<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
REGISTRATION NO. 333-31331
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 (Primary Standard (I.R.S. Employer
of 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)
Copy to:
GLENN S. ARDEN, ESQ. VICTOR ZANETTI, ESQ.
JONES, DAY, REAVIS & POGUE ARTER & HADDEN
599 LEXINGTON AVE 1717 MAIN ST.
NEW YORK, NEW YORK 10022 SUITE 4100
(212) 326-3939 DALLAS, TEXAS 75201
(214) 761-2100
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. [X]
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value................ 1,018,811 $4.375 $4,387,500 $1350.70
==================================================================================================================================
</TABLE>
(1) 1,000,000 of the shares to be registered are issuable upon conversion of
the Company's outstanding 18% Senior Secured Convertible Promissory Notes
due June 30, 2000 (the "Notes") and upon exercise of the Company's
outstanding Common Stock Purchase Warrants dated June 30, 1997 (the
"Warrants") and 18,811 of the shares are held by a shareholder pursuant to
the exercise of an outstanding warrant. The Company is also registering
such indeterminate number of additional shares of Common Stock as may
become issuable pursuant to the anti-dilution provisions of the Notes
and the Warrants.
(2) Computed in accordance with Rule 457 under the Securities Act of 1933
solely for purposes of calculating the registration fee.
(3) $1,329.54 has previously been paid.
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>
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 State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1997
PROSPECTUS
AUTOBOND ACCEPTANCE CORPORATION
1,018,811 SHARES OF COMMON STOCK
--------------------
The shares of Common Stock, no par value ("Common Stock"), of AutoBond
Acceptance Corporation, a Texas corporation ("AutoBond" or the "Company"),
to which this Prospectus relates (the "Shares") may be sold from time to time
by or for the account of certain shareholders and prospective shareholders
of the Company described herein (the "Selling Shareholders"). Up to 800,000
of the Shares are issuable upon conversion of the Company's outstanding
18% Senior Secured Promissory Notes (the "Notes"), 200,000 of the Shares are
issuable upon exercise of the Company's outstanding Common Stock Purchase
Warrants dated June 30, 1997 (the "Warrants") and 18,811 of the Shares
are held by a shareholder pursuant to the exercise of a warrant issued by the
Company in March 1996. The Company sold the Notes and the Warrants in a
private transaction (the "Note and Warrant Placement") exempt from
the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"). If the Company pays down the Notes in
full before June 30, 1998, the holders of the Notes (the "Noteholders") will
have no conversion rights.
Each of the Selling Shareholders will act independently of the Company
in making decisions with respect to the timing, manner and size of each sale.
Such sales may be made in the over-the-counter market, or otherwise, at market
prices prevailing at the time of the sale, at prices related to the then
prevailing market prices or in negotiated transactions. The Company will receive
none of the proceeds from the sales made hereunder. All expenses of registration
incurred in connection with this offering shall be borne by the Company but all
selling expenses incurred by the Selling Shareholders shall be borne by such
Selling Shareholders. The Company has agreed to indemnify the Selling
Shareholders against certain liabilities arising under the Securities
Act. See "Selling Shareholders and Plan of Distribution."
In connection with the sale of Shares, Selling Shareholders may engage
broker-dealers who in turn may arrange for other broker-dealers to participate.
In addition, the underwriters, dealers or agents may receive compensation from
the Selling Shareholders or from purchasers of the Shares for whom they may
act as agents, in the form of discounts, concessions or commmissions.
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol ABND.
SEE "RISK FACTORS" ON PAGE 3 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
The Selling Shareholders and any brokers, underwriters, dealers and
agents participating in sales hereunder may be deemed hereunder underwriters
within the meaning of the Securities Act. Commissions received by any such
person may be deemed to be underwriting commissions under the Securities Act.
See "Selling Shareholders and Plan of Distribution."
--------------------
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.
--------------------
The date of this Prospectus is September , 1997
<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.
AutoBond Acceptance Corporation (the "Company") is a specialty consumer
finance company engaged in underwriting, acquiring, servicing and securitizing
retail installment contracts ("finance contracts") originated by franchised
automobile dealers in connection with the sale of used and, to a lesser extent,
new vehicles to selected consumers with limited access to traditional sources of
credit ("subprime consumers"). Subprime consumers generally are borrowers unable
to qualify for traditional financing due to one or more of the following
reasons: negative credit history (which may include late payments, charge-offs,
bankruptcies, repossessions or unpaid judgments); insufficient credit,
employment or residence histories or high debt-to-income or payment-to-income
ratios (which may indicate payment or economic risk).
The Company acquires finance contracts directly from franchised
automobile dealers, makes credit decisions using its own underwriting guidelines
and credit personnel and performs the collection function for finance contracts
using its own collections department. The Company also acquires finance
contracts from third parties other than dealers, for which the Company
reunderwrites and collects such finance contracts in accordance with the
Company's standard guidelines. The Company securitizes portfolios of these
retail automobile installment contracts to efficiently utilize limited capital
to allow continued growth and to achieve sufficient finance contract volume to
allow profitability. The Company markets a single finance contract acquisition
program to automobile dealers which adheres to consistent underwriting
guidelines involving the purchase of primarily late-model used vehicles. This
enables the Company to securitize those contracts into investment grade
securities with similar terms from one issue to another providing consistency to
investors.
The shares of Common Stock, no par value ("Common Stock"), of the
Company, to which this Prospectus relates (the "Shares") may be sold
from time to time by or for the account of certain shareholders and
prospective shareholders of the Company described herein (the "Selling
Shareholders") from time to time in transactions in the over-the-counter market
or otherwise at the prevailing market prices at the time of sale. Up to 800,000
of the Shares are issuable upon conversion of the Company's outstanding 18%
Senior Secured Promissory Notes (the "Notes"), 200,000 of the Shares are
issuable upon exercise of the Company's outstanding Common Stock Purchase
Warrants dated June 30, 1997 (the "Warrants"), and 18,811 of the Shares are
held by a shareholder pursuant to the exercise of a warrant issued by the
Company in March 1996. The Company sold the Notes and the Warrants in a private
transaction (the "Note and Warrant Placement") exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act").
If the Company pays down the Notes in full before June 30, 1998,
the holders of the Notes (the "Noteholders") will have no conversion rights.
2
<PAGE>
<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 securitize 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 such sources of financing,
(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 acquisition 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."
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
3
<PAGE>
<PAGE>
imposition of any of the above-reference 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) $50.0
million warehouse revolving line of credit with Daiwa Finance Corporation and
(ii) $10.0 million warehouse revolving line of credit with Sentry Financial
Corporation (together, the "Revolving Credit Facilities") which expire in March
1998 and December 31, 2000, 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 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. 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. Moreover, because
of the similarity of the Company's name with those of certain securitization
issuers sponsored by William Winsauer, the Company could be adversely affected
if the ratings of securitizations completed by such issuers were downgraded.
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."
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. Although the Company has no
specific plans for additional equity financings due to the liquidity provided by
securitizations, the issuance of its Convertible Notes and financings of excess
spread cash flows, the Company may at some point require additional equity
financing. 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."
4
<PAGE>
<PAGE>
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, among other things, management's estimate of future
delinquencies, credit losses and prepayments for the finance contracts included
in that securitization. If actual rates of credit loss, delinquencies or
prepayments for the finance contracts exceeded those estimated, the value of the
interest-only strip receivables would be impaired. The Company periodically
reviews its credit loss, delinquencies 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 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.
5
<PAGE>
<PAGE>
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 agreements provide 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 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 interest-only strip 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 calculations 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.
6
<PAGE>
<PAGE>
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.
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 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 March 31, 1997,
approximately 77.5% 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."
7
<PAGE>
<PAGE>
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. The Company does not maintain key man life
insurance on any of its officers, directors or employees at the present time.
See "Business--Funding/Securitization of Finance Contracts" and
"Management--Employment Agreements."
CONTROL BY CERTAIN SHAREHOLDERS
William O. Winsauer beneficially owns an aggregate of approximately
56.6% of the outstanding shares of Common Stock. Accordingly, Mr. Winsauer has
majority control of the Company, with the 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," "Beneficial Ownership of Common
Shares" 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."
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."
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 6,512,500 shares of Common Stock outstanding.
Of such shares, 5,456,311 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
8
<PAGE>
<PAGE>
thereunder. Approximately 64,500 shares of Common Stock are eligible for sale
pursuant to Rule 144, subject to compliance with such Rule and the contractual
provisions described below. 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 he market price of shares of Common Stock
prevailing from time to time. The prevailing market price of the Common Stock
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," "Beneficial Ownership of Common Shares," and
"Selling Shareholders and Plan of Distribution."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been, and may
continue to be, extremely volatile. Factors such as expanding competition in the
consumer automobile finance market, quarterly fluctuations in the operating
results of the Company, its competitors and other similar finance companies and
general conditions in the automobile manufacturer and consumer lender markets,
including changing economic conditions for Obligors, used automobile resale
market conditions, servicing practices, may have a significant impact on the
market price of the Common Stock. In particular, if the Company were to report
operating results that did not meet the expectations of research analysts, the
market price of the Common Stock could be materially adversely affected. In
addition, the stock market has recently experienced substantial price and volume
fluctuations, which have particularly affected the market prices of the stock of
many consumer automobile finance companies.
USE OF PROCEEDS
The Company will receive none of the proceeds from the sales made
hereunder. The Company intends to apply the net proceeds from the sale of the
Common Stock issued upon exercise of the Warrants toward the acquisition of
finance contracts and other general corporate purposes. Principal of the Notes
will be reduced by the amount of the Common Stock issued upon conversion of the
Notes.
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 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.
BUSINESS
GENERAL
The Company is a specialty consumer finance company engaged in
underwriting, acquiring, servicing and securitizing retail installment contracts
("finance contracts") originated by franchised automobile dealers in connection
with the sale of used and, to a lesser extent, new vehicles to selected
consumers with limited access to traditional sources of credit ("sub-prime
consumers"). Sub-prime 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 (which may
indicate payment or economic risk).
The Company acquires finance contracts generally from franchised
automobile dealers, makes credit decisions using its own underwriting guidelines
and credit personnel and performs the collection function for finance contracts
using its own collections department. The Company also acquires finance
contracts from third parties other than dealers for which the Company
reunderwrites and collects such finance contracts in accordance with the
Company's standard guidelines. The Company securitizes portfolios of these
retail automobile installment contracts to efficiently utilize limited capital
to allow continued growth and to achieve sufficient finance contract volume to
allow profitability. The Company markets a single finance contract acquisition
program to automobile dealers which
9
<PAGE>
<PAGE>
adheres to consistent underwriting guidelines involving the purchase of
primarily late-model used vehicles. This has enabled the Company to securitize
those contracts into investment grade securities with similar terms from one
issue to another providing consistency to investors. For the period of inception
through June 30, 1997, the Company acquired 15,928 finance contracts with an
aggregate initial principal balance of $146,829,860, and which had an initial
average principal balance, at acquisition, of $9,218, a weighted average
annual percentage rate ("APR") of 20.32%, a weighted average finance contract
acquisition discount of 8.5% and a weighted average maturity of 41.9 months.
Since inception, the Company has completed seven securitizations pursuant to
which it privately placed $173 million in finance contract-backed securities.
RECENT DEVELOPMENTS
On June 30, 1997, the Company privately placed $2,000,000 in aggregate
principal amount of its 18% Convertible Series Secured Promissory Notes (the
"Notes") with Warrants to purchase 200,000 shares of Common Stock, with net
proceeds to the Company of $1,975,000.
On August 21, 1997, the Company completed its Series 1997-B
securitization of $34.4 million in finance contracts. The senior securitization
notes received an A/A3 rating from Fitch Investors Service and Moody's
Investors Services respectively. Credit deficiency insurance was purchased
on all of the finance contracts securitized.
GROWTH AND BUSINESS STRATEGY
The Company's growth strategy anticipates the acquisition of an
increasing number 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; (iii)
penetrating new markets that meet the Company's economic, demographic and
business criteria and (iv) securitizing portfolios of acquired finance
contracts.
To foster its growth and increase profitability, the Company will
continue to pursue a business strategy based on the following principles:
10
<PAGE>
<PAGE>
TARGETED MARKET AND PRODUCT FOCUS--The Company targets the sub-prime
auto finance market because it believes that sub-prime finance presents
greater opportunities than does prime lending. This greater opportunity
stems from a number of factors, including the relative newness of sub-
prime auto finance, the range of finance contracts that various
sub-prime 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,
1997, new vehicles and used vehicles represented 5.9% and 94.1%,
respectively, of the finance contract portfolio. In addition, the
Company concentrates on acquiring finance contracts from dealerships
franchised by major automobile manufacturers because they typically
offer higher quality vehicles, are better capitalized, and have better
service facilities than used car dealers.
EFFICIENT FUNDING STRATEGIES--Through an investment-grade warehouse
facility and a periodic 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. The net effect of the
Company's funding and securitization program is to provide more
proceeds than the Company's acquisition costs, resulting in positive
revenue cash flow, lower overall costs of funding, and permitting loan
volume to increase with limited additional equity capital.
UNIFORM UNDERWRITING CRITERIA--To manage the risk of delinquency or
defaults associated with sub-prime consumers, the Company has utilized
since inception a single set of underwriting criteria which are
consistently applied in evaluating credit applications. This evaluation
process is conducted on a centralized basis utilizing experienced
personnel. These uniform underwriting criteria create consistency in
the securitization portfolios of finance contracts that make them more
easily analyzed by the rating agencies and more marketable and permit
static pool analysis of loan defaults to optimally structure
securitizations. See "Management's Discussion and
Analysis--Repossession Experience--Static Pool Analysis."
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 marketing, funding, underwriting and collections
operations and eliminates the expenses associated with full-service
branch or regional offices.
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 substantial experience
in underwriting, collecting and financing automobile finance contracts.
INTENSIVE COLLECTION MANAGEMENT--The Company believes that intensive
collection efforts are essential to ensure the performance of sub-prime
finance contracts and to mitigate losses. The Company's collections
managers contact delinquent accounts frequently, working cooperatively
with customers to get full or partial payments, but will initiate
repossession of financed vehicles no later than the 90th day of
delinquency. As of March 31, 1996, a total of 3,923,200 or 2.54%, of
the Company's finance contract portfolio were between 60 and 90 days
past due and $2,785,800, or approximately 1.80%, of the Company's
finance contracts outstanding were greater than 90 days past due. From
inception through June 30, 1997, the Company repossessed approximately
8.81% of its financed vehicles, and the Company had completed the
disposal of 608
11
<PAGE>
<PAGE>
vehicles, resulting in an average loss per repossession of
approximately $1,827 per vehicle. See "Management's Discussion and
Analysis--Net Loss per Repossession."
LIMITED LOSS EXPOSURE--To reduce its potential losses on defaulted
finance contracts, the Company historically has insured each finance
contract it funds against damage to the financed vehicle through a
vendor's comprehensive single interest physical damage insurance policy
(a "VSI Policy"). In addition, in connection with the Company's
warehouse financing and securitizations through December 31, 1996, the
Company purchased credit default insurance through a deficiency balance
endorsement (the "Credit Endorsement") to the VSI Policy. The Credit
Endorsement reimburses the Company for the difference between the
unpaid contract finance balance and the net proceeds received in
connection with the sale of the repossessed vehicle. Moreover, the
Company limits loan-to-value ratios and applies a purchase price
discount to the finance contracts it acquires. The Company's
combination of underwriting criteria, intensive collection efforts and
the VSI Policy and Credit Endorsement has resulted in net charge-offs
(after receipt of liquidation and insurance proceeds) of 14.13%
(excluding repossession costs) of the principal balance outstanding on
disposed repossessed vehicles for which the liquidation process has
been completed as of June 30, 1997. For its 1997-B securitization
and future securitizations, the Company is purchasing credit default
insurance from Progressive Northern Insurance Company.
See "--Insurance" below and "Management's Discussion and Analysis--
Net Loss per Repossession."
BORROWER CHARACTERISTICS
Borrowers under finance contracts in the Company's finance contract
portfolio are generally sub-prime consumers. Sub-prime 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 sample of
1,533 finance contracts in the finance contract portfolio which the Company
believes are representative of the portfolio as a whole, the Company has
determined the following characteristics with respect to its finance contract
borrowers. The average borrower's monthly income is $2,400, with an average
payment-to-income ratio of 15.7%. The Company's guidelines permit a maximum
payment-to-income ratio and debt-to-income ratio of 20% and 50%, respectively.
The Company's guidelines require a cash down payment of 10% of the vehicle
selling price. Based upon a sample of its borrowers which the Company believes
to be representative, the average borrower's time spent at current residence
is 65.6 months, while the average time of service at current employer is
46.6 months. The age of the average borrower is 34.3 years.
CONTRACT PROFILE
From inception to June 30, 1997, the Company acquired 15,928 finance
contracts with an aggregate initial principal balance of $146,829,860.
Of the finance contracts acquired, approximately 5.9% have related to the sale
of new automobiles and approximately 94.1% have related to the sale of used
automobiles. The average age of used finance vehicles was approximately two
years at the time of sale. The finance contracts had, upon acquisition, an
average initial principal balance of $11,315; a weighted average APR of
19.71%; a weighted average finance contract acquisition discount of 8.5%; and a
weighted average contractual maturity of 51.1 months. As of June 30, 1997, the
finance contracts in the finance contract portfolio had a weighted average
remaining maturity of 42 months. Since inception, the Company's cumulative
repossessions through June 30, 1997 have totaled 1,416 or 8.81% of the total
portfolio.
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 sub-prime borrowers. Accordingly, the Company's
12
<PAGE>
<PAGE>
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 sub-prime 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, 1997, the Company was licensed or qualified to do business in 40
states. Over the near terms, the Company intends to focus its proposed
geographic expansion on states in the midwest and mid-Atlantic regions.
Location of Dealers. Approximately 40% of the Company's dealer network
consists of dealers located in Texas, where the Company has operated since 1994.
A group of six dealerships (including Charlie Thomas Ford) under
substantial common ownership accounted for approximately 26.51% and 17.56% for
the fiscal year ended 1995 and 1996 respectively, of finance contracts acquired
during the same period. One dealership, Charlie Thomas Ford, Inc. of Houston,
Texas, accounted for 8.79% of the finance contracts acquired by the Company for
the period from inception through December 31, 1996 (8.77% and 8.94% for the
fiscal year ended 1995 and 1996 respectively). The Company is no longer
purchasing contracts from these dealerships due to a dispute over repurchase
obligations. See "Litigation."
DEALER SOLICITATION
Marketing Representatives. As of March 31, 1997, the Company utilized
28 marketing representatives, sixteen of which were individuals employed by the
Company and twelve of which were marketing organizations serving as independent
representatives. These representatives have an average of ten years experience
in the automobile financing industry. The Company is currently evaluating
candidates for additional marketing representative positions. The marketing
representatives 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.
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 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 contracts, 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
13
<PAGE>
<PAGE>
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. The Company intends to develop notable 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 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 contacts from such 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
financing contract. Representations and warranties in a Dealer Agreement
generally relate to matters such 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 is obligated
to 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 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 of at least 14%;
(vii) provides 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 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 Manufacturer's 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.
