<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1996
REGISTRATION NO. 333-05359
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
AUTOBOND ACCEPTANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------
<TABLE>
<S> <C> <C>
TEXAS 6141 75-2487218
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
301 CONGRESS AVENUE
AUSTIN, TEXAS 78701
(512) 435-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ADRIAN KATZ, VICE CHAIRMAN
AUTOBOND ACCEPTANCE CORPORATION
301 CONGRESS AVENUE
AUSTIN, TEXAS 78701
(512) 435-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
GLENN S. ARDEN, ESQ. STEVEN R. FINLEY, ESQ.
DEWEY BALLANTINE GIBSON, DUNN & CRUTCHER LLP
1301 AVENUE OF THE AMERICAS 200 PARK AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10166
(212) 259-8000 (212) 351-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(A) AND ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS
---- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Dilution; Risk Factors
7. Selling Security Holders............................. Principal and Selling Shareholders
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities To Be Registered........... Prospectus Summary; Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; Capitalization;
Selected Consolidated Financial and Operating Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Description of
Capital Stock; Shares Eligible for Future Sale;
Change in Accountants; Consolidated Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
</TABLE>
- ------------
* Not applicable.
<PAGE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST , 1996
PROSPECTUS
1,500,000 SHARES
[LOGO]
COMMON STOCK
Of the shares of common stock, no par value (the 'Common Stock'), offered
hereby, 1,275,000 shares are being sold by AutoBond Acceptance Corporation (the
'Company'), and 225,000 shares are being sold by certain shareholders (the
'Selling Shareholders'). See 'Principal and Selling Shareholders.' The Company
will not receive any of the proceeds from the sale of shares by the Selling
Shareholders.
Prior to this offering, there has been no public trading market for the
Common Stock, and there can be no assurance that any active trading market will
develop. It is currently anticipated that the initial public offering price will
be between $11.00 and $13.00 per share. See 'Underwriting' for information
relating to the factors to be considered in determining the public offering
price.
Application will be made to list the Common Stock for quotation on The
Nasdaq Stock Market's National Market System ('Nasdaq') under the symbol 'ABND.'
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' ON PAGES 7-14.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share................................. $ $ $ $
Total(3).................................. $ $ $ $
</TABLE>
(1) The Company has agreed to indemnify Principal Financial Securities, Inc.
(the 'Underwriter'), against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See 'Underwriting'.
(2) Before deducting expenses of the offering estimated at $ payable
by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 225,000 additional shares of
Common Stock at the Price to Public per share, less the Underwriting
Discount, solely for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See 'Underwriting.'
The shares of Common Stock are offered by the Underwriters, when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel or
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the shares will be made
against payment on or about , 1996 at the office of Principal
Financial Securities, Inc., in Dallas, Texas.
------------------------
PRINCIPAL FINANCIAL SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
<PAGE>
HEADQUARTERS AND STATES OF OPERATIONS
[MAP]
HEADQUARTERS * AUSTIN, TX
Pictured above is a line drawn map of the 48 contiguous states of the
United States of America, with shading of those states where the Company
currently operates and a five-pointed star indicating the location of the
Company's headquarters in Austin, Texas.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless indicated
otherwise, all information contained in this Prospectus (i) reflects the
767.8125-for-1 stock split effected by the Company on June 4, 1996 and (ii)
assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
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 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 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.
The Company was formed by William O. Winsauer and his brother, John S.
Winsauer, to capitalize on William O. Winsauer's expertise in the securitization
of subprime finance contracts which he developed as the founder of AutoBond,
Inc. ('ABI'). From 1989 to 1994, ABI structured 20 investment-grade rated
securitizations of subprime consumer automobile finance contract portfolios,
aggregating approximately $190 million in principal amount, originated and
underwritten by third party intermediaries. The Company acquires finance
contracts directly from 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
developed the necessary expertise and relationships to underwrite, acquire,
securitize and service finance contracts by assembling a team of experienced
professionals. The Company's senior operating management averages 24 years of
experience in the consumer finance industry, with expertise in the operation of
automobile dealerships, underwriting and acquiring consumer finance contracts,
investment banking and securitizations and collections. The Company's credit
underwriters average thirteen years of experience in the auto finance industry,
and its sales representatives and collection professionals average ten and seven
years of industry experience, respectively.
The Company commenced operations in August 1994 and through June 30, 1996
had acquired 5,714 finance contracts with an aggregate initial principal balance
of $68.2 million, of which $60.7 million have been securitized in three
investment-grade rated transactions. [In the six month period ended June 30,
1996, the Company underwrote and acquired 2,856 finance contracts with an
aggregate initial principal balance of $33.9 million. At June 30, 1996, the
Company had 492 dealer relationships in sixteen states, substantially all of
which were franchised dealers of major automobile manufacturers.] The Company
earned net income of $873,487 for the fiscal year ended December 31, 1995,
compared to a loss of $544,605 for the period from inception through December
31, 1994. The Company earned net income of $1.9 million for the six months ended
June 30, 1996, compared to a loss of $931,372 for the six months ended June 30,
1995. As of June 30, 1996, the Company conducted significant business in 11
states (defined as those states that each represent at least 1.0% of the total
number of finance contracts acquired during the second quarter of 1996). For the
period from inception in August 1994 through June 30, 1996, 91.0% of the
Company's finance contracts were originated with obligors who resided in Texas.
The Company markets a single finance contract acquisition program to its
dealers which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles. Through June 30, 1996, the
finance contracts acquired by the Company had, upon acquisition, an average
initial principal balance of $11,941, a weighted average annual percentage rate
('APR') of 19.5%, a weighted average finance contract acquisition discount of
8.6% and a weighted average maturity of 53.0 months.
The Company's growth strategy anticipates the acquisition of an increasing
volume of finance contracts. The key elements of this strategy include: (i)
increasing the number of finance contracts acquired per automobile dealer; (ii)
expanding the Company's presence within existing markets; and (iii) penetrating
new markets that meet the Company's economic, demographic and business criteria.
3
<PAGE>
<PAGE>
To sustain its growth, the Company will continue to pursue a business
strategy based on the following principles:
EXPERIENCED MANAGEMENT TEAM -- The Company actively recruits and retains
experienced personnel at the executive, supervisory and managerial levels.
The senior operating management of the Company consists of seasoned
automobile finance professionals with an average of 24 years experience in
underwriting, collecting and financing automobile finance contracts.
EFFICIENT FUNDING STRATEGIES -- Through an investment-grade rated warehouse
facility and a quarterly securitization program, the Company increases its
liquidity, redeploys its capital and reduces its exposure to interest rate
fluctuations. The Company has also developed the ability to borrow funds on
a non-recourse basis, collateralized by excess spread cash flows from its
securitization trusts.
TARGETED MARKET AND PRODUCT FOCUS -- The Company targets the subprime auto
finance market because it believes that subprime finance presents greater
opportunities than does prime lending. This greater opportunity stems from
a number of factors, including the relative youth of subprime auto
finance, the unique market niche that subprime auto finance companies
provide, the relative lack of competition compared to traditional
automotive financing and the potential returns sustainable from large
interest rate spreads. The Company focuses on late-model used rather than
new vehicles, as management believes the risk of loss is lower on used
vehicles due to lower depreciation rates, while interest rates are
typically higher than on new vehicles. For the period from inception
through June 30, 1996, New Vehicles and Used Vehicles represented 10.7% and
89.3% respectively of the finance contract portfolio measured by dollar
value of amounts financed and 8.0% and 92.0% respectively as a percentage
of units acquired. In addition, the Company concentrates on acquiring
finance contracts from dealerships franchised by major automobile
manufacturers.
UNIFORM UNDERWRITING CRITERIA -- To manage the risk of delinquency or
defaults associated with subprime consumers, the Company has developed
underwriting criteria which are consistently applied in evaluating credit
applications. This evaluation process is conducted on a centralized basis
utilizing experienced personnel.
LIMITED LOSS EXPOSURE -- To reduce its potential losses on defaulted
finance contracts, the Company insures each finance contract it funds
against damage and fraud to the financed vehicle through a vender's
comprehensive single interest physical damage insurance policy (the 'VSI
Policy'). In addition, the Company purchases credit default insurance
through a deficiency balance endorsement (the 'Credit Endorsement') to the
VSI Policy. Moreover, the Company limits loan-to-value ratios and applies a
purchase price discount to the finance contracts it acquires.
INTENSIVE COLLECTION MANAGEMENT -- The Company believes that intensive
collection efforts are essential to ensure the performance of subprime
finance contracts. The Company's collections managers contact delinquent
accounts frequently, beginning on the fifth day of delinquency, and
initiate repossession of financed vehicles no later than the 90th day of
delinquency. As of June 30, 1996, a total of 85, or 1.5%, of the Company's
finance contracts outstanding were between 60 and 90 days past due. Since
inception through June 30, 1996, the Company repossessed approximately 5.1%
of its financed vehicles.
CENTRALIZED OPERATING STRUCTURE -- While the Company establishes and
maintains relationships with dealers through sales representatives located
in the geographic markets served by the Company, all of the Company's
day-to-day operations are centralized at the Company's offices in Austin,
Texas. This centralized structure allows the Company to closely monitor its
underwriting and collections operations and eliminates the expenses
associated with full-service branch or regional offices.
The Company is a Texas corporation. The Company's principal executive
office and mailing address is 301 Congress Avenue, 9th Floor, Austin, Texas
78701, and its telephone number is (512) 435-7000.
4
<PAGE>
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company............................ 1,275,000 shares
Common Stock offered by the Selling
Shareholders....................... 225,000 shares
Total Common Stock offered(1)... 1,500,000 shares
Common Stock to be outstanding after
the Offering(1)(2)................. 6,981,311 shares
Use of proceeds...................... The Company intends to use the net proceeds received by it to: acquire new
finance contracts; repay subordinated indebtedness of $300,000; repay
certain outstanding indebtedness under revolving warehouse credit
facilities; and for general corporate purposes.
The Selling Shareholders have agreed to use the net proceeds received by
them to repay in full the outstanding balance under a working capital
facility guaranteed by the Company and certain indebtedness to the
Company. See 'Use of Proceeds' and 'Certain Transactions.'
Proposed Nasdaq symbol............... ABND
</TABLE>
- ------------
(1) Excludes 225,000 additional shares which may be issued pursuant to exercise
of the Underwriters' over-allotment option. See 'Underwriting.'
(2) Includes 18,811 shares of Common Stock reserved for issuance pursuant to the
exercise of outstanding warrants. See 'Description of Capital
Stock -- Warrants.' Excludes 300,000 shares of Common Stock reserved for
issuance pursuant to the exercise of options to be outstanding at the time
of the Offering. See 'Management -- Option Plan.'
5
<PAGE>
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ ------------------------------------
1994(1) 1995 1995 1996
---------- ---------- ---------------- ----------------
(DOLLARS IN THOUSANDS EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income.......................... $ 19 $ 781 $ 417 $ 333
Servicing fee income......................... 0 0 9 277
Gain on sale of finance contracts............ 0 4,086 134 5,744
Net income (loss) before taxes and
extraordinary loss......................... (545) 1,072 (931) 2,996
Net income (loss)............................ (545) 873 (931) 1,876
Net income (loss) per share.................. (0.11) 0.17 (.18) .33
Weighted average shares outstanding.......... 5,118,753 5,190,159 5,118,753 5,698,367
Pro forma net income(2)...................... $ -- $ 923 $ -- $ 1,900
Pro forma net income per share(2)............ -- 0.15 -- 0.27
PORTFOLIO DATA:
Number of finance contracts acquired......... 202 2,659 1,042 2,856
Principal balance of finance contracts
acquired................................... $ 2,454 $ 31,200 $ 12,207 $ 33,358
Principal balance of finance contracts
securitized................................ $ 0 $ 26,261 $ 0 $ 34,396
Average initial finance contract principal
balance.................................... $ 12.2 $ 12.0 $ 12.0 $ 11.9
Weighted average initial contractual term
(months)................................... 54.3 53.3 53.0 52.7
Weighted average APR of finance contracts.... 19.1% 19.3% 19.2% 19.7%
Weighted average finance contract acquisition
discount................................... 8.6% 8.8% 8.7% 8.6%
Number of finance contracts outstanding (end
of period)................................. 197 2,774 1,219 5,485
Principal balance of finance contracts
outstanding (end of period)................ $ 2,450 $ 31,311 $ 14,125 $ 59,392
OPERATING DATA:
Number of enrolled dealers (end of period)... 50 280 169 492
Number of states served (end of period)...... 2 7 5 16
Total expenses as a percentage of total
principal balance of finance contracts
acquired in period......................... 23.0% 12.2% 12.2% 10.1%
ASSET QUALITY DATA:
Delinquencies 60+ days past due as a
percentage of principal balance of finance
contracts (end of period).................. 0.30% 2.30% 1.39% 2.48%
Net charge-offs as a percentage of average
finance contract balances(3)(4)(5)......... 0.00% 0.66% 0.39% 1.45%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(6)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Finance contracts held for sale, net......... $ 546 $ 546
Excess servicing receivable.................. 1,575 1,575
Total assets................................. 16,292 28,984
Short term debt.............................. 537 0
Long term debt............................... 6,248 6,248
Shareholders' equity......................... 4,645 17,784
</TABLE>
- ------------
(1) The Company was incorporated on June 15, 1993 and commenced operations in
August 1994.
(2) Pro forma net income and pro forma net income per share give effect to (i)
the savings of interest expense on the retirement of the $300,000
subordinated debt, (ii) the savings of interest on the retirement of the
$237,000 in advances outstanding under the Revolving Credit Facilities, and
(iii) the sale by the Company of 1,275,000 shares of the Common Stock
offered hereby based on an initial public offering price of $12.00 after
deducting underwriting discounts and commissions and estimated offering
expenses and the application of approximately $537,000 of the net proceeds
therefrom to the prepayment of the subordinated debt and Revolving Credit
Facilities as if such transaction had been consummated as of January 1,
1995.
(3) Averages are based on daily balances.
(4) Six month figures are annualized.
(5) With respect to repossessions where full disposition proceeds have not been
received, calculations assume immediate recovery of disposition proceeds
(including insurance proceeds) and realization of loss at average historic
loss rates.
(6) As adjusted to give effect to (i) estimated net proceeds of the Offering of
$13.2 million (at an assumed initial public offering price of $12.00 per
share) and (ii) the application of such net proceeds. See 'Use of Proceeds.'
6
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<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the information contained elsewhere in this
Prospectus, prospective purchasers should carefully consider the following risk
factors concerning the Company and its business in evaluating an investment in
the Common Stock offered hereby.
LIMITED OPERATING HISTORY
The Company was incorporated in June 1993 and commenced operations in
August 1994 and, accordingly, has only a limited operating history. Although the
Company has experienced substantial growth in dealer relationships, finance
contract acquisitions and revenues, there can be no assurance that this growth
is sustainable or that historical results are indicative of future results. In
addition, the Company's results of operations, financial condition and liquidity
depend, to a material extent, on the performance of its finance contracts.
Because of the Company's limited operating history, its finance contract
portfolio is relatively unseasoned. Thus, the Company's portfolio performance,
including historical delinquency and loss experience, is not necessarily
indicative of future results. Furthermore, the Company's ability to achieve and
maintain profitability on both a quarterly and an annual basis will depend, in
part, upon its ability to implement its business strategy and to securitize
quarterly on a profitable basis. See 'Selected Consolidated Financial and
Operating Data.'
ABILITY OF THE COMPANY TO IMPLEMENT ITS BUSINESS STRATEGY
The Company's business strategy is principally dependent upon its ability
to increase the number of finance contracts it acquires while maintaining
favorable interest rate spreads and effective underwriting and collection
efforts. Implementation of this strategy will depend in large part on the
Company's ability to: (i) expand the number of dealerships involved in its
financing program and maintain favorable relationships with these dealerships;
(ii) increase the volume of finance contracts purchased from its dealer network;
(iii) obtain adequate financing on favorable terms to fund its acquisition of
finance contracts; (iv) profitably securitize its finance contracts on a regular
basis; (v) maintain appropriate procedures, policies and systems to ensure that
the Company acquires finance contracts with an acceptable level of credit risk
and loss; (vi) hire, train and retain skilled employees; and (vii) continue to
expand in the face of increasing competition from other automobile finance
companies. The Company's failure to obtain or maintain any or all of these
factors could impair its ability to implement its business strategy
successfully, which could have a material adverse effect on the Company's
results of operations and financial condition. See 'Business -- Growth and
Business Strategy.'
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company requires access to significant sources and amounts
of cash to fund its operations and to acquire and securitize finance contracts.
As a result of the initial period required to accumulate finance contracts prior
to securitizing such contracts, until the first quarter of 1996, the Company's
cash requirements exceeded cash generated from operations. The Company's primary
operating cash requirements include the funding of (i) the acquisition of
finance contracts prior to securitization, (ii) the initial cash deposits to
reserve accounts in connection with the warehousing and securitization of
contracts in order to obtain lower financing rates, (iii) fees and expenses
incurred in connection with the warehousing and securitization of contracts and
(iv) ongoing administrative and other operating expenses. The Company has
traditionally obtained these funds in three ways: (a) loans and warehouse
financing arrangements, pursuant to which acquisitions of finance contracts are
funded on a temporary basis; (b) securitizations or sales of finance contracts,
pursuant to which finance contracts are funded on a permanent basis; and (c)
general working capital, which if not obtained from operations, may be obtained
through the issuance of debt or equity. Failure to procure funding from all or
any one of these sources could have a material adverse effect on the Company.
See 'Use of Proceeds' and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources.'
7
<PAGE>
<PAGE>
Cash Flows Associated With Financings. Under the financial structures the
Company has used to date in its warehousing and securitizations, certain excess
cash flows generated by the finance contracts are retained in a cash reserve or
'spread' account to provide liquidity and credit enhancement. While the specific
terms and mechanics of the cash reserve account can vary depending on each
transaction, the relevant agreement generally provides that the Company is not
entitled to receive certain excess cash flows unless certain reserve account
balances have been attained and the delinquency or losses related to the
contracts in the pool are below certain predetermined levels. In the event
delinquencies and losses on the contracts exceed such levels, the terms of the
warehouse facility or securitization may require increased cash reserve account
balances to be accumulated for the particular pool or, in certain circumstances,
may require the transfer of the Company's collection function to another
servicer. The imposition of any of the above-referenced conditions could
materially adversely affect the Company's liquidity and financial condition.
Dependence on Warehouse Credit Facilities. The Company's two primary
sources of financing for the acquisition of finance contracts are its (i) $20.0
million warehouse revolving line of credit with Peoples Security Life Insurance
Company (an affiliate of Providian Capital Management) and (ii) $10.0 million
warehouse revolving line of credit with Sentry Financial Corporation (together,
the 'Revolving Credit Facilities') which expire in December 1996 and July 1998,
respectively. To the extent that the Company is unable to maintain the Revolving
Credit Facilities or is unable to arrange new warehouse lines of credit, the
Company may have to curtail its finance contract acquisition activities, which
would have a material adverse effect on its operations and cash position. These
warehouse lines are typically repaid with the proceeds received by the Company
when its finance contracts are securitized. The Company's ability to continue to
borrow under the Revolving Credit Facilities is dependent upon its compliance
with the terms thereof, including the maintenance by the Company of certain
minimum capital levels and of the VSI Policy, or the establishment of an
acceptable self-insurance program. There can be no assurance that such
facilities will be extended or that substitute facilities will be available on
terms acceptable to the Company. The Company's ability to obtain a successor
facility or similar financing will depend on, among other things, the
willingness of financial organizations to participate in funding subprime
finance contracts and the Company's financial condition and results of
operations. The Company's growth is dependent upon its ability to obtain
sufficient financing under its Revolving Credit Facilities, and any additional
or successor facilities, at rates and upon terms acceptable to the Company. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources' and
'Business -- Funding/Securitization of Finance Contracts.'
Dependence on Securitization Transactions. The Company relies significantly
on a strategy of periodically selling finance contracts through asset-backed
securitizations. Proceeds from securitizations are typically used to repay
borrowings under the warehouse credit facilities, thereby making such facilities
available to acquire additional finance contracts. The Company's ability to
access the asset-backed securities market is affected by a number of factors,
some of which are beyond the Company's control and any of which could cause
substantial delays in securitization, including, among other things, conditions
in the securities markets in general, conditions in the asset-backed securities
market and investor demand for subprime auto paper. Additionally, gain on sale
of finance contracts represents a significant portion of the Company's total
revenues and, accordingly, net income. If the Company were unable to securitize
finance contracts or account for any securitization as a sale transaction 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. Moreover, the
Company's ability to borrow funds on a non-recourse basis, collateralized by
excess spread cash flows, is an important factor in providing the Company with
substantial liquidity. If the Company were unable to securitize its finance
contracts and did not have sufficient credit available, either under warehouse
credit facilities or from other sources, the Company would have to sell portions
of its portfolio directly to whole loan buyers or curtail its finance contract
acquisition activities. See 'Business -- Funding/Securitization of Finance
Contracts.'
Dependence on the VSI Policy. In order to limit potential losses on finance
contracts, the Company has purchased, and expects to continue to purchase,
insurance under the VSI Policy (including the Credit Endorsement) for each
contract at the time of its acquisition. The VSI Policy currently in effect
includes physical damage and loss coverage with respect to the financed vehicles
as well as loss coverage pursuant to the Credit Endorsement with respect to
unpaid amounts under the related finance contract,
8
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<PAGE>
subject in each case to certain conditions and limitations. The protections
afforded by the VSI Policy (including the Credit Endorsement) are not complete
and depend on the Company's compliance with the terms and conditions of the
policy. Coverage under the VSI Policy (and the Credit Endorsement) is currently
required under the Company's Revolving Credit Facilities and its securitizations
to date. There can be no assurance that such insurance will be available in the
future at reasonable rates. The VSI Policy (including the Credit Endorsement)
may be cancelled prospectively, without cause, upon 30 days' prior written
notice to the Company and, for cause, upon ten days' prior written notice. The
unavailability of such insurance, coupled with the absence of alternative forms
of credit enhancement, could adversely affect the Company's ability to
profitably acquire and securitize finance contracts. See 'Business --
Insurance.'
Need for Additional Capital. The Company's ability to implement its
business strategy will depend upon its ability to continue to effect
securitizations or to establish alternative long-term financing arrangements and
to obtain sufficient financing under warehousing facilities on acceptable terms.
There can be no assurance that such financing will be available to the Company
on favorable terms. If such financing were not available or the Company's
capital requirements exceeded anticipated levels, then the Company would be
required to obtain additional equity financing, which would dilute the interests
of shareholders who invest in this offering. The Company cannot estimate the
amount and timing of additional equity financing requirements because such
requirements are tied to, among other things, the growth of the Company's
finance contract acquisitions which cannot be definitively forecast for future
periods. If the Company were unable to raise such additional capital, its
results of operations and financial condition could be adversely affected. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources' and 'Business -- Financing
Program.'
DETERMINATION OF GAIN FROM SECURITIZATION TRANSACTIONS
The gain from securitization transactions recognized by the Company in each
securitization and the value of the future excess spread cash flows in each
transaction reflect management's estimate of future credit losses and
prepayments for the finance contracts included in that securitization. If actual
rates of credit loss or prepayments, or both, on such finance contracts exceeded
those estimated, the value of the excess servicing receivables 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 carrying value
of the future excess spread cash flows by writing down the asset and recording a
charge to servicing fee income. The Company's results of operations and
liquidity could be adversely affected if credit loss or prepayment levels on
securitized finance contracts substantially exceeded anticipated levels. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Revenues/Credit Loss Experience' and Note 1 to Notes to
Consolidated Financial Statements.
ECONOMIC CONSIDERATIONS
The Company's business is directly related to sales of new and used
automobiles, which are affected by employment rates, prevailing interest rates
and other domestic economic conditions. Delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions. Because of the
Company's focus on subprime borrowers, the actual rates of delinquencies,
repossessions and losses on such contracts under adverse conditions could be
higher than those currently experienced. Any sustained period of economic
slowdown or recession could adversely affect the Company's ability to sell or
securitize pools of finance contracts. The timing of any economic changes is
uncertain. Decreased sales of automobiles and weakness in the economy could have
an adverse effect on the Company's business and that of the dealers from which
it purchases finance contracts.
DEFAULTS ON CONTRACTS; PREPAYMENTS
The Company is engaged in acquiring automobile finance contracts entered
into by dealers with subprime borrowers who have limited access to traditional
sources of consumer credit. The inability of a
9
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<PAGE>
borrower to finance an automobile purchase by means of traditional credit
sources generally is due to various factors, including the borrower's past
credit experience and the absence or limited extent of the borrower's credit
history. Consequently, the contracts acquired by the Company generally bear a
higher rate of interest than finance contracts of borrowers with favorable
credit profiles, but also involve a higher probability of default, may involve
higher delinquency rates and involve greater servicing costs. The majority of
the Company's borrowers are classified as subprime consumers due to negative
credit history, including history of charge-offs, bankruptcies, repossessions or
unpaid judgments. Generally, subprime consumers are those that do not qualify
for financing from traditional lending sources. The Company's continued
profitability depends upon, among other things, its ability to evaluate the
creditworthiness of customers, to prevent defaults through proactive collection
efforts and to minimize losses following defaults with proceeds from the sale of
repossessed collateral and with insurance proceeds. Because of the Company's
limited operating history, its finance contract portfolio is somewhat
unseasoned. Accordingly, delinquency and loss 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 delinquency and net
charge-off rates in the portfolio could have a material adverse effect on the
Company's operations and profitability, and its ability to obtain credit or
securitize its finance contracts. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and 'Business -- Borrower
Characteristics,' ' -- Contract Acquisition Process,' ' --
Funding/Securitization of Finance Contracts' and ' -- Contract Servicing and
Collection.'
The Company's servicing income also can be adversely affected by
prepayments or defaults on contracts in the servicing portfolio. The Company's
servicing revenue is based on the number of outstanding contracts. If contracts
are prepaid or charged-off, the Company's servicing revenue will decline to the
extent of such prepaid or charged-off contracts. There can be no assurance as to
what level of prepayment, if any, will occur on the finance contracts.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors. Factors affecting prepayment of motor vehicle finance contracts
include borrowers' job transfers, unemployment, casualty, trade-ins, changes in
available interest rates, net equity in the motor vehicles and servicing
decisions.
LOSS OF SERVICING RIGHTS AND SUSPENSION OF FUTURE RETAINED CASH FLOWS
The Company is entitled to receive servicing fee income only while it acts
as collection agent for securitized contracts. Any loss of these collection fees
could have an adverse effect on the Company's results of operations and
financial condition. The Company's right to act as collection agent under the
servicing agreements and as administrator under the trust agreements, and
accordingly to receive collection fees, can be terminated by the trustee upon
the occurrence of certain events of administrator termination (as defined in the
servicing agreements and the trust agreements). See 'Business --
Funding/Securitization of Finance Contracts.'
Under the terms of each of the trust agreements, upon the occurrence of
certain amortization events, the Company's rights to receive payments of its
collection fees and payments in respect of its retained interest in the
securitization excess spread cash flows would be suspended unless and until all
payments of principal and interest due on the investor certificates are made.
