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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
Commission file number 000-21673
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AutoBond Acceptance Corporation
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2487218
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
301 Congress Avenue, Austin, Texas 78701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 435-7000
--------------
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 No X
----- -----
As of December 20, 1996, there were 6,526,086 shares of the registrant's
Common Stock, no par value, outstanding
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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PART I Financial Information
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<S> <C>
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Properties
PART II Other Information
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Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
i
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PART I
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1
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AUTOBOND ACCEPTANCE CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
12/31/95 9/30/96
ASSETS
(unaudited)
<S> <C> <C>
Cash & equivalents 92,660 335,604
Restricted cash 360,266 168,927
Cash held in escrow 1,322,571 1,386,578
Finance contracts held for sale, net 3,354,821 804,808
Repossessed assets held for sale 673,746 393,760
Class B Certificates 2,834,502 8,338,160
Excess servicing receivable 846,526 2,347,028
Debt issuance cost 700,000 1,133,816
Trust receivable 525,220 2,749,138
Due from affiliate -- 133,547
Prepaid expenses & Other 354,208 1,572,463
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Total assets $11,064,520 $19,363,831
======================
LIABILITIES
& SHAREHOLDERS EQUITY
Liabilities:
Revolving credit 1,150,421 -
Notes payable 2,674,597 7,971,696
Repurchase agreement 1,061,392 -
Subordinated debt - 300,000
Accounts payable and accrued liabilities 1,836,082 1,477,923
Bank overdraft 861,063 1,991,012
Payable to affiliate 255,597 -
Deferred income taxes 199,000 1,783,136
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Total liabilities $8,038,152 $13,523,768
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Shareholder's equity
Common stock 1,000 1,000
Additional paid-in capital 2,912,603 2,912,603
Deferred compensation (62,758) (24,206)
Loans to shareholders (153,359) (450,363)
Retained earnings 328,882 3,401,028
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Total S/H equity 3,026,368 5,840,063
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Total Liab & S/H equity $11,064,520 $19,363,831
========== ==========
</TABLE>
2
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AUTOBOND ACCEPTANCE CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
-------------------- --------------------
3 MONTHS ENDED 9 MONTHS ENDED
-------------------- --------------------
9/30/95 9/30/96 9/30/95 9/30/96
-------------------- ---------------------
<S> <C> <C> <C> <C>
REVENUES:
Interest Income 1,098,660 600,557 1,900,441 2,070,909
Interest Expense
(750,106) (669,816) (1,134,459) (1,807,335)
-------------------- ---------------------
Net Interest Income 348,554 (69,258) 765,982 263,574
Gain on Sale of Finance Contracts - 3,679,081 133,684 9,423,067
Servicing Fees 45,998 197,597 54,561 474,805
-------------------- ---------------------
Total Revenues $ 394,553 $3,807,420 $ 954,228 $10,161,445
-------------------- ---------------------
EXPENSES:
Loan Loss Provision 225,000 49,750 430,000 113,234
Salaries & Benefits 360,493 1,236,353 740,576 3,082,399
General & Administrative 241,873 433,163 823,762 1,317,511
Other Operating Expenses 204,706 190,637 528,781 842,019
-------------------- ---------------------
Total Expenses $ 1,032,072 $1,909,902 $ 2,523,119 $5,355,163
-------------------- ---------------------
Net Income before Taxes (637,519) 1,897,518 (1,568,891) 4,806,282
Provision for Income Taxes - 614,136 - 1,634,136
-------------------- ---------------------
Net Income before Extraordinary item (637,519) 1,283,382 (1,568,891) 3,172,146
Extraordinary Item - - - 100,000
-------------------- ---------------------
NET INCOME $ (637,519)$1,283,382 $(1,568,891) $3,072,146
==================== =====================
Shares Outstanding 5,118,750 5,701,086 5,118,750 5,701,086
EARNINGS PER SHARE $(0.12) $0.23 $(0.31) $0.54
==================== =====================
</TABLE>
3
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AUTOBOND ACCEPTANCE CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------- --------------------------
1995 1996 1995 1996
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(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (637,520) $1,283,382 $(1,568,892) $3,072,146
Adjustments to reconcile net income
to net cash used in operating activities:
Amortization of finance contract acquisition
discount & insurance (52,625) (282,575) (94,430) (1,161,132)
Amortization of deferred compensation 12,784 - 38,552
Provision for credit losses 225,000 49,750 430,000 113,234
Deferred income taxes 614,136 1,584,136
Amortization of excess servicing receivable 360,781 894,795
Amortization of debt issuance cost 106,500 242,071
Changes in operating assets & liabilities:
Restricted cash (143,403) 107,370 (521,395) 191,339
Cash held in escrow 280,269 (64,007)
Prepaid expenses and other assets 172,307 (740,363) 74,000 (1,218,255)
Class B Certificates (2,245,852) (5,503,658)
Excess servicing receivable (238,253) (79,934) (1,500,502)
Accounts payable & accrued liabilities (28,920) 388,672 (358,159)
Due to/from affiliate (491,038) (46,847) 57,472 (389,144)
Purchases of finance contracts (7,241,924) 24,371,694) (19,448,876) 57,729,995)
Repayments of finance contracts 764,057 278,638 1,469,228 603,595
Sales of finance contracts 23,171,959 1,351,303 59,014,035
----------------------- --------------------------
Net cash used in operating activities (7,405,146) (1,688,935) (17,942,852) (2,170,952)
----------------------- --------------------------
Cash flows from investing activities:
Advances to AutoBond Receivables Trusts (691,570) (2,223,918)
Loans to Shareholders (138,638) (14,329) (134,500) (297,004)
Disposal porcees from repossessions 119,808 1,095,470
----------------------- --------------------------
Net cash used in investing activities (138,638) (586,091) (134,500) (1,425,452)
----------------------- --------------------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving
credit agreements 6,814,865 (237,292) 17,832,378 (1,150,421)
Debt issuance costs (416,456) (675,887)
Proceeds (repayments) from borrowings under
repurchase agreement (1,061,392)
Proceeds from notes payable 2,403,027 9,137,333
Payments on notes payable (679,550) (3,840,234)
Proceeds from subordinated debt borrowings 300,000
Shareholder contributions 2,221,415 2,097,344
Increase (repayments) of bank overdraft (483,161) (194,835) (36,122) 1,129,949
----------------------- ----------------------------
Net cash provided by financing activities 8,553,119 874,894 19,893,600 3,839,348
----------------------- ----------------------------
Net increase in cash & cash equivalents 1,009,335 (1,487,277) 1,816,248 242,944
Cash & cash equivalents at beginning of period 806,913 1,822,881 - 92,660
----------------------- ----------------------------
Cash & cash equivalents at end of period $ 1,816,248 $ 335,604 $1,816,248 $335,604
======================== ==============================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 750,106 $ 563,315 $1,134,459 $1,575,025
======================== =============================
Cash paid for income taxes $ - $ - $ - $ -
======================== =============================
Non-cash investing & financing activities:
Accrual of debt issuance cost $ - $ - $ - $ -
======================= ==============================
Repossession of automobiles $ 359,125 $ 41,762 $ 403,474 $ 857,246
======================= ==============================
</TABLE>
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AUTOBOND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements included herein are unaudited and have
been prepared in accordance with generally accepted accounting principle 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 regulations. In the opinion of
management, the 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 nine months ended September 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996. For
further information, refer to the audited financial statements and footnotes
thereto included in the Company's initial public offering Prospectus, which is
included in its Registration Statement on Form S-1 (No.