14
<PAGE>
<PAGE>
The Company's current purchase criteria limit 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 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 acquisitions 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 sub-prime
consumer typically meets with the dealership's F&I manager to discuss options
for financing the purchase of the vehicle. If the sub-prime 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 year ended December 31, 1996, 71,132 credit applications were
submitted to the Company. Of these 71,132 applications, approximately 32.8% were
approved and 10.1%, or 7,215 contracts, were acquired by the Company. 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 where the original
documents are 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 of the
automobile that will serve as collateral under the finance contract. Moreover,
the
15
<PAGE>
<PAGE>
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 credit and collections 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.
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.
From time to time, the Company also acquires bulk portfolios from other
originators. In this event, the Company reunderwrites such contracts to ensure
appropriate credit standards are maintained. The Company acquired approximately
$14 million in finance contracts in 1996 from Greenwich Capital Financial
Products which were originated by First Fidelity Acceptance Corp. During the
first quarter of 1997, the Company acquired approximately $8.5 million in
finance contracts from Credit Suisse First Boston Corporation which were
originated by Jefferson Capital Corporation.
16
<PAGE>
<PAGE>
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 sub-prime 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 Enterprises") ("LSE") to provide contract administration. For
the 1997B securitization, the Company assumed the servicing functions performed
by LSE.
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 sub-prime 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 175 people full-time, including 54
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, 1997, there were 445 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 and
finance 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
applicable insurance 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 applicable
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.
17
<PAGE>
<PAGE>
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 applicable 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 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 applicable 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,
if applicable, 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 prior to December 31, 1996 is covered from the moment of
its purchase by the Interstate VSI Policy, including the Credit Endorsement. The
Interstate 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. Each finance contract acquired
by the Company after December 31, 1996 is covered from this moment of its
purchase by either the Interstate VSI Policy, including the Credit Endorsement,
another VSI Policy (which does not include a Credit Endorsement), or the VSI
Policy and deficiency balance endorsement (the "Progressive Policy")
issued by Progressive Northern Insurance Company ("Progressive").
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 the Company or as Servicer, tracks the physical damage insurance
of borrowers, and contacts borrowers in the event of a lapse in coverage
or inadequate documentation. Moreover, the VSI policies insure 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 a VSI Policy generally provided
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 $50,000 in the case of the Progressive
Policy; 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 under the
Interstate Policy are subject to a $500 deductible per loss ($250 for the
Progressive Policy). 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.
Each 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.
18
<PAGE>
<PAGE>
Deficiency Balance Endorsements. In addition to physical damage and
loss coverage, all the Interstate VSI Policy contained 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 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.
The Progressive Policy contains a Deficiency Balance Endorsement
(the "DBE"), pursuant to which Progressive will insure AutoBond's interest
in the Financed Vehicles against direct loss incurred due to the Company's
inability to recover one hundred percent (100%) of the balance due under
an instrument representing a Finance Contract. Under the DBE, Progressive
will cover such impairment of the Company's interest in the Financed Vehicle,
measured as the Net Payoff Amount, reduced by (a) claim settlements from other
insurance policies, (b) claim settlements due under other coverage provisions
of the VSI Policy or its other endorsements, and (c) monies recoverable under
any other recourse or repurchase agreement or through any dealer hold-back,
or any other source. The maximum liability under the DBE is Five Thousand
Dollaers ($5,000) for any financed contract, and claims payments may not
exceed, on a monthly basis, 88% of the premiums paid.
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, 1997, the Company had no balances outstanding under the
$10.0 million Sentry Facility, which expires on December 31, 2000. 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
19
<PAGE>
<PAGE>
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, 1997).
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 $241,767 for the six months ended June 30, 1997.
During 1996, the Company also paid $700,000 in commitment fees pursuant to its
agreement with Sentry.
On May 22, 1996 the Company, through its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into the Providian Facility, which
expired December 15, 1996. The proceeds from the borrowings under the Providian
Facility were used to acquire finance contracts, to pay credit default insurance
premiums and to make deposits to a reserve account. Interest was payable monthly
with a delay of 15 days and accrued 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 required 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
were rated investment-grade by a nationally recognized statistical rating
organization. As of December 31, 1996, no advances were outstanding with respect
to the Providian Facility.
The Company's wholly-owned subsidiary, AutoBond Funding Corporation I,
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 up to a maximum aggregate
principal amount of $25 million, for the acquisition of finance contracts.
On February 14, 1997 the Company, though its wholly-owned subsidiary
AutoBond Funding Corporation II, entered into the $50,000,000 Daiwa Facility,
which expires March of 1998. The proceeds from borrowings under the Daiwa
Facility are used to acquire finance contracts, and to make deposits to a
reserve account. Interest is payable monthly at the 30-day LIBOR plus 1.15%
annum rate. The Daiwa 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 Daiwa Facility are rated investment-grade by a nationally recognized
statistical rating organization. The Daiwa 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 repossession triggers. On June 30, 1997, the
Daiwa Facility was bifurcated to include a special purpose issuer,
AutoBond Master Funding Corporation ("Master Funding") to which finance
contracts securing advances could be sold and derecognized pursuant to
SFAS No. 125. Accordingly, as of such date, $33 million of advances secured
by $35.8 million of finance contracts were transferred to Master Funding.
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 seven securitizations involving approximately
$173 million in aggregate principal amount of finance contracts.
In its securitization transactions through December 31, 1996, the
Company sold pools of finance contracts to a special purpose subsidiary, which
then assigned the finance contracts to a trust in exchange for cash and certain
retained beneficial interests in the trust. The trust issued two classes of
fixed income investor certificates: Class A Certificates which were 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 were retained by the Company's securitization
subsidiary and which collateralize borrowings on a non-recourse basis. The
Company would also fund a cash reserve account that provides credit support to
the Class A Certificates. The Company's securitization subsidiaries also
retained an interest in the trust that is subordinate to the interest of the
investor certificateholders. 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. In its securitization transactions in 1997, the Company follows
the provisions of the recently effective SFAS 125. In these securitizations the
20
<PAGE>
<PAGE>
Company will sell pools of finance contracts to a special purpose subsidiary,
which will then issue notes under a trust indenture secured by such finance
contracts. The special purpose corporations may issue multiple classes of
secured notes, including subordinated excess spread notes. The Company will also
fund a cash reserve account that provides credit support to the senior notes.
The Company's securitization subsidiaries also will retain an interest in the
finance contracts that is subordinate to the interest of the noteholders. The
retained interests entitle the Company to receive the future excess spread cash
flows from the trust estate 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 estate.
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. If the structure of the securitizations was changed, it could
impact the Company's ability to generate liquidity. See "Recent Events."
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, 1997,
the Company held interest-only strip receivables and Class B Certificates
totalling $19.7 million, a portion of which had been pledged to secure notes
payable of $10.7 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 "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.
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 typically 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:
21
<PAGE>
<PAGE>
(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 sub-prime 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 sub-prime 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 sub-prime credit market.
In many cases, those organizations electing to remain in the automobile finance
business have migrated toward higher quality customers to allow reductions in
their overhead cost structures.
As a result, the sub-prime 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, 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.
Additionally, during the first half of 1997, several of the
Company's competitors have experienced serious problems ranging from allegedly
fraudulent misstatements of earnings to increasing losses and inadequate
reserves. Although the Company believes it has made adequate reserves to cover
losses, the ability of the Company to obtain funding in the future and the rates
at which such financings may be obtained could be impaired as a result of the
turmoil in the sub-prime auto finance industry. Although the Company was able to
obtain financing under the Daiwa Facility and continues to have financing
available under the Sentry Facility, there can be no assurance that the turmoil
in the sub-prime auto finance industry will not have an effect on the Company's
ability to raise funds and may result in an increased cost of funding to the
Company.
REGULATION
The Company's business is subject to regulation and licensing under
various federal, state and local statues and regulations. As of June 30, 1997,
the Company's business operations were conducted with dealers located in 37
states, and, accordingly, the laws and regulations of such states govern the
Company's operations. Most states where the
22
<PAGE>
<PAGE>
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 is 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 regulations. 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.
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.
EMPLOYEES
As of June 30, 1997, the Company employed 172 persons, none of
which was covered by a collective bargaining agreement. The Company believes
that its relationship with its employees is satisfactory.
23
<PAGE>
<PAGE>
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 $18,338. 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 leased
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 expired on February 28, 1997. The Company
no longer maintains any regional office facilities.
LEGAL PROCEEDINGS
In the normal course of its business, the Company is from time to time
made a party to litigation involving consumer-law claims. These claims typically
allege improprieties on the part of the originating Dealer and name AutoBond
and/or its assignees as subsequent holders of the finance contracts.
To date none of these actions have resulted in the payment of damages, or any
judgments therefor, by the Company or its assignees, nor have any actions
been certified as eligible for class-action status.
The Company's carrier for the credit deficiency insurance obtained
through 1996, Interstate Fire & Casualty Co. ("Interstate") determined
in late 1996 to no longer offer such coverage to the auto finance
industry, including the Company. In connection with Interstate's attempt
to no longer offer credit deficiency coverage for contracts originated
after December 1996, the Company commenced an action in the United States
District Court for the Western District of Texas, Austin Division, seeking a
declaratory judgment that (a) AutoBond was entitled to 180 days' prior
notice of cancellation and (b) Interstate was not entitled to raise premiums
on finance contracts for which coverage was obtained prior to the effectiveness
of such cancellation, as well as seeking damages for the Company's alleged
deficiencies in paying claims. Prior to receiving AutoBond's complaint
in the Texas action, Interstate commenced a similar action for declaratory
relief in the United States Court for the Northern District of Illinois.
While settlement discussions are ongoing, AutoBond and the Company have to date
acted on the basis of a cancellation date of May 12, 1997 (i.e., no finance
contracts presented after that date will be eligible for credit deficiency
coverage by Interstate, although all existing contracts for which coverage was
obtained will continue to have the benefits of such coverage), no additional
preimiums having been demanded or paid, and the claims-paying process having
been streamlined.
As set forth in the discussion of finance contracts held for
sale in Note 3 to the Notes to the Company's audited financial statements,
in February 1997 the Company discovered certain breaches of representations and
warranties with respect to finance contracts sold into a securitization. The
Company honored its obligations to the securitization trust and repurchased
finance contracts totaling $619,520 from a Trust during the three months ended
March 31, 1997. Of the total amount of these finance contracts, $190,320 were
purchased from one dealer. Although the Company has requested that this dealer
repurchase such contracts, the dealer has refused. After such Dealer's refusal
to repurchase, the Company commenced an action in the 157th Judicial District
Court for Harris County, Texas against Charlie Thomas Ford, Inc. to compel
such repurchase. Discovery is proceeding but no trial date has been set.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company and its subsidiaries for the periods and at the date indicated. The
elected 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,
1996 and June 30, 1997 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 three months ended
March 31, 1997 are not necessarily indicative of results to be expected for the
fiscal year ending December 31, 1997. The data presented below should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.
24
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income....................................... $ 781 $ 137 $ 333 $ (35)
Servicing fee income...................................... 0 658 277 434
Gain on sale of finance contracts......................... 4,086 12,821 5,744 8,692
Other income (loss)....................................... 0 388 -- (521)
-------- ------- ------ --------
Total revenues..................................... 4,867 14,004 6,354 8,570
-------- ------- ------ -------
Provision for credit losses............................... 49 412 63 --
Salaries and benefits..................................... 1,320 4,529 1,846 3,273
General and administrative................................ 1,463 2,331 884 2,759
Other operating expenses.................................. 963 1,120 564 783
-------- ------- ------- -------
Total expenses..................................... 3,795 8,392 3,357 8,642
-------- ------- ------- -------
Income before taxes and extraordinary item............... 1,072 5,611 2,996 1,757
Provision for income taxes................................ 199 1,927 1,020 611
Extraordinary loss net of tax effect...................... -- (100) -- --
-------- -------- ------- -------
Net income ............................................... 873 3,585 1,876 1,146
======== ======== ======== ========
Earnings per share before extraordinary item.............. $ 0.17 $ 0.64 $ 0.35 $ 0.18
Earnings per share........................................ $ 0.17 $ 0.62 $ 0.33 $ 0.18
Weighted average shares outstanding....................... 5,190,159 5,811,377 5,698,367 6,529,104
ASSET QUALITY DATA:
Delinquencies 60+ days past due as a percentage of principal
balance of finance contract portfolio (end of period)(1).... 2.30% 3.34% 2.48% 4.34%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------- ------------
1995 1996 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 93 4,121 176
Restricted Funds.......................................... 1,323 2,982 10,484
Finance contracts held for sale, net...................... 3,355 228 329
Interest-only strip receivable............................ 847 4,247 10,980
Total assets....................................... 11,065 27,277 40,429
Notes payable............................................. 2,675 10,175 10,653
Repurchase agreement...................................... 1,061 0 0
Revolving credit agreement................................ 1,150 0 7,000
Subordinated debt......................................... 0 0 0
------ ------ ------
Total debt......................................... 4,886 10,175 17,653
Shareholders' equity...................................... 3,026 12,286 14,631
</TABLE>
(1) Includes the Company's entire finance contract portfolio of contracts held
and contracts securitized.
25
<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 Financial 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 Company is a specialty consumer finance company engaged in
underwriting, acquiring, servicing and securitizing retail installment
contracts ("finance contracts") originated by franchised automobile
dealers in connection with the sale of used and, to a lesser extent,
new vehicles to selected consumers with limited access to traditional sources
of credit ("sub-prime consumers"). Sub-prime 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 (which may indicate payment or economic risk).
The Company acquires finance contracts generally from franchised
automobile dealers, makes credit decisions using its own underwriting guidelines
and credit personnel and performs the collection function for finance contracts
using its own collections department. The Company also acquires finance
contracts from third parties other than dealers, for which the Company
reunderwrites and collects such finance contracts in accordance with the
Company's standard guidelines. The Company securitizes portfolios of these
retail automobile installment contracts to efficiently utilize limited capital
to allow continued growth and to achieve sufficient finance contract volume to
allow profitability. The Company markets a single finance contract acquisition
program to automobile dealers which adheres to consistent underwriting
guidelines involving the purchase of primarily late-model used vehicles. The
Company has
26
<PAGE>
<PAGE>
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:
interest income, gain on sale of finance contracts and servicing fee income.
Interest Income. Interest income consists of the sum of three primary
components: (i) interest income earned on finance contracts held for sale by the
Company; (ii) interest income earned on Class B certificates, and (iii) the
accretion of the interest-only strip receivable. Other factors influencing
interest income during a given fiscal period include (a) the annual percentage
rate of the finance contracts acquired, (b) the aggregate principal balance of
finance contracts acquired and funded through the Company's warehouse and other
credit facilities prior to securitization, and (c) the length of time such
contracts are funded by the warehouse and other credit facilities. Finance
contract acquisition growth has had a significant impact on the amount of
interest income earned by the Company.
Gain on Sale of Finance Contracts. Upon completion of a securitization
prior to 1997, the Company recognized 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 insurance premiums, if any) to the
Company of the finance contracts sold. Excess spread cash flows represent the
difference between the weighted average contract rate earned and the rate paid
on multiple class certificates issued to investors in the securitization, taking
into account certain assumptions regarding prepayments, defaults, proceeds from
disposal of repossessed assets, and servicing and other costs, over the life of
the securitization.
The Company implemented Statement of Financial Accounting Standards No.
125 "Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities" (SFAS No. 125) as of January 1, 1997. SFAS No. 125 provides new
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement also provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings and requires that liabilities
and derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value. For transfers that result
in the recognition of a sale, SFAS No. 125 requires that the newly created
assets obtained and liabilities incurred by the transferors as a part of a
transfer of financial assets be initially measured at fair value. Interests in
the assets that are retained are measured by allocating the previous carrying
amount of the assets (e.g. finance contracts) between the interests sold (e.g.
investor certificates) and interests retained (e.g. interest-only strip
receivable) based on their relative fair values at the date of the transfer. The
amounts initially assigned to these financial components is a determinant of the
gain or loss from a securitization transaction under SFAS No. 125.
The discounted excess spread cash flows are reported on the consolidated
balance sheet as "Interest-Only Strip Receivable". The fair value of the
interest-only strip receivable is 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 subordinated certificates are then formed by
carving out 65% to 80% of the discounted excess spread cash flows. The remaining
20% to 35% of the discounted excess spread cash flows represent the
interest-only strip receivable. All of the excess spread cash flows are paid by
the securitization Trustee to the investor security holders until such time as
all accrued interest together with principal have been paid in full.
Subsequently, all remaining excess spread cash flows are paid to the Company.
An impairment review of the interest-only strip receivable is performed
quarterly by calculating the net present value of the expected future excess
spread cash flows after giving effect to changes in
27
<PAGE>
<PAGE>
assumptions due to market and economic changes and the performance of the loan
pool to date. The discount rate used is the same as that used to record the
initial interest-only strip receivable. 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. To the extent that
the Company deems the asset to be permanently impaired, the Company would record
a charge against earnings and write down the asset accordingly. The Company
recorded an adjustment to other income (loss) of $467,926 during the three
months ended June 30, 1997 as a result of the impairment review. Should the
Company be unable to sell finance contracts acquired during 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.
In the Company's March 1997 securitization transaction, the Company sold
a pool of finance contracts to a special purpose subsidiary, which then assigned
the finance contracts to an indenture trustee. Under the trust indenture, the
special purpose subsidiary issued three classes of fixed income investor notes:
"Class A Notes", Class B Notes" and "Class C Notes", which were sold to
investors, generally at par, with fixed coupons. A portion of the Class C Notes
represented a senior interest in certain excess spread cash flows from the
finance contracts. In addition, the securitization subsidiary retained rights to
the remaining excess spread cash flows, which may be used to collateralize
borrowings on a non-recourse basis. The Company also funded a cash reserve
account that provides credit support to the Class A Notes, Class B Notes and a
portion of the Class C Notes.
Gain on sale of finance contracts was $2,749,612, $2,972,804,
$3,554,745, $3,543,539 and $3,575,748 for each of the securitizations occurring
in March 1996, June 1996, September 1996, December 1996 and March 1997,
respectively. Gain on sale of finance contracts into the new unconsolidated
securitization subsidiary in June 1997 totaled $5,116,397. This represents
approximately 16.6%, 16.7%, 15.9%, 14.2%, 13.9% and 14.3% of the outstanding
balances of the finance contracts at each of the respective dates.
The Company's cost basis in finance contracts sold has varied from
approximately 97.5% to 103% of the value of the senior investor securities. This
portion of recognized gain on sale varies based on the Company's cost of
insurance covering the finance contracts and the discount obtained upon
acquisition of the finance contracts. Generally, the Company has acquired
finance contracts from dealers at a greater discount than with finance contracts
acquired from third parties. 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 are expected to shrink as a percentage of
the size of the securitization.