Such amortization events include (i) the occurrence of any event of
administrator termination referred to in the immediately preceding paragraph or
(ii) the institution of certain bankruptcy or liquidation proceedings against
any of the securitization subsidiaries of the Company.
Upon the occurrence of certain trigger events under the trust agreements,
the amount required to be retained in the cash reserve accounts is increased
such that future residual cash flows would be retained in such accounts rather
than paid to the Company. Such cash reserve trigger events include: (i)
increases in the net loss ratio and delinquency ratios above certain levels for
each pool of securitized finance contracts; or (ii) the occurrence of an event
of administrator termination resulting from a bankruptcy event of the Company.
In addition to the foregoing, the trust agreement provides that, upon the
occurrence of any amortization event, a greater portion of the excess spread
cash flows available for funding the cash reserve account be directed to such
account than would be required in the absence of an amortization event, and that
payment to the Company of its retained interest in such excess spread cash flows
be
10
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<PAGE>
withheld until payments of principal and interest then due the holders of the
investor certificates are paid in full. See 'Business -- Funding/Securitization
of Finance Contracts.'
The Company's loss of rights to collection fees under the trust agreements
or the occurrence of a trigger event that limited release of future residual
cash flows from the pooled contracts and cash reserve accounts could have an
adverse effect on the Company's results of operations and financial condition.
VARIABLE QUARTERLY EARNINGS
The Company's revenues and income have fluctuated in the past and may
fluctuate in the future. 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 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. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
In addition, income in any quarterly period may be affected by the
revaluation of excess servicing receivables, which are valued at the present
value of the expected future excess spread cash flows using the same discount
rate as was appropriate at the time of securitization. If actual prepayment or
default rates on securitized finance contracts exceed those assumed in the
Company's calculation of the gain from securitization transactions, the Company
could be required to record a charge to earnings. As a result of these factors,
the Company's operating results may vary from quarter to quarter, and the
results of operations for any particular quarter are not necessarily indicative
of results that may be expected for any subsequent quarter or related fiscal
year. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and Note 1 to Notes to Consolidated Financial Statements.
COMPETITION
The market in which the Company operates is highly competitive and
fragmented, consisting of many national, regional and local competitors, and is
characterized by relative ease of entry and the recent arrival of a number of
new competitors. Existing and potential competitors include well-established
financial institutions, such as banks, savings and loans, small loan companies,
industrial thrifts, leasing companies and captive finance companies owned by
automobile manufacturers and others. Many of these competitors are substantially
larger and better capitalized than the Company and may have other competitive
advantages over the Company. Competition by existing and future competitors
would result in competitive pressures, including reductions in the Company's
finance contract acquisitions or reduced interest spreads, that would materially
adversely affect the Company's profitability. Further, as the Company seeks to
increase its market penetration, its success will depend, in part, on its
ability to gain market share from established competitors. See
'Business -- Competition.'
RELATIONSHIPS WITH DEALERS
The Company's business depends in large part upon its ability to maintain
and service its relationships with automobile dealers. There can be no assurance
the Company will be successful in maintaining such relationships or increasing
the number of dealers with which it does business or that its existing dealer
base will continue to generate a volume of finance contracts comparable to the
volume historically generated by such dealers. For the period from inception
through June 30, 1996, one dealer, Charlie Thomas Ford, Inc., Houston, Texas,
accounted for 11.2% (14.0% for the first six months of 1996) of the finance
contracts acquired by the Company, and a group of six dealerships with
substantial common ownership (including such dealer) accounted for 14.8% (17.5%
for the first six months of 1996) of the finance contracts acquired by the
Company during the period. See 'Business -- Dealer Network.'
11
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<PAGE>
INTEREST RATE RISK
The Company's profitability is dependent upon the difference, or 'spread,'
between the effective rate of interest received by the Company on the finance
contracts it acquires and the interest rates payable either under its warehouse
credit facilities or on securities issued in securitizations. Several factors
affect the Company's ability to manage interest rate risk. First, finance
contracts are purchased at fixed rates, while amounts borrowed under certain of
the Company's credit facilities bear interest at variable rates that are subject
to frequent adjustment to reflect prevailing rates for short-term borrowings.
Second, the interest rate demanded by investors in securitizations is a function
of prevailing market rates for comparable transactions and of the general
interest rate environment. Because the finance 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 finance
contracts are purchased until the closing of its securitization of such finance
contracts. Narrowing spreads would adversely affect the net interest income
earned by the Company while finance contracts are held for sale. In addition,
increases in interest rates prior to the securitization or sale of finance
contracts may reduce the gain realized by the Company. The Company does not
currently hedge its interest rate exposure. While the Company may consider
hedging strategies to attempt to limit such exposure in the future, there can be
no assurance that any such strategy, if adopted, will be successful. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
GEOGRAPHIC CONCENTRATION AND EXPANSION
For the period from inception in August 1994 through June 30, 1996,
approximately 91.0% of the Company's finance contracts, as a percentage of the
aggregate nominal principal balance of such finance contracts, had been
originated in the State of Texas. Such geographic concentration could have an
adverse effect on the Company should negative economic and other factors occur
in Texas that would cause the finance contracts to experience delinquencies and
losses in excess of those experienced historically. It is the Company's current
intention to expand the number and proportion of finance contracts acquired from
dealers in states other than Texas. Such geographic expansion may entail greater
risks as the Company does business in areas and with dealers with which it is
less familiar than in Texas. Such expansion also entails risks associated with
the adequate retention and training of sufficient personnel and the need for
sufficient financing sources. See 'Business -- Growth and Business Strategy.'
REGULATION
The Company's business is subject to numerous federal and state consumer
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 the
Company to provide specified disclosure; and (v) define the Company's rights to
collect on finance contracts and to repossess and sell collateral. A change in
existing laws or regulations, or in the creation or enforcement thereof, or the
promulgation of any additional laws or regulations could have a material adverse
effect on the Company's business. See 'Business -- Regulation.'
DEPENDENCE ON KEY EXECUTIVES
The success of the Company's operations is dependent upon the experience
and ability of William O. Winsauer, the Chairman of the Board and Chief
Executive Officer, and Adrian Katz, the Vice Chairman of the Board and Chief
Operating Officer. The loss of the services of Messrs. Winsauer or Katz could
have an adverse effect on the Company's business. In addition, if the loss of
either Mr. Winsauer or Mr. Katz constituted a 'change in control,' it could
result in an amortization event under the trust agreements relating to the
Company's securitizations, reducing future cash flows from securitizations or an
event of funding termination under its Providian Facility (as defined herein).
The Company does not maintain key man life insurance on any of its officers,
directors or employees at the
12
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<PAGE>
present time. See 'Business -- Funding/Securitization of Finance Contracts' and
'Management -- Employment Agreements.'
CONTROL BY CERTAIN SHAREHOLDERS
Upon completion of the Offering, William O. Winsauer, John S. Winsauer and
Adrian Katz will beneficially own an aggregate of approximately 78.46% of the
outstanding shares of Common Stock (76.0% if the Underwriters' over-allotment
option is exercised in full). Accordingly, such persons, if they were to act in
concert, would have majority control of the Company, with the potential ability
to elect the Board of Directors and to approve or prevent certain fundamental
corporate transactions (including mergers, consolidations and sales of all or
substantially all of the Company's assets). See 'Certain Transactions,'
'Principal and Selling Shareholders' and 'Description of Capital Stock.'
ABSENCE OF DIVIDENDS
The Company has not paid any dividends on its Common Stock to date and
currently does not intend to pay dividends in the future. The payment of
dividends, if any, will be contingent upon the Company's financial condition,
results of operations, capital requirements, contractual restrictions and other
factors deemed relevant by the Board of Directors. See 'Dividend Policy.'
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that a regular trading market for
the Common Stock will develop after this Offering or that, if developed, it will
be sustained. The Company has applied for quotation of the Common Stock on
Nasdaq, subject to official notice of issuance. The initial public offering
price of the Common Stock will be determined by negotiations among the Company
and the Representatives (as defined herein) of the Underwriters and may not be
indicative of the price at which the Common Stock will trade after completion of
the Offering. In addition, market prices for securities of many emerging
companies have experienced wide fluctuations not necessarily related to the
operating performance of such companies. See 'Underwriting.'
PREFERRED STOCK
The Board of Directors, without further vote or action by the Company's
shareholders, is authorized to issue shares of Preferred Stock in one or more
series and to fix the terms and provisions of each series, including dividend
rights and preferences over dividends on the Common Stock, conversion rights,
voting rights (in addition to those provided by law) which may be senior to the
voting rights of the Common Stock, redemption rights and the terms of any
sinking fund therefor, and rights upon liquidation, including preferences over
the Common Stock. Under certain circumstances, the issuance of a series of
Preferred Stock could have the effect of delaying, deferring or preventing a
change of control of the Company and could adversely affect the rights of the
holders of the Common Stock. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Common Stock.
See 'Description of Capital Stock.'
DILUTION
Purchasers of Common Stock pursuant to the Offering will experience
immediate and substantial dilution. The purchase price of the Common Stock
offered hereby substantially exceeds the net tangible book value per share of
Common Stock at June 30, 1996 (as adjusted to give effect to the Offering) of
$0.80 per share, resulting in immediate dilution to new investors in the amount
of $9.44 per share. See 'Dilution.'
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 6,981,311 shares
of Common Stock outstanding (7,206,311 shares if the Underwriters'
over-allotment option is exercised in full). Of such shares, the shares sold in
the Offering (other than shares which may be purchased by 'affiliates' of the
Company) will be freely tradeable without restriction or further registration
under the Securities Act.
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<PAGE>
The 5,481,311 remaining shares of Common Stock are 'restricted securities,' as
that term is defined under Rule 144 promulgated under the Securities Act, and
may only be sold pursuant to a registration statement under the Securities Act
or an applicable exemption from the registration requirements of the Securities
Act, including Rule 144 and 144A thereunder. Approximately 69,800 shares of
Common Stock will be eligible for sale pursuant to Rule 144 immediately after
the Offering, subject to compliance with such Rule and the contractual
provisions described below. The Company and all holders of Common Stock prior to
the Offering have agreed with the Underwriters not to, directly or indirectly,
offer, sell, contract to sell or otherwise dispose of any securities of the
Company or any securities that are convertible into or exchangeable for, or that
represent the right to receive, Common Stock prior to the expiration of 180 days
from the date of this Prospectus without the prior written consent of Principal
Financial Securities, Inc. No predictions can be made as to the effect, if any,
that market sales of shares of existing shareholders or the availability of such
shares for future sale will have on the market price of shares of Common Stock
prevailing from time to time. The prevailing market price of the Common Stock
after the Offering could be adversely affected by future sales of substantial
amounts of Common Stock by existing shareholders or the perception that such
sales could occur. See 'Certain Transactions,' 'Principal and Selling
Shareholders,' 'Shares Eligible for Future Sale' and 'Underwriting.'
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<PAGE>
USE OF PROCEEDS
The aggregate net proceeds from the sale of the Common Stock being offered
by the Company in the Offering (at an assumed initial public offering price of
$12.00 per share and after deducting underwriting discount and estimated
offering expenses) will be approximately $13.2 million (approximately $15.7
million if the Underwriters' over-allotment option is exercised in full).
The Company intends to apply the net proceeds from the sale of the Common
Stock offered hereby primarily toward the acquisition of finance contracts. In
addition, net proceeds will be used (i) to prepay subordinated indebtedness of
$300,000, which bears interest at the rate of 10.0% per annum and matures in
March 1997, (ii) to repay advances outstanding under the Revolving Credit
Facilities, which currently bear interest at a blended rate of 8.1% per annum
and mature within 120 days of incurrence, (iii) to invest in short-term
investment grade securities and (iv) for general corporate and working capital
purposes.
The Selling Shareholders have agreed to use the net proceeds of
approximately $2.4 million to be received by them from the Offering for the
repayment in full of the outstanding balance, and accrued interest of the
Working Capital Facility, which amounts to $1,910,000 and is currently
guaranteed by the Company, and for the repayment of certain other indebtedness
to the Company. Such other indebtedness totalled $436,034 as of June 30, 1996.
The Selling Shareholders have submitted undertaking letters to the Company
obligating them to pay such amounts. See 'Certain Transactions' and Note 12 to
Notes to Consolidated Financial Statements.
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. The
Company's current policy is to retain earnings to provide funds for the
operation and expansion of its business and for the repayment of indebtedness.
Any determination in the future to pay dividends will depend on the Company's
financial condition, capital requirements, results of operations, contractual
limitations and other factors deemed relevant by the Board of Directors.
15
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<PAGE>
DILUTION
At June 30, 1996, the Company had an aggregate of 5,687,500 shares of
Common Stock outstanding with a net tangible book value of $4,584,100 or $0.80
per share. Net tangible book value per share represents the amount of total
tangible assets less total liabilities of the Company divided by the number of
shares of Common Stock outstanding. Without taking into account any changes in
such net tangible book value after June 30, 1996, other than to give effect to
the Offering (at an assumed initial public offering price of $12.00 per share
and after deducting underwriting discount and estimated offering expenses) and
the receipt by the Company of the net proceeds to it, the net tangible book
value at June 30, 1996 would have been $17,813,100 or $2.56 per share. This
represents an immediate increase in net tangible book value of $1.76 per share
to existing shareholders and an immediate dilution in net tangible book value of
$9.44 per share to new investors purchasing shares in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......................................... $12.00
Net tangible book value per share before the Offering(1)............................ $0.80
Increase per share attributable to new investors.................................... 1.76
-----
Net tangible book value per share after the Offering..................................... 2.56
------
Dilution per share to new investors...................................................... $ 9.44
------
------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the difference between the existing shareholders and new investors in the
Offering with respect to: (i) the number of shares of Common Stock purchased
from the Company; (ii) the total consideration paid to the Company; and (iii)
the average price per share paid by existing shareholders and by the new
investors purchasing shares in the Offering (at an assumed initial public
offering price of $12.00 per share and before deducting underwriting discount
and estimated offering expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(2)......................... 5,687,500 81.69% $ 2,913,603 16.00% $ 0.51
New investors.................................... 1,275,000 18.31 15,300,000 84.00 12.00
--------- ------- ----------- -------
Total....................................... 6,962,500 100.0% $18,213,603 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
- ------------
(1) Net tangible book value gives effect to the exercise of all dilutive common
stock equivalents, calculated under the treasury stock method.
(2) The information with respect to net tangible book value per share in the
table set forth above does not include 300,000 shares issuable upon the
exercise of stock options to be outstanding as of the Offering exercisable
at the assumed initial public offering price of $12.00 or 18,811 shares
issuable upon the exercise of an outstanding warrant with an exercise price
of $0.53 per share. As of June 30, 1996, 557,000 shares of Common Stock were
reserved for issuance under the Company's Option Plan (as defined herein).
See 'Management -- Option Plan' and 'Description of Capital Stock --
Warrants.' To the extent such options and warrants are exercised, there will
be further dilution to the new investors.
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CAPITALIZATION
The following table sets forth information regarding the short-term debt
and capitalization of the Company as of June 30, 1996 (i) on an actual basis and
(ii) on an as adjusted basis to give effect to the sale of 1,275,000 shares of
Common Stock offered by the Company (at an assumed initial public offering price
of $12.00 per share and after deducting the underwriting discount and estimated
offering expenses) and the application of the estimated net proceeds therefrom.
See 'Use of Proceeds.'
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term Debt:
Revolving credit agreements......................................................... $ 237 $ 0
Subordinated debt................................................................... 300 0
------- -----------
Total short-term debt............................................................... $ 537 $ 0
------- -----------
------- -----------
Long-term Debt -- Notes payable.......................................................... $ 6,248 $ 6,248
------- -----------
Shareholders' Equity:
Common Stock, no par value, 25,000,000 shares authorized; 5,687,500 shares issued
and outstanding, actual; and 6,962,500 shares issued and outstanding, as
adjusted(1)........................................................................ $ 1 $ 1
Additional paid-in capital.......................................................... 2,912 16,141
Retained earnings................................................................... 2,205 2,205
Deferred compensation............................................................... (37) (37)
Loans to shareholders............................................................... (436) 0
------- -----------
Total shareholders' equity..................................................... 4,645 18,310
------- -----------
Total short-term debt and capitalization....................................... $11,430 $24,558
------- -----------
------- -----------
</TABLE>
- ------------
(1) Excludes (i) 557,000 shares of Common Stock reserved for issuance under the
Option Plan and (ii) 18,811 shares of Common Stock issuable upon the
exercise of a warrant granted in connection with the issuance of
subordinated debt. See 'Description of Capital Stock -- Warrants,' and
'Management -- Option Plan.'
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial data for the
Company and its subsidiaries for the periods and at the dates indicated. The
selected income statement and balance sheet data for or at the end of each of
the full fiscal years presented below were derived from the financial statements
of the Company which were audited by Coopers & Lybrand L.L.P. independent
auditors, as indicated in their report thereon appearing elsewhere in this
Prospectus, and are qualified by reference to such consolidated financial
statements. The financial data as of and for the six months ended June 30, 1995
and June 30, 1996 have been derived from the Company's unaudited interim
financial statements, prepared in conformity with generally accepted accounting
principles, and include all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. The operating data and selected portfolio data are derived from the
Company's accounting records. Results of operations for the six months ended
June 30, 1996 are not necessarily indicative of results to be expected for the
fiscal year ended December 31, 1996. The data presented below should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ----------------------------------------
1994(1) 1995 1995 1996
------ ------- ------------------ ------------------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income......................................... $ 19 $ 781 $ 417 $ 333
Servicing fee income........................................ 0 0 9 277
Gain on sale of finance contracts........................... 0 4,086 134 5,744
------ ------- ---------- ----------
Total revenues......................................... 19 4,867 560 6,354
------ ------- ---------- ----------
Provision for credit losses................................. 45 49 205 64
Salaries and benefits....................................... 225 1,320 380 1,846
General and administrative.................................. 245 1,463 582 884
Other operating expenses.................................... 48 963 324 564
------ ------- ---------- ----------
Total expenses......................................... 564 3,795 1,491 3,358
------ ------- ---------- ----------
Net income (loss) before taxes and extraordinary loss....... (545) 1,072 (931) 2,996
Provision for income taxes.................................. 0 199 0 1,020
------ ------- ---------- ----------
Net income (loss)........................................... (545) 873 (931) 1,876
Net income (loss) per share................................. $(0.11) $ 0.17 $ (.18) $ .33
Weighted average shares outstanding......................... 5,118,753 5,190,159 5,118,753 5,698,367
Pro forma net income(2)..................................... $ -- $ 923 $-- $ 1,900
Pro forma net income per share(2)........................... -- 0.15 -- 0.27
PORTFOLIO DATA:
Number of finance contracts acquired........................ 202 2,659 1,042 2,856
Principal balance of finance contracts acquired............. $2,454 $31,200 $ 12,207 $ 33,358
Principal balance of finance contracts securitized.......... $ 0 $26,261 $ 0 $ 34,396
Average initial finance contract principal balance.......... $ 12.2 $ 12.0 $ 12.0 $ 11.9
Weighted average initial contractual term (months).......... 54.3 53.3 53.0 52.7
Weighted average APR of finance contracts................... 19.1% 19.3% 19.2% 19.7%
Weighted average finance contract acquisition discount...... 8.6% 8.8% 8.7% 8.6%
Number of finance contracts outstanding (end of period)..... 197 2,774 1,219 5,485
Principal balance of finance contracts (end of period)...... $2,450 $31,311 $ 14,125 $ 59,392
</TABLE>
(table continued on next page)
18
<PAGE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ----------------------------------------
1994(1) 1995 1995 1996
------ ------- ------------------ ------------------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Number of enrolled dealers (end of period).................. 50 280 169 492
Number of states served (end of period)..................... 2 7 5 16
Total expenses as a percentage of total principal balance of
finance contracts acquired in period...................... 23.0% 12.2% 12.2% 10.0%
ASSET QUALITY DATA:
Delinquencies 60+ days past due as a percentage of principal
balance of finance contract portfolio (end of period)..... 0.30% 2.30% 1.39% 2.48%
Net charge-offs as a percentage of average finance contract
balances(3)(4)(5)......................................... 0.00% 0.66% 0.39% 1.45%
------ ------- ---------- ----------
------ ------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- JUNE 30,
1994 1995 1996
------------------ ------------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 0 $ 93 $ 1,823
Cash held in escrow................ 0 1,323 1,667
Finance contracts held for sale,
net.............................. 2,361 3,355 546
Excess servicing receivable........ 0 847 1,575
Total assets.................. 2,500 11,065 16,292
Notes payable...................... 0 2,675 6,248
Repurchase agreement............... 0 1,061 0
Revolving credit agreement......... 2,055 1,150 237
Subordinated debt.................. 0 0 300
------- ---------- ---------
Total debt.................... 2,055 4,886 6,785
Shareholders' equity............... (109) 3,026 4,645
</TABLE>
- ------------
(1) The Company was incorporated on June 15, 1993 and commenced operations in
August 1994.
(2) Pro forma net income and pro forma net income per share give effect to (i)
the savings of interest expense on the retirement of the $300,000
subordinated debt, (ii) the savings of interest on the retirement of the
$237,000 in advances outstanding under the Revolving Credit Facilities, and
(iii) the sale by the Company of 1,275,000 shares of the Common Stock
offered hereby based on an initial public offering price of $12.00 after
deducting underwriting discounts and commissions and estimated offering
expenses and the application of approximately $537,000 of the net proceeds
therefrom to the prepayment of the subordinated debt and Revolving Credit
Facilities as if such transaction had been consummated as of January 1,
1995.
(3) Averages are based on daily balances.
(4) Six-Month figures are annualized.
(5) With respect to repossessions where full disposition proceeds have not been
received, calculations assume immediate recovery of disposition proceeds
(including insurance proceeds) and realization of loss at average historic
loss rates.
19
<PAGE>
<PAGE>
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 preceding 'Selected
Consolidated Financial and Operating Data' and 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 six months ended
June 30, 1996 are not necessarily indicative of results to be expected for the
entire fiscal year ended December 31, 1996.
The Company is a specialty consumer finance company engaged in acquiring,
securitizing and servicing finance contracts originated by automobile dealers in
connection with the sale of used and new vehicles to subprime consumers. The
Company has experienced significant growth in its finance contract portfolio
since it commenced operations in August 1994.
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
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 receivable by calculating the net present value of the expected
future excess spread cash flows to the Company from the securitization trust
utilizing the same
20
<PAGE>
<PAGE>
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.
Gain on sale of finance contracts was $3,951,706, $2,749,612 and $2,972,804
for each of the securitizations occurring in December 1995, March 1996 and June
1996 respectively. This represents approximately 15.05%, 16.60% and 16.67% 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 cost 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 discount obtained upon acquisition
of the finance contracts.
Additionally, costs of sale reduce the total gain recognized. As the
Company's securitization program matures, placement fees and other costs
associated with the sale should shrink as a percentage of the size of the
securitization. For example, costs of sale for the March transaction were
$280,000, while costs for the June transaction were about $230,000.
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. Gain
from the most recent securitization was approximately 16.67% of the securitized
amount, while the gains from the two prior securitizations were 16.60% and
15.05%. 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 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 WEIGHTED
BALANCE AT AVERAGE
ORIGINAL JUNE 30, CONTRACT CERTIFICATE GROSS
SECURITIZATION BALANCE(1) 1996 RATE RATE RATINGS(2) SPREAD(3)
- ----------------------------------------- ---------- ----------- -------- ----------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables
Trust 1995-A........................... $ 26,261 $26,261(4) 18.9% 7.23% A/A3 11.7%
AutoBond Receivables
Trust 1996-A........................... 16,563 16,563(4) 19.7 7.15 A/A3 12.5
AutoBond Receivables Trust 1996-B........ 17,833 17,833(4) 19.7 7.73 A/A3 12.0
---------- -----------
Total............................... $ 60,657 $60,657
---------- -----------
---------- -----------
</TABLE>
- ------------
(1) Refers only to balances on Class A investor certificates.
(2) Indicates ratings by Fitch Investors Service, L.P. and Moody's Investors
Service, Inc., respectively.
(footnotes continued on next page)
21
<PAGE>
<PAGE>
(footnotes continued from previous page)
(3) Difference between weighted average contract rate and senior Class A
Certificate rate.
(4) Before expiration of the revolving period for each 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.
Servicing fee income, excess spread cash flows and the value of the excess
servicing receivable may be affected by changes in the levels of prepayments,
defaults, delinquencies, recoveries and interest rates from those assumed by the
Company at the time of securitization. To the extent the assumptions used
materially differ from actual results, the amount of cash received by the
Company over the remaining life of the securitization could be significantly
affected, and the Company would be required to take a charge against earnings,
which could have a material adverse effect on the Company's financial condition
and operating results. To date, no such charge has been required. See 'Risk
Factors -- Defaults on Contracts; Prepayments' and ' -- Loss of Servicing Rights
and Suspension of Future Retained Cash Flows.'
EXPENSE ALLOCATIONS
The Company has shared certain general and administrative expenses with
ABI. Historically, each entity's expenses have been allocated based on the
estimated utilization of resources, including employees, office space, equipment
rentals and other miscellaneous expenses. The office, equipment and furniture
leases at the Company's headquarters are in ABI's name, and accordingly,
approximately 75% of ABI's lease expense for the year ended December 31, 1995
was allocated to the Company. As of January 1, 1996, the Company has been and
will be compensated for services rendered and reimbursed for expenses incurred
on behalf of ABI, pursuant to a management agreement. See 'Certain Transactions'
and Note 12 to Notes to Consolidated Financial Statements. ABI has no material
current operations other than to manage its investment in, and its shareholder's
investments in, securitizations outside the Company. It is anticipated that ABI
will wind down as the outstanding principal of such investments is retired.
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance
contract acquisition activity.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD FROM JUNE 30,
INCEPTION THROUGH YEAR ENDED -------------------
DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996
----------------- ----------------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Number of finance contracts acquired................ 202 2,659 1,042 2,856
Principal balance of finance contracts.............. $ 2,464 $31,915 $12,468 $33,902
Number of active dealerships(1)..................... 50 222 119 252
Number of enrolled dealerships...................... 50 280 169 492
</TABLE>
- ------------
(1) Dealers who have sold at least one finance contract to the Company during
the period.
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. Because results of operations for 1994 are based on a five-month period
from the inception of the Company's operations through December 31,
22
<PAGE>
<PAGE>
1994, a comparison of those results to results of operations for fiscal 1995 may
not be meaningful. Additionally, comparisons of the six-month periods ended June
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 half
of 1995. The following discussion and analysis should be read in conjunction
with 'Selected Consolidated Financial and Operating Data' and the Company's
Consolidated Financial Statements and the Notes thereto.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total Revenues
Total revenues increased $5.8 million to $6.4 million for the six months
ended June 30, 1996 from $560,000 for the comparable period ended June 30, 1995.
Net Interest Income. Net interest income decreased $84,597 to $332,831 for
the six months ended June 30, 1996 from $417,428 for the six months ended June
30, 1995. The decrease in net interest income was primarily due to an increase
in overall net borrowing costs and fees associated with Revolving Credit
Facilities. The average balance of finance contracts held for sale increased
$1.2 million to $8.7 million for the six months ended June 30, 1996, from $7.5
million for the six month period ended June 30, 1995. The average APR of
outstanding finance contracts was 19.7% at June 30, 1996, compared with 19.2% at
June 30, 1995.
