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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q/A
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 28050
ONYX ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0577635
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Onyx Acceptance Corporation
27051 Towne Centre Drive
Foothill Ranch, Ca 92610
(949) 465-3900
(Address and telephone number of principal executive offices)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
As of November 10, 1998, there were 6,168,754 shares of registrant's
Common Stock, par value $.01 per share outstanding.
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ONYX ACCEPTANCE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q/A
Onyx Acceptance Corporation (the "Company") hereby amends and restates in their
entirety each of the following items of the Company's Quarterly Report on Form
10-Q for the three and nine months ended March 31, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Restated Condensed Consolidated Statements of Financial Condition at September 30,
1998 and December 31, 1997.......................................................... 3
Restated Condensed Consolidated Statements of Income for the three months and nine
months ended September 30, 1998 and September 30, 1997.............................. 4
Restated Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and September 30, 1997........................................ 5
Notes to Restated Condensed Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 9
PART II. OTHER INFORMATION
Item 5. Other Information................................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................................... 22
SIGNATURES................................................................................... 23
EXHIBIT INDEX................................................................................ 24
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash & cash equivalents ..................................... $ 5,771,881 $ 991,010
Trust receivables ........................................... 7,236,807 7,377,801
Contracts held for sale (Net of allowance) .................. 125,345,160 64,342,309
Retained interest in securitized assets ..................... 93,793,893 64,357,850
Other assets ................................................ 6,475,773 4,767,490
------------- -------------
Total assets ..................................... $ 238,623,514 $ 141,836,460
============= =============
LIABILITIES
Accounts payable ............................................ $ 10,612,817 $ 6,564,446
Debt ........................................................ 175,752,152 91,759,281
Other liabilities ........................................... 10,918,213 5,795,323
------------- -------------
Total liabilities ................................. 197,283,182 104,119,050
EQUITY
Common stock
Par value $.01 per share; authorized 15,000,000 shares;
issued and outstanding 6,168,754 as of September 30,
1998 and issued and outstanding 6,017,635 as of
December 31, 1997 ....................................... 61,687 60,176
Paid in capital ............................................. 37,841,627 37,810,158
Retained earnings (Deficit) ................................. 3,437,018 (152,924)
------------- -------------
Total equity ..................................... 41,340,332 37,717,410
------------- -------------
Total liabilities and equity ..................... $ 238,623,514 $ 141,836,460
============= =============
</TABLE>
See the accompanying notes to the restated condensed
consolidated financial statements.
3
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ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Interest income ............................. $ 7,001,062 $ 3,659,736 $16,703,145 $ 8,807,440
Interest expense ............................ 4,213,990 2,096,118 10,651,700 4,981,310
----------- ----------- ----------- -----------
Net interest income ......................... 2,787,072 1,563,618 6,051,445 3,826,130
Gain on sale of contracts ................... 9,676,893 6,073,232 25,911,096 12,780,463
Service fee income .......................... 4,007,969 1,686,336 10,015,975 8,341,755
Total Revenues .............................. 16,471,934 9,323,186 41,978,516 24,948,348
EXPENSES:
Provision for credit losses ............. 597,957 100,045 1,229,764 604,639
Salaries and benefits ................... 7,216,960 4,644,626 19,492,705 12,389,370
Depreciation ............................ 565,600 349,515 1,307,918 810,316
Occupancy ............................... 500,371 386,517 1,315,224 1,043,791
General and administrative expenses ..... 4,595,279 2,943,706 12,496,254 7,343,420
----------- ----------- ----------- -----------
Total Expenses .............................. 13,476,167 8,424,409 35,841,865 22,191,536
----------- ----------- ----------- -----------
Net Income before Taxes ..................... 2,995,767 898,777 6,136,651 2,756,812
Income Taxes ............................ 1,243,243 386,833 2,546,709 1,186,529
----------- ----------- ----------- -----------
Net Income after Taxes ...................... $ 1,752,524 $ 511,944 $ 3,589,942 $ 1,570,283
=========== =========== =========== ===========
Net Income per share - Basic ................ $ 0.28 $ 0.09 $ 0.59 $ 0.26
Net Income per share - Diluted .............. $ 0.27 $ 0.08 $ 0.56 $ 0.25
Basic Shares outstanding .................... 6,162,374 6,016,471 6,093,198 5,994,696
Diluted Shares outstanding .................. 6,381,882 6,379,802 6,445,412 6,386,216
</TABLE>
See the accompanying notes to the restated condensed
consolidated financial statements.
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ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash used in operating activities ........................ $ (76,587,801) $ (57,483,979)
INVESTING ACTIVITIES:
Purchases of property and equipment ..................... (2,411,692) (1,451,371)
------------- -------------
Cash used in investing activities .............. (2,411,692) (1,451,371)
FINANCING ACTIVITIES:
Proceeds from exercise of options/warrants .............. 32,981 57,562
Payments on capital lease obligations ................... (473,577) (370,952)
Proceeds from drawdown on excess servicing
line of credit, net ................................... 15,972,101 18,500,000
Paydown of warehouse lines related to securitization
and sale............................................... (624,456,000) (340,500,000)
Proceeds from warehouse lines ........................... 682,956,181 382,497,213
Proceeds from subordinated debt ......................... 10,000,000 0
Payments in other loans ................................. (251,322) (251,320)
------------- -------------
Net cash provided by financing activities ...... 83,780,364 59,932,503
------------- -------------
Increase in cash and cash
equivalents .................................. 4,780,871 997,153
Cash and cash equivalents at beginning of period ............. 991,010 603,028
------------- -------------
Cash and cash equivalents at end of period ................... $ 5,771,881 $ 1,600,181
============= =============
Supplemental Disclosures of Cash Flow
Information:
Interest paid ................................................ $ 10,453,649 $ 4,818,269
Capital lease additions ...................................... $ 132,577 $ 383,139
</TABLE>
See the accompanying notes to the restated condensed
consolidated financial statements.
5
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ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The restated condensed consolidated financial statements included herein
are unaudited and have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial reporting and Securities
and Exchange Commission regulations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the regulations. In the opinion of management, the restated
financial statements reflect all adjustments (of a normal and recurring nature)
which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. Operating results for the
three and nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. The
restated condensed consolidated financial statements should be read in
conjunction with the audited financial statements and footnotes thereto for the
year ended December 31, 1997 included in the Company's 1997 Annual Report on
Form 10-K and the 10-Q/A for the quarters ended June 30, 1998 and March 31,
1998.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, management
utilizes assumptions and estimates that affect the reported value of retained
interest in securitized assets and the gain on sale of Contracts. Such
assumptions include, but are not limited to, estimates of loan prepayments,
defaults, recovery rates and present value discount rates. The Company uses a
combination of its own historical experience, industry statistics and
expectation of future performance to determine such estimates. Actual results
may differ from the Company's estimates due to numerous factors both within and
beyond the control of Company management. Changes in these factors could require
the Company to revise its assumptions concerning the amount of voluntary
prepayments, the frequency and or severity of defaults and the recovery rates
associated with the disposition of repossessed vehicles.
