<PAGE> 1
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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 JUNE 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)
<TABLE>
<S> <C>
DELAWARE 33-0577635
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
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 July 31, 1998, there were 6,159,104 shares of registrant's Common
Stock, par value $.01 per share outstanding.
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<PAGE> 2
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 six months ended June 30, 1998 filed with the Securities
and Exchange Commission on August 14, 1998.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Restated Condensed Consolidated Statements of Financial Condition at
June 30, 1998 and December 31, 1997.......................................................... 3
Restated Condensed Consolidated Statements of Income for the three months and six months
ended June 30, 1998 and June 30, 1997......................................................... 4
Restated Consolidated Statements of Cash Flows for the six months ended
June 30, 1998, and June 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............ 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 17
Item 5. Other Information................................................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................................................. 21
SIGNATURES................................................................................................. 26
EXHIBIT INDEX.............................................................................................. 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 657,869 $ 991,010
Trust receivables 6,586,806 7,377,801
Contracts held for sale (Net of allowance) 101,078,637 64,342,309
Retained interest in securitized assets 82,859,389 64,357,850
Other assets 5,963,802 4,767,490
------------- -------------
Total assets $197,146,503 $141,836,460
============= =============
LIABILITIES
Accounts payable $ 5,402,629 $ 6,564,446
Debt 143,388,095 91,759,281
Other liabilities 8,776,989 5,795,323
------------- -------------
Total liabilities 157,567,713 104,119,050
EQUITY
Common stock
Par value $.01 per share; authorized 15,000,000 shares;
issued and outstanding 6,157,828 as of
June 30, 1998 and issued and outstanding
6,017,635 as of December 31, 1997 61,578 60,176
Paid in capital 37,832,718 37,810,158
Retained earnings (deficit) 1,684,494 (152,924)
------------- -------------
Total equity 39,578,790 37,717,410
------------- -------------
Total liabilities and equity $197,146,503 $141,836,460
============= =============
</TABLE>
See the accompanying notes to the restated condensed
consolidated financial statements.
3
<PAGE> 4
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Interest income ........................... $5,221,533 $3,265,712 $9,702,083 $5,147,704
Interest expense .......................... 3,616,724 1,830,284 6,437,710 2,885,192
----------- ----------- ----------- -----------
Net interest income ....................... 1,604,809 1,435,428 3,264,373 2,262,512
Gain on sale of contracts ................. 8,083,093 3,553,512 16,234,203 6,707,231
Service fee income ........................ 4,039,365 4,114,006 6,008,006 6,655,419
Total Revenues ............................ 13,727,267 9,102,946 25,506,582 15,625,162
EXPENSES:
Provision for credit losses ........... 324,819 211,324 631,807 504,594
Salaries and benefits ................. 6,334,576 4,327,419 12,275,745 7,744,744
Depreciation .......................... 499,356 258,819 926,338 460,802
Occupancy ............................. 442,412 333,183 814,853 657,274
General and administrative expenses ... 4,254,211 2,461,962 7,716,955 4,399,714
----------- ----------- ----------- -----------
Total Expenses ............................ 11,855,374 7,592,707 22,365,698 13,767,128
----------- ----------- ----------- -----------
Net Income before Taxes ................... 1,871,893 1,510,239 3,140,884 1,858,034
Income Taxes .......................... 776,835 650,006 1,303,466 799,696
----------- ----------- ----------- -----------
Net Income after Taxes .................... $1,095,058 $ 860,233 $1,837,418 $1,058,338
=========== =========== =========== ===========
Net Income per share - Basic .............. $ 0.18 $ 0.14 $ 0.30 $ 0.18
Net Income per share - Diluted ............ $ 0.17 $ 0.13 $ 0.28 $ 0.17
Basic Shares outstanding .................. 6,092,400 6,005,444 6,058,610 5,983,809
Diluted Shares outstanding ................ 6,533,804 6,374,934 6,477,178 6,389,423
</TABLE>
See the accompanying notes to the restated condensed
consolidated financial statements.