Gain on Sale of Finance Contracts. For the six months ended June 30, 1996,
gain on sale of finance contracts amounted to $5.7 million. For the six months
ended June 30, 1996, the Company completed two securitizations aggregating
approximately $34.4 million in principal amount of finance contracts and the
gain on sale of finance contracts accounted for 90.4% of total revenues. For the
six months ended June 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 six months ended June 30, 1996, servicing fee income was $277,208, of which
$166,020 was collection agent fees and $111,188 arose from excess spread cash
flows net of amortization of the excess servicing receivable. The Company had
completed no securitizations and only a small whole-loan sale as of June 30,
1995 and reported no servicing fee income for such period.
Total Expenses
Total expenses of the Company increased $1.9 million to $3.4 million for
the six months ended June 30, 1996 from $1.5 million for the six months ended
June 30, 1995. Although operating expenses increased during the six months ended
June 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 expenses as
a percentage of total principal balance of finance contracts acquired in period
decreased to 10.1% in the six months ended June 30, 1996 from 12.2% in the six
months ended June 30, 1995.
Salaries and Benefits. Salaries and benefits increased $1.5 million to $1.8
million for the six months ended June 30, 1996 from $380,000 for the six months
ended June 30, 1995. This increase was due primarily to an increase in the
number of the Company's employees. Salaries and benefits are expected to
increase due to compensation of the Company's Chief Executive Officer, which the
Company began paying in May 1996. See Note 13 to Notes to Consolidated Financial
Statements.
General and Administrative Expenses. General and administrative expenses
increased $302,459 to $884,348 for the six months ended June 30, 1996 from
$581,889 for the six months ended June 30, 1995. This increase was due primarily
to growth in the Company's operations. General and administrative expenses
consist principally of office, furniture and equipment leases, professional
fees, communications and office supplies, and are expected to increase, upon
completion of the Offering, due to the costs of operating as a public company.
Other Operating Expenses. Other operating expenses (consisting principally
of servicing fees, credit bureau reports and insurance) increased $240,162 to
$564,237 for the six months ended June 30, 1996 from $324,075 for the six months
ended June 30, 1995. This increase was due to increased finance contract
acquisition volume.
23
<PAGE>
<PAGE>
Net Income
In the six months ended June 30, 1996, net income increased to $1.9 million
from a loss of $931,372 for the six months ended June 30, 1995. The increase was
primarily attributable to the two securitization transactions completed in the
first quarter of 1996, while there was no securitization transaction and only
one small whole-loan sale during the first half of 1995, as well as growth in
finance contract acquisitions.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO PERIOD FROM AUGUST 1, 1994
(INCEPTION) THROUGH DECEMBER 31, 1994
Total Revenues
Total revenues increased to $4.9 million for the fiscal year ended December
31, 1995 from $19,001 for the period from inception through December 31, 1994.
Although the Company was incorporated in June 1993, it did not commence
operations until August 1994; thus the period from inception through December
31, 1994 reflects only five months of start-up operations.
Net Interest Income. Net interest income increased $762,093 to $781,094 for
the fiscal year ended December 31, 1995 from $19,001 for the period from
inception through December 31, 1994. The increase in net interest income was
primarily due to an increase in average balance of finance contracts held for
sale. The average daily balance of outstanding finance contracts increased $13.8
million to $14.7 million for the fiscal year ended December 31, 1995 from
$855,640 for the period from inception through December 31, 1994. The average
APR of finance contracts outstanding was 19.3% at December 31, 1995 as compared
to 19.1% at December 31, 1994.
Gain on Sale of Finance Contracts. In the fiscal year ended December 31,
1995, the gain on sale of finance contracts was $4.1 million, or 83.9% of total
revenues, from the securitization of approximately $26.2 million in finance
contracts and the sale of finance contracts to a third party. For the period
from inception through December 31, 1994, there were no securitizations.
Servicing Fee Income. The Company completed its first securitization
transaction on December 29, 1995; therefore prior to 1996 there was no servicing
fee income collected by the Company.
Total Expenses
Total expenses of the Company increased $3.2 million to $3.8 million for
the fiscal year ended December 31, 1995 from $563,606 for the five-month period
ended December 31, 1994. Although operating expenses increased during the year
ended December 31, 1995, the Company's finance contract portfolio grew at a
faster rate than the rate of increase in operating expenses. As a result, total
expenses as a percentage of total principal balance of finance contracts
acquired in period decreased to 12.2% in the year ended December 31, 1995 from
23.0% in the five months ended December 31, 1994.
Provision for Credit Losses. Provision for credit losses increased $3,702
to $48,702 for the fiscal year ended December 31, 1995, from $45,000 for the
period from inception through December 31, 1994. This increase was due primarily
to increased acquisition volume and does not reflect any change in expected
defaults as a percentage of finance contracts purchased.
Salaries and Benefits. Salaries and benefits increased $1.1 million to $1.3
million for the fiscal year ended December 31, 1995 from $225,351 for the
five-month period ended December 31, 1994. This increase was due primarily to an
increase in the number of the Company's employees.
General and Administrative Expenses. General and administrative expenses
increased $1.2 million to $1.5 million for the fiscal year ended December 31,
1995 from $244,974 for the five-month period ended December 31, 1994. This
increase was due primarily to growth in the Company's operations.
Other Operating Expenses. Other operating expenses increased $914,736 to
$963,017 for the fiscal year ended December 31, 1995, from $48,281 for the
five-month period ended December 31, 1994, due to the increase in finance
contracts acquired.
24
<PAGE>
<PAGE>
Net Income
Net income increased to $873,487 for the fiscal year ended December 31,
1995 from a net loss of $544,605 for the period from inception through December
31, 1994. This increase was primarily attributable to the Company's initial
securitization transaction having been completed in December 1995, as well as
growth in finance contract acquisitions.
FINANCIAL CONDITION
Finance Contracts Held for Sale, Net. Finance contracts held for sale, net
of allowance for credit losses, decreased $11.9 million to $545,681 at June 30,
1996, from $12.3 million at June 30, 1995; and increased $1.0 million to $3.4
million at December 31, 1995, from $2.4 million at December 31, 1994. 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 finance contracts on a regular quarterly basis. See Note 1 to the
Notes to Consolidated Financial Statements for a discussion of finance contracts
held for sale and allowance for credit losses.
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 and June 1996 securitizations were
$525,220, $331,267 and $356,658, 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%.
Excess Servicing Receivable. The following table provides historical data
regarding the excess servicing receivable:
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
INCEPTION YEAR ENDED JUNE 30,
THROUGH DECEMBER 31, DECEMBER 31, ------------------------------------------
1994 1995 1995 1996
-------------------- ------------ ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance...................... $0 $ 0 $ 0 $ 847
Additions.............................. 0 895 0 1,262
Amortization........................... 0 (48) 0 (534)
-- --
------ -------
Ending balance......................... $0 $847 $ 0 $ 1,575
-- ------ --- -------
------ --- -------
</TABLE>
DELINQUENCY EXPERIENCE
The following table reflects the delinquency experience of the Company's
finance contract portfolio at December 31, 1994 and 1995 and at June 30, 1995
and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------- ----------------------------------
1994 1995 1995 1996
-------------- ---------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal balance of finance contracts
outstanding........................... $2,450 $31,311 $14,125 $59,392
Delinquent finance contracts(1):
31-59 days past due................ 60 2.46% 1,440 4.60% 597 4.23% 3,075 5.18%
60-89 days past due................ 7 0.30 474 1.51 129 0.91 933 1.57
90 days past due and over.......... 0 0.00 246 0.79 68 0.48 532 0.89
------ ---- ------- ----- ------- ---- ------- ----
Total......................... $ 67 2.76% $ 2,160 6.90% $ 794 5.62% $ 4,540 7.64%
------ ---- ------- ----- ------- ---- ------- ----
------ ---- ------- ----- ------- ---- ------- ----
</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.
25
<PAGE>
<PAGE>
CREDIT LOSS EXPERIENCE
An allowance for credit losses is maintained for all contracts held for
sale. See Notes 1 and 3 to Notes to Consolidated Financial Statements. 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 (as required by the VSI Policy), the Company's Collections
Department will initiate the repossession of the financed vehicle. Bonded,
insured outside repossession agencies are used to secure involuntary
repossessions. In most jurisdictions, notice to the borrower of the Company's
intention to sell the repossessed 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 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 has obtained credit deficiency balance coverage
through the Credit Endorsement of the VSI Policy. See 'Business -- Insurance.'
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.
The following table summarizes the Company's credit loss experience from
inception through June 30, 1996.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
AUGUST 1, 1994 (INCEPTION)
THROUGH JUNE 30, 1996
--------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cumulative initial finance contract principal balances acquired........................ $ 68,218
Gross charge-offs...................................................................... 3,299
Recoveries(1).......................................................................... (2,980)
----------
Net charge-offs(1)..................................................................... $ 319
----------
----------
Gross charge-offs as a percentage of cumulative initial finance contract principal
balances acquired.................................................................... 4.84%
Recoveries as a percentage of gross charge-offs(1)..................................... 90.3%
Net charge-offs as a percentage of cumulative initial finance contract principal
balances acquired(1)................................................................. 0.47%
</TABLE>
- ------------
(1) With respect to repossessions where full disposition proceeds have not been
received, calculations assume immediate recovery of disposition proceeds
(including insurance proceeds) and realization of loss at average historic
rates. See ' -- Net Loss Per Repossession.' This table is presented for
industry comparison purposes and does not reflect the Company's method of
accounting for charge-offs and recoveries for financial reporting purposes.
26
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<PAGE>
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 dollar levels of delinquencies and charge-offs and
analyzes the data on a 'static pool' basis.
The following table provides static pool repossession frequency analysis of
the Company's portfolio performance from inception through June 30, 1996. In
this table, all finance contracts have been segregated by month of acquisition.
All repossessions have been segregated by the month in which the repossessed
contract was originally acquired by the Company. Cumulative repossessions equals
the ratio of repossessions as a percentage of finance contracts acquired for
each segregated month. Annualized repossessions equals an annual equivalent of
the cumulative repossession ratio for each segregated month. This table provides
information regarding the Company's repossession experience over time. For
example, recently acquired finance contracts demonstrate very few repossessions.
After approximately one year of seasoning, frequency of repossessions appear to
reach a plateau. Based on industry statistics and the performance experience of
the ABI-sponsored securitizations, the Company believes that finance contracts
seasoned in excess of approximately 18 months will start to demonstrate
declining repossession frequency.
<TABLE>
<CAPTION>
REPOSSESSION FREQUENCY
YEAR AND MONTH OF REPOSSESSIONS BY ------------------------------
ACQUISITION MONTH ACQUIRED CUMULATIVE(1) ANNUALIZED(2) CONTRACTS ACQUIRED
- -------------------------------------------- ---------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1994
August................................. 0 0.00% 0.00% 1
September.............................. 1 12.50 6.82 8
October................................ 7 22.58 12.90 31
November............................... 7 11.48 6.89 61
December............................... 10 9.90 6.25 101
1995
January................................ 16 12.70% 8.47% 126
February............................... 24 12.70 8.96 189
March.................................. 29 14.01 10.51 207
April.................................. 22 13.92 11.14 158
May.................................... 21 10.94 9.38 192
June................................... 18 10.53 9.72 171
July................................... 9 8.41 8.41 107
August................................. 22 9.09 9.92 242
September.............................. 18 6.82 8.18 264
October................................ 14 5.07 6.76 276
November............................... 25 7.16 10.74 349
December............................... 23 6.08 10.43 378
1996
January................................ 8 1.99% 3.97% 403
February............................... 6 1.40 3.35 430
March.................................. 6 1.26 3.77 477
April.................................. 3 0.60 2.40 500
May.................................... 0 0.00 0.00 508
June................................... 0 0.00 0.00 542
</TABLE>
- ------------
(1) For each month, 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 December 1994, ten repossessions
divided by 101 contracts acquired, divided by 19 months outstanding times
twelve equals an annualized repossession frequency of 6.25%).
27
<PAGE>
<PAGE>
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.
<TABLE>
<CAPTION>
FROM
AUGUST 1, 1994
(INCEPTION) TO
JUNE 30, 1996(1)
-----------------
<S> <C>
Number of finance contracts acquired........................................................... 5,714
Number of finance contracts repossessed........................................................ 289
Repossessed units disposed of............................................................. 144
Repossessed units in inventory awaiting disposition....................................... 145
Cumulative gross charge-offs(1)................................................................ $ 1,643,679
Costs of repossession(1)....................................................................... 33,861
Proceeds from auction, physical damage insurance and refunds(1)................................ (1,178,170)
-----------------
Net loss.................................................................................. 499,370
Deficiency insurance settlement received(1)............................................... 340,247
-----------------
Net charge-offs(1)............................................................................. $ 159,123
-----------------
-----------------
Net charge-off per unit disposed............................................................... $1,105
Recoveries as a percentage of cumulative gross charge-offs..................................... 92.4%
</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 June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily funded its operations and the
growth of its finance contract portfolio through six principal sources of
capital: (i) cash flows from operating activities; (ii) funds provided from
borrowers' 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; and (vi)
proceeds from the issuances of subordinated debt and capital contributions of
principal shareholders.
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 six months ended June 30, 1996, $31.2
million and $33.4 million, respectively, was used by the Company to purchase
finance contracts, $2.7 million and $324,957, respectively, was received as
payments on finance contracts, and $27.4 million and $35.8 million,
respectively, was received from sales of finance contracts, primarily through
securitizations. The Company used $525,220 and $687,925 to fund cash reserve
accounts for the securitizations completed in the year ended December 31, 1995
and the six months ended June 30, 1996, respectively.
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 $913,129 for the six months ended June 30,
1996) and net proceeds from borrowings against excess spread cash flows ($2.7
million for the year ended December 31, 1995 and $4.1 million for the six months
ended June 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
28
<PAGE>
<PAGE>
advances may be paid down incrementally or reinvested in additional finance
contracts on a revolving basis.
At June 30, 1996, the Company had approximately $237,000 outstanding on 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 10.25% at June 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. Under the Sentry Facility, the
Company paid interest of $412,000 for the year ended December 31, 1995. In April
1996, the Company agreed to pay a one-time commitment fee of $700,000 to Sentry.
The Sentry Facility is cross-collateralized to the Company's guarantee of the
Sentry Working Capital Line. See 'Certain Transactions.'
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), which expires December 15, 1996. The proceeds
from the borrowings under the Providian 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% with a maximum rate of 11.0% and a minimum rate of 7.60%. The
Providian Facility also requires the Company to 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.
The Company's wholly-owned subsidiary, AutoBond Funding Corporation I
('AutoBond Funding'), entered into a warehouse credit facility (the 'Nomura
Facility') with Nomura Asset Capital Corporation, pursuant to a credit agreement
dated as of June 16, 1995, with a final maturity date of June 16, 2005. This
facility was terminated at the lender's option, and no new advances were made
after February 6, 1996. The Nomura Facility provided advances to AutoBond
Funding up to a maximum aggregate principal amount of $25.0 million for the
acquisition of finance contracts. On March 29, 1996, the remaining total
outstanding balance of advances of $9.0 million, and interest of $89,000, were
paid by AutoBond Funding. As of June 30, 1996 no advances were outstanding with
respect to the Nomura Facility.
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 non-recourse 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 of the outstanding
advances under warehouse credit facilities 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 and June 1996 the
Company securitized approximately $26.2 million, $16.6 million and $17.8
million, respectively, in nominal
29
<PAGE>
<PAGE>
principal amount of finance contracts and used the net proceeds 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 June 30, 1996, the Company held excess
servicing receivables and Class B Certificates totalling $7.7 million,
substantially all of which had been pledged to secure notes payable of $6.2
million.
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 of Common Stock at a price of
$0.53 per share.
Continued availability of funding from the Company's securitization program
cannot be guaranteed. However, borrowings under the Company's warehouse facility
are rated investment grade by a nationally recognized statistical rating
organization. Although the Company currently has only one long-term warehouse
facility, management believes that the investment grade rating should allow the
Company successfully to obtain additional warehouse financing.
The warehouse facility provides 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 cashflow 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 the Company's next five proposed securitization
transactions. 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 this 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 1996. The Company has no specific plans or arrangements for
additional equity financings. 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. See 'Risk Factors -- Liquidity and Capital Resources.'
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company does not believe that inflation directly has a
material adverse effect on its financial condition or results of operations,
increases in the inflation rate generally are associated with increased interest
rates. Because the Company borrows funds on a floating rate basis during the
period leading up to a securitization, and in many cases purchases finance
contracts bearing a fixed rate nearly equal but less than the maximum interest
rate permitted by law, increased costs of borrowed funds
30
<PAGE>
<PAGE>
could have a material adverse impact on the Company's profitability. Inflation
also can adversely affect the Company's operating expenses.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 114, 'Accounting by
Creditors for Impairment of a Loan' ('SFAS 114'), does not apply to the Company
because the Company's finance contract portfolio is comprised of
smaller-balance, homogeneous contracts that are collectively evaluated for
impairment.
Statement of Financial Accounting Standards No. 122, 'Accounting for
Mortgage Servicing Rights' ('SFAS 122') requires that upon sale or
securitization of servicing-retained finance contracts, the Company capitalize
the cost associated with the right to service the finance contracts based on
their relative fair values. Fair value is determined by the Company based on the
present value of estimated net future cash flows related to servicing income.
The cost allocated to the servicing right is amortized in proportion to and
over the period of estimated net future servicing fee income. SFAS No. 122 had
no impact on the Company's financial statements for the six-month period ended
June 30, 1996 and would have had no material impact on any of the prior
periods presented as servicing fees approximate cost.
Statement of Financial Accounting Standards No. 123, 'Accounting for
Stock-Based Compensation' ('SFAS 123'), was issued by the Financial Accounting
Standards Board in October 1995. SFAS 123 provides for companies to recognize
compensation expense associated with stock based compensation plans over the
anticipated service period based on the fair value of the award on the date of
grant. SFAS 123 is effective for fiscal years beginning after December 15, 1995.
As allowed under SFAS 123, the Company has elected to adopt SFAS 123's
disclosure-only alternative and will continue to account for stock-based
compensation as prescribed by Accounting Principles Board Opinion No. 25,
'Accounting for Stock Issued to Employees.'
31
<PAGE>
<PAGE>
BUSINESS
GENERAL
AutoBond Acceptance Corporation (the 'Company') is a specialty consumer
finance company engaged in underwriting, acquiring, servicing and securitizing
finance contracts originated by automobile dealers in connection with the sale
of used and, to a lesser extent, new vehicles to subprime consumers. Subprime
consumers generally are borrowers unable to qualify for traditional 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.
The Company was formed by William O. Winsauer and his brother, John S.
Winsauer, to capitalize on William O. Winsauer's expertise in the securitization
of subprime finance contracts which he developed as the founder of ABI. From
1989 to 1994, ABI structured 20 investment-grade rated securitizations of
subprime consumer automobile finance contract portfolios, aggregating
approximately $190.0 million in principal amount, originated, underwritten and
serviced by third parties. ABI's only continuing interest in these
securitizations was and is as a passive investor, and as a liaison with the
rating agency which rated the transactions. The Winsauers saw additional and
more fulfilling opportunities in forming an ongoing business that, unlike ABI,
controlled the origination, underwriting and collection functions. Accordingly,
the Company acquires finance contracts directly from automobile dealers, makes
credit decisions using its own underwriting guidelines and credit personnel, and
performs the collection function for the finance contracts using its own
Collections Department. The Company developed the necessary expertise and
relationships to underwrite, acquire, securitize and service finance contracts
by assembling a team of experienced professionals. The Company's senior
operating management averages 24 years of experience in the consumer finance
industry, with expertise in the operation of automobile dealerships,
underwriting and acquiring consumer finance contracts, investment banking and
securitizations, and collections. The Company's credit underwriters average
thirteen years of experience in the auto finance industry, and its sales
representatives and collection professionals average ten and seven years,
respectively, of industry experience.
The Company commenced operations in August 1994 and through June 30, 1996
had acquired 5,714 finance contracts with an aggregate initial principal balance
of $68.2 million, of which $60.7 million have been securitized in three
investment-grade rated transactions. In the six month period ended June 30,
1996, the Company underwrote and acquired 2,856 finance contracts with an
aggregate initial principal balance of $33.9 million. At June 30, 1996, the
Company had 492 dealer relationships in sixteen states, substantially all of
which were franchised dealers of major automobile manufacturers. The Company
earned net income of $873,487 for the fiscal year ended December 31, 1995
compared to a loss of $544,605 for the period from inception to December 31,
1994. The Company earned net income of $1.9 million for the six months ended
June 30, 1996 compared to a loss of $931,372 for the six months ended June 30,
1995.
The Company markets a single finance contract acquisition program to its
dealers which adheres to consistent underwriting guidelines involving the
purchase of primarily late-model used vehicles. Through June 30, 1996, the
finance contracts acquired by the Company had, upon acquisition, an average
initial principal balance of $11,941, a weighted average APR of 19.5%, a
weighted average finance contract acquisition discount of 8.6% and a weighted
average maturity of 53.0 months. The Company generally finances vehicles ranging
in age from zero to seven years. The average age of financed vehicles at the
time the related finance contracts were acquired has been approximately two
years. Vehicles older than seven years with below-average mileage or superior
service histories are occasionally approved by the Company for financing.
GROWTH AND BUSINESS STRATEGY
The Company's growth strategy anticipates the acquisition of an increasing
volume of finance contracts. The key elements of this strategy include: (i)
increasing the number of finance contracts acquired per automobile dealer; (ii)
expanding the Company's presence and geographic scope within existing markets;
and (iii) penetrating markets in the midwest and mid-Atlantic regions and other
new markets that meet the Company's economic, demographic and business criteria.
32
<PAGE>
<PAGE>
To sustain its growth, the Company will continue to pursue a business
strategy based on the following principles:
EXPERIENCED MANAGEMENT TEAM -- The Company actively recruits and retains
experienced management personnel at the executive, supervisory and
managerial levels. The senior operating management of the Company consists
of seasoned automobile finance professionals with an average of 24 years
experience in underwriting, collecting and financing automobile finance
contracts.
EFFICIENT FUNDING STRATEGIES -- Through an investment-grade rated
warehouse facility and a quarterly securitization program, the Company
increases its liquidity, redeploys its capital and reduces its exposure to
interest rate fluctuations. This practice requires the Company to monitor
and report on the performance of its portfolios of finance contracts on a
monthly basis. The Company has also developed the ability to borrow funds
on a non-recourse basis, collateralized by its interest in excess spread
cash flows from its securitization trusts.
TARGETED MARKET AND PRODUCT FOCUS -- The Company targets the subprime
auto finance market because it believes that subprime finance presents
greater opportunities than does prime lending. The Company focuses on late
model used, rather than new vehicles, as management believes the risk of
loss is lower on used vehicles due to lower depreciation rates, while
interest rates are typically higher than on new vehicles. In addition, the
Company concentrates on acquiring finance contracts from dealerships
franchised by major automobile manufacturers.
UNIFORM UNDERWRITING CRITERIA -- To manage the higher risk of delinquency
or default associated with subprime consumers, the Company has developed
uniform underwriting criteria that are consistently applied in evaluating
credit applications. This evaluation process is conducted on a centralized
basis utilizing experienced personnel.
LIMITED LOSS EXPOSURE -- In addition to stringent underwriting guidelines,
the Company obtains a VSI Policy, including a Credit Endorsement, for each
finance contract it funds. The VSI Policy protects the Company's economic
interest in the financed vehicle against damage and fraud. In the event a
subprime consumer defaults and the underlying vehicle is repossessed and
sold, the Credit Endorsement reimburses the Company for the difference
between the unpaid finance contract balance and the net proceeds received
in connection with the sale of the vehicle. In addition, the Company will
not acquire finance contracts where the amount financed exceeds a certain
percentage of the vehicle's value, and the Company applies a
non-refundable contract acquisition discount when acquiring finance
contracts.
INTENSIVE COLLECTION MANAGEMENT -- The Company believes that intensive
collection efforts are essential to ensure the performance of subprime
finance contracts. The Company's collections managers contact delinquent
accounts frequently, beginning on the fifth day of delinquency, and
initiate repossession of financed vehicles no later than the 90th day of
delinquency. As of June 30, 1996, a total of 85, or 1.5%, of the Company's
finance contracts outstanding were between 60 and 90 days past due. Since
inception through June 30, 1996, the Company has repossessed approximately
5.1% of its financed vehicles.
CENTRALIZED OPERATING STRUCTURE -- While the Company establishes and
maintains relationships with dealers through sales representatives located
in the geographic markets served by the Company, all of the Company's
day-to-day operations are centralized at the Company's offices in Austin,
Texas. This centralized structure allows the Company to closely monitor
its underwriting and collections operations and eliminates the expenses
associated with full-service branch or regional offices.
BORROWER CHARACTERISTICS
Borrowers under finance contracts in the Company's finance contract
portfolio are generally subprime consumers. Subprime consumers are purchasers
of financed vehicles with limited access to traditional sources of credit and
are generally individuals with weak or no credit histories. Based on a
randomly-selected representative sample of 107 finance contracts in the finance
contract portfolio, the Company has determined the following characteristics
with respect to its finance contract borrowers. The average borrower's monthly
income is $2,605, with an average payment-to-income ratio of 13.9% and an
average debt-to-income ratio of 35.8%. The Company's guidelines permit a maximum
payment-
33
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<PAGE>
to-income ratio and debt-to-income ratio of 22% and 50%, respectively. The
average borrower's time spent at current residence is 42 months, while the
average time of service at current employer is 47 months. The average down
payment is 18.5% of the amount financed. The age of the average borrower is 34
years.
CONTRACT PROFILE
From inception to June 30, 1996, the Company acquired 5,714 finance
contracts with an aggregate initial principal balance of $68.2 million. Of the
finance contracts acquired, approximately 8.0% have related to the sale of new
automobiles and approximately 92.0% have related to the sale of used
automobiles. The average age of used financed vehicles was approximately two
years at the time of sale. The finance contracts had, upon acquisition, an
average initial principal balance of $11,941; a weighted average APR of 19.5%; a
weighted average finance contract acquisition discount of 8.6%; and a weighted
average contractual maturity of 53.0 months. As of June 30, 1996, the finance
contracts in the finance contract portfolio had a weighted average remaining
maturity of 47.8 months. Since inception, the Company's cumulative net
charge-offs have been $319,345 or 0.47% of the portfolio's aggregate initial
principal balance. With respect to repossessions where full disposition proceeds
have not been received, these cumulative net charge-off calculations assume
immediate recovery of disposition proceeds (including insurance proceeds) and
realization of loss at average historic loss rates.