NOTE 2 - RESTATEMENT
As required by the Financial Accounting Standards Board's ("FASB")
Special Report, "A Guide to Implementation of Statement 125 on Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
Second Edition," dated December 1998, and related guidance set forth in
statements made by the staff of the Securities and Exchange Commission, ("SEC")
on December 8, 1998, the Company has restated its 1998 and 1997 financial
statements to reflect the change in the method of measuring and accounting for
Trust Receivables and Retained Interest in Securitized Assets ("Credit
Enhancement Assets") on its securitization transactions to the cash-out method
from the cash-in method.
Initial deposits to restricted cash accounts, if any, and subsequent cash flows
received by securitization trusts sponsored by the Company accumulate as Credit
Enhancement Assets until certain targeted levels are achieved, after which cash
is distributed to the Company on an unrestricted basis. Under the cash-in method
previously used by the Company, (i) the assumed discount period for measuring
the present value of Credit Enhancement Assets ended when cash flows were
received by the securitization trusts and (ii) initial deposits to restricted
cash accounts were recorded at face value. Under the cash-out method now
required by the FASB and SEC, the assumed discount period for measuring the
present value of Credit Enhancement Assets ends when cash, including return of
the initial deposits, if any, is distributed to the Company on an unrestricted
basis.
The change to the cash-out method results only in a difference in the timing of
revenue recognition from a securitization and has no effect on the total cash
flows of such transactions. While the total amount of revenue recognized over
the term of a securitization transaction is the same under either method, the
cash-out method results in (i) lower initial gains on the sale of contracts held
for sale due to the longer discount period and (ii) higher subsequent servicing
fee income from accretion of the additional cash-out discount. Accordingly, the
reductions in previously reported earnings resulting from retroactive
application of the change will generally be recognized in subsequent period
earnings as servicing fee income.
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The restatement resulted in the following changes to prior period financial
statements:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands except net In thousands except net
income per share) income per share)
----------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
TOTAL REVENUE:
Previous $ 16,779 $ 9,551 $ 42,875 $ 25,485
As Restated $ 16,472 $ 9,323 $ 41,979 $ 24,948
NET INCOME:
Previous $ 1,929 $ 658 $ 4,111 $ 1,923
As Restated $ 1,753 $ 512 $ 3,590 $ 1,570
NET INCOME PER SHARE:
BASIC:
Previous $ 0.31 $ 0.11 $ 0.67 $ 0.32
As Restated $ 0.28 $ 0.09 $ 0.59 $ 0.26
DILUTED:
Previous $ 0.30 $ 0.10 $ 0.64 $ 0.30
As Restated $ 0.27 $ 0.08 $ 0.56 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------- -------
<S> <C> <C>
TRUST RECEIVABLES:
Previous $33,943 $27,629
As Restated $ 7,237 $ 7,378
RISA:
Previous $72,716 $48,839
As Restated $93,794 $64,358
SHAREHOLDERS' EQUITY:
Previous $44,699 $40,555
As Restated $41,340 $37,717
</TABLE>
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NOTE 3 - CONTRACTS HELD FOR SALE
Contracts held for sale consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Contracts held for sale ....... $ 134,678,766 $ 71,216,278
Less unearned interest ........ 10,097,204 7,835,794
------------- -------------
124,581,562 63,380,484
Allowance for credit losses ... (915,323) (316,902)
Dealer participation .......... 1,678,921 1,278,727
------------- -------------
Total ......................... $ 125,345,160 $ 64,342,309
============= =============
</TABLE>
NOTE 4 - RETAINED INTEREST IN SECURITIZED ASSETS
Retained interest in securitized assets ("RISA") capitalized upon
securitization of Contracts represents the present value of the estimated future
earnings to be received by the Company from the excess spread created in
securitization transactions. Excess spread is calculated by taking the
difference between the coupon rate of the Contracts sold and the certificate
rate paid to the investors less contractually specified servicing and guarantor
fees and projected credit losses, after giving effect to estimated prepayments.
Prepayment and credit loss assumptions are utilized to project future earnings
and are based on historical experience, industry statistics and expectation of
future performance. All assumptions are evaluated each quarter and adjusted, if
appropriate, to reflect the actual performance of the Contracts.
Future earnings are discounted at a rate management believes to be
representative of market at the time of securitization. The balance of RISA is
amortized against actual retained interest income earned on a monthly basis over
the expected repayment life of the underlying Contracts. RISA is classified in a
manner similar to available for sale securities and as such is marked to market
each quarter. Market value changes are calculated by discounting the remaining
projected excess spread using a current market discount rate. Any changes in the
market value of the RISA are reported as a separate component of other
comprehensive income as an unrealized gain or loss, net of deferred taxes. As of
September 30, 1998 the market value of RISA approximated cost. The Company
retains the rights to service all Contracts it securitizes.
The Company is currently using securitization assumptions that are consistent
with its historical performance, industry statistics and expectation of future
performance. These assumptions are an ABS prepayment speed of 1.75%, an
annualized net credit loss rate of 2.0% and a discount rate of 3.50% over the
pass-through rate.
The following table presents the balances and activity for RISA:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Beginning balance ... $ 64,357,850 $ 33,530,020
Additions ........... 55,746,030 41,603,001
Amortization ........ (26,309,987) (10,775,171)
------------ ------------
Ending balance ...... $ 93,793,893 $ 64,357,850
============ ============
</TABLE>
In initially valuing the RISA, the Company establishes an off balance sheet
allowance for expected future credit losses. The allowance is based upon
historical experience and management's estimate of future performance regarding
credit losses. The amount is reviewed periodically and adjustments are made if
actual experience or other factors indicate that future performance may differ
from management's prior estimates.
The following table presents the estimated net undiscounted retained interest
earnings to be received from securitizations. Estimated net undiscounted RISA
earnings are calculated by taking the difference between the coupon rate of the
Contracts sold and the certificate rate paid to the investors, less the
contractually specified servicing fee of 1.0% and guarantor fees, after giving
effect to
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estimated prepayments and assuming no losses. To arrive at the RISA,
this amount is reduced by the off balance sheet allowance established for
potential future losses and by discounting to present value.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Estimated net undiscounted RISA earnings ... $ 148,886,521 $ 99,613,524
Off balance sheet allowance for losses ..... 42,866,539 25,546,412
Discount to present value .................. 12,226,089 9,709,262
-------------- --------------
Retained interest in securitized assets .... $ 93,793,893 $ 64,357,850
============== ==============
Outstanding balance of Contracts
sold through securitizations ............ $1,039,551,336 $ 693,896,100
============== ==============
</TABLE>
Management believes that the off balance sheet allowance for losses is currently
adequate to absorb potential losses in the securitized portfolio.
NOTE 5 - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share ("EPS"):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $1,752,524 $ 511,944 $3,589,942 $1,570,283
========== ========== ========== ==========
Weighted average shares outstanding ............... 6,162,374 6,016,471 6,093,198 5,994,696
Net effect of dilutive stock
Options/warrants ................................ 219,508 363,331 352,214 391,520
Diluted weighted average shares outstanding ....... 6,381,882 6,379,802 6,445,412 6,386,216
Net income per share:
Basic EPS ......................................... $ 0.28 $ 0.09 $ 0.59 $ 0.26
========== ========== ========== ==========
Diluted EPS ....................................... $ 0.27 $ 0.08 $ 0.56 $ 0.25
========== ========== ========== ==========
</TABLE>
NOTE 6 - NEW PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes the accounting and
reporting standards for derivative instruments, and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments as fair value.