4
<PAGE> 5
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash used in operating activities $(50,305,625) $(56,556,748)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,582,662) (1,225,724)
------------- -------------
Cash used in investing activities (1,582,662) (1,225,724)
FINANCING ACTIVITIES:
Proceeds from exercise of options/warrants 23,960 56,112
Payments on capital lease obligations (271,939) (201,035)
Proceeds from drawdown on excess servicing line of credit 4,972,101 13,500,000
Payments to pay down excess service line (21,650,000) 0
Paydown of warehouse line related to securitization and sale (362,006,000) (198,500,000)
Proceeds from warehouse line 420,654,572 243,913,253
Proceeds from subordinated debt 10,000,000 0
Payments on other loans (167,548) (167,548)
------------- -------------
Net cash provided by financing activities 51,555,146 58,600,782
------------- -------------
Increase (decrease) in cash and cash equivalents (333,141) 818,310
Cash and cash equivalents at beginning of period 991,010 603,028
------------- -------------
Cash and cash equivalents at end of period $ 657,869 $ 1,421,338
============= =============
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 6,241,210 $ 2,751,361
Capital lease additions $ 97,628 $ 509,808
</TABLE>
See the accompanying notes to the restated condensed
consolidated financial statements.
5
<PAGE> 6
ONYX ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited 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 six months ended June 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 quarter ended March 31, 1998.
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.
The restatement resulted in the following changes to prior period financial
statements:
6
<PAGE> 7
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) (In thousands)
---------------------------------------------------------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
TOTAL REVENUE:
<S> <C> <C> <C> <C>
Previous $ 14,171 $ 8,711 $ 26,096 $ 15,934
As Restated $ 13,727 $ 9,103 $ 25,507 $ 15,625
NET INCOME:
Previous $ 1,354 $ 653 $ 2,182 $ 1,266
As Restated $ 1,095 $ 860 $ 1,837 $ 1,058
NET INCOME
PER SHARE:
BASIC:
Previous $ 0.22 $ 0.11 $ 0.36 $ 0.21
As Restated $ 0.18 $ 0.14 $ 0.30 $ 0.18
DILUTED:
Previous $ 0.21 $ 0.10 $ 0.34 $ 0.20
As Restated $ 0.17 $ 0.13 $ 0.28 $ 0.17
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
TRUST
RECEIVABLES:
Previous $31,756 $27,629
As Restated $6,587 $7,378
RISA:
Previous $63,011 $48,839
As Restated $82,859 $64,358
SHAREHOLDERS'
EQUITY:
Previous $42,762 $40,555
As Restated $39,579 $37,717
</TABLE>
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.
7
<PAGE> 8
NOTE 3 - CONTRACTS HELD FOR SALE
Contracts held for sale consisted of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Contracts held for sale ........ $108,531,938 $ 71,216,278
Less unearned interest ......... 8,587,086 7,835,794
------------- -------------
99,944,852 63,380,484
Allowance for credit losses .... (499,724) (316,902)
------------- -------------
99,445,128 63,063,582
Dealer participation ........... 1,633,509 1,278,727
------------- -------------
Total .......................... $101,078,637 $ 64,342,309
============= =============
</TABLE>
NOTE 4 - RETAINED INTEREST IN SECURITIZED ASSETS
SFAS 125 requires that following a transfer of financial assets, an entity
is to recognize the assets it controls and the liabilities it has incurred, and
derecognize assets for which control has been surrendered and liabilities that
have been extinguished.