Further, the excess spread component of recognized gain is affected by
various factors, including most significantly, the coupon on the senior investor
securities and the age of the finance contracts in the pool, as the excess
spread cash flow from a pool of aged, as opposed to new, finance contracts is
less. The aging (capture of excess spread prior to securitization) necessarily
results in less available excess spread cash flow from the securitization. The
Company believes that margins in the range of those previously recognized are
sustainable subject to adverse interest rate movements, availability of VSI
insurance at current rates and the Company's ability to continue purchasing
finance contracts from dealers 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
28
<PAGE>
<PAGE>
spread for each of the Company's securitizations (dollars in thousands):
<TABLE>
<CAPTION>
Remaining Weighted
Balance at Average
June 30, Contract Certificate Gross
Securitization Balance(1) 1997 Rate Rate Ratings(2) Spread
(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables
Trust 1995-A $26,261 $15,306 18.9% 7.23% A/A3 11.7%
AutoBond Receivables
Trust 1996-A 16,563 11,601 19.7% 7.15% A/A3 12.5%
AutoBond Receivables
Trust 1996-B 17,833 13,606 19.7% 7.73% A/A3 12.0%
AutoBond Receivables
Trust 1996-C 22,297 20,068 19.7% 7.45% A/A3 12.3%
AutoBond Receivables
Trust 1996-D(4) 25,000 25,000 19.5% 7.37% A/A3 12.1%
AutoBond Receivables
Trust 1997-A(5) 27,196 25,676 20.8% 7.82% A/A2 13.0%
BBB/BB
======================
Total $135,150 $111,257
======================
</TABLE>
- ---------------------------
(1) Refers only to balances on senior investor
certificates.
(2) Indicates ratings by Fitch Investors Service, L.P. and Moody's Investors
Service, Inc., respectively.
(3) Difference between weighted average contract rate and senior
certificate rate.
(4) Reflects status of trust in revolving period.
(5) Includes Class A and Class B Notes.
On June 30, 1997, a new warehouse and securitization structure was
formed whereupon finance contracts were transferred to a special purpose entity.
The special purpose entity issued variable funding warehouse notes which are
convertible into term notes at the option of the holder of such notes. The
transfer of the finance contracts to the special purpose entity was recognized
as a sale under SFAS No. 125.
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 administrative 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) the accretion of the discount applied to excess spread cash flows in
calculating the carrying value of the interest-only strip 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.
FINANCE CONTRACT ACQUISITION ACTIVITY
The following table sets forth information about the Company's finance
contract acquisition
29
<PAGE>
<PAGE>
activity (dollars in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1996 1997
---------------------
<S> <C> <C>
Number of finance contracts acquired 2,856 6,017
Principal balance of finance contracts acquired $33,902 $69,288
Number of active dealerships 1 252 831
Number of enrolled dealerships 492 1,136
</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. The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES
Total revenues increased $2,296,182 to $6,110,826 for the three months
ended June 30, 1997 from $3,814,644 for the three months ended June 30, 1996 due
to the growth in finance contract acquisition activity.
Interest Income. Interest income increased $613,921 to $1,279,640 for
the three months ended June 30, 1997 from $665,719 for the three months ended
June 30, 1996 due to higher outstanding volumes of finance contracts held for
sale. The Company began the quarter ended June 30, 1997 with $5.9 million in
finance contracts held for sale carried over from the quarter ended March 31,
1997.
Gain on Sale of Finance Contracts. For three months ended June 30, 1997,
gain on sale of finance contracts amounted to $5,116,397, compared with
$3,042,641 for the comparable 1996 period. The Company sold finance contracts
aggregating approximately $35.8 million into the new unconsolidated
securitization subsidiary on June 30, 1997 and the gain on sale of finance
contracts accounted for 83.7% of total revenues. For three months ended June 30,
1996, there was one securitization transaction in the principal amount of $17.8
million. The gain on sale of finance contracts for this sale transaction
accounted for 79.8% of total revenues in the three months ended June 30, 1996.
The ratio of gain on sale to the outstanding balances of the finance contracts
sold for the three months ended June 30, 1997 was 14.3%, compared with 17.1% for
the comparable 1996 period.
Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the three months ended
June 30, 1997, servicing fee income was $242,490, primarily collection agent
fees. Servicing fee income increased by $136,206 from the three months ended
June 30, 1996 as a result of increased securitization activity by the Company.
As of June 30, 1996, the Company had completed only three securitizations and
servicing income amounted to $106,284 for the quarter.
Other Income (Loss). For three months ended June 30, 1997, other loss
amounted to $527,701, compared with $0 for the comparable 1996 period. The
Company recorded a charge against earnings for permanent impairment of the
interest-only strip receivable, determined on a disaggregated basis, of
30
<PAGE>
<PAGE>
$467,926 during the period. Additionally, unrealized loss on the Company's Class
B certificates totaled $59,775 during the three months ended June 30, 1997.
TOTAL EXPENSES
Total expenses of the Company increased $2,176,066 to $4,625,458 for the
three months ended June 30, 1997 from $2,449,392 for the three months ended June
30, 1996. Total expenses as a percentage of total principal balance of finance
contracts acquired in the period decreased to 13.1% for the three months ended
June 30, 1997 compared to 13.3% for the three months ended June 30, 1996.
Provision for Credit Losses. No provision for credit losses on finance
contracts held for future securitizations was taken for the three months ended
June 30, 1997, due to the timing of finance contract acquisition and
securitization activity compared with a provision of $48,500 for the three
months ended June 30, 1996.
Interest Expense. Interest expense rose to $955,679 for the three months
ended June 30, 1997 from $544,497 for the three months ended June 30, 1996.
Interest expense increased by $411,182 due to higher net borrowing costs
associated with the revolving credit facilities, along with increased debt
issuance costs amortization of $219,613.
Salaries and Benefits. Salaries and benefits increased $676,143 to
$1,732,971 for the three months ended June 30, 1997 from $1,056,828 for the
three months ended June 30, 1996. This increase was due primarily to an increase
in the number of the Company's employees necessary to handle the increased
contract acquisition volume and the collection activities on a growing portfolio
of finance contracts. The number of employees of the Company increased by 93 to
172 employees at June 30, 1997, compared to 79 employees at June 30, 1996.
General and Administrative Expenses. General and administrative expenses
increased $945,633 to $1,543,133 for the three months ended June 30, 1997 from
$597,500 for the three months ended June 30, 1996. 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, non-employee marketing commissions, communications and office
supplies, and are expected to increase as the Company continues to grow and also
due to the costs of operating as a public company.
Other Operating Expenses. Other operating expenses (consisting
principally of servicer fees, credit bureau reports and insurance) increased
$191,608 to $393,675 for the three months ended June 30, 1997 from $202,067 for
the three months ended June 30, 1996. This increase was due to increased finance
contract acquisition volume.
NET INCOME
In the three months ended June 30, 1997, net income increased $161,617
to $966,869 from $805,252 for the three months ended June 30, 1996. The increase
in net income was primarily attributable to an increase in finance contract
acquisition volume. The principal balance of finance contracts acquired
increased $16.9 million to $35.3 million for the three months ended June 30,
1997 from $18.4 million for the three months ended June 30, 1996.
31
<PAGE>
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES
Total revenues increased $2,907,945 to $10,399,490 for the six months
ended June 30, 1997 from $7,491,545 for the six months ended June 30, 1996
primarily due to increased finance contract acquisition and sales volumes. The
principal balance of contracts acquired rose from $33.9 million during the six
months ended June 30, 1996 to $69.2 million during the six months ended June 30,
1997.
Interest Income. Interest income increased $323,381 to $1,793,732 for
the six months ended June 30, 1997 from $1,470,351 for the six months ended June
30, 1996 due to growth in finance contract acquisition activities.
Gain on Sale of Finance Contracts. For six months ended June 30, 1997,
gain on sale of finance contracts amounted to $8,692,144, compared with
$5,743,986 for the comparable 1996 period. The Company completed sales
aggregating approximately $63.8 million in principal amount of finance contracts
and the gain on sale of finance contracts accounted for 83.6% of total revenues
for the current period. For the six months ended June 30, 1996, there were two
securitization transactions totaling a principal amount of $34.4 million
resulting in gain on sale of finance contracts of $5,743,986 which accounted for
76.7% of total revenues. The ratio of gain on sale to the outstanding balances
of the finance contracts sold for the six months ended June 30, 1997 was 13.6%,
compared with 16.6% for the two transactions completed in the prior year period.
Servicing Fee Income. Servicing fee income increased $157,194 to
$434,402 for the six months ended June 30, 1997 from $277,208 for the six months
ended June 30, 1996 due to growth in securitization activities. The Company was
administering seven securitization trusts at June 30, 1997 compared to three
securitization trusts at June 30, 1996.
Other Income (Loss). For six months ended June 30, 1997, other loss
amounted to $520,788, compared with $0 for the comparable 1996 period. The
Company recorded a charge against earnings for permanent impairment of the
interest-only strip receivable, determined on a disaggregated basis, of $467,926
during the period. Additionally, unrealized loss on the Company's Class B
certificates totaled $52,862 during the six months ended June 30, 1997.
TOTAL EXPENSES
Total expenses of the Company increased $4,147,232 to $8,642,868 for the
six months ended June 30, 1997 from $4,495,636 for the six months ended June 30,
1996. Although operating expenses increased during the six months ended June 30,
1997, the Company's finance contract portfolio grew at a faster rate than the
rate of increase in operating expenses. Total expenses as a percentage of total
principal balance of finance contracts acquired in the period decreased to 12.5%
during the six months ended June 30, 1997 from 13.3% for the six months ended
June 30, 1996.
Provision for Credit Losses. No provision for credit losses on finance
contracts held for future securitizations was necessary during the six months
ended June 30, 1997 compared with a provision of $63,484 for the six months
ended June 30, 1996.
Interest Expense. Interest expense increased by $690,877 due to higher
borrowing volumes associated with the revolving credit facilities, along with
increased debt issuance costs amortization of $430,733.
Salaries and Benefits. Salaries and benefits increased $1,426,578 to
$3,272,625 for the six months ended June 30, 1997 from $1,846,047 for the six
months ended June 30, 1996. This increase was due
32
<PAGE>
<PAGE>
primarily to an increase in the number of the Company's employees necessary to
handle the increased contract acquisition volume and the collection activities
on a growing portfolio of finance contracts.
General and Administrative Expenses. General and administrative expenses
increased $1,874,809 to $2,759,157 for the six months ended June 30, 1997 from
$884,348 for the six months ended June 30, 1996. 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, non-employee marketing commissions, communications and office supplies,
and are expected to increase as the Company continues to grow and also due to
the costs of operating as a public company.
Other Operating Expenses. Other operating expenses (consisting
principally of servicer fees, credit bureau reports and insurance) increased
$218,452 to $782,689 for the six months ended June 30, 1997 from $564,237 for
the six months ended June 30, 1996. This increase was due to increased finance
contract acquisition volume.
NET INCOME
In the six months ended June 30, 1997, net income decreased $730,012 to
$1,145,897 from $1,875,909 for the six months ended June 30, 1996. The decrease
in net income was primarily attributable to an increase in infrastructure costs
to support higher finance contract acquisition volume. The principal balance of
finance contracts acquired increased $35.4 million to $69.3 million for the six
months ended June 30, 1997 from $33.9 million for the six months ended June 30,
1996, including $12.5 million of finance contracts which the Company acquired in
March 1997 from Credit Suisse First Boston.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total Revenues
Total revenues increased $9.1 million to $14.0 million for the
year ended December 31, 1996 from $4.9 million for the year ended December 31,
1995 due to growth in finance contract acquisition and securitization activity.
Net Interest Income. Net interest income decreased $644,300 to
$136,794 for the year ended December 31, 1996 from $781,094 for the year ended
December 31, 1995. The decrease in net interest income was primarily due to a
reduction in the average daily balance of finance contracts held for sale. This
was due to the fact that the Company securitized its production quarterly in
1996 versus a single securitization in 1995. Interest income also declined due
to an increase in overall net borrowing costs and fees associated with
non-recourse term loans and Revolving Credit Facilities. Finally, there is no
spread between the interest rate earned on the Class B certificates and the
related non-recourse loans collateralized by such certificates. The increase in
the outstanding balance of the Class B certificates and the related debt causes
net interest income to narrow. The average APR of outstanding finance contracts
was 19.45% at December 31, 1996, compared with 19.3% at December 31, 1995.
Gain on Sale of Finance Contracts. For the year ended December
31, 1996, gain on sale of finance contracts amounted to $12.8 million. For the
year ended December 31, 1996, the Company completed four securitizations
aggregating approximately $81.7 million in principal amount of finance contracts
and the gain on sale of finance contracts accounted for 91.6% of total revenues.
For the year ended December 31, 1995, there was one securitization transaction
in the principal amount of $26.3 million. The gain on sale of finance contracts
for this sale transaction accounted for 84.0% of total revenues in 1995.
33
<PAGE>
<PAGE>
Servicing Fee Income. The Company reports servicing fee income
only with respect to finance contracts that are securitized. For the year ended
December 31, 1996, servicing fee income was $657,950, of which $402,016 was
collection agent fees, $154,029 resulted from discount accretion on the excess
servicing receivable, $50,000 was management fees from an affiliated company,
and $51,904 arose from other sources. The Company had completed only one
securitization in 1995, which was completed at December 31, 1995, and had no
servicing fee income for such period.
Total Expenses
Total expenses of the Company increased $4.6 million to $8.4
million for the year ended December 31, 1996 from $3.8 million for the year
ended December 31, 1995. Although operating expenses increased during the year
ended December 31, 1996, the Company's finance contract portfolio grew at a
faster rate than the rate of increase in operating expenses. Total expenses as a
percentage of total percentage balance of finance contracts acquired in the
period decreased slightly to 10.1% during the year ended December 31, 1996 from
12.0% for the year ended December 31, 1995, reflecting improved efficiency in
the Company's operations.
Salaries and Benefits. Salaries and benefits increased $3.2
million to $4.5 million for the year ended December 31, 1996 from $1.3 million
for the year ended December 31, 1995. This increase was due primarily to an
increase in the number of the Company's employees necessary to handle the
increased contract acquisition volume and the collection activities on a growing
portfolio of loans, and 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 $868,506 to $2.3 million for the year ended
December 31, 1996 from $1.5 million for the year ended December 31, 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 as the Company continues to grow and also 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
$156,628 to $1.1 million for the year ended December 31, 1996 from $963,017 for
the year ended December 31, 1995. This increase was due to increased finance
contract acquisition volume.
Net Income
In the year ended December 31, 1996, net income increased to
$3.6 million from $873,487 for the year ended December 31, 1995. Net income for
the year ended December 31, 1996 includes an extraordinary charge of $100,000,
net of income tax benefits of $50,000, which represents the prepayment penalty
associated with the early redemption of the Class B Certificate Notes from the
1995-A securitization. The increase in net income was primarily attributable to
an increase in the number of finance contracts securitized during 1996: $81.7
million, compared to $26.3 million in 1995.
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.
34
<PAGE>
<PAGE>
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 $26.3 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 securitization.
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 12.0% 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.
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, increased $100,883 to $329,312 at June 30,
1997, from $228,429 at December 31, 1996. 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 basis.
Trust Receivable. At the time a securitization closes, the Company's
securitization subsidiary is required to fund a cash reserve account within the
trust to provide additional credit support for the senior investor securities.
Additionally, depending on the structure of the securitization, a portion of the
future excess spread cash flows from the trust is required to be deposited in
the cash reserve account to increase the initial deposit to a specified level.
Amounts on deposit in cash reserve accounts are also reflected as advances to
the relevant trust under the item "Cash flows from investing activities" in the
Company's consolidated statements of cash flows. The initial cash reserve
deposits for the December 1995, March 1996, June 1996, September 1996, December
1996 and March 1997 securitizations and the June 1997 sale into the
unconsolidated special purpose subsidiary were $525,220, $331,267, $356,658,
$445,934, $500,000, $560,744 and $715,971, respectively, equivalent to 2% of the
initial principal amount of the senior trust securities. A portion of excess
spread cash flows will increase such reserves until they reach 6%.
Other Assets. On June 30, 1997, the Daiwa Facility was restructured so
that advances thereunder and the finance contracts securing them could be
derecognized pursuant to SFAS No. 125 by sales into an unconsolidated
subsidiary. Accordingly, as of such date, $33,000,000 of advances were
outstanding and secured by $35,798,557 of finance contracts in the Company's
unconsolidated qualifying special purpose subsidiary. In conjunction with this
transaction, the Company retained a partial interest in the loans sold of
$2,497,485, representing the difference between the principal amount of the
finance contracts transferred and the amount funded through the variable rate
funding notes. This amount was realized upon conversion of the secured
variable funding notes into term notes during the August securitization.
35
<PAGE>
<PAGE>
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 investor
securities. Additionally, depending on the structure of the securitization, a
portion of the future excess spread cash flows from the trust is required to be
deposited in the cash reserve account to increase the initial deposit to a
specified level. Amounts on deposit in cash reserve accounts are also reflected
as advances to the relevant trust under the item "Cash flows from investing
activities" in the Company's consolidated statements of cash flows. The initial
cash reserve deposits for the December 1995, March 1996, June 1996, September
1996, December 1996 and March 1997 securitizations were $525,220, $331,267,
$356,658, $445,934, $500,000 and $560,744, 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%.
Interest-Only Strip Receivable. The following table provides
historical data regarding the interest only strip receivable (formerly known as
excess servicing receivable):
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
-------------------
(Unaudited)
<S> <C>
Beginning balance $4,247,274
Unrealized appreciation 1,453,984
Additions 5,643,627
Accretion 102,783
Impairment charge (467,926)
------------
Ending Balance $10,979,742
</TABLE>
DELINQUENCY EXPERIENCE
The following table reflects the delinquency experience of the Company's
finance contract portfolio (dollars in thousands):
<TABLE>
<CAPTION>
December 31, June 30, 1997
1996
----------------------------------
<S> <C> <C>
Principal balance of finance contracts $104,889 $154,653
outstanding
Delinquent finance contracts 1:
60-89 days past due 1,827 1.74% 4,038 2.61%
90 days past due and over 1,328 1.27% 2,786 1.80%
==================================
Total $3,155 3.01% $6,824 4.41%
- -------------------------------------------==================================
1 Percentage based upon outstanding balance. Excludes finance contracts where
the underlying vehicle is repossessed, the borrower is in bankruptcy, or there
are insurance claims filed.
</TABLE>
CREDIT LOSS EXPERIENCE
An allowance for credit losses is maintained for contracts held for
sale. The Company reports a provision for credit losses on finance contracts
held for sale. Management evaluates the reasonableness of the assumptions
employed by reviewing credit loss experience, delinquencies, repossession
trends, the size of the finance contract portfolio and general economic
conditions and trends. If necessary, assumptions will be changed in the future
to reflect historical experience to the extent it deviates materially from that
which was assumed. Since inception, the Company's assumptions have been
consistent and are adequate based upon actual experience. Accordingly, no
additional charges to earnings to date have been necessary to accommodate more
adverse experience than anticipated.