333-05359).
2. EARNINGS PER SHARE
Earnings per share is calculated using the weighted average
number of common shares and common share equivalents outstanding during the
year. Primary and fully diluted earnings per share are the same for all periods
presented. Effective May 30, 1996, the Board of Directors of the Company voted
to effect a 767.8125-for-1 stock split. All share information and earnings per
share calculations for the periods presented in the financial statements herein,
and the notes hereto, have been retroactively restated for such stock split.
The weighted average number of common and common equivalent
shares outstanding for the purposes of computing net income (loss) per share
were 5,701,086 and 5,118,750 for the three and nine months ended September 30,
1996 and 1995 respectively.
3. STOCKHOLDERS' EQUITY
On November 14, 1996, the Company completed its initial public
offering of 1,075,000 shares of common stock (the "Offering"), of which 825,000
were newly issued by the Company. The Offering represented approximately 16.6%
ownership of the Company. Net proceeds of the Offering (of approximately $6.3
million) were used primarily to repay subordinated indebtedness and to
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acquire finance contracts. The balance of the proceeds were used for general
corporate purposes, including working capital. For further information about the
Offering, refer to the Company's Registration Statement on Form S-1 (No.
333-05359).
4. FINANCE CONTRACTS HELD FOR SALE:
The following amounts are included in Finance Contracts held for sale
as of:
<TABLE>
<CAPTION>
December 31
--------------------------
September 30,
1994 1995 1996
---- ---- -------------
(Unaudited)
<S> <C> <C> <C>
Principal balance of Finance Contracts held for sale $ 2,459,424 $ 3,539,195 $ 842,180
Prepaid insurance .................................. 156,095 260,155 35,064
Contract acquisition discounts ..................... (209,040) (350,827) (50,470)
Allowance for credit losses ........................ (45,000) (93,702) (21,966)
----------- ----------- -----------
$ 2,361,479 $ 3,354,821 $ 804,808
=========== =========== ===========
</TABLE>
5. REVOLVING CREDIT AGREEMENTS:
Effective August 1, 1994, the Company entered into a Secured Revolving
Credit Agreement with Sentry Financial Corporation ("Sentry") which was amended
and restated on July 31, 1995. The amended agreement ("Revolving Credit
Agreement") provides for a $10,000,000 warehouse line of credit which terminates
December 31, 2000, unless terminated earlier by the Company or Sentry upon
meeting certain defined conditions. The proceeds of the Revolving Credit
Agreement are to be used to originate and acquire Finance Contracts, to pay for
loss default insurance premiums, to make deposits to a reserve account with
Sentry, and to pay for fees associated with the origination of Finance
Contracts. The Revolving Credit Agreement is collateralized by the Finance
Contracts acquired with the outstanding borrowings, and a guarantee by the
majority shareholder and an affiliate, wholly owned by the majority shareholder.
The Company pays a utilization fee of up to 0.21% per month on the average
outstanding balance of the Revolving Credit Agreement. The Revolving Credit
Agreement also requires the Company to pay up to 0.62% per quarter on the
average unused balance. Interest is payable monthly and accrued at a rate of
prime plus 1.75% (10.25% at December 31, 1995). The Revolving Credit Agreement
contains certain restrictive covenants, including requirements to maintain a
certain minimum net worth, and cash and cash equivalent balances. Under the
Revolving Credit Agreement, the Company paid interest of $411,915 for the year
ended December 31, 1995.
Pursuant to the Revolving Credit Agreement, the Company is required to
pay
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a $700,000 warehouse facility fee payable upon the successful securitization of
Finance Contracts. The $700,000 is payable in varying amounts after each of the
first three securitizations. The Company accrued the $700,000 debt issuance cost
upon the first securitization in December, 1995, the date the Company determined
the liability to be probable in accordance with SFAS No. 5. The $700,000 debt
issuance cost is being amortized as interest expense through December 31, 2000,
the termination date of the Revolving Credit Agreement, utilizing the effective
interest method.
Effective June 16, 1995, the Company entered in to a $25,000,000 Credit
Agreement with Nomura Asset Capital Corporation ("Nomura") which allowed for
advances to the Company though June 2000 with all outstanding amounts to mature
June 2005. Advances outstanding under the facility accrued interest at the three
month LIBOR rate plus 6.75% which approximated 12.59% at December 31, 1995. The
warehouse facility allowed Nomura to terminate the agreement upon 120 days
notice. On October 6, 1995, the Company received notice of Nomura's intent to
terminate, and all outstanding advance amounts together with accrued interest
were paid by the Company prior to March 31, 1996.
Effective May 21, 1996 the Company, through its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into a $20 million revolving warehouse
facility (the "Revolving Warehouse Facility"), with Peoples Security Life
Insurance Company (an affiliate of Providian Capital Management), which expires
December 15, 1996. The proceeds from the borrowings under the Revolving
Warehouse Facility are to be used to acquire Finance Contracts, to pay credit
default insurance premiums and to make deposits to a reserve account. Interest
is payable monthly at a per annum rate of LIBOR plus 2.60%. The Revolving
Warehouse Facility also requires the Company to pay a monthly fee on the average
unused balance of 0.25% per annum. The Revolving Warehouse Facility is
collateralized by the Finance Contracts acquired with the outstanding
borrowings. The revolving Warehouse Facility contains certain covenants and
representations similar to those in the agreements governing the Company's
existing securitizations.