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. 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 is reported as a separate component of shareholders'
equity as an unrealized gain or loss, net of deferred taxes. As of June 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. These assumptions are an ABS
prepayment speed of 1.75%, annualized net credit loss assumption 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>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Beginning balance ...... $64,357,850 $33,530,020
Additions .............. 33,639,129 41,603,001
Amortization ........... (15,137,590) (10,775,171)
------------ ------------
Ending balance.......... $82,859,389 $64,357,850
============ ============
</TABLE>
8
<PAGE> 9
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 future undiscounted retained
interest earnings to be received from securitizations. Estimated future
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 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>
JUNE 30, 1998 DECEMBER 31, 1997
------------ --------------
<S> <C> <C>
Estimated net undiscounted RISA earnings ....................... $130,225,596 $99,613,524
Off balance sheet allowance for losses ......................... 35,473,164 25,546,412
Discount to present value ...................................... 11,893,043 9,709,262
------------ ------------
Retained interest in securitized assets ........................ $82,859,389 $64,357,850
============ ============
Outstanding balance of Contracts sold through securitizations .. $896,037,921 $693,896,100
============ ============
</TABLE>
Management believes that the off balance sheet allowance for losses is
currently adequate to absorb potential losses in the sold portfolio.
NOTE 5 - NET INCOME PER SHARE
The following is an illustration of the dilutive effect of the Company's
potential common stock on net income per share ("EPS")
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income .......................................... $1,095,058 $ 860,233 $1,837,418 $1,058,338
========== ========== ========== ==========
Weighted average shares outstanding ................. 6,092,400 6,005,444 6,058,610 5,983,809
Net effect of dilutive stock options/warrants ....... 441,404 369,490 418,568 405,614
Diluted weighted average shares outstanding ......... 6,533,804 6,374,934 6,477,178 6,389,423
Net income per share:
Basic ............................................... $ 0.18 $ 0.14 $ 0.30 $ 0.18
========== ========== ========== ==========
Diluted ............................................. $ 0.17 $ 0.13 $ 0.28 $ 0.17
========== ========== ========== ==========
</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
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments as fair value.
9
<PAGE> 10
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 OPERATION
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.
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
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 is the difference between the rate earned on Contracts held
on balance sheet and the interest costs associated with the Company's
borrowings. Net interest income totaled $1.6 million for the three months ended
June 30, 1998 compared to $1.4 million for the same period in 1997. For the six
months ended June 30, 1998, net interest income was $3.3 million as compared to
$2.3 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. To protect against changes in interest rates, the Company hedges
Contracts prior to their securitization with forward interest rate swap
agreements. Gains or losses on these forward interest rate swap agreements are
deferred and are included as part of the basis of the underlying Contracts and
recognized when the Contracts are securitized.
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 $324,819 for the quarter ended June 30, 1998 compared to $211,324 for
the same period in 1997. Provision for credit losses consists of net credit
losses incurred during the period plus
10
<PAGE> 11
future provision for losses reserved against the net changes in Contracts held
for sale during the period. Net credit losses accounted for $251,311 during the
second quarter of 1998 compared to $121,747 in the second quarter of 1997 due to
an increase in the average Contracts held for sale in the period. Future
provisions totaled $73,508 and $89,577 for the second quarter of 1998 and 1997
respectively. Contracts held for sale increased by $14.7 million for the second
quarter of 1998 vs. $17.9 million for the second quarter of 1997. Provision for
credit losses for the six month period ended June 30, 1998 were $631,807
compared to $504,594 for the period ended June 30, 1997. At June 30, 1998,
Contracts held for sale were $101.1 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 $8.1 million for the
three months ended June 30, 1998 compared to $3.6 million for the same period of
1997. The increase in the gain on sale is primarily the result of wider interest
rate spreads and an increase in Contracts sold. For the six months ended June
30, 1998, the Company recorded a gain on sale of $16.2 million compared to a
gain on sale of $6.7 million for the same period in 1997. Contracts sold during
the second quarter of 1998 totaled $208.8 million compared to $121.7 million
during the same period of 1997. Gross 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.
SERVICING INCOME
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 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 decreased to $4.0 million during the second quarter of 1998
from $4.1 million during the same period in 1997. Servicing fee income for the
six month period ended June 30, 1998 was $6.0 million compared to $6.7 million
for the like period in 1997. Higher contractual service fees due to the growth
of the servicing portfolio were offset by a reduction in the accrual for
servicing advances on delinquent Contracts and by an acceleration of the
amortization of the RISA.