The Company is presently assessing the presentation and effect of SFAS No. 133
on the financial statements of the Company.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Onyx Acceptance Corporation (the "Company" or "Registrant") is a
specialized consumer finance company engaged in the purchase, securitization and
servicing of Contracts originated by franchised and select independent
automobile dealerships and to a lesser extent the origination of motor vehicle
loans on a direct basis to consumers (collectively the "Contracts"). The Company
focuses its efforts on acquiring Contracts that are collateralized by late model
used and, to a lesser extent, new automobiles, that are entered into with
purchasers whom the Company believes have a favorable credit profile.
9
<PAGE> 10
As required by the Financial Accounting Standards Board's ("FASB") Special
Report, "A Guide to Implementation of Statement 125 on Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, Second
Edition," dated December 1998, and related guidance set forth in statements made
by the staff of the Securities and Exchange Commission, ("SEC") on December 8,
1998, the Company has restated its 1998 and 1997 financial statements to reflect
the change in measuring and accounting for Credit Enhancement Assets on its
securitization transactions to the cash-out method from the cash-in method.
The Company generates revenues primarily through the purchase, origination,
warehousing, subsequent securitization and ongoing servicing of Contracts. The
Company earns net interest income on Contracts held during the warehousing
period. Upon the securitization and sale of Contracts, the Company recognizes a
gain on sale of Contracts, receives future servicing cash flows and earns
servicing fees from the trusts over the life of the related securitization.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income revenue is the difference between the rate earned on
Contracts and the interest costs associated with the Company's borrowings. Net
interest income totaled $2.8 million for the three months ended September 30,
1998 compared to $1.6 million for the same period in 1997. For the nine months
ended September 30, 1998, net interest income revenue was $6.1 million as
compared to $3.8 million for the same period in 1997. These increases are due to
the higher amounts of average Contracts held for sale during the period.
Prior to securitizing Contracts, the Company earns interest income on its
Contracts, pays interest expense to fund the Contracts and absorbs any credit
losses. After securitization, the net earnings are recorded as service fee
income as a component of servicing income.
PROVISION FOR CREDIT LOSSES
The Company maintains an allowance for credit losses to cover
anticipated losses for Contracts held for sale. The allowance for credit losses
is increased by charging the provision for credit losses and decreased by actual
losses on the Contracts held for sale or by the reduction of the amount of
Contracts held for sale. The level of the allowance is based principally on the
outstanding balance of Contracts held for sale and the historical loss trends
for the period of time the loans are held before being sold in a securitization.
When the Company sells Contracts in a securitization transaction, it reduces its
allowance for credit losses and factors potential losses into its calculation of
gain on sale. The Company believes that the allowance for credit losses is
currently adequate to absorb potential losses. The provision for credit losses
totaled $597,957 for the quarter ended September 30, 1998 compared to $100,045
for the same period in 1997. Provision for credit losses consists of net credit
losses incurred during the period plus future provision for losses reserved
against the net changes in Contracts held for sale during the period. Net credit
losses accounted for $182,358 during the third quarter of 1998 compared to
$125,590 in the third quarter of 1997. The increase in net credit losses was due
to an increase in the average Contracts held for sale in the period. Future
provisions totaled $415,599 and $(25,545) for the third quarter of 1998 and 1997
respectively. Contracts held for sale increased by $24.3 million for the third
quarter of 1998 versus a $4.7 million decrease for the third quarter of 1997.
Provision for credit losses for the nine month period ended September 30, 1998
were $1.2 million compared to $604,639 for the period ended September 30, 1997.
At September 30, 1998, Contracts held for sale were $125.3 million compared to
$64.3 million at December 31, 1997.
GAIN ON SALE OF CONTRACTS
The Company recorded a gain on sale of Contracts of $9.7 million for the
three months ended September 30, 1998 compared to $6.1 million for the same
period of 1997. The increase in the gain on sale is primarily the result of an
increase in Contracts sold. For the nine months ended September 30, 1998, the
Company recorded a gain on sale of $25.9 million compared to a gain on sale of
$12.8 million for the same period in 1997. Contracts sold during the third
quarter of 1998 totaled $250.0 million compared to $149.6 million during the
same period of 1997. Net interest rate spreads, inclusive of all costs,
decreased to 3.18% for the third quarter 1998 securitization vs. 3.30% for the
securitization completed in the third quarter 1997. Interest rate spread is
affected by product mix, general market conditions and overall market interest
rates. The risks inherent in interest rate fluctuation are reduced through
hedging activities. To protect against changes in interest rates, the Company
may hedge Contracts prior to their securitization with forward interest rate
swap agreements. Gains or losses on these forward interest rate swap agreements
are included as part of the basis of the underlying Contracts and recognized
when the Contracts are securitized.
SERVICING INCOME
10
<PAGE> 11
Servicing fee income includes retained interest income, contractual
servicing income and other fee income. Retained interest income represents
excess spread earned on securitized loans less any losses not absorbed by the
off balance sheet allowance for losses. Retained interest income is dependent
upon the average excess spread on the Contracts sold and the size of the
serviced portfolio. Changes in the amount of prepayments and credit losses may
also affect the amount and timing of retained interest income. Contractual
servicing income is earned at a rate of 1% per annum on the outstanding balance
of Contracts securitized. Other fee income consists primarily of documentation
fees, late charges and deferment fees and is dependent on the number of
Contracts originated and the dollar amount outstanding. Increased competition
may also affect the amount of other fee income that the Company may earn when
originating or servicing Contracts.
Servicing fee income increased to $4.0 million during the third quarter of 1998
from $1.7 million during the same period in 1997 due primarily to higher
contractual service fees related to the growth in the servicing portfolio.
Servicing fee income for the nine month period ended September 30, 1998 was
$10.0 million compared to $8.3 million for the like period in 1997.
OPERATING EXPENSES
Total operating expenses were $13.5 million for the three months ended
September 30, 1998 compared to $8.4 million for the same period in 1997. The
increase in total operating expenses is primarily attributable to an increase in
the amount of Contracts serviced by the Company. The serviced portfolio
increased to $1.2 billion at September 30, 1998 from $649.6 million at September
30, 1997. Total operating expenses for the nine month period ending September
30, 1998 were $35.8 million compared to $22.2 million for the same period in
1997.
The Company incurred salary and benefit expenses of $7.2 million during the
third quarter of 1998 compared with $4.6 million for the third quarter of 1997,
an increase of 56.5%. This increase is attributable to the incremental staffing
requirements related to the expansion of operations and the growth of the
servicing portfolio. The number of employees at the Company increased from 302
at September 30, 1997 to 499 at September 30, 1998. Salary and benefit expenses
for the nine month period ended September 30, 1998 were $19.5 million compared
to $12.4 million for the nine months ending September 30, 1997.
Depreciation expenses increased to $565,600 for the three months ended September
30, 1998 compared to $349,515 for the same period of 1997 as the Company
continued to invest in technology and infrastructure. Expansion into new states
resulted in an increase in occupancy costs to $500,371 for the three months
ending September 30, 1998 from $386,517 in the like period in 1997. General and
administrative expenses increased to $4.6 million in the third quarter of 1998
from $2.9 million in the third quarter of 1997, due primarily to an increase in
the dollar amount of the servicing portfolio.
