AUTOBOND ACCEPTANCE CORP, S-1, 1997-11-28

AUTOBOND ACCEPTANCE CORP
S-1, 1997-11-28
PERSONAL CREDIT INSTITUTIONS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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 INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) 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. NORMAN R. MILLER, ESQ.
JONES, DAY, REAVIS & POGUE WOLIN, RIDLEY & MILLER LLP
599 LEXINGTON AVE. 3100 BANK ONE CENTER
NEW YORK, NEW YORK 10022 1717 MAIN STREET
(212) 326-3939 DALLAS, TEXAS 75201-4681
(214) 939-4900
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]_________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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 PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stock, no par value ($10 liquidation preference)... 1,150,000 $10 $11,500,000 $3,485
==================================================================================================================================
</TABLE>

(1) The Company is also registering such number of shares of Common Stock as may
become issuable upon redemption of the preferred stock.
(2) Computed in accordance with Rule 457 under the Securities Act of 1933 solely
for purposes of calculating the registration fee.
------------------------
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.
================================================================================

SUBJECT TO COMPLETION, DATED NOVEMBER 28, 1997
PROSPECTUS

1,000,000 SHARES
AUTOBOND ACCEPTANCE CORPORATION
% SERIES A CUMULATIVE PREFERRED STOCK
(Liquidation Value $10 Per Share)
-----------------
AutoBond Acceptance Corporation, a Texas Corporation ('AutoBond' or the
'Company') is offering (the 'Offering') 1,000,000 shares of $10 liquidation
preference % Series A Cumulative Preferred Stock, no par value (the 'Preferred
Stock') at $10 per share through Tejas Securities Group, Inc. as the sole
managing underwriter and the representative ('Representative') of the
underwriters ('Underwriters') herein named.

Dividends on the Preferred Stock are cumulative from the date of issuance
and will be payable quarterly on the 31st day of March, June, September,
and December of each year, commencing on March 31, 1998 at a rate of % per
annum. The Company, at its option, may redeem one-sixth of the Preferred Stock
each year, after three years from the date of issuance upon 30 days' written
notice (the 'redemption date') in cash at the liquidation value per share (plus
accrued and unpaid dividends) or, if in Common Stock, at a price representing a
15% discount to the average closing bid price per share for the Common Stock for
the 5 trading days prior to the redemption date. See 'Description of the Capital
Stock.' The Preferred Stock is not redeemable at the option of the holder and
has no stated maturity.

The Company will apply to have the Preferred Stock listed on the American
Stock Exchange ('AMEX').

SEE 'RISK FACTORS' ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE PREFERRED STOCK OFFERED
HEREBY. THIS OFFERING INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED
BY INVESTORS REQUIRING CURRENT INCOME.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------

<TABLE>
<CAPTION>
======================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNTS(1)(3) COMPANY(2)(3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $10 $0.80 $9.20
- ------------------------------------------------------------------------------------------------------
Total........................................... $10,000,000 $800,000 $9,200,000
======================================================================================================
</TABLE>

(1) Excludes a nonaccountable expense allowance payable by the Company to the
Representative of 2% of the aggregate initial public offering price of the
Preferred Stock. The Company has agreed to issue a Common Stock
Purchase Warrant (the 'Representative's Warrant') to the Representative
exercisable for four years commencing one year after the date of this
Prospectus to purchase 300,000 shares of Common Stock for $ per share
and to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
'Underwriting.'

(2) Before deducting expenses payable by the Company estimated at $250,000,
together with the Representative's nonaccountable expense allowance of
$200,000.

(3) Assumes no exercise of the Representative's option, exercisable within 45
days from the date of this Prospectus, to purchase up to 15% of the
aggregate number of shares of Preferred Stock offered in connection with the
Offering on the same terms, solely to cover overallotments (the
'Overallotment Option'). If the Overallotment Option is exercised in full,
the total Price to Public, Underwriting Discounts and Proceeds to Company
will be $11,500,000, $920,000 and $10,580,000, respectively. See
'Underwriting.'
-----------------
The Preferred Stock is offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
their right to reject orders, in whole or in part. It is expected that
delivery of the Preferred Stock will be made in Austin, Texas on or about
, 1997.

TEJAS SECURITIES GROUP, INC.
-----------------
The date of this Prospectus is November , 1997

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.

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
PREFERRED STOCK, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement under the Securities Act of 1933, as
amended (the 'Securities Act'), with respect to the securities offered pursuant
to this Prospectus. For further information, reference is made to such
Registration Statement, the amendments thereof and the exhibits thereto, which
are available for inspection without charge at the public reference facilities
of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
as well as the Regional Offices of the Commission at Citicorp Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington D.C. 20549, at prescribed rates. The Commission also maintains
a website, located at http://www.sec.gov, that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission, including the Company. The Company also files with the
Commission such periodic reports as are required under the Securities Exchange
Act of 1934, as amended (the 'Exchange Act') and the rules and regulations of
the Commission thereunder.

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information presented in this Prospectus assumes no exercise of
the Underwriter's Overallotment Option or the Representative's Warrant.

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 OFFERING

<TABLE>
<S> <C>
Securities Offered(1)........................ 1,000,000 shares of % Series A Cumulative Preferred Stock.

Common Stock Outstanding..................... 6,531,311 shares

Estimated Net Proceeds(1).................... Approximately $8,750,000 after deducting commissions and expenses
of approximately $1,250,000 including the underwriting discount,
the Representative's nonaccountable expense allowance and other
expenses of the Offering.

Use of Proceeds.............................. Acquisition of finance contracts; Repayment of convertible notes, working
capital and general corporate purposes. See 'Use of Proceeds.'

AMEX Listing................................. Application will be made to list the Preferred Stock on the
American Stock Exchange (the 'AMEX') under the symbol "ABNDP."

RISK FACTORS................................. Investment in the securities involves a high degree of risk and
should only be purchased by investors capable of suffering a
loss of their entire investment. See 'Risk Factors.'
</TABLE>
- ------------
(1) If the Overallotment Option is exercised in full, 150,000 additional shares
of Preferred Stock will be sold, with net proceeds to the Company of
$10,130,000 after deducting commissions and expenses.

DESCRIPTION OF PREFERRED STOCK

<TABLE>
<S> <C>
Dividends.................................... Payable quarterly each March 31, June 30, September 30 and December 31,
commencing March 31, 1998, at the rate of % per annum.
Dividends are cumulative from the date of issue.
Redemption................................... The Preferred Stock is not redeemable or convertible at the option
of the holder. One-sixth of the outstanding Preferred Stock is
redeemable each year at the Company's option at any time on or
after three years from the date of issuance upon 30 days'
written notice in cash (at the liquidation value per share plus accrued
and unpaid dividends) or, if in Common Stock, at a price
representing a 15% discount to the average closing bid price per
share for the Preferred Stock for the 5 trading days prior to
the redemption date.

Voting Rights................................ If dividends on the Preferred Stock are in arrears for [two]
quarterly dividend periods, holders of the Preferred Stock will
have the right to elect [three] additional directors to serve on
the Board until such dividend arrearage is eliminated. In
addition, certain changes that would be materially adverse to
the rights of holders of the Preferred Stock cannot be made
without the affirmative vote of the holders of two-thirds of the
shares of Preferred Stock, voting as a single class. See
'Description of Capital Stock.'

Ranking...................................... The Preferred Stock will rank senior to the Common Stock (the only
capital stock of the Company outstanding as of the date of this
Prospectus) with respect to the payment of dividends and amounts
upon liquidation, dissolution or winding up.

Liquidation Preference....................... $10 per share, plus accrued and unpaid dividends.
</TABLE>

RISK FACTORS

An investment in the shares of Preferred 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 Preferred 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 securitization of 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 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 such
securitizations suffered losses. 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 monetize excess spread cash flows, has been an important
factor in providing the Company with substantial liquidity, but such ability
appears to be diminishing due to the difficulty in obtaining acceptable
insurance and ratings. If the Company were unable to securitize its finance
contracts and did not have sufficient credit available, either under warehouse
credit facilities or from other sources, the Company would have to sell portions
of its portfolio directly to whole loan buyers or curtail its finance contract
acquisition activities. See 'Business -- Funding/Securitization of Finance
Contracts.'

Dependence on Insurance Policies. In order to limit potential losses on
finance contracts, the Company has purchased insurance under Vendor's single
interest ('VSI') insurance policies, including loss deficiency coverages for
each contract at the time of its acquisition. VSI Policies generally include
physical damage and loss coverage with respect to the financed vehicles and may
include loss coverage with respect to unpaid amounts under the related finance
contract, subject in each case to certain

conditions and limitations. The protections afforded by the VSI Policies are not
complete and depend on the Company's compliance with the terms and conditions of
the policy. There can be no assurance that such insurance will be available in
the future at reasonable rates. The Company is currently involved with a
disagreement with one of its VSI carriers as to the scope of the policy's
coverage, and the ratings of two securitizations supported in part by such
policy have been put under review. The unavailability of such insurance, coupled
with the absence of alternative forms of credit enhancement, could adversely
affect the Company's ability to profitably acquire and securitize finance
contracts. See 'Business -- Insurance' and ' -- Recent Developments.'

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. Although the Company has no specific plans for additional
equity financings other than this offering of Preferred Stock, 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.'

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. Over time, the Company's finance contract portfolio becomes more
seasoned. This effect on the delinquency statistics can be observed in the
comparison of quarter ended September 30, 1997 versus 1996 delinquency
percentages. The portfolio is tangibly more seasoned as of September 30, 1997
versus September 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. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Business -- Borrower Characteristics,' ' -- Contract
Acquisition Process,' ' -- Funding/Securitization of Finance Contracts' and
' -- Contract Servicing and Collection.'

The Company's servicing income also can be adversely affected by
prepayments or defaults on contracts in the servicing portfolio. The Company's
servicing revenue is based on the number of outstanding contracts. If contracts
are prepaid or charged-off, the Company's servicing revenue will decline to the
extent of such prepaid or charged-off contracts. There can be no assurance as to
what level of prepayment, if any, will occur on the finance contracts.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors. Factors affecting prepayment of motor vehicle finance contracts
include borrowers' job transfers, unemployment, casualty, trade-ins, changes in
available interest rates, net equity in the motor vehicles and servicing
decisions.

LOSS OF SERVICING RIGHTS AND SUSPENSION OF FUTURE RETAINED CASH FLOWS

The Company is entitled to receive servicing fee income only while it acts
as collection agent for securitized contracts. Any loss of these collection fees
could have an adverse effect on the Company's results of operations and
financial condition. The Company's right to act as collection agent under the
servicing agreements and as administrator under the trust agreements, and
accordingly to receive collection fees, can be terminated by the trustee upon
the occurrence of certain events of administrator termination (as defined in the
servicing agreements and the trust agreements). See 'Business -- Funding/
Securitization of Finance Contracts.'

Under the terms of each of the trust agreements, upon the occurrence of
certain amortization events, the Company's rights to receive payments of its
collection fees and payments in respect of its retained interest in the
securitization excess spread cash flows would be suspended unless and until all
payments of principal and interest due on the investor certificates are made.
Such amortization events include (i) the occurrence of any event of
administrator termination referred to in the immediately preceding paragraph or
(ii) the institution of certain bankruptcy or liquidation proceedings against
any of the securitization subsidiaries of the Company.