OPERATING EXPENSES
Total operating expenses were $11.9 million for the three months ended
June 30, 1998 compared to $7.6 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
$1.0 billion at June 30, 1998 from $564.9 million at June 30, 1997. Total
operating expenses for the six month period ending June 30, 1998 were $22.4
million compared to $13.8 million for the same period in 1997.
The Company incurred salary and benefit expenses of $6.3 million during
the second quarter of 1998 compared with $4.3 million for the second quarter of
1997, an increase of 46.5%. 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
292 at June 30, 1997 to 449 at June 30, 1998. Salary and benefit expenses for
the six month period ended June 30, 1998 were $12.3 million compared to $7.7
million for the six months ending June 30, 1997.
11
<PAGE> 12
Depreciation expenses increased to $0.5 million for the three months ended June
30, 1998 compared to $0.3 million 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 $0.4 million for the three months
ending June 30, 1998 from $0.3 million in the like period in 1997. General and
administrative expenses increased to $4.3 million in the second quarter of 1998
from $2.5 million in the second 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
1998 and 1997 were 41.5% and 43.0% respectively.
FINANCIAL CONDITION
CONTRACTS HELD FOR SALE
Contracts held for sale totaled $101.1 million at June 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 $381.8 million
during the six months of 1998. The Company plans to continue to securitize
Contracts on a regular basis.
The following table illustrates the changes in the Company's Contract
acquisition volume, total revenue, securitization activity and servicing
portfolio during the past five fiscal quarters:
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR 31, JUNE 30,
1997 1997 1997 1998 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Contracts purchased/originated during period .... $ 145,548 $ 152,334 $ 182,310 $ 218,204 $ 229,600
Average monthly volume during period ............ 48,516 50,778 60,770 72,735 76,553
Gain on sale of Contracts ....................... 3,554 6,073 6,806 8,151 8,083
Contracts securitized during period ............. 121,676 149,600 166,000 173,000 208,759
Contracts sold during period .................... 0 0 0 15,000 0
Servicing portfolio at period end ............... 564,922 649,563 757,277 884,692 1,009,246
</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, 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 second quarter of 1998
the Company continued to realize some of the benefits of the centralization and
training of the collection department. At June 30, 1998, delinquencies for the
servicing portfolio represented 1.49% of the amount of Contracts in the
Company's servicing portfolio or $15.1
12
<PAGE> 13
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 1.78% during the quarter compared to 2.04% for the
second quarter of 1997.
DELINQUENCY EXPERIENCE OF SERVICING PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------------------------- ---------------------------
AMOUNT NO. AMOUNT NO.
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Servicing portfolio .................. $1,009,246 98,918 $ 757,277 73,502
Delinquencies(1)(2)
31-59 days .............. $ 9,041 921 $ 11,902 1,211
60-89 days .............. $ 2,473 244 $ 3,370 346
90+ days ................ $ 3,552 332 $ 3,743 316
---------- ---------- ---------- ----------
Total ................................ $ 15,066 1,497 $ 19,015 1,873
========== ========== ========== ==========
Total delinquencies as a percent of
Servicing portfolio .................. 1.49% 1.51% 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.
LOAN LOSS EXPERIENCE OF SERVICING PORTFOLIO
<TABLE>
<CAPTION>
FOR THE SIX MONTH FOR THE THREE MONTHS ENDED
PERIOD ENDED JUNE 30, JUNE 30,
------------------------------- --------------------------------
1998 1997 1998 1997
------------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Period end Contract outstanding ...................... $ 1,009,246 $ 564,922 $ 1,009,246 $ 564,922
Average servicing portfolio(1) ....................... $ 875,657 $ 475,141 $ 935,391 $ 517,134
Number of gross charge-offs .......................... 1,756 863 938 496
Gross charge-offs .................................... $ 9,374.8 $ 5,308.8 $ 4,917.2 $ 2,999.6
Net charge-offs ...................................... $ 7,917.2 $ 4,611.0 $ 4,155.4 $ 2,631.4
Annualized net charge-offs as a percent of average
Servicing portfolio .................................. 1.81% 1.94% 1.78% 2.04%
</TABLE>
- ------------
(1) Average is based on daily balances.