INCOME TAXES
The Company files federal and state tax returns. The effective tax rates
for September 30, 1998 and 1997 were 41.5% and 43.0% respectively.
FINANCIAL CONDITION
CONTRACTS HELD FOR SALE
Contracts held for sale totaled $125.3 million at September 30, 1998
compared to $64.3 million at December 31, 1997. The balance in the held for sale
portfolio is largely dependent upon the timing of the origination and
securitization of Contracts. The Company completed securitization transactions
of $631.8 million and a whole loan sale of $15.0 million during the nine months
of 1998. The Company plans to continue to securitize Contracts on a regular
basis.
11
<PAGE> 12
The following table illustrates the changes in the Company's Contract
acquisition volume, securitization activity and servicing portfolio during the
past five fiscal quarters:
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1998 1998 1998
---------- --------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Contracts purchased/originated during period .. $ 152,334 $ 182,310 $ 218,204 $ 229,660 $ 286,470
Average monthly volume during period .......... 50,778 60,770 72,735 76,553 95,490
Gain on sale of Contracts ..................... 6,073 6,806 8,151 8,083 9,677
Contracts securitized during period ........... 149,600 166,000 173,000 208,759 250,000
Contracts sold during period .................. 0 0 15,000 0 0
Servicing portfolio at period end ............. 649,563 757,277 884,692 1,009,246 1,176,153
</TABLE>
ASSET QUALITY
With the continued expansion of the Company in the eastern United States
and the significant growth in the existing branches, the Company undertook a
project to centralize and improve its servicing and collection process. The
Company believes that a centralized group is efficient and effective, and
assures that collection practices and policies are applied consistently
throughout the Company. Management continues to rely on the use of current
technology such as predictive dialers utilizing automated processing for
contacting delinquent borrowers, including a payment system that allows
electronic payment on delinquent accounts to be applied the same day as the
contact with the borrower. Over the past few quarters, management has focused on
the hiring, training and retention of a centralized collection staff. During the
third quarter of 1998 the Company continued to realize some of the benefits of
the centralization and training of the collection department. At September 30,
1998, delinquencies for the servicing portfolio represented 2.02% of the amount
of Contracts in the Company's servicing portfolio or $23.8 million as compared
to 2.51% at December 31, 1997 or $19.0 million. Loan losses for the servicing
portfolio as a percentage of average serviced loans outstanding decreased to
1.72% during the quarter compared to 2.16% for the third quarter of 1997.
DELINQUENCY EXPERIENCE OF SERVICING PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------------------- --------------------------
AMOUNT NO. AMOUNT NO.
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Servicing portfolio ............... $1,176,153 115,151 $ 757,277 73,502
Delinquencies(1)(2)
31-59 days ........... 15,565 1,643 11,902 1,211
60-89 days ........... 4,114 413 3,370 346
90+ days ............. 4,103 383 3,743 316
---------- ---------- ---------- ----------
Total ............................. $ 23,781 2,439 $ 19,015 1,873
========== ========== ========== ==========
Total delinquencies as a percent
of Servicing portfolio ...... 2.02% 2.12% 2.51% 2.55%
</TABLE>
(1) Delinquencies include principal amounts only.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
12
<PAGE> 13
LOAN LOSS EXPERIENCE OF SERVICING PORTFOLIO
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD FOR THE THREE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1997 1998 1997
---------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Period end Contracts outstanding ... $1,176,153 $ 649,563 $1,176,153 $ 649,563
Average servicing portfolio(1) ..... $ 945,077 $ 518,898 $1,083,919 $ 606,412
Number of gross charge-offs ........ 2,740 1,466 984 603
Gross charge-offs .................. $ 14,827 $ 8,987 $ 5,453 $ 3,679
Net charge-offs .................... $ 12,576 $ 7,881 $ 4,659 $ 3,270
Annualized net charge-offs as
a percent of average Servicing
portfolio ........................ 1.77% 2.03% 1.72% 2.16%
</TABLE>
(1) Average is based on daily balances.
(2) Net charge-offs are gross charge-offs minus recoveries of Contracts
previously charged off.
13
<PAGE> 14
THE FOLLOWING TABLE ILLUSTRATES THE MONTHLY PERFORMANCE OF EACH OF THE
SECURITIZED POOLS OUTSTANDING FOR THE PERIOD FROM THE DATE OF SECURITIZATION
THROUGH SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
MONTH 95-1 96-1 96-2 96-3 96-4 97-1 97-2 97-3 97-4 98-1 98-A 98-B
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.01% 0.03% 0.07% 0.02% 0.02% 0.00% 0.00% 0.00% 0.00% 0.01% 0.01%
3 0.02% 0.05% 0.20% 0.07% 0.05% 0.03% 0.02% 0.02% 0.01% 0.02% 0.03%
4 0.02% 0.11% 0.33% 0.16% 0.14% 0.06% 0.07% 0.09% 0.04% 0.08% 0.07%
5 0.05% 0.23% 0.46% 0.43% 0.24% 0.13% 0.22% 0.13% 0.11% 0.14%
6 0.06% 0.40% 0.78% 0.54% 0.38% 0.26% 0.32% 0.24% 0.20% 0.24%
7 0.08% 0.69% 0.98% 0.74% 0.53% 0.37% 0.59% 0.36% 0.28% 0.40%
8 0.10% 0.82% 1.15% 0.97% 0.81% 0.52% 0.80% 0.47% 0.43%
9 0.21% 0.93% 1.39% 1.13% 0.98% 0.60% 0.91% 0.62% 0.55%
10 0.24% 1.15% 1.52% 1.32% 1.18% 0.76% 1.07% 0.73% 0.72%
11 0.29% 1.25% 1.69% 1.47% 1.43% 0.92% 1.26% 0.81%
12 0.41% 1.47% 1.94% 1.60% 1.63% 1.02% 1.42% 0.94%
13 0.55% 1.65% 2.08% 1.77% 1.73% 1.13% 1.58% 1.10%
14 0.70% 1.79% 2.34% 1.94% 1.87% 1.23% 1.68%
15 0.83% 2.02% 2.52% 2.09% 2.07% 1.40% 1.80%
16 0.98% 2.25% 2.76% 2.27% 2.23% 1.56% 1.97%
17 1.06% 2.43% 2.89% 2.42% 2.33% 1.68%
18 1.11% 2.59% 3.10% 2.57% 2.49% 1.75%
19 1.27% 2.77% 3.14% 2.70% 2.62% 1.85%
20 1.37% 2.93% 3.30% 2.83% 2.73%
21 1.41% 3.06% 3.47% 2.94% 2.84%
22 1.54% 3.15% 3.60% 3.00% 2.93%
23 1.59% 3.21% 3.70% 3.08%
24 1.69% 3.28% 3.81% 3.17%
25 1.76% 3.40% 3.93% 3.28%
26 1.83% 3.43% 4.06%
27 1.86% 3.55% 4.13%
28 1.97% 3.60% 4.22%
29 2.01% 3.73% 4.23%
30 2.08% 3.75%
31 2.13% 3.79%
32 2.16% 3.85%
33 2.26% 3.88%
34 2.27%
35 2.28%
36 2.28%
37 2.30%
38 2.28%
39 2.28%
40 2.26%
41 2.26%
42 2.25%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires substantial cash and capital resources to operate
its business. Its primary uses of cash include: (i) acquisition of Contracts;
(ii) payments of dealer participation; (iii) securitization costs, (iv)
settlements of hedging transactions; (v) operating expenses; and (vi) interest
expense. The capital resources available to the Company include: (i) interest
income during the warehousing period; (ii) servicing fees; (iii) releases from
spread accounts; (iv) settlements of hedging transactions; (v) sales of
Contracts in securitizations; and (vi) borrowings under its credit facilities.