Upon the occurrence of certain trigger events under the trust agreements,
the amount required to be retained in the cash reserve accounts is increased
such that future residual cash flows would be retained in such accounts rather
than paid to the Company. Such cash reserve trigger events include: (i)
increases in the net loss ratio and delinquency ratios above certain levels for
each pool of securitized finance contracts; or (ii) the occurrence of an event
of administrator termination resulting from a bankruptcy event of the Company.

In addition to the foregoing, the trust 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.

COMPETITION AND INDUSTRY CONDITIONS

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. 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. There can be no assurance that the turmoil in the sub-prime auto
finance industry will not continue to have an effect on the Company's ability to
raise funds and may result in an increased cost of funding to the Company. See
'Business -- Competition,' and ' -- Recent Developments.'

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 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 September 1997,
approximately 58% of the Company's finance contracts, as a percentage of the
aggregate nominal principal balance of such finance contracts, had been
originated in the State of Texas. Such geographic concentration could have an
adverse effect on the Company should negative economic and other factors occur
in Texas that would cause the finance contracts to experience delinquencies and
losses in excess of those experienced historically. It is the Company's current
intention to expand the number and proportion of finance contracts acquired from
dealers in states other than Texas. Such geographic expansion may entail greater
risks as the Company does business in areas and with dealers with which it is
less familiar than in Texas. Such expansion also entails risks associated with
the adequate retention and training of sufficient personnel and the need for
sufficient financing sources. See 'Business -- Growth and Business Strategy.'

REGULATION

The Company's business is subject to numerous federal and state consumer
laws and regulations, which, among other things: (i) require the Company to
obtain and maintain certain licenses and qualifications; (ii) limit the interest
rates, fees and other charges the Company is allowed to charge; (iii) limit or
prescribe certain other terms of the Company's contracts, (iv) require the
Company to provide specified disclosure; and (v) define the Company's rights to
collect on finance contracts and to repossess and sell collateral. A change in
existing laws or regulations, or in the creation or enforcement thereof, or the
promulgation of any additional laws or regulations could have a material adverse
effect on the Company's business. See 'Business -- Regulation.'

DEPENDENCE ON KEY EXECUTIVES

The success of the Company's operations is dependent upon the experience
and ability of William O. Winsauer, the Chairman of the Board and Chief
Executive Officer, and Adrian Katz, the Vice Chairman of the Board and Chief
Operating Officer. The loss of the services of Messrs. Winsauer or Katz could
have an adverse effect on the Company's business. In addition, if the loss of
either Mr. Winsauer or Mr. Katz constituted a 'change in control,' it could
result in an amortization event under the trust agreements relating to the
Company's securitizations, reducing future cash flows from securitizations or an
event of funding termination. 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.'

PREFERRED STOCK

In addition to the 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.'

Redemption of Preferred Stock. Commencing three years from the date of this
Prospectus, the Preferred Stock may be redeemed by the Company at its option in
cash or in Common Stock. Accordingly, holders of the Preferred Stock may be
required to either exchange their Preferred Stock for Common Stock or accept a
fixed payment price for each share of Preferred Stock. See 'Description of
Capital Stock.'

No Assurance of an Active Public Market. While the Preferred Stock will be
free of restrictions on transfer, there is presently no public market for the
Preferred Stock and [although the Company will apply to have the Preferred Stock
listed on AMEX,] there can be no assurance that an active market will develop or
be maintained. Accordingly, there can be no assurance that the purchasers will
be able to sell the Preferred Stock in the future. See 'Description of
Securities.'

Non-Registration in Certain Jurisdictions of Shares of Common Stock
Underlying the Preferred Stock. The Preferred Stock is not redeemable unless,
at the time of redemption, the Company has a current prospectus covering the
shares of Common Stock issuable upon redemption of such Preferred Stock and such
shares of Common Stock have been registered, qualified or deemed to be exempt
under the securities laws of the state of residence of the holders of such
Preferred Stock. Although the Company is registering the underlying Common Stock
hereby and will use its best efforts to maintain a current prospectus relating
thereto while the Preferred Stock is outstanding, there is no assurance that it
will be able to do so.

Purchasers may buy Preferred Stock in the aftermarket or may move to
jurisdictions in which the shares of Common Stock underlying the Preferred Stock
are not so registered or qualified during the period that the Preferred Stock is
outstanding. In this event, the Company would be unable to issue Common Stock to
those persons desiring to convert their shares of Preferred Stock unless and
until such shares could be qualified for sale in jurisdictions in which such
purchasers reside, or an exemption from such qualification exists in such
jurisdiction. In such event, the holders of Preferred Stock could be unable to
convert their shares to Common Stock. See 'Description of Securities.'

Offering Price Arbitrarily Determined. The offering price of the Preferred
Stock will be arbitrarily determined through negotiations between the
Representative and the Company does not necessarily bear any relationship to the
Company's assets, earnings or other investment criteria. See 'Underwriting.'

SHARES ELIGIBLE FOR FUTURE SALE

The Company currently has 6,531,311 shares of Common Stock outstanding. Of
such shares, 1,075,000 shares are available for immediate sale in the public
market and 5,456,311 shares of Common Stock are 'restricted securities,' as that
term is defined under Rule 144 promulgated under the Securities Act, and may
only be sold pursuant to a registration statement under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act,
including Rule 144 and 144A thereunder. Approximately 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 'Beneficial Ownership of Common
Shares.'

In addition up to 515,000 shares of Common Stock may be issued upon
exercise of certain stock options and up to 600,000 shares of Common Stock may
be issued upon exercise of certain warrants. See 'Management -- Option Plan' and
'Description of Capital Stock -- Warrants and Convertible Notes.'

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Company's Common Stock has been, and may continue
to be, extremely volatile and the market price of the Preferred Stock may also
be 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 aggregate net proceeds from the sale of the Preferred Stock being
offered by the Company in the Offering (at an assumed initial public offering
price of $10 per share and after deducting underwriting discount and estimated
offering expenses) will be approximately $8,750,000 (approximately $10,130,000
if the Underwriters' over-allotment option is exercised in full).

The Company intends to apply the net proceeds from the sale of the
Preferred Stock offered hereby primarily to provide for the repayment of $2
million of the Company's 18% Convertible Notes and toward the acquisition of
finance contracts. In addition, any remaining net proceeds may be used for
working capital and general corporate purposes. Pending such uses, the
Company may invest the proceeds from this offering in short-term,
investment-grade securities.

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.
Pursuant to the terms of the Preferred Stock, the Company will pay (when and as
declared by the Board of Directors) on the Preferred Stock quarterly cumulative
dividends of % per annum in cash. See 'Description of Capital
Stock -- Preferred Stock.'

CAPITALIZATION

The following table sets forth information regarding the capitalization of
the Company as of September 30, 1997 (i) on an actual basis and (ii) on an as
adjusted basis to give effect to the sale of 1,000,000 shares of Preferred Stock
offered by the Company (at an assumed public offering price of $10.00 per share
and after deducting the underwriting discount and estimated offering expenses)
and the application of the estimated net proceeds therefrom. See 'Use of
Proceeds.'

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term Debt -- Notes Payable.......................................................... $10,280 $ 8,280
------- -----------
Shareholder's Equity:
Common Stock, no par value, 25,000,000 shares authorized; 6,531,311 shares issued
and outstanding, actual and as adjusted(1)......................................... 1 1
Preferred Stock, 5,000,000 shares authorized, no par value; no shares issued and
outstanding, actual; 1,000,000 shares of Series A Cumulative Preferred Stock, $10
liquidation preference, issued and outstanding, as adjusted........................ -- 10,000
Additional paid-in capital(2)............................................................ 8,704 7,455
Retained earnings........................................................................ 5,571 5,571
Deferred compensation.................................................................... (1) (1)
Loans to shareholders.................................................................... (7) (7)
Unrealized appreciation on interest-only strip receivables............................... 1,266 1,266
------- -----------
Total shareholders' equity..................................................... 15,534 24,292
------- -----------
Total capitalization........................................................... $25,814 $32,572
------- -----------
------- -----------
</TABLE>
- ------------
(1) Excludes (i) 515,000 shares of Common Stock reserved for issuance under the
Option Plan, (ii) 917,165 shares of Common Stock issuable upon the exercise
of outstanding warrants and notes, and (iii) 300,000 shares of Common Stock
which may be issued and sold upon the exercise in full of the
Representative's Warrants. See 'Description of Capital Stock -- Warrants,'
and 'Management -- Option Plan.'

(2) Includes the effect of Offering expenses of $1,250,000.

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 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 September 30, 1997, the Company acquired 19,167 finance
contracts with an aggregate initial principal balance of $221,032,319, and which
had an initial average principal balance, at acquisition, of $11,532, a weighted
average annual percentage rate ('APR') of 19.575%, a weighted average finance
contract acquisition discount of 8.5% and a weighted average maturity of 52.2
months. Since inception, the Company has completed eight securitizations
pursuant to which it privately placed $204 million in finance contract-backed
securities.

RECENT DEVELOPMENTS

On August 21, 1997, the Company completed its Series 1997-B securitization
of $34.7 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.

On October 22, 1997, the Company closed its Series 1997-C 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.

In November 1997, the Company was informed by Moody's, and then by Fitch,
that the rated notes issued in the 1997-B and 1997-C securitization transactions
had been placed under review for possible downgrade, due to certain recent
statements made by representatives of Progressive Northern Insurance Company
('Progressive') about the coverage afforded under the VSI and Deficiency Balance
insurance policies issued in connection with such transactions. Specifically
Moody's and Fitch, after discussions with representatives of Progressive, cited
concerns with Progressive's interpretation of its right to cancel the policies,
as well as its aggregate limit of liability on claims paid under the Deficiency
Balance policy. The Company disagrees with the actions taken by Moody's and
Fitch and reaffirms its understanding that (a) coverages under the Progressive
policies are not cancelable with respect to Auto Loans for which premiums have
been paid in full, and (b) Progressive's aggregate limitation of liability per
month is 88% of premiums paid to date. Nevertheless, in order to resolve the
situation, the Company is in active discussions with the rating agencies and
other parties.

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:

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 September 30, 1997, new vehicles and used vehicles represented 6.4%
and 93.6%, 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
September 30, 1997, a total of $5,700,863 or 3.24%, of the Company's
finance contract portfolio were between 60 and 89 days past due and
$2,666,668, or

approximately 1.51%, of the Company's finance contracts outstanding were
90 days past due or greater. The aforementioned percentages and amounts
exclude loans in the Company's finance contract portfolio where, at
September 30, 1997, the underlying vehicle has been repossessed, the
borrower is in bankruptcy, the dealer is to buy back the loan, or where an
insurance claim has been filed. From inception through September 30, 1997,
the Company repossessed 1,949 (approximately 10%) of its financed vehicles,
and the Company had completed the disposal of 797 vehicles, resulting in an
average loss per repossession of approximately $1,972 per vehicle. See
'Management's Discussion and Analysis of Financial Condition & Results of
Operations -- 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 15.49% (excluding
repossession costs) of the principal balance outstanding on disposed
repossessed vehicles for which the liquidation process has been completed
as of September 30, 1997. For its 1997-B and 1997-C securitizations, the
Company purchased credit default insurance from Progressive Northern
Insurance Company. See 'Recent Developments', ' -- Insurance'
and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- 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 average borrower's age is 34.3 years.