6. NOTES PAYABLE:
Pursuant to the securitization completed in December 1995, the Company
entered into a term loan agreement with a...company to borrow approximately
$2,684,000. The loan was collateralized by the Company's Class.....B Certificate
in the Trust as well as the Transferor's Interest in the cash flows of the Trust
. The loan accrued interest at 20% per annum payable monthly and principal
payments were made based on principal payments received on the Class B
Certificates.
Effective April 8, 1996, the outstanding balance of $2,585,757 was
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refinanced through a non-recourse term loan entered into with a new finance
company. The term loan is collateralized by the Company's Class B Certificates,
and matures April 8, 2002. The term loan bears interest at 15% per annum payable
monthly. Principal and interest payments on the term loan are paid directly by
the Trustee to the finance company and are based on payments required to be made
to the Class B Certificateholder pursuant to the Trust. The Company can prepay
the term loan in whole or part at any time if the holder seeks to transfer such
loan to a third party.
Effective March 28, 1996, the Company obtained another non-recourse term
loan in the amount of $2,059,214 from an institutional investor under similar
terms as described in the preceding paragraph. The loan is collateralized by the
Class B Certificates issued to the Company pursuant to the March 29, 1996
securitization transaction. The Company may prepay the loan in whole or in part
at any time subsequent to March 28, 1997, or any time after receiving notice by
the investor of its intent to transfer the loan to a third party. The maturity
date of the loan is the earlier of March 28, 2002 or the date that all
outstanding principal and accrued interest has been paid by the Trustee or the
Company.
Effective June 27, 1996, the Company obtained a third non-recourse term
loan in the amount of $2,066,410 from an institutional investor under similar
terms as described in the preceding two paragraphs. The loan is collateralized
by the Class B Certificates issued to the Company pursuant to the June 27, 1996
securitization transaction. The Company may prepay the loan in whole or in part
at any time subsequent to June 27, 1997, or any time after receiving notice by
the investor of its intent to transfer the loan to a third party. The maturity
date of the loan is the earlier of April 15, 2002 or the date that all
outstanding principal and accrued interest has been paid by the Trustee.
Effective September 30, 1996, the Company obtained non-recourse
term loans in the aggregate amount of $2,403,027 from institutional investors
under similar terms as described in the preceding paragraphs. The loans are
collateralized by the Class B Certificates issued to the Company pursuant to the
September 30, 1996 securitization transaction. The Company may repay the loans
in whole or in part at any time subsequent to September 30, 1997, or any time
after receiving notice by an investor of its intent to transfer its loan to a
third party. The maturity date of each loan is the earlier of September 30, 2002
or the date that all outstanding principal and accrued interest has been paid by
the Trustee or the Company.
During July 1996, a private investment management company entered into a
commitment agreement to provide the Company financing collateralized by the
senior excess spread interests to be created in each of the Company's
securitization
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transactions through September 1997. Timing and amount of payments of interest
and principal on the loans will correspond to distributions from the
securitization trusts on the Class B Certificates. The interest rate of such
loans will be 15% per annum, payable monthly. The commitment is subject to the
Company's ability to continue meeting several provisions, including: (1)
similarly structured securitization transactions; (2) the absence of rating
downgrades and defaults from previous securitizations; and (3) satisfactory
performance reports.
7. COMMITMENTS AND CONTINGENCIES:
The Company leases office space, furniture, fixtures and equipment
under operating leases and allocates a significant portion of such costs to the
Company based on estimated usage. The affiliate reports such leases as operating
leases. Total rent expense allocated to the Company under all operating leases
was approximately $237,938 and $268,022 in the first nine months of 1995 and
1996 respectively.
The aggregate minimum rental commitments of the affiliate for all
non-cancelable operating leases with initial or remaining terms of more than one
year are as follows:
<TABLE>
<CAPTION>
Year ending
<S> <C>
1996............................................. $382,888
1997............................................. 378,498
1998............................................. 154,250
</TABLE>
The Company guaranteed a working capital line entered into by the
Company's majority shareholder. Total borrowings of $2,250,000 under such line
of credit were contributed to the Company as additional paid-in capital during
the year ended December 31, 1995. The indebtedness of the majority shareholder
is repaid from and collateralized by a portion of cash flows from Finance
Contracts underlying certain securitization transactions completed by the
majority shareholder and affiliates owned by the majority shareholder, The
outstanding balance guaranteed by the Company at December 31, 1995 was
approximately $2,000,000. All amounts outstanding under the working capital
line, if any, are expected to be repaid from the sale of a portion of the
majority shareholder's common stock upon successful completion by the Company of
an initial public offering. In April 1996, the Company made a payment of $89,000
as a principal reduction in the working capital line to bring the outstanding
balance to the maximum permitted outstanding amount as of March 31, 1996.
Effective September 26, 1996 the Company was released from its guarantee of the
shareholder's debt and the outstanding amounts of such debt were repaid by the
selling shareholders from IPO proceeds.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the other financial data
included herein. The financial information set forth below has been rounded in
order to simplify its presentation. However, the ratios and percentages set
forth below are calculated using the detailed financial information contained in
the Financial Statements and the Notes thereto, and the financial data included
elsewhere in this Prospectus. The unaudited results for the nine months ended
September 1996 are not necessarily indicative of results to be expected for the
entire fiscal year ended December 31, 1996.
AutoBond Acceptance Corporation ("the Company") is a specialty consumer
finance company engaged in underwriting, acquiring, servicing and securitizing
retail installment contracts ("finance contracts") originated by franchised
automobile dealers in connection with the sale of used and, to a lesser extent,
new vehicles to selected consumers with limited access to traditional sources of
credit ("subprime consumers"). Subprime consumers generally are borrowers unable
to qualify for traditional sources of credit financing due to one or more of the
following reasons: negative credit history (which may include late payments,
charge-offs, bankruptcies, repossessions or unpaid judgments); insufficient
credit, employment or residence histories or high debt-to-income or
payment-to-income ratios (which may indicate payment or economic risk).
The Company acquires contracts directly from franchised automobile
dealers, makes credit decisions using its own underwriting guidelines and credit
personnel and performs the collection function for finance contracts using its
own collections department. The Company also acquires finance contracts from
third parties other than dealers, for which the Company reunderwrites and
collects such finance contracts in accordance with the Company's standard
guidelines. The Company securitizes portfolios of these retail automobile
installment contracts to efficiently utilize limited capital to allow continued
growth and to achieve sufficient finance contract volume to allow profitability.
The Company markets a single finance contract acquisition program to automobile
dealers which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles.
REVENUES
The Company's primary sources of revenues consist of three components:
net interest income, gain on sale of finance contracts and servicing and
collection
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fees.