DEALER NETWORK
General. The Company acquires finance contracts originated by automobile
dealers in connection with the sale of late-model used and, to a lesser extent,
new cars to subprime borrowers. Accordingly, the Company's business development
strategy depends on enrolling and promoting active participation by automobile
dealers in the Company's financing program. Dealers are selected on the basis of
geographic location, financial strength, experience and integrity of management,
stability of ownership, quality of used car inventory, participation in subprime
financing programs, and the anticipated quality and quantity of finance
contracts which they originate. The Company principally targets dealers
operating under franchises from major automobile manufacturers, rather than
independent used car dealers. The Company believes that franchised dealers are
generally more stable and offer higher quality vehicles than independent
dealers. This is due, in part, to careful initial screening and ongoing
monitoring by the automobile manufacturers and to the level of financial
commitment necessary to secure and maintain a franchise. As of June 30, 1996,
the Company was licensed or qualified to do business in 26 states. Over the near
term, the Company intends to focus its proposed geographical expansion on states
in the midwest and mid-Atlantic regions.
The following table sets forth information about the Company's acquisitions
from its dealer network.
<TABLE>
<CAPTION>
ACQUISITION OF FINANCE CONTRACTS
----------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- ----------------------
1994 1995 1995 1996
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Number of active dealers during
period(1)............................. 50 222 119 252
Total number of dealers subject to
dealer agreements(2).................. 50 280 169 492
Number of active states(3).............. 2 7 5 16
Number of finance contracts acquired
during period......................... 202 2,659 1,042 2,856
Aggregate principal balance of finance
contracts acquired during period
(dollars in thousands)................ $ 2,454 $ 31,200 $ 12,207 $ 33,358
</TABLE>
- ------------
(1) Based upon those dealers from which the Company acquired finance contracts
during the related period.
(2) Aggregate number of dealers based upon signed agreements with dealers from
whom the Company will accept applications for finance contracts.
(footnotes continued on next page)
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(footnotes continued from previous page)
(3) Based upon those states in which the Company has acquired more than one
finance contract during the related period or in which it is actively
pursuing the expansion of its existing business.
Location of Dealers. Approximately 52.8% of the Company's dealer network
consists of dealers located in Texas, where the Company has operated since 1994.
During the six months ended June 30, 1996, the Company acquired finance
contracts from dealers in sixteen states.
The following table summarizes, with respect to each state in which the
Company operates, the date operations commenced, the number of dealers with whom
the Company had dealer agreements in such state as of June 30, 1996 and the
number of finance (and percentage of total finance) contracts acquired by the
Company from dealers in such state during the last fiscal year and for the six
months ended June 30, 1996:
<TABLE>
<CAPTION>
FINANCE CONTRACTS ACQUIRED
----------------------------------
NUMBER OF YEAR ENDED SIX MONTHS
DEALERS AT DECEMBER 31, ENDED
JUNE 30, 1996 1995 JUNE 30, 1996
DATE BUSINESS --------------- --------------- ---------------
STATES COMMENCED NUMBER % NUMBER % NUMBER %
------ --------- ------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C> <C>
Texas.............................. September 1994 260 52.8% 2,425 91.2% 2,523 88.34%
Oklahoma........................... November 1994 50 10.2 94 3.5 8 0.28
Connecticut........................ January 1995 12 2.4 63 2.4 0 0.00
New Mexico......................... May 1995 17 3.5 44 1.7 57 2.00
Utah............................... June 1995 15 3.0 18 0.7 1 0.04
Georgia............................ October 1995 47 9.6 10 0.4 44 1.54
Arizona............................ November 1995 10 2.0 5 0.2 15 0.53
Missouri........................... January 1996 2 0.4 0 0.0 1 0.04
Colorado........................... January 1996 9 1.8 0 0.0 58 2.03
Maryland........................... February 1996 12 2.4 0 0.0 37 1.30
Ohio............................... March 1996 19 3.9 0 0.0 20 0.70
Florida............................ April 1996 14 2.8 0 0.0 53 1.86
Virginia........................... April 1996 3 0.6 0 0.0 6 0.21
Pennsylvania....................... May 1996 19 3.9 0 0.0 27 0.95
North Carolina..................... June 1996 1 0.2 0 0.0 1 0.04
South Carolina..................... June 1996 2 0.4 0 0.0 5 0.18
------ ----- ------ ----- ------ -----
Total......................... 492 100.0% 2,659 100.0% 2,856 100.0%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
</TABLE>
One dealership, Charlie Thomas Ford, Inc. of Houston, Texas, accounted for
11.2% of the finance contracts acquired by the Company for the period from
inception through June 30, 1996 (8.8% and 14.0% for the fiscal year ended 1995
and the first half of 1996 respectively). A group of six dealerships (including
Charlie Thomas Ford) under substantial common ownership accounted for 14.8%
(12.3% and 17.5% for the fiscal year ended 1995 and the first half of 1996
respectively) of finance contracts acquired during the same period.
DEALER SOLICITATION
Marketing Representatives. As of June 30, 1996, the Company utilized
thirteen marketing representatives, eight of which were individuals employed by
the Company and five of which were marketing organizations serving as
independent representatives. These representatives have an average of ten years
experience in the automobile financing industry. Each marketing representative
reports to, and is supervised by, the Company's Vice President -- Marketing. The
Company is currently evaluating candidates for additional marketing
representative positions. The majority of marketing representatives are
full-time employees who reside in the region for which they are responsible.
Marketing representatives are compensated on the basis of a salary plus
commissions based on the number of finance contracts purchased by the Company in
their respective areas. The Company maintains an exclusive relationship with the
independent marketing representatives and compensates such representatives on a
commission basis. All marketing representatives undergo training and orientation
at the Company's Austin headquarters.
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The Company's marketing representatives establish financing relationships
with new dealerships, and maintain existing dealer relationships. Each marketing
representative endeavors to meet with the managers of the finance and insurance
('F&I') departments at each targeted dealership in his or her territory to
introduce and enroll dealers in the Company's financing program, educating the
F&I managers about the Company's underwriting philosophy, its practice of using
experienced underwriters (rather than computerized credit scoring) to review
applications, and the Company's commitment to a single lending program that is
easy for dealers to master and administer. The marketing representatives offer
training to dealership personnel regarding the Company's program guidelines,
procedures and philosophy.
After each dealer relationship is established, a marketing representative
continues to actively monitor the relationship with the objective of maximizing
the volume of applications received from the dealer that meet the Company's
underwriting standards. Due to the non-exclusive nature of the Company's
relationships with dealers, the dealers retain discretion to determine whether
to seek financing from the Company or another financing source. Each
representative submits a weekly call report describing contacts with prospective
and existing dealers during the preceding week and a monthly competitive survey
relating to the competitive situation and possible opportunities in the region.
The Company provides each representative a weekly report detailing applications
received and finance contracts purchased from all dealers in the region. The
marketing representatives regularly telephone and visit F&I managers to remind
them of the Company's objectives and to answer questions. To increase the
effectiveness of these contacts, the marketing representatives can obtain
real-time information from the Company's newly installed management information
systems, listing by dealership the number of applications submitted, the
Company's response to such applications and the reasons why a particular
application was rejected. The Company believes that the personal relationships
its marketing representatives establish with the F&I managers are an important
factor in creating and maintaining productive relationships with its dealership
customer base.
The role of the marketing representatives is generally limited to marketing
the Company's financing program and maintaining relationships with the Company's
dealer network. The marketing representatives do not negotiate, enter into or
modify dealer agreements on behalf of the Company, do not participate in credit
evaluation or loan funding decisions and do not handle funds belonging to the
Company or its dealers. Over the last several months, the Company has also added
marketing professionals in additional states, including Colorado, Maryland,
Virginia, Florida, Ohio, South Carolina, North Carolina and Pennsylvania. The
Company intends to develop significant finance contract volume in each state in
which it initiates coverage. The Company has elected not to establish full
service branch offices, believing that the expenses and administrative burden of
such offices are generally unjustified. The Company has concluded that the
ability to closely monitor the critical functions of finance contract approval
and contract administration and collection are best performed and controlled on
a centralized basis from its Austin facility.
Dealer Agreements. Each dealer with which the Company establishes a
financing relationship enters into a non-exclusive written dealer agreement (a
'Dealer Agreement') with the Company, governing the Company's acquisition of
finance contracts from the dealer. A Dealer Agreement generally provides that
the dealer shall indemnify the Company against any damages or liabilities,
including reasonable attorney's fees, arising out of (i) any breach of a
representation or warranty of the dealer set forth in the Dealer Agreement or
(ii) any claim or defense that a borrower may have against a dealer relating to
a financing contract. Representations and warranties in a Dealer Agreement
generally relate to such matters as whether (a) the financed automobile is free
of all liens, claims and encumbrances except the Company's lien, (b) the down
payment specified in the finance contract has been paid in full and whether any
part of the down payment was loaned to the borrower by the dealer and (c) the
dealer has complied with applicable law. If the dealer violates the terms of the
Dealer Agreement with respect to any finance contract, the dealer must
repurchase such contract on demand for an amount equal to the unpaid balance and
all other indebtedness due to the Company from the borrower.
FINANCING PROGRAM
Unlike certain competitors who offer numerous marketing programs that the
Company believes serve to confuse dealers and borrowers, the Company markets a
single financing contract acquisition
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program to its dealers. The Company believes that by focusing on a single
program, it realizes consistency in achieving its contract acquisition criteria,
which aids the funding and securitization process. The finance contracts
purchased by the Company must meet several criteria, including that each
contract: (i) meets the Company's underwriting guidelines; (ii) is secured by a
new or late-model used vehicle of a type on the Company's approved list; (iii)
was originated in a jurisdiction in the United States in which the Company was
licensed or qualified to do business, as appropriate; (iv) provides for level
monthly payments (collectively, the 'Scheduled Payments') that fully amortize
the amount financed over the finance contract's original contractual term; (v)
has an original contractual term from 24 to 60 months; (vi) provides for finance
charges at an APR between 14% and 30%; (vii) provides for a verifiable down
payment of 10% or more of the cash selling price; and (viii) is not past due or
does not finance a vehicle which is in repossession at the time the finance
contract is presented to the Company for acquisition. Although the Company has
in the past acquired a substantial number of finance contracts for which
principal and interest are calculated according to the Rule of 78s, the
Company's present policy is to acquire primarily finance contracts calculated
using the simple interest method.
The amount financed with respect to a finance contract will generally equal
the aggregate amount advanced toward the purchase price of the financed vehicle,
which equals the net selling price of the vehicle (cash selling price less down
payment and trade-in), plus the cost of permitted automotive accessories (e.g.,
air conditioning, standard transmission, etc.), taxes, title and license fees,
credit life, accident and health insurance policies, service and warranty
contracts and other items customarily included in retail automobile installment
contracts and related costs. Thus, the amount financed may be greater than the
Manufacturers Suggested Retail Price ('MSRP') for new vehicles or the market
value quoted for used vehicles. Down payments must be in cash or real value of
traded-in vehicles. Dealer-assisted or deferred down payments are not permitted.
The Company's VSI Policy limits the net selling price of a vehicle to be
financed to a maximum of 95% of the vehicle's retail book value. In addition,
the Company's current purchase criteria limits acceptable finance contracts to a
maximum (a) net selling price of the lesser of (i) 112% of wholesale book value
(or dealer invoice for new vehicles) or (ii) 95% of retail book value (or MSRP
for new vehicles) and (b) amount financed of 120% of retail book value in the
case of a used vehicle, or 120% of MSRP in the case of a new vehicle. In
assessing the value of a trade-in for purposes of determining the vehicle's net
selling price, the Company uses the published wholesale book value without
regard to the value assigned by the dealer.
The following table sets forth the characteristics of a typical finance
contract originated by a dealer and the application of the Company's acquisition
guidelines to such contract.
SAMPLE CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
ITEM DOLLAR VALUE COMMENTS
---- ------------ --------
<S> <C> <C>
Cash selling price............... $ 12,000
Down payment..................... (1,800) 15% down, using real trade equity and/or cash
Net selling price................ 10,200 Also defined as 'Base Advance'
Allowed add-ons:
Tax, title and license...... 700
Credit life insurance....... 500 Rates established by state insurance departments
Disability insurance........ 700 Rates established by state insurance departments
Service contract............ 1,200
------------
Amount financed.................. 13,300
------------
Acquisition discount............. (1,130) Typical 8.5% discount
------------
------------
Acquisition price................ $ 12,170 Advance to dealer
------------
Wholesale book (or dealer invoice
for new vehicles): $10,000 (for example shown)
Retail book (or MSRP for new
vehicles): $12,000 (for example shown)
</TABLE>
37
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<PAGE>
<TABLE>
<CAPTION>
COMPANY ACQUISITION GUIDELINES EXAMPLE SHOWN
------------------------------ --------------
<S> <C> <C>
Minimum down payment: 10% of cash selling price: $ 1,200 $1,800/$12,000=15%
Maximum base advance: lesser of: (1) 112% of wholesale book: $11,200 $10,200/$10,000=102.0%
or (2) 95% of retail book: $11,400
Maximum amount financed: 120% of retail book (used vehicle): $14,400 $13,300/$12,000=110.8%
</TABLE>
The credit characteristics of an application approved by the Company for
acquisition generally consist of the following: (i) stability of applicant's
employment, (ii) stability of applicant's residence history, (iii) sufficient
borrower income, (iv) credit history, and (v) payment of down payment.
The Company applies a loan-to-value ratio in selecting finance contracts
for acquisition calculated as equaling the quotient of: (a) The cash selling
price less the down payment on the vehicle, divided by (b) the wholesale value
of the vehicle (net of additions or subtractions for mileage and equipment
additions listed in the applicable guide book). For new vehicles, wholesale
value is based on the invoice amount, including destination charges. For used
vehicles, wholesale value is computed using the applicable guide book (Kelley or
NADA) in use within the market in which the vehicle is located.
All of the Company's finance contracts are prepayable at any time. Finance
contracts acquired by the Company must prohibit the sale or transfer of the
financed vehicle without the Company's prior consent and provide for
acceleration of the maturity of the finance contract in the absence of such
consent. For an approved finance contract, the Company will agree to acquire
such finance contract from the originating dealer at a non-refundable contract
acquisition discount of approximately 8.5% to 12% of the amount financed.
CONTRACT ACQUISITION PROCESS
General. Having selected an automobile for purchase, the subprime consumer
typically meets with the dealership's F&I manager to discuss options for
financing the purchase of the vehicle. If the subprime consumer elects to
finance the vehicle's purchase through the dealer, the dealer will typically
submit the borrower's credit application to a number of potential financing
sources to find the most favorable terms. In general, an F&I department's
potential sources of financing will include banks, thrifts, captive finance
companies and independent finance companies.
For the six months ended June 30, 1996, 29,412 credit applications were
submitted to the Company. Of these 29,412 applications, as of June 30, 1996,
approximately 36% were approved and 10% were acquired by the Company.(1) The
difference between the number of applications approved and the number of finance
contracts acquired is attributable to a common industry practice in which
dealers often submit credit applications to more than one finance company and
select on the basis of the most favorable terms offered. The prospective
customer may also decide not to purchase the vehicle notwithstanding approval of
the credit application.
Contract Processing. Dealers send credit applications along with other
information to the Company's Credit Department in Austin via facsimile. Upon
receipt, the credit application and other relevant information is entered into
the Company's computerized contract administration system by the Company's
credit verification personnel and a paper-based file with the original documents
is created. Once logged into the system, the applicant's credit bureau reports
are automatically accessed and retrieved directly into the system. At this
stage, the computer assigns the credit application to the specific credit
manager assigned to the submitting dealer for credit evaluation.
Credit Evaluation. The Company applies uniform underwriting standards. In
evaluating the applicant's creditworthiness and the collateral value of the
vehicle, the credit underwriter reviews each application in accordance with the
Company's guidelines and procedures, which take into account, among other
things, the individual's stability of residence, employment history, credit
history, ability to pay, income, discretionary income and debt ratio. In
addition, the credit underwriter evaluates the applicant's credit bureau report
in order to determine if the applicant's (i) credit quality is deteriorating,
(ii) credit history suggests a high probability of default or (iii) credit
experience is too limited for the Company to assess the probability of
performance. The Company also assesses the value and useful life
- ------------
(1) Applications and approvals for May and June are based on estimates due to
loss of data incurred in recent changeover of application processing
systems.
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<PAGE>
of the automobile that will serve as collateral under the finance contract.
Moreover, the credit underwriters consider the suitability of a proposed loan
under its financing program in light of the (a) proposed contract term and (b)
conformity of the proposed collateral coverage to the Company's underwriting
guidelines.
Verification of certain applicant-provided information (e.g., employment
and residence history) is required before the Company makes its credit decision.
Such verification typically requires submission of supporting documentation,
such as a paycheck stub or other substantiation of income, or a telephone bill
evidencing a current address. In addition, the Company does not normally approve
any applications from persons who have been the subject of two or more
bankruptcy proceedings or two or more repossessions.
The Company's underwriting standards are applied by experienced credit
underwriters with a personal analysis of each application, utilizing experienced
judgment. These standards have been developed and refined by the Company's
senior operating management who, on average, possess more than 24 years in the
automobile finance industry. The Company believes that having its credit
underwriters personally review and communicate to the submitting dealership the
decision with respect to each application, including the reasons why a
particular application may have been declined, enhances the Company's
relationship with such dealers. This practice encourages F&I managers to submit
contracts meeting the Company's underwriting standards, thereby increasing the
Company's operating efficiency by eliminating the need to process applications
unlikely to be approved. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition.'
The Company's Credit Department personnel undergo ongoing internal training
programs that are scheduled on a weekly basis and are attended by such personnel
depending on their responsibilities. All of these personnel are located in the
Company's offices in Austin where they are under the supervision of the Vice
President -- Credit and the credit manager. The credit manager and the Vice
President -- Credit have an aggregate of more than 30 years of experience in the
automobile finance business. In addition, the Company reviews all repossessions
to identify factors that might require refinements in the Company's credit
evaluation procedures.
Approval Process. The time from receipt of application to final credit
approval is a significant competitive factor, and the Company seeks to complete
its funding approval decision in an average of two to three hours. When the
Company approves the purchase of a finance contract, the credit manager notifies
the dealer by facsimile or telephone. Such notice specifies all pertinent
information relating to the terms of approval, including the interest rate, the
term, information about the automobile to be sold and the amount of discount
that the Company will deduct from the amount financed prior to remitting the
funds to the dealer. The discount is not refundable to the dealer.
Contract Purchase and Funding. Upon final confirmation of the terms by the
borrower, the dealer completes the sale of the automobile to the borrower. After
the dealer delivers all required documentation (including an application for
title or a dealer guaranty of title, naming the Company as lienholder) to the
Company, the Company remits funds to the dealer via overnight delivery service,
generally within 48 hours of having received the complete loan funding package.
As a matter of policy, the Company takes such measures as it deems necessary to
obtain a perfected security interest in the related financed vehicles under the
laws of the states in which such vehicles are originated. This generally
involves taking the necessary steps to obtain a certificate of title which names
the Company as lienholder. Each finance contract requires that the automobile be
adequately insured and that the Company be named as loss payee, and compliance
with these requirements is verified prior to the remittance of funds to the
dealer. Upon funding of the finance contract and payment of the required
premium, the financed vehicle is insured under the Company's VSI Policy, which
includes coverage of property damages in the event that the borrower does not
maintain insurance.
CONTRACT SERVICING AND COLLECTION
Contract servicing includes contract administration and collection. Because
the Company believes that an active collection program is essential to success
in the subprime automobile financing market, the Company retains responsibility
for finance contract collection. The Company currently contracts with CSC
Logic/MSA L.L.P. (a Texas limited liability partnership doing business as 'Loan
Servicing
39
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<PAGE>
Enterprises') ('LSE') to provide contract administration. The Company may in the
future assume certain of the servicing functions performed by LSE, but there can
be no assurance that this will occur.
Contract Administration. LSE provides certain finance contract
administration functions in connection with warehouse facilities and in
connection with finance contracts sold to securitization trusts, including
payment processing, statement rendering, insurance tracking, data reporting and
customer service for finance contracts. LSE inputs newly originated finance
contracts on the contract system daily. Finance contract documentation is sent
by the Company to LSE as soon as dealer funding occurs. LSE then mails a welcome
letter to the borrower and subsequently mails monthly billing statements to each
borrower approximately ten days prior to each payment due date. Any borrower
remittances are directed to a lock box. Remittances received are then posted to
the proper account on the system. All borrower remittances are reviewed under
LSE's quality control process to assure its proper application to the correct
account in the proper amount. LSE also handles account inquiries from borrowers
and performs insurance tracking services. LSE also sends out notices to
borrowers for instances where proper collateral insurance is not documented.
Contract Collection. As collection agent, the Company is responsible for
pursuing collections from delinquent borrowers. The Company utilizes proactive
collection procedures, which include making early and frequent contact with
delinquent borrowers, educating borrowers as to the importance of maintaining
good credit, and employing a consultative and customer service approach to
assist the borrower in meeting his or her obligations. The Company's ability to
monitor performance and collect payments owed by contract obligors is a function
of its collection approach and support systems. The Company's approach to the
collection of delinquent contracts is to minimize repossessions and charge-offs.
The Company maintains a computerized collection system specifically designed to
service subprime automobile finance contracts. The Company believes that if
problems are identified early, it is possible to correct many delinquencies
before they deteriorate further.
The Company currently employs 19 people full-time, including twelve
collections specialists and other support personnel, in the Collections
Department. Each employee is devoted exclusively to collection functions. The
Company attempts to maintain a ratio of between 500 and 600 finance contracts
per collections specialist. As of June 30, 1996, there were 460 finance
contracts in the Company's finance contract portfolio for every collections
specialist. The Collections Department is managed by the Vice
President -- Collections, who possesses 30 years experience in the automotive
industry. The Company hires additional collections specialists in advance of
need to ensure adequate staffing and training.
The Company's collectors have real-time computer access to LSE's database.
Accounts reaching five days past due are assigned to collectors who have
specific responsibility for those accounts. These collectors contact the
customer frequently, both by phone and in writing. Accounts that reach 60 days
past due are assigned to two senior collectors who handle those accounts until
resolved. To facilitate collections from borrowers, the Company has increased
its utilization of Western Union's 'Quick Collect,' which allows borrowers to
pay from remote locations, with a check printed at the Company's office.
Consistent with the Company's internal policies and securitization documents,
finance contract provisions, such as term, interest rate, amount, maturity date
or payment schedule will not be amended, modified or otherwise changed, except
when required by applicable law or court order or where permitted under the VSI
Policy.
Payment extensions may be granted if, in the opinion of management, such
extension provides a permanent solution to resolve a temporary problem. An
extension fee must be paid by the customer prior to the extension. Normally,
there can be only one extension during the first 18 months of a finance
contract. Additional extensions may be granted if allowed under the VSI Policy,
although the Company's securitization documents restrict permitted extensions to
no longer than one month and not more than once per year. Payment due dates can
be modified once during the term of the contract to facilitate current payment
by the customer.
Repossessions and Recoveries. 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 (as required by the VSI Policy), the Company's
Collections Department will initiate the repossession of the financed vehicle.
Bonded, insured outside repossession agencies are used to secure involuntary
repossessions. In most jurisdictions, the Company is required to give notice to
the borrower of the Company's intention to sell
40
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the repossessed vehicle, 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 are then filed. See ' -- Insurance.'
INSURANCE
Each finance contract requires the borrower to obtain comprehensive and
collision insurance with respect to the related financed vehicle with the
Company named as a loss payee. The Company relies on a written representation
from the selling dealer and independently verifies that a borrower in fact has
such insurance in effect when it purchases contracts. Each finance contract
acquired by the Company is covered from the moment of its purchase by the VSI
Policy, including the Credit Endorsement. The VSI Policy has been issued to the
Company by Interstate Fire & Casualty Company ('Interstate'). Interstate is an
indirect wholly-owned subsidiary of Fireman's Fund Insurance Company.
Physical Damage and Loss Coverage. The Company initially relies on the
requirement, set forth in its underwriting criteria, that each borrower maintain
adequate levels of physical damage loss coverage on the respective financed
vehicles. LSE tracks the physical damage insurance of borrowers, and contacts
borrowers in the event of a lapse in coverage or inadequate documentation.
Moreover, LSE is obligated, as servicer, subject to certain conditions and
exclusions, to assist the processing of claims under the VSI Policy. Interstate
will insure each financed vehicle securing a contract against: (i) all risk of
physical loss or damage from any external cause to financed vehicles which the
Company holds as collateral; (ii) any direct loss which the Company may sustain
by unintentionally failing to record or file the instrument evidencing each
contract with the proper public officer or public office, or by failing to cause
the proper public officer or public office to show the Company's encumbrance
thereon, if such instrument is a certificate of title; (iii) any direct loss
sustained during the term of the VSI Policy by reason of the inability of the
Company to locate the borrower, the related financed vehicle, or by reason of
confiscation of the financed vehicle by a public officer or public office; and
(iv) all risk of physical loss or damage from any external cause to a
repossessed financed vehicle for a period of 60 days while such financed vehicle
is (subject to certain exceptions) held by or being repossessed by the Company.
The physical damage provisions of the VSI Policy generally provide coverage
for losses sustained on the value of the financed vehicle securing a contract,
but in no event is the coverage to exceed: (i) the cost to repair or replace the
financed vehicle with material of like kind and quality; (ii) the actual cash
value of the financed vehicle at the date of loss, less its salvage value; (iii)
the unpaid balance of the contract; (iv) $40,000 per financed vehicle (or, in
the case of losses or damage sustained on repossessed financed vehicles, $25,000
per occurrence); or (v) the lesser of the amounts due the Company under clauses
(i) through (iv) above, less any amounts due under all other valid insurance on
the damaged financed vehicle less its salvage value. No assurance can be given
that the insurance will cover the amount financed with respect to a financed
vehicle.
All claim settlements for physical damage and loss coverage are subject to
a $500 deductible per loss. There is no aggregate limitation or other form of
cap on the number of claims under the VSI Policy. Coverage on a financed vehicle
is for the term of the related contract and is noncancellable. The VSI Policy
requires that, prior to filing a claim, a reasonable attempt be made to
repossess the financed vehicle and, in the case of claims on skip losses, every
professional effort be made to locate the financed vehicle and the related
borrower.
Credit Deficiency Endorsement. In addition to physical damage and loss
coverage, the VSI Policy contains a Credit Endorsement which provides that
Interstate shall indemnify the Company for certain losses incurred due to a
deficiency balance following the repossession and resale of financed vehicles
securing defaulted finance contracts eligible for coverage. Coverage under the
Credit Endorsement is strictly conditioned upon the Company's maintaining and
adhering to the credit underwriting criteria set forth in the Credit
Endorsement. Losses on each eligible contract are covered in an amount equal to
the deficiency balance resulting from the Net Payoff Balance less the sum of (i)
the Actual Cash Value of the financed vehicle plus (ii) the total amount
recoverable from all other applicable insurance, including
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refunds from cancelable add-on products. The maximum coverage under the Credit
Endorsement is $15,000 per contract.
'Actual Cash Value' for the purposes of the Credit Endorsement only, means
the greater of (i) the price for which the subject financed vehicle is sold or
(ii) the wholesale market value at the time of the loss as determined by an
automobile guide approved by Interstate applicable to the region in which the
financed vehicle is sold.
'Net Payoff Balance' for the purposes of the Credit Endorsement, means the
outstanding principal balance as of the default date plus late fees and
corresponding interest no more than 90 days after the date of default. In no
event shall Net Payoff Balance include non-approved fees, taxes, penalties or
assessments included in the original instrument, or repossession, disposition,
collection, remarketing expenses and fees or taxes incurred.