CONTRACT PROFILE

From inception to September 30, 1997, the Company acquired 19,167 finance
contracts with an aggregate initial principal balance of $11,532. Of the finance
contracts acquired, approximately 6.4% have related to the sale of new
automobiles and approximately 93.6% 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 $11,532; a weighted average APR of 19.575%;
a weighted average finance contract acquisition discount of 8.5%; and a weighted
average contractual maturity of 52.2 months. As of September 30, 1997, the
finance contracts in the finance contract portfolio had a weighted average
remaining maturity of 42 months.

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 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 September 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, Inc.) 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 'Legal Proceedings.'

DEALER SOLICITATION

Marketing Representatives. As of September 30, 1997, the Company utilized
44 marketing representatives, 36 of whom were individuals employed by the
Company and eight of whom 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
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.

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 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.

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 its
warehouse arrangements. For all of its securitizations, the Company either has
assumed or will assume the servicing functions performed by LSE.

Contract Administration. LSE, as servicer, provides certain finance
contract administration functions in connection with warehouse facilities and
the Company, as servicer, provides such functions in connection with finance
contracts sold to securitization trusts, including payment processing, statement
rendering, insurance tracking, data reporting and customer service for finance
contracts. The servicer 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. The servicer 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. The servicer also handles account inquiries
from borrowers and performs insurance tracking services. The servicer 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.

As of September 30, 1997, the Company employed 198 people full-time,
including 71 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 September 30, 1997, there
were 270 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.

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 or the Company 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.

Deficiency Balance Endorsements. In addition to physical damage and loss
coverage, the Interstate VSI Policy contains a Credit Endorsement which provides
that Interstate shall indemnify the Company for certain losses incurred due to a
deficiency balance following the repossession and resale of financed vehicles
securing defaulted finance contracts eligible for coverage. Coverage under the
Credit Endorsement is strictly conditioned upon the Company's maintaining and
adhering to the credit underwriting criteria set forth in the Credit
Endorsement. Losses on each eligible contract are covered in an amount equal to
the deficiency balance resulting from the Net Payoff Balance less the sum of (i)
the Actual Cash Value of the financed vehicle plus (ii) the total amount
recoverable from all other applicable insurance, including 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 the Company'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 Dollars ($5,000)
for any financed contract, and claims payments may not exceed, on a monthly
basis, 88% of the premiums paid. See ' -- Recent Developments.'

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
a portion of 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 September 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 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%.

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 of 2% of the advance. The Company also deposits an additional 8%
of the amount advanced to the 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 pursuant to SFAS No. 125. As Master Funding
is not a consolidated subsidiary of the Company, advances outstanding under the
Daiwa Facility that relate to contracts sold to Master Funding are not
recognized as liabilities on the Company's balance sheet.

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 accounting for its securitization transactions in 1997, the
Company follows the provisions of the recently effective SFAS 125. In these
securitizations the 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
Developments.'

Upon each securitization, the Company recognizes the sale of finance
contracts and records a non-cash 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
September 30, 1997, the Company held interest-only strip receivables and Class B
Certificates totalling $18.4 million, a portion of which had been pledged to
secure notes payable of $10.3 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 entitles
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:

(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.
See 'Recent Developments.'

REGULATION

The Company's business is subject to regulation and licensing under various
federal, state and local statues and regulations. As of September 30, 1997, the
Company was licensed to conduct business operations with dealers located in 38
states, and, accordingly, the laws and regulations of such states govern the
Company's operations. Most states where the Company operates (i) limit the
interest rates, fees and other charges that may be imposed by, or prescribe
certain other terms of, the finance contracts that the Company purchases and
(ii) define the Company's rights to repossess and sell collateral. In addition,
the Company is required to be licensed or registered to conduct 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 September 30, 1997, the Company employed 198 persons, none of whom
was covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is satisfactory.

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
does not maintain any regional office facilities, although its securitization
subsidiaries are incorporated and maintain an office in Nevada.

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 the Company
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) the Company
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 the Company'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 by certain
dealers 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
selected income statement and balance sheet data for the period from August 1,
1994 (inception) to December 31, 1994, and the years ended December 31, 1995 and
1996, and as of December 31, 1994, 1995 and 1996 presented below were derived
from the financial statements of the Company which were audited by
Coopers & Lybrand L.L.P. independent accountants, 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
nine months ended September 30, 1996 and September 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 nine months ended September 30, 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.

<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994 (INCEPTION) YEAR ENDED DECEMBER NINE MONTHS ENDED
TO DECEMBER 31, 1994(2) 31, SEPTEMBER 30,
----------------------------- --------------------- ---------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net interest income.................................. $ 19 $ 781 $ 137 $ 263 $ 177
Servicing fee income................................. 0 0 658 475 660
Gain on sale of finance contracts.................... 0 4,086 12,820 9,423 13,533
Other income (loss).................................. 0 0 388 -- (530)
-------- --------- --------- --------- ---------
Total revenues.................................. 19 4,867 14,003 10,161 13,840
-------- --------- --------- --------- ---------
Provision for credit losses.......................... 45 49 412 113 125
Salaries and benefits................................ 226 1,320 4,529 3,082 5,413
General and administrative........................... 245 1,463 2,331 1,318 4,482
Other operating expenses............................. 48 963 1,120 842 1,266
-------- --------- --------- --------- ---------
Total expenses.................................. 564 3,795 8,392 5,355 11,286
-------- --------- --------- --------- ---------
Income before taxes and extraordinary item........... (545) 1,072 5,611 4,806 2,554
Provision for income taxes........................... 0 199 1,926 1,634 896
Extraordinary loss net of tax effect................. -- -- 100 100 --
-------- --------- --------- --------- ---------
Net income........................................... $(545) $ 873 $ 3,585 $ 3,072 $ 1,658
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Earnings per share before extraordinary item......... $(0.11) $ 0.17 $ 0.64 $ 0.56 $ 0.25
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Earnings per share................................... $(0.11) $ 0.17 $ 0.62 $ 0.54 $ 0.25
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Weighted average shares outstanding.................. 5,118,753 5,190,159 5,811,377 5,701,086 6,537,129

ASSET QUALITY DATA:
Delinquencies 60+ days past due as a percentage of principal balance of
finance contract portfolio (end of period)(1)...... 0.30% 2.30% 3.34% 2.73% 4.75%
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 0 $ 93 $ 4,121 $ 173
Restricted funds.......................................................... 0 1,683 2,982 6,165
Finance contracts held for sale, net...................................... 2,361 3,355 228 1,000
Interest-only strip receivable............................................ 0 847 4,247 9,979
Total assets......................................................... 2,500 11,065 26,277 37,386
Notes payable............................................................. 0 2,675 10,175 10,280
Repurchase agreement...................................................... 0 1,061 0 0
Revolving credit agreement................................................ 2,055 1,150 0 4,240
Subordinated debt......................................................... 0 0 0 0
Total debt........................................................... 2,055 4,886 10,175 14,520
Shareholders' equity...................................................... (109) 3,026 12,286 15,535
</TABLE>

- ------------

(1) Includes the Company's entire finance contract portfolio of contracts held
and contracts securitized. Excludes finance contracts where underlying
vehicle is repossessed, the borrower is in bankruptcy, the dealer is to buy
back the loan, or insurance claims have been filed.
(2) The Company was incorporated on June 15, 1993 and commenced operations in
August 1994.

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.

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 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 nine months ended September 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.

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 spread for
each of the Company's securitizations (dollars in thousands):

<TABLE>
<CAPTION>
WEIGHTED
REMAINING AVERAGE
BALANCE AT CONTRACT CERTIFICATE GROSS
SECURITIZATION BALANCE(1) SEPTEMBER 30, 1997 RATE RATE RATINGS(2) SPREAD(3)
- ------------------------------------------ ---------- ------------------ -------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AutoBond Receivables Trust 1995-A......... $ 26,261 $ 13,577 18.9% 7.23% A/A3 11.7%
AutoBond Receivables Trust 1996-A......... 16,563 10,438 19.7% 7.15% A/A3 12.5%
AutoBond Receivables Trust 1996-B......... 17,833 12,001 19.7% 7.73% A/A3 12.0%
AutoBond Receivables Trust 1996-C......... 22,297 18,248 19.7% 7.45% A/A3 12.3%
AutoBond Receivables Trust 1996-D......... 25,000 21,862 19.5% 7.37% A/A3 12.1%
AutoBond Receivables Trust 1997-A(4)...... 27,196 23,951 20.8% 7.82% A/A2 13.0%
BBB/BB
AutoBond Receivables Trust 1997-B(6)...... 34,725 33,937 19.9% 7.66% A/A3 12.3%
AutoBond Receivables Trust 1997-C(5)(6)... 34,430 34,430 20.0% 7.56% A/A3 12.5%
---------- ------------------
Total................................ $204,305 $168,444
---------- ------------------
---------- ------------------
</TABLE>
- ------------
(1) Refers only to balances on senior investor certificates.

(2) Indicates ratings by Fitch Investors Service, L.P. ('Fitch') and Moody's
Investors Service, Inc. ('Moody's'), respectively.

(3) Difference between weighted average contract rate and senior certificate
rate.

(4) Includes Class A and Class B Notes.

(5) Transaction closed subsequent to September 30, 1997.

(6) See Recent Developments for a discussion of recent actions taken by Fitch
and Moody's.
------------------------
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. The Company has
notified the third-party servicer, Loan Servicing Enterprise, that the Company
intends to assume all loan servicing responsibilities in respect of the
securitization trusts, resulting in an increase in gross contractual servicing
fees to $15 per month per contract.

FINANCE CONTRACT ACQUISITION ACTIVITY

The following table sets forth information about the Company's finance
contract acquisition activity (dollars in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1997
----------- -----------

<S> <C> <C>
Number of finance contracts acquired......................................... 4,979 9,091
Principal balance of finance contracts acquired......................... $ 57,730 $ 103,249
Number of active dealerships(1)......................................... 322 839
Number of enrolled dealerships(2)....................................... 603 1,383
</TABLE>
- ------------
(1) Dealers who have sold at least one finance contract to the Company during
the period.

(2) Total number of dealerships which were enrolled as of the end of 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 SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996

TOTAL REVENUES

Total revenues increased $1,892,983 to $6,370,219 for the three months
ended September 30, 1997 from $4,477,236 for the three months ended September
30, 1996 due to expansion of the Company's finance contract acquisition and
securitization activities.

Interest Income. Interest income increased $713,112 to $1,313,670 for the
three months ended September 30, 1997 from $600,558 for the three months ended
September 30, 1996 due the growth and timing of finance contract acquisitions.
The Company acquired finance contracts totaling $34.0 million during the three
months ended September 30, 1997 compared to $23.8 million in the comparable 1996
period. Accretion on the interest-only strip receivables increased $176,412 from
the respective 1996 period to $236,483 during the three months ended September
30, 1997.

Gain on Sale of Finance Contracts. The Company recognized gain on sale
totaling $4,840,621 on finance contracts carried at $31.0 million (15.5%) during
the three months ended September 30, 1997. Gain on sale amounted to $3,679,081
on finance contracts carried at $23.2 million (15.9%) in the comparable 1996
period. Accordingly, gain on sale of finance contracts rose $1,161,540 during
the three months ended September 30, 1997 over 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
September 30, 1997, servicing fee income was $225,389, primarily collection
agent fees. Servicing fee income increased by $27,792 from the three months
ended September 30, 1996 as a result of increased securitization activity by the
Company. The ratio of servicing fee income to the average principal balance of
finance contracts outstanding declined from 1.1% at September 30, 1996 to .5% at
September 30, 1997 on an annualized basis as the Company waived $55,843 in
collection agent fees during the current period.

