plan") and reserved 1,000,000 shares for such purposes and in May 1996 the Company adopted the 1996 stock option plan (the "1996 Plan") and reserved 750,000 shares for such purposes (collectively the "Option Plan"). The Option Plan is administered by the Board of Directors or a committee appointed by the Board of Directors and provides for grants of incentive stock options ("ISOs") and non-incentive stock options ("Non-ISOs") to employees, directors and consultants of the Company or its subsidiaries (as defined in the Option Plan).
Consultants and directors who are not also employees of the Company may only be granted Non-ISOs. The exercise price of each ISO may not be less than 100% of the fair market value of the common stock at the time of grant, except that in the case of a grant to an employee who owns 10% or more of the outstanding common stock of the Company or a subsidiary of the Company (a "10% Stockholder"), the exercise price shall not be less than 110% of the fair market value on the date of grant. The exercise price of each Non-ISO granted under the Option Plan may not be less than 85% of the fair market value of the common stock at the time of grant or, in the case of a Non-ISO granted to a 10% Stockholder, 110% of the fair market value of the common stock at the time of the Grant. ISOs may not be exercised after the tenth anniversary (fifth anniversary in the case of any option granted to a 10% Stockholder) of their grant. Options may not be transferred during the lifetime of an option holder. No stock options may be granted under the Option Plan after ten years from the adoption of the Option Plan. Each director who is not also an employee of the Company will automatically receive each year Non-ISO's to purchase 30,000 shares of Common Stock which vest in equal monthly increments of 833 shares pursuant to such terms as are provided in the formula provisions of the Option Plan. The stock options are immediately vested or are subject to vesting over a three year period.
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its employee stock options. Therefore, no compensation cost has been recognized. If the Company accounted for its stock options under the fair value method of SFAS No, 123, the Company's net income and earnings per share would not have been materially different than its actual results.
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995 and 1997
A summary of the status of the Company's Option Plan as of June 30, 1995, 1996 and 1997, respectively and changes during each of the years then ended is presented below:
The following table summarizes information about the stock options outstanding at June 30,7:
Effective January 1, 1996, the Company adopted the Aegis Consumer Funding Group, Inc. 401 K Plan ("the Plan"). The Plan is contributory up to 15% of a Plan's participant's compensation, as defined, and covers substantially all employees. Employees become eligible participants after completing six months of service. The Plan provides the participants with a choice of seven investment vehicles in a broad range of risk tolerance portfolios ranging from a fixed income account to an international stock fund. The Company matches on a discretionary basis which has been 50% of a participant's contribution up to 6% (voluntary contributions in excess of 6% are not matched by the Company) since its inception. The Company's discretionary match is approved by its Board of Directors on an annual basis. Plan participants become vested in the Company's matching contribution after completion of 3 years of service. Forfeitures of non vested employer contributions at the end of each Plan year are first used to reduce the administrative expenses of the Plan, second to reduce the Company's matching contribution and any then remaining forfeitures are allocated to eligible employees, regardless of participation status as a profit sharing contribution made by the employer. For the years ended June 30, 1996 and 1997, the Company contributed approximately $87,400 and $216,700, respectively as its matching contribution.
12. EARNINGS (LOSS) PER SHARE
Pro forma net income and pro forma earnings per share for the year ended June 30, 1995 is calculated assuming the Company's April 1995 IPO occurred as of the beginning of the year and gives effect to (i) the redemption of approximately $2.5 million of the Company's preferred stock and dividends paid of $194,198, (ii) the termination of a consulting agreement providing consulting fees of $139,751, net of taxes, (iii) the repayment of approximately $5.0 million of indebtedness under the Company's revolving credit facility and related interest expense of $192,157, net of taxes.
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
The components of the Company's earnings (loss) per share of common and common equivalent share are as follows:
The Aegis Consumer Funding Group, Inc. Notes to Consolidated Financial Statements Years Ended June 30, 1995, 1996 and 1997
In February 1997, the Financial accounting Standarda Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for annual and interim financial statements issued for periods ending after December 15, 1997. SFAS No. 128 was issued to simplify the Standards for calculating earnings per share ("EPS") previously found in APB No. 15, Earnings Per Share. SFAS 128 replaces the presentatin of primary EPS with a presentation of basic EPS. The new rules also require dual presentation of basic and diluted EPS on the face of the statement of operations for companies with a complex capital structure. For the Company, basic EPS will exclude the dilutive effects of stock options and certain non-vested ISO'S. Diluted EPS for the Company will reflect all potential dilutive securities (similar to fully diluted EPS under APB No.15). Under the provisions of the SFAS 128, basic EPS for the fiscal year ended June 30, 1996 would have been $0.72. All other per share data would have been the same as reported amounts.