Net Interest Income. Net interest income consists of the sum of two
components: (i) the difference between interest income earned on finance
contracts held for sale and interest expense incurred by the Company pursuant to
borrowings under its warehouse and other credit facilities; and (ii) the
accretion of finance contract acquisition discounts. Other factors influencing
net interest income during a given fiscal period include (a) the annual
percentage rate of the finance contracts acquired, (b) the aggregate principal
balance of finance contracts acquired and funded through the Company's warehouse
and other credit facilities prior to securitization, (c) the length of time such
contracts are funded by the warehouse and other credit facilities prior to
securitization and (d) the average cost of funds under the warehouse and other
credit facilities. Finance contract acquisition growth has had a significant
impact on the amount of net interest income earned by the Company.
Gain on Sale of Finance Contracts. Upon completion of a securitization, the
Company recognizes a gain on sale of finance contracts equal to the present
value of future excess spread cash flows from the securitization trust, and the
difference between the net proceeds from the securitization and the net carrying
cost (including the cost of VSI Policy premiums) to the Company of the finance
contracts sold. The Class B Certificates and the excess servicing receivable are
determined based on the estimated present value of excess spread cash flows from
a securitization trust. Excess spread cash flows represent the difference
between the weighted average contract rate earned and the rate paid on Class A
Certificates issued to third party investors in the securitization, less
servicing fees and other costs, over the life of the securitization. Excess
spread cash flows are computed by taking into account certain assumptions
regarding prepayments, defaults, proceeds from disposal of repossessed assets,
and servicing and other costs. The Class B Certificates and excess servicing
receivable are determined by discounting the excess spread cash flows at a rate
based on assumptions that market participants would use for similar financial
instruments subject to prepayment, default, collateral value and interest rate
risks. The Class B Certificates are then formed by carving out 80% of the
discounted excess spread cash flows. The remaining 20% of the discounted excess
spread cash flows represent excess servicing receivable. All excess spread cash
flows are paid by the securitization Trustee to the Class B Certificateholders
until such time as all accrued interest at 15% together with principal have been
paid in full. Subsequently, all remaining excess spread cash flows are paid to
the Company and are referred to as the 'Transferor's Interest." The discounted
Transferor's Interest is reported in the balance sheets as excess servicing
receivable. In each securitization, all of the Class B Certificates and
Transferor's Interest are retained by the Company. The Class B Certificates are
used by the Company as collateral on its non-recourse term loans entered into
with investors. Each quarter, the Company performs an impairment review of the
excess servicing
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receivable by calculating the net present value of the expected future excess
spread cash flows to the Company from the securitization trust using the same
discount rate used to record the initial excess servicing receivable. To the
extent that market and economic changes occur which adversely impact the
assumptions utilized in determining the excess servicing receivable, the Company
would record a charge against servicing fee income and write down the asset
accordingly. Impairment is determined on a disaggregated basis consistent with
the risk characteristics of the underlying finance contracts, consisting
principally of origination date and originating dealership, as well as the
performance of the pool to date. There were no adjustments required as a result
of impairment reviews during any of the periods presented in the financial
statements. Should the Company be unable to securitize finance contracts in the
form of a sale in a financial reporting period, the Company would likely incur a
significant decline in total revenues and net income or report a loss for such
period. To date, the Company's securitizations have been characterized as debt
for tax purposes. Since the Company records a provision for income taxes on
securitizations, alternatively characterizing securitizations as sales for tax
purposes would have no effect on net income, although the timing of tax payments
by the Company would be accelerated.
Gain on sale of finance contracts was $3,951,706, $2,749,612,
$2,972,804, and $3,679,081 for each of the securitizations occurring in December
1995, March 1996, June, 1996 and September 1996 respectively. This represents
approximately 15.05%, 16.60%, 16.67% and 16.50% of the outstanding balances of
the finance contracts at each of the respective securitization dates. Gain on
sale can be broken into three major components: the amount by which the proceeds
from the sale of Class A Certificates exceeds the Company's cost basis in the
contracts, costs of sale (primarily placement, rating agent, and legal and
accounting fees), and discounted excess spread cash flows (the Class B
Certificates and Transferor's Interests).
The Company's costs basis in finance contracts sold has varied from
approximately 97.5% to 98.0% of the value of the Class A Certificates. This
portion of recognized gain on sale will vary based on the Company's cost of
insurance covering the finance contracts and the discount obtained upon
acquisition of the finance contracts.
Further, the excess spread component of recognized gain is affected by
various factors, including most significantly, the coupon on the Class A
Certificates and the age of the finance contracts in the pool, as the excess
spread cashflow from a pool of aged, as opposed to new, finance contracts is
less. The aging (capture of excess spread prior to securitization) necessarily
results in less available excess spread cash flow from the securitization. The
Company believes that margins in the range of those previously recognized are
sustainable subject to adverse interest rate movements, availability of VSI
insurance at current rates and the Company's ability
12
<PAGE>
<PAGE>
to continue purchasing finance contracts at approximately an 8.5% discount.
The gain on sale of finance contracts is affected by the aggregate
principal balance of contracts securitized and the gross interest spread on
those contracts. The following table illustrates the gross interest spread for
each of the Company's securitizations:
<TABLE>
<CAPTION>
Remaining Weighed
Balance at Average
Original September 30, Contract Certificate Gross
Securitization Balance(1) 1996 Rate Rate Ratings(2) Spread(3)
- -------------- ---------- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables
Trust 1995-A .... $26,261 $26,261 18.9% 7.23% A/A3 11.7%
AutoBond Receivables
Trust 1996-A .... 16,563 16,563 19.7 7.15 A/A3 12.5
AutoBond Receivables
Trust 1996-B ... 17,833 17,833 19.7 7.73 A/A3 12.0
AutoBond Receivables
Trust 1996-C ... 22,297 22,297 19.7 7.45 A/A3 12.2
------ ------ ---- ---- ---- ----
Total .......... 82,954 82,954
====== ======
</TABLE>
- --------------
(1) Refers only to balances on Class A investor certificates.
(2) Indicates ratings by Fitch Investors Service, LP. and Moody's Investors
Service, Inc., respectively. (3) Difference between weighted average
contract rate and senior Class A Certificate rate. (4) Before expiration of
the revolving period for such trust.
Servicing Fee Income. The Company earns substantially all of its
servicing fee income on the contracts it services on behalf of securitization
trusts. Servicing fee income consists of: (i) contractual servicing fees
received through securitizations, equal to $7.00 per month per contract included
in each trust (excluding amounts paid to third-party servicers by the trust);
(ii) Transferor's Interest, reduced by the amortization of the excess servicing
receivable; and (iii) fee income earned as servicer for such items as late
charges and documentation fees, which are earned whether or not a securitization
has occurred.