Other Income (Loss). For three months ended September 30, 1997, other loss
amounted to $9,461, compared with $0 for the comparable 1996 period. Other loss
included unrealized loss on the Company's Class B certificates totaling $27,463
recorded during the three months ended September 30, 1997.

TOTAL EXPENSES

Total expenses of the Company increased $2,993,727 to $5,573,445 for the
three months ended September 30, 1997 from $2,579,718 for the three months ended
September 30, 1996. The ratio of total expenses to the average principal balance
of finance contracts outstanding declined from 14.9% for the three months ended
September 30, 1996 to 13.5% for the three months ended September 30, 1997 on an
annualized basis.

Provision for Credit Losses. Provision for credit losses on finance
contracts rose to $125,000 for the three months ended September 30, 1997
compared to $49,750 for the three months ended September 30, 1996. The Company
charged off loans totaling $105,173 to the allowance for credit losses during
the three months ended September 30, 1997.

Interest Expense. Interest expense rose to $1,102,195 for the three months
ended September 30, 1997 from $669,815 for the three months ended September 30,
1996. Interest expense increased by $432,380 due to higher net borrowing costs
associated with the revolving credit facilities, along with increased debt
issuance costs amortization of $96,800.

Salaries and Benefits. Salaries and benefits increased $1,270,118 to
$2,506,470 for the three months ended September 30, 1997 from $1,236,352 for the
three months ended September 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 97 to 198 employees at September 30, 1997, compared to 101 employees at
September 30, 1996.

General and Administrative Expenses. General and administrative expenses
increased $923,476 to $1,356,639 for the three months ended September 30, 1997
from $433,163 for the three months ended September 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 $292,503 to
$483,141 for the three months ended September 30, 1997 from $190,638 for the
three months ended September 30, 1996. This increase was due to increased
finance contract acquisition volume.

NET INCOME

In the three months ended September 30, 1997, net income decreased $771,568
to $511,814 from $1,283,382 for the three months ended September 30, 1996. The
decrease in net income was attributable to the factors discussed above.

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996

TOTAL REVENUES

Total revenues increased $4,800,928 to $16,769,709 for the nine months
ended September 30, 1997 from $11,968,781 for the nine months ended September
30, 1996 due to expansion of the Company's finance contract acquisition and
securitization activities.

Interest Income. Interest income increased $1,036,493 to $3,107,402 for the
nine months ended September 30, 1997 from $2,070,909 for the nine months ended
September 30, 1996 due the growth and timing of finance contract acquisitions.
The Company acquired finance contracts totaling $103.3 million during the nine
months ended September 30, 1997 compared to $57.7 million in the comparable 1996
period. Accretion on the interest-only strip receivables increased $225,285 from
the respective 1996 period to $339,266 during the nine months ended September
30, 1997.

Gain on Sale of Finance Contracts. The Company realized gain on sale
totaling $13,532,765 on finance contracts carried at $96.7 million (14.0 %)
during the nine months ended September 30, 1997. Gain on sale amounted to
$9,423,067 on finance contracts carried at $59.0 million (16.0%) in the
comparable 1996 period. Accordingly, gain on sale of finance contracts rose
$4,109,698 during the nine months ended September 30, 1997 over the comparable
1996 period.

Servicing Fee Income. The Company reports servicing fee income only with
respect to finance contracts that are securitized. For the nine months ended
September 30, 1997, servicing fee income was $659,791, primarily collection
agent fees. Servicing fee income increased by $184,986 from the nine months
ended September 30, 1996 as a result of increased securitization activity by the
Company. The

ratio of servicing fee income to the average principal balance of finance
contracts outstanding declined from .9% at September 30, 1996 to .5% at
September 30, 1997 on an annualized basis.

Other Income (Loss). For nine months ended September 30, 1997, other loss
amounted to $530,249, 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 nine months ended September 30, 1997. Additionally, unrealized loss on
the Company's Class B certificates totaled $80,325 during the nine months ended
September 30, 1997.

TOTAL EXPENSES

Total expenses of the Company increased $7,053,815 to $14,216,313 for the
nine months ended September 30, 1997 from $7,162,498 for the nine months ended
September 30, 1996. The ratio of total expenses to the average principal balance
of finance contracts outstanding declined from 17.6% for the nine months ended
September 30, 1996 to 13.4% for the nine months ended September 30, 1997 on an
annualized basis.

Provision for Credit Losses. Provision for credit losses on finance
contracts increased $11,766 to $125,000 for the nine months ended September 30,
1997 from $113,234 for the nine months ended September 30, 1996.

Interest Expense. Interest expense rose to $2,930,592 for the nine months
ended September 30, 1997 from $1,807,335 for the nine months ended September 30,
1996. Interest expense increased by $1,123,257 due to higher borrowing volumes
outstanding under the revolving credit facilities, along with increased debt
issuance costs amortization of $391,962.

Salaries and Benefits. Salaries and benefits increased $3,477,902 to
$6,560,301 for the nine months ended September 30, 1997 from $3,082,399 for the
nine months ended September 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.

General and Administrative Expenses. General and administrative expenses
increased $2,017,079 to $3,334,590 for the nine months ended September 30, 1997
from $1,317,511 for the nine months ended September 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 $423,811 to
$1,265,830 for the nine months ended September 30, 1997 from $842,019 for the
nine months ended September 30, 1996. This increase was due to increased finance
contract acquisition volume.

NET INCOME

In the nine months ended September 30, 1997, net income decreased
$1,414,436 to $1,657,711 from $3,072,147 for the nine months ended September 30,
1996. The decrease in net income was primarily attributable to an increase in
infrastructure costs to support higher finance contract acquisition and
servicing volume. The principal balance of finance contracts acquired increased
$45.5 million to $103.3 million for the nine months ended September 30, 1997
from $57.7 million for the nine months ended September 30, 1996.

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.

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 $402,017 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.

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

Restricted Cash. Restricted cash increased $3.2 million to $6.2 million at
September 30, 1997 from $3.0 million at December 31, 1996. In accordance with
the Company's revolving credit facilities, proceeds advanced by the lender for
purchase of finance contracts are held by a trustee until the Company delivers
qualifying collateral to release the funds, normally in a matter of days. The
trustee held $6.1 million of funds advanced for the purchase of finance
contracts at September 30, 1997. The Company is also 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.

Finance Contracts Held for Sale, Net. Finance contracts held for sale, net
of allowance for credit losses, increased $771,109 to $1.0 million at September
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.

Interest-Only Strip Receivable. The following table provides historical
data regarding the interest-only strip receivable:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Beginning balance.................................................... $ 4,247,274
Unrealized appreciation.............................................. 1,918,138
Additions............................................................ 3,942,033
Accretion............................................................ 339,266
Impairment charge.................................................... (467,926)
-------------
Ending balance....................................................... $ 9,978,785
-------------
-------------
</TABLE>

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 Company's securitizations follow:

<TABLE>
<CAPTION>
SENIOR INVESTOR INITIAL
CERTIFICATE RESERVE
SECURITIZATION AMOUNT(1) DEPOSIT PERCENT
- ------------------------------------------------------------------ --------------- -------- -------
<S> <C> <C> <C>
AutoBond Receivables Trust 1995-A................................. $26,261,009 $525,220 2.0%
AutoBond Receivables Trust 1996-A................................. 16,563,366 331,267 2.0%
AutoBond Receivables Trust 1996-B................................. 17,833,885 356,658 2.0%
AutoBond Receivables Trust 1996-C................................. 22,297,719 445,934 2.0%
AutoBond Receivables Trust 1996-D................................. 25,000,000 500,000 2.0%
AutoBond Receivables Trust 1997-A(2).............................. 28,037,167 560,744 2.0%
AutoBond Receivables Trust 1997-B................................. 34,725,196 868,130 2.5%
AutoBond Receivables Trust 1997-C(3).............................. 34,430,079 860,752 2.5%
</TABLE>
- ------------
(1) Refers only to balances on senior investor certificates upon issuance.

(2) Includes Class A, Class B and Class C-1 Notes.

(3) Transaction closed subsequent to September 30, 1997.

A portion of excess spread cash flows will increase such reserves until
they reach 6% of the outstanding balance of the senior investor certificates.

Prepaid Expenses and Other Assets. Prepaid expenses and other assets
increased $4.9 million to $5.6 million at September 30, 1997 from $683,955 at
December 31, 1996. The Company carried $5.7 million in other assets as of
September 30, 1997 related to the Company's retained interest in amounts
transferred to a special purpose subsidiary which issued variable rate funding
notes. Subsequent to September 30, 1997, Daiwa exercised its option to surrender
its variable rate funding notes for term notes in connection with the AutoBond
Receivables Trust 1997-C securitization.

DELINQUENCY EXPERIENCE

The following table reflects the delinquency experience of the Company's
finance contract portfolio:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Principal balance of finance contracts outstanding...... $104,889,000 $176,120,091
Delinquent finance contracts(1):
60-89 days past due................................ 1,826,800 1.74% 5,700,863 3.24%
90 days past due and over.......................... 1,328,300 1.27% 2,666,668 1.51%
------------ ---- ------------ ----
Total......................................... $ 3,155,100 3.01% $ 8,367,531 4.75%
------------ ---- ------------ ----
------------ ---- ------------ ----
</TABLE>
- ------------
(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.

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.

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
and 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 insurance claims under the VSI policy and, if
applicable, the deficiency balance policy are then filed.

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 September 30, 1997 versus 1996
delinquency percentages. The portfolio is tangibly more seasoned as of September
30, 1997 versus September 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 September
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(1) ANNUALIZED(2) ACQUIRED
- ------------------------------------------- -------------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
1994
Q3.................................... $ 21,930 23.54% 7.24% $ 93,170
Q4.................................... 557,839 23.52% 7.84% 2,371,600
1995
Q1.................................... 1,412,092 22.38% 8.14% 6,310,420
Q2.................................... 1,357,521 22.05% 8.82% 6,157,440
Q3.................................... 1,454,691 20.19% 8.97% 7,205,900
Q4.................................... 2,658,117 21.81% 10.90% 12,188,860
1996
Q1.................................... 2,990,647 19.34% 11.05% 15,459,930
Q2.................................... 3,420,207 18.53% 12.35% 18,458,820
Q3.................................... 3,143,095 13.24% 10.59% 23,735,100
Q4.................................... 2,496,556 9.68% 9.68% 25,802,890
1997
Q1.................................... 2,239,219 6.58% 8.78% 34,014,880
Q2.................................... 313,943 0.89% 1.78% 35,273,260
Q3.................................... 34,939 0.10% .41% 33,960,049
</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 $557,839
in repossessions divided by principal balance of $2,371,600 in contracts
acquired, divided by 12 quarters outstanding times four equals an annual
repossession frequency of 7.84%).

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
SEPTEMBER 30, 1997
-----------------------
<S> <C>
Number of finance contracts acquired.................................................... 19,167
Number of vehicles repossessed.......................................................... 1,949
Repossessed units disposed of........................................................... 797
Repossessed units awaiting disposition(2)............................................... 1,152
Cumulative gross charge-offs(1)......................................................... $ 8,672,289
Costs of repossession(1)................................................................ 228,820
Proceeds from auction, physical damage insurance and refunds(1)......................... (5,246,388)
-----------------------
Net loss................................................................................ 3,654,721
Deficiency insurance settlement received(1)............................................. (2,082,812)
-----------------------
Net charge-offs(1)...................................................................... $ 1,571,909
-----------------------
-----------------------
Net charge-offs per unit disposed....................................................... 1,972
Recoveries as a percentage of cumulative gross charge-offs(3)........................... 84.51%
</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 September 30, 1997.