If a delinquency exists and a default is deemed inevitable or the
collateral is in jeopardy, and in no event later than the 90th day of
delinquency, the Company's Collections Department will initiate the repossession
of the financed vehicle. Bonded, insured outside repossession agencies are used
to secure involuntary 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 relevant 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 related
deficiency balance endorsement are then filed.
36
<PAGE>
<PAGE>
Because of the Company's limited operating history, its finance contract
portfolio is somewhat unseasoned. This effect on the delinquency statistics can
be observed in the comparison of quarter ended June 30, 1997 versus 1996
delinquency percentages. The portfolio is tangibly more seasoned as of June 30,
1997 versus June 30, 1996. Accordingly, delinquency and charge-off rates in the
portfolio may not fully reflect the rates that may apply when the average
holding period for finance contracts in the portfolio is longer. Increases in
the delinquency and/or charge-off rates in the portfolio would adversely affect
the Company's ability to obtain credit or securitize its receivables.
REPOSSESSION EXPERIENCE - STATIC POOL ANALYSIS
Because the Company's finance contract portfolio is continuing to grow
rapidly, management does not manage 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
in dollars of the Company's portfolio performance from inception through June
30, 1997. In this table, all finance contracts have been segregated by quarter
of acquisition. All repossessions have been segregated by the quarter in which
the repossessed contract was originally acquired by the Company. Cumulative
repossessions equals the ratio of repossessions as a percentage of finance
contracts acquired for each segregated quarter. Annualized repossessions equals
an annual equivalent of the cumulative repossession ratio for each segregated
quarter. This table provides information regarding the Company's repossession
experience over time. For example, recently acquired finance contracts
demonstrate very few repossessions because properly underwritten finance
contracts to subprime consumers generally do not default during the initial term
of the contract. Between approximately one year and 18 months of seasoning,
frequency of repossessions on an annualized basis appear to reach a plateau.
Based on industry statistics and the performance experience of the Company's
finance contract portfolio, the Company believes that finance contracts seasoned
in excess of approximately 18 months will start to demonstrate declining
repossession frequency. The Company believes this may be due to the fact that
the borrower perceives that he or she has equity in the vehicle. The Company
also believes that since the loans generally amortize more quickly than the
collateral depreciates, losses and/or repossessions will decline over time.
<TABLE>
<CAPTION>
Repossession Frequency
----------------------------------------------
Principal Balance of Principal Balance
Year and Quarter of Repossessions by of Contracts
Acquisition Quarter Acquired Cumulative Annualized Acquired
1 2
- ------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1994
Q3 $ 21.93 22.53% 7.84% $ 93.17
Q4 543.74 22.93% 8.34% 2,371.60
1995
Q1 1,372.16 21.74% 8.70% 6,310.42
Q2 1,182.94 19.21% 8.54% 6,157.44
Q3 1,319.80 18.32% 9.16% 7,205.90
Q4 2,340.22 19.20% 10.97% 12,188.86
1996
Q1 2,609.80 16.88% 11.25% 15,459.93
Q2 2,817.73 15.26% 12.21% 18,458.82
Q3 2,482.84 10.46% 10.46% 23,735.10
</TABLE>
37
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Repossession Frequency
----------------------------------------------
Principal Balance of Principal Balance
Year and Quarter of Repossessions by of Contracts
Acquisition Quarter Acquired Cumulative Annualized Acquired
1 2
- ------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Q4 1,460.59 5.66% 7.55% 25,802.89
1997
Q1 845.00 2.48% 4.97% 34,014.88
Q2 29.72 .08% .34% 35,273.26
</TABLE>
- ----------------------
1 For each quarter, cumulative repossession frequency equals the number of
repossessions divided by the number of contracts acquired
2 Annualized repossession frequency converts cumulative repossession frequency
into an annual equivalent (e.g., for Q4 1994, principal balance of $543.74
thousand in repossessions divided by principal balance of $2.372 million in
contracts acquired, divided by 11 quarters outstanding times four equals an
annual repossession frequency of 8.34%).
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. As less of
the Company's finance contracts are acquired with credit deficiency insurance,
the Company expects its net loss per repossession to increase. The following
table demonstrates the net charge-off per repossessed automobile since
inception.
<TABLE>
<CAPTION>
From August 1,
1994 (Inception)
to June 30, 1997
------------------
<S> <C>
Number of finance contracts acquired 16,079
Number of vehicles repossessed 1,416
Repossessed units disposed of 608
Repossessed units awaiting disposition 2 808
Cumulative gross charge-offs 1 $6,687,060
Costs of repossession 1 165,903
Proceeds from auction, physical damage insurance and refunds 1 (4,088,756)
------------------
Net loss $ 2,764,207
Deficiency insurance settlement received 1 (1,653,352)
==================
Net charge-offs 1 $1,110,855
==================
Net charge-offs per unit disposed $ 1,827
Recoveries as a percentage of cumulative gross charge-offs 3 85.87%
</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, 1997.
2 The vehicles may have been sold at
auction; however AutoBond might not have received all insurance proceeds as of
June 30, 1997.
3 Not including the costs of repossession which are reimbursed by
the securitization trusts.
38
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily funded its operations and the
growth of its finance contract portfolio through seven principal sources of
capital: (i) cash flows from operating activities; (ii) funds provided from
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; (vi)
proceeds from the issuances of subordinated debt and capital contributions of
principal shareholders and (vii) an initial public offering of common stock.
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 six months ended June 30, 1996 and 1997, $33.4 million and $66.9 million,
respectively, was used by the Company to purchase finance contracts, $324,957
and $809,626, respectively, was received as payments on finance contracts, and
$35.8 million and $65.6 million, respectively, was received from sales of
finance contracts, primarily through securitizations. The Company used $687,925
and $1,276,715 to fund cash reserve accounts for the securitizations completed
in the six months ended June 30, 1996 and 1997, respectively.
Significant activities comprising cash flows from financing activities
include net borrowings (repayments) under revolving credit facilities of
$(913,129) and $7.0 million for the six months ended June 30, 1996 and 1997,
respectively.
Revolving Credit Facilities. The Company obtains a substantial portion
of its working capital for the acquisition of finance contracts through
revolving credit facilities. Under a warehouse facility, the lender generally
advances amounts requested by the borrower on a periodic basis, up to an
aggregate maximum credit limit for the facility, for the acquisition and
servicing of finance contracts or other similar assets. Until proceeds from a
securitization transaction are used to pay down outstanding advances, as
principal payments are received on the finance contracts, the principal amount
of the advances may be paid down incrementally or reinvested in additional
finance contracts on a revolving basis.
At June 30, 1997, the Company had no outstanding balance on a $10.0
million revolving credit facility (the "Sentry Facility") with Sentry Financial
Corporation ("Sentry"), which expires on December 31, 2000. The proceeds from
borrowings under the Sentry Facility are used to acquire finance contracts, to
pay applicable 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% (10.25% at June 30, 1997).
The Sentry Facility contains certain conditions and imposes certain
requirements, including, among other things, minimum net worth and cash and cash
equivalent balances in the reserve accounts. In April 1996, the Company paid a
one-time commitment fee of $700,000 to Sentry. Under the Sentry Facility, the
Company incurred interest expense of $241,767 for the six months ended June 30,
1997.
The Company and its wholly owned subsidiary, AutoBond Funding
Corporation II, entered into a $50 million revolving warehouse facility (the
"Daiwa Facility") with Daiwa Finance Corporation ("Daiwa") effective as of
February 1, 1997. Advances under the Daiwa Facility mature on the earlier of 120
days following the date of the advance or March 31, 1998. The proceeds from the
borrowings under the Daiwa Facility are to be used to acquire finance contracts
and to make deposits to a reserve account. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the loans funded be covered by default deficiency
insurance. Interest is payable upon maturity of the advances and accrues at the
lesser of (x) 30 day LIBOR plus 1.15% (6.84% at June 30, 1997), or (y) 11% per
annum. The Company also pays a non-utilization fee of .25% per annum on the
unused amount of the line of credit. Pursuant to the Daiwa Facility, the Company
paid a $243,750
39
<PAGE>
<PAGE>
commitment fee. The debt issuance cost is being amortized as interest expense on
a straight line basis through March 1998. The Daiwa Facility contains certain
covenants and representations similar to those in the agreements governing the
Company's existing securitizations including, among other things, delinquency
and repossession triggers. At June 30, 1997, advances under the Daiwa Facility
totaled $7,000,000, in addition to $33,000,000 in advances derecognized pursuant
to SFAS No. 125. The Company incurred interest expense under the Daiwa Facility
of approximately $445,232 during the six months ended June 30, 1997.
On June 30, 1997, the Daiwa Facility was restructured so that advances
thereunder and the finance contracts securing them could be derecognized
pursuant to SFAS No. 125 by sales into an unconsolidated
subsidiary. Accordingly, as of such date, $33,000,000 of advances were
outstanding and secured by $35,798,557 of finance contracts in the Company's
qualifying unconsolidated special purpose subsidiary, AutoBond Master Funding
Corporation. These secured variable funding notes are convertible into term
notes prior to March 1998 at the option of the noteholder.
Notes Payable. Pursuant to the an agreement (the "Securities Purchase
Agreement") entered into on June 30, 1997, the Company issued by private
placement $2,000,000 in aggregate principal amount of senior secured convertible
notes ("Convertible Notes"). Interest is payable quarterly at a rate of 18% per
annum until maturity on June 30, 2000. If the Company pays down the Convertible
Notes in full prior to June 30, 1998, the holders will have no conversion
rights. The Convertible Notes, collateralized by the interest-only strip
receivables from the Company's first four securitizations, are convertible into
shares of common stock of the Company upon the earlier to occur of (i) an event
of default on the Convertible Notes and (ii) June 30, 1998, through the close of
business on June 30, 2000, subject to prior redemption. The conversion price is
equal to the outstanding principal amount of the Convertible Note being
converted divided by the lesser of (x) $5.00 (as adjusted by the terms of the
Securities Purchase Agreement) and (y) 85% of the average of the five lowest
closing bid prices of the Company's common stock on the Nasdaq Stock Market, or
such other exchange or market where the common stock is then traded during the
60 trading days immediately preceding the date the Convertible Note is converted
or the applicable date of repayment (subject to adjustment under certain
circumstances specified in the Securities Purchase Agreement). The Company also
paid certain debt issuance costs to the purchaser totaling $25,000, which is
being amortized as interest expense on a straight line basis through June 30,
2000.
Also pursuant to the Securities Purchase Agreement, the Company issued
warrants which upon exercise allow the holders to purchase up to 200,000 shares
of common stock at $4.225 per share. The warrants are exercisable to the extent
the holders thereof purchase up to $10,000,000 of the Company's subordinated
asset-backed securities before June 30, 1998.
Securitization Program. In its securitization transactions through the
end of 1996, the Company sold pools of finance contracts to a special purpose
subsidiary, which then assigned the finance contracts to a trust in exchange for
cash and certain retained beneficial interests in future excess spread cash
flows. The trust issued two classes of fixed income investor certificates:
"Class A Certificates" which were 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 were typically retained by the Company's
securitization subsidiary and which collateralize borrowings on a non-recourse
basis. The Company also funded a cash reserve account that provides credit
support to the Class A Certificates. The Company's securitization subsidiaries
also retained a "Transferor's Interest" in the contracts that is subordinate to
the interest of the investor certificate holders.
In the Company's March 1997 and August 1997 securitization transactions,
the Company sold a pool of finance contracts to a special purpose subsidiary,
which then assigned the finance contracts to an indenture trustee. Under
the trust indenture, the special purpose subsidiary issued senior classes of
fixed income investor notes: which were sold to investors, generally at par,
with fixed coupons. The subordinated notes represent a senior interest
in certain excess spread cash flows from the finance contracts, In addition,
the securitization subsidiary retained rights to the remaining excess
spread cash flows.
40
<PAGE>
<PAGE>
basis. The Company also funded cash reserve accounts that provides credit
support to the senior class or classes.
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 and August 1997, 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, June 1996, September 1996, December 1996, March 1997
and August 1997, the Company securitized approximately $26.2 million,
$16.6 million, $17.8 million, $22.3 million, $25.0 million, $28.0 million
and $34.5 million, respectively, in nominal 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, 1997, the Company held interest-only strip receivables and Class B
Certificates totaling $19.7 million, substantially all of which had been pledged
to collateralize notes payable of $10.7 million. The Class C Notes from the
March 1997 transaction were sold to investors during March 1997.
Initial Public Offering. On November 14, 1996, the Company completed the
initial public offering of its Common Stock. The closing comprised 825,000
shares sold by the Company (including 75,000 shares issued pursuant to the
exercise of the underwriters over allotment option) and 250,000 shares sold by
the Selling Shareholders. With a price to public of $10 per share and an
underwriting discount at $.70 per share, the Company received gross proceeds of
$7,725,000 from the offering, from which it paid offering expenses of
approximately $1.7 million. The net proceeds were utilized for working capital,
repayment of subordinated debt of $300,000 and investment in finance contracts.
Although management believes the proceeds of the initial public offering
of the Company's common stock, proceeds from finance contracts, securitization
proceeds, issuance of convertible notes and borrowings under its warehouse
facilities should be sufficient to fund expansion of the Company's business
through the end of 1997, management also believes that additional capital
through equity or subordinated debt issuances would allow the Company to take
better advantage of growth opportunities. There can be no assurance, however,
that the Company will be able to obtain such additional funding.
The statements contained in this document that are not historical facts
are forward looking statements. Actual results may differ from those projected
in the forward looking statements. These forward looking statements involve
risks and uncertainties, including but not limited to the following risks and
uncertainties: changes in the performance of the financial markets, in the
demand for and market acceptance of the Company's loan products, and in general
economic conditions, including interest rates, presence of competitors with
greater financial resources and the impact of competitive products and pricing;
the effect of the Company's policies; and the continued availability to the
Company of adequate funding sources. Investors are also directed to other risks
discussed in document filed by the Company with the Securities and Exchange
Commission.
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
41
<PAGE>
<PAGE>
equal but less than the maximum interest rate permitted by law, increased costs
of borrowed funds 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
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128, which the Company will be required
to implement effective December 31, 1997, specifies the computation,
presentation, and disclosure requirements for earnings per share. The Company
believes the implementation of SFAS No. 128 will not have a significant effect
on the earnings per share calculation.
42
<PAGE>
<PAGE>
MARKET FOR COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
On November 8, 1996, the Company's Common Stock was listed for
quotation and began trading on Nasdaq National Market ("Nasdaq") under the
symbol "ABND". Prior to such date, the Company's stock was closely held and not
traded on any regional or national exchange.
High and Low Sale Prices by Period
<TABLE>
<CAPTION>
Period High Low
- ------ ---- ---
<S> <C> <C>
November 8, 1996-December 31, 1996 $11 $9 1/4
January 1, 1997-March 31, 1997 $10 3/8 $4
April 1, 1997-June 30, 1997 $4 3/4 $2 1/4
</TABLE>
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. As of July 11, 1997, the Company had approximately 16
stockholders of record, exclusive of holders who own their shares in "street" or
nominee names.
The Company has not paid and does not presently intend to pay cash
dividends on its Common Stock. The Company anticipates that its earnings for the
foreseeable future will be retained for use in operation and expansion of
business. Payment of cash dividends, if any, in the future will be at the sole
discretion of the Company's Board of Directors and will depend upon the
Company's financial condition, earnings, current and anticipated capital
requirements, terms of indebtedness and other factors deemed relevant by the
Company's Board of Directors.
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and principal 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)................... 37 Chairman of the Board and Chief Executive
Officer and Director
Adrian Katz.............................. 32 Vice Chairman of the Board and Chief
Operating Officer and Director
John S. Winsauer(1)...................... 34 Secretary and Director
R.T. Pigott, Jr.......................... 42 Vice President and Chief Financial Officer
Alan E. Pazdernik........................ 56 Vice President-Credit
Robert R. Giese.......................... 57 Vice President-Collections
Robert S. Kapito......................... 39 Director
Manuel A. Gonzalez....................... 46 Director
Stuart A. Jones.......................... 41 Director
Thomas I. Blinten........................ 40 Director
</TABLE>
- ------------------
(1) Messrs. William and John Winsauer are brothers.
Directors serve for annual terms. Officers are elected by the Board of
Directors and serve at the discretion of the Board.
43
<PAGE>
<PAGE>
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 and Mr. Winsauer's
investments in securitizations sponsored by Mr. Winsauer. In the late 1980s, Mr.
Winsauer began selling whole loan packages of contracts originated by the
Gillman Companies, a large dealership group based on 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 Mr. Winsauer. 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 he was
responsible for structuring asset-backed, commercial and residential
mortgage-backed securities. Form 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 structure of new
securitizations. Mr. Katz has been involved in the sale and financing through
securitization of consumer assets since 1985.
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.
R.T. Pigott, Jr., Vice President and Chief Financial Officer
Mr. Pigott joined the Company in April 1997 as its Vice President and
Chief Financial Officer. From 1988 to 1996, Mr. Pigott was Executive Vice
President and Chief Financial Officer of Franklin Federal Bancorp of Austin,
Texas. Mr. Pigott is a CPA with approximately twenty years experience in finance
services, including six years as an audit manager with a big six accounting
firm.
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
44
<PAGE>
<PAGE>
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
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
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
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.
Thomas I. Blinten-Director
From November 1995 to date, Thomas Blinten was 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
The Board of Directors 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 is 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
45
<PAGE>
<PAGE>
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 is 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, for the years ended December 31, 1996
and 1995, the annual and long-term compensation of the Company's highest paid
employees ("named executives"). These were the only employees whose annual
compensation exceeded $100,000 for the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
ANNUAL COMPENSATION AWARDS
----------------------------------------------------------- -------------
SECURITIES
BASE OTHER ANNUAL UNDERLYING ALL OTHER
NAMES AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION
- ------------------------------ ------------- ------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William D. Winsauer(1).......... 1996 $240,000 0 0 40,000 0
Chairman of the Board and 1995 0 0 0 0 0
Chief Executive Officer
Adrian Katz..................... 1996 150,000 0 0 20,000 0
Vice Chairman of the Board 1995 18,750 0 0 0 75,742(2)
John S. Winsauer................ 1996 120,000 0 0 20,000 0
Director and Secretary 1995 40,000 0 0 0 0
Charles Pond(3)................. 1996 180,000 90,000 0 20,000 0
President 1995 - - - - -
Robert G. Barfield (4).......... 1996 78,000 0 88,945 15,000 0
Vice President, Marketing 1995 75,500 32,175 0 0 0
William J. Stahl(5)............. 1996 120,000 0 0 25,000 0
Vice President and Chief 1995 85,000 0 0 0 0
Financial Officer
</TABLE>
- ------------------
(1) Mr. Winsauer's 1996 base salary is annualized; actual payments were
$160,000. Although Mr. Winsauer received no compensation in the fiscal
year 1995, he received loans from the Company in the aggregate amount of
$132,359.
(2) Stated value of compensation in the form of stock issuance.
(3) Resigned from the Company, effective February 15, 1997, whereupon all
options terminated. Mr. Pond received an agreed bonus of $90,000 upon
completion of the Company's initial public offering.