MANAGEMENT INFORMATION SYSTEMS
Management believes that a high level of real-time information flow and
analysis is essential to manage the Company's informational and reporting needs
and to maintain the Company's competitive position. As stated above, the Company
has contracted with a third party servicer, LSE, to provide data processing for
the Company's portfolio of finance contracts. LSE provides on-line information
processing services with terminals located in the Company's offices that are
connected to LSE's main computer center in Dallas.
In addition, management uses customized reports, with a download of
information to personal computers, to issue investor reports and to analyze the
Company's finance contract portfolio on a monthly basis. The system's
flexibility allows the Company to achieve productivity improvements with
enhanced data access. Management believes that it has sufficient systems in
place to permit significant growth in the Company's finance contract portfolio
without the need for material additional investment in management information
systems.
FUNDING/SECURITIZATION OF FINANCE CONTRACTS
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, generally the lender 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 June 30, 1996, the Company had approximately $237,000 outstanding under
the $10.0 million Sentry Facility, 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 10.25% at June 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 account. Under the Sentry Facility, the
Company paid interest of $412,000 for the year ended December 31, 1995. In April
1996, the Company agreed to pay a commitment fee of $700,000 under the Sentry
Facility. The Sentry Facility is cross-collateralized to the Company's guarantee
of the Sentry Working Capital Line. See 'Certain Transactions.'
On May 22, 1996 the Company, through its wholly-owned subsidiary AutoBond
Funding Corporation II, entered into the Providian Facility, which expires
December 15, 1996. The proceeds from the borrowings under the Providian 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
with a delay of 15 days and accrues at a per annum rate of LIBOR plus 2.60%
(which was 8.0375% when initially determined on May 17, 1996). The Providian
Facility also requires the Company
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to 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 conditions and imposes certain requirements similar to those in
the agreements relating to the Company's existing securitizations including,
among other things, delinquency and default triggers.
The Company's wholly-owned subsidiary, AutoBond Funding entered into the
Nomura Facility, pursuant to a credit agreement dated as of June 16, 1995, with
a final maturity date of June 16, 2005. This facility was terminated at the
lender's option, and no new advances were made after February 6, 1996. The
Nomura Facility provided for advances to AutoBond Funding up to a maximum
aggregate principal amount of $25 million, for the acquisition of finance
contracts. On March 29, 1996, the remaining total outstanding balance of
advances of $9.0 million, and interest of $89,000, were paid by AutoBond
Funding. As of June 30, 1996 no advances were outstanding with respect to the
Nomura Facility.
Securitization Program. The periodic securitization of finance contracts is
an integral part of the Company's business. Securitizations enable the Company
to monetize its assets and redeploy its capital resources and warehouse credit
facilities for the purchase of additional finance contracts. To date, the
Company has completed three securitizations involving approximately $60.7
million in aggregate principal amount of finance contracts.
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 the trust. 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 (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 non-recourse 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 an interest in the contracts
that is subordinate to the interest of the investor certificateholder. The
retained interests entitle the Company to receive the future excess spread 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 of the outstanding
advances on warehouse credit facilities makes additional borrowing available, to
the extent of such proceeds, under those facilities for the acquisition of
additional finance contracts. Second, additional working capital is obtained
through the Company's practice of borrowing, through the issuance of
non-recourse debt, against the value of the senior interest in the retained
excess spread.
Upon each securitization, the Company recognizes the sale of finance
contracts and records a gain or loss in an amount which takes into account the
amounts expected to be received as a result of its retained interests. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Revenues -- Gain on Sale of Finance Contracts.' At June 30, 1996,
the Company held excess servicing receivables and Class B Certificates totalling
$7.7 million, a portion of which had been pledged to secure notes payable of
$6.2 million.
If the Company were unable to securitize contracts in a financial reporting
period, the Company would incur a significant decline in total revenues and net
income or report a loss for such period. If the Company were unable to
securitize its contracts and did not have sufficient credit available, either
under its warehouse credit facilities or from other sources, the Company would
have to sell portions of its portfolio directly to investors or curtail its
finance contract acquisition activities. See 'Risk Factors -- Dependence on
Securitization Transactions' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources.'
When the Company securitizes finance contracts, it repays a portion of its
outstanding warehouse indebtedness, making such portion available for future
borrowing. As finance contract volume increases, the Company expects to
securitize its assets at least quarterly, although there can be no assurance
that the Company will be able to do so.
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The securitization trust agreements and the servicing agreement contain
certain events of administrator termination, the occurrence of which entitle the
trustee to terminate the Company's right to act as collection agent and
administrator. Events of administrator termination include: (i) defaults in
payment obligations under the trust agreements; (ii) unremedied defaults in the
performance of certain terms or covenants under the trust agreements, the
servicing agreements or related documents; (iii) the institution of certain
bankruptcy or liquidation proceedings against the Company; (iv) material
breaches by the Company of representations and warranties made by it under the
servicing agreements and the sale agreements pursuant to which it has sold the
securitized finance contracts; (v) the occurrence of a trigger event whereby the
ratio of delinquent finance contracts to total securitized finance contracts for
each transaction exceeds the percentage set forth in the servicing agreements;
(vi) a material adverse change in the consolidated financial condition or
operations of the Company, or the occurrence of any event which materially
adversely affects the collectibility of a material amount of the securitized
finance contracts or which materially adversely affects the ability of the
Company to collect a material amount of the finance contracts or to perform in
all material respects its obligations under the servicing agreements, trust
agreements and related documents; or (vii) any of the rating agencies rating the
securitization transactions determines that the Company's serving as collection
agent under the servicing agreement would prevent such agency from maintaining
the required ratings on such transactions, or would result in such transactions'
being placed on negative review, suspension or downgrade.
The trust agreements contain amortization events, the occurrence of any of
which may affect the Company's rights to receive payments in respect of the
future excess spread cash flows otherwise payable to it until principal and
interest payments due the holders of all investor certificates are paid in full.
Such amortization events include: (i) defaults in certain payments or repurchase
obligations under the trust agreements; (ii) unremedied defaults in the
performance of any covenants or terms of the trust agreements by a
securitization subsidiary; (iii) the occurrence of certain bankruptcy or
insolvency events of a securitization subsidiary; (iv) unremedied material
breaches of representations or warranties of a securitization subsidiary; (v)
occurrence of an event of administrator termination; (vi) failure of a
securitization subsidiary to transfer certain required amounts of unpaid
principal balance of finance contracts to each securitization trust or to retain
the resulting shortfall in the collection accounts; (vii) failure of any
transfer under the trust agreements to create, or failure of any investor
certificates to evidence, a valid and perfected first priority undivided
ownership or security interest in the pool of securitized finance contracts and
related collateral; (viii) failure of the Company to own, directly or
indirectly, 100% of the outstanding shares of common stock of any securitization
subsidiary; (ix) entry of unpaid and unstayed judgments aggregating in excess of
$25,000 are entered against any securitization subsidiary; or (x) occurrence of
a 'change in control' with respect to the Company.
COMPETITION
The subprime credit market is highly fragmented, consisting of many
national, regional and local competitors, and is characterized by relative ease
of entry and the recent arrival of a number of well capitalized publicly-held
competitors. Existing and potential competitors include well-established
financial institutions, such as banks, savings and loans, small loan companies,
industrial thrifts, leasing companies and captive finance companies owned by
automobile manufacturers and others. Many of these financial organizations do
not consistently solicit business in the subprime credit market. The Company
believes that captive finance companies generally focus their marketing efforts
on this market only when inventory control and/or production scheduling
requirements of their parent organizations dictate a need to enhance sales
volumes and exit the market once such sales volumes are satisfied. The Company
also believes that increased regulatory oversight and capital requirements
imposed by market conditions and governmental agencies have limited the
activities of many banks and savings and loans in the subprime credit market.
In many cases, those organizations electing to remain in the automobile finance
business have migrated toward higher credit quality customers to allow
reductions in their overhead cost structures.
As a result, the subprime credit market is primarily serviced by smaller
finance organizations that solicit business when and to the extent their capital
resources permit. The Company believes no one of its competitors or group of
competitors has a dominant presence in the market. The Company's strategy is
designed to capitalize on the market's relative lack of major national financing
sources. Nonetheless,
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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 may 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
of which are being used, at least in part, to fund expansion and finance
increased purchases of finance contracts. The Company's ability to compete
successfully depends largely upon its relationships with dealerships and the
willingness of dealerships to offer finance contracts to the Company that meet
the Company's underwriting criteria. There can be no assurance that the Company
will be able to continue successfully in the markets it serves.
REGULATION
The Company's business is subject to regulation and licensing under various
federal, state and local statutes and regulations. As of June 30, 1996, the
Company's business operations were conducted with dealers located in sixteen
states, and, accordingly, the laws and regulations of such states govern the
Company's operations. Most states where the Company operates (i) limit the
interest rates, fees and other charges that may be imposed by, or prescribe
certain other terms of, the finance contracts that the Company purchases and
(ii) define the Company's rights to repossess and sell collateral. In addition,
the Company is required to be licensed or registered to conduct its finance
operations in certain states in which the Company purchases finance contracts.
As the Company expands its operations into other states, it will be required to
comply with the laws of such states.
Numerous federal and state consumer protection laws and related regulations
impose substantive disclosure requirements upon lenders and servicers involved
in automobile financing. Some of the federal laws and regulations include the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Credit Reporting Act, the Fair Credit Billing Act, the
Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z and the Soldiers' and Sailors' Civil Relief
Act.
In addition, the Federal Trade Commission ('FTC') has adopted a
holder-in-due-course rule which has the effect of subjecting persons that
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the purchaser could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Vehicles requires that all sellers
of used automobiles prepare, complete and display a Buyer's Guide which explains
the warranty coverage for such automobiles. The Credit Practices Rules of the
FTC impose additional restrictions on sales contract provisions and credit
practices.
The Company believes that it is in substantial compliance with all
applicable material laws and regulations. Adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business. In
addition, due to the consumer-oriented nature of the industry in which the
Company operates and the unclear application of various truth-in-lending laws
and regulations to certain products offered by companies in the industry,
industry participants are sometimes named as defendants in litigation involving
alleged violations of federal and state consumer lending or other similar laws
and regulation. A significant judgment against the Company or within the
industry in connection with any litigation could have a material adverse effect
on the Company's financial condition and results of operations.
In the event of default by a borrower under a finance contract, the Company
is entitled to exercise the remedies of a secured party under the Uniform
Commercial Code ('UCC'). The UCC remedies of a secured party include the right
to repossession by self-help means, unless such means would constitute a breach
of the peace. Unless the borrower voluntarily surrenders a vehicle, self-help
repossession by an independent repossession agent engaged by the Company is
usually employed by the Company when a borrower defaults. Self-help repossession
is accomplished by retaking possession of the vehicle. If a breach of the peace
is likely to occur, or if applicable state law so requires, the Company must
obtain a court order from the appropriate state court and repossess the vehicle
in accordance with that order. None of the states in which the Company presently
does business has any law that would require the Company, in the absence of a
probable breach of the peace, to obtain a court order before it attempts to
repossess a vehicle.
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In most jurisdictions, the UCC and other state laws require a secured party
to provide an obligor with reasonable notice of the date, time and place of any
public sale or the date after which any private sale of collateral may be held.
Unless the obligor waives his rights after default, the obligor in most
circumstances has a right to redeem the collateral prior to actual sale (i) by
paying the secured party all unpaid installments on the obligation, plus
reasonable expenses for repossessing, holding and preparing the collateral for
disposition and arranging for its sale, plus in some jurisdictions, reasonable
attorneys' fees or (ii) in some states, by paying the secured party past-due
installments. Repossessed vehicles are generally resold by the Company through
wholesale auctions which are attended principally by dealers.
LITIGATION
The Company is currently not a party to any material litigation, although
it is involved from time to time in routine litigation incident to its business.
PROPERTIES AND FACILITIES
The Company's headquarters are located in approximately 18,900 square feet
of leased space at 301 Congress Avenue, Austin, Texas, for a monthly rent of
$22,838. The lease for such facility expires in June 1998. The Company's
headquarters contain the Company's executive offices as well as those related to
automobile finance contract acquisition. In addition, the Company leases
approximately 520 square feet of office space at 1010 Woodman Drive, Suite 240,
Dayton, Ohio, for its midwest regional marketing office at a rent of $550 per
month. The lease for the Ohio facility expires on February 28, 1998.
EMPLOYEES
As of June 30, 1996, the Company employed 79 persons, none of which was
covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is satisfactory.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, director designees and executive officers of the Company,
their respective ages and their present positions with the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William O. Winsauer(1).................... 36 Chairman of the Board and Chief Executive Officer and
Director
Adrian Katz............................... 31 Vice Chairman of the Board and Chief Operating
Officer and Director
Charley A. Pond........................... 50 President
John S. Winsauer(1)....................... 34 Secretary and Director
William J. Stahl.......................... 47 Vice President and Chief Financial Officer
John T. Dibble............................ 52 Vice President -- Operations
Robert G. Barfield........................ 42 Vice President -- Marketing
Alan E. Pazdernik......................... 56 Vice President -- Credit
Robert R. Giese........................... 56 Vice President -- Collections
Robert S. Kapito.......................... 39 Director Designee(2)
Manuel A. Gonzalez........................ 45 Director Designee(2)
Stuart A. Jones........................... 41 Director Designee(2)
Thomas I. Blinten......................... 39 Director Designee(2)
</TABLE>
- ------------
(1) Messrs. William and John Winsauer are brothers.
(2) Each Director Designee has consented to become a Director on or before
completion of the Offering.
The number of Directors on the Board will be fixed at seven, and the
Company intends to designate the sixth and seventh Directors prior to
consummation of the Offering. Directors serve for annual terms. Officers are
elected by the Board of Directors and serve at the discretion of the Board.
MANAGEMENT BACKGROUND
William O. Winsauer, Chairman of the Board and Chief Executive Officer
Mr. Winsauer has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since its formation in 1993. Mr. Winsauer has
been involved in arranging and developing various sources of financing for
subprime finance contracts since 1989. Mr. Winsauer was the founder of ABI in
1989 and served full time as its President and sole shareholder from 1989
through 1993, and remains its President and sole shareholder to date. ABI has no
material current operations other than to manage its investments in
ABI-sponsored securitizations. In the late 1980s, Mr. Winsauer began selling
whole loan packages of contracts originated by the Gillman Companies, a large
dealership group based in Houston, Texas and worked with his brother, John S.
Winsauer, in certain of the transactions placed through The Westcap Corporation
in 1991 and 1992. Subsequently, Mr. Winsauer was directly responsible for
initiating, negotiating, coordinating and completing a number of transactions
involving the issuance of over $235 million of both public and private
asset-backed securities backed by subprime automobile finance contracts, $190
million of which were sponsored by ABI. Mr. Winsauer was among the first
individuals to be involved in the structuring and marketing of securitization
transactions involving subprime finance contracts.
Adrian Katz, Vice Chairman, Chief Operating Officer and Director
Mr. Katz joined the Company in November 1995 and was elected Vice Chairman
of the Board of Directors and appointed Chief Operating Officer in December
1995. Immediately prior to that, from February 1995 he was employed as a
managing director at Smith Barney, Inc. (a broker/dealer), where
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he was responsible for structuring asset-backed, commercial and residential
mortgage-backed securities. From 1989 through 1994, Mr. Katz was employed by
Prudential Securities Incorporated (a broker/dealer), where he was appointed a
managing director in 1992 and where he served as a co-head of the Mortgage and
Asset Capital Division with corresponding sales, trading, banking and research
management responsibilities. From 1985 to 1989, Mr. Katz worked for The First
Boston Corporation developing software and managing the structuring of new
securitizations. Mr. Katz has been involved in the sale and financing through
securitization of consumer assets since 1985.
Charley A. Pond, President
Mr. Pond joined the Company in January 1996 as its President and is
responsible for various day-to-day operations of the Company. From June 1995 to
November 1995, Mr. Pond served as President of AutoLend Group, Inc., an
automobile finance company. Prior to that, from August 1989 to June 1995, Mr.
Pond served Mercury Finance Company, an automobile finance company, as its Vice
President and Chief Financial Officer. Prior to his tenure at Mercury, Mr. Pond
was involved with the corporate finance divisions of several New York-based
banks.
John S. Winsauer, Secretary and Director
Mr. Winsauer has served as Secretary and a Director of the Company since
October 1995. In addition, Mr. Winsauer has been a shareholder of the Company
since June 1993. Mr. Winsauer's primary responsibilities have included the
development and implementation of the Company's computer and communications
systems. From January 1993 until present, Mr. Winsauer has been employed by
Amherst Securities Group (a broker/dealer previously known as USArbour
Financial) as a Senior Vice President, prior to which he served as a Senior Vice
President of The Westcap Corporation (a broker/dealer) from April 1989 to
January 1993. From June 1989 through August 1992, in his position as Senior Vice
President with The Westcap Corporation, Mr. Winsauer participated in the
successful marketing of whole-loan packages of finance contracts placed by the
Gillman Companies.
William J. Stahl, Vice President and Chief Financial Officer
Mr. Stahl joined the Company in March 1995 as its Vice President and Chief
Financial Officer. From August 1991 to March 1995, Mr. Stahl was Senior Vice
President and Director of the financial strategies group of The Westcap
Corporation, a broker/dealer which specialized in structured investment products
for institutional investors. Prior to that, Mr. Stahl was employed in a similar
capacity at Kemper Securities, Inc. and its predecessor Underwood Neuhaus & Co.
from January 1989 until August 1991. Mr. Stahl is a CPA with approximately
thirteen years experience in public accounting, including six years as a partner
in his own firm. In addition, Mr. Stahl has ten years experience with
broker/dealers of fixed income investments as a financial analyst.
John T. Dibble, Vice President -- Operations
Mr. Dibble joined the Company in May 1994 as Vice President -- Operations
to manage its underwriting and servicing functions. From 1990 to 1994, Mr.
Dibble was a Vice President with First Interstate Bank of Texas overseeing the
collection department for the Consumer Loan Division, and was responsible for
the centralization of all collection functions for the bank's network of
branches in Texas. From 1982 to 1989, he served in various management capacities
with Citicorp Acceptance, including portfolio analysis and control, credit and
collections, pricing and financial reporting. Mr. Dibble started his career with
Ford Motor Credit Co., where he worked from 1969 to 1980, and has approximately
20 years of experience in various aspects of automotive sales finance management
and administration.
Robert G. Barfield, Vice President -- Marketing
Mr. Barfield joined the Company in 1994 as Regional Marketing Manager and
was promoted to his present position in February 1995. Previously, Mr. Barfield
was the finance director at Archer Motor Co.
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(an automobile dealership) from August 1993 to September 1994. Mr. Barfield was
General Manager of the Gullo Auto Center (an automobile dealership) from March
1992 to August 1993 and he served as General Sales Manager to Charlie Thomas
Auto World (an automobile dealership) from January 1990 to March 1992. Mr.
Barfield has eleven years experience working in the automotive finance industry.
Alan E. Pazdernik, Vice President -- Credit
Mr. Pazdernik joined the Company in September 1995 as Vice
President -- Credit. From October 1991 until he joined the Company, Mr.
Pazdernik was employed as Credit Manager by E-Z Plan, Inc., a company he created
to handle the internal financing of subprime automobile paper. Prior to October
1991, Mr. Pazdernik served over 18 years as the Director of Finance and
Insurance Operations for Red McCombs Automotive (an automobile dealership),
handling the credit, collection, and finance contract administration functions
for a $70 million portfolio of automobile finance contracts. In his present
capacity with the Company, Mr. Pazdernik manages the credit and funding
departments, and has been involved in the Company's efforts to increase market
share in the San Antonio area.
Robert R. Giese, Vice President -- Collections
Mr. Giese joined the Company in April 1994 as Vice
President -- Collections. From 1984 to April 1994, he served as Vice President
in Retail Credit Administration with First Interstate Bank of Texas, with
responsibility for controlling the performance of the consumer loan portfolio in
Texas. Mr. Giese has more than 30 years experience in sales, finance and
banking, including management experience coordinating credit underwriting,
collections, asset disposal, centralized loss recovery and loan workout
functions. His experience in sales, credit and collections supports the Company
in its management of delinquency and loss performance.
Robert S. Kapito -- Director Designee
Mr. Kapito has been nominated and has agreed to serve as a Director of the
Company upon the consummation of the offering. Since May 1990, Mr. Kapito has
been Vice Chairman of BlackRock Financial Management, an investment advisory
firm ('BlackRock'). Mr. Kapito is a member of BlackRock's Management Committee
and Investment Strategy Committee and Co-Head of the Portfolio Management Group.
Mr. Kapito also serves as Vice President for BlackRock's family of mutual funds
and for the Smith Barney Adjustable Rate Government Income Fund. Mr. Kapito has
also served since May 1987 as President of the Board of Directors of Periwinkle
National Theatre.
Manuel A. Gonzalez -- Director Designee
Mr. Gonzalez has been nominated and has agreed to serve as a Director of
the Company upon the consummation of the Offering. From September 1993 to
December 1994, Mr. Gonzalez was Executive Vice President of the Company and ABI.
Mr. Gonzalez is currently Dealer Principal/Owner of NorthPoint Pontiac Buick
GMC, an automobile dealership located in Kingwood, Texas. Since March 1991, Mr.
Gonzalez has been President of Equifirst Financial Services, Inc., a consulting
firm specializing in the automobile dealership industry. From 1988 through 1990,
Mr. Gonzalez was Chief Financial Officer for the Gillman Companies, prior to
which he served as a Vice President at First City Bank, Texas where he managed
the banking relationships of a large number of automobile dealers.
Stuart A. Jones -- Director Designee
From March 1989, to the present, Stuart Jones has been self-employed as
head of Stuart A. Jones Finance and Investments, Dallas, Texas, a
privately-owned consultancy specializing in investment banking and real estate
financing. From January, 1990 to January, 1994, Mr. Jones also served as Counsel
to the Brock Group, Ltd., Washington, D.C., an international trade and
investment strategies consulting firm, where he represented clients in various
real estate, energy and environmental matters.
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Thomas I. Blinten -- Director Designee
Since November 1995, Thomas Blinten has been a Managing Director and
executive management Committee member of Nomura Capital Services, Inc., New
York, New York, a majority-owned subsidiary of Nomura Securities Company,
responsible for interest rate swap and OTC derivative sales and trading. From
March 1993 to November 1995, Mr. Blinten was a Principal and management
committee member of General Re Financial Products, a wholly-owned subsidiary of
General Re Corporation. From July 1990 through March 1993 he was a Manager in
the Derivative Products department for Kemper Securities, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to consummation of the Offering, the Board of Directors shall have
established a Compensation Committee and an Audit Committee comprised of outside
directors. The Company's bylaws provide that each such committee shall have
three or more members, who serve at the pleasure of the Board of Directors.
The Compensation Committee will be responsible for administering incentive
grants under the Company's incentive stock option plan (the 'Option Plan') and
reviewing and making recommendations to the Board of Directors with respect to
the administration of the salaries, bonuses and other compensation of executive
officers, including the terms and conditions of their employment, and other
compensation matters.
The Audit Committee will be responsible for making recommendations to the
Board concerning the engagement of the Company's independent auditors and
consulting with independent auditors concerning the audit plan and, thereafter,
concerning the auditors' report and management letter.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company,
as well as certain other compensation paid or accrued, for the fiscal year ended
December 31, 1995 to the Company's Chief Executive Officer, and each of the
other four most highly compensated executive officers of the Company:
1995 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL
NAME AND PRESENT POSITION TOTAL SALARY BONUS COMPENSATION
------------------------- ----- ------- ------- ------------
<S> <C> <C> <C> <C>
William O. Winsauer ........................................... $ 0(1) $ 0 $ 0 $ 0(1)
Chairman of the Board and Chief Executive Officer
Robert G. Barfield ............................................ 107,675 75,500 32,175 0
Vice President -- Marketing
Adrian Katz ................................................... 94,492 18,750 0 75,742(2)
Vice Chairman and Chief Operating Officer
John T. Dibble ................................................ 95,520 90,000 5,520 0
Vice President -- Operations
William J. Stahl .............................................. 85,000 85,000 0 0
Vice President and Chief Financial Officer
</TABLE>
- ------------
(1) Although Mr. Winsauer received no compensation in the fiscal year 1995, he
received loans from the Company in the aggregate amount of $132,359. See
'Certain Transactions.'
(2) Stated value of compensation in the form of stock issuance.
Under the Company's compensation structure for fiscal 1996, the five
highest paid officers will be as follows (annual base salary in parentheses):
William O. Winsauer ($240,000); Charley A. Pond ($180,000); Adrian Katz
($150,000); William J. Stahl ($120,000); and John S. Winsauer ($120,000).
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<PAGE>
Three members of the Company's Board of Directors, Messrs. William and John
Winsauer and Adrian Katz, participated in the Board's deliberations regarding
executive compensation.
EMPLOYMENT AGREEMENTS
Messrs. William Winsauer, Katz and Pond have entered into employment
agreements with the Company on substantially the following terms:
William O. Winsauer. Mr. Winsauer entered into an employment agreement with
the Company dated May 1, 1996. Under the terms of this agreement, Mr. Winsauer
has agreed to serve as Chief Executive Officer of the Company for a period of
five years and, during such time, to devote his full business time and attention
to the business of the Company. The agreement provides for compensation of Mr.
Winsauer at a base salary of $240,000 per annum, which may be increased or
decreased from time to time in the sole discretion of the Board, but in no event
less than $240,000 per annum. The agreement entitles Mr. Winsauer to receive the
benefits of any cash incentive compensation as may be granted by the Board to
employees, and to participate in any executive bonus or incentive plan
established by the Board from time to time.
The agreement provides Mr. Winsauer with additional benefits including (i)
the right to participate in the Company's medical benefit plan, (ii) entitlement
to benefits under the Company's executive disability insurance coverage, (iii) a
monthly automobile allowance of $1,500 plus fees, maintenance and insurance,
(iv) four weeks paid vacation and (v) all other benefits granted to full-time
executive employees of the Company.
The agreement automatically terminates upon (i) the death of Mr. Winsauer,
(ii) disability of Mr. Winsauer which continues for a period of six months,
following expiration of such six months, (iii) termination of Mr. Winsauer 'for
cause' (which termination requires the vote of a majority of the Board) or (iv)
the occurrence of the five-year expiration date, provided, however, that the
agreement may be extended for successive one-year intervals unless either party
elects to terminate the agreement in a prior written notice. Mr. Winsauer may
terminate his employment under the agreement for good reason as set forth below.
In the event of Mr. Winsauer's termination for cause, the agreement provides
that the Company shall pay Mr. Winsauer his base salary through the date of
termination and the vested portion of any incentive compensation plan to which
Mr. Winsauer may be entitled.
Mr. Winsauer may terminate his employment under the agreement for 'good
reason,' including: (i) removal of, or failure to re-elect Mr. Winsauer as Chief
Executive Officer; (ii) change in scope of responsibilities; (iii) reduction in
salary; (iv) relocation of the Company outside Austin, Texas; (v) breach by the
Company of the agreement; (vi) certain changes to the Company's compensation
plans; (vii) failure to provide adequate insurance and pension benefits; (viii)
failure to obtain similar agreement from any successor or parent of the Company;
or (ix) termination of Mr. Winsauer other than by the procedures specified in
the agreement.