(2) The vehicles may have been sold at auction; however AutoBond might not have
received all insurance proceeds as of September 30, 1997.

(3) Not including the costs of repossession which are reimbursed by the
securitization trusts.

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. Net
cash used in operating activities totaled $6.3 million during the nine months
ended September 30, 1997. The Company used $5.1 million to fund an increase in
other assets during the period, including $5.7 million received upon closing of
the AutoBond Receivables Trust 1997-C securitization subsequent to September 30,
1997. The Company used $99.2 million to purchase finance contracts and $96.7
million was received from sales of finance contracts, primarily through
securitizations during the nine months ended September 30, 1997. Significant
activities comprising cash flows from investing activities include net advances
to AutoBond Receivables Trusts of $2.5 million for the nine months ended
September 30, 1997. Cash flows from financing activities include net borrowings
under revolving credit facilities of $4.2 million for the nine months ended
September 30, 1997.

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 September 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 September 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 $358,174 for the nine months ended
September 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% (6.81% at September 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 September 30, 1997,
advances under the Daiwa Facility totaled $4,240,208. The Company incurred
interest expense under the Daiwa Facility of approximately $816,396 during the
nine months ended September 30, 1997.

On June 30, 1997, the Daiwa Facility was amended to allow the Company, at
its election, to transfer finance contracts into a qualified unconsolidated
special purpose subsidiary, AutoBond Master Funding Corporation. In conjunction
with these transfers, this special purpose subsidiary issues variable funding
warehouse notes which are convertible into term notes at the option of the
holder of such notes. Transfers of finance contracts to the special purpose
entity have been recognized as sales under SFAS No. 125.

Notes Payable. Pursuant to the 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. To date, the holders have
purchased $2,900,000 of subordinated asset-backed securities.

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, August 1997 and October 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 three 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. The Company also funded cash reserve accounts that provide 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 the Company's liquidity primarily in two
ways. First, the application of proceeds toward payment of the outstanding
advances under warehouse credit facilities makes additional borrowing available,
to the extent of such proceeds, under those facilities for the acquisition of
additional finance contracts. During the nine months ended September 30, 1997,
the Company securitized approximately $94.9 million 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
September 30, 1997, the Company held interest-only strip receivables and Class B
Certificates totaling $18.4 million, substantially all of which had been pledged
to collateralize notes payable of $10.3 million.

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 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 ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 128 'Earnings Per
Share.' SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share and is designed to improve earnings per
share information by simplifying the existing computational guidelines and
revising the previous disclosure requirements. The statement is effective for
periods ending after December 15, 1997, including interim periods.

In June 1997, the FASB issued SFAS No. 130, 'Reporting Comprehensive
Income,' which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.

Also in June 1997, the FASB issued SFAS No. 131, 'Disclosure about Segments
of an Enterprise and Restated Information,' which establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997.

The Company does not believe the implementation of these recent accounting
pronouncements will have a material effect on its consolidated financial
statements.

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
July 1, 1997 -- September 30, 1997........................................... $ 5 1/8 $3 13/16
</TABLE>

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company. As of November , 1997, the Company had approximately
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 used to pay dividends on the Preferred Stock and
retained for use in the operation and expansion of its business. Payment of cash
dividends on its Common Stock, 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.......................................... 33 Vice Chairman of the Board and Chief Operating
Officer and Director
John S. Winsauer(1).................................. 35 Secretary and Director
R.T. Pigott, Jr...................................... 43 Vice President and Chief Financial Officer
Alan E. Pazdernik.................................... 57 Vice President -- Credit
Robert R. Giese...................................... 58 Vice President -- Collections
Robert S. Kapito..................................... 40 Director
Manuel A. Gonzalez................................... 47 Director
Stuart A. Jones...................................... 42 Director
Thomas I. Blinten.................................... 41 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.

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 financial
services, including six years as an audit manager with a national 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 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

Currently a private investor. From November 1995 to September 1997, 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 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>
ANNUAL COMPENSATION
-------------------------------------------
BASE OTHER ANNUAL
NAMES AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------ ---- -------- ------- ------------

<S> <C> <C> <C> <C>
William O. Winsauer(1) ....... 1996 $240,000 $ 0 $ 0
Chairman of the Board and 1995 0 0 0
Chief Executive Officer
Adrian Katz .................. 1996 150,000 0 0
Vice Chairman of the Board 1995 18,750 0 0
John S. Winsauer ............. 1996 120,000 0 0
Director and Secretary 1995 40,000 0 0
Charles Pond(3) .............. 1996 180,000 90,000 0
President 1995 -- -- --
Robert G. Barfield(4) ........ 1996 78,000 0 88,945
Vice President, Marketing 1995 75,500 32,175 0
William J. Stahl(5) .......... 1996 120,000 0 0
Vice President and Chief 1995 85,000 0 0
Financial Officer

<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
SECURITIES
UNDERLYING ALL OTHER
NAMES AND PRINCIPAL POSITION OPTIONS(#) COMPENSATION
- ------------------------------------------ ------------
<S> <C> <C>
William O. Winsauer(1) .......$ 40,000 $ 0
Chairman of the Board and 0 0
Chief Executive Officer
Adrian Katz .................. 20,000 0
Vice Chairman of the Board 0 75,742(2)
John S. Winsauer ............. 20,000 0
Director and Secretary 0 0
Charles Pond(3) .............. 20,000 0
President -- --
Robert G. Barfield(4) ........ 15,000 0
Vice President, Marketing 0 0
William J. Stahl(5) .......... 25,000 0
Vice President and Chief 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).

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>

(footnotes on next page)

(footnotes from previous page)

(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 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.

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.

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 INDEMNIFICATION MATTERS

The Company's Articles of Incorporation provide that, pursuant to Texas
law, no director of the Company shall be liable to the Company or its
shareholders for monetary damages for an act or omission in such director's
capacity as a director except for (i) any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) any act or omission not in good
faith or that involves intentional misconduct or a knowing violation of law,
(iii) any transaction from which the director derived an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office or (iv) any act or omission for which the liability of a
director is expressly provided for by statute. The effect of this provision in
the Articles of Incorporation is to eliminate the right of the Company and its
shareholders (through shareholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
These provisions will not affect the liability of directors under other laws,
such as federal securities laws.

Under Section 2.02-1 of the Texas Business Corporation Act, the Company can
indemnify its directors and officers against liabilities they may incur in such
capacities, subject to certain limitations. The Company's Articles of
Incorporation provide that the Company will indemnify its directors and officers
to the fullest extent permitted by law.

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, 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 $132,213 as of September
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
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 $132,213 at September 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.

The Board of Directors has adopted a policy that any future transactions
with affiliates of the Company will be on terms no less favorable to the Company
than are reasonably available from unrelated third parties and shall have been
approved by a majority of the Company's directors who do not have a material
interest in the transactions.

BENEFICIAL OWNERSHIP OF COMMON SHARES

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 15, 1997 by (i) each
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.

<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
BENEFICIAL OWNER OWNERSHIP OWNED
- -------------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
William O. Winsauer .................................................................. 3,648,062 55.9%
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
John S. Winsauer ..................................................................... 1,225,688 18.8
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Adrian Katz .......................................................................... 578,750 8.9
AutoBond Acceptance Corporation
301 Congress Avenue
Austin, Texas 78701
Robert S. Kapito ..................................................................... 16,000 *
Manuel A. Gonzalez ................................................................... 500 *
Thomas I. Blinten .................................................................... 11,000 *
Stuart A. Jones ...................................................................... 7,000 *
--------- -----
Total (all executive officers and directors as a group)(1)............................ 5,487,000 84.0%
--------- -----
--------- -----
</TABLE>
- ------------
(1) Does not include out-of-the-money options. See 'Management -- Stock
Options.'

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.

Common Stock. As of November 14, 1997, there were 6,531,311 shares of
Common Stock outstanding. Holders of Common Stock are not entitled to any
preemptive rights. The Common Stock is neither redeemable nor convertible into
any other securities. All outstanding shares of Common Stock are fully paid and
nonassessable. All shares of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.

Each holder of Common Stock is entitled to one vote for each share of
Common Stock held of record on all matters submitted to a vote of shareholders,
including the election of directors. Shares of Common Stock do not have
cumulative voting rights.

In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share equally and ratably in all of the
assets remaining, if any, after satisfaction of all debts and liabilities of the
Company.

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.

% Cumulative Preferred Stock, Series A. Prior to completion of this
offering of Preferred Stock, the Board will adopt an amendment to the Articles
of Incorporation designating the terms of the Preferred Stock, consisting of up
to 1,150,000 shares, no par value.

When issued, the Preferred Stock will be validly issued, fully paid and
nonassessable. The holders of the Preferred Stock will have no preemptive rights
with respect to any shares of capital stock of the Company or any other
securities of the Company convertible into or carrying rights or options to
purchase any such shares. The Preferred Stock will not be subject to any sinking
fund or other obligation of the Company to redeem or retire the Preferred Stock.
Unless converted into shares of Common Stock or redeemed by the Company at its
option, the Preferred Stock will have a perpetual term, with no maturity.
Application will be made to list the Preferred Stock on the AMEX under the
symbol 'ABNDP.'

Ranking. The Preferred Stock will rank senior to the Common Stock with
respect to payment of dividends and amounts upon liquidation, dissolution or
winding up of the Company.

While any shares of the Preferred Stock are outstanding, the Company may
not authorize, create or increase the authorized amount of any class or series
of stock that ranks prior or senior to the Preferred Stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or winding up
without the consent of the holders of two-thirds of the outstanding shares of
the Preferred Stock. However, the Company may create additional
classes of stock, increase the authorized number of shares of preferred stock or
issue series of preferred stock which rank on a parity with the Preferred Stock
with respect, in each case, to the payment of dividends and amounts upon
liquidation, dissolution or winding up of the Company (a 'Parity Stock') without
the consent of any holder of the Preferred Stock. See ' -- Voting Rights.'

Dividends. Holders of shares of Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors out of funds at the
time legally available therefor, dividends at a rate of % per annum, payable
in cash quarterly in arrears on March 31, June 30, September 30 and December 31
of each year beginning March 31, 1998. Dividends will accrue and are cumulative
from the date of first issuance of the Preferred Stock and will be payable to
holders of record as they appear on the stock books of the Company on such
record dates as are fixed by the Board of Directors. Under Texas law, dividends
are generally payable if the Company is not otherwise insolvent to the extent
its net assets exceed its stated capital. Accumulated dividends on shares of
Preferred Stock will not bear interest.

Dividends payable on the Preferred Stock for any period less than a full
dividend period will be computed on the basis of twelve 30-day months and a
360-day year.

Except as provided in the next sentence, no dividend will be declared or
paid or other distribution of cash or other property declared or made directly
by the Company or any affiliate or any person acting on behalf of the Company or
any of its affiliates on any Parity Stock unless full cumulative dividends have
been declared and paid or are contemporaneously declared and funds sufficient
for payment set aside on the Preferred Stock for all prior and contemporaneous
dividend periods. If accumulated and accrued dividends on the Preferred Stock
for all prior and contemporaneous dividend periods have not been paid in full,
then any dividend declared on the Preferred Stock for any dividend period and on
any Parity Stock will be declared ratably in proportion to accumulated, accrued
and unpaid dividends on the Preferred Stock and the Parity Stock.