13
<PAGE>
<PAGE>
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance contract
acquisition activity.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
YEAR ENDED -----------------------
DECEMBER 31, 1995 1995 1996
----------------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Number of finance contracts acquired 2,659 1,656 4,979(1)
Principal balance of finance contracts $31,915 19,725 57,730(1)
</TABLE>
- -----------
(1) Includes $8.6 million in aggregate principal amount of finance contracts
acquired from First Fidelity Acceptance Corp. and included in the third
quarter securitization.
The Company's third quarter securitization included $8,618,441 in
aggregate principal amount of finance contracts purchased by the Company from
Greenwich Capital Financial Products, Inc. ("GCFP"), pursuant to a loan sale
agreement among the Company, GCFP and First Fidelity Acceptance Corp. ("FFAC"),
the originator of the finance contracts. The Company reunderwrote the finance
contracts, paid premiums under the VSI Policy, and will service the finance
contracts. In the fourth quarter of 1996, the Company has purchased
approximately $6.5 million of additional finance contracts from GCFP and FFAC
under the loan sale agreement. The Company acquired 1,469 finance contracts from
dealers, totalling $16,916,971 in aggregate principal amount, during the third
quarter of 1996, compared with 2,856 finance contracts acquired from dealers,
totalling $33,358,000, during the first six months of 1996.
RESULTS OF OPERATIONS
Period-to-period comparisons of operating results may not be
meaningful, and results of operations from prior periods may not be indicative
of future results. Comparisons of the three and nine month periods ended
September 30, 1995 and 1996 may not be meaningful as there were no
securitization transactions, and only a small whole-loan sale transaction,
during the first nine months of 1995. The following discussion and analysis
should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995
14
<PAGE>
<PAGE>
TOTAL REVENUES
Total revenues increased to $3.8 million and $10.2 million,
respectively, for the three and nine months ended September 30, 1996 from
$394,553 and $954,228 for the comparable periods ended September 30, 1995, due
to gains and servicing income from securitization transactions, offset slightly
by decreases in net interest income.
NET INTEREST INCOME. Net interest income decreased to ($69,258)
and $263,574, respectively, for the three and nine months ended September 30,
1996 from $348,554 and $765,982 for the three and nine months ended September
30, 1995. The decrease in net interest income was due to an increase in overall
net borrowing costs and fees associated with Revolving Credit Facilities and the
sale of finance contracts in 1996 pursuant to securitizations.
GAIN ON SALE OF FINANCE CONTRACTS. For the three and nine months
ended September 30, 1996, gain on sale of finance contracts amounted to $3.7
million and $9.4 million, respectively. For the nine months ended September 30,
1996, the Company completed three securitizations aggregating approximately
$56.7 million in principal amount of finance contracts and the gain on sale of
finance contracts accounted for 92.7% of total revenues. For the nine months
ended September 30, 1995, there were no securitization transactions and only a
small whole-loan sale.
SERVICING FEE INCOME. The Company reports servicing fee income
only with respect to finance contracts that are transferred to a securitization
trust. In the nine months ended September 30, 1996, servicing fee income was
$474,805, of which $304,487 was collection agent fees and $170,318 arose from
excess spread cash flows net of amortization of the excess servicing receivable.
Servicing fee income for the three months ended September 30, 1996 was $197,597.
The Company had completed no securitizations and only a small whole-loan sale as
of September 30, 1995 and reported no servicing fee income through such date.
TOTAL EXPENSES
Total expenses were $1.9 million for the three months ended
September 30, 1996, compared with $1.0 for the comparable 1995 period. Total
expenses of the Company increased $2.9 million to $5.4 million for the nine
months ended September 30, 1996 from $2.5 million for the nine months ended
September 30, 1995. Although operating expenses increased during the nine months
ended September 30, 1996, the Company's finance contract portfolio grew at a
faster rate than the rate of increase in operating expenses. As a result, total
15
<PAGE>
<PAGE>
expenses as a percentage of total principal balance of finance contracts
acquired in the period decreased to 9.3% in the nine months ended September 30,
1996 from 12.8% in the nine months ended September 30, 1995.
The overall increases in expenses for the 1996 nine month period
was due to increased salary expense and operational expenses due to growth in
finance contract acquisition volume.
NET INCOME
In the three and nine months ended September 30, 1996, net income
increased to $1.3 million and $3.2 million, respectively, from losses of
$637,519 and $1.6 million, respectively, for the three and nine months ended
September 30, 1995. The increase was attributable to the three securitization
transactions completed in the first nine months of 1996, while there were no
securitization transactions and only one small whole-loan sale during the first
nine months of 1995.
FINANCIAL CONDITION
FINANCE CONTRACTS HELD FOR SALE, NET. The number and principal balance
of contracts held for sale are largely dependent upon the timing and size of the
Company's securitizations. The Company plans to securitize contracts on a
regular quarterly basis.
TRUST RECEIVABLE. At the time a securitization closes, the Company's
securitization subsidiary is required to fund a cash reserve account within the
trust to provide additional credit support for the senior trust certificates.
Additionally, depending on the structure of the securitization, a portion of the
future excess spread cash flows from the trust is required to be deposited in
the cash reserve account to increase the initial deposit to a specified level.
Amounts on deposit in cash reserve accounts are also reflected as advances to
the relevant trust under the item "Cash flows from investing activities" in the
Company's consolidated statements of cash flows. The initial cash reserve
deposits for the December, 1995, March 1996, June 1996 and September 1996
securitizations were $525,220, $331.267, $356,658 and $445,934, respectively,
equivalent to 2% of the initial principal amount of the senior trust
certificates. A portion of excess spread cash flows will increase such reserves
until they reach 6% (or higher if certain delinquency or net loss ratios are
reached).
EXCESS SERVICING RECEIVABLE. The following table provides historical data
regarding the excess servicing receivable:
16
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
YEAR ENDED ------------------
DECEMBER 31, 1995 1995 1996
----------------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................... $ 0 $0 $ 847
Additions........................... 895 0 2,395
Amortization........................ (48) 0 (895)
---- -- -------
Ending balance ..................... $847 $0 $2,347
==== == ======
</TABLE>
DELINQUENCY EXPERIENCE
The following table reflects the delinquency experience of the Company's
finance contract portfolio at December 31, 1995 and September 30 1995 and 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30
DECEMBER 31, --------------------------------
1995 1995 1996
----------------- ----------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal balance of finance
contracts outstanding......... $31,311 19,846 78,880
Delinquent finance contracts (1):
60-89 days past due.............. 474 1.51% 383 1.93% 1,396 1.77%
90 days past due and over........ 246 0.79 196 0.99% 761 0.96
-------- ----- --------- ----- ------ ----
</TABLE>
- ------------
(1) Percentage based on outstanding balance. Excludes finance contracts where
the underlying vehicle is repossessed, the borrower is in bankruptcy, or
there are insurance claims filed.