Management believes that the resources available to the Company provide the
needed capital to fund the expansion of the Company, Contract purchases, and
investments in origination and servicing capabilities.
14
<PAGE> 15
Cash used in operating activities was $76.6 million for the nine months
ended September 30, 1998, compared to $57.5 million used in the nine months
ended September 30, 1997. The increase in cash used in operating activities was
attributable to the fact that for the nine month period ended September 30,
1998, Contract purchases exceeded Contracts sold in sales and securitizations by
$87.6 million. Cash used in investing activities was $2.4 million for the
quarter ended September 30, 1998 compared to $1.5 million for the quarter ended
September 30, 1997. A reduction in the use of the Company's capital lease lines
contributed to the increase in investing activities. Cash provided by financing
activities was $83.8 million for the quarter ended September 30, 1998, compared
to $59.9 million for the quarter ended September 30, 1997. Proceeds from
subordinated debt along with an increase in the issuance of commercial paper,
net of pay downs related to securitization and sale, contributed to the change
in cash provided by financing activities.
Warehouse Lines
The Company's wholly owned special purpose subsidiary, Onyx Acceptance
Financial Corporation ("OAFC"), is party to a $325 million auto loan warehouse
program (the "CP Facility") with Triple-A One Funding Corporation ("Triple-A").
Triple-A is a commercial paper asset-backed conduit lender sponsored by MBIA
Insurance Corporation ("MBIA"). This facility provides funds to purchase
Contracts and was increased during the third quarter from $245 million to $325
million. The advance rate to OAFC is 98% of adjusted eligible principal balance
of each Contract. This lending facility was extended in the third quarter and
will expire in September 2001.
The Company, through another finance subsidiary, Onyx Acceptance Funding
Corporation ("Fundco") holds a $100 million line with Merrill Lynch Mortgage
Capital, Inc. ("MLMCI") (the "Merrill Line") which provides funding for the
purchase and origination of Contracts. The Merrill Line provides an advance rate
of approximately 95% of the principal balance of the Contracts that are used for
collateral. The interest rate is based on LIBOR. The Merrill Line has a term of
one year and matures in February 1999.
Residual Facilities
The Company has a $45 million residual facility with State Street Bank,
BankBoston, and The Travelers Insurance Company (the "Residual Facility") under
which the Company may (subject to borrowing base availability) borrow for
working capital purposes. Under the term of the Residual Facility, the available
borrowings are determined by a collateral based formula of a percentage of the
value of the excess cash flow to be received from certain securitizations and
trust receivables. The Residual Facility converts from revolving loans to
fully-amortizing two-year term loans on June 12, 1999 or earlier, upon the
occurrence of certain "credit triggers".
Fundco has two $50 million residual facilities with MLMCI and Salomon Brothers
Realty Corp., ("SBRC") respectively, (the "Residual Lines "). The Residual Lines
are used by the Company to finance operating requirements. The amounts available
for borrowing under each line are determined using a collateral based formula of
a percentage of the value of excess cash flow to be received from certain
securitizations, and, with respect to the MLMCI facility, a percentage of the
amount of the Merrill Line outstanding on a quarterly basis. The interest rates
are based on LIBOR and the Residual Lines have a term of one year. The facility
provided by MLMCI matures in February 1999; the facility provided by SBRC
matures in September 1999.
The Company during the first quarter of 1998, completed a $10.0 million
subordinated debt offering. The term of the debt is for two years ending
February 27, 2000, with an option by the Company to extend the term by three
years during which the loan would fully amortize. The debt bears a fixed
interest rate of 9.5%.
SECURITIZATIONS AND LOAN SALES
In September, 1998, the Company consummated a securitization in the
amount of $250.0 million compared to $149.6 million in the third quarter of
1997. The dollar weighted average investor rate for the third quarter 1998
securitization was 5.78% and a net interest rate spread inclusive of all costs
of 3.18% as compared to a dollar weighted average investor rate of 6.35% and a
net interest rate spread inclusive of all costs of 3.30% for the securitization
completed in the third quarter 1997. For the nine month period ended September
30, 1998, the Company securitized and sold a total of $646.8 million of
Contracts. Of this total, $631.8 million were securitized, while $15.0 million
were sold on a whole loan basis, with servicing retained. For the nine months
ended September 30, 1998, the Company recorded a gain on sale of $25.9 million
on total sales and securitizations of $646.8 million as compared to a gain on
sale of $12.8 million with securitizations totaling $361.3 million for the first
nine months of 1997.
15
<PAGE> 16
The Contracts originated and held by the Company during the warehousing period
are all fixed rate and accordingly, the Company has exposure to changes in
interest rates. The Company is able through the use of varying maturities on
advances from the CP Facility to lock in rates during the warehousing period,
when in management's judgment it is appropriate, to mitigate interest rate
exposure. Further, the Company often employs a hedging strategy which primarily
includes the execution of forward interest rate swaps. These hedges are entered
into by the Company in numbers and amounts which generally correspond to the
anticipated principal amount of the related securitization or whole loan sale.
As of September 30, 1998, the Company had executed forward interest rate swaps
of $160 million, which become effective November 27, 1998.
YEAR 2000
The Company is substantially dependent on its and third party computer systems,
business applications and other information technology systems ("IT systems"),
due to the nature of its consumer finance business and the increasing number of
electronic transactions in the industry. Historically, many IT systems were
developed to recognize the year as a two-digit number, with the digits "00"
being recognized as the year 1900. The year 2000 presents a number of potential
problems for such systems, including potentially significant processing errors
or failure. Given the Company's reliance on its computer systems, the Company's
results of operations could be materially adversely affected by any significant
errors or failures.
The Company has developed and is in the midst of executing a comprehensive plan
designed to address the "year 2000" issue for its in house and third party IT
applications. Earlier this year, the Company completed a detailed risk
assessment of its various in house and third party computer systems, business
applications and other affected systems, formulated a plan for specific
remediation efforts and began certain of such remediation efforts. The Company
assembled survey data from third party vendors and certain other parties with
which the Company communicates electronically to determine the compliance
efforts being undertaken by these parties and to assess the Company's potential
exposure to any non-compliant systems operated by these parties. During the
remainder of 1998 and the first quarter of 1999, the Company expects to continue
and complete its remediation efforts and to undertake internal testing of its in
house and third party systems and applications
The Company currently estimates that its costs related to year 2000 compliance
remediation for Company-owned IT systems and applications will be approximately
$300,000 in 1998 and approximately $150,000 in 1999. The amount expected to be
expended during 1998 represents approximately 15% of the Company's IT systems
budget. As of September 30, 1998, the Company had expended approximately
$200,000 for remediation of its IT software systems and applications. By the
second quarter of 1999, the Company expects to undergo third-party review of its
year 2000 remediation efforts. This third party review will include an
assessment of the procedures undertaken by the Company as well as a computer
software test of selected portions of the Company's computer code. The Company
currently expects that its year 2000 remediation efforts will be completed by
the second quarter of 1999. The Company expenses year 2000 remediation costs as
incurred and expects to fund these costs through cash flow from operations.