Neither the Company nor any affiliate nor any person acting on behalf of
the Company or any of its affiliates will (i) declare, pay or set apart funds
for the payment of any dividend or other distribution of cash or other property
declared or made directly or indirectly by the Company or any such affiliate or
person with respect to any Junior Stock (as defined below) or (ii) redeem,
purchase or otherwise acquire for consideration any Junior Stock through a
sinking fund or otherwise (other than a redemption or purchase or other
acquisition of shares of Common Stock made for purposes of an employee incentive
or benefit plan of the Company or any subsidiary) or (iii) pay or distribute any
cash or other property for the benefit of any holder of Junior Stock in respect
thereof, directly or indirectly, unless (A) all cumulative dividends with
respect to the Preferred Stock and any Parity Stock at the time such dividends
are payable have been paid or such dividends have been declared and funds have
been set apart for payment of such dividends and (B) sufficient funds have been
paid or set apart for the payment of the dividend for the current dividend
period with respect to the Preferred Stock and any Parity Stock. The foregoing
limitations do not restrict the Company's ability to take the foregoing actions
with respect to any Parity Stock.

As used herein, (i) the term 'dividend' does not include dividends payable
solely in shares of Junior Stock on Junior Stock, or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock,
and (ii) the term 'Junior Stock' means the Common Stock, and any other class of
capital stock of the Company now or hereafter issued and outstanding that ranks
junior to the Preferred Stock as to the payment of dividends or amounts upon
liquidation, dissolution or winding up of the Company.

Redemption. The Preferred Stock is not redeemable or convertible at the
option of the holder. The Preferred Stock may not be redeemed by the Company
until three years from the issuance date. One-sixth of the shares of Preferred
Stock outstanding during any year thereafter are redeemable for cash at the
liquidation value per share, plus accrued and unpaid dividends, in whole or in
part, at any time, at the option of the Company, or, in Common Stock, as
follows:

For each share of Preferred Stock redeemed, the Company will issue to the
holder X number of shares of Common Stock, where

$10/preferred share
X = ---------------------
.85($Y/common share),

where Y equals the average of the closing bid prices per share of the Common
Stock on NASDAQ for the 5 trading days prior to the redemption date.

Notice of redemption will be given by mail or by publication (with
subsequent prompt notice by mail) to the holders of record of the Preferred
Stock not more than four business days after the Company issues a press release,
in the case of a redemption for Common Stock, or not less than 30 nor more than
60 days prior to the date of redemption, in the case of a redemption for cash.
The redemption date will be a date selected by the Company not less than 30 nor
more than 60 days after the date on which the Company gives the notice of
redemption or issues the press release announcing its intention to redeem the
Preferred Stock, as the case may be. If fewer than all of the shares of
Preferred Stock are to be redeemed, the shares to be redeemed shall be selected
by lot or pro rata or in some other equitable manner determined by the Company.

On the redemption date, the Company must pay in cash on each share of
Preferred Stock to be redeemed any accumulated, accrued and unpaid dividends, if
any, on the redemption date, whether or not earned or declared. In the case of a
redemption date falling after a dividend record date and prior to the related
dividend payment date, the holders of the Preferred Stock at the close of
business on such record date will be entitled to receive the dividend payable on
such shares on the corresponding dividend payment date, notwithstanding the
redemption of such shares following such dividend record date. Except as
provided for in the preceding sentences, no payment or allowance will be made
for accumulated or accrued dividends on any shares of Preferred Stock called for
redemption or on the shares of Common Stock issuable upon such redemption.

In the event that full cumulative dividends on the Preferred Stock and any
Parity Stock have not been paid or declared and set apart for payment, the
Preferred Stock may not be redeemed in part and the Company may not purchase or
acquire shares of Preferred Stock otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Preferred Stock.

On and after the date fixed for redemption, provided that the Company has
made available at the office of the registrar and transfer agent a sufficient
number of shares of Common Stock and/or an amount of cash to effect the
redemption, dividends will cease to accumulate or accrue on the Preferred Stock
called for redemption (except that, in the case of a redemption date after a
dividend record date and prior to the related dividend payment date, holders of
Preferred Stock on the dividend record date will be entitled on such dividend
payment date to receive the dividend payable on such shares), such shares shall
no longer be deemed to be outstanding and all rights of the holders of such
shares of Preferred Stock shall cease except the right to receive the shares of
Common Stock upon such redemption and/or any cash payable upon such redemption,
without interest from the date of such redemption. At the close of business on
the redemption date, each holder of Preferred Stock to be redeemed (unless the
Company defaults in the delivery of the Common Stock or cash) will be, without
any further action, deemed a holder of the number of shares of Common Stock
and/or the amount of cash for which such Preferred Stock is redeemable.

Fractional shares of Common Stock will not be issued upon redemption of the
Preferred Stock, but, in lieu thereof, the Company will pay an amount in cash
based on the current market price of the Common Stock on the day prior to the
redemption date.

Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, holders of shares of Preferred Stock are entitled to receive,
out of legally available assets, a liquidation preference of $10.00 per share,
plus an amount equal to any accrued and unpaid dividends to the payment date,
and no more, before any payment or distribution is made to the holders of Common
Stock or any series or class of the Company's stock hereafter issued that ranks
junior as to the liquidation rights to the Preferred Stock, but the holders of
the shares of the Preferred Stock will not be entitled to receive the
liquidation preference on such shares until the liquidation preference of any
other series or class of the Company's stock previously or hereafter issued that
ranks senior as to liquidation rights to the Preferred Stock has been paid in
full.

Voting Rights. Except as indicated below, or except as otherwise from time
to time required by applicable law, the holders of Preferred Stock will have no
voting rights.

[If [two] quarterly dividends payable on the Preferred Stock or any other
Parity Stock are in arrears, whether or not earned or declared, the number of
directors then constituting the Board will be increased by [three] and the
holders of Preferred Stock will have the right to elect [three] additional
directors to serve on the Board at an annual meeting of stockholders or special
meeting held in place thereof, or at a properly called special meeting of the
holders of the Preferred Stock and at each subsequent annual meeting of
stockholders or special meeting held in place thereof, until all such dividends
in arrears and dividends for the current quarterly period on the Preferred
Stock have been paid or declared and set aside for payment. Notwithstanding the
foregoing, the total number of directors elected by the holders of the Preferred
Stock and the Representative will not exceed [three].]

The approval of the holders of two-thirds of the outstanding shares of
Preferred Stock will be required in order to

amend the Articles of Incorporation or Bylaws to affect materially and adversely
the rights, preferences or voting power of the holders of the Preferred Stock
or to authorize, create, or increase the authorized amount of, any class of
stock having rights prior or senior to the Preferred Stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or winding up or
charge any provision of the Articles of Incorporation or Bylaws that relate to
the Board of Directors or the election of directors or approve any merger or
consolidation involving the Company or a sale of all or substantially all of the
assets of the Company. However, the Company may create additional classes of
Parity or Junior Stock, increase the authorized number of shares of Parity or
Junior Stock and issue additional series of Parity or Junior Stock without the
consent of any holder of Preferred Stock.

It is not possible to state the actual effect of any other authorization of
Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of any other series of Preferred
Stock. The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a third party to
aqcuire a majority of the outstanding voting stock. Accordingly, the issuance of
Preferred Stock may be used as an 'anti-takeover' device without further action
on the part of the stockholders of the Company, and may adversely affect the
holders of the Common Stock.

The Transfer Agent and Registrar for the Preferred Stock will be American
Stock Transfer and Trust.

WARRANTS AND CONVERTIBLE NOTES

See 'Underwriting' for a description of the Representative's Warrant.

The Company has outstanding warrants (the 'IPO Warrants') which were issued
in favor of The Boston Group, L.P. (the 'Boston Group') 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
convertible notes.

The Company agreed to sell to the Representative, for $50, IPO 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 ($12/share). The IPO
Warrants are exercisable for a period of four years beginning November 1997. The
IPO Warrants may not be sold, transferred, assigned or hypothecated except to
the officers or partners of the Boston Group or, beginning November 1997, to the
employees of the Representative. The IPO 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 IPO Warrants. As of the date hereof, none of
the IPO Warrants have been exercised.

The IPO 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 IPO
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 IPO Warrants are entitled to include
their shares of Common Stock in the registration.

In June 1997, the Company issued $2,000,000 in aggregate principal amount
of its 18% Senior Secured Promissory Notes (the '18% Notes') and Common Stock
Purchase Warrants, dated June 30, 1997 (the 'June 1997 Warrants'). The 18% Notes
are convertible into 800,000 shares of Common Stock upon the earlier to occur of
(i) an event of default on the 18% 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 or repayment (subject to adjustment
under certain circumstances). As of the date of this Prospectus, the aggregate
principal amount of Notes outstanding is $2,000,000, which may be converted into
762,086 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 the Warrant
Placement, the Company has filed with the Commission under the Securities Act a
Registration Statement with respect to the resale of the underlying 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 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, none of the 18% Notes have been
converted and none of the June 1997 Warrants have been exercised.

The June 1997 Warrants entitle the holders of such Warrants, upon exercise
of a Warrant, to purchase from the Company 200,000 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.

In addition, in connection with the 1997-B and 1997-C securitizations, $5.8
million in Class B Notes are exchangeable (at a rate of 117.5% of the principal
amount of Class B Notes exchanged) for the Company's 17% Convertible Notes,
solely upon the occurrence of a delinquency ratio trigger relating to the
securitized pools.

UNDERWRITING

The Underwriters named below, represented by Tejas Securities Group, Inc.
(the 'Representative'), have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the Company
the number of shares of Preferred Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that

the obligations of the Underwriters are subject to certain conditions and that
the Underwriters are committed to purchase all of such shares, if any are
purchased.

NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------- ---------
Tejas Securities Group, Inc...................................

---------
Total.....................................................
---------
---------

The Representative was organized in Texas within the last three years and
its principal business function is to underwrite and sell securities. The
Representative has been recently formed and has underwritten only a limited
number of public offerings. After interviewing various underwriters, the Company
has advised the Representative that it chose the Representative based upon
various factors, including the Company's belief that the Representative has an
understanding of the Company and its business.

The Company has been advised by the Representative that the Underwriters
propose to offer shares to the public at the initial offering price set forth on
the cover page of this Prospectus, and to certain securities dealers at such
price less a concession of not more than $ per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Preferred Stock to certain other brokers and dealers. After the initial
public offering, the public offering price and concessions and discounts may be
changed by the Underwriters. No reduction in such terms shall change the amount
of proceeds to be received by the Company as set forth on the cover page of this
Prospectus.

The Company has granted the Underwriters an option, exercisable within
forty-five days after the date of this Prospectus, to purchase up to an
aggregate of an additional 15% of the aggregate number of Preferred Shares
offered in connection with the Offering, to cover over-allotments, at the same
price per share of Preferred Stock being paid by the Underwriters for the other
shares of Preferred Stock offered hereby.

The Representative has informed the Company that it does not expect any
sales of the shares of Preferred Stock offered hereby to be made by the
Underwriters to any accounts over which they exercise discretionary authority.