Other than following a change in control, and upon termination of Mr.
Winsauer in breach of the agreement or termination by Mr. Winsauer for good
reason, the Company must pay Mr. Winsauer: (i) his base salary through the date
of termination; (ii) a severance payment equal to the base salary multiplied by
the number of years remaining under the agreement; and (iii) in the case of
breach by the Company of the agreement, all other damages to which Mr. Winsauer
may be entitled as a result of such breach, including lost benefits under
retirement and incentive plans.
In the event of Mr. Winsauer's termination following a change in control,
the Company is required to pay Mr. Winsauer an amount equal to three times the
sum of (i) his base salary, (ii) his annual management incentive compensation
and (iii) his planned level of annual perquisites. The agreement also provides
for indemnification of Mr. Winsauer for any costs or liabilities incurred by Mr.
Winsauer in connection with his employment.
Adrian Katz. Mr. Katz entered into an employment agreement with the Company
dated November 15, 1995. Under the terms of this agreement, Mr. Katz has agreed
to serve as Vice Chairman and Chief Operating Officer of the Company for a
period of three years and, during such time, to devote his full business time
and attention to the business of the Company. The agreement grants Mr. Katz a
base salary of $12,500 per full calendar month of service, which amount may be
increased from time to time
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at the sole discretion of the Board. The agreement terminates upon the death of
Mr. Katz. In the event of any disability of Mr. Katz which continues for a
period of six months, the agreement may be terminated by the Company at the
expiration of such six-month period. The agreement automatically terminates upon
the discharge of Mr. Katz for cause.
Mr. Katz has agreed not to disclose certain confidential proprietary
information of the Company to unauthorized parties, except as required by law,
and to hold such information for the benefit of the Company. The agreement
contains standard non-competition covenants whereby Mr. Katz has agreed not to
conduct or solicit business with any competitors or clients of the Company
within certain restricted geographic areas for a period of two years following
the termination of his employment. The restriction also applies to the
solicitation of any current or recent employees of the Company. The restricted
areas include any territory within a 40-mile radius of an automobile dealership
with which the Company has done business during the term of the agreement.
Pursuant to the terms of the agreement, Mr. Katz received 568,750 shares of the
Company's Common Stock on January 1, 1996, equal to 10% of the Company's
outstanding shares of Common Stock following the issuance of such shares to Mr.
Katz.
Charley A. Pond. Mr. Pond entered into an employment agreement with the
Company dated February 15, 1996. Under the terms of this agreement, Mr. Pond has
agreed to serve as President of the Company for a period of three years and,
during such time, to devote his full business time and attention to the business
of the Company.
The agreement grants Mr. Pond a base salary of $15,000 per full calendar
month of service, which amount may be increased from time to time at the sole
discretion of the Board. In addition, upon the Company's successful completion
of an initial public offering of its common stock, the Company is obligated to
pay Mr. Pond a bonus of $90,000. An additional performance bonus is payable to
Mr. Pond in the event the Company meets certain sales and income targets set
forth in the agreement. Such bonus is equal to $4,500 for each 10% increase in
the Company's sales or income over each of the specified targets. As an officer
of the Company, Mr. Pond shall be entitled to participate in its stock option
plan.
The agreement terminates upon the death of Mr. Pond. In the event of any
disability of Mr. Pond which continues for a period of six months, the agreement
may be terminated by the Company at the expiration of such six-month period. The
agreement automatically terminates upon the discharge of Mr. Pond for cause. If
Mr. Pond's employment with the Company terminates prior to February 15, 1997 for
any reason other than termination for cause or voluntary termination by the
employee, the Company is obligated to pay Mr. Pond's salary for the remainder of
the first year of the agreement.
Mr. Pond has agreed not to disclose certain confidential proprietary
information of the Company to unauthorized parties, except as required by law,
and to hold such information for the benefit of the Company. The agreement
contains standard non-competition covenants whereby Mr. Pond has agreed not to
conduct or solicit business with any competitors or clients of the Company
within certain restricted geographic areas for a period of two years following
the termination of his employment. The restriction also applies to the
solicitation of any current or recent employees of the Company. The restricted
areas include any territory within a 40-mile radius of any automobile dealership
with which the Company has done business during the term of the agreement.
OPTION PLAN
Prior to completion of the Offering, management expects the Board of
Directors of the Company to adopt and the shareholders of the Company to
approve, the Company's proposed 1996 Stock Option Plan (the 'Option Plan'),
under which stock options may be granted to employees of the Company and its
subsidiaries. The Option Plan permits the grant of stock options that qualify as
incentive stock options ('ISOs') under Section 422 of the Internal Revenue Code
of 1986, as amended, and nonqualified stock options ('NSOs'), which do not so
qualify. The Company will authorize and reserve 557,000 shares (8% of the
Company's outstanding shares of Common Stock without giving effect to
outstanding warrants) for issuance under the Option Plan. The shares may be
unissued shares or treasury shares. If an option expires or terminates for any
reason without having been exercised in full, the unpurchased shares subject to
such option will again be available for grant under the Option Plan. In the
event of certain corporate reorganizations, recapitalizations or other specified
corporate
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transactions affecting the Company or the Common Stock, proportionate
adjustments shall be made to the number of shares available for grant and to the
number of shares and prices under outstanding option grants made before the
event.
The Option Plan will be administered by the Compensation Committee of the
Board of Directors (the 'Committee'). Subject to the limitations set forth in
the Option Plan, the Committee has the authority to determine the persons to
whom options will be granted, the time at which options will be granted, the
number of shares subject to each option, the exercise price of each option, the
time or times at which the options will become exercisable and the duration of
the exercise period. The Committee may provide for the acceleration of the
exercise period of an option at any time prior to its termination or upon the
occurrence of specified events, subject to limitations set forth in the Option
Plan. Subject to the consent of optionees, the Committee has the authority to
cancel and replace stock options previously granted with new options for the
same or a different number of shares and having a higher or lower exercise
price, and may amend the terms of any outstanding stock option to provide for an
exercise price that is higher or lower than the current exercise price.
All employees of the Company and its subsidiaries are eligible to receive a
grant of a stock option under the Option Plan, as selected by the Committee. The
exercise price of shares of Common Stock subject to options granted under the
Option Plan may not be less than the fair market value of the Common Stock on
the date of grant. Options granted under the Option Plan will generally become
vested and exercisable over a three-year period in equal annual installments,
unless the Committee specifies a different vesting schedule. The maximum term of
options granted under the Option Plan is ten years from the date of grant. ISOs
granted to any employee who is a 10% shareholder of the Company are subject to
special limitations relating to the exercise price and term of the options. The
value of Common Stock (determined at the time of grant) that may be subject to
ISOs that become exercisable by any one employee in any one year is limited by
the Internal Revenue Code to $100,000. All options granted under the Option Plan
are nontransferable by the optionee, except upon the optionee's death in
accordance with his will or applicable law. In the event of an optionee's death
or permanent and total disability, outstanding options that have become
exercisable will remain exercisable for a period of one year, and the Committee
will have the discretion to determine the extent to which any unvested options
shall become vested and exercisable. In the case of any other termination of
employment, outstanding options that have previously become vested will remain
exercisable for a period of 90 days, except for a termination 'for cause' (as
defined), in which case all unexercised options will be immediately forfeited.
Under the Option Plan, the exercise price of an option is payable in cash or, in
the discretion of the Committee, in Common Stock or a combination of cash and
Common Stock. An optionee must satisfy all applicable tax withholding
requirements at the time of exercise.
In the event of a 'change in control' of the Company (as defined in the
Option Plan) each option will become fully and immediately vested and the
optionee may surrender the option and receive, with respect to each share of
Common Stock issuable under such option, a payment in cash equal to the excess
of the fair market value of the Common Stock at the time of the change in
control over the exercise price of the option. However, there will be no
acceleration of vesting and cash payment if the change in control is approved by
two-thirds of the members of the Board of Directors of the Company and provision
is made for the continuation or substitution of the options on equivalent terms.
The Option Plan has a term of ten years, subject to earlier termination or
amendment by the Board of Directors, and all options granted under the Option
Plan prior to its termination remain outstanding until they have been exercised
or are terminated in accordance with their terms. The Board may amend the Option
Plan at any time, except that shareholder approval is required for certain
amendments to the extent necessary for purposes of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended.
The grant of a stock option under the Option Plan will not generally result
in taxable income for the optionee, nor in a deductible compensation expense for
the Company, at the time of grant. The optionee will have no taxable income upon
exercising an ISO (except that the alternative minimum tax may apply), and the
Company will receive no deduction when an ISO is exercised. Upon exercising an
NSO, the optionee will recognize ordinary income in the amount by which the fair
market value of the Common Stock on the date of exercise exceeds the exercise
price, and the Company will generally be entitled to a corresponding deduction.
The treatment of an optionee's disposition of shares of Common
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Stock acquired upon the exercise of an option is dependent upon the length of
time the shares have been held and whether such shares were acquired by
exercising an ISO or an NSO. Generally, there will be no tax consequence to the
Company in connection with the disposition of shares acquired under an option
except that the Company may be entitled to a deduction in the case of a
disposition of shares acquired upon exercise of an ISO before the applicable ISO
holding period has been satisfied.
The Committee will make initial grants of stock options under the Option
Plan, effective upon the date of the Offering, to certain of the Company's
executive officers and other employees to purchase an aggregate of 300,000
shares of Common Stock at a per share exercise price equal to the Offering
Price. Under this initial phase of the Option Plan, William O. Winsauer will be
granted options to purchase a total of 40,000 shares, and John S. Winsauer,
Charley A. Pond and Adrian Katz will each be granted options to purchase 20,000
shares. The remaining options to purchase 200,000 shares will be granted to
other employees. These options will become vested and exercisable over a
three-year period in equal annual installments beginning on the first
anniversary of the Offering date. The number of shares of Common Stock that may
be subject to options granted in the future under the Option Plan to executive
officers and other employees of the Company is not determinable at this time.
DIRECTOR COMPENSATION
In return for their services to the Company, each of the non-employee
directors will be compensated in the following manner: (i) an annual payment of
$5,000 cash; (ii) payment of $500 per meeting of the Board of Directors attended
and $500 for each committee meeting attended (plus reimbursement of
out-of-pocket expenses); and (iii) an option to purchase 3,000 shares of the
Company's Common Stock, exercisable at the initial public offering price
hereunder, on or after the date commencing one year following the date of the
Offering.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation provide that, pursuant to Texas
law, no director of the Company shall be liable to the Company or its
shareholders for monetary damages for an act or omission in such director's
capacity as a director except for (i) any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) any act or omission not in good
faith or that involves intentional misconduct or a knowing violation of law,
(iii) any transaction from which the director derived an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office or (iv) any act or omission for which the liability of a
director is expressly provided for by statute. The effect of this provision in
the Articles of Incorporation is to eliminate the right of the Company and its
shareholders (through shareholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
These provisions will not affect the liability of directors under other laws,
such as federal securities laws.
Under Section 2.02-1 of the Texas Business Corporation Act, the Company can
indemnify its directors and officers against liabilities they may incur in such
capacities, subject to certain limitations. The Company's Articles of
Incorporation provide that the Company will indemnify its directors and officers
to the fullest extent permitted by law.
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CERTAIN TRANSACTIONS
The following is a summary of certain transactions to which the Company was
or is a party and in which certain executive officers, directors or shareholders
of the Company had or have a direct or indirect material interest. The Company
believes that the terms contained in each of such transactions are comparable to
those which could have been obtained by the Company from unaffiliated third
parties.
William O. Winsauer entered into a Secured Working Capital Loan Agreement
dated as of July 31, 1995 (the 'Sentry Working Capital Line') with Sentry, which
provides for a line of credit of up to $2.25 million. Proceeds from the Sentry
Working Capital Line were contributed to the Company as paid-in capital. The
obligations of Mr. Winsauer under the Sentry Working Capital Line, including all
payment obligations, are guaranteed by the Company and its affiliate, ABI, whose
sole shareholder is William O. Winsauer, pursuant to a Working Capital Guarantee
and Waiver dated as of July 31, 1995. All amounts outstanding under the Sentry
Working Capital Line ($1,910,000 at June 30, 1996), including a payment of
$89,000 made by the Company to Sentry in April 1996 on behalf of Mr. Winsauer,
will be paid from the sale of shares by William Winsauer as part of the
Offering. See 'Use of Proceeds.'
During 1995, the Company made loans to William O. Winsauer and John S.
Winsauer in the amount of $132,359 and $21,000, respectively. As of June 30,
1996, the outstanding amounts of these loans increased to $304,861 and $131,173,
respectively. Such loans bear no interest and have no repayment terms, but will
be repaid out of the proceeds of the sale of Common Stock by the Selling
Shareholders in the Offering. To date, the full amount on each of these loans
remains outstanding. See Note 12 to Notes to Consolidated Financial Statements.
The Company had net advances due from ABI of $86,700 as of June 30, 1996,
which funds were utilized by ABI prior to 1996 to cover expenses incurred in
connection with the management of ABI's investments in securitization trusts.
The Company and ABI entered into a management agreement dated as of January 1,
1996 (the 'ABI Management Agreement') which provides for repayment of such
advances together with interest at 10% per annum on or before May 31, 1998, the
reimbursement of expenses incurred on behalf of ABI and for an annual fee
payable by ABI to the Company for services rendered by it or the Company's
employees on behalf of ABI. The ABI Management Agreement states that the Company
shall provide the following management services for ABI on an ongoing basis: (i)
day-to-day management of ABI's portfolio of partnership interests in the
securitization trusts sponsored by ABI between 1992 and 1994, including various
monitoring and reporting functions; (ii) certain cash management services,
including the advancing of funds to pay ABI's ordinary business expenses and
(iii) providing advice as to regulatory compliance. The ABI Management Agreement
also provides that the Company will perform certain accounting functions on
behalf of ABI including (i) maintenance of financial books and records, (ii)
monitoring of cash management functions, (iii) preparation of financial
statements and tax returns and (iv) providing advice in connection with
retention of independent accountants. As compensation for services rendered
thereunder, the ABI Management Agreement provides that ABI shall pay the Company
an annual fee of $50,000, payable quarterly. In addition, the agreement provides
for the quarterly reimbursement of advances made by the Company of out-of-pocket
costs and expenses on behalf of ABI.
The Company entered into a shareholders' agreement (the 'Shareholder
Agreement'), with Messrs. John and William Winsauer and Adrian Katz, dated as of
January 1, 1996. The Shareholder Agreement provides, among other things, that in
the event any party to the Shareholder Agreement, other than William Winsauer,
shall receive a bona fide offer to purchase any or all of his shares of Common
Stock of the Company, such selling shareholder shall first offer such shares for
sale to the Company upon the same terms and at the same price as are set forth
in the offer received by such selling shareholder. In the event the Company
declines to purchase such shares, the selling shareholder is obligated to offer
such shares for sale to William Winsauer upon the same terms and at the same
price. On or before the effective date of the Offering, the Shareholder
Agreement will be terminated.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of June 30, 1996 and
as adjusted to reflect the sale of the shares of Common Stock in the Offering
(assuming no exercise of the Underwriters' over-allotment option), based on
information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
Common Stock, (ii) each director and each officer of the Company with beneficial
ownership of Common Stock and (iii) all officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING SHARES OFFERING
----------------------- OFFERED IN -----------------------
NAME AND ADDRESS NUMBER PERCENTAGE THE OFFERING NUMBER PERCENTAGE
---------------- ------ ---------- ------------ ------ ----------
<S> <C> <C> <C> <C> <C>
William O. Winsauer ............................. 3,839,062 67.50% 171,000 3,668,062 52.69%
301 Congress Avenue
Austin, Texas 78701
John S. Winsauer ................................ 1,279,688 22.50 54,000 1,225,688 17.60
301 Congress Avenue
Austin, Texas 78701
Adrian Katz ..................................... 568,750 10.00 0 568,750 8.17
301 Congress Avenue
Austin, Texas 78701
Total (all officers and directors as a
group).................................... 5,687,500 100.00% 225,000 5,462,500 78.46%
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par
value.
Common Stock. As of June 30, 1996, there were 5,687,500 shares of Common
Stock outstanding. Holders of Common Stock are not entitled to any preemptive
rights. The Common Stock is neither redeemable nor convertible into any other
securities. All outstanding shares of Common Stock are fully paid and
nonassessable. All shares of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.
Each holder of Common Stock is entitled to one vote for each share of
Common Stock held of record on all matters submitted to a vote of shareholders,
including the election of directors. Shares of Common Stock do not have
cumulative voting rights.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share equally and ratably in all of the
assets remaining, if any, after satisfaction of all debts and liabilities of the
Company.
Preferred Stock. The Board of Directors, without further shareholder
action, is authorized to issue shares of Preferred Stock in one or more series
and to fix the terms and provisions of each series, including dividend rights
and preferences over dividends on the Common Stock, conversion rights, voting
rights (in addition to those provided by law), redemption rights and the terms
of any sinking fund therefor, and rights upon liquidation, including preferences
over the Common Stock. Under certain circumstances, the issuance of a series of
Preferred Stock could have the effect of delaying, deferring or preventing a
change of control of the Company and could adversely affect the rights of the
holders of the Common Stock. As of June 30, 1996 there were no issued and
outstanding shares of Preferred Stock and there is no current intention to issue
any Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is .
WARRANTS
The Company currently has one outstanding Warrant (the 'Warrant') with
respect to its Common Stock, which was issued on March 12, 1996, in favor of a
private investor (the 'Warrant Holder'). The Warrant entitles the Warrant
Holder, upon its exercise, to purchase from the Company 18,811 shares of its
Common Stock (the 'Warrant Shares') at $0.53 per share. The exercise price per
share may be adjusted over time due to certain adjustments that are to be made
to the number of shares constituting a 'Warrant Share' in the event of Common
Stock splits, dilutive issuances of additional Common Stock, issuance of
additional warrants or other rights, or issuance of securities convertible into
Common Stock by the Company.
The Warrant provides the Warrant Holder with certain registration rights
that arise upon the Company's proposal to register, subsequent to its initial
public offering, its Common Stock for sale to the public under the Securities
Act. In such event, the Warrant obligates the Company to give written notice to
the Warrant Holder of its intention to register shares in a public offering.
Upon the written request of the Warrant Holder, received by the Company within
20 days after the giving of any such notice by the Company, to register any of
its Warrant Shares and/or Warrant Shares issuable upon exercise of a Warrant
held by such Warrant Holder, the Company must use its best efforts to cause the
Warrant Shares as to which registration shall have been so requested to be
included in the registration statement proposed to be filed by the Company, all
to the extent requisite to permit the sale or other disposition by the Warrant
Holder (in accordance with its written request) of such Warrant Shares.
Alternatively, the Company may include the Warrant Shares as to which
registration shall have been requested by a Warrant Holder in a separate
registration statement to be filed concurrently with the registration statement
proposed to be filed by the Company. The Warrant also provides that in the event
that any registration statement filed by the Company shall relate, in whole or
in part, to an underwritten public offering, the number of Warrant Shares to be
included in such registration statement may be
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reduced or no Warrant Holders may be included in such registration, subject to
certain conditions, if and to the extent that the managing underwriters shall
give their written opinion that such inclusion would materially and adversely
affect the marketing of the securities to be sold therein by the Company. Except
as set forth above, the Warrant sets no limit on the number of registrations
that may be requested pursuant to the terms of the Warrant.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION, BYLAWS AND TEXAS
CORPORATION LAW
GENERAL
The provisions of the Articles of Incorporation, the Bylaws and the Texas
Business Corporation Act (the 'TBCA') described in this section may affect the
rights of the Company's shareholders.
AMENDMENT OF ARTICLES OF INCORPORATION
Under the TBCA, a corporation's articles of incorporation may be amended by
the affirmative vote of the holders of two-thirds of the total outstanding
shares entitled to vote thereon, unless a different amount, not less than a
majority, is specified in the articles of incorporation. The Company's Articles
of Incorporation reduces such amount to a majority.
CUMULATIVE VOTING
Under the TBCA, cumulative voting is available unless prohibited by a
corporation's articles of incorporation. The Company's Articles of Incorporation
expressly prohibits cumulative voting.
CLASSIFIED BOARD
The TBCA permits but does not require, the adoption of a classified board
of directors consisting of any number of directors with staggered terms, with
each class having a term of office longer than one year but not longer than
three years. The TBCA also provides that no classification of directors shall be
effective for any corporation if any shareholder has the right to cumulate his
vote unless the board of directors consists of nine or more members. The Company
has not adopted a classified board of directors.
REMOVAL OF DIRECTORS
The TBCA provides that if a corporation's articles of incorporation or
bylaws so provide, at a meeting of shareholders called for that purpose, any
director or the entire board of directors may be removed with or without cause,
by the vote of the holders of the portion of shares specified in the
corporation's articles of incorporation or bylaws, but not less than a majority
of the shares entitled to vote at an election of directors. Neither the
Company's Articles of Incorporation nor its Bylaws provide for the removal of
directors; under the TBCA removal of directors is permitted by majority with or
without cause.
INSPECTION OF SHAREHOLDER REGISTER
The TBCA permits any person who shall have been a shareholder for at least
six months immediately preceding his demand, or who is the holder of at least 5%
of the outstanding stock of the corporation, to examine the shareholder list,
provided that a written demand setting forth a proper purpose of such
examination is made and served on the statutory agent of the corporation.
RIGHT TO CALL SPECIAL MEETINGS OF SHAREHOLDERS
Under the TBCA a special meeting of shareholders of a corporation may be
called by the president, board of directors or shareholders as may be authorized
in the articles of incorporation or bylaws of the corporation or by the holders
of at least 10% of all the votes entitled to be cast on any issue proposed to be
considered at the proposed special meeting, unless the articles of incorporation
provide for a lesser or greater percentage (but not more than 50%). The
Company's Articles of Incorporation do not provide for a lesser or a greater
percentage. In addition, the Company's Bylaws provide that such a special
meeting may be called by the Chairman of the Board, the Chief Executive Officer,
the Secretary or any two directors of the Company.
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MERGERS, SALES OF ASSETS AND OTHER TRANSACTIONS
Under the TBCA, shareholders have the right, subject to certain exceptions,
to vote on all mergers to which the corporation is a party. In certain
circumstances, different classes of securities may be entitled to vote
separately as classes with respect to such mergers. Under the Company's Articles
of Incorporation, approval of the holders of at least a majority of all
outstanding shares entitled to vote is required for a merger. The approval of
the shareholders of the surviving corporation in a merger is not required under
Texas law if: (i) the corporation is the sole surviving corporation in the
merger; (ii) there is no amendment to the corporation's articles of
incorporation; (iii) each shareholder holds the same number of shares after the
merger as before with identical designations, preferences, limitations and
relative rights; (iv) the voting power of the shares outstanding after the
merger plus the voting power of the shares issued in the merger does not exceed
the voting power of the shares outstanding prior to the merger by more than 20%;
(v) the number of shares outstanding after the merger plus the shares issued in
the merger does not exceed the number of shares outstanding prior to the merger
by more than 20%; and (vi) the board of directors of the surviving corporation
adopts a resolution approving the plan of merger.
The Company's Articles of Incorporation further provide that the Company
may sell, lease, exchange or otherwise dispose of all, or substantially all, of
its property, other than in the usual and regular course of business, or
dissolve, if the shareholders owning a majority or more of all the votes
entitled to be cast in the transaction approve the transaction. However, certain
of the Company's securitization documents prohibit mergers and sales of
substantially all assets.
ACTION WITHOUT A MEETING
Under the TBCA, any action to be taken by shareholders at a meeting may be
taken without a meeting if all shareholders entitled to vote on the matter
consent to the action in writing. In addition, a Texas corporation's articles of
incorporation may provide that shareholders may take action by a consent in
writing signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting. The Company's Articles of Incorporation contain such a provision.
DISSENTERS' RIGHTS
Under the TBCA, a shareholder is entitled to dissent from and, upon
perfection of the shareholder's appraisal rights, to obtain the fair value of
his or her shares in the event of certain corporate actions, including certain
mergers, share exchanges, sales of substantially all assets of the corporation,
and certain amendments to the corporation's articles of incorporation that
materially and adversely affect shareholder rights.
DIVIDENDS AND STOCK REPURCHASES AND REDEMPTIONS
The TBCA provides that the board of directors of a corporation may
authorize, and the corporation may make, distributions subject to any
restrictions in its articles of incorporation and the following limitations:
(1) A distribution may not be made by a corporation if after giving
effect thereto the corporation would be insolvent or the distribution
exceeds the surplus of the corporation, provided, however, that if the net
assets of a corporation are not less than the amount of the proposed
distribution the corporation may make a distribution involving a purchase
or redemption if made by the corporation to: (a) eliminate fractional
shares; (b) collect or compromise indebtedness owed by or to the
corporation; (c) pay dissenting shareholders entitled to payment for their
shares under the TBCA; or (d) effect the purchase or redemption of
redeemable shares in accordance with the TBCA.
(2) The corporation may make a distribution not involving a purchase
or redemption of any of its own shares if the corporation is a consuming
assets corporation.
59
<PAGE>
<PAGE>
PREEMPTIVE RIGHTS
Under the TBCA, shareholders of a corporation have a preemptive right to
acquire additional, unissued, or treasury shares of the corporation, or
securities of the corporation convertible into or carrying a right to subscribe
to or acquire shares, except to the extent limited or denied by statute or by
the articles of incorporation. The Company's Articles of Incorporation expressly
deny preemptive rights.
DISSOLUTION
The TBCA permits, and the Company's Articles of Incorporation allow, that
voluntary dissolution may occur upon the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote thereon.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 6,981,311 shares
of Common Stock outstanding (7,206,311 shares if the Underwriters'
over-allotment option is exercised in full). Of such shares, the shares sold in
the Offering (other than shares which may be purchased by 'affiliates' of the
Company) will be freely tradeable without restriction or further registration
under the Securities Act. The 5,481,311 remaining shares of Common Stock are
'restricted securities,' as that term is defined under Rule 144 promulgated
under the Securities Act, and may only be sold pursuant to a registration
statement under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act, including Rule 144 and 144A
thereunder. Approximately 69,800 shares will be eligible for sale pursuant to
Rule 144 immediately after the Offering, subject to compliance with such Rule
and the contractual arrangements disclosed below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least two years from the later of the date such
restricted shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (69,813 shares based on the number of shares
to be outstanding immediately after this Offering, assuming no exercise of the
Underwriters' over-allotment option) or the average weekly trading volume in the
public market during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. Sales under Rule 144 are also subject
to certain requirements as to the manner and notice of sale and the availability
of public information concerning the Company.
Affiliates may sell shares not constituting restricted shares in accordance
with the foregoing volume limitations and other restrictions, but without regard
to the two-year holding period. Restricted shares held by affiliates of the
Company eligible for sale in the public market under Rule 144 are subject to the
foregoing volume limitations and other restrictions.