The Company's most critical operating system is the loan accounting system which
is maintained by a third party vendor. The Company is included in a user task
force that provides input to the vendor for the year 2000 project. The changes
to the loan accounting system were substantially complete by September 30, 1998
and the system is undergoing testing by the service bureau. The testing should
be completed by December 31, 1998. The Company is developing a testing plan and
will be provided a testing system under a separate environment to allow the
Company to test the system during the first quarter of 1999. In addition, the
user task force is also testing the system during the first quarter of 1999. The
service bureau is confident that the changes to the system will be tested and in
production by the end of the second quarter of 1999. The Company does not at
this time see any issues with the timing or the proposed changes to the system.
Based on the survey data and other information compiled by the Company to date,
the Company has not identified any other third parties that the Company expects
will suffer year 2000 related problems likely to have a significant adverse
effect on the Company's operations. However, many of these third parties are
currently in the process of implementing the critical portions of their own year
2000 compliance measures. As a result, at the current time the Company does not
have sufficient information to determine whether its external relationships will
be materially adversely affected by the year 2000 compliance problems.
The Company is currently formulating detailed contingency plans in the event
that its various systems and applications do not achieve year 2000 compliance in
a timely fashion. The contingency plans are focused on identifying potential
failure scenarios for the Company's IT systems and those of third parties with
which the Company interacts and on ensuring the continuation of critical
16
<PAGE> 17
business operations. The Company currently expects that this contingency
planning will be completed by the end of 1998. During the first half of 1999,
the Company expects to integrate each of these contingency plans into a
Company-wide contingency plan.
If the Company's year 2000 issues were not completely resolved prior to the end
of 1999, the Company could be subject to a number of potential consequences,
including among others, an inability to timely and accurately process and
collect payments from customers and originate Contracts in a timely manner. The
Company is attempting to limit its exposure to year 2000 issues by closely
monitoring its own year 2000 remediation efforts, assessing the year 2000
compliance efforts of various third parties with which it interacts and
developing contingency plans addressing potential problems that could have a
material adverse effect on the Company's results of operations. Although the
Company intends to put into place programs and procedures designed to mitigate
the aforementioned risks, there can be no assurances that all potential problems
may be mitigated by these procedures.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133 establishes the accounting and reporting
standards for derivative instruments, and for hedging activities. It requires
that an entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company is presently assessing the presentation and effect of SFAS
No. 133 on the financial statements of the Company.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999.
PART II. OTHER INFORMATION
Item 5. Other Information.
FORWARD LOOKING STATEMENTS
The preceding Management's Discussion and Analysis of the Company's
Financial Condition and Results of Operations contain certain "forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, which provides a new "safe harbor" for these types of statements. This
Quarterly Report on Form 10-Q/A contains forward-looking statements which
reflect the current views of Onyx Acceptance Corporation with respect to future
events and financial performance. These forward looking statements are subject
to certain risks and uncertainties, including those identified below which could
cause actual results to differ materially from historical results or those
anticipated. Forward-looking terminology can be identified by the use of terms
such as "may, "will," "expect," "anticipate," "estimate," "should" or "continue"
or the negative thereof or other variations thereon or comparable terminology.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. Onyx Acceptance Corporation
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the level of demand for auto
contracts, which is affected by such external factors as the level of interest
rates, the strength of the various segments of the economy, debt burden held by
the consumer and demographics of the lending markets of Onyx Acceptance
Corporation; (2) continued dealer relationships; (3) fluctuations between
consumer interest rates and the cost of funds; (4) federal and state regulation
of auto lending operations; (5) competition within the consumer lending
industry; (6) the availability and cost of securitization transactions and (7)
the availability and cost of warehouse and residual financing.
RISK FACTORS
Except for the historical information contained herein, the matters
discussed in this Quarterly Report are forward-looking statements which involve
risk and uncertainties, including but not limited to economic, competitive and
governmental factors affecting the Company's operations and other factors
discussed in the Company's periodic filings with the Securities and Exchange
Commission.
17
<PAGE> 18
Liquidity. The Company requires substantial cash to implement its business
strategy, including cash to: (i) acquire Contracts; (ii) pay dealer
participation; (iii) pay securitization costs ; (iv) settle hedge transactions;
(v) satisfy working capital requirements ; and (vi) pay interest expense. These
cash requirements increase as the Company's volume of purchases or originations
of Contracts increases. A substantial portion of the Company's revenues in any
period is represented by gain on sale of Contracts in such period but the cash
underlying such revenues is received over the life of the Contracts. In
addition, cash paid by the Company for dealer participation is not recovered at
the time of securitizations, but over the life of the Contract. The Company has
operated and expects to continue to operate on a negative cash flow basis as
long as the volume of Contract purchases continues to grow. The Company has
historically funded these negative operating cash flows principally through
borrowings from financial institutions, sales of equity securities and sales of
subordinated notes. No assurance can be given, however, that the Company will
have access to the capital markets in the future for equity or debt issuances or
for securitizations, or that financing through borrowings or other means will be
available on acceptable terms to satisfy the Company's cash requirements to
implement its business strategy.
The Company's inability to access the capital markets or obtain acceptable
financing could have a material adverse effect on the Company's results of
operations and financial condition.
Dependence on Warehouse and Residual Financing. The Company depends on
warehousing facilities with financial institutions to finance the purchase or
origination of Contracts pending securitization. The Company's wholly owned
special purpose subsidiary, Onyx Acceptance Financial Corporation ("OAFC"), is
party to a $325 million auto loan warehouse program (the "CP Facility") with
Triple-A One Funding Corporation ("Triple-A"). Triple-A is a commercial paper
asset-backed conduit lender sponsored by MBIA Insurance Corporation ("MBIA").
This facility provides funds to purchase Contracts and was increased during the
third quarter from $245 million to $325 million. The advance rate to OAFC is 98%
of adjusted eligible principal balance of each Contract. This loan term was
extended in the third quarter and will expire in September 2001.
The Company, through another finance subsidiary, Onyx Acceptance Funding
Corporation ("Fundco") holds a $100 million line with Merrill Lynch Mortgage
Capital, Inc. ("MLMCI") (the "Merrill Line") which provides funding for the
purchase and origination of Contracts. The Merrill Line provides an advance rate
of approximately 95% of the principal balance of the Contracts that are used for
collateral. The interest rate is based on LIBOR and has a term of one year and
matures in February 1999.
The Company has a $45 million residual facility with State Street Bank,
BankBoston, and The Travelers Insurance Company (the "Residual Facility") under
which the Company may (subject to borrowing base availability) borrow for
working capital purposes. Under the term of the Residual Facility, the available
borrowings are determined by a collateral based formula of a percentage of the
value of the excess cash flow to be received from certain securitizations and
trust receivables. The Residual Facility converts from revolving loans to
fully-amortizing two-year term loans in June 1999 or earlier upon the occurrence
of certain "credit triggers".