The Company has agreed to pay the Representative a non-accountable expense
allowance of 2% of the amount of the Offering. To date, the Company has not paid
any of the non-accountable expense allowance to the Representative. The
Representative's expenses in excess of the non-accountable expense allowance,
including its legal expenses, will be borne by the Representative. To the extent
that the expenses of the Representative are less that the non-accountable
expense allowance, the excess shall be deemed to be compensation to the
Representative.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities under the Securities Act or will
contribute payments the Underwriters may be required to make in respect thereof,
the Company 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.

The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids and syndicate covering
transactions, which may have the effect of stabilizing or maintaining the market
price of any class of the Preferred Stock at levels above those that might
otherwise prevail in the open market. A 'stabilizing bid' is a bid for or the
purchase of any Preferred Stock on behalf of the Underwriters for the purpose of
fixing or maintaining the price of such shares. A 'syndicate covering

transaction' is the bid for or the purchase of Preferred Stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with this offering.

Stabilizing bids and syndicate covering transactions may have the effect of
causing the price of the Preferred Stock of any class to be higher than it might
be in the absence thereof. Neither the Company nor the Underwriters makes any
representation or prediction as to the direction or magnitude of any such effect
on the prices for the Preferred Stock. Neither the Company nor Underwriters
makes any representation that the Underwriters will engage in any such
transactions or that, once commenced, any such transactions will not be
discontinued without notice.

The Company has agreed to sell to the Representative, for $100, a
Representative's Warrant to purchase up to 300,000 shares of Common Stock at an
exercise price per share equal to 105% of the average closing bid price per
share for the five days prior to the Offering being effective. The
Representative's Warrant are exercisable for a period of four years commencing
one year after the date of this Prospectus. The Representative's Warrant is not
transferable except to the officers or partners of the Representative or,
beginning one year after completion of the Offering, to the employees of the
Representative. The Representative's Warrant includes a net exercise provision
permitting the holder, upon consent of the Company, to pay the exercise price
by cancellation of a number of shares with a fair market value equal to the
exercise price of the Representative's Warrant.

The Representative shall have the right to designate a member of the
Company's board of directors until the next annual meeting at which time
management will cause such designee to be nominated for election to the board of
directors and such nomination shall be supported by management. Such designee
shall continue to be nominated and supported by management until such time as
the Representative's Warrant either expires or is exercised in full by the
Representative. Alternatively, the Representative may desginate an observer
to attend meetings of the Board of Directors.

The Representative's Warrants provide certain rights with respect to the
registration under the Securities Act of up to 300,000 shares of Common Stock
issuable upon exercise thereof. The holders of the shares issuable upon exercise
of the Representative's Warrant may require the Company to file a registration
statement under the Securities Act with respect to such shares. In addition, if
the Company registers any of its Common Stock for its own account, the holders
of the shares issuable upon exercise of the Representative's Warrant are
entitled to include their shares of Common Stock in the registration.

The Preferred Stock will be traded on AMEX under the symbol 'ABNDP.'

The Common Stock of the Company is traded on Nasdaq National Market under
the symbol 'ABND.'

LEGAL MATTERS

Certain legal matters with respect to the securities offered hereby will be
passed upon for the Company by Jones, Day, Reavis & Pogue, Dallas, Texas and for
the Underwriters by Wolin, Ridley & Miller LLP, Dallas, Texas.

EXPERTS

The consolidated balance sheets as of December 31, 1995 and 1996, and the
consolidated statements of operations, changes in 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, 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.

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets, December 31, 1996 and September 30, 1997 (unaudited).......................... F-2
Consolidated Statements of Operations for the Three and Nine Month Periods ended September 30, 1996
(unaudited) and September 30, 1997 (unaudited)........................................................... F-3
Consolidated Statements of Shareholders Equity for the Nine Months ended September 30,
1997 (unaudited)......................................................................................... F-4
Consolidated Statements of Cash Flows for the Nine Month Periods ended September 30, 1996 (unaudited)
and September 30, 1997 (unaudited)....................................................................... F-5
Notes to Consolidated Financial Statements (unaudited)..................................................... F-6
Report of Independent Accountants.......................................................................... F-10
Consolidated Balance Sheets, December 31, 1995 and 1996.................................................... F-11
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-12
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-13
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-14
Notes to Consolidated Financial Statements................................................................. F-15
</TABLE>

F-1

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 4,121,342 $ 173,582
Restricted funds................................................................... 2,981,449 6,164,785
Finance contracts held for sale, net............................................... 228,429 999,538
Collateral acquired, net........................................................... 152,580 427,026
Class B certificates............................................................... 10,465,294 8,467,246
Interest-only strip receivable..................................................... 4,247,274 9,978,785
Debt issuance cost................................................................. 997,338 751,280
Trust receivable................................................................... 2,230,003 4,726,996
Due from affiliate................................................................. 168,847 132,213
Other assets....................................................................... 683,955 5,564,082
------------ -------------
Total assets............................................................. $ 26,276,511 $37,385,533
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit facilities................................................... $ -- $ 4,240,208
Notes payable................................................................. 10,174,633 10,279,888
Accounts payable and accrued liabilities...................................... 1,474,586 3,071,275
Bank overdraft................................................................ -- 445,137
Payable to affiliate.......................................................... 265,998 190,852
Deferred income taxes......................................................... 2,075,553 3,623,405
------------ -------------
Total liabilities........................................................ 13,990,770 21,850,765
------------ -------------
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, 6,531,311 shares
issued and outstanding....................................................... 1,000 1,000
Additional paid-in capital.................................................... 8,617,466 8,704,466
Deferred compensation......................................................... (11,422) (1,142)
Loans to shareholders......................................................... (235,071) (7,006)
Unrealized appreciation on interest-only strip receivable..................... -- 1,265,971
Retained earnings............................................................. 3,913,768 5,571,479
------------ -------------
Total shareholders' equity............................................... 12,285,741 15,534,768
------------ -------------
Total liabilities and shareholders' equity.......................... $ 26,276,511 $37,385,533
------------ -------------
------------ -------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-2

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1996 1997 1996 1997
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Interest income.................................... $ 600,558 $1,313,670 $2,070,909 $ 3,107,402
Gain on sale of finance contracts.................. 3,679,081 4,840,621 9,423,067 13,532,765
Servicing fee income............................... 197,597 225,389 474,805 659,791
Other income (loss)................................ -- (9,461) -- (530,249)
---------- ---------- ---------- -----------
Total revenues................................ 4,477,236 6,370,219 11,968,781 16,769,709
---------- ---------- ---------- -----------
Expenses:
Provision for credit losses........................ 49,750 125,000 113,234 125,000
Interest expense................................... 669,815 1,102,195 1,807,335 2,930,592
Salaries and benefits.............................. 1,236,352 2,506,470 3,082,399 6,560,301
General and administrative......................... 433,163 1,356,639 1,317,511 3,334,590
Other operating expenses........................... 190,638 483,141 842,019 1,265,830
---------- ---------- ---------- -----------
Total expenses................................ 2,579,718 5,573,445 7,162,498 14,216,313
---------- ---------- ---------- -----------
Income before income taxes and extraordinary loss....... 1,897,518 796,774 4,806,283 2,553,396
Provision for income taxes.............................. 614,136 284,960 1,634,136 895,685
---------- ---------- ---------- -----------
Income before extraordinary loss........................ 1,283,382 511,814 3,172,147 1,657,711
Extraordinary loss, net of tax benefits of $50,000...... -- -- (100,000) --
---------- ---------- ---------- -----------
Net income.................................... $1,283,382 $ 511,814 $3,072,147 $ 1,657,711
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Income per common share:
Income before extraordinary loss................... $ 0.23 $ 0.08 $ 0.56 $ 0.25
Extraordinary loss................................. -- -- (0.02) --
---------- ---------- ---------- -----------
Net income.................................... $ 0.23 $ 0.08 $ 0.54 $ 0.25
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Weighted average shares outstanding..................... 5,701,086 6,537,129 5,701,086 6,537,129
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
-------------------
(UNAUDITED)
<S> <C>
Common stock:
Balance, December 31, 1996.............................................................. $ 1,000
-------------------
Balance, September 30, 1997............................................................. 1,000
-------------------
Additional paid-in capital:
Balance, December 31, 1996.............................................................. 8,617,466
Issuance of common stock warrants....................................................... 87,000
-------------------
Balance, September 30, 1997............................................................. 8,704,466
-------------------
Deferred compensation:
Balance, December 31, 1996.............................................................. (11,422)
Amortization of deferred compensation................................................... 10,280
-------------------
Balance, September 30, 1997............................................................. (1,142)
-------------------
Loans to shareholders:
Balance, December 31, 1996.............................................................. (235,071)
Net payments received................................................................... 228,065
-------------------
Balance, September 30, 1997............................................................. (7,006)
-------------------
Unrealized appreciation on interest-only strip receivable:
Balance, December 31, 1996.............................................................. --
Increase in unrealized appreciation on interest-only strip receivable................... 1,265,971
-------------------
Balance, September 30, 1997............................................................. 1,265,971
-------------------
Retained earnings:
Balance, December 31, 1996.............................................................. 3,913,768
Net income.............................................................................. 1,657,711
-------------------
Balance, September 30, 1997............................................................. 5,571,479
-------------------
Total shareholders' equity......................................................... $15,534,768
-------------------
-------------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 3,072,146 $ 1,657,711
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of finance contract acquisition discount and insurance..... (1,161,132) (11,472)
Amortization of deferred compensation................................... 38,552 10,280
Amortization of debt issuance costs..................................... 242,071 634,033
Depreciation and amortization........................................... -- 197,203
Provision for credit losses............................................. 113,234 125,000
Deferred income taxes................................................... 1,584,136 895,685
Accretion of interest-only strip receivable............................. 894,795 (339,266)
Unrealized loss on Class B certificates................................. -- 80,325
Changes in operating assets and liabilities:
Restricted funds........................................................ 127,332 (3,183,336)
Other assets............................................................ (1,218,255) (5,077,330)
Class B certificates.................................................... (5,503,658) 1,917,723
Interest-only strip receivable.......................................... (1,500,502) (3,474,107)
Accounts payable and accrued liabilities................................ (358,159) 1,596,689
Due to/due from affiliate............................................... (389,144) (38,512)
Purchases of finance contracts............................................... (57,729,995) (99,211,259)
Sales of finance contracts................................................... 59,014,035 96,719,843
Repayments of finance contracts.............................................. 603,595 1,199,737
------------ ------------
Net cash used in operating activities.............................. (2,170,949) (6,301,053)
------------ ------------
Cash flows from investing activities:
Advances to AutoBond Receivables Trusts...................................... (2,223,918) (2,496,993)
Loan payments from (to) shareholders......................................... (297,004) 228,065
Disposal proceeds from collateral acquired................................... 1,095,470 132,596
------------ ------------
Net cash used in investing activities.............................. (1,425,452) (2,136,332)
------------ ------------
Cash flows from financing activities:
Net borrowings (payments) under revolving credit facilities.................. (1,150,424) 4,240,208
Debt issuance costs.......................................................... (675,887) (387,975)
Repayments of borrowings under repurchase agreement.......................... (1,061,392) --
Proceeds from notes payable.................................................. 9,137,333 2,015,150
Payments on notes payable.................................................... (3,840,234) (1,909,895)
Proceeds from subordinated debt borrowings................................... 300,000 --
Increase in bank overdraft................................................... 1,129,949 445,137
Issuance of common stock warrants............................................ -- 87,000
------------ ------------
Net cash provided by financing activities.......................... 3,839,345 4,489,625
------------ ------------
Net increase (decrease) in cash and cash equivalents.............................. 242,944 (3,947,760)
Cash and cash equivalents at beginning of period.................................. 92,660 4,121,342
------------ ------------
Cash and cash equivalents at end of period........................................ $ 335,604 $ 173,582
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5

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 6,537,129
for periods ended September 30, 1997.