CREDIT LOSS EXPERIENCE
An allowance for credit losses is maintained for all contracts held for
sale. The Company reports a provision for credit losses on finance contracts
held for sale. Management evaluates the reasonableness of the assumptions
employed by reviewing credit loss experience, delinquencies, repossession
trends, the size of the finance contract portfolio and general economic
conditions and trends. If necessary, assumptions will be changed in the future
to reflect historical experience to the extent it deviates materially from that
which was assumed. Since inception, the Company's assumptions have been
consistent and are adequate based upon actual experience. Accordingly, no
additional charges to earnings to date have been necessary to accommodate more
adverse experience than anticipated.
If a delinquency exists and a default is deemed inevitable or the
collateral is in jeopardy, and in no event later than the 90th day of
delinquency, the Company's Collections Department will initiate the repossession
of the financed vehicle. Bonded, insured outside repossession agencies are used
to secure involuntary
17
<PAGE>
<PAGE>
repossessions. In most jurisdictions, notice to the borrower of the Company's
intention to sell the repossessed vehicle is required, whereupon the borrower
may exercise certain rights to cure his or her default or redeem the automobile.
Following the expiration of the legally required notice period, the repossessed
vehicle is sold at a wholesale auto auction (or in limited circumstances,
through dealers), usually within 60 days of the repossession. The Company
closely monitors the condition of vehicles set for auction, and procures an
appraisal under the VSI Policy prior to sale. Liquidation proceeds are applied
to the borrower's outstanding obligation under the finance contract and loss
deficiency claims under the VSI Policy and Credit Endorsement thereto are then
filed. The physical damage and loss provisions of the VSI Policy insures each
financed vehicle against losses relating to (i) physical damage to repossessed
vehicles, (ii) failure to file or record necessary instruments or documents, and
(iii) loss or confiscation of the vehicle. Generally the amount of coverage will
not exceed (i) the vehicle's replacement value, (ii) its cash value less salvage
value, (iii) the unpaid Finance Contract balance, (iv) $40,000 per vehicle
($25,000 per occurrence for repossessed vehicles), or (v) the lesser of the
amounts under clauses (i)-(iv) above less other insurance coverage on the
vehicle. The Company also obtained credit deficiency balance coverage through
the Credit Default Endorsement of the VSI Policy. The Company will consider
alternative methods of credit enhancement for its portfolio or its
securitizations depending upon market conditions.
Because of the Company's limited operating history, its finance contract
portfolio is somewhat unseasoned. Accordingly, delinquency and charge-off rates
in the portfolio may not fully reflect the rates that may apply when the average
holding period for finance contracts in the portfolio is longer. Increases in
the delinquency and/or charge-off rates in the portfolio would adversely affect
the Company's ability to obtain credit or securitize its receivables.
REPOSSESSION EXPERIENCE - STATIC POOL ANALYSIS
Because the Company's finance contract portfolio is continuing to grow
rapidly, management does not manage delinquency or losses on the basis of a
percentage of the Company's finance contract portfolio, because percentages can
be favorably affected by large balances of recently acquired finance contracts.
Management monitors actual data on a 'static pool" basis.
The following table provides static repossession frequency analysis of
the Company's portfolio performance from inception through September 30, 1996.
In this table, all finance contracts have been segregated by quarter of
acquisition. All repossessions have been segregated by the quarter in which the
repossessed contract was originally acquired by the Company. Cumulative
repossessions equals the ratio of repossessions as a percentage of finance
contracts acquired for each
18
<PAGE>
<PAGE>
segregated quarter. Annualized repossessions equals an annual equivalent of the
cumulative repossession ratio for each segregated quarter. This table provides
information regarding the Company's repossession experience over time. For
example, recently acquired finance contracts demonstrate very few repossessions
because properly underwritten finance contracts to subprime consumers generally
do not default during the initial term of the contract. After approximately one
year of seasoning, frequency of repossessions on an annualized basis appear to
reach a plateau. Based on industry statistics and the performance experience of
the Company's finance contract portfolio, the Company believes that finance
contracts seasoned in excess of approximately 18 months will start to
demonstrate declining repossession frequency.
STATIC POOL REPOSSESSION TABLE THROUGH Q3, 1996
<TABLE>
<CAPTION>
Repossession Frequency
-------------------------------------------------
Year and Quarter of Repossessions by
Acquisition Quarter Acquired Cumulative (1) Annualized(2) Contracts Acquired
----------- ---------------- --------------- ------------- ------------------
<S> <C> <C> <C> <C>
1994
Q3 ................... 1 11.11% 4.94% 9
Q4..................... 35 18.13 9.07 193
1995
Q1..................... 80 15.33% 8.76% 522
Q2..................... 75 14.40 9.60 521
Q3..................... 70 11.42 9.14 613
Q4..................... 112 11.17 11.17 1,003
1996
Q1..................... 62 4.73% 6.31% 1,310
Q2..................... 34 2.19 4.39 1,550
Q3..................... 1 0.05 0.19 2,119
</TABLE>
- --------------
(1) For each quarter, cumulative repossession frequency equals the number of
repossessions divided by contracts acquired.
(2) Annualized repossession frequency converts cumulative repossession frequency
into an annual equivalent (e.g., for Q4 1994, 35 repossessions divided by
193 contracts acquired, divided by 8 quarters outstanding times four equals
an annualized repossession frequency of 9.07%).
NET LOSS PER REPOSSESSION
Upon initiation of the repossession process, it is the Company's intent
to complete the liquidation process as quickly as possible. The majority of
repossessed vehicles are sold at wholesale auction. The Company is responsible
for the costs of repossession, transportation and storage. The Company's net
charge-off per repossession equals the unpaid balance less the auction proceeds
(net of associated costs) and less proceeds from insurance claims. The following
table demonstrates the net charge-off per repossessed automobile since
inception.