(4) Resigned from the Company, effective February 15, 1997, whereupon all
options terminated. Mr. Barfield received performance-based commissions
of $88,945 in 1996.
(5) Resigned from the Company, effective March 31, 1997, whereupon all options
terminated.
Under the Company's compensation structure for fiscal 1997, the highest
paid officers with salaries in excess of $100,000 will be as follows (annual
salary in parentheses): William O. Winsauer ($240,000); Adrian Katz ($150,000);
John S. Winsauer ($120,000); and Ted Pigott ($96,000 in base salary and $26,000
in bonus).
46
<PAGE>
<PAGE>
STOCK OPTIONS
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------
NUMBER OF % OR TOTAL
SECURITIES OPTIONS GRANTED EXERCISE GRANT DATE
UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED FISCAL 1996 ($/SH)(1) DATE VALUE(2)
- ------------------------------- --------------- ---------------------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
William O. Winsauer............. 40,000 14.1% $10.50 11/14/2006 $4.88
John S. Winsauer................ 20,000 7.0 10.50 11/14/2006 4.88
Adrian Katz..................... 20,000 7.0 10.50 11/14/2006 4.88
Robert S. Kapito................ 3,000 1.1 10.50 11/14/2006 4.88
Manuel A. Gonzalez.............. 3,000 1.1 10.50 11/14/2006 4.88
Stuart A. Jones................. 3,000 1.1 10.50 11/14/2006 4.88
Thomas I. Blinten............... 3,000 1.1 10.50 11/14/2006 4.88
</TABLE>
- ------------------
(1) The options were granted under the Company's Option Plan on November 14,
1996. The exercise price is the fair market value of the underlying stock
on the date the options were granted. The options vest 1/3 per year at the
end of each of the three years following the date of grant.
(2) Extracted from the Notes to the Company's audited financial statements.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Messrs. William Winsauer and Katz 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) 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 Mr.
Winsauer, (ii) disability of Mr. Winsauer which continues for a period of six
months, following expiration of such six months, (iii) the 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 remaining years
47
<PAGE>
<PAGE>
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 liability
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 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.
OPTION PLAN
The Board of Directors of the Company has adopted and the shareholders
of the Company has approved, the Company's 1996 Stock Option Plan (the
"Option Plan"), under which stock options may be granted to directors, officers
and 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 515,000 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 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 is 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.
48
<PAGE>
<PAGE>
All directors, officers and 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 service, 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.
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 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 made initial grants of stock options under the Option
Plan to certain of the Company's directors, 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 has granted options to purchase a total of
40,000 shares, and John S. Winsauer, Charley A. Pond and Adrian Katz have each
been granted options to purchase 20,000 shares. The remaining options to
purchase 200,000 shares were granted to other employees and non-employee
directors. The employee options become vested and exercisable over a three-year
period in equal annual installments beginning on the first anniversary of the
grant date. The non-employee director options to purchase 12,000 shares are
described below under "Director Compensation." 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.
49
<PAGE>
<PAGE>
DIRECTOR COMPENSATION
In return for their services to the Company, each of the non-employee
directors are 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 granted under the Option Plan to
purchase 3,000 shares of the Company's Common Stock.
LIMITATION OF DIRECTORS' LIABILITY AND LNDEMNIFICATION 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.
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.
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),
and reimbursement of a payment of $89,000 made by the Company to Sentry in April
1996 on behalf of Mr. Winsauer, were paid from the sale of shares by William
Winsauer as part of the Offering. Effective September 26, 1996 the Company was
released from its guarantee of the shareholder's debt.
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 December 31,
1996, the outstanding amounts of these loans increased to $201,000 and $34,000,
respectively. Such loans bear no interest and have no repayment terms. As of
March 20, 1997, these advances were repaid in full. See Note 12 to Notes to
Consolidated Financial Statements.
Historically, the Company and ABI, which is wholly-owned by William O.
Winsauer, have provided services for each other on a regular basis. In this
regard, the Company had net advances due from ABI of $192,547 as of June 30,
1997, 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
50
<PAGE>
<PAGE>
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. Amounts due to the
Company under the ABI Management Agreement amounted to $192,547 at June 30,
1997.
Since July 1994, ABI has also provided certain administrative services
to Intercontinental Brokerage Inc. ("Intercontinental"), an independent
insurance broker in connection with Intercontinental's obligations as
administrator of pools of finance contracts subject to the Interstate Policy.
ABI received fees from Intercontinental totalling approximately $752,000 for the
period from July 1994 to March 1997, including with respect to finance contracts
as to which the Company has paid administrative fees to Intercontinental. Since
March 1997 the Company has elected not to insure finance contracts under the
Interstate Policy and ABI will not receive any future fees from Intercontinental
with respect to such finance contracts.
BENEFICIAL OWNERSHIP OF COMMON SHARES
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 21, 1997 by (i)
ach person who is known by the Company to own beneficially more than 5% of its
outstanding Common Stock, (ii) each director and nominee for director, (iii)
each named executive officer, and (iv) all executive officers and directors as a
group.
51
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------
AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP OWNED
- ----------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
William O. Winsauer............................................ 3,643,062 56.6%
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
John S. Winsauer............................................... 1,225,688 19.0
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Adrian Katz 568,750 8.8
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Robert S. Kapito............................................... 16,000 *
BlackRock Financial Management, Inc.
345 Park Avenue
New York, New York 10154
Manuel A. Gonzalez............................................. 500 *
NorthPoint Pontiac Buick GMC
22211 Eastex Freeway
Kingwood, Texas 77339
Thomas I. Blinten.............................................. 5,000 *
Nomura Capital Services, Inc.
2 World Financial Center
Building B
New York, New York 10281-1198
Stuart A. Jones................................................ 200 *
Stuart A. Jones Finance and Investments
200 Expressway Tower
6116 North Central Expressway
Dallas, Texas 75206
-------------------- -------------------
Total (all executive officers and directors as a group)........ 5,459,200 84.4%
==================== ===================
</TABLE>
DESCRIPTION OF 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, 1997, there were 6,512,500 shares of
Common Stock outstanding. Holders of Common Stock are not entitled to any
preemptive rights. The Common Stock is neither redeemable nor
52
<PAGE>
<PAGE>
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.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the Common
Stock is American Stock Transfer & Trust 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 March 31, 1997 there were no issued and
outstanding shares of Preferred Stock and there is no current intention to issue
any Preferred Stock.
CONVERTIBLE NOTES. The Notes are convertible upon the earlier to occur
of (i) an event of default on the Notes and (ii) June 30, 1998, through the
close of business on June 30, 2000, subject to prior redemption, into shares of
Common Stock of the Company at a price equal to the outstanding principal amount
of the Note being converted divided by the lesser of (x) $5.00 (or the price as
adjusted by the terms of the Securities Purchase Agreement) and (y) 85% of the
average of the five lowest closing bid prices of the Company's Common Stock on
the Nasdaq National Market, or such other exchange or market where the Common
Stock is then traded during each of the 60 Trading Days immediately preceding
the date the Note is converted or the applicable date of repayment (subject to
adjustment under certain circumstances specified in the Securities Purchase
Agreement). As of the date of this Prospectus, the aggregate principal amount of
Notes outstanding is $2,000,000, which may be converted into 617,165 shares of
Common Stock.
WARRANTS
The Company has outstanding warrants (the "Representative's
Warrants") which were issued in favor of The Boston Group, L.P. (the
"Representative") in connection with the Company's initial public offering
and Warrants with respect to its Common Stock which were issued on
June 30, 1997 in connection with the issuance of the Notes.
53
<PAGE>
<PAGE>
The Company agreed to sell to the Representative, for $50,
Representative's Warrants to purchase up to 100,000 shares of Common Stock at
an exercise price per share equal to 120% of the actual public offering price
per share. The Representative's Warrants are exercisable for a period of four
years beginning November 1997. The Representative's Warrants may not be sold,
transferred, assigned or hypothecated except to the officers or partners of the
Representative or, beginning November 1997, to the employees of the
Representative. The Representative's Warrants include a net exercise provision
permitting the holder, upon consent of the Company, to pay the exercise price by
cancellation of a number of share with a fair market value equal to the exercise
price of the Representative's Warrants.
The Representative's Warrants provide certain rights with respect to
the registration under the Securities Act of up to 100,000 shares of Common
Stock issuable upon exercise thereof. The holders of the shares issuable upon
exercise of the Representative's Warrants may require the Company to file a
registration statement under the Securities Act with respect to such shares for
a period of four years beginning November 1997. In addition, if the Company
registers any of its Common Stock for its own account during the four year
period beginning November 1997, the holders of the shares issuable upon exercise
of the Representative's Warrants are entitled to include their shares of Common
Stock in the registration.
The Warrants entitle the holders of such Warrants, upon exercise of a
Warrant, to purchase from the Company 100,000 shares of its Common Stock
(the "Warrant Shares") at $4.225 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
dividends, stock splits, dilutive issuances of additional Common Stock,
consolidation of outstanding Common Stock shares, issuance of additional
warrants or other rights, or issuance of securities convertible into
Common Stock of the Company. The Company is obligated to register the shares of
Common Stock issuable upon exercise of the Warrants in accordance with the terms
of a Registration Rights Agreement between the Company and the Warrant Holders
(the "Registration Rights Agreement"). Under the terms of such Registration
Rights Agreement, the Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock issuable under the Warrants.
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
54
<PAGE>
<PAGE>
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 BOOKS AND RECORDS
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 books and
records of the Company, provided that a written demand setting forth a proper
purpose of such examination is made.
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 one of the directors of the Company or by the
holders of at least ten percent of all of the Common Stock entitled to vote at
such meeting
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
the 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
55
<PAGE>
<PAGE>
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 prove 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 exchange and sales of substantially all assets of the
corporation.
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.
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.
56
<PAGE>
<PAGE>
SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION
The Selling Shareholders are (i) Steven W. Bischoff, in the case of
18,811 of the Shares (0.29% of the Company's total outstanding shares), and
(ii) two institutional investors who will hold the Shares upon conversion of the
Notes or exercise of the Warrants. Bischoff acquired his shares pursuant to to
warrants, exercisable at $0.53 per share, issued in March 1996. Pursuant to the
Note and Warrant Placement, Notes in the principal amount of $1,000,000 and
Warrants for 100,000 shares were issued to each of Lion Capital Partners, L.P.
and Infinity Emerging Opportunities Limited. If either of these investors
converted their Notes and exercised their Warrants as of the date of this
prospectus, each would own 408,583 Shares, constituting 5.56% of the Company's
outstanding Shares. Additional information regarding the Selling Shareholders
referred to above, or any transferees thereof, may be set forth from time to
time in prospectus supplements to this Prospectus.
The Notes are convertible upon the earlier to occur of (i) an event of
default on the Notes and (ii) June 30, 1998, through the close of business on
June 30, 2000, subject to prior redemption, into shares of Common Stock of the
Company at a price equal to the outstanding principal amount of the Note being
converted divided by the lesser of (x) $5.00 (or the price as adjusted by the
terms of the Securities Purchase Agreement) and (y) 85% of the average of the
five (5) lowest closing bid prices of the Company's Common Stock on the Nasdaq
National Market, or such other exchange or market where the Common Stock is then
traded during each of the sixty (60) Trading Days immediately preceding the date
the Note is converted or the applicable date of repayment (subject to adjustment
under certain circumstances specified in the Securities Purchase Agreement). As
of the date of this Prospectus, the aggregate principal amount of Notes
outstanding is $2,000,000, which may be converted into 617,165 shares of Common
Stock.
Pursuant to a Registration Rights Agreement dated as of June 30, 1997
(the "Registration Rights Agreement") between the Company and the initial
purchasers named therein entered into in connection with the Note and Warrant
Placement, the Company has filed with the Commission under the Securities Act a
Registration Statement on Form S-1, of which this Prospectus forms a part, with
respect to the resale of the Shares from time to time and has agreed to keep
such registration statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities
covered by such registration statement until the earlier to occur of (i) with
respect to the first Registration Statement, six (6) years after the date of
this Agreement, (ii) with respect to any subsequent Registration Statement, two
(2) years after the issuance of the Additional Shares covered thereby and (iii)
in each case, such time as all of the securities which are the subject of such
registration statement cease to be Registrable Securities (such period, in each
case, the "Registration Maintenance Period") subject, however, to the right of
the Company to suspend effectiveness of the registration statement for not more
than 30 consecutive days or an aggregate of 90 days during such Registration
Maintenance Period, provided the reference to 30 consecutive days shall be 60
consecutive days in the event the Company has publicly announced a transaction
and, in connection therewith, the Company's independent certified public
accountants have delivered a certificate to the Holders stating that it is not
practicable to prepare and file with the Commission all necessary accounting
information associated with such transaction to cause the registration statement
to be reinstated during such 30 day period. As of the date of this Prospectus,
the Warrants may be converted into 200,000 shares of Common Stock at a price of
$4.225/share.
As of the date of this Prospectus, none of the Notes have been converted and
none of the Warrants have been exercised. Sales of the Shares may be made from
time to time by the Selling Stockholders, or, subject to applicable law, by
pledgees, donees, distributees, transferees or other successors in interest.
Such sales may be made on the NASDAQ, in another over-the-counter market, on a
national securities exchange (any of which may involve crosses and block
transactions), in privately negotiated transactions or otherwise or in a
combination of such transactions at prices and at terms then prevailing or at
prices related to the then current market price, or at privately negotiated
prices. In addition, any Shares covered by this Prospectus which qualify for
sale pursuant to Section 4(1) of the Securities Act or Rule 144 promulgated
thereunder may be sold under such provisions rather than pursuant to this
Prospectus. Without limiting the generality of the foregoing, the Shares may be
sold in one or more of the following types of transactions: (a) a block trade in
which the broker-dealer so engaged will attempt to sell the Shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) an exchange
distribution in accordance with the rules of such exchange; (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (e) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate in the
resales.
In connection with distributions of the Shares or otherwise, the Selling
Stockholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Shares registered hereunder in the course of hedging the positions they
assume with Selling Stockholders. The Selling Stockholders may also sell Shares
short and deliver the Shares to close out with such short positions. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the Shares
registered hereunder, which the broker-dealer may resell pursuant to this
Prospectus. The Selling Stockholders may also pledge the Shares registered
hereunder to a broker or dealer and upon a default, the broker or dealer may
effect sales of the pledged Shares pursuant to the Prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Stockholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be 'underwriters' within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the Selling
Stockholders, or any other broker-dealer, is acting as principal or agent for
the Selling Stockholders, the compensation to be received by underwriters who
may be selected by the Selling Stockholders, or any broker-dealer, acting as
principal or agent for the Selling Stockholders and the compensation to be
received by other broker-dealers, in the event the compensation of such other
broker-dealers is in excess of usual and customary commissions, will, to the
extent required, be set forth in a supplement to this Prospectus (the
'Prospectus Supplement'). Any dealer or broker participating in any distribution
of the Shares may be required to deliver a copy of this Prospectus, including
the Prospectus Supplement, if any, to any person who purchases any of the Shares
from or through such dealer or broker.
The Company has advised the Selling Stockholders that during such time as
they may be engaged in a distribution of the Shares included herein they are
required to comply with Regulation M promulgated under the Exchange Act. With
certain exceptions, Regulation M precludes any Selling Shareholder, any
affiliated purchases and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the Common Stock.
It is anticipated that the Selling Stockholders will offer all of the
Shares for sale. Further, because it is possible that a significant number of
Shares could be sold at the same time hereunder, such sales, or the possibility
thereof, may have a depressive effect on the market price of the Company's
Common Stock.
57
<PAGE>
<PAGE>
The Company and the Selling Shareholders have agreed to indemnify each
other against certain liabilities arising under the Securities Act. The Company
has agreed to pay all expenses incident to the offer and sale of the Shares by
the Selling Shareholders to the public, other than selling expenses incurred by
the Selling Stockholder and registration expenses to the extent that the Company
is prohibited from paying for such expenses on behalf of the Selling
Shareholders by applicable Blue Sky laws.
The Common Stock of the Company is traded on Nasdaq under the symbol
"ABND."
LEGAL MATTERS
Certain legal matters with respect to the common stock offered hereby
will be passed upon for the Company by Jones, Day, Reavis & Pogue,
Dallas, Texas.
EXPERTS
The consolidated balance sheets as of December 31, 1994, 1995 and 1996,
and the consolidated statements of operations, changes in shareholders' equity,
and cash flows, for the period from August 1, 1994 through December 31, 1994 and
for the years ended December 31, 1995 and December 31, 1996, included in this
prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that 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.
58
<PAGE>
<PAGE>
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), wherefrom investors may obtain copies of the registration
statement and exhibits.