Fundco has two $50 million residual facilities with MLMCI and SBRC respectively,
(the "Residual Lines "). The Residual Lines are used by the Company to finance
operating requirements. The amounts available for borrowing under each line are
determined using a collateral based formula of a percentage of the value of
excess cash flow to be received from certain securitizations, and, with respect
to the MLMCI facility, a percentage of the amount of the Merrill Line
outstanding on a quarterly basis. The interest rates are based on LIBOR and the
Residual Lines have a term of one year. The facility provided by MLMCI matures
in February 1999; the facility provided by SBRC matures in September 1999.
The Company's business strategy will require continued availability of financing
during the warehousing period. There can be no assurance that such financing
will be available to the Company on favorable terms. The inability of the
Company to arrange new warehousing credit facilities or to extend its existing
credit facilities when they expire would have a material adverse effect on the
Company's results of operations and financial condition.
The continued availability of the CP Facility is subject to, among other things,
maintenance of a target net yield, and compliance by the Company with certain
financial covenants contained in the sale and servicing agreement between the
Company, as seller, and the Company's wholly owned special purpose finance
subsidiary, OAFC as purchaser of contracts held for sale. These covenants
include a minimum ratio of net worth to total assets, minimum net yield, ratio
of RISA plus trust receivables to tangible net worth, minimum cash on hand and
minimum earnings coverage. All covenants are tested quarterly except for minimum
net yield and net cash on hand, which are tested monthly.
18
<PAGE> 19
The continued availability of the Residual Facility is subject to, among other
things, substantially similar financial covenants to those of the CP Facility
except that leverage is measured as the ratio of net worth plus subordinated
debt to total liabilities plus net worth, and is tested at quarter end.
Additionally, the Company is subject under the documentation governing the
Residual Facility, to minimum net worth and subordinated debt plus net worth
tests, a limitation on quarterly operating losses and covenants restricting
delinquencies, losses, prepayments and net yields of Contracts included in a
securitization. The continued availability of the Merrill Line and the Residual
Lines are subject to certain financial covenants, which are primarily dependent
upon the net worth of the Company.
Dependence on Securitization Program. The Company relies significantly upon
securitizations to generate cash proceeds for repayment of its credit facilities
and to create availability to purchase additional Contracts. Further, gain on
sale of Contracts generated by the Company's securitizations represents a
significant portion of the Company's revenues. Several factors affect the
Company's ability to complete securitizations of its Contracts, including
conditions in the securities markets generally, conditions in the asset-backed
securities market specifically, the credit quality of the Company's portfolio of
Contracts and the Company's ability to obtain credit enhancement. If the Company
were unable to profitably securitize a sufficient number of its Contracts in a
particular financial reporting period, then the Company's revenues for such
period would decline and could result in lower income or a loss for such period.
In addition, unanticipated delays in closing a securitization could also
increase the Company's interest rate risk by increasing the warehousing period
for its Contracts.
Dependence on Credit Enhancement. Since inception, through September 30, 1998
each of the Company's securitizations has utilized credit enhancement in the
form of a financial guarantee insurance policy issued by MBIA, or a predecessor,
in order to achieve "AAA/Aaa" ratings. This form of credit enhancement reduces
the costs of the securitizations relative to alternative forms of credit
enhancements currently available to the Company. MBIA is not required to insure
future securitizations nor is the Company restricted in its ability to obtain
credit enhancement from providers other than MBIA or to use other forms of
credit enhancement. There can be no assurance that the Company will be able to
obtain credit enhancement in any form from MBIA or any other provider of credit
enhancement on acceptable terms or that future securitizations will be similarly
rated. The Company also relies on MBIA's financial guarantee insurance policy to
reduce its borrowing cost under the "A-1/P-1" rated CP Facility. A downgrading
of MBIA's credit rating or MBIA's withdrawal of credit enhancement could result
in higher interest costs for future Company securitizations and financing costs
during the warehousing period. Such events could have a material adverse effect
on the Company's results of operations and financial condition.
Interest Rate Risk. The Company's profitability is largely determined by the
difference, or "spread," between the effective rate of interest received on the
Contracts acquired by the Company and the interest rates payable under its
credit facilities during the warehousing period or for securities issued in
securitizations. Several factors affect the Company's ability to manage interest
rate risk. First, the Contracts are purchased at fixed interest rates, while
amounts borrowed under the Company's credit facilities bear interest at variable
rates that are subject to frequent adjustment to reflect prevailing rates for
short-term borrowings. The Company's policy is to increase the buy rates it
posts with dealerships or to increase rates it uses to solicit to consumers for
Contracts in response to increases in its cost of funds during the warehousing
period. However, there is generally a time lag before such increased borrowing
costs can be offset by increases in the buy rates for Contracts and, in certain
instances, the rates charged by its competitors may limit the Company's ability
to pass through its increased costs of warehousing financing. Second, the spread
can be adversely affected after a Contract is purchased and while it is held
during the warehousing period by increases in the prevailing rates in the
commercial paper markets. The CP Facility permits the Company to select
maturities of up to 270 days for commercial paper issued under the CP Facility.
Third, the interest rate demanded by investors in securitizations is a function
of prevailing market rates for comparable transactions and the general interest
rate environment. Because the Contracts purchased by the Company have fixed
rates, the Company bears the risk of spreads narrowing because of interest-rate
increases during the period from the date the Contracts are purchased until the
closing of its securitization of such Contracts. The Company employs a hedging
strategy that is intended to minimize this risk which historically has involved
the execution of forward interest rate swaps or the use of a pre-funding
structure for its securitizations. There can be no assurance, however, that this
strategy will consistently or completely offset adverse interest-rate movements
during the warehousing period or that the Company will not sustain losses on
hedging transactions. The Company's hedging strategy requires estimates by
management of monthly Contract acquisition volume and timing of its
securitizations. If such estimates are materially inaccurate, then the Company's
gains on sales of Contracts and results of operations could be adversely
affected. In addition, to the extent that the interest rates charged on
Contracts sold in a securitization with a pre-funding structure decline below
the rates prevailing at the time that the securitization closed the Company has
some interest rate exposure to falling interest rates during the pre-funding
period. Such a rate decline would reduce the interest rate spread because the
interest rate on the
19
<PAGE> 20
securities would remain fixed. This, in time, would negatively impact the gains
on sale of Contracts and the Company's results of operations.
Default and Prepayment Risk. The Company's results of operations, financial
condition and liquidity depend, to a material extent, on the performance of
Contracts purchased and warehoused by the Company. A portion of the Contracts
acquired by the Company may default or prepay during the warehousing period. The
Company bears the risk of losses resulting from payment defaults during the
warehousing period. In the event of payment default, the collateral value of the
Financed Vehicle may not cover the outstanding Contract balance and costs of
recovery. The Company maintains an allowance for credit losses on Contracts held
during the warehousing period, which reflects management's estimates of
anticipated credit losses during such period. If the allowance is inadequate,
then the Company would recognize as an expense the losses in excess of such
allowance and results of operations could be adversely affected. In addition,
under the terms of the CP Facility, the Company will not be able to borrow
against defaulted Contracts.
Prepayment or default of Contracts in the servicing portfolio can also adversely
affect the Company's servicing income. The Company's contractual servicing
revenue is based on a percentage of the outstanding balance of such Contracts.
Thus, if Contracts are prepaid or charged-off, then the Company's servicing
revenue will decline to the extent of such prepaid or charged-off Contracts.