(2) Net charge-offs are gross charge-offs minus recoveries of Contracts
previously charged off.
THE FOLLOWING TABLE ILLUSTRATES THE MONTHLY PERFORMANCE OF EACH OF THE
SECURITIZED POOLS OUTSTANDING FOR THE PERIOD FROM THE DATE OF SECURITIZATION
THROUGH JUNE 30, 1998:
13
<PAGE> 14
<TABLE>
<CAPTION>
MONTH 95-1 96-1 96-2 96-3 96-4
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.01% 0.00% 0.00%
2 0.01% 0.03% 0.07% 0.02% 0.02%
3 0.02% 0.05% 0.20% 0.07% 0.05%
4 0.02% 0.11% 0.33% 0.16% 0.14%
5 0.05% 0.23% 0.46% 0.43% 0.24%
6 0.06% 0.40% 0.78% 0.54% 0.38%
7 0.08% 0.69% 0.98% 0.74% 0.53%
8 0.10% 0.82% 1.15% 0.97% 0.81%
9 0.21% 0.93% 1.39% 1.13% 0.98%
10 0.24% 1.15% 1.52% 1.32% 1.18%
11 0.29% 1.25% 1.69% 1.47% 1.43%
12 0.41% 1.47% 1.94% 1.60% 1.63%
13 0.55% 1.65% 2.08% 1.77% 1.73%
14 0.70% 1.79% 2.34% 1.94% 1.87%
15 0.83% 2.02% 2.52% 2.09% 2.07%
16 0.98% 2.25% 2.76% 2.27% 2.23%
17 1.06% 2.43% 2.89% 2.42% 2.33%
18 1.11% 2.59% 3.10% 2.57% 2.49%
19 1.27% 2.77% 3.14% 2.70% 2.62%
20 1.37% 2.93% 3.30% 2.83%
21 1.41% 3.06% 3.47% 2.94%
22 1.54% 3.15% 3.60% 3.00%
23 1.59% 3.21% 3.70%
24 1.69% 3.28% 3.81%
25 1.76% 3.40% 3.93%
26 1.83% 3.43% 4.06%
27 1.86% 3.55%
28 1.97% 3.60%
29 2.01% 3.73%
30 2.08% 3.75%
31 2.13%
32 2.16%
33 2.26%
34 2.27%
35 2.28%
36 2.28%
37 2.30%
38 2.28%
39 2.28%
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
MONTH 97-1 97-2 97-3 97-4 98-1 98-A
----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.00% 0.00% 0.00% 0.00% 0.01%
3 0.03% 0.02% 0.02% 0.01% 0.02%
4 0.06% 0.07% 0.09% 0.04% 0.08%
5 0.13% 0.22% 0.13% 0.11%
6 0.26% 0.32% 0.24% 0.20%
7 0.37% 0.59% 0.36% 0.28%
8 0.52% 0.80% 0.47%
9 0.60% 0.91% 0.62%
10 0.76% 1.07% 0.73%
11 0.92% 1.26%
12 1.02% 1.42%
13 1.13% 1.58%
14 1.23%
15 1.40%
16 1.56%
</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, including
cash held in spread accounts; (iv) settlements of hedging transactions; (v)
operating expenses; and (vi) interest expense. The capital resources available
to the Company include: (i) net interest income during the warehousing period;
(ii) contractual servicing fees; (iii) future servicing cash flows; (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.