3. FINANCE CONTRACTS HELD FOR SALE

The following amounts are included in finance contracts held for sale as
of:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Unpaid principal balance................................................. $266,450 $ 1,090,592
Prepaid insurance........................................................ 18,733 42,437
Contract acquisition discounts........................................... (31,554) (88,465)
Allowance for credit losses.............................................. (25,200) (45,026)
------------ -------------
$228,429 $ 999,538
------------ -------------
------------ -------------
</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 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 SFAS No. 125, 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 similar to those classified as 'available

F-6

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

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>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C>
Beginning balance.................................................... $ 4,247,274
Unrealized appreciation.............................................. 1,918,138
Additions............................................................ 3,942,033
Accretion............................................................ 339,266
Impairment charge.................................................... (467,926)
-------------
Ending balance....................................................... $ 9,978,785
-------------
-------------
</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 $1,265,971, net of related tax effect of $652,167, on
the valuation of the interest-only strip receivable for the nine months ended
September 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 for the nine months ended September 30, 1997.

5. REVOLVING CREDIT FACILITIES

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 $358,174 for the nine months ended
September 30, 1997.

F-7

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

insurance. Interest is payable upon maturity of the advances and accrues at the
lesser of (x) 30 day LIBOR plus 1.15% (6.81% at September 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 September 30, 1997,
advances under the Daiwa Facility totaled $4,240,208. The Company incurred
interest expense under the Daiwa Facility of approximately $816,396 during the
nine months ended September 30, 1997.

6. NOTES PAYABLE

The following amounts are included in notes payable as of:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Notes payable, collateralized by Class B certificates.................... $ 10,050,781 $ 8,159,296
Convertible notes payable................................................ -- 2,000,000
Other notes payable...................................................... 123,852 120,592
------------ -------------
$ 10,174,633 $10,279,888
------------ -------------
------------ -------------
</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 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.

F-8

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

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. See 'Legal Proceedings.'

F-9

REPORT OF INDEPENDENT ACCOUNTANTS

To the 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.

COOPERS & LYBRAND L.L.P.

Austin, Texas
March 26, 1997

F-10

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
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

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994 YEAR ENDED
(INCEPTION) DECEMBER 31,
THROUGH --------------------------
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

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
--------- ------ ---------- ------------

<S> <C> <C> <C> <C>
Capital contributions at
inception................... 5,118,753 $1,000 $ 451,000
Loans to shareholders.........
Net loss......................
--------- ------ ---------- ------------
Balance, December 31, 1994.... 5,118,753 1,000 451,000
Capital contributions......... 2,323,103
Loans to shareholders.........
Deferred compensation pursuant
to employee contract........ 138,500 $ (138,500)
Amortization of deferred
compensation................ 75,742
Net income....................
--------- ------ ---------- ------------
Balance, December 31, 1995.... 5,118,753 1,000 2,912,603 (62,758)
Stock issued pursuant to
employee contract........... 568,747
Loans to shareholders.........
Amortization of deferred
compensation................ 51,336
Issuance of common stock in
public offering............. 825,000 5,704,863
Net income....................
--------- ------ ---------- ------------
Balance, December 31, 1996.... 6,512,500 $1,000 $8,617,466 $ (11,422)
--------- ------ ---------- ------------
--------- ------ ---------- ------------

LOANS TO RETAINED
SHAREHOLDERS EARNINGS TOTAL
------------ ---------- -----------
<S> <C> <C> <C>
Capital contributions at
inception................... $ 452,000
Loans to shareholders.........$ (16,000) (16,000)
Net loss...................... $ (544,605) (544,605)
------------ ---------- -----------
Balance, December 31, 1994.... (16,000) (544,605) (108,605)
Capital contributions......... 2,323,103
Loans to shareholders......... (137,359) (137,359)
Deferred compensation pursuant
to employee contract........
Amortization of deferred
compensation................ 75,742
Net income.................... 873,487 873,487
------------ ---------- -----------
Balance, December 31, 1995.... (153,359) 328,882 3,026,368
Stock issued pursuant to
employee contract...........
Loans to shareholders......... (81,712) (81,712)
Amortization of deferred
compensation................ 51,336
Issuance of common stock in
public offering............. 5,704,863
Net income.................... 3,584,886 3,584,886
------------ ---------- -----------
Balance, December 31, 1996....$ (235,071) $3,913,768 $12,285,741
------------ ---------- -----------
------------ ---------- -----------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-13

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994
(INCEPTION) YEAR ENDED
THROUGH 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

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.

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,

F-15

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

F-16

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

F-17

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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).

F-18

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

F-19

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>

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
</TABLE>

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
-----------
-----------

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.

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

F-20

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

F-21

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

F-22

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

advances under Revolving Credit Facilities, and (iii) for general corporate and
working capital purposes.

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 YEAR ENDED
(INCEPTION) 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.

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.

F-23

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
----------------------
# SHARES WEIGHTED
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>

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.

F-24

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 1996 DECEMBER 31, 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.

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

F-25

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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-26

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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:

OPERATING
LEASES
---------
1997............................................................... $ 542,580
1998............................................................... 305,697
1999............................................................... 91,847
2000............................................................... 16,567
2001............................................................... --
Thereafter......................................................... --
---------
$ 956,691
---------
---------

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.

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

F-27

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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:

F-28

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<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:
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
------- ---------- ----------
Interest paid........................... $19,196 $2,099,867 $1,885,322

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-29

================================== ====================================

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................................................... 3
Risk Factors......................................................... 5
Use of Proceeds...................................................... 12
Dividend Policy...................................................... 12
Business............................................................. 14
Selected Financial Data.............................................. 30
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 31
Market for Company's Common Equity and Related Shareholder Matters... 46
Management........................................................... 47
Certain Transactions................................................. 54
Beneficial Ownership of Common Shares................................ 55
Description of Capital Stock......................................... 56
Underwriting......................................................... 60
Legal Matters........................................................ 62
Experts.............................................................. 62
Change in Accountants................................................ 62
Index to Financial Statements........................................ F-1
------------------------
UNTIL 90 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.

1,000,000 SHARES

AUTOBOND ACCEPTANCE
CORPORATION

% CUMULATIVE
SERIES A PREFERRED STOCK
($10 LIQUIDATION PREFERENCE)

-------------------------
PROSPECTUS
-------------------------

TEJAS SECURITIES GROUP, INC.

, 1997

================================== ====================================

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................. $
----------
Accounting fees and expenses.................................................... *
Legal fees and expenses......................................................... *
Printing Fees................................................................... *
Miscellaneous................................................................... *
----------
Total...................................................................... $ *
----------
----------
</TABLE>

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.

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.

II-1

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 and 1997C securitization in October 1997, Autobond Master Funding
Corporation issued approximately $34.5 million and $34.4 million in Class A
Notes and $2.9 million and $2.9 million in Class B Notes, respectively
(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;

<TABLE>
<C> <S>
1.1 -- Underwriting Agreement (to be filed by amendment)
1.2 -- Form of Representative's Warrrant (to be filed by amendment)
3.1* -- Restated Articles of Incorporation of the Company
3.2* -- Amended and Restated Bylaws of the Company
4.1 -- Specimen Preferred Stock Certificate (to be filed by amendment)
4.2* -- Specimen Common Stock Certificate
5.1 -- Opinion of Jones, Day, Reavis & Pogue (to be filed by amendment)
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
</TABLE>

II-2

<TABLE>
<C> <S>
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'D' -- Servicing Agreement, dated January 29, 1997, between CSC LOGIC/MSA L.L.P., doing business as 'Loan
Servicing Enterprise' and the Company
10.16'D' -- Credit Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the Company and
Daiwa Finance Corporation
10.17'D' -- Security Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the Company
and Norwest Bank Minnesota, National Association
10.18'D' -- 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'D'*** -- Financial Data Schedule
</TABLE>
- ------------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-05359).

'D' 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.

*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.

(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.

II-3

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

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 November 26, 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 November 26, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ ---------------------------------------------------------------------

<C> <S>
/S/ WILLIAM O. WINSAUER Chairman of the Board, Chief
......................................... Executive Officer and Director
(WILLIAM O. WINSAUER) (Principal Executive Officer)

/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)

/S/ R. T. PIGOTT, JR. Vice President and Chief Financial Officer
.........................................
(R. T. PIGOTT, JR.)

/S/ ROBERT S. KAPITO Director
.........................................
(ROBERT S. KAPITO)

/S/ MANUEL A. GONZALEZ Director
.........................................
(MANUEL A. GONZALEZ)

/S/ STUART A. JONES Director
.........................................
(STUART A. JONES)

/S/ THOMAS I. BLINTEN Director
.........................................
(THOMAS I. BLINTEN)
</TABLE>

II-5

<PAGE>

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
AutoBond Acceptance Corporation and Subsidiaries

In connection with our audits of the consolidated financial statements of
AutoBond Acceptance Corporation and Subsidiaries as of December 31, 1995 and
1996 and for the period from August 1, 1994 (inception) through December 31,
1994 and for the years ended December 31, 1995 and 1996, which consolidated
financial statements are included in the Prospectus, we have also audited the
financial schedule included herein.

In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

COOPERS & LYBRAND L.L.P.

Austin, Texas
March 26, 1997

S-1

<PAGE>

SCHEDULE II

AUTOBOND ACCEPTANCE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
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ADDITIONS
BALANCE CHARGED BALANCE
AT BEGINNING COST AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) OF PERIOD
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<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
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(A) Deductions in 1996 were write-offs of uncollectible finance contracts.

S-2

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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
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<C> <S> <C>
1.1 -- Underwriting Agreement (to be filed by amendment)...............................................
1.2 -- Form of Representative's Warrrant (to be filed by amendment)....................................
3.1* -- Restated Articles of Incorporation of the Company...............................................
3.2* -- Amended and Restated Bylaws of the Company......................................................
4.1 -- Specimen Preferred Stock Certificate (to be filed by amendment).................................
4.2* -- Specimen Common Stock Certificate...............................................................
5.1 -- Opinion of Jones, Day, Reavis & Pogue (to be filed by amendment)................................
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'D' -- Servicing Agreement, dated January 29, 1997, between CSC LOGIC/MSA L.L.P., doing business as
'Loan Servicing Enterprise' and the Company.....................................................
10.16'D' -- Credit Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the
Company and Daiwa Finance Corporation...........................................................
10.17'D' -- Security Agreement, dated as of February 1, 1997, among AutoBond Funding Corporation II, the
Company and Norwest Bank Minnesota, National Association........................................
10.18'D' -- 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.........................................................
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
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<C> <S> <C>
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'D'*** -- Financial Data Schedule.........................................................................
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* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-05359).

'D' 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.

*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.

STATEMENT OF DIFFERENCES
------------------------

The dagger symbol shall be expressed as .............................. 'D'

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EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-1
(File No. 333- ) of our report dated March 26, 1997, on our audits of the
consolidated financial statements and financial statement schedule 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
November 28, 1997

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