19
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FROM AUGUST 1, 1994
(INCEPTION) TO
OCTOBER 28, 1996
----------------
<S> <C>
Number of finance contracts acquired ............................................ 7,841
Number of finance vehicles repossessed .......................................... 543
Repossessed units disposed of ............................................ 260
Repossessed units in inventory awaiting disposition ...................... 283
Cumulative gross charge-offs(1) ................................................. 3,000,961
Costs of repossessions(1) ....................................................... 69,296
Proceeds from auction, physical damage insurance and refunds(1) ................. (2,131,168)
----------
Net loss ................................................................. 869,823
Deficiency insurance settlement received(1) .............................. (667,086)
----------
Net charge-offs(1)..............................................................$ 272,033
Net charge-off per unit disposed................................................$ 1,046
Recoveries as a percentage of cumulative gross charge-offs ...................... 93.2%
</TABLE>
- ------------
(1) Amounts are based on actual liquidation and repossession proceeds (including
insurance proceeds) received on units for which the repossession process had
been completed as of October 28, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily funded its operations and the
growth of its finance contract portfolio through seven principal sources of
capital: (i) cash flows from operating activities; (ii) funds provided from
borrower's payments received under finance contracts held for sale; (iii)
borrowings under various warehouse and working capital facilities; (iv) proceeds
from securitization transactions; (v) cash flows from servicing fees; (vi)
proceeds from the issuances of subordinated debt and capital contributions of
principal shareholders; and (vii) proceeds from the Company's initial public
offering.
Cash Flows. Significant cash flows related to the Company's operating
activities include the use of cash for purchases of finance contracts, and cash
provided by payments on finance contracts and sales of finance contracts. For
the year ended December 31, 1995 and the nine months ended September 30, 1996,
$31.2 million and $57.7 million, respectively, was used by the Company to
purchase finance contracts, $2.7 million and $10.2 million, respectively, was
received as payments on finance contracts, and $27.4 million and $56.7 million,
respectively, was received from sales of finance contracts, primarily through
securitizations. The Company used $525,220 and $1,133,859 to fund cash reserve
accounts for the securitizations completed in the year ended December 31, 1995
and the nine months ended September 30, 1996, respectively.
20
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<PAGE>
Significant activities comprising cash flows from financing activities
include net repayments under revolving warehouse credit facilities ($904,355 for
the year ended December 31, 1995 and $1,150,421 for the nine months ended
September 30, 1996) and net proceeds from borrowings against excess spread cash
flows ($2.7 million for the year ended December 31, 1995 and $5.3 million for
the nine months ended September 30, 1996).
Warehouse Credit Facilities. The Company obtains a substantial portion
of its working capital for the acquisition of finance contracts through
warehouse credit facilities. Under a warehouse facility, the lender generally
advances amounts requested by the borrower on a periodic basis, up to an
aggregate maximum credit limit for the facility, for the acquisition and
servicing of finance contracts or other similar assets. Until proceeds from a
securitization transaction are used to pay down outstanding advances, as
principal payments are received on the finance contracts, the principal amount
of the advances may be paid down incrementally or reinvested in additional
finance contracts on a revolving basis.
At September 30, 1996, the Company had no borrowings under a $10.0
million revolving credit facility (the "Sentry Facility") with Sentry Financial
Corporation ("Sentry"), which expires on July 31, 1998. The proceeds from
borrowings under the Sentry Facility are used to acquire finance contracts, to
pay credit default insurance premiums and to make deposits to a reserve account
with Sentry. The Company pays a utilization fee of up to 0.21% per month on the
average outstanding balance under the Sentry Facility. The Sentry Facility also
requires the Company to pay up to 0.62% per quarter on the average unused
balance. Interest is payable monthly and accrues at a per annum rate of prime
plus 1.75% (which was approximately 10.0% at September 30, 1996).
The Sentry Facility contains certain conditions and imposes certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent balances in the reserve accounts. In April 1996, the Company agreed
to pay a one-time commitment fee of $700,000 to Sentry.
On May 22, 1996, the Company, through its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into a $20.0 million warehouse facility
(the "Providian Facility") with Peoples Security Life Insurance Company (an
affiliate of Providian Capital Management). The proceeds from the borrowings
under the Providian Facility have been used to acquire finance contracts, to pay
credit default insurance premiums and to make deposits to a reserve account.
Interest is payable monthly at a per annum rate of LIBOR plus 2.60% with a
maximum rate of 11.0% and a minimum rate of 7.60%. The Providian Facility also
requires the Company to
21
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<PAGE>
pay a monthly fee on the average unused balance at a per annum rate of 0.25%.
Borrowings under the Providian Facility are rated investment-grade by a
nationally recognized statistical rating organization. The Providian Facility
contains certain covenants and representations similar to those in the
agreements governing the Company's existing securitizations.
Discussions are currently being held to extend the Providian Facility,
which matures on December 27, 1996. Although failure to significantly extend the
Providian Facility would leave the Company with only one long-term warehouse
facility, management believes that the Company's expected ability to achieve
investment grade ratings for similarly structured warehouses should allow the
Company to obtain additional warehouse financing on acceptable terms.
Securitization Program. In its securitization transactions, the Company
sells pools of finance contracts to a special purpose subsidiary, which then
sells the finance contracts to a trust in exchange for cash and certain retained
beneficial interests in future excess spread cash flows. The trust issues two
classes of fixed income investor certificates: "Class A Certificates," which are
sold to investors, generally at par with a fixed coupon, and subordinated excess
spread certificates ("Class B Certificates"), representing a senior interest in
excess spread cash flows from the finance contracts, which are typically
retained by the Company's securitization subsidiary and which collateralize
borrowings on a nonrecourse basis. The Company also funds a cash reserve account
that provides credit support to the Class A Certificates. The Company's
securitization subsidiaries also retain a "Transferor's Interest" in the
contracts that is subordinate to the interest of the investor
certificateholders. The retained interests entitle the Company to receive the
future cash flows from the trust after payment to investors, absorption of
losses, if any, that arise from defaults on the transferred finance contracts
and payment of the other expenses and obligations of the trust.
Securitization transactions impact the Company's liquidity primarily in
two ways. First, the application of proceeds toward payment makes additional
borrowing available, to the extent of such proceeds, under those facilities for
the acquisition of additional finance contracts. In December 1995, March 1996,
June 1996 and September 1996 the Company securitized approximately $26.2
million, $16.6 million, $17.8 million and $22.3 million, respectively, in
nominal principal amount of finance contracts and used the net proceedsd to pay
down borrowings under its warehouse credit facilities. Second, additional
working capital is obtained through the Company's practice of borrowing funds,
on a non-recourse basis, collateralized by its interest in future excess spread
cash flows from its securitization trusts. At September 30, 1996, the Company
held excess servicing receivables and Class B Certificates totalling $10.7
million, substantially all of which had been pledged to secure notes payable of
$8.0 million.