Cash used in operating activities was $50.3 million for the six months
ended June 30, 1998, compared to $56.6 million used in the six months ended June
30, 1997. Increases in the proceeds from the sale of finance receivables
contributed to the reduction in cash used in operating activities. Cash used in
investing activities was $1.6 million for the quarter ended June 30, 1998
compared to $1.2 million for the quarter ended June 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 $51.5 million
for the quarter ended June 30, 1998, compared to $58.6 million for the quarter
ended June 30, 1997. Payments to reduce the balance in the excess servicing line
contributed to the decrease in cash provided by financing activities.
Warehouse Lines
15
<PAGE> 16
The Company's wholly owned special purpose subsidiary, Onyx Acceptance
Financial Corporation ("OAFC"), is party to a $245 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. The advance rate to OAFC was increased during the first quarter of
1998 from 95% to 98% of adjusted eligible principal balance of each Contract.
This loan expires in September 1998. It is the intent of management to extend
the term of the facility for an additional three years.
In the first quarter of 1998, the Company created a new finance
subsidiary, Onyx Acceptance Funding Corporation ("Fundco") through which two new
lending lines were developed, each with Merrill Lynch Mortgage Capital, Inc. A
$100 million line (the "Merrill Line") provides funding for the purchase and
origination of Contracts. It provides an advance rate of approximately 95% of
the principal balance of each 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.
Residual Facilities
The Company has a $45 million residual facility with State Street Bank
of Boston, BankBoston, and the Travelers Insurance Company (the "Residual
Facility") under which the Company may (subject to borrowing base availability)
borrow for working capital and expenditures. 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 if
earlier, upon the occurrence of certain "credit triggers".
Fundco has a $50 million facility line with Merrill Lynch Mortgage
Capital, Inc. (the "Residual Line"). The residual facility is used by the
Company to finance operating requirements. The amount available for borrowing is
determined using a collateral based formula of a percentage of the value of
excess cash flow to be received from certain securitizations and a percentage of
the amount of the Merrill Warehouse Line outstanding on a quarterly basis. The
interest rate is based on LIBOR and the facility has a term of one year and
matures in February 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 June, 1998, the Company consummated a securitization in the amount of
$208.8 million compared to $121.7 million in the second quarter of 1997. The
dollar weighted average investor rate for the second quarter 1998 securitization
was 5.87% and a net interest rate spread inclusive of all costs of 3.34% as
compared to a dollar weighted average investor rate 6.35% and a net interest
rate spread inclusive of all costs of 3.11% for the securitization completed in
the second quarter 1997. For the six month period ended June 30, 1998, the
Company securitized and sold a total of $396.8 million of retail installment
Contracts. Of this total, $381.8 million were securitized, while $15.0 million
were sold on a whole loan basis, with servicing retained. For the six months
ended June 30, 1998, the Company recorded a gain on sale of $16.2 million on
total sales and securitizations of $396.8 million as compared to a gain on sale
of $6.7 million with securitizations totaling $211.7 million for the first six
months of 1997.
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 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 August 5, 1998, the Company had executed forward interest rate swaps of
$220 million, which become effective September 11, 1998, which the Company
believes are adequate to cover its next securitization or loan sale.
16
<PAGE> 17
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
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure 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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 20, 1998
(the "Meeting"). At the Meeting, the stockholders were asked to vote on the
election of two directors, to approve an amendment to the Company's 1996 Stock
Option/Stock Issuance Plan (the "1996 Plan") and to ratify the appointment of
the Company's independent auditors.
1. Election of Directors
The stockholders approved the Company's director nominees, Mr. Thomas
C. Stickel and Mr. John W. Hall, to serve for a three year term
expiring at the Annual Meeting in the year 2001. The voting on the
nominations was as follows:
<TABLE>
<CAPTION>
Nominee: Votes For Votes Against Abstentions
--------
<S> <C> <C> <C>
Thomas C. Stickel 4,529,988 2,900 62,000
John W. Hall 4,529,988 2,900 62,000
</TABLE>
2. Amendment to the Company's 1996 Stock Option/Stock Issuance Plan The
stockholders approved the Company's amendment to the Company's 1996
Stock Option/Stock Issuance Plan.