13. RELATED PARTY TRANSACTIONS
For the year ended June 30 1995, the Company provided consulting, financial and structuring services to an affiliated entity of one of its then significant stockholders. In connection with these engagements, the Company earned $275,000 for the year ended June 30, 1995. For the years ended June 30, 1996 and 1997, none of these services were provided.
During the year ended June 30, 1996, the Company recorded a valuation allowance of $600,000 on a note receivable it received in connection with the sale of certain retained interests in securitized receivables. The note accrued interest at 8.5% per annum and matures in August 2000. In May 1997, the Company filed a proof of claim for approximately $668,000 in the United States Bankruptcy Court for the Northern District of New York in the debtor's case.
The Company had a consulting agreement with another significant stockholder whereby it provided advisory services to the Company for the development, implementation and marketing of consumer product lines. In connection with this agreement, the Company paid approximately $350,000 to such stockholder during the year ended June 30, 1995. This agreement was canceled effective April 6, 1995.
In March 1996, the Company entered into a consulting agreement (the "Consulting Agreement") with Whitehall, a company affiliated with significant shareholders, whereby Whitehall was engaged to provide consulting services to the Company relating to operations, management, financing and marketing. The Consulting Agreement was renewed on its anniversary date February 5, 1997, for an additional one-year term and provides an annual fee to Whitehall of $300,000 (subject to adjustment in certain circumstances) plus reasonable and necessary expenses. For the years ended June 30, 1996 and 1997, the Company incurred an expense of $125,000 and approximately $317,700, respectively, under the Consulting Agreement.
14. INCOME TAXES
At June 30, 1997, the Company had a federal net operating loss carry- forward of approximately $43.7 million which will expire no sooner than September 30, 2005. Future utilization of approximately $36.7 million of the total net operating losses are subject to an annual limitation under Section 382 of the Internal Revenue Code. The Company has recorded a deferred tax asset relating to the future benefit of the carryforward. As discussed in the summary of significant accounting policies, the Company underwent a quasi- reorganization in 1992. Accordingly, any benefit relating to the use of $1.8 million Section 382 loss carry forward generated prior to the quasi- reorganization will be reflected as an adjustment to stockholders' equity. A full valuation allowance of $661,000 has been established against this $1.8 million Section 382 loss carryforward. In addition, a valuation allowance of $12.2 million has been established against the Company's remaining NOL as a result of the Company incurring losses in excess of previously earned income.
The Company's income tax provisions consist of the following:
The reconciliation of the federal statutory rate to the effective tax rate is as follows:
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized financial data is as follows (dollars in thousands, except for per share amounts):
The quarters ended December 31, 1995, March 31, 1996, June 30, 1996, September 30, 1996, December 31, 1996, March 31, 1997 and June 30, 1997 include write-downs on retained interests in securitized receivables of $1.5 million, $2.5 million, $3.5 million, $2.0 million, $29.0 million, $4.4 million and $13.6 million, respectively.
The quarter ended June 30, 1996, included a non-cash charge of $807,000 from the release of escrowed shares which was offset by an increase in paid-in-capital. There was no impact on total stockholders' equity as a result of the escrow share release and the resultant non-cash charge.
The quarter ended March 31, 1997, has been restated to reflect a $4.4 million write down on retained interests in securitized receivables resulting from a correction of an error in the Company's valuatin model discovered during the valuation process for the quarter ended June 30, 1997.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest and income taxes paid during the year were as follows:
17. SUBSEQUENT EVENTS
On October 16, 1997, III Finance Ltd. ("III Finance") and the High Risk Fund Ltd. ("HUB") converted $21.3 million of the Company's 12% Convertible Subordinated Debenture (the"Debenture") into $2.1 million of 12,75% Cumulative Preferred Stock (the "Preferred Stock"). The Preferred Stock is convertible into common stock at $1.26 per share. Additionally, on November 10, 1997, the remaining debt holder converted its $4.0 million of subordinated debt into $4.0 million of preferred stock with substantially the same terms as the conversion of the Debenture, except tthat $2.0 million of the preferred stock is convertible into common stock at $2.00 pershare. Had these conversions of debt to equity occurred prior to the Company's fiscal year ended June 30, 1997, the Company's positive net worth would have been approximately $13.4 million. The Company of debt to equity reduces the Company's annual debt service requirements by approximately $3.0 million. Payment of Preferred Stock dividends, if any, are subject to the approval of the Board of Directors.
On November 10, 1997, the Company agreed in principle to sell, subject to shareholder and creditor approval, its interest in SST for $7.0 million to a related entity of III Finance. The Company received a down payment of $2.0 million in two installments of $800,000 and $1.2 million on November 10, 1997 and November 14, 1997, respectively, the remaining purchase price of $5.0 million will be received upon completion of the sale agreement. In connection with the sel, the Company has a repurchase option, expiring on December 31, 1998, to repurchase SST for $7.0 million, plus an annual accretion of 5.0%.