The gain on sale of Contracts recognized by the Company in each securitization
and the value of the RISA in each transaction reflects management's estimate of
future credit losses and prepayments for the Contracts included in that
securitization. If actual rates of credit loss or prepayments, or both, on such
Contracts exceeded those estimated, the value of the RISA would be impaired. The
Company periodically reviews its credit loss and prepayment assumptions relative
to the performance of the securitized Contracts and to market conditions. If
necessary, the Company would adjust the value of the RISA by making a charge to
servicing fee income. However, the Company's results of operations and liquidity
could be adversely affected if credit loss or prepayment levels on securitized
Contracts substantially exceeded anticipated levels. Further, any write down of
RISA would reduce the amount available to the Company under the Residual
Facility or Residual Lines, possibly requiring the Company to pay down amounts
outstanding under the Residual Facility or Residual Lines or provide additional
collateral to cure a potential borrowing base deficiency.
Loss of Servicing Rights and Suspension of Future Servicing Cash Flows. The
Company is entitled to receive servicing income only while it acts as servicer
for Contracts during the warehousing period and under the servicing agreement
for securitized Contracts. Any loss of the servicing rights would have a
material adverse effect on the Company's operations and financial condition.
The Company's right to act as servicer can be terminated by MBIA, as program
manager, on Contracts funded by the CP Facility, upon the occurrence of certain
servicer termination events (as defined in the sale and servicing agreement).
Servicer termination events include material misrepresentations or material
breaches of warranties or covenants by Onyx or OAFC, including the financial
covenants of Onyx contained in the sale and servicing agreement.
The Company's loss of the servicing rights under the Company's sale and
servicing agreements, the sale and servicing agreements under the owner trusts
or the pooling and servicing under the grantor trusts, or the occurrence of a
trigger event that would block release of future servicing cash flows from the
trusts' spread accounts would have a material adverse effect on the Company's
results of operations and financial condition.
Variable Quarterly Earnings. The Company's revenues and losses have fluctuated
in the past and are expected to fluctuate in the future principally as a result
of the timing and size of its securitizations. Several factors affecting the
Company's business can cause significant variations in its quarterly results of
operations. In particular, variations in the volume of the Company's Contract
acquisitions, the interest rate spreads between the Company's cost of funds and
the average interest rate of purchased Contracts, the effectiveness of the
Company's hedging strategies, the certificate rate for securitizations, and the
timing and size of securitizations, can result in significant increases or
decreases in the Company's revenues from quarter to quarter. Any significant
decrease in the Company's quarterly revenues could have a material adverse
effect on the Company's results of operations and its financial condition.
Dependence on Key Personnel. The Company's future operating results depend in
significant part upon the continued service of its key senior management
personnel, none of whom is bound by an employment agreement. The Company's
future operating results also depend in part upon its ability to attract and
retain qualified management, technical, and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position or
20
<PAGE> 21
the Company's inability to attract and retain skilled employees, as needed,
could materially adversely affect the Company's results of operations and
financial condition. The Company presently maintains a key man life insurance
policy on John W. Hall in the amount of $3 million.
Competition. Competition in the field of financing retail motor vehicles sales
is intense. The automobile finance market is highly fragmented and historically
has been serviced by a variety of financial entities including the captive
finance affiliates of major automotive manufacturers, banks, savings
associations, independent finance companies, credit unions and leasing
companies. Several of these competitors have greater financial resources than
the Company and may have a significantly lower cost of funds. Many of these
competitors also have long-standing relationships with automobile dealerships
and offer dealerships or their customers other forms of financing or services
not provided by the Company. Furthermore, during the past two years, a number of
automobile finance companies have completed public offerings of common stock,
the proceeds from which are to be used, at least in part, to fund expansion and
finance increased purchases of Contracts. However, in 1996 and 1997, many of
these auto finance companies experienced significant liquidity and performance
challenges due to the intense competition. The Company's ability to compete
successfully depends largely upon its relationships with dealerships and the
willingness of dealerships to offer those Contracts that meet the Company's
underwriting criteria to the Company for purchase. There can be no assurance
that the Company will be able to continue to compete successfully in the markets
it serves.
The Effect of Adverse Economic Conditions. The Company is a motor vehicle
consumer auto finance company whose activities are dependent upon the sale of
motor vehicles. The ability of the Company to continue to acquire Contracts in
the markets in which it operates and to expand into additional markets is
dependent upon the overall level of sales of new and used motor vehicles in
those markets. A prolonged downturn in the sale of new and used motor vehicles,
whether nationwide or in the California markets, could have a material adverse
impact upon the Company, the results of its operations and its ability to
implement its business strategy.
The automobile industry generally is sensitive to adverse economic conditions
both nationwide and in California. Periods of rising interest rates reduce
economic activity, and higher rates of unemployment generally result in a
reduction in the rate of sales of motor vehicles and higher default rates on
motor vehicle loans. There can be no assurance that such economic conditions
will not occur, or that such conditions will not result in such severe
reductions in the Company's revenues or cash flows available to the Company to
permit the Company to remain current on its credit facilities.
Regulation. The Company's business is subject to numerous federal and state
consumer protection laws and regulations, which, among other things: (i) require
the Company to obtain and maintain certain licenses and qualifications; (ii)
limit the interest rates, fees and other charges the Company is allowed to
charge; (iii) limit or prescribe certain other terms of the Company's Contracts;
(iv) require specific disclosures; and (v) define the Company's rights to
repossess and sell collateral. The Company believes it is in compliance in all
material respects with all such laws and regulations, and that such laws and
regulations have had no material adverse effect on the Company's ability to
operate its business. However, the Company's failure to comply with applicable
laws and regulations, changes in existing laws or regulations, or in the
interpretation thereof, or the promulgation of any additional laws or
regulations could have a material adverse effect on the Company's results of
operations and financial condition.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
----------- -------------
<S> <C>
*3.4 Certificate of Incorporation of the Company.
*3.5 Bylaws of the Company.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
</TABLE>
- ------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-680)
(b) Reports on Form 8-K
None.
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ONYX ACCEPTANCE CORPORATION
By: /s/ JOHN W. HALL
-------------------------------
John W. Hall
President and Principal
Executive Officer
Date: March 30, 1999
By: /s/ DON P. DUFFY
-------------------------------
Don P. Duffy
Executive Vice President and
Principal Financial Officer
Date: March 30, 1999
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C>
21.1 Subsidiaries of the Registrant..........................................................................
27.1 Financial Data Schedule.................................................................................
</TABLE>
24
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Onyx Acceptance Financial Corporation, a Delaware corporation
ABNI, Inc., a Delaware corporation
Onyx Acceptance Funding Corporation, a Delaware corporation
C. U. Acceptance Corporation, a Delaware corporation
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,771,881
<SECURITIES> 0
<RECEIVABLES> 125,345,160
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 238,623,514
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 61,687
<OTHER-SE> 41,278,648
<TOTAL-LIABILITY-AND-EQUITY> 238,623,514
<SALES> 0
<TOTAL-REVENUES> 16,471,934
<CGS> 0
<TOTAL-COSTS> 13,476,167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 597,957
<INTEREST-EXPENSE> 4,213,990
<INCOME-PRETAX> 2,995,767
<INCOME-TAX> 1,243,243
<INCOME-CONTINUING> 1,752,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,752,524
<EPS-PRIMARY> .28<F1>
<EPS-DILUTED> .27
<FN>
<F1> FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