<TABLE>
<CAPTION>
The voting went as follows: Votes For Votes Against Abstentions
<S> <C> <C> <C>
3,861,288 669,900 64,600
</TABLE>
3. Appointment of Independent Auditors The Company's proposal to ratify
the appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998 was
also approved by the stockholders.
<TABLE>
<CAPTION>
The voting went as follows: Votes For Votes Against Abstentions
<S> <C> <C> <C>
3,742,182 2,100 600
</TABLE>
Item 5. Other Information.
FORWARD LOOKING INFORMATION
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 can be identified by the use of forward-looking terminology such as
"may, "will," "expect," "anticipate," "estimate," "should" or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
matters set forth in this Form 10-Q/A constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
differ materially from those in such forward-looking statements.
17
<PAGE> 18
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 filing with the Securities and Exchange Commission.
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 and fund spread accounts; (iv)
settle hedge transactions; (v) satisfy working capital requirements and pay
operating expenses; 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 warehousing
facilities include a $245 million asset-backed commercial paper conduit program
(the "CP Facility"), of which MBIA is the program manager, and a $100 million
Libor based repurchase facility provided by Merrill Lynch Mortgage Capital Inc.
("Merrill Line"). The combined facilities allow the Company to finance up to 98%
of the purchase price of Contracts. The CP Facility expires in September 1998.
The management is in the process of extending the facility for an additional
three years. The Merrill Line has a term of one year and matures in February
1999. The Company currently has two revolving credit loans with institutional
lenders for working capital and expenditures for which the Company's warehouse
facilities are not otherwise available. The $45 million Revolving Facility,
unless extended, converts on June 11, 1999 into fully amortizing two-year term
loans maturing on June 29, 2000, and the $50 million Residual Line has a term of
one year and matures in February 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. These covenants include a minimum ratio
of tangible net worth to total liabilities plus tangible net worth, minimum
operating cash flow, minimum amount of Contracts serviced by the Company and
minimum cash on hand.
The continued availability of the Revolving 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
Revolving 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
Line are subject to certain financial covenants, which are primarily dependent
upon the net worth of the Company.
18
<PAGE> 19
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 June 30, 1998
each of the Company's securitizations has utilized credit enhancement in the
form of a financial guarantee insurance policy issued by MBIA 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 by
the Company on the Contracts acquired by the Company and the interest rates
payable under its credit facilities during the warehousing period or for
certificates 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 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 certificates 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
19
<PAGE> 20
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 Revolving Facility or Residual Line, possibly requiring the
Company to pay down amounts outstanding under the Revolving Facility or Residual
Line 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 pooling and
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 on
Contracts funded by the Facility as program manager, 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 or the pooling and servicing agreements or the occurrence
of a trigger event that would block release of future servicing cash flows from
the Grantor 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
20
<PAGE> 21
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 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 an
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
reduced economic activity or 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
----------- -------------
<S> <C>
*3.1 Omitted.
*3.2 Omitted.
*3.3 Omitted.
*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.
* Incorporated by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-680).
(b) Reports on Form 8-K
None.
</TABLE>
21
<PAGE> 22
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
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C>
21.1 Subsidiaries of the Registrant...............................
27.1 Financial Data Schedule......................................
</TABLE>
23
<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
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 657,869
<SECURITIES> 0
<RECEIVABLES> 101,078,637
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 197,146,503
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 61,578
<OTHER-SE> 39,517,215
<TOTAL-LIABILITY-AND-EQUITY> 197,146,503
<SALES> 0
<TOTAL-REVENUES> 5,221,533
<CGS> 0
<TOTAL-COSTS> 11,855,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 324,819
<INTEREST-EXPENSE> 3,616,724
<INCOME-PRETAX> 1,871,893
<INCOME-TAX> 776,835
<INCOME-CONTINUING> 1,095,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,095,058
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