22
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<PAGE>
Subordinated Debt. The Company issued subordinated debt in the principal
amount of $300,000 to an individual investor pursuant to a subordinated note
dated as of March 12, 1996. The subordinated note has a final maturity date of
March 12, 1997 and provides for payment of interest at a per annum rate of 10.0%
and includes a warrant to purchase 18,811 shares Common Stock at a price of
$0.53 per share.
Initial Public Offering. On November 14, 1996, the Company completed the
initial public offering of its Common Stock. The closing comprised 825,000
shares sold by the Company (including 75,000 shares issued pursuant to the
exercise of the underwriters) overallotment option) and 250,000 shares sold by
the Selling Shareholders. With a price to public of $10 per share and an
underwriting discount at $.70 per share, the Company received gross proceeds of
$7,725,000 from the offering, from which it expects to pay offering expenses of
$1.4 million. The net proceeds are being utilized for working capital, debt
repayment of $300,000 and investment in finance contracts, including
approximately $6.2 million in principal amount acquired from First Fidelity
Acceptance Corporation for inclusion in the Company's fourth quarter
securitization.
The warehouse facilities provide the short-term cash needed to
accumulate loan pools for securitizations. Under the Company's practice of
borrowing funds, on a non-recourse basis, collateralized by its interest in
future excess spread cash flows, working capital is thereby provided for the
cashflow needs of the Company. The structure of the excess spread cashfiow and
related note payable provides for self-amortization of such debt. The Company's
excess spread cashflow projections indicate that the excess spread cashflows
will be sufficient to retire the related debt within approximately 30 months of
its incurrence. Cash from the excess spread retained by the Company is received
monthly, commencing immediately upon completion of the securitization
transaction. Interest and principal payments are made first to the Class A
Certificateholders, then Trust operating expenses are paid. Excess cashflow,
comprised of interest and fees from the loans reduced by interest on Class A
Certificates and trust operating expenses, is then distributed in two manners.
If the cash reserve account is less than the required amount, 35% of the excess
cashflow is retained in the trust to build the cash reserves until required
levels are met. The remaining 65% of excess spread cashflow is utilized to first
pay down any non-recourse borrowing in full, and then distributed to the Company
for operating purposes. The final cash flows for each transaction should be
released at the expected maturity of 72 months.
The Company has entered into a commitment with a private investment
management company for financing collateralized by the senior excess spread
interests to be created in each of the Company's securitization transactions
through
23
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<PAGE>
September 1997. Timing and amount of payments of interest and principal on the
loans will correspond to distributions from the securitization trusts on the
Class B Certificates. The interest rate on such loans will be 15% per annum,
payable monthly. The commitment also provides that the Class B Certificates
evidencing the interests in such senior excess spread cash flows be rated "BB"
by Fitch.
The Company expects that the proceeds of the Company's initial public
offering, proceeds from finance contracts, securitization proceeds and
borrowings under its warehouse facilities will be sufficient to fund expansion
of the Company's business through the end of 1997. The Company has no specific
plans or arrangements for additional equity financings, due to the liquidity
provided securitizations and financings of excess spread cash flows. The Company
believes it will be able to obtain additional funding through an increase in the
maximum amount available for borrowings under its warehouse facilities and
through securitizations. There can be no assurance, however, that the Company
will be able to obtain such additional funding.
24
<PAGE>
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
None other than routine matters in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following reflects all applicable Exhibits required under
Item 601 of Regulation S-K:
<TABLE>
<S> <C>
* 3.1 Restated Articles of Incorporation of the Company
* 3.2 Amended and Restated Bylaws of the Company
* 4.1 Specimen Common Stock Certificate
* 10.1 Amended and Restated Loan Origination, Sale and Contribution
Agreement dated as of December 15, 1995 by and between the
Company and AutoBond Funding Corporation I
* 10.2 Security Agreement dated as of May 21, 1996 among AutoBond
Funding Corporation II, the Company and Norwest Bank Minnesota,
National Association
* 10.3 Credit Agreement and Side Agreement, dated as of May 21,
1996 among AutoBond Funding Corporation II, the Company and
Peoples Life Insurance Company
* 10.4 Servicing Agreement dated as of May 21, 1996 among AutoBond
Funding Corporation II, CSC Logic/MSA L.L.P., doing business as
"Loan Servicing Enterprise", the Company and Norwest Bank
Minnesota, National Association
* 10.5 Loan Acquisition Sale and Contribution Agreement dated as of
May 21, 1996 by and between the Company and AutoBond Funding
Corporation II
</TABLE>
25
<PAGE>
<PAGE>
<TABLE>
<S> <C>
* 10.6 Second Amended and Restated Secured Revolving Credit Agreement dated as
of July 31, 1995 between Sentry Financial Corporation and the Company
* 10.7 Management Administration and Services Agreement dated as of
January 1, 1996 between the Company and AutoBond, Inc.
* 10.8 Employment Agreement dated November 15, 1995 between Adrian Katz and
the Company
* 10.9 Employment Agreement dated February 15, 1996 between Charles A. Pond
and the Company
* 10.10 Employment Agreement effective as of May 1, 1996 between William O. Winsauer
and the Company
* 10.11 Vender's Comprehensive Single Interest Insurance Policy and Endorsements,
issued by Interstate Fire & Casualty Company
* 10.12 Warrant to Purchase Common Stock of the Company dated March 12, 1996
* 10.13 Employee Stock Option Plan
* 10.14 Dealer Agreement, dated November 9, 1994, between the Company and Charlie
Thomas Ford, Inc.
* 10.15 Automobile Loan Sale Agreement, dated as of September 30, 1996, among the
Company, First Fidelity Acceptance Corp., and Greenwich Capital
Financial Products, Inc.
* 27.1 Financial Data Schedule
</TABLE>
- -----------------------------------
* Incorporated by reference from the Company's Registration Statement on From
S-1 (Registration No. 333-05359)
(b) Reports on Form 8-K
None.
26
<PAGE>
<PAGE>
SIGNATURES
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 on December 22, 1996.
AutoBond Acceptance Corporation
By: /S/ WILLIAM O. WINSAUER
__________________________
William O. Winsauer
(Chairman of the Board and
Chief Executive Officer)
By: /S/ WILLIAM J. STAHL
___________________________
William J. Stahl
(Vice President and Chief
Financial Officer)
27