59
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets, June 30, 1997 (unaudited).......................................... F-2
Consolidated Statements of Operations for the Three and Six Month Periods ended
June 30, 1996 and June 30, 1997 (unaudited)................................................. F-3
Consolidated Statements of Shareholders Equity for the Period From
December 31, 1996 through June 30, 1997 (unaudited)........................................ . F-4
Consolidated Statements of Cash Flows for the Six Month Periods
ended June 30, 1996 and June 30, 1997 (unaudited)........................................... F-5
Notes to Consolidated Financial Statements (unaudited).......................................... F-6
Report of Independent Accountants............................................................... F-9
Consolidated Balance Sheets, December 31, 1995 and 1996......................................... F-10
Consolidated Statements of Operations for the Period From August 1, 1994
(Inception) to December 31, 1994, and the Years Ended December 31, 1995
and 1996.................................................................................... F-11
Consolidated Statements of Shareholders' Equity for the Period From
August 1, 1994 (Inception) to December 31, 1994, and the Years
Ended December 31, 1995 and 1996............................................................ F-12
Consolidated Statements of Cash Flows for the Period From August 1, 1994
(Inception) to December 31, 1994, and the Years Ended December 31, 1995
and 1996.................................................................................... F-13
Notes to Consolidated Financial Statements...................................................... F-14
</TABLE>
F-1
<PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTOBOND ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
--------------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,121,342 $ 175,661
Restricted funds 2,981,449 10,483,904
Finance contracts held for sale, net 228,429 329,312
Repossessed assets held for sale, net 152,580 534,263
Class B certificates 10,465,294 8,861,463
Interest-only strip receivable 4,247,274 10,979,742
Debt issuance cost 997,338 954,579
Trust receivable 2,230,003 3,655,427
Due from affiliate 168,847 192,547
Other assets 683,955 4,261,958
==========================
Total assets $26,276,511 $40,428,856
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit facilities $ -- $ 7,000,000
Notes payable 10,174,633 10,653,293
Accounts payable and accrued liabilities 1,474,586 2,829,913
Bank overdraft -- 1,851,327
Payable to affiliate 265,998 282,822
Deferred income taxes 2,075,553 3,180,632
--------------------------
Total liabilities 13,990,770 25,797,987
--------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; no shares
issued
Common stock, no par value; 25,000,000 shares authorized, 1,000 1,000
6,512,500 shares issued and outstanding
Additional paid-in capital 8,617,466 8,617,466
Deferred compensation (11,422) (4,568)
Loans to shareholders (235,071) (2,323)
Unrealized appreciation on interest-only strip receivable -- 959,629
Retained earnings 3,913,768 5,059,665
--------------------------
Total shareholders' equity 12,285,741 14,630,869
--------------------------
Total liabilities and shareholders' equity $26,276,511 $40,428,856
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------
1996 1997 1996 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Interest income ..................... $ 665,719 $ 1,279,640 $ 1,470,351 $ 1,793,732
Gain on sale of finance contracts ... 3,042,641 5,116,397 5,743,986 8,692,144
Servicing fee income ................ 106,284 242,490 277,208 434,402
Other income (loss) ................. -- (527,701) -- (520,788)
--------------------------------------------------------------
Total revenues .................... 3,814,644 6,110,826 7,491,545 10,399,490
--------------------------------------------------------------
Expenses:
Provision for credit losses ......... 48,500 -- 63,484 --
Interest expense .................... 544,497 955,679 1,137,520 1,828,397
Salaries and benefits ............... 1,056,828 1,732,971 1,846,047 3,272,625
General and administrative .......... 597,500 1,543,133 884,348 2,759,157
Other operating expenses ............ 202,067 393,675 564,237 782,689
--------------------------------------------------------------
Total expenses .................... 2,449,392 4,625,458 4,495,636 8,642,868
--------------------------------------------------------------
Income before income taxes and ........ 1,365,252 1,485,368 2,995,909 1,756,622
extraordinary loss
Provision for income taxes ............ 460,000 518,499 1,020,000 610,725
--------------------------------------------------------------
Income before extraordinary loss ...... 905,252 966,869 1,975,909 1,145,897
Extraordinary loss, net of tax benefits
of $50,000 (100,000) -- (100,000) --
==============================================================
Net income ...................... $ 805,252 $ 966,869 $ 1,875,909 $ 1,145,897
==============================================================
Income per common share:
Income before extraordinary loss .... $ 0.16 $ 0.15 $ 0.35 $ 0.18
Extraordinary loss .................. (.02) -- (0.02) --
--------------------------------------------------------------
Net income ...................... $ 0.14 $ 0.15 $ 0.33 $ 0.18
==============================================================
Weighted average shares outstanding ... 5,706,311 6,528,321 5,698,367 6,529,104
==============================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
--------------------
<S> <C>
Common stock:
Balance, December 31, 1996 .................................. $ 1,000
------------
Balance, June 30, 1997 ...................................... 1,000
------------
Additional paid-in capital:
Balance, December 31, 1996 .................................. 8,617,466
------------
Balance, June 30, 1997 ...................................... 8,617,466
------------
Deferred compensation:
Balance, December 31, 1996 .................................. (11,422)
Amortization of deferred compensation ....................... 6,854
------------
Balance, June 30, 1997 ...................................... (4,568)
------------
Loans to shareholders:
Balance, December 31, 1996 .................................. (235,071)
Net payments received ....................................... 232,748
------------
Balance, June 30, 1997 ...................................... (2,323)
------------
Unrealized appreciation on interest-only strip receivable:
Balance, December 31, 1996 .................................. --
Increase in unrealized appreciation on interest-only strip .. 959,629
receivable
------------
Balance, June 30, 1997 ...................................... 959,629
------------
Retained earnings:
Balance, December 31, 1996 .................................. 3,913,768
Net income .................................................. 1,145,897
------------
Balance, June 30, 1997 ...................................... 5,059,665
------------
Total shareholders' equity .................................... $ 14,630,869
============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
SIX MONTHS ENDED
JUNE 30
-------------------------------
1996 1997
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 1,875,909 $ 1,145,897
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of finance contract acquisition discount and (878,557) (11,472)
insurance
Amortization of deferred compensation .................... 25,768 6,584
Amortization of debt issuance costs ...................... 135,571 430,733
Depreciation and amortization ............................ -- 89,727
Provision for credit losses .............................. 63,484 --
Deferred income taxes .................................... 970,000 610,725
Accretion of interest-only strip receivable .............. (53,910) 102,783
Unrealized gain on Class B certificates .................. -- 52,862
Changes in operating assets and liabilities:
Restricted funds ......................................... (260,307) (7,502,455)
Other assets ............................................. (477,892) (3,667,460)
Class B certificates ..................................... (3,257,806) 1,550,969
Interest-only strip receivable ........................... (674,325) (5,381,267)
Accounts payable and accrued liabilities ................. (329,239) 1,355,327
Due to/due from affiliate ................................ (342,297) (6,876)
Purchases of finance contracts ............................ (33,358,304) (66,945,327)
Sales of finance contracts ................................ 35,842,076 65,573,597
Repayments of finance contracts ........................... 324,957 809,626
----------------------------
Net cash used in operating activities .................. (394,872) (11,786,027)
----------------------------
Cash flows from investing activities:
Advances to AutoBond Receivables Trusts ................... (1,532,348) (1,425,424)
Loan payments from (to) shareholders ...................... (282,675) 232,748
Disposal proceeds from repossessions ...................... 975,662 91,009
----------------------------
Net cash used in investing activities .................. (839,361) (1,101,667)
----------------------------
Cash flows from financing activities:
Net borrowings (payments) under revolving credit facilities (913,129) 7,000,000
Debt issuance costs ....................................... (259,431) (387,974)
Repayments of borrowings under repurchase agreement ....... (1,061,392) --
Proceeds from notes payable ............................... 6,734,306 2,041,388
Payments on notes payable ................................. (3,160,684) (1,562,728)
Proceeds from subordinated debt borrowings ................ 300,000 --
Increase in bank overdraft ................................ 1,324,784 1,851,327
----------------------------
Net cash provided by financing activities .............. 2,964,454 8,942,013
----------------------------
Net increase (decrease) in cash and cash equivalents ........ 1,730,221 (3,945,681)
Cash and cash equivalents at beginning of period ............ 92,660 4,121,342
============================
Cash and cash equivalents at end of period .................. $ 1,822,881 $ 175,661
============================
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of AutoBond Acceptance Corporation
("the Company") included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring nature)
which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. Results for interim periods
are not necessarily indicative of the results for a full year. For further
information, refer to the audited financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended December 31, 1996 (Number
000-21673).
Certain data from the prior year has been reclassified to conform to
1997 presentation.
2. EARNINGS PER SHARE
Earnings per share is calculated using the weighted average number of
common shares and common share equivalents outstanding during the year. Fully
diluted earnings per share are not presented because the relevant potentially
dilutive securities are not significant. Effective May 30, 1996, the Board of
Directors of the Company voted to effect a 767.8125-for-1 stock split. All share
information and earnings per share calculations for the periods presented in the
financial statements herein, and the notes hereto, have been retroactively
restated for such stock split.
The weighted average number of common and common equivalent shares
outstanding for the purposes of computing net income per share were 6,528,321
and 6,529,104 for the three months and six months ended June 30, 1997,
respectively.
3. FINANCE CONTRACTS HELD FOR SALE
The following amounts are included in finance contracts held for sale as
of:
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
----------------------------------
(Unaudited)
<S> <C> <C>
Unpaid principal balance ............... $ 266,450 $ 362,933
Prepaid insurance ...................... 18,733 --
Contract acquisition discounts.......... (31,554) (8,421)
Allowance for credit losses............. (25,200) (25,200)
======================
$ 228,429 $ 329,312
======================
</TABLE>
4. INTEREST-ONLY STRIP RECEIVABLE
The Company adopted Statement of Financial Accounting Standards No. 125
"Transfer and Servicing of Financial Assets and Extinguishment of Liabilities"
(SFAS No. 125) as of January 1, 1997. SFAS No. 125 provides new accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This statement also provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings and requires that
F-6
<PAGE>
<PAGE>
liabilities and derivatives incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value.
As a result of adopting the statement, the excess servicing receivable
previously shown on the consolidated balance sheet as of December 31, 1996 has
been reclassified as interest-only strip receivable, and accounted for as an
investment security classified as "available for sale" under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). Accordingly, any unrealized gain or
loss in the fair value is included as a component of equity, net of the income
tax effect. Any impairment deemed permanent is recorded as a charge against
earnings.
The fair value of interest-only strip receivable is calculated based
upon the present value of the estimated future interest income after considering
the effects or estimated prepayments, defaults and delinquencies. The discount
rate utilized is based upon assumptions that market participants would use for
similar financial instruments subject to prepayments, defaults, collateral value
and interest rate risks.
The changes in the interest-only strip receivable follow:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
------------------
(Unaudited)
<S> <C>
Beginning balance $4,247,274
Unrealized appreciation 1,453,984
Additions 5,643,627
Accretion 102,783
Impairment charge (467,926)
==================
Ending balance $10,979,742
==================
</TABLE>
The Company periodically reviews the fair value of the interest-only
strip receivable. Changes in the fair value of securities available for sale are
recognized as an adjustment to stockholders' equity. This adjustment amounted to
a net unrealized gain of $959,629, net of related tax effect of $494,355, on the
valuation of the interest-only strip receivable for the six months ended June
30, 1997. Additionally, the Company recorded a charge against earnings for
permanent impairment of the interest-only strip receivable, determined on a
disaggregated basis, of $467,926 during the six months ended June 30, 1997.
5. REVOLVING CREDIT FACILITIES
At June 30, 1997, the Company had no outstanding balance on a $10.0
million revolving credit facility (the "Sentry Facility") with Sentry Financial
Corporation ("Sentry"), which expires on December 31, 2000. The proceeds from
borrowings under the Sentry Facility are used to acquire finance contracts, to
pay applicable 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% (10.25% at June 30, 1997).
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 incurred interest expense of $241,767 for the six months ended June 30,
1997.
F-7
<PAGE>
<PAGE>
The Company and its wholly owned subsidiary, AutoBond Funding
Corporation II, entered into a $50 million revolving warehouse facility (the
"Daiwa Facility") with Daiwa Finance Corporation ("Daiwa") effective as of
February 1, 1997. Advances under the Daiwa Facility mature on the earlier of 120
days following the date of the advance or March 31, 1998. The proceeds from the
borrowings under the Daiwa Facility are to be used to acquire finance contracts
and to make deposits to a reserve account. The Daiwa Facility is collateralized
by the finance contracts acquired with the outstanding advances. The Daiwa
Facility does not require that the loans funded be covered by default deficiency
insurance. Interest is payable upon maturity of the advances and accrues at the
lesser of (x) 30 day LIBOR plus 1.15% (6.84% at June 30, 1997) or (y) 11% per
annum. The Company also pays a non-utilization fee of .25% per annum on the
unused amount of the line of credit. Pursuant to the Daiwa Facility, the Company
paid a $243,750 commitment fee. The debt issuance cost is being amortized as
interest expense on a straight line basis through March 1998. The Daiwa Facility
contains certain covenants and representations similar to those in the
agreements governing the Company's existing securitizations including, among
other things, delinquency and repossession triggers. At June 30, 1997, advances
under the Daiwa Facility totaled $7,000,000, in addition to $33,000,000 in
advances derecognized pursuant to SFAS No. 125. The Company incurred interest
expense of approximately $445,232 during the six months ended June 30, 1997.
On June 30, 1997, a new warehouse and securitization structure was
formed whereupon finance contracts were transferred to a special purpose entity.
The special purpose entity issued variable funding warehouse notes which are
convertible into term notes at the option of the holder of such notes. The
transfer of the finance contracts to the special purpose entity was recognized
as a sale under SFAS No. 125.
6. NOTES PAYABLE
The following amounts are included in notes payable as of:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
----------------------------------
(Unaudited)
<S> <C> <C>
Notes payable, secured by
Class B certificates $10,050,781 $ 8,526,047
Convertible notes payable -- 2,000,000
Other notes payable 123,852 127,245
==================================
$10,174,633 $10,653,292
==================================
</TABLE>
Pursuant to the an agreement (the "Securities Purchase Agreement")
entered into on June 30, 1997, the Company issued by private placement
$2,000,000 in aggregate principal amount of senior secured convertible notes
("Convertible Notes"). Interest is payable quarterly at a rate of 18% per annum
until maturity on June 30, 2000. If the Company pays down the Convertible Notes
in full prior to June 30, 1998, the holders will have no conversion rights. The
Convertible Notes, collateralized by the interest-only strip receivables from
the Company's first four securitizations, are convertible into shares of common
stock of the Company upon the earlier to occur of (i) an event of default on the
Convertible Notes and (ii) June 30, 1998, through the close of business on June
30, 2000, subject to prior redemption. The conversion price is equal to the
outstanding principal amount of the Convertible Note being converted divided by
the lesser of (x) $5.00 (as adjusted by the terms of the Securities Purchase
Agreement) and (y) 85% of the average of the five lowest closing bid prices of
the Company's common stock on the Nasdaq Stock Market, or such other exchange or
market where the common stock is then traded during the 60 trading days
immediately preceding the date the Convertible Note is converted or the
applicable date of repayment (subject to adjustment under certain circumstances
specified in the Securities Purchase Agreement). The Company
F-8
<PAGE>
<PAGE>
also paid certain debt issuance costs to the purchaser totaling $25,000, which
is being amortized as interest expense on a straight line basis through June 30,
2000.
Also pursuant to the Securities Purchase Agreement, the Company issued
warrants which upon exercise allow the holders to purchase up to 200,000 shares
of common stock at $4.225 per share. The warrants are exercisable to the extent
the holders thereof purchase up to $10,000,000 of the Company's subordinated
asset-backed securities before June 30, 1998.
7. COMMITMENTS AND CONTINGENCIES
The Company is required to represent and warrant certain matters with
respect to the finance contracts sold to the Trusts, 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 repurchase the finance contracts from the Trust at a price equal to
the remaining principal plus accrued interest. The Company repurchased finance
contracts totaling $619,520 from a Trust during the three months ended March 31,
1997. Of the total amount of these finance contracts, $190,320 were purchased
from one dealer. Although the Company has requested that this dealer repurchase
such contracts, the dealer has refused. The Company has commenced litigation
against such dealer.
F-9
<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, 1995 and 1996 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 years ended December 31, 1995 and 1996. 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, 1995 and 1996, 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 years
ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic 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
March 26, 1997
F-10
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1995 1996
------ ----------- -------
<S> <C> <C>
Cash and cash equivalents $ 92,660 $ 4,121,342
Restricted cash 360,266 318,515
Cash held in escrow 1,322,571 2,662,934
Finance contracts held for sale, net 3,354,821 228,429
Repossessed assets held for sale, net 673,746 152,580
Class B Certificates 2,834,502 10,465,294
Excess servicing receivable 846,526 4,247,274
Debt issuance cost 700,000 997,338
Trust receivable 525,220 2,230,003
Due from affiliate 168,847
Prepaid expenses and other assets 354,208 383,573
Software development costs 300,382
----------- -----------
Total assets $11,064,520 $26,276,511
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit agreements $ 1,150,421
Notes payable 2,674,597 $10,174,633
Repurchase agreement 1,061,392
Accounts payable and accrued liabilities 1,836,082 1,474,586
Bank overdraft 861,063
Payable to affiliate 255,597 265,998
Deferred income taxes 199,000 2,075,553
----------- -----------
Total liabilities 8,038,152 13,990,770
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000
shares authorized; no shares issued
Common stock, no par value; 25,000,000
shares authorized; 5,118,753 and
6,512,500 shares issued and outstanding 1,000 1,000
Additional paid-in capital 2,912,603 8,617,466
Deferred compensation (62,758) (11,422)
Loans to shareholders (153,359) (235,071)
Retained earnings 328,882 3,913,768
----------- -----------
Total shareholders' equity 3,026,368 12,285,741
----------- -----------
Total liabilities and shareholders'
equity $11,064,520 $26,276,511
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-11
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
August 1, 1994
(Inception)
Through Year Ended
December 31, December 31,
1994 1995 1996
-------------- ------------ -------
<S> <C> <C> <C>
Revenues:
Interest income $ 38,197 $ 2,880,961 $ 2,519,612
Interest expense (19,196) (2,099,867) (2,382,818)
---------- ----------- -----------
Net interest income 19,001 781,094 136,794
Gain on sale of finance contracts 4,085,952 12,820,700
Servicing fee income 657,950
Unrealized gain on Class B
Certificates 388,278
--------- ----------- -----------
Total revenues 19,001 4,867,046 14,003,722
--------- ----------- -----------
Expenses:
Provision for credit losses 45,000 48,702 412,387
Salaries and benefits 225,351 1,320,100 4,529,006
General and administrative 244,974 1,462,740 2,331,246
Other operating expenses 48,281 963,017 1,119,644
--------- ----------- -----------
Total expenses 563,606 3,794,559 8,392,283
--------- ----------- -----------
Income (loss) before income taxes
and extraordinary item (544,605) 1,072,487 5,611,439
Provision for income taxes 199,000 1,926,553
--------- ----------- -----------
Income (loss) before extraordinary
item (544,605) 873,487 3,684,886
Extraordinary loss, net of tax
benefit of $50,000 (100,000)
--------- ----------- -----------
Net income (loss) $(544,605) $ 873,487 $ 3,584,886
========= =========== ===========
Income (loss) per common share:
Income (loss) before extraordinary
item $ (0.11) $ 0.17 $ 0.64
Extraordinary loss (0.02)
----------- ----------- -----------
Net income (loss) $ (0.11) $ 0.17 $ 0.62
=========== =========== ===========
Weighted average shares outstanding 5,118,753 5,190,159 5,811,377
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-12
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Deferred Loans To Retained
Shares Amount Capital Compensation Shareholders Earnings Total
---------- ------- ----------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital contributions at
inception 5,118,753 $ 1,000 $ 451,000 $ 452,000
Loans to shareholders $ (16,000) (16,000)
Net loss $ (544,605) (544,605)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 5,118,753 1,000 451,000 (16,000) (544,605) (108,605)
Capital contributions 2,323,103 2,323,103
Loans to shareholders (137,359) (137,359)
Deferred compensation pursuant
to employee contract 138,500 $ (138,500)
Amortization of deferred
compensation 75,742 75,742
Net income 873,487 873,487
----------- ----------- ----------- ----------- ----------- ----------- ----------
Balance, December 31, 1995 5,118,753 1,000 2,912,603 (62,758) (153,359) 328,882 3,026,368
Stock issued pursuant to
employee contract 568,747
Loans to shareholders (81,712) (81,712)
Amortization of deferred
compensation 51,336 51,336
Issuance of common stock in
public offering 825,000 5,704,863 5,704,863
Net income 3,584,886 3,584,886
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 6,512,500 $ 1,000 $ 8,617,466 $ (11,422) $ (235,071) $ 3,913,768 $12,285,741
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-13
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
August 1, 1994
(Inception)
Through Year Ended
December 31, December 31,
1994 1995 1996
--------------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (544,605) $ 873,487 $ 3,584,886
Adjustments to reconcile net income to net cash
used in operating activities:
Amortization of finance contract acquisition
discount and insurance (4,513) (795,579) (358,949)
Amortization of deferred compensation 75,742 51,336
Amortization of debt issuance costs 497,496
Provision for credit losses 45,000 48,702 412,387
Deferred income taxes 199,000 1,876,553
Accretion of excess servicing receivable (154,029)
Unrealized gain on Class B Certificates (388,278)
Changes in operating assets and liabilities:
Restricted cash (138,176) (222,090) 41,751
Cash held in escrow (1,322,571) (1,340,363)
Prepaid expenses and other assets (354,208) (329,747)
Class B Certificates (2,834,502) (7,242,514)
Excess servicing receivable (846,526) (3,246,719)
Accounts payable and accrued liabilities 25,636 1,110,446 (361,496)
Due to/due from affiliate 504,534 (248,937) (158,446)
Purchases of finance contracts (2,453,604) (31,200,131) (83,672,335)
Sales of finance contracts 27,399,543 85,014,394
Repayments of finance contracts 51,638 2,660,018 1,605,461
------------ ------------ ------------
Net cash used in operating activities (2,514,090) (5,457,606) (4,168,612)
------------ ------------ ------------
Cash flows from investing activities:
Advances to AutoBond Receivables Trusts (525,220) (1,704,783)
Loans to shareholders (16,000) (137,359) (81,712)
Disposal proceeds from repossessions 220,359 646,600
------------ ------------ ------------
Net cash used in investing activities (16,000) (442,220) (1,139,895)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
agreements 2,054,776 (904,355) (1,150,421)
Debt issuance costs (794,834)
Proceeds (repayments) from borrowings under repurchase
agreement 1,061,392 (1,061,392)
Proceeds from notes payable 2,674,597 12,575,248
Payments on notes payable (5,075,212)
Shareholder contributions 452,000 2,323,103
Increase (decrease) in bank overdraft 23,314 837,749 (861,063)
Proceeds from public offering of common stock, net 5,704,863
------------ ------------ ------------
Net cash provided by financing activities 2,530,090 5,992,486 9,337,189
------------ ------------ ------------
Net increase in cash and cash equivalents -0- 92,660 4,028,682
Cash and cash equivalents at beginning of period -0- -0- 92,660
------------ ------------ ------------
Cash and cash equivalents at end of period $ -0- $ 92,660 $ 4,121,342
============ ============ ============
Non-cash investing and financing activities:
Accrual of debt issuance cost $ $ 700,000 $
=========== ============ ============
Repossession of automobiles $ $ 849,756 $ 291,086
=========== ============ ============
Deferred compensation $ $ 138,500 $
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-14
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
AutoBond Acceptance Corporation (AAC) was incorporated in June 1993 and
commenced operations August 1, 1994. AAC and its wholly-owned
subsidiaries, AutoBond Funding Corp I (ABF I), AutoBond Funding Corp II
(ABF II), and AutoBond Funding Corp III (ABF III) (collectively, the
Company), engage primarily in the business of acquiring, securitizing
and servicing automobile installment sale contracts originated by
franchised automobile dealers (the Contracts). The Company specializes
in Contracts to consumers who generally have limited access to
traditional financing, such as that provided by commercial banks or
captive finance companies of automobile manufacturers. The Company
purchases Contracts directly from automobile dealers or from other
originators, with the intent to resell them to institution investors in
securitization structures.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of AAC and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior years' financial statements to
conform with the current year's presentation.