Further, under Rule 144(k), if a period of at least three years has elapsed
between the later of the date restricted shares were acquired from the Company
and the date they were acquired from an affiliate of the Company and the person
acquiring such shares was not an affiliate for at least three months prior to a
proposed sale, such person would be entitled to sell the shares immediately
without regard to volume limitations and the other conditions described above.
The Company and all holders of Common Stock prior to the Offering have
agreed not to, directly or indirectly, offer, sell, contract to sell or
otherwise dispose of any Common Stock, including, but not limited to, any
securities that are convertible into or exchangeable for, or that represent the
right to receive, Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Principal Financial Securities,
Inc. See 'Underwriting.' No predictions can be made as to the effect, if any,
that market sales of shares of existing shareholders or the availability of such
shares for future sale will have on the market price of shares of Common Stock
prevailing from time to time. The prevailing market price of Common Stock after
the Offering could be adversely affected by future sales of substantial amounts
of Common Stock by existing shareholders or the perception that such sales could
occur.
60
<PAGE>
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the 'Underwriting Agreement') among the Company, the Selling Stockholders and
the underwriter named below (the 'Underwriters'), for whom Principal Financial
Securities, Inc. ('Principal Financial') is acting as the representative (the
'Representative'), each of the Company and the Selling Shareholders have agreed
to sell to the Underwriters, and each of the Underwriters severally has agreed
to purchase from the Company and the Selling Shareholders, the respective number
of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Principal Financial Securities, Inc....................................
---------
Total............................................................. 1,500,000
---------
---------
</TABLE>
The Underwriters are committed to purchase and pay for all such shares if
any are purchased.
The Underwriters have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock directly to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $
per share of Common Stock. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share of Common Stock on
sales to certain other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be changed by the
Underwriters.
Prior to the Offering, there has been no public trading market for the
Common Stock. Although the Company has applied for quotation of the Common Stock
on Nasdaq, there can be no assurance that any active trading market will develop
for the Common Stock or, if developed, will be maintained. The initial public
offering price will be determined through negotiations between the Company and
the Representative. The factors to be considered in determining the initial
public offering price will include the history of and the prospects for the
industry in which the Company competes, the ability of the Company's management,
the past and present operations of the Company, the historical results of
operations of the Company, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of the offering and the
recent market prices of securities of generally comparable companies.
The Company has granted the Underwriters an option exercisable during the
30-day period after the date of this Prospectus to purchase up to 225,000
additional shares of Common Stock, solely to cover over-allotments, if any, at
the initial public offering price less the underwriting discount, as set forth
on the cover page of this Prospectus.
The Company and all holders of Common Stock prior to the Offering have
agreed that they will not, without the prior written consent of Oppenheimer,
directly or indirectly, offer, sell, grant any option to purchase or otherwise
dispose (or announce the offer, sale, grant of any option to purchase or other
disposition) of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for shares of Common Stock for a period of 180 days
after the date of this Prospectus.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the common stock offered hereby will
be passed upon for the Company by Dewey Ballantine, New York, New York. Dewey
Ballantine will rely as to matters of Texas
61
<PAGE>
<PAGE>
law upon the opinion of Butler & Binion, L.L.P. Certain legal matters with
respect to the Offering will be passed upon for the Underwriters by Gibson,
Dunn & Crutcher LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at and for the years
ended December 31, 1994 and 1995 appearing in this Prospectus and Registration
Statement have been audited by Coopers & Lybrand L.L.P., independent auditors,
as set forth in their report thereon appearing elsewhere in this Prospectus and
in the Registration Statement, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In September 1995, in anticipation of the commencement of the Company's
securitization program and its status as a public company, the Company's Board
of Directors appointed Coopers & Lybrand L.L.P. as the Company's independent
certified public accountants. Prior thereto, Mann Frankfort Stein & Lipp
(Houston, Texas) ('Mann Frankfort') served as the Company's independent
accountants.
During the Company's fiscal years ended December 31, 1994 and 1995, and the
subsequent interim period from January 1, 1996 through the date hereof, there
have been no disagreements with Mann Frankfort on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to its satisfaction, would have caused Mann
Frankfort to make reference thereto in its report on the financial statements
for the period from September 1, 1994 to March 31, 1995. The report of Mann
Frankfort on the Company's financial statements for such audit period did not
contain an adverse opinion or a disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles, except that
Mann Frankfort was unable to obtain an independent accountant's report on the
internal control procedures of LSE and was unable to apply other auditing
procedures regarding certain finance receivables. Accordingly, Mann Frankfort
was unable at such time to express an opinion on the Company's financial
statements. Following receipt of such information from LSE, Mann Frankfort was
subsequently able to issue an unqualified report as of October 6, 1995. Coopers
& Lybrand L.L.P. has since conducted an audit of the Company's financial
condition and operations for the period covered by the Mann Frankfort audit.
From time to time, Mann Frankfort continues to perform various accounting
services on behalf of the Company.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form S-1 (of which this Prospectus is
a part) under the Securities Act of 1933, as amended (the 'Securities Act'),
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. Statements contained in this Prospectus as to the contents
of any contract or any other document are not necessarily complete, and in each
instance, reference is made to the copy of such contract or document filed as an
exhibit or schedule to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including exhibits thereto, may be inspected without charge at the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the New York Regional Office located at 7 World Trade
Center, New York, New York 10048, and at the Chicago Regional Office located at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained, at prescribed rates, from the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company intends to furnish to its shareholders with annual reports
containing financial statements audited by its independent auditors and with
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
The Commission maintains a Web site at http://www.sec.gov pursuant to Item
502(a)(2) under Regulation S-K as recently amended in SEC Release No. 33-7289
(May 9, 1996).
62
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets, December 31, 1994 and 1995 and June 30, 1996 (Unaudited)...................... F-3
Consolidated Statements of Operations for the Period From August 1, 1994 (Inception) through December 31,
1994, the Year Ended December 31, 1995 and the Six-Month Periods Ended June 30, 1995 (Unaudited) and 1996
(Unaudited).............................................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Period From August 1, 1994 (Inception) to December
31, 1994, the Year Ended December 31, 1995 and the Six-Month Period Ended June 30, 1996 (Unaudited)...... F-5
Consolidated Statements of Cash Flows for the Period From August 1, 1994 (Inception) to December 31, 1994,
the Year Ended December 31, 1995 and the Six-Month Periods Ended June 30, 1995 (Unaudited) and 1996
(Unaudited).............................................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
AUTOBOND ACCEPTANCE CORPORATION
We have audited the accompanying consolidated balance sheets of AutoBond
Acceptance Corporation and Subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the period from August 1, 1994 (Inception) through December 31, 1994
and for the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AutoBond
Acceptance Corporation and Subsidiaries as of December 31, 1994 and 1995, and
the consolidated results of their operations and their cash flows for the period
from August 1, 1994 (Inception) through December 31, 1994 and for the year ended
December 31, 1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Austin, Texas
May 1, 1996
F-2
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................................ $ 92,660 $ 1,822,881
Restricted cash...................................................... $ 138,176 360,266 276,297
Cash held in escrow.................................................. 1,322,571 1,666,847
Finance contracts held for sale, net................................. 2,361,479 3,354,821 545,681
Repossessed assets held for sale..................................... 673,746 513,568
Class B Certificates................................................. 2,834,502 6,092,308
Excess servicing receivable.......................................... 846,526 1,574,761
Debt issuance cost................................................... 700,000 823,860
Trust receivable..................................................... 525,220 2,057,568
Due from affiliate................................................... 86,700
Prepaid expenses and other assets.................................... 354,208 832,100
---------- ----------- -----------
Total assets............................................... $2,499,655 $11,064,520 $16,292,571
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit agreement...................................... $2,054,776 $ 1,150,421 $ 237,292
Notes payable................................................... 2,674,597 6,248,219
Repurchase agreement............................................ 1,061,392 --
Subordinated debt............................................... 300,000
Accounts payable and accrued liabilities........................ 25,636 1,836,082 1,506,843
Bank overdraft.................................................. 23,314 861,063 2,185,847
Payable to affiliate............................................ 504,534 255,597 --
Deferred income taxes........................................... 199,000 1,169,000
---------- ----------- -----------
Total liabilities.......................................... 2,608,260 8,038,152 11,647,201
---------- ----------- -----------
Shareholders' equity:
Common stock, no par value; 25,000,000 shares authorized;
5,118,753 shares, 5,118,753 shares and 5,687,500 shares issued
and outstanding,.............................................. $ 1,000 $ 1,000 $ 1,000
Additional paid-in capital...................................... 451,000 2,912,603 2,912,603
Deferred compensation........................................... (62,758) (36,990)
Loans to shareholders........................................... (16,000) (153,359) (436,034)
Retained earnings (accumulated deficit)......................... (544,605) 328,882 2,204,791
---------- ----------- -----------
Total shareholders' equity (deficit)....................... (108,605) 3,026,368 4,645,370
---------- ----------- -----------
Total liabilities and shareholders' equity................. $2,499,655 $11,064,520 $16,292,571
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994 SIX MONTHS ENDED
(INCEPTION) YEAR ENDED JUNE 30,
THROUGH DECEMBER DECEMBER 31, ------------------------
31, 1994 1995 1995 1996
---------------- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Interest income................................. $ 38,197 $ 2,880,961 $ 801,781 $1,470,351
Interest expense................................ (19,196) (2,099,867 ) (384,353) (1,137,520)
---------------- ------------ ---------- ----------
Net interest income........................ 19,001 781,094 417,428 332,831
Gain on sale of finance contracts............... 4,085,952 133,684 5,743,986
Servicing fee income............................ 8,563 277,208
---------------- ------------ ---------- ----------
Total revenues........................ 19,001 4,867,046 559,675 6,354,025
---------------- ------------ ---------- ----------
Expenses:
Provision for credit losses..................... 45,000 48,702 205,000 63,484
Salaries and benefits........................... 225,351 1,320,100 380,083 1,846,047
General and administrative...................... 244,974 1,462,740 581,889 884,348
Other operating expenses........................ 48,281 963,017 324,075 564,237
---------------- ------------ ---------- ----------
Total expenses........................ 563,606 3,794,559 1,491,047 3,358,116
---------------- ------------ ---------- ----------
Income (loss) before taxes and extraordinary loss.... (544,605) 1,072,487 (931,372) 2,995,909
Provision for income taxes........................... 199,000 1,020,000
---------------- ------------ ---------- ----------
Income (loss) before extraordinary loss.............. (544,605) 873,487 (931,372) 1,975,909
Extraordinary loss, net of tax benefits of $50,000... (100,000)
---------------- ------------ ---------- ----------
Net income (loss)............................... $ (544,605) $ 873,487 $ (931,372) $1,875,909
---------------- ------------ ---------- ----------
---------------- ------------ ---------- ----------
Income (loss) per common share:
Income (loss) before extraordinary loss......... $ (0.11) 0.17 (0.18) 0.35
Extraordinary loss.............................. (0.02)
---------------- ------------ ---------- ----------
Net income (loss)............................... (0.11) .17 (0.18) 0.33
---------------- ------------ ---------- ----------
---------------- ------------ ---------- ----------
Weighted average shares outstanding.................. 5,118,753 5,190,159 5,118,753 5,698,367
---------------- ------------ ---------- ----------
---------------- ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
--------- ------ ---------- ------------
<S> <C> <C> <C> <C>
Capital contributions at inception................ 5,118,753 $1,000 $ 451,000
Loans to shareholders.............................
Net loss..........................................
--------- ------ ---------- ------------
Balance, December 31, 1994........................ 5,118,753 1,000 451,000
Capital contributions............................. 2,323,103
Loans to shareholders.............................
Deferred compensation per employee contract....... 138,500 $ (138,500)
Amortization of deferred compensation............. 75,742
Net income........................................
--------- ------ ---------- ------------
Balance, December 31, 1995........................ 5,118,753 1,000 2,912,603 (62,758)
Stock issued per employee contract................ 568,747
Loans to shareholders.............................
Amortization of deferred compensation............. 25,768
Net income........................................
--------- ------ ---------- ------------
Balance, June 30, 1996 (unaudited)................ 5,687,500 $1,000 $2,912,603 $ (36,990)
--------- ------ ---------- ------------
--------- ------ ---------- ------------
<CAPTION>
LOANS TO RETAINED
SHAREHOLDERS EARNINGS TOTAL
------------ ---------- ----------
<S> <C> <C> <C>
Capital contributions at inception................ $ 452,000
Loans to shareholders.............................$ (16,000 ) (16,000)
Net loss.......................................... $ (544,605) (544,605)
------------ ---------- ----------
Balance, December 31, 1994........................ (16,000 ) (544,605) (108,605)
Capital contributions............................. 2,323,103
Loans to shareholders............................. (137,359 ) (137,359)
Deferred compensation per employee contract.......
Amortization of deferred compensation............. 75,742
Net income........................................ 873,487 873,487
------------ ---------- ----------
Balance, December 31, 1995........................ (153,359 ) 328,882 3,026,368
Stock issued per employee contract................
Loans to shareholders............................. (282,675 ) (282,675)
Amortization of deferred compensation............. 25,768
Net income........................................ 1,875,909 1,875,909
------------ ---------- ----------
Balance, June 30, 1996 (unaudited)................$ (436,034 ) $2,204,791 $4,645,370
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994 SIX MONTHS ENDED
(INCEPTION) YEAR ENDED JUNE 30,
THROUGH DECEMBER 31, DECEMBER 31, ---------------------------
1994 1995 1995 1996
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ (544,605) $ 873,487 $ (931,372) $ 1,875,909
Adjustments to reconcile net income to net cash used
in operating activities:
Amortization of finance contract acquisition
discount and insurance......................... (4,513) (795,579) (41,805) (878,557)
Amortization of deferred compensation............ 75,742 25,768
Provision for credit losses...................... 45,000 48,702 205,000 63,484
Deferred income taxes............................ 199,000 970,000
Amortization of excess servicing receivable...... 48,687 534,014
Amortization of debt issuance cost............... 135,571
Changes in operating assets and liabilities:
Restricted cash.............................. (138,176) (222,090) (377,992) 83,969
Cash held in escrow.......................... (1,322,571) (344,276)
Prepaid expenses and other assets............ (354,208) (98,307) (477,892)
Class B Certificates......................... (2,834,502) (3,257,806)
Excess servicing receivable.................. (895,213) (79,934) (1,262,249)
Accounts payable and accrued liabilities..... 25,636 1,110,446 388,672 (329,239)
Due to/due from affiliate.................... 504,534 (248,937) 548,510 (342,297)
Purchases of finance contracts....................... (2,453,604) (31,200,131) (12,206,952) (33,358,304)
Repayments of finance contracts...................... 51,638 2,660,018 705,171 324,957
Sales of finance contracts........................... 27,399,543 1,351,303 35,842,076
----------------- ------------ ----------- ------------
Net cash used in operating activities............ (2,514,090) (5,457,606) (10,537,706) (394,872)
----------------- ------------ ----------- ------------
Cash flows from investing activities:
Advances to AutoBond Receivables Trusts.............. (525,220) (1,532,348)
Loans to shareholders................................ (16,000) (137,359) 4,138 (282,675)
Disposal proceeds from repossessions................. 220,359 975,662
----------------- ------------ ----------- ------------
Net cash used in investing activities............ (16,000) (442,220) 4,138 (839,361)
----------------- ------------ ----------- ------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
agreements......................................... 2,054,776 (904,355) 11,017,513 (913,129)
Debt issuance costs.................................. (259,431)
Proceeds (repayments) from borrowings under
repurchase agreement............................... 1,061,392 (1,061,392)
Proceeds from notes payable.......................... 2,674,597 6,734,306
Payments on notes payable............................ (3,160,684)
Proceeds from subordinated debt borrowings........... 300,000
Shareholder contributions............................ 452,000 2,323,103 (124,071)
Increase in book overdraft........................... 23,314 837,749 447,039 1,324,784
----------------- ------------ ----------- ------------
Net cash provided by financing activities........ 2,530,090 5,992,486 11,340,481 2,964,454
----------------- ------------ ----------- ------------
Net increase in cash and cash equivalents................ 0 92,660 806,913 1,730,221
Cash and cash equivalents at beginning of period......... 0 0 0 92,660
----------------- ------------ ----------- ------------
Cash and cash equivalents at end of period............... $ 0 $ 92,660 $ 806,913 $ 1,822,881
----------------- ------------ ----------- ------------
----------------- ------------ ----------- ------------
Supplemental disclosure of cash flow information:
Cash paid for interest............................... $ 19,196 $ 2,099,867 $ 384,353 $ 1,011,710
----------------- ------------ ----------- ------------
----------------- ------------ ----------- ------------
Cash paid for income taxes........................... $ 0 $ 0 $ 0 $ 0
----------------- ------------ ----------- ------------
----------------- ------------ ----------- ------------
Non-cash investing and financing activities:
Accrual of debt issuance cost........................ $ 0 $ 700,000 $ 0 $ 0
----------------- ------------ ----------- ------------
----------------- ------------ ----------- ------------
Repossession of automobiles.......................... 0 $ 849,756 $ 44,349 $ 815,484
----------------- ------------ ----------- ------------
----------------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements and following notes, insofar as they are
applicable to the six-month periods ended June 30, 1995 and 1996, and
transactions subsequent to May 1, 1996, the date of the Report of Independent
Accountants, are not covered by the Report of Independent Accountants. In the
opinion of management, all adjustments, consisting of only normal recurring
accruals considered necessary for a fair presentation of the unaudited
consolidated results of operations for the six-month periods ended June 30, 1995
and 1996, have been included.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
AutoBond Acceptance Corporation (the 'Company') was incorporated in June
1993 and commenced operations August 1, 1994. The Company is engaged in the
business of acquiring, securitizing and servicing automobile finance contracts
('Finance Contracts') on new and used automobiles for individuals with subprime
credit histories.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
RESTRICTED CASH
In accordance with the Company's revolving credit facilities, the Company
is required to maintain a cash reserve with its lenders of 1% to 6% of the
proceeds received from the lender for the origination of the Finance Contracts.
Access to these funds is restricted by the lender; however, such funds may be
released in part upon the occurrence of certain events including payoffs of
Finance Contracts.
CASH HELD IN ESCROW
Upon closing of a securitization transaction, certain funds due to the
various parties, including the Company and its warehouse lenders, frequently
remain in escrow pending disbursement by the Trustee one to ten days subsequent
to closing.
TRUST RECEIVABLE
At the time a securitization closes, the Company is required to establish a
cash reserve within the trust for future credit losses. Additionally, depending
on each securitization structure, a portion of the Company's future servicing
cash flow is required to be deposited as additional reserves for credit losses.
The December 1995, March 1996 and June 1996 securitization transactions resulted
in initial cash reserves of approximately $525,000, $331,000 and $357,000,
respectively, approximating 2% of the Finance Contracts sold to the trusts. The
trust reserves will be increased from excess cash flows until such time as they
attain a level of 6% of the outstanding principal balance.
FINANCE CONTRACTS HELD FOR SALE
Finance Contracts held for sale are stated at the lower of aggregated
amortized cost, or market value. Market value is determined based on the
estimated value of the Finance Contracts if securitized and sold.
F-7
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company generally acquires Finance Contracts at a discount, and
purchases loss default and vender single interest physical damage insurance on
the Finance Contracts. The purchase discount and insurance are amortized as an
adjustment to the related Finance Contracts' yield and operating expense,
respectively, utilizing the same basis as that used to record income on the
Finance Contracts, over the contractual life of the related loans. At the time
of sale, any remaining unamortized amounts are netted against the Finance
Contract's principal amount outstanding to determine the resultant gain or loss
on sale.
Allowance for credit losses on the Finance Contracts is based on the
Company's historical default rate, the liquidation value of the underlying
collateral in the existing portfolio, estimates of repossession costs and
probable recoveries from insurance proceeds. The allowance is increased by
provisions for estimated future credit losses which are charged against income.
The allowance account is reduced for direct charge-offs using the specific
identification method, and for estimated losses upon repossession of automobiles
which is netted against the related Finance Contracts and transferred to
Repossessed assets held for sale.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of
long-lived assets other than financial instruments, excess servicing receivables
and deferred tax assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation of impairment is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required.
REPOSSESSED ASSETS HELD FOR SALE
Automobiles repossessed and held for sale are initially recorded at the
lower of the net recorded investment in the Finance Contracts on the date of
repossession or the fair value of the automobiles. Fair value is determined
based on the expected cash proceeds from the sale of the assets and applicable
insurance payments, net of all disposition costs. Due to the relatively short
time period between acquisition and disposal of the assets, discounting of the
expected net cash proceeds to determine fair value is not utilized. Subsequent
impairment reviews are performed quarterly on a disaggregated basis. A valuation
allowance is established if the carrying amount is greater than the fair value
of the assets. Subsequent increases and decreases in fair value result in
adjustment of the valuation allowance which is recorded in earnings during the
period of adjustment. Adjustments for subsequent increases in fair value are
limited to the existing valuation allowance amount, if any. During each of the
periods presented, no valuation allowance has been required.
CLASS B CERTIFICATES
Pursuant to the securitization transactions, the related Trusts have issued
Class B Certificates to the Company which are subordinate to the Class A
Certificates and senior to the excess servicing receivable with respect to cash
distributions from the Trust. The Company accounts for the Class B Certificates
as trading securities in accordance with Statement of Financial Accounting
Standards ('SFAS') No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.' SFAS No. 115 requires fair value accounting for these
certificates with the resultant unrealized gain or loss recorded in the
statements of operations in the period of the change in fair value. The Company
determines fair value on a disaggregated basis utilizing a discounted cash flow
analysis similar to that described below for determining market value of the
excess servicing receivable, as well as other unique characteristics such as the
remaining principal balance in relation to estimated future cash flows and the
expected remaining terms of the certificates. During each of the periods
presented, there have been no unrealized gains or losses on the Class B
Certificates. The Class B Certificates accrue interest at 15%.
F-8
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXCESS SERVICING RECEIVABLE
Excess servicing receivable includes the estimated present value of future
net cash flows from securitized receivables over the amounts due to the Class A
and Class B Certificateholders in the securitizations and certain expenses paid
by the entity established in connection with the securitization transaction. The
Finance Contracts sold in conjunction with the securitization transactions are
treated as sale transactions in accordance with SFAS No. 77, 'Reporting by
Transferors for Transfers of Receivables with Recourse.' Gain or loss is
recognized on the date the Company surrenders its control of the future economic
benefits relating to the receivables and the investor has placed its cash in the
securitization trust. Accordingly, all outstanding debt related to the Finance
Contracts sold to the securitization trust is deemed to be simultaneously
extinguished. The Company sells 100% of the Finance Contracts and retains a
participation in the future cash flows released by the securitization Trustee.
The Company also retains the servicing rights, and contracts with third parties
to perform certain aspects of the servicing function.
The discount rate utilized to determine the excess servicing receivable is
based on assumptions that market participants would use for similar financial
instruments subject to prepayment, default, collateral value and interest rate
risks. The future net cash flows are estimated based on many factors including
contractual principal and interest to be received, as adjusted for expected
prepayments, defaults, collateral sales proceeds, insurance proceeds, payments
to investors on the pass-through securities, servicing fees and other costs
associated with the securitization transaction and related loans. The gain from
securitization transactions include the excess servicing receivable and Class B
Certificates plus the difference between net proceeds received on the
transaction date and the net carrying value of Finance Contracts held for sale.
The carrying value of the excess servicing receivable is amortized in
proportion to and over the period of estimated net future excess servicing fee
income, for which the amortization is recorded as a charge against servicing fee
income. The excess servicing receivable is reviewed quarterly to determine if
differences exist between estimated and actual credit losses and prepayment
rates at each balance sheet date using the discount factor applied in the
original determination of the excess servicing receivable. The Company's
analysis determines whether the excess servicing receivable is in excess of the
present value of the estimated remaining cash flows. The Company does not
increase the carrying value of the excess servicing receivable for favorable
variances from original estimates, but to the extent that actual results exceed
the Company's prepayment or loss estimates, any required decrease adjustment is
reflected as a write down of the receivable and a related charge against current
period earnings.Write downs of excess servicing receivables due to modification
of future estimates as a result of the quarterly impairment reviews are
determined on a disaggregated basis consistent with the risk characteristics of
the underlying loans consisting principally of origination date and originating
dealership. There were no material adjustments to the carrying value of the
excess servicing receivable during 1995 or the six-month period ended June 30,
1996.
DEBT ISSUANCE COST
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective interest method over the lives of the
related debt.
FEDERAL INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered
F-9
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or settled. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period and the change during the
year in deferred tax assets and liabilities. The Company files consolidated
federal and state tax returns.
EXTRAORDINARY LOSS
The extraordinary loss in 1996 was from a $150,000 prepayment fee related
to a $2,684,000 term loan with a finance company during 1996. The term loan
carried a stated interest rate of 20% (see Note 6).
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.
PERVASIVENESS OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTEREST INCOME
Interest income on Finance Contracts acquired prior to December 31, 1995 is
determined on a monthly basis using the Rule of 78s method which approximates
the simple interest method. Subsequent to December 31, 1995, the Company uses
the simple interest method to determine interest income on Finance Contracts
acquired. The Company discontinues accrual of interest on loans past due for
more than 90 days. The Company accrues interest income on the Class B
Certificates (see Note 4) monthly at 15% using the interest method.
CONCENTRATION OF CREDIT RISK
The Company acquires Finance Contracts from a network of automobile dealers
located in sixteen states, including Texas, Arizona, Oklahoma, New Mexico,
Connecticut, Georgia and Utah. For the five-month period ended December 31,
1994, the year ended December 31, 1995 and the six months ended June 30, 1996,
the Company had a significant concentration of Finance Contracts with borrowers
in Texas, which approximated 94%, 91% and 91% of total Finance Contracts,
respectively.
F-10
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS:
Effective January 1, 1996 the Company adopted SFAS No. 122 which requires
that upon sale or securitization of servicing-retained finance contracts, the
Company capitalize the cost associated with the right to service the finance
contracts based on their relative fair values. Fair value is determined by the
Company based on the present value of estimated net future cash flows related to
servicing income. The cost allocated to the servicing right is amortized in
proportion to and over the period of estimated net future servicing fee income.
SFAS No. 122 had no impact on the Company's financial statements for the
six-month period ended June 30, 1996 and would have had no material impact on
any of the prior periods presented as servicing fees approximate cost.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, 'Accounting for Stock-Based Compensation.' SFAS No. 123 establishes fair
value-based financial accounting and reporting standards for all transactions in
which a company acquires goods or services by issuing its equity instruments or
by incurring a liability to suppliers in amounts based on the price of its
common stock or other equity instruments.
During 1996, the Company adopted the disclosure-only alternative under SFAS
No. 123, and will continue to account for stock-based compensation as prescribed
by Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to
Employees.'