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.
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
eleven days subsequent to closing.
F-15
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
Continued:
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,
June 1996, September 1996 and December 1996 securitization transactions
resulted in initial cash reserves of approximately $525,000, $331,000,
$357,000, $446,000, and $500,000, respectively, which approximates 2% of
the Finance Contracts sold to the respective trusts. The trust reserves
are increased monthly 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.
The Company generally acquires Finance Contracts at a discount, and has
purchased 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 Contract's 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
amounts 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. No such write-downs were recorded in 1995 or 1996.
REPOSSESSED ASSETS HELD FOR SALE
Automobiles repossessed and held for sale are initially recorded at the
recorded investment in the Finance Contracts on the date of repossession
less an allowance. This value approximates 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.
F-16
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
Continued:
REPOSSESSED ASSETS HELD FOR SALE, Continued
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 was established. An adjustment of
approximately $300,000 was made in the fourth quarter of 1996 to adjust
for the differences between actual proceeds from sale to the carrying
amounts recorded for repossessed assets, some portion of which may
relate to prior quarters.
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 quotes from
outside dealers who utilize discounted cash flow analyses 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. Estimated
transaction costs associated with a sale of the Class B Certificates are
not deducted from the fair value determination. During 1996, an
unrealized gain of $388,278 was recognized on the Class B Certificates.
During 1996, the Company's Class B Certificate from their 1995
securitization was upgraded by Fitch Investors Service from BB to BB+.
The Class B Certificates accrue interest at 15%.
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 Certificate holders in the securitization 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.
F-17
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
Continued
EXCESS SERVICING RECEIVABLE, Continued
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 to determine if the present value of the estimated remaining
future excess servicing fee income is less than the carrying amount
using the discount factor applied in the original determination of the
excess servicing receivable. 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
impairment review 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 adjustments for impairment to the carrying value of the excess
servicing receivable during 1995 or 1996.
The receipt of the servicing fee income related to the excess servicing
asset is subordinate to the Class A and Class B Certificates. As a
result, the Company recognizes income for the accretion of the discount
associated with the present value effect on the carrying value of the
excess servicing asset. Such accretion amounted to approximately
$154,000 in 1996.
The value of the excess servicing reflects management's estimate of the
net future servicing income on the finance contracts held in each
securitization trust. Such estimate is affected by assumptions such as
repossession rates, uninsured loss amounts, delinquencies, prepayment
rates and timing of cash receipts. If actual results are significantly
different than those assumptions presumed by management in such a manner
as to reduce the amount of excess spread cash flows available than
originally estimated, the excess servicing asset will be impaired. Given
the valuation of the excess servicing asset is affected by a significant
number of assumptions and that changes in such assumptions affect the
amount of cash flows available to the Company, it is at least reasonably
possible that decreases to the value of the excess servicing receivable
will occur in the near term and that the decreases could materially
affect the amounts reported in the income statement.
F-18
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
Continued
SOFTWARE DEVELOPMENT COSTS
Software development costs recorded include external costs incurred to
modify the related software from a state of technical feasibility to its
operational form and will be amortized over 5 years, which is its
estimated useful life. No amortization was recorded in 1996, as the
software was not available for use during 1996.
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are capitalized and amortized
in interest expense over the lives of the related debt.
Debt issuance costs related to the issuance of notes payable
collateralized by Class B Certificates, are amortized on a
dissaggregated basis over the term of the related note using the
interest method. Debt issuance costs related to warehouse credit
facilities are amortized using the straight-line method.
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 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 a consolidated federal income tax return.
EXTRAORDINARY ITEM
The extraordinary loss recorded in 1996 relates to a $150,000 prepayment
fee on a $2,684,000 term loan that was repaid 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.
Common share equivalents of 71,406 and 19,489 were used in the
calculation of earnings per share in 1995 and 1996, respectively. Fully
diluted earnings per share are not presented because the relevant stock
options and warrants are not significant. There were no common share
equivalents in 1994. 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.
F-19
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
Continued
INTEREST INCOME
Generally, 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 generally 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
monthly at 15% using the interest method.
CONCENTRATION OF CREDIT RISK
The Company generally acquires Finance Contracts from a network of
automobile dealers located in thirty-six states, including among others
Texas, Arizona, Oklahoma, New Mexico, Connecticut, Georgia and Utah. For
the years ended December 31, 1995 and 1996, the Company had a
significant concentration of Finance Contracts with borrowers in Texas,
which approximated 91% and 63.7% of total Finance Contracts,
respectively. For the years ended December 31, 1995 and 1996, one dealer
accounted for 8.8% and 8.9%, respectively, of the Finance Contracts
purchased by the Company. No other dealer accounted for more than 10% of
the Finance Contracts purchased.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 provides consistent
standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The statement is
effective for transfers of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be applied
prospectively.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share. The Company believes the
implementation of SFAS No. 128 will not have an effect on earnings per
share calculation.
3. FINANCE CONTRACTS HELD FOR SALE:
The following amounts are included in Finance Contracts held for sale as
of:
<TABLE>
<CAPTION>
December 31,
1995 1996
---- ----
<S> <C> <C>
Principal balance of Finance Contracts
held for sale $3,539,195 $ 266,450
Prepaid insurance 260,155 18,733
Contract acquisition discounts (350,827) (31,554)
Allowance for credit losses (93,702) (25,200)
---------- ----------
$3,354,821 $ 228,429
========== ==========
</TABLE>
F-20
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. EXCESS SERVICING RECEIVABLE AND SECURITIZATIONS:
The Company has completed the following securitization transactions
(rounded to thousands):
<TABLE>
<CAPTION>
December March June September December
1995 1996 1996 1996 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Principal of loans sold $26,200,000 $16,500,000 $17,800,000 $22,300,000 $25,000,000
A Certificate 26,200,000 16,500,000 17,800,000 22,300,000 25,000,000
A Certificate rate 7.23% 7.15% 7.73% 7.45% 7.37%
B Certificate $ 2,800,000 $ 2,000,000 $ 2,000,000 $ 2,400,000 $ 2,800,000
B Certificate rate 15% 15% 15% 15% 15%
Excess servicing asset $ 846,000 $ 597,000 $ 650,000 $ 1,000,000 $ 1,000,000
Gain on sale 4,100,000 2,800,000 2,900,000 3,320,000 3,800,000
The changes in the excess servicing asset are as follows:
Balance, January 1, 1996 $ 846,526
Additions from securitization transactions 3,246,719
Accretion of discount 154,029
-----------
Balance, December 31, 1996 $ 4,247,274
===========
</TABLE>
The Company is required to represent and warrant certain matters with
respect to the Finance Contracts sold to the Trusts, 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 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, however, the Company
repurchased loans with principal balances of $420,000 in total from a
Trust in February 1997. The Company expects that it will recover, under
dealer representations and warranty provisions, the amounts due on the
repurchased loans from the dealership who sold the Company the loans.
F-21
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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. Interest is payable monthly and accrues
at a rate of prime plus 1.75% (10.25% and 10% at December 31, 1995 and
1996, respectively). 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 and
$220,674 for the years ended December 31, 1995 and 1996, respectively.
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 was 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 on a straight line basis through
December 31, 2000, the termination date of the Revolving Credit
Agreement. 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. At December 31, 1996,
$10,000,000 was available for borrowings under the credit line as there
were no amounts outstanding at that date.
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 Nomura
credit facility were outstanding at December 31, 1996.
F-22
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REVOLVING CREDIT AGREEMENTS, Continued:
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 expired December 15, 1996. The proceeds from the
borrowings under the Revolving Warehouse Facility were used to acquire
Finance Contracts, to pay credit default insurance premiums and to make
deposits to a reserve account. Interest was payable monthly at a per
annum rate of LIBOR plus 2.60%. The Revolving Warehouse Facility also
required the Company to pay a monthly fee on the average unused balance
of 0.25% per annum. The Revolving Warehouse Facility was 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. No advances under the Revolving
Warehouse Facility were outstanding at December 31, 1996.
The interest rate on borrowings under revolving credit agreements ranged
from 8% to 10% for the year ended December 31, 1996.
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 Certificates from its 1995 securitization as well as the excess
servicing receivable from the cash flows of the related 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, 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 Certificate
holders 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.
F-23
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. NOTES PAYABLE, Continued:
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 June 26, 2002 or the date that all outstanding
principal and accrued interest has been paid by the Trustee or the
Company.
Effective September 30, 1996 and December 27, 1996, the Company obtained
non-recourse term loans for $2,403,027 and $2,802,891, respectively,
from institutional investors under similar terms as described above. The
loans are collateralized by the Class B Certificates issued to the
Company pursuant to the September 30, 1996 and December 27, 1996
securitization transactions. The Company may prepay the loans in whole
or in part at any time subsequent to September 30, 1997, or any time
after receiving notice by the investor of its intent to transfer the
loan to a third party. The maturity date for the loans is September 30,
2002 and December 31, 2002, respectively.
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 securitization;
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%.
The Company repurchased such Finance Contracts during January 1996 in
accordance with the terms of the agreement.
8. INITIAL PUBLIC OFFERING:
On November 14, 1996, the Company and Selling Shareholders sold 750,000
and 250,000, respectively, of shares of common stock in an initial
public offering at a price of $10 per share. The net proceeds from the
issuance and sale of common stock amounted to approximately $5,000,000
after deducting underwriter discounts and issuer expenses. Portions of
the net proceeds were used (i) to prepay outstanding subordinated debt
of approximately $300,000 plus accrued interest, (ii) to repay advances
under Revolving Credit Facilities, and (iii) for general corporate and
working capital purposes.
F-24
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. INITIAL PUBLIC OFFERING, Continued:
The underwriters of the Company's initial public offering purchased an
additional 75,000 shares of the Company's common stock at $10 per share
by exercising half of their over-allotment option. The net proceeds from
the issuance and sale of these shares amounted to approximately $700,000
after deducting underwriter's discounts.
9. INCOME TAXES:
The provision for income taxes for 1996 consists of a deferred tax
provision of $1,926,553 and no current liability. 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) Year Ended
December 31, December 31,
1994 1995 1996
-------------- ------------ --------
<S> <C> <C> <C>
Federal tax at statutory rate
of 34% $ (185,166) $ 364,646 $ 1,907,889
Nondeductible expenses 2,166 17,354 18,664
Change in valuation allowance 183,000 (183,000) --
----------- ----------- -----------
Provision for income taxes $ -- $ 199,000 $ 1,926,553
=========== =========== ===========
</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,
1995 1996
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for credit losses $ 31,859 $ 16,728
Costs related to securitizations 19,664 491,935
Other 106,424 3,883
Net operating loss carryforwards 1,032,396 2,792,067
----------- -----------
Gross deferred tax assets 1,190,343 3,304,613
----------- -----------
Deferred Tax Liabilities:
Gain on securitization 1,389,343 5,242,372
Other -- 137,794
----------- -----------
Gross deferred tax liabilities 1,389,343 5,380,166
----------- -----------
Net deferred tax liabilities $ 199,000 $ 2,075,553
=========== ===========
</TABLE>
At December 31, 1996, the Company had tax net operating loss
carryforwards of approximately $8,212,000 which will expire in fiscal
years 2009 through 2011.
F-25
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. 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.
STOCK BASED COMPENSATION PLAN
The Company grants stock options under a stock-based incentive
compensation plan (the "Plan"). The Company applies Accounting
Principles Board Opinion 25 and related Interpretations in accounting
for the Plan. In 1995, SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued, which, if fully adopted by the
Company, would change the methods the Company applies in recognizing the
cost of the Plan. Adoption of the cost recognition provisions of SFAS
123 is optional and the Company has decided not to elect these
provisions of SFAS 123. However, pro forma disclosures as if the Company
adopted the expense recognition provisions of SFAS 123 for 1996 are
required by SFAS 123 and are presented below.
Under the Plan, the Company is authorized to issue shares of Common
Stock pursuant to "Awards" granted in various forms, including incentive
stock options (intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended), non-qualified stock options, and
other similar stock- based Awards. The Company granted stock options in
1996 under the Plan in the form of non-qualified stock options.
STOCK OPTIONS
The Company granted stock options in 1996 to employees and directors.
The stock options granted in 1996 have contractual terms of 10 years.
All options granted to the employees and directors have an exercise
price no less than the fair market value of the stock at grant date. The
options granted in 1996 vest, 33.33% per year, beginning on the first
anniversary of the date of grant. The Company granted 274,500 options in
1996 and 1 warrant for 100,000 shares of stock (collectively, "stock
options"). The warrant is fully exercisable after 1 year.
In accordance with APB 25, the Company has not recognized any
compensation cost for these stock options granted in 1996.
A summary of the status of the Company's stock options as of December
31, 1996 and the changes during the year ended is presented below:
STOCK OPTIONS
<TABLE>
<CAPTION>
1996
-------------------------
Weighted
# Shares of Average
Underlying Exercise
Options Prices
----------- ---------
<S> <C> <C>
Outstanding at beginning of the year 0 n/a
Granted at-the-money 274,500 $10.06
Granted at a premium 100,000 $12.00
-------
Total granted 374,500 $10.58
======= ======
Outstanding at end of year 374,500 $10.58
======= ======
Exercisable at end of year 0 n/a
Weighted-average FV of options granted at-the-money $ 4.88
Weighted-average FV of warrants granted at a premium $ 4.65
Weighted-average FV of options granted during the year $ 4.82
</TABLE>
F-26
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. STOCKHOLDERS' EQUITY, Continued:
STOCK OPTIONS, Continued
The fair value of each stock option and warrant granted is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for grants in 1996: dividend
yield of 0.00% for both years; risk-free interest rates are different
for each grant and range from 5.89% to 6.06%; the expected lives of
options are estimated to be 5 years; and a volatility of 46.46% for all
grants.
As of December 31, 1996, 374,500 options are outstanding with none
bearing exercisable and a weighted-average contractual life of all stock
options being 9.93 years.
PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation
plan been determined consistent with SFAS 123, the Company's net income
and net income per common share for 1996 would approximate the pro forma
amounts below:
<TABLE>
<CAPTION>
As Reported Pro Forma
December 31, December 31,
1996 1996
------------ --------
<S> <C> <C>
SFAS 123 Charge, pre-tax - $1,804,560
APB 25 Charge - -
Net income $3,584,886 $2,393,876
Net income per common share $ .62 $ .41
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
1995.
WARRANTS
The Company issued to its underwriters of their initial public offering
a warrant to purchase up to 100,000 common shares of the Company's
common stock at a price per share equal to $12.00. The warrant is
exercisable after one year from November 14, 1996, or earlier if the
Company effects certain registrations of its common stock.
In addition to subordinated debt issued March 12, 1996, which was not
outstanding at December 31, 1996, a detachable warrant was issued to an
individual for the purchase of 18,811 shares 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 in 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 minimus.
F-27
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. STOCKHOLDERS' EQUITY, Continued:
PREFERRED STOCK
Pursuant to the Company's Amended Articles of Incorporation, the Company
is authorized to issue from time to time up to 5,000,000 shares of
Preferred Stock, in one or more series. The Board of Directors is
authorized to fix the dividend rights, dividend rates, any conversion
rights or right of exchange, any voting right, any rights and terms of
redemption (including sinking fund provisions), the redemption rights or
prices, the liquidation preferences and any other rights, preferences,
privileges and restrictions of any series of Preferred Stock and the
number of shares constituting such series and the designation thereof.
There were no shares of Preferred Stock issued or outstanding during
1995 or 1996.
11. RELATED PARTY TRANSACTIONS:
Prior to January 1, 1996 the Company shared 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 56.59% of the Company. Each entity was allocated expenses
based on a proportional cost method, whereby payroll costs were
allocated based on management's review of each individual's
responsibilities, and costs related to office space and equipment
rentals were based on management's best estimate of usage during the
year. Miscellaneous expenses were allocated based on the specific
purposes for which each expense related. Management believes the methods
used to allocate the general and administrative expenses shared with ABI
were 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 had paid any compensation to its
CEO during 1994 or 1995; however, management of the Company commenced
compensation payments to the CEO during the latter half of 1996 (see
Note 12). The Company estimated that a reasonable amount of compensation
to pay the CEO on a stand-alone entity basis would approximate $40,000
and $100,000 for the five months ended December 31, 1994 and the year
ended December 31, 1995.
The Company advanced approximately $132,000 and $201,000 as of December
31, 1995 and December 31, 1996, respectively, to William Winsauer, CEO
and majority shareholder of the Company, and approximately $21,000 and
$34,000 as of December 31, 1995 and December 31, 1996, respectively, to
John Winsauer, a significant shareholder of the Company. The advances
are non-interest bearing amounts that have no repayment terms and are
shown as a reduction of shareholders' equity. As of March 20, 1997,
these loans were repaid in full.
F-28
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. RELATED PARTY TRANSACTIONS, Continued:
The Company and ABI entered into a management agreement dated as of
January 1, 1996 (the 'ABI Management Agreement') which requires ABI to
pay an annual fee of $50,000 to the Company for services rendered by it
or the Company's employees 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. Amounts due to the Company under the ABI Management
Agreement amounted to $143,547 at December 31, 1996.
12. EMPLOYMENT AGREEMENTS:
During 1995 and 1996, the Company entered into three-year employment
agreements with two 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. This agreement provides for a minimum monthly salary of
$12,500, together with shares of the Company's common stock, issued
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 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 $51,336 for the years ended December 31, 1995 and 1996,
respectively.
The second 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 chief executive
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 also provides the officer with certain additional
benefits.
F-29
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. EMPLOYMENT AGREEMENTS, Continued:
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
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.
13. COMMITMENTS AND CONTINGENCIES:
An affiliate of the Company leases office space, furniture, fixtures and
equipment under operating leases and during 1995 allocated a significant
portion of such costs to the Company based on estimated usage (see Note
11).
Future minimum lease payments (which reflect leases having noncancelable
lease terms in excess of one year) are as follows for the year ended
December 31:
<TABLE>
<CAPTION>
Operating
Leases
--------
<S> <C>
1997 $542,580
1998 305,697
1999 91,847
2000 16,567
2001 --
Thereafter --
--------
956,691
========
</TABLE>
Rental expense under operating leases for the years ended December 31,
1996, 1995 and 1994 were approximately $524,000, $351,000, and $61,000,
respectively.
F-30
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. COMMITMENTS AND CONTINGENCIES, Continued:
The Company guaranteed a working capital line entered into by the
Company's majority shareholder. Total borrowings of $2,250,000 under
such line of credit were contributed to the Company as additional
paid-in capital during the year ended December 31, 1995. The
indebtedness of the majority shareholder is repaid from and
collateralized by a portion of cash flows from Finance Contracts
underlying certain securitization transactions completed by the majority
shareholder and affiliates owned by the majority shareholder. The
outstanding balance guaranteed by the Company at December 31, 1995 was
approximately $2,000,000. All amounts outstanding under the working
capital line, if any, are expected to be repaid from the sale of a
portion of the majority shareholder's common stock upon successful
completion by the Company of an initial public offering. In April 1996,
the Company made a payment of $89,000 as a principal reduction in the
working capital line to bring the outstanding balance to the maximum
permitted outstanding amount as of March 31, 1996. Effective September
26, 1996 the Company was released from its guarantee of the
shareholder's debt for a release fee of $125,000.
The Company is the plaintiff or the defendant in several legal
proceedings that its management considers to be the normal kinds of
actions to which an enterprise of its size and nature might be subject,
and not to be material to the Company's overall business or financial
condition, results of operations or cash flows.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The 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, 1996. Additionally, due to the December borrowing date, the note
payable and repurchase agreement fair values approximated 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.
F-31
<PAGE>
<PAGE>
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued:
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 relative recency of the securitization
transaction date, the carrying amount approximates fair value.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 92,660 $ 92,660 $ 4,121,342 $ 4,121,342
Finance Contracts held for sale, net 3,354,821 3,854,821 228,428 228,428
Class B Certificates 2,834,502 2,834,502 10,465,294 10,465,294
Excess servicing receivable 846,526 846,526 4,247,274 4,247,274
Note payable 2,674,597 2,674,597 10,174,633 10,174,633
Revolving credit borrowings 1,150,421 1,150,421 -- --
Repurchase agreement 1,061,392 1,061,392 -- --
</TABLE>
15. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Supplemental cash flow information with respect to payments of interest
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Interest paid $ 19,196 $2,099,867 $1,885,322
</TABLE>
No income taxes were paid during fiscal 1994, 1995 or 1996.
16. SUBSEQUENT EVENTS:
Effective February 5, 1997, the Company through its wholly owned
subsidiary AutoBond Funding II, obtained a warehouse line of credit of
$50,000,000 with Daiwa Finance Corporation for a fourteen month period.
This line of credit does not require that the loans funded be covered by
default deficiency insurance. The interest rate applied to this line of
credit is the lesser of (x) 30 day LIBOR plus 1.15% or (y) 11% per
annum. The agreement requires the Company pay a non-utilization fee of
.25% per annum on the amount of the line unused. Pursuant to this line
of credit, the Company paid a $243,750 commitment fee. The Debt issuance
costs will be amortized as interest expense through April 1998,
utilizing the effective interest method.
In January 1997, the Company granted 40,000 options to officers and
employees.
F-32
<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
Page
----
Prospectus Summary..........................................................
Risk Factors................................................................
Use of Proceeds.............................................................
Dividend Policy.............................................................
Dilution....................................................................
Capitalization..............................................................
Selected Consolidated Financial and Operating Data..........................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................
Business....................................................................
Management..................................................................
Certain Transactions........................................................
Principal and Selling Stockholders..........................................
Description of Capital Stock................................................
Shares Eligible for Future Sale.............................................
Underwriting................................................................
Legal Matters...............................................................
Experts.....................................................................
Change in Accountants.......................................................
Additional Information......................................................
Index to Financial Statements...............................................
----------------------
UNTIL 25 DAYS AFTER THE DATE OF THIS PROSPECTUS (AS SUPPLEMENTED FROM
TIME TO TIME) 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.
1,018,811 SHARES
AUTOBOND ACCEPTANCE
CORPORATION
COMMON STOCK
-------------------
PROSPECTUS
-------------------
September , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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:
Securities and Exchange Commission registration fee....... $ 1,350.70
----------
Accounting fees and expenses.............................. 5,000
Legal fees and expenses................................... 10,000
Miscellaneous............................................. 10,000
----------
Total ........................................... $26,350.70
----------
----------
All amounts except the Securities and Exchange Commission registration
fee are estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act provides:
13. 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 for willful or intentional misconduct in the performance of his
duty to the corporation.
14. 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.
15. A corporation may advance an officer or director the
reasonable costs of defending an action suit, investigation or other
proceeding in certain cases.
16. 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 has procured directors' and officers' liability insurance
in the amount of $5 million.
See "Item 17. Undertakings" for a description of the Securities and
Exchange Commission's position regarding such indemnification provisions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In December 1995, March 1996, June 1996, September 1996 and December
1996, Company's five securitization subsidiaries issued approximately $26.2
million, $16.6 million, $17.8 million, $22.3 million and $25.0 million,
respectively, in Class A Investor Certificates, in each case evidencing an
undivided 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. The certificates issued in the December 1995, March 1996, June
1996, September 1996 and December securitizations have final maturity dates of
October 15, 2001, January 15, 2002, April 15, 2002, July 15, 2002 and November
15, 2002, respectively. In March 1997, the Company's 1997-A securitization
subsidiary issued approximately $25.8 million in Class A Notes, $1.4 million in
Class B Notes and $1.6 million in Class C Notes and in its 1997B securitization
in August 1997, Autobond Master Funding Corporation issued approximately
$34.5 million in Class A Notes and $2.9 million in Class B Notes (together,
the "Notes"), secured on a non-recourse basis by a pool of finance contracts
and with final maturities of five years. In each case, the Class A Certificates
and the Notes 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 both the 1995 and 1996
securitizations with sophisticated institutional investors.
In June 1997, the Company issued $2,000,000 in aggregate principal
amount of its 18% convertible promissory notes (convertible into 200,000 shares
of the Company's Common Stock) and warrants to purchase 200,000 shares of the
Company's Common Stock, in each case to institutional investors pursuant to
Section 4(2) of the Securities Act.
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 has been repaid in full and the Warrant has been exercised.
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
The following reflects all applicable Exhibits required under Item 601 of
Regulation S-K;
3.1* Restated Articles of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
4.1* Specimen Common Stock Certificate
5.1 Opinion of Jones, Day, Reavis & Pogue
10.1* Amended and Restated Loan Origination, Sale and Contribution
Agreement dated as of December 15, 1995 between the Company
and AutoBond Funding Corporation I
II-2
<PAGE>
<PAGE>
10.2* Security Agreement dated as of May 21, 1996 among AutoBond
Funding Corporation II, the Company and Norwest Bank
Minnesota, National Association
10.3* Credit Agreement and Side Agreement, dated as of May 21, 1996
among AutoBond Funding Corporation II, the Company and Peoples
Life Insurance Company
10.4* Servicing Agreement dated as of May 21, 1996 among AutoBond
Funding Corporation II, CSC Logic/MSA L.L.P., doing business
as "Loan Servicing Enterprise", the Company and Norwest Bank
Minnesota, National Association
10.5* Loan Acquisition Sale and Contribution Agreement dated as of
May 21, 1996 by and between the Company and AutoBond Funding
Corporation II
10.6* Second Amended and Restated Secured Revolving Credit Agreement
dated as of July 31, 1995 between Sentry Financial Corporation
and the Company
10.7* Management Administration and Services Agreement dated as of
January 1, 1996 between the Company and AutoBond, Inc.
10.8* Employment Agreement dated November 15, 1995 between Adrian
Katz and the Company
10.9* Employment Agreement effective as of May 1, 1996 between
William O. Winsauer and the Company
10.10* Vender's Comprehensive Single Interest Insurance Policy and
Endorsements, issued by Interstate Fire & Casualty Company
10.11* Warrant to Purchase Common Stock of the Company dated
March 12, 1996
10.12* Employee Stock Option Plan
10.13* Dealer Agreement, dated November 9, 1994, between the Company
and Charlie Thomas Ford, Inc.
10.14* Automobile Loan Sale Agreement, dated as of September 30,
1996, among the Company, First Fidelity Acceptance Corp., and
Greenwich Capital Financial Products, Inc.
10.15+ Servicing Agreement, dated January 29, 1997, between CSC
LOGIC/MSA L.L.P., doing business as "Loan Servicing
Enterprise" and the Company
10.16+ Credit Agreement, dated as of February 1, 1997, among AutoBond
Funding Corporation II, the Company and Daiwa Finance
Corporation
10.17+ Security Agreement, dated as of February 1, 1997, among
AutoBond Funding Corporation II, the Company and Norwest Bank
Minnesota, National Association
10.18+ Automobile Loan Sale Agreement, dated as of March 19, 1997, by
and between Credit Suisse First Boston Mortgage Capital
L.L.C., a Delaware limited liability company and the Company
10.19x Automobile Loan Sale Agreement, dated March 26, 1997, between
Credit Suisse First Boston Mortgage Capital L.L.C. and the
Company.
10.20** Credit Agreement, dated as of June 30, 1997, by and among
AutoBond Master Funding Corporation, AutoBond Acceptance
Corporation and Daiwa Finance Corporation.
10.21** Amended and Restated Trust Indenture, dated as of June 30,
1997, among AutoBond Master Funding Corporation, AutoBond
Acceptance Corporation and Norwest Bank Minnesota, National
Association.
10.22** Securities Purchase Agreement, dated as of June 30, 1997, by
and among AutoBond Acceptance Corporation, Lion Capital
Partners, L.P. and Infinity Emerging Opportunities Limited.
21.1** Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of Jones, Day, Reavis & Pogue (contained in
Exhibit 5.1)
27.1+** Financial Data Schedule
- --------
* Incorporated by reference from the Company's Registration Statement on
From S-1 (Registration No. 333-05359).
+ Incorporated by reference from the Company's 1996 Annual Report on Form 10-K.
x Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
**Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
II-3
<PAGE>
<PAGE>
(b) Financial Statement Schedules:
The following schedules are filed as part of this Registration
Statement and are filed herewith:
Schedule II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are
not applicable or are not required or the information required to be
set forth therein is included in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
1. The Undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or
the most recent post-effective amendment hereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in this Registration
Statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
2. The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) of Section 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in this Registration Statement 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.
3. Insofar as indemnification for liabilities arising under the Securities Act
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 Securities 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, office 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 Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on September 25, 1997.
AUTOBOND ACCEPTANCE CORPORATION
By: /s/ William O. Winsauer
----------------------------------------
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William O. Winsauer and Adrian Katz and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorneys-in-fact and agents or any
of them or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
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 September 25, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ William O. Winsauer Chairman of the Board, Chief Executive Officer
----------------------------------------- and Director (Principal Executive Officer)
William O. Winsauer
/s/ Adrian Katz Vice Chairman of the Board, Chief Operating
----------------------------------------- Officer and Director
Adrian Katz
/s/ John S. Winsauer
----------------------------------------- Vice President and Director
John S. Winsauer
</TABLE>
II-5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
/s/ R. T. Pigott, Jr.
----------------------------------------- Vice President and Chief Financial Officer
R. T. Pigott, Jr.
----------------------------------------- Director
Robert S. Kapito
/s/ Manuel A. Gonzalez
----------------------------------------- Director
Manuel A. Gonzalez
----------------------------------------- Director
Stuart A. Jones
/s/ Thomas I. Blinten
----------------------------------------- Director
Thomas I. Blinten
</TABLE>
II-6
<PAGE>
<PAGE>
SCHEDULE II
AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance Charged Balance
at Beginning Cost and at End
Description of Period Expenses Deductions (A) 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
Year ended December 31, 1996 $ 93,702 $412,387 $(480,889) $ 25,200
</TABLE>
(A) Deductions in 1996 were write-offs of uncollectible finance contracts.
S-1
<PAGE>
<PAGE>
Exhibit
Number Description of Exhibit
------- ----------------------
3.1* Restated Articles of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
4.1* Specimen Common Stock Certificate
5.1 Opinion of Jones, Day, Reavis & Pogue
10.1* Amended and Restated Loan Origination, Sale and Contribution
Agreement dated as of December 15, 1995 between the Company and
AutoBond Funding Corporation I
10.2* Security Agreement dated as of May 21, 1996 among AutoBond Funding
Corporation II, the Company and Norwest Bank Minnesota, National
Association
10.3* Credit Agreement and Side Agreement, dated as of May 21, 1996
among AutoBond Funding Corporation II, the Company and Peoples
Life Insurance Company
10.4* Servicing Agreement dated as of May 21, 1996 among AutoBond
Funding Corporation II, CSC Logic/MSA L.L.P., doing business as
"Loan Servicing Enterprise", the Company and Norwest Bank
Minnesota, National Association
10.5* Loan Acquisition Sale and Contribution Agreement dated as of
May 21, 1996 by and between the Company and AutoBond Funding
Corporation II
10.6* Second Amended and Restated Secured Revolving Credit Agreement
dated as of July 31, 1995 between Sentry Financial Corporation
and the Company
10.7* Management Administration and Services Agreement dated as of
January 1, 1996 between the Company and AutoBond, Inc.
10.8* Employment Agreement dated November 15, 1995 between Adrian Katz
and the Company
10.9* Employment Agreement effective as of May 1, 1996 between
William O. Winsauer and the Company
10.10* Vender's Comprehensive Single Interest Insurance Policy and
Endorsements, issued by Interstate Fire & Casualty Company
10.11* Warrant to Purchase Common Stock of the Company dated March 12,
1996
10.12* Employee Stock Option Plan
10.13* Dealer Agreement, dated November 9, 1994, between the Company and
Charlie Thomas Ford, Inc.
10.14* Automobile Loan Sale Agreement, dated as of September 30, 1996,
among the Company, First Fidelity Acceptance Corp., and Greenwich
Capital Financial Products, Inc.
10.15+ Servicing Agreement, dated January 29, 1997, between CSC LOGIC/MSA
L.L.P., doing business as "Loan Servicing Enterprise" and the
Company
10.16+ Credit Agreement, dated as of February 1, 1997, among AutoBond
Funding Corporation II, the Company and Daiwa Finance Corporation
10.17+ Security Agreement, dated as of February 1, 1997, among AutoBond
Funding Corporation II, the Company and Norwest Bank Minnesota,
National Association
10.18+ Automobile Loan Sale Agreement, dated as of March 19, 1997, by and
between Credit Suisse First Boston Mortgage Capital L.L.C., a
Delaware limited liability company and the Company
10.19x Automobile Loan Sale Agreement, dated March 26, 1997, between
Credit Suisse First Boston Mortgage Capital L.L.C. and the
Company.
10.20** Credit Agreement, dated as of June 30, 1997, by and among AutoBond
Master Funding Corporation, AutoBond Acceptance Corporation and
Daiwa Finance Corporation.
<PAGE>
<PAGE>
10.21** Amended and Restated Trust Indenture, dated as of June 30, 1997,
among AutoBond Master Funding Corporation, AutoBond Acceptance
Corporation and Norwest Bank Minnesota, National Association.
10.22** Securities Purchase Agreement, dated as of June 30, 1997, by and
among AutoBond Acceptance Corporation, Lion Capital Partners, L.P.
and Infinity Emerging Opportunities Limited. (To be filed
by Amendment)
21.1** Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 5.1)
27.1+** Financial Data Schedules
- --------
*Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-05359).
+ Incorporated by reference from the Company's 1996 Annual Report on Form 10-K.
x Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
**Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
<PAGE>
<PAGE>
EXHIBIT 5.1
September 25, 1997
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Ladies and Gentlemen:
We are acting as counsel for AutoBond Acceptance Corporation (the
"Company") in connection with the issuance and sale of up to 1,018,811
shares of Common Stock, no par value, of the Company (the "Shares"), as
contemplated by the Company's Registration Statement on Form S-1
(No. 333-31331), filed by the Company to effect registration of the Shares
under the Securities Act of 1933, as amended (the "Act").
We have examined such documents, records, and matters of law as we have
deemed necessary for purposes of this opinion, and based thereupon we are
of the opinion that the Shares are duly authorized and, when issued and
delivered against payment of the consideration therefor as contemplated in
the Registration Statement, such Shares will be validly issued, fully paid,
and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus constituting a part of such Registration Statement.
In giving such consent, we do not thereby admit that are in the category of
persons whose consent is required under Section 7 of the Act.
Very truly yours,
JONES, DAY, REAVIS & POGUE
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Form S-1
(File No. 333-31331) of our report dated March 26, 1997, on our audits of the
financial statements of AutoBond Acceptance Corporation and Subsidiaries.
We also consent to the references to our firm under the captions "Experts"
and "Selected Financial Data."
Coopers & Lybrand L.L.P.
Austin, Texas
September 25, 1997
<PAGE>