3. FINANCE CONTRACTS HELD FOR SALE:
The following amounts are included in Finance Contracts held for sale as
of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Principal balance of Finance Contracts held for sale.......... $2,459,424 $3,539,195 $ 566,743
Prepaid insurance............................................. 156,095 260,155 17,997
Contract acquisition discounts................................ (209,040) (350,827) (25,122)
Allowance for credit losses................................... (45,000) (93,702) (13,937)
---------- ---------- ----------
$2,361,479 $3,354,821 $ 545,681
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
4. EXCESS SERVICING RECEIVABLE:
During December 1995, the Company completed its first securitization
transaction since inception through the sale of certain Finance Contracts to
AutoBond Receivable Trust 1995-A (the 'Trust'). The Finance Contracts were sold
at the outstanding principal balance of the Finance Contracts which approximated
$26.2 million and the Company, through AutoBond Funding Corporation 1995,
retained a subordinated interest (Class B Certificate) in the Trust from
discounted net cash flows generated by the Finance Contracts in excess of
principal and interest paid to the Class A Certificate holder. At December 31,
1995, the Class A Certificate had an aggregate principal balance of
approximately $26.2 million and accrues interest at 7.23%, and the Class B
Certificate had an aggregate notional principal balance of approximately $2.8
million and accrues interest at 15%. AutoBond Funding Corporation 1995 also has
the right to the remaining Trust cash flows ('Transferor's Interest') after
payment on the Class A and Class B Certificates, absorption of net losses from
defaults on the underlying finance contracts, and payment of the other expenses
of the Trust. Such Transferor's Interest discounted at 15% is recorded as an
increase to excess servicing receivable for each securitization transaction.
The Company is required to represent and warrant certain matters with
respect to the Finance Contracts sold to the Trust, which generally duplicate
the substance of the representations and warranties made by the dealers in
connection with the Company's purchase of the Finance Contracts. In the event of
a breach by the Company of any representation or warranty, the Company is
obligated to
F-11
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repurchase the Finance Contracts from the Trust at a price equal to the
remaining principal plus accrued interest. The Company has not recorded any
liability and has not been obligated to purchase Finance Contracts under the
recourse provisions during any of the reporting periods.
On March 29, 1996, the Company completed its second securitization
transaction through the sale of certain Finance Contracts to AutoBond
Receivables Trust 1996-A. The Finance Contracts were sold at the outstanding
principal balance of $16.6 million and resulted in an increase of excess
servicing receivable and Class B Certificates of $606,068 and $2,059,214,
respectively.
During June 1996, the Company completed its third securization transaction
through the sale of certain Finance Contracts to AutoBond Receivables Trust
1996-B. The Finance Contracts were sold at the outstanding principal balance of
$17.8 million and resulted in an increase of excess servicing receivable and
Class B Certificates of $654,181 and $2,066,410, respectively.
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 accrues 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
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 into a $25,000,000 Credit
Agreement with Nomura Asset Capital Corporation ('Nomura') which allowed for
advances to the Company through 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. No advances under the Credit
Agreement were outstanding as of each of the balance sheet dates.
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
F-12
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 finance 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 (see Note 4). 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
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
(see Note 4), 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 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 the Company's next five proposed
securitization transactions. 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 and the borrowings will include a 3% origination fee.
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. REPURCHASE AGREEMENT:
On December 20, 1995, the Company entered into an agreement to sell certain
Finance Contracts totaling $1,061,392 to a finance company, and repurchase such
Finance Contracts in January 1996 for an amount equal to the remaining unpaid
principal balance plus interest accruing at an annual rate of 19%.
F-13
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company repurchased such Finance Contracts during January 1996 in accordance
with the terms of the agreement.
8. SUBORDINATED DEBT:
Effective March 12, 1996, the Company received proceeds of $300,000 from an
individual for a 10% Subordinated Note with a detachable warrant to purchase
18,811 shares of common stock of the Company. The note bears interest at 10% per
annum and the principal together with accrued interest is payable on March 12,
1997. The debt is uncollateralized and is subordinate to the other indebtedness
and guarantees of the Company. The warrant allows for the purchase of common
stock at an exercise price equal to the fair market value as of March 12, 1996,
the date of grant. The warrant is exercisable in full or part during the period
commencing six months after the effective date of the Company's initial public
offering and ending 1.5 years thereafter. Management has determined that the
fair value of the warrant at its issuance date was de minimis.
9. INCOME TAXES:
The provision for income taxes for 1995 consists of a deferred tax
provision of $199,000 and no current liability. Due to net losses incurred from
inception through December 31, 1994, the Company has no provision in 1994. The
reconciliation between the provision for income taxes and the amounts that would
result from applying the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994
(INCEPTION) THROUGH YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal tax at statutory rate of 34%................. $(185,000) $ 365,000 $1,019,000
Nondeductible expenses............................... 2,000 17,000 1,000
Change in valuation allowance........................ 183,000 (183,000) --
-------------- ------------ ----------
Provision for income taxes...................... $ -- $ 199,000 $1,020,000
-------------- ------------ ----------
-------------- ------------ ----------
</TABLE>
Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and income tax purposes. Significant components of
the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Deferred Tax Assets:
Allowance for credit losses......................................... $ 15,000 $ 32,000 $ 53,000
Other............................................................... -- 116,000 266,000
Net operating loss.................................................. 168,000 1,042,000 1,498,000
--------- ---------- ----------
Gross deferred tax assets........................................... 183,000 1,190,000 1,817,000
--------- ---------- ----------
Deferred Tax Liability --
Gain on securitizations............................................. -- 1,389,000 2,986,000
--------- ---------- ----------
Net temporary differences................................................ 183,000 (199,000) (1,169,000)
Valuation allowance...................................................... (183,000) -- --
--------- ---------- ----------
Net deferred tax liability..................................... $ 0 $ 199,000 $1,169,000
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
At December 31, 1995, the Company had a net operating loss carryforward of
$3,067,000 which will expire beginning in fiscal year 2009. The 1994 net
operating loss carryforward was reserved in full at
F-14
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 due to the uncertainty of realization of the deferred asset.
In 1995, the valuation allowance was reversed to reflect the estimated
realizability of the operating loss carryforwards.
10. EARNINGS PER SHARE
The following table reconciles the number of common shares shown as
outstanding on the balance sheet with the number of common and common equivalent
shares used in computing primary earnings per share as follows:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994
(INCEPTION) SIX MONTHS
THROUGH YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Common shares outstanding........................................ 5,118,753 5,118,753 5,687,500
Effect of using weighted common and common equivalent shares
outstanding.................................................... 71,406 (7,113)
Effect of shares issuable to warrant holder...................... 17,980
------------- ------------ ------------
Shares used in computing primary earnings per share.............. 5,118,753 5,190,159 5,698,367
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
11. STOCKHOLDERS' EQUITY
Effective May 30, 1996, the Board of Directors adopted Restated Articles of
Incorporation which authorized 25,000,000 shares of no par value common stock
and 5,000,000 shares of no par value preferred stock.
12. RELATED PARTY TRANSACTIONS:
The Company shares certain general and administrative expenses with
AutoBond, Inc. ('ABI'), which was founded and is 100% owned by the Chief
Executive Officer ('CEO') of the Company. The CEO owns 67.5% of the Company.
Each entity is allocated expenses based on a proportional cost method, whereby
payroll costs are allocated based on management's review of each individual's
responsibilities, and costs related to office space and equipment rentals are
based on managements' best estimate of usage during the year. Miscellaneous
expenses are allocated based on the specific purposes for which each expense
relates. Management believes the methods used to allocate the general and
administrative expenses shared with ABI are reasonable, and that the expenses
reported in the financial statements after the ABI allocations approximate the
expenses that would have been incurred on a stand-alone entity basis. Total
expenses allocated to the Company from ABI amounted to approximately $441,000
for the period from August 1, 1994 (inception) to December 31, 1994 and
$2,163,000 for the year ended December 31, 1995. Additionally, neither the
Company nor any of its affiliates have paid any compensation to its CEO during
any of the periods presented herein; however, management of the Company expects
to commence compensation payments to the CEO during 1996 (see Note 13).
The Company has advanced approximately $153,000 and $436,000 to two
shareholders as of December 31, 1995 and June 30, 1996, respectively. The
advances are non-interest bearing amounts which have no repayment terms and have
been shown as a reduction of shareholders' equity.
The Company and ABI entered into a management agreement dated as of January
1, 1996 (the 'ABI Management Agreement') which provides for repayment by ABI of
$141,090 of advances outstanding as of the effective date in the form of an
uncollateralized note. The note matures on May 31, 1998 and bears interest at
10% payable at maturity. The Management Agreement requires ABI to pay an annual
fee of $50,000 to the Company for services rendered by it or the Company's
employees
F-15
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on behalf of ABI as follows: (i) monitoring the performance of certain
partnership interests owned by ABI and its sole shareholder, (ii) certain cash
management services, including the advancing of funds to pay ABI's ordinary
business expenses and (iii) providing advice as to regulatory compliance. The
ABI Management Agreement also provides that the Company will perform certain
accounting functions on behalf of ABI including (i) maintenance of financial
books and records, (ii) monitoring of cash management functions, (iii)
preparation of financial statements and tax returns and (iv) providing advice in
connection with retention of independent accountants. The ABI Management
Agreement further provides for the reimbursement of advances made by the Company
for out-of-pocket costs and expenses incurred on behalf of ABI.
13. EMPLOYMENT AGREEMENTS:
During 1995 and 1996, the Company entered into three-year employment
agreements with three officers of the Company. One employment agreement is dated
November 15, 1995 and is effective from such date through November 15, 1998.
This agreement is automatically extended unless the Company gives six months
notice of its intent not to extend the terms of the agreement.
The agreement provides for a minimum monthly salary of $12,500, together
with shares of the Company's common stock, issuable January 1, 1996, equal to
10% of the outstanding shares after giving effect to the shares issued to the
employee. Half of such issued shares are not subject to forfeiture whereas the
remaining 50% are subject to forfeiture. Equal amounts of the forfeitable shares
bear no risk of forfeiture upon the officer remaining employed as of November
15, 1996 and November 15, 1997, respectively.
The Company valued the shares to be issued January 1, 1996 based on an
independent appraisal of the Company as of November 15, 1995, the measurement
date, and recorded an increase to additional paid-in capital and deferred
compensation of $138,500. Deferred compensation is amortized on a straight-line
basis over the two forfeiture periods ending November 15, 1997 resulting in
compensation expense of $75,742 and $25,768 for the year ended December 31, 1995
and the six-month period ended June 30, 1996.
The second employment agreement is dated February 15, 1996 and is effective
from such date through February 15, 1997. This agreement provides for a minimum
monthly salary of $15,000 and further provides for a $90,000 bonus in the event
the Company successfully completes an initial public offering prior to February
28, 1997. Additionally, the officer is entitled to receive a performance bonus
in the event the Company meets certain sales and income targets as defined in
the agreement, and is limited to $90,000 annually. If the officer is terminated
prior to February 15, 1997 for any reason other than a discharge by the Company
for cause or termination initiated by the officer, then the remaining portion of
the first year salary becomes immediately due and payable to the officer or his
beneficiary.
The third employment agreement is dated May 31, 1996, and is effective from
such date for five years. The agreement provides for compensation at a base
salary of $240,000 per annum, which may be increased and may be decreased to an
amount of not less than $240,000, at the discretion of the Board of Directors.
The agreement entitles the officer to receive the benefits of any cash incentive
compensation as may be granted by the Board to employees, and to participate in
any executive bonus or incentive plan established by the Board of Directors.
The agreement provides the officer with additional benefits including (i)
the right to participate in the Company's medical benefit plan, (ii) entitlement
to benefits under the Company's executive disability insurance coverage, (iii) a
monthly automobile allowance of $1,500 together with maintenance and insurance,
(iv) six weeks paid vacation and (v) all other benefits granted to full-time
executive employees of the Company.
The agreement automatically terminates upon (i) the death of the officer,
(ii) disability of the officer for six continuous months together with the
likelihood that the officer will be unable to perform
F-16
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
his duties for the following continuous six months, as determined by the Board
of Directors, (iii) termination of the officer 'for cause' (which termination
requires the vote of a majority of the Board) or (iv) the occurrence of the
five-year expiration date provided, however, the agreement may be extended for
successive one-year intervals unless either party elects to terminate the
agreement in a prior written notice. The officer may terminate his employment
for 'good reason' as defined in the agreement. In the event of the officer's
termination for cause, the agreement provides that the Company shall pay the
officer his base salary through the date of termination and the vested portion
of any incentive compensation plan to which the officer may be entitled.
Other than following a change in control, if the Company terminates the
officer in breach of the agreement, or if the officer terminates his employment
for good reason, the Company must pay the officer: (i) his base salary through
the date of termination; (ii) a severance payment equal to the base salary
multiplied by the number of years remaining under the agreement; and (iii) in
the case of breach by the Company of the agreement, all other damages to which
the officer may be entitled as a result of such breach, including lost benefits
under retirement and incentive plans.
In the event of the officer's termination following a change in control,
the Company is required to pay the officer an amount equal to three times the
sum of (i) his base salary, (ii) his annual management incentive compensation
and (iii) his planned level of annual perquisites. The agreement also provides
for indemnification of the officer for any costs or liabilities incurred by the
officer in connection with his employment.
14. COMMITMENTS AND CONTINGENCIES:
An affiliate of 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 (see Note 12). The affiliate
reports such leases as operating leases. Total rent expense allocated to the
Company under all operating leases was approximately $61,000 and $351,000 in
1994 and 1995, 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........................................................ 378,488
1998........................................................ 154,250
</TABLE>
The Company has 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.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
During 1995, the Company adopted SFAS No. 107, 'Disclosures about Fair
Value of Financial Instruments' which requires disclosure of fair value of
information for financial instruments. The
F-17
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company would realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of those investments.
NOTE PAYABLE, REVOLVING CREDIT BORROWINGS AND REPURCHASE AGREEMENT
The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities and characteristics. The
revolving credit lines are variable rate loans, resulting in a fair value that
approximates carrying cost at December 31, 1995. Additionally, due to the
December borrowing date, the note payable and repurchase agreement fair values
approximate cost at December 31, 1995.
FINANCE CONTRACTS HELD FOR SALE
The fair value of Finance Contracts held for sale is based on the estimated
proceeds expected on securitization of the Finance Contracts held for sale.
EXCESS SERVICING RECEIVABLE
The fair value is determined based on discounted future net cash flows
utilizing a discount rate that market participants would use for financial
instruments with similar risks. Due to the nature of this financial instrument
and the recent securitization transaction date, the carrying amount approximates
fair value.
The estimated fair values of the Company's financial instruments at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------ -----
<S> <C> <C>
Cash and cash equivalents......................................... $ 92,660 $ 92,660
Finance Contracts held for sale, net.............................. 3,354,821 3,354,821
Repossessed assets held for sale, net............................. 673,746 673,746
Class B Certificates.............................................. 2,834,502 2,834,502
Excess servicing receivable....................................... 846,526 846,526
Note payable...................................................... 2,674,597 2,674,597
Revolving credit borrowings....................................... 1,150,421 1,150,421
Repurchase agreement.............................................. 1,061,392 1,061,392
</TABLE>
F-18
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................................................... S-2
Schedule II -- Valuation and Qualifying Accounts........................................................... S-3
</TABLE>
All other consolidated financial statement schedules not listed have been
omitted since the required information is either included in the consolidated
financial statements and the notes thereto or is not applicable or required.
S-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
AUTOBOND ACCEPTANCE CORPORATION
Our report on the consolidated financial statements of AutoBond Acceptance
Corporation and Subsidiaries as of December 31, 1995 and 1994 and for the period
from August 1, 1994 (inception) to December 31, 1994 and for the year ended
December 31, 1995, is included on page F-2 of this Registration Statement. In
connection with our audits of such consolidated financial statements, we have
also audited the related consolidated financial statement schedule listed on the
index on page S-1 of this Registration Statement.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Austin, Texas
May 1, 1996
S-2
<PAGE>
<PAGE>
SCHEDULE II
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
OF PERIOD EXPENSES RETIREMENTS OF PERIOD
------------ ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for Credit Losses:
Period from August 1, 1994
(Inception) to December 31, 1994............... $ -- $ 45,000 $ -- $45,000
Year ended December 31, 1995..................... $ 45,000 $ 48,702 $ -- $93,702
</TABLE>
S-3
<PAGE>
<PAGE>
__________________________________ _________________________________
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ANY
UNDERWRITER OR THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE AS TO WHICH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................................................................. 3
Risk Factors....................................................................................................... 7
Use of Proceeds.................................................................................................... 15
Dividend Policy.................................................................................................... 15
Dilution........................................................................................................... 16
Capitalization..................................................................................................... 17
Selected Consolidated Financial and Operating Data................................................................. 18
Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 20
Business........................................................................................................... 32
Management......................................................................................................... 47
Certain Transactions............................................................................................... 55
Principal and Selling Shareholders................................................................................. 56
Description of Capital Stock....................................................................................... 57
Shares Eligible for Future Sale.................................................................................... 60
Underwriting....................................................................................................... 61
Legal Matters...................................................................................................... 61
Experts............................................................................................................ 62
Change in Accountants.............................................................................................. 62
Additional Information............................................................................................. 62
Index to Consolidated Financial Statements......................................................................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,500,000 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PRINCIPAL FINANCIAL
SECURITIES, INC.
, 1996
__________________________________ _________________________________
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................................ $10,182
NASD filing fee.................................................................... 3,453
Printing expenses.................................................................. *
Accounting fees and expenses....................................................... *
Legal fees and expenses............................................................ *
Nasdaq listing fees................................................................ *
Fees and expenses (including legal fees) for qualifications under state securities
laws............................................................................. 15,000
Transfer agent's fees and expenses................................................. *
Miscellaneous...................................................................... *
-------
Total.............................................................................. $ *
-------
-------
</TABLE>
- ------------
* To be filed by amendment.
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq listing fees are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act provides:
1. A corporation may indemnify any officer or director from
and against any judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by him in an action, suit,
investigation or other proceeding to which he is, was, or is
threatened to be a party; provided that it is determined by the
Board of Directors, a committee thereof, special legal counsel,
or a majority of the stockholders that such officer or director:
(a) conducted himself in good faith; (b) (i) in the case of his
conduct as a director of the corporation, reasonably believed
that his conduct was in the best interest of the corporation or
(ii) in all other cases, that his conduct was at least not
opposed to the corporation's interest; and (c) in a criminal
case, had no reasonable cause to believe his conduct was
unlawful. In matters as to which the officer or director is
found liable to the corporation or is found liable on the basis
that a personal benefit was improperly received by him, such
indemnity is limited to the reasonable expenses actually
incurred. No indemnification is permitted with respect to any
proceeding in which the officer or director is found liable for
willful or intentional misconduct in the performance of his duty
to the corporation.
2. A corporation shall indemnify an officer or director
against reasonable expenses incurred by him in connection with
an action, suit, investigation, or other proceeding to which he
is, was, or was threatened to be a party if he has been wholly
successful in its defense.
3. A corporation may advance an officer or director the
reasonable costs of defending an action, suit, investigation or
other proceeding in certain cases.
4. A corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director,
officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such
liability under the provisions of this Article.
II-1
<PAGE>
<PAGE>
The Company's Articles of Incorporation provide that the Company will
indemnify its directors and officers to the fullest extent permitted by law.
The Company is in the process of procuring directors' and officers'
liability insurance in the amount of $5 million.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In December 1995, March 1996 and June 1996, the Company's three
securitization subsidiaries issued approximately $26.2 million, $16.6 million
and $17.8 million, respectively, in Class A investor Certificates, evidencing an
undivided ownership interest in a pool of finance contracts with an initial
aggregate unpaid principal balance equal to the initial principal balance of
such Class A Certificates, and with an initial gross principal balance slightly
in excess of such Class A balance. Each of the outstanding Class A Certificates
received a rating upon issuance of 'A' from Fitch and 'A3' from Moody's. The
certificates issued in the December 1995, March 1996 and June 1996
securitizations have final maturity dates of April 15, July 15 and September 15,
2002, respectively. In each case, the Class A Certificates were privately placed
with sophisticated institutional investors pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the 'Securities Act'). The Company has
financed on a non-recourse basis approximately 80% of the retained excess spread
from each of the 1995 and 1996 securitizations with sophisticated institutional
investors.
In March 1996, the Company issued to a private investor, pursuant to
Section 4(2) of the Securities Act, a Subordinated Note (the 'Subordinated
Note') in the amount of $300,000 and a Warrant (the 'Warrant') for the purchase
of 18,811 shares of Common Stock. The payment obligations of the Company under
the Subordinated Note are subordinated to all other indebtedness of the Company
that is not specifically designated as subordinate to the Subordinated Note. The
Subordinated Note carries a per annum interest rate equal to 10% and has a final
maturity date of March 12, 1997.
The Warrant entitles the holder, upon exercise thereof, to purchase from
the Company shares of its Common Stock, at a price per share equal to the fair
market value of the Common Stock as of the date of grant. The exercise price per
share may deviate from the initial public offering price over time as certain
adjustments may be made to the number of shares constituting a purchasable
'share' resulting from stock splits, issuance of additional Common Stock,
issuance of additional warrants or other rights or issuance of securities
convertible into Common Stock by the Company. The Warrant provides the holder
with certain registration rights that arise upon the Company's proposal to
register, subsequent to its initial public offering, the Common Stock for sale
to the public under the Securities Act.
In November 1995, the Company agreed to issue, pursuant to Section 4(2) of
the Securities Act, to Adrian Katz 568,750 shares of Common Stock in
consideration for current and future services. Such shares were issued in
January 1996.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1* -- Underwriting Agreement
3.1`D -- Restated Articles of Incorporation of the Company
3.2`D' -- Amended and Restated Bylaws of the Company
5.1* -- Opinion of Dewey Ballantine
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`D' -- 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
10.6`D' -- Second Amended and Restated Secured Revolving Credit Agreement dated as of July 31, 1995 between Sentry
Financial Corporation and the Company
</TABLE>
II-2
<PAGE>
<PAGE>
<TABLE>
<S> <C>
10.7`D' -- Management Administration and Services Agreement dated as of January 1, 1996 between the Company and
AutoBond, Inc.
10.8`D' -- Employment Agreement dated November 15, 1995 between Adrian Katz and the Company
10.9`D' -- Employment Agreement dated February 15, 1996 between Charles A. Pond and the Company
10.10`D' -- Employment Agreement effective as of May 1, 1996 between William O. Winsauer and the Company
10.11`D' -- Vender's Comprehensive Single Interest Insurance Policy and Endorsements, issued by Interstate Fire &
Casualty Company
10.12`D' -- Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.13* -- Employee Stock Option Plan
16.1`D' -- Change in certifying accountant's letter
21.1 -- Subsidiaries of the Company
23.1`D' -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Dewey Ballantine (contained in Exhibit 5.1)
23.3 -- Consents of Director Designees
24.1`D' -- Power of Attorney (included on signature page of Registration Statement)
27.1 -- Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment
`D' Previously Filed
(b) Financial Statements
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Austin, State of Texas, on August 29, 1996.
AUTOBOND ACCEPTANCE CORPORATION
By: /s/ WILLIAM O. WINSAUER
...................................
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the capacity
indicated on August 29, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
By: /s/ WILLIAM O. WINSAUER Chairman of the Board, Chief Executive Officer and Director
......................................... (Principal Executive Officer)
(WILLIAM O. WINSAUER
AS ATTORNEY-IN-FACT)
* Vice Chairman of the Board, Chief Operating Officer and Director
.........................................
(ADRIAN KATZ)
* Vice President and Director
.........................................
(JOHN S. WINSAUER)
* Chief Financial Officer (Principal Financial and Accounting Officer)
.........................................
(WILLIAM J. STAHL)
</TABLE>
*By: /s/ WILLIAM O. WINSAUER
..................................
(WILLIAM O. WINSAUER
AS ATTORNEY-IN-FACT)
II-4
<PAGE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
1.1* -- Underwriting Agreement
3.1`D' -- Restated Articles of Incorporation of the Company
3.2`D' -- Amended and Restated Bylaws of the Company
5.1* -- Opinion of Dewey Ballantine
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`D' -- 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
10.6`D' -- Second Amended and Restated Secured Revolving Credit Agreement dated as of July 31,
1995 between Sentry Financial Corporation and the Company
10.7`D' -- Management Administration and Services Agreement dated as of January 1, 1996 between
the Company and AutoBond, Inc.
10.8`D' -- Employment Agreement dated November 15, 1995 between Adrian Katz and the Company
10.9`D' -- Employment Agreement dated February 15, 1996 between Charles A. Pond and the Company
10.10`D' -- Employment Agreement effective as of May 1, 1996 between William O. Winsauer and the
Company
10.11`D' -- Vender's Comprehensive Single Interest Insurance Policy and Endorsements, issued by
Interstate Fire & Casualty Company
10.12`D' -- Warrant to Purchase Common Stock of the Company dated March 12, 1996
10.13* -- Employee Stock Option Plan
16.1`D' -- Change in certifying accountant's letter
21.1 -- Subsidiaries of the Company
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Dewey Ballantine (contained in Exhibit 5.1)
23.3 -- Consents of Director Designees
24.1`D' -- Power of Attorney (included on signature page of Registration Statement)
27.1 -- Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment
`D' Previously Filed
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as `D'
<PAGE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
AutoBond Funding Corporation I, a Delaware corporation
AutoBond Funding Corporation II, a Delaware corporation
AutoBond Funding Corporation 1995, a Delaware corporation
AutoBond Funding Corporation 1996-A, a Delaware corporation
AutoBond Funding Corporation 1996-B, a Delaware corporation
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to Registration
Statement on Form S-1 file No. 333-05359 of our report dated May 1, 1996, on our
audits of the consolidated financial statements and financial statement schedule
of AutoBond Acceptance Corporation. We also consent to the reference to our firm
under the caption 'Experts.'
COOPERS & LYBRAND L.L.P.
Austin, Texas
August 29, 1996
<PAGE>
<PAGE>
EXHIBIT 23.3
CONSENTS OF DIRECTOR DESIGNEES
August 29, 1996
Board of Directors
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Dear Sirs:
Each of the undersigned hereby consents to being named as a Director
Designee in the Registration Statement on Form S-1 of AutoBond Acceptance
Corporation.
Very truly yours,
Robert Kapito
Manuel A. Gonzalez
Stuart A. Jones
Thomas I. Blinten
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statements of income on pages F-3
and F-4 of the Company's Form S-1 Registration Statement as filed with the
Securities and Exchange Commission on June 6, 1996, and refiled on
August 29, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 93 1,823
<SECURITIES> 2,835 6,092
<RECEIVABLES> 2,869 4,065
<ALLOWANCES> 0 0
<INVENTORY> 4,029 1,059
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 11,065 16,293
<CURRENT-LIABILITIES> 3,759 3,993
<BONDS> 0 0
<COMMON> 0 0
0 0
1 1
<OTHER-SE> 3,025 4,644
<TOTAL-LIABILITY-AND-EQUITY> 11,065 16,293
<SALES> 4,086 5,744
<TOTAL-REVENUES> 4,867 6,354
<CGS> 0 0
<TOTAL-COSTS> 2,283 2,410
<OTHER-EXPENSES> 1,463 884
<LOSS-PROVISION> 49 63
<INTEREST-EXPENSE> 2,100 1,138
<INCOME-PRETAX> 1,072 2,996
<INCOME-TAX> 199 1,020
<INCOME-CONTINUING> 873 1,976
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (100)
<CHANGES> 0 0
<NET-INCOME> 873 1,876
<EPS-PRIMARY> 0.17 0.33
<EPS-DILUTED> 0 0
<FN>
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
</FN>
<PAGE